HC Deb 08 May 1978 vol 949 cc792-937

4.20 p.m.

Sir Geoffrey Howe (Surrey, East)

I beg to move Amendment No. 1, in page 10, line 13, leave out '34' and insert '33'.

The Second Deputy Chairman

With this it will be convenient to take Amendment No. 2, in page 10, line 13, leave out '34 per cent.' and insert '32 per cent.'

Sir G. Howe

The Committee will appreciate that this amendment provides us with an opportunity to discuss in the first instance the appropriate level for the basic rate of income tax, and then to look, some four weeks on, at the impact of the Budget which the Chancellor introduced just a month ago tomorrow. The Committee will have the opportunity of taking a decision, as we close this debate, about the level of taxation proposed by the Government in the Budget.

I dare say that the Chancellor of the Exchequer will once again repeat the performance with which we are not now unfamiliar—that of diverting attention from the merits of his own Budget and from the merits of the proposals that we are considering—the appropriate level for the basic rate of income tax—and will launch into one of his celebrated histrionic attacks on the Opposition, thereby doing some service to his reputation as a robust, bullying Chancellor but doing very little service to the merits of the issue.

I hope that I can bring the right hon. Gentleman to consider the response to his Budget in the light of the economic policies which the Government have been following over recent months. We have seen, to put it mildly, a somewhat erratic attitude towards the management of the exchange rate—if "management" is the right word—with the Government having robustly defended a low rate until last autumn, when they were obliged to surrender to the movements of the market, with consequences at that time for their capacity to control the money supply, now followed by a reverse in direction, whether willed or inadvertent is not entirely clear.

But the effect of all this was, towards the end of last year, a substantial rise in the exchange rate accompanied by a substantial expansion of the money supply, giving rise to concern in this country and elsewhere as we came to the turn of the year. Now the scene has changed very remarkably and the Chancellor should take care lest the economic legacy that he bequeaths to the next Government catches up with him before he has actually expired.

The signs are not looking at all propitious. The international exchange value of the pound has fallen since it reached its peak—whether that was an inadvertent peak or not—by more than 8 per cent., that is, by about 7½ per cent. over the last three months and by about 1½ per cent. since the Budget was opened.

The exchange reserves, of which the right hon. Gentleman was boasting in his Budget Statement, have fallen by almost $4 billion since January. The balance of payments surplus, in which the nation, led by a beneficient Labour Government, was entitled to revel for years of affluence following the flow of North Sea oil, is shrinking before our eyes. The decline in the value of the pound means that imports will become and are becoming more expensive quite quickly, and the response in relation to our exports will be nothing like as quick.

Thus, the estimate for the balance of payments surplus contained in the Red Book, already revised down only about a month ago, could be down to nothing by the end of the year, while, of course, inflation, the economic factor about which the right hon. Gentleman is currently crowing most loudly, is also likely to respond adversely to what is now going on. If the exchange rate has fallen by 7½ or 8 per cent. since the beginning of the year, the impact on inflation domestically by the end of the year could be as much as 2½ per cent. upwards.

The right hon. Gentleman boasted about all these things in his Budget Statement. He boasted also about the low levels to which interest rates had come, yet not only did we have the increase of 1 per cent. in minimum lending rate on the very day of his Budget but we have since had the further increase announced only last Friday. So we are going through a period where the interest rate structure is certainly higher than it need have been or higher than it would otherwise have been, where the cost of the public sector borrowing requirement for that reason is likely to be higher than it would otherwise have been. The consequences even of that could well exceed the cost of the cut in income tax that we are now discussing.

In short, the history of the month since the Budget Statement confirms the immediate judgment of the market and the judgment made by my right hon. Friend the Leader of the Opposition, expressing real anxiety about the scale of the Government's proposals. We well understand that the Chancellor is taking risks with the nation in order to avoid if he can, following the example of his predecessor, Mr. Roy Jenkins, in failing sufficiently to expand in order to secure the return of a Labour Government and, if he cannot do that, at least to secure his reputation among future Labour Party historians.

The public sector borrowing requirement projected in the Budget was, if anything, too high, and should, if anything, be reduced. That is the foundation, as we have made plain, of the way we criticise the Budget and the basis on which we criticise the particular composition of the taxes and tax reliefs proposed. I am therefore moving for the reduction of income tax by 1p on the basic rate, and I do so on the firm foundation that we seek no increase in the public sector borrowing requirement—on the contrary, we seek movement in the opposite direction.

The Chancellor may snort arrogantly—

The Chancellor of the Exchequer (Mr. Denis Healey)

I am laughing.

Sir G. Howe

The right hon. Gentleman may laugh, but he is no more attractive when he laughs than when he snorts. He must learn, whether he laughs or snorts, to pay some attention to the judgment and decision of the House on his Budget proposals. If the Committee carries the amendment he has a number of clear alternatives that he will have to face.

Either the right hon. Gentleman can decide to reduce public spending in whatever way he thinks most appropriate, or he can decide to raise the revenue which the Government regard as necessary and which they want to spend by seeking to raise it in another way, or—and this is more probable—he can seek to try to bully and bluster and bluff his way out of it by bringing threats and great noises to bear on other parties in the House. I see some hon. Members nodding robustly, and more power to their elbow.

The hon. Member for Cornwall, North (Mr. Pardoe) will remember what happened last year when the Liberal Party sought to oppose the increase in petrol duty. Within 48 hours of the Budget Statement, the Chancellor went on to that distinguished public platform, the Jimmy Young Show, and threatened the Liberals with dire penalties. He said that if they proceeded with their opposition to the increase in petrol duty, he would increase the duty on beer by, I think, about 3p a pint. The Liberals quaked and trembled for 48 hours and did not actually vote with us on the Budget Resolution on the following Monday. But that is characteristic of the way the Chancellor is likely to react to this amendment.

The right hon. Gentleman will threaten the most dire consequences and will choose alternatives likely to be least acceptable to the Scottish National Party or the Liberals in order to suggest that it would be quite intolerable for them to have the courage of their convictions in voting for a reduction in the basic rate of income tax.

That style of argument, characteristic of the Chancellor though it may be, is neither attractive nor would it be legitimate. He is able to resort to it only because of the back-to-front way in which the House and the Committee sets about the consideration of the Government's plans for spending and taxation.

4.30 p.m.

It is worth reminding ourselves of the principles governing these matters. The resources which the Government, kept in office by the favour of the House, can spend depend in the first instance upon how much Parliament is prepared to authorise to them by way of taxes on the people of this country. The Government may seek to go beyond that to a limited extent—the discretion is entirely the Government's—by seeking to borrow more resources than the House makes available to them through taxation. There is no direct parliamentary control over the borrowing of the Government. It is the responsibility of the Government. But the Government must start and finish their consideration of their plans for expenditure by considering how much the House will allow to them by way of taxes imposed on the people.

