BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 12 April 1978 vol 947 cc1410-540

4.9 p.m.

Sir Geoffrey Howe () Surrey, East

I begin by following the example of my right hon. Friend the Leader of the Opposition in congratulating the Chancellor on the manner of his presentation. It is the second time I have had to do it on an occasion such as this in his absence but we are glad to welcome him and I am glad to renew the congratulations extended to him on the manner of his presentation.

I am glad also to have an opportunity of proffering to the Chancellor, if he will accept it, a certain amount of sympathy at the difficulty that must have faced him in pursuing so many conflicting objectives as he introduced his thirteenth Budget. He had, on the one hand, to try to atone for the quality of reception of the 12 that had gone before. He had, on the other hand, to try to minimise the chances of his party's defeat at the next General Election, when the Prime Minister sums up courage to go to the country; and also, rather surprisingly for a man with such a reputation for modesty, apparently he had to set about paving the way for his succession to the leadership of his party in due course.

It is difficult enough to reconcile an appeal to the populace with something that commends itself to the taste of the Parliamentary Labour Party. The Chancellor set about it with all the enthusiasm of a man trying to sing the words of "Rule Britannia" to the tune of the "Red Flag". As if that task were not enough to daunt him, the occasion had been well publicised as the first test of whether this would be a truly Lib-Lab Budget, and the run-up to this contest had given us an intriguing insight into the personal relationships that prevailed.

The hon. Member for Cornwall, North (Mr. Pardoe), using language reminiscent of the moderation which we came to know and love during the Liberal leadership campaign, set about paying tribute to the Chancellor with a description of his affection for playing the bully, for talking through people, mistaking sledgehammers for rapiers and taking refuge from errors behind the mask of truculent arrogance—a very apt description. We are told that partners in marriage are said to grow alike as the relationship goes on. This particular marriage started off with them made for each other. The Chief Secretary, poor soul, has had, we are told, the unenviable task of acting as a kind of supernumerary marriage guidance officer.

As though personality was not creating enough difficulties, there has been much confusion on policy also, because, as we understand it, the Liberal Party has been pressing for an increase in employers' national insurance contributions, and yet two years ago it voted against the Chancellor when he introduced that very same thing. The Chancellor must have felt that taking advice from the Liberal Party was like trying to take counsel with a kaleidoscope and to pursue a courtship with something resembling a circus horse, one half of which looks as though it wants to get to the altar and the other half thinks it safer to stop off at the divorce court on the way. I do not want to be unfair to the hon. Member for Cornwall, North.

Mr. John Pardoe () Cornwall, North

It is very good of the right hon. and learned Gentleman.

Sir G. Howe

The hon. Member for Cornwall, North has been quite right in some of his observations widely reported in the Press. Hon. Members may remember that in that distinguished journal the News of the World on Sunday last, the hon. Member said that the first three years of the Chancellor's performance were the worst since the war a record of economic blunders, wrong forecasts, misplaced optimism, poor judgment and sheer wrongheaded dogmatism unmatched in modern times". So spoke the economic spokesman of the Liberal Party. That tells us a great deal about the self-confidence of the Liberal Party, that its Members would rather keep such a man in office for two more years than risk their seats at a General Election—because the hon. Member for Cornwall, North was quite right. It is an astonishing record over which the Chancellor has to look. The gross domestic product is still below what it was five years ago and the living standards of the average family are still well down, and of those on twice or three times the average very badly down.

The nearest we have come, I suppose, to success in the Chancellor's tenure of the office has been to get inflation back within hailing distance at least of what he said it was at the last General Election; but the pound has been halved in value and unemployment has almost trebled. On that point at least, the hon. Member for Cornwall, North has been quite right.

The Chancellor has succeeded in developing a number of differing alibis for his performance as the years have gone by, and he is moving to a different one currently with his frequent reference to the plight that he and our country share with the whole industrial world and the whole free world which, he is fond of saying, has been having it just as bad. It is not so, of course. Almost no country like our own has had inflation on anything like the same scale or unemployment worse than our own. It is, I think, a unique achievement still to be presiding over a gross domestic product lower than it was five years ago.

The Chancellor may have become so accustomed to our dismal place in the world economic league that it may explain a very odd and unimpressive feature of what he had to say yesterday: that he came to this House of Commons believing it necessary proudly to announce that the new bond that he was arranging to issue on the New York Stock Exchange would be given by the authorities of that city an AAA rating. Has this United Kingdom been reduced to the status of a banana republic? Only the present Chancellor of the Exchequer, after his four years in office, would have dreamed of thinking it necessary to draw attention to, and take credit for, the fact that this country commands an AAA rating.

The phrase "the whole free world" demands a little more examination. It is a very convenient facing-both-ways phrase to use from the Front Bench of the Labour Party, because to those in the Manifesto group it conveys a comfortable impression that their party is still part of the free world. It gives to those in the Tribune group licence and freedom to take an opposite view and to say that everything that has happened is a crisis of capitalism. It is a convenient two-way bet for the Chancellor. I notice that some of those who take that view come up with some fairly strange ideas for a solution of our economic problems. The other day, in a part of London where I live, I saw a poster in an Underground station about a meeting organised, so far as I know, by some member of the Tribune group which bore the intriguing title "Why is there no inflation in Socialist Albania?" I understand the solution is to conclude that since inflation is caused by too much money chasing too few goods, the Albanian solution is to abolish both of them. On that point I come to the central strategy of the Budget, with special reference to what the Chancellor has said and done about inflation.

The House will have noticed the frequency with which the Chancellor, in his statement yesterday, used words about whether he was going to be right to give a stimulus or boost on this scale or that scale to the economy. But he was certainly right to say that it is not easy to judge the point at which a demand stimulus may prove self-defeating in terms of both jobs and prices, because the reality is that if we are to get the economy right it is not so much the economy that needs stimulation as the people who make it up and make it work.

There is a grave risk that if the Chancellor reverts to the discredited nostrum which he discarded—that deficit financing creates jobs—he will end by creating not jobs but a recurrence of inflation. The pound, which the Red Book says rose in value on average last year by 7 per cent., has fallen by about as much in this calendar year. This year's money supply, as the Chancellor admitted, is turning out certainly ahead of the top limit of his monetary target. Those are both dangerous signs.

We take no comfort from the Chancellor's announcement yesterday that next year's target rate is only one point down on that for this year, because it does not look as if he is taking that objective very seriously. We are even more dismayed by the fact that next year's planned public spending is now to increase, according to the Red Book, by some 6 per cent., by more than £3½ billion, by the fact that the contingency reserve, with the year only one week old, has almost all gone and by the fact that the public sector borrowing requirement, which the Chancellor has certainly been bringing down as a percentage of the gross domestic product, last year to 4 per cent., is actually planned this year to rise to 5½ per cent. of GDP. We find that a disturbing course of events.

It is almost as though the words uttered by the Prime Minister at the Labour Party conference of blessed memory of September 1976— We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists"— are becoming in grave danger of being overlooked following the departure of the Prime Minister's son-in-law for a different post in Washington.

Perhaps the best verdict on the Chancellor's determination of his Budget judgment was provided by the fact that, in the very same speech, on the same day, he felt it necessary to announce an increase in minimum lending rate of 1 per cent. It is about as reassuring as a shopkeeper spreading his wares in the window of his shop and deliberately setting off the burglar alarm at the same time.

I turn to the rest of the Chancellor's proposals against a sombre setting. It is not necessary to subscribe to the whole of the analysis and prescription of the Cambridge economic policy group. Indeed, I should be reluctant to tread down that path. But it is possible to share its fears about the future of unemployment and other prospects in this country. It talks of the prospect and possibility of 5 million out of work within a decade. I do not go all the way with that.

If we look, as Labour Members must, at the picture of closure after closure, redundancy after redundancy, in industries of all kinds, at the world of little growth in which we live and at the competition that we face either from capital-intensive high-technology industries in Japan or the United States or from low-cost industries in countries such as Korea or Brazil, it is difficult to be confident about the future on the course charted by the Chancellor.

Many hon. Members surely agree that the time has come to recognise the need for an entirely fresh approach to these problems. The Liberal Party, on the one hand, and the Tribune group, on the other hand, ask for that. Whatever else one may say about the Budget, it is exactly what we have not got.

The Budget, in its total judgment—to borrow words from the Cambridge economic policy group—is nothing more than a short-term response to the pressure of short-term influences. It is most unlikely to make any significant change in the course that our economy is following.

Labour Members below the Gangway propose a distinctive and different approach: an enlarged role for State enterprise for planning, more jobs and more activities for the National Enterprise Board. I do not take the view that that is likely to be the right course.

The history of the steel industry, for example, shows that in the end, subsidise as we may, defer closures as we may, the jobs still go, but the money that could have gone to modernisation to strengthen the industry for the future has gone to postpone the inevitable rather than to achieve anything else. Subsidies and protection of the right kind in the right circumstances are legitimate to ease the process of change, to defer, to soften hardship, but they represent no solution, and that is not the way that appeals to us.

The answer that the Chancellor gave in his speech was that the main responsibility for restoring the health of our economy must fall on management and the work forces in individual firms and plants. I entirely agree. The right hon. Gentleman went on to say that the Government have the responsibility for providing an environment which encourages them in their work. Again, I agree. But, by "encouragement", one looks for real encouragement on a scale of the kind that we have not seen for a long time. It is exactly that that the Chancellor has failed to offer.

There are two halves to the encouragement which has to be undertaken. On the one hand, we have to seek for the regulations and controls which check and which inhibit enterprise and make it more difficult to succeed. In exchange control, for example, capital is locked up idle in this country so that even the National Enterprise Board does not know what to do with it. We should be thinking of opening the barriers of exchange control to open up opportunities abroad for that money and to create bridgeheads for British exports of services, goods and jobs. We also need to change planning and building regulations which make it much harder than it should be to build and to embark on new enterprises.

Above all, in the context of this debate, we need to change the tax environment. This Budget gives the proof—if proof were needed—that there is no hope of a change of the right kind on the right scale unless the House and the country are prepared to face two things. The first is that there is no room for any increase in public spending if we are to have room to manoeuvre in getting the tax burden changed. The spokesman for the Liberal Party, in his statement last week, said that we could spend not a penny more on public spending. It is a pity that he and his party nevertheless voted, when we debated the public expenditure White Paper, for expenditure increases of about £3 billion this year, thereby casting away money which would have given room to carry through the Liberal budget, about which we have heard so much.

The second thing that we have to be prepared to do—the Chancellor expressed some sympathy with this, and I know that he understands the argument—is to switch the shape and burden of our tax system from taxes on income to taxes on spending. It is a change in the pattern of the tax system—remembering that in respect of such a change those on benefits are protected. The pension increase, about which we have already spoken this afternoon, is welcome. The increase in child benefits is also designed to facilitate a switch of that kind.

We must also recognise that those at work, when faced with higher direct or indirect taxes, now see income tax as much a part of their cost of living as anything else. That was the point made by the Prime Minister only a fortnight ago.

Rates are part of the retail price index, yet income tax is not. But, from the point of view of the worker who sees a huge bite going out of his pay packet before he receives it, intolerably high income tax is as much something which forms part of his cost of living as any other part of prices. Those are the changes which are necessary and which we shall have to carry through if we are to make the major reforms in our tax system that we need. The reforms are agreed by Opposition Members and, I suspect, by many Labour Members.

We certainly need a substantial reduction in the basic rate of tax—at least back to where the outgoing Conservative Government left it, and beyond. That could have been achieved in this Budget had it been properly designed.

We certainly need to continue raising tax thresholds well beyond the level of supplementary benefit, and we need to get the top rate of tax down at least to 60 per cent. A much better way of discouraging tax avoidance is to lower the rates which encourage it than to embark upon the constitutional monstrosity of retrospective legislation which the Government have made. We also need to restore the real value of higher rate bands.

All those things could have been achieved within this Budget if public spending were not exploding on the scale that the Government have authorised.

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

May I take the right hon. and learned Gentleman back to what he said about the retail price index? I accept that income tax is part of the cost of living. Is he saving that Tory policy would be to put income tax into the RPI and to take out goods which are already there so that, when indirect taxes go on those goods, the public are cheated, because the RRI will have been fiddled?

Sir G. Howe

I am saying no such thing. The RPI has stood as it has for many years, and it remains as a given factor in our economic life. I am saying what many workers say to me and must say to the hon. Gentleman, if he listens to them. They regard the burden and bite of direct taxation from their pay packets as representing just as important an impact on their cost of living as the prices that they pay in the shops and in indirect taxes. That is the reality and the argument that the Chancellor has recognised, but unfortunately has not moved to do anything about.

Instead of that kind of change, what have we got? We have some changes of the system in favour of small businesses. They are certainly welcome. We have been arguing and championing the cause of small businesses over many years, because they are, as the Chancellor said, vital to the creation of new jobs in the economy.

But the total value of what the Chancellor is proposing for small businesses does not exceed £100 million in loss of revenue in the entire year. It does not begin to undo the damage done to small businesses by this Government. Indeed, it is less than half the amount being taken back from small businesses as a result of last week's increases in employers' national insurance contributions and, incidentally, a fifth of what would have been taken from small businesses if the Chancellor had accepted the Liberal Party's advice to double that impost.

Sadly, the Chancellor of the Duchy of Lancaster is not here today. He has been conducting a broad-ranging mission among small businesses to see what is necessary to bring them sustenance and succour. The diet which he has produced is about as useful as giving a starving man a diet of bread and water.

Profit-sharing is a matter about which we have heard something from the Chancellor. It is fine that this Government have begun to introduce some kind or scheme for profit-sharing. It is a watered down version of the scheme produced by a study group presided over by my hon. Friend the Member for Guildford (Mr. Howell) over a year ago. It does not give the employee the right to own his share from the start. It does not give him the right to tax relief on sale at the end of five years. It is only a very modest step in the right direction of spreading ownership widely throughout industry.

Only the Parliamentary Liberal Party could believe that this Government's introduction of this profit-sharing scheme represents a lasting conversion on the part of the Labour Party to the cause of profitable private enterprise.

Mr. Pardoe

It is more than we ever got from the Conservatives.

Sir G. Howe

The investment income surcharge changes have been useful, but still do not begin to restore the levels under the last Conservative Government.

The major change that the Chancellor has chosen to adopt is the introduction of the reduced rate band. It is true that this does something for the poverty trap, but I believe that it does nothing like as much as would have been done by raising the thresholds across the board. For the same sum as the right hon. Gentleman has spent on the reduced rate band, the thresholds could have been raised by four times as much as the Chancellor raised them yesterday. That would have had the effect of taking many more people out of the tax system altogether and taking the thresholds well clear of short-term benefit rates.

As it stands, as I understand it, the reduced rate band runs out at £35 a week for single people and £45 a week for married people. The benefit goes overwhelmingly to juveniles and very largely to part-time workers, many of them pensioners and married women.

Mr. Rooker

That is 4 million people.

Sir G. Howe

Four million people, but a very large proportion of them are in the categories that I have described. For the rest, for the other 20 million taxpayers, the changes that have been made make the differential trap a good deal worse, because the reduced rate band confers a single flat-rate benefit on all those on any other income level beyond the limit of £45 a week. When one looks at what has actually been done for them, one finds that the total effect of the tax changes for those earnings more than £45 a week is that almost all the tax reductions are almost entirely swallowed up by increases in national insurance contributions. For a man on the average wage, the net addition to take-home pay as a result of this Budget amounts to £14 a week.

Mr. Rooker

That is not bad.

Sir G. Howe

I am sorry. I meant 14p a week. It is a very modest change, but that is the reality. Those earning more than the average wage, people on £120 a week, for example, will be quite a considerable amount worse off as a result of the combined effect of the tax changes and the national insurance increases.

What else does the Chancellor offer by way of an environment that will encourage those who work in British industry? When we heard that passage in his speech we were quite enthusiastic and exhilarated, thinking that at last he was recognising what needed to be done, but, as we followed him through, what he came to thereafter was the prospect of the industrial strategy, as he put it, reaching down to the factory floor.

The industrial strategy is not something that I find discussed with much excitement by working people up and down the country. Where there are people who have heard of the industrial strategy, it is regarded as an activity in which some representatives of industry have to engage in order to teach Labour Ministers at least a little about the facts of industrial life and to stop them getting up to worse mischief. There is no real encouragement in that.

What most people want, and what they were expecting from the Chancellor, was a real reduction in the amount of tax they have to pay on average and above-average wages, but many people are getting less in their pocket. For those earning between £45 and £145 a week, every extra pound they earn will be carrying more tax and national insurance deductions.

This is the most remarkable thing—that this Budget, which is meant to encourage and remotivate British industry, leaves the great majority of taxpayers paying less out of each extra pound they earn in their pay packet over the last part of the income scale. Indeed, one touchstone by which to judge this Budget is the rather curious Budget Resolution No. 13: 13. Divers and diving supervisors (income tax) That provision may be made for applying Schedule D instead of Schedule E to certain divers and diving supervisors. For the benefit of those who may not have followed these matters very closely I shall explain that that means that the Government are being driven and obliged to make special provision to relieve divers, in effect, from the general burden of the British tax system. That is a change that the Government are not making for other people. They are doing it for divers because the North Sea is the only place where men engaged on vital work can make a real comparison between their tax burden and the tax burden on those from other countries. It is a measure of just how far the Chancellor has failed to put the matter right elsewhere that he finds it necessary to make that special provision in that Budget Resolution.

We must express disappointment over the shape and scale of this Budget. It is said by some to be a Liberal Budget. If it is a Liberal Budget, and this is all that a Liberal Budget is mean to be able to achieve, heaven save us from any more Budgets like this. The Parliamentary Liberal Party, for reasons we can well understand, is much more easily satisfied than those who voted for its Members.

If this is any kind of a Budget, it is closer to being a Tribune group-TUC Budget than a Budget that should commend itself to the Liberal Party, because it consists of two parts—massive increases in public spending and substantial tax cuts, administered in the wrong way and for the wrong reasons, ill-designed to restore encouragement to British trade and industry.

For this Chancellor, it is admittedly an uncharacteristic Budget. Having plundered the pockets of the British people for four years, he now presents himself as committing an act of charity when he comes to the fact that he is giving some back.

The House would do well to remember what was said, I think, of the Dissenters' treatment by James II: "You are therefore to be hugged now only that you may be the better squeezed another time."

This is a Budget that is hostile to enterprise, hostile to skill, hostile to jobs, hostile to job creators, hostile to wealth creators and hostile to prosperity. That is why the country truly needs a fresh start.

4.37 p.m.

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

I suppose that I should congratulate the Shadow Chancellor on the humorous parts of his speech. The more serious parts lacked a little credibility.

As was clear from the right hon. and learned Gentleman's speech and that of the Leader of the Opposition, the right hon. and learned Gentleman was faced with a classic schizophrenic problem of his own making. On the one hand, he wanted to see much larger income tax cuts. On the other hand, he and his right hon. Friend attacked my right hon. Friend the Chancellor of the Exchequer because the borrowing requirement was too high and because this was a give-away electioneering Budget. Which is it? The right hon. and learned Gentleman cannot have both.

In practice, not surprisingly—to mix metaphors a little—the right hon. and learned Gentleman became impaled on the horns of his own schizophrenia. His dilemma was made all the worse because he knows that this will prove to be both a popular and a responsible Budget and will be seen as such in the country.

Mr. Terence Higgins (Worthing) rose—

Mr. Barnett

I shall not give way at this stage. I appreciate that the hon. Gentleman is in some difficulties with his own Front Bench and wants to try to make up for all the criticism he has made. I shall give way to him later. I am sorry. I should not even say that.

Mr. Higgins rose—

Mr. Barnett

I shall give way to the hon. Gentleman later.

Mr. Higgins rose—

Mr. Barnett

This is ridiculous. I have hardly started my speech. The Shadow Chancellor spent much of his speech making jokes at the expense of my right hon. Friend the Chancellor of the Exchequer. As soon as I have one little joke, Conservative Members want to intervene. I am surprised. I shall return to the hon. Member for Worthing, but first I shall deal with his right hon. and learned Friend.

First, he told us that he would have a fresh approach. He says that we need a fresh approach. What did we have from him? I do not know about Conservative Members, but I did not detect one constructive comment throughout his speech. Both Mrs. Thatcher and her Shadow Chancellor have constantly promised 'massive cuts' in taxation if and when they get to power. They have not, however, told us in convincing detail how they would go about it. Those are not my words but those written today by Mr. William Davis in that well-known paper the Daily Express. The article continues: Making any real impact on the system involves huge sums and some painful—and unpopular—decisions. The Liberals have calculated that it would require a minimum of £6 billion, a figure that frightened even them. Mr. Davis cannot have been talking to the hon. Member for Cornwall, North (Mr. Pardoe) as I have. The hon. Gentleman does not frighten so easily. Mr. Davis adds: Now we have heard from Mr. Healey, Mrs. Thatcher should spell out in unequivocal terms what kind of Budget we could have expected from her. Nothing less will do. Conservative hon. Members will have to answer that sort of question when, for example, we come to a General Election. However, they will have had nothing from the right hon. and learned Gentleman today to enable them to offer any answers. Not one word of that sort did we have from the right hon. and learned Gentleman. The answer that Conservative Members will be compelled to give is that a Conservative Government would increase the rate of inflation by increasing indirect taxes.

We do not know what level of borrowing requirement they want. The right hon. Lady the Leader of the Opposition and the right hon. and learned Gentleman have said, or implied, that the borrowing requirement should be lower. What exactly do they want it to be? We were not told anything about that in the right hon. and learned Gentleman's speech. He uttered not one word about it. What sort of responsibility is that from someone who purports that he will have the job of being the real Chancellor? We did not hear anything responsible from him today. Indeed, the consequences of everything that he suggested would be disastrous for the economy.

I take one simple example. The right hon. and learned Gentleman said that he would want to see the top rate of income tax reduced to 60 per cent. That is also what the Liberals want. Both the right hon. and learned Gentleman and the Liberals are wrong, but that is not surprising. For a married man on £25,000 a year the right hon. and learned Gentleman would be increasing his net take-home pay by £1,250. For the man on £50,000 a year the increase would be £7,032. A Conservative Government would be doing that, but at one and the same time the average-paid and lower-paid workers would, because of the huge costs, get nothing but massive increases in their living costs. That would be the consequence of what the right hon. and learned Gentleman would be doing on the other hand.

Mr. Malcolm Rifkind (Edinburgh, Pentlands) rose—

Mr. Barnett

No, I am not giving way. The right hon. and learned Gentleman can answer if he wishes. He is perfectly capable of doing so. Whatever the right hon. Member for Lowestoft (Mr. Prior), the moderate, if I dare say so and upset him again, Shadow Secretary of State for Employment, wants to do about pay policy, the policies of his right hon. and learned Friend the Shadow Chancellor and his right hon. Friend the Leader of the Opposition would destroy any chance of getting any moderation in pay policy.

What would we get? We would be back to the wildest pay and price inflation. That is what we would get from their policies.

Sir G. Howe

Does not the Chief Secretary yet realise, even after his teach-ins with the hon. Member for Cornwall, North (Mr. Pardoe), that one of the primary difficulties in getting top management to return to Britain to run companies such as British Leyland—I refer to those who have gone overseas—is the crushingly high level of direct tax rates that the Government persist in imposing on them? That is the reason for making the change.

Mr. Barnett

I can assure the right hon. Gentleman that the teach-ins between myself and the hon. Member for Cornwall, North are a two-way game. We are teaching one another. I hope that the hon. Gentleman has learnt a lot in recent weeks. We want to see reductions in the rates of taxation. However, if the right hon. and learned Gentleman is saying that £2½ billion net is too much, although he did not tell us exactly that, or even if he is saying that it is about right, anything more that he gave to those on the top rates would give either an increasing cost of living for others, as he has told us, or would have to come from tax reliefs for the lower paid. Where is it to come from?

Mr. Rifkind rose—

Mr. Barnett

No, I shall not give way. Even if the right hon. and learned Gentleman's fresh approach, as he calls it so pleasantly, is such that he is 100 per cent. right on the consequence and effect of further tax cuts and we have a huge improvement in industrial performance, he did not produce, and never has produced, one piece of hard evidence to support his policy. Any improvement would be massively upset by the huge increase in industrial costs and by the pay and price explosion that he would have provoked.

That is the background to the employment situation that we would face. When the right hon. and learned Gentleman and his right hon. and hon. Friends express concern about the level of unemployment, we are bound to say that in those circumstances they are being just a little hypocritical. I put it no more delicately than that.

Not everyone believes that everything can be done by the money supply. Without restraint in pay bargaining the inescapable alternative will be unemployment."—[Official Report, 30th March 1977; Vol. 429, c. 437.] That is what the right hon. and learned Gentleman was suggesting last year. However, does he believe that his so-called fresh approach would produce the moderation in pay settlements that is needed? If he does—I note that he is nodding—he must be on his own. I did not see anyone else on the Opposition Front Bench nodding. I find it incredible that anybody could imagine that that could be the case.

The right hon. and learned Gentleman had the right analysis. The Government must play their part in creating the environment, as he rightly says. However, if we were to pursue his policies with rigid money supply on top, we should have either large-scale unemployment or confrontation, or more likely both.

The central problem is unemployment, but even worse than the misery and waste of the present high levels of unemployment is to pretend to the unemployed that this or that single, simple solution will solve the problem. It will not. The plain fact is that there is no single simple panacea for the desperate problem of unemployment that we face. The right hon. and learned Gentleman underrates the intelligence of the people if he believes that cutting taxation will solve all our problems.

Mr. Prior

When the right hon. Gentleman says that there is no simple solution to the problem of unemployment, is he not rebuking his right hon. Friend the Chancellor of the Exchequer, who produced a figure of 1 million fewer unemployed only a few months ago?

Mr. Barnett

I am not unaccustomed to rebuke my right hon. Friend from time to time. However, on this matter I would not wish to rebuke him. What he said on the subject was absolutely right.

