NATIONAL INSURANCE SURCHARGE BILL

HC Deb 06 December 1976 vol 922 cc31-161

Order for Second Reading read.

3.31 p.m.

Mr. David Howell (Guildford)

On a point of order, Mr. Speaker. I wonder whether the House could have your guidance. You may be aware—you probably are—that the Ways and Means Resolution which we have debated, and which governs the Bill, has been so drawn as virtually to prevent the putting down of any amendments of the kind which would reflect the interests and concerns of those parties most worried by the Bill—in particular, the Churches and charities.

It is impossible, because of the way in which it has been drawn, to put down amendments to the Bill to reflect the particular concerns of particular classes of people who would pay, as employers, national insurance contributions. Is there any way in which the House can be protected from this kind of procedural device, which rules out effective debate which can reflect the interests of people genuinely concerned and who may be severely damaged by the Bill?

Mr. Speaker

The hon. Gentleman knows, of course, that Second Reading will cover a wide field, but I fear that I cannot help him on the main part of his question. It is a matter for the Chairman of Committees. But it is right that the hon. Member should raise it on the Floor of the House. I am afraid that the answer is that I have no power at all to intervene.

3.33 p.m.

The Financial Secretary to the Treasury (Mr. Robert Sheldon)

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

The Bill that is before the House this afternoon validates the proposal made by my right hon. Friend the Chancellor of the Exchequer on 22nd July 1976 to impose a surcharge of two percentage points on the employers' national insurance contribution. My right hon. Friend made it quite clear at the time that this measure was a taxation measure and that the revenue would accrue to the Exchequer.

Perhaps at this stage I might remind the House of the reasons for my right hon. Friend's decision, which he explained when he made his statement to the House at that time. The Chancellor began by explaining that the size of the Budget deficit in the current financial year, although raising problems of financing, was advantageous at a time of recession, as it enabled us to keep unemployment lower than it would otherwise have been.

However, the public sector borrowing requirement had to be reduced for 1977–78, and it was his view that unless our borrowing requirement fell steadily over the next three years the financing of the public sector could pre-empt private savings, which productive industry was likely to require on a substantial scale to finance stockbuilding and investment. It would also lead to an excessive growth of the money supply, which would refuel inflation.

Then the Chancellor went on to announce public expenditure cuts which, it was estimated, would reduce the public sector borrowing requirement by about £800 million. He followed this in the same statement by announcing the National Insurance Surcharge, which he estimated would reduce the PSBR by about £700 million.

That is the background against which the House must look at the Bill. However, there was a further occasion on which the measures were discussed, including, of course, the National Insurance Surcharge. The House debated the July measures at considerable length on 2nd August, just before the Summer Recess.

During that August debate the Government could hardly be accused of reticence over the National Insurance Surcharge. The Chancellor devoted a considerable part of his speech to an exposition of the reasons, the working and the likely economic effects of the surcharge, including the effects on unemployment as far as he was able to judge them.

That was four months ago. Since then my right hon. Friend has received representations about the new tax from employers' organisations and private individuals. It has provoked a measure of public debate. Although Opposition Members have not referred to it much in their comments on the state of the economy, I will concede that when they have mentioned it they have not failed to express their dislike of it.

Against this background, I find it a little surprising that the Opposition are behaving over the Bill and its handling as if the Government were springing a complete surprise. It is true that the process of the Bill through the House is rather rapid, for very straightforward, practical reasons. The measure, as its name denotes, is a surcharge on the national insurance contribution, and it uses the machinery employed to raise that contribution.

In order, therefore, to avoid widespread inconvenience for employers who have to operate the system, it was felt that the introduction of the surcharge ought not to affect the normal programme for the administration of changes in the national insurance contribution itself. The late opening of the Session has meant that it was difficult to give more time to the Bill without prejudicing that programme.

The Bill provides that the surcharge will be paid by employers from 6th April next year on the same basis as that on which they pay national insurance contributions in respect of their employees. It will apply, that it to say, to earnings under £95 a week. It will not apply in respect of those earning less than £13 a week, because no national insurance contribution is payable by them.

While the tax fits into the national insurance system, it is, however, in no way part of it. The receipts will go straight into the Consolidated Fund, together with the proceeds of all other taxes, and because the tax uses the machinery of national insurance contributions, it will be exceptionally cheap to collect. This was referred to in the Ways and Means Resolution. It will throw no extra administrative burden on employers, and no additional civil servants will be needed to operate it.

Mr. David Howell

The hon. Gentleman is right in saying that the proposal does not come as a surprise, since it was put forward on 22nd July. But what is a surprise, and has been greeted with dismay, is that the Ways and Means Resolution should literally prevent any class of employer—notably those employing people in registered charities—from putting forward amendments, let alone having those amendments accepted, to allow them to be excused this additional surcharge.

As the surcharge has nothing to do with national insurance and goes straight into the Exchequer on a separate basis, is not this a very strong reason for giving much more thought to the whole proposal before it is rushed through?

Mr. Sheldon

I think that what was generally understood was that this would be a broad-ranging tax. Indeed, my right hon. Friend the Chancellor of the Exchequer has said as much. I might remind the hon. Gentleman that charities pay indirect and direct taxes, and that this has been the case for many years. But I concede the point that the hon. Gentleman makes, particularly concerning the Churches. I understand that the Archbishop of Canterbury has arranged to see the Prime Minister on this matter. We are always prepared to listen to representations and to see how far they are justified and how they can be taken into account.

Mr. Ian Stewart (Hitchin)

Is it not totally out of proportion for it to be necessary for the Archbishop of Canterbury to make representations to the Prime Minister about adjustments to a tax Bill which should be dealt with in the normal way by adequate time being available for the tabling of amendments to it?

Mr. Sheldon

I am sorry that this effect of the tax changes was not generally understood, but clearly these are matters which can be taken into account, and representations are always welcome, from whatever source, even those less exalted than the Archbishop of Canterbury.

Mr. George Cunningham (Islington, South and Finsbury)

I thought it was the case that ministers of the Church were still self-employed for the purposes of national insurance. I thought that an exception had been made in their case and a regulation made on the ground that the Church could not afford to pay the extra amount that would have been payable if the ministers were employees. If that is the case—and perhaps the point can be cleared up later—would it not be the case that ministers of the Church would attract no additional payments as a result of this Bill?

Mr. Sheldon

There is a change in prospect which will affect the position, as I understand it, and the consequence of that might be that they could be taxed at some future time. But others are concerned, so the problem is a little more complex, although I take my hon. Friend's point.

As I have said, this will throw no extra administrative burden on the employers and no additional civil servants will be needed. I consider that to be a valuable additional objective of the surcharge. I think that the Opposition ought to be concerned about that aspect because of their general anxiety about the size of the Civil Service, which I share, and their desire to avoid adding to industry the burden of more forms to fill in.

It would perhaps be convenient if I explained at this point that although local authorities will pay the surcharge, it will be taken into account for rate support grant purposes. I should also make clear that the surcharge will be deductible against corporation tax, just as the employers' national insurance contribution is deductible. We must expect that, over a period, the bulk of the surcharge will be passed on into prices. To that extent, profits, taking the economy as a whole, will be largely unaffected As the House is also aware, the surcharge will be an allowable cost under the Price Code, in the terms in which such costs are defined in the code.

Although the rate of the national insurance surcharge is comparatively low, the comprehensive nature of its base makes it revenue-rich, and therefore well suited to its public sector borrowing requirement—reducing objective. The revenue yield in 1977–78 is estimated at £950 million, and the reduction in the PSBR in that year at £700 million.

Why do we need this substantial increase in revenue? The answer is that we must reduce the public sector borrowing requirement from the levels it would otherwise reach. This is, however, not a policy of mindless deflation. We still expect the PSBR to be large in 1977–78 because the level of economic activity is not as high as we would like it to be. But we must have a PSBR that is financable. An excessive PSBR reflects a structural imbalance in the economy. It is linked with a large external deficit and with a severe problem of internal financing. An excessive PSBR can face us with the unpalatable choice between high interest rates and printing money. It is for these reasons that it is part of the Goverment's strategy to reduce the public sector borrowing requirement progressively.

Mr. Alan Clark (Plymouth, Sutton)

Is not this a rather large proportion just to disappear in lag? The hon. Gentleman says that the yield is £950 million but the amount by which the public sector borrowing requirement will be reduced is £700 million. What happens to the £250 million?

Mr. Sheldon

The hon. Gentleman will know the difference between revenue and the public sector borrowing requirement. I shall go into detail of how the figures are arrived at, and I hope that the hon. Gentleman will be satisfied. If not, I will gladly give way to him again.

The reason for the needs to reduce the public sector borrowing requirement is a reflection of the need to eliminate the external deficit and to enable us, without inflation and without intolerable interest rates, to provide for the borrowing needs both of the public sector and of industry. It is essential to the industrial strategy, which is, of course, a policy for the medium and long term, that industry should be able to borrow for investment and for working capital at tolerable interest rates. To assure the future of the economy and of high employment in it, we have to deal with the external deficit and we have to give priority to adequate resources for industry.

We believe that the reduction in the PSBR will have to be achieved over a period by a combination of public expenditure and taxation changes. The structural change will be the result not of one Budget or one package but of a succession of changes at different times. We are now discussing an important tax element in that process. It is a large element and I must tell the House that it is essential to the whole programme and strategy.

I turn now to the main problem as expressed in the debate on the Ways and Means Resolution—unemployment and the possible effect of the surcharge on it. The debate last week demonstrated the House's concern, and lion. Members, notably my hon. Friends behind me, pressed me to indicate precisely what we expect this effect to be.

The difficulty about responding to this in an open and constructive manner as possible is that to take one measure in isolation and to look at its possible effects on employment and on other critical economic variables is to risk producing a highly misleading picture. As I have just been arguing, the reduction of the PSBR, to which this new tax contributes importantly, is central to the Government's economic policy. If that policy were to fail, the prospects for the economy would be vastly poorer, and with it, of course, the prospects for employment.

It is not, moreover, realistic to compare the effects of this surcharge with the effects of doing nothing at all. That is the wrong kind of comparison to make, because, if we were to do nothing at all, the policy itself would be bound to fail. The only real comparison we can usefully make in discussing the different levels of employment as a result of introducing this measure, or not doing so, is with alternative methods of reducing the public sector borrowing requirement. There is no denying—and I have never tried to do so—that the surcharge, like any tax increase, will of itself cause demand in the economy to fall, and that of itself, again, will have some effect on employment. We have never sought to pretend otherwise.

But I emphasise that the surcharge is not a tax on employment as such. It is true that the tax base is earnings from employment. But I believe that the tax will be mainly passed on in prices, and it is principally because of this rise in prices that the tax is bound, taken in isolation, to induce some fall in demand. I do not welcome that any more than I welcome any other of the employment effects which may be associated with tax increases or reductions in public expenditure. It is much more likely, however, that with this tax the effects will be contained, since they are thinly spread over the whole economy and not concentrated in a highly selective way on particular industries which would otherwise bear the full brunt of any tax changes.

The House, while conceding this, may nevertheless feel that a broad quantitative estimate of the possible effect of the surcharge on the level of unemployment would be helpful. This point was put to me last week by my hon. Friend the Member for South Ayrshire (Mr. Sillars). I have already suggested that the adverse effect by the fourth quarter following the introduction of the surcharge might be about 10,000. I know of no other intellectually respectable method of arriving at an estimate.

The decision to proceed with the National Insurance Surcharge in the face of the overriding need to bring down the PSBR was not taken without careful consideration of the alternative courses. Our critics delude themselves if they think that these would be painless or less painful than the tax we are proposing.

Mr. James Sillars (South Ayrshire)

Could the Financial Secretary tell us some of the alternatives which he considered and rejected?

Mr. Sheldon

I will come to that because there are alternatives, and we shall need to consider them when the hon. Member for St. Ives (Mr. Nott) deals with this point. We would like to hear him put an amount on public expenditure cuts. I would be grateful if he would be helpful about this when he intervenes.

The first option that would have been open to us was to do nothing at all. However, I find it impossible to advocate this. The second option was to make a choice between public expenditure cuts or tax increases or a combination of the two.

With tax increases, we could, of course, have gone for VAT. To produce the same effect on the PSBR as we estimate we shall achieve through this National Insurance Surcharge, we should have needed to raise the standard rate of VAT by 3½ percentage points to 11½ per cent. We calculate that this would increase unemployment, beyond what it would otherwise be, by some 50,000 by the fourth quarter following the introduction of the tax—that is, by five times as much as the increase we foresee as a result of the surcharge. Moreover, the use of VAT in this way would produce a larger and more immediate effect on the Retail Price Index than will the surcharge. The estimated RPI increase by the fourth quarter after introduction would be 1.8 per cent. in the case of VAT, but in the case of the surcharge it will be about half that, namely 0.9 per cent.

Mr. David Mitchell (Basingstoke)

In condemning a VAT increase in this case is the Financial Secretary saying that there is no increase in the pipeline already?

Mr. Sheldon

The hon. Member knows better than to ask questions of that kind. He knows that these matters are before the House as a result of measures announced last July. I am dealing with them today.

The difference between the effect of VAT and the effect of the surcharge on the RPI is because the surcharge is a broadly-based, thinly-spread tax, whereas VAT relates almost entirely to consumers' expenditure, of which it covers no more than about one-half.

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

Does the Minister agree that this type of taxation adds to the cost of exports, whereas VAT applies only to the home market?

Mr. Sheldon

The surcharge applies to all employers, I agree.

A further disadvantage of VAT, compared with the surcharge, is that its price-raising impact is felt more quickly than the corresponding effect under the surcharge. By the autumn 1977 virtually the whole of the effect of VAT would already be through, but in the case of the surcharge the effect as we estimate it should be no more than about one-half of 1 per cent.

This difference is very important for the social contract. The TUC is holding firmly to its bargain on the current round of pay policy, and both the TUC and the Government are determined to avoid a free-for-all on pay after July next. Where a choice is open to us, it is right that we should make the choice which does not make their task more difficult.

If VAT is ruled out as an appropriate option, what are the other taxation alternatives? We could, of course, operate on the excise duties on oil, alcoholic drinks, and tobacco, but to produce the necessary revenue-PSBR effect would require very large increases indeed in the duty rates, and these would carry big RPI effects.

Another possibility in principle is Corporation Tax, but our room for manoeuvre here is very limited in practice. Company profits have been depressed by the sharp recession through which the economy has been passing, and are only just beginning to recover. The House will not need me to dwell on the implications of any sharp increase in profits taxation for the rate of productive investment and for the job creation that we expect to flow from the additional investment in prospect, on present policies, the period immediately ahead.

There remains income tax, but I imagine that no responsible person would dissent from the words uttered on this subject by my right hon. Friend the Chancellor, and what he said about the problems of income tax at the levels operating at present, particularly in so far as it affects the low paid, and the problems of the poverty trap. There are other problems as well.

The other alternative for reducing the PSBR is further public expenditure cuts. The Opposition always say that it is easier to cut public expenditure than anything else. Having stated this again and again and again, the right hon. and learned Member for Surrey, East (Sir G. Howe) on 26th November referred to this once more, when he mentioned the need for a massive transfer of resources from the public to the private sector and called for a reduction in direct taxation. The policy of the Opposition is clear. It rests on the assumption that massive cuts in public expenditure will lead to massive transfers from public to private expenditure and investment.

This hope, which they have repeatedly expressed, that public expenditure cuts will lead to increased private investment is no more than a hope, and hope is an insufficient basis on which to plan. By cutting public expenditure and assuming that this will lead automatically to an increase in private investment, one is falling into precisely the same error as did the right hon. Member for Sidcup (Mr. Heath). He produced tax reductions, a climate for industrial investment, the Industrial Relations Act, which he believed industry wanted, and a flexible exchange rate. When he had done all that, he found that there was still insufficient investment, so he resorted to complaints and exhortations one after the other. The truth is that reductions in public expenditure do not automatically lead to increased private expenditure and investment. This gap between the two leads to higher and higher levels of unemployment.

Mr. Cecil Parkinson (Hertfordshire, South)

The Financial Secretary said that hope was no basis for an economic policy. But the whole of his Department's economic policy in the last two years has been based on the hope of a world boom. The whole of the Chancellor's strategy from 1975 onwards has been based on the policy that there shall be no cuts in public expenditure because of advantages expected from the forthcoming world boom. How can he say that hope is no basis for an economic policy when his policy is based on the hope of a world boom?

Mr. Sheldon

The hon. Members fails to understand the realities of the situation. The reality is that clearly any growth in the economy has to come from a growth of exports and sales abroad. It would have come with a world boom that much earlier. If the hon. Member is saying that our economic policy is based only on the hope of a world boom, I disagree. It has only delayed the way in which we expect the economy to operate. When the right hon. Member for Sidcup found that the investment he sought was not forthcoming, he had come to the end of the realistic part of his Government's economic policy.

We are never sure what the Conservatives mean when they apply the word "massive" to public expenditure cuts. But let us leave the word massive to speak for itself. If there were now a Conservative Government they would fall between the two stools of massive reductions in public expenditure either without an improvement in investment or with a consequential increase in unemployment.

We on the Labour benches must, therefore, not allow the Tory Party to conduct its savage experiments on the body of British industry and those who work in industry. The truth is that all tax instruments suffer from disadvantages. It is perhaps a rather unenviable task to have to choose between them and to present the conclusions to the House.

Mr. Sillars

My hon. Friend has not given us a calculation of the advantage to the public sector borrowing requirement of reducing unemployment by 500,000. How much does it cost to have 1.3 million unemployed, and what savings would there be for the PSBR if that figure were reduced by 500,000?

Mr. Sheldon

I am not sure that I can help my hon. Friend. I sought to deal with his question about the impact of the Bill on unemployment levels. I have sought to produce the most suitable figures for him. I am sorry that I cannot go further. I have given him the best figures I have been able to produce. They represent the position that we expect to develop.

Mr. R. B. Cant (Stoke-on-Trent, Central)

Did the Chancellor not say that a one point fall in the unemployment percentage would save the Exchequer £400 million in the payment of benefits?

Mr. Sheldon

I thank my hon. Friend for his intervention. I do not have those figures before me.

Any measure of taxation produces the kind of discriminatory problems that I have tried to analyse. I believe that the National Insurance Surcharge constitutes the most rational choice in present circumstances. It raises the revenue required for our PSBR objective, it minimises the effect on prices and it imposes no extra administrative burden or staffing requirements on the public or private sector. Accordingly I ask the House to support the Bill.

4.3 p.m.

Mr. John Nott (St. Ives)

The Financial Secretary has ground out his brief to an empty House with the talent that we know so well and that we certainly admire as an important parliamentary asset—that of boring his audience. It is not surprising that the House is empty today. There are several important meetings of the Labour Party's National Executive Committee outside the House and the less important and certainly less influential meeting of the Cabinet to consider the future of the nation. That no doubt explains why the Financial Secretary is not joined here today by the Chief Secretary and the Chancellor.

When the Financial Secretary asks what public expenditure cuts I have in mind, I must remind him that I am not yet a member of the Government. I thought that he and his colleagues were considering this afternoon in Cabinet the public expenditure cuts that they were to carry out and that have been belatedly forced upon them by the IMF. I shall return to public expenditure and try to answer some of the Minister's questions later.

Let me take as my text the first sentence that appeared in an article in The Observer yesterday by Mr. Alan Watkins under the heading The last stand for social democracy". Writing in this organ, which is the one in which social democracy is having almost its last stand—it is to be underwritten by a multi-national American oil company, which is probably appropriate for The Observer—Mr. Watkins said: To defend Cabinets is usually neither effective journalistically nor agreeable personally. Attack is much more fun for everyone. That is true.

With the single exception of the present Shadow Cabinet, which is decisive, enlightened and courageous at all times, all Cabinets tend to be compounded of every shade of political opinion, personal prejudice, departmental jockeying and self-interest. It is also axiomatic that any political body of 24 men and women is unlikely to agree on anything more sensible than the lowest common denominator of any policy. It is not surprising, therefore, that the biggest bouncer of them all, never too scrupulous in his methods, should have bounced this Bill through the Cabinet.

Mr. Watkins, who for us is a useful fund of tittle-tattle from the embattled Labour Benches, says one thing of the Treasury's arrogance in bouncing this particular measure through the Cabinet. He tells us that the Cabinet was not consulted or even informed. That was followed by the recent rise in interest rates which he says the Cabinet first read about in the newspapers.

I do not know whether that is true. I suspect that the Cabinet was consulted after it was too late for it to object. But Mr. Watkins claims the old revisionists Mrs. Shirley Williams and Mr. Anthony Crosland … decided in the case of the IMF loan that the Cabinet must behave as a Cabinet". That is what is happening now. The Chief Secretary and the Chancellor are there. The Cabinet is behaving as a Cabinet while the nation awaits with expectation to see precisely what will emerge. I shall not be diverted on to the subject of the IMF loan, because today we must ask whether the Chancellor was wise to bounce this Bill through the Cabinet and whether the Labour Whips will be sensible to force it through the Commons.

In a way the July measures seem almost to be a part of history. They are remote and they bring to us not unhappy memories of July and August of this year. The memories are rather like those early childhood memories of bathing in the warm seas around our coasts. The measures seem very remote indeed, but in reality they have not even begun to bite. The newspapers are full of the next round of cuts and the next tax increases, and still there are three months or more to go before the last cuts take effect.

When this 23 per cent. increase in the tax on jobs takes effect there will be more than 1½ million unemployed in this country on, the Prime Minister assures us, a rising trend of unemployment. That only underlines the points we have repeatedly made in this House over the past two years—that by delaying action to reduce the deficit the Government would eventually be forced to do so by events in far worse conditions than would have been necessary a year or more ago. That is precisely the situation today.

I agree with the Chancellor about two substantial matters. I endorse his tactics with his Cabinet. One cannot ask a bunch of political morons to draft a Letter of Intent any more than one can consult them about taxation policy. I have never believed in the Treasury consulting the Cabinet about very much. Let the Chancellor talk to individual Cabinet members individually. However, to try to consult them collectively about measures of every kind seems counterproductive. It is clear that the right hon. Gentleman did not consult them fully about this Bill.

Secondly, of course, it was essential for the Chancellor to go for a major reduction of the deficit in July, but there is more than one way of achieving that objective. Our objection to this measure is that it will fall almost wholly upon the private sector, the very sector of the economy which is already bearing an intolerable strain.

Until the Financial Secretary spoke, I thought that it would have some minor effect upon the public sector, but now I understand that the increase will be allowed for in the rate support grant and so all the objectives which the Chief Secretary himself set out in a speech on 26th November will be annulled. He said: From 1965 to 1975 the number of employees in manufacturing industry fell from 8.39 million to 7.33 million, while in national and local government service, not including teachers and Health Service workers, the number rose from 1.3 million to 1.6 million. That position has to be reversed. The whole burden of what the Chancellor and the Government have said over the past few months has underlined the need to get resources of men and money back into the private sector and out of the public sector, and yet this measure goes entirely contrary to that.

Will the main burden of tax fall on prices or on jobs? I agree with the Financial Secretary that it is difficult to estimate the answer, but with economic activity now declining, it seems probable that business men will not be able to pass this on in prices. I listened to the Financial Secretary's statistics with interest. I could not follow them, but I shall read them in the morning. I think they must be wrong.

If £1,000 million has to be taken out of the economy in tax in this way, it can come only out of prices—in which case it has precisely the same effect as VAT—or it must come, in whole or in part, out of profit margins. There is nowhere else it can come from. It is not possible for any statistical exercise to show that it will both result in lower prices than an increase in VAT and have less effect on jobs. That is clearly impossible.

If the Financial Secretary says that the impact of this particular tax will build up only slowly and will build up more slowly than VAT, and that it will, therefore, have less effect on prices, that may, of course, be true. But it would also mean that it would have a lesser impact upon the public sector borrowing requirement, which is the reason for the measure. It cannot be correct, as the Financial Secretary claimed, that this measure will lead to lower unemployment than VAT on the one hand, and also lead to lower price increases on the other hand. If £1,000 million is taken out of the economy, it must have the same impact as £1,000 million taken in other ways. The question is how it falls. Whether the main burden of this tax is on prices or on jobs we do not know, but it seems that economic activity is now declining and looking different from how it looked in July. It will be difficult for business men to pass this burden through to prices as was originally thought to be possible.

Most of the assumptions upon which the tax was founded have been revised. Growth in the United States of America is faltering. The latest CBI report, published today, shows a slow-down in export orders. The Chancellor has revised his forecast of growth of GNP from 4½ per cent. to about 2 per cent. Altogether, it will be very difficult to push the tax through into prices as was thought likely to happen in July—and it will therefore have to make its impact upon margins, which means jobs and investment.

Incidentally, I have one major advantage over the Financial Secretary. It is that I do not have access to the medium-term forecast of the Treasury. We know from what has happened recently that there is no advantage in having access to it. I remind the House that in our debate on 10th March 1976, when we debated the Treasury assumptions contained in the public expenditure White Paper, every hon. Member who spoke, Labour and Tory, indicated that the resources table in the White Paper was obvious nonsense. Yet the Government defended it up and down while every hon. Member refuted it.

I quote from one comment I made briefly then: This shows that with case I in the table, involving 4 per cent. growth over the next three years—2.4 per cent. over the five-year period—we should need to save about £6,650 million of Government expenditure by 1979, at 1975 survey prices, in order to achieve the objectives of the Government."—[Official Report, 10th March 1976; Vol. 907, c. 543.] I remember very well the hon. Member for Luton, West (Mr. Sedgemore) saying that these figures were nothing more than a bunch of aspirations and bore no relation to reality. Here we are, only four months after the Treasury's last forecast, and a growth of 4½ per cent. has been revised downwards to 2 per cent., which is what the House was saying without access to the Treasury model and without the benefits of all that expert advice from which the Government suffer. We got it right and the whole of the system got it wrong.

Mr. Cant

Does the hon. Gentleman agree that there might be hope in that the Treasury is now willing to rent out its computer on an hourly basis and might not have quite so much use for it itself?

Mr. Nott

I have always been very surprised at the passion of the hon. Member for Motherwell and Wishaw (Dr. Bray) to get at this model in the Treasury.

I have some experience of looking at medium-term economic forecasts and I suspect their usefulness. We do not have a resources problem now. We have a problem of money. No one in his right mind would have made the cuts in spending now if one was looking purely at the resources problems of the economy. The reason the IMF is here and sterling is falling is that we have a financial imbalance in our accounts. Yet still the medium-term forecast is churning out this Keynsian demand-effect stuff which is of little relevance to our current problem.

Next we come to the justification, which I note that the Financial Secretary did not mention today but which he made the other night, for this tax. He said that the employers' contributions among our European partners were very much higher than our own. That argument was so trivial and inaccurate that we must not get drawn into it again today, and I notice that the Financial Secretary has not mentioned it again today.