That constitutional point is symbolised by the fact that the basic rate of income tax is fixed from year to year. The Government come before the House proposing a rate of income tax and it is not only Parliament's right, it is Parliament's duty, to consider whether to allow the Government the rate of income tax they seek. That is the framework within which they consider the matter. If the Government are denied a particular tax or a tax at a particular level by a vote of the House because they cannot command a majority for that proposal, it is for the Government to consider either how far to reduce their spending to bring it into line with the resources Parliament has allowed them or to consider other means of raising revenue.

The same majority in the House which has refused, or may refuse, the Government the rate of income tax which they require could equally well refuse approval of other alternative ways of raising the same revenue. That is the right Parliament has if it has any right in this situation. Obviously, if this amendment is carried today, the Government will need to consider what they should propose next. The Committee will also want to consider what should happen next in the light of the vote.

The Government would certainly have to consider their position. They could proceed, as we suggest, to cut spending. If they insist on hanging on to their spending programmes complete and unabated and seek authority from the House to pay for them by higher taxes and if they do not receive authority for such increases the responsibility for making that choice rests upon the Government's shoulders and upon the shoulders of no one else. If the Government cannot command the support of Parliament for the taxes they propose and need, they have an alternative ready to hand, which is to seek the authority from the people of the country which the House of Commons is perfectly entitled to deny them. If that is what they would do we should welcome it.

Mr. Ron Thomas (Bristol, North-West)

Is the right hon. and learned Gentleman saying that in putting forward certain tax proposals the Opposition have no responsibility to say where the resources should come from?

Sir G. Howe

I have made clear in our previous debate and shall make it clear again what are the alternative ways of dealing with this matter. There is no escape, whether below or above the Gangway on the Labour Benches, from the central proposition that it is the Government who come to the House of Commons and seek authority to impose taxes at a certain level. If the House denies that authority the Government's spending power and resources are, or must be, correspondingly reduced.

If the Government wish to defy the decision of the House and press ahead with irresponsible or larger spending programmes they can do so only by going to the country for support. They cannot spend, responsibly, money which the House refuses to give them by taxes on the people. I shall address myself to alternative ways of dealing with the matter in a moment.

I wish to say something about the cost of this proposal for a reduction of 1p in the basic rate. There has been some disputation about the arithmetic. The full-year cost of this proposal is agreed at £370 million. It is also agreed that the cost of such a proposal in the first year would be less than that because of the delay in payment of income tax that takes place. The question is how much less would be the first year yield.

When we put forward our figure a fortnight ago suggesting that the first-year cost would be £300 million we were proceeding on the arithmetic contained in the Red Book of the previous year. The Committee will remember that a year ago the Government proposed to knock 2p off the basic rate. The Red Book set out the arithmetic for the first-year cost and the full-year cost of that. That showed that the first-year cost would be 83 per cent. of the full-year cost. On that basis we arrived at our figure of £300 million for the first year. That is a not unreasonable calculation. If anything, it errs on the side of caution because, with the introduction of the reduced rate, the percentage should, if anything, be rather smaller.

The Financial Secretary has written to me trying to amplify the figures he gave in the debate a fortnight ago and setting out the Government's view that the figure for the first year would be £340 million. I have pressed him to explain that a little further. I confess that I find it difficult to understand why the percentage yield in the first year of 83 per cent. is any different in relation to our 1p this year from what it was in relation to the Government's 2p a year ago. I would assert that on that basis our figure of a £300 million first-year cost would be correct.

On the other hand, the Financial Secretary points out that there is an additional cost involved in the variation relating to advance corporation tax of about £33 million, which is a figure of a different dimension. The figure is not important beyond the search of accuracy. If we agree that the figure is around £330 million to £340 million a year, we can agree also that the cost of this 1p reduction in the basic rate of income tax is less than half the yield that would accrue to the Government if they went over to a single flat-rate 10 per cent. rate of value-added tax and that the entire package of measures which we shall be debating in the next couple of weeks amounts to about £500 million—less than 1 per cent. of the total of public spending. We are certainly dealing with figures which it would be perfectly possible for the Government to handle in a variety of ways.

In dealing with the merits of the proposal I make it plain that our proposition to reduce the basic rate by 1p does not represent anything like what needs to be done to reform the basic income tax system of the country. It is only a token change. I suspect that there is widespread agreement on all sides of the Committee about the need to secure a reduction in the levels of income tax payable by the people of this country. In his more candid moments the Chancellor has said as much.

We cannot seek to do more than we suggest in our amendment in the context of this Budget. The real question is why the Chancellor has not sought to do anything along these lines in this Budget. Last year, and for several years before, the country was ringing with anguished explanations from the Chancellor to the effect that the level of income tax was much too high and acted as positive disincentive to achievement at all levels of industry, that direct taxation had grown too large and so on.

We began to believe the Chancellor's protestations to that effect when in last year's Budget he proposed a reduction in the basic rate from 35p to 33p in the pound. The right hon. Gentleman was beginning to give some conviction to his claims. At the time of last year's Budget we were faced with the prospect that the Chancellor would impose as a basic rate on the average wage earner a total marginal deduction of 38¾p in the pound—33p basic rate and 5¾ per cent. on national insurance contributions on top of that.

He did that after having considered in his Budget Statement the alternative of a reduced rate and having rejected that quite explicitly because the restoration of incentives was more important than the case for introducing a basic rate. We were impressed by that. Indeed, it looked as though wisdom had penetrated into practice in the Treasury as well as into preaching.

Last year, with the withdrawal of one of the 2p cuts in the basic rate, we ended with a marginal rate of 39¾p—34p basic rate and 5¾p on national insurance. Where are we this year? This year, because of the increase in national insurance contributions up to 6½p, with the Chancellor having made no change whatsover in the basic rate of income tax, the rate payable on the marginal pound by most wage earners and taxpayers is 40½p—34p plus 6½p. This year people will be paying 1¾p in the pound more than was proposed for last year.

Why is it that the Chancellor last year chose explicitly to reduce the basic rate to increase incentives and to reject the attractive alternative of a reduced rate band, yet this year stood the case entirely on its head? Indeed, in this year's Budget statement the Chancellor did not even canvass or discuss the possibility of a reduction in the basic rate.

Mr. Dennis Skinner (Bolsover)

Why only 1p?