Mr. Dennis Skinner () Bolsover

My right hon. Friend is commonly known as "Top Cat" in some circles, but he is doing a pretty good job. In dealing with unemployment he has every right to challenge the Tories as he is doing. However, he must answer the question that I am about to put. He has said that there is no simple panacea. However, when cuts in public expenditure were announced throughout the whole of 1976 we were told by my right hon. Friend and his colleagues on the Treasury Bench that the cuts would produce additional unemployment. The answer is not all that simple but it is fairly easy. If we increase public expenditure by an amount equivalent to that which has been cut, some of the unemployment would be eliminated.

Mr. Barnett

As I knew that my hon. Friend would be raising that point I can tell him that I shall be turning to it. However, I am bound to tell him, as I think he knows, that I do not altogether agree with him. I shall come to the point that he raises at a later stage.

The right hon. and learned Gentleman's solution appears to be, as always but without specifying it, to cut public expenditure and increase tax reductions. We have it on the evidence of the Leader of the Opposition that she prefers the Good Samaritan to the State. The right hon. Lady was not, of course, referring to the organisation of that name, which does a first-class job. However, in her speech on that occasion, she said: So do not be tempted to identify virtues with collectivism. I wonder whether the State services would have done as much for the man who fell among thieves as the Good Samaritan did for him. I am not sure where she put the right hon. and learned Gentleman in that, but she certainly could not have been referring to him as a Good Samaritan because his idea of a Good Samaritan is to add large sums of money to the costs of lower-paid people and then wait for the millionaires, who are given massive tax reliefs, too, to play the Good Samaritan. That is his policy.

It is as foolish to imagine that the Good Samaritan could answer the terrifying social and financial problems of a modern State as to argue that income tax cuts are the simple answer to our poor industrial performance. To accept that kind of argument—and it is the only argument that has ever been pursued from the Opposition Front Bench; I have never heard another argument from them—[An HON. MEMBER: "Rubbish."] That is absolutely right. It is rubbish, because it ignores the facts completely.

In the 1950s, prosperity in Britain was certainly growing, but the growth was near the bottom of the international league and was the lowest in Western Europe. Between 1950 and 1962, our national wealth grew about 2.3 per cent. a year. In the United States, the growth was 3.3 per cent., and in Western Germany it was over 7 per cent. [An HON. MEMBER: "What is it now?"] Of course, it is very much lower in Western Germany, in the United States and in the whole of the OECD. What is more, they did not start from the kind of situation from which the present Government started in February 1974. [Interruption.] It is very difficult to have a serious discussion about how one can improve industrial performance with the kind of comments that we get from the Opposition.

The fact is that if one looks back over 100 years, one sees most other major economies out-performing us. That is over 100 years—even when there were no Labour Governments, sadly. Our average growth for each decade for the century from 1860 was about 21 per cent., exceeding only that of France in Western Europe, and strikingly below that of Germany, about 31 per cent., and those of the United States and Japan, both over 40 per cent.

Mr. Rifkind

Will the Chief Secretary give way?

Mr. Barnett

No, I do not think so. [HON. MEMBERS: "Give way."] I shall finish this point and then give way. [Interruption] That remark is quite typical. I am trying to make a serious point, which I hope that we shall all note, that this country has performed badly for some 100 years. That is not something to jeer at. It is something to be very sad about.

The fact is that this point deserves to be noted if only because we shall never begin to get the problem right if we believe that the sole solution is to cut income tax and sit back and pray for it all to come right, as the right hon. and learned Gentleman seems to suggest that we should do.

Mr. Rifkind

When the Chief Secretary is basing his case on international comparisons of past performance, will he mention one other of our major competitors which are actually producing less now than it was four years ago?

Mr. Barnett

Actually we are not producing less than we were four years ago, as the hon. Gentleman will see if he cares to look at the figures. If he cares to look at the growth of output over the last four years, he will see that most other countries have done very badly as well. [HON. MEMBERS: "Answer the question."] The hon. Gentleman is wrong, anyway. But I ask hon. Members to take seriously the problem of Britain's poor industrial performance, not for four years but for 100 years, relatively speaking. It is a nonsense to suggest that the whole answer is to cut taxes.

Mr. Peter Tapsell () Horncastle

Before the Chief Secretary leaves that interesting and important argument, will he also add the corollary that for a very large part of the historic period that he has mentioned this country was building up enormous overseas assets, which in fact helped us to pay to win two world wars?

Mr. Barnett

With the greatest respect to the hon. Gentleman, any decent analysis of that period will show that one of our problems was that we were living off the Empire for far too long and were not ready for the time when it turned into a Commonwealth. That is one of our major problems. Indeed, it is that kind of shallow analysis that is the cause of so much of our troubles.

But even if we improve our industrial performance, an objective on which I hope that at least we can all agree, we face many immense problems which no Budget can solve. I refer to the world-wide problems facing every country in the developed world of surplus capacity in so many major industries—steel, shipbuilding, textiles, petrochemicals—all made worse by growing competition as poorer countries rightly expand their own industries. The solution here can never rest with just one country; it rests with much greater co-operation both within the developed countries and between the developed and the developing countries, to bring about an expansion of world trade.

I mention this to show that it will not be enough simply to increase our output. We also have to be able to sell the increased output. Also, of course, whilst improved industrial performance is essential and will help us to sell it, and at the same time create more jobs, or at least prevent the loss of existing jobs, there are very severe limits to what can be achieved against a background of slow growth in world trade.

However, as the Chancellor said yesterday, the Budget measures make our contribution to world expansion. I am certainly hopeful that the further summit meeting in July will make it possible to do more, but for now—[HON. MEMBERS: "Oh."] Are Opposition Members getting worried about what we might yet do in July?

The fact is that the criticism of this Budget has been that perhaps we have done too little, or perhaps we have done too much, getting the balance wrong, both within what we felt able to do on taxation and between taxation and public expenditure. I want to deal with this criticism, but, before I do, it will not surprise the House if I start with a conclusion—namely, that with the criticism so diverse and wide-ranging, most reasonable observers will conclude that the Chancellor has got it about right. [HON. MEMBERS: "Oh."] I said "most reasonable observers." I do not expect to find many on the Opposition Benches. Most reasonable observers will think that.

But no economist or politician can forecast with absolute certainty the actual size of the Budget stimulus to within £1 billion or £2 billion either way. I notice that the right hon. and learned Gentleman the Shadow Chancellor did not attempt to do so. Although most people will not be able to forecast with absolute certainty, I am sure that it will not prevent them from forecasting with absolute certainty from time to time, if not constantly. But the right hon. and learned Gentleman, as ever, took the coward's way out and did not make any judgment at all as to what the size of the net Budget stimulus should be. I am not surprised. I am asking the Shadow Chancellor why he did not tell us what we should have done.

Perhaps it is because on the odd occasion when the right hon. and learned Gentleman has made a forecast, he has been as wrong as anyone else. I do not necessarily blame him for that, because it is not easy to get these forecasts right. I understand that he can be as wrong as anyone. Indeed, two years ago he said: It will…prove impossible to finance recovery of the economy alongside the likely scale of public spending without an explosion of the money supply. He got that wrong, because there was no explosion of the money supply.

The right hon. and learned Gentleman went on to say: This will mean an acceleration of inflation in 1978. But of course, he was completely wrong about that, as he knows very well.

The fact is that the best comments on forecasts that I have seen of late came in The Guardian of last Friday, by Hamish McRae. Referring to a Mr. Brian Reading, who will be known to Opposition Members, according to Hamish McRae, Brian Reading had something to say about forecasts, and he was writing perfectly fairly about the Treasury model, although I am sure that he would be the first to agree that it would apply almost equally well to any model that one cares to take. It is very interesting, because he said: Over half the forecast rise in imports of manufactured goods is accounted for by the time trends in the Treasury model. A time trend is basically an econometrician's way of saying that because something has happened in the past, though for no obvious reason, it will probably continue to happen in the future. It is obviously a very unsatisfactory basis on which to predict catastrophe. Then: Mr. Reading's parting shot is this: 'The dependence of the balance of payments forecast on this one shaky area of the model—where the results depend upon the extrapolation of exponential time trends and the manipulation of sizeable residuals—means that little confidence can be attached to the forecasts.' Or as Hilaire Belloc put it: 'Oh let us never, never doubt What nobody is sure about'".

Mr. Peter Hordern () Horsham and Crawley

Will the Chief Secretary give way?

Mr. Barnett

I should like to finish this point.

Taking what no one is sure about—namely, the best forecasts—with all their limitations and a large pinch of salt, as well as looking at the prospects for world trade as we now see them, all that we can do is measure whatever stimulus the Budget can provide on the best judgment which will allow a sustainable increase in output—and the emphasis should be on the word "sustainable".

Mr. Hordern

The right hon. Gentleman is talking about getting things wrong. Would he read the Financial Statement produced by his right hon. Friend? He said before that the growth of GDP in this country had been rather better than that of some other countries. I refer him to paragraph 3 of the Financial Statement: For 1977, according to provisional data, the growth rate for the United States and Japan will be around 5 per cent., but that of Germany no higher than 2½ per cent. In paragraph 40, the statement says that, for the United Kingdom, GDP (average estimate) for the year as a whole rose by ¾ per cent. between 1976 and 1977, but there was no growth at all during the course of 1977.

Mr. Barnett

Unusually for him, the hon. Gentleman could not have been listening. I did not say that our performance for the last four years in terms of industrial output was better than that of other countries. For myself, I respect the views of those who, taking different assumptions on the forecasts which should be made, come to different conclusions. Indeed, I recognise that some of my hon. Friends in particular would have wanted us to do rather more than we were able to do.

Mr. Ron Thomas (Bristol, North-West) rose—

Mr. Barnett

Before I give way, may I tell my hon. Friend what I wanted to say about what I know he would have said?

I understand and sympathise with the reasons which led many of my hon. Friends to ask for a larger stimulus. They stem almost entirely from a deep desire to reduce the level of unemployment, which I very much share. But it is impossible to be precise about the stimulus to the nearest £1 billion or £2 billion. A larger stimulus would in my view carry a degree of risk which is unacceptable if we are to achieve a steady—I emphasise the word "steady"—and sustainable growth of output and a permanent and lasting reduction in unemployment.

I should like to explain why I come to that conclusion. First, one must accept —and I do—that a larger stimulus would raise domestic demand. In all but the very short term, domestic output is more likely to suffer rather than to gain. Higher imports would lead to a balance of payments deficit, despite North Sea oil. Of course, that is a consequence we might be able to live with, given our financial strength, but the other effects would be much less easy to live with—for example, a sharply increased borrowing requirement, with pressure on the exchange rate and interest rates, all of which would feed on themselves, causing the rate of inflation to accelerate.

Faced with this, and the general shock to both consumer and industrial confidence, investment plans would inevitably be in jeopardy, and jobs with them. All in all, it is a gamble in going for a larger stimulus which I, for that reason, do not feel we should have taken.

Mr. Ron Thomas

Would my right hon. Friend not agree that this package, with the hoped-for increase in growth of 3 per cent., when we take into account the propensity to save and to import finished and semi-finished manufactured goods, will have no impact on the indefensible level of unemployment?

Mr. Barnett

I do not accept that at all. My hon. Friend will know that the relationship between output and employment anyway is very difficult at the moment.

Mr. Thomas indicated assent.

Mr. Barnett

I see that he does. Over the last year, there were forecasts that there would be more than 2 million unemployed because output was flat. In practice, despite an extra 170,000 coming on to the labour market, there has been a fall in unemployment, month on month, and an increase in vacancies. No one knows the answers to this, and I do not pretend to, but if that was the situation achieved when output was flat, I believe that with a 3 per cent. growth of output we shall see some further fall in unemployment.

I turn now to those others—I am not sure whether the Shadow Chancellor is among them—who feel a little unhappy that perhaps we have given too big a stimulus in the Budget. Those who are arguing in this way believe, I assume, that a smaller stimulus would further strengthen our financial situation. But the other effects of a smaller stimulus would work in the opposite direction. For example, there would be lower levels of output and higher unemployment. Because of this, and a smaller improvement in net take-home pay due to smaller tax cuts, the chance of obtaining co-operation through moderation in pay settlements would be diminished and we should lose any slight benefit of the kind that those who would have wanted something less believe would have been achieved.

What we have done, on the best judgment that one can make, we think, has got it about right—with about £2½billion of tax cuts and a commitment on public expenditure out of the contingency reserve of about £550 million. This should set us on the road to increased output and a reduction in unemployment—a reduction that is sustainable and something that we can improve as and when we see an improvement in our industrial performance.

Mr. Higgins

This might be an appropriate moment to make the point that I wanted to make earlier, when the right hon. Gentleman put great stress on schizophrenia, from which he said we were suffering. Can he recall any previous Chancellor who was so schizophrenic as to reduce taxation at the same time as putting up interest rates?

Mr. Barnett

I never accuse the hon. Gentleman of schizophrenia: I was accusing his right hon. and learned Friend the Member for Surrey, East. As the hon. Gentleman knows, putting up an interest rate by 1 per cent. when our interest rates are lower than dollar rates is certainly not a means of increasing the rate of inflation. Certainly his right hon. and hon. Friends on the Front Bench do not accept that if we allowed interest rates to be too low and therefore allowed too fast an expansion of the money supply, that would help to keep down inflation.

Mr. J. Enoch Powell () Down, South

If the £2½ billion of revenue forgone is to be replaced by borrowing from the public of the same amount, where is the stimulus?

Mr. Barnett

A borrowing requirement of about £8½ billion is what we expect next year—we cannot know with any certainty because the borrowing requirement has been, not only under this Government but under many others, £1 billion or £2 billion out either way because of the huge flows—but it depends how it is financed and it depends on savings and so many other factors. I know that the right hon. Gentleman likes to take these matters seriously. He takes a very simple and logical view of them, usually on a false premise, and it seems that he is doing the same now.

It is too simple to say that if we reduce the tax yield by £2½; billion, we shall necessarily have to borrow that much more. If we did, the question of how it was borrowed matters enormously. Thus, it is not quite as simple as that, as the right hon. Gentleman must know. However, he always likes to put the questions in a simple form.

Mr. Powell

I am grateful to the right hon. Gentleman for assisting my simplicity. If, as he has already admitted, the stimulus is not to be quantified at £2½ billion because it is only the part of it which is borrowed in a particular way which yields a stimulus, will he kindly quantify that part which is going to be so borrowed and which is going to be a stimulus?

Mr. Barnett

The right hon. Gentleman is asking impossible questions, because one does not know at this stage. All that I can say, as the Chancellor said yesterday, is that we intend to ensure that we shall not be borrowing that money in a way which will stimulate inflation—and that, of course, is within the power of Government. I am surprised at the right hon. Gentleman looking at the matter in this odd way. There is a variety of ways of deciding how the money should be borrowed. I know the right hon. Gentleman's views. He would probably prefer a smaller borrowing requirement. That is a perfectly respectable view to take. The trouble is, perhaps, that the right hon. Gentleman is not speaking from this Dispatch Box.

The right hon. and learned Gentleman the Shadow Chancellor did not tell us whether he thinks that the borrowing requirement is too high. I do not know what he did tell us. Certainly he did not tell us anything of an instructive kind. Perhaps he would care to tell us now whether he thinks the borrowing requirement is too high. I see that he would not. What he did tell us, apparently, was that he would cut public expenditure, but he did not tell us whether there were any of the increases in public expenditure programmes announced yesterday by the Chancellor of the Exchequer that he would not have carried out.

Sir G. Howe

Does the Chief Secretary not understand that we voted against the planned increases in public spending set out in the White Paper a month ago, and that we would not be embarking on those increases which are adding £3.5 billion to the prospective borrowing requirement in the next year?

Does the Chief Secretary also not understand the warning I gave him that the borrowing requirement is dangerously large, but that in any event the solution to the problem of our economy does not lie in simplistic stimuli to the economy but in introducing a sensible tax structure which will encourage people rather than the economy?

Mr. Barnett

That is the oddest comment. So putting a few thousand million pounds more into the economy through tax cuts would not be a stimulus? That would be something different, would it? I see that it would. Would it? I must confess to the right hon. and learned Gentleman that I honestly do not know what he is talking about and, judging by their faces, nor do any of his hon. Friends. The right hon. and learned Gentleman was very open just now—rather more open than he was when we last debated public expenditure. I asked him then what elements in that public expenditure he would have cut. Now he is saying that he would have cut all the increases that we announced. I will look through them and see where those increases lay.

Sir G. Howe

I said in the debate on public expenditure that it was our view that the total of public spending should not exceed the real outturn in the financial year just ended. That is what I said then, and I repeat it now. It is by transgressing that that the Government are making their present error.

Mr. Barnett

That is very interesting. The right hon. and learned Gentleman is trying to get out of what he said earlier. All he is doing now is to talk in generalities, without telling us where he would cut. [Interruption.] I am trying my best to give some credibility to the Opposition, and it is very difficult. The readers of the Daily Express want to know. They want to have some credibility from him. The fact is that the only areas of public expenditure, in the main, in regard to which the Opposition have been positive are where they would make increases. I refer, of course, to defence expenditure and to law and order. I read the speeches of the right hon. and learned Gentleman regularly and the only areas where there is reference to specific cuts in public expenditure are subsidies and transfer payments, as they are sometimes called.

Would the right hon. and learned Gentleman not have increased by £156 million the expenditure on employment measures? Would he not have increased child benefit by £165 million? I gather that he has welcomed it. Those are the two biggest items. Then there is the figure of £65 million for school meal charges. Would he put those up? The right hon. and learned Gentleman's hon. Friends are quite right to feel upset, because at some time or other he will have to answer the questions that he is not now answering. His hon. Friends are not getting the answers from their Front Bench. That is why the Conservatives are in this kind of difficulty, because they have no credible policy of any kind.

I now turn to the contents of the tax package. I appreciate that there are a number of questions about whether there should have been bigger income tax cuts offset by indirect tax increases, which I think one or two Conservatives had in mind. Should we have used all the relief for the widest possible band of reduced rate of tax, or should we have done it in a variety of different ways, such as cutting the basic rate and so on?

I should like first to say a brief word on tax avoidance, to which the right hon. and learned Gentleman referred. I am not referring here to the ordinary ways in which a taxpayer can arrange his affairs to the best tax advantage. I am referring to schemes of the kind which the Chancellor of the Exchequer had in mind yesterday—schemes which are totally artificial and with no real financial or commercial result other than a fee for the organiser and a large reduction in tax to the detriment of all other taxpayers.

The schemes to which I refer are sold by people who have other schemes on the shelf ready as soon as one is countered. In the past, the House, reluctant as it is to approve retrospective legislation, has done so back to the date when the scheme was first detected. Unfortunately, there is always a period—which the vendors of these schemes lengthen by the level of secrecy which they impose—during which the marketers of the schemes and their customers benefit before the legislation can take effect. They know the situation and they plan accordingly.

I hope that the House will agree that this is wholly unsatisfactory, and that we can show those concerned that for the future the game is just not worth the risk. I propose that we should legislate in each case as it comes to our attention in such a way as to remove all tax advantage of a scheme from the outset. I believe that it will be possible to do this without harming those genuinely engaged in any commercial transactions to which these artificial arrangements may be attached.

As I have said, I understand the general dislike of retrospective legislation, but we are not dealing here with anything remotely like normal trading or even normal tax avoidance. These are operations which many, regardless of political views, will find repugnant. The tax stake is very large. We estimate that in the years 1973–74 to 1975–76 tax at stake from schemes detected are about £200 million. But in the last year or two it has escalated, and in 1976–77 the figure could be £200 million for one year. We know of one claim alone in which it is sought to establish a loss of nearly £100 million.

We owe it, I believe, to the millions of ordinary taxpayers to stop it. If in the process those who play with fire in this way get their fingers burnt, I hope that we shall shed few tears for them.

Mr. E. Fernyhough () Jarrow

I wonder how many farm workers, how many miners, how many building workers and how many railwaymen were involved in this mean little cheating scheme which cost the nation £200 million.

Mr. Barnett

They are not little schemes, as I explained. Some of them are very large schemes. One scheme alone involved £100 million. These are not for people of the sort that my right hon. Friend had in mind.

I turn now to the different ways that I mentioned in which we might have distributed the income tax relief that was available. On the first question of a switch from direct to indirect taxes—including even petrol, or perhaps not including petrol—I say at once that, provided basic necessities are excluded from the indirect taxes, I should like to make such a switch as soon as possible. But at a time when it is not only essential to bring down the rate of price inflation but to reduce expectations about inflation, among both wage negotiators and price fixers, there could not be a worse time at which deliberately to increase the rate of inflation.

The argument between the threshold and a reduced rate is finely balanced. It is true, of course, that raising the threshold takes more out of tax, but the reduced rate band of 25 per cent. creates a new marginal rate for about 4 million people. For this group of taxpayers 25 per cent. will be their basic rate. I see this as a start on the road to making it the basic rate in due course for millions more. I am very pleased that we have been able to do this and also to make a further small increase in the threshold. It should be recalled that this is on top of the October increase which fully indexed the allowances for 1978–79.

Mr. Ralph Howell () Norfolk, North

Is the right hon. Gentleman aware of the intense disappointment on the Conservative Benches and in the country generally that the Government have not had the good sense to reduce the standard rate of income tax? Is he aware that what goes to those who benefit from the reduced band will be largely offset by the fact that they will receive fewer wefare benefits as a result of their paying less tax, and that the help will be generally cancelled out? Will the right hon. Gentleman tell the House the number of people that he estimates will be taken out of the poverty trap as a result of this Budget?

Mr. Barnett

I am not altogether clear about what the hon. Gentleman is saying. I know of the great interest that he takes in the poverty trap. The point I would make is that since the 4 million people I am talking about will be paying 9 percentage points less tax in the pound than previously, that can only be helpful to those within the poverty trap.

With regard to a reduction in the basic rate of tax, I am sure the hon. Gentleman is under some misapprehension because that does nothing for people in the poverty trap. Each 1p reduction in the basic rate costs about £600 million in a full year. That would not help those in the poverty trap. I eventually want to see a reduction in the basic rate of tax, because it would help skilled workers whom I believe we should be seeking to help. But in a year when we are dealing with £2,500 million we want to help most those at the lowest end of the income scale—in which the hon. Gentleman has a great interest—as well as those on average pay.

I think it was right to do this largely through the reduced rate band and through doing a little more with regard to the threshold. I hope that when the hon. Gentleman has read what I have said he will realise that what we have done will do much more for those people in whom he takes such a great interest than if we had cut the basic rate instead.

Mr. John Roper () Farnworth

Will my right hon. Friend clarify one point which has been raised with me today? When a married couple are both working will the £750 at the reduced rate apply both to the husband and to the wife?

Mr. Barnett

The answer is "Yes", because each of them gets his or her own allowance, and they are taxed separately, as my hon. Friend knows.

I should like to say a brief word about the top rates of tax. This should be seen in perspective. Even for a married man, with two children under 11, on a modest £25,000 a year, and on a reasonable assumption of a maximum mortgage, although his marginal rate of tax is high—I would not deny that—his average rate of tax will have been less than 50 per cent. Nevertheless, we have provided some relief for the higher-rate income earners. But I am sure that it was right in this year to concentrate our relief on those at the lower rates of income and on average rates.

Looking at the Budget as a whole, I think it will be seen that the tax cuts are well balanced to help those in the greatest need, particularly when one includes those helped through the new profit-sharing schemes, the help to the hotel industry, the farming industries and small firms. We were able to do a little more as well. We were able to take action on public expenditure. The departmental Ministers will be giving details, as my right hon. Friend the Secretary of State for Social Services did today.

I am glad to note that the expenditure increases announced yesterday were welcomed by everyone, including those who want to make the biggest public expenditure cuts. On the whole, despite what the right hon. and learned Member for Surrey, East said, his hon. Friends seemed to like the Budget, including the expenditure increases in programmes that were announced.

I believe that this Budget provides a tremendous opportunity. The situation has been transformed from what it was four years ago. I can understand the carping criticism of the Conservative Opposition when they see the prospects so much brighter than they have been for so long. The situation is enormously improved. We can now see output beginning to grow. Inflation has fallen to 7 per cent. and should stay there throughout the year. We have shown that we can control the money supply which will be kept within a range of 8 per cent. to 12 per cent. The balance of payments in 1978 is the best since 1971, and that year itself was a good year only because of what that Government inherited from the previous Labour Government. The borrowing requirement is within the IMF guidelines. All that is a very considerable achievement.

We have come through the worst world recession since the war, starting in our case with a nightmarish inheritance of February 1974. We can now—providing there is no danger of reverting to the confrontation policies of 1970 to 1974—see better times ahead. I commend this Budget to the House.

5.25 p.m.

Mr. David Steel () Roxburgh, Selkirk and Peebles

The Chief Secretary referred to his occasional meetings with my hon. Friend the Member for Cornwall, North (Mr. Pardoe) as a mutually beneficial teach-in. Certainly my hon. Friend has accepted that and the results were obvious in the terms of the announcements yesterday and today.

Indeed, if there remains a disagreement between us—as there does, and I shall refer to it later—it is not because we consider that there has been a failure of understanding or appreciation of our proposals on the part of Treasury Ministers but rather, as the Chief Secretary indicated, that there has been a failure of political inclination or will actually to carry them out, particularly in this year. I shall return to that in a moment.

I first want to deal with the speech of the right hon. and learned Member for Surrey, East (Sir G. Howe), who has explained why he has had to leave the Chamber. I make no complaint about that. He had quite a lot of fun at the expense of the Liberal Party. I make no complaint about that. He was described by one distinguished political commentator as "Mogadon man"—guaranteed to put everyone to sleep. I thought that was rather unfair because I counted only three Conservative Members asleep this afternoon. [HON. MEMBERS: "Four."] Moreover, the right hon. and learned Gentleman did not put me to sleep because I thought his jokes were a good deal better than his arguments. On this occasion his contribution was very lively indeed.

I have no objection to the Conservative Party taking the Liberal proposals and arguing vehemently against them, whether with ribaldry or with serious intent. I am sorry that I cannot return the compliment. We have had no Tory proposals in advance of this Budget which we could analyse, discuss and throw into the political debate. I had rather thought that we would at least get the benefit of the alternative Conservative Budget after the Government's Budget had been announced. Sadly, we were disappointed. We have to continue to conduct the political debate on how the economy should be handled without the benefit of the kind of published detailed proposals from the Conservative Party which we at any rate were willing to put forward into the discussion.