Let me say once again, as I did the other night, that this surcharge has nothing whatever to do with social benefits. The full amount goes straight into the Consolidated Fund. It is a naked tax, not even hidden by the fig leaf of the National Insurance Fund. It goes straight into the revenue of the Exchequer and is used as a tax like any other.

Certainly if one were justifying this as a means of offsetting income tax there are other figures that one could quote to show that in the United Kingdom—if one takes the percentage income absorbed by income tax for a married couple on average earnings with two children—the head of the family is paying 20 per cent. of his earnings in tax. In France 0.7 per cent. goes in tax, in West Germany 7.9 per cent., in Belgium 7.8 per cent., in the Netherlands 2.9 per cent., and in Italy 2.4 per cent. If we are to use these kinds of percentages, we should at least state the whole of the case. They do not take us very far. This is clearly a tax and it has nothing to do with social contribution.

This brings me to the important subject of Churches and charities. I leave other hon. Members to deal with charities, but I think that the House, although it is empty, will take the gravest exception to being steamrollered by the Government on this matter. The Ways and Means Resolution is so tightly drawn that we are able to put down amendments to deal only with the rate and the date. We shall not be able to put on the Order Paper successfully anything to do with Churches or charities.

The letter in The Times today from the Bishop of London needs an answer from the Government and I hope that the Minister of State will reply to it when he winds up the debate. The change in the status of clergy from self-employed to employed persons will cost the Church an extra £350,000 a year—that is the figure mentioned by the bishop in The Times. The cost of these proposals will bring the total figure to £700,000. If that estimate is too high or inaccurate, no doubt the Minister of State will correct it. Clearly there is a substantial additional impost to be made upon the Church of England. I refer to the Church of England alone—that is the only Church referred to by the Bishop of London.

More directly, I wish to refer to the Minister of State's remarks in Committee on the Development Land Tax Bill earlier this year. He said: there is no intention of extending taxation, be it income tax, capital gains tax, corporation tax or any other tax, except those indirect taxes which we have imposed on chariies for a long time. Of course this increases the national insurance stamp which the employer—the Church—will have to pay on behalf of its employees—the clergy. We understand that it is an addition to the impost which the Church is already going to pay, but this extra money does not flow into the National Insurance Fund. It is an "any other tax" which the Minister of State clearly said would not be imposed on the Church.

The Minister of State, Treasury (Mr. Denzil Davies)

Perhaps I may deal with this point now. I said clearly that I was dealing with direct taxes on gains or profits. The list comprised income tax, which is a tax on profits, capital gains tax, a tax on gains, corporation tax, a tax on profits, and development land tax, a tax on gains, or profits. I specifically excluded indirect taxation, which is not a tax on gains or profits. This surcharge is not a tax on gains or profits. It is an indirect tax and is clearly excluded from my statement.

Mr. Nott

I have the Minister's statement here. He said: there is no intention of extending taxation, be it income tax, capital gains tax, corporation tax"— that may refer to direct taxes— or any other tax, except those indirect taxes which we have imposed on charities for a long time."—[Official Report, Standing Committe J, 13th May 1976; c. 1172.] I understood that this was an indirect tax. The Financial Secretary has explained that it is an indirect tax which will fall upon prices—that was the whole burden of his remarks—and was an alternative to VAT but it is not imposed on charities now. That is how I understand it and how the whole House must understand it. It bears no other interpretation.

The Financial Secretary argued that any other attempt to raise additional revenue of £1,000 million, whether by VAT or any other method, would have an adverse impact on activity. That is certainly correct, but we can assert at this juncture that the surcharge will be more damaging to jobs and new investment than the equivalent amount of revenue raised in VAT.

Contrary to what the Financial Secretary said when he read out his statistics, they were not based upon the very unhappy economic situation which we now foresee, the downturn in world trade and the United States' economy. Indeed, only last week, the Chancellor of the Exchequer was challenged in the House by the hon. Member for Luton, West on the regressive nature of indirect taxation. The Chancellor responded: It certainly was true 30 years ago that, broadly, indirect taxation was regressive and income tax was progressive, in the social sense. That is no longer true when income tax is paid at levels of earnings below those which qualify for supplementary benefit. It cannot really be regarded as a progressive tax. On the other hand, the structure of the value added tax, which zero rates half—the most important half—of family expenditure, can be shown to be in many respects progressive rather than regressive."—[Official Report, 30th November 1976; Vol. 921, c. 719.] Yet now we have the Financial Secretary coming along today boasting about the fact that this tax is broadly based.

Only a week ago, the Chancellor was singing a eulogy to VAT—no doubt in preparation for what he thought he might have to do any moment now—saying that it was not a broadly based tax and was greatly advantageous to the families of this country in comparison with income tax because it fell upon only half of household expenditure and therefore we should not think of it any longer as being regressive. Now the Treasury, in the form of the Financial Secretary is here and says that this surcharge is a good tax, that it is broadly based, regressive and falls on food, fuel and all the items that the Chancellor of the Exchequer excluded.

I do not know what the Treasury really wants. It is clear that it badly needs money and that, with the IMF leaning on it, it has to find money somewhere and will use any excuse or statistic, however bogus, in order to get this Bill past the Government Back Benchers. Since there are only two of the Financial Secretary's colleagues sitting behind him, I do not think that the problem will be too great on this occasion.

Of course, we would not choose to raise £1,000 million by this method or by VAT at the moment. We have repeatedly made clear that we would find the money out of public spending generally. Before the Financial Secretary becomes too chirpy, let me say that the mere passage of events has proved our case. Every single word said by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) when we last debated this matter has come to pass.

Had the Cabinet agreed to find £2,000 million out of public expenditure in July —which is certainly what our sterling creditors were expecting—it is possible to argue that the collapse of sterling might have been averted, that the massive social problems which that collapse is likely to cause could have been avoided and that our independence as a nation would not have been put in jeopardy in the way that we are now experiencing.

Only four months later, the Government are faced with the demand to find £2,000 million out of public spending anyway. What was the debate all about at that time? The Financial Secretary and Treasury Ministers were saying that if they found an extra £1,000 million out of public expenditure, it would have unfortunate effects, that it would destroy jobs, that it was a typical Tory suggestion, that it was just what we would do. They said that they would find it by way of a tax which would not hurt anybody.

Now, not only has the country got the £1,000 million tax on jobs, it has had the £1,000 million out of public expenditure in July and is going to get probably more than another £1,000 million out of public expenditure next week. Where has it all got us? Nowhere at all. If the Chancellor and his colleagues had done the right thing in July, we should not be where we are today.

I shall conclude by answering the Financial Secretary's challenge about the Opposition's view—probably a mistake and my right hon. and hon. Friends will be angry with me. If the Government had followed our advice two years ago, 18th months ago and six months ago and had taken the necessary amounts out of public spending to bring the Budget more nearly into balance—and none of my hon. or right hon. Friends has ever made such a ludicrous suggestion that £5,000 million should be taken out in the next year —the country would not now be facing the national humiliation which it is now suffering at the hands of the IMF.

I feel ashamed when I think that the managing director of the IMF has to sneak his way in and out of London for fear of being seen and molested by the Press. I feel ashamed that the less developed nations sit on the board of the Fund and are now telling us how to run our country because of the profligacy of this Government. The Government should be ashamed that the less developed countries, which are experiencing more severe problems than our own are telling us what to do, and that the IMF has practically exhausted its funds and has to pre-empt its dwindling resources for us. The Government will have to take the steps which we have been urging for the last two years in any case.

The matter is not over. It has still some time to run and the sooner a start is made the happier will be our country. The sooner these measures are taken, the less severe will be the consequences in the medium term.

4.32 p.m.

Mr. Terry Walker (Kingswood)

The hon. Member for St. Ives (Mr. Nott) has still refused to say which items he would choose to cut. That was the question which he was asked by my hon. Friend the Financial Secretary. It is no good his saying that the Opposition told us what to do two years or 18 months ago. The question has never been answered by the Leader of the Opposition or by the right hon. and learned Member for Surrey, East (Sir G. Howe), although it has come up at Question Time on many occasions. I regard the issue as a red herring, and I do not propose to follow the hon. Member for St. Ives in his argument.

My hon. Friend the Financial Secretary and my right hon. Friend the Chancellor of the Exchequer have an unenviable task in bringing forward this measure, but it is necessary if we are to reduce the public sector borrowing requirement as our economy recovers from the recession. I appreciate the necessity of this measure as opposed to the more Draconian measures which have been canvassed by the Opposition. I do not say that they have suggested such measures, but they have canvassed them in the newspapers. That is why I shall support the Government.

I rise to tell the House of the grave concern felt by the churches and charities about the Government's proposal to add two percentage points to employers national insurance contributions. That money is to go to the Exchequer and not to the National Insurance Fund, which means that it is a payroll tax and that it does not raise revenue for the Fund. The Chancellor of the Exchequer has agreed that that is so. If implemented in its present form, the proposal will seriously affect churches and charities. It will substantially put up the cost of staff.

For example, the increase for Dr. Barnardo's will be about £120,000 a year and for the National Children's Home about £90,000 a year. That means that voluntary organisations will have to curtail their activities at a time when my right hon. Friend the Secretary of State for Social Services has said that the Government are anxious for greater reliance to be placed on voluntary organisations because of financial pressures on local authorities. The Government must not forget that.

Unlike many other employers, the churches and charities will not be able to pass on the tax in increased prices or by setting it against corporation tax as the Chancellor of the Exchequer has suggested. I speak for all the churches, not only the Church of England.

The proposals are particularly unfortunate and inopportune for all denominations. They come at a time when most of the denominations have reluctantly agreed to bow to the Government's wishes to let their clergy become employed contributors for national insurance purposes. From the Church of England's point of view, I shall feel much happier when the clergy are regarded as employed persons rather than self-employed, because that will be in their interests. This extra 2 per cent. comes at a time when it has been agreed by the Church that April 1978 shall be the date when clergy become employed persons. It is a great blow to the Church of England.

I can give figures only for the Church of England, but it seems that the change of status of clergy will cost the Church of England an additional £350,000 a year. That cost will initially fall upon the Church Commissioners because, being responsible for the emoluments of clergy, they will have to pay most of the money. They are the only people in a position to act as employers for national insurance purposes. On the other hand—this is what I want my hon. Friend the Financial Secretary to consider—the Commissioners have no means whatever of passing on the additional costs in increased prices or charges in the way as can be done by commercial organisations. That argument has been put on many occasions.

The effect of this increase in costs, therefore, can only be to reduce the amount that would otherwise be available for the payment of clergy stipends and pensions. In other words, the whole of the 2 per cent. increase in employers' contributions would have to come directly or indirectly out of the pockets of the clergy themselves and their widows, and in recent years they have probably been among the hardest hit, being part of a lower-paid category of workers. Other denominations as well as the Church of England will obviously be affected in much the same way.

That is the fact that has led us to make representations. Indeed, the Church Commissioners made representations to the Chancellor on 19th August 1976. We made these points because we felt that there was a case for us to have special consideration. As a result of the inquiries we have made, we understand that it is not the present intention to extend charity exemption to this new form of tax. Therefore, what we are asking is that consideration should be given to this matter and that full knowledge of the facts should be understood by the Treasury, which should understand what would happen if this kind of tax were levied upon the Church and charities.

The policy of granting tax relief to charities has long been accepted as being in the interests of the community. If this policy is reversed to any material extent, by direct or indirect methods, for reason of principle or of administrative convenience, suddenly or by a slow erosion, the consequences for the Church will be grave and far-reaching. A full-time minister, even on the much-reduced scale of today, is an important person. He plays a very important part in the life and work of the community. It is these points that we have sought to make in our representations.

There is another very important consideration, quite apart from the cost and the timing of these proposals, which are very unfortunate. The clergy have planned to become employed persons. The churches and charities are deeply concerned at the implications in this matter for the future and the fact that it will mark a breach in the principle that on grounds of public benefit they are not subject to direct taxation. That is a principle which Governments of all political persuasions have long been at pains to maintain. Churches and charities are not, therefore, liable to corporation tax, capital gains tax or capital transfer tax. When the House decided that they could not be wholly exempt from development land tax, the Financial Secretary went out of his way to explain to the House that that was not a tax in the ordinary sense of the term and that the arrangements were not to be taken as marking any general departure from the principle that charities were not taxed.

I hope that these matters can be looked at again. Lord Allen of Abbeydale has written to the Chancellor on behalf of the National Council of Social Service. The two Archbishops have written to the Prime Minister on this matter, and I believe that meetings are planned. The Churches Main Committee, which represents all the churches, the Pensions Board and the Church Commissioners are unanimous and are strongly of the opinion that further efforts should be made to persuade the Government to allow charities, including the churches, exemption from this new form of tax.

I therefore ask the Minister, even at this late stage, to reconsider the situation. If it is necessary to draft new clauses, let us hope that that will be done. If, however, that cannot be done, perhaps we may have a promise that at a later stage some help can be given. I earnestly ask my hon. Friend to look again at this matter. It is worrying a great many people in the churches and in charities.

4.45 p.m.

Mr. David Mitchell (Basingstoke)

We are asked today to pass a Bill which will take £1,000 million out of business, commerce, Churches and charities. I join the hon. Member for Kingswood (Mr. Walker) in his sense of outrage at the thought of £120,000 having to be found by Dr. Barnardo's Homes and the additional sums to be found by other charities and the Churches hard pressed by so many rising costs already.

I should like to look at three aspects of this matter. They are, first, the way in which this contradicts and undermines the whole of the Chancellor's design for recovery; secondly, the effect that it will have on business generally and the small business in particular; thirdly, the effect of this tax on unemployment.

Before doing so, I should like to utter a protest to the Treasury Bench about this abuse of the national insurance system. We are starting on a very dangerous road when the national insurance system is used as a method of raising tax. Once the national insurance contribution is part of tax and rises in line with public policy, so we are on a slippery road that leads to benefits being variable in accordance with public policy and the current politico-economic trend. There is a very dangerous risk here that there will be a backlash from contributors to the National Insurance Fund, who have contributed, albeit grudgingly, in the past in the knowledge that they were contributing to what would one day be their pension, or their fall-back if they were unemployed, or their sickness benefit. To find now that their contributions are going into the general maw of Government spending is unacceptable to many of them.

I turn to the undermining of the Chancellor's plans for national recovery. Hon Members will know that I am no sycophantic admirer and supporter of the Chancellor of the Exchequer, but he has repeatedly made it clear that he will reduce next year's prospective increases in Government expenditure in order to release resources, and if the Government take less resources, more will be available for industrial regeneration and modernisation, and the financing of expansion, particularly of exports.

Perhaps I may quote the Chancellor's view on this matter as expressed in his Budget statement. He referred to the Government having limited the demands of the public sector so as to make room for industrial expansion. He went on to talk about temporary shortages of capacity—skilled manpower, capital equipment, raw materials, components and so on".—[Official Report, 6th April 1976; Vol. 908, c. 240, 241.] He spoke about his way of dealing with the "bottleneck situation. There are further references to the need to shift resources, and he talked particularly about his concern that as world trade expanded and new trading opportunities arose, none of these opportunities should be missed by creditworthy companies because of shortage of available finance. He said that there was a need to avoid crowding out and the like.

Somewhat exceptionally, the Chancellor was still saying the same thing in July. For any Chancellor to be saying the same thing a few months later is perhaps noteworthy. On 22nd July he warned of the danger that financing of the public sector will pre-empt private savings which productive industry is likely to require on a substantial scale. "— [Official Report, 22nd July 1976; Vol. 915, c. 2012.] Private industry does require those private savings on a substantial scale. The Chancellor is quite right. But what this Bill will do is to take £1,000 million of them away, and that is the direct contradiction to the policies outlined by the Chancellor.

As if to underline my point, The Times last Friday under the headline "Is innovation caught in a poverty trap?" pointed out that the £25,000 MacRobert Award for engineering innovation administered by the Council of Engineering Institutions will not be awarded this year because no successful innovation had been brought forward over the past year which would warrant it.

That underlines what the report by the Select Committee on Science and Technology said, that the greatest obstacle to technological innovation was neither a shortage of ideas nor an absence of opportunity but that innovation was limited because industry was short of capital and because risk capital was unavailable. In those circumstances, what sense can it make for the Chancellor to send his minions to the House today to recommend a Bill which takes £1,000 million from the industrial sector? The Chancellor talks of moving resources into industry, but his actions achieve the very reverse.

My second point relates to the effect on business. Anyone who wants to ruin private enterprise in the mixed economy can use one of three methods: he can denude it of skilled labour, he can destroy the motivation of management or he can strip it of essential working capital. Along with a few broadcasts encouraging divisive class warfare, the mixture is almost certain to succeed.

That is the situation we face. Skilled labour and management are tax-sick. Much of the £1,000 million proposed in the Bill will come out of working capital. I know that the Treasury will say that part of it will be passed on in price increases. Part of it may—after a suitable delay while industry carries the costs itself—but there is one sector which will not be able to pass it on, and that is the sector of industry whose prices are not decided by price commissions or anyone else but by the hard thrust of competition, by the fact that putting up prices means that one cannot sell. It is on those firms, predominantly the small business sector, that the effect of the tax will fall most severely.

A quarter of hon. Members represent regional constituencies which rely on small businesses more than any other part of the economy. The effect on small businesses will be very serious, coming on top of the efforts that have to be made to run a business while borrowing money at 17 or 18 per cent. —the point to which the Government have driven un interest rates —and on top of multi-rate VAT, higher corporation tax and the threat of a wealth tax.

I estimate—perhaps the Minister can correct me if I am wrong—that this Bill will take £202 million out of the small business sector over the next year. One tends to overlook the multiplier effect. A small business expands or survives—if it does—by ploughing back its profits, its surplus from the previous year's trading, and from bank borrowing. But bank borrowing is always limited by the resources of the company. No bank will lend without regard to the company's resources.

Thus, when the Government strip businesses of money by means of this tax, they will reduce the borrowing ability of businesses and attack small firms who cannot go to shareholders or the Stock Exchange for more working capital. This will have a serious effect in a time of inflation, when these businesses need more money and the Chancellor is supposed to be urging them on to higher production for export.

The Bill will mean less ploughing back, less borrowing, less modernisation and a less competitive British industry. We have a record Chancellor. He is not top of the pops. His record is the achievement of the highest level of bankruptcies recorded—not just the highest level under this Government, since the war or even since 1931, but the highest level ever since records were first kept in 1914.

Can the Minister of State estimate the number of small businesses which will be bankrupted by this proposal? He looks slightly bewildered. Does he know the number? I hope that he will guide the House. If he does not give us an indication, we are inevitably driven to assume that he does not know. That would not be surprising, of course, from a Government who care so little about small firms.

Turning to the estimates of the numbers who will be unemployed as a result of the Bill, the House should be grateful to the Expenditure Committee, whose activities were reported in The Times on 29th July. There has been some misunderstanding about this, and I hope that the House will carefully consider it. According to the report, Mr. Posner, who was Deputy Chief Economic Adviser to the Treasury, advised the Committee … that Britain's gross national product would be some ¾ per cent. lower by early 1978 than it would otherwise have been without the imposition of the £2,000m package of measures. On conventional Treasury arithmetic, this lower level of economic activity would result in 150,000 to 160,000 fewer jobs. Half of that amount—£1,000 million—is tied up in this Bill. I therefore take it that 75,000 to 80,000 of the additional unemployed will be created as a result of the Bill.

We should consider what that means for our own constituencies. I should like the advice of hon. Members. Will it be equally shared among all 635 constituencies, with each constituency suffering another 120 unemployed, or is it true that some constituencies which traditionally have had high unemployment will have much more as a result of the Bill while others will get off relatively lightly?

How will hon. Members answer the questions of their newly unemployed constituents? Are they waiting for the right hon. Member for Bristol, South-East (Mr. Benn), who sits on the opposition bench in the Cabinet, to give a lead? Are they waiting for the hon. Member for Liverpool, Walton (Mr. Heffer), who unfortunately is not here at the moment, who claims to support small businesses, to give a lead? Or will the hon. Member for Bolsover (Mr. Skinner), sitting in his advice session in his constituency office, be interrupting the unemployed from a sedentary position when they come to tell him their problems? What will the keeper of the conscience of the Left, the hon. Member for Paddington (Mr. Latham) do when he meets some of these extra unemployed in the streets of his constituency?

Hon. Members should consider how the Bill will affect their constituents. The unemployed are not an experiment for the Chancellor; they are real people who will be out of work. They will be hurt personally, their families will be hurt, their self-respect will be hurt. These are the people about whom we are thinking, and I hope that Labour Members will also think about them when they vote tonight.

5.0 p.m.

Mr. James Sillars (South Ayrshire)

I must tell the hon. Member for Basingstoke (Mr. Mitchell) that most people on this side of the House think about that matter all the time. If in the next six months the Government were to change, I should look forward to the hon. Gentleman's contribution if his Front Bench were to cut public expenditure and increase unemployment. No doubt, he would come into the Lobby with Socialists on that occasion.

This is part of the debate about how to handle public expenditure problems, which arise out of the serious decline in the economy. There are two reasons for that decline. One is that the country was very ill-advised to say "Yes" in the Common Market referendum. It is a remarkable feature of our political debate that the subject that dominated political debate for well over a decade is never talked about now that we are full-blown members of the EEC. Yet it is not so long ago that we were told that if we voted "Yes" there would be an investment boom such as we had never seen in modern times and jobs galore would come to every part of the United Kingdom. One of the major poster campaigns talks about jobs for the boys. The right hon. Member for Birmingham, Stechford (Mr. Jenkins) is one of the few boys to get any jobs out of the Common Market.

The other reason why it is inevitable is that early in their period in office after October 1974 the Government, for reasons known only to themselves in the inner councils of the Cabinet, gave up full employment as one of the priorities of a Labour Government. Once they had subordinated full employment to certain other issues in the economy we inevitably reached the stage of having 1.3 million unemployed.

My hon. Friend the Financial Secretary said that the great difficulty with a Conservative Government was that they always fell between two stools, that they cut public expenditure but never generated the necessary investment to create jobs, and that the necessary switch of resources never took place to the extent expected by those who cut public expenditure. That could be a description of the Labour Government's management of the economy as well. They have cut public expenditure and yet unemployment has gone up and up. The Glasgow Herald today gives one of the reasons. Under the heading "More Invested Abroad" on page 10 it has a news item containing a statement by Mr. I. R. Guild, Chairman of Dundee's Northern American Trust. The report says: The implication for the trust's policy is that until Britain is 'in a mood to take the steps necessary to halt inflation and restore the confidence of other countries in sterling' the Northern American board intends to hold a large part of the company's funds in countries 'whose atmosphere is more conducive to growth and financial prosperity.' Overseas investment went up from 50 per cent. to 63 per cent. of the portfolio". This is the problem with the Labour Government's economic strategy, just as it was the problem with the previous Government's economic strategy.

We are not controlling investment and directing it into this country. The result is that the Government are falling between two stools and unemployment is rising. According to the Prime Minister, it will continue to rise for a considerable time in 1977.

No matter how skilfully my hon. Friend moved the Second Reading, he has chosen to cut the public sector borrowing requirement by increasing unemployment—although there are arguments about the numbers—without being able to give any guarantee that the Government's economic managers can take control of the investment available in this country.

We are talking about an enormous deflation—£1,000 million, which even in inflationary times is a substantial deflationary package. We must think of what has already happened and what is probably to come before we pack up for the Christmas holiday. We all know that the argument in the Cabinet is about the amount of deflation as a condition of the IMF loan rather than whether there is to be any reflation of the economy. My hon. Friend and I have had arguments about this before. I shall not attack him on value added tax and his assessment of the Alternatives. I shall just put that matter on the file. We shall see whether the Chancellor of the Exchequer uses that argument or a counter-argument when he brings the package before the House.

I turn to the alternatives. It will be difficult for ordinary Labour supporters to accept the argument that the Bill is one of the only measures available to the Government just after a week in which our newspapers have regaled us with the stories of rich people such as Sir Hugh Fraser being able to run up gambling debts of £1½ million to £2 million and to write them off. If will be difficult for them to believe it when the Labour Government are putting people out of work. I have had arguments before with the Government about their economic strategy. I do not think that they have an economic strategy in any Socialist sense. The hon. Member for Hertfordshire, South (Mr. Parkinson) was right when he intervened in my hon. Friend's speech. Hope is a major ingredient of the Government's approach to economic problems.

As I listened to my hon. Friend and the hon. Member for St. Ives (Mr. Nott) I often wondered whether some of the Left-wing young Socialists in the Labour Party were not right. It was an argument between technologists in the capitalist system. They were not arguing about fundamental changes in the system. We were listening to two technologists arguing how one operated the mechanism. There seemed to be an underlying assumption that it was the best mechanism one could find anywhere in the world. I returned to the conclusion I had reached some years ago that we must find alternatives to the capitalist system. That is why the Socialist movement was born. It is sad to see a Labour Minister engaged in that kind of debate with a Conservative.

If the Government had taken the advice of the Tribune Group when it was offered early in the life of this Parliament and had gone for selective import controls and the direction and control of investment, we should not be in our present position. The Government will argue that it is very difficult, because of the GATT rules, for us to impose selective import controls and the rest, but I believe that they are inevitable anyway and that it is a pity that they were not introduced before.

In some of his major economic statements, the Chancellor has admitted that when the United Kingdom economy has moved into a growth period we have sucked in a disproportionate amount of imports. We could reasonably and legitimately have argued with the outside world that we were entitled to take our share of its goods but not a disproportionate share. We shall skirt around the economic problems all the time, and unemployment will grow worse and worse—

Mr. David Mitchell

What greater and more effective import control could one have than a 45 per cent. devaluation, with a 45 per cent. increase in the cost of imports?

Mr. Sillars

It does not appear to have worked. I know the argument that if one deflates the economy one does not draw in the imports, but such has been the reduced base of the United Kingdom manufacturing sector that that argument has not worked for a considerable time.

I believe that my hon. Friend could have gained the same amount of money to reduce the public sector borrowing requirement by reducing unemployment by 2 per cent. Every 1 per cent. reduction in unemployment means £400 million less in the public sector borrowing requirement.

As I go round the city of Glasgow and my constituency I see appalling housing conditions and I also see the capacity to manufacture bricks and cement. There is plenty of sand available, and building workers are unemployed. As a Socialist, I cannot for the life of me understand why, when we are supposed to be run by a Socialist Administration, we cannot put all those ingredients together to tackle the bad housing in Glasgow and the housing problem in places such as my constituency. We have houses there in which it is very difficult for people to live, especially in the present wintry conditions.

I believe that the Government's whole economic strategy has gone in the direction of Conservatism and away from Socialism.

I understand that this Bill is one of the measures designed to give effect to the July package. I did not support the July package. Therefore, it would be illogical of me to support a measure designed to achieve the objective set out in the July package which I opposed.

5.10 p.m.

Mr. Cyril Smith (Rochdale)

I submit that the Bill, apart from gathering an extra tax, can have only three possible effects: increased prices, more bankruptcies, and increased numbers of people being unemployed, to whom presumably the State will distribute part of the tax that it proposes to collect to make them unemployed.