Sir G. Howe

Because the room for manoeuvre left to this House of Commons by the plans for public expenditure voted by the Government, by hon. Members below the Gangway, amounting to £4,000 million, was thereby limited very strictly. If the hon. Member wishes to join us in expressing a desire for larger reductions of basic rates, he will be able to achieve that only by a change in Government. It will not be achieved by his own Government.

Mr. Skinner

I would welcome an election fought upon the basis of the Tory Party cutting tax by 1p and the Labour Party on the basis of this Budget with a little more besides. The right hon. and learned Gentleman seems to be rather shy about telling us what is the real Tory Party policy. He says that there is more to it than a reduction of 1p in income tax and that this is merely a token matter. If by some mischance the Tory Party were able to get into power, and if by some further mischance the right hon. and learned Gentleman were to be Chancellor of the Exchequer—most of us doubt this—what would be the real Tory Party policy? The electorate would want to know and would quickly brush it aside if it were only about cutting tax by 1p.

Sir G. Howe

The electorate has a clear recollection and a clear understanding of what the choice is.

Mr. Skinner

Tell us.

Sir G. Howe

If we were merely to set about restoring the position which existed when we left office—getting the marginal rate down to 30p in the pound, raising thresholds back to their real level, and reducing income tax at the higher level to what it was before—that would represent a dramatic liberation for the British people. It would be well worth fighting an election about that. We need to make more fundamental changes than that, but let the British people have the chance of voting even for that alternative. That is the way in which we shall get back to a prospect of creating jobs and prosperity, which has been totally denied to the country by the Government's policies. That is the direction in which we want to go.

But why is it that the Chancellor has proceeded in this way? It is a question which requires some consideration and some answering. The Committee will remember that one of the few passages in which the Chancellor became eloquent in his Budget Statement was when he said: The key to growth and high employment must lie in an improvement in our industrial performance. With slightly less conviction he said: Our main job now is to carry the industrial strategy down to the managers and workers in individual companies and plants throughout the country. I do not know how it is visualised that that would happen. He went on to say that the Government have a responsibility for providing an environment which encourages their work."—[Official Report, 11th April 1978; Vol. 947, c. 1187–8.] 4.45 p.m.

The way in which that ought to happen should be—as has been expressed by many people since the Budget—by securing a reduction in the basic rate of tax and by doing something to restore incentives to the skilled worker, to the manager and to those who had their hopes raised last year by the Chancellor and have seen them as readily dashed this year.

If we look at the real world, we find that it is not one in which messengers arrive from Whitehall carrying talismen about the industrial strategy on to the shop floor. The only way in which the industrial strategy can command any meaning on the shop floor is by the extent to which the Government, through their tax bite and their policy as it affects the average worker, alter or do not alter the environment in which people work, and the degree of encouragement which they receive.

I had a letter only today, from a computer manager, which gives the verdict very clearly on this issue. He had been attending, with his colleagues, a confer- ence on computer management last week. He writes: My fellow computer managers were expressing the opinion that their standard of living has not improved in 10 or 12 years, and yet these are the men who are leading us into the twenty-first century. We had several guest speakers from the United States who were much in demand for information on job prospects over there. That is the reality. If the Government fail to do anything to motivate or encourage people of that kind, they fail at the first stage of any so-called industrial strategy.

It is for that reason that we ask the House of Commons today to make this token reduction in the basic rate of income tax, as an indication of the kind of change that is necessary. If the Government ask us how we are to pay for this, and how we are to meet this dreadful responsibility, I remind them that I gave certain illustrations when we discussed the matter 10 days ago.

The Government must address themselves to the much more fundamental question. Having taken the people of this country through the tribulation, as the Government described it, of cutting public spending by £4,000 million over the last two years, they are proposing this year to increase public spending by exactly the same amount—6 per cent. Does the Chancellor really believe that he can point to identifiable gains and changes in the conditions and living standards of the people of this country as a result of that total relaxation of disciplined control of public spending? Does he not recollect that in 1976, when he was bringing forward his first expenditure cuts White Paper, he said then that it would be essential to stick to the same pattern and size of public spending for several years to come?

Why is the Chancellor now casting away the savings which have been made, abandoning restraint on public spending, in order to lose the chance of making the income tax cuts which he regarded as essential and preferable last year? The Chancellor has totally fallen back from his own judgment. He has gravely disappointed the nation by introducing a Budget which really for him represents the end of the road.

The Chancellor, snorting again, seems to be deaf to advice from the official Opposition or from any other quarter. If he looks at the other courses which are also available to him, and decides that he is unwilling to change any of his plans for increased public spending in the next 12 months, there are still other possibilities which have been proffered to him by his partners below the Gangway on this side of the House.

I would not recommend to him the idea of an increase in the employers' national insurance surcharge. It is curious to reflect on the kind of discussion which must have taken place about that within the Government, because 18 months ago the Government introduced the national insurance surcharge for employers and the Liberal Party voted against it. In more recent times, the Liberal Party has been urging it on the Government and the Government have been denouncing it for its folly. It is a partnership in which either one partner or the other has been urging such a change. We would not regard it as a sensible plan to introduce because it would amount, as the Liberal Party said two years ago, to a tax on jobs. It is not the most sensible way of setting about it.

The alternative—if tax increases there must be—of a single rate of value added tax would be a penalty worth paying if there were some prospect of getting some reduction in the burden of personal income tax. The yield on a single rate of value added tax would be £700 million—more than twice as much as is necessary to pay for the amendment. It would represent a shift in the balance of the tax system of the kind that we have urged ever since the Chancellor adopted the 8 per cent. rate, and of the kind that he has urged in his more candid moments. It would represent an increase in the retail price index of no more than 0.8 per cent., and about 0.5 per cent. for pensioners. It would be the key to the commencement of the role switch in the shape and nature of our tax burden, not as big as in the end is desirable, but certainly a great deal better than nothing.

If the Chancellor makes a great baying noise about the effect of that on the retail price index, let him reflect also that the downward slide in the value of the pound that has taken place since the beginning of this year—7½ per cent. or 8 per cent.— has itself added to the retail price index more than three times the cost of changing to a single rate of VAT.

We shall hear a great deal of noise about all these alternatives. No doubt the Chancellor will protest in all sorts of ways that the prospect of this House of Commons changing his Budget in the way we suggest is something that is quite intolerable. I would remind the Committee of the central point of the argument. Spending and borrowing plans may or may not be the exclusive responsibility of the Chancellor—certainly it is he who brings them forward and has control over the spending and borrowing programmes—but the level of taxation and, above all, the basic level of income tax is the responsibility of this House of Commons and of Parliament.