I want to begin by looking at the economic background against which this Budget has been constructed. If there is a marked shift in direction between this Budget and previous Budgets from the Chancellor it is surely because the economic background is now very different from that which we faced at the time of the last Budget but one a year ago. I have never subscribed to what I call the "Healey formula"—the calculation of the rate of inflation on a three-month basis. I am referring to the famous 8.4 per cent. figure. But since that figure has been used so much, if one takes that particular standard and looks at the situation a year ago one finds that in the quarter just before the last Budget—just before the Lib-Lab agreement was made—the annual rate of inflation was 21.6 per cent. In the equivalent quarter this year, ending in February, the equivalent was 7 per cent. By any standard that is a remarkable turnaround. The Chancellor himself said yesterday that he was hoping that that 7 per cent. figure would turn out to be the annual figure and not just the quarterly figure. I also hope that that will be the case.

If one is quoting these quarterly figures one should remind oneself that in the last quarter of the previous Conservative Government, ending February 1974, the rate of inflation was 18.9 per cent. At least on a short-term basis we have substantially reduced the level of inflation and we must hope that the economic programme of the Government will continue that trend over a longer period. All the indicators—mortgage rates, the value of the pound against the dollar, the balance of payments figures, and so on—are very much more satisfactory than a year ago.

I have no hesitation in saying that it the Lib-Lab agreement helped to create a year of political stability against which it was possible for this Budget to be of a rather different character and flavour from previous Labour Budgets, then my colleagues are due some of the credit.

I turn to three particular proposals in the Budget. The first deals with small businesses. There are some ten proposals dealing with this sector in the Budget. Yesterday, when the Chancellor talked about the contribution that the small business sector could make to employment and the development of the economy, a Conservative voice behind me asked him when he learned that. The answer is that he learned it this year. I pay tribute to my hon. Friends the Members for Colne Valley (Mr. Wainwright) and Cardigan (Mr. Howells) and the Chancellor should pay tribute to his right hon. Friend the Chancellor of the Duchy of Lancaster because between them they have changed the whole attitude of the Government.

They have not just changed it from what this Government were doing previously—which was reprehensible anyway—but from what successive Governments have done over 10 or 15 years. As the Bolton Committee reminded us, this was not just a short-term discrimination against small businesses. We have been seeking positive discrimination in favour of small businesses, and I must admit that this Budget is riddled with such positive discrimination.

Mr. Nicholas Ridley () Cirencester and Tewkesbury

How can the right hon. Member say that? Every single major recommendation of the Bolton Committee was implemented by the last Conservative Government. How can he ignore that fact when there were only two very small recommendations that I did not implement when I was a Minister?

Mr. Steel

If the hon. Member is still on speaking terms with his right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) he will remember that he at least has been a bit more candid about the record of the Conservative Government, as far as the self-employed are concerned. Indeed, the facts speak for themselves. Whatever the hon. Member may say about what happened when he was a Minister, the truth is that there has been a decline in small businesses in Britain which has been going on under successive Governments. I hope that the Conservatives will pay tribute to the Government because at least they have taken particular steps to reverse the trend, and we welcome it.

The proposal on farm income taxation will be widely welcomed in the agricultural industry. Although it is right that the publicity for the restoration of free school milk for all primary school children should be on social grounds, because that is the most important argument, it should not be forgotten that this will be a great help for the hard-pressed dairy industry, which has been arguing this case for some time.

The profit-sharing proposals to which Members of the Opposition have referred are a feature of this Budget. The Government have adopted the most radical of the three proposals in the consultative document. I welcome their choice and emphasise that this is the beginning of something for which Liberals have been arguing for 50 years. The Yellow Book of 1928 says: The real purpose of profit-sharing is to show that the worker is treated as a partner, and that the division of the proceeds of industry is not a mystery concealed from him, but is based upon known and established rules to which he is a party. That philosophy has gone unheeded for 50 years. It is no good the right hon. and learned Member for Surrey, East saying that it bears some resemblance to some report of some Conservative committee. We have had years of Conservative Government with no action on profit sharing at all. When this was mentioned, an hon. Member behind me was foolish enough to talk about the share option scheme. But the share option scheme was a scheme for top people. It was for company directors.

The £500 ceiling under this scheme makes it absolutely clear that this is a tax incentive scheme for the worker and the manager in industry. Some hon. Members may think that I ride a hobby horse on this particular proposal, and if I do it is because two years ago I visited some firms in the United States which have used tax incentives there. Talking to workers and directors in those firms I found myself convinced that what I have talked about in theory was working there in practice for the benefit of productivity and industrial relations. I was convinced that it was time it was transferred here more effectively.

As is well known in the House, ICI has had a rudimentary kind of profit-sharing scheme for some time. Recently it has had a committee of its own work people reviewing this scheme, and as a result the company is about to turn it into a far more effective scheme related to the value added in the company with the individual's reward relating to his position in the company on a fixed formula, so that the qualification at the end of my Yellow Book quotation will apply. This will be a great improvement in the scheme. A large number of companies have been in touch with us, as I am sure they have been with the Treasury, asking what we are doing to give incentive to enable them to proceed with such schemes.

Some people say that the scheme is only a limited one and does not apply to the nationalised industries or to unquoted companies. However, if we have to wait until we can get a grand universal profit-sharing scheme for all of industry we shall never have anything. This is a limited scheme for a limited section of industry but it is, none the less, the first healthy step to identifying all the interests of profitability, and the rewards to industry throughout the length and breadth of the company.

In the economic climate against which this Government and the previous one have had to operate—namely, with wage restraint of different kinds, whatever one chooses to call it—the great attraction of the profit-sharing scheme at this time is that it is a way of rewarding people in private industry over and above any wage norm that has been established, whether by Government, by statute, or by agreement with the TUC. Therefore, it is particularly relevant at present as we all want to encourage savings and the spread of wealth. The proposals announced by the Chancellor—and they were already trailed in the consultative document—have not received the full attention and importance that they deserve.

On the question of income tax, it was agreed last July that there should be a shift in the burden of taxation away from incomes. I do not think that the Treasury has achieved this. The Government's take from income tax has increased anyway because of the increase in earnings and inflation, and this factor must be taken into account. It is arguable that there has been no real shift away from the burden of tax on incomes. Nevertheless, the Government are absolutely right to give priority, within the tax reductions, to the question of the poverty trap. This has been rightly and deservedly welcomed.

In our statement to the Government we suggested that there should be either a dramatic reduction in the standard rate to 30p or the introduction of a lower rate band which could be widened in successive Budgets over successive years to become the new standard rate.

The Government rejected the reduction in the standard rate and, even more disappointingly, the lower rate band that they have chosen is so narrow at £750 that although the Chief Secretary talked of widening it in future years I believe that there has been a failure of nerve here in making a substantial reduction in income tax.

In view of the fact that the Chancellor has accepted that tax on income in this country is higher than in most of our industrial competitors, the reform of the taxation system is most overdue in this area. The incentive effect of having only a couple of pounds extra in the pocket is not marked enough to give the psychological stimulus for which we are looking. Perhaps we can return to this matter at the Committee stage of the Finance Bill, which should be very interesting this year.

Mr. Rooker

The right hon. Member should join us on that Committee.

Hon. Members

The hon. Member will not be there.

Mr. Steel

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) must not claim his position on the Standing Committee during my speech. He may suffer a disappointment on this matter.

On the higher rates of income tax, I do not believe that very many people are affected by the very top rates. There are no votes in the issue. Therefore, what is the posture or the impression that we give to those who climb the ladder of success in their professions or businesses? It is intolerable that we should have such steeply rising rates of income tax culminating in 83 per cent. There is a strong case for making reductions there, particularly when the cost to the Exchequer is so relatively small.

Mr. Rooker

I agree with almost everything the right hon. Gentleman says, but surely there is no case for reducing the high marginal rate of 83 per cent. until we change the tax structure, so that we prevent the situation which has arisen in this Budget where even the welcome changes in respect of the low paid—changes which I wholeheartedly approve —have led to a reduction in tax to the man earning £25,000 a year of £15 per week. That has happened as a result of the modest changes at the lowest end of the scale. Surely the right hon. Gentleman does not want to add to that by further reducing the high marginal rate.

Mr. Steel

So long as we have a tax structure which takes such a large proportion of the Government's income from income tax, it is bound to have that kind of effect. However, that should not deter us. Provided that we have tackled the problem at the lowest end, as the Government have tackled it, we should not be politically deterred from dealing with the problem of the confiscatory amount of taxation at the higher end.

If there are those in middle management—I am not talking about those who are affected by the 83 per cent. figure but of those in the middle and upper bands—who opened their newspapers this morning and read the new tax tables and are feeling disappointed with the Government, I hope that they will blame not just the Government but those who claim to speak for them. I do not think there is any secret between us that this is a matter on which we disagreed in our amicable discussions. The CBI and the British Institute of Management were pulling the opposite way from the Liberal Party on payroll tax. No doubt this is one reason why the Government have not acceded to our view that it would be possible to make substantial reductions in the higher rate provided that we had a 1 or 1½ per cent. surcharge on the employers' contribution to pay for it.

My hon. Friend the Member for Cornwall, North and I, in our discussions with employers in advance of the Budget, argued this case, and we found that our view was generally accepted. Yet the official spokesmen for that section of interest in the country—the CBI and the British Institute of Management—have been telling the Government the exact opposite. It is sad that the Government appear to have listened to them. Therefore, I hope that those who are feeling outraged will blame not only the Chancellor and the Chief Secretary but their own spokesmen for failing to accept a modest increase in employers' contributions as a means of paying for these taxes.

The Chancellor of the Exchequer referred to this matter yesterday and said that at a time of high unemployment this would be the wrong step to take. But when we are engaged in an exercise to try to keep down the level of wage inflation next year to a figure of about 5 per cent. and when we look back a year ago and remember that employers were facing wage increases of around 20 per cent., to talk in terms of 1 and 1½ per cent. surcharge is a modest contribution to ask them to make to what would be the restoration of differentials and a much better climate of opinion among middle management.

Mr. Anthony Nelson () Chichester

The right hon. Gentleman has honestly explained how he would finance a reduction in the higher rates of marginal taxation, but it would be worth while for the House to know exactly where the Liberal Party stands on this subject. Earlier he proposed a much more expansionist cut in the lower rates of direct taxation. Clearly, this can be financed only by a higher rate of borrowing, a higher rate of indirect taxation and more cuts in public expenditure. Which of those would he favour—and, if it is indirect tax, by how much would he increase it?

Mr. Steel

The danger of giving way on these occasions is that the hon. Member involved anticipates what one is coming on to say. Unlike the Conservative Party, we have published our proposals for better or for worse and they can be criticised, but at least they exist. I shall send the hon. Gentleman a copy of our detailed, costed proposals so that he can be in no doubt where we stand.

On the other hand, the Conservative Party is totally hypocritical on this matter. We had this afternoon the announcement, following yesterday's proposals, of a £1.36 billion increase in public expenditure in a full year on child benefits. The Conservative Opposition welcomed it and indicated their support for it. Yet that provision was included in the public expenditure White Paper, against which they voted and which was paraded with great virtue this afternoon.

The modest £40 million on education was derided by the right hon. Lady the Leader of the Opposition yesterday as hardly worth mentioning. Does that mean that the Conservatives do not think it is enough? But will they vote against that public expenditure? Of course they will not. Will they vote against the £50 million for the National Health Service? Of course they will not. Will they object to extra help for the disabled or extra help for widows? Will they vote against home insulation grants for private homes, which we criticised the Secretary of State for Energy for not introducing? Again the answers are in the negative. The truth is that the Conservative Party is against public expenditure in general and in favour of it in particular. That is an intolerable position for any political party to adopt.

Let me seek to answer the hon. Member for Chichester (Mr. Nelson). Our proposal is that a shift in the burden of taxation should be made by putting more on to expenditure. I have mentioned the payroll tax. The other two items in our document included the standardisation of VAT at 10 per cent. That is attractive to many people not only because it has a relatively small effect on the retail price index but because it raises £710 million. That is a good deal of money to be able to add to income tax reductions.

Another proposition we put forward was for increased taxation on alcohol and tobacco. I, like everybody else, enjoy alcohol and tobacco, and I shall not be hypocritical or puritanical about it. But when we have a situation in Britain where 39 per cent. of drivers killed in car accidents are found in post mortems to have been drunk, surely there is a case when there is so much alcohol abuse at least to make sure that the duties on alcohol keep pace with inflation. Nothing has been done on that score in this Budget.

Let me take the sale of tobacco. It is estimated by some that there are 50,000 premature deaths a year and 50 million lost working days per year because of the effects of tobacco. Yet all we had in the Budget was a tinkering little proposal dealing with high tar cigarettes. The fact is that the new smoking material has been a commercial flop. No incentive has been given to encourage that material by increasing taxation on tobacco all round.

Nobody likes to pay these increases. They are probably the most unpopular proposals in the Liberal Party's whole scheme. But I face that matter and I believe that it is wrong to regard expenditure on alcohol and tobacco as essential. If people had £5 or £6 more in their pockets each week as a result of income tax reductions, they would not worry about a little more on the cost of cigarettes or on beer.

Mr. Cyril Smith () Rochdale

Will my right hon. Friend at this point in his speech make it clear to the House that if an amendment is moved to the Finance Bill to reduce the standard rate of income tax, Liberal Members will vote for it?

Mr. Steel

That is one option—either to reduce the standard rate or to widen the reduced rate band. That is what we said in our document. One of these is certainly what we should do in the Committee stage of the Finance Bill. Until we have recosted our proposals in the light of the Budget, it would be foolish to commit ourselves to any particular proposal, but one of these—even a widening of the reduced rate band or a reduction in standard rate—is certainly what we should pursue.

Some people then ask "What about those who do not earn? They would not benefit from these proposals." They instance, for example, pensions. We know that pensions, as we heard in this afternoon's announcement, are tied—or are supposed to be tied—to increases in earnings or increases in prices. Pensions and other social benefits would be geared to take account of these increases in the cost of living. I know that the subject is difficult, but I hope that some day some Government will be able to overcome the psychological difficulty of making announcements of pension increases in April and of having them paid in November. It causes a great deal of resentment among old-age pensioners and I wish that we could ally all our financial dealings to the April date so that we have announcement and payment at the same time.

Why have the Government not accepted our proposals on income tax? The answer is—they are quite blunt about it—the effect on the retail price index of adding them all together. It is said that if they were to adopt the whole of the Liberal proposals, 2.7 per cent. would be added to RPI. We were not suggesting that they should take the whole lot.

Over the years I have not been a regular contributor to economic and financial debates in this House. I leave that to my hon. Friend the Member for Cornwall, North whose expertise is much greater than mine. But as a lay observer of these debates I notice one peculiar feature. That is that across the Floor of the House from year to year different financial totem poles are erected before which we all have to bow down and worship. At one time it was the value of the pound. That was the stock thing. One judged the political success of a Government or Chancellor by whether the value of the pound was going up or down. Then the balance of payments became the great political talking point. We were always talking about how the balance of payments was doing month by month. This has now been replaced by the retail price index. We now all have to worship the index. It must be left absolutely pure.

It may be that the Chancellor of the Exchequer has a guilty conscience about the 8.4 per cent. figure that he gave before the last General Electoin. I see that he is shaking his head. He does not have a guilty conscience. I withdraw my explanation.

Of course the index is a standard and an accepted guide, but what is more important is whether people feel that living standards have been raised. The sort of proposals that we put forward would raise living standards and create the incentives that the rather timid and conservative approach to the Budget will not create.

Despite what I said earlier about the economic outlook compared with a year ago, we cannot disguise the fact that we are a country with high unemployment, low investment, poor industrial relations and low productivity and growth. That is not a good advertisement for how we have been running this country since the war.

It is the view of myself and my colleagues that the political and industrial system will have to change. We are glad to have helped in averting national disaster, but the time must come when we put our different views on these deeper issues to the electorate and invite it to judge.

There can be no long-term identity of interest between the Policies of the Labour Party, its executive and its conference and the policies of the Liberal Party, and the time will have to come when these different policies are put to the people. This is not a Liberal Budget because it is not a Liberal Government, but it includes a taste of what Liberal influence can achieve, and we are happy to appeal for a larger influence when the next election comes.

5.52 p.m.

Mr. Michael Stewart () Fulham

My right hon. Friend the Chancellor of the Exchequer has been able to tell us that, after a few difficult years, we are now in a situation where most of our people are beginning to experience a moderate, but perceptible, rise in real living standards and that, given reasonable common sense and prudence, we can expect this rise to continue. In other words, we shall be living in a community where total real wealth is increasing. In such circumstances, part of the benefit of that increase should go to individual taxpayers through tax reductions and part should go to increases in public expenditure. The question is: what are the proportions to be?

The Leader of the Opposition set out yesterday her general philosophy that the proportion of the national wealth going to public expenditure should be progressively decreased. I invite the House to consider some of the results of such a philosophy.

The right hon. Lady and many of her colleagues draw a distinction between what they call the individual with money in his pocket, whom they picture as a flesh-and-blood creature, and a dead abstraction called the Government. They deduce from that picture that leaving money in an individual's pocket is always good and the collection of money by the Government and the spending of public money is always to be regretted. That approach completely misunderstands the nature of public expenditure in a society such as ours.

Let us consider some examples of where public money is spent. A large part of it goes not to some dead, impersonal creature called the Government, but to living human beings—pensioners, the sick, the disabled and recipients of social benefits of all sorts. If we take the view that the proportion of the national wealth going to public expenditure is to be reduced progressively, the result will be that the gap between the income of men and women at work and the income of pensioners will be widened because the income of pensioners is paid out of public expenditure.

Mr. Nelson

Surely the right hon. Gentleman's analysis rests on a prophecy of static growth. If there is a real growth in the economy and the percentage that Government consumes is reduced, it is quite possible that, in real terms, public expenditure could increase and therefore many of the results that the right hon. Gentleman has proposed would not become a reality.

Mr. Stewart

The hon. Gentleman did not listen to the first few sentences of my speech. I pointed out that the Chancellor had shown that we have reached a stage at which we may expect a modest measure of growth. I said that in those circumstances some of that benefit should be passed on in tax reductions and some should go to increase public expenditure. The Conservative philosophy is that the proportion going to public expenditure should shrink. That is bound to mean that persons whose incomes depend on the level of public expenditure will get less, proportionately, than those whose incomes come entirely from the private part of the economy.

Whatever the absolute figures, the gap between the pensioner and the person in work will be widened. The gap between the man who always enjoys good health and the man with ill health will be widened. The gap between those in full possession of their faculties and those who are disabled will be widened. The contrast is not, as the Leader of the Opposition suggests, between flesh-and-blood individuals and a dead abstraction called the Government; it is between one set of individuals and another, or sometimes between one aspect of an individual—his aspect as a taxpayer—and his other aspect, possibly as a pensioner. If the philosophy of the right hon. Lady is pursued, it will become ever harder for Secretaries of State for Social Services to make the sort of announcements that we heard earlier. The funds will not be available.

It is not only pensioners, the sick and the disabled whose incomes are greatly determined by the rate of public expenditure. The income of public servants is also greatly affected. If the proportion of the nation's wealth going to public expenditure is to be diminished, we shall be committing ourselves to the sort of incomes policy that always discriminates against the public servant. It will be harder to maintain the comparability of the pay rates of firemen, policemen, the Armed Forces, workers in the National Health Service and postmen. This cannot be dodged. Their incomes come from public expenditure and if the proportion going to public expenditure is reduced, their proportionate share will be reduced and the gap between them and people in private employment will widen.

It is not only pensioners and public servants who are affected. Some public expenditure is not on persons, but on such things as buildings and equipment, just as some private individuals' expenditure is on buildings and equipment.

If public expenditure as a proportion of the total wealth is always to be reduced, the gap in the quality of housing that is entirely privately paid for and that provided by local authorities will widen. This will give us a more divided nation. It will also be easier to provide for the dignity, amenities, comfort and efficiency of a hotel than for the dignity, amenities, comfort and efficiency of a hospital or a school. I cannot believe that that would be in the public interest.

It is important that the nation should realise that when people inveigh against public expenditure they are really inveighing against the pensioner, the soldier and the policeman, and the degree of decency and adequacy of hospitals and schools. They must make up their minds whether that is really what they want to do. I repeat that I am speaking all the time in terms of proportions.

If an economy is growing, one can have an increase in private standards of life and in the public services, but if we start off by saying that the proportion going to the public service must shrink, we put at a disadvantage the people whose incomes are from that source—the people who work in the public service—and we put the quality of buildings and equipment in the public service at an increasing disadvantage compared with everything else. I cannot believe that that is the right policy. On reflection, I do not believe that it is what people want. It would provide us with a more divided and more resentful nation.

There is a further consideration that might lead us to think that as a society becomes richer there is a case for increasing the proportion of its public expenditure. We cannot expect a very poor and primitive society to do much to help the unfortunate. There have been societies so primitive that when their members reached a certain age they were literally thrown in the river, to the crocodiles, because society could not afford to maintain them any longer. The richer a society becomes, the more it can afford to provide for the less fortunate or for those who are past working age. Not only can it afford to do so; it ought to do so. We are becoming increasingly aware of this. After the great structure of the Welfare State had been laid in the years from 1945 to 1950, we became increasingly aware of the particular welfare problems that still needed attention. We have awakened comparatively recently to what can and ought to be done for the disabled.

If society is to grow richer I trust that we shall continue to identify particular needs of that kind. But we meet them inescapably through public expenditure. The money comes out of the taxpayers' pocket, goes through the Government machine, and comes out again as public expenditure, and it is none the worse for that. Therefore, if anything—one need not be dogmatic about it—there is a case for saying that the richer a society is the bigger proportion of its wealth it can and ought to spend on public expenditure if it has any conscience about the less fortunate members of society.

We should add that modern technology has been giving a new dimension to the problem. There have been plenty of Questions on the Order Paper recently about the provision of kidney machines—an expensive form of medical equipment. If nobody had invented them, if knowledge had not extended so far, the financial problem of providing them would not arise, but we know that knowledge is likely to increase. If we want to run our hospitals, our schools and many of our public services well, and if we want to use the fruits of modern knowledge, we shall have to be prepared to pay for it.

I am not advocating a society so austere that it never allows its increase of wealth to give anything for pure enjoyment of the citizen with money in his own pocket, but this doctrine that public expenditure itself is undesirable and that the share of it in the total economy should be reduced is a recipe for a divided, unjust, mean and unhappy society.

6.4 p.m.

Mr. Vivian Bendall () Ilford, North

I am grateful, Mr. Deputy Speaker, for your having called on me to speak in this very important debate. It is true that it is a pleasure to follow the speech of a person who is so well respected as the right hon. Member for Fulham (Mr. Stewart). It is a great privilege to be able to speak in the House representing the constituents of Ilford, North who have elected me to serve them here. This being my maiden speech, I therefore ask for the indulgence of the House.

I should like to say something about the House of Commons. When one first comes here one is extremely conscious of the heritage, history and background and of what the House of Commons and the Mother of Parliaments have meant to the British people. It has also given the world, over the years, a great sense of democracy. As a result of this, I think that this country can be rightly proud of many of the achievements that it has given the free world.

I pay tribute to my predecessor, Mrs. Millie Miller. It was unfortunate and untimely that her death should come in the way that it did. I suppose that it is always a politician's ambition to win an important by-election, but I do not think that it is any politician's ambition to have to win it through the sad and untimely death of somebody who died many years before she should have done. When I say that, I know that I speak for many people in Ilford, North who received a lot of help from my predecessor. I shall use my best endeavours to represent them as well and in the same way as they were represented by her.

There are matters that concern my constituents. One should not be controversial in one's maiden speech, and I shall do my best, because of the privilege of the House, to keep to that precept. However, there are matters which I think it would be wrong not to explain to the House and which are giving my constituents some concern. Most of them revolve around the economy and the debate that we are having today on the Budget.

I remember during a by-election meeting a man in his early twenties. He was a skilled engineer in electronics. This young man was very concerned at the fact that not many other young men were coming into skilled industries. I asked him why this was so, and he told me that he felt that there was no longer any incentive. He said that there were no pay differentials. This question has been discussed in the debate.

There is also concern not only among skilled workers but among middle management and others about the size of taxation today. What gives me the greatest worry and concern is the fact that many of my generation and the generation following mine, great scientific and technical young people, have gone abroad rather than stay in this country. That is tragic for our nation, because those young people are our very future. Our very future is concerned with how and what will resolve our economic difficulties.

People are concerned about unemployment. We have two large firms in North Ilford—Plessey and Thorn—which are very concerned about the new clauses to Government contracts which might ultimately lead to unemployment if those contracts were lost through wage rises given by sub-contractors over which they had little control.

There is concern also among smaller business men. I am grateful for the Chancellor of the Exchequer's announcement of help to small business men, but I wonder whether, given the high rate of inflation that we have seen in the last three or four years, this will be sufficient to prevent more firms going into liquidation. We must remember that it is the small firms that still employ the largest number of people in our community and society today.

This leads me to the last two points that I want to make about my constituents' concerns. Widows have received a little help, but they will need a lot more help if we are to get things going in the right direction for them. People today, in spite of what is said by the media or by anybody else, are deeply concerned about their future and the future of their families We must try to create a new spirit of adventure, a spirit that induces people to be successful.

I pledge myself to serve to the best of my abilities the constituents of Ilford, North who elected me, and I look forward to serving the House of Commons.

6.10 p.m.

Mr. John Cronin () Loughborough

It is a pleasant task to be able to congratulate the hon. Member for Ilford, North (Mr. Bendall) on his excellent maiden speech. Hon. Members on both sides of the House were very much affected by his tribute to the late Mrs. Millie Miller. In addition to that, I think that he made an admirable speech and expressed it with a certain modesty and charm, which augurs for even better things when he has been longer in the House.