I agree with the hon. Member for South Ayrshire (Mr. Sillars) that it would be nice if we could evolve ways of paying people to work instead of not to work. It seems almost impossible for this Government and, indeed, previous and, I imagine, future Governments to evolve any kind of principle which relates together all the facilities, on the one hand, to assist the unemployed and on the other hand, in consequence of them being unemployed, all the materials and skill, and so on, which are available. If the State has to pay people not to work why those funds cannot be used to pay them to work on providing good housing, and so on, has always been beyond my comprehension.

The Government have now conceded that a new kind of tax is envisaged in the Bill. It is a tax designed as part of the employers' contribution through the National Insurance Fund. For the first time it makes National Insurance Fund taxation a tool of economic management. That is a serious departure from past practice and the House should be fully aware of it.

The Liberal Party has for a long time advocated a simple payroll tax to replace the employers' contributions and regional employment premiums. It should be capable of being varied on a regional basis according to employment and the availability of employment in the various regions.

The Bill nibbles, as it were, at an employment tax, but it is totally unimaginative. It imposes a greater burden on industry and local government without any attempt to use that increased burden to stimulate employment prospects where they are most urgently needed.

In the Ways and Means debate last week I said that I doubted the ability of certain sections of industry to stand the extra tax which will be placed on it in consequence of the Bill. I doubt whether industry can continue to absorb increased taxes of this kind.

At the weekend the Chancellor of the Exchequer publicly referred to the high burden of income tax in this country. But there are many kinds of taxes which affect industry and which, in my view, have reached absorption point. The Government must understand that there is a limit to the amount of taxation which can be imposed on industry.

If we want industry to invest—I attended a board meeting of my own company this morning at which this very item was on the agenda—it must feel that it has the incentive to invest and that it will not constantly be clobbered by successive Governments both by legislation and increased taxation.

Last Monday I heard an interesting speculation—strangely enough in Scotland—by a professor from Sheffield University. He made the point that it seemed illogical to argue that the country needed increased investment to reduce the numbers of unemployed. He argued, with some logic, that if the investment is made correctly, it should mean fewer rather than more people being employed.

I have long held the view that we should start thinking about full production as opposed to full employment. They are not necessarily the same. A reduced retirement age for men, a shorter working week, and so on, are matters which come into the whole argument about the difference between full production and full employment.

When this tax in the Bill was envisaged, we were envisaging a mini boom some time in 1977–78. It is obvious now that that will not take place. The mini boom, which was forecast for 1977–78, is now unlikely to take place. Therefore, the circumstances in which the principles of this Bill were conceived are now completely different.

There are many weaknesses in the tax. It affects exporters in the same way as importers. It does not matter, under the terms of this Bill, whether one imports or exports. However, it matters in terms of the economy. One is a benefit to the economy whereas the other can be—not necessarily, but it often is—a hindrance to it. The tax makes no differentiation between the two. It seems to assume that industry is a sacred cow with an unlimited supply of milk. It takes no account of the ability of a company to pay, as does profits tax, and it takes no account of a desire to pay, as does VAT, for example. If one does not buy goods, one does not pay VAT. The tax hits small as well as large and prosperous businesses. It hits charities as well as profit-making concerns. It hits churches as well as gambling halls.

This is a rotten Bill with the seed of a decent idea, but a seed which is being indecently cultivated. It will increase the numbers of people unemployed. It will be the difference between a profit and a loss to many companies. It will mean increased prices. I certainly take the view that it is ill-conceived. I strongly hold the view that it is ill-timed. My colleagues and I will certainly vote against it. I hope that all those Labour Members who urged people to lobby Parliament only a few days ago on the subject of unemployment will be with us in the Lobbies tonight, because this Bill will inevitably increase unemployment. I hope that the House will decide to throw out the Bill.

5.18 p.m.

Mrs. Margaret Bain (Dunbartonshire, East)

The Scottish National Party opposed the July measures. Therefore, we shall vote against this piece of legislation.

We believe that there is an alternative for the people of Scotland to continuing under the present set-up of successive Westminster Governments who never seem to come to any clear conclusion on how to solve Scotland's problems.

I was extremely amused when the hon. Member for St. Ives (Mr. Nott) berated the Government and suggested that they should follow Conservative advice. Like the hon. Member for South Ayrshire (Mr. Sillars), I was intrigued because the public expenditure cuts envisaged by the Conservative Opposition would lead to yet further unemployment, particularly in Scotland where there is a large public sector and where the present cuts are having a disastrous effect on the whole community.

As for the dynamic Shadow Cabinet that the hon. Gentleman describes, again I cannot believe him. I prefer to accept the criticism of the Reform Group that calls the members of the Shadow Cabinet semi-crazed kamikaze pilots. The only part of his remarks with which I agreed was when he said that the Government desperately need money.

Various Opposition Members have said that they are representatives of the regions. As the House will know, I consider myself a representative not of a region but of a nation, although I represent an area within it. In that area there are many small companies and small businesses that are extremely important for employment opportunities. My fear is that by introducing this measure many of the small companies will not be able to continue. They are already being affected by difficulties such as increased rates of inflation. They are having to face the difficulties caused by public expenditure cuts. They already have surcharges placed upon them. They are having to cope with a great deal of legislation that makes the running of a company extremely difficult. Any extra taxation is totally unacceptable. I fear that it would have disastrous results in Scotland.

I echo the questions that have been put by other hon. Members—what estimate has been made of the effect of this measure on small businesses? What consultation has taken place with representatives of small companies? It seems that the Government intend to take away the opportunity for many companies to use their money for investment, which would ultimately provide more employment.

Unemployment is the key to the whole debate. As there are only two Scottish Members in the Chamber, both from minority parties, it is interesting to look back to 1961 to see what the present Secretary of State for Scotland said when a payroll tax was first introduced. He said: The important point is what is likely to be the effect of the payroll tax if it is imposed. If the Financial Secretary has taken account of the reaction to this proposal in Scotland, for example, where, as he knows, we have serious unemployment problems, he will realise that, not only Scottish trade unionists, but Scottish employers and other organisations … have said that they thoroughly disagree with the Government's proposal for a payroll tax. He then said: However justifiable that may be in areas where there is a tremendous demand for labour, it would certainly prove a considerable blow to areas like Scotland where the opposite is and has been the case during the last few years." —[Official Report, 20th April 1961, Vol. 638, c. 1425–26.] Plus ça change … except that the right hon. Gentleman will probably vote for an increase in this piece of taxation.

We recognise that the Government are desperately looking for £1,000 million. As it will be taken from the public sector, there will be the spread of more unemployment in public sector services. Only yesterday I was speaking to a mass meeting of members of the Transport and General Workers Union in Partick, where there is the threat of 3,000 redundancies within public transport services in Glasgow. That is a city that has the lowest level of car ownership in the whole United Kingdom. How ludicrous can the Government get?

We must bear in mind the whole background of the IMF package and the terms that it will put to the Government. When I was listening to the radio this morning in Scotland before coming to Westminster I heard that there is a rumour that the IMF will suggest to the Government that they reduce taxation on the North Sea oil companies because the companies are getting a bit worried about the present situation. I hope that a Treasury representative will be able to deny that rumour. The oil companies are not here as charity organisations. They are making larger profits in operating off this country than anywhere else in the world. The sooner the Government comes to terms with the realities and make it more difficult for the companies to walk off with excess profits the better.

We in Scotland keep waiting for the great economic miracle to occur. I put it to the Government Front Bench that if a Conservative Government were in power there would be riots in the West of Scotland. The Government cannot continue to count on the undying support of those in the West of Scotland. They are reaching the end of their tether. They see what is happening. They see services cut back and living standards decline. They see rising unemployment.

In speeches over the weekend senior members of the Government predicted that we shall have even more unemployment this winter. That is totally unacceptable to my hon. Friends. The Government, by bringing in this measure, are creating more unemployment. We have no hesitation in opposing it.

5.26 p.m.

Mr. John Watkinson (Gloucestershire, West)

I was moved to participate in the debate because of a remark made by the hon. Member for Rochdale (Mr. Smith) with which I have a great deal of sympathy. The hon. Gentleman said that if we seek greater investment in industry generally, that in itself will entail a movement out of the private sector as new machinery is introduced, new investment is made and industry is made more efficient.

An increase in investment will mean that we shall be faced with the added problem of finding new jobs for those who have been displaced. Even if the Government's industrial strategy, which I wholeheartedly support, is successful, we shall still be faced with the problem of unemployment, a problem that exists now but will continue to a much greater extent as we move forward than probably any of us anticipated.

That leads me to the conclusion that in our own country and in other industrialised countries in the West, we are facing not unemployment of a partial or transient nature but long-term structural unemployment in our economy. That may entail Western countries, and ours in particular, considering new means whereby we can employ the greatest possible number of people in the economy. Faced with structural unemployment, there may well be involved direct Government intervention in employment, involving, perhaps, legislation on the number of hours that can be worked, for example.

This is an area that needs to be investigated, and should be investigated, by a Labour Administration. We have been warning about this for a long time. We have said that we are moving into an era in which there will be an increased amount of leisure. That leisure is being forced unwillingly upon a large number of people through unemployment. We may have to be looking at ways in which we can realistically share out work among our population. I do not support the view that there are hundreds of thousands of people in this country who enjoy being on the dole, who actually enjoy not working. My view from my constituency is that most of the people I meet who are out of work are desperately looking for jobs. They want to work and they are seeking work.

If we face the problem that is faced in this country, in the United States, in Western Germany and in the West as a whole, where there are between 12 million and 15 million people unemployed, we may have to relook at our approach and consider new means whereby we can bring people into employment and share out the work in a much more equitable fashion than at present. At the moment we rely basically on the market mechanism. That mechanism may no longer be the one which provides for full employment in our economy.

In bringing forward this measure it seems that the Government are attempting to deal with one of the fundamental economic problems confronting the nation—namely, the level of the public sector borrowing requirement. That element has emerged as one of the most significant economic variables at present. We all know of the enormous burdens that the Government—the taxpayers—are presently having to bear to sustain Government expenditure. At the same time we know that the Government, to sustain the level of public expenditure, are having to borrow tens of thousands of millions of pounds above revenue.

Only a matter of a few years ago a Conservative Government were faced with similar difficulties. They too, had to increase the borrowing requirement and did so massively under Lord Barber. The effects of that were the so-called Barber boom. We know now the effect which that boom had in inflationary terms upon our economy. The difficulty facing the Government is that they have to learn the lessons of what took place under Chancellor Barber. At the same time they have to maintain, as far as they are able, the level of employment in the economy. One way of doing that is by creating jobs in the public sector by operating a high public sector borrowing requirement. There is nothing ignoble about a high public sector borrowing requirement. Under previous administrations it has been operated to keep people in work.

We know that the danger involved in maintaining a high level of PSBR is the inflationary tendency engendered by such a borrowing requirement. The difficulty, under our existing banking and financial systems, is that if the Government are forced into the banking system, to maintain their borrowing, that gives the banks the power to create money. The creation of money may well lead to a vicious increase in the inflationary spiral.

The prime policy of this Government has been to try to control the level of inflation in our economy. What the Government are saying is that they are sticking to that policy. They are saying that to sustain the public sector, without further inflation, and to maintain control over the public sector borrowing requirement, they are seeking means other than the printing presses to finance their effort. The Government are seeking to do this through the surcharge—

Mr. Costain

Surely the hon. Gentleman is not trying to persuade the House that adding 2 per cent. to salaries will not increase prices. The Government Front Bench admit that it will do so.

Mr. Watkinson

I have to accept that there will be some measure of this surcharge passed on by way of increased prices. That has been accepted by the Government Front Bench. What I say is that with the present high level of PSBR the risks are that it will topple over into spiralling inflation on a much larger scale. Faced with these alternatives the Government have said that they have to find the money in this way. We dare not repeat the mistakes made by the Tory Government. We must turn our backs on the method which they adopted. If we concede that money supply is an important ingredient in a number of economic variables, and if we say that there are limits to the extent that the money supply can be increased, that means that we must plan the use to which our money supply is put to a much greater extent than hitherto.

The hon. Member for Folkestone and Hythe (Mr. Costain) was a Member of this House in the early 1970s. He knows what happened under the Barber boom and where the money went. It did not go into those sectors into which he and I would want it to go—the manufacturing base of our economy. To a large extent it went into the property element of our economy and we had a spiralling increase in the price of real estate, with all the damaging effects that had for ordinary individuals who wished to buy property.

If money supply is an important variable—and I accept that the evidence points to the fact that it is—here is a good reason why we should seek to control the direction and movement of money to a much greater extent than we have done. With respect to my hon. Friends who assisted in the preparation of the Transport House document on banking and finance, that document missed out an important ingredient in the powers of the banking system, namely the power to increase the supply of money in our economy with the deleterious effects which that can have and which it did have under Chancellor Barber.

As a party and as a Government we must be prepared to intervene, probably to a much greater extent than before, in the workings of the financial system, for the reasons I have given. If we say that the banking system has the power to increase money supply and if we say that the level of money supply and the rate of increase is important, we ought to ask questions about the manner in which the banking system increases the money supply.

Here we come to a crucial variable in banking, and that is the rôle played by Treasury bills. As Conservative Members may well know, when the Government have been unable to finance their borrowing requirements through the non-banking sector, they have turned to the banking system and raised money through Treasury bills. The banking system treats Treasury bills as if they were cash. That enables the banking system to expand the money supply. We must ask ourselves serious questions about the rôle and significance of Treasury bills in the banking system.

My hon. Friend the Member for South Ayrshire (Mr. Sillars) raised the question of the level of investment. I agree that what we need in the economy is an increase in that level. I am worried about the amount of money flowing out of the country rather than being used to promote industrial investment at home.

I was concerned about the increase in interest rates announced by the Chancellor recently. Here is a move which must have a direct effect upon the amount of investment that takes place in British industry. It never was clear for what reason the interest rate was raised. Was it to protect the pound? Was it to control the increase in the level of money supply? Whether it was to control the money supply or to encourage foreign currency to enter the country, the effect of increasing the rate of interest has been to undermine confidence in industry and to make the whole business of investing in industry and raising funds that much more difficult. I hope that we shall shortly be seeing a significant reduction in interest rates. At their present levels, coupled with inflation, they do not create an encouraging atmosphere in which industry can invest.

We must set the British economy in the context of the world situation and consider the problems of other economies such as those of Germany, America and France. When we do that, we discover very disturbing trends. It was apparent in the early part of this year that there was a growth in world trade; there was a general movement towards expansion. However, those expansionary tendencies have been limited in the past few months and the movement towards expansion has dried up. This must have major repercussions for ourselves and for the rest of the world.

We all hope that, given the statements of President-elect Carter, there will be a significant change in policy in the United States and a move towards expansion. Surely we are entitled to look to countries such as the United States and West Germany, where inflation is under much better control than we have managed to achieve in this country, for some form of expansion of their economies, because if we are to expand and to invest more, and if more jobs are to be provided, particularly in export industries, we must look to an expansion in the economies of other countries.

I hope that when the new President of the United States takes office he will give expression to the expansionist moves which he promulgated during his election campaign. It is clear that unless world trade expands, the export potential of this country will be severely restricted and, if that happens, it will become all the more difficult for us to move out of the present depression.

I note that President Giscard d'Estaing and the President of Italy have suggested the holding of a conference at which Heads of State should get together to talk about the economic problems confronting Europe and that there should be a concerted effort in the West to move the West out of recession, because it is clear that we cannot continue to maintain the present level of unemployment, nor should the leaders of the United States, France and Germany wish to sustain the present level of unemployment. There must be a concerted move forward, and I hope that my right hon. Friend the Prime Minister will join other European leaders and President-elect Carter to bring about an improvement in that situation.

5.43 p.m.

Mr. Ian Stewart (Hitchin)

I appreciate the intricate analysis of the implications of the Bill of the hon. Member for Gloucestershire, West (Mr. Watkinson). He spoke a good deal of sense about some aspects of money supply and the borrowing requirement, about which there is probably not much difference among hon. Members.

I wish to return to the question of the consequences of the announcement of 22nd July. The first thing which needs to be done is to point out the incongruity of discussing the Bill and measures in this way at the beginning of December when they were introduced in July and we are now in the shadow of new economic measures which will no doubt be presented to the House within a matter of days. Therefore, to be discussing the economic and unemployment effects of major financial measures of this kind in a vacuum, as it were—because we are without a great deal of the information—makes it difficult for us to reconcile the figures which have been given to us by the Government since July. I have no doubt that it makes it equally difficult for the Government to answer our questions, but it does not make the questions themselves any less relevant.

We are dealing with measures which were presented in the heat wave of the summer when, with a rosier outlook for the future, it was expected that unemployment would level off and would fall next year and the year after. It was felt at that time that companies in the private sector would be able to stand the addition of a payroll tax—much of which would fall to be paid in the private sector. It was thought that inflation and interest rates would come down and that the situation in the corporate sector of the economy would be different by the time that the measures took effect.

The other night the Financial Secretary reminded us that one of the attractions, if that is the right word for it, of this type of measure—a means of reducing the borrowing requirement—was the delayed effect so that the impact would not be felt until the economy was in a position to take it and the manufacturing sector was able to take the unemployment effects in its stride.

Naturally, it is on the effects on employment that much of the discussion has concentrated. Even now, after question and answer and comment and counter-comment, I find it extremely difficult to reconcile the arithmetic which has been given to us. In his original proposals, the Chancellor of the Exchequer referred to an overall figure of 60,000 unemployed resulting from these measures, but the way that he put it gave the impression, not that there would be an increase of 60,000 in unemployment, but that unemployment would come down by that much less over a period of a year or two. Of that 60,000, he attributed 10,000 to the effect of the so-called National Insurance Surcharge. However, we rapidly entered rough water, because the Secretary of State for Employment was reported as having quoted the much higher figure of 115,000 as being the likely consequence of these measures.

Opportunities were soon taken by hon. Members to ask questions of the Government and by the General Sub-Committee of the Expenditure Committee to question Treasury officials about the meaning of the figures. I do not think that they were much clearer by the end of it.

First, there was the question of what was meant by a 60,000 change in the level of registered unemployed. If one uses the Treasury forecasting manual, which apparently points out that there is only a 40 per cent. registration ratio for unemployment, it means that, to give a recorded change in unemployment of 60,000, the gross figure would be 150,000 because the "registration ratio" means, in simple language, the number of unemployed people who bother to sign on. So immediately a much larger figure was being discussed.

When the Chancellor of the Exchequer talked about the figures, he said that he thought that they would apply perhaps to early 1978. When he said that, early 1978 was 18 months hence, but now it is not much more than a year hence, and many things have changed. The right hon. Gentleman said—and it was significant—that the effect could be greater by 1979. He stated: First of all, the increase in national insurance contributions will affect unemployment with a considerable delay. I have therefore agreed that by, say, early 1979—that is nearly three years from now—the effect could be bigger. But by that time I would expect the period of high unemployment to be behind us anyway. That is certainly the objective of our policies". —[Official Report, 2nd August 1976; Vol. 916, c. 1249.] It may have been the objective then, and perhaps it is the objective even now, but in practice we all have to face the fact that these projections have not so far given cause for confidence in what has happened since. But the whole of the strategy of the July measures was based on these projections.

Indeed, Mr. Michael Posner, the then Deputy Chief Economic Adviser to the Government—whose name has been mentioned on a number of occasions in the discussions of these measures, and who has an extraordinary way with figures —said that it was important to get control of the public sector borrowing requirement because this was a matter of confidence. He felt that the employment problem would be resolved in a year or two's time and that therefore the effect on unemployment of the surcharge would not be serious.

In fact, he tried to make a virtue out of this, because he said that he thought the announcement in July would be of considerable importance in reinforcing confidence. I repeat that because it is such an astonishing statement. He thought it would be of considerable importance in reinforcing the confidence about which I have already spoken; an announcement now having an effect if used through time of helping to release resources at a slightly later time in the recovery when we think it should be necessary to do so". The thinking of those who were advising the Government in the hot days of the summer was that it would actually be necessary to shake out some people from their jobs in order to provide the resources for the economic recovery which was then foreseen. But if the whole prospect now for the level of employment has changed, clearly the figure of unemployment, as well as the financial assumptions on which the measure is based, must be revised. We have not yet had such a revision.

My mental arithmetic is not very rapid, but if there were to be 100,000 more unemployed next year than had been supposed six months or so ago, if they were not in employment, and therefore no surcharge were being paid in respect of them, it seems to me that it would mean a reduction in the revenue from this new tax of perhaps upwards of £50 million in a full year. That is a quite considerable figure in relation to the net effect on public sector borrowing requirements of £700 million, which the Financial Secretary mentioned earlier in the debate.

With regard to the more specifically financial implications, the Financial Secretary mentioned, as I understood him that there would be a revenue of some £950 million starting in April 1977, and that this would rise to £1,030 million in a full year. How exactly does that work? For those of us who are not privy to the technical details of the raising of this tax, it is a little curious that we have a new measure imposed at the beginning of a financial year and that the revenue in the first year is not the same as the revenue in a full year.

It may be that there is some administrative reason for this, but in a Second Reading debate it would be helpful to have an indication from the Minister of State, when he replies, as to how it works. How exactly is the tax to work? How is it to be levied?

It is in the form of a surcharge on the national insurance payments, but in the Social Security Act 1975, on which this Bill relies, there are pages and pages and schedule upon schedule of technical details as to the way in which the Class 1 secondary contributions, to which the surcharge attaches, are actually to be paid. It would be helpful to have made clear in simple language from the Treasury Bench exactly how this money is likely to end up in the Treasury.

In Schedule 1, paragraph 5, of the Social Security Act, there is power to combine collection of contributions under the Social Security Act with tax. This means that the money would then go to the Inland Revenue. Paragraph 5(3) states: The Inland Revenue shall, at such times and in such manner as the Treasury may direct, account to the Secretary of State" — that is the Secretary of State for Social Services— for, and pay to him, the sums estimated by the Inland Revenue, in such manner as may be so directed, to have been received by them as contributions in accordance with regulations made by virtue of this paragraph. Under this new Bill, the Secretary of State has to pay it all back again to the Treasury, in terms of Clause 1(2). I have no doubt that the whole thing will end up in a ledger and that this will be done by book entries. But, as this is a new tax involving a large amount of money, it would be helpful to have a clear statement as to how the money will find its way to the Treasury, and as to the current administrative arrangements, under the Social Security Act, in relation to payment of national insurance contributions when combined with other forms of tax.

Concerning the change in the yield of this tax from July, as it was estimated then, I have a feeling that a figure of £910 million was quoted at that time for the first year, and that now it is now £950 million. Has that figure been up-rated because of inflation or because wage bills have turned out to be higher than they were then expected to be? What is the reason for the change in those figures?

I have no doubt that there is a good reason, but how exactly have we got back to the figure of £700 million for the reduction of the public sector borrowing requirement? It would be helpful to the House, in considering the Bill, to have the information at this stage. After all, there will not be many later stages of the Bill and we have not much time in which to think about it.

Again, how much—I expect that this question ties up with what I have just asked—will be offset against corporation tax? It would be useful to know how much of the tax will fall on companies which would be paying corporation tax on that amount of profit which will not now accrue to them, for the reason that before it becomes profit it will have been paid in this surcharge. We should also like to have up-to-date information from the Government about the effect on local authorities.

In answer to a Parliamentary Question some time ago, a gross figure of £145 million in, I believe, a full year was quoted, and it was estimated that this would be about £50 million net. It would be useful to have an up-to-date assessment of the figures involved.

In introducing the Bill this afternoon, the Financial Secretary said that this surcharge would be allowable under the Price Code in accordance with existing terms. The existing terms are complicated, and the question was raised in the Ways and Means debate recently as to the effect on retailers. Perhaps the Government would spell out exactly would what would be the position of retailers, and whether under the existing terms they will be able to offset the effects of this charge.

Hon. Members in all parts of the House have today raised one of the most fundamental aspects not from a financial point of view but more from a moral point of view, namely that of charities. I had the experience—one might almost call it a pleasure—of discussing, for many hours earlier this year, with the Minister of State aspects and details of the development land tax. I thought that he made an honourable attempt to defend the dishonourable measures contained in the Development Land Tax Bill, as it passed through the House, with regard to the taxation of gains accruing to charities. It was possible, as he did, to present the argument that the development gain was at least in part provided by the community and was of a special nature, and that there was not much difference whether a charity or any other owner of property or land achieved the amount involved, so that in such circumstances it would not be right to make a special exemption for charities and churches.

But the Minister of State said, in words which have been quoted by my hon. Friend the Member for St. Ives (Mr. Nott), that there was no intention to extend the treatment of charities in this way for tax purposes. The hon. Gentleman intervened earlier in this debate to say that his words did not apply to indirect taxation. Perhaps that is so. But it is fair to say that the whole tone of the Government's case which he presented on the development land tax was that there was nothing to worry about because that tax was a special animal, and that for administrative reasons it was not possible or right to exclude from it charities and Churches.

Yet here we have, for the second time within a year, an imposition on charities. I believe that this represents a fundamental change in Government and Labour Party thinking about the attitude to charities. In 1966, when selective employment tax was introduced, charities were eventually exempted. The original proposal to tax charities through SET was strongly resisted and in the end they did not have to pay it.

This surcharge is not a selective employment tax but a general employment tax, and surely it is much more important that charities should be exempted from it, and not just because it is a substantial amount of money for the charities to find. For example, £100,000 is a tremendous sum for the Spastics Society to find. Although it is not very much to the Government, it is crucial to the society. How can it pass on the tax in prices? If the Government and the Labour Party wish their claim that they are not slowly but surely undermining the principle that charities should be exempt from tax wherever possible to be credible, they should act on this point.

It is not good enough that we should have to have proposed amendments to these measures passed to Downing Street via Lambeth Palace because we in this House have not the opportunity, in time or procedure, to table the necessary amendments and to debate them on the Floor of the House.

I ask the Government to think again. They are not giving the Bill much time. I was much in sympathy with what the hon. Member for Kingswood (Mr. Walker) said. It would indeed evoke a response in all parties if the Government were to abandon for once the tidy convenience that they claim to be one of the great virtues of the Bill in this method of taxation, and realise that there will be a severe crisis of confidence in the attitude of the Government towards charities unless they do think again, and quickly.

The circumstances in which we are discussing the Bill are fundamentally changed from those which existed at the time these measures were announced. Indeed, I wonder whether it makes much sense for us to be hammering this legislation through in advance of the measures which are now contemplated to be brought before us either next week or at any rate before Christmas.

Let us recall the circumstances in which these measures were announced. There had just been a restatement of industrial strategy at Chequers. The Government, the CBI and the TUC were all to cooperate and to get British industry moving again. But at the last minute the Chancellor found that he did not think that the effects on the public sector borrowing requirement of his thin slice of cosmetic salami in July would be enough, so he said that we must have this surcharge, making it as far as possible in the future so that it would not have an immediate effect. It might not have an immediate financial effect in financial terms if the Government's projections about the economy had been fulfilled, but there is now another factor—the effect on confidence.