The Chancellor knows, as do a number of his colleagues, if they are honest with themselves, that the burden of direct taxation and the rate of income tax in this country is much too high and ought to be reduced. The people of this country know that equally well. Surely today Parliament ought to take the step of giving substance to the feeling of the people, and giving substance to the inner feeling of the Labour Party, by passing this resolution requiring a reduction in the basic rate of income tax, asserting our position in the constitutional structure and requiring the Government then to cut their spending plans in accordance with the resources which this House of Commons allows to them rather than in accordance with their own aspirations. It is for that that I ask the House of Commons to pass this motion which I commend this afternoon.

Mr. Healey

The right hon. and learned Member for Surrey. East (Sir G Howe) told the House on 27th April: It is a Labour Budget, put forward by a Labour Government, —we can agree that far— and it is not possible for us … to do more than make modest changes in it."—[Official Report, 27th April 1978; Vol. 948, col. 1666.] He said that he would not enter into a Dutch auction with the Liberal Party because he hoped at some time or other that the Tory Party might win a General Election.

The right hon. and learned Member was clearly torn, in an exceptionally anxious and lack-lustre speech this afternoon, between his desire to grub up a few extra votes and the whole line that he has taken on the Budget until now.

In the end he came down in favour of the votes rather than the economic interests of the nation. As the right hon. Member for Down, South (Mr. Powell) pointed out the other day, the Opposition have started off by putting down a series of amendments to Clause 11—the first clause we are debating—which would increase the fiscal stimulus proposed by the Government by well over 25 per cent. and add well over £500 million to the PSBR, which the right hon. and learned Member has told us is already far too high.

Since the size of the PSBR in the current fiscal year has figured so prominently in our discussion of the Budget let me remind the Committee of what the Conservative Front Bench have said about it. The right hon. Lady the Leader of the Opposition started the moment I sat down on 11th April by saying: I must warn the right hon. Gentleman that when he said that the public sector borrowing requirement would go back to £8.5 billion, many of us thought that it was very high if he was to keep down the level of inflation in future years.—[Official Report, 11th April 1978; Vol. 947, c. 1213.] The next day the right hon. and learned Gentleman himself said: We are even more dismayed by the fact that … the public sector borrowing requirement … is actually planned this year to rise to 5½ per cent. of G.D.P. We find that a disturbing course of events."—[Official Report, 12th April 1978; Vol. 947, c. 1414.] The next day the hon. Member for Horncastle (Mr. Tapsell) said: the stock markets have fallen. They are alarmed, and overseas opinion is alarmed, by the size of the public sector borrowing requirement."—[Official Report, 13th April 1978; Vol. 947, c. 1791.] The hon. Member for St. Ives (Mr. Nott) said: But there is no question whatever of our increasing the borrowing requirement. That is out of the question, and, whatever misquotations or misrepresentations we may hear tonight, it is simply not true. Then the hon. Member for Blaby (Mr. Lawson), when winding up the whole of the Budget debate, said: There can be no doubt whatever that the £8½ billion public sector borrowing requirement proposed by the Chancellor is too high. To this medium artillery provided by the Conservative Front Bench, we had the support from the light cavalry of Worthing, Horsham, Cirencester and Tewkesbury and Croydon, South. But up to that point no Opposition Member had ventured to tell us how high the PSBR should be. However, when I pressed him, the hon. Member for Blaby—always ready to oblige—was kind enough to enlighten our ignorance. He said: When he addressed the House in this debate on Wednesday the Chief Secretary said it was impossible to predict the figure within a margin of £2 billion either way. So, for the benefit of the Chancellor of the Exchequer, I would say that the PSBR should be between £4 billion and £8 billion."—[Official Report, 17th April 1978; Vol. 948, c. 53–150.] I see nods from the Conservative Front Bench.

It appears that in giving so wide a range the hon. Gentleman was relying on a £2 billion margin of error in prediction, which is reasonable enough. I assume that with his usual judicious moderation he was aiming at a PSBR mid-way between these limits—at £6 billion—£2½ billion less than the Government are currently predicting. There seems to be unusual immobility in the hon. Gentleman's head at this moment.

We naturally assumed that, when we came to discuss the Finance Bill in Committee, Conservative Members would, as they have every right and power to do, have put down amendments to cancel all the Government's proposals for tax cuts so as to bring the PSBR down to the level which they believe is right. Indeed, for the first five or 10 minutes of the right hon. and learned Gentleman's speech I had the impression that that was precisely what he was going to do. But he did not do anything of the sort. Instead, on this clause alone—the first clause that we are debating—the Conservatives have proposed additional cuts in taxation whose effect would be to increase the PSBR this year by over £500 million to over £9 billion.

Mr. Nigel Lawson (Blaby)

Will the Chancellor give way?

Mr. Healey

Of course, with the greatest of pleasure.

Mr. Lawson

Even though I suspect that he is trying to mislead the Committee, the Chancellor knows very well that the reason for the increase in the PSBR is the huge increase in public expenditure which he is planning. It has not arisen on the tax side. That is why we have said that this is where the cuts should come.

Mr. Healey

The hon. Gentleman is quite wrong. The £2 billion tax cuts proposed by the Government do increase the PSBR and, in my view, rightly so. Now the hon. Gentleman and his hon. Friends propose to add another £500 million to that.

I hope that the hon. Member for St. Ives at least—I am sorry that he is not here at this moment—has no intention of voting for this amendment. If he does vote for it, I hope that he will at least spare us the pompous preaching about concern for market reactions with which he regaled us in the Budget debate. I hope that right hon. and hon. Members opposite will also spare us that sort of hypocritical pomposity.

Sir G. Howe

Does not the Chancellor first of all acknowledge the point raised by my hon. Friend the Member for Blaby (Mr. Lawson) that the increase in public spending plans contained in the Government's White Paper for this year adds £4,000 million to the borrowing requirement to which the Government have committed themselves? Does he not also acknowledge that the one thing the House of Commons can do is to deny the Government the tax increases which they seek and that we are perfectly entitled to do that and then require the Government to cut their coat according to the cloth allowed to them by the House of Commons?

Mr. Healey

The House debated the public expenditure increases the other day and approved them by a substantial majority. The House has taken its decision on the public expenditure plans for the coming year. Such is our procedure, and has been under successive Governments, that we are now discussing the tax proposals which are intended to help in financing those public expenditure proposals which the House of Commons has already approved.

5.0 p.m.

The amendment would cut the basic rate of income tax by 1p to 33p in the pound and would itself add £340 million to the PSBR this year. I ask the Opposition—and I appeal to Back Benchers especially—whether they really believe the risks that they would impose on the economy, risks which, in a way, the first part of the right hon. and learned Gentleman's speech emphasised and underlined, worth the electoral gain that they may hope to derive from the amendment.

