§ I now come to my proposals for those taxes which most concern the individual man and woman.
§ I think it is now generally recognised that, while the total burden of taxation in Britain is well within the international average, the proportion of total revenue derived from income tax is still too high although I have already reduced it significantly in the last three years. So cuts in income tax will account for almost all the £2½ billion stimulus which I have announced.
§ I know that some hon. and right hon. Members think it would be right to cut income tax this year by a much larger sum and offset the additional costs by increases in indirect taxation. In principle I have some sympathy with this view. But I believe that this year we must consolidate and reinforce our success in the fight against inflation so that we can for good and all bring down the inflationary expectations which have damaged our economy in recent years in so many ways. In this situation I cannot believe it would make sense for the Government themselves deliberately to raise the inflation rate and increase the cost of living. I will, therefore, leave the indirect taxes generally unchanged on this occasion—with one small exception.
§ To discourage the smoking of cigarettes which have a higher tar yield, I intend to introduce from 4th September a supplementary duty on cigarettes with a tar yield of 20 milligrammes or more. If the manufacturers fully passed on this increased duty in prices they would raise the price of 20 of these cigarettes by about 7p. About 15 per cent. of cigarettes will be affected.
§ The House will recognise that this supplementary duty is not designed primarily to raise revenue—it could bring in only £25 million in a full year at most—and if it results in leading smokers abandoning these high tar cigarettes, no one will be more pleased than I. In any case, the effect on the RPI will be negligible.
§ I have also been asked to consider an increase in the national insurance surcharge. The share of employer social 1204 security contributions and payroll taxes in total revenue is a good deal lower in Britain than in most other countries of the European Community. But I do not believe it would be right to increase it so soon after it has been introduced, and at a time when unemployment is our major problem. It would increase industrial costs at a time when it is essential to improve our competitiveness and it would ultimately be largely passed on in higher prices at a time when the fight against inflation is at a crucial stage.
§ The proposals I have announced so far leave £2,400 million for reductions in income tax. I have considered carefully how they should be distributed so as to further the objectives I have set myself, to increase the incentive for greater effort and to promote social justice.
§ I believe it right to regard this Budget as the second phase in a process which I began last autumn. I told the House in October that, as well as increasing the plans for public expenditure in 1978–79, I was raising the level of the personal allowances fixed in last year's Finance Act by 12 per cent. so as to ensure that their real value was maintained and that I was bringing forward this increase in tax thresholds by 12 months compared with the date provided for in the Act. In practice, this increase of 12 per cent. has turned out to be slightly higher than the increase in the retail price index over the calendar year 1977.
§ The question I have had to decide for this Budget is whether I should devote the hulk of the tax relief now available to raising the tax thresholds still further or whether I should introduce a lower initial rate of tax. Since I have already more than fulfilled my obligation to index tax thresholds. I have been particularly impressed by the argument that the rate at which people become liable to enter income tax is too high. It is, indeed, the highest in the world. It means that many of the low paid are little better off in work than on the dole. I cannot believe that this makes sense in either economic or social terms.
§ I propose, therefore, to introduce a lower rate of tax, at 25 per cent., on the first £750 of taxable income. This new lower rate will be the marginal rate of tax for some 4 million of the low paid. Most taxpayers now caught in the poverty trap will find its impact that much less 1205 severe because their tax will be nine percentage points lower than now. Other taxpayers will be £1.30 a week better off as a result of this change alone. I hope it may be possible to extend this lower rate band in future years.
§ I still believe, however, that it is necessary to raise the tax threshold as far as possible above the main social security benefit levels and to take as many people as I can out of tax altogether. I therefore propose this year to raise the single person's allowance and the wife's earnings allowance by a further £40 to £985 and the married allowance by £80 to £1,535.
§ This increase in tax thresholds will help widows and also provide the family man with special help during the second stage of the transition to the child benefit scheme. The additional child benefit which mothers are now receiving will in general more than offset the effect on family income of the reduction in the child tax allowance which we have already announced.
§ But I believe it also important to ensure that this change does not reduce the father's pay packet, and for this reason I am increasing the married allowance by twice as much as the increase in the single allowance. I propose, as last year, to ensure that the allowance for one-parent families is kept in line with that for two-parent families by increasing the additional allowance by £40 to £550.
§ Pensioners with a modest additional income have a special problem, which I expect all hon. Members will have come across in their constituencies. I therefore propose to increase the age allowance a little more than personal allowances generally—by £50 for the single person and £100 for the married—and to raise the age allowance income limit to £4,000.
§ The cost of these measures will be £2,150 million, of which nearly £1,600 million is attributable to the lower band and just over £550 million to the increases in the personal allowances. As a result of these increases 360,000 people who would otherwise have been paying income tax in the coming year will not now do so.
§ Although last October I increased the thresholds for the basic rate of tax by 12 per cent., I did not at that time similarly index the threshold for the higher 1206 rates of tax. If I did not raise this now, people with no more than one and a half times average earnings would move into higher rate liability this year. I propose, therefore, to raise the upper limit of the basic rate from £6,000 to £7,000. This will mean that a married man with earnings of £8,500 will not be liable to tax at the higher rate, even if he is entitled to no allowances other than his married allowance. As a result, 450,000 people who would otherwise be paying tax at the higher rate will not have to do so. This will be of particular advantage to highly skilled engineers, foremen and middle managers.
§ I propose also to increase the thresholds to the successive higher rate bands. The 40 per cent. band will, as now, be £1,000 in length. This will be followed by two bands of £1,000, two of £1,500, one of £2,000, one of £2,500 and one of £5,500. The 83 per cent. rate will thus be reached at a taxable income of £23,000 as compared with the present £21,000.
§ There is a similar case for raising the thresholds for the surcharge on investment income. I propose, therefore, to raise the general threshold to the 10 per cent. rate of surcharge from £1,500 to £1,700 and the threshold to the 15 per cent. rate from £2,000 to £2,250, in line with the rise in prices.
§ However, it is significant that nearly half of those liable to the surcharge are over 65, and two-thirds of these have incomes below the higher rate threshold. I therefore intend, in addition to the increase I have already announced, to help those elderly people living on relatively modest income from savings by increasing the real value of the surcharge thresholds for them. I propose that for those over 65, the thresholds for the 10 per cent. rate should go up from £2,000 to £2,500, and for the 15 per cent. rate from £2,500 to £3,000. Finally, I propose that maintenance payments should be wholly exempted from the surcharge with effect from this year.
§ The changes in the personal allowances will take effect under PAYE on the first pay day after 10th May. Single people and earning wives earning over £19 a week will in general then get a refund of £1.30, and they will thereafter pay 26p a week less in tax. The refund for married men earning over £30 a week will 1207 in general be £2.60 and the weekly reduction for them will be 52p. The new tax tables giving effect to the changes in rates of tax, including the lower rate band, will operate from mid-July. There will then be a further refund of about £18 and a further reduction in tax of £1.30 a week.