At that time, the whole industrial strategy was in the melting pot. It still is. Firms are still waiting for gestures of good faith, sustained over a period, by the Government to show that they really mean what they say—that they want their industrial strategy to work. Mr. Posner has talked about reinforcing confidence. I do not know what sort of confidence the Government think can exist when, having come to a concordat with industry about the future, they impose heavy measures of taxation almost immediately afterwards.

It is equally ridiculous for the House to have to discuss this Bill now when the circumstances in which its measures were introduced have been fundamentally changed and when we know that a sword of Damocles is hanging over our heads in the form of what comes out of the Cabinet wranglings and the to-ing and fro-ing with the International Monetary Fund.

I do not want to sound uncharitable, but I can conclude only that the Government want to muzzle discussion on the Bill. When the July measures were announced, no Government time was made available for their discussion. The Opposition had to use a Supply Day and the technique of a motion on the Chancellor's salary in order to get them discussed on the Floor of the House. Yet that was for a package approaching £2,000 million, half of it in taxation. Then we had a Ways and Means Resolution late at night, and we have been stampeded into Second Reading without even enough time to work through the technical implications of the Bill, let alone to reconcile the economic and employment consequences. We are to take the further stages within 48 hours, so that nothing worthwhile can be done about the Bill.

When we complain about the consequesnces of these proposals, the Government say "What would you do?" or "They are not as bad as other measures we might take". But they cannot seriously complain of the consequences of their own folly. Up to as late as last July they were staking everything on recovery and boom, which they hoped would get things going. They were wrong. They staked their funding plans on the expectation that there would be lower rates of interest. They were wrong. They staked their hopes for the balance of payments on the value of sterling and the terms of trade. They were wrong. They have been wrong so many times. They have been wrong in the whole of the economic assumptions on which their measures were introduced, yet they have the effrontery to complain when hon. Members point out that those measures are damaging. That takes a pretty thick neck.

The Government have done their best to put the boot in to charities. The Financial Secretary to the Treasury has told us that they have abandoned hope. What now remains? Faith. I am afraid, however, that the country has little faith left in the Government.

6.9 p.m.

Mr. R. B. Cant (Stoke on Trent, Central)

I did not intend to speak in this debate. I came into the Chamber because I have a natural curiosity about financial matters, and I ended up being asked by the Chief Whip to speak for at least an hour, for reasons which I cannot fully understand. I feel rather like a biblical character who went out in search of asses and found a kingdom.

Too much has been made of this piece of legislation. I must confess that the Chancellor of the Exchequer does from time to time persuade me that he is a man who takes a great deal of persuading to do certain things. Yet on other occasions he acts with such rapidity that one feels that the measures he puts forward are something of after-thoughts. Two years ago I suggested that it would be useful to set certain money supply targets for the country. The Chancellor said at the time that this was totally impossible, but now I think that he is with us in spirit on these matters. I got the feeling last July that his decision to impose this National Insurance Surcharge was rather an after-thought, just like, as one of my hon. Friends said, the recent interest rates took many people by surprise.

But we must accept that the whole economic scene is something which is changing far too rapidly for our liking, and changing in the wrong direction. We may say that this is just a back-cloth to much more momentous discussion, and that many things have gone wrong since July. But it is not only the Government who are to blame. If we think of the decline of sterling and the magnitude of the increase in interest rates, we then ask ourselves how this could have happened.

I believe that the financial institutions of this country have a lot to answer for. Why did the Chancellor put up the Minimum Lending Rate to 15 per cent.? This was the obvious consequence of the fact that in July, August and September the pension funds and insurance companies just refused to lend him any money. As a conseqence he had to do something which he did not want to do —go to the banks and start the process of printing money. When some of us who are not on the Left wing of the Labour Party try to answer the criticisms of our more militant colleagues about the financial institutions of the City, it is sometimes a bit difficult. Even The Times asked at one stage: How much more do these people want? They could get a yield on long-term gilt-edged securities of 16 per cent., but obviously they were going to put the Chancellor of the Exchequer neatly across a barrel—if one can imagine that physically—and screw the last 1 per cent. out of him.

The difficulties in which we find ourselves are a consequence of many factors, and it is not up to any of us to start pointing an accusing finger at my right hon. Friend who has struggled with this problem with great courage for a long time.

I see that my hon. Friend the Member for South Ayrshire (Mr. Sillars) has left us. He would say that I am another financial technician making a contribution, but he was right when he chastised the technicians this afternoon and he raised many serious points.

There is the question of the actual impact of the decision to introduce this National Insurance Surcharge on the liquidity of companies. I asked the Financial Secretary to give me a note of this point and he did so. In his reply he said To the extent that it is not immediately passed forward into prices, the surcharge will temporarily affect liquidity and profits. However the financing prospects for manufacturing industry have been vastly improved during the last year by the lower corporate taxation resulting from stock relief and the relaxations already announced in the Price Code. Firms will have had the opportunity to take full advantage of the new Price Code provisions for nine months before the surcharge comes into effect. I wonder whether hon. Members opposite are not putting too gloomy an interpretation on the financial data available to us. Of course some of it is out of date, but the latest figures would suggest at any rate, that for the first half of 1976, at £700 million, the financial surplus of the corporate sector is the biggest since the second half of 1972. In fact, there is nothing wrong with the growth of cross-trading profits of companies.

The question is whether we are on target in the corporate sector for reaching the estimated financial surplus of between £1 billion and £1.5 billion. I know that this estimate has been severely questioned by the stockbrokers Phillips & Drew, who say that the way in which national income accounts are drawn up produces an exaggerated effect. This arises from a number of factors such as trade credit, import deposits—if one has them—income earned abroad which is not returned to this country, or profits which are sent from this country to firms abroad. The fact is that this could have a serious effect on the liquidity of companies.

My hon. Friend the Minister of State knows all about the law relating to taxation and in his mind he has all the figures relating to company liquidity. This is extremely important. If by imposing this tax we are posing a serious threat to the liquidity of the corporate sector, I might find it difficult, despite my great attachment to the Chancellor ideologically, to support him. I am beginning to wonder. Do the figures for the first half of this year show a serious deterioration that implies that serious difficulties will arise for this year as a whole or for 1977–78?

Mr. Parkinson

It is true that profits in the corporate sector in the last year have been quite good. However, that sector faces the fact that stock appreciation relief has effectively stopped increasing. It is at a fixed level. Very little stock appreciation relief will be given this year. Next year companies, which all expect to do worse, will pick up a big tax bill on their current profits. Their work in progress and their stocks will almost certainly be run down, and they will therefore be refunding part of their stock appreciation relief. No corporate planner taking a medium-term view would be too happy about his company's cash prospects, say, a year from now.

Mr. Cant

Coming as it does from the hon. Gentleman, who has a great deal of experience in these matters, that statement must to some extent be accepted. I am simply one of those rather pathetic academicians who depend entirely on reading the printed word, and that does not always convey the truth. So far I have not received the message indicating that the future of these companies is quite as gloomy or as dark as the hon. Gentleman suggests.

Certain events are taking place which might affect company liquidity one way or the other and which we would certainly have to take into account in evaluating our attitude to the Bill. Perhaps my hon. Friend the Minister of State will care to explain them. I do not doubt—and my view is borne out both by the printed word and by what I am told by business men—that the liquidity of companies is being improved because of the way in which they are reacting to devaluation. In other words, it is partly the case that some firms cannot produce the output that is required and that they are exporting more. This applies particularly to the car industry.

These firms are tending to invoice in sterling and to put up their prices rather than to use the competitive edge offered by a depreciating currency in order to maximise their sales abroad and their revenue. This is an excellent thing if a company merely wants to increase its profits. I suggest that a wide range of businesses in this country are doing this. Any of the things which might contribute to a decline in company liquidity would be to some extent compensated for by this development. Again, we do not know. There is no systematic survey to prove that this practice is happening over the whole area of exporting. It is certainly current practice with a very large number of firms, however.

To what extent are we in a situation in which, I think for speculative reasons, quite a large number of firms are maximising their existing overdraft facilities and engaging in the delightful business of arbitrage? They are using their overdraft facilities with one bank to invest their money in certificates of deposit in the money market. In itself this must make a considerable contribution to the liquidity of the corporate sector, but it is increasing the nation's money supply in a quite artificial way.

What is likely to be the effect on company liquidity by the end of April of companies persistently enaging in the unpatriotic practice of leads and lags? We know that the money supply in this country has increased considerably. We know that at least £200 million of the last monthly increase was due to business men in this country lagging and leading. They were borrowing money in order to buy foreign currencies forward, and they were failing to return some of that sterling to the banking system, leaving their export earnings in Amsterdam, New York, Timbuctoo or wherever. A great deal is going on financially in the corporate sector, and when one adds up the hundreds of millions involved the sum assumes considerable proportions and it has an effect on liquidity.

Let me turn to the effect of the surcharge on prices. My hon. Friend the Minister told me in his note that it would automatically become an allowable cost for Price Code purposes. This meant that manufacturing and service industries will be able to pass the tax through into prices. The position of distributors is slightly different, but they will benefit from their mark-up on the increased price charged by their suppplier. Distributors are not given any special relief in the Price Code for employers' national insurance contribution, and since the surcharge partakes of all the economic qualities of the former, it was not felt necessary to make any separate arrangements for the surcharge in the Price Code in respect of distributors. I should like to know why that is so. It seems to me that the inflexibility of the surcharge is one of the things to be set against it, although obviously a tax of this sort is economical in terms of additional manpower.

In his note my hon. Friend illustrated this inability to use the tax in a selective manner in a different way. He said: All employers (with a few minor exceptions) pay national insurance contributions in respect of their qualifying employees at the same rate, and the administrative arrangements on to which the surcharge is being grafted therefore make no allowance for variations in rate except for the relatively small categories of mariners and the armed forces. With his enormous insight into these technical problems my hon. Friend the Minister of State might let us know why that is so.

As other hon. Members have been perplexed by some of the figures which have been bandied about, it might be useful to have an explanation of the reasons why the PSBR is expected to be reduced by £700 million only in 1977–78. One hon. Member asked my hon. Friend why that was so, and I thought that he was brushed off impolitely. I therefore take the opportunity of the Financial Secretary's absence to ask my more friendly hon. Friend the Minister of State for an explanation.

I understand that the figure is £400 million. We are told that the cuts would take £1,150 million but that this sum is reduced by a number of factors. My understanding is that although local authorities will not pay this cost—and as a local authority man I am very happy about that—only £400 million will be payable by manufacturing industry, and this is likely to be less than 1 per cent. of manufacturing costs. I should like some explanation of that. A suggestion has been made that there has been a change and that the non-service sector will have to pay more.

Some of my hon. Friends have now entered the Chamber so perhaps I should relieve myself and the Opposition of any further contribution from me.

Mr. David Mitchell

The hon. Member for Stoke-on-Trent, Central (Mr. Cant) has indicated to the House that there would be about a 1 per cent. increase in industrial costs as a result of this Bill. Against a background where industries are having considerable difficulties in competing in some markets, does he dismiss that as a matter of no consequence?

Mr. Cant

I understand that the increase in manufacturing costs will be less than 1 per cent. It may be part of the disease from which we all suffer that one regards a sum of less than 1 per cent. as of no account. The hon Member for Basingstoke (Mr. Mitchell) is right in saying that a sum of this magnitude can be considerable in this context.

I hope that when we come to the real debate, when the Chancellor announces the arrangements he has made with the IMF—if that is a better way of putting it than saying the terms that we have had to accept from the IMF—he will not make cuts of the enormity suggested by The Times, which was £5,000 billion, but cuts of, perhaps, £1,500 billion.

Although maintaining the public sector borrowing requirement at its present level by increasing taxes of one sort or another would be a solution to our problems, if the Chancellor pursues this policy and at the same time imposes rigorous domestic credit and expansion of money supply targets, we are heading for an increased level of unemployment which many will find intolerable.

We have moved—as I think The Economist said in a recent article—from monetarism to black box monetarism. I think this is carrying the conversion of the Chancellor to the creed of Professor Friedman too far. I hope that when the Chancellor comes to the House he will congratulate us on having passed this Bill. I also hope he will create a situation in which the public sector borrowing requirement can be financed at a lower rate of interest that at present. Then we could have a little relaxation of the money supply targets and, perhaps, persuade industrialists to get on with the job for which they exist.

6.34 p.m.

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

The hon. Member for Stoke-on-Trent, Central (Mr. Cant) was frank enough to say that his Whips sent him in to talk for an hour. He has put up a fine show and I congratulate him. It cannot have escaped the notice of the House that the Government Whips are pushing their supporters into the Chamber two by two as though they were going into the Ark. Perhaps they do not want their own supporters—except in small numbers—to know about the dreadful Bill for which they will vote tonight. This has continued all afternoon.

The hon. Member for Kingswood (Mr. Walker), a Church Commissioner, made a special appeal about the effect of this measure on charities, and I want to expand on that. But having quite rightly said how this Bill would affect charities and Churches, the hon. Member added that he would vote for the Bill and then disappeared. We had a fine speech from my hon. Friend the hon. Member for Hitchin (Mr. Stewart) who dealt with the Bill succinctly. I do not want to bore the House by repeating his important points.

It asks a lot of this House for the Government to introduce such a measure which will cost industry or the public, or both, £1,000 million—a week or two before the expected mini-Budget. This Bill is being rushed through the House. It was printed on 30th November; we have the Second Reading today, and, as my right hon. Friend the Leader of the Opposition made clear during business questions last Thursday, it will be rushed through at such a speed that hon. Members will be unable to take advice from their constituents about points which should be raised.

Mr. David Mitchell

The prospect of hon. Members—some of whom have considerable numbers of unemployed in their constituencies—consulting their constituents and finding them dead against a measure which would considerably increase unemployment figures may well be the reason the Government are bringing forward this Bill now—so that Labour Members of Parliament cannot consult their constituents. Is this possible?

Mr. Costain

It is not only possible but highly probable. This Bill will particularly affect small businesses, which are the special province of my hon. Friend the Member for Basingstoke (Mr. Mitchell).

We have high rates of unemployment and inflation. What possible effect can this Bill have but to add to both those figures? What will be done by an industry which already faces strict competition and is having to fight for success, when it is told point blank, that it must add 2 per cent. to its labour costs? It will be heartbreaking for an industrialist, who has fought over the years to become more competitive, to export more, and who, after a long struggle, has cut labour costs by 2 per cent., to be told that, although he has done well, 2 per cent. will now be added to labour costs. Industrialists will say that the only way to keep going and to remain competitive will be to reduce their labour forces by 2 per cent. That is the only way to absorb the increase effectively.

An efficient company will decide immediately that, in order to keep up production, the labour force must be cut by 2 per cent. If everybody carried out that policy, there would be a 2 per cent. increase in unemployment and the cost of paying the unemployed would largely offset, if not completely absorb, the amount of revenue raised by the Bill.

I receive letters weekly from small business men in my constituency. In my part of the country most firms are small businesses because of the nature of our planning consent. We have an unemployment rate in my area of 8 per cent.—the highest since the Second World War. We are not a development area and we are given no inducements to offer as an encouragement to industry, yet our unemployment rate is higher than that in many so-called distressed areas.

If each employer in my constituency took on one extra employee, that would greatly help the unemployment situation. But employers know that if they take on extra workers, they will have to pay a surcharge of 2 per cent. for doing so and, if they are over-optimistic about the number of workers they need, they will be penalised under the Employment Protection Act and have to pay compensation.

Every measure introduced by the Government seems to have precisely the opposite effect to what is needed to deal with our economic problems. Labour Members below the Gangway scream and howl for import controls. The effect of that is that every importer imports all he can before the controls can be introduced, and this has precisely the opposite effect to that hoped for by hon. Members opposite. Those imports will be sold in competition with our industry and will make our unemployment problems even worse.

Do Labour Members not realise the harm they do every time they make such statements? They are obsessed with class warfare. The recent Labour political broadcast did nothing but harm to our economy. Anyone overseas who heard about it would think that Britain was a country ripped down the middle. Hon. Members opposite must get over their hatred and envy if we are to get the country back on a straight course.

I am concerned about the effect of the Bill on local authorities and labour-intensive industries. The Government have said that they will relieve some of the liability on local authorities by making an improved rate support grant settlement in order to offset the cost. I know that my local authority has been making great endeavours to cut expenses, but the assurance that authorities will get more to help them to meet this 2 per cent. surcharge does not seem to fit in with the recent announcement of the first reduction in the rate support grant for many years.

Until about 12 years ago I was treasurer of one of the biggest charities in the country—the National Children's Home. I know that even in those days charities had difficulties in raising money, particularly when cash was tight. Now charities are to be clobbered again by the Government. We have never had anything like this in our history. The Government seem to go out of their way to make things more difficult for charities. With the difficult economic circumstances, people will not be subscribing as much to charities whose overheads are increasing. This situation can be offset only by a reduction in services.

The Government should realise that many charities are saving them a great deal of money. The NCH was housing 4,000 children and if it had not considered the care of these children—which it did much more effectively and with more love and devolution than any local authority could—local authorities would have faced increased costs. It is little recompense for all this love, devotion and care to be told that charities are to be charged an extra 2 per cent. on labour costs. Charities are very labour-intensive. This is an ill-timed measure which we could well do without.

Hon. Members opposite owe it to their constituents to come into the Chamber and hear the arguments against the Bill If they do not, I hope that their constituents, particularly the unemployed, will ask why they have supported a Bill which will cause more unemployment.

The Government Whip on the Front Bench is waving his hand around pointing to the absence of Opposition Members. But hon. Members on this side know that they will vote against the Bill and they know that there is no argument in favour of it. The Government supporters should be in the Chamber to hear the arguments. We know that it is a stupid Bill and I have heard no arguments from hon. Members opposite to make me change my mind.

There have been references to the Common Market, the economy and to Lord Barber's time as Chancellor of the Exchequer, but the casual references to the Bill from the four Government Back Benchers who have spoken so far are an indication that they do not really support it. Yet they will go into the Lobby tonight and let down their constituents.

6.47 p.m.

Dr. Oonagh McDonald (Thurrock)

I wish to make clear that in my comments on this Bill I am concerned not so much about the imposition of a tax on employers as about the effect on employment, labour costs in the public sector, and prices. I wish to pose a number of questions to the Chancellor of the Exchequer which I hope will be answered tonight.

I notice that the National Insurance Surcharge will increase labour costs in various parts of the public sector. Examples of the increased costs are £145 million for local authorities, £15 million for British Rail, between £13 million and £14 million for the public bus transport services, £60 million for the National Health Service, £60 million for the Civil Service, £21 million for the National Coal Board, £7 million for the gas boards and £15 million for the electricity industry. All these additional costs will be incurred in 1977–78—the first year of the surcharge.

I am concerned about the effect of these increased labour costs. Will the Government write off the costs to the public sector? They have given some answer in respect of local authorities by saying that help will be given from the rate support grant, but it has been left unclear exactly how much support will be given, particularly as the grant for next year has already been settled. Will the Government take on board these additional costs in the public sector?

The Government have said that the revenue will be £930 million in the first year, but the cost of the surcharge can be set against corporation tax and, although I asked today how much the net revenue will be—bearing in mind that the increases can be set against corporation tax—I have not yet received a reply. The Government cannot be sure how much additional revenue will come from the National Insurance Surcharge unless there is an answer to that question in the next year.

The Government estimate that 10,000 people will be made unemployed by the surcharge next Year—1977–78. Two elements seem to have been ignored. First, the Government have no idea how much redundancy payments will cost during that year. That will, therefore, affect the amount of revenue that the Government can expect during the first year of the operation of the surcharge. Secondly, one has to bear in mind that the cost of unemployment is high, and rightly so. If a man or a woman loses his or her job, he or she is entitled to the benefit now received. For a married man with two children on the average industrial wage the cost will be £50 a week for the first 26 weeks of unemployment. The cost of the measure will, therefore, be high. One must also consider the possibility of unemployment being higher than 10,000 during the first year.

I am worried about the introduction of the Bill. The Government have so far left unanswered a number of questions which I should like to be answered later tonight. I want to know how much revenue will come from the National Insurance Surcharge which will take effect from next year.

6.53 p.m.

Sir Brandon Rhys Williams (Kensington)

This is a bad day in the story of the decline of the House of Commons when a Bill which is intended to raise taxation by over £1,000 million is able to attract for Second Reading an attendance about the same as for a Standing Committee. It is also a bad day in the history of National Insurance when the Government deliberately perverts the principle in order to find an easy way of raising money from the public. National insurance was not intended to allow loopholes for abuse of this kind. We are today setting a bad precedent.

The Financial Secretary spoke with such enthusiasm of this new way of raising money that one cannot not expect it to be abandoned again. One can only wonder why the rate of surcharge is not to be 10 per cent. or 20 per cent. It represents an increase in direct taxation of earnings at the employer's expense. Why have the Government chosen to embark on this course at this moment? No doubt they will say that higher taxation rather than more borrowing is in accordance with the doctrines of orthodox finance. But they do not say why they do not cut some of their superfluous expenditure.

Will a surcharge of this kind help to switch resources from consumption to investment? Presumably one of the Government's major motives at this time is to encourage efficiency and business confidence. The measure will not reduce funds available for consumption immediately and we cannot tell when it will. No doubt it will reduce pressure of demand when it works its way through the system but that will be in a way which is directly inflationary, because, as the Financial Secretary stressed several times it will be passed on in higher prices. How it can be passed on in higher prices and charges by charities and Churches however, he did not say.

We must conclude that the tax will be paid for by business which cannot encourage business confidence, already so badly faltering. Presumably it is designed not to make an immediate difference in wage rates, but it will make employers more wary of taking on labour again, because it will directly add to labour costs.

When we add to wage-related taxes we contribute to unemployment, and we are now taking a step which will inevitably tend to depress wages. To say that the employer's national insurance contribution is something apart from the total cost of labour in the manufacturing process is only an illusion. With the passage of time if a business is to survive the total cost of wages and national insurance contributions must be lumped together.

This surcharge is a tax which will reduce profits in the short run and damage confidence. It will not be possible for industry to pass on the whole of the extra cost—for instance, where an industry is already facing sharp competition from overseas. In my borough one can see Japanese television sets—in spite of the recent fall in our exchange rate—which are made by reputable manufacturers and which are being sold by well-known houses at £185. I am told we shall soon have Korean television sets being marketed at £150.

How can British manufacturers hope to compete with imports at that price if they are also helping to sustain the Government by paying another 2 per cent. as a wages surcharge? This new tax does not hit imports, but will discourage overseas manufacturers from setting up in this country in the type of business where their goods are finished or assembled and packed by British labour.

Dr. McDonald

Surely the hon. Gentleman's argument is one for import controls and not one against this tax?

Sir B. Rhys Williams

Not necessarily. I am glad to have the opportunity of paying tribute to the hon. Member for Thurrock (Dr. McDonald) for her well-informed speech. I should be prepared to support a system of import deposits, which was tried successfully before but which does not have the effect of controls and quotas, which would inevitably lead to retaliation.

This is a tax which hits British goods but no imports. It is different from VAT, which presumably would also be levied on imported goods. It increases the cost of food which under the British system, VAT does not. Food production is labour-intensive and therefore, to add to the cost of wages the tax will have a differentially adverse effect on the cost of food.

This is not the occasion on which to bring forward figures, which I have at last obtained from the responsible Department, showing the comparison between 1976 and 1970 of the cost of household essentials. If one compares food prices as they affect families with the effect on single people and small households, we find that families are more acutely exposed to inflation. To increase the cost of food bears particularly heavily on families.

Although I have not been able to hear the whole debate, I do not think that hon. Members have made much of the questionable use of the insurance system to raise this money. It is highly objectionable in principle. It confuses still further the direct taxation of earned income and the finance of national insurance. We have never really accustomed ourselves to the new principle in national insurance which was introduced when we went on to earnings-related contributions. Labour Members, and a particular right hon. Lady, have never been prepared to face the consequences of earnings-related contributions and flat rate benefits. We have to look at the finance of national insurance and see whether the anomalies that we are piling on are not such as to smash the whole system altogether before very long.

This whole structure was riddled with inconsistencies even when it was introduced in the days of Lloyd George; but by now the whole system has become so tortuous and so rickety that I truly believe that the only good thing that can be said about the Bill is that it is likely to bring the end of the present national insurance system a little nearer. That would be a good thing, because we ought to be thinking very clearly what we are doing in the whole field of the redistribution of income.

This Bill has nothing to do with national insurance. The Financial Secretary was being rather disingenuous, unusually for him, when he implied that the money would be raised through the mechanism of national insurance. Am I not right in recalling that the contributions, now that they are earnings-related and we have abolished the stamps, are raised through the mechanism of Pay-As-You-Earn? Therefore, the Financial Secretary should admit that this is a way of increasing PAYE on wages without wage earners discovering that that is what has happened. It is not a question of increasing the national insurance element.

If that had been the Government's bona fide intention, perhaps they might have directed attention to one of the other extraordinary anomalies in national insurance—namely, the 17 per cent. or perhaps 18 per cent. annual contribution which is gratuitously made by taxpayers to the National Insurance Fund for some reason that is completely lost in history. The Government might have been making better sense if they had said that because of the economic situation they were obliged to stop paying that inexplicable contribution. They did not do that. Instead we are to have a two-way movement. National insurance is to receive a subsidy from taxpayers, and beneficiaries, through what purports to be an increase in the national insurance contribution, will pay a subsidy back to the Consolidated Fund.

This argues that no one has given any serious thought to the background of this emergency measure at all and that the Chancellor, finding himself under pressure, has simply grabbed at the first thing that he could think of. It would be better if he thought again and did not press his right hon. and hon. Friends to vote for the Bill in the Lobby tonight.

Unfortunately, all too few members have heard the attacks on the Bill, because those on the Labour side have got into the habit of voting for measures of this kind, which add very much to the burdens on employers and the public in general, without giving them a moment's thought. But the public will not be ignoring what is happening. The effect of the Bill will be felt. It will be another nail in the Government's coffin.

As to administrative advantages, PAYE is calculated mainly at the employer's own expense. It is not just a matter for the Civil Service but for employers themselves. I do not want to let this opportunity pass without saying once again that the Inland Revenue ought not to depend on employers to do its work for it with the PAYE system.

It was introduced as an emergency measure during the war, when some way had to be found of raising taxes on wages on a current system instead of retrospectively. However, what was tolerable in the exigencies of war—and which has lasted all too long since then—becomes increasingly intolerable when employers are being ruined by the level of taxes which they themselves must calculate and implement on the Government's behalf.