A married man on £40 a week would get precisely nothing from this proposed reduction in the basic rate of tax. A married man with two children on £70 a week—midway in the earnings table—would get 27p a week. I shall show how some of the ways in which the Opposition would seek to offset its effect on the PSBR would cancel out nearly all this benefit. I do not think that it is surprising that newspapers from The Observer to The Daily Telegraph are now asking the Opposition to think again about their amendment.

The right hon. and learned Member for Surrey, East said on Second Reading that he expected the Government to offset this increase in the PSBR by cuts in public expenditure. He said it again this afternoon. At first, I assumed that he was talking of cuts of £3 billion to bring the PSBR down to the level of £6 billion assumed by the hon. Member for Blaby. But, no: a wonderful sea change has come over the right hon. and learned Gentleman since he attacked us in the Budget debate for having far too high a PSBR. On Second Reading of the Finance Bill he sang a very different tune. At £8½ billion, the PSBR was no longer far too high; it was simply up against the limit. He proposed nevertheless to increase it, but by only £500 million, and he took great credit for his modesty. Like the housemaid's baby, he hopes to get away with the increase because it is only a little one.

I quote the right hon. and learned Gentleman's words, because they are worth reflecting on. He said: … we are trying with limited room for manoeuvre to fillet some sense out of a Labour Budget, the borrowing requirement of which is already up against the limit"— not above the limit— That is why it would not be right for Parliament to place upon a reluctant and intransigent Government any larger increase in their borrowing requirement."—[Official Report, 27th April 1978; Vol. 948, c. 1677.] He went on to tell us that the Government should bring the PSBR back to £8½ billion, the level he said originally was dangerously high, by cutting £500 million off public expenditure in the current year, and he listed the cuts that he thought appropriate.

I have been looking at them since the right hon. and learned Gentleman spoke, and they crumble in one's hands. The largest item is the additional £300 million which the House has just authorised for the National Enterprise Board. In the first place, this is not an increased authorisation for the current year. It is an increase in the statutory limit for all the Board's funds for the foreseeable future. But if we withheld from the NEB this year any money beyond the £700 million statutory limit which existed before April, we would bring the NEB's activity to a complete halt later this year. [HON. MEMBERS: "Hear, hear."] I am glad to hear the Opposition cheering that remark.

Now let me spell out what that would mean. We would have to deny British Leyland any funds beyond the £450 million that we authorised recently and risk throwing 100,000 people out of work. I hope the Opposition will cheer that. [HON. MEMBERS: "Rubbish."] We would have to stop support for Rolls-Royce and let Britain's unique national asset in aerospace disappear just at the moment when a huge American order has been won: I do not hear hon. Members cheering that one. They seem suddenly to have fallen silent.

But even this would save nothing like £300 million this year. The NEB's total allocation is only £275 million a year, and the bulk of that for 1978–79 is already committed. The same goes for the £41½ million which the right hon. and learned Gentleman wants to cut off selective assistance to industry. Almost every penny of that is already committed or required to meet contractual obligations which already exist. The same goes for the £150 million which the right hon. and learned Gentleman wants to cut on municipalisation and the Community Land Act. The total saving possible in these areas, too, is far less than the figures which he quoted. I wonder how many Conservative councils would welcome a disruption of their plans for buying up and improving older property.

Moreover, as the Financial Times pointed out last Friday, even if these cuts were feasible and helped to reduce the PSBR, most of them would do nothing to reduce the demand on real resources created by some £500 million worth of tax cuts. Let me quote the words of the Financial Times last Friday: It is this tendency to see a simple readymade answer to every complex problem which is making Sir Geoffrey the despair of his potential friends in the City.

Mr. Skinner

And here.

Mr. Healey

The Financial Times went on: All too often one has heard bankers and brokers seeking comfort in the thought: 'Of course, it doesn't actually mean that he is going to be Chancellor when they get in …'. The hon. Members for Blaby and St. Ives still have something to look forward to.

The fact is that we could not, even it we wanted to, offset all the Opposition's tax cuts with cuts in public expenditure on goods and services this year. The right hon. Member for Down, South, with his Treasury experience, was right about that the other day, and so was the hon. Member for Oswestry (Mr. Biffen) when he said that public expenditure cuts were a precondition to tax cuts and not a way of validating them after the event.

Of course, it would be possible to cut public expenditure by cutting transfer payments—

Mr. Lawson

That is right.

Mr. Healey

The hon. Member for Blaby says "That is right"; for example, by cancelling the autumn increase in child benefit, by a crushing increase in school meal charges, and by refusing to increase pensions in November. I suppose that is what the hon. Member really wants.

Mr. Lawson


Mr. Healey

Now the hon. Member says "Rubbish". He agreed with me a moment ago. I hope that whoever replies on behalf of the Opposition will tell us which transfer payments they propose to cut and how much saving they hope to get from them. That will be useful ammunition for the coming test in the country.

But if it is not possible to get the offsetting savings through cuts in public expenditure, from where is the money to come? The Liberal Party is quite clear and always has been. It says that it should come from enormous increases in indirect taxes, which would push up the cost of living by more than 3 per cent., into double figures. I must tell the Committee that there would be little chance of pay moderation next year if that were done. We would be throwing away all the hard-won gains of the past three years and conceding defeat in the battle against inflation, just when victory was within our grasp.

Sir G. Howe

Does not the Chancellor of the Exchequer realise the extent to which the words that he has just used apply to his own public spending pattern? We have heard him denouncing the Opposition for putting forward proposals for cuts in public spending. Does not he recollect that he himself, despite all his protests to the contrary, cut £4,000 million of his public spending plans in the last two years and that, by deciding now to restore that spending, it is he who is throwing away all the hard-won gains of the past two years?

Mr. Healey

The right hon. and learned Member has made this speech three times already this afternoon.

Mr. Lawson

Why not take it on board, then?

Mr. Healey

I have taken it on board. The fact is that this Government have cut public expenditure, and it was very painful to do so. But we have always cut it for the year following the current year, for the precise reason that I am trying to explain and which is well understood by anyone who has previously served in the Treasury. It is not possible to cut goods and services significantly during a current fiscal year. Cuts can be made only for the following year.

The right hon. and learned Member for Surrey, East is a little more modest than the Liberal Party. The one firm proposal that he has made for increasing indirect taxes is to consolidate the rate of value added tax at 10 per cent. But this, too, would increase the cost of living for every family in the land. Not only would it cancel out most of the benefit that the average worker got from the cut in the basic rate; it would also impose additional uncompensated burdens on the low paid, who get no benefit from a cut in the basic rate.

The proposals made by the Opposition for offsetting the increase in demand and the increase in the PSBR which their tax cuts would engender are either impractical, inadequate, and irrelevant, or make nonsense of the tax cut itself.

Some hon. Members have asked me whether it really matters if the public sector borrowing requirement is £9 billion rather than £8½ billion. I was asked that question by the right hon. Member for Down, South on Second Reading, along with questions about the relationships between tax cuts, demand, and output which are relevant to that matter. I shall try to answer the right hon. Member concisely, though he knows that questions of economic theory and practical financing arise here on which we are unlikely to reach full agreement in a single debate.

However, I hope that we can agree—there is agreement about this among all Government's and by the world's leading financial and economic institutions such as the IMF and the OECD—that it is right for a Government to spend more than it receives in revenue when the economy is working, well below capacity. I hope also that we can agree that this can be done without creating inflationary pressures, provided that the gap can be financed by borrowing outside the banking system. How far the Government can borrow outside the banking system will depend on expectations in the financial markets, particularly about inflation, and on the level of private saving, which in turn depends partly on the extent to which individuals save some of their income, and partly on how much money companies borrow for investment.

The percentage of income saved is most conveniently expressed as the savings ratio. Broadly speaking, a high savings ratio justifies a higher public deficit than a lower one. If we look at the world today, we see at one extreme Japan, with a savings ratio of 24 per cent. and a general Government financial deficit—the nearest proxy of the PSBR for which international figures are available—which is 6 per cent. of gross domestic product. At the other extreme we see the United States with a savings ratio of 6 per cent. and a financial deficit of 1 per cent. of GDP. Britain and Germany come in the middle. Britain has a savings ratio of 15 per cent. and a financial deficit of 4 per cent. of GDP, and Germany has a savings ratio of 14 per cent. and a financial deficit of 4 per cent.

Mr. Witteveen, the managing director of the IMF, argued in Mexico City at the Interim Committee last week that Japan and Germany could afford to accept still higher public sector deficits because their rates of inflation were exceptionally low, their economies were running well below capacity, there was little business borrowing for investment and they had large balance of payments surpluses. Britain and the great majority of countries in his view could afford a more modest stimulus than the strongest economies, but if all moved together, according to their capacity, the multiplier effect would produce an increase in world output greater than the sum of the parts. At the Mexico meeting the overwhelming majority of Governments supported that and, of course, the British Government have been propounding it for some time.

Mr. Hugh Fraser (Stafford and Stone)

It is a wonder that the Japanese did not tell him to jump in the lake.

Mr. Healey

They did not tell him to jump in the lake. As the right hon. Member should know, the Japanese Government said that they were trying to achieve a higher deficit but that they were so far failing to do so.

I made it clear in the Budget debate that my Budget proposals were a British contribution to this common effort, and that the estimate of the resulting PSBR was compatible with a somewhat lower growth of the monetary aggregates than last year. This could be achieved only at the cost of a small increase in interest rates which would tend marginally to reduce the stimulus to demand flowing from the tax cuts.

The right hon. Member for Down, South is right to say that only three-fifths of the money paid out in the Budget tax cuts will increase output in Britain by increasing the demand for British goods. That is mainly because some of the money will be saved, some will come back to the Government through indirect taxes on goods bought, and some will be spent on imports.

However, to the extent that the Government borrow from private sector savings to finance their own deficit, part of the private money saved will help to increase output through Government spending. If a Budget stimulus could never increase output, President Carter's Administration would not have been able to reduce unemployment so dramatically as they have done in the last 12 months and the IMF and OECD—along with their member Governments—would be barking up a gum tree in asking for tax cuts to increase demand and output and reduce unemployment.

5.15 p.m.

On the other hand, if the PSBR is too high in relation to GDP, inflation and the underlying growth of money supply, the Government will have to choose either to restrict growth through an excessive increase in interest rates or to allow the money supply to exceed its target; in either case jobs and prices would suffer.

I have explained in the Budget debate why I think £8½ billion should be the ceiling of the PSBR this year, and why I think it is compatible with a growth of M3 of 8 per cent. to 12 per cent. Since then the outflow of foreign exchange will make the achievement of my monetary targets somewhat easier than I expected, just as the inflow made it more difficult last year, and nobody reminded me of it more than the Opposition Front Bench.

Mr. Peter Tapsell (Horncastle)

Would it be right to say that the Government had to use more than 2 billion dollars of the 4 billion dollar reserves lost last month to support sterling? Is the Chancellor seriously suggesting that that 2 billion dollars spent on supporting sterling was part of his Budget strategy to control the money supply?

Mr. Healey

The hon. Member really is talking the most utter balderdash. Of course it was not part of the Budget strategy to control the money supply. Nevertheless, it has a very useful effect on the money supply, just as the very large inflows of hot foreign currency last year had a very damaging effect on the money supply—an effect which I took steps to end when I changed intervention policy last October. The hon. Member really should not ask questions to which he knows the answers unless he thinks that they are in some way damaging to his opponents.

Mr. Tapsell

The question was very damaging.

Mr. Healey

But there is no scientific way of fixing a precise ceiling for the PSBR and no scientific way of predicting precisely what PSBR will result from a given stimulus. The PSBR is the residual of an almost infinite number of variables and the margin of error is very great—as we have seen in recent years and as the right hon. Member for Chipping Barnet (Mr. Maudling), with his experience as Chancellor, was able to confirm. But the Chancellor of the day has to make his best estimate both of the permissible ceiling and of the likely outturn—knowing that he may well be wrong and that he may have grounds for revising his estimates as the year proceeds.

Dr. Jeremy Bray (Motherwell and Wishaw)

Can my right hon. Friend say whether he intends to maintain access to the IMF standby, or whether he intends to set the country free from the IMF conditions?

Mr. Healey

I have no intention of changing the Budget strategy which I announced a month ago and which is totally consonant with the IMF's views. Whether we continue the standby is a completely separate question, to be decided after completely different considerations. The idea that relinquishing the standby would mean that it would make sense totally to change the policy that the Government are following is one which I do not support, although I know that my hon. Friend does.

Mr. Lawson

I have listened very carefully to the long and rather convoluted passage in the Chancellor's speech about the £8½ billion ceiling for the PSBR this year. He said that the Chancellor of the day must make his assessment of the ceiling for the PSBR and the likely out-turn. If £8½ billion is the ceiling, will he tell us the likely outturn?

Mr. Healey

That is indeed the likely outturn, as far as we can estimate it at this time. I made this clear in the Budget debate. It may well be that factors will reduce the PSBR well below what is predicted in the Red Book, and it may be that other factors could push it higher. In that case I would need to take some compensating action. One of the factors which might put it higher than the ceiling that I have set, would be the passing of this amendment. The hon. Gentleman, to his eternal shame, is supporting an amendment which would have certain economic effects. I will outline these to the House, together with our general response to the situation which would arise if the Opposition were so irresponsible as to force a Division and win it.

