PERSONAL TAXATION

HC Deb 03 March 1977 vol 927 cc644-756

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Bates.]

4.50 p.m.

Sir Geoffrey Howe (Surrey, East)

The subject of the burden of personal taxation is in our view not unconnected with the subjects which have just been discussed, and as long as the burden of personal taxation remains in its present position, so long will it be more rather than less difficult to secure the conquest of unemployment.

The case I wish to put in concentrating on the burden of direct taxation on personal income can be summed up in a few sentences. The present rates of direct taxation are much too high. Secondly, they are paid by people who are too poor to be required to pay such direct taxation at all. Thirdly, the combined burden of personal taxation is much too heavy at all levels of income.

This gives rise to serious consequences for society as a whole. First, there is a widespread and growing feeling not just of injustice at the scale of the present burdens, but that we have designed and are tolerating a system which is almost literally by now insane, with the poor paying income tax when their incomes are below those defined as the poverty level.

More and more people see that they get less money in work than they do out of work, and this is having a deeply damaging effect on the willingness of people to work, to acquire skills and to take risks, not just discouraging them, but driving them away from this country. All this is causing the growth of a more and more complex and expensive bureaucracy in the Inland Revenue. The House will have seen the growth of that service—an increase of 6,000 last year to a figure of 80,000—reported in the papers today. The number is now probably up to as much as 85,000.

Probably most serious of all, the burden of personal taxation is undoubtedly giving rise to more and more dishonesty as more and more people on both sides of the market move into what is known as the cash economy, resentful of the very high levels of tax being imposed on their earnings.

I invite the House to support three propositions, First, by far and away the most powerful reason for seeking to control and reduce public spending, which we have now so blithely dealt with in the measures just introduced, is that high public spending is certainly the major cause of the burden of personal taxation being so much too high.

Secondly, I should like to think that the House, with support from both sides, would want to carry through a strategy of altering the entire balance of our taxation system. We have been leaning more and more in recent years upon direct taxation which has been contributing in larger and larger share to our total tax revenue and which now runs at 53 per cent. of the total tax take. This has created a situation which is by now intolerable.

As the Chancellor has told the House on several occasions, indirect taxes, particularly VAT, are now less regressive than our present system of direct taxation. About half of the goods covered by VAT are not purchased by the poorer households. Indirect taxes have the great advantage in that they do not fall on taxpayers whether the taxpayers want them to or not. A person has an option to decide whether he makes a purchase which attracts a high rate of tax. We have to undertake this shift in the balance of our tax system because more and more people both outside as well as within the House now believe that pay as you spend is a far healthier principle of taxation than pay as you earn, with the burden as high as it is.

Thirdly, it is surely time for this House to reassert itself and to call upon the Government to end the practice of taxation by stealth, using inflation as a means of imposing taxes upon the people that this House has never authorised.

I know that my hon. Friend the Member for Blaby (Mr. Lawson) has argued many times that the right answer to this problem is to provide for indexation of our tax system, certainly at all the personal allowance and threshold levels. There is a great deal to be said for this view, which is increasingly commending itself in Australia, Canada and European countries. If it were done it would make it more difficult to continue the present crazy system under which the Government take separate decisions at separate times of the year about what they will spend and about how they are to raise that taxation.

If the Government do not feel disposed at this stage to accept the advice of my hon. Friend by going all the way for indexation, surely they should ensure that as each Budget is presented to the House the consequences of inflation for the tax system are clearly and specifically spelt out. The Chancellor should tell the House precisely how much taxation is likely to accrue to him as a result of inflation and say how little or how much of that he is abating by changes in the general levels of tax.

In that way the House and the country can see how much tax is being added to our burden at a time when the Chancellor may be purporting to reduce that burden. It is for that reason that the burden of income tax since the last year in which the Conservatives were in office—that is 1973–74—has risen to the present year by 129 per cent. The reality is that few people understood, let alone voted for, an increase in the burden of direct personal taxation of 129 percent. This was taxation inflicted by the misrepresentation of inflation.

We know quite well just how far that will go in the coming year because in a letter to one of my hon. Friends the Chancellor said that if incomes in the present year go up by 10 per cent. and there is no change in the rates and allowances the yield of income tax will automatically go up by 17 or 18 per cent. This is taxation by stealth, and we should no longer tolerate it.

I want to find out to what extent there might be an area of common ground in the House on this matter. In recent months the Chancellor has been making speeches which have echoed the speeches from the Opposition side of the House on many occasions. Last November he said: the level of income tax is already dangerously high and is already doing real damage to our economic performance, particularly through its effect on those at each end of the earnings ladder."—[official Report, 30th November 1976; Vol. 921. c. 717.] He went on to make precisely the same point in his letter to the International Monetary Fund. We take some comfort from that because the Chancellor may feel himself more bound by his undertakings to the IMF than by his random observations to this House.

He said then that it was his own belief that the present levels of taxation had proved discouraging to effort and efficiency and if they were to continue unchanged they could threaten the improvement in our economic performance which was an essential objective of the Government's strategy. So far, in spite of what he may say in these creditable statements, he has been doing almost exactly the opposite. Income tax is dangerously high because the Chancellor has made it so, and he has done that with the enthusiastic support of the Labour Party. The question is, how far is he free to reverse his present position?

The Labour Party's document "Labour's Programme for Britain in 1976" contains the most alarming statements about this, claiming, for example, that the Labour Government have already made substantial progress towards a fairer income tax system. The effective starting point of the higher rates of taxation have been brought down, the document says. They have been brought down by inflation and the failure to index, as has the starting point of the investment income surcharge. The document continues a great deal remains to be done to bring in more income tax revenue from those who can afford to pay…. Measures to deal with tax avoidance must therefore be continuous…. These should not wait for annual Finance Bills, but be carried out through an enabling Bill to provide for the plugging of tax loopholes by Statutory Instrument. Heaven forbid! But how far is the Chancellor free to begin responding to his own claim that income tax is dangerously high if he is supported by advice of that kind? We believe that the Chancellor is a prisoner of his past and of his party in this respect and, as so often in the past, he will not begin to fulfil the promises implied by the words I have quoted.

I invite the House to consider first the burden of taxation on those on pay below the average and on average pay levels—the lower paid end of the income tax payers. One must consider their position alongside the social security system contributions and benefits.

We start with the fact that people at that level pay the highest starting rate of income tax, at 35p in the pound, of anywhere in the world. Add to that 5¾ per cent. national insurance contributions, and we have people paying almost 41p in the pound, paying it, moreover, from the lowest starting point of any country in the world. That starting point, the threshold at which income tax becomes payable by such taxpayers, has sunk steadily over a long period. When PAYE was introduced it was set at a figure above the average earnings. It is now down to about 40 per cent. of average earnings.

We have the ludicrous position that a single man begins paying tax at 41p in the pound for every pound he earns above £14 a week. The tax threshold for a single man is £735, yet the long-term supplementary benefit level for such a person is £752. If he is married, the tax threshold is £20 a week, or £1,085 a year, but the long-term supplementary benefit level is £1,187. Therefore, we have an absurd situation in which tax is being paid through the direct income tax system at levels well below those established as the official poverty line.

The irony is that when the Chancellor of the Exchequer announced to the Labour Party Conference in 1973 his intention to provoke howls of anguish from the rich, the reason he gave was that We shall increase tax on the better-off so that we can help hundreds of thousands of families now tangled helplessly in the poverty trap by raising the tax threshold and introducing reduced rates of tax for those at the bottom of the ladder. The right hon. Gentleman provoked the howls of anguish, but he did nothing to fulfill the promise. He has done the opposite, and has provoked howls of anguish from the poor as well as the rich. This lunacy is widely recognised by many people throughout the country.

I wish to read extracts from a letter sent to my hon. Friend the Member for Blaby by one of his constituents. The Chief Secretary may laugh, but this is at the heart of our criticism of the position the Government have now reached. My hon. Friend's constituent wrote: I am a working man in my early fifties, and I have never drawn dole in my life … However. … I recently spent some time on the sick list, and as a result received benefits from the State, in accordance with the law. When I came to reckon upon my financial situation, I found that my net loss for not working was about £4 a week. This set me thinking … and I reckon that if I become redundant I could … virtually retire, since £4 per week could easily be saved by getting rid of my car". The writer then talks about two workmates of his, one married with two children and the other single, who compared their pay cards. Both were on the same rate and both had 40 hours on the card. He says: Out of a topline of £63 approximately, one drew £50 and the other"— the single man— drew £43, a difference of only £7 extra which he is allowed to keep out of his own money to support three extra people. his wife and two children. If he were on the dole he would get more in cash allowances than the paltry £7 he is allowed to keep from his own pay". That is a typical example at a pay level of £63 a week, an example which more and more ordinary working people are understanding for themselves, as the letter clearly sets out.

Mr. Norman Tebbit (Chingford)

That is less than average pay.

Sir G. Howe

That is correct.

Mr. George Cunningham (Islington, South and Finsbury)

Will the right hon. and learned Gentleman make completely clear whether those figures for the receipts of benefit are assuming receipt of the earnings-related part of unemployment benefit? I do not say that this negatives his argument, but it is as well to get it clear, because the earnings-related part would be payable for only six months.

Sir G. Howe

I am sure that that must be right, but the reality remains, and I am sure that the hon. Gentleman understands the force of this point. I want to read the closing sentence of the letter, with which I am sure the hon. Gentleman will agree: In closing, I would like to make clear that I in no way condemn my workmates (in fact, I could almost say that I too am coming around to their way of working and thinking). It is a condemnation of a muddled system which penalises the conscientious worker and seems to idolise the idle. That is the force of our criticism against the position we have now reached.

As the right hon. Member for Newham, North-East (Mr. Prentice) pointed out in his resignation speech before Christmas, if we continue on our present course the situation is bound to get worse, and there are not many things which can be done to make it better. One is that benefits of this kind can be made subject to tax, which has complications, or the extent to which they are raised in line with changes in the price level needs to be reconsidered. Alternatively, the tax thresholds must at the very least be fully indexed. Even that may not be sufficient to correct the abuses of which we are complaining.

This is the point I want the Chief Secretary to accept. Even to raise the thresholds to compensate for inflation from £735 to £845 for a single man and £1,085 to £1,250 for a married man, as he told an audience in Harrogate not many weeks ago, would cost the Government £1,500 million. Therefore, the kind of figure being bandied around as the tax that the Chancellor might "give away" in his forthcoming Budget is no more than would be necessary to preserve the burden of tax at its present level. If the Government set about restoring the tax threshold to the level at which it was set in the 1973 Budget, they would have to "give away" £3,600 million. Anything less would maintain a more severe tax burden than that in the last Budget introduced by a Conservative Government.

That is still not enough to correct the situation. To adjust the starting point for higher-rate income tax would cost £600 million. To lower the standard rate from 35 per cent. back to 30 per cent. would cost more than £2,000 million. So the Chancellor is now taking more than £6,000 million in tax than he would have been taking if he had maintained the real value of allowances and the rates prevailing under the last Conservative Government.

I know that the hon. Member for Cornwall, North (Mr. Pardoe) is likely to say that the process of increasing the tax burden has gone on under all Governments.

Mr. John Pardoe (Cornwall, North)

How does the right hon. and learned Gentleman know that?

Sir G. Howe

I read the hon. Gentleman's speeches, and I want to challenge the way in which he continues to make that assertion.

There has been a degree of non-indexation under Governments of all parties, but I want the hon. Gentleman to understand the difference between a Labour Government and a Conservative Government. Let the hon. Gentleman look simply at one set of figures. When the right hon. Member for Huyton (Sir H. Wilson) first came to office in 1964, the percentage of the income of an average man, a man with two children and a wife, taken up by income tax and social security contributions was 9.5 per cent. When the Government changed in 1970, that had risen to 20 per cent. By 1973–74, it had fallen to just under 19 per cent.—not a dramatic change, I agree, but at least a move in the right direction. In the current tax year it has risen to 24.8 per cent. Let us consider a man on three times average earnings. For him, the amount has risen from 22.9 per cent. in 1964 to 27.7 per cent. in 1970. It had gone back down to 26.7 per cent. in 1973, but it is now up to 38 per cent.

Therefore, I make with total confidence the point that it is under a Labour Government that the process of taxation by stealth proceeds and that under a Conservative Government we are likely to see some progress in the opposite direction.

I pass on to the position of skilled workers and managers, because that is almost more serious. But first I want to mention one particular meanness. I refer to the Government's manipulation of the investment income surcharge. I say nothing about the lunacy of a top rate of 98 per cent. on investment income, but I want to speak about the way in which this tax is now falling largely on retired people with modest investment incomes.

The Chief Secretary will remember, and should remember to his shame, the way in which in this Government's first year in office the starting point for investment income surcharge was reduced from £2,000 to £1,000, with a figure of £1,500 for those over 65. To compensate for inflation it should now be raised to £4,000. The Government, for the sake of a paltry revenue of about £275 million a year, have failed to raise it. That is paltry by comparison with the £17,000 million which the Government take in income tax from the whole of the population.

Our complaint is that 42 per cent. of that burden falls on those over the age of 65. All their investment income above £30 per week is subject to that investment income surcharge. They have saved throughout their lives by investment, not through insurance, and they deeply resent this cruelly unjust burden placed on the fruits of their saved income—and they resent it even more when they set their position alongside those who are able to draw inflation-proof pensions in the public sector. Why should old people pay this additional impost on income to sustain inflation-proof benefits? How can that be defended? That is one of the most striking examples of the burdens of the present tax system.

I turn to the situation of skilled and managerial workers—the people of whom the Chancellor has often spoken as the "chaps on £4,000 to £8,000"—those of whose difficulties he is deeply conscious, so he says, and who have taken quite a caning. The Government must now recognise that skilled workers and managers are becoming increasingly demoralised at the huge and real burden of taxation that has fallen on their shoulders. They are unwilling to accept promotion, unwilling to move, unable to save, they are cutting back on their willingness to work and many of them emigrate. The figures of those who want to emigrate are a reason to be seriously alarmed at the situation.

We shall ignore this matter at our peril. It is an area in which the tax burden is dangerously high. The remedy lies in the Chancellor's hands. He can bring rates of taxation down from the present dramatically high figure of 83 per cent. If he were to act by cutting the top rate to 60 per cent., the real loss would be £120 million. He could follow the example taken, curiously enough, by the Indian Government. Mrs. Gandhi has recently reduced the ton rates of income tax from 75 to 66 per cent., and it Ins had the predictable consequence of bringing about a substantial increase in the yield of income tax from that kind of person. The right hon. Gentleman could follow the example of the Irish Government who in their Budget last month reduced direct tax rates from 77 to 26 per cent. down to a band of 60 to 20 per cent. That surely would be a sensible thing to do.

The alternative would be to raise the starting point for those in the higher band of income tax. If the starting point of £5,000 had been altered in line with inflation since 1973, the figure should now be standing at £9,100. That is the reason why an increasingly heavy burden now falls on those who are expected to take managerial positions and to undertake skilled work in this country and who are suffering reductions in their taxed take-home pay of up to 30 per cent. and more.

If the Chancellor were to make changes of that kind, there are a number of other complicated and expensive nonsenses that he could avoid—for example, the recent consultative document proposing a change in the basis of taxation on overseas earnings. Many companies have made representations to the Chancellor challenging the proposition that in order to obtain relief on overseas earnings the person concerned must remain abroad for 30 days—suggesting six trips of five days or 10 trips of three days, and so on, and implying that this should all in some way be computed. But this all arises because of the foolish attempt to identify those at "the sharp end of the export business" and to give special concessions to those who happen to go overseas on export business. It is a ludicrous distinction to make. Who is at the sharp end of the business in that sense? Why should it always be the salesman in Paris or Mexico who alone is seeking to promote exports, instead of the chargehand fitter in Derby who works all the hours God sends to get orders packed?

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

Surely the reason is that the chargehand fitter in Derby does not meet the foreign people who are paying very much less tax when competing in other countries.

Sir G. Howe

My hon. Friend is quite right, because that worker is ignorant of the burden placed upon him. This underlines the case for reducing these grotesquely high taxes. There would then be no need for elaborate arrangements of that kind.

Let me instance the elaborate arrangements now made for the taxation of benefits in kind related to motor cars. The Labour Party National Executive document preens itself on the fact that the Government have introduced a measure of taxation to cover motor cars used by "directors and senior executives".

Mr. Tebbit

But not by Ministers.

Sir G. Howe

But not by Ministers, as my hon. Friend says. I shall return to that matter a little later. What does the National Executive believe the figure falling on senior executives amounts to? It falls on those earning over £5,000—but not just that category, because it includes those earning far less than that.

My hon. Friend the Member for Richmond, Yorkshire (Sir T. Kitson) has submitted to me a document from one of his constituents who has set out graphically the rules applied by the Revenue in these cases. Let us take an employee who is provided with a car and who earns a salary of £3,700. He must face the hard work that is often involved in business travel outside normal working hours is paid no overtime, travels 22,000 miles a year, and his salary, plus business costs on petrol and accommodation, takes his income above the £5,000 figure. Therefore he will be taxed on the benefits of having a car. But if, in the coming year, he refuses to suffer the inconvenience of working away from home and travels less frequently, he will escape liability for tax on the car with which he was provided.

That kind of nonsensical situation is now happening. Already the Government have drawn into the net of those paying tax above the standard rate—about a million extra people compared with the figure three years ago. There were 400,000 people paying above standard rates in the period 1973–74, and that figure has now risen to 1,300,000. By adding to that list all those who receive expenses taking their pay above £5,000, yet more people are drawn into the exceedingly complicated and bureaucratic arrangements.

Even further injustices are still in the mind of this Government and the Chancellor. They are considering a change in the child benefit and child allowance system which for people paying tax above 55 per cent. a year involves a gradually growing additional burden, about which the Government are prepared to do nothing. An additional burden is imposed on those who are responsible for university students not receiving full grants. It is characteristic of this Government that they should be prepared to tolerate that casual additional burden which will fall on the shoulders of those whose plight they purport to recognise.

I wish to turn to the proposal put by the TUC for withdrawing relief on mortgage interest payments for those paying above the standard rate. I wish to give the Chief Secretary a warning. If the Government accept that advice, they will be piling the last straw on the backs of managers who already feel grotesquely over-taxed, and they will inflict grave damage on the economy in a number of ways. Such a move will serve to raise the price of houses in the average price level as those who live in the larger houses begin to move to smaller ones because they find they will be forced to do so. That will be an impediment to skilled employees and managers.

Mr. George Cunningham

It will lower the price at the higher level.

Sir G. Howe

It will lower the price at the higher level, but what on earth is the point of securing empty houses at the higher level.

Mr. Cunningham

They will not be emtpy. They will be cheaper.

Sir G. Howe

Houses at average prices will be more expensive because people will withdraw from houses in the higher price range and will crowd into houses sold at average prices. That will make the prices of those average houses a good deal higher. Such a serious change looks as if it will involve legislation of the worst kind of retrospective nature.

In all these ways the Government have maintained and strengthened a pattern of personal taxation which is doing grave damage to the prospects of our economy. It is doing severe and growing damage to the morale and efficiency of the nation. It is imperative to make a fresh start, first by doing far more than this Government are doing to bring down the total burden of taxation, and second, by recognising that it is already long past time to begin changing the basis of our tax system.

We should make a fresh start in the direction of lightening taxes on personal income, even if it means increasing the tax paid by people when they choose to spend their own money. People passionately want to keep a larger share of their earned income, and they want a greater range of choice in the way in which they spend that money.

Unless the Government set out soon to make these changes, they will not begin to secure the industrial recovery about which they talk so often. For that reason, we shall ask the House to divide on this issue.

5.21 p.m.

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

I hope that the House will appreciate at the outset that I shall not anticipate my right hon. Friend's Budget on 29th March, and that hon. Members will recognise the reason why.

As the right hon. and learned Member for Surrey, East (Sir G. Howe) knows, I agree that the levels of direct taxation are too high. I have said this on numerous occasions both in the country and in the House. Equally, we have made clear that it is our intention to reduce them, but the extent to which any Government can reduce the burden of personal taxation, or taxation generally, must depend on the economic and industrial performance of the nation and the level of total national income. The right hon. and learned Gentleman does himself a disservice by pretending that somehow or another he can find huge sums of money in order to relieve the burden of personal taxation.

Mr. Percy Grieve (Solihull)

Will the right hon. Gentleman give way?

Mr. Barnett

I have hardly started. I promise to give way to the hon. and learned Gentleman. It will be a great pleasure to do so, but I wish to continue a little way. If the hon. and learned Gentleman persists, I shall give way.

Mr. Grieve

I appreciate that I have interrupted early, and I am grateful to the Chief Secretary. Does he not appreciate that our point is that the present disastrous financial and economic state of the country is in large measure due to over-high taxation?

Mr. Barnett

With the greatest respect to the hon. and learned Gentleman, our industrial performance has been bad not for three years but for 30 years, and, indeed, even from the beginning of this century. It is absurd to suggest that there is one simple reason for our bad industrial performance, and I hope that the hon. and learned Gentleman will reflect on what he has just said.

I have said frequently that I recognise that there is a need to try to reduce the levels of direct taxation as quickly as is possible. To imply that it can all be reversed at a stroke of the right hon. and learned Gentleman's pen, and that massive tax reductions can somehow be provided across the board for the higher-taxpayer, the middle income groups, the lower tax groups and everybody, is a deliberate attempt to mislead, and it will be seen as such by anyone seriously examining the situation.

I should like to deal with some of the points raised by the right hon. and learned Gentleman, and if I miss some, my hon. Friend the Minister of State will take them up when he replies. The right hon. and learned Gentleman talked about the "paltry" sum of £275 million to give some relief to those paying investment income surcharge. Again, I make clear that we have not been able to—[Interruption.] I am glad to hear that the right hon. and learned Gentleman did not suggest that. The implication was that he would find £275 million for that, £120 million to reduce the top rate of income tax, and large sums of money to revalorise the personal allowances, to help the lower paid, and to help the higher rate thresholds as well. The total sum, which the right hon. and learned Gentleman did not add up, would be pretty huge. He did not give the total.

Mr. David Stoddart (Swindon)

The right hon. and learned Gentleman did on one occasion.

Mr. Barnett

The right hon. and learned Gentleman spoke of tax reductions of more than £5,000 million on one occasion.

I should like to do something about raising the investment income surcharge starting point of £1,000, but it is fair to say of the great majority of pensioners, that the average worker will not save enough in his life time to be caught on his investment savings by the present level of investment income surcharge. The right hon. and learned Gentleman somehow implies that the great majority of workers can save the kind of sums that would be required to be caught by the levels of investment income surcharge, but that simply is not the case.

When one is looking at the matter responsibly one has to examine the balance between providing relief for investment income and for earned income. We should like to do something for all of these—and I am sure that right hon. and hon. Members on both sides would wish to do something—but we must have a balance in priority, and the highest priority must be to try to help those who are paying, as the right hon. and learned Gentleman rightly said, high marginal rates of direct taxation on low earnings.

Mr. Tebbit

Could the Chief Secretary say whether he thinks that there is any moral justification for taxing at a lower rate a pension which is drawn from an industrial pension scheme than is applied to the income which would have been gained if the person concerned had put the same amount of his savings into private investment? What is the difference, except that one is conducted collectively and, therefore, has the approval of the collectivists, and the other is done individually and therefore, upsets them?

Mr. Barnett

The fact is that one is deferred pay and the other is investment. [HON. MEMBERS: "Oh."] Of course, it is deferred pay. I know the hon. Gentleman's obsession with public service pensions, but the average public service pension is about £10 a week, and the majority are much lower than that.