I think that everyone agrees that a new spirit is needed in the country. There would probably be some difference between us about how it could be achieved, but we would all accept that basic premise. I am sure that I speak for hon. Members on both sides when I say that we look forward very much to hearing again from the hon. Gentleman.

I must refer to the speech of the right hon. and learned Member for Surrey, East (Sir G. Howe) since he was expressing an official declaration of the policy of the Conservative Party. I think that my right hon. Friend the Chief Secretary got it quite wrong when he said that the right hon. and learned Gentleman was schizophrenic. There was nothing schizophrenic about his speech. I thought that it was entirely depressive. I felt that apart from those Conservative Members who actually fell asleep during the speech there was a total lack of enthusiasm from his own side for everything that he said, even though he produced all the well-worn Tory doctrines of cutting income tax and reducing public expenditure. I also noticed—I say this with regret—that the right hon. Lady the Leader of the Opposition, who was sitting beside the right hon. and learned Gentleman, displayed a lack of enthusiasm which was inimical to the right hon. and learned Gentleman's prospects.

The right hon. Lady is at present on a train bound for my constituency, the fair town of Loughborough. I hope that she will tell my constituents that it is an important part of the policy of the Conservative Party that in the future those who are fortunate enough to have incomes of £50,000 will receive an extra £7,000 a year in their pay packets. This is the policy that we had ex cathedra from the Shadow Chancellor. That was the only part of his speech that evoked any enthusiasm. His spectacles flashed brilliantly when he produced the splendid doctrine that the upper levels of income tax should be reduced to 60 per cent.

Mr. Nelson

But the Liberals want that also.

Mr. Cronin

I do not intend to pursue the speech of the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel).

I believe that this excellent Budget is admirably adapted to our current circumstances. I sympathise with the leader of the Liberal Party—a party that wants to decrease taxation further, but it would be imprudent to do that at this stage. A £2.5 billion injection into the economy is, I believe, entirely satisfactory. It will give industrial activity and investment the right stimulus and it will help to reduce unemployment. I am happy to welcome the help being offered to small businesses, because that will make an important contribution to this end.

It is a pity that the minimum lending rate was increased to 7½ per cent., but at a time of prolonged weakness in the dollar when US interest rates will probably rise in the near future, it would be imprudent to have a substantial divergence between the interest rates on sterling and the dollar. The MLR rise is a commendable precaution, although it is one for which I cannot feel great enthusiasm.

I am delighted with the introduction of the lower tax band and the measures taken to avoid the poverty trap. I am sure that all hon. Members feel the same. Equally, I am delighted at the increase in child benefits. I recommended this move in the strongest terms in the debate on the last Budget. One likes to think—possibly erroneously—that one has had some influence on one's colleagues in the Treasury.

It is also satisfactory, although it is a minor part of the Budget, that there is to be increased duty on high-tar cigarettes. Anything which reduces the genocidal activities of the tobacco manufacturers is to be welcomed. There is a case for making the duty very much higher.

It is disappointing that the Government have not seen fit to give more than £50 million to hospitals. The Health Service and everyone who takes an interest in the Service will regret that. The extra £40 million for schools, college buildings and the training of teachers was a somewhat miserable contribution, too.

I fear, however, that the Budget will not greatly assist this country's principal economic problems. I fear, too, that it is impossible for any Budget completely to correct those problems. The problems are the inflationary effect of wage increases without increases in productivity, poor productivity in industry generally, and the fact that expansion of the economy always leads to a big increase in imports.

On wages, it is all-important that negotiations for a stage 4 of wage stability should continue and should produce as satisfactory measures as possible. The majority of unions have accepted wage policy in a mood of moderation and responsibility. We all owe an enormous debt of gratitude to them for having done so much to maintain wages stability and reduce inflation to its present level. That could not have been achieved without the unions.

I hope that my right hon. Friend the Chancellor will persist in these negotiations and that we shall never return to free collective bargaining as it was practised in 1974. That would be disaster. It is Conservative policy to return to free collective bargaining, but I suggest that that would lead only to free collective chaos and to the situation in which the Government of the right hon. Member for Sidcup (Mr. Heath) collapsed in total disaster. I hope that we shall never again see that.

The poor productivity of British industry is largely due to lack of investment which stems from the timidity of British industrialists. No Chancellor can induce industrialists to invest if they do not want to. If industrialists did not see their way to making a sufficient profit, no fiscal incentives would induce them to increase investment. I see little hope for the future in that respect.

The other reason for poor productivity is over-manning and the various industrial disorders. Pre-eminent in this respect is British Leyland which epitomises poor productivity. To change that situation requires inducing the unions to change their attitudes. It is unfortunate that there is a tendency for trade unions to adopt an entirely adversary attitude towards industrialists. This is understandable, and I can sympathise with their doing it, but it is most important that workers should be brought into management and feel that they have a real say and a real responsibility.

I believe that we can get rid of the adversary attitude. Working people certainly do not have it in Germany or Japan. There is willing co-operation between the unions and industry in both those countries, with excellent results. It is important not only to have workers on boards of directors—I am not saying that I approve the whole Bullock Report—but to see that all the absurd class distinctions that are perpetuated in firms all over this country are abolished, also. There is a lot to be done in making the worker feel that he has part of the responsibility for maintaining our economy at the maximum possible rate, and is not thinking entirely of his own weekly wage packet.

I come now to the third problem—that expansion of the economy is always followed by a great increase in imports. So far this has been the cause of the economical stop-go situation that we have seen ever since the Second World War. There has always been a balance of payments problem whenever there has been a substantial expansion of the economy, and Governments have had to take appropriate measures to damp down the economy; so there has always been a tendency for the British economy to be kept down most of the time in that respect. This has applied to Governments of both sides of the House. North Sea oil will move that danger away for quite a time, in terms of our balance of payments.

What is most disagreeable about the propensity of the British people to buy imported goods is the effect that it has on unemployment, and this is the most dangerous situation of the whole lot. The situation was epitomised in a photograph that I saw in a newspaper a couple of years ago, which showed workers arriving in bulk at a motor cycle factory for a meeting to protest against cutting down production of that factory's motor cycles. In that photograph one could see that most of the workers were mounted on Suzuki, Honda and similar Japanese machines. This is a situation which is certainly likely to get worse as time goes on.

I do not pretend to be an unlimited admirer of the department of applied economics of Cambridge University, but I thought that its Cambridge economic policy survey, which was produced last month, put forward very interesting and relevant figures. It was indicated on page 2 that since 1960 our exports have increased by between 4 per cent. and 8 per cent. per annum but our imports have increased by between 8 per cent. and 12 per cent. per annum in total, and it is mentioned on page 1 that British-manufactured products have hardly increased at all in total over the last seven years, whereas imports over the last seven years have increased by two and a half times.

The fact that imports have increased by two and a half times over the last seven years is a really substantial clue to one of the main causes of unemployment. The Cambridge economic policy survey goes on to say that if something is not done about these massively increased imports, unemployment will reach 5 million in the next 10 years. This is a staggering figure and it has probably caused some of us to feel some scepticism. One thing, however, must be very obvious, although it is a truism to say so. If imports go on increasing at the present rate there is no hope at all of reducing our unemployment below 1½ million and it is much more likely to rise, even if one does not accept the staggering figure given by the Cambridge economic policy survey.

What can the Government do about it? I appreciate that there are all kinds of arguments against protection. First, restriction of imports would be contrary to a whole series of system of alliances and agreements that we have made. I have in mind GATT and the EEC. Yesterday the Prime Minister made a good point in saying he would much prefer to see the whole world trying to expand without hindrance from protection imposing import controls. Of course, if we had real protection it would encourage inefficiency in British industry. For instance, it takes a long time to get delivery of some Leyland cars. I cannot imagine what the situation would be if that company were completely protected and did not have to worry about Japanese and other foreign competitors. There is great danger of encouraging inefficiency.

On the other hand, these difficulties must be accepted, because unless we are to have a very large increase in unemployment we have to do something about reducing imports. I suggest to my right hon. Friend that this can be done, as it is already being done. At present we are having import restrictions of various types largely through voluntary agreements. I suggest that they must be continued. When the summit conference at Bonn occurs, further consideration should be given to additional import controls. This particularly applies to Japan, which is the principal offender, because although there is a general danger of reprisals being taken, we need not fear the danger of reprisals from Japan, which takes hardly any imports at all from us, whereas that country floods our markets with exports, particularly in the car and entertainment electronics industries.

I want to end by saying simply that I consider this is an excellent Budget but I hope that it is a long way from being the end of the road in terms of tax concessions and help to the underprivileged people. I hope that the next Budget—which I am sure will again be brought to the Dispatch Box by my right hon. Friend the Chancellor, either before or after the next election—will give much more help to retirement pensioners. I hone, also, that it will give some help to skilled workers and middle management by reducing the standard rate of income tax. This is today, however, an admirable Budget, which indicates that this Government's economic policy has been successful and will continue to be successful.

6.28 p.m.

Mr. Ralph Howell () Norfolk, North

I want to add my congratulations to my hon. Friend the Member for Ilford, North (Mr Bendall) and say how very much we welcome him on the Opposition Benches. I add my congratulations to him for his great victory in that constituency, which has given great heart to the whole country in knowing that we shall soon be shot of this wretched Government. I do not wish to argue with the hon. Member for Loughborough (Mr. Cronin), but I was appalled by his pessimism when he said that no Budget could cure the ills of this country. We have to find a way to rectify our problems, and later in my speech, with the lesser responsibilities of a Back Bencher, I hope to be able to put forward a few suggestions which I believe will remedy our basic economic ills.

This is the thirteenth Budget of the right hon. Gentleman and it is very much like all the rest of them. It is almost a non-Budget which will achieve practically nothing. I do not know how the right hon. Gentleman has the audacity to say this will remedy unemployment when all his other Budgets have done nothing except build up this huge unemployment figure still greater, ever since this Government have been in power. Even the figure of 1½ million is not the true figure, because there are at least 300,000 people hidden in non-jobs to make the figures look a little less bad than they are.

This Budget is nothing more than a repeat of the cruel charade through which we go on every occasion. If nothing had been done, we would have been paying £3,500 million more in tax next year than we did last year. The Government now tell us that they are to reduce taxation by £2 billion in this part-year and by £2,500 billion in a full year. In fact, they will be taking £1½ billion extra from us in the coming year.

The Chancellor's speech was full of half-truths.

Mr. Rooker

So was the hon. Gentleman's statement just now.

Mr. Howell

It will make no real impact on the poverty trap. Much of what the Chancellor said indicated that the Government believe that they are in some way curing the poverty trap. The Government have not grasped the extent of the poverty trap. It is not only people on low wages but those on average wages and above who are caught in the poverty trap. Depending on the cost of traveling to work, and so on, people with considerable incomes are caught. They find that they are no better off than if they stopped work altogether.

From reading the Chancellor's speech, it seems to me that he believes that 4 million people will benefit from his lower-band tax rate. I do not believe that there will be any real benefit to the lowest wage earners. The money that they do not pay in income tax will be deducted from the means-tested benefits to which they are entitled. Therefore, just as many people will be caught in the poverty trap as before the Budget changes.

I should like to refer now to the idleness trap.

Mr. Rooker

I have great respect for the hon. Gentleman, but he is misleading the House. Many of the means-tested benefits are based on gross, not net, income. For that reason, what he said is the exact opposite of the truth.

Mr. Howell

That is not so. The hon. Gentleman knows enough about this subject—

Mr. Rooker

And so does the hon. Gentleman.

Mr. Howell

I know a great deal about the subject and have delved into it rather longer than has the hon. Gentleman.

Looking at the net spending power tables that we have had so far and shall have again in the near future, as soon as the Treasury answers my Questions, we will find that people at the lower end of the wages scale are no better off as a result of this lower band.

I also want to talk about those who are caught in the idleness trap. Many of the unemployed simply cannot afford to go to work, and everybody in this House knows it. We hear it at our surgeries. We should face this fact. There are tens of thousands or hundreds of thousands of people who cannot afford to work, especially in areas such as the low-wage area which I am privileged to represent. More and more people are asking themselves: why work?

I am thoroughly ashamed of the society that we have created. I believe that all hon. Members should be equally ashamed, because it is getting worse. More and more people are dependent on State handouts to pay their way. In fact they simply cannot pay their way.

I had four such people in my surgery on Saturday. Bills for electricity of £140 a quarter are coming through to people who are unable to find the money. Therefore, £1 a week is being deducted from their supplementary benefits. We are getting into bigger trouble, and we should recognise it. We should do something bolder than this Budget and even much bolder than the proposals that the Liberal Party has put forward to correct the appalling situation that we have created.

The trouble is that our income tax rates are roughly double those of our main competitors and partners in Europe.

Mr. Rooker

Rubbish.

Mr. Howell

That is not rubbish. The hon. Gentleman can argue this as much as he likes. The Chancellor in his Budget speech said that our income tax rates were the highest in the world, and they are.

Mr. Rooker

My right hon. Friend did not say that. He referred to the starting rate.

Mr. Deputy Speaker (Sir Myer Galpern)

Order. I think that the hon. Member for Norfolk, North (Mr. Howell) should ignore interventions from a sedentary position and not be taken off his line of argument.

Mr. Howell

We must face the fact that our income tax rates are roughly double those of our main competitors. Our starting rate of 34 per cent. and top rate of 83 per cent. are double the American starting rate of 14 per cent. and top rate of 50 per cent. and the French starting rate of under 5 per cent. and top rate of 53 per cent.

Mr. Cronin

I think that the hon. Gentleman ought to bear in mind that income tax in Scandinavia and in Holland is higher than in this country. If one makes corrections for the difference in currencies, one finds that there is very little difference between income tax in this country and in Germany and France.

Mr. Howell

Hon. Gentlemen may argue this as long as they like. We are paying more income tax than any other country in the world, with the exception of Algeria, Portugal and one other State, which I cannot recall. That is the kind of league into which we have got ourselves. I suggest that we should get ourselves out of it.

As a result of the lack of co-ordination between our taxation and welfare systems, we have created a treadmill society. The whole country is caught on this treadmill. We are not performing well. All the economic indicators prove that we are performing very badly. I believe that we should find a way of correcting this position before we drive more and more of our best brains and skilled people out of the country.

It is useless to criticise the Government without putting forward some tangible suggestions. First, we should see whether there is a better way of getting more in line with the rest of the world with our income tax rates. I should like the next Conservative Government to consider seriously having income tax rates similar to those of America, France and Germany and seeing what would happen. I believe that that would have an electrifying effect on this country.

We must also raise our tax thresholds well above any social security ceilings. To have this interlocking of benefits, whereby people are taxed at levels below social security and family income supplement levels, is totally absurd and wrong, because it dissuades people from working. All income should be treated similarly for tax purposes. There is no sense in the present complications with tax refunds, simply because some short-term benefits are exempt from taxation.

All this would cost a tremendous amount of money. To make any appreciable change in our position and to avoid pessimism of Labour Members would probably mean a switch not of £2½ billion, or the £5 billion that the Liberals have suggested, but of £10 billion. That is what it would take to get us out of our present impossible situation.

Other measures that we must consider include the introduction of a minimum wage. Why on earth Labour Members do not support this suggestion I cannot understand. They are always complaining about low wages. I believe that we should have a national minimum wage to rid us of the appallingly low rates that we have in this country.

One of the biggest causes of the poverty trap is our idiotic system for child benefit. Even now, after the changes this month, people in work with a family of three receive £6.90 for the children. When those people are first unemployed, the same children qualify for a payment of £13.50, and when they enter the long-term unemployment area they qualify for a payment of £23.30. This is a serious matter which must be corrected if we are ever to encourage people to work and make it worth while to work.

I believe that this Budget will do little to correct this country's ills. I look forward to a bold Budget from the incoming Conservative Government at an early date.

6.42 p.m.

Mr. Peter Hardy () Rother Valley

I am tempted to suggest that a searching examination be made of the various points put forward by the hon. Member for Norfolk, North (Mr. Howell), but if the hon. Gentleman were to see his speech subjected to that searching examination I think that it would make him extremely uncomfortable, in regard not merely to the points he made but the values that his speech embraced.

As for the high rates of tax, I do not share the apparent approval of massive reductions of the highest rate expressed by Conservative Members and, I think, by the whole Opposition. That is not because I do not accept that those rates are high but because I am not sure that any marked reduction would be particularly helpful.

In the past two years in my area we have broken industrial records in two or three works. We had the world-shattering development of a bar mill at Thrybergh, in my constituency, which slashed the world record in the speed of commissioning by a massive amount. If the people responsible for that could receive the benefit from tax relief, I would have no objection to their receiving it, on both sides of industry, but such a concession would not really assist those who create wealth. The best and biggest rewards in Britain today go to those who emphasise the frivolity of British society and to those who manipulate money rather than create wealth.

Therefore, those who deserve most are not likely to receive most. Those who should perhaps be ill-rewarded would be the ones most to benefit. Accordingly, I advise my right hon. Friend the Minister of State to be very cautious in listening to representations from the Liberals or any other quarter about that rate.

The Labour movement—we must have regard for it—embraces the principle of the redistribution of wealth. I believe that rewards must be great for those who can contribute greatly, but those who deserve little should not receive a great deal. The point made by my right hon. Friend the Member for Fulham (Mr. Stewart), that taxation is important if we are to have a civilised society, has been ignored by a number of Opposition Members, particularly the hon. Member for Norfolk, North.

I agree with the Leader of the Liberal Party that the Conservative Party has proposed no viable alternative. In that regard I am particularly pleased that my right hon. Friend the Chief Secretary spent a little time considering our economic history over the past 100 years. He was able to notice—it is easily discerned—that we have had inadequate success. That is because for the greater part of that century we have followed the approach that the Conservative Front Bench is demanding we should follow today.

It is not at all unreasonable for anyone on the Labour Benches to suggest that the consequences of the 1971 Budget are largely responsible for our ills today. The consequences of Budget after Budget in the latter half of the nineteenth century and the early part of the twentieth century are responsible for the underlying weakness of the British economy in the 1970s. Therefore, we are right to challenge the Conservative Party not merely for failing to provide adequate details about its financial policies but because it failed to realise—it does not even begin to understand—that its political approach has been largely responsible for the weakness that this country faces.

However, I suppose that we cannot expect that sense of responsibility to pervade the Opposition Front Bench. We had a rather ungracious response by the Leader of the Opposition in her prepared off-the-cuff comments yesterday, and a similar response from the Shadow Chancellor today. I would have some sympathy with him—for all the people lined up behind him who want his job seem to me to be eager to repeat the mistakes of 1971—if he did not show evidence that he was prepared to repeat the example of 1971 as well.

It is rather sad that the Conservative Party today is adopting the pose of the compulsive gambler. Having lost its wagers in the early 1970s, it seems eager to place the same stakes on the same horse. While Britain may have a few more shirts in 1978, I do not want to see us lose the lot as a result of a repetition of Conservative profligacy after the next election.

I do not think that the British people will make that mistake, because the mood of the nation has been more easily, more properly and more accurately seized by my right hon. Friend the Chancellor than by the right hon. Lady. I do not think that the country wanted a reckless Budget, and it has not had one. It has had a relevant Budget. When I look at it from the background of the constituency that I represent, I can see the wisdom within it.

We need to stimulate our economy. We need to invest. I believe that my right hon. Friend the Chancellor today and in earlier arrangements has created a climate in which investment can take place. It has taken place in my constituency in the past year or two. Our unemployment is very high—well above the national average, but in two of the employment exchange areas in Rother Valley the unemployment rate is no higher than it was in 1972, before tremendous recession affected Britain and the rest of the Western industrialised world.

We have seen that investment because a number of firms have shown determination. They have been assisted by Government aid and by a sensible local authority. Heaven knows, we see that we could do with more of those when we look at some of the local authorities which are acting with gross irresponsibility, failing to spend that which the Government provide.

We have also seen that development because we have a sensible attitude of support for good industrial relations. My area should surmount its economic difficulties to a large extent as a result of my right hon. Friend's further measures. If it does not, and if the failure to invest is even more extensive, I believe that before many years are out a General Election will have to be fought on the principle that the Government will have to have greater powers of direction to secure the creation of the wealth that we need. We can anticipate objections from Conservative Members.

I believe that there should be a mixed economy. However, if private industry in Britain does not seize the opportunities that the Government have given in the Budget and under previous arrangements, it will have no one to blame but itself if it is treated with a real measure of contempt.

Those comments do not apply to private sectors of industry in my constituency that have invested successfully and created many jobs. I want to see that attitude extended. I want to see the same attitude shown in other parts of the country. It would help, too, if local authorities in those areas took a more responsible attitude. If private industry will not seize the opportunities that are given to it, it must accept that it will be subject to a great deal of criticism in the years ahead. The country's future is too important to be left to the whims of those who have little aspiration and even less ambition.

Mr. Cronin

Does my hon. Friend agree that we are now approaching a crisis of capitalism, and that if the capitalist society continues in the present highly unsuccessful situation it will not survive?

Mr. Hardy

My hon. Friend is right. If capitalism wishes to survive, let it survive. The choice is now with capitalism. The Government have given directions to make it possible for capitalism to secure its own health. It is necessary to ask whether it has the will to survive. In my area a will has been shown, but my area appears to be untypical. I have extremely successful steel and coal industries in my constituency. If British industrialists had the will to invest anywhere in Britain, they would occupy some of the empty sites in my area that are available for industrial development.

Mr. Hordern

The Chancellor of the Exchequer claimed yesterday that the level of manufacturing investment in the year past had been rather successful. I am sorry that the hon. Member for Rother Valley (Mr. Hardy) was not satisfied with that rate of investment. In fact, manufacturing industry has invested more despite the return that it is able to get on its investment having decreased ever since the Government came into power. Will the hon. Gentleman explain how he will get manufacturing industry to direct its investment at the Government's whim? Is he suggesting that the Government should take over all manufacturing industry?

Mr. Hardy

No, I am not saying that; I am suggesting that it is in the national interest that manufacturing industry should expand and invest. I was urging it to expand and invest. My right hon. Friend has made it possible for it to expand and invest. If it fails to do so, the national interest will require the Government to take action that the hon. Gentleman, and perhaps a great many others who are not supporters of his party, might deplore. The fact remains that a manufacturing base in Britain that is expansionist is essential, and my right hon. Friend is prepared to give it priority

I accept that there has been an increase in investment in the past year. However, that increase has been by no means adequate. Corporation tax is now almost a voluntary tax. There are many other inducements to undertake industrial development. It is disappointing that in my constituency, and in others of which right hon. and hon. Members are well aware, the private sector, with some magnificent exceptions, including both small and large businesses, has not reacted with greater enthusiasm. I do not want to labour the point, otherwise I shall speak for far longer than I intended.

I am delighted that extra money has been made available for the National Health Service. My right hon. Friend has applied the logic that hon. Members and the Labour Party in South Yorkshire were urging a few months ago on the opening of the splendid new hospital at Rotherham. I am particularly pleased about the improvement in national nutrition that will result from the provision of free milk for 7-to-11-year-olds. If we have adequate concern for the nation's health, that provision is necessary. It should never have been take away. It was removed when the economic conditions did not require that degree of stern savagery. I believe that it will be helpful because it will support the important dairy industry.

I am pleased about the arrangements for tourism and agriculture. Although the Liberal Party is eager to take credit for the tax arrangements for farmers, I think that my right hon. Friend will confirm that measures were taken as much in response to representations from members of the agricultural group of the Parliamentary Labour Party as in response to other political organisations of less consequence.

I am concerned about the deficit in the public sector borrowing requirement, which provides the cloak for the appalling failure of Conservative local authorities. They have failed to build houses and failed to provide adequate services for their communities in a variety of sectors. Their constant excuse has been the Government's cash limits. My right hon. Friend knows better than I that those cash limits have been the excuse rather than the reason.

The local authority in my area has been able to provide splendidly without breaching Government cash limits. We should take a more careful view. We should call the bluff of some of the Tory authorities that are acting irresponsibly and rather dishonestly by seizing an excuse that is not an excuse. Their action seems to be unjust.

It is the action of Tory authorities that has led to the public sector borrowing requirement being £3½ billion less than forecast. If action is not taken by the Treasury in the months ahead, it will be the reason for the public sector borrowing requirement forecast not being reached in the current financial year. The Government should take a more flexible view. I do not think that it would cost very much money.

It will take us two or three years to recover the strength in local government that the Labour Party enjoyed in 1975. We shall obviously win many seats this year. However, I do not think that we shall win enough to take control of all the authorities that have served their communities ill. Our losses during our period of unpopularity were extremely heavy.

Mr. Hordern

It is not over yet.

Mr. Hardy

We shall see about that. I am tempted to continue for a long time but I shall not do so.

I believe that the British people were not in a mood for an electioneering, bribing Budget. They do not have an electioneering Budget. They have a responsible, relevant Budget. That responsibility and relevance will serve Britain well. I suggest that the House and the country would do well to take note of the point that my right hon. Friend was eager to stress—namely, that this is yet another phase in a continuing process.

My right hon. Friend used the word "recipe". I regard it as a recipe as well. It is a recipe for but one course of a continuing meal and a most valuable one. We have seen living standards rise in the last quarter of 1977. They rose by a greater amount than at any time for six years. Living standards will rise to heights that will have been well earned, to standards that have been set by a responsible and relevant Administration.

6.58 p.m.

Mr. A. G. F. Hall-Davis () Morecambe and Lonsdale

Before I turn to the main points that I wish to make I hope that I may be permitted one or two brief comments on the course of the debate so far.

The hon. Member for Rother Valley (Mr. Hardy) has referred to the crisis of capitalism. We have been uniquely unfortunate in Britain in the post-war period in that it is matters industrial that have been the main battleground between the parties. There is a heavy responsibility on both sides of the House to try to establish as much agreed ground as possible on the attitude of Government towards British industry. There are signs that is taking place. If I may say so, there are welcome signs as much from the Labour Benches as I hope there are from the Conservative Benches.

The top rates of tax have been referred to in passing by almost every speaker in the debate. I have always recognised the intellectual capacity of the Treasury in both its officials and usually its Ministers. Therefore, I do not despair in making what I hope are constructive and logical comments.