While the Financial Secretary was speaking, I noted that he drew a comparison with the Health Administration and pointed to the emphasis that is placed on lower personal taxation by my hon. and right hon. Friends. He claimed that it did not produce an investment boom under the previous Conservative Administration. The ridiculousness of that argument can be appreciated if we try to imagine instead that we might succeed in producing an investment boom by higher personal taxation. Obviously, if we increase the emphasis of the tax burden on the personal sector, it will not lead to an investment boom; so the hon. Gentleman's argument must have a flaw in it somewhere.

The flaw is that there was an investment boom under the previous Conservative Government but, for another reason, which the hon. Gentleman did not mention, it did not go into manufacturing and expansion, particularly of goods for the export market. That other reason was that, under the terms of the Smithsonian settlement—which I regard as the central tragedy of the last Conservative Administration—we allowed the pound-dollar exchange rate to be fixed at far too high a level.

The pound was brought into the Smithsonian rearrangement at a rate which immediately attracted imports into Britain. It allowed German, Japanese, American and other importers into Britain to operate at such a level of profit that they were able to establish dealerships everywhere, to build up good stocks, to advertise substantially and to become established in the British market. At the same time, because of the adverse exchange rates, British manufacturers looked for export markets, found that exporting was not fun, could not make profits in exports—and concluded that the whole export performance was an uphill business which did not justify a high rate of investment.

It was the Smithsonian settlement which was catastrophic and which led to the situation in 1972–73, when the credit was made available for investment but went into existing assets—office blocks and the like—instead of the production of goods. However, there was indisputably an investment boom and the Financial Secretary should think again if he is basing his philosophy on the muddle which I hope I have just exposed.

If we failed to take advantage of the opportunities that we had in the early 1970s because the pound's exchange rate was too high, let us not make mistakes on this occasion when the exchange rate of the pound is, according to the experts, now too low. Personally, I venture to doubt whether the fall in the exchange rate of the pound has been overdone. I think it quite likely that it will continue to coast downwards during the whole life of the present Government, because they are not really bent upon taking the measures that will stabilise the economy and restore business confidence. However, I hope that the Treasury's thinking is not so addled and confused that it will continue proposing paltry, wrongheaded measures of this kind instead of taking the measures that are really needed.

The Bill will discriminate against British manufacturers without hitting imports. It will damage business confidence. It will make unemployment more intractable. In the long run it will tend to depress wages. It is a deplorable precedent and it ought to be abandoned.

7.8 p.m.

Mr. George Rodgers (Chorley)

I concede that I find it somewhat melancholy that when I have a deep emotional interest and a mine of information on subjects that are before the House, I find it most difficult to catch the eye of the Chair. However, in today's circumstances it seems that all facilities have been made available.

I have some opinions on this measure. I think that the use of the National Insurance Fund for purposes that are not related to national insurance is something about which we should be concerned. I do not suggest that this instance is unique. Certainly the Road Fund has been used by successive Governments for purposes other than those originally intended. In the case before us the revenue that is accumulated will be funded by the consumer through prices and the bulk of it will return to industry. Now, through Government funds, we are making available to private industry between £9 million and £10 million a day. If that sum is to be passed over to private industry, clearly it must be acquired from some source. No doubt some of the money that becomes available through this formula will find its way back to industry.

I am surprised by the scale of the fallacy that industry will bear the whole weight of the burden. Perhaps not so much here, but certainly in the Press, it is being suggested that industry will carry the burden, whereas in fact the consumer will carry it, through prices.

It is difficult to comprehend the attitude of the Opposition. They simultaneously demand a curtailment of public spending and, in some cases, an increase in VAT. This measure has precisely the same effect. It is an indirect tax, an unfair tax, but certainly nothing that the Opposition say suggests that they are opposed to indirect taxation.

I could recommend to the Chancellor a score of methods for obtaining additional revenue without this Bill. We could have had a wealth tax much earlier and there should have been much tighter control of taxation. The paltry number of prosecutions shows that tax evasion flourishes on a grand scale. Substantial economies could be made on the British Army of the Rhine.

What can be said in favour of this formula? It provides substantial funds without a doubt. The Exchequer will benefit. The method of collection, un-like that for VAT, is simple and straight forward. There will be no substantial on-costs and no great army of bureaucrats to administer it. Successive Governments have rejected the notion that national insurance contributions should be increased to provide greater social benefits. Yet apparently, the Chancellor finds it not only convenient but morally sound to use the Fund for other purposes.

I am not wildly excited by the Bill. When the Price Code is being relaxed, industry is increasingly able to retain profits, and corporation tax has been reduced, I cannot see how industry will be overburdened by this method of passing funds to the Chancellor.

It has been said that charities are being unfairly penalised. I do not dispute this, and it is wrong, but there is some cant and hypocrisy about the charge when in recent days and weeks we have heard from the Opposition a flow of abuse against people who receive social security benefits. Against that background, when charges are made against victims of harsh circumstances who are entitled to their benefits, it is unfair that Conservative Members should suggest that they are so deeply concerned about charities.

Sir B. Rhys Williams

The public are concerned about the abuse of the national insurance system, but the hon. Member implies that there have been criticisms from these Benches of people receiving social security benefits who are in real need. Can he substantiate that claim?

Mr. Rodgers

Yes, indeed. Such comments are made on a wide scale. I accept absolutely that the hon. Gentleman would not personally take that path, but it is common knowledge that people entitled to benefits have been the subject of abuse by Conservative Members, and I deeply resent it.

It has been said that industry seeks confidence from Government and that the Government are doing nothing to provide it. It is this elusive confidence that people find so hard to define. This attitude seems impudent. It is time that some sectors of industry started earning confidence. For example, Courtaulds and that sector of private industry are prepared to leave a whole town destitute and derelict by withdrawing from the area after having received massive public funds.

However one may feel about the broad method of collecting revenue, the Opposition's alternatives are frightening. There is a campaign among many Conservative Members to slash the social services, to create terrible unemployment far in excess of the unpleasant levels we now have. At the same time, they advocate lavish tax concessions to those who are already prosperous.

It is not enough to decry these proposals unless the Conservatives make their alternatives public. All that we have had so far are hints and whispers of the carnage which will be done to public spending. Faced with that ghastly alternative, my support tonight will go to the Government—not because I think they have a splendid case, but because I see no case at all from the Opposition.

7.16 p.m.

Mr. John MacGregor (Norfolk, South)

My hon. Friend the Member for Kensington (Sir B. Rhys Williams) questioned the hon. Member for Chorley (Mr. Rodgers) about what he said about the Opposition's attitude to social security benefits. Our real concern has been about the interaction between social security benefits and wages—the fact that, below a certain income level there is no incentive to seek a job and that there is real resentment among many people in work at that income level because they would be better off out of work. That resentment is shared among great masses of the population.

We have been joined in this view by the Chancellor himself. He has made two or three very powerful speeches—including one in the House and one in Leeds at the weekend—accepting the point that we have been making month after month. He has said that it is millions of ordinary working people who most resent this situation.

Mr. George Rodgers

Would the hon. Gentleman agree that the level of income provided by social security payments is fixed only at subsistence level and that therefore the error lies in the low wages paid in some industries and that the remedy lies in increasing wages rather than reducing benefits?

Mr. MacGregor

Many companies cannot increase wages and in many instances, unless the worker's job is changed, they are not allowed to. It is the threshold level at which taxation is now paid that has most of all caused this problem.

The problem facing the Chancellor, now that he has recognised the seriousness of the situation, is that it is immensely expensive to put it right. Unless he cuts public expenditure, he does not have the wherewithal, because of lost revenue, to correct the problem properly in the coming year.

Mr. Ivor Clemitson (Luton, East)

Is it not true that many companies do not pay the wage rates laid down by wages councils and that they are therefore breaking the law?

Mr. MacGregor

We are straying rather far from the subject of this debate. That might be right in some cases, but it is also true that many companies are either going into liquidation or having steadily to lose labour because of the effects of costs, including rising labour costs.

I have not been able to attend all the debate because of a Select Committee meeting, but I heard the last two or three speeches by Labour Members. I take the point of the hon. Member for Chorley that some of the increase of this charge can be put on prices, but none of us knows how that balance will come out. I am sure that the Chancellor himself does not know how much will be put on prices and paid for by the consumer and how much will have to come out of a company's net of tax profits simply because it cannot put its prices up—either because of overseas competition or because there is not the consumer demand which would enable it to continue to sell its products if it did. There is a question mark here over how much will be able to be passed on in prices. My guess is that much less will be passed on in prices than the hon. Member for Chorley thinks.

I should like to answer what was said by the hon. Member for Thurrock (Dr. McDonald). I am sorry she has now left the Chamber. She surprised me by saying that she was not concerned about the effect on employers, but was greatly concerned about the effect on employment. In a number of instances, because of the effect on employers, there will immediately be an effect on employment. I do not see how one can disentangle the two. This is typical of the attitude of Labour Members below the Gangway, who always argue against the effects on employment, against the effects on public sector and public sector employers, but never against the effects on employers in the manufacturing and commercial sectors.

It is fascinating to discuss measures on Second Reading long after they have been introduced. It is not often that we discuss economic measures, which is effectively what this is, in quite this way. It shows how much Government strategy gets knocked cock-eyed month after month.

If we look at the Chancellor's speech on 2nd August 1976, and the reasoning behind the measures he was introducing, we can see now just how much his reasonining was false and how much the situation has changed. Speaking of his measures, including the public expenditure cuts as well as the national insurance contribution measures—I prefer to call them payroll tax measures—he said: The mixture … ensures that this will be achieved in a way causing relatively little damage to output, employment and the price level. By the end of next year the economy is still likely to have grown faster and unemployment to be lower than we expected at Budget time last April. Moreover the measures will not begin to affect employment until the middle of 1977, when the peak of unemployment will be far behind us." —[Official Report, 2nd August 1976; Vol. 916, c. 1235.] Since July, we have seen, once again, that unemployment is expected to be high, for a mass of reasons already debated, which the Prime Minister himself now concedes.

We can see that prices will rise much more over the next six to nine months than the Chancellor expected when he made his statement on 2nd August 1976, not least because of the depreciation of sterling since then, which he failed to foresee. Growth prospects and prospects of industrial investment are likely to be lower because companies are likely to be more concerned about the immediate future, and will be much more cautious about substantial investment plans which would bring down the level of unemployment. We can see that interest rates have gone up, though the Chancellor spoke in that debate of 2nd August of action to prevent raising interest rates to a level at which industry cannot afford to borrow".—[Official Report, 2nd August 1976; Vol. 916, c. 1238.] The rates which the Chancellor was trying to keep down then have since substantially increased.

The impact of these measures will now be much greater than the Chancellor expected in July, because the situation has substantially changed. The Chancellor himself, in last week's debate on the economic measures, conceded that the economic statistics showed how much the situation had deteriorated even since October, and not just since July. Once again we have an example of how the Government are boxed in by the errors they made in the first two years of office, by allowing public expenditure to expand too fast and by a wages explosion which had a particular impact on the public sector and which the Government are now trying to damp down.

I prefer to refer to this measure as a 23 per cent. increase. That is effectively what it is, not a 2 per cent. increase. To call it a 2 per cent. increase is rather like a finance company or a hire-purchase company not stating the proper rate of interest before the law was changed. It would now be illegal for such companies to do that. Let us describe the true rate of increase, which is 23 per cent.

This measure, as some of my hon. Friends have pointed out, and I am sure some Labour Members will concede, will add to the lack of confidence in industry. What grieves me is that it is another example of what has happened over the past two years. Because of the mismanagement of our economic affairs, extra burdens have always been laid on industry rather than on the Government's own programmes.

I think I am right in saying that local authorities will receive 60 per cent. back. I should be grateful if the Minister who winds up the debate would clarify this point. There seems to be some uncertainty. I understand that the increases for local authorities were taken into account in the calculations for the rate support grant, but we do not know whether the increase in national insurance contributions is being wholly given back in rate support grant. If it is, I assume that local authorities are receiving back 60 per cent. of the extra impost on them. However, ratepayers are still being asked to find an extra 40 per cent.

Fast-expanding local authorities have enormous problems of coping with their rapid growth. One example is my own authority, Norfolk County Council, where the population growth is six times the national average. It is astonishing that such authorities should have to try to budget for growth, knowing perfectly well the difficult economic circumstances of the country, to keep the burden on the ratepayers down by budgeting in a responsible manner, and then have the Government put an extra impost on them.

If local authorities are getting something back, industry is not. It will be offset against corporation tax, so in some cases there will be a 52 per cent. saving, but, in many instances, because of first-year allowances, it will be well below 52 per cent. This is a much bigger burden for industry, commercial as well as manufacturing, than it is for local authorities.

Although it is unfair to local authorities in terms of an extra impost, it is also unfair because the Government have not put the case across properly. It would be reasonable to add this extra burden on to employment in local authorities if the Government were saying that they were trying to reduce labour in local authorities or were trying to make it more cost effective. However, the Government are saying the opposite. They are placing this burden on local authorities but do not expect them to lose any labour except through natural wastage. That is not coming clean with the local authorities who are trying desperately hard to do a good job.

Another example where the Government seem hell bent on hitting industry with one hand and with other measures creating unproductivity and short-term measures of high cost is the employment measures which the Government have introduced over the past two years. Many aspects of the Employment Protection Act and some of the other trade union Acts which have been introduced, aspects, too, of Acts which were introduced many years ago but which are now adding a heavy impost to the cost of labour, like the Redundancy Payments Act, are making companies very careful about taking on extra labour. In one sense this is a good thing because it will ensure that those companies which have a great deal of over-manning will have got rid of it. It will certainly force them to look carefully at the totality of their labour costs.

In another sense, it is yet another measure adding to employment costs of companies and making it much less likely that when they wish to expand they will take on extra labour to the extent that they would have in the past.

I do not think that job creation schemes are any substitute. While they are certainly desirable, they do nothing in the long term to create lasting productive jobs. We could all quote examples. I believe I am right in saying that some teachers who were unable to get employment this year are being employed through job creation schemes to advise other people on how to find jobs. That is a simple and silly example of the way in which the present Government strategy is moving.

A more pertinent example, directly related to the Bill, is the fact that the Government are spending £500 million on job creation schemes to create temporary and unproductive jobs and, yet, on the other hand are taking back £700 million from management, forcing them to shed labour in a way most of us would find regrettable. This approach of hitting industry and then trying to deal with the effects by palliative measures on employment will make the situation much worse for the future. Many companies which in the past one might have thought when they started to expand would take on a substantial amount of new labour will not now do so.

It is no use saying that the public sector can take up the slack, because industry will again have to pay for it and there will not be the funds available to enable the public sector to do so. I find the prospects for getting down the high rate of unemployment rather alarming.

I turn now to the point made by the hon. Member for Chorley regarding how much can be passed on in prices. It will be a matter of guesswork as much as anything else how much will be passed on, because none of us can accurately predict the economic situation over the next 12 months. One sector where there will be little opportunity to pass on this increase in prices is the retail trade. I understand that under the Price Code it may be very difficult to pass on any of the extra costs incurred as a result of this surcharge. Last week, in the Money Resolution debate, the Financial Secretary, understandably at that late hour, did not take up this point and make the situation clear. I hope that he will do so tonight.

The Financial Secretary today shifted his defence of these measures. Last week he put a considerable part of the defence on the fact that most European countries had a higher percentage of national insurance costs than we have. Quite rightly, he did not make that defence today, because it was shot down last week. I am still doubtful about the defence put forward by the hon. Gentleman. Much of it was based on looking at the alternatives which the Chancellor might have faced in July. The hon. Gentleman dismissed VAT.

Mr. Robert Sheldon

The hon. Gentleman is repeating a comment which was made earlier in the debate. I did not find it necessary to repeat everything that I said in the debate on the Ways and Means Resolution, for obvious reasons. The argument that the surcharge bore heavily upon industry needs to be considered in comparison with the burden upon industry, for whatever purpose, which firms in other European countries also have to bear. One must be compared with the other.

Mr. MacGregor

As we made clear in that debate, we must look at the various other statistics of burdens placed upon industry and put the whole comparison together.

Today the Financial Secretary rested his defence to a large extent on the other alternatives and pointed out the disadvantages. My hon. Fiend the Member for Basingstoke (Mr. Mitchell), when arguing about the disadvantage of a VAT increase, intervened to ask whether the hon. Gentleman was saying that the Chancellor ruled out any intention of a VAT increase as a result of the IMF discussions, and he refused to give a clear answer. I understand that, but the point is that so much of what he was saying in his defence today about the difficulties of alternative measures will look strange indeed if, in the next month, the Chancellor comes forward at least with a package which has some of those measures in it. That illustrates again that the Government are working not on a strategy, but on a policy which is on a hand-to-mouth basis.

The Financial Secretary said that one of the advantages was that this measure would raise the revenue required for our public sector borrowing requirement objectives. That was the 22nd July public sector borrowing requirement objectives. This measure is clearly not satisfactory enough to meet those objectives today. The hon. Gentleman's defence makes sense only if the Government, in whatever package they are about to bring forward, are not proposing to do anything further by way of indirect taxation or taxation on employers. I suspect that, when the measures are announced, we shall find that is not the case.

The more we look back over every speech made by the Chancellor on all the various economic measures which he has brought before the House, the more we see that not once has he got it right. Therefore, because of the errors of the first two years, the Government are in a terrible box. Public expenditure cuts are an absolute necessity, but I fear are likely to be concentrated on postponing capital expenditure because the Chancellor is hemmed in by his own party and therefore unable to do anything else. That will have its impact on industry, on future growth, and especially on the construction industry.

Increases in indirect tax rates and the payroll tax which we are discussing today will depress industry still further. Direct tax cuts are essential to overcome a number of problems, but, because of the high level of public sector borrowing requirement. it will not be easy to achieve cuts on the scale required.

Unemployment is rising and will now be difficult to get down with all the waste of the nation's resources and the personal tragedies they involve. Before long we shall have to start thinking of what has previously been the unthinkable —namely, whether people who are likely to be unemployed for some time should be put on jobs in the community which they could usefully carry out, which jobs, because of cut-backs in local authority expenditure, cannot be done from official local authority means. That will mean a considerable change of thinking on the part of trade unions.

The Government face a very difficult year and this measure will not make it any easier. Clearly in its impact on industry it will make it worse. It is perhaps a divine retribution on the Labour Party and Government, but it is a tragedy for the country.

7.37 p.m.

Mr. Ted Leadbitter (Hartlepool)

There are times in debates of this kind when we find the Opposition presenting their two faces. The first is that, when the House of Commons is considering local authority expenditure, they demand swingeing cuts. They maintain that the cuts that the Labour Government are considering go nowhere near to meeting the national interest requirements, whatever they may be and however they may try to describe them, vague and general as they always are. The other face is that, when we produce a measure, no matter how small or insignificant, they maintain that it is damaging to the economy.

One of the great lessons which politicians ought to try to learn and to pursue is to have a philosophy of consistency. One of the great difficulties is that in this House the only thing which is consistent is its inconsistency. I suggest that we should at least honour our pledges to the country by making contributions which show a genuine and sincere concern for the national interest.

In this regard the Government might claim to be complimented on making at least one step towards dealing with the problems of the economy and the need to reduce the public sector borrowing requirement by underlining that one of the objectives is to present a picture of confidence abroad. More than at any other time we should be making it clear to the rest of the world that we are determined to deal with the endemic problems of our national economy and some of the more serious underlying problems which have arisen out of the highly costly local government reorganisation introduced by the previous Government in 1972.

The Conservative Opposition have blamed the Labour Party and Government for the high cost of local government which the previous Government instituted, and, as recently as last week, they reneged on the devolution policy which they fathered in 1968. Again, we see the two faces of the Conservative Party.

It is not sufficient to congratulate the Government on any approach that they make to these endemic problems by saying that it is totally to be taken for granted if one of the objectives is to produce some state of confidence abroad. It is not sufficient to say that that by itself requires the acquiescence of Government Members. Surely we should examine the proposed surcharge with reasonably keen scrutiny. Will it do exactly what the Government feel it should do—namely, introduce a state of confidence? If that scrutiny exposes weakening effects, those of us who are inclined to feel opposed to the measure will be persuaded to support it only if we are assured that in Committee the doubts that prevail will be removed.

I suggest that the Bill's title is wrong. It is not a National Insurance Surcharge. To put it plainly and simply, it is a tax. Possibly it is the worst possible sort of tax. The basic weakness is already determined in that it is suggested that it will be spread evenly throughout the economy and will not penalise individual sectors. Who has the crystal ball? There is one thing for certain, and that is that the Treasury has never had a crystal ball.

However, it is suggested that the corollary of a minimum level of new taxation spread evenly across the economy is just when we have a diversified economy, different regions with different problems and local government in a state of flux. If I remember rightly, England and Wales were placed in a state of flux in 1972. The same applied to Scotland in 1974. They have hardly had time to reach a state of stability. The social and public services are not yet through their teething troubles. Therefore, I have a right to ask, if I am to support the Bill tonight, for some assurance in Committee that the thinking that has been imposed upon us by the Treasury will not be assumed to be more important than opinions expressed in the House, which interpret the feelings and differences in various areas.

Although it is only right to expose the contradiction of the Opposition and to accept that it is legitimate to say that there is a need to help the Government to get the economy right and to establish confidence abroad, surely it is legitimate to make the pungent criticism that we must not take these measures for granted because they come from the ivory towers of the Treasury. After all, they come from people who spend their time idling along in their commuting excursions and discussing whether we in this place are as gullible as they think we are. I suggest that the Government must think again, and with great care.

My hon. Friend the Member for Thurrock (Dr. McDonald) produced some interesting figures. As a new Member, she should be congratulated. She outlined the costs of this measure to the electricity boards, the gas authority, local authorities and other bodies. Does not the Treasury understand that one of the most aching problems for many people is how best to meet their electricity bills without imposing further charges next year? Does it not understand that if we are to surmount our major economic problems we cannot be successful if we approach them in this piecemeal fashion?

Would it not have been wiser to wait for the mini-Budget so that the whole issue could be handled in one package, so that people outside the House could comprehend, so that by debate and discussion and by going into the country we could crystallise the salient features of the new strategy, or the bolstering up of the established strategy, to get the economy right? Would not that have made more sense? Sufficient has been said from both sides of the House to indicate to the Government Front Bench that there is a great need to take heed of what Members say, bearing in mind that they represent the people in the constituencies.

I shall take one or two matters at random for the pleasure of passing the time away. It has been calculated that the additional labour costs brought about by the Bill will be an increase of 1½ per cent. and that the additional industrial costs as a whole might amount to a slightly smaller increase.

Of the total revenue of £1.3 billion for 1977–78, about £900 million will be payable by private sector employers and about £400 million by manufacturing industries. Is this the right time to do this? Is it the right amount to impose upon individual employers? Does it do the economy any good? In the hardening of world markets, will employers pay the surcharge or will they agree to let their costs remain at the level they have established by removing from the labour force the value of the surcharge? I suspect that they will choose the latter course.

Can we afford this measure with nearly 1½ million people unemployed? The cost of keeping 1½ million people unemployed is a serious charge upon the nation. That poses the serious question of whether we have reached a stage where it is more costly to keep men idle than at work.

I suggest that it is more costly to keep members of our community out of work than in work. Three examples are teachers, young nurses and new fire brigade personnel. At present we need a wide range of social workers. Why not sack some of the chief officials and reinstate the field workers who are close to the public? That would make sense, but this measure will not bring about that result.

If there has to be this surcharge upon local authorities, why will the authority in Hartlepool and the county authority in Cleveland—

Mr. Leslie Spriggs (St. Helens)

Is it not Hartlepools?

Mr. Leadbitter

No, we took off the "s" in the local government boundary recommendations. What is in an "s"?

My two local authorities have worked had to ensure that there will be no growth in expenditure during the coming financial year. This Bill will impose a great hardship upon them because they will have to tell the electorate that there will be more unemployment and fewer teachers and nurses. The hierarchy, the well-paid, will not lose their jobs. Local councillors will get the blame for what we do. That is the forecast for May of next year if the Government do not re-think their approach to the strategy policy, which I would like to support.

I say that we should deal with our strategy for the economy in a way that is understood by the public at large and not in a piecemeal fashion, as we did last week when the Government introduced a Bill to save a measly £14 million and which deprived those who had paid superannuation contributions of part of their pension if they received above £25 by way of earnings. It is a waste of time for Members of the House and civil servants to operate in this way.

I have mentioned civil servants and I wish to be highly complimentary about them, which is a change for anyone in the House of Commons. I have a high regard for them. It does not, however, do them much good if we say that there will be no cause for any further increase in the Civil Service as a result of this Bill yet forget that the devolution Bill will increase the numbers of civil servants by 1,000 in Scotland and about the same number in Wales. Again, there is the piecemeal approach. We must remember those who have to administer these schemes. Some notes on the Bill make the comment that when the increase it proposes moves into prices it will lead to a temporary squeeze in profits and on liquidity. There is the observation that this effect will be temporary. Has anyone in this House ever known "temporary" to mean that?

Circumstances and conditions change. It is no good saying that an increase brought about by this measure will have a temporary effect on profits or prices. This gives the illusion that it will nip hard for only a short time. We know that in an inflationary situation there will be price rises next year anyway. People will not be able to measure that part of them attributable to this Bill. All that the public will know is that prices have risen and that this Bill was one of the contributory factors.

I have spoken about the effects of this Bill on the economy as a whole. I conclude with some observations on the areas which I believe have not been helped by our regional policies, at least not during my 25 years in public life. I do not suggest that nothing has been done. I do say that the difficulties in our regions still persist.

In my area, an industrial constituency, we have 4,200 people out of work now. Recently we lost 1,800 jobs. Since January there has been an increase of 1,600 in unemployment. Unless someone is forceful enough to change the policies of the British Steel Corporation—and I shall bend my efforts in this direction—and prevent the closure of the steel works in my area, more workers will be made unemployed. We are running towards 20 per cent. unemployment. I am afraid that this measure will create further hardship in my area. That is true also of Merseyside, Wales, Scotland and other parts of the country.

I shall support this Bill tonight because I am satisfied that there is a choice only between the Labour Government and the Conservatives, and I have already discarded that lot because they want to get out the axe. They want to cut the thing to ribbons.

My criticism of the Government Front Bench is that they are not pacing this measure correctly. They should stop doing things in a piecemeal fashion. I put it to the Government that they obtain my vote only on the basis that they will inform the relevant Secretaries of State of the need to stop this piecemeal approach. I seek the assurance that when the Bill goes into Committee the Government will be flexible and will listen to our amendments aimed at mitigating some of the damage contained in the Bill.

7.57 p.m.

Mr. Cecil Parkinson (Hertfordshire, South)

The hon. Member for Hartlepool (Mr. Leadbitter) began his speech—which I must say did not bear the hallmarks of the well-prepared speech that we usually hear from him—by accusing the Conservative Party of presenting two faces to the public. At the end of his speech he laid down a series of conditions which would govern his support for the Bill. He asked for changes in Committee, something which he knows will not happen. The hon. Member made a good speech explaining why this is a bad Bill. Then he said that we would support the Government. People who live in glass houses should not throw stones. The hon. Gentleman revealed his two faces during a 15-minute speech.

Mr. Leadbitter

The hon. Member knows that in Committee alterations are made to Bills. It has been my pleasure to serve on several Committees when changes have been made. I have withdrawn my support if they have not been made.

Mr. Parkinson

Once again, that will read very well in the Hartlepool Gazette, as the hon. Gentleman knows. A lot of his speech will read well in the Hartlepool Gazette. I do not cast doubt on the hon. Gentleman's motives but much of his speech was distinctly aimed at the Hartlepool Gazette, if there is such a thing.

The Government have hit on a new tack on their approach to imposing fresh taxes and policies. When, last year, they had to introduce a prices and incomes policy we did not have a Prices and Incomes Bill. We had a Remuneration Charges and Grants Bill. But it was a Prices and Incomes Bill. Today we have this Bill, innocuously titled the National Insurance Surcharge Bill. We all know that it is a payroll tax Bill. Why do not the Government, as a beginning to their policy of introducing the nation to the economic facts of life, start by putting the true name on the measures they introduce?

There is a surprisingly broad area of agreement about the Bill. We agree that it will cost £1,000 million. We agree that, initially at least, the cost will be borne mainly by the private sector. Later, as the Minister explained, the private sector will be allowed to pass on the additional costs to its customers via the Price Code; but he made a point of explaining that this tax has been introduced because, unlike VAT, it would take some time for the price effect to work through. In other words, the Price Commission will not let the expenses through quickly. Companies will have to wait quite a long time for permission to increase prices to reflect the cost.

However, although it may be true that the effect will work its way more slowly through the cost of living index and the cost may be borne by companies initially whereas under VAT it would be borne straight away by the consumer, it has some very unpleasant implications. The distributive and retailing trades will add this tax to the cost of food and all other essential services which, under VAT, are zero rated.

Therefore, this tax—and I hope that hon. Members opposite realise it—will reflect itself as a tax on food and essential services. This is the other side of the claim of the Financial Secretary that, unlike VAT, it will not work through to prices so quickly. It will work through to the prices of essential goods which old-age pensioners, for example, will be buying. A whole range of expenditure which, under VAT, would not have borne an increase will be hit by this proposed tax.

Everybody agrees that the proposed tax will affect jobs. According to the Treasury, 10,000 jobs will be lost. It was rather cheeky of the Financial Secretary to say that that was the only intellectually credible estimate available. Few of us accuse the Secretary of State for Employment of being an intellectual, but he put a figure of 110,000 on this. Nobody, to the best of my knowledge, has doubted the right hon. Gentleman's credibility, although some might have doubted his intellect. Therefore, there is a clash between two Departments, and all the Financial Secretary can do, when we ask him to explain which of the figures is right, is to say "intellectually our figure is much more credible".

The Treasury has produced many figures in recent years which might have been intellectually credible when produced but which have turned out regularly to be staggeringly wrong. The Government claim that the Job Creation Programme has cost £500 million and will produce about 70,000 jobs. Therefore, the suggestion is that a charge of double that figure will have an effect nearer to a loss of 100,000 jobs than 10,000 jobs.

It seems to be agreed by hon. Members that jobs will have to come from the private sector via the so-called regeneration of British industry if they are to come from anywhere. There are bound to be public sector cuts which will have effects on public sector employment. Every nationalised industry has redundancy plans. When the Aircraft and Shipbuilding Industries Bill eventually gets through the House, there will be a considerable number of redundant shipyard workers. Therefore, the Government agree, and we agree, that any increase in the number of jobs will have to occur in the private sector.

I accept many of the arguments adduced by the hon. Member for Hartlepool about the deficiencies of the Bill, but the one which stands out above all others, and the reason why the House should consider carefully whether it should give the Bill a Second Reading, is the fact that it will damage employment prospects in the private sector; and we all agree that if there are no new jobs in that sector there will be no new permanent jobs. This is my principal criticism of the Bill.

The Bill is very much in keeping with the Government's approach to the private sector and private enterprise generally. The Government are loud in their praise of private enterprise. These days, the Chancellor of the Exchequer and the Prime Minister never miss an opportunity to say that they believe in the mixed economy, that the private sector is important to Britain, and that they are totally committed to profits to regenerate industry. But let us look at their actions. If one believes in the private sector and in the mixed economy, one must accept certain aspects of private industry. One must accept that private industry must make a good return on the capital employed. It must make good profits if money is to be ploughed back into new equipment and jobs.

Do the Government allow the private sector to make profits? In the review of the Price Code this year the Government made relaxations which will increase the net return on capital employed from about 3 per cent. to 4 per cent. The concessions made in the Price Code allowed industry to increase its rate of return by 1 per cent., which is negligible. I accept that this is slightly simplistic, but who will borrow money at 18 per cent., with all the risks it involves, and with a world recession on the horizon, or certainly in the absence of a world boom, and the prospect of a net return on capital of 4 per cent.? Therefore although the Prime Minister pays lip service to profits, when he has the chance to do something about them by relaxing the Price Code he refuses to do it.

The Chancellor of the Exchequer makes speeches—we heard another one last weekend—in which he says that the squeeze on differentials in industry is too severe. The Financial Secretary has said that the difference between the highly paid and people on average earnings in industry is in a proportion of about 4 to 1, which is less than it is in Iron Curtain countries, including China. The Financial Secretary and other Ministers say that the salaries of British managers have been squeezed. But have the Government done anything about it? Such people have had their standards of living viciously attacked by the Government, who have effectively frozen their salaries for nearly three years and have piled on the taxes. Therefore, when it comes to allowing the successful to enjoy better results than the unsuccessful—an inevitable part of the private sector in which the Government say they believe—the Government pay lip service to the notion but by their actions prevent the successful from enjoying more than the unsuccessful.

The Government talk about the need for investment. We accept the need for investment. But investment needs investors, and the Government will not accept the need to pay dividends to investors, because dividends remain virtually frozen. The tax on dividends can reach 98 per cent. Therefore, although the Government say that investors and investment are needed, instead of encouraging them they do exactly the opposite. Through the tax system and dividend controls, they discourage investors and thereby investment.

The Government say that more resources must be released to enable the private sector to invest. They say that they must cut their take of the gross domestic product so that more is left for the private sector. But then the Chancellor of the Duchy of Lancaster goes to the City and, lo and behold, before we know where we are there is a new tap stock on offer at 16 per cent. The Government say that they are desperately anxious to release resources for the private sector but are busy offering interest rates which the private sector cannot afford to pay and mopping up every available investor's pound they can find, including the money which until recently has been finding its way into the hands of the building societies.

There will be substantial unemployment in the building industry next year and an almost total collapse of the private housing programme. It must not be forgotten that in ordinary times the building industry employs 1½ million people—three times as many as the steel industry and the coal industry put together. Yet it is having a major squeeze applied to it. There will be tens of thousands more building workers out of work this time next year than there are now. This measure will not be any help to the construction industry where prices are lower than they were last year and there is immense competition for work. There is no means by which this increase can be passed on in the building industry. This tax will make job prospects in the building industry much worse.

The Government talk of the need for profits, of the importance of the investor, of the need to release resources, but they are doing exactly the opposite of helping in those three areas. Time after time the Government talk of the importance of small businesses. Whatever is said about big companies, small busineses are "in". The right hon. Member for Bristol, South-East (Mr. Benn) always exempted small businesses from his criticisms. The hon. Member for Liverpool, Walton (Mr. Heifer) always leaps to his feet and makes a plea on their behalf.

I am sorry to be speaking in the absence of the hon. Member for Walton, but I do not intend to be personally critical of him. He believes in small businesses, but not in their growing. He has no sympathy with the man who starts a business and builds it up and as a result generates personal wealth. He regards that as anti-social. He is in favour of the idea of small businesses, but he resents the end result of running a successful small business.

The same is true of the Government: they have no sympathy with private industry. By the capital transfer tax—a confiscatory tax—the Government ensure that there is no joy for anyone who has struggled through this maze and climbed over a series of obstacles and finally reached the other end. If he has survived the obstacles on the way of being overtaxed, of not being allowed to invest, and a whole range of other restrictions and finally built up a successful business, at the end the hon. Member for Walton says "This is where we come in. This business belongs to us and our tax system will ensure that we take it away from him."

How can the Government claim that they believe in the private sector and the mixed economy when they consistently do things that militate against them and refuse to accept the end result of the private sector, which is that the more successful will have greater wealth at their disposal than the less successful? The Government do not accept that. It is time that they stopped pretending that they believe in the private sector.

I was depressed to read today that the Trades Union Congress and the Government are to set up a joint committee to study the question of the introduction of a wealth tax. There is no need for them to do that. They can read the report of the Select Committee on a Wealth Tax and remind themselves why the Government chose not to introduce it this year. The truth is that it is a very expensive tax to administer. If the yield in the early days were to be negligible, it would probably be a claim on the nation's resources rather than a contributor. The administrative costs would be stupendous. It would take a long time to set up such a tax.

Does anybody think that today's announcement will do anything to strengthen the confidence of industrialists and of small business men? The Government are constantly telling people "We believe in you. We know that you have the answer to our problems, but we intend to ensure that you do not use your talents to solve them."

I oppose this Bill, for a variety of reasons, but chiefly because it is further evidence of the Government's hostility to the private sector. It represents a further harassing and squeezing of the sector on which the Government and the nation depend for recovery. It is a deplorable Bill and I shall vote against it tonight with enthusiasm.

8.15 p.m.

Mr. Ken Weetch (Ipswich)

For the purposes of this debate I do not believe that a volunteer is worth 10 pressed men. Conscripted armies in Britain have always put up a very stout performance.

In making this speech, I have the advantage of following my hon. Friend the Member for Hartlepool (Mr. Leadbitter). I had the pleasure of listening to his rather unusual analysis of the economic and industrial situation. As I listened to him, I concluded that he will not receive the Treasury award for orthodoxy. He has forfeited that inevitably.

My right hon. Friend the Chancellor has said that the long-term aim is the regeneration of British industry. In facing that problem, he grapples with longstanding difficulties. There was a period in Britain's economic history when our industry led the world, but I regret that that was because we had started first, and for a time we had a monopoly position. From about 1870 onwards, we have gradually been losing against our competitors. In fact, vis-a-vis the nations of the industrial West, as I will call them—I include Japan—we have gradually been becoming less competitive. My right hon. Friend the Chancellor is trying to reverse a very long-term industrial decline.

Manufacturing industry, with the devaluation of the currency, has exceptional opportunities to make an advance in exports. The greatest threat to this is not the 2 per cent. surcharge as a charge on industrial resources but the high rate of interest which must be faced by industrialists on their borrowing. A minimum Lending Rate of about 15 per cent. is not compatible with any sustained industrial advance. The two do not go together. For a person who has to borrow at between 16 per cent. and 20 per cent. the prospect is daunting. A person who finances borrowing from his own resources is faced with the fact that it is more profitable to buy medium-term paper than it is to erect buildings and bring in machines. As a precondition of any industrial advance, the Minimum Lending Rate of about 15 per cent. is a very great obstacle. One of the first objectives in an economic policy must be to reduce that rate of interest as quickly as possible.

My hon. Friend the Member for Hartlepool made some interesting points about public expenditure. If I understand him rightly, what he is saying is that all public expenditure is not good public expenditure. We must discriminate.

I believe that there could be significant savings in public expenditure without doing damage to anybody. When I look up and down this land at the area health authorities, I wonder what most of them do all day. As a result of local government reorganisation, institutions have been constructed which are not cost-effective to any extent, as they were promised to be. Indeed, there is duplication over a wide field where decisions have to be made. I am not saying this only as a result of my own observations. People, often with party cards, come in and tell me every day that there is waste in various sectors of public expenditure. There is no question about it at all.

The first monument of bureaucracy gone wild is the Act to reorganise local government. It was a piece of monumental folly. It was promised that we should have more cost-effective local government. We have nothing of the kind. Unfortunately, we do not seem able to alter it. Having already stirred things up once, I am told that we have to wait for the dust to settle before we can do anything about it. The next such monument is the Act to reorganise the National Health Service. The framework of that public service can be looked at pretty critically in terms of public expenditure.

I am a strong believer in the mixed economy. I also believe—contrary to some of my hon. Friends who are sitting below the Gangway—that a public sector borrowing requirement of the size we have now is actually a threat to industrial advance. I hear of a public sector borrowing requirement of £9,000 million, £10,000 million or £11,000 million. Those are quite striking figures.

I know very well that in a time of industrial depression, when there is unemployment, the public sector borrowing requirement is bound to be higher than it would normally be. But if we are to finance a public sector borrowing requirement of that size year in and year out, we shall have to do one of a number of things. First, we may have to print money, if we are not careful. Secondly, we can try to finance it through taxation, direct or indirect. Thirdly, we can try to finance it through borrowing.

The main thrust of my right hon. Friend the Chancellor of the Exchequer seems to be that we borrow in the medium term to cover this deficit. In pursuing a policy of that nature, we create a greater demand for loanable funds in the market place, and thereby force up rates of interest. When the Treasury issues tap stock of one denomination or another at high rates of interest, there is immediately some fallout in other sectors of the economy. The first thing that happens is that mortgage rates go up to 12¼ per cent. Secondly, we have to pay a high rate of interest in order to finance stocks of goods and industrial machinery.

Taking a macro-economic view—to use a terrible term—I believe that monetary factors play a very substantial part in the economic difficulties that we face today. That does not bring any comfort to the Conservative Party, because much of the inflationary difficulty that we now face—and faced in 1974—can be directly related to the fact that Chancellor Barber lost control of the money supply in 1973.

If control is lost of the money supply, as measured by M3, in 1973, given a time-lag it will work its way into the price level, and that is precisely what it did in 1974. Therefore, on a monetary analysis, I do not think that there is any comfort at all for the Conservative Party.

If we are to finance the public sector borrowing requirement through taxation, industrial companies in Britain must bear some of the burden. They must help to finance the adjustment that has to be made. I believe that a massive increase in direct and indirect taxation has to be avoided. On the other hand, there will have to be some tax relief at lower levels of income, because we cannot continue with a situation in which it pays some people to stop at home rather than work. There will have to be some tax relief at lower levels of income, otherwise there is a substantial disincentive.

I said that a massive increase in direct and indirect taxation had to be avoided. Instead, two percentage points were added to the national insurance contribution, and this will take effect from April next year. I understand that the yield in the financial year 1977–78 will be just over £900 million, and the yield in a full year will be just over £1,000 million. Well under half of this will come from manufacturing industry.

I take the point that if we are to have a high level of public services in this country—good pensions, modern hospitals, and all the rest of the infrastructure of high public expenditure on social services—the engine or the animal which has to carry this burden is manufacturing industry. Manufacturing industry has to create the wealth, in my view, before we can spend it.

It is no coincidence that other nations in the world with high levels of pensions and social security provision usually have a prosperous manufacturing industry. I readily concede that point. On the other hand, a moment ago I referred to the necessity of trimming in some way the public sector borrowing requirement. The Chancellor of the Exchequer was able to raise £700 million with the two percentage points on national insurance contributions. I understand that the addition of the two percentage points will be an allowable cost for the purposes of the Price Code.

A short time ago I went on a three-week intensive visit to industry in Ipswich. In my constituency the biggest employer is the engineering industry. I made a direct point, at every firm I visited, of asking what were the problems facing it in its efforts towards industrial advance. Oddly enough, this visit was made at the time when my right hon. Friend the Chancellor of the Exchequer had made his announcement concerning the two percentage points. I went through all the largest manufacturing enterprises in my constituency and asked them what were their problems. Not one of them referred to the two percentage points on national insurance contributions. These firms mentioned problems galore, but the substantial one was certainly not the national insurance contributions.

The addition in insurance costs will come at a time when profitability in British industry as a whole is rising and will rise, and when the Chancellor has, as I have been told from every quarter, given enormous benefit to industry through stock relief. One must take these factors into account, and accept that the Government were boxed in and had before them a small range of options, all pretty painful because, wherever one looks at public expenditure with a view to getting reductions, there are harmful consequences.

The hon. Member for Hertfordshire, South (Mr. Parkinson) said that the Bill would hit employment in the public sector. The import of his remarks was that if he wished unemployment on anybody, he wished it on the public sector. In fiscal terms, there is some advantage in the surcharge, in that, if one is to raise any money by taxes at all, a move towards indirect taxation has less of a direct effect on the retail price index, and I understand that the increase in prices which will come about from the surcharge will be gradual, the full impact not being felt until early 1978.

Nevertheless, I understand—and looking at it rationally, I think that there is something in this—that this tax, as my hon. Friend the Member for Hartlepool described it, calling a spade a spade, has the advantage of raising revenue quickly, together with a considerable ease of introduction and administration. I do not think very much of a tax where thre is considerable administrative cost before one starts to realise revenue.

I want to point out a comparison in national insurance contributions between Britain and other industrial countries. It is statistically correct to say that most other industrial countries have national insurance contributions which bear more heavily on employers than anything we have, even including this surcharge. For example, in West Germany, social security payments by industry total 14½ per cent. of the wage and salary bill, in Belgium, 14½ per cent., in Italy 18 per cent. and in France 22 per cent. In Britain, it is under 5 per cent. Britain does not come off badly when social security contributions are seen as a percentage of tax revenue as a whole. In those figures, the social security contributions in Italy amount to 33 per cent., in France, 32 per cent., in West Germany, 21 per cent. and in the United Kingdom, only 9½ per cent.

I am arguing that if one is to raise £1,000 million in taxation in order to reduce some of the impact of a large deficit in the public sector borrowing requirement, this way is less damaging than most of the other options open to us, given the disadvantage, which I accept, that an additional burden on industry is involved. Far from this being the omen of disaster, it is a rational way of raising money to finance the public sector borrowing requirement. But at the end of the day, that does not relieve us of the responsibility of cutting out waste in the public sector where it occurs. There is no painless way out of these difficulties but the surcharge is a more painless way than most.

8.35 p.m.

Mr. Esmond Bulmer (Kidderminster)

When I asked the Secretary of State for Employment what advice his Department had tendered the Treasury about the effect of the Bill on employment, he was either unwilling or unable to give a coherent answer. I understand that he has said elsewhere that the effect could be about 115,000 jobs. Clearly, we could talk all night about what the real impact might be, but the only certainty is that we have no way of knowing. All that is clear is that if £400 million is taken out of manufacturing industry now, there will be fewer jobs. That is my first reason for rejecting the Bill.

I also wish to probe a little further into just what consultation does go on between the Departments, particularly between the Department of Employment and the Treasury. When I asked the Secretary of State for Employment what advice he had given to the Treasury before the Government introduced the 25 per cent. value added tax, again I got a wholly unsatisfactory answer, to the effect that it was a matter for Customs and Excise. When I asked Customs and Excise, I was told that it had not been asked to provide any information. All we know is that a lot of jobs were lost and that within 12 months the Government had to go into reverse.

I do not know how the Treasury carry out our affairs, but on the basis of the last few years there is clearly room for improvement. I join the hon. Member for Hartlepool (Mr.Leadbittter) in some of his strictures. This Bill appears to me to be a typical, neat, intellectual answer to the short-term problem of how to raise a certain sum, but I do not believe that it has been thought through. I remain to be convinced that the Treasury and its Ministers, speaking for a Government who express concern for jobs, really take jobs into account when doing the national housekeeping. A great deal more could be done.

The hon. Member for Ipswich (Mr. Weetch) was almost asking for an employment audit. A great deal of Government expenditure does not really take account of the quality of employment, and a great deal of departmental thinking ignores employment completely. For example, in my constituency recently, when it was a question of how we linked an industrial estate with a trunk route, it was clear that the civil servants in the Department of Transport were wholly concerned about safety factors and that it was outside their brief to consider employment factors. They were not, it seemed to me, as concerned as perhaps they should have been to arrive at a compromise. I hope that the Minister will give us an assurance that will go some way towards allaying the fears in all parts of the House and will say how that employment is taken into account properly when the Treasury considers measures such as these.

In my constituency unemployment has risen by one-third in the last 12 months. That is the highest unemployment we have had since the year. In that situation it is inevitable that any Member of Parliament should wish to probe the underlying factors. I have talked to, visited, or written to all 51 of the major employers in the private sector in my constituency. They told me that over the last two years 28 of them were employing fewer people than they were two years ago, 15 were employing the same number, and only five were employing more. Three had gone bankrupt.

My constituency relies heavily on the carpet industry. One-third of all those employed depend on this industry in one way or another. It is perfectly clear that over the next five or six years there will be technological changes which will mean fewer people being employed and more machinery being needed. More machines may create more jobs, but these will be outside the constituency. In Kidderminster we do not know where new jobs will come from in the next five years. If they are to be self-generated, this can be done only through the expansion of existing business or new business.

The hon. Member for Ipswich said that large companies to which he had talked had said that this increase in the stamps was not critical. I do not argue with him —obviously he is correct. But our small and growing businesses must look at this in the context of all the other burdens which have been placed upon them in the last few years. These burdens are considerable and growing, and in some cases they threaten to become intolerable.

We have had a 40 per cent. depreciation in our currency. This means that any small or growing business dependent upon buying in materials has to find that much more money for materials. Wage levels have gone up without any regard for the wealth generated. As a nation we pay ourselves almost 60 per cent. more than we did at the time of the three-day-week, yet we are producing only 5 per cent. less. With that sort of arithmetic put against a small business competing with local authorities or large businesses, one can understand that the burden is not one which is easily met.

Then, there is the burden of rates, which have doubled or even trebled for some unfortunate companies. In 1974 the Government altered the basis of the rate support grant for our part of the world. They are about to do so again. This will create a further burden.

The Employment Protection Act contains many worthwhile proposals but my criticism of it was levelled at the speed at which these proposals were introduced and the lack of thought about the impact that they would have on small businesses. We are now seeing the cost of making that mistake. The cost, if someone is taken on who proves unsatisfactory, is far too high for small businesses and it is acting against the young person or the high flyer. A company often will choose an older, more experienced person instead of a younger person because it feels that it cannot justify taking a risk.

All businesses have suffered from too much legislation. One figure that I saw recently claimed that there were 2,600 pages of legislation from the last Session, and a great deal of this was concerned with industry. No one running a small business can cope with this volume of legislation. How many people in this House have read more than a small fraction of the legislation? It is only when a business is hauled over the coals by some new inspectorate that it realises that a law has come into being. Large companies can employ staff to keep track of this legislation, but small companies cannot afford to do so.

We have had changes in VAT as well. How many people in the Treasury really understand the burden imposed on small businesses filling in forms and so on?

Inflation is a really crippling factor. A business with working capital of £100,000 is having to find an extra £40,000 and the rate of interest charged on £40,000 is another £8,000. How can small businesses find that sort of money? How can even medium-sized businesses find that money today? They cannot do so. If the owner of a business compares a return based on his working day and night with closing down and putting his money into Government paper, he must ask himself whether he is mad to carry on.

All these burdens exist on the small and growing business. But let us suppose that in spite of all that an individual proprietor persists in the belief that one day he will create something which will be of value for himself and his family. What is the prospect before him? The immediate prospect is of dividend control. I wonder how many members of the TUC have thought this through. It is they who argue for it. I do not think that the Treasury wants it. The immediate impact of that control is so to depress the value of many company shares that the larger company is better off taking over a smaller company than putting the money into plant and equipment.

The control also operates unfairly against private sector pensions. It allows overseas interests to buy our companies far too cheaply, and it seems economic nonsense to argue for a wealth tax in addition to the existing penal capital transfer tax and capital gains tax. If the TUC really is interested in the creation of jobs it must begin to understand the wealth-creating process.

On top of all these burdens there is to be a 23 per cent. increase in the employer's stamp. That has to be seen in the context of all the other burdens. Perhaps the Treasury will say that since all these businesses have borne so much, it proves surely that they can carry more. Was not that the mistake made by the Stuarts and the Bourbons and all the profligates down the ages? The determination to spend above one's income, allied to a belief in the divine mission to do so, which was what we saw at the Labour Party conference, seems to make disaster inevitable.

I see no chance of jobs being created while the Government maintain their present strategy and their present psychology. It is not wholly the Government's fault that there has been a shift from manufacturing industry. As we all know, it is a deep-seated problem. Over the last 10 years 200,000 jobs a year have been lost in manufacturing industry. It is not good enough to say that the Bill is not damaging. If we are to recreate our industrial base, we have to put long-term before short-term, accept lower standards of living, and create before we can spend. That means that there must be much less interference with industry.

There must be a period when it is possible for a company to plan in the long term, to have some understanding of what the rate of inflation might be, and to feel confident that the decisions it makes will not be invalidated by changes in Government thinking every two or three months. In addition, we need a tax system more in line with the systems operated by our successful overseas competitors.

If we had these things confidence would return and jobs would be created. I shall certainly vote against the Bill because it does nothing to bolster the confidence of the country's wealth-creating sector.

8.48 p.m.

Mr. Leslie Spriggs (St. Helens)

The House of Commons, industrialists throughout the country, people who are unemployed and others who are afraid of what might happen to their jobs will be frightened to death, I believe, by Clause 1(1) of the Bill. Most of the small industries, especially those in my constituency, are suffering from a lack of liquidity. No matter how urgently the Government requires money, there is no sense or purpose in squeezing more money out of industry that cannot afford it. There is no use in creating unemployment. That is against the philosophy of the Labour Party. Clause 1 of the Bill reads: Every person who pays or is liable to pay a secondary Class 1 contribution under the Social Security Act 1975 in respect of earnings paid in a tax week beginning on or after 6th April 1977 shall be liable to pay with the contribution a surcharge equal to 2 per cent. of the amount of the earnings in respect of which the contribution is paid or payable. There have been several calculations on what this means to British industry. It is estimated that it will cost almost £100,000, commencing in April 1977.

It was rather dishonest to draft this Bill with wording to attach it to the National Insurance Scheme. If a Government require money, they need only tell Parliament. They should be straight, come to the point and tell Members on both sides about the state of the country. If the Government must have money they do not need to hide that fact in this manner. This system is one of the cheapest ways of collecting taxes. Many of my constituents, and many industrialists throughout the country, must be wondering, in view of this Bill, where it will end. If it is so easy, cheap and simple to collect 2 per cent. across the hoard from British industry, any future Government may decide to do the same thing. This could create an unsatisfactory state of affairs for British industry.