It really is silly for the hon. Gentleman not to recognise that our direct taxation system, under successive Governments, has always differentiated between earned and investment income. It changed only when the previous Government unified the direct tax system. I agreed with that unification, and accepted that, when it was done, there was a case for some relief from the higher investment income surcharge at the lowest levels of investment income. All I am saying is what I should have thought most reasonable people would accept, that, given the limitation of the amount of relief that can be provided, the highest priority must be to give that relief to those with earned income.

Mr. Ridley

If I can introduce into the Finance Bill a system whereby private individuals can in some way have deferred pay credited to a savings account and invested, will the Chief Secretary agree to waive the investment income surcharge on that income?

Mr. Barnett

The hon. Gentleman tries to be too clever, and it is unlike him. It is difficult for him as well. He knows that our direct tax system differentiates between the two and, indeed, his right hon. and learned Friend did not suggest that we should not. He did not suggest positively a great many thing except that he told us that we should massively reduce levels of direct taxation—though he did not tell us how. He did not say that we should remove the differentiation which we make between investment and earned income.

Sir G. Howe

The point I was making was that the Government lowered the starting point from £2,000 to £1,000, and then allowed inflation to roar away. The least they should do in the way of justice is to put it back to a figure nearer to what it should be, which is £4,000, from the starting point originally designed. The Government have dragged it down and kept it at the lower level, to the great disadvantage of those who depend on savings income in retirement.

Mr. Barnett

The right hon. and learned Gentleman must recognise that one cannot look at one aspect of the tax system in isolation from all the rest. It is quite wrong to pick out one item for indexing back to a particular date.

Sir G. Howe

That is the sharpest.

Mr. Barnett

The right hon. and learned Gentleman is now saying that that is the sharpest. Previously, he was talking about the top rate, and then it was the lowest end. He must decide where his priorities lie. One has to look at the whole tax system.

I was interested to hear the right hon. and learned Gentleman talk about the problems of introducing the child benefit scheme—I hope to hear some clarification from him about this—and the effect on higher rate taxpayers of the phasing out of child tax allowances. The truth is that the right hon. and learned Gentleman and his party support the child benefit scheme. I shall be interested to know how he would help specifically—I do not mean by indexing the higher rate thresholds—parents of that kind. He knows that there is no specific way of helping them.

Sir G. Howe

The Chief Secretary knows perfectly well that, when this matter was debated earlier, my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) put forward specific proposals simply to prevent the higher-rate taxpayer from becoming actually worse off as a result of the introduction of child benefit which we support. The fundamental remedy, as the Chief Secretary must know, is to alter the rates of taxation at higher levels in order to prevent people from being made worse off as a result of the change. There can be no justification for keeping an additional burden, however modest, on these people with middle and higher incomes—managers and skilled workers—as a result of making a change, however beneficial. That is the point, and there are various ways of dealing with it.

Mr. Barnett

The right hon. and learned Gentleman knows that there is no way of specifically directing relief to that particular group. It is no use wriggling. There is no way of doing it. He supports the child benefit scheme, which means phasing out child tax allowances. There are ways of helping all income groups at that particular level, but that is not directing relief specifically to those parents. I recognise that there are problems for such parents, but it is a strange argument to suggest that one is in favour of bringing in the child benefit scheme, while recognising that that means removing the child tax allowances, and then seeking to escape from the inevitable dilemma that arises from it.

The main burden of the right hon. and learned Gentleman's speech was directed to personal income tax, and I shall deal now with some of the points he made. The international comparisons which are frequently made are invariably somewhat misleading—I include in that many of the examples which I have given from time to time—because on closer analysis any international statistics do not give the true circumstances in any individual country. When I give international statistics I do so only to give a broad indication of the situation. Right hon. and hon. Members on the Tory Benches frequently give such figures in an effort to show that we have a very high level of direct taxation in the United Kingdom. I do not deny it. We have a very high level of direct taxation, but the case should not be overstated, either. We have a very high starting rate at the lowest end of the income tax scale. We also have a very high top rate, but we do not have the highest rate of direct taxation in ail the developed world if national insurance contributions are included—in other words, if one counts the effective rate rather than the marginal rate.

The hon. Member for Norfolk, North (Mr. Howell), who is constantly putting Questions on these statistics, has given us the opportunity, if we did not have it already, to find many more to show that there are many countries with higher totals of direct taxation than we have. It is not true, therefore, that we are the highest taxed country in the world.

Mr. Ralph Howell (Norfolk, North)

Will the Chief Secretary name the countries which have a higher rate than we have?

Mr. Barnett

I am happy to do so. I thought that the hon. Gentleman would never ask. Taking national insurance as well as taxation, as a percentage of gross national product, which is one basis for doing it—

Mr. Ralph Howell

No.

Mr. Barnett

All right. I shall give it on the basis of average production workers' earnings. This comes from an answer recently given by my right hon. Friend the Financial Secretary, and here are the figures: the United Kingdom 23 per cent.; the Netherlands 31 per cent.; Denmark 38 per cent.; Germany 23 per cent. Is that all right?

Mr. Ralph Howell

Let us have it in a fair way, comparing the figures which the right hon. Gentleman said I have asked for and given in the form of percentage rates of tax.

Mr. Barnett

I shall be happy to answer. We have always answered the hon. Gentleman's Questions as quickly as possible, and if he puts down more Questions we shall be happy to deal with them. However, merely because he finds that one set of answers does not suit his argument, he should not seek to ask further Questions. I have not disputed that we have high levels of direct taxation. I only dispute that we have the highest effective rates throughout the world. We have high rates, and I shall come to the problems which that carries with it.

Mr. Ron Thomas (Bristol, North-West)

Does my right hon. Friend agree that in making these comparisons one has to take many various allowances and other factors into account, including mortgage interest relief and goodness knows how many ways of avoiding actually paying a tax?

Mr. Barnett

My hon. Friend is right. I thought for a moment that he was about to ask me another question to which I shall come shortly.

Mr. Tebbit

He will.

Mr. Barnett

I am sure he will.

Comparisons can be misleading for a number of reasons. First, they ignore the social wages. [HON. MEMBERS: "Oh."] Of course. If a worker is left with less cash in his wage packet he may none the less enjoy the same living standard as will be enjoyed by someone with a higher net take-home pay because of the provision of health services, education, pensions and many other benefits. That is a fact. I know that the Opposition constantly say that they would leave the taxpayer with more cash in the pocket and reduce the level of public expenditure to do it. That would be fine, but I wish that they would occasionally tell us which part of the social wage they propose to cut. They have never told us.

Mr. Tebbit

The right hon. Gentleman's.

Mr. Barnett

If the hon. Gentleman thinks that my salary is the social wage, he is welcome to it, net of tax.

The other main point made by the right hon. and learned Member for Surrey, East was that it would not be a true reduction in taxation if we did not increase the personal allowance in the next Budget in line with inflation from April—even taking it on a one-year basis, from April 1976 to April 1977. It is a simple statistical fact, of course, but again it takes the situation in isolation.

I was interested to note that the right hon. and learned Gentleman quoted his hon. Friend the Member for Blaby (Mr. Lawson) in this connection. He quoted him more than once, but on this matter he quoted his hon. Friend's view as being in favour of indexation. The right hon. and learned Gentleman did not give us the privilege of knowing whether he supported indexation. Perhaps he will tell us at some stage, since he must now be beginning to think that perhaps, at some time in the next 20 years, he may even be Chancellor of the Exchequer. It would be valuable to know whether the right hon. and learned Gentleman supports indexation, because it is only a true measure if one takes the increase in personal tax allowances from one year to the other, and it is not true unless one increases it directly in line with inflation. Moreover, if one accepts indexation, not just the personal tax allowances, indirect taxes have to come in as well. Indeed, as the right hon. and learned Gentleman knows, the hon. Member for Blaby is in favour of taking indexation to much greater lengths.

One could argue that, if personal tax allowances and indirect taxation were to be indexed, there would be many other areas of economic and financial life that equally should be indexed, if that were what one would want to do. I see the right hon. and learned Gentleman shaking his head at that—

Mr. George Cunningham

Let my right hon. Friend give way to him.

Mr. Barnett

I am ready to give way to the right hon. and learned Gentleman at any time, but I do not think that he will tell us today. He does not wish to answer now.

I do not accept the case for indexation, for a great many reasons. Above all, I do not accept it because of the rigidity which it would impose on a Chancellor.

Mr. A. J. Beith(Berwick-upon-Tweed):Oh!

Mr. Barnett

The hon. Gentleman ought to understand what would be imposed if one did that.

I do not deny that indexation would require a Government to come to the House of Commons and say explicitly that they were asking for such and such more direct taxation. That is true. Neither the Chancellor nor I have ever denied that when the Chancellor has not increased personal tax allowances in line with inflation he has not, therefore, fully revalorised personal tax allowances and that, therefore, inflation is increasing direct taxation.

I should have thought that any serious examination of the way to handle both direct and indirect taxes would show that maximum flexibility allows discretionary change—so that one can modify the impact, not just between direct and indirect taxation, but between different groups of taxpayers. That would not be so readily available if there were built into it the rigidity that personal tax allowances must be increased in line with what happened in the previous year.

Sir G. Howe

That which the Minister defines as rigidity, and which has been accepted in Canada, Australia and other countries, would be regarded by many people as a valuable discipline upon transfers. That is why I said that it deserves to be considered seriously. Will the Minister at least accept that the Chancellor of the Exchequer ought, when he discusses changes in taxes, to adopt the principle of truth in taxation and that this year he should not tell people in his Budget broadcast that he will give them so much extra if they will do this or that in relation to the pay deal, but should tell them candidly that he will take that much less away from them? Does not the Minister recognise the case for spelling this out clearly and for accepting truth in taxation?

Mr. Barnett

I have noticed that the right hon. and learned Gentleman is in favour of truth and of considering the matter seriously. I am grateful for that, and I am sure that the House is, also.

I assure him that I have considered indexation seriously, and I have come to the conclusion that there are many disadvantages in it. I do not, therefore, recommend it to the House. That is my position, but the right hon. and learned Gentleman's position—and we have noted it—is that he will consider indexation. I do not accept the case for it and the right hon. and learned Gentleman has not made out a case. Indeed, he has not made it out to his own satisfaction. He will only consider indexation, and he will not tell the House that he intends to introduce it. He knows that we have spelt out the truth in countless answers to Questions in the House and during the Budget and Finance Bill debates. It is silly for the right hon. and learned Gentleman to keep saying "Spell it out". We have done so on numerous occasions.

Mr. David Howell (Guildford)

In view of that, can the right hon. Gentleman say why the Chancellor of the Exchequer said the other day that he hoped to reduce taxation in the next Budget while, according to the Chief Secretary's definition and the definition of all those who know about these things, it will, in fact, increase?

Mr. Barnett

The hon. Gentleman and his hon. Friends are worried about how popular the next Budget will be. That is why they are worried about the cut in direct taxation. One cannot look at direct taxation in isolation from everything else. A reduction in direct taxation is a reduction, whether fully revalorised or not.

Mr. Frank Allaun (Salford, East)

On this point, as a simple man and a fellow blunt Mancunian may I ask the Minister a blunt question? But first, I congratulate him on his promotion to the Cabinet. We are told that the Government suddenly find themselves able to grant possibly £2 billion in tax relief in the Budget. Why are the Government not equally able to restore the cuts in housing, education and health? That would certainly reduce unemployment more directly. May we plead with the Chief Secretary that at least part of the handout should go in this social direction that will also directly reduce unemployment?

Mr. Barnett

I thank my hon. Friend for his kind remarks. I make it quite clear that we are talking in a purely hypothetical situation. I am not proposing to tell the House now precisely what will be in the Budget. Otherwise my position in the Cabinet might not last long. I know my hon. Friend's views and I know that many of my hon. Friends would like to see some of the cuts that we have had to make in public expenditure reversed. But I do not agree. We have had to achieve a better balance between public expenditure and the levels of taxation. One has to recognise what I have been saying in my speech—although there have been one or two interventions from time to time—and that is that the levels of direct taxation ought to be reduced for people with low levels of income. I am in favour of doing as much as possible to help reduce the level of direct taxation, particularly for such people as my hon. Friend and I represent in the Greater Manchester area.

Mr. Frank Allaun

May I follow up that point? We were told two or three months ago that the size of the public expenditure deficit required these cuts. Suddenly we are told that it is not required, because the Minister can give away money. So, there must have been a misleading account, either deliberate or unintentional, and the answer is not quite as straightforward as the one that we have had so far.

Mr. Barnett

I always have the greatest respect for my hon. Friend, but I do not know who said that the cuts were not required. I have not said that, and neither has the Chancellor.

I want to turn to the question of the erosion of differentials. I have said on numerous occasions that we recognise that the combination of the incomes policies of successive Governments, together with tax increases and inflation, has considerably eroded the differentials between the highest and the average paid, between the unskilled and the skilled, and between those in work and those out of it. I have never hidden the fact that I recognise that that is a problem with which we must deal.

I am also bound to say that the reduction in real net income is not simply due to the level of direct taxation: it is due to the underlying reason that we have done so badly as a nation. If, tomorrow, we passed the necessary resolution to reduce direct taxation by the £5,000 million that the right hon. and learned Member for Surrey, East mentioned, it would not increase anybody's living standards. It would not solve anything. It is oversimplifying the situation to suggest that by reducing high levels of taxation we shall somehow suddenly achieve a massive turn-round and a massive output as a nation. It would help to some extent, but to pretend that that is the only reason—[HON. MEMBERS: "We do not say that."] I am glad to hear that nobody on the Opposition Benches does so.

I noted the Opposition spokesman's quotation from a letter received by his hon. Friend the Member for Blaby. The hon. Member must be receiving a great many letters—I must say that I receive a fair number from him. The Chancellor and I, and a great many other hon. Members, have talked about the differentials between those who are in work and those who are out of work. There is a problem here. I do not object to what the right hon. and learned Gentleman quoted. The figures are clear. Not many people would be better off out of work, because, as the right hon. and learned Gentleman conceded, the majority of people on short-term benefit do not receive earnings-related supplement.

One is bound to accept that the great majority of workers, even if they can do better out of work than they could in a job, want to get back to work. It is wrong to suggest that simply because we calculate the figures here and show that some people are better off out of work, there are millions of workers taking advantage of that situation. It simply is not true. An unemployed man who is married with two children receives a flat-rate benefit of £27.50 a week, and not many hon. Members would be happy trying to survive on that sort of money.

We accept the problem of the erosion of differentials at all levels and between those in work and those out of work, but I hope that no one will succumb to the temptation of saying that vast numbers of workers have suddenly become scroungers and are seeking to use the Welfare State to their advantage. We recognise the problem of differentials in many areas. It is a problem not least because it deters the acquisition of skills and responsibilities and discourages a longer view of career prospects.

We want to do something about it. The question is, how much can we do?

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

I agree that people prefer to work rather than not to work, provided that they get some reward for doing so, but has the right hon. Gentleman considered that the very high fares that many people have to pay to get to work are a further disincentive?

Mr. Barnett

I was just coming to the question of incentives. I know that fares are a very great burden for many people, in all our constituencies, who have to travel any distance to work, but there is no simple answer to this problem. If it is suggested that we should reduce the fares for millions of passengers going to work, the money would have to come from somewhere—from direct or indirect taxation. I am not sure that this would be fair, because some people choose to live nearer to their work and to pay higher rents rather than live further out and travel to work. That is a personal choice and, although I recognise the problem to which the hon. Gentleman has referred, I do not think that we should provide tax relief on fares or subsidies public transport even more in order to reduce fares.

There is ample anecdotal evidence about the disincentive of personal levels of taxation. I am under no illusion about that, even though one does not always get the hard evidence and the facts. I have seen several surveys and they do not provide hard evidence. However, I am not saying that, just because they are not always crystal clear in their evidence, there is no disincentive. We recognise that, in many instances, there is.

I should just point out that the Royal Commission in 1955 found something that I have had confirmed in my constituency, namely, that at least some workers work longer hours because of the incidence of income tax. The incentive works the other way because these people have decided that they want a certain take-home pay. I am not suggesting that this is an argument for higher levels of taxation, but there is evidence that this attitude is taken by some workers.

The disincentive applies particularly to entrepreneurs, professional people and others who begin to feel that there is no point in earning more. I do not think that it applies to the same extent to managers who stay in this country. It may make some managers go abroad or persuade them not to come back once they are abroad, but it would be a bit of an insult to the managers who are working hard in this country to suggest that if we reduced their taxation they would immediately start working a lot harder. I do not accept that argument.

It would be comparatively cheap to do as the right hon. and learned Member for Surrey, East suggested and give substantial relief for those at the top end of the tax scale. It would cost very little in terms of lost revenue, but it would cost many thousands of millions of pounds to help the average taxpayers—those earning between £1,500 and £6,000 a year—who pay the bulk of tax.

The House must recognise the problem. It is impossible to argue that we should give substantial cash relief, no matter how justified, for those at the top end of the tax scale while we were able to do only very little for those at the bottom of the scale.

Mr. Frank Allaun

It would be despicable.

Mr. Barnett

I do not always agree with my hon. Friend's choice of words, but such action would certainly be impossible for any Government, especially when they were asking the average worker, as we are asking him, to accept a pay deal which will result in a small reduction in real living standards in the coming year. We could not justify doing that and we would not ask the House to do so. I hope that no Opposition Members would support such a proposition.

The best way of helping all tax payers is for us to get a pay policy that is as flexible as possible in the next pay round and that will reduce the rate of price inflation and thereby help everyone, whether high or low paid.

Mr. Tebbit

The average industrial worker with a wife and two children has suffered a loss of £3.80 a week in the real value of his take-home pay while the Government have been in office. That is bad enough, but the man on £6,000 or £7,000 a year has suffered a far greater reduction. Although it may not be a terrible disincentive to that man, many people have noticed—though the Chief Secretary may not have done so—that if that man spends a great deal of time at work for very little reward, his wife does not find it particularly funny and will discourage him from doing so.

Mr. Barnett

My attitude to that situation is similar to my attitude to the hon. Gentleman—I do not find it particularly funny. I have said that I am appalled at the erosion of differentials. It is a serious problem, but if anyone suggested that it is the fault of what has happened in the last three years that our total national income has not grown as fast as that of the rest of the developed world, that would be a rather silly party point. However, I do not accuse the hon. Gentleman of doing that.

There is a need to make cuts in income tax, but it would be foolish and dishonest to imply that we can make cuts of the magnitude of £5 billion that the right hon. and learned Member for Surrey, East has sometimes referred to. I know that on these occasions he always says—in what might be called the small print—that he could not do it tomorrow. The trouble is the average taxpayer does not read that sort of small print and gets the impression that the right hon. and learned Gentleman is offering something that he knows he cannot deliver.

There are literally only four ways of obtaining substantial tax reductions. The first method is increased borrowing. The second method is to make cuts in public expenditure. The third method is to switch from direct to indirect taxes. The fourth method is better economic growth than we have been able to achieve in recent years or, indeed, for many years.

My hon. Friend the Member for Salford, East (Mr. Allaun) who has now left the Chamber, wants increased borrowing. No doubt he takes that view for very good reasons. However, to increase borrowing at present cannot be contemplated. We are determined not to take that course. To finance reductions in taxation by going above the levels of borrowing to which we arc committed would not be sensible. It is crucial that we reduce the level of borrowing to ensure that finance is available to industry at interest rates that it can afford. That is the only way in which we shall be able to help all those that we represent. That is the only way of dealing with the problem. It would be reckless and irresponsible to endanger the gains that we have been making on the financial front by increased borrowing.

The second possible approach is to make further massive cuts in public expenditure. This is the point that was made very quickly by the right hon. and learned Member for Surrey, East. The right hon. and learned Gentleman skated over that very quickly. That is because he and everyone in the House knows that all that we have had from him and his right hon. and hon. Friends in the past three years have been ways not of cutting expenditure but many ways of increasing it. I understand that in about two weeks' time we are to have a debate on public expenditure. Perhaps I shall then be interrupted on fewer occasions and I shall be able to spell out the many ways of increasing public expenditure that have been advanced by the Opposition.

It would be extremely difficult to ask workers to accept a pay deal, flexible as we hope the next round will be, on the basis of massive cuts in public expenditure unless someone can explain to me after three years of examining public expenditure—they have been three very strange years—how we can make cuts of thousands of millions of pounds that are painless. Unless I am told how that can be done, that is not a real proposition.

The third method is to switch from direct taxation to indirect taxation. Many of us came to politics believing that the switch should go the other way, namely, from indirect taxation to direct taxation. Many of us felt that that would be much more progressive. I am bound to say that the situation has changed considerably. [HON. MEMBERS: "Oh"]—There is nothing amusing about that. The situation has not changed only over the past three years. In 1969–70 expenditure taxes took 45 per cent. and income taxes took 38 per cent. In 1975–76 that was reversed so that expenditure taxes took 37.4 per cent. and income taxes took 42.6 per cent. That went on under successive Governments. When income tax is so steeply progressive that it is hitting people on the margin, including national insurance contributions, at nearly 41 per cent.—I have in mind those with incomes that are at about supplementary benefit level—it can no longer be argued that we should proceed further with switches from indirect taxation to direct taxation. I believe that we must make a move in the opposite direction, not least because to increase some indirect taxes would be nothing like as regressive as we have often thought. I shall not spell out that argument in detail on this occasion. I hope that no one is taking anything that I am saying other than from a medium or long-term viewpoint.

Many countries in the EEC, as well as industrial countries throughout the world, rely much more heavily than we do on indirect taxes. However, I am bound to say to Conservative Members that other countries rely on employers to a much greater degree for national insurance contributions. When we added 1 per cent. to employer contributions recently the Opposition voted against us. No doubt they can always justify a selective approach. No doubt, they can justify supporting what some countries do on one matter and not on another.

I favour a switch from direct taxation to indirect taxation but I do not believe that it can be done overnight. At a time when a major problem is the level of inflation it would be difficult to argue the case to make a substantial increase in the rate of inflation to pay for huge reductions in income tax. However, I believe that we should move in the direction of switching from direct to indirect taxation.

Mr. John MacGregor (Norfolk, South)

Has the right hon. Gentleman calculated the effect of an increase in indirect taxes—not too great an increase—on the RPI compared with what has happened over the past year, given that most people will have much more money in their pockets to spend?

Mr. Barnett

I can assure the hon. Gentleman that I have done so many calculations over the past three years that that one is somewhere among them.

The fourth and best way to finance tax reductions must be from a higher rate of economic growth than has been achieved by successive Governments. Even if we obtain higher levels of economic growth of the sort that we should all like to see, in the immediate future that growth will be largely pre-empted for industry, for the balance of payments, and for the better balancing of our external financial position. That has to be.

Provided that we do not pretend that there is some simple panacea, provided that we do not pretend that we can concentrate resources on reducing income tax and that we can somehow get everything right at a stroke, provided we ensure that we get the economy into proper balance first, the prospects will be brighter for our economic future as well as for reducing the general level of income tax. It would be madness to try to reward ourselves with tax cuts that we had not yet earned. That would be to do what has been done all too frequently in the past. I hope that no one suggests that that should happen again.

In the short term—as the House will recognise, I am somewhat inhibited—I have made it clear that we want to reduce the level of income tax, although that must depend entirely on the next pay round and the general room for manoeuvre that the economic situation allows.