Whatever one thinks about the rates of tax, the one thing that strikes me is that it is totally illogical to aggregate the tax on unearned income with the tax on earned income. If one takes the example of a man who has acquired over his working life what would be considered in any other country a modest amount of savings, and if one then adds a 15 per cent. surcharge for investment income on top of a highly progressive rate on earned income, one finds that if he aspires to the highest success in his profession or occupation, one lands him, on his quite modest investment income, with tax at 98 per cent. In effect, it is saying to him that by his efforts in his work he is destroying totally the value to him of the income from his or his wife's savings, because in this system there is no separation of aggregation, no right to opt for separate taxation of investment income for husband and wife.

I move to what I hope the Minister of State will regard as four constructive suggestions arising out of the Budget situation with which we have been confronted. I believe that two of these suggestions would help to revitalise the economy. I believe that they will be given serious consideration by Treasury Ministers, and possibly sympathetic consideration. I believe that the other two suggestions will improve our social services while making possible, or certainly helping to make possible, a lowering of direct taxation.

I must say at the outset, however, that these latter two suggestions are so contrary to Socialist doctrine that, whilst I believe that the rational case for them is irrefutable, I am quite sure that the irrational doctrinaire response of the Labour Party's Left wing will mean that they will never be accepted by a Labour Government. All the same, I have a right and duty to draw attention to them.

My first point concerns profit sharing. This has a part to play in securing the identification by employees of their own welfare with the success of the firm for which they work. It will help to improve industrial relations, and I think that, particularly, it will encourage observance of procedural agreements. The avoidance of frequent stoppages, which too often occur without any use being made of the procedures agreed between unions and employers for the resolving of disputes, would do a great deal to improve the competitiveness of British industry and its reputation abroad with its overseas customers.

I believe that the improvement of our competitive ability can be brought about only by pursuing a number of courses at the same time. There is no single panacea for Britain's industrial problems. I am not therefore suggesting that profit sharing is a panacea, but I believe that it has a part to play.

The point I put to the Minister of State this evening, in advance of the drafting of the Finance Bill, is that the value of the contribution of profit sharing will be directly related to the freedom that the Government are prepared to give to those engaged in wage and salary negotiations, on both sides of the negotiating table, the freedom that they are given to apply it in the way that they believe is in the best interests of the firm and its employees.

I readily accept that in political terms there must be a limit to the amount allowed in any one year. I think that £500 is a very reasonable limit. In fact, I should be inclined to describe it as rather more generous than I expected the Government to offer. But I ask of the Government that they should avoid writing into the Finance Bill detailed restrictions on how profit sharing should be applied, and that they should leave it to the employers and unions to agree on the form of profit sharing and what conditions should be applied in their particular case.

For instance, in some cases they may feel that it should be highly geared to an increase in profits. I would think that if it were adopted in a company such as British Leyland, in the position of British Leyland today, that might be highly desirable. In other companies they might feel that it should be devoted to encouraging the maintenance of existing profit levels.

This need to give freedom to industrial negotiators on profit sharing brings me to my next point. The Chancellor was notably reticent in his Budget Statement on the question of pay policy. He said—this is the only time that I shall quote him, but I think that it is helpful— the main responsibility here again must continue to lie with the trade unions and employers who actually negotiate on pay".—[Official Report, 11th April 1978; Vol. 947, c. 1189.] Last year, very late in the day, the Government laid down a 10 per cent. guideline. It was quite clear at the time when the statement was made that it was intended as an average. But it quickly became a minimum figure for settlements and, therefore, it became a maximum at the same time. This left no scope for the adjustment of differentials or for extra inducements to be given to respond to market demands. It is my personal experience that this rigidity has placed a great strain on industrial relations. If it is continued after 31st July, it will gravely restrict the ability of industry to be flexible in its response to export opportunities, and it will make it much more likely that the increased home demand that the Chancellor foresees will be met by a damaging inflow of imports.

It is my view—this is a personal view—that it is worth accepting a slight extra price rise and possibly a slightly higher average level of pay settlements in order to protect the balance of payments by the increased flexibility and efficiency of industry and the improvements in industrial relations that would result. If the Government are serious in their wish to return to genuinely free collective bargaining, I suggest that there will probably not be a more favourable opportunity than exists in the current year.

My final comment on this point is that in any case, whatever the Government's policy is to be, the Prime Minister or the Chancellor of the Exchequer should make the Government's stance known well before the end of phase 3 and should not repeat last year's cliff-hanger, which was certainly of no help either to employers or to trade union negotiators.

Mr. Peter Viggers () Gosport

My hon. Friend will have observed that paragraph 3 on page 12 of the Red Book, under "Assumptions", says: The forecasts assume that average pay increases in the year beginning in August 1978 are about half the average for the current pay round. Does my hon. Friend agree with me that in view of pressures of pent-up frustration and demand within the pay structure at present, it is quite unrealistic to expect that pay increases will be half those of the previous round—in other words, that they will be 5 per cent? After all, who is to stand still to allow the Armed Services, the police, the fire services and all the others who have pent-up claims to overtake them?

Mr. Hall-Davis

I thank my hon. Friend for drawing attention to that paragraph. In view of my earlier comments, I would rather not fall into the trap I am suggesting that the Chancellor should avoid by making any forecasts myself of what would be reasonable. But perhaps it is fair to comment that after the Chancellor's experience of yast year, one would not expect the Government to pitch the figure any higher than they think might be credible.

I move from industry to the social services. It is an accepted feature of taxation policy in Britain, pursued under both the major parties, that the Government should give a number of tax reliefs to encourage what they consider to be socially desirable expenditure by individuals. The relief that comes most readily to mind is relief on mortgage interest on loans up to £25,000. There is tax relief on life assurance premiums and relief on payments to provide pensions, whether the payments are made by companies or individuals. Yet it is a striking feature of our taxation system that there is no relief for those who wish to provide for their children's education or their family's health care without making demands on the State system.

One often hears the cry "privilege" about non-State education from many members of the Labour Party. Yet the present system confines the option of private education to the very high earners or those with capital—and, as the years go by, almost entirely to the latter. The education service would be improved if encouragement were given to those who wish to provide education for their children outside the State system. I am not saying that they should opt out of their contribution to the State system—of course they cannot do that—but they should be encouraged to relieve the burden on it.

Mr. Hardy

Would the hon. Gentleman not agree that many areas of private education benefit greatly from charitable status? Would he also accept that many of us do not regard them as charities? Does he regard the public school institution as a charity?

Mr. Hall-Davis

As the hon. Gentleman may have sensed from my remarks, I tend to take a pragmatic view of these things. I would say that anything which relieved the burden on the taxpayer and made better State education possible was welcome. In lieu of tax reliefs, I am not opposed to charitable status. That is a pragmatic, rather than a logical, attitude.

In health provision, not only people in the Labour Party but many members of the public have an obsession with queue jumping. That is typified in the attitude of another North-Western Member, the right hon. Member for Blackburn (Mrs. Castle). I can understand this feeling. My father was a general practitioner in Bolton in the heart of industrial Lancashire, and I grew up with some sense of what privilege in health care could mean.

But the way to get rid of queue-jumping is not to lengthen the queue by making everyone join it but to relieve the pressure on the present limited resources of the NHS or to increase the resources. I still hope that Labour Members will grasp that the best way of eliminating queue-jumping is to get rid of the queues. The NHS is currently functioning only by putting undue pressures and work loads on its staff.

The community health council which covers the Lancaster district, in which part of my constituency lies, was so concerned recently about the position that it could see developing that members of its outpatient, clinics and support services panel visited a considerable number of wards and departments in the hospitals of the district at a number of different times of the day to gather factual information. In the resulting statement, which is not peculiar to my constituency but is typical of the problems of the NHS, the council said: The principal conclusion to be drawn from the information and impressions gained on these visits is quite indisputable, namely that the level of nurse staffing throughout the district is too low. That catastrophe has not yet occurred must be attributed partly to good fortune but, to an even greater extent, to the devotion to duty of individual members of the staff. This is the reality of the NHS. It cannot give the care, either in hospital or in the community, that would be within its powers if it were properly financed, staffed and equipped. Later, the statement said: We therefore recommend (1) That the Secretary of State be reminded that under Part 1 of the National Health Service Act 1946, a comprehensive Health Service be provided in the Lancaster Health District. In the face of that situation, instead of penalising health expenditure by individuals and companies to provide care outside the NHS, the Government should be encouraging it.

I close with perhaps a more radical proposal. It has always struck me as the tragedy of the NHS that, although this is the one public service which almost everyone is willing to pay for, the mechanisms of revenue-raising and Government spending stand in the way. Instead of talking about the arguments for and against an increased national insurance surcharge, as the Chancellor did yesterday, the Treasury for once—I know that this is a fundamental suggestion—should abandon its objection to the hypothecation of revenue, which for the layman is the earmarking of a particular tax or levy for a particular purpose.

I should like the Treasury to place a health charge on the employer in order to ease—not entirely to remove: that would be too much—the financial problems of the Health Service. That should be accompanied by a greater involvement of people with business and industrial experience—both employers and unions—in the operation of the NHS. It is intolerable that the British people should continue to have a service which is deteriorating at a time when they are prepared to meet the cost of a service of which the whole nation could be proud.

7.17 p.m.

Mr. Bruce George () Walsall, South

I am glad that the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) touched on health and private education, because I know one fee-paying school in the West Midlands with a high academic reputation which cannot open its doors until the filth in its kitchens is cleaned up by order of the environmental health department.

I welcome the Budget, as I am sure will the majority of my fair-minded constituents. The commitment of the Government to British Leyland this week will greatly affect my constituents, many of whom are indirectly employed in companies providing British Leyland with components or making the machine tools. In conjunction with the Budget, which will stimulate industry, that is greatly to be welcomed.

Unemployment in my constituency is 4.8 per cent.—well under the national average—but that disguises the underlying problems of the local economy. Ironically, within about a one-mile radius of the centre of the town of Darlaston in my constituency, four companies have recently announced that they are laying workers off—GKN (Nuts and Bolts), Carringtons, Wellman Cranes, F. H. Lloyd. I trust that the impetus created by this Budget will save and create employment. I hope that the Budget will stimulate the engineering industry in the West Midlands, which will benefit the economy as a whole.

This is not an electioneering Budget. The Chancellor realises that the ordinary working man is not an unsophisticated oaf. He cannot be bought for beer, as votes were bought in the last century. It is a responsible Budget. Even if it were an electioneering one, we hold no patent on that practice. When the Leader of the Opposition talks about electioneering Budgets, she seeks to give the impression that we have a monopoly. The history of the 1950s and 1960s is testimony to the stupidity of that sort of analysis.

I want to deal mainly with one aspect of the Budget—assistance given to the hotel and catering industry—and to the related tourist industry, which is vital for our economy. It employs in all sections probably over 3 million people. It is important not just in attracting foreign currency but, as society becomes wealthier, in meeting the increasing demands which our own population will make.

This is a very important industry, and I welcome the £15 million boost that the hotel industry has been given in the Budget. The Press today was quite ecstatic in its response to this aspect of the Budget. The Guardian talked about small hotels in the regions getting a boost, and said that The hotel and tourist industry welcomed Mr. Healey's provisions giving 20 per cent. initial capital allowance on the cost of building new hotels or extensions to existing hotels with over 10 bedrooms. They are also allowed a writing-down relief of 4 per cent. annually. One of my local newspapers, The Birmingham Post, writes today: Hotel industry set for a boom". I very much welcome the Chancellor's provision for the industry. I do not think that my own constituency of Walsall, South will be the centre of any tourist boom. It may not rival other parts of the West Midlands in its pleasing aesthetic appeal. Nevertheless, I think that hotels in the area will benefit, particularly because of our relative juxtaposition with the National Exhibition Centre.

There is an impressive list of incentives which have been given to the hotel industry over the last 10 years to stimulate growth. I criticise the Chancellor's £15 million cash boost to the industry on the ground that it is not tied to any provision that the industry must put its own house in order. I am not criticising the industry en bloc. There are some excellent hotel companies and some excellent establishments of which they and we can be very proud. Regrettably, however, the excellence is not very widely spread. Indeed, it is very thinly spread.

The hotel and catering industry has some of the worst employers in the country. They exhibit many of the manifestations of nineteenth century employers. Some of them would put to shame the nineteenth century mill owners. I believe, therefore, that this major grant, which I welcome, should have strings attached to it. That section of the industry which is not meeting the standards that ought to be required of it should be compelled to put its house in order. There should be rather more than a gentle stimulus to it to improve its practices.

Both private research and Government statistics show that wages in the industry are among the lowest in the country. A number of the low-paid employees in the industry will very greatly welcome the tax concessions, especially the increases in child benefit allowance and the decisions about school meals.

The hon. Member for Norfolk, North (Mr. Howell) pointed out that many working people are deliberately choosing not to go to work because of the disincentive. There may be truth in this assertion in some instances, but I put to the hon. Gentleman very seriously that he underestimates the strength of the work ethic in this country. There are very many people who would be much better off at home, on social security. But we must not forget the stringent checks which are made by the Department on people who wilfully refuse to go to work. The majority of working people, despite the low wages that they are enjoying—or not enjoying—are prepared to go out to work, and I do not denigrate people who fall within this category.

Wages are depressingly low in the hotel and catering industry. In many cases industrial relations are appalling. There are employers who pay over the minimum and there are employers who earn the respect of their employees, but regrettably many do not fall within this category. Many employers resist trade unions with every means at their disposal. I deplore this. Only about 11 per cent. of the work force in the hotel and catering industry is unionised. I hope that the unions will make a very much more significant impact on the industry than they hitherto have been able to make.

There is another defect of the industry which should be removed, either by means of the Chancellor's measures or by anything which could be done by my right hon. Friend the Secretary of State for Employment. I should like to see the weapon of dismissal, which is used so frequently in this industry, blunted. I have been looking at a publication of the highly respected Hotel and Catering Industry Training Board. In a guide for managers, speaking of industrial relations, it states in very moderate terms that the hotel and catering industry is one in which the weapon of dismissal has been frequently used". That is an understatement. Dismissal is one of the weapons used by management to keep out trade unions and to coerce the work force. We have not to go very far in London to see manifestations of the problems in the hotel and catering industry. Some of the disputes have been highly publicised. We have read recently about the sufferings of top people in Claridges and of their Dunkirk spirit on £60 a day. In some ways I sympathise with them, but I sympathise more with the people in dispute with the management.

Here is an example from some of the reports which I have received. In this case, of which I have no personal knowledge, a young man sought to form a trade union and was dismissed. This is the weapon used. The management usually has a battery of excuses when dismissing any worker who seeks to form a trade union.

A dispute of which I have personal knowledge is that involving Garner Steak Houses, officially called Monseigneur Grills. I spent four days in representing a worker who was unfairly dismissed 18 months ago. I represented him with all the skill of the district attorney in the Perry Mason series. We lost. I could not prove the allegations that were made, yet it gave me a direct knowledge of this company and very much regret that the work force is in dispute.

Once again, the problem has been caused by the attitude of the employers to the work force seeking to get unionised, on this occasion the T. and G.W.U. The attitude of the employers is to resist trade unions at all costs. In those circumstances, bitterness arises. Indeed, it is a scar on our London scene that so many establishments are being picketed by the workers, who feel that there is discrimination against them.

I have a report from some workers in this dispute who state that they have been trying to get the union recognised. It points out that they are repeatedly threatened by the management. The management is prepared to close down altogether rather than recognise the union, despite the fact that more than 80 per cent. of the staff are union members. They state: We are mostly immigrant workers, working in an industry that is traditionally unorganised, and where employers are violently anti-trade union. If we win this will be a great boost for all workers in the hotel and catering industry and for the trade union movement. I do not think that any responsible employers in the hotel and catering industry and in the tourist industry should resist so strongly the growth of organised trade unions. It is not, in my view, in their interest to do so, because trade unions are highly responsible bodies. I want to see stability in the industry and also profitability. I am not speaking as someone who seeks to knock the industry and to put it down. I want to see the industry expand. One way in which it can expand is by the Government having a commitment towards it. Obviously, the £15 million is adequate testimony to its importance in the Government's thinking.

Wages in the industry must be improved. In the Garner Steak Houses dispute the document sent to me refers to waiters who received from the company a weekly take-home pay of £28 for a compulsory 55-hour week. A 70-hour week was and is quite common.

Wages, therefore, must be improved. If wages are improved, morale will also improve. The report of the Hotel and Catering Industry Economic Development Committee refers to staff turnover, and one can see the astronomical costs to the industry of so many people voting with their feet and clearing off. Very few establishments keep their staff beyond 12 months because the wages are so low. The conditions are Dickensian. Staff are often sleeping in sub-standard accommodation. It is necessary to improve and to cut down on staff turnover. Official reports have shown turnover to vary between 38 per cent. and 200 per cent. The trade unions must be recognised. Management must be improved. Let us hope that the Hotel and Industry Training Board and the Hotel and Catering EDC will be able to promote and stimulate change in the quality of management, not just in the large companies which need quality management but in the small companies as well.

If all of these things are done we shall see a healthy, viable and contented industry. When the kitchen staff, the waiters and the chamber maids are contented with their lot, obviously the customer will benefit. I ask the Chancellor of the Exchequer to have discussions with the Secretary of State for Employment and to seek by any means at his disposal to promote beneficial change in the industry.

Let us get away from the scandal of these disputes which are now taking place in London under our very noses. I hope that ACAS will produce its report on Garner Steak Houses very swiftly. Why does not the Secretary of State for Employment seek some form of committee of inquiry into the hotel and catering industry, its wages, conditions and industrial relations?

Mr. Margolis

, the chairman of Monseigneur Grills, is reported in Time Out to have said that he sees himself as the George Ward of the catering industry. I do not want to see the hotel and catering industry suffering in the same way and being the object of daily disputes on television as Grunwick has been. But that is what we shall see. We shall see disputes such as the one in Claridges spreading elsewhere. There has already been an indication on the tapes of the Press Association that the dispute will spread. How long do we have to wait before this industry is put on to a proper footing, one under which these disputes will be eradicated so that we can have an industry of which we can be proud?

I very much welcome this Budget. It has a number of aspects that I regard as highly desirable. It is not an electioneering Budget. I ask the Chancellor in future to consider the use of financial measures as a carrot or a stick to induce this industry—many aspects about which we can be satisfied and many about which we can rightly be nauseated—to improve. If by dangling a carrot or waving a stick we help bring about this change, this will be greatly to the benefit of the community as a whole as well as to the industry.

7.33 p.m.

Dr. Alan Glyn () Windsor and Maidenhead

I hope that the hon. Member for Walsall, South (Mr. George) will forgive me if I do not pursue him down the corridors of Claridges. I agree with him on one thing; clearly this is not an electioneering Budget. It is a neutral Budget. It is unexciting. It does not do much harm, but it does very little good.

About 4 million taxpayers out of 20 million are affected, but affected marginally. I certainly would not suggest in any way to the Government that this was an election bribe. I do not believe that those taxpayers will be fired with sufficient enthusiasm to alter the position of their cross on the ballot paper when the General Election comes. I would not be surprised if there was not another Budget before the election.

I wish to emphasise three points. Does the Budget do three things which to my mind are in the forefront of the minds of most electors? The first relates to the extraordinarily high rate of unemployment—the highest since the 1930s. Does it tackle that? What about industrial production? I am not certain of the figures, but I understand that industrial production is at approximately the same level as four years ago. Will the Budget stimulate that? I do not think so.

I asked the Chief Secretary a fortnight ago what the rate of inflation was last year compared with 1973–74. I did not get an answer. I do not know whether it was 8½ per cent. I do not believe that this Budget will do anything to reduce inflation, which is what we all want to see. Only time will tell whether I am right or wrong. The Chief Secretary was right when he said that no single factor would affect these very important issues, but a combination of factors could affect them.

I turn to the question of taxes. Many hon. Members are sad that there has not been a reduction in the standard rate of income tax. Such a step is justified because we must have some incentive for people—especially the skilled workers and the self-employed. To retain this high rate of taxation is a positive disincentive.

My chief argument against the Budget is that there is no shift from direct to indirect taxation.

We got a spark from the Chief Secretary. He said that he was not actually opposed to this suggestion, but that this was not the right time to carry it out. I have never known any time when it was right to introduce a change. But this is one of the most important methods by which we can stimulate incentive and enterprise in this country. People should be allowed to take home their wages almost without any income tax deduction. It should then be up to them to decide how they spend it. If they want to spend it on buying a new television, or on drink, or if they wish to save it, they should be allowed to do so. In other words, it should be up to the individual to say how he wishes to dispose of his income.

Over a period of years I should like to see a shift from direct to indirect taxation which gives the individual the right to choose how he wishes to pay his taxes.

My second point about taxation relates to VAT. I believe that it would have been right to have a single rate, not so much because it raises more money but because it is very much easier to administer. It causes much less difficulty, especially to the small man, if he knows that there is a single rate and that he does not have to differentiate. I do not think we should continue with differential rates of VAT, for that reason. If we had a rate of 10 per cent. I believe that it would raise another £700 million, but administration is the point that I wish to bring home to the House.

I turn to the question of the surcharge on invested income. This is a very sore point. Many Labour Members think that invested income is derived only from inherited money, but many of my constituents are people who have been employed—many in jobs, not in their own businesses—and have saved all their lives out of taxed income. They have then accumulated a sum of money, which they have invested in order to derive an income from it. They are being taxed twice. For Heaven's sake, why can we not treat invested income in the same manner as any other form of income?

We all must welcome the increase in pensions. However, I should like to to make one point. I hope that my figures are correct. When we look at the present pension rate we must remind ourselves that the value of the pound is only 52 per cent. of what it was when the Conservative Government left office in 1974. Therefore, we must divide the pension by two in order to convert to 1974 values. That is something that the House should remember.

I turn to what I regard as possibly the most important item in the Budget—the question of small businesses. The leader of the Liberal Party suggested that the Chancellor had listened to his entreaties on this subject. I suggest that the Chancellor listened to something else. Perhaps he took a walk up to Carey Street and saw how many small businesses had gone to the wall in the last four years. When the Chancellor of the Duchy of Lancaster went around the country he might well have told the Chancellor of the Exchequer "Look here, there are a lot of votes in this". Indeed there are.

I am not accusing the Government of vote catching. What I am saying is that I do not believe they are doing enough for the small business man. They have given him a little mitigation—too little, too late. But if we want to build up the industry of this country we must encourage the small business man. The number of forms that he has to fill in must be reduced. In many cases he is on his own, or with perhaps one assistant. He finds it extremely difficult to compete with the complex and difficult forms as well as the administration which he is required to perform as an unpaid tax collector.

As this is such a vital section of industry we must turn our attention to it. If we can increase the number of people in small businesses we shall be doing something towards reducing unemployment in this country.

There are many small businesses which, to my knowledge, are doing very well. When one asks the small business man why he does not expand he says that he is frightened to do so. He points out that he has a good business but that if things turn a bit difficult in his field he will be unable to sack anyone. The fact is that employers in small businesses are reluctant to expand because of the Employment Protection Act. They are reluctant to take on more employees.

Mr. Rooker

It was, of course, always the intention of the Conservative Government, who introduced the Industrial Relations Act and the unfair dismissal procedures, to reduce the time during which an employee could work for a company before he qualified under the unfair dismissal procedures. Lord Carr is on record as saying that the 104 weeks was introduced only to get the system going so that there was no administrative backlog. We have only carried through the intention of those who introduced the unfair dismissal procedures. This is really not a party point.

Dr. Glyn

I agree with the hon. Member that this should not be a party point. Like many other hon. Members, I went through these Lobbies night after night on that Act, and I admit I was not really all that keen on it. The fact remains that many people in this country are reluctant to expand good businesses because of the unfair dismissal procedures. The House should consider this point, because we are trying, in a way, to increase employment and if we continue with radical disincentives we must think very carefully about the way in which they will operate on small business men, to whom we look for increased production.

I welcome the concessions on agriculture and the contribution to law and order, small though it is.

I want to make a point about the premium on working—a point that has been raised several times already. It is quite true that many hon. Members in this House have constituents who write and tell us that at the end of it all they are better off not working. The hon. Member for Walsall, South was quite right when he said that there are many people who, although they are getting less money, choose to work. But there are others who say that they cannot afford to work. This is an area at which every Government must look extremely carefully.

I wish to raise the question of temporary employment. I believe that we must go not for short-term employment but for a much longer and more permanent solution. We realise that help is needed in the short term, but we do not want to see the short-term employment scheme go on for ever. This is something to which careful consideration must be given.

Mention has been made of comparisons between ourselves and other Western European countries. I do not think that such comparisons are very satisfactory. For one reason, we have the added advantage of North Sea oil. When we take our economic position into consideration, it is almost as if we are working on the basis of not having North Sea oil. We should regard North Sea oil as a bonus. The oil, or, rather, the proceeds from it, should be used for looking for alternative sources of energy, either in the nuclear field or somewhere else, to boost our industrial capacity so that when the oil supply ends we shall be in a position to compete with other European countries.

We must try by tax changes, by indirect and fairer methods of taxation, to create the incentives necessary to build up our society, to recognise thrift and hard work and, as Churchill said, To produce that net below which no one should fall.

7.45 p.m.

Mr. Douglas Crawford () Perth and East Perthshire

I want to speak about the Budget from a Scottish point of view, but first of all I want to make a general remark about this so-called give-away Budget. The newspapers have been filled with talk of "give-away", "boom" and "bonanza", but the Chancellor has merely given back to the people what they have put in, and he has not given back much of that.

There has been much talk of the improved economic background to the Budget and the Government have been taking the credit. But, as the hon. Member for Windsor and Maidenhead (Dr. Glyn) said, one of the reasons for the improved economic background is North Sea oil. In Scotland we are starting to see the beginning of the rip off of Scottish resources and the beginning of the big hand-out. The Budget gives back to the people about £2½ billion. It is no coincidence that this is roughly the projected take from Scottish oil annually in the next few years. There is something almost immoral about using Scottish resources as collateral for the largesse that the Chancellor was distributing yesterday.

I quote here from Mr. Peter Balfour, who is the new chairman of the Scottish Council, and by no means could he be regarded as a member of the Scottish National Party. He said on 9th March: The bonus of oil revenue must not only be invested to secure our long-term position, but should also be separately identified and accounted. It should not be allowed to disappear like some maxi road fund into the maw of the Treasury and disappear without trace. Nor should it, in my view, be used to finance programmes in which the Government would have been obliged to invest anyway, but should be spent on imaginative new products which would otherwise be beyond our capacity to finance. If the Budget is about anything it should be about the stimulation of industry. Quite frankly, this Budget will not stimulate industries in Scotland, large or small, to the required degree. We have almost 200,000 unemployed, which is the highest figure since the war. We need industrial investment and to get that the motivation must be right.

The Chancellor said a lot yesterday about this problem, but he did not offer any practical, empirical solutions. He described the destination, but he did not say very much about the road, and he has not done anything to make the passage along that road to the destination any smoother. It is all very well to say that we must get up earlier and work harder, but exhortation is not enough.

The Chancellor said a lot about small businesses, and these businesses may well say "For this relief much thanks." However, the Scottish National Party wanted the Chancellor to do two things and these things have not been done. We shall seek to insert them during the various stages of the Finance Bill.

The first of these provisions is that the levy on the self-employed imposed by the Conservatives in 1973 should be abolished. I repeat that that was introduced by the Conservatives in 1973. The second provision that we want to see is the raising of the threshold at which VAT becomes payable from £7,500 to £15,000. The Chancellor is proposing £10,000, but we believe that it should be raised to £15,000. There is no reason why very small businesses should be required to act as unpaid tax accountants for the Government.

The Chancellor said a lot about the National Enterprise Board but not a single word about the Scottish Development Agency. There is a viable and urgent need for the budget of the SDA to be raised to at least £300 million a year. In a letter to me on 8th March the Chief Secretary said: Your only suggestion is that the Scottish Development Agency should be given an extra £300 million in a year as a starter. You do not say what the Agency would be expected to do with it, or how this starter would do more than the Government's measures to increase employment in Scotland. We have no evidence that the level of funds available to the Agency is inadequate"— tell that to Clydeside— or is preventing it from taking steps to assist in dealing with Scotland's deep-seated economic problems. The SNP does not take that view. Scotland may or may not get what the Treasury considers to be fair, but we do not get a fair share of our own resources as seen from a Scottish point of view. This Scottish point of view is one which more and more people in Scotland are coming round to share.

An example of what could be done for Scotland is plain for all to see across the Irish Sea. The country with the highest growth rate in the EEC is the Republic of Ireland. Last year the Irish Industrial Development Authority gave grant assistance to industrial projects creating 24,000 new jobs. That is not a lot, but it is a great improvement for Ireland. A total of 12,000 of those jobs were stimulated from existing industry and 12,000 came from overseas.

The Industrial Development Authority's target was 23,000 jobs. It was said that the fact that the target was surpassed was due to two factors—one a stepping up of the IDA's promotional activities at home and overseas and the other the increased budget which the Irish Government had given to industrial development authorities. I do not accept the Chief Secretary's view that the Scottish Development Agency would not know what to do with an increased budget. If the Republic of Ireland can become one of the fast-growing economies in the EEC, I do not see why Scotland cannot emulate that country.

There is another industry in Scotland which is suffering—and that is whisky. Time and time again in this House the SNP has sought to get the duty on whisky lowered. We have been opposed by the Government, and the Conservatives have been apathetic and have abstained, apart from one or two honourable exceptions. The SNP has warned the Chancellor that he cannot tax this industry any more or the goose will not continue to lay any more golden eggs. We have consistently in the appropriate part of the Finance Bill over the last three years sought to reduce the duty on whisky.

Let me quote what the chairman of the Scotch Whisky Development Committee, Adam Bergins, said recently: Last year was the first time since 1969 that the total amount of Scotch whisky sold throughout the world did not increase in comparison with the previous year. We have not yet received figures for the whole of 1977, but releases from bond for sale in the home market in the first 11 months of the year amounted to 13,400,000 proof gallons. That was less than 17 per cent. less than in 1976. He continued: The Chancellor told Parliament that the additional revenue raised by these measures would amount to £280 million in the financial year 1977–78. Financial commentators reported that the Chancellor looked to spirits to contribute £20 million of that extra. But what happened? During the financial year just ended, because the duty has been so high, the total Government take fell last financial year by £28 million.

The tax cuts in general are not enough for Scotland. I calculate that they represent about 3 to 4 per cent. That is not enough even when set against the Chancellor's suggestion that inflation this year will come down to only 7 per cent. Individuals are given the illusion of tax cuts without the reality.

As for companies, apart from smaller companies, the fact that there has been no cut in corporation tax will in no way assist investment and job creation in Scotland. There is now, more than ever before, a need for a separate Scottish budget. I realise that the Conservatives helped us a little way along this road during a Division on the Scotland Bill when they accepted our suggestion that the Government's pay policy should not run in Scotland. We were very grateful to have the Conservative and Unionist Party's support. I presume that they made another of their mistakes, but that provision was deleted from the Scotland Bill, and presumably it will remain out.

We are beginning to see the start of some kind of different economic strategy in Scotland. The fact that the rather restrictive pay policy operating in England is not to be extended to Scotland is a welcome step in the right direction.

The Government and the Liberal Party have made their proposals, but we still do not know what are the Conservative Party's proposals. Let me read into the record the SNP's proposals. [HON. MEMBERS: "Hear, hear."] I am grateful for that support because after the next General Election hon. Members will have to deal with one or two more SNP Members.

The first proposal is that the duty on whisky should be paid at the time of sale and not when it comes out of bond. This would incur a once-for-all cost of £80 million. These costings are not mine, but are contained in a parliamentary reply.

The second proposal is that duty on whisky should be reduced from its present level to that pertaining in March 1975. The present duty is about £3.16 per bottle and in March 1975 the figure stood at £2.57. This would cost about £75 million.

Mr. Rooker

Since the hon. Gentleman is dealing with the subject of whisky, does he agree with the remarks in the recent report by the Comptroller and Auditor General to Parliament referring to the massive tax fiddle that is taking place because of the removal of large samples of whisky from bond? That was in a report presented to the House in February. Does the hon. Gentleman wish to see that loophole closed?

Mr. Crawford

Most certainly we are for closing such a loophole. We are interested in jobs in the whisky industry, and if there are tax fiddles that reduce the number of jobs, we would be totally in favour of closing such loopholes.

We suggest raising the threshold at which VAT becomes payable from £7,500 to £15,000. This would cost in Scotland £3 million per year. We also suggest a reduction of 2½ per cent. in corporation tax. That is not very much, but it would give a psychological boost to investment in larger companies. We also suggest—and I know that my hon. Friend the Member for Dunbartonshire, East (Mrs. Bain) will agree with me here—the abolition of taxation on the basic rate of widows' pensions. Although we welcome the increase in pensions, the SNP believes that the rise is not great enough.

Nobody should say that Scotland cannot afford these measures. The climate is right and a notable comment on the situation was made two months ago by Mr. Jeremy Morse, the chairman of Lloyds Bank: Scottish independence would be more likely to lead to increased investment in Scotland. He said that when he was opening a branch of Lloyds Bank in Edinburgh. He continued: Whatever the political outcome of the present trend in Scotland, it is enough to make an international banker say 'Can we be in 43 countries and not be in Scotland?' The climate in Scotland is ripe for expansion. The sooner Scotland can get away from the dead hand of the Treasury and London, the better. It cannot come too soon. More and more people in Scotland are not prepared to see the revenues from their own resources being used to pay off debts which Scotland did not incur in the first place.

What the Chancellor has done for Scotland is to give us a few crumbs from our own very rich table, and we are expected to be grateful for them. Hon. Members may laugh, but it is not so long since the SNP had only one representative in this House. It will not be long now before a Scottish Chancellor will come to a Scottish Parliament in Edinburgh and bring forward firm financial proposals which will utilise Scotland's vast resources in a way that will increase investment and drastically reduce unemployment in Scotland. For the unemployed, for small business as well as large, and for investors that day cannot come soon enough.

7.58 p.m.

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

This has been an interesting debate so far. It is a great pity that it has not been broadcast live. The public should have been able to listen today to Conservative Party policy. However, they would have discovered that now that we have passed the stage of off-the-cuff remarks, we still do not know the state of Conservative Party policy.

The only concrete proposal came from the right hon. and learned Member for Surrey, East (Sir G. Howe). He wanted to ensure that the man earning £50,000 a year had a tax cut of £140 a week—in other words, he wanted to give such a man a tax cut of £7,000. That was about the only firm proposal that we had from the official Opposition—a party which pretends to put itself up as a future Government. The Conservatives will be walking totally naked into a General Election—although I do not think this is an election Budget—in terms of policy. The public will not know what the Tories really stand for.

It has already been said that the Conservatives are in favour of public expenditure cuts in general but not in favour of specific cuts. They will not oppose any of the proposed increases put forward by the Chancellor, but they never make their policy clear, except when they seem to imply that we should reduce nurses' wages in order to give the doctors more. They never dare spell out their proposals so that the public can draw conclusions from their comments.

I wish to ask a question of the Treasury Front Bench, and I hope that it will be answered in the Minister's reply. It relates to the background of the Chancellor's speech yesterday and to the work that goes on behind the scenes. It has been put to me that while my right hon. Friend's speech was broadcast live on the radio, his words were flashed up on the television screen so fast that the media must have had prior knowledge of what he was going to say. I hope that we can have a categorical denial that the speech was given to anyone in the media before it was made.

Mr. Norman Lamont () Kingston upon Thames

May I suggest another question that the hon. Gentleman should put to his right hon. Friends? He is making an extremely important point, but another extraordinary feature of the Budget was that important matters were not referred to at all in the Chancellor's speech. Hon. Members had to collect all the bumph that was available only to journalists in order to discover, for example, that the minimum repayment required of credit card holders had been altered. A number of matters were not told to Parliament.

Mr. Rooker

I accept the implication behind what the hon. Gentleman said. I had to collect this great load of bumph from the Vote Office to discover changes that the Chancellor had not announced.

There is a great myth about Budgets. The Chancellor need not have bothered to say half of what he said. Even though his speech was shorter and less confusing than usual, all the clichés and initials that were used give the impression to the public that there is a great mystique about Budgets, that we are all clever "bods" and that only Ministers and Shadow spokesmen really understand these matters and only they should be allowed to get involved in affairs of State. If my right hon. Friend had left out all the things that he need not have bothered to say, he would have had more time to tell us about the things included in the bumph, some of which were extremely relevant.

Of course, there are some things that no Chancellor would ever say. No Chancellor would point out that, because of our crazy taxation system, the effects even of a Budget that is largely directed towards the working poor has a spin-off that leaves the rich to get away with a lot of tax cuts.

This is the first time that I have spoken in a debate in which there has been a maiden speech. I do not want to comment on the speech of the hon. Member for Ilford, North (Mr. Bendall), but my hon. Friends and I were extremely grateful for the generous way he spoke about our late colleague, Millie Miller.

We have seen two reputations completely smashed today. The first—it probably goes without saying—was that of the right hon. and learned Member for Surrey, East. This is probably the last time that we shall hear him leading for the Opposition. He had nothing to say, and his colleagues were almost falling asleep. The look on the face of the Leader of the Opposition showed that she had got the message. The right hon. and learned Gentleman's performance was well below par—even for him.

The other reputation that has gone out of the window is that of the hon. Member for Norfolk, North (Mr. Howell), who has built up a considerable reputation for expertise and knowledge about the working of the poverty trap. I am sorry that he is not here. I have not left the Chamber, so I have not had the opportunity to inform him that I intended to refer to his speech.

The hon. Gentleman had built up his reputation in a way that appealed to my hon. Friends. Until today, he had been wholly constructive and had not sought to use the information and problems about the interaction of the social security system and the tax system to attack the Welfare State, as his hon. Friend the Member for Aberdeen, South (Mr. Sproat) has done.

I hope that the hon. Member for Norfolk, North will read his speech, because he showed that he did not understand the working of the poverty trap. He said that people would not escape from it. He clearly did not understand that some means-tested benefits depend on gross income and, if there are tax reductions, people will be better off and will not lose benefits, because their gross income will remain the same. He also followed the example of the hon. Member for Aberdeen, South, of attacking those who cannot defend themselves even outside the House. These people have too few spokesmen to put their case.

The hon. Gentleman also sought to use wicked smears against those who are in the dole queue for no reason other than the way that the economy has been run in past years. There was nothing about those who go to work knowing that they are probably a little worse off than they would be on the dole. There was no comment on that from the so-called champion of those in the poverty trap. The hon. Gentleman's reputation as an hon. Member who can speak with authority, responsibility and care on this matter has gone straight out of the window.

Before the Budget I sought not to get involved in any auctioneering on what the size of tax cuts should be. Like my hon. Friend the Member for Coventry, South-West (Mrs. Wise), I have been under considerable pressure about what we would like to see. It is not the role of any Back Bencher, or any Minister except Treasury Ministers, to decide how to apportion the blocks of cash between public expenditure and direct tax cuts.

My hon. Friend the Member for Coventry, South-West and I took extreme exception last year to the disposition of the tax cuts. I take no exception this year. I was delighted to see the combination of increases in the thresholds and the introduction of a lower rate band. It was clear that the Chancellor could not do both adequately. We could not have a really broad band, because that would have used up all the money, and I wanted to see the thresholds raised, even if only a little, because that will take some people out of paying tax altogether and it is important that we should seek to do this. I accept that, because of what happened in October, we could not have full indexation.

The Chancellor's combination of changes is highly significant. It gives us the opportunity to build on the lower rate band, not by spurious amendments to the Finance Bill but by allowing future Chancellors to build on it responsibly. We have achieved an important principle. Of course, the Opposition do not like it.

There was a headline in the Evening Standard last night which said that the lowest rate of tax was down to 25 per cent. It was only in one edition, and was neatly changed later, because it was, no doubt, thought that it looked a bit too pro-Labour. All later editions were changed, and I had to buy a copy of the early edition because copies were not available, as the headline had been changed so fast. It upsets the Tory Party when the Tory Press can make this brief, succinct analysis of what the Chancellor has done.

My right hon. Friend said that the marginal rate of tax for many millions of people will be only 25 per cent. He gave the figure as 4 million, and we have to accept what he says. Obviously hon. Members will seek to probe this in Questions to see the slight changes that affect wage and salary scales.

It is no good the Opposition decrying what the Chancellor has done and saying that the lower band will apply only to part-time workers. For many people, working part-time means the difference between total poverty and a semblance of a reasonable standard of living. The change will benefit people such as the woman who has to go out to work in the afternoon or evening because her family commitments prevent her doing otherwise.

In addition, those on very low earnings in wages council industries, where employers pay below the legal minimum and full-time workers get a pittance of £45 a week or less, will also receive considerable benefit. It is hypocrisy for the Opposition to say that the change will not affect many people.

I enjoyed much of the speech of the hon. Member for Windsor and Maidenhead (Dr. Glyn), but he was wrong to say that the lower band will affect only 4 million taxpayers. All 20 million taxpayers will be affected, and I shall show later the effect on one or two bands.

The other part of the Chancellor's announcement about which I was deeply pleased was the bringing forward to November of the increase in child benefit. There has been considerable public and private Labour Party pressure on my right hon. Friend to do this.

The warning shots across the bows had already been fired. Unfortunately, no one knew about it, because the Order Paper had not been printed. The Early-Day Motion tabled last week entitled "Parliament and the Inland Revenue" did not get the coverage that it should have had, but I think it likely that the Treasury took its content on board. It sought to draw attention to the House and to the Inland Revenue and its staffs that from last week the lower child tax allowances were being operated without parliamentary approval. This was made clear in the leaflet to the taxpayers.

My right hon. Friend the Financial Secretary nods. Everyone might have known about the programme, but there was no legislative authority for it. If the child benefit increase had not been brought forward to November it might have been difficult for the Chancellor to get through a clause in the Finance Bill giving effect to the child tax allowances which had already been put into operation. That was our point. We said that if no approval were given, we would not expect any complaints from the Inland Revenue, because it knew what it was doing in implementing the scheme without approval.

I accept that this was the broad plan of things, but it had got to a point at which the family support operating at present was such that in October or by the end of the year—by the time the tax changes had filtered through—the family support in 1978, in real terms, would have been considerably less than in previous years, from both Governments. We were not prepared to tolerate that. The point has been made and accepted. We on the Labour Benches are extremely grateful and I know that most Conservative Members feel the same. The recipients will be even more grateful, because it is to them that the benefits will accrue.

What was missing from the Chancellor's speech was some reference to the Mead Report, because the Chancellor did not want to spend a lot of time telling the public what a mess our tax system was in with its interaction with the social security system. I do not accept all the recommendations in the Mead Report; far from it. But there are many important recommendations in it to which I thought the Chancellor might have paid a little attention. The analysis of the poverty trap was extremely cold and clinical. The highest marginal rates of tax are not paid by the wealthy at 83 per cent. or 98 per cent.; they are paid by the working poor at 106 per cent. in some cases. Account has been taken of this sort of analysis.

There was an important analysis of the change to expenditure taxes. The report said that one could do this unless one had a good and workable wealth tax and an inheritance tax.

Those are all good Labour Party proposals that we have not put into effect. That is one reason why we do not hear very much about the Mead Report from the Conservative Party. It contains a lot of good recommendations that happen logically and fortuitously to have long been Labour Party policy. I hoped that the Chancellor would say something about that.

On the subject of closing some of the tax loopholes, I imagine that we shall have many speeches from the Conservative Party and from leader writers outside saying that it is a constitutional outrage because it is retrospective legislation. But, as my right hon. Friend the Chief Secretary made abundantly clear, the people who have benefited have been playing the game. They knew what the convention was in this place and they adjusted their tax schemes accordingly. There is one scheme that my right hon. Friend referred to in which £100 million of tax is at stake—tax that should rightfully have been paid. That is quite outrageous. The public have a right to know who is trying to perpetuate this rip off on the taxpayer. All the taxpayers pay for it. So do the pensioners and those on hospital waiting lists, because there is less money available for everybody else.

Some of the loopholes are well known. I should imagine that it would be very difficult for the Tory Party in Committee to oppose some of the changes that my hon. Friends are to propose. What has been happening is totally immoral. We are not talking about moonlighting jobs. We are talking about massive sums of money. Wimpey, the building firm, for a fee of £2.8 million, got rid of its whole corporation tax liability of over £18 million the year before last. That is the way in which large companies are operating. They are just paying a small fee, with no tax. It is not illegal to do so, but it is a totally artificial scheme and is seen as such by everybody else when it is discovered. By then it is too late to do anything about it. Therefore I welcome the element of retrospection, which has caught these people on the hop because they thought that it was going to be retrospective only to announcements late in 1977. They will be caught as far back as early 1976.

A speech was made by the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) about the effect on the National Health Service, in which he advocated more public subsidy to the private sector of the service. One would think that the private sector was self-sufficient. It is not. The public do not know much about this, but the nationally funded blood transfusion service collects blood from donors all over the country, delivers it, keeps it, converts it and supplies it free of charge to the private sector and the National Health Service with no handling charges, let alone charges for the blood.

I do not want the American system here, in which people sell their blood. There is much hidden subsidy in the private sector, and the hon. Member wants even more. Many examples such as this could be quoted throughout the system.

There is a point to which I want to draw attention, because probably no one else will. On balance, this Budget has been for the working poor, and as such I totally applaud it. It shows up our crazy system of taxation. I want my hon. Friends to promise to do something about this in the future. As long as the present system exists they will not be able to meet the argument about the high marginal rate of tax. I will not go to the wall defending the status quo. If someone earning £20,000 a year—£400 a week—obtained from a Budget a tax reduction of £11 a week—this is from a Budget that benefits the working poor—without any of the tax rates changing, it shows how much he would gain if the tax rates changed.

A system must be introduced so that Labour Governments—because it will only be Labour Governments—who want to introduce Budgets in favour of the working poor—the majority of people who earn less than average earnings—can do it in such a way that the benefit can be concentrated without going right up through the system to give the further benefits to which I have just referred. Eleven pounds a week is not a bad bonus, even if one is earning £400 a week. My constituents—the workers who will receive only about £2 a week more—will feel a bit sick to think that the Budget that we are saying is good for the low-paid can have this effect on the highly-paid people.

I should like some sort of commitment to consider a root-and-branch change of the tax system, so that we can get rid of this crazy anomaly. It might enable my right hon. Friends to tackle some of the problems of the high marginal rates which penalise certain people, though not everybody. But they will not be able to move on that as long as the present system exists. If they move on that and on the low-paid, the rich people will have two bites of the cherry. They will receive the benefit from dropping the high marginal rate and the benefit of the spin-off that works its way through the present system because it is so antiquated and out of touch with modern means.

Mr. Deputy Speaker (Mr. Oscar Murton)

Order. I appeal to hon. Members for shorter speeches. Time is moving on.

8.19 p.m.

Mr. Malcolm Rifkind () Edinburgh, Pentlands

I agree with everything said by the hon. Member for Birmingham, Perry Barr (Mr. Rooker): what the income tax system needs is a root and branch change. It is becoming increasingly clear that that is the last thing we shall get from this Government.

The Chancellor's proposals presented to the House yesterday have been described as being his thirteenth Budget, which in the good old days might have implied a thirteen-year tenure of office. At least the British public can be grateful for the small mercy that they have been spared that trauma. Such is the Chancellor's capacity to promote inflation with all that he touches that he has been able to cram into his four years of office a degree of misery that would take any other Chancellor of the Exchequer those 13 years to achieve.

Yesterday, when he presented his proposals to the House the House and the public were once again told that the economy had turned the corner. Those of us in the House and throughout the country who have heard that expression many times before—that the economy has turned the corner and that we are about to enter the broad, sunlit uplands of economic prosperity—might be accused of treating that claim with a little scepticism. However, the Ministers on the Treasury Bench will be pleased to know that I have always been prepared to accept that claim when it has come from the Front Bench, whenever it is made. After all, if we turn the same corner often enough we tend to get back to where we started.

It has taken the Chancellor over four years to return to inflation roughly comparable with the 8.4 per cent. that he claimed in 1974. The nation will not forget, however, that between these two peaks of remarkable economic achievement the level of inflation topped 27 per cent., and that for the first time in modern history the British nation faced economic bankruptcy and national humiliation. Even now unemployment is still higher than at any time since the hungry thirties. The value of the pound is humiliatingly lower than it has ever been in our history and the productivity of British industry is less than during the three-day working week. That is an achievement of which no Government could be proud.

The Chancellor and other Ministers say that they have great faith in our economic recovery under their supervision. I suppose I would accept that if I used G. K. Chesterton's definition of faith as being the capacity to believe that which is demonstrably untrue.

One of the most interesting factors in the debate has been the contribution of the Liberal leader and, during the preparation of the Budget, of the Liberal Party. It is fascinating and sad to watch the Liberal Party's frantic attempts to prove its relevance on the contemporary British political scene. There is nothing more pathetic than the leader of the Liberal Party posturing as a latter-day Asquith, unless it is the hon. Member for Cornwall, North (Mr. Pardoe) posturing as a latter-day Lloyd George.

The Liberals have said that in general they are satisfied with the Budget, but that shows that they are easily satisfied. They wished to implement three changes. Two of them—the proposals for helping small businesses and for profit-sharing—welcome though they are, are of minuscule importance to the overall state of the economy. But the fundamental Liberal commitment, a commitment which is shared in many quarters, was for a radical change in the structure of taxation. The Government's response has been timid in the extreme. The Liberal Party has failed to make any impact on the Government and its irrelevance for the future is clear.

I wish to concentrate on the problems of income tax. The Government's real failure has been in not contributing towards solving those problems. Their failure to make a contribution is all the more to be regretted since there are two fundamental reasons why this was the best time for many years for such a radical change to be made.

First, the nation has never been more united in demanding massive reductions in direct taxation, particularly income tax. Income tax has never been popular, but never has there been greater unanimity among the working public that it is too high. Equally, there has never been a time when the burden of direct taxation has been so great.

There has been comment on the Government's failure to reduce the top rates of tax. It is extraordinary that the only countries with higher rates than the United Kingdom are Algeria, Egypt and Tanzania, countries with which we are not normally compared in economic matters, but with which, if this Government are to remain in office for any length of time, comparisons would become increasingly desirable.

For many years taxation has divided the two major parties. For years the Conservative Party has argued that a high level of tax is undesirable and that if the choice arises it should be reduced, even if that means increasing indirect tax. For years the abour Party has argued to the contrary, believing sincerely that a policy of high taxation is desirable in the public interest, providing the best means of supporting and helping the vast majority of people. They argue that were we to reduce direct taxes significantly, only a privileged middle-class minority would benefit. The Labour Party believes, therefore, that direct taxes should be high and indirect taxes low.

A couple of fundamental changes in recent years make a nonsense of that distinction. Consider the total number of people who now pay income tax. At one time it was a middle-class tax paid only by those who were relatively prosperous. In 1939 there were 4 million taxpayers. By 1959 the number was 18 million, and today it is about 24 million. Unlike 20 or 30 years ago, it is paid by the vast majority of working people, irrespective of their economic background, their type of employment or their level of income. The Labour Pary has never come to grips with this fundamental change.

The whole concept of higher rates of tax was once a perfectly legitimate method of redistributing wealth. Only those who were prosperous by conventional standards had to pay the higher rates. There are the very rich among us today who pay the higher rates, but the vast majority of those who pay these rates would not have been considered prosperous 30 years ago. The failure to index those rates to inflation has led to this problem in the last few years. The old theories that direct taxes were somehow progressive while indirect taxes were regressive might have been valid 30 years ago, but they are becoming increasingly absurd and irrelevant today. That is what makes so significant the Prime Minister's comments to the national executive committee of the Labour Party. He told the committee: If you talk to people in the factories and clubs they all want to pay less tax. They are more interested in that than in the Government giving money away in other directions. It is unfortunate that it has taken the Prime Minister and his Government so long to realise what the people they claim to represent really want. It is extraordinary that after four years of Labour Government no attempt should have been made to reduce the basic rate of income tax from 34 per cent. If the Chancellor had wanted he could have cut it by 5 per cent. That would have represented exactly the amount he has injected into the economy.

The Socialist appeal in this country and in many others has been based on the slogan that Socialists seek a fundamental and irreversible transfer of economic power in favour of working people. That is a fair representation of what the Socialists seek and what they believe in, and in a certain context I can give total and unqualified support to that objective of the transfer of economic power in favour of working people, because if we translate that into modern contemporary requirement it means first that we have to accept that "working people" is a phrase which encompasses a vast majority of the public, and the old doctrine of the working class is no longer relevant when those who live on inherited or investment income represent but a minute fraction of the total population. Therefore, if the Labour Party is now prepared to accept, as a meaningful definition of the phrase "working people", that it includes the self-employed and employers and professional people as well as employees, we can agree on that.

Equally, there is certainly a need for a fundamental transfer of economic power, but no longer is it relevant to talk in terms of a fundamental transfer of economic power from one section of the population to another section; the transfer that is required today is a transfer from the State, the Government, back to the people of this country. It is the State, through Governments of all political complexions, which controls such a high proportion of our national income and our national wealth, and if it is transfer that we seek, it is transfer not from groups or classes of the population but from the State as a whole back to the population as a whole.

That is the policy that has to be followed, and it is because this Government have failed in this as in every Budget they have brought before the House in their four years in office that this Budget will be a great disappointment, not only to their committed political opponents but to a vast majority of the population.

8.30 p.m.

Mr. Michael McGuire () Ince

In reply to the hon. Member for Edinburgh, Pentlands (Mr. Rifkind) and some other speakers from the Opposition Benches, I would say that when the Prime Minister made the speech which the hon. Member has just quoted about tapping the wellspring in the country that wants a reduction in taxation, he was absolutely right, and this Government were right to do what they have done. My hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) said that the hon. Member for Norfolk, North (Mr. Howell) was one of two hon. Members he instanced whose reputations had been destroyed or shattered today. I do not go along with that. Sometimes in this House we are too quick to impugn the motives and utterances of others wrongly. I am sorry that the hon. Member for Norfolk, North is not here. Having so many other commitments we tend to be disrespectful to one another and leave after we've made our speeches, and I am as guilty as any other. I am not parading myself as a model in this respect.

Although the hon. Member for Norfolk, North is not present I would say that I do not attribute any ill motive to him, but he has made a reputation as a caring Member of the House in trying to analyse the interaction between people getting low pay at work and those who have to rely on State benefits, and he is right to do so. I draw a slightly different conclusion from that which he has highlighted. That is that the wages paid to many of our working people today are abysmally low, not that people who are on social security or drawing other State benefits are getting too much. Hon. Members, who are bound to have had experience of constituents who, through sheer misfortune in a majority of cases, have had to rely on State benefits, will know in their hearts that nobody is going to get rich on such benefits. A myth has been created that people would sooner be on State benefit than get work. That has not been my experience.

Only this week I had a most heartrending letter from a constituent telling me how many times he has tried to get a job and how his failure to do so has humiliated him. He is still seeking work. He is a man with two children, the kind of person who, according to the hon. Member for Norfolk, North—at least, if I understand what I believe he implied—is one of those better off on State benefit. Most of the unemployed people in this country deeply want to be employed. They do not want State benefit. Generally speaking people are on those benefits only because they cannot get off them. I am not saying that there are not some—a very small minority—who abuse those benefits. In any free society we shall get abuse from all sections of society. But a vast majority of those people, heaven help them, want to get off State benefit and to earn a living. They know they will be better off if that can be achieved.

The hon. Member for Norfolk, North, if I understand him correctly, implied that this was a choice that people welcomed and that they do not want to find work. I am probably one of the few, certainly in this Chamber now, who had to suffer humiliation when my mother was on what was then called "public assistance". My hon. Friend the Member for Sheffield, Hillsborough (Mr. Flannery) indicates his agreement. Anybody who suffered that experience knows that it is burned into his soul.

The Tory Party is wrong in always trying to pretend that people generally like to be on social security benefits and that it is more desirable economically than working. That is a myth. I think that the hon. Member for Norfolk, North did himself a disservice.

The hon. Member for Perth and East Perthshire (Mr. Crawford), as we would expect, trotted out slogans about how the wicked English were battening upon the riches of Scotland to the detriment of Scottish people. I represent an area which has been proved in the House over the years to have been badly served in its share or allocation of the national cake. Certainly it has been very badly done by in the allocation of Government jobs as compared with those which have gone to Wales and Scotland. I am an ex-coal miner. I suggest that if we applied the hon. Gentleman's philosophy about the resources in one country being kept exclusively in that country, there would not be many coal pits in Scotland functioning. The hon. Gentleman should remember that. It is not a question of devolution, revolution or evolution. The choice will be made freely and fairly by the people of Scotland in a General Election. When they make that choice—and if they choose a separate Scottish Parliament—I think that they will come to their cake and milk and will find just how much they relied on the total wealth of Great Britain to help disadvantaged areas.

I felt that this was a novel Budget. I think that, in the words of the bingo caller who shouts out "Thirteen, lucky for some", it has been lucky and an improvement for many people.

I was particularly pleased to see the reference to law and order. If by that my right hon. Friend means more money to provide more policemen on the beat, I put up both hands. I think that is something like the wellspring of tax reduction for which the public is asking. Therefore, I welcome it.

However, I crib that my right hon. Friend, having money to dish out here and there, did not help a section of the public which I think urgently needs help. I have mentioned these people before. I refer to parents who transport their children to school because those children do not qualify for free transport under the absurd regulation regarding two miles or three miles which determines whether free transport is to be made available.

I have had many deputations from parents in my constituency who will not allow their children to go to school unescorted. They make eight journeys a day to school, in the morning and back, before lunch and back, after lunch and back and again at the end of the afternoon. They face crushing financial burdens. They do not qualify for help. They will not allow their children to go to and from school unescorted—I do not blame them—and yet there is no relief for them. It would not require a large sum to help those people. I ask my right hon. Friend to note that the Government should make a start with the 11-year-olds and under. It would not cost much and it would be greatly welcomed.

I should have liked my right hon. Friend to level up the VAT rates. Many people—business men and others—will say that the absurdity of the 12 per cent. and 8 per cent. rates could have been resolved by a simple 10 per cent. rate. I think that most people would have welcomed it. I do not know whether the Exchequer would have lost.

Mr. Nigel Lawson () Blaby

It would have gained.

Mr. McGuire

If it would have gained, that is all the more reason for doing it. But if the loss would not be very much, I think that convenience should have pressed that upon my right hon. Friend.

I end on the question of the Chancellor's industrial strategy which ran like a thread through his speech. My right hon. Friend was at pains to emphasise that he did not want to do anything which would prejudice the success of our industrial strategy. He mentioned the finely balanced argument between having import control protection and free trade. We know that there is probably no other country in the world that depends as much on free trade as this country, but I think that we shall be driven to have selective protection for certain industries, some of them perhaps basic industries. The fact is that otherwise the bottom of our industrial base will collapse. It is already being whittled away very greatly in many areas. There is 65 per cent. import penetration in textiles.

The other week I had an example of a company in my constituency, with a marvellous industrial relations record, facing problems caused by imports. I am told by the trade unions concerned that it has a very good safety record. It does not shirk spending money for safety appliances and making the work safer for its workers. It has a sick pay scheme and many other social benefits that we expect enlightened employers to provide. But it is faced with imports the cost of which is almost exceeded by its own raw material costs.

The answer is not a matter of modernisation to any great extent, although the company would do it if possible. When one is faced with that kind of cost and challenge, what can one do? When I questioned the company and we had a discussion about one or two matters, I found that it had to buy its steel from abroad. I asked "Why don't you buy it from the British Steel Corporation?". Whether we come from steel-making constituencies or other constituencies, we should take the company's answer on board. It said "The quality of the product from British Steel is too poor". It has to buy from overseas or it would go out of business. I am led to believe that the quality is too poor because British Steel has not modernised sufficiently in those mills where it makes what is called cold-rolled steel.

Mr. Bernard Conlan (Gateshead, East) rose—

Mr. McGuire

I shall give way to my hon. Friend in a moment. I want to finish what I am saying about this so that it will be absolutely clear.

I do not know how many people are importing that particular type of finished steel because the Corporation's product is of such poor quality that they cannot manufacture what they want to manufacture with it, with the result that they must buy abroad. The reason the steel is of a poor quality is that the Corporation does not have the modern machinery. I believe that it is incumbent on the Government to give it the modern machinery, otherwise, we shall go down and down. British steel production will go down and down, because nobody will buy its products.

Mr. Conlan

Is my hon. Friend aware that if the remarks he has just made are reported generally it will imply that the whole range of steel products produced by British Steel is inferior? That is not so.

Mr. Hordern

The hon. Gentleman did not say that.

Mr. Conlan

The products of British Steel are of a very high quality. The Corporation may be lacking in certain specialised grades, and it is in those limited grades that manufacturers find they have to import. It is a very small proportion indeed.

Mr. McGuire

I was at pains to say—that is why I wanted to finish what I was saying before my hon. Friend intervened, though I understand the reasons for his intervention—that I did not know in how many grades that complaint was made. I assume and hope that it is in a very narrow range, as he indicates.

What I am saying is that if we have a nationalised steel industry and it does not have the modern equipment, the problem is not the will; it is not the fact that the workmen do not want to do the work or do not have the expertise. If they do not have the equipment, we should give it to them. It is as simple as that. That would help our economy and the company to which I have referred, which does not want to import.

However, I want to return to my main theme, that we shall have to look closely at the question of protection. It will not be a wall around all our inefficient or ill-deserving industries simply to keep them in business. That would be wrong and self-defeating. The company that I mentioned—I deliberately did not give its name—like so many others has not inflicted any of these ills upon itself. But there comes a time when some of our industries cannot compete with products coming in from poor-economy countries.

I know that there is an argument, and certainly among my hon. Friends, about whether we have to help some of the poorest countries to get on to the threshold of industrialisation. If that is so, all countries should assist those that want to get on the threshold as we have done by allowing 65 per cent. import penetration, which will probably increase, in textiles. I do not know the figures for other industries, but we have gone a long way towards discharging our debt.

It will do no one any good if we say "We have to let other countries' products into our home market even if we cannot compete with them, even if the industries that are now complaining are suffering from ills that have not been self-inflicted."

Is it to be said that we have to let in these imports and let other countries come under the umbrella? If that is done, our industries will have no protection. To allow them to be imported in that way is foolish and damaging. It is a matter that we shall have to examine carefully. I urge my right hon. Friend the Chancellor and his colleagues not to dismiss the argument about selective import controls as being contrary to the good principle of free trade.

It is my right hon. Friend's thirteenth Budget and I look forward to his fourteenth. It will certainly be a Labour Budget on the next occasion. I do not think that there is any question about that. I understand the chagrin of the Tories. They think that we have pinched one or two of their clothes, but that is legitimate in politics. I believe that with all our other policies we shall be returned at the next General Election and that it will be a Labour Chancellor who will introduce the next Budget. That Chancellor is certain to be my right hon. Friend. I hope that in the next Budget he will help the group of people that I have been asking him to help and regret that he did not help in this Budget.

8.47 p.m.

Mr. Terence Higgins () Worthing

I believe that I have heard every one of the speeches today. They have been in marked contrast with the headlines that appeared in a number of newspapers both last night and today. There has not been very much enthusiasm for the Budget in the speeches that we have heard from either side of the House.

Many of the headlines referred to tax cuts. The Chancellor has made great play of his claim that he is cutting taxation. However, when we consider Table 6 in the Government's Red Book we find that the difference between the estimated outturn in 1977–78 for taxes on income compared with the outturn that is estimated for 1978–79, there is an increase of about £3,000 million. The headlines led us to believe that there have been massive cuts in taxation and that combined with the indexation amendment that we passed last year the Chancellor has reduced the burden of tax on income. It is clear from the Red Book that that is not true.

Direct taxation and national insurance contributions have both been increased by massive amounts. That is worthy of comment at the outset. There is now no way in which the Chancellor can reduce tax levels before the General Election to those that existed when he came into office. The right hon. Gentleman constantly says that he would like to reduce taxation, but Socialist Chancellors are not genuinely in favour of doing so. It takes a Conservative Chancellor to make significant reductions in the burden of taxation.

The crucial question that we must ask ourselves is whether the Budget converts the substantial financial turnround that has been achieved into a real turnround with benefits for unemployment, real output and the standard of living. In my view that is not the effect of the Budget. There is reason to have real doubt whether the financial turnround that has taken place will be sustained.

The latest figures that are analysed in "Greenwell's Bulletin"—I do not always agree with it but the data are often extremely useful—suggest that the present rate of increase in the money supply is extremely worrying and not vastly different from that which existed in the period leading up to the February 1974 General Election.

I have explained previously why I think that such figures need to be qualified. However, the present figures are worrying. It may be that the Financial Secretary to the Treasury will feel able to comment upon them when he replies. They are extremely relevant to the point upon which I want to concentrate first, which arises from the Chief Secretary's remarks. I am glad to see that he has arrived back in his place. I was astonished by his remark about schizophrenia, because I think it is true to say that no Chancellor has ever introduced a Budget that has reduced taxation at the same time as making an announcement of an increase in the general level of interest rates, as determined in this case by the minimum lending rate.

This is really quite extraordinary. It would seem that what the Government have in mind is to reduce taxation and then to cover the public sector borrowing requirement by borrowing from the non-bank public, which obviously would involve, I believe, an increase in interest rates. The Chief Secretary says that this 1 per cent. increase is purely for international considerations and so on. None the less, it is quite clear that there is an enormous deficit to be financed, and I believe that that will require an increase in interest rates.

At all events, even in the Chancellor's own Budget Statement there is this inconsistency. Clearly, if one has both cuts in taxation, on the one hand, which are designed to increase incentives and firms' efficiency, and, on the other hand, at the same time rising interest rates, that has quite the opposite effect. There are very good reasons why successive Governments have tried to pursue a policy that is consistent with regard to fiscal and monetary aspects of the economy, but clearly that is not so in this instance.

It was also interesting that in pursuing this argument the Chief Secretary was not prepared to say to what extent the £2½ billion cut in taxation was expected to be covered by borrowing from the non-bank public—that is, by borrowing which did not itself have an inflationary effect. My impression is that the Chancellor is sailing very close to the wind indeed in the changes that he has made, and he has no headroom at all if the estimate of the PSBR goes wrong. Given the extent to which his calculations last year were wrong, this gives very considerable cause for concern.

I should like to take up a point made by the hon. Member for Ince (Mr. McGuire) about import controls. It is absolutely vital that we should resist appeals from either the Tribune group or the Cambridge new school, so-called, for import controls. Any move of that kind on a significant scale would result in a protectionist war and, as the hon. Gentleman rightly pointed out, the effect of that on Britain would be far more serious than it would be on anyone else.

The other point about which I am worried in the international context is that I believe that the effect of North Sea oil may tend to raise the exchange rate, and in his Budget the Chancellor has done nothing to offset that effect either by removing or by reducing exchange controls or to encourage significant flows across the exchange, which would ensure that the exchange rate remains at a level at which British industry can continue to be competitive, despite the present still very high level of inflation.

In that context, what needs to be said is that whatever may be done about the actual phasing of the debts by way of borrowing, on the one hand, and lending, on the other hand, it is still very important that there should be a significant move across the exchanges if the exchange rate policy is to be consistent.

I turn now to the question of industrial strategy. This is important, and if we are to avoid a situation in which an expansion of demand results in imports being sucked in and a corresponding effect on the overall international picture, it is very important that the Chancellor should have a strategy which encourages firms and individuals who are working in them.

I have grave reservations about two points in the Chancellor's speech upon which perhaps the Financial Secretary will comment. In his Budget Statement, the Chancellor made a new announcement about stock relief and suggested that the first two years of stock relief should effectively be written off but not the amounts which accrued subsequently, though these are clearly very large. He went on to suggest that some further arrangement might be made next year.

I think that the effect of this on many companies may well be rather horrifying, because hitherto it has been generally assumed, I think, that the stock relief deferred tax would not ultimately be collected, and although it clearly has an effect on the balance sheet and the firm's ability to raise finance and so on, that has been the underlying assumption on which perhaps both banks and firms have been operating. The Chancellor has now implied that the deferred tax may be collected, and large sums are involved. If he is not saying that I hope that the Financial Secretary will make it clear, or it could have a worrying effect.

The other thing contrary to justified industrial strategy is the lower rate of income tax. In a number of industries where work is difficult, particularly heavy industry, workers are inclined to stop working when they believe that they are beginning to pay tax. That is why it is important to raise the threshold, but that may still happen with a 25 per cent. band. The result will be a perpetuation of the situation where people will not work if they think that it is not worth their while.

In terms of the Red Book, the overall effect seems to be an increase in the level of demand not significantly different from that which the Government say is their estimate of productive potential. I am therefore not convinced that these measures will have a significant effect on unemployment next winter. That prospect remains dim. It is no good the Chief Secretary saying that unemployment has not risen as fast as might have been expected in view of the level of output. Many people are retained in jobs simply through the Government's measures, but those jobs are not likely to be viable in the long term. We must encourage firms to invest, introduce more capacity and employ more people in jobs with a future.

The Chief Secretary is unduly complacent about that, Industry's rate of return at the moment is very low. It has fallen dramatically over the years, and nothing in the Budget will encourage those with extra capacity to invest and create sustainable jobs.

It is remarkable how the figures have changed. Even five years ago, the suggestions for what the Chancellor should do ranged from raising taxes by £100 million to reducing them by £400 million. Now figures like £2 billion, £3 billion or £5 billion are bandied around. We have gone from millions to billions. The rate of inflation has been appalling, but it has not been that bad. We have gone from fine tuning, which has been, in some ways, legitimately criticised, to the changing of huge sums.

At the same time, there are very few actual incentives in the £2½ billion taxes of which the Chancellor proposes to relieve the taxpayer. The changes are wrongly structured as they relate to the lower rate, the threshold and the previous standard rate and will not do much to increase incentives in British industry.

There is a certain staleness about the Chancellor's proposals. We did not even have his usual enthusiastic picture of things improving and all, by some miracle, being well next year. All we got was a series of proposals which are very dull and quite inadequate to deal with the fundamental problems of the economy.

The sooner the Chancellor is replaced by a Conservative Chancellor, whose heart is in the reduction of taxation, and who really believes in the profit motive and incentives, the better that will be. We only have to compare the record of the Government with that of the previous Conservative Government to realise what a lamentable failure the Chancellor's successive Budgets—all 13 of them—have been. This one is not as objectionable as some of the previous Budgets, but it does not do sufficient to set the record straight. That being so, the sooner we have a change of Government, and a Conservative Government who are really determined to get back to profits and incentives, the better.

9.0 p.m.

Mr. Nicholas Ridley () Cirencester and Tewkesbury

My first and extremely pleasant duty is to congratulate my hon. Friend the Member for Ilford, North (Mr. Bendall) on a really remarkable maiden speech. He broke with the tradition of making a thoroughly controversial maiden speech and made a very non-controversial and short one. I am quite certain that the whole House will agree that that was pleasing to the House and that my hon. Friend's talents were clear from what we heard. I am sure that we all look forward to hearing him again.

I cannot say the same for the Budget as a whole. I had expected rather more, listening to the trailers. On Monday the Chancellor of the Exchequer said that he had some most agreeable proposals. After listening to the debate today, I think that that has rung a little hollow.

The Prime Minister went even further on Monday, and said that the Budget should be seen as a first step in the industrial West's collective action towards economic harmony. Judging by the attendance at this debate, hon. Members do not feel moved in that way.

These minor fiscal adjustments are wrongly interpreted as being a contribution to some major world economic plan. The Prime Minister is clearly trying to take attention away from the difficulties of the British economy by posturing as the saviour of the world economy, but the Budget did not justify his posturing.

The first matter that I should talk about is the Budget judgment. My hon. Friend the Member for Worthing (Mr. Higgins) felt, as I do, that a considerable amount of risk is involved in the strategy behind the Budget.

I turn first to the question of public expenditure. In terms of considering the judgment, I notice that in the Red Book an increase is predicted in paragraph 38 that is rather above that in the White Paper. I notice, also—several hon. Gentlemen have pointed this out—that the contingency reserve has already been more or less used up before the year even starts.

Then we have the strange feature that the nationalised industries are apparently lending the Government £29 million, whereas in fact they are being heavily financed by public dividend capital. I simply ask the question: where does this public dividend capital appear in the accounts? It is real money. The view that one gets in looking at public expenditure is that the 2.2 per cent. increase of the Chief Secretary has long ago been forgotten, that the 4 per cent. increase of his officials is probably now thoroughly conservative, and that there will be a much greater increase in public expenditure than we were led to believe.

The Chief Secretary turned on my right hon. and learned Friend the Shadow Chancellor and demanded to know where we would make cuts. I will give the Chief Secretary one answer to that. It is that subsidies lead directly to mounting deficits financed by new and additional public expenditure on grants and loans which put other public sector priorities at risk; to indiscriminate subsidies from the taxpayer to the consumers; and in some cases to sharp reductions in investment and employment". I am certain that the Chief Secretary would agree with these strictures on subsidies—or does he not agree? The Chief Secretary, apparently, is not answering that question. Those strictures on subsidies come from page 22 of his Government's own White Paper, "The Nationalised Industries", Cmnd. 7131, which was published last week. If the Government think like that about subsidies, I do not see why the Conservative Opposition should not have the same view as well.

The tax reductions will bring the public sector borrowing requirement to £8½ billion. Already the money supply is edging above the guidelines for last year. The guidelines for this year are only 1 per cent. less, between 8 per cent. and 12 per cent. Most people feel that this is a moment when caution should have been shown. The Chancellor is clearly susceptible to this line of argument. In his Budget speech he went out of his way to warn us that for some extraordinary reason the month of May will show an increase in the money supply, which we must not take too seriously, but the whole of this optimism is belied by the fact that on the same day he had to increase the minimum lending rate by 1 per cent.

It is, indeed, an odd Budget which, to quote the Chief Secretary, "puts a stimulus into the economy" and at the same time takes it out again with an increase in lending rate. One can only call the Chancellor's Budget judgment an extremely risky strategy.

I turn to the tax proposals themselves. I suppose that I should first go into the subject of Liberal policy. I am glad to see the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) in the House. I am an ardent member of the Institute of Lib-Lab Relations and have paid my subscription. I should not really waste time on it. I have often been told that when shooting high pheasants it is a mistake to have a pot at a rabbit, but I cannot resist it in the light of the right hon. Gentleman's speech.

One should first start with the men and then go on to consider the measures. I have with me a list of the Liberal Shadow Cabinet. I notice the name of Lord Avebury, who is the spokesman on race relations. I thought that yesterday he made an extremely offensive remark about the immigration policy announced by my right hon. Friend the Member for Penrith and The Border (Mr. Whitelaw). Also included is Lord Mackie of Benshie, who is Minister without Portfolio. There is the right hon. Member for Orkney and Shetland (Mr. Grimond), the Shadow Secretary of State for Energy, whose contributions on that subject are frequent and well known. But the thing that surprises me most about this body of important politicians is that this afternoon the hon. Member for Rochdale (Mr. Smith)—the Shadow Secretary of State for Employment—interrupted his Shadow Leader during his speech in order to extract from him a public pledge about what the Liberals would do when voting in Committee about certain income tax matters.

Never before have I seen a Shadow Secretary of State interrupt his Shadow Leader in public in order to demand a pledge, which, incidentally, was not even given to him. That makes new constitutional history, upon which I congratulate the Liberal Party.

Mr. David Steel

I am sorry to spoil the hon. Gentleman's constitutional point. In fact, neither my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) nor my hon. Friend the Member for Rochdale (Mr. Smith) is currently, or has been for some time, a member of the Shadow Administration.

Mr. Ridley

The right hon. Gentleman should issue a new list. He should get publicity for this astonishing change in responsibility and the dismissals that have taken place.

Having dealt with the men, or, rather, the right hon. Gentleman having dealt with the men, I turn to the measures. Here I have the Shadow Liberal Queen's Speech. I shall check on how we are getting on with the implementation of these proposals. It says that works councils should be set up by law with non-trade unionists having equal rights. I have not seen that Bill before the House. The Liberals also called for the extension of civil liberties by relaxing the Official Secrets Act, and that has not come forward. They called for rent derestriction of furnished houses, a national efficiency audit to reduce Civil Service bureaucracy, a reduction of unemployment, particularly among young people, and better consumer protection by strengthening the Monopolies Commission.

There is a lot of legislation still to come. At this rate we certainly will not get up by August. Finally, the Liberals wanted Assemblies for Scotland and Wales with proportional representation and direct elections to the European Parliament also with proportional representation.

One can hardly say that much of the overall programme has been carried out. If one looks at the Liberal economic programme one sees that the Liberals wanted tax reforms and cuts involving £3 billion, less income tax, and new household allowances to help widows and other singles. This brings me to the Liberal Budget, about which we have heard so much.

A year ago I had occasion to refer to the Liberal Party as "mice joining a sinking ship", but I did not think that we would ever find the Shadow Liberal Chancellor grappling with the helmsman of the sinking ship and fighting as it sank. Although the Chief Secretary described this process as "a two-way teach-in" it is much more like the Cambridge boat race crew.

I take it from the Liberal Budget that The raising of the employers' National Insurance contribution of 1½ per cent. is justifiable The Liberals say that this will pay for the tax cuts because in most other industrial countries business corporations pay more pay roll tax. However, the hon. Member for Rochdale on 6th December, speaking on the Second Reading of the National Insurance Surcharge Bill, said But there are many kinds of taxes which affect industry and which, in my view, have reached absorption point. I think that he means saturation point. He went on: The Government must understand that there is a limit to the amount of taxation which can be imposed on industry."—[Official Report, 6th December 1976; Vol. 922, c. 65.] That must have been a unique occasion, because every Liberal voted against it. It never happened before. What is the cause of this change of view?

Then there is the question of the petrol tax and the direct and indirect tax switch. The Liberals voted against an increase in the petrol tax last year, although now they claim that the Government must make a massive switch to indirect taxation and that this is a step in the right direction that could have been taken perfectly well. We have this strange ambivalence about the Liberal proposals.

More than anything that the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) can claim as a victory, whether on small businesses or profit sharing, has been the repudiation of his hon. Friend's Budget judgment. His hon. Friend wanted to cut income tax by £4.4 billion and increase indirect tax by £1.3 billion, leaving £3.1 billion increase to the borrowing requirement. I think that that is wildly high. The fact of the matter is that he has not achieved anything like that in his mutual teach-in with the Chief Secretary. The Chancellor has not put up indirect taxation at all.

The main economic desires of the Liberal Party, with which I have considerable sympathy, have simply not been conceded by the Government. The question for the right hon. Gentleman is whether he will lead his troops back down the hill or whether he will lead them up the hill this time. We want to know whether it is all huff and puff or whether he really means business. I think we all know the answer but we shall look with great interest at the vote on Monday night.

Returning to the Chancellor's Budget, I refer to the speech of the hon. Member for Perth and East Perthshire (Mr. Crawford), who it not here at present. Apparently he is the only advocate left of a switch from indirect taxation to direct taxation. He said that we could cut £150 million from duty on whisky and presumably put it on to the threshold of income tax, or something similar, to raise the money. That is something that we can all agree to disregard.

I come to the details of the increase in the tax threshold. It must be the mood of the House that the extent of the reliefs at the bottom end of the scale are very small indeed. I would not deride them because they are small, because small reliefs are better than none, but when we remember that in the past year pay rises have been held to 10 per cent. and inflation at about the same level, and that on top of that there have been massive increases in electricity and fuel charges, rates and many other forms of payment, which people cannot get out of paying, we see that the increases in take-home pay are extremely small.

I do not believe that the poverty trap has in any way been conquered. My hon. Friend the Member for Norfolk, North (Mr. Howell) always plays an extremely valuable part in the discussion of these matters. He was much more right than were his critics this afternoon in the debate. There is no doubt that the poverty trap remains with us.

I believe that the reduced rate band was a mistake. I am certain that if the money involved had been spent in raising the thresholds—or raising them higher than they have been raised—it would have left many people not only out of tax altogether but out of the poverty trap. Many widows and single women between 60 and 65 are still paying tax on income that is solely composed of their State benefit. It cannot be right to pay people State benefit and then to have to take it away in tax because it is greater than what is considered to be the minimum level. This area has been one which the Government have conspicuously failed to sort out.

One verdict on four years of Socialism is that the disincentives to work and the taxation of those at the lowest end of the salary scale are an absolute disgrace. The situation should have been sorted out by now, and the Chancellor of the Exchequer has missed one more opportunity to do anything about the situation on this occasion.

I turn to the small business relief—a relief which is thoroughly welcome but which does not go anything like far enough. I believe that the only way of dealing with the threat of growing unemployment in the future is to have a much more active and successful policy of encouraging small businesses to grow. Perhaps the whole House would not agree, but certainly my hon Friends would identify capital transfer tax as one of the greatest inhibitions. It is quite possible to start a small business in any other country in the Common Market—even in the world, but it is very easy in the rest of the Common Market. In this country if one is successful and knows that capital transfer tax will take away a large slice of the reward, people will go away.

I welcome the roll-over provisions on capital gains tax, but why could not they be made to apply to capital transfer, too? That would have been a real concession—something that might have made this country an attractive place for entrepreneurs from other European countries to start their businesses here, which is what we want to see.

I do not believe the Chancellor of the Duchy of Lancaster has done anything like enough. I remember on a film I saw the other day that one man said to another "My word, you have got bloodshot eyes". The other man replied "Yes, you ought to see them from my side." The Government should see this subject of small businesses from my side.

I remember Mr. Cyril Plant addressing a TUC conference in 1976 saying With all the means at our disposal we must destroy the capacity to pursue self-employment. Yet what have the Government done? The Prime Minister has made him a peer. A man with those views is thought fit for preferment in the Labour movement and to advocate views in Parliament that are totally contrary to what the Government are apparently seeking to do for small businesses. It is a Jekyll and Hyde situation—Dr. Lever and Mr. Plant.

Can we be told whether this conversion to the interests of small businesses is skin deep or genuine? If it is genuine, can the Chancellor of the Duchy of Lancaster be allowed to do a little more? I heard the Chancellor of the Duchy tell an all-party audience in the House that he agreed that capital transfer tax was disastrous for small businesses and that the rates were inhibiting. Perhaps there is still time for proposals to be put in the Finance Bill, but so far none has been put forward. It is time that the Chief Secretary remembered our Committee debates on capital transfer tax. He will probably remember debates on the Gilbert and Sullivan shop, and other such matters. He has not yet met the point, and he must do so if he wishes to encourage small businesses in this country.

The Chief Secretary has been at work in no uncertain way on tax evasion and avoidance. I must ask him a few questions about the section of the Budget speech which, no doubt, derives from him. We are told that a level of secrecy which amounts almost to conspiracy to mislead".—[Official Report, 11th April 1978; Vol. 947, c. 1202.] has been at work. May we please have details? What does this mean? Can we be told why no charges of conspiracy to mislead have been laid in the courts? Of course, this is just preparing a justification for the retrospective legislation that the Chancellor of the Exchequer has announced.

Retrospection was claimed by the hon. Member for Birmingham, Perry Barr (Mr. Rooker) to be justified because trying to dodge taxes was a moral offence. No one on the Opposition Benches will condone the schemes or vote against their being stopped, but that is a different matter from agreeing to retrospection. Let me quote the Chief Secretary a lesson on this subject: It is time that tax-gatherers thought out more deeply and clearly their ethical approach to those aspects of human conduct which appear to offend them so much. Taxation has no more to do with morals than the Rating and Valuation Act, or the Community Land Act, or even the dog licence. Taxation is an act of Parliament not an act of God. It is what Parliament says it should be, no more and no less. Not only has taxation no morals, it may not even claim to be fair. While we all have a public duty to comply with the law (including the speed limit?) this does not extend to complying with the 'spirit' of the law, still less with the supposed 'intentions of Parliament'. The law is what the Act says or, in case of doubt, what the Courts construe its words to mean. Those wise words of Lord Houghton, writing about tax evasion in The Accountant, would be well taken by the Chief Secretary. Lord Houghton expressed the traditional view of the House. It does not seem justified for the Government at this stage, after the hundreds of years of the cowboys and Indians game between tax dodgers and the Inland Revenue, suddenly to claim that they had the right to bring in retrospective legislation.

I spent the weekend dreaming up the epitaph of the Chief Secretary for when, alas and unhappily, he is finally laid to rest. It may go something like this: The bones of Barnett lie in this shrine. He died in accordance with Schedule 9 Which states that life after 63 Is a way of evading CTT. The progress of the economy has become rather like a range of mountains which diminishes into the sea and finally disappears. The tops get less high and the troughs become flatter. That is because we seem to have no scope now between stimulation and inflation. Any amount of stimulus that may be given to the economy immediately alerts us, as my hon. Friend the Member for Worthing rightly pointed out, to the fear that inflation will return. No one believes that it will result in growth or extra employment.

In this Budget, as I have said, we have both stimulation and retardation. We have had both the £2½ billion in tax cuts and the 1 per cent. increase in MLR. So, in a way, the boom happened and went between half-past three and quarter to five yesterday afternoon. We are back in the trough again.

One has to put this in the context of the Government's record over the last four years: unemployment at a high level and rising; overseas borrowing, which, after the repayments, is still standing at about £13 billion which the Government have borrowed and did not even have a triple-A certificate when they borrowed that lot; inflation; the value of the currency just about halved; the standard of living down 6 per cent.; production stagnant and no growth since 1973. It is clear that it is a vain policy to think that somehow, by injecting small amounts of tax cuts and by reducing people's marginal tax by £1, £2 or £3 a week, this will suddenly transform the situation and be the panacea on the fiscal side which will put it all right.

There is one glaring omission. The help for the managers, the entrepreneurs, who are responsible for creating jobs and wealth, is not forthcoming.

The best form of tax avoidance—the form which has been practised more than any other in this country—is simply to go away. That is the best way to avoid the Chancellor's taxes. We do not live in a closed world now, when people cannot travel. The Government, with their obstinate attitude towards higher rate taxation, have driven away the skilled managers, the professional men, the technical experts and, above all, the entrepreneurs who might have given them the jobs that they need and the gross domestic product that they could then tax to pay for their public expenditure.

I want to make only one quick quote. Today I saw the chairman of the National Coal Board. He told me that the manager of a colliery in the Ruhr would have 88,000 deutschemarks after tax. Converted into English money at the current rate of exchange, and as there is a 31 per cent. increase in the cost of living in Germany compared with this country, the equivalent net income of that colliery manager after tax is £17,480. Sir Derek Ezra's salary, which is public—so I do not think that he will mind me quoting it—on the relevant scale, after tax, is just under £11,000 take-home pay. How can a colliery manager, who is fairly junior in the managerial train, get £17,480 when the chairman of the National Coal Board gets £11,000?

We have, therefore, this one obstinate problem with which the Government will not deal, which is that their egalitarian doctrines still stand in the way of the growth of the British economy. There can be no doubt of the main reason for the British economy's not growing. It is that the Government hold the obsessive view that all money belongs to them and that they dish it out to the people they like to dish it out to.

We believe that all money belongs to those who earn it, and that they pay what is necessary to the State. Until the Labour Party begins to understand that not only is egalitarianism a view not shared by the people of this country, but that it is a fatal view which causes production to dwindle and clever, skilful and hard working people to leave the country, there is no hope that the Government can fulfil any of their economic plans. They would do far better to resign.

9.32 p.m.

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

My first task this evening is to pay tribute to the maiden speech of the hon. Member for Ilford, North (Mr. Bendall). It was a refreshingly novel type of speech for these days. The convention that maiden speeches should be non-controversial is being swept aside and we hear very few non-controversial maiden speeches. The hon. Member's speech showed the value of sticking to the conventions of the House, not only in that it got the hearing that all maiden speeches deserve and require, but also in the understanding it gave us of the person and of the work that he sets out to do in this House. His particularly kind and generous tribute to Mrs. Millie Miller was exceptionally welcome. It enables us to say with complete certainty that we shall indeed listen very carefully when the hon. Gentleman makes his next speech.

We have had an interesting second day's debate on the Budget. One of the tasks facing Treasury Ministers and their colleagues is to try to learn something about the policies of the Opposition. One of the difficulties is to work out their aims and how their policies are being formed. It is a form of Kremlinology since we try to determine, on the basis of who is making the statement, whether it is likely to find its way into the Tory manifesto or that party's subsequent programme.

Clues about Tory plans and intentions are subject to close examination according to who is in which position and who makes which statements. We indulge in this examination game on matters such as public expenditure, policy towards the Bank of England, and so on. But we have had two important clues today and over the past two days on some particularly important matters. The first is the tax credits system. In "The Right Approach" the Conservatives indicated that they believed in such a system. In "The Right Approach to the Economy" no reference is found to it. Thus, between the introduction of "The Right Approach" and that of "The Right Approach to the Economy", clearly there had either been some change of mind or some reordering of priorities.

We are very interested in a policy that would cost about £6 billion and was to have brought in a new and great scheme to end all the nonsenses, so the Tories told us, and we are interested in how it was to be developed. We know that the right hon. Member for Wanstead and Woodford (Mr. Jenkin) has been telling us about the delights of this scheme, but we also know that he does not happen to sit very near the right hon. Lady the Leader of the Opposition, either at Question Time or at other times and that today the hon. Lady the Member for Wallasey (Mrs. Chalker) replied to the statement made by my right hon. Friend the Secretary of State for Social Services.

We understand all these matters, but the nearest we have had to a definition came in yesterday's reply by the Leader of the Opposition. Referring to the reduced rate band, she said One of the effects of bringing it back is that we could never, in fact, have a tax credit system. [Interruption.]"—[Official Report, 11th April 1978; Vol. 947, c. 1212.] I am particularly sorry about that interruption, because obviously the hon. Lady did not complete the sentence which—although we cannot say it with certainty, even at this stage—probably would have laid to rest the £6 billion tax credit scheme that was inadvisedly brought to light.

I should be delighted if we could have a definitive statement whether this £6 billion scheme has finally collapsed. It is an important matter to an Opposition party that states its concern with public expenditure. If the Conservative Party has finally demolished the £6 billion scheme, the least that ought to be done is for the party to announce it so that we could look for its replacement somewhere else. It seems a pity that a matter as important as this has not been more fully dealt with by the Opposition.

The other matter at which we have looked with some care to see the changing shape of Opposition policies concerns the investment income surcharge. This was brought in by the then Mr. Tony Barber. Although from time to time we have heard disapproving noises about the investment income surcharge in meetings of the Finance Bill Committee, it was not mentioned in "The Right Approach". There again the Opposition seems to have changed their mind on some of these matters. Subsequently it was said in "The Approach to the Economy", at page 31: We are increasingly doubtful about the wisdom of retaining any kind of Investment Income Surcharge; in truth, it is a tax on savings. That is where it was last week when we heard a Ten-Minute Rule Bill speech on 5th April. The hon. Member for Norfolk. South (Mr. MacGregor) then urged in that Bill the abolition of the investment income surcharge. The hon. Gentleman is a Whip. There was a previous occasion when the hon. Member for Blaby (Mr. Lawson) was a Whip. In both cases their roles were not clear to us from this side of the House because they seemed to have a certain amount of freedom and yet, of course, they are part of the official Opposition team. On previous occasions on such subjects as the Bank of England, when this former Tory Whip came to the Front Bench, as he did eventually, we heard the same arguments put forward from the Dispatch Box. Perhaps we may be hearing a scheme to end the investment income surcharge from the Dispatch Box soon.

At present the Opposition seem to be in some form of no-man's land and it is difficult for us to know what their position is on an important matter such as this. Governments of all kinds have held that there is a distinction between the moneys earned by one's toil and the moneys that come from capital invested.

The amount of money that comes from the investment income surcharge, £300 million, is such as to prompt one to inquire whether the position of the Tory Party has now settled down so that it is able to make a definitive statement of where it stands on the matter. The Tory Party seems to be undertaking a review of many of our economic, financial and taxation measures. There is nothing wrong in that, but I must ask the Tory Party to let us know where it stands on those matters so that we can find out what we have to attack and what we have to examine.

If this country were unlucky enough to wait for this information in the first Conservative Budget—the Tory Party not having given the electors a chance to see the kind of measures it would introduce—it would have no basis on which to claim the assistance of the majority that might willingly have been given.

Mr. Tapsell

Is the right hon. Gentleman seeking to debate the Labour Government's last Budget or the Conservative Party's first Budget?

Mr. Sheldon

I am trying to find out from which standpoint the Conservative Party is criticising this Budget. When it makes a statement on what it likes and what it does not like, it is difficult to know its coherent basis, if it has one.

The right hon. and learned Member for Surrey, East (Sir G. Howe), whom I do not see in his place, mentioned that he wanted to see the basic rate reduced to 30 per cent. and below. A basic rate of 30 per cent. and below would cost about £2,400 million, at a rough reckoning. If the Conservative Party were to bring the top rate down to 60 per cent.— the right hon. and learned Gentleman said that he would prefer to reduce it further than that—this would cost, depending on how the bands were placed, about £400 million to £500 million.

We shall see where the Conservative Party stands on investment income surcharge during further debates and in amendments which Conservative Members may seek to table to the Finance Bill. We see that they are talking about a reduction in tax of at least £3 billion. Those are substantial sums. The question that has to be asked straight away is how the reduction is to be phased and how the Conservative Party would pay for it.

We know how the Liberals would pay for the reductions that they are seeking. They would pay for them in indirect tax increases. But the Conservatives have made no such statement. They have simply come to the House and given their views about very substantial sums of money without giving any indication how they would do what they propose.

I know that the Conservatives can say that they have done this sort of thing before. I know that they can point to the fact that they once had a Chancellor of the Exchequer, Tony Barber, who was able to come in on a considerable balance of payments surplus and blow it all away by that sort of policy and by the subsequent printing of money. Anybody who seeks to do it again is likely to find even greater problems when he tries to implement it.

There are those who suggest that these enormous tax cuts without any offsetting indirect tax increases would lead to an improvement in confidence which would encourage investment. I very much doubt whether it would do anything of the sort. A policy of moderate changes taking place year by year, as the economy permits it, is right and proper. But the substantial changes proposed could lead to a decline in confidence, to problems of gross inflation and of imports coming in to meet enormous demand that could not be met by our own productive industry.

Some of the problems of the motor car industry stem from the time when that flood of money was let loose, well in excess of what the industry could cope with. One of the hardest tasks of anybody importing motor cars is to set up the servicing and spare parts industry. People were able to do that on the crest of a boom engendered by the printing of money. We are still suffering from the damage that it did to a number of other industries, too.

Among the other things done then were the three major tax changes introduced by Mr. Barber, as he then was. The first was the introduction of the unified tax system, which my right hon. Friend the Chief Secretary and I strongly welcomed and had advocated for some time. The second was the introduction of the imputation tax system, which I strongly rejected at the time and still feel sorry about. But, unlike the Opposition, we feel a responsibility to retain some form of continuity, so that industry can understand the basis on which its profits are being taxed. Therefore, although we opposed that system, we still retain it. The third change was the value-added tax, which we kept for the same reason, but I think that it was right after a reasonable interval to have the kind of review that we have just completed.

Perhaps I may say something about the review. In the Standing Committee on last year's Finance Bill, I undertook to ask Customs and Excise to invite interested bodies to give their views on a number of specific areas—in particular, bad debt relief and annual accounting—and on VAT generally. I thought that after four years' experience of the working of VAT it was right that the operation of the tax should be looked at closely to see what could be done to simplify and improve it.

As a result, a number of representations have been received and there have been useful discussions with a number of trade and professional bodies. What we have had in mind is the need to simplify the administration of the tax, particularly its effect on small firms. I am pleased to tell the House that in a number of ways we have been able to do this. We announced yesterday some proposed changes, and I would like now to give some more detail about these changes and the reasons for them.

My right hon. Friend the Chancellor mentioned in his Budget speech that the registration threshold was being increased from £7,500 to £10,000. This is the maximum practicable increase possible under the EEC sixth directive on VAT. The new limit will apply to any business whose effective date of registration falls on or after today, 12th April. This means that where a business exceeds the old turnover limits for the first time for the quarter or quarters ending 31st March it will not be required to register if the turnover is below the new limit. A corresponding increase in the threshold for de-registration is also being made. This will be raised from £6,000 to £8,500, but for practical reasons this cannot come into effect until 1st July. It is estimated that these changes will enable up to 90,000 businesses which normally make net payments of VAT to cancel their VAT registration if they wish.

We also propose to make important changes in the rules on partial exemption under VAT. At present about 20,000 traders who are partly exempt have to apportion their input tax according to the ratio of their chargeable business to their exempt business. This involves them in complicated book-keeping transactions. We are maintaining the present 5 per cent. de minimis rules, which many traders have told us are of substantial benefit. This will allow many more businesses to ignore their exempt outputs for this purpose.

On this basis, the number of traders suffering some reduction in their input tax will be reduced from 20,000 to about 3,000. This change will particularly help smaller traders. It will also provide the opportunity to bring in a very much simplified VAT return form, which will benefit all the 1¼ million traders who are registered for VAT. The present form contains 26 boxes for figures covering two pages. The new form will require fewer than half these figures and will use only one page. The new form will be introduced in the autumn.

There are two smaller changes. We are proposing to encourage smaller businesses to modify their normal record keeping procedures so that they can, if they wish, use their cash books as their record of purchases for input tax purposes. That will save them the trouble of keeping a separate account of purchase invoices. The other small change concerns the limit below which retailers are able to issue less detailed tax invoices. The limit for individual supplies will be raised from £10 to £25.

There are two other matters that have been the subject of greater argument. During the passage of the Finance Bill last year the Committee considered suggestions for introducing some form of annual accounting for VAT. That was one of the recommendations made by a Conservative task force. Customs and Excise has been studying the suggestions and has discussed them with relevant trade and professional bodies. In general those bodies have shown a marked lack of enthusiasm for the proposal. The consensus has been that annual accounting would make it more difficult for small firms to keep their records up to date and would complicate rather than simplify the administration of the tax. That view was supported in representations that Customs and Excise received from the CBI, the National Chamber of Trade and the Retail Consortium. Against that background we are persuaded that it would not be right to introduce annual accounting.

A suggestion was made that businesses, especially smaller ones, would find it easier if VAT return periods covered the same period as their own financial year for their accounts. That arrangement is already normally permitted where businesses do not have a financial year ending at or near the end of March or December. There is a need to even out the flow of returns made to Customs and Excise, but in order to help smaller firms it is now proposed that any firm with an annual turnover of up to £50,000 may opt to choose its VAT periods to fit in with its own financial year.

The other topic that has been the subject of controversy for some time is whether a major simplification of the tax could be achieved by eliminating VAT on transactions between registered businesses. That proposal seems to be inspired partly by comparison with the machinery of purchase tax where sales between registered traders were relieved of tax, and partly because VAT has the same economic effect as a retail stage tax. On that basis some argue that it is not worth collecting it at the earlier stages only to pay it back to the registered purchaser. As with the suggestion about annual accounting, there is some obvious immediate attraction about these proposals, but there are a number of great difficulties, especially those of control, as the retail stage is not so easy to recognise as many might suppose.

Many businesses make extensive supplies to both trade customers and final consumers, and experience throughout the world has shown the difficulty of collecting retail stage taxes at other than comparatively low levels. Finally, any simplification measure would have to be accepted by the EEC and all the other member States as consistent with our Community obligations. Nevertheless, we shall consider carefully the representations that have recently been made.

I mention one or two other matters on the administration of VAT before I come to relief for bad debts. The administration of VAT in the early days of the tax was the subject of some criticism. A great deal of that criticism was unjustified, but the review provided the opportunity to examine a number of aspects concerning the control of the tax.

I have been concerned that a fresh look should be taken at the training programme for VAT staff and at the operation of the tax as regards removal of books and documents from traders' premises. That is a matter that causes a great deal of unnecessary concern and misunderstanding, especially among smaller traders. Customs and Excise has examined its training programme for new entrants who will be working on VAT control visits. It will be introducing a fundamentally revised programme that takes account of the experience gained since the introduction of the tax.

It has also revised its instructions not only to make it absolutely clear that books should not be removed from premises, except where it is absolutely essential, but even then, except in fraud cases, only with the agreement of the trader concerned. It is also placing emphasis on the need to make sure that the books are returned as quickly as possible.

Customs and Excise has also been having discussions with the construction industry to simplify the administration of the tax. This is a complex area, but I hope that something useful will emerge.

We are also looking at the possibility of action concerning the VAT position of transactions in land. This is another complex area of the law, but we are exploring this matter and are having discussions on this as well.

Finally I should like to say something about my right hon. Friend's announcement concerning relief for bad debts. This has been the subject which has aroused the greatest interest in the review. In considering any relief, we have had to bear in mind that by the time a debt becomes bad, the debtor, if he is already registered for VAT, will normally have already taken credit in his own tax account for the VAT element, and any relief which is granted to the creditor may therefore result in the Exchequer refunding tax which has already been effectively repaid to the debtor, and this would involve a considerable loss of revenue.

There are problems of controlling a relief scheme to make sure that there is genuine entitlement to the amounts claimed, and there are also the costs to businesses in administering such a scheme. These have all to be taken into account. But, unfortunately, relief for bad debts cannot be regarded as a measure of simplification in the administration of the tax. I recognise strongly that there is a good deal of feeling that something must be done. This was particularly evident during our Committee stage debates on last year's Finance Bill.

We have, therefore, looked for a scheme that will be simple to operate for traders and Customs alike, and we have decided to accept the point put in the debates last year when we were urged to recognise the hardship arising when a trader incurs a loss of tax on a bad debt, even when he has pursued his customer to the full extent available under the law and his customer has gone into insolvency. In such circumstances, it was pressed on us, there is then greater certainty about the debt, and generally speaking there is a third party, often the official receiver, who is administering affairs. So the scope for abuse is small as compared with other debts. It is also a fact that the average non-preferential creditor in an insolvency recovers only 2 per cent. or so of his debt.

Perhaps finally I could say something about tobacco duty and the surcharge that has been imposed upon it for health reasons. Although the derogation refers only to cigarettes, we are, of course, free to propose a corresponding increase in other tobacco products. Hand-rolled cigarettes may yield as much tar as any manufactured cigarettes, but it not possible to determine tar yields for hand-rolling tobaccos, as much depends upon the method of making the cigarette. We have, therefore, decided that health arguments do not require an immediate duty increase to discourage such tobacco. We shall however, watch the situation and we shall be prepared to take action if there is substantial switching from manufactured cigarettes to hand-rolling tobacco as a result of the surcharge.

It is nearly 10 years since I and one of my hon. Friends went to visit the then Financial Secretary, the present Chancellor of the Duchy of Lancaster, to urge him to impose a differential surcharge on cigarettes. It is with some pride, at any rate, that I find myself in the position of bringing forward some of the detailed measures concerning this particular health surcharge. We got the derogation. I think that it will be valuable, and it will certainly be very much a matter for investigation and examination by other countries which are interested in what we are doing here.

I believe that this Budget, which seeks to remove some of the harshness of the economic measures that we have had to accept in recent years, has been generally welcomed. What we have seen over the past few years, as a result of sharing the burdens, is that we have come out of this period united as a people with a social strength as well as a social cohesiveness. What we now need to do is to convert these advantages to their economic and industrial equivalents. I believe that this Budget will be the means of providing the prospects of bringing this—

It being Ten o'clock, the debate stood adjourned.

Debate to be resumed tomorrow.