Compared with other systems of tax collection, none could deny that this method of taxation by adding to national insurance contributions will be a financial terror to small companies in this country, because it is mainly the small companies that lack liquidity. The Minister said that this tax would be so thinly spread throughout the country that it would not penalise individual sectors. He should come down to earth and listen to what a constituent wrote to me at the weekend. She said: After listening to the Secretary of State for Social Services appealing to people to be good neighbours towards pensioners, I feel obliged to write to you as our Member of Parliament to point out that loneliness is not the real issue. The cause of loneliness is that pensioners just do not have the means to go out and meet people and, for the most part, are too proud to ask for or accept charity. In my opinion, the ever-increasing cost of rents, rates, heating and food is at the root of the trouble. I would like to point out our own case. My husband is 67 years of age and I am 62. He has worked hard all his life on long-distance haulage work with no other pension, only his State pension, plus a small amount of graduated pension i.e. combined pension £26.48. So to help keep us off the breadline he does a part-time labouring job in an engineering firm three days a week, eight-hour days, for which he is paid 50p an hour or £12 per week. Since the increase in pensions, they have taken back in tax more than the amount of my pension rise of £1.30. They now deduct £3 out of the £12 in tax, thus leaving £9 out of this. My husband pays 24p per day bus fares and has the cost of lunch. We have been to the income tax office today and we are told we are being taxed on £8 of our income at 35p in the pound. I shall not go further. That is a message from the grass roots, from people who have given this country the benefit of their working lives, people who have invested their lives in Great Britain. This man has finished work and, although aged 67, he goes out to do a part-time job. I hope that hon. Members took in what I was saying when I read that letter.

Some of us will have to consider very deeply before we vote in favour or against the Bill. We have to be absolutely sure that there is no other way. I can think of one. There are many people living on islands in the sun whose wealth is being produced in this country but who do not subscribe one penny to the Inland Revenue. These people are outside the British tax laws even though their wealth is produced here. They hold British passports, but if they are not genuine British people, the time has surely come to withdraw British passports from people who believe that Britain and the British are no longer worth their while or their support.

I appeal to the Minister to deal with the questions I have put to him, especially the correspondence to which I have referred. I appeal to him to give us the answers before the Division.

8.59 p.m.

Mr. Stan Thorne (Preston, South)

It is a pleasure to follow the speech of my hon. Friend the Member for St. Helens (Mr. Spriggs), who went to the heart of the issue which we are facing. I have long been of the opinion that there resides in the Treasury a form of intellectual expertise which defies the understanding of ordinary mortals such as myself.

We have been given to understand time and again that, in recent months, the Treasury has been in the business of attacking inflation. Apparently the best way to attack inflation is with inflationary measures. National insurance contributions paid by employers are a cost on production. Costs are reflected in prices, so one must assume that prices will rise and be allowed to rise by the Secretary of State for Prices and Consumer Protection.

It might be suggested that the cost be taken out of profits or that we should diminish the rate of profits. But a former Secretary of State for Prices and Consumer Protection introduced a measure some months ago which was designed to improve the rate of profit and to encourage investment in manufacturing industry in particular.

Employers are likely to attempt to reduce costs following the introduction of this measure. How can they do that? Excess capacity in the manufacturing industry can be taken up without adding to the work force. It is possible to cut back on those employed without any real loss in sales. Stockbuilding may be delayed but sales can be maintained. If that is not on, there is always the physical rate of production—the return from labour and how it can be improved and speeded up without a major threat of industrial action, which is not easily undertaken by workers and certainly less easily when unemployment is high.

Industrialists may not invest as early as they might because of this measure, which does nothing to get to grips with the fundamental problems and the basic crisis of the capitalist society in Britain today. The measure is only small beer compared with the measures that the Treasury are apparently in the final stages of preparing.

Who are the decision makers? As far as I am aware, we have no Trotskyists, crypto-Communists or Left-Wing Socialists in the Cabinet.

Mrs. Elaine Kellett-Bowman (Lancaster)

The hon. Member must be joking.

Mr. Thorne

We have some Social Democratic politicians who are determined to prop up an economic system which is reeling and in decline. Talk of an efficient, thriving mixed economy allied to an almost blind belief in an ability to come out of the econmic crisis in the next two years with a greater stability than before falsely motivates the Government Front Bench. If that were to happen I could be forgiven for assuming that we shall proceed vigorously to activate the National Enterprise Board. Or will it then be argued that we do not need such mechanisms as the NEB because things are "going very well, thank you"?

Booms, even small booms, tend to put back economic change. If in the meantime we have recourse to the electorate with our present policies firmly written on the banners in the election campaign, we shall not have the power which government gives to pursue our policies thereafter. We need, as never before, an alternative economic strategy that is considerably different from that—if one can call it a strategy—being pursued by the present Government. That alternative economic strategy has been spelt out several times from the Labour Benches, not least by my hon. Friends the Members for Luton, West (Mr. Sedgemore) and for Bristol, North-West (Mr. Thomas) and several others. It is not my intention—dare I say it?—to bore the House by spelling out some aspects of that economic strategy.

Mr. Brian Sedgemore (Luton, West)

My hon. Friend should spell it all out. It will not bore anyone.

Mr. Thorne

The Labour Party, according to its manifesto, its historical development and what is written in Clause 4 of its constitution, is in business to put into effect when in Government economic measures which are based upon the acceptance of the public ownership of the means of production, distribution and exchange. I do not expect any Labour Government to transform the economic situation overnight, but I expect them to respond to capitalist crises with Socialist measures, not measures that hit precisely those people to whom reference has been made by my hon. Friend the Member for St. Helens, who vote Labour and who expect from a Labour Government concern for their living standards and an acceptance of their contribution over many years to establishing the wealth of this country.

It is no secret that we on the Government side of the House have a three-line Whip tonight. My hon. Friend the Member for Hartlepool (Mr. Leadbitter), whose point of view I respect, said that there were two alternatives—to vote for the measure or for Conservative Members. It seems to me that the Government are relying on precisely that sort of blackmail. It is not the Trotskyists or the Left who are blackmailing us or threatening us in that way. We hear a lot from some very strange places. Over the weekend, we heard from the strangest of them all, my right hon. Friend the Member for Huyton (Sir H. Wilson). It is not the Left who are exercising blackmail. It is the Right wing of the Labour Party that has been in control of the party and of Labour Governments for the best part of this century.

I must admit, finally, to being fed up with the double-think that emanates from the Government Front Bench. This measure will definitely promote further unemployment.

Mr. Nick Budgen (Wolverhampton, South-West)

The hon. Gentleman is right about that.

Mr. Thorne

I was not sent here to support any measure that was designed to create further unemployment. On the contrary, I was sent here to ensure measures which would avoid unemployment, and not create it. In spite of all that, I shall gain no pleasure from being in the Lobby alongside Opposition Members, who have no sympathy whatever for the unemployed. I have no alternative in this situation but to vote against this measure. This is a decision that we all have to take. All that a Back Bencher has left is the exercise of his right to vote so as to show his opposition to unpalatable measures.

9.10 p.m.

Mr. David Howell (Guildford)

We have not been playing to a packed House this afternoon—there have been a number of rival attractions. The hon. Member for Preston, South (Mr. Thorne), who spoke so robustly, has reminded us that many of his colleagues have been out for the afternoon hunting the termites which were reported over the weekend to have eaten the grass roots of the Labour Party. No doubt that has taken some away.

Apart from the fact that Christmas is coming on, the difficulty about getting a debate going on a subject as important as this—it is extraordinary that there should have been so little interest in a Government proposal to raise taxation by £1,000 million—is that we are discussing the events of last summer, which were overtaken by the events of the autumn, which in turn have now been overtaken by the events of this winter.

The errors of last July, which were predicted at the time and of which we believe this Bill to be one, have long since led to other mistakes, as we said they would. They in turn have led to more errors and now the process is being repeated a third time. At this moment, while we have been having this debate, more errors are in the making.

These measures were conceived last summer, when there was a good deal of confidence around in a world recovery. The Chancellor talked boldly about his hopes for economic growth in 1977 and asserted that there would be all sorts of prospects. He said: The Government's plans for the reduction of the PSBR will of course make it easier to finance the borrowing requirement without excessive growth of the money supply. It will also mean less pressure on interest rates, to the benefit of industry, of mortgage holders and of Government and local authority borrowing."—[Official Report, 22nd July 1976; Vol. 915, c. 2018.] That was in July, when the idea of a 15 per cent. Minimum Lending Rate would have seemed a nightmare—yet that is what we have.

Things looked very different then. Today business confidence is dropping sharply. The latest survey from the CBI talks of "marginal projects" being dropped. In personal terms, that means that many people will get their cards, that many are being thrown out of work at this moment, new jobs are not coming on line, new warehouses are not being built or new hands being taken on, new investment projects and machinery are not being put in—all because of the high cost of money. Economic growth was going to be 4 or 4½ per cent. in the coming year, but the forecast now is1½ to 2 per cent.

We have been told by everyone, from the Prime Minister downwards, that unemployment will climb sharply. A figure of 1½ million has been mentioned. On present trends—let us hope that they are reversed—and making all too familiar, if weary, guesses about the sort of botched job which will come out of the next economic package—I fear that 1½, million will prove a conservative estimate. I hope and pray not, naturally, but unemployment will climb and climb sharply.

The present position, therefore, could not be more different from what was described by the Chancellor in July and August, when he spoke about the package of measures which spawned the Bill. We know the main reasons. One is the world-wide reason that the recovery has halted. Our high hopes that we would be lifted up on the world boom are not to be borne out. Therefore, it needs totally new thinking.

But the other reason is at home, staring us in the face, written into the words "marginal projects being dropped." The 15 per cent. minimum lending rate, the cost of money, has a tremendous impact. I do not think that hon. Members who talk blithely about the need to keep up public expenditure, implying that they are happy with that sort of interest rate financing, realise the enormous effect of such interest rates on business jobs and prospects. They do not understand the ugly threat, the feeling in the stomach of every person in a job who knows that he may lose it because money is becoming so expensive that his boss will have to close down part of the works. That is the effect of high interest rates, and the high public expenditure requiring those interest rates, and it is why we believe the July measures, of which this is a part, and the way in which they were conceived and shaped to be wrong.

The Financial Secretary rightly said that the alternative to this payroll tax was to cut public spending. We believe that it was a wrong and escapist measure in July. We are not against a shift in the long term towards lower income taxes, higher indirect taxes and higher social security contributions, more in line with those of the EEC. But what we are against is using this as an escapist measure to raise additional revenue rather than cutting public expenditure when that could have been done in the summer.

I know that back in those heady days the Chancellor of the Exchequer said that it could not be done because it would endanger Government objectives. So the easy way round was taken. This has been a constantly repeated theme of the Financial Secretary: it is an easy tax to introduce; it does not hurt too much; it is the easy way. We think that it is doubly wrong, because it does nothing to raise and restore confidence, which more substantial public expenditure cuts in the summer might very well have done. Moreover, it destroys private sector jobs.

My hon. Friend the Member for St. Ives (Mr. Nott) was absolutely right: if we had been able to persuade the Government in July to have a bit of courage and to go for £2,000 million of cuts, instead of £1,000 million and £1,000 million from the increased taxation on jobs, the chances of avoiding the present axe would have been much greater. The hon. Member for Kingswood (Mr. Walker) shakes his head and sucks in his breath, but that is the reality. The result of going for only £1,000 million of cuts then and trying to snatch the other £1,000 million the easy way through this Bill has been the collapse of confidence now, at a time of great turmoil, and cuts that are far more painful than they would have been if the Government had had more courage back in July.

Mr. Terence Walker

The hon. Gentleman once again talks glibly about £2,000 million cuts. Perhaps he will now tell us where those cuts would come.

Mr. Howell

I was talking about the £2,000 million cuts that should have been made in the summer.

Mr. Walker

Where?

Mr. Howell

Would the hon. Gentle man like a list? The list would be: plans to reduce housing subsidies, which should increase council house rents, probably on a phased basis; a policy of non-replacement of staff in central and local government, which would have a cumulative effect on the PBSR; the possibility of reducing the degree to which social security benefits are upgraded in line with inflation; together with possible further substantial cuts in construction in the building industry. Does the hon. Gentleman know where that list comes from? It is the reported list that is being worked on now in the Cabinet in preparation for the IMF public expenditure cuts.

That is the kind of price Labour Members and the Government will have to pay for a little lack of courage back in July. If it is said that by arguing for cuts in July we were arguing for unemployment, that is wrong. When the reckoning is done it will be found that if our advice had been taken there would be more people in jobs at the end of the day.

There was a chance back in July to restore what is now called, I believe, the symmetry of the British economy, that is, to do what the Chief Secretary is always eloquently arguing we should do, which is to shift resources out of the public sector and achieve a balance with a larger input into the wealth-creating side. Instead, the Chancellor said that it could not be done without further endangering Government objectives. That appeared in Hansard in July. As a result of that retreat, those Government objectives, from what I have read from the Financial Times, are being endangered.

We had £2,000 million off the public sector borrowing requirement, but, because it was taken out wrongly, we have another £1,500 million to £2,000 million—I hear that it is to be £2,000 million—coming up now. Therefore, within five months the Labour Government will have taken about £4,000 million out of the public sector borrowing requirement. That is the size of the measures that have been taken by the Government.

I agree with some of those on the Left wing of the Labour Party on one point. The tragedy is that even now it is doubtful whether it will be enough. Because it has been done in a botched and reluctant way, because it has been done in a manner which is always reluctant and doubting and without any firm positive strategy, and because it has been done in bits and pieces, I fear that at the end of the day we shall get the worst of both worlds. Certainly people will be thrown out of work, but the gains which might have been achieved on the other side by raising confidence, getting down interest rates, obtaining better monetary conditions, improving investment prospects and restoring the private sector will not be realised.

Therefore, we shall get the sacrifices in terms of people losing jobs without the gains that would have come if the situation had been handled properly in the first place. That is the first and major reason why we believe that this is the wrong measure. It was wrong at the time, it was put forward in the wrong way in the economic package in July, and now it has been totally invalidated by events.

The second reason concerns the impact of this measure on small businesses and the matters about which my hon. Friend the Member for Basingstoke (Mr. Mitchell) and the hon. Member for St. Helens (Mr. Spriggs) spoke with great eloquence.

The hon. Member for St. Helens used the phrase "a financial terror". That was a very graphic phrase to describe the impact of this 23 per cent. increase on the employer's contribution for a small firm with a few employees. It is a financial terror. It is part of the Government's vendetta against small businesses.

I know that they do not much care for small business men, but, as my hon. Friend the Member for Kidderminster (Mr. Bulmer) reminded us, small business men have been and will be hit very hard. The hon. Member for St. Helens was right when he said that the smaller the firm, the more it would be hit. It will mean that more employees will have to be brought into the office or up to the end of the works and be told "You will have to go. I cannot afford to pay you any more." That is the prospect for the small firm.

It is the same kind of attitude as lay behind the multiple rate VAT. That was brought forward by Treasury Ministers without any concern for the small business. That is why, as my hon. Friend the Member for Basingstoke reminded us, we have bankruptcies at an all-time record level. This measure will give that wheel another spin, and more people will be thrown out of work as a result of its application.

The third reason why we have no time for this Bill concerns the Churches and charities. A shabby trick was played on the House through the Ways and Means Resolution. It was unworthy of the Government to make it impossible for hon. Members to put down amendments regarding the position of Churches and charities. I am sorry that Treasury Ministers decided to go for that kind of device.

The Financial Secretary said "It is all right. Do not worry. The Archbishop of Canterbury will see the Prime Minister." There are plenty of things on which the Government need spiritual advice from the Archbishop of Canterbury, but I should have thought that two such senior people could employ their time a little better than having to sort out the latest mess created by the Laurel and Hardy team at the Treasury over this tax.

Mr. Terry Walker

Which is Laurel?

Mr. Robert Sheldon

There has been some misunderstanding about the precise form of the representations regarding the Churches. I know that representations are being made. I am not sure of the way in which they are due to be made.

Mr. Howell

It seems that the picture of the Archbishop of Canterbury and the Prime Minister in cahoots is not correct. I am sorry about that. At any rate, that is what the Financial Secretary said earlier. Clearly some intervention is needed, divine or otherwise.

The way in which the Churches have been treated verges on the malicious. On 16th July the prelates, in their wisdom, decided under pressure from the Government—according to a letter in The Times today, they did so reluctantly —to become employed earners and, therefore, involved in paying employer contributions. That will cost the Church of England £350,000.

On 22nd July, without any warning, an announcement was made in the House that doubled the liability. That was within a week of the Churches having decided to become employed earners. That seems to be a cruel reward for complying with Government pressures to join the employed earner category.

There is nothing to be proud about in those events. There is nothing to be proud about in that this measure will add the following sums to the following charities—namely, £12,000 to the National Council of Social Service, £25,000 to the Save the Children Fund, £93,000 to the Spastics Society and £120,000 to Dr. Barnardo's. I see nothing to be proud about in those measures.

The Financial Secretary told us that the Archbishop was to meet the Prime Minister although it now appears that they are not to meet. Whatever happens, I think that the Minister owes it to the House to explain in great detail what will be done to take the heat off these people. The Ways and Means Resolution has denied us the chance of tabling amendments and debating the matter properly on Wednesday, which is disgraceful.

The final reason for our opposition to this measure—perhaps it is the strongest of all—is concerned with jobs. It has been asserted again and again that more public spending cuts will throw people out of work. That is correct, and it would be painful, but everyone recognises that we shall not get out of this difficulty without pain. We have argued, and we argue now, that not to cut will be more painful, that more people will be thrown out of work. There could be no better proof of our thesis than the issue we are now debating.

In the summer we told the Government that if they did not face reality and cut spending they would find it necessary to take measures to throw people out of work. We did not anticipate the 15 per cent. Minimum Lending Rate, but we knew about this proposal, which even on the Government's estimate would put another 10,000 people out of work. There have been many estimates that put the figure considerably higher.

Mr. George Cunningham

A minute or two ago the hon. Member quoted some figures when describing the effect of the Bill on charities. In one instance I believe that he quoted a figure of approximately £100,000. On a rough calculation that suggests a wages bill of about £5 million. Can that be true?

Mr. Howell

The hon. Gentleman's rough calculation is not quite the same as mine. The figures I quoted are those involved given the 23 per cent. increase in the national insurance employer payment. If my figures are not precise, we shall work out the precise figures after-wards. Very substantial amounts are involved. The Church of England figure is correct. I do not know whether the Minister will confirm it, but it is £350,000.

Mr. George Cunningham

The hon. Gentleman says that he will work out the accurate figures afterwards, but he worked out what he suggested were accurate figures for the purpose of the quotations he made a few minutes ago. It is a simple matter of arithmetic. If 2 per cent. equals £100,000, 100 per cent. is £5 million. It is roughly 2 per cent. of the wages Bill. In fact, it is a little less than that—namely, 1.8 per cent. If 1.8 per cent. of the wages bill is £100,000, the wages bill must be approximately £5 million. The hon. Gentleman made a lot of this so let us get it right. Do any of the charities have a wages bill of £5 million? If so, it is incredible.

Mr. Howell

Those are the figures given by the charities. I should have thought that a total wages bill of £5 million for all those working in charities was not a fantastic sum. The hon. Member must accept that these are the figures provided by the charities. If he wants to challenge the charities, let him do so. I think that he will find that he is totally wrong, as he proved to be in an earlier intervention this afternoon.

I was talking about the loss of jobs involved in this measure. The Leader of the House has used the most emotive words on this question of jobs. He has said that: We will fight unemployment so long as there is breath in our bodies. We say that if any Labour Members support that statement they should be voting with us against this Bill in the Lobby tonight.

As for those of whom the Leader of the House was speaking, all that I can say after tonight's work is that those who are to lose their jobs—and there are, alas, many in that position—would do well to steer clear of the breathing apparatus of hon. Members on the left wing of the Labour Party. Every time they utter a word, and we have had examples this evening, more jobs are lost. The commitment over the nationalisation measure last week and the week before meant that more jobs were lost. Tonight's work will mean anothed 10,000 jobs lost, at least. I exclude from my comments some Labour Members who have spoken eloquently and with understanding this evening. They see what will be the impact of this measure. Despite the fine words of members of the Left about fighting unemployment we see that their actions belie their words.

Except for a very small part of the Job Creation Programme which has good elements in it, practically everything that has been done since July has helped to destroy jobs and make new ones more scarce. This Bill raises taxes when taxable capacity is almost at its limit. It is part of the Government's job destruction programme. That is why I advise my right hon. and hon. Friends to vote against it.

9.32 p.m.

The Minister of State, Treasury (Mr. Denzil Davies)

We have had a long and interesting debate. Perhaps I could deal first with some of the specific points that have been raised. I refer at once to the speech of my hon. Friend the Member for St. Helens (Mr. Spriggs) who suggested that it was dishonest to introduce this tax—I accept that it is a tax—by attaching it, as he said, to the National Insurance Scheme. I want to refute that allegation of dishonesty.

This tax was announced by my right hon. Friend on 22nd July as part of the July measures. It was debated again on 2nd August and it was made clear that this was a tax to raise money and to reduce the Government's public sector borrowing requirement. We said that we thought that the best way, administratively, of raising the money was through the medium of the National Insurance Scheme. It is in no way intended to be an abuse of that scheme. We thought that it was the easiest way of doing it, far easier, for instance, than raising the same amount through value added tax.

Mr. Spriggs

Will my hon. Friend tell the House when this Bill was published?

Mr. Davies

My hon. Friend knows quite well when the Bill was published. The details of the tax—

Mr. Spriggs

When?

Mr. Davies

—were made absolutely clear when the tax was announced.

Mr. David Howell

When?

Mr. Davies

Last week.

May I also say that Conservative Members who now complain about this tax and the fact that we are using the National Insurance Scheme to raise the money should have given greater thought to this problem when they introduced VAT. If they had done so they would not have created a vast bureaucracy requiring 12,000 civil servants to raise a sum which could have been raised much more easily. The Conservative Party when in Government could have imposed fewer burdens on industry had they not introduced the complex VAT system.

One of the major points raised in the debate related to Churches and charities. It was raised in a thoughtful speech by my hon. Friend the Member for Kings-wood (Mr. Walker) who, unlike some Tory Members, put forward a clear and cogent argument. He did not attempt to use figures from newspapers, which seem to be wildly out, at least as far as we can tell, but he made valid points. We shall consider very carefully the representations which have been made and are being made by the Churches and charities. The fact that the Bill may become law without an amendment will not inhibit us from listening to those representations and considering them in depth, and if it turns out—I make no commitment—that we think that we should accede to them it will be possible to put the matter right before the tax is introduced on 6th April.

Mr. Ian Stewart

As the surcharge will not be paid until April next year and the passage of the Bill can, apparently, be compressed in a week, would it not have been better to wait until the representations had been considered and then introduced a Bill which took them into account?

Mr. Davies

No. The Bill must be passed fairly quickly so that the new tables to be sent to employers can be sent out early enough and be in their hands to enable them to do the national insurance calculations in good time. Hon. Members would not want us to impose greater administrative burdens on industry by delaying the sending out of the information.

We accept that representations are being made about Churches and charities. We shall consider them with great sincerity. The fact that the Bill may become law without an amendment will not inhibit us in taking account of those representations if we feel that they are justified.

Another point which has been raised relates to the surcharge and the question of deductibility for the Price Code. Perhaps I can deal briefly with this matter to make clear how the surcharge and the Price Code will operate. It will be treated in exactly the same way as employers' national insurance contributions, which are an allowable cost. Manufacturing and service industries will be permitted to pass the tax through their prices, just as they are able to pass on increases in other overhead costs.

I come to the point raised by the hon. Member for St. Ives (Mr. Nott). The position of distributors is different because the Price Code does not permit them to increase their prices solely on the ground that their overheads have gone up. However, the cost of the goods that they sell will have risen because of the surcharge and distributors will be permitted to add their normal mark-up to these increased costs. The position about the surcharge is no different under the Price Code from what it is in relation to other costs.

My hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) and the hon. Member for Hitchin (Mr. Stewart) referred to the difference between the yield in 1977–78 and the reduction in the public sector borrowing requirement, saying that the yield will be greater than the reduction in the public sector borrowing requirement. Let me explain why there is a difference between the two figures. There are several reasons. First, the price of goods and services purchased by the Government will increase to reflect the National Insurance Surcharge. Hence, there is some offset in terms of the cost of public expenditure.

Secondly, social security benefits which are linked to prices will be increased because of the small price effect of the tax. Unemployment pay will also rise because of the increase in unemployment, although this will be very small because, as the hon. Member for Guildford (Mr. Howell) conceded, the increase in unemployment will be about 10,000 jobs. [HON. MEMBERS: "No."] That is what the hon. Gentleman said.

Mr. David Howell

Why does the Minister of State say that I said things that I did not say? If he looks at Hansard tomorrow, he will see that at no point did I concede such a figure. I said that it was the estimate of the Financial Secretary. Many others put it considerably higher.

Mr. Davies

The only figure which the hon. Gentleman gave was the figure given by my hon. Friend—10,000—and the hon. Gentleman has not challenged it.

Thirdly, there is the impact of a tax of this kind on other tax receipts because, to the extent that the level of demand in the economy as a whole is lower, the revenue from other taxes will be reduced. That is why there is a difference between the yield of the tax in 1977–78 and the reduction in the public sector borrowing requirement which we seek.

Mr. David Mitchell

The evidence given to the Select Committee was that the cut of £2,000 million imposed in the July measures would lead to an increase in unemployment of 150,000 or 160,000. As £1,000 million, of half of that sum, is to be raised by this surcharge, does it not follow that the unemployment figure will be increased by half as much?

Mr. Davies

It does not follow. If the hon. Gentleman reads the debate which took place on 2nd August he will see clearly that my right hon. Friend said£and I repeat£that the effect of this tax on employment will be 10,000 jobs lost by the end of the fourth quarter after the introduction of the tax.

I turn to the question of profits. Fears have been expressed on both sides to the effect that this tax will affect the profits of industry. The tax is not entirely based on any prices. I accept that some industries will want to pass the tax on in increased prices. In other cases they will not be able to do so. In other cases still I accept that industries will have to absorb the increase.

Over the past 12 months the Government have introduced a number of measures that have made it easier for industry to increase its productivity. For instance, there has been the relaxation of the Price Code, which will have run for nine months before this tax is introduced. There are the stock relief proposals which have been of enormous benefit to industry. Also there are the very generous incentives and reliefs from corporation tax.

Mr. Giles Shaw (Pudsey)

Irrespective of what the hon. Gentleman is now saving, would he not agree with the statement of the Price Commission in its latest report, that the profitability of British industry is about 56 per cent. of reference levels and that since 1972 at any rate its real profitability has considerably decreased?

Mr. Davies

I accept that over the past 10 or 20 years the profitability of industry has not been as high as it should have been. The concern expressed in the debate, is that next year when the tax is introduced it will have a very adverse effect on the profitability of industry.

My point was that the profitability of industry next year will show a healthy increase as a result of many measures which have been introduced. [HON. MEMBERS: "Really?"] Hon. Members do not believe Treasury figures. I will give them figures from a firm of stockbrokers which no doubt they will believe, as so many of them seem to spend so much time in and around the City. I quote from what the firm of Phillips and Drew said in its latest estimate of company profits: Despite the current slow down in world economic growth and the worsening outlook for consumer spending in the United Kingdom we still expect that there will be another significant advance in company profits next year. We are forecasting a 20 per cent. rise in industrial profits, 34 per cent. in financial profits and 25 per cent. increase in oil company's profits. In view of that forecast from a leading firm of stockbrokers, do hon. Members still argue that profits will be under great pressure next year as a result of the introduction of this impost? If they do, they are not interested in arguments or forecasts.

Mr. Budgen

Will the hon. Gentleman tell the House what the effect of a reduction in the increase of the supply of money, particularly if it is reduced to say, a 10 per cent. increase, will be upon profits over the period in which the supply of money is so controlled?

Mr. Davies

The hon. Gentleman is dealing with an entirely different point, as he well appreciates. I will come to the difficulty of financing the public sector borrowing requirement and the need for the tax because of the difficulty of financing a high PSBR. As for profits, hon. Gentlemen have made wild statements which bear no resemblance to reality.

Mr. Russell Fairgrieve (Aberdeenshire, West)

Does the hon. Gentleman think that next year profit as a percentage of sales will rise?

Mr. Davies

I do not think that the hon. Gentleman is talking about the same thing. My point was that, if industry has an increase in profits next year, this tax will not bear heavily—in fact, it will bear very lightly—given the fact that in many cases the tax will be passed on in prices and that not all firms will seek to absorb the tax in one way or another.

Mr. MacGregor

With regard to profits, if these increases actually take place, what real rate of return on capital would this produce for companies? Will the Minister say whether it would take into account the inflation accounting system?

Mr. Davies

The hon. Gentleman is going deep into quite different areas and will not expect me to answer questions about them. No doubt if he reads Phillips and Drew he will find something relevant on those aspects.

My hon. Friend the Financial Secretary said in opening that the main need for the tax was in order to reduce the PSBR. That is the main problem facing the Government at the moment—the problem of financing the PSBR—and that is why we decided to introduce this tax.

Some people may ask "Why bother to reduce the PSBR at all?" At one time the Conservative Government were happy to print money rather than pay much attention to the effects of the PSBR on the economy. But if we do not reduce it we have to try to finance it at very high rates of interest, and these affect industry and housing as well. We cannot finance a very high public sector borrowing requirement without having to pay very high rates of interest on the money we borrow. The effect of those high rates of interest on industry, jobs, employment and housing would be far greater than the effect on industry of reducing the PSBR by the amount it will be reduced as a result of this tax surcharge.

Some of my hon. Friends—in particular my hon. Friend the Member for South Ayrshire (Mr. Sillars)—asked why we do not reduce the PSBR by cutting unemployment. If it were possible in the short term to reduce the PSBR by reducing unemployment, that would be the best way to do it in the present situation. But I ask my hon. Friend, for whom I have the greatest regard and respect, how he suggests that we could cut unemployment in the short term without creating problems or even increasing inflation and damaging investment and employment in the medium term.

I know of no way in which we can reflate the economy when inflation is runing at 15 or 16 per cent. My hon. Friend suggested bringing in imports control, but my understanding even of the alternative strategy on that subject is that it would need a very substantial cut in public expenditure, and I do not think that my hon. Friend would support it if that came about. There is really no alternative, I suggest—

Mr. Sillars

My point was in respect of the control and direction of capital to ensure an adequate level of investment. Why has my hon. Friend dodged that aspect of the argument?

Mr. Davies

I did not dodge it. I had forgotten that my hon. Friend made that point, and I apologise for that. But we have extremely strict controls over the movement of capital out of this country. The investments to which he referred would not have been financed out of the reserves of this country. Most foreign investments at the moment, because of the tight controls introduced, are financed abroad. My hon. Friend may ask "Why have that foreign investment at all? Why not have it in the United Kingdom?" That is another point. But the fact is that there is no drain on our reserves at the moment as a result of investment abroad.

I return to the question of the need to reduce the PSBR. There are two approaches, and they have been shown very clearly in the debate. The Government maintain that to reduce the PSBR we must have a combination of direct control of public expenditure and control of fiscal measures. It is the fiscal part of the package, introduced by my right hon. Friend, that we are debating tonight.

The Government believe—unlike the Conservative Party and the Conservative Front Bench—that the PSBR problem is a financing problem, and that it should be dealt with not entirely by cutting public expenditure, which Conservative Members want to do, but by a combination of fiscal measures and public expenditure measures.

If it is agreed that some way has to be found of reducing the PSBR, and that this should be done partly by fiscal measures, then we have to look at the different fiscal measures available to us. But the only two main fiscal measures available to reduce the requirement by over £700 million are value-added tax and income tax. These are the two broad-based fiscal measures which could be said to be alternative ways of reducing the requirement by such an amount.

Some hon. Members might wish to increase value added tax, but to raise such an amount of money would mean an increase of 3½ per cent. in the basic rate of VAT. That would have meant a loss over the first 12 months of 50,000 jobs instead of the 10,000 which will be lost as a result of this measure. The effect of such an increase in VAT would therefore have been far greater in the first 12 months than it will be by this means.

Mr. J. W. Rooker (Birmingham, Perry Barr)

Does not my hon. and learned Friend accept that he has just made out a case for scrapping value added tax and raising the money through national insurance contributions because fewer jobs would be lost in that way?

Mr. Davies

I do not think that there is a case for scrapping VAT, and in any case we are bound by treaty to keep it. But whether VAT is the best way of raising such a sum of money is a matter for debate on other occasions. If VAT were raised by 3½ per cent., prices would increase more quickly—indeed, by the beginning of summer next year they would have gone up almost 2 per cent. My hon. Friend should consider the effect of another 2 per cent. on the retail price index in the middle of next year on the social contract in terms of jobs and prices. The surcharge will increase prices by less and will cause fewer jobs to be lost.

Mr. Bulmer

Does it not follow from what the hon. and learned Gentleman has said that the Government have plans to introduce further increases in VAT?

Mr. Davies

The hon. Gentleman knows that he cannot simply ask questions like that. The point is that, if we have to choose, given the need to reduce the public sector borrowing requirement and to do so by a combination of fiscal and public expenditure measures, this surcharge is less damaging than an increase of 3½ per cent. on VAT would entail.

The other alternative would have been 2p on the basic rate of income tax. My hon. Friend the Member for St. Helens made the fair point that a constituent was complaining about the rates which pensioners have to pay in direct taxation. If we were to raise the basic rate of income tax by another 2p, his constituent, and so many others on low incomes, would suffer even more, and no one would suggest that we should go along that road.

Mr. F. A. Burden (Gillingham)

What will happen if there is also a 3½ per cent. increase in VAT?

Mr. Davies

The hon. Gentleman is asking a hypothetical question. I was pointing out the alternative options for raising close on £1,000 million as part of the July package. One of them would have been to raise VAT, which would have had a worse effect than this surcharge, and the other would have been an increase in income tax. Given the need—which the Opposition do not accept, because they do not accept that it is necessary to reduce the public sector borrowing requirement by fiscal means as well as by reducing expenditure—I suggest that this surcharge is the best way to do it in terms of prices, jobs and the general effect on the economy.

My hon. Friend the Member for Preston, South (Mr. Thorne) suggested that Ministers would, at the end of the debate, say "If you do not vote for this measure you will let the Opposition in and they will cut public expenditure." He said that that kind of argument would be blackmail on our part. I say to him that there is no question of blackmail. We have to face the realities of the situation and the difficult choices which have to be made in a very difficult economic situation.

The hon. Member for Guildford said quite clearly and honestly that if the Opposition were in power they would introduce a package cutting public expenditure by £2 billion. That is their approach. Our approach is that there must be a combination of fiscal and public expenditure measures—£1 billion in public expenditure cuts and £1 billion in taxation.

Mr. Nott

Is the Minister of State saying that the Government will not be cutting £2 billion off public expenditure?

Mr. Davies

The hon. Gentleman must contain himself. The point has been made fairly clear, even to the Opposition Front Bench. We are concerned with the July package and the need to reduce the Government's deficit by £2 billion. We have said consistently that we cannot allow public expenditure to bear the whole brunt of that reduction. We must balance the public expenditure reduction with an increase in taxation, and that is what we are doing here. That is what we are voting for tonight—a combination of cuts in public expenditure and fiscal measures.

I have been reading the debate on the Address. The hon. Member for Cornwall, North (Mr. Pardoe) quoted Mr. Milton Friedman. I know that Mr. Friedman has some apostles on the Opposition Front Bench, but even he does not seek a wholesale slashing of public expenditure.

Even he accepts that the package must be a combination of fiscal measures and public expenditure cuts. What we have heard tonight is something well to the right of Milton Friedman. It seems that the Opposition are now saying "Forget the fiscal measures and cut public expenditure because this is something to which we are committed ideologically."

My hon. Friends the Members for South Ayrshire and St. Helens, and the hon. Member for Dunbartonshire, East (Mrs. Bain) mentioned the effect of this measure on the regions. But I must tell them that Scotland, Wales and the English regions all benefit more from public expenditure than other parts of Britain. If we were to go along the road advocated by the Opposition, Scotland, Wales and the regions would suffer far more than under our policies. This is the choice which Scotland, Wales and the regions must make tonight. I would have thought that, looking at it in terms of reducing the PSBR, hon. Members from those areas would prefer our kind of approach to the Tory approach.

The choice is quite clear—whether we reduce the PSBR by cutting £2 billion off public expenditure or by putting half the burden on public expenditure and raising taxation. Hon. Members must bear in mind that company profits next year will not be bad, and only half the burden will fall on manufacturing industry, which is the backbone of our industry. That is the choice which the House must make. I urge hon. Members to reject the Opposition's desire for wholesale cuts of £2 billion in public expenditure and to support the Second Reading of this Bill.

Mr. Nott

With the leave of the House, I must say to the Minister of State—

Hon. Members

No.

Mr. Speaker

Order. Permission refused.

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

The House divided: Ayes 280, Noes 278.

Division No. 11.]	AYES	[10.00 p.m.
Abse, Leo	Archer, Peter	Ashton, Joe
Allaun, Frank	Armstrong, Ernest	Atkins, Ronald (Preston N)
Anderson, Donald	Ashley, Jack	Atkinson, Norman
Bagier, Gordon A.T.	Gilbert, Dr John	Miller, Mrs Millie (Ilford N)
Barnett, Guy (Greenwich)	Ginsburg, David	Mitchell, R. C. (Soton, Itchen)
Barnett, Rt Hon Joel (Heywood)	Golding, John	Molloy, William
Bates, Alf	Gould, Bryan	Moonman, Eric
Bean, R. E.	Gourlay, Harry	Morris, Alfred (Wythenshawe)
Benn, Rt Hon Anthony Wedgwood	Graham, Ted	Morris, Charles R. (Openshaw)
Bennett, Andrew (Stockport N)	Grant, George (Morpeth)	Morris, Rt Hon J. (Aberavon)
Bidwell, Sydney	Grant, John (Islington C)	Moyle, Roland
Bishop, E. S.	Grocott, Bruce	Murray, Rt Hon Ronald King
Blenkinsop, Arthur	Hamilton, James (Bothwell)	Newens, Stanley
Boardman, H.	Harrison, Walter (Wakefield)	Noble, Mike
Booth, Rt Hon Albert	Hart, Rt Hon Judith	Oakes, Gordon
Bottomley, Rt Hon Arthur	Hattersley, Rt Hon Roy	Ogden, Eric
Boyden, James (Bish Auck)	Hatton, Frank	O' Halloran, Michael
Bradley, Tom	Hayman, Mrs Helene	Orme, Rt Hon Stanley
Bray, Dr Jeremy	Healey, Rt Hon Denis	Ovenden, John
Brown, Hugh D. (Provan)	Heffer, Eric S.	Owen, Rt Hon Dr David
Brown, Robert C. (Newcastle W)	Hooley, Frank	Padley, Walter
Brown, Ronald (Hackney S)	Horam, John	Palmer, Arthur
Buchan, Norman	Hoyle, Doug (Nelson)	Park, George
Buchanan, Richard	Huckfield, Les	Parker, John
Butler, Mrs Joyce (Wood Green)	Hughes, Rt Hon C. (Anglesey)	Parry, Robert
Callaghan, Rt Hon J. (Cardiff SE)	Hughes, Mark (Durham)	Pendry, Tom
Callaghan, Jim (Middleton & P)	Hughes, Robert (Aberdeen N)	Perry, Ernest
Campbell, Ian	Hughes, Roy (Newport)	Phipps, Dr Colin
Canavan, Dennis	Irvine, Rt Hon Sir A. (Edge Hill)	Prentice, Rt Hon Reg
Cant, R. B.	Irving, Rt Hon S. (Dartford)	Prescott, John
Carmichael, Neil	Jackson, Colin (Brighouse)	Price, C. (Lewisham W)
Carter, Ray	Jackson, Miss Margaret (Lincoln)	Price william (Rugby)
Cartwright, John	Janner, Greville	Radice, Giles
Castle, Rt Hon Barbara	Jay, Rt Hon Douglas	Rees, Rt Hon Merlyn (Leeds S)
Clemitson, Ivor	Jeger, Mrs Lena	Richardson, Miss Jo
Cocks, Rt Hon Michael	Jenkins, Hugh (Putney)	Roberts, Albert (Normanton)
Cohen, Stanley	John, Brynmor	Roberts, Gwilym (Cannock)
Coleman, Donald	Johnson, James (Hull West)	Robinson, Geoffrey
Concannon, J. D.	Johnson, Walter (Derby S)	Roderick, Caerwyn
Conlan, Bernard	Jones, Alec (Rhondda)	Rodgers, George (Chorley)
Cook, Robin F. (Edin C)	Jones, Barry (East Flint)	Rodgers, Rt Hon William (Stockton)
Corbett, Robin	Jones, Dan (Burnley)	Rooker, J. W.
Cowans, Harry	Judd, Frank	Roper, John
Cox, Thomas (Tooting)	Kaufman, Gerald	Rose Paul B.
Craigen, Jim (Maryhill)	Kelley, Richard	Ross, Rt Hon W. (Kilmarnock)
Crawshaw, Richard	Kerr, Russell	Rowlands, Ted
Cronin, John	Kilroy-Silk, Robert	Ryman, John
Crosland, Rt Hon Anthony	Kinnock, Neil	Sandelson, Neville
Crowther, Stan (Rotherham)	Lambie, David	Sedgemore, Brian
Cryer, Bob	Lamborn, Harry	Selby, Harry
Cunningham, G. (Islington S)	Lamond, James	shaw Arnold (Ilford South)
Cunningham, Dr J. (Whiteh)	Latham, Arthur (Paddington)	Sheldon Robert Ashton-u-Lyne>
Davidson, Arthur	Leadbitter, Ted	Shore, Rt Hon Peter
Davies, Bryan (Enfield N)	Lee, John	Short, Mrs Renée (Wolv NE)
Davies, Denzil (Llanelli)	Lever, Rt Hon Harold	Silkin, Rt Hon John (Deptford)
Davies, Ifor (Gower)	Lewis, Ron (Carlisle)	Silkin, Rt Hon S. C. (Dulwich)
Davis, Clinton (Hackney C)	Lipton, Marcus	Silverman, Julius
Deakins, Eric	Litterick, Tom	Skinner, Dennis
Dean, Joseph (Leeds West)	Loyden, Eddie	Smith, John (N Lanarkshire)
Dell, Rt Hon Edmund	Luard, Evan	Spearing, Nigel
Dempsey, James	Lyon, Alexander (York)	Spriggs, Leslie
Doig, Peter	Lyons, Edward (Bradford W)	Stallard, A. W.
Dormand, J. D.	Mabon, Dr J. Dickson	Stewart, Rt Hon M. (Fulham)
Douglas-Mann, Bruce	McCartney, Hugh	Stoddart, David
Duffy, A. E. P.	McDonald, Dr Oonagh	Stott, Roger
Dunnett, Jack	McElhone, Frank	Strang, Gavin
Dunwoody, Mrs Gwyneth	MacFarquhar, Roderick	Strauss, Rt Hon G. R.
Eadie, Alex	McGuire, Michael (Ince)	Summerskill, Hon Dr Shirley
Edge, Geoff	MacKenzie, Gregor	Swain, Thomas
Edwards, Robert (Woiv SE)	Mackintosh, John P.	Thomas, Jeffrey (Abertillery)
Ellis, John (Brigg & Scun)	Maclennan, Robert	Thomas, Mike (Newcastle E)
Ellis, Tom (Wrexham)	McMillan, Tom (Glasgow C)	Thomas, Ron (Bristol NW)
English, Michael	McNamara, Kevin	Tierney, Sydney
Ennals, David	Madden, Max	Tinn, James
Evans, Fred (Caerphilly)	Magee, Bryan	Tomlinson, John
Ewing, Harry (Stirling)	Mahon, Simon	Tomney, Frank
Fernyhough, Rt Hon E.	Mallalleu, J. P. W.	Torney, Tom
Fitch, Alan (Wigan)	Marks, Kenneth	Tuck, Raphael
Flannery, Martin	Marquand, David	Varley, Rt Hon Eric G.
Fletcher, L. R. (llkeston)	Marshall, Dr Edmund (Goole)	Wainwright, Edwin (Dearne V)
Fletcher, Ted (Darlington)	Marshall, Jim (Leicester S)	Walden, Brian (B' ham L'dyw' d)
Foot, Rt Hon Michael	Mason, Rt Hon Roy	Walker, Harold (Doncaster)
Ford, Ben	Maynard, Miss Joan	Walker, Terry (Kingswood)
Forrester, John	Meacher, Michael	Ward, Michael
Fraser, John (Lambeth, N'w'd)	Mellish, Rt Hon Robert	Watkins, David
Freeson, Reginald	Mikardo, Ian	Watkinson, John
Garrett, John (Norwich S)	Millan, Rt Hon Bruce	Weetch, Ken
George, Bruce	Miller, Dr M. S. (E Kilbride)	Weitzman, David

Welibeloved, James	Williams, Rt Hon Shirley (Hertford)	Wrigglesworth, Ian
White, Frank R. (Bury)	Williams, Sir Thomas (Warrington)	Young, David (Bolton E)
White, James (Pollok)	Wilson, Alexander (Hamilton)
Whitlock, William	Wilson, Rt Hon Sir Haroid (Huyton)	TELLERS FOR THE AYES:
Willey, Rt Hon Frederick	Wise, Mrs Audrey	Mr.Joseph Harper and
Williams, Alan (Swansea W)	Woodall, Alec	Mr.Peter Snape.
Williams, Alan Lee (Hornch'ch)	Woof, Robert
NOES
Adley, Robert	Fraser, Rt Hon H. (Stafford & St)	Luce, Richard
Aitken, Jonathan	Freud, Clement	McAdden, Sir Stephen
Alison, Michael	Fry, Peter	MacCormick, Iain
Amery, Rt Hon Julian	Galbraith, Hon T. G. D.	McCrindie, Robert
Arnold, Tom	Gardiner, George (Reigate)	Macfariane, Neil
Atkins, Rt Hon H. (Speithorne)	Gardner, Edward (S Fylde)	MacGregor, John
Awdry, Daniel	Gilmour, Rt Hon lan (Chesham)	Macmillan, Rt Hon M. (Farnham)
Bain, Mrs Margaret	Gilmour, Sir John (East Fife)	McNair-Wilson, M. (Newbury)
Baker, Kenneth	Glyn, Dr Alan	McNair-Wilson, P. (New Forest)
Banks, Robert	Godber, Rt Hon Joseph	Madel, David
Beith, A. J.	Goodhart, Philip	Marshall, Michael (Arundel)
Bell, Ronald	Goodhew, Victor	Marten, Neil
Bennett, Dr Reginald (Fareham)	Goodlad, Alastair	Mates, Michael
Benyon, W.	Gorst, John	Mather, Carol
Berry, Hon Anthony	Gow,Ian (Eastbourne)	Maude, Angus
Biffen, John	Gower, Sir Raymond (Barry)	Maudling, Rt Hon Reginald
Biggs-Davison, John	Grant, Anthony (Harrow C)	Mawby, Ray
Blaker, Peter	Gray, Hamish	Maxwell-Hyslop, Robin
Body, Richard	Griffiths, Eldon	Mayhew, Patrick
Boscawen, Hon Robert	Grimond, Rt Hon J.	Meyer, Sir Anthony
Bottomley, Peter	Grist, Ian	Miller, Hal (Bromsgrove)
Bowden, A. (Brighton, Kemptown)	Hall, Sir John	Mills, Peter
Boyson, Dr Rhodes (Brent)	Hall-Davis, A. G. F.	Miscampbell, Norman
Braine, Sir Bernard	Hamilton, Michael (Salisbury)	Mitchell, David (Basingstoke)
Brittan, Leon	Hampson, Dr Keith	Moate, Roger
Brockiebank-Fowler, C.	Hannam, John	Monro, Hector
Brotherton, Michael	Harvie Anderson, Rt Hon Miss	Montgomery, Fergus
Brown, Sir Edward (Bath)	Hastings, Stephen	Moore, John (Croydon C)
Bryan, Sir Paul	Havers, Sir Michael	More, Jasper (Ludlow)
Buchanan-Smith, Alick	Hawkins, Paul	Morgan, Geraint
Budgen, Nick	Hayhoe, Barney	Morgan-Giles, Rear-Admiral
Bulmer, Esmond	Henderson, Douglas	Morris, Michael (Northampton S)
Burden, F. A.	Heseltine, Michael	Morrison, Hon Peter (Chester)
Butler, Adam (Bosworth)	Hicks, Robert	Mudd, David
Carlisle, Mark	Higgins, Terence L.	Neave, Airey
Chalker, Mrs Lynda	Hodgson, Robin	Nelson, Anthony
Churchill, W. S.	Holland, Philip	Neubert, Michael
Clark, Alan (Plymouth, Sutton)	Hooson, Emlyn	Newton, Tony
Clark, William (Croydon S)	Hordern, Peter	Normanton, Tom
Clegg, Walter	Howe, Rt Hon Sir Geoffrey	Nott, Jonn
Cockcroft, John	Howell, David (Guildford)	Onslow, Cranley
Cooke, Robert (Bristol W)	Howell, Ralph (North Norfolk)	Oppenheim, Mrs Sally
Cope, John	Howells, Geraint (Cardigan)	Osborn, John
Cordle, John H.	Hunt, David (Wirral)	Page, Rt Hon R. Graham (Crosby)
Cormack, Patrick	Hurd, Douglas	Page, Richard (Workington)
Corrie, John	Hutchison, Michael Clark	Pardoe, John
Costain, A. P.	Irving, Charles (Cheltenham)	Parkinson, Cecil
Crawford, Douglas	James, David	Pattie, Geoffrey
Critchley, Julian	Jenkin, Rt Hon P. (Wanst'd & W'df'd)	Penhaligon, David
Crowder, F. P.	Jessel, Toby	Percival, Ian
Davies, Rt Hon J. (Knutsford)	Johnson Smith, G. (E Grinstead)	Peyton, Rt Hon John
Dean, Paul (N Somerset)	Johnston, Russell (Inverness)	Pink, R. Bonner
Dodsworth, Geoffrey	Jones, Arthur (Daventry)	Price, David (Eastleigh)
Douglas-Hamilton, Lord James	Jopling, Michael	Prior, Rt Hon James
Drayson, Burnaby	Joseph, Rt Hon Sir Keith	Pym, Rt Hon Francis
du Cann, Rt Hon Edward	Kaberry, Sir Donald	Raison, Timothy
Durant, Tony	Kellett-Bowman, Mrs Eiaine	Rathbone, Tim
Dykes, Hugh	Kershaw, Anthony	Rawlinson, Rt Hon Sir Peter
Eden, Rt Hon Sir John	Kilfedder, James	Rees, Peter (Dover & Deal)
Edwards, Nicholas (Pembroke)	Kimball, Marcus	Rees-Davies, W. R.
Emery, Peter	King, Evelyn (South Dorset)	Reid, George
Eyre, Reginald	King, Tom (Bridgwater)	Renton, Rt Hon Sir D. (Hunts)
Fairbairn, Nicholas	Kitson, Sir Timothy	Renton, Tim (Mid-Sussex)
Fairgrieve, Russell	Knight, Mrs Jill	Rhys Williams, Sir Brandon
Farr, John	Knox, David	Ridley, Hon Nicholas
Fell, Anthony	Lamont, Norman	Ridsdale, Julian
Finsberg, Geoffrey	Langford-Holt, Sir John	Rifkind, Malcolm
Fisher, Sir Nigel	Latham, Michael (Melton)	Roberts, Wyn (Conway)
Fletcher, Alex (Edinburgh N)	Lawrence, Ivan	Ross, Stephen (Isle of Wight)
Fletcher-Cooke, Charles	Lawson, Nigel	Rossi, Hugh (Hornsey)
Fookes, Miss Janet	Lester, Jim (Beeston)	Rost, Peter (SE Derbyshire)
Forman, Nigel	Lewis, Kenneth (Rutland)	Royle, Sir Anthony
Fowler, Norman (Sutton C'f'd)	Lloyd, Ian	Sainsbury, Tim
Fox, Marcus	Loveridge, John	St. John-Stevas, Norman

Shaw, Giles (Pudsey)	Stewart, Ian (Hitchin)	Walker-Smith, Rt Hon Sir Derek
Shelton, William (Streatham)	Stokes, John	Wall, Patrick
Shepherd, Colin	Stradling Thomas, J.	Walters, Dennis
Shersby, Michael	Tapsell, Peter	Warren, Kenneth
Sillars, James	Taylor, R. (Croydon NW)	Watt, Hamish
Silvester, Fred	Taylor, Teddy (Cathcart)	Weatherill, Bernard
Sims, Roger	Tebbit, Norman	Wells, John
Skeet, T. H. H.	Thomas, Dafydd (Merioneth)	Whitelaw, Rt Hon William
Smith, Cyril (Rochdale)	Thomas, Rt Hon P. (Hendon S)	Wiggin, Jerry
Smith, Dudley (Warwick)	Thompson, George	Wigley, Dafydd
Speed, Keith	Thorne, Stan (Preston South)	Wilson, Gordon (Dundee E)
Spence, John	Townsend, Cyril D	Winterton, Nicholas
Spicer, Jim (W Dorset)	Trotter, Neville	Wood, Rt Hon Richard
Spicer, Michael (S Worcester)	van Straubenzee, W. R.	Young, Sir G. (Ealing, Acton)
Sproat, Iain	Vaughan, Dr Gerard	Younger, Hon George
Stainton, Keith	Viggers, Peter
Stanbrook, Ivor	Wainwright, Richard (Colne V)	TELLERS FOR THE NOES:
Steel, David (Roxburgh)	Wakeham, John	Mr. Spencer Le Marchant and
Steen, Anthony (Wavertree)	Walder, David (Clitheroe)	Mr.Michael Roberts.
Stewart, Donald (Western Isles)	Walker, Rt Hon P. (Worcester)

Question accordingly agreed to.

Bill read a Second time.

Bill committed to a Committee of the whole House.—[Mr. Ashton.]

Committee tomorrow.