In the longer term we must aim for a much better tax profile. The threshold is too low, and people come into tax at too high a rate, but to have a reduced rate band in circumstances in which we would be limited in the amount of relief that we could give would mean that we could not increase the threshold as much as we would like. At the same time we are considering all the representations that are being made. If the choice is between a reduced rate band and raising the threshold, I ask the House to recognise that the best way to help the lowest paid is to raise the threshold. I want to see a much better tax profile, not just one reduced rate. I want to see a number of reduced rates.

In the longer term I want to see a much better and fairer tax system. I am bound to say that such a system would have to include taxation of all taxable capacity. That must mean the proper taxation of wealth. It is no use pretending that we can ignore the taxable capacity of large sums of inherited wealth. It is not possible to devise a fair tax system in any other way.

Our priority for now must be to maintain the priority of financial stability and to improve our industrial performance. That is the only real way of improving both net take-home pay and real living standards. It is the only way that we shall reduce the burden of personal taxation.

6.10 p.m.

Mr. John Cope (Gloucestershire, South)

I propose to make a short intervention, in the course of which I should like to comment on one or two remarks made by the Chief Secretary. I thought that in some senses the hon. Member for Salford, East (Mr. Allaun) went near the nub of what lies behind all the discussions when he referred to the balance between taxation and expenditure and made it clear that in his opinion taxation should be increased, or allowed to go up as a result of inflation, to restore the cuts in expenditure. The hon. Gentleman seemed to think it surprising that the idea had suddenly got about in Treasury circles—and from Treasury circles spreading to other circles—that there might be room for what the Chief Secretary, despite his earlier remarks, kept referring to as "cuts" in direct taxation at the time of the Budget.

I should remind the hon. Member for Salford, East if he were here—as he is not, I must remind the House as a whole—of the position at the time of the Budget last year. Income tax and surtax, which was very nearly finished, but not quite, were forecast to raise in 1975–76 almost exactly £14,000 million. When the Chancellor rose to make his Budget Statement last year, the estimate for the current financial year was very nearly £18,000 million—an increase of £4,000 million before the Budget changes took place. I do not know what the equivalent figure for this year will be, but I should judge that it will be of the same magnitude.

Almost by the time that the Chancellor sat down, as it were—in fact, not by the time that he sat down, because the House will remember that some of the reliefs last year were conditional on agreement with the unions—at any rate, by the time that the Budget changes, including the conditional ones, were fully introduced, a step back of about £1,000 million of that £4,000 million had been taken by the Chancellor. The result last year was an increase of about £3,000 million as a result of inflation. That is the money which is talked about as being available for so-called "cuts" in direct taxation.

Some of that figure—I do not know how much, and I suspect that nobody else knows how much—is pure inflation by itself. But a large part of that figure is the result of people coming into the higher tax brackets and coming into income tax at the bottom end, because the allowances are still below the rates for social security benefits, as we heard this afternoon. The extent to which that has been happening is considerable.

The Chief Secretary also spoke about the differential between direct and indirect taxation. I am not sure how his figures compare with the figures given yesterday in the Inland Revenue report, but the figures in that report are fairly startling.

Taking income tax and surtax, which have been incorporated into one—so we must join the figures together for earlier years—at the start of the Labour Administration in 1964 just under 40 per cent. of all tax revenue was taken in income and surtax. By the end of that Administration—1970–71—it had risen to over 42 per cent. That was not a dramatic rise but it was a significant rise in the proportion of direct taxation.

The level remained more or less stable until 1973–74. Since then it has gone up from 42.8 per cent. in 1973–74 to 53.5 per cent. in 1976–77. It will undoubtedly have gone up considerably more in the estimates for the forthcoming year. That is a switch of more than 10 per cent. in the proportion of tax coming on to income and surtax and their successors. I should make it clear that a small proportion comes from corporation tax, but it is a very small portion of the percentage. The vast majority comes from indirect taxes collected by Customs and Excise.

Another peculiar matter—I was not quite able to follow from where the Chief Secretary got his figures—concerns the comparisons between taxation in this country and taxation overseas. In an intervention one of my hon. Friends drew attention to the nub of the matter by referring to the way in which these comparisons bite on most people. People from this country who travel abroad on business see themselves, day by day, alongside those with whom they are work- ing overseas. But we should not imagine that they are the only people who are affected by these comparisons.

Increasingly, particularly in some industries in my constituency, many skilled and less skilled people, who are not export salesmen or managers at high levels, travel abroad in the course of their work. I am thinking particularly of the aircraft industry. The Bristol aircraft industry is involved in joint projects with the French and the Germans. Therefore, many people have to travel abroad and are able to compare at first hand what happens.

The Chief Secretary produced figures that seemed to indicate that taxation in some Continental countries was much higher than it is here if the employee's social security contributions are included. I recall and have before me some of the figures that were given in a Written Answer on 4th November last year. They show United Kingdom average earnings and the percentage of total earned income of a family man taken in income tax and employee's social security contributions combined. The United Kingdom figure is the highest of all the principal European countries listed.

The Chief Secretary mentioned France and Germany in particular. The figures given in November show that in the United Kingdom 25.75 per cent. of average earnings was taken in income tax and employees' social security contributions. The German figure was 22.22 per cent. That is not a great deal less but it is certainly less. Incidentally, the French figure was 8.34 per cent., but that is a reflection in part of the different nature of the French tax system. Howexer, it is also a reflection of the different weights of the taxation systems of the two countries.

The important point is not so much the United Kingdom average earnings but the steepness of increase that occurs in the United Kingdom compared with the other countries listed. If we take twice the United Kingdom average earnings and the same percentage figure at that stage—this comes from the same Written Answer on 4th November—the German figure goes up from 22.22 per cent. to 26.38 per cent., but the United Kingdom figure goes up from 25.75 per cent. to over 32 per cent. That steep increase is the principal worry. The figures taken are for the current year in each case.

I recognise, as do my hon. Friends, the great problems facing the Government in deciding how to frame the Budget. I am sure that there is no doubt among any of us that the balance must be kept between the various options outlined by the Chief Secretary. But the right hon. Gentleman at one stage appeared to be suggesting that we were proposing decreases only in the real level of direct taxation. That is not so. However, that must be high on any Government's priorities.

To some extent, the subject of this debate is, which came first, the chicken or the egg? Does the growth and success of our economy depend on reducing tax rates so as to raise incentives, or must we wait until the economy has improved before we can reduce taxes? There is no scientific way, so far as I know, of answering that question absolutely or of calculating the exact effects in advance. It is a matter of political judgment.

However, my belief, which is shared by many of my hon. Friends and by many of my constituents at all levels of income, in work and out, is that it is essential, first, to restore the incentive to work and to work hard before we can expect the economy to expand faster. I do not believe that we can expect the economy to expand first for some other reasons—the Chief Secretary has never spelled out those reasons—and then dish out cuts in taxation. That is the importance of this debate and of what happens on 29th March.

The Chief Secretary rightly said that we were suspicious of what will happen then and about whether any so-called "cuts" in taxation will be real. I hope that he will face what he said about taxation honesty and that his right hon. Friend will make clear the extent to which any cuts will be real and the extent to which he is simply cashing in on the inflation over which this Government have presided and which has a mammoth effect on raising their revenue.

I made my maiden speech rather less than three years ago on this same subject of the importance of the real value of taxation allowances. I apologise for having had to repeat some of what I said in that speceh, but the subject has increased in importance since then.

6.23 p.m.

Mr. John Pardoe (Cornwall, North)

I hope that it would not be uncharitable to ssume that this debate has been initiated by the Conservatice Opposition with two purposes in mind—first, an annual ritual-bash at the Chancellor and, second, an attempt to upstage him on the personal taxation cuts which they fear, I hope rightly, that he will make in the Budget. But I hope that the debate will do far more than that. That it should do so is obvious, if from nothing else, from the 119th Report of the Board of Inland Revenue, which some of us managed to read today over and above the Press summaries. Anyone who has read it—I managed to: it is not very long—and anyone who has been following the work of the Institute of Fiscal Studies Commission under the chairmanship of Professor Mead can be under no illusions about the British tax system.

The British tax system is a Gothic nightmare—a monster. It is not a monster, however, that has suddenly risen from the bog of the last three years of Labour government. It was born way back in the two-party past and it has grown fat and greedy on the wilful negligence of successive Governments.

The tax system is not the cause of all our ills. It would be futile to give the impression that somehow shuffling the pack of taxes will solve all our industrial and economic problems. But anyone who wants to know why Britain suffers has only to ask what kind of a system of government allowed a system of taxation such as this to continue for so long. The answer can only be a diseased and decrepit system of government which has outlived its usefulness and deserves to be put out of its misery. The same can be said of the tax system.

Anyone who is not part of what I might call the professional tax establishment but who has had to grapple with taxation debates and the Committee stages of Finance Bills—let alone with his own tax returns—knows that this is nothing new. There is and has been plenty of evidence of the inadequacies and ghastliness of the British tax system for a long time. The regular articles that appear in Economic Trends on the combined effects of taxes and social welfare benefits on household incomes show that we spend an enormous amount of ingenuity—and another 6,000 Inland Revenue officials in the last year above the total of the year before—in taking money out of one pocket and putting it in another. And the pockets do not always belong to different people.

The present tax system is an extra-ordinarily inefficient way of redistributing income, if that is what we want to do. It has not worked; we might as well admit it and try to redistribute income, if we want to do so, in some other way.

There are two warnings that I would take to heart. First, no one should believe politicians who say that the tax system will come right with an overall cut in public spending and they should especially not believe those politicians who say that they will make those cuts but do not itemise them.

Public spending has come to hold the place in the mythology, I would almost say the theology, of the Conservative Party which defence spending has always held in the mythology of the Left—that is, that it is a bottomless pit from which one can always get money to finance one's latest pet topic. There are very strict limits to cuts in public spending, which nearly always mean cuts in public investment. For the foreseeable future, that means a cut in total investment, because for the foreseeable future cuts in public investment are not likely to be compensated for by corresponding increases in private investment. I wish they were, but they are not.

We must consider also the effects of cuts in public investment on the taxable capacity of the private sector of industry. No one who represents a constituency like mine, which now has the highest rate of unemployment of any in the country—20 per cent. male unemployment in some towns—can doubt that cuts in public investment in fact mean a substantial cut in the taxable capacity, the real wealth, of the people of the area.

For instance, if a sewerage scheme is not built in Wadebridge it will deprive 50 men of work for two years. Such a scheme would be a great help there, because Wadebridge has 350 men, or 20 per cent., unemployed at the moment. But that is not the only effect. The direct effect of the scheme would be to put 50 men to work for two years, but it would also have a multiplier effect on the money that they would then be able to spend in the shops and many other effects on the local economy. Also, without that sewerage scheme, there can be no other building to provide work in that locality. The people who are unemployed will therefore have to travel away to work. In that microcosm one sees the problems caused by cutting public investment.

I have indicated that we shall not change the whole balance of the British economy by shuffling taxes. I do not want to give the impression that we shall. Tax reform will not change everything. Our economic decline has been going on for a long time. Its beginning predated the most recent growth of the tax monster. But the tax system is now a formidable barrier to all other avenues to our economic and industrial success. What is wrong?

First, income tax has been forced to carry far too large a part of the burden. The Inland Revenue report today clearly shows in Table 1 what the pattern has been. In 1969–70, income tax plus surtax was 37.8 per cent. of the total tax revenue; the estimate for 1976–77 is 53.5 per cent. But that is not a true picture because the Inland Revenue has fallen for the politicians' myth that national insurance contributions are not a tax. I hope that, in future reports, the Inland Revenue, in these helpful tables, will show national insurance contributions as part of total taxation.

If national insurance contributions are included in total taxation, we see that income tax was 28.73 per cent. of the tax revenue in 1969–70 and is estimated to be 42.5 per cent. in 1976–77. If, in 1976–77, income tax was still at the share of 28.73 per cent., the total income tax revenue would be £5,000 million less than it is.

The Chancellor of the Exchequer and the rest of us are desperately trying to think of ways in which we can find the revenue to reduce the personal tax burden. Here is £5,000 million which, if only we could move back to the profile of tax of 1969–70, we would have available to increase tax allowances, to expand tax bands, and the rest, or perhaps even to reduce the standard rate, and, I hope, introduce a lower rate of income tax. It is crazy to start off at 35 per cent., which—if one is fair and calls a tax a tax—with national insurance contributions included, means that one actually starts at around 41 to 42 per cent.

Mr. George Cunningham

If it is logical to regard national insurance contributions as tax, how come that it would not also be possible to regard pension contributions as tax? How can one logically differentiate between contributions made for which one gets a State pension and contributions made for which one gets a private pension? One has to apply the line somewhere, and surely it is more sensible to draw the line where it is?

Mr. Pardoe

I do not want again to get into the row about inflation-proofed pensions in the public sector. Most of the private pension contributions are a payment for actual value received. The national insurance scheme is in no sense related to the pension one is to get. It is related to the pensions that one's parents are getting now. We are paying for the pensions of our parents. It is a pay-as-you-go scheme, not a funded contribution. We might as well regard it as tax. In any case, we need to do so in order to compare like with like in other countries, where these things count as social security tax.

Mr. George Cunningham

The hon. Gentleman is wrong. Private pensions in France, for example, are on a pay-as-you-go basis for the most part, so, by his own criterion, the hon. Gentleman should include the private pension contributions as tax. But of course he does not.

Mr. Pardoe

That is one of the difficulties of comparing percentages of taxation on national wealth and incomes country across country. The Chief Secretary was trying to make comparisons, but they are extraordinarily difficult to do. Not all the same services are paid for out of taxation, and so on. I accept the hon. Gentleman's point, but perhaps he would like to ask his constituents whether they see any difference between a contribution and a tax. I guess that when they see their pay packets they think that the national insurance contribution is a tax and blame the Chancellor accordingly. If they see the payment of national insurance contributions on that basis, we might as well stop perpetuating the political mythology and accept that the national insurance contribution is a tax.

The Tories will say that these terrible increases are the fault of the wicked Socialists, but that is only partially true. I accept what the right hon. and learned Member for Surrey, East (Sir G. Howe) said about allowances. There is no doubt that, under the Conservative Government, tax allowances kept ahead of the rate of inflation. But if one looks at the percentage of income tax in the total tax revenue. I am afraid one sees that his Government started down the road. Including national insurance contributions, income tax rose from 28.73 per cent. in 1969–70 to 33.14 per cent. in 1973–74, he last full tax year of the Conservative Government. Most of that happened by what the right hon. and learned Gentleman calls "stealth" and of course this result is the effect of inflation on personal tax allowances and on tax hands.

An extremely clear exposition of what has happened is shortly being published by the Institute of Economic Affairs. It is a pamphlet called "Over-taxation by inflation", by Dr. David Morgan. I have argued on many occasions that we should have complete indexation of the tax system. No-one who has read Dr. Morgan's pamphlet can fail to be convinced by the argument. Indexation would be a wonderful discipline on Government spending. It would stop them from escaping the slings and arrows of Parliamentary scrutiny. They would have to come to us and get their tax in a full-frontal manner, as it were, rather than in some more secretive way.

The first proposal I make is that we must index the whole tax system. But I ask the right hon. and learned Gentleman who, I think, is moving in this direction, pursued or pushed by the hon. Member for Blaby (Mr. Lawson), how one indexes the tax system without a written constitution. Whatever one Parliament says, another can undo. Unless one wrote it into a Bill of Rights or a written constitution, or there were some kind of entrenched clause, it would be difficult to have a foolproof system of indexation.

Part of what went wrong in those years of Conservative Government lay in the introduction of value added tax. It was supposed to replace purchase tax and selective employment tax, but it never did. Those two taxes reached a peak revenue in 1970–71 bringing in £3,260 million, or 18.16 per cent. of total tax revenue. The last year of significant revenue from these two taxes was 1972–73, when they brought in £2,381 million, or 11.93 per cent. of total tax revenue. Value added tax and car tax were introduced later, in 1973–74. Their revenue then brought in £1,561 million, or 7.25 per cent. of total tax revenue, and only in 1975–76 did the revenue from VAT and car tax together exceed what the revenue from purchase tax and selective employment tax together had been in 1970–71, five years earlier. Even now it is only about 10 per cent. of total tax revenue.

I do not blame the right hon. and learned Member for Surrey, East, because I supported the introduction of VAT, anyway. But the way in which we have introduced VAT into Britain means that we have landed ourselves with a very inefficient expenditure tax. One measure of this inefficiency is certainly that many retail stores today actually pay out more in compliance costs than they hand over to the revenue in money. The right hon. and learned Member for Surrey, East may have seen the study by Bath University which shows that only too clearly.

What are the possible ways forward? We could switch from income taxes to others taxes but VAT would have to be broadened at its base, and we all know what that means. If we exclude two major items of expenditure such as housing and food we cannot do with VAT what the French do with it. I accept that for any Government to bring in VAT on food would be politically impossible and I therefore regret to say that VAT is not a satisfactory tax for us to make this very substantial switch about which I suspect there is a growing consensus in this House.

We might move over to a much higher social security tax—national insurance contributions if the hon. Member for Islington, South and Finsbury (Mr. Cunningham) must have it that way. Europe has much higher social security taxes. In Italy it is 40 per cent. of the wage bill which is an astronomical figure. That is better than an income tax, but I believe it is not the whole answer although it may take a large part of the burden.

At the Liberal Conference last year I proposed the abolition of income tax and its gradual replacement by a graduated expenditure tax. I had reason to believe that would be heavily documented in the coming months and I think that it is already beginning to be so.

Sir Geoffrey Howe

Is the hon. Gentleman aware that the last election that Gladstone lost to Disraeli was 103 years ago last week, when Gladstone stood on the platform of the abolition of income tax? Perhaps the hon. Gentleman had better take warning from that fact.

Mr. Pardoe

Because Gladstone failed is no reason why I should try! As much as I admire Gladstone I cannot accept that as a natural brake on Liberal proposals for ever and anon.

But I think the graduated expenditure tax, with its parentage in Professor Kaldor's work on the Royal Commission on Taxation in the 1950s, is the way that we can move forward.

The question we ought to be asking ourselves is what tax do people prefer to pay. All my experience with my constituents leads me to believe that they would prefer to pay tax on expenditure rather than tax on income. We might as well accept that point and go along with it in creating an equitable tax structure.

The trouble with taxes on expenditure is that most are included in the retail price index. It would be very much better if we followed the example of some foreign countries and left taxes on expenditure out of the calculations of the retail price index altogether. Any way, it would be very convenient for the Chancellor.

If we do retain income tax as a major source of revenue in this country we have to broaden the base very substantially. The Economist has calculated that if we broadened it right across the board we could bring the rate down to 17 per cent. on all income and yet have the same yield. That would be an enormous advantage administratively and it would be very much simpler for everyone to understand. We could then solve the poverty problem in other ways. Certainly we could solve the inequality problem by cash grants in a tax credit system.

Whatever tax we have we cannot go on taxing people below the poverty line. Many of my constituents are much worse off working than not working and lose more than £1 for every extra £1 that they earn. That cannot be allowed to continue. Therefore, if we have to continue with an income tax we have to have a tax credit system. I believe this should encompass virtually all the 44 means tests with which we at present encumber ourselves, including housing allowances, rent allowances and rate allowances.

Capital taxation is in an appalling mess. We get very little income from it. In 1976–77 we got £400 million from capital gains and £282 million from capital transfer tax and death duties together. The total for that year was £682 million. That is not to be sneezed at, but it is only 2 per cent. of total tax revenue.

As part of a substantial reduction in income tax, and much lower rates at the top, some capital taxation is absolutely essential. But investment income surcharge is utterly ridiculous. It is madness to tax someone on capital which gives a return when we do not tax the capital that one hangs on the wall. Surely it is the other way round that we ought to go.

The way forward is to scrap all our present capital taxes and the investment income surcharge and introduce either an annual wealth tax or an accessions tax. I believe that an annual wealth tax, self-assessed rather like the American income tax, is a quid pro quo for the abolition of investment income surcharge and the reduction in all rates of income tax to 50 per cent. I would go for that in the Budget.

Mr. Grieve

What effect does the hon. Gentleman think that a wealth tax, carried as far as works of art, would have upon the national collections of this country in private hands? We have already seen the danger of execessive taxation in recent weeks with regard to the great collection at Mentmore?

Mr. Pardoe

The hon. and learned Gentleman should read the report of the Select Committee on the wealth tax and in particular the minority report in my own name. It was one of five minority reports. The Committee dealt extensively with the problems of works of art and the national heritage. I remind the hon. Gentleman that my minority report was so satisfactory that I was able to persuade all the Conservative representatives on the Committee to vote for it. Admittedly that was a quid pro quo for my voting for theirs.

There is no doubt that a great deal of all-party support exists in the House for a wealth tax, and the Government should not forget it. It is not something that we have to fight about in the old adversarial political style. There is a broad measure of agreement in all parts of the House for a wealth tax and we may still go along that road.

Proposals on these lines would go a long way towards solving some of the problems with regard to tax. In the words of Edmund Burke: To tax and to please, no more than to love and to be wise, is not given to men". But it would hardly be possible to devise a tax system so unpleasing, so unlovely and so unwise as the British tax system is today. We have to make radical and far-reaching changes in it.

6.48 p.m.

Mr. George Cunningham (Islington, South and Finsbury)

Edmund Burke is quoted in this Chamber practically every week, if not every day. The only quotation from him that I cherish is what he said when he was asked by a lady if he really believed in the nonsense he spoke about the wicked Tories and the Whigs, when he replied "Gad, Madam—does any man swear to the truth of a song?" I always recall that when one hears the Front Benches going through their ritual motions, particularly when debating tax matters. It would be a commonsensical thing—far too commonsensical for the House of Commons, of course—to have a Select Committee of this House responsible for looking at tax matters on a continuing permanent basis. Although there must always be a measure of disagreement between the parties periodically, nevertheless there appears to be a considerable measure of agreement with regard to the techniques and devices that are best adopted in the taxation field and, indeed, on the substance of taxation policy. I hope that that reform will ultimately be adopted by the House.

It has been suggested today that the tax system is, if not all, at least a large part of the British economic disease. In my view, the British economic disease is no more or less than the simple, old-fashioned administrative inefficiency that exists throughout our society in private and public industry, in Government, in commerce, and so on, and has nothing or very little to do with the taxation system.

The truth is that tax has risen in virtually all countries throughout the world. A far larger proportion of national wealth is taken in tax and spent on public purposes than was the case a few decades ago. That tendency has still some way to go, but that does not mean that every increase in public expenditure and therefore in tax is to be welcomed as an advance in Socialism. Nor is every expenditure of a public kind to be welcomed as part of the social wage. If I were to tell some of my council tenants that the wage of the clerk attending or not attending to their needs in the housing department was part of their social wage, I should either he laughed out of court or chased out of their premises, and I would richly deserve to be.

It is important that the Government and the House should devise better methods of watching over the relentless rise in public expenditure programmes. I do not think that we yet have the devices for doing that. I think that the changes in public expenditure scrutiny which began with the Plowden Report in the early 1960s were a disaster. Treating the great public Departments as individual satraps, each allocated its total, with the Treasury having relatively little to do with the figures for the sub-sub-programmes and the large projects within each programme, is the wrong road to go down. We shall never get a sensible system of priorities until we have at the centre a unit, both at ministerial and at official level, which is responsible for comparing sub-sub-programmes in one Department with sub-sub-programmes in another Department. Even in the Departments of the highest general priority—housing or social security—there are always sub-programmes which are of far lower priority than some of the programmes in the Departments of lesser general priority. The difficulty is that it is very hard for departmental Ministers to stand outside their departmental responsibilities and take an overall view.