The amendment would reduce the basic rate of income tax from 34p in the £ to 33p. This cut of 1p in the basic rate could not, for administrative reasons, take effect until the late autumn at the earliest. Therefore, the tax cut would involve a payment of over six months tax rebate in October and November and would have two economic consequences. First, there would be a sudden increase in purchasing power and demand for resources at a time when the economy might already be growing at a rate close to capacity. In that way we would suck in imports and create jobs abroad instead of in Britain, and no one has argued that point more eloquently than the hon. Member for Blaby. Secondly, the payment of the rebate in October or November would bring a large increase in the central Government borrowing requirement, with an immediate effect that month on the growth of the money supply and of the PSBR.

As I have explained, I believe that the Committee would be highly imprudent to take measures now which would have consequences in six months' time, which might be seriously damaging both to the sustained growth of our economy and to our hopes of keeping inflation under control. I cannot, of course, guarantee that the consequences will be as I have described. No one in or out of government can predict with certainty how the growth of output will in fact develop in the coming months or whether the PSBR will in fact be as high as forecast in April.

I simply state that the risks are not risks that I can advise the Committee to accept. They are risks that the Conservative Party would never have asked the House of Commons to accept except in an election year. I think that that is already obvious to the country. Of course, all these risks will increase if the irresponsibility of the Opposition leads to further losses of revenue as the Bill moves on its way through the House, as is apparently the intention of the right hon. and learned Member for Surrey, East.

Therefore, the Government have to oppose the reduction and ask the Committee to vote against the amendment. If the Committee decided tonight to approve the reduction and the House upheld its decision on Report, the Government would accept that decision although we believe it to be wrong. The Government would thereafter watch the situation closely both as regards the development of the economy in the coming months before the payments to which I have referred are made and as regards any further irresponsibility in Finance Bill debates.

I have referred to the possible effect on the growth of the PSBR compared with the limit of £8½ billion which I set in the Budget, which the Opposition Front Bench has repeatedly attacked as being already too high. As I have explained, the outlook for the PSBR is inevitably uncertain. I shall monitor its movements continuously to ascertain whether it is likely to exceed £8½ billion. It it seems likely to do so, the Government will take all necessary steps to correct it.

The Opposition parties have suggested that such steps should be cuts in public expenditure or increases in indirect taxation I have already explained the difficulties of offsetting tax cuts through cuts in public expenditure, especially those that the Opposition have selected. Apart from their intrinsic undesirability, most of them would increase unemployment. They could not possibly offset the loss of revenue in this financial year or the increased demand for resources.

Increases in value added tax or specific duties would increase prices at a stroke and jeopardise our hopes of keeping inflation down in the coming year. Moreover, they would cancel out all the advantages of a cut in the basic rate of tax for the average family and impose additional burdens on the lower paid, who get no advantage from a cut in the basic rate.

There are, however, possibilities that the right hon. and learned Gentleman did not mention—for example, an increase in company taxation or increases in stamp duty affecting those who can best afford it. Despite the daunting administrative difficulties, the Liberal Party has suggested increasing employers' national insurance surcharge. It may be possible in spite of the difficulties, to find something there. As I said in my Budget Statement, that is one area where I recognise, like the Liberal Party, that the present burden in Britain is considerably lighter than it is in most countries of the European Community.

However, I must warn the Committee that action in any of these areas would be undesirable. It would have consequences that I prefer to avoid. If it were otherwise, I should have proposed such changes in my Budget. All that I can claim is that action in these areas would be less damaging, both socially and economically, than action in the areas recornmended by the Conservative Opposition. I do not want to take such action, but I have an inescapable responsibility for the economy and our finances and I will not shirk it. The only way in which the Committee can avoid these risks altogether is to defeat the irresponsible electioneering Opposition amendment, and I call on it to do so.

Mr. Reginald Maudling (Chipping Barnet)

If I had had doubts—I had at one time—about supporting the amendment, they would have been dispelled by the Chancellor's speech. It was a strange mix of the combative and the theoretical. I have known the right hon. Gentleman for many years. If I may say so—I hope without offence—I like him as a friend. However, why does he always hide his natural intelligence in a desire to be combative and controversial? He can talk sense if he tries. Why does he not try to do so a little more often?

This afternoon the right hon. Gentleman spent a lot of time being rude to my colleagues and making party political points. He spent much time reading out a complicated brief prepared by a department of the Treasury about the money supply. I do not think that he believed a word of it, and neither did I, quite frankly. He finished up by making the most extraordinary statement. He said that if we passed the amendment there might be an increase in demand on the economy in the autumn at a time when demand was rising roughly to take the whole of the available capacity. Now, really! What is he talking about?

I suppose that our economy is working at about 30 per cent. below capacity. We are producing rather less than we did in the three-day week.

Mr. Healey

I know that the right hon. Gentleman still bears the scars of the dash for growth that he tried shortly before the Labour Party won the election in 1964. However, to spare his own embarrassment, I remind him of the experience of his successor, Lord Barber, who attempted to expand the economy so fast that he brought it to a complete halt in 1973. On top of that, he engendered a yawning and growing gap in our balance of payments deficit and a massive increase in the money supply that have had a major effect on inflation for the past three years.

Mr. Maudling

The so-called clash for growth in 1963–64, when I was blamed by the Labour Party for not moving fast enough, would have succeeded but for the folly and stupidity of the incoming Labour Government in 1964. Let us hear no more of that.

Does the right hon. Gentleman say, or does he expect anyone with a grain of sense to believe, that there is a danger of the amendment, if passed, setting up in the autumn—for example, October—a sudden and immense demand upon our production resources that is greater than they can manage, at a time when we are producing at a level below that obtaining at the time of the three-day week? The Chancellor should not descend to that level of argument. If I may say so, he is much more intelligent than that.

Mr. Skinner

Go and make your speech in Malta.

Mr. Maudling

If I may say so, the hon. Member for Bolsover (Mr. Skinner) reminds me of what Shakespeare said in Anthony and Cleopatra, that time cannot wither him, nor custom stale his infinite malevolence.

I return to the serious business of the Bill. I would not accord high priority to the reduction of the standard rate of income tax. The reduction of 1p is such a small amount that it will not have a decisive effect. I should give much higher priority to the reduction of the higher rates of tax. I should turn my attention to the top rate and would reduce all the higher bands of taxation. When thinking in terms of incentives, we should give serious consideration to reducing the main thrust of our tax reduction in that sector.

I support the amendment for four reasons. First, I believe that there is a general need to reduce direct taxation. Of course, by doing so we shall not solve our economic problems. However, if we do not reduce direct taxation we shall not have achieved the precondition for solving our economic problems.

Secondly, I do not share the alarm about the PSBR that is so widely felt in many circles, including the City and elsewhere. I cannot believe that in the current conditions of a gross inadequacy of demand in our economy we need be all that bothered about a further increase in the PSBR. The danger of excess demand in our economy is remote. The relationship between the PSBR and the total savings of the nation is the ratio which we must bear in mind. I cannot believe in present circumstances that there are grave dangers from a possible further increase in the PSBR.

5.30 p.m.

Thirdly, I agree that the amount of £300 million involved in the amendment is within the margin of error, or margin of estimating, of the Chancellor of the Exchequer.

Fourthly, my right hon. and learned Friend the Member for Surrey East (Sir G. Howe) has, on Second Reading and today, mentioned specific ways of restoring the effect on the PSBR by cutting public expenditure.

Those are four clear reasons: the general need to reduce direct taxation; excessive concern about the PSBR; the amount involved is within the margin of error; and my right hon. and learned Friend has given ways in which a reduction of taxation can be compensated by a reduction in Government expenditure. These reasons are an adequate intellectual argument for voting for the amendment.

Mr. Douglas Jay (Battersea, North)

At the beginning of the speech of the right hon. and learned Member for Surrey, East (Sir G. Howe) I thought that he was arguing that there was no harm in increasing the borrowing requirement by another £500 million, but by the time he came to the end of his speech he appeared to be running away from that and suggesting that the position could be remedied by an increase in the rate of VAT. If that is now the Conservative Party's argument, it should be made clear to the country that the Conservatives are proposing not a reduction in taxation, but a switch from one form of taxation to another.

I hope that the Chancellor does not give way to the suggestions in these amendments for still further tax relief. Unlike the right hon. Member for Chipping Barnet (Mr. Maudling), I think that it would be imprudent to increase the borrowing requirement still further at a time when interest rates are tending to rise here and in the United States and when the balance of payments can so easily slip out of control. The Chancellor was absolutely right in the Budget to cut income tax at the lowest end of the scale to prevent an overlap between social security benefits and earned income after tax.

I hope that we can all agree, whatever we disagree about, that to make people worse off, or no better off, if they work is absurd and must be an incentive to some people not to take work. I agree that we must have reasonable differentials for skill and responsibility, that there is a point beyond which we cannot reasonably press increases in progressive direct taxation, and we have probably reached that point in recent years.

However, a good case has not been made out for a major switch to indirect taxation, and above the level at which there could be an overlap such as I have described with social benefits there is no evidence that direct taxation has a major effect on working effort.

The hon. Member for Cornwall, North (Mr. Pardoe) in the Budget debate argued that income tax is no longer progressive because it extends so far down the scale of income. It may be undesirable for it to extend so far down, but that does not make it less progressive. A tax is progressive if those with lower incomes pay a lower percentage of their incomes than those at the top of the scale. That remains true of income tax today, whereas with indirect taxation the reverse is true. The hon. Member for Cornwall, North shakes his head. I remind him that some years ago the middle classes of this country were greatly shocked to learn from the Colwyn Committee on national debt and taxation, which reported in 1927, that those with the middle incomes were the most lightly taxed section of the population, taking direct taxation and indirect taxation together.

The highest incomes paid the highest proportion of income tax. The middle incomes paid a lesser rate and those on the lowest incomes paid a higher proportion of their total income because of the imposition on them of high indirect taxation. If there were more time I would give the hon. Member figures to show that that was so. That is a system which no one could reasonably justify.

Since then there has been, as I am sure the hon. Gentleman will agree, a huge increase in direct taxation, but we have also had a huge increase in indirect taxation in the post-war period. According to the Colwyn Report, 80 per cent. of British Budget revenue in 1920 was coming from direct taxation. We have not reached as progressive a system as that since that time.

There was, however, in the first years after 1945—and here I agree with the hon. Member for Cornwall, North and the Conservative Front Bench—a case for some rise in indirect taxes. That was because the taxes that were then raised were not on necessities in the old sense. Our increase in indirect taxation revenue from 1945 to 1970 has come mainly from three sources—tobacco, petrol and alcohol. There were specially good reasons, and still are, for all those. The best case of all is for taxing petrol. It is ironic that that is the one tax to which the hon. Member for Cornwall, North is so passionately opposed.

We now have some much more regressive and more reactionary indirect taxes than any of those. I refer to the EEC levies and duties on food. No debate on taxation makes any sense if we do not mention these taxes which are much more regressive and more extortionate than VAT or the taxes on petrol or tobacco. The EEC levies on grain are now running at 100 per cent., on dairy products at about 200 per cent., and on meat at 60 per cent. or 70 per cent. These products are prime necessities and the rates are far higher than anyone would dream of on VAT. Thanks to those food taxes, it is now again true, as it was at the time of the Colwyn Report, that the very poor are now paying a higher proportion of their income in total taxation than are people in the middle of the scale.

As the total value of retail food sales is about £15,000 million a year, very large sums are involved in these food taxes. It is because of the incidence of these taxes that I am entirely opposed to any proposal for a further major switch from direct to indircet taxation.

The argument from the Conservative Party and the Liberal Party in favour of such a switch is that income tax has a major depressing effect on working effort. I believe that that argument is grossly exaggerated. If that is true, why does Sweden with the highest production and the highest real income per head in the Western world, raise the highest proportion of its budget revenue from direct taxation? That requires an explanation from those who claim that taxation at our levels is a major influence.

Some people are deterred from working effort at some time by direct taxation, but a large section of the population can do nothing about it one way or the other. There is a third group. Some people are impelled by higher income tax to earn more if they can when the tax rises. I have always been a member of that third group. In so far as I had the chance of increasing my earnings, since in this imperfect world one has to pay the electricity and gas bills and so forth. I have always found that when the tax bill went up I have had to earn more.

It seems to be forgotten that the consequences here work both ways. The real question surely is, if we are serious about this question of taxes and incentives, which group is the most numerous. Instead of speculating and exchanging political slogans as we so often do, it is worth remembering that the Radcliffe Committee in the mid 1950s carried out an expert and dispassionate survey by questioning a very large number of people in order to determine the result. It would do Opposition Members good to study its conclusions. I quote only the final conclusion of that Committee. It said: Few productive workers had any detailed knowledge of the way they were affected by income tax.… There was no evidence from this inquiry of productive effort being inhibited by the income tax structure within its present limits. That is the conclusion of what until recently was the only thorough and impartial inquiry we have had on the subject. Its findings are in contrