§ I now come to the heart of my Budget—the reductions in income tax and their relevance for pay policy. Given the size of the fiscal stimulus I consider justified and the net revenue resulting from the tax changes I have just described, I shall be able to make reductions in income tax amounting to some £2¼ billion in a full year—assuming we reach a pay agreement for the year from August 1977 which is consistent with our inflation objectives. To the extent we fall short of such an agreement the scope for overall tax relief would be that much smaller.
§ I need not go into all the reasons why substantial income tax relief is desirable. We shall discuss that fully in the Budget and Finance Bill debates. In a nutshell, the effect of inflation has been to put too high a proportion of the tax burden on to the income tax; to impose tax on too low a level of income; and to bring too many people into the higher rates of tax at each successive level, starting at a level not very far above average earnings. The effect has been to weaken the incentive to work throughout the economy. In correcting this, I have to distribute tax relief so as to give priority to the areas where the problem creates the greatest hardship or is most damaging to our economic performance.
§ The greatest hardship falls on the poorer members of our society. I could 280 help them through three possible changes in the income tax—by increasing personal allowances, by introducing a reduced rate band, and in the case of retired people with only modest savings by raising the threshold for the surcharge on investment income. I shall take these in turn.