That is why there should be a Minister, preferably of Cabinet rank—and if not that, just outside the Cabinet—responsible not for the day-to-day control of public expenditure as the Chief Secretary is now but, rather, for searching in the forest and pruning out the sub-programmes that may have been desirable at one time but that have ceased to have the same justification that they once had. Public expenditure should always be pruned and not simply cut arbitrarily.

I want to raise a few matters in relation to the tax system, and it is very useful to have an opportunity to do so a month or so before the Budget, at least in the fond hope that one can have some effect on the thinking leading up to the Budget.

Ultimately, we shall go over to a system where tax allowances are reductions in the tax which is payable and not reductions in the income which is taxable. If we did that, automatically we should make the benefit of any given allowance—say, for a child—of equal value for a person paying the basic rate of tax and for a person paying at a higher rate of tax. Therefore, it is not a change which can be adopted in isolation. It would have to be accompanied by alterations in the bands applying to the higher rates of tax. Nor is it a change that can be adopted suddenly throughout the tax system.

We have made a beginning. The relief that is now given on life insurance premiums is limited to the basic rate. But that makes very much more difficult the form of the coding allowance. That allowance has to be injected in the form in a totally different way from the way that we deal with other allowances. I should like to see us picking one after another of the existing allowances and limiting it to the basic rate, as each change is made not necessarily making the allowances exactly counter-balancing but making some balancing adjustment to the rates of higher taxation.

If the allowances were expressed as deductions in tax payable rather than in deductions in income taxable, I believe that the public would understand the system much better. If there is a disincentive in the tax system to work longer and harder, it is usually because people do not understand how the system works rather than because they understand it and think it too ferocious.

In the old days, it was common—and still is—to find people who thought that, if they worked overtime not only did they lose all that they were paid for the overtime but a bit more besides. That was never possible in our system, but a lot of people thought that it was, and that was the disincentive. So, the simpler that we can make the system, the better it will be for the incentive to earn more, and that change would make it more easy to comprehend.

There is also a need to have a long—term series of objectives with regard to tax. I instance the married man's allowance. Do we want the ratio between the married man's allowance and the single man's allowance to get wider or narrower? No one Government can make up their mind about that. But if we were to debate the matter more, preferably upstairs and sitting down—everyone talks much greater sense when sitting down than when standing up—we could come to a consensus.

My preference would be gradually to narrow down the differential between the married man's allowance and the single person's allowance. I do not see any reason why a couple without children should pay less tax if they are married than they would if they were both working but both single. That is one consequence of the system that we have now.

Mr. Grieve

Does the hon. Gentleman see any reason why a couple should pay a great deal more tax, if they happen to have investments, because they are married than they would if they were single?

Mr. Cunningham

The difficulty about that is that whereas I cannot switch to my wife the earnings that I have, I can arrange to switch to her the investment income that I have—assuming that I have any, which I do not. That, therefore, makes it more difficult to deal with investment income in the straightforward manner in which it is possible to deal with earnings between husband and wife. There may be a way out of this, but it is a difficulty which has to be faced. It is not as easy as the question seems to suggest.

It would be of advantage, too, if, ultimately, we could get rid of the married man's higher allowance, because it would take away the disadvantage which the widow feels at present. At the moment, the widow is no worse off than the widower. He, if he has children, also loses the advantage of the married man's allowance if his wife dies, just as she loses that advantage if her husband dies. But there is no reason at all why the married couple without children should have that advantage. We ought to take that money and shift it over to the benefit of children—previously in the form of child tax allowance, in future in the form of child benefit.

Therefore, in principle, I should like to see the Chancellor this year shading down the differential between the married man's allowance and the single allowance. But he cannot and must not do it this year, because this year he cannot do anything except that to benefit families with children. I recognise that dilemma. This year we cannot increase child benefit beyond what it has been fixed at, because it takes a long time to alter that figure. Nor should we increase child tax allowances, because we are in the business of trying to phase them out. Therefore, the only way in which we can help families with children is to give an advantage to all married couples.

I am sure that the Chancellor this year will allow the differential between the married man's allowance and the single person's allowance to increase. I only hope that the Treasury Ministers explicitly realise and state that it is being done this year, if it is done, for that reason and that reason alone, and that the long-term objective of reducing the ratio will still be pursued.

I also suggest that this year some thought should be given in the child benefits context to tax allowances which will after April continue to be available, if the Government get their way, to parents resident in this country with children resident abroad. In practice, this means the children of immigrants to this country resident abroad, for the most part. We are, therefore, on very sensitive ground indeed. Let us all recognise that. But I do not think that the sensitivity of the ground should deter us from looking fully at the situation.

It is, I think, the Government's intention that the present rate of child tax allowance—£000 at the rate for the child under 11—should be retained for a child resident abroad, because that child will not qualify for the new child benefit, as residence in this country is a condition of the child benefit, which it is not for child tax allowance.

I shall cite an extreme case, but the others are not much less extreme. Let us consider an immigrant to this country from Bangladesh, who has, back in Bangladesh, three children under 11. That immigrant will be receiving a total tax allowance for those three children of £900 of income which is not made taxable. Converting that into its value in Bangladesh and expressing it as a multiple of the national income of Bangladesh, one finds that the multiple is 7½ times, so the immigrant in this country in that situation is being provided with a cash figure that is 7½ times the national income of Bangladesh.

This was never a system that anyone sat down and worked out. No one ever said that this was a sensible thing to do, that it was a form of overseas aid, or anything like that. This is the accidental consequence of never having thought that it was worth while to limit the tax allowance in respect of children who were resident overseas. Years ago, of course, there were very few such children resident overseas. But this is big money now, and the time when we are reducing the child tax allowances for children at home because people are getting the new child benefit is the time to consider whether at least some reduction should not be made in the rate of this assistance provided in respect of overseas children.

Hon. Members will find that in Germany recently, their equivalent of child benefit provided for children outside Germany and outside other Community countries has been reduced on exactly the kind of grounds that I am now advancing.

It is particularly appropriate to look at this matter this year, for two reasons. First, we are phasing down the child tax allowance anyway. Second, hon. Members may recall that in the Finance Bill of last year, contrary to what the Govern- ment wanted, an amendment of mine was forced upon them whereby the increase in child tax allowance from £240 to £300 a year was limited to that year, and it expires in April 1977. The figure automatically goes back down to £240 for everyone in April this year. unless legislation in the Finance Bill provides otherwise.

My limited objective, therefore, is to say to the Government that at least that much of a reduction ought to be applied in respect of children resident overseas. The figure should go back down to what it was up to April 1976 and stand at no more than £240. In other words, the Finance Bill should not provide for any rise in the figure that would otherwise apply in April 1977.

Reference has been made to mortgage relief. I should like to take just one minute, not to provoke the kind of partisan comments which are the general stuff of a discussion on this issue, but to suggest that it is at least respectably arguable that mortgage relief does not bring a benefit to the owner-occupier at all. Of course, if one takes away the relief from one owner-occupier, one is taking away a terrifically significant advantage. But the situation that we must imagine is one in which we have taken it away from everyone and, of course, taken it away very gradually indeed.

What would be the effect of that? At present more people want houses than there are houses to be bought. The only consequence of providing a Treasury subsidy to the buyer is to make him able to pay more for the same houses than he would otherwise be able to pay. That person usually works out what he can afford to pay as the starting point and then sees what he can get for the money. If he were able to afford less in monthly payments because he was not getting relief, he would be able to offer less for the house. The consequence would, as a general rule, be that the price of houses would not fall, because one could do this only in a very gradual way, but that they would not rise as fast as they otherwise would do.

I suggest that what we are doing at present, except in areas where there is an excess of houses over people wanting them—I do not know any such area—is giving an extra push to the inflation of house prices. I therefore suggest very seriously that the notion that mortgage relief is obviously a subsidy and a help to the owner-occupier is at least questionable, and that we ought to discuss that notion more and not take it for granted.

Mr. Peter Hordern (Horsham and Crawley)

I agree that that would be a most interesting topic of conversation and worthy of discussion in a Select Committee. However, surely the hon. Gentleman would not wish to isolate the subsidy given to the mortgagor from that given to the council house tenant which, as he knows, is three times as much as that given to the mortgagor. That being so, would not the hon. Gentleman also wish to phase out council house subsidies, which would have the effect of increasing the number of council houses available?

Mr. Cunningham

Let me respond in the spirit in which I am asking hon. Members to respond to my motion. It seems to me that the subsidy to the council house tenant is actually a subsidy. It actually reduces the rent that the council house tenant needs to pay. I am trying to get away from the notion that these two things are equal things, which is how I have always regarded them in the past and have always been slammed down by the Conservative party for so regarding them. What I am saying is whether or not we want it, a council house subsidy really is a subsidy and brings benefit in the form of a lesser payment for the council house tenant on average, but that the tax allowance is not a subsidy actually, in that sense, to the owner-occupier. In fact it operates, strictly speaking, against his interests because any normal owner-occupier who moves up-market say, three times in his lifetime—most people move up-market until they come to retirement—suffers relatively more from a high rate of inflation than from a low rate of inflation.

I do not have time to develop this notion now but I suggest that it is worth closer consideration. The hon. Member for Horsham and Crawley (Mr. Hordern) shakes his head. I am already late for an appointment outside the House which will take me away almost as soon as I have sat down, so I shall not pursue the matter. I merely suggest that we should discuss this matter more closely than we usually discuss it, and we should look at it too see whether there is anything in it.

Mr. MacGregor

I appreciate the way in which the hon. Gentleman is putting his point. If we started from square one and did not have the present system he would be right, but the present system exists. Even if the present system was phased out slowly there would be a big difference in house prices between those with existing mortgages and those who would have to take new mortgages. The effect would be very much to freeze the housing market and it would make many people immobile in terms of moving to other jobs.

Mr. Cunningham

When I said "gradually", I meant gradually. The relief is not something that could be denied to any new borrower. One would have to reduce relief for all who were enjoying it over a period of about 30 or 40 years. When we are talking about something that would take as long as that, once we decide that it is desirable it is all the more important to get started because it will take so long to achieve.

I have only one more point that I wish to make, because I shall have to leave the Chamber almost as soon as I have finished. I express the hope to the Government that on the tricky matter of taxation and short-term social security benefits they should not consider that there is no alternative between what we do now and the proposal to tax short-term benefits in the normal way. I have put a proposal to the Financial Secretary to the Treasury which seems to me to give most of the advantages of taxation while avoiding most of the costs and removing most of the anomalies. If the system would have that effect, it is something that should be given very serious consideration in the Finance Bill, not, I imagine for adoption in the present year, but perhaps next year.

7.13 p.m.

Mr. Peter Hordern (Horsham and Crawley)

The hon. Member for Islington, South and Finsbury (Mr. Cunningham) made a most interesting and thought-provoking speech. I for one should like a Select Committee of the House set un which would be permanently in session to examine taxation and taxation proposals. That would enable us to conduct our affairs with a very much better background than we customarily have when we address ourselves from time to time to the Government's taxation proposals.

The hon. Member for Islington, South and Finsbury has asked one or two questions about the position of the overseas children of people who are resident in this country. I thought he made a very good point on that subject. I should like to compare the position of those children with the position of United Kingdom pensioners who have retired and have left this country to live abroad but who are not eligible for any increase in their pensions, whereas the children of people living in this country, children who may never have been to this country and may never come here, regularly receive increases in their child allowances. It is a strange set of circumstances that allows this to happen.

We last had a debate on personal taxation just a year ago, which was led, I believe, by the Liberal Party. In that brief space of 12 months the personal tax position of everyone in this country has become so much worse that it is astonishing that we have not had further debates on this most important topic.

Yesterday we had an emergency debate on British Leyland. Those who took part were concerned about the question of differentials, which may be the principal cause of the problems at British Leyland. Those problems have been exacerbated by the problems of the pay code. But a large contributory reason for the intense frustration felt by those who have the skill to perform difficult and intricate operation is the very high level of direct taxation. They have found that their take-home pay is not enough to meet the extra costs which they and their wives have had to bear. I am sure that that is a very important reason for the sense of frustration and dissatisfaction in British Leyland.

Mr. Pardoe

Does the hon. Gentleman agree that it might not be entirely a coincidence that the dispute that he has mentioned has happened in the last quarter of the tax year?

Mr. Hordern

That is a very interesting point and is perhaps another point that a Select Committee on tax evasion should examine.

I believe I do not exaggerate when I say that the level of taxation lies at the heart of our national problems today. I say that because the effects of taxation have become so much more dramatic in the last three years. The effects on the economy even before that were dramatic enough, but the last three years are especially significant because of the extent of the damage that has been caused. It may not be the whole problem—I do not suggest that it is—but whether one thinks of production or of productivity, of enterprise or of profit, of savings or thrift there is one question that will not stay for an answer.

With personal taxation as high as it is, people wonder whether there is any point in working harder or accepting greater responsibility. There is no longer any direct link between effort and reward. There is not even any particularly significant point in monetary terms in accepting promotion. There is no use saying that if one takes a new job or new responsibility one will receive an extra £2,000 in gross salary. One might receive an extra £500 net, but is it worth all the inconvenience, the cost of moving house, of accepting new responsibility, of placing one's children in new schools to accept that new figure? Too often now the answer is "No."

Take the example of an able young accountant earning perhaps £10,000 a year. Let us assume that he gets the job of a lifetime and doubles his salary so that he is now getting £20,000 a year. I am not saying that this is typical, but it could happen. He will find that his net salary will rise by just over £3,000 a year—that is, an increase in net salary from £6,300 to £9,400 a year. If the same salary were paid in New York that man would be getting £15,300; in Frankfurt he would be getting £13,200; in Paris £16,100; in Japan £16,900. That is the most pitiful comparison.

To take another example, let us suppose that a man achieves a lifetime's ambition and becomes managing director of a company, on £30,000 a year. Starting from a gross income of £10,000 in one year his net income after tax would be only £1,900 more—that is, an increase in net salary from £9,400 to £11,300. In France and Japan his counterpart would receive more than twice as much after tax. In Germany he would receive £18,400; in the United States £20,900. What sort of promotion is that for someone who has been made up to managing director of a company?

Why should a man take on the highest form of responsibility for such a minuscule extra reward, especially when he knows what people in comparable jobs abroad are getting? Of course, business managers have to put up with the additional frustration of the freeze in incomes over the last year or so for anyone earning more than £8,500. So, they see, year after year, not the normal improvement in their standard of living which they used to experience when they were younger but an absolute and relative decline. They get poorer every year. Nobody who has the drive and ability to get to the top in business will lightly accept that situation. Hence the demand for company cars, for drivers and for perks of every description on a massive scale.

People in this position do not live their lives in the way that they choose. They conduct their lives on the most tax-efficient basis. Life for them becomes a sort of tax distorted struggle, an endless search for cash benefits. And in case the hon. Member for Bristol, North-West (Mr. Thomas) thinks that this is confined to directors, let me tell him that the search for cash benefits exists at every scale, as I am sure he knows very well—

Mr. Ron Thomas

The directors are just better at it.

Mr. Hordern

What is perhaps even more serious is the effect on business itself. I quote here from an article in the Financial Times under the headline: Tax-cut call by Chemical Association which said: One company reported in response to association inquiries that of more than 70 expatriates working in various parts of the world not one had any interest in returning to U.K.-based appointments. I do not think that that can be a healthy trend. I think that it represents a most serious state of affairs. Further, it is not confined only to company executives or managers of large businesses.

The position is also described in another report in the Financial Times. An English woman who is a bilingual secretary working in Frankfurt gets there £10,100 a year. Suppose that there is a United Kingdom bank employee earning £4,000 who, because he is good about currency transactions is transferred to Frankfurt. His salary becomes £17,700. In addition, these people pay half the tax they would pay in this country.

So, leadership and management of business is suffocated by Government intervention and throttled by a lack of personal incentive. Leadership is important, but it is not as important as the frustration felt by every working person in this country. There is frustration because of the Pay Code, frustration because of the attack on differentials, and, above all, massive indignation at the level of personal taxation and the size of the deduction from the pay packet. This is so at every level.

Twenty years ago a man with two children paid tax first when his income was 93.4 per cent. of average earnings. Today he pays tax at 44.6 per cent. of average earnings. Further, when he pays tax he pays it effectively not at a low rate, as they do in other countries, but at 41 per cent. So, a married man with no children pays tax at 35 per cent. when his income exceeds £1,100 a year. It increases to 41 per cent. if national insurance contributions are included.

I regard that as an extortionate figure, not only absolutely, but relatively to other countries. My hon. Friend the Member for Norfolk, North (Mr. Howell), whose Questions have provided very interesting information over a long period, has shown that a family man earning £35 a week or less is better off out of work than working. I think that my hon. Friend's figures do no take account of tax refunds, so that the situation may be even worse than the facts he has uncovered would indicate.

It is not the fact that a man out of work is treated generously that is so objectionable to a man in work; it is that he is treated differently for tax purposes. That is what causes so much trouble. The House should recognise the extraordinary change in tax experience that has occurred to every working person during the last three years alone in this country. Three years ago, in 1973–74, income tax yielded £7.1 billion. In 1976–77 it is expected to yield £17 billion. Of course, a lot of that is due to inflation. But three years ago income tax accounted for 41 per cent. of total revenue. This year it is expected to account for 53.4 per cent. of total revenue—a 30 per cent. increase over that period.

I do not have the latest figures for other countries, but the figures of two years ago showed that income tax took up 32.8 per cent. of revenue in Germany, 20.9 per cent. in Italy and 20.4 per cent. in France. Compare that with 53.4 per cent. in Britain today.

Again, the latest report from the Inland Revenue shows that the number of people liable to pay the higher rate charge 1975–76 was more than four times the number who paid surtax in 1972–73. That again is in a three-year period. The latest figure for this current year must be much more alarming still and much greater than four times as much.

If the average increase in earnings over the last two years continues from now the man on average earnings and on present allowances and who has no children will find himself paying tax at the higher rates by December 1978. In other words, he will find himself a surtax payer when he is on average earnings. From that time, assuming that no change is made, there will develop what can only be described as a gearing situation, which will cause deeper and deeper unrest.

We tend to judge the morale of the country by obvious signs. Industrial unrest is one and political unpopularity is another. I believe that the pressure for devolution is a third. I believe also however that there is an underlying discontent which is not obvious. It is that more and more of our money is being taken from us without any evidence that it is being used to good effect.

But I reckon that what was an irritation three years ago is becoming a festering sore which will put industry and our economy at risk. The signs are there for all to see. Why is it that production over the last three years has for the most part been less than it was during the three-day week in 1974? Let us just consider what the industrial climate will be when personal tax really begins to bite in a way that it has not bitten so far.

It seems clear that we just cannot continue in this way. If production and productivity are low now what possible hope is there that either will improve when the levels of personal taxation become totally unacceptable, as they will with the present level of inflation and the present marginal rates—unacceptable not just for management but for every worker in the land?

There is a growing sense of indignation which the Government cannot ignore. Resentment of those who get tax-free payments for being out of work will grow to dangerous levels. More people will down tools and more still will look for work in other countries. Even those countries which used to have the highest rates of personal tax are reducing them. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) mentioned some of them today. India, Israel and Ireland have reduced them substantially already. Why should we stand alone?

Where then should we look for alternative sources of revenue? First, we should examine expenditure. Is it right, for example, that council house tenants should pay a substantially lower proportion of their income in rent than they used to? In 1968, 8.2 per cent. of average earnings went in rent. The latest figure I have discovered is 6.2 per cent. in 1975. This is particularly the case since the majority of people, according to the NEDO report which none of us is permitted to read, would prefer to own their own homes rather than continue as council house tenants. The hon. Member for Bristol, North-West is a good example of that trend. As a council tenant he bought his house and he therefore knows what the position is. I am sure his view is shared by many people in the country.

Let us take another example—and here again I refer to my hon. Friend the Member for Norfolk, South. The amount disbursed in flat-rate unemployment benefit and supplementary benefit in 1974 was £73.5 million. Two years later it had grown to £189 million, simply reflecting the increase in the number of unemployed. But the cost of administering those benefits rose in the same period from £80 million to £165 million. What is that money going on? How is it being used? How can it cost twice as much in two years to administer the paying out of short-term benefits?

My hon. Friend the Member for Aberdeen, South (Mr. Sproat) discovered that total expenditure on personal social services amounted to £1,028 million. He found that the cost of administration by Government Departments alone, not taking local authorities into account, was £710 million. If those figures are correct it is undeniable that the cost of administration for paying out these benefits of every kind is far in excess of their value. How can that be right?

There is a growing number of administrators in the National Health Service. In 1964–65 the administrative costs of the NHS was £39.2 million. In 1973–74, the latest year for which we have figures, it had grown to £130 million.

Mr. Ron Thomas

Surely the hon. Gentleman will agree that the cost of administering social security payments and unemployment pay has risen because of the continued witch hunt by Conservative Members demanding all kinds of investigations into people. Secondly, it was the reorganisation by the hon. Gentleman's Government that brought about the rapid increase in the number of administrators in the NHS and local government.

Mr. Hordem

As the Duke of Wellington said to somebody who asked him whether he was Mr. Jones, if the hon. Gentleman believes that he will believe anything.

In the past two years the number of civil servants alone has risen by 60,000 people, which is 10 per cent. The original estimate for central government salaries for 1975–76 was £6.8 billion. The estimate for 1976–77 was £8.5 billion, and that in an era of cash limits. It is interesting to reflect that if the increase in central government salaries had been restricted to 20 per cent. in one year it would have been possible to reduce the top rate of income tax to 45 per cent.

The key to reductions in direct taxation is partly reductions in the cost of administration and other reductions in public expenditure. It is partly a switch from direct to indirect taxation, a point that the Chief Secretary was making. But it is to be found also in the encouragement of business and industry, which a lower direct taxation regime would bring, and a substantial increase in the yield of corporation tax, which the removal of price control would also bring. That is the best way to cure unemployment, not by spending too much time on distinct, selective unemployment schemes, but removing the burden that now rests on industry and allowing it to invest more to increase its profits, on which the yield of corporation tax would increase.

We must take care to see that the levels of direct taxation do not cause industry and business to seize up altogether. With tax as it is, increasing resentment is felt by those who produce against those who do nothing but administer. They see the numbers of the administrators grow. The producers see the administrators' inflation-proof pensions and watch their functions multiply at the direct expense of the producer. They feel like Gulliver in the land of Lilliput, tied to the ground by little men.

The worst of it is that there is no need to inflict these wounds upon ourselves. We do not need to have such high levels of indirect taxation. The choice is entirely in our own hands. If we choose to do so, we can provide incentives. We can provide rewards, but it will require a determination to reverse the trend of recent years and a strength of purpose which neither this Chancellor nor this Government possess.

Several Hon. Membersrose—

Mr. Deputy Speaker (Mr. Oscar Murton)

I should inform the House that the last three speeches lasted on overall average 24 minutes each, and many hon. Members are still anxious to speak.

7.35 p.m.

Mr. Douglas Crawford (Perth and East Perthshire)

The House will not be surprised to hear that I shall confine what I have to say primarily to Scotland, though some of what I say will be of relevance to the other countries in these islands.

In Scotland, as elsewhere, the burden of taxation is too high, is rising, and must come down. There are personal taxes and personal taxes, some direct and some more indirect. I was a little worried when the Chief Secretary talked of a possible reduction in direct income tax and a possible increase in what I think he called indirect taxes. I am thinking of the whisky industry—the Scottish goose that has laid golden eggs for the English Treasury for long enough. As I have already pointed out to the Chancellor of the Exchequer in writing, if this important Scottish industry is to realise its full potential it is vital that the levels of duty come down at least to those levels prevailing in October 1974. The right hon. Gentleman has told me in a written reply that that would cost the Exchequer £70 million to £80 million a year.

I also believe that there should be a change in the time at which duty is paid on whisky. It is now paid when it comes out of bond, but there is a case for imposing it when the whisky is sold. As it is, the whisky industry is, in effect, giving the Government an interest-free loan of two or three months' duration. I have been told by the Chancellor that the once-and-for-all cost of such a change would be about £80 million. My hon. Friend the Member for Banff (Mr. Watt) raised the matter in an Adjournment debate about a year ago and got short shrift from the Minister who replied.

The second area where the burden of personal taxation is crippling is that of small businesses. I refer the House particularly to two taxes that were either proposed or introduced by the Conservatives—the levy on the self-employed and value added tax. I accept that VAT is with us and I do not think that it will go away, but for small business men it is a personal administrative nightmare in form filling. There is a case for raising the threshhold at which VAT becomes payable from businesses with a turnover of £5,000 a year to, say, £15,000 a year. I learned from an answer to a Question that the cost of that would be about £75 million in a full year, including £8 million to £9 million in Scotland.

The levy on the self-employed should be abolished outright. The Treasury estimates the income from it to be only £75 million to the United Kingdom economy, and £8 million to £9 million in Scotland.

The total cost to the Treasury of these matters would be between £160 million and £170 million. To arrive at the net cost, we must subtract the £70 million that the Chancellor is saving, purely in Scottish terms, by the abolition of regional employment premium. Therefore, the net cost of what I propose would be under £100 million—a puny amount when set against the £400 million accruing annually from whisky and the current estimated annual oil wealth of £1,600 million.

The Chief Secretary spoke of four ways in which tax could be reduced. There is a fifth way—the sensible use of natural resources.

Much has been made of the current top rates of personal income tax. The United Kingdom level of 83 per cent. on earned income is too high by any standard. It is essential to get the figure down to 60 per cent., or at least to the levels prevailing in Belgium and Italy, which are about 72 per cent.

Perhaps it would be unfair to ask the Minister to reply to detailed costing matters at such short notice, but he might, in his reply, give an estimate of the cost of the reduction in taxation at these top levels.

The right hon. and learned Member for Surrey, East (Sir G. Howe) said that a reduction from 83 per cent. to 60 per cent. would cost £120 million. Obviously a reduction from 83 per cent. to 70 per cent. would cost only half that figure.

I am glad that the right hon. and learned Gentleman alluded to what the Irish Government have done in this sector. This shows what can be done—and by extension it shows how Scotland is being cribbed, cabined and confined by this monolithic unitary economic State.

Theret is in Scotland a curious thing called the Scotland is British Campaign, comprising a motley number of business men and a token trade unionist. This fine body of men point to the joys and benefits that flow to Scotland from belonging to the economic union called the United Kingdom. I ask them whether one of those joys is high taxation at the top levels current in the United Kingdom, or whether they would prefer those lower levels of tax that prevail in other small European countries.

At a time when public expenditure within the Secretary of State for Scotland's authority is scheduled to fall from £3,408 million in the current year to £2,850 million in 1978–79, and when current and capital local authority expenditure in Scotland in the next two years is scheduled to fall from £1,783 million to £1,508 million in 1978–79, why does tax in Scotland not also fall? I am rapidly coming to the conclusion that this House and this Treasury no longer have any moral right to levy any taxation in Scotland at all. We all know the famous two-centuries old phrase, that there should be no taxation without representation. Scotland may have representation of a sort in this House, but that representation is not listened to or observed. I refer particularly to last week's vote, when Scottish Members voted by a majority of more than two to one for the devolution Bill and when, at the same time, the weight of Members representing English constituencies steamrollered flat the wishes of Scottish Members and the overwhelming wish of the people of Scotland.

The moral right of this House to tax people and companies in Scotland has been seriously, and I believe fatally, eroded by its continuing failure to take into account the genuine aspirations of the people of my country. If this House is in process of forfeiting its moral right to tax people and companies in Scotland, it will most assuredly soon lose the legal right so to do, when the majority of the people of Scotland show that what they wish is a Scottish Parliament with full control over Scotland's economic and financial affairs—a Parliament whose taxation legislation adequately and properly reflects Scottish representation, a Parliament with power to reduce taxes, and a Parliament that will become worthy of the ancient nation of Scotland.

7.45 p.m.

Mr. Raphael Tuck (Watford)

I apologise to my right hon. Friend the Chief Secretary to the Treasury for the fact that it was impossible for me to be here for the greater part of his speech.

I wish to call to his attention the fact that our taxation system bears very heavily and unjustly on certain sections of the population that are least able to bear them and bears unequally on other sections of the community. I wish to highlight three instances of this unjust and unequal situation. Let me take the case of a married man who has reached the age of 60 and falls ill. That man may have worked from the age of 20 and by the time he is 60 may have been able to save enough money to produce an unearned income of £3,000 a year and at the same time obtain earned income of £4,000 a year. That gives him a total of £7,000 a year.

I have calculated the position by taking those figures. If I am wrong I hope that the Chief Secretary will correct me. I calculate that on that figure of £7,000 for that man of 60, after his allowances as a married man, he will pay tax of about £2,586.75p a year. Therefore, his net income will be £4,413.25p for himself and his wife.

If at that age he falls ill and is retired and has no pension, the £4,000-a-year income will disappear into thin air. He will then receive only £3,000 a year gross unearned income. He will thus receive £1,400 less, in gross income terms, than he was receiving in net income under the earlier situation. He is taxed on that sum. and indeed he has to pay a surcharge. I then calculate his tax to be £907.50, making a net income of £2,092.50p compared with the figure of £4,413.25p when he was earning.

Even if that man were not taxed at all on the sum of £3,000, he would still be earning £1,400 less than he was earning before, but he is taxed on the figure of £3,000. Therefore, he will receive less than half the income he enjoyed before. In my view, that man should not be taxed at that level of income. If such a man were receiving £10,000 a year, he would be able to pay the tax on it, but at the level of £3,000 he should bear no tax. That man is now being taxed, and he cannot bear it.

Furthermore, he is being taxed at that figure at a time when he is at an age when he needs a little more comfort than a man would need at the age of 30 or 40. A man of 60 certainly needs more heat in his home, because we hear about so many cases of hypothermia.

I hope that one day my right hon. Friend the Chief Secretary will be an old man—indeed, I hope that all Ministers on the Treasury Bench will have the fortune to become old men. They will then realise that at that age they need more comforts than do younger men. If my right hon. Friend had an income in earlier years of £4,400 net, surely he would not then like it to go down as low as £2,092 net in later years. I ask him to consider greatly raising the threshold from the present figure.

Next, I wish to draw attention to the discrimination that is now practised against the self-employed. Let me take the case of two men, one who is self-employed and the other who is an employee. Let us call them Mr. Employee and Mr. Self-Employed. Let us assume that they both start work at the age of 20 and that Mr. Employee puts a certain amount, as he has to do, into national insurance. This, of course, is added to by a greater contribution from his employer. That situation rolls on until the man is at retirement age. When retirement age arrives, Mr. Employee will then receive a pension of £3,000 a year.

Let us then take the case of Mr. Self-Employed. He also puts aside a certain amount, but has to put aside a far greater amount than does Mr. Employee, to reach the figure of £3,000, because Mr. Self-Employed does not have an employer behind him to contribute a large sum. Mr. Self-Employed, who has put aside a much larger amount than Mr. Employee, then reaches the age of retirement and is also able to receive, flowing from the amounts he has put aside, a sum of £3,000 a year. Both gentlemen are taxed—but Mr. Self-Employed's income is taxed as unearned income, while Mr. Employee's is taxed as earned income. That situation is completely inequitable and there is no possible justification for it. It might even be agreed that because Mr. Self-Employed has put more in he should be able to get more out. At any rate, they are both getting £3,000 a year and they both should be taxed in the same way. They both put aside their money for their future years, and when they have to retire one should not be discriminated against in favour of the other.

Finally, I take the case of journey to work. This has been a controversy for a long time. A person is not allowed to deduct from his taxable income the amount that he spends on travel to work, because the law says that it has to be necessarily, wholly and exclusively in respect of his work. Therefore, part of it is in respect of going to sleep at his home, and he cannot take off the expenses. A Member of Parliament, for example, who goes from his home to Parliament and back, cannot deduct that cost, as expenses, from his taxable income.

In my view this should be revised. The test should not be whether it is wholly and exclusively attributable to his work; it should be whether, if he did not have the employment, he would undertake that journey. If the answer is "Yes", he should not be allowed to deduct it, but if the answer is "No", it means that he is undertaking that journey because he had that employment, and if he is incurring expenses because of his employment those expenses should be deductible.

As I am a Member of Parliament, I should like to state at once, to allay any suspicions that I have an interest in this, that I have no interest; I make the journey to my home in Sussex by car. That is taxed, so I have no interest. But one of my hon. Friends who has been a Member of Parliament since 1975 lives in Aberdeen, and he will have to pay about £700 more in income tax than he paid before because he is not now allowed to deduct the cost of his journey home and back as a taxable allowance. I regard this as inequitable and unjust. The test should be whether it is because he is a Member of Parliament or an employee that he makes the journey. If that is so, he should be allowed to deduct the amount.

After all, a barrow boy, who works from home, is allowed to deduct his expenses for the journey to market and back, where, incidentally, he makes a lot of money and possibly fiddles quite a proportion of his income, whereas a Member of Parliament or an ordinary worker cannot. I ask my right hon. Friend to consider what I have said and to see whether he can do anything to alleviate these injustices, which our taxation system unfortunately involves.

7.53 p.m.

Mr. Percy Grieve (Solihull)

We have had an interesting and thoughtful debate. I congratulate the hon. Member for Watford (Mr. Tuck) on the three cogent points he has made, and I congratulate also the hon. Member for Islington, South and Finsbury (Mr. Cunningham) on his thoughtful contribution.

I want first to deal with the intervention that I made early in the speech of the Chief Secretary. I say to the Chief Secretary, with good humour, that he did what an advocate with a bad case always does—he avoided my point and answered a question that I had not asked. I did not suggest to the House, nor did I suggest to him, that over-taxation was the cause of all our ills. I suggested, as have many other hon. Members, that it is an important cause of our present ills.

I shall outline briefly four reasons why, in my view, this country is suffering grievously from the dangerous levels of direct taxation—and in this I echo the Chancellor himself. The first is the demoralisation that comes from the diminution of differentials. Member after Member has pointed out that if we continue to erode differentials—and they are now being eroded not just by taxation but by the pay pause—there will be an erosion of incentive, except that incentive which lies—and I concede this at once—in the pride of a man in his own achievement.

I do not denigrate or under-estimate that, but the man who takes pride in his own achievement and his own work may well find that when he gets home late at night to his wife she says to him "Why have you remained so long at the office? Why are you undertaking this enormous burden of extra work when all it brings into the house is the price of a few more jars of Continental Nescafe?" This happens. I hope that I make that point cogently to everyone here, and certainly to everyone who runs a house or who has to help with the housekeeping in this day and age.

Second, as my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) pointed out, salaries enormously in excess of those now available in England are being paid in every country with which we are in competition, and in every one of those countries the level of direct taxation is drastically lower than ours. Frequently I have occasion to go to France, as many of my hon. Friends know. In France it is impossible to compete with one's colleagues in business, in the professions and in politics, in the hospitality one can offer them and in the way that one can live with them and make friends, because of the tremendous differences in the level of direct taxation in our two countries.

The result is that people are emigrating and we are losing some of our best brains and some of our best men and women. I was horrified the other day in my constituency when a youngish man at the top of his profession told me that he wanted to leave for one of the great Dominions, and asked for my assistance in obtaining the necessary permissions from the relevant High Commission. This will continue at an increasing rate if we do not recognise the importance to our community of the entrepreneur, of the executive, of the talented, able and hardworking man.

My third point is one on which there has been enormous emphasis in debate after debate in recent weeks—the effect of over-taxation on investment. A large part of the funds for investment which were available when this country was becoming great and rich and was building up its industry came from the savings of people whe were able to save because they were not taxed as much as they are now. I ask the Chief Secretary to bear this in mind, because one of the reasons why we are failing in investment is that the individual no longer has the money to invest because it is being taken by the tax collector to pay for the over-expenditure of the State.

Finally, there are British men and women all over the world—in such places as Hong Kong, the Gulf States and South America—earning their living and putting money aside for their retirement. This has been so for centuries, and for centuries those people have returned to make their homes in their own country in their retirement with love in their hearts and a desire for their native heath.

But they are no longer able to do so, and that is not only a loss in what one might call senior manpower in this country; it is a loss in investment, because no longer dare they bring their money back here, and no longer dare they suffer the appalling decline in their standard of living which they would suffer if they came back to this country.

No doubt, many of my hon. Friends and Opposition Members will know of other examples of the effects upon our economy of the vicious scale that our taxation has now attained.

In November—by coincidence, only six days before the Chancellor said that taxation had reached a dangerous level—I put down a series of Questions to the Chancellor of the Exchequer to ask what income after tax was now necessary to produce an income of equivalent purchasing power to £1,000, £2,000, £3,000, £5,000, £7,000 and £10,000 a year in a series of past years.

The first year that I selected was 1939. I shall give some of the figures, because they reveal the level that our taxation has now attained and the effects of it. In order now to have an income with a spending power equivalent to an earned income of £1,000 in 1939, a married man with two children would have to earn £13,461 a year. Were his income all from investments, he would need to have £25,256 a year.

I go now from the realm of the practical to what almost seems the realm of fantasy. A similar family man with an earned income that gave him, in 1939, a spending power of £10,000 a year would now need to earn £220,534 a year to give him the equivalent spending power. Were his income all from investments, he would need £1,810,634 a year. Perhaps the Treasury Minister will tell us at the end of the debate how many people in Britain now have an income of £1,810,634 a year. Yet a man with £10,000 a year before the war, as we all know, was far from being a millionaire.

I turn now to the effect of this Government's policies during the past two years, since they also can be exemplified by the figures that I obtained. A man with earnings of £2,000 a year in 1974 would in November 1976, after two years of Socialist Government, need £3,216 a year in order to have the same income, in terms of purchasing power. A family man getting on in business with £7,000 a year in 1974 would, in November 1976, have needed to earn £12,346 a year to break even. Moreover, were his income all from investments, he would have needed £14,129 a year—that is, double the investment figure that he would have needed two years before—and who in this country has had that?

You asked us not to take too long, Mr. Deputy Speaker, and I shall do my best to bring my speech to a quick con- elusion, but in the light of the figures that have been given I wish to dwell for a moment on the lot of those to whom the hon. Member for Watford referred a few minutes ago—the lot of the retired, of the elderly, of widows, and especially of the retired self-employed and their widows.

Everyone in this country now knows that the only conceivable way by which, in a collectivist State, one can provide for one's future is through a pension. But that is not how those who are now in their late 70s, their 80s and their 90s saw their future when they were providing for themselves. As the hon. Member for Watford said, they provided for their future by putting aside some capital, investing it and saving it, providing lifeblood to British industry.

Those are the people whom this Government have deliberately penalised. I say "deliberately" because that is the fruit of the Chancellor of the Exchequer's promise at the end of 1973 to squeeze the rich "until the pips squeaked". Moreover, it is not only the rich whom he has squeezed—if there are any rich left, and, having looked at the figures, one wonders about that—in my constituency there are many retired people living on the savings of a useful and fruitful life. They have to pay the investment income surcharge at over £1,500 a year, and so do their widows after them. There is many a widow now who cannot live save by selling the capital on the income from which she has relied for her living.

There are many who foresee the day when, if they live long enough, they will have no money left. These women, who have given their lives to their husbands, and whose husbands gave their lives and savings to their country in industry—and, no doubt, in the Services in their time—as well as in many other ways, look forward to the day when, if they live long enough, their capital will be gone and they will be dependent on the local authority.

There may be hon. Members on the Government side who would like to see these people dependent upon the local authority. I cannot believe that there are many such, but possibly there are some. I ask Ministers on the Treasury Bench to bear in mind the lot of these people. When I write to Treasury Mini- sters, as I constantly do, on behalf of that class of person, I receive a cruel and heartless reply, to the effect that "They are cushioned by their capital. It does not matter. They have some capital to fall back on." If they have to sell a tranche of capital every year, for how long will they have any capital to fall back on?

Is that the way to encourage thrift? Is that the way to encourage saving? Is that the way to encourage the qualities that will make us great? Is that the way to encourage the investment that alone will give lifeblood to British industry? Morality, justice, expediency and the necessities of the economy all dictate and demand a drastic change in this Government's policies.

8.8 p.m.

Mr. Ron Thomas (Bristol, North-West)

I wish at the outset to take up one of the points just made by the hon. and learned Member for Solihull (Mr. Grieve) and which was made earlier by the right hon. and learned Member for Surrey, East (Sir G. Howe) and several of his hon. Friends. I refer to their constant theme that the levels of direct taxation in Britain have a distorting effect upon incentives. The Opposition constantly refer to what they call this disincentive effect, the suggestion being that there are thousands of innovating entrepreneurs who would be ready to regenerate British industry and do all manner of wonderful things if only the level of direct taxation were reduced by some amount or other. Not for them patriotism, of course, because we are told that they are all rushing overseas. Not for them the idea of doing a day for Britain, or a year for Britain. For them, it is not the principle; it is the money, because it seems that they are all leaving these shores for sunnier climes.

Is there any good evidence, apart from all sorts of assertions, that our direct taxation system has a disincentive effect? This matter was discussed in considerable detail by the Radcliffe Commission—the Royal Commission on the Taxation of Profits and Incomes. I shall read a couple of lines from the Commission's conclusions because, whether right or wrong, at least its discussion was based on considerable investigation and inquiry rather than upon assertion.

Mr. Grieve

I cannot be definite about the date, but was not the Radcliffe Report published about 20 years ago?

Mr. Thomas

I readily accept that it was published about 20 years ago, but similar arguments to those that were used by the hon. and learned Member were being used at that time. I do not suppose that there has ever been a debate on a Budget, from the time of Pitt onwards, without the Tories talking about the disincentive effect. Let us face that. The Royal Commission said: Such rates are criticised as tending to repress effort and to discourage the taking of risks. That is exactly what the hon. and learned Member said, and the Royal Commission was responding to similar complaints that were being made then. It went on: Probably they do, to some, though quite an unascertainable, extent. All heavy taxation may be said to have this repressive effect, just as, though again to an unascertainable extent, it tends to stimulate effort by diminishing the individual's disposable income. But if we are asked to infer from this that the heavy rates have any special disincentive effect upon the receivers of the higher levels of income, so as to justify a shifting of the existing weight of taxation from these ranges to lower levels of income, we are bound to reply that we see no evidence that the higher income earners are specially affected by disincentive.

Mr. Costain

Has the hon. Gentleman never known a constituent who, when asked why he did not work overtime, said that the overtime pay would all go in income tax? Is the hon. Member so out of touch with working people that he has never had that said to him?

Mr. Thomas

If the hon. Member has a constituent who says that, he should spare the time to explain to his constituent that unless he is getting more than £7,000 a year, only 35 per cent. of any marginal increase in income can go in income tax. That is the position, and I am sure that the Minister will confirm it. I have discussed this with workers as part of my job in the university extra-mural department. I have talked with them about the whole question of overtime and the incidence of income tax. The majority of workers, when faced with that situation, have to do more overtime, not less.

Much has been said by the Opposition on the matter of choice. They say that money should be left in the pockets of the workers so that they can choose whether to spend the money at the Dorchester or to buy the kids' school dinners. Working people do not have a choice of how to spend their money, because it is already committed to rent, food, and such things. They do not say "I do not know whether to buy the wife a diamond tiara this week or to go for a month to a sun-drenched island"—as do hon. Members on the Opposition Benches. They and the people they represent are the ones who have the choice. That is why, in the whole history of economic thought, people such as Marshall have flogged this idea—because the wealthy have choice.

I must have frightened the hon. and learned Member for Solihull to death, because he has left the Chamber, but he said that there was little personal saving, because of the high rate of taxation. He had better check the statistics. I hope that the Minister will show them to him. He should see Economic Trends for November, because he would see that both the level of personal savings and the savings ratio are higher than ever. There may be all kinds of reasons for that, but that is the actual statistical record.

The hon. and learned Member for Solihull then said that because there were insufficient savings we were not getting capital investment. But what happened under the Tories? What happened with the Barber hand-outs that were given to all those wealthy people? That money did not go into capital investment or manufacturing industry. The level of capital investment continued to decline.

There was the argument that part of the conflict at British Leyland is probably caused by direct taxation. I believe that a great deal of the conflict in British Leyland and in British industry generally is due to the social contract and the freeze on wage increases. To sustain the other attempted argument one has to explain why, under a Tory Government, with lower levels of direct taxation, more days were lost through industrial disputes and conflict than have been lost during the last two or three years. That takes some explaining away.

The Chief Secretary has already shown up, refuted, and, in my judgment, completely demolished the argument that Britain, in terms of direct taxation, is more heavily taxed than any other country. Again, if one looks at the November issue of Economic Trends and takes into account income tax and national insurance contributions, one finds that Britain is nowhere near the most highly taxed country in the world. As the Chief Secretary pointed out, the figures have been given to us this afternoon, and that is the end of the story.

It matters little how much taxation one has to pay if, when one receives one's wage packet, one then has to pay for health, education and a whole range of services that are otherwise provided by the public sector. I do not want to pay less income tax if that means that we shall no longer have a free National Health Service. These things are important. Income is a combination of the money that one has left in one's wage packet or salary cheque and that which is provided in the social wage through a whole range of public services such as education, and health.

The hon. Member for Cornwall, North (Mr. Pardoe), representing the Liberal point of view, more or less suggested that we should get rid of income tax and go on to VAT. Of course, one could have a progressive form of VAT on certain items. Rolls-Royce cars could be taxed at about 200 per cent. But any kind of VAT on expenditure must hit the poorer sections of our community far harder than the wealthy ones. That is why the wealthy and their representatives opposite want an expenditure tax, VAT or some such thing. They know quite well that such a tax hits the poorer members of society and leaves the wealthy that much better off.

The right hon. and learned Member for Surrey, East talked about the level of direct taxation and public expenditure. Of course, those two cannot be divorced. We on the Government side do not suggest that that can be done, but some of us have repeatedly pointed out the indefensible system that spends between £4,000 million and £5,000 million a year on people not in work. A large chunk of our public expenditure borrowing requirement exists because of a capitalist system that fails to find jobs for at least 1½ million members of its working population.

We have heard a great deal about other countries and how the innovating entrepeneurs there are better and higher paid, and are making a far better job of things. In terms of employment they are not. There are over 1 million unemployed in West Germany—and that is after sending back about 1 million immigrant workers. There are 16 million unemployed in OECD countries. So, those innovating entrepeneurs are not making a better job of it.

The right hon. and learned Member for Surrey, East also talked about the switch to indirect taxation. He said: "Pay as you spend and not as you earn. Give workers a choice" Few working people in this country have any choice about how they spend their money. It is already committed to food, housing, and so on.

We also had from the right hon. and learned Gentleman crocodile tears about workers having to pay this and that other rate of tax, but he represents a party that would cut all subsidies, push up rents and push up the price of food and goodness knows what else. Those crocodile tears leave me unimpressed.

Everyone on the Government Benches is concerned with a situation in which workers on a low level of pay must pay a marginal rate of tax of 35 per cent. I appeal to the Government to give careful consideration to the suggestion in the TUC's latest economic review for a more progressive direct tax system. Marginal income used to carry progressive rates of tax, with, for instance, the first £200 of income attracting tax at 2s. in the pound, the next £200 at 4s., and so on. The TUC suggests that the Government should consider reducing the tax impact on a new first band of taxable income.

It is indefensible that a married couple with two children and a wage of £30 a week should be paying a marginal rate of tax of 35 per cent. and that this rate should apply right through to salaries of £7,500 a year, or even more, since the wealthy members of our society use accountants and the tax avoidance businesses that are springing up for advice on their insurances and their mortgage relief. They can probably earn up to £8,000 a year before they start paying higher rates.

The TUC suggests that tax bands should be reduced, that the threshhold should be increased, or that tax relief should be allowed on national insurance contributions—or a mixture of all three.

I appeal to the Government to consider introducing a wealth tax as soon as possible. There is plenty of evidence that what should be classed as income and should, therefore, be taxed is still being converted into capital. Even under the so-called price controls, there is plenty of evidence that firms are making scrip issues of shares and the like, rather than paying dividends, which would be taxed. There are many cases of income which should be taxed being converted into capital, which is not taxed. This is still happening.

I refute the suggestion that our system of direct taxation has a disincentive effect or is the great burden that hon. Members opposite suggest. I strongly believe in direct taxation, based on ability to pay. It is not possible to have an expenditure tax based on ability to pay.

I suggest to those who believe that the wealthy members of our society are overtaxed that they go to the hotels and clubs in London tonight and look at the sort of obscene expenditure that goes on night after night in this city and other parts of Britain.

8.23 p.m.

Mr. Ralph Howell (Norfolk, North)

I shall not follow the hon. Member for Bristol, North-West (Mr. Thomas) except to say that his arguments have convinced me more than ever that we should move away from direct taxation to indirect taxation.

I am sorry that the Chief Secretary is not here. I wanted to congratulate him on his fine performance in standing on his Socialist head. I know that it was not appreciated by his hon. Friends, but the right hon. Gentleman is one of the brighter members of his party and he has given us considerable encouragement. He and the Chancellor of the Exchequer are gradually being weaned away from the sacred Socialist cow of high income tax.

That is encouraging, but I doubt whether they will be able to do nearly enough to reverse the trend of taking increasing amounts in taxation which has been going on for so long. As my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) pointed out, it would need a reduction of about £4,000 million to stop the rot.

The Chief Secretary took me to task for asking a number of Questions in an attempt to prove that we have the highest rates of income tax in the world. He said that I should also take into account the national insurance contributions. He did not answer me very well and it was unfair of him to produce that sort of answer. He should have pointed out that other countries that have a higher combined total pay very much larger family allowances and other benefits from those higher contributions. The right hon. Gentleman should not try to dodge the issue by giving a biased and unfair answer.

A massive switch should be made from direct to indirect taxation. I am not addressing hon. Members opposite so much as my own Front Bench. That is the way ahead for our party. It is no good tinkering with this. When we have the opportunity to put our policies into operation, we should have the courage to halve the revenue from income tax.

We have a starting rate of 35 per cent. and a top rate of 83 per cent. That gives us a mean of 59 per cent., which is more than double the mean rate of our competitors. Until we halve our rates of income tax, our industry and people have no chance of competing in world markets. The incentive is not there. I urge my party to take a really positive stride and have a starting rate of no higher than 15 per cent. and a top rate of no more than 50 per cent.

This could be done by switching from direct to indirect taxation. It would not necessarily mean any loss of revenue, although we should probably be able to tax ourselves less heavily as a result. We should also raise the tax threshholds considerably. The revenue from income tax this year is about £15,000 million, and £7,000 million of that will come from people who are earning less than the average wage. What possible sense can there be in this?

Everyone on this side recognises that we are operating a totally crazy taxation and welfare system in which some awful things happen and they discourage people in all walks of life. For example, if a man with two children increases his income from £35 to £45 a week, he will be paying a marginal rate of 94 per cent. Of that £10, the family will receive only 58p. What a crazy situation. If a similar family increased its income by £30 a week, it would be left with only £4.01 more than it was receiving previously. That is horrifying.

I draw the attention of the House to two disturbing letters that I have received from constituents in the past two or three days. One person writes that her income consists of £735 from her pension and £504 untaxed interest. She has been charged income tax of £176.40. She writes: I am 61 years old, unmarried, and this excessive income tax demand has really reduced me to below the poverty line. What a pitiful situation that this country cannot organise its affairs in a better way than that.

The second letter states: I am aged 63 and have been widowed for six months. I have a small occupational pension and my total income amounts to £28 weekly. The Government claim £5 of this and I am expected to keep a roof over my head, keep warm and fed on the remaining £23. It is not merely shameful, it is criminal that we allow that sort of thing to happen. We are driving more and more people away from independence and forcing them to rely on the State. That is what a great many people in the House are deliberately setting out to achieve. That is what those who want to achieve complete State control are aiming at.

I draw the attention of the House to the remark made by the Chief Secretary about some of my colleagues who, he says, harp on about scroungers. I do not take that approach. I am concerned that practically the whole working population is demoralised by the present state of affairs in which it is virtually impossible to better oneself. It seems that we are on a huge treadmill.

I represent a low-wage constituency Probably half the people in my area would be better off if they did not bother to work, yet they continue to do so. We are an extremely conscientious nation. Our people would rather work than not and they continue to work. However, it is time that we woke up to the present situation. It is time that we realised that we shall never get out of the appalling plight that confronts the country until we dramatically revise our taxation and welfare system.

We must recognise that the Government will not be able to do much in that direction. Too many of their supporters are intent on keeping the restrictive policy that is doing so much to lead the country down the road to complete State control. That is what it is all about, and that is why the Government will be unable to make any real, substantial changes in the forthcoming Budget or in any other Budget that they may formulate.

8.33 p.m.

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

One of the great troubles about this annual essay competition is that we go in for a great many exaggerations and hope to prove general points on the basis of particular cases, including cases of genuine hardship such as the hon. Member for Norfolk, North (Mr. Howell) and other hon. Members have mentioned. We then try to find some sort of correlation between the rate of income taxation and our national economic decline. On balance, this is not particularly fruitful.

When we talk about the burden of income taxation and reaction to it we are over-simplifying the situation considerably. If we think in terms of the average family and its attitude to taxation, that is a generalised phenomenon.

If we spoke to people who live in Staffordshire, from where I come, they would probably be talking about the prospect of a 30 per cent. increase in their rates. If we spoke to people who live in London, we would probably find that they are talking about an appalling increase in their electricity charges. It is the burden of one tax or price increase when compared with another that adds up to a total that undoubtedly is becoming quite frightening. If one asks how much income tax they pay—for example, the chairman of a company to whom I was talking yesterday was complaining about the burden of taxation—they would not have the slightest idea.

In general, the cause of the dissatisfaction is not so much the burden of taxation or prices as—the Chief Secretary said this, too—the failure of the underlying economy to produce a general income which makes tax contributions not so burdensome.

That applies to the more specific case referred to by my hon. Friend the Member for Bristol, North-West (Mr. Thomas), who has now left the Chamber—my hon. Friends seem to have a knack of making speeches and then leaving—as the innovating entrepreneur. I am sure that such people are not constrained by the high level of taxation.

Mr. John Page (Harrow, West)

Yes, they are.

Mr. Cant

The hon. Gentleman seems to know all the answers. I am just putting my humble point of view. In effect, they are constrained by the relatively low level of salaries. We had a massive debate in this House about the brain drain of doctors because of high tax levels. But, as was pointed out, doctors went to the United States not for lower tax levels but for three times the income. That important factor should be borne in mind.

I should like to give a couple of warnings to the Minister of State who is waiting to deliver his peroration. We know, because we read it in the newspapers, that we are likely to get a reduction in income tax of between £1 billion and £2 billion.

My hon. Friend the Member for Salford, East (Mr. Allaun) said that tampering with the thresholds, the base rates, having new rates and so forth, will be desirable from the point of view of incentives and of general welfare. If the public sector borrowing requirement is to be not the IMF's £8.7 billion or the National Institute of Economic and Social Research's £7 billion, but possibly Phillips and Drew's £6 billion to £6.5 billion and everything works out nicely, the Chancellor will have between £1 billion and £2 billion to give away.

The great danger is that, if the Chancellor uses what is undoubtedly theoretically the best route for increasing demand within the economy—that is, reducing income tax—he may fall foul of what my hon. Friend the Member for Bristol, North-West referred to as the savings ratio. But my hon. Friend was out of date to the extent of about 4 per cent. when he said that the savings ratio had never been higher. It is now possible that the savings ratio has fallen from about 14¼ per cent. to 10 per cent. If, in consequence of the Chancellor's beneficence in reducing taxes, we save them—we may do that, because we live in strange times—a lot of what he hopes for by way of incentives and generating more employment may be lost.

Many hon. Members opposite have said that the Chancellor should accelerate the present change from income taxation to indirect taxation. That is splendid in theory but unfortunately it cannot be done rapidly. The Chancellor should not go for the income tax concessions of between £1 billion and £2 billion for which the TUC is pressing if that will mean increases in VAT and Customs and Excise duties. That would have a serious impact on the retail price index.

I know that it is said that additional indirect taxation of £800 million adds only 1 per cent. to the RPI, but people are even more sensitive to increasing prices than they are to unemployment. My right hon. Friend should turn his back on that option. He might help the RPI if he let the pound appreciate, stopped the Bank of England buying dollars and allowed the minimum lending rate to fall a little faster. That would help the RPI and make our lives much happier.

8.42 p.m.

Mr. John Wakeham (Maldon)

It is reasonable that a good deal of any debate on personal taxation should be devoted to the effect of high taxes on incentives at all levels of income. Cases have been made out about those on all levels, but there are other problems connected with direct taxation with which I want to deal.

The first is the effect of high direct taxation on industrial costs. It is very expensive for a company to change salary levels, giving people increased responsibility and so on. At one end of the income scale, to increase the take-home pay of a senior executive by £20 a week one would have to increase his gross salary by about £5,000 a year. That is a much more expensive cost for the company. It is often inflationary and prohibitive. At the other end of the scale, it would cost an employer £18.35 a week to increase by £10 a week the take-home pay of a man earning half the average industrial wage. So direct taxation to an additional industrial cost. We should also recognise that many such increases would leave the employee no better off but would simply offset part of the effect of inflation.

Second, the whole cult of expense accounts and fringe benefits is a byproduct of a system of high direct personal taxation. I am sure that many executives would willingly give up their expensive Jaguars for Minis if they thought that some of the consequent saving would be reflected in higher take-home pay.

Thirdly, the whole business of high rates of direct taxation has produced and exacerbated many of the anomalies in our tax system. The situation has required the Inland Revenue to bring in countless amendments and changes, many of them extra-statutory concessions, which appear in a book published every year. Indeed, one could say that extra-statutory concessions have become a growth industry. From the day of William Pitt up to 1972, we managed with about 60 extra-statutory concessions. Since then, the number has nearly doubled. In addition, the Inland Revenue in practice makes a number of concessions, quite rightly, which are not included in the official list.

I believe that the Inland Revenue in many instances tries to find a fair way of dealing with relatively minor but nevertheless, to the taxpayer, important anomalies. It is up to the politicians to find a better way than exists of dealing with anomalies. The pressure of legislative time is such that we cannot deal adequately with them at present.

I am an accountant, and my professional body proposed to the Renton Committee some years ago ways of dealing with anomalies and extra-statutory concessions in an easy and effective way and which would not take up too much parliamentary time. I believe that those in the Inland Revenue and in the professions who are trying to work our tax system should be aided by Parliament in dealing with these problems.

The increases in high rates of direct taxation are shown in the report of the Inland Revenue published yesterday. The costs of the collection of tax are increasing. The cost of the collection of income tax increased by 42 per cent. last year, and is now about 2p in the pound. Part of the problem of these additional costs can be attributed to the unnecessary and unrewarding complexity of our income tax laws. Both the accounting profession and the Board of Inland Revenue have indicated willingness to solve the problems, and they look to us to give them the means to save the additional burdens of these complications, which are an added cost to our society.

8.48 p.m.

Dr. Cohn Phipps (Dudley, West)

The hon. Member for Maldon (Mr. Wakeham) very properly pointed out some of the anomalies arising from our system of very heavy progressive direct taxation. Many hon. Members who have spoken have dwelt upon anomalies. I think that there is a general consensus in the House that something has to be done about them. But the solutions offered in the debate have been very different, and it is of the nature of the solutions that I wish to speak.

I begin in all tax matters with what seems to me to be fairly basic and general premises. First, it has always seemed to me to be something of a privilage to pay high taxation. That may not seem so to many people who have always been used to paying high taxation, but if one pays high taxation it means, basically, that one is either earning or has more money than other members of society who are paying less in tax.

I start with the premise that anyone paying high taxes is, after all, likely to be a better off member of society than anyone else. But I equally take the view—I believe that it should form the basis of the Labour Party's approach to taxation—that we should not be taxing the creators of wealth as heavily as we tax the inheritors of wealth or those who in one way or another gain wealth without genuinely earning it.

I believe that the burden of taxation on earned income should be reduced and that the burden of taxation on unearned income of all kinds should be increased. I appreciate that the great mass of taxation will come from direct or indirect taxes upon persons. There are not enough rich people around. Even if we con- fiscated all the wealth that they possessed it would not make a major difference. But we can change the balance of our taxation in ways which would allow a reduction in direct income tax at the higher levels but which at the same time would continue to gather money from the unearned income that people received.

Unearned income is difficult to define. People can properly argue that money which has been put aside into savings, and upon which income tax was paid, and which in its turn earned interest or dividends, is perhaps part of earned income. But that is a different kind of income from someone who happens to inherit £500,000 from a dead uncle. I personally should like to see taxation levied on inherited wealth rather more than it is at the moment. We could then accept that earned income is partly in the form of dividends from money which is saved.

If we did away with the investment income surcharge what would we put in its place? One thing which has not been brought out strongly enough is the effect that investment income surcharge has on society as a whole. In recent years people with large amounts of money to invest have tended to look at capital gains rather than income. As a result we have had the boom in fringe banks, property and things of that sort.

That has not been an unnatural thing to do especially if one is taxed at 98 per cent. People will say "I may as well take a gamble or have a splurge". That has not been a healthy factor in the way that the private sector has invested. But investment income surcharge produces £280 million a year. That is the figure that I have received. It is a fairly substantial one. Capital gains tax produces £400 million a year. It is not unrealistic to ask "If this is a disincentive to sensible investment why do we not replace the investment income surcharge with a high capital gains tax?" Simple figures show that if £400 million is raised through capital gains tax at 30 per cent., then £666 million will be raised at 50 per cent. That is £260 million more, which is almost exactly the same amount of money that is raised by investment income surcharge.

Mr. Robert Boscawen (Wells)

Would the hon. Gentleman also raise capital gains tax on savings put into occupational pensions? That would be the only fair way of doing it.

Dr. Phipps

I was a member of the Select Committee on the wealth tax and we discussed the whole nature of occupational pensions. As the hon. Gentleman may know, I was in favour of taxing pensions which were unearned, as many pensions are. So long as they are not realised the element of pensions which are earned could be kept out of the capital gains tax net.

What I am talking about is realised capital gains and, with those realised capital gains, I am trying to balance what seems to be the disincentive at the moment to sensible investment. If the net effect is no different, it would make more sense to put it on capital gains tax and to take it off the investment income surcharge. My right hon. Friend might look at that.

Another matter about which I want to make one comment concerns overseas tax relief. I think that we are in danger of getting into an awful mess over this. We set up a relief on 25 per cent. of the salary which can be said to be earned overseas as an incentive both for people to go overseas and sell and, it must be admitted, as a way in which higher income earners can be given some relief.

We now have a situation where, having given that concession for a specific purpose, we have the Inland Revenue arguing that it should be for 30 continuous days overseas. Any company which required its salesmen to spend 30 continuous days overseas every time that they went to sell its products would not be likely to be a very efficient company. We also have the crazy situation where the Inland Revenue now argues that the travel costs should be classed the same as one's travel costs between one's place of work and one's home. This is nonsense, and I hope that my hon. Friend the Minister of State will speak to the Inland Revenue and make it clear that, if we intend to make a concession, it must be made a real concession. To suggest that the cost of an air fare to Tokyo and back should be taxed as if it were part of one's income is a ludicrous concept, and I hope that it will not be continued.

I return to my principal aim in this debate, which is to point out that, if we are to move away from direct personal income taxation, it is not sufficent, as Opposition Members have suggested, merely to regain this money by taking away subsidies to council house tenants or by reducing unemployment benefits. We have to look at the genuine immorality of our tax system which is also a genuine disincentive to achievement. I refer to the immorality of inherited wealth and what might be called gratuitous wealth gained by the fact of—[HON. MEMBERS: "Oil money."] Absolutely—money gained purely by the effect of increases in the value of shares, by people being left money, and so on. It is a strong disincentive. I have always felt that, if one's son was any good, he did not need the money, and, that if he was not any good, he ought not to get it.

If there is a problem in British industry, it is nepotism. Too many people are there because their fathers, grandfathers and great-grandfathers were there in positions of power. This cannot be good for British industry. By and large, it is unlikely that the sons of creative entrepreneurs will themselves be creative entrepreneurs. I have never heard it suggested that the sons of creative artists and musicians are likely themselves to be creative artists and musicians. I imagine that perhaps 2 per cent. or 3 per cent. may do, and I suggest that much the same figure could be applied to creative entrepreneurs.

With our inheritance laws, we endorse a system which perpetuates mediocrity and, in many cases, downright uselessness at the very top in industry. If we wish to change the nature of our tax laws by reducing direct taxation on the individual, the place to look for its replacement is in the gratuitous enrichment which far too many individuals get without lifting a finger for it.

9.0 p.m.

Mr. Tim Rathbone (Lewes)

I should like to divert from the points made by the hon. Member for Dudley, West (Dr. Phipps) and move from macro-taxation difficulties, upon which most hon. Members have concentrated, to some micro examples. It is perhaps appropriate to do so towards the end of the debate, because a very horrifying picture has been painted by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and many of my hon. Friends about the way in which business taxes impinge on large and small businesses, and even on whisky distillers, and how taxes on management, entrepreneurs and risk-takers are also damping the fuel that they can give to the prosperity of this country, as they are affecting others in industry and in service companies and agriculture.

I fear that from the Labour Benches there have been too many of the silly arguments about workers—who are workers and who are non-workers—and divisive arguments about the Savoy, and so forth, which are based on divisive political beliefs. However, from that criticism I should like to eliminate the hon. Member for Watford (Mr. Tuck), and I want to spend one moment, and one only, on the problem that he identified. It was also identified by my hon. and learned Friend the Member for Solihull (Mr. Grieve). I refer to the taxation of the retired—taxation that at present is at too high a rate, on a lifetime of hard work and often a lifetime of thrift.

Like other hon. Members, I have had many letters on this subject recently. I should like to quote from one in particular, because it makes such a clear and precise case about the difficulties in day-to-day living faced by one family. A constituent wrote to me saying As Budget day draws nearer, I feel I must write to you in the hope that you will use every effort to obtain a reduction of taxation. I was born in Dover in 1892. He is, therefore, 84. When the State pension was increased last November, the Inland Revenue people promptly dashed in with a new coding on a month 1 basis, causing my monthly tax on my former employer's monthly pension of £38.28 to be increased from £3.25 to £8.10—an increase of £4.85. Hon. Members can easily work out that that is an increase of about 150 per cent.

My constituent went on to explain that his pension came from ex-employers—one company that took over a previous company for which he had worked for 29 years. The previous company started a scheme through an insurance company in 1946, to which he contributed until he retired in 1963, when the capital sum was used to purchase a life annuity producing £234 a year, which works out at £4.50 a week.

Those two pensions and the national insurance weekly pension of £26.20 are his total income, though, as he goes on to explain, his wife has savings and investments bringing her in £179 a year—which is the huge total of £3.44 a week. He continues You may be sure it is extremely difficult to meet escalating prices and make ends meet. Further explaining some of the bills that he has had difficulty in meeting, he says, This winter I have had to borrow to meet these coal and electricity accounts and in fact have borrowed £60 to pay the last account. I have never been in debt in my life so you can imagine how worrying things are. He volunteered for infantry service in 1915, was in the battle of the Somme in 1916 and returned home, after being wounded at Ypres, in April 1917. He adds I know there must be many people who are worse off than myself but I do think octogenarians like myself should be made able to enjoy some happiness in the late years of their lives, and a little less worry. What a mess our poor country is in. The Government must reduce expenditure so that absolute levels of taxation can be reduced. They must transfer taxation from earnings and savings to expenditure. That is the way back to a vital, vigorous and fair Britain.

9.4 p.m.

Mr. Robert Boscawen (Wells)

The last words that the Chief Secretary to the Treasury used warned us not to reward ourselves with tax cuts before they were earned. I know exactly what he means, and I understand that tax cuts cannot come out of thin air. The words that he used were symbolic of so much that is wrong with what the Labour Party and all that it stands for thinks on the subject of taxation.

Taxes are not really rewards, should not he regarded as rewards, and never will be rewards. Rewards are earnings from labour and skill, and nothing else. They should not be thought of as something that a benevolent State hands out to us when we are good boys and work hard. The fact that earnings from work are so depleted by tax and deferred pay, before an individual has to meet all the other burdens brought about today by inflation, is one reason for Britain's poor industrial performance.

Of course, industrial performance does not depend wholly on taxation. No one in the House has ever suggested that it does, although the Chief Secretary tried to pretend that my right hon. and learned Friend the Member for Surrey, East (Sir. G. Howe) had done so. But I am certain that it is one of the causes, and one that we could put right ourselves without great difficulty. It is suggested that it would not cost a great deal, in teens of income tax, to reduce the level on the higher rates, but politically it would be exceedingly difficult. I readily accept that.

We must say over and over again that it is through the failure of talent to break through in industry and to go all-out to seek skilled careers, career opportunities and freelance opportunities, that industry suffers. When I sit as a member of one of the Government's sector working parties—part of the great industrial regeneration in which we are supposed to be taking part—it is clear to me that what is really needed is a major effort to stimulate new management, new managerial talent, new risk-taking and entrepreneurial talent to come forward and take jobs and regenerate industry.

The high burden of taxation affects not only those people who are in the highest-paid jobs and who are paying the higher rates of tax. We must also remember all those people who want to get into those high-paid jobs but have been put off because there was so little differential in pay, after tax, between those jobs and their present ones. That is not the only reason why they are not coming forward, but it is one that we could put right if we set about it.

If the Chief Secretary continues to say that we have to get Britain's growth going again before we can cut taxes we never shall get growth going, because it will be too late. The stimulus has to come first. That is true in large and small industries, and nowhere is it more true than among the self-employed. The stimulus must come now if Britain's regeneration is to take place. That is the fundamental message of this debate.

9.9 p.m.

Mr. David Howell (Guildford)

I think it has been a good time to have a debate about the burden of personal taxation. Nowadays the Budget or the Budget decision-making process seems to he opening out into a more and more prolonged business, starting in January or February or even before Christmas and going on until June or July. Since everyone else is allowed a preliminary say in this matter, I do not see why Parliament should not also seek to put its views on record before final decisions on the tax side of the Budget are served up ready-baked on Budget day. The opening out of the Budget process is a trend that we should welcome, and today's debate has been a useful part in that.

Let me begin with one of the aspects of the burden of taxation which has been touched on this evening but which is perhaps more disguised than some. That is the enormous burden of administration involved in the personal tax system. The very timely production by the Commissioners of Inland Revenue of their 119th report, which was published yesterday and which is in the Press today, makes a good peg upon which to hang a few remarks. The report shows and reflects the widespread disquiet that one finds across the country about certain aspects of the tax administration.

I should like to think that Treasury Ministers also share that disquiet. The disquiet comes in two slices. First there is disquiet on the sheer complexity and size of the operation which is now dealt with. As the Commissioners point out, their budget has risen to a staggering £354 million for 1975–76, so that presumably during the current year they are pushing on to £400 million as the administrative costs of running the Inland Revenue. Although in an excellently-written report the Commissioners do not say so explicitly, it is clear that this is their ultimatum to events—that we cannot go on attempting to deal with complexity of this kind at such a gigantic cost.

We know what the administration problem is primarily. It is that we have a vast and predominantly manual system which is attempting to deal with millions more taxpayers who have come into the tax bracket and with the vast increase in those who have come into the higher tax bracket. We should aim to move out of this situation, not only by means of lifting the tax burden but by simplification of it. The first possibility is self-coding, on which we should be going all out. Down the line a little there should be a move to self-assessment so that we can begin to reduce to the sort of staff figures that the United States Internal Revenue Service manages to achieve. As the Chief Secretary knows, the IRS has roughly the same manpower as our own, but it deals with a considerably larger number of customers and an enormously larger amount of revenue.

I was disappointed that the Chief Secretary did not choose a day like today to indicate that there is some creative thinking going on in his Department about these matters. But instead he devoted his efforts to refuting, rather thinly, one or two of the points put forward from this side of the House.

Mr. John Page

I was listening intently to the point my hon. Friend made about the £400 million that the Inland Revenue costs to run. Does my hon. Friend have and idea what might be the cost of manpower concerned in the preparation of tax returns, from the company and individual point of view, to get the stuff to the Inland Revenue?

Mr. Howell

I should think that the compliance costs are quite enormous. The suggestion that a system of self-assessment would be more expensive is absurd. The whole answer to that is that under self-assessment the tax system would be simple. If the Chief Secretary was prepared to look at these maters constructively I think he would find that they were worth consideration and that they were matters for this Department and for his Ministers to examine carefully.

There is widespread concern on the question of powers. Some publications have suggested that the Government should be thinking about having a Minister more closely alongside the Inland Revenue. I think that was suggested in The Times. I do not share that view. There are obvious dangers about politicians getting politics into the business of tax administration. We must obviously avoid that. I hope that the Chief Secretary agrees on that score.

I do not agree with the fashionable ideas that are currently going the rounds for reorganising the Treasury by splitting it. That to me would add confusion and bureaucracy to the current situation. I would offer what might be the best answer—and this is a subject upon which a number of my hon. Friends, including my hon. Friend the Member for Horsham and Crawley (Mr. Hordern), have touched this afternoon—of giving a more permanent responsibility to a Committee of this House to safeguard the individual and oversee the operations of the tax Departments. There may be something there. The best hope for safeguarding our freedoms is the revival of the power and authority of Parliament.

The Chief Secretary had certain questions to ask on indexing. He had some exchanges with my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), who made clear, as I do now, that while there may be those behind us who believe in full-blown indexing, our view is that the principle to which we should adhere is that of truth in taxation. That is a straightforward view. All that it says is that we should establish by custom, if not by law, the habit for Chancellors of the future, one hopes the very near future, to make absolutely clear the reasons for allowing the real tax burden to rise, if that happens.

It is misleading when the Chancellor talks about hoping to reduce taxation. In the Chief Secretary's words, to bring us back to the real levels of last year a cut of £1½ billion would be needed. Anything less would not be a reduction. I agree with what Samuel Brittan has said in the Financial Times. It should not need a campaign in the newspapers, by the Opposition parties or people outside this place to persuade Ministers to follow what should be the basic principle of setting out for the public what is really happening.

There is no difficulty about it. We would expect the Chancellor for straightforward reasons to say why he is allowing the real tax burden to rise and by how much he hopes to cut the real increase, rather than use the highly misleading word " reduce ". We hold that view most strongly, and we hope to see some adherence to it by the Government in the coming weeks.

The one truth on which we are all agreed in this debate is that there has been a vast rise in the real burden, and it has fallen nowhere more fiercely than on middle management, skilled people and craftsmen. We believe that that is one of the most serious developments in the economy today. Of course, we do not argue, as the Chief Secretary tried to imply we were arguing, that that is the root of all evil. There is a whole range of problems to solve, but it is essential to solve that one.

We have support from all sorts of eminent citizens. As Hughie Scanlon has argued. There is an absolute need to restore differentials, not just for craftsmen but also for middle management and among the professions, engineers, doctors, accountants and other sections of the community where there has been loss of traditional relativities. Failure to use financial incentives as a means of motivation may significantly erode job performance. Compared with the widespread agreement on such matters, what the Chief Secretary said was by any standards a counsel of utter despair. Many people who read what the Chief Secretary said will share my despondency. He seemed to be saying that there could not be help for the middle management range unless there was to be help for everybody, but that as there could not be help for everybody on the sort of scale of which he was talking, because it would cost billions of pounds, there could not be help for anybody.

The right hon. Gentleman asked whether we could argue that there should be help for the higher income ranges without its being extended to everybody. It seemed to amaze him that some of us thought that possibly there could be such help, because it is in the higher income ranges, in middle management and among the supervisors and senior craftsmen that there has been a disproportionate sacrifice. If that is so, there is a strong and integrated case for benefit in the form of tax relief to be applied in those areas.

We are deluged with evidence. My hon. Friend the Member for Horsham and Crawley gave some graphic examples showing a drop in living standards of between 35 per cent. and 40 per cent. for middle and senior management in the past three years.

The Left—whose members do not seem to be present in the Chamber, although they had a spokesman present a little earlier—does its case no good at all by claiming that there has been a monopoly of sacrifice among blue-collar workers and manual workers. There have been cuts and disappointments in that area and the ending of the idea that living standards would go on rising indefinitely, but it is not in that area where the biggest sacrifice has occurred. Therefore, there is every justification for allowing substantial tax reliefs to seek to end the present demoralisation of middle management.

Let me deal with the mortgage relief restriction issue which has been running through our debates, and on which the hon. Member for Islington, South and Finsbury (Mr. Cunningham) commented. If the Government are seriously contemplating such a move and listen to the economic committee of the TUC, I ask them to think back to the pickle they got into last year. Do they not realise that when they are dealing with the higher rated taxpayers, it was found by the Board of Inland Revenue that in 1975–76 a total of 1,750,000 people were paying tax at the higher rates and paying investment surcharge—and the number is even larger at the moment. If it is suggested that the relief against higher rates of tax should be ended, many hundreds of thousands more people will be in that category.

In short, we are not talking about what, in the Chief Secretary's favourite phrase, are awkward problems involving "only a minority", but about millions of people. We have only to cast our mind back to last year to remember what happened over the fringe benefits issue. When they introduced their scheme the Government believed that it involved only a minority—just a few of the very rich, who should be made to squeal. But as soon as the provisions came in, they found that they were dealing, not with a tiny privileged group, but with a vast number of work people in a vast range of incomes. When that was discovered Labour Members came rushing from their meetings with shop stewards to tell the Government to call the whole thing off.

I urge the Government before they plunge into this new proposal to think very carefully. It would totally demoralise middle management and lead once again to another round of legislative chaos. If the Government do not restrict mortgage relief, I know what will happen. It will be presented by the Chancellor under the umbrella of his favourite phrase—namely "solid achievement". It will be presented as a great relief and concession to middle management rather as the decision to cut VAT from 25 to 12 per cent. was presented as a great achievement.

The truth is that every time a mistake is corrected by the Government, such as their mistake over VAT, and every time the Government do not do something silly, it is brought forward as a solid achievement. The Chancellor of the Exchequer used that rather interesting phrase in a recent interview with Keith Richardson in The Sunday Times. The right hon. Gentleman said So now we are taking far more notice of the industrial impact. When I put some of the VAT rates up to 25 per cent. in the 1975 Budget that was a mistake. I was interested to hear the right hon. Gentleman say that. He continued: But last year, when we looked at the possibility of ending the vehicle excise duty and putting up the petrol tax instead, there were all kinds of good reasons for doing it but the industrial implication would have been a flood of imports of small foreign cars and so we didn't do it. That's one solid achievement for the industrial strategy already, if you like. The truth is that the industrial strategy, which is the centre of everything we are concerned with in every job, seems to lie either in undoing what the Government have done, or in not doing what they have said they will do.

Behind all this there is a serious point. It is that the real industrial strategy starts with tax reductions—not of putting aside resources for industry, which is a phrase that falls often from the Chief Secretary's lips, but of putting them aside for the people in the industry. Industry is not a large block of soulless activities, but consists of people—managers, supervisors, blue-collar and white-collar workers—who respond to incentives and who want to get back to good jobs. Passionate feelings have been expressed this afternoon about the loss of jobs.

We are just as concerned about the situation. We try to turn a deaf ear to the patter that is so often heard to the effect that the Opposition policies will lead to more unemployment—even greater than the appalling levels we now experience. We do not accept that argument. We want to see jobs just as much as do hon. Members on the Government Benches, but where will the jobs come from? We do not believe that they will come in the foreseeable future from handling out vast grants and subsidies for the restructuring or rationalisation, let alone nationalisation, of huge industries.

We say that jobs will come from small firms, farms, new enterprise, local builders, wholesalers, manufacturers and commerce. They will come from small family firms. If we get these going again we shall see some pick-up in employment. But if these people remain in their present state, where it does not pay to take on anybody or to expand, because if they do they will run into severe financial difficulties, we shall never see the beginning of the recovery in jobs which we, as much as anybody else, would like to achieve. That is why in the coming Budget debates we shall emphasise the need to put more incentives back into business taxation on both the income and the capital side.

This afternoon the Chief Secretary told us that easing the higher tax rates would not cost very much, so he and his colleagues cannot say that we are being irresponsible in a budgetary and revenue sense. It is true that all these higher taxes on capital and on income could be substantially reduced, if not abolished, with little impact on the revenue at all. Some figures will, no doubt, be brought forward by Ministers, but in reality the overall effect will probably be to generate more income and revenue and to produce even a positive increase in revenue rather than a reduction. That certainly applies to the top marginal tax rate, the 83 per cent, rate.

I cannot understand why the Chief Secretary found it so agonising this afternoon to contemplate the prospect of cutting the 83 per cent. rate. It is an object of ridicule. It has nothing to do with serious fiscal policy. Our creditors in the world think us barmy. The Financial Secretary told my hon. Friend the Member for Norfolk, North (Mr. Howell), that only four countries in the world had a higher rate than our 83 per cent— Tanzania, Portugal, Egypt and Algeria—and below us on the list come Tunisia and Uganda. I do not think that it would be asking too much of the Government to get us just below Uganda on that list. That would be a start. I believe that it could be done without smashing up the whole social contract philosophy which the Chief Secretary believes is so essential to getting the deal.

I see the right hon. Gentleman's problem—that is the way he sees things—but I do not necessarily agree, and I think that he is being too sensitive. He could tackle some of these ridiculous rates and put some morale back into business and get jobs going again, without upsetting the deal or challenging his Budget constraints or revenue needs.

That is our first priority—if I may borrow a phrase which I hope will not be too embarrassing to Ministers—"to get the country back to work", on the farm, in the firm, in the High Street and right across the commercial and small business sector of England. That is the way we believe we shall do it. That is why we have no hesitation of putting as our first priority the need to lift the burden of business taxation on both income and capital. We say that straightforwardly and we have no doubt that that is in the interests of the vast majority of working people.

The second priority which goes with it—indeed, it is of equal importance—is to lift the thresholds. We all recognise, as does the Chief Secretary, that that is where the money is. That is where the big costs lie. The situation is appalling, and it has been described graphically by my hon. Friends this afternoon. It creates the most pathetic, impoverished circumstances for individuals. All hon. Members know the situation when a constituent comes to them with a badly printed pay slip and asks in total bewilderment how it is that on his modest income, which is way below average earnings, the deduction in the tax box can be quite so much.

It is a miserable story, and we have to get it right. We know that it costs an immense amount of money. The Chief Secretary does not need to tell us that. But we have reached a stage where taxation, which was supposed to be the wonderful instrument to carry forward Socialism, has now become the enemy of the poor. It is a direct attack on the weakest members of the community, and unless we can get it right we shall run into worse and worse difficulties.

What can the Chancellor do? I agree with my hon. Friend the Member for Norfolk, North that, when one really comes down to it, there is not much that he can do. Of course, he can do a bit to stop the situation deteriorating. We recognise that. He can, of course, see that the further real increase in taxation which will take place this year can be not quite so heavy as it would be if he did nothing. He can talk about that, and, if he is prepared to do so—and it will be shameless propaganda if he does—he can claim that as a reduction in taxation. But the truth is that there is no hope whatever of bringing down the level of taxation on the poor or on skilled craftsmen, middle management and those who work to create new jobs and getting tax levels back to sanity unless he and the Government think seriously more in terms of lower public spending and/or a switch to spending taxes. Those are the realities, as the Chief Secretary well knows.

Any real reduction in the grotesque tax burden which at present goes right down the line to the lower paid—even to the single man on £15 a week—cannot be financed without a further check on Labour's public spending ambitions. The sooner that truth is admitted and explained to his colleagues by the Chief Secretary the better it will be for our nation, the more quickly will jobs return, and the better will it be for all the 25 million workers in this country.

9.31 p.m.

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

The hon. Member for Guildford (Mr. Howell) made one point which I shall deal with at the outset. He accused my right hon. Friend of lack of creative thinking because he did not mention in his opening speech the difficulties of the present tax system, the costs of collection and the administrative burden of collecting such vast sums of money. I assure the hon. Gentleman that we are occasionally capable of some creative thinking. But this is obviously a problem which has bedevilled all Governments. I understand that the Government of which the hon. Gentleman was a member looked at the matter and came to the conclusion that they could do nothing about it.

The hon. Member for Guildford now tells us that it is Conservative policy to have what I think was called self-coding. It was called self-coding, not self-assessment. I am not quite sure what self-coding means, but it must be something on the road to self-assessment. I accept entirely that if we had a full-blown self-assessment system such as there is in the United States—which the Opposition now seem to favour—there would be fewer civil servants administering the system and the costs of administration would probably be lower, but the truth is that the costs would be transferred to the private sector and the individual.

For the ordinary employed person in this country, the tax system is extremely simple. It is probably one of the simplest tax systems in the Western world. The taxpayer is provided with a very sophisticated service at the cost of Inland Revenue officials who do all the calculations for him. If the hon. Gentleman cares to go to the United States and examine what the ordinary employee there has to do to work out his tax—doing it by a certain date, since if he does not he will pay a fine—he will see the full nature of the burden on the individual in the United States compared with the burden here in terms of administration costs.

One cannot have it both ways. Both systems are complex. The question is who must do most of the work. It is no good the hon. Gentleman shaking his head. That is the reality of the matter.

Mr. Rathbone

I assure the Minister of State and those whom he may have taken with him in his argument that that is not so. I lived and worked in the United States for eight years, and I never had any difficulty whatever in the self-assessment process. It is not the burden which he suggests.

Mr. Davies

The hon. Gentleman may not have had difficulty, but the burden upon the taxpayer is bound to be greater under a self-assessment system than under a system whereby the coding and deduc- tion work is done for him by the Inland Revenue. That is the point I make.

Moreover, the powers of criminal investigation in the United States are considerably harsher than they are here. I recall that when we introduced mild powers of investigation in the Finance Bill last year, the Opposition created a considerable fuss. If they want the kind of self-assessment system which the United States operates, they must accept very strict powers of criminal investigation such as are given to the Internal Revenue Service.

I turn now to the main points raised in the debate and the question of the burden of personal taxation. We could possibly agree on two points. First, there has been a shift in the burden of taxation in this country over the last few years from indirect taxation to direct taxation. In other words, the burden has gone towards direct taxes and away from indirect taxes. Compared with most Western developed countries we are probably raising more in direct taxes and less in indirect taxes. That is certainly the case when we are compared with European countries, and there is no doubt that there has been this shift.

Secondly, there is not much doubt that at the margins—and I am talking about the margins at the bottom and the top—our rates are higher than those of most of our international competitors. That cannot be denied. Whether the effective rate of tax in the case of every individual is much higher, taking into account such allowances as the mortgage allowance and so on, is debatable. But the marginal rate of 35 per cent. hits people at the lowest end of the scale and one must concede that the marginal rates at the top are higher than those of most of our competitors.

The people who suffer most are those right at the bottom who come into tax at an early stage at the rate of 35 per cent. They are such people as widows, single people, and people on small incomes with possibly a State pension or a small additional pension. We readily accept that there is a high marginal rate. In the same way, at the top end of the scale we are obviously competing in the international market of industry. When managers move from one country to another, there is no doubt that we are at some disadvantage because our top marginal rates are higher than those that they have to pay in other countries.

As for the rates in the middle, we are not substantially out of line, especially if one takes social security contributions into account. I accept that by bringing in those contributions we are not necessarily comparing like with like and that these comparisons, as the Chief Secretary said, are difficult to make. But if we take those contributions into account, the difference between us and other countries, especially in Western Europe, is not substantial.

Having accepted that the burden of direct taxation has grown over the last three or four years, the Opposition should have said in their arguments from where they would get the money to reduce the burden. The right hon. and learned Member for Surrey, East (Sir G. Howe) and the hon. Member for Guildford talked about truth in taxation. We do not get much truth from them about where the money would come from to reduce the burden. Granted that both sides of the House are agreed that there is a burden, where will the money come from? The Opposition Front Bench did not face that fact or try to answer the question, and they did not live up to their rather grandiose assertion of truth in taxation.

The truth is that the money can come from only two sources. We could increase the public sector borrowing requirement, but that is an option that the Government would not pursue—unlike the Barber Administration that printed money like confetti, reduced taxes and increased public expenditure. We would not pursue such profligate policies. We are more responsible about the public sector borrowing requirement. Most Labour Chancellors are more responsible than Tory Chancellors when they are in office, because Labour Chancellors understand the real value of money better than the Opposition.

Mr. Horbern

Can the Minister say when any Tory Government have had to spend 11 per cent. of the GNP in the public sector borrowing requirement as this Government have had to do?

Mr. Davies

To pick a figure of 11 per cent. without any relationship to what is happening in the outside world, and the increase in the price of oil, is, frankly, quite ridiculous. A Conservative Administration increased public expenditure, cut taxation and printed money like confetti to try to solve this country's economic problems.

If we are to reduce the burden of direct taxation as hon. Members opposite wish and if we are looking for truth, we must realise that the only alternatives are increasing indirect taxation or cutting public expenditure.

Hon. Members opposite did not make clear whether they favour increasing indirect taxes. If we are to alleviate the burden in that way, that will increase the cost of living. The hon. Member for Cornwall, North (Mr. Pardoe) invited us to fiddle the Index of Retail Prices. I was interested to hear him say that some European countries exclude indirect taxation from their equivalent to the RPI. Unfortunately, we cannot do that.

Hon. Members opposite say they wish to reduce the burden of direct taxation, but do they wish to do that at the cost of a substantial increase in the RPI? We are told and we accept that inflation depresses investment, that it is bad for the economy and that it increases unemployment. Are hon. Members opposite asking us to relieve the burden of direct taxation by substantially increasing indirect taxation?

Mr. Pardoe

We assume that indirect tax increases result in price increases, because we can see them in the RPI, and that direct tax increases do not increase inflation. In fact, increases in direct taxation increase inflation just as much as increases in indirect taxation.

Mr. Davies

Indirect tax increases affect the RPI and that has an effect on wage rates, wage claims, the value of the pound and all the other indicators relating to inflation.

Mr. David Howell

Is the hon. Gentleman saying that an increase in VAT is ruled out under the social contract?

Mr. Davies

That is a silly question. I am making a serious point. If the hon. Gentleman and his colleagues want a substantial shift in the burden of direct taxation, one way of getting the money would be to increase indirect taxation, but that would put up the cost of living. Are they in favour of that? They have not told us. If they were so concerned about truth in taxation, they would have answered that question earlier.

The other alternative, which has been mentioned by hon. Members opposite, is a reduction in public expenditure. They constantly tell us that we must cut public expenditure, but truth seems to stop at that point for them. It does not go any further and they do not identify the areas that they want cut in order to alleviate the burden of direct taxation.

We shall be truthful, and I repeat what I said in a recent Answer to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley). The effect of having indexed—to use the shorthand word for the revalorisation of allowances and rates—all tax rates from 1974–75 would be £5 billion less in the hands of the Exchequer and, presumably, £5 billion more in the hands of taxpayers. That has been the effect of our being unable, for one reason or another, to index allowances and rates. Hon. Members opposite should not shirk from these factors. Those who call for indexation should say what would have happened if that money had not flowed into the coffers of the Exchequer. It would have had an effect on the economy, on the poor and on unemployment rates.

If we had operated a policy of so-called indexation and denied ourselves that £5 billion, we should have had to do certain other things. The £5 billion could have been saved by a cut of 80 per cent. in retirement pensions. That is the nature of the effect of not indexing. If we were to index there would have to be an 80 per cent. cut in retirement pensions to save £5 billion—[Interruption.] I am sorry that Opposition Members do not like the figures. Let me give them another figure. As an alternative they could have a 75 per cent. cut in expenditure on the National Health Service. The Opposition have asked for the truth about taxation. They have asked us to tell the British people the truth. We are doing just that. We have raised an extra £5 billion as a result of not having been able to revalorise or index the tax system.

It is only fair that it should be known where the £5 billion has gone and what the effect of not receiving it into the Exchequer would have been. The Opposition could have had a 25 per cent. cut in defence expenditure or a 25 per cent. cut spread over retirement pensions, the National Health Service and defence expenditure. Alternatively, they could have had a 12 per cent. cut in all sections of central Government expenditure.

Mr. Reginald Eyre (Birmingham, Hall Green)

Perhaps I may give the hon. Gentleman a helpful example. It would have meant the Government not spend£7½ million on administrative costs in respect of the Community Land Act to acquire land worth £2 million.

Mr. Davies

I am sorry that I gave way to the hon. Gentleman.

Mr. F. A. Burden (Gillingham)

I bet you are.

Mr. Davies

Opposition Members want the truth about taxation and public expenditure and I am giving them the truth. If we had followed a policy of complete indexation, £5 billion would not have been available to us. That would have had a catastrophic effect on levels of public expenditure and on most people living in this country.

Mr. Grieve

The point being made by my right hon. and hon. Friends is not that we cut one section of essential public expenditure entirely but that there are economies to be made across the board by good administration.

Mr. Davies

Yes, the hon. and learned Gentleman is right. I have said that there could have been a 12 per cent. cut across the board. Economies could have been made across the board. I am merely pointing out the consequences of a reduction of £5 billion.

If there were some money available for a reduction in direct taxation, how could the money best be utilised within out present tax system? I am sure that Opposition Members appreciate that there are different ways in which the money could be used, which must be determined by the nature of our tax system.

If we approach the matter on the basis of the mass of taxpayers, there are three basic approaches. There could be a permutation of the three but there are three basic ways in which money could be used to reduce direct taxation. The expensive way is to increase personal allowances. The advantage of doing so, if we could do so by a full amount in respect of inflation, is that it would give the greatest benefit to those right at the bottom. The advantage of the full re-valorisation of personal allowances, which is very expensive, is that it takes most people out of the tax net right at the bottom. It helps the very people that Opposition Members have mentioned who face a tax rate of 35 per cent. at the lowest levels of income.

The indexation of personal allowances would also give considerable benefit to those at the top end of the scale. I accept that Opposition Members would want to see that. However, very often the effect is completely disproportionate when we consider the whole tax profile. Although an increase in personal allowances is beneficial in taking a large number of taxpayers out of the tax net, it perpetuates a tax profile that still looks rather inequitable when we consider the levels of income right from the bottom to the top of the tax bracket.

Another alternative which could be used and which has been mentioned today, especially by my hon. Friend the Member for Bristol, North-West (Mr. Thomas), is the introduction of a reduced tax band. Unfortunately, if a reduced rate band is introduced and is to make any worthwhile contribution, it has to be a fairly large band and the rate of tax has to be a bit lower than 35 per cent. For example, a reduced rate band on £2,000 would cost £3,700 million if charged at 25 per cent. or £1,850 million if charged at 30 per cent. A reduced rate band on £1,000 at 25 per cent. would cost £2.2 billion. Indeed, at 25 per cent. on the first £500, it would cost about £1.2 billion.

A reduced rate band, as distinct from an increase in the tax threshold, would not give most help to those on the smallest incomes. For the man on the tax threshold complete exemption for a few pounds is worth more than a lower rate of tax on a larger band of income which he has not got. If the cost of the reduced rate band had to be met by keeping the tax threshold lower than it would otherwise be, it would widen the poverty trap by enlarging the overlap between tax liability and entitlement to means-tested benefit. If having a reduced rate band is at the expense of having less of an increase in allowances, it will not benefit people at the lower end of the scale as much as an increase in allowances.

Mr. Crawford

Earlier I spoke about Scotland. There are now the resources available in the Scottish context to raise the threshold and lower the rate of VAT on all the things that we need to avoid the poverty trap and bring down the rate of tax at the top level in Scotland.

Mr. Davies

I shall listen with interest when the hon. Gentleman introduces his first budget.

Another way of reducing the burden is by reducing the basic rate. A reduction of the basic rate gives greater benefit to the large group of taxpayers in the middle. But if that is an alternative to increasing the allowances, there will be less of a benefit at the bottom and at the top end of the scale, because an increase in allowances does not greatly benefit those in the middle of the tax bracket. These are the constraints which to some extent, apart from money, the present tax system imposes on us in creating a more equitable profile.

My right hon. Friend the Chief Secretary made it clear that if it were possible over the longer term, we would all like to see one or even more reduced rate bands. One of our problems is that we have no rates below 35 per cent. Unfortunately, the constraints on having anything like that are not only of money but of trying to operate—I come back to the point I made at the beginning about self-assessment—a sophisticated PAYE system with a large number of different bands of income tax. In order to operate sophisticated PAYE system, one needs more or less a basic rate. If we do away with the basic rate thereby having more rates of tax and perhaps creating a more equitable profile of taxation, we must consider whether to move from the present system to a different kind of system with all the administrative implications involved in that.

For the Opposition merely to call for a debate on the burden of personal taxation is to choose to look at only one area. However, we cannot separate the burden of personal direct taxation from indirect taxation. We must balance the one against the other. We cannot also separate direct taxation from inflation in the economy because the main reason that the burden has increased over the last three years has nothing to do with the present Government's policies or with our tax system. The reason is inflation. That has created this extra burden, and most of the inflation has been caused not by anything that has happened in this country but by factors completely outside this country's control.

Mr. MacGregor

Is it not clear that it is not inflation but the Government's failure to keep the tax thresholds in line with inflation which has caused the present situation? Is it not clear from this debate that the real lesson is that the extra £5 billion of taxation has been imposed on the British people by this Government and that because of their failure to deal earlier with public expenditure, they are now in the trap that the Minister has described?

Mr. Davies

The hon. Gentleman was not listening earlier to my explanation of the £5 billion. I made it absolutely clear that if the £5 billion had not existed, there would have been far lower levels of public expenditure at a time of world recession and considerable difficulty in all the industrialised countries. Is he suggesting that the Government should have reduced public expenditure by £5 billion? [HON. MEMBERS: "Yes".] They say, "Yes", but they have come into this Chamber and read letters from poor constituents who are brought into the tax net at very low levels of income. They profess with crocodile tears to be very sorry for those people and now they are shouting, "Yes", and demanding that we reduce public expenditure by a substantial amount—thereby hitting the very people whom they profess, at least, to be concerned to help.

Hon. Members opposite, with a few exceptions, have shown again that they are not even concerned about burdens of direct taxation on everybody but merely about those burdens on the people with the highest incomes. If they were concerned about those at the bottom of the scale, they could not have come to that Despatch Box or made speeches calling for substantial cuts in public expenditure or substantial increases in indirect taxes. That shows their hypocrisy. Now they fear that we may be able to do something over the whole range of direct taxation.

In our taxation policy, we shall not consider only the top end of the bracket, because our taxation policy is to marry that with the need to get a third stage in our incomes policy. We could not possibly justify the kind of massive tax reductions at the top end of the scale that Conservative Members seem to want. Perhaps one of these days they will come here and tell the truth, not only about their taxation and public expenditure policies but also about whether they want an incomes policy or not.

Mr. Ridley

We do not.

Mr. Davies

Some of them do not. The hon. Member does not. I understand that. He would prefer it if unemployment exceeded 2 million, if we had slashing cuts in public expenditure and very reduced taxation for the better off. But from the Conservative Front Bench we get no truth at all about their policies on taxation, on public expenditure, even on incomes policy.

This Government took over at a time of considerable world recession and difficulty. We have managed to stabilise our public expenditure and our public sector borrowing requirement and we are gradually bringing down the rate of inflation. Hon. Members may laugh, but as a result of the co-operation of the trade union movement, whose co-operation they do not apparently want, we are bringing down the rate of inflation. Hon. Members feel rather jealous about that, I imagine, because they could never get the kind of agreement with the trade union movement that we have been able to get.

We have managed to stabilise public expenditure and the borrowing requirement and are bringing inflation down to the level of our competitors. We are gradually getting the British economy back on an even keel. Hon. Members are frightened that in addition we shall be able to reduce the burden of direct taxation. What they fear most is a good stable economy because they appreciate that their chances of office will be much less if we manage to secure it.

Mr. Ridleyrose—

Mr. Davies

I was hoping that the hon. Gentleman would have taken part in the debate.

Mr. Humphrey Atkins (Spelthorne)

rose in his place and claimed to move, That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question put accordingly, That this House do now adjourn:—

The House divided: Ayes 270, Noes 272.

Division No. 84.]	AYES	[10.0 p.m.
Adley, Robert	Fairgrieve, Russell	Kimball, Marcus
Aitken, Jonathan	Farr, John	King, Evelyn (South Dorset)
Alison, Michael	Fell, Anthony	King, Tom (Bridgwater)
Amery, Rt Hon Julian	Fisher, Sir Nigel	Kitson, Sir Timothy
Arnold, Tom	Fletcher, Alex (Edinburgh N)	Knight, Mrs Jill
Atkins, Rt Hon H. (Spelthorne)	Fookes, Miss Janet	Knox, David
Awdry, Daniel	Forman, Nigel	Lamont, Norman
Bain, Mrs Margaret	Fowler, Norman (Sutton C'f'd)	Langford-Holt, Sir John
Baker, Kenneth	Fox, Marcus	Latham, Michael (Melton)
Banks, Robert	Fraser, Rt Hon H. (Stafford & St)	Lawrence, Ivan
Beith, A. J.	Freud, Clement	Lawson, Nigel
Bell, Ronald	Fry. Peter	Lester, Jim (Beeston)
Bennett, Dr Reginald (Fareham)	Galbraith, Hon T. G. D.	Lewis, Kenneth (Rutland)
Benyon, W.	Gardiner, George (Reigate)	Loveridge, John
Berry, Hon Anthony	Gardner, Edward (S. Fylde)	Luce, Richard
Biffen, John	Gilmour, Rt Hon Ian (Chesham)	McAdden, Sir Stephen
Biggs-Davison, John	Gilmour, Sir John (East Fife)	MacCormick, Iain
Blaker, Peter	Glyn, Dr Alan	MacGregor, John
Body, Richard	Godber. Rt Hon Joseph	Macmillan, Rt Hon M. (Farnham)
Boscawen, Hon Robert	Goodlad, Alastair	McNair-Wilson, M. (Newbury)
Bottomley, Peter	Gorst, John	McNair-Wilson, P. (New Forest)
Bowden, A. (Brighton, Kemptown)	Gow, Ian (Eastbourne)	Madel, David
Boyson, Dr Rhodes (Brent)	Gower, Sir Raymond (Barry)	Marshall, Michael (Arundel)
Braine, Sir Bernard	Grant, Anthony (Harrow C)	Marten, Neil
Brittan, Leon	Gray, Hamish	Mates, Michael
Brocklebank-Fowler, C.	Grieve, Percy	Mather, Carol
Brooke, Peter	Griffiths, Eldon	Maude, Angus
Brotherton, Michael	Grimond, Rt Hon J.	Maudling, Rt Hon Reginald
Brown, Sir Edward (Bath)	Grist, Ian	Mawby, Ray
Bryan, Sir Paul	Grylls, Michael	Maxwell-Hyslop, Robin
Buchanan-Smith, Alick	Hall, Sir John	Mayhew, Patrick
Budgen, Nick	Hall-Davis, A. G. F.	Meyer, Sir Anthony
Bulmer, Esmond	Hamilton, Michael (Salisbury)	Miller, Hal (Bromsgrove)
Burden, F. A.	Hampson, Dr Keith	Mills, Peter
Butler, Adam (Bosworth)	Hennam, John	Miscampbell, Norman
Carlisle, Mark	Harvie Anderson, Rt Hon Miss	Mitchell, David (Basingstoke)
Chalker, Mrs Lynda	Hastings, Stephen	Moate, Roger
Channon, Paul	Havers, Sir Michael	Monro, Hector
Clark, Alan (Plymouth, Sutton)	Hayhoe, Barney	Montgomery, Fergus
Clark, William (Croydor S)	Heath, Rt Hon Edward	Moore, John (Croydon C)
Clarke, Kenneth (Rushcliffe)	Henderson, Douglas	More, Jasper (Ludlow)
Clegg, Walter	Heseltine, Michael	Morgan, Geraint
Cockcroft, John	Hicks, Robert	Morris, Michael (Northampton S)
Cooke, Robert (Bristol W)	Higgins, Terence L.	Morrison, Charles (Devizes)
Cope, John	Hodgson, Robin	Morrison, Hon Peter (Chester)
Cormack, Patrick	Holland, Philip	Mudd, David
Costain, A. P.	Hoosen, Emlyn	Heave, Airey
Craig, Rt Hon W. (Belfast E)	Hordern, Peter	Neubert, Michael
Crawford, Douglas	Howe, Rt Hon Sir Geoffrey	Newton, Tony
Crouch, David	Howell, David (Guildford)	Nott, John
Crowder, F. P.	Howells, Geraint (Cardigan)	Onslow, Cranley
Davies, Rt Hon J. (Knutsford)	Hunt, David (Wirral)	Oppenheim, Mrs Sally
Dean, Paul (N Somerset)	Hunt, John (Bromley)	Page, John (Harrow West)
Dodsworth, Geoffrey	Hurd, Douglas	Page, Rt Hon R. Graham (Crosby)
Douglas-Hamilton, Lord James	Hutchison, Michael Clark	Page, Richard (Workington)
Drayson, Burnaby	Irving, Charles (Cheltenham)	Pardoe, John
du Cann,Rt Hon Edward	James, David	Parkinson, Cecil
Durant, Tony	Jenkin, Rt Hon P. (Wanst'd & W'df'd)	Pattie, Geoffrey
Dykes, Hugh	Johnson Smith, G. (E Grinstead)	Penhaligon, David
Eden, Rt Hon Sir John	Johnston, Russell (Inverness)	Percival, Ian
Edwards, Nicholas (Pembroke)	Jones, Arthur (Daventry)	Peyton, Rt Hon John
Elliott, Sir William	Jopling, Michael	Pink, R. Bonner
Emery, Peter	Joseph, Rt Hon Sir Keith	Price, David (Eastleigh)
Ewing, Mrs Winifred (Moray)	Kaberry, Sir Donald	Prior, Rt Hon James
Eyre, Reginald	Kershaw. Anthony	Pym, Rt Hon Francis
Fairbalrn, Nicholas	Kilfedder, James	Raison, Timothy
Rathbone, Tim	Sinclair, Sir George	Trotter, Neville
Rawlinaon, Rt Hon Sir Peter	Skeet, T. H. H.	van Straubenzee, W. R.
Rees, Peter (Dover & Deal)	Smith, Dudley (Warwick)	Vaughan, Dr Gerard
Rees-Davies, W. R.	Speed, Keith	Viggers, Peter
Reid, George	Spence, John	Wainwright, Richard (Coloe V)
Renton, Rt Hon Sir D. (Hunts)	Spicer, Michael (S Worcester)	Wakeham, John
Renton, Tim (Mid-Sussex)	Sproat, Iain	Welder, David (Clitheroe)
Rhodes James, R.	Stainton, Keith	Walker, Rt Hon P. (Worcester)
Ridley, Hon Nicholas	Stanbrook, Ivor	Watt, Hamish
Rldsdale, Julian	Stanley, John	Weatherill, Bernard
Rifkind, Malcolm	Steel, Rt Hon David	Wells, John
Rippon, Rt Hon Geoffrey	Steen, Anthony (Wavertree)	Welsh, Andrew
Roberts, Wyn (Conway)	Stewart, Rt Hon Donald	Whitelaw, Rt Hon William
Rodgers, Sir John (Sevenoaks)	Stewart, Ian (Hitchin)	Wiggin Jerry
Ross, Stephen (Isle of Wight)	Stokes, John	Wigley, Dafydd
Rossi, Hugh (Hornsey)	Tapsell, Peter	Wilson, Gordon (Dundee E)
Rost, Peter (SE Derbyshire)	Taylor, R. (Croydon NW)	Winterton, Nicholas
Royle, Sir Anthony	Taylor, Teddy (Cathcart)	Wood,Rt Hon Richard
Sainsbury, Tim	Tebbit, Norman	Young, Sir G. (Ealing, Acton)
St. John-Staves, Norman	Temple-Morris, Peter	Younger, Hon George
Scott, Nicholas	Thatcher, Rt Hon Margaret
Shaw, Giles (Pudsey)	Thomas, Dafydd (Merioneth)	TELLERS FOR THE AYES:
Sheldon, William (Streatham)	Thomas, Rt Hon P. (Hendon S)
Shepherd, Colin	Thompson, George	Mr. Spencer Le Marchant and
Silvester, Fred	Thorpe, Rt Hon Jeremy (N Devon)	Mr. Michael Roberts.
Sims, Roger	Townsend, Cyril D.
NOES
Abse, Leo	Davies, Bryan (Enfield N)	Hughes, Roy (Newport)
Allaun, Frank	Davies, Denzil (Llanelli)	Hunter, Adam
Anderson, Donald	Davies, Ifor (Gower)	Irvine, Rt Hon Sir A. (Edge Hill)
Archer, Peter	Davis, Clinton (Hackney C)	Irving, Rt Hon S. (Dartford)
Armstrong, Ernest	Deakins, Eric	Jackson, Colin (Brighouse)
Ashley, Jack	Dean, Joseph (Leeds West)	Jackson, Miss Margaret (Lincoln)
Ashton, Joe	Dell, Rt Hon Edmund	Janner, Greville
Atkins, Ronald (Preston N)	Dempsey, James	Jay, Rt Hon Douglas
Atkinson, Norman	Doig, Peter	Jeger, Mrs Lena
Barnett, Guy (Greenwich)	Dormand, J. D.	Jenkins, Hugh (Putney)
Barnett, Rt Hon Joel (Heywood)	Douglas-Mann, Bruce	John, Brynmor
Bates, Alf	Duffy, A. E. P.	Johnson, James (Hull West)
Bean, R. E.	Dunnett, Jack	Johnson, Walter (Derby S)
Bann, Rt Hon Anthony Wedgwood	Eddie, Alex	Jones, Alec (Rhondda)
Bennett, Andrew (Stockport N)	Edge, Geoff	Jones, Barry (East Flint)
Bidwell, Sydney	Ellis, John (Brigg & Scun)	Jones, Dan (Burnley)
Bishop, E. S.	English, Michael	Judd, Frank
Blenkinsop, Arthur	Ennals, David	Kaufman, Gerald
Boardman, H.	Evans, Fred (Caerphilly)	Kelley, Richard
Booth, Rt Hon Albert	Evans, Ioan (Aberdare)	Kerr, Russell
Boothroyd, Miss Betty	Ewing, Harry (Stirling)	Kilroy-Silk, Robert
Bottomley, Rt Hon Arthur	Fernyhough, Rt Hon E.	Kinnock, Nell
Boyden, James (Bish Auck)	Fitch, Alan (Wigan)	Lamble, David
Bradley, Tom	Flannery, Martin	Lamborn, Harry
Bray, Dr Jeremy	Fletcher, Ted (Darlington)	Lamond, James
Brown, Hugh D. (Proven)	Foot, Rt Hon Michael	Latham, Arthur (Paddington)
Brown, Robert C. (Newcastle W)	Ford, Ben	Lee, John
Buchan, Norman	Forrester, John	Lestor, Miss Joan (Eton & Slough)
Buchanan, Richard	Fowler, Gerald (The Wrekin)	Lever, Rt Hon Harold
Butler, Mrs Joyce (Wood Green)	Fraser, John (Lambeth, N'w'd)	Lewis, Ron (Carlisle)
Callaghan, Rt Hon J. (Cardiff SE)	Freeson, Reginald	Lipton, Marcus
Callaghan, Jim (Middleton & P)	Garrett, John (Norwich S)	Litterick, Tom
Campbell, Ian	Garrett, W. E. (Wallsend)	Lomas, Kenneth
Canavan, Dennis	George, Bruce	Leyden, Eddie
Cant, R. B.	Gilbert, Dr John	Luard, Evan
Carmichael, Nell	Ginsburg, David	Lyon, Alexander (York)
Carter, Ray	Golding, John	Lyons, Edward (Bradford W)
Carter-Jones, Lewis	Gould, Bryan	Mabon, Rt Hon Dr J. Dickson
Cartwright, John	Gourlay, Harry	McCartney, Hugh
Castle, Rt Hon Barbara	Graham, Ted	McDonald, Dr Oonagh
Clemitson, Ivor	Grant, George (Morpeth)	McElhone, Frank
Cocks, Rt Hon Michael	Grant, John (Islington C)	McGuire, Michael (Ince)
Cohen, Stanley	Grocott, Bruce	MacKenzie, Gregor
Coleman, Donald	Harper, Joseph	Mackintosh, John P.
Colquhoun, Ms Maureen	Harrison, Walter (Wakefield)	Maclennan, Robert
Concannon, J. D.	Hart, Rt Hon Judith	McMillan, Tom (Glasgow C)
Cook, Robin F. (Edin C)	Hattersley, Rt Hon Roy	McNamara, Kevin
Corbett, Robin	Hayman, Mrs Helene	Madden, Max
Cox, Thomas (Tooting)	Healey, Rt Hon Denis	Magee, Bryan
Craigen, Jim (Maryhill)	Heffer, Eric S.	Mahon, Simon
Crawshaw, Richard	Harem, John	Mallalieu, J. P. W.
Cronin, John	Howell, Rt Hon Denis (B'ham, Sm H)	Marks, Kenneth
Crowther, Stan (Rotherham)	Hoyle, Doug (Nelson)	Marquand, David
Cryer, Bob	Huckfield, Les	Marshall, Dr Edmund (Goole)
Cunningham, G. (Islington S)	Hughes, Rt Hon C. (Anglesey)	Marshall, Jim (Leicester S)
Davidson, Arthur	Hughes, Robert (Aberdeen N)	Maynard, Miss Joan

Meacher, Michael	Roberts, Gwilyan (ob/)	Thorne, Stan (Preston South)
Mellish, Rt Hon Robert	Robinson, Geoffrey	Tierney, Sydney
Mendelson, John	Roderick, Caerwyn	Tinn, James
Mikardo, Ian	Rodgers, George (Chorley)	Tomlinson, John
Millan, Rt Hon Bruce	Rodgers, Rt Hon William (Stockton)	Tomney, Frank
Miller, Mrs Millie (Ilford N)	Rooker, J. W.	Torney, Tom
Molloy, William	Rose, Paul B.	Tuck, Raphael
Moonman, Eric	Rose, Rt Hon W. (Kilmarnock)	Urwin, T. W.
Morris, Alfred (Wythenshawe)	Rowlands, Ted	Varley, Rt Hon Erie G.
Morris, Charles R. (Openshaw)	Sandelson, Neville	Wainwright, Edwin (Dearne V)
Morris, Rt Hon J. (Aberavon)	Sedgemore, Brian	Walden, Brian (B'ham, L'dyw'd)
Moyle, Roland	Selby, Harry	Walker, Harold (Doncaster)
Mulley, Rt Hon Frederick	Shaw, Arnold (Ilford South)	Walker, Terry (Kingswood)
Murray, Rt Hon Ronald King	Sheldon, Rt Hon Robert	Ward, Michael
Newens, Stanley	Shore, Rt Hon Peter	Watkins, David
Noble, Mike	Short, Mrs Renée (Wolv NE)	Weetch, Ken
Oakes, Gordon	Silkin, Rt Hon John (Deptford)	Weitzman, David
Ogden, Eric	Silkin, Rt Hon S. C. (Dulwich)	Wellbeloved, James
O'Halloran, Michael	Silverman, Julius	White, James (Pollok)
Orme, Rt Hon Stanley	Skinner, Dennis	Whitlock, William
Ovenden, John	Small, William	Willey, Rt Hon Frederick
Owen, Rt Hon Dr David	Smith, John (N Lanarkshire)	Williams, Rt Hon Alan (Swansea W)
Padley, Walter	Snape, Peter	Williams, Rt Hon Shirley (Hertford)
Park, George	Spearing, Nigel	Williams, Sir Thomas (Warrington)
Parker, John	Spriggs, Leslie	Wilson, Alexander (Hamilton)
Parry, Robert	Staliard, A. W.	Wilson, Rt Hon Sir Harold (Huyton)
Pavitt, Laurie	Stewart, Rt Hon M. (Fulham)	Wilson, William (Coventry SE)
Pendry, Tom	Stoddart, David	Wise, Mrs Audrey
Perry, Ernest	Stott, Roger	Woodall, Alec
Phipps, Dr Colin	Strauss, Rt Hon G. R.	Woof, Robert
Prentice, Rt Hon Reg	Summerskill, Hon Dr Shirley	Wrigglesworth, Ian
Price, William (Rugby)	Swain, Thomas	Young, David (Bolton E)
Radice, Giles	Taylor, Mrs Ann (Bolton W)
Rees, Rt Hon Merlyn (Leeds S)	Thomas, Jeffrey (Abertillery)	TELLERS FOR THE NOES:
Richardson, Miss Jo	Thomas, Mike (Newcastle E)	Mr. James Hamilton and
Roberts, Albert (Normanton)	Thomas, Ron (Bristol NW)	Mr. Frank R. White.
Question accordingly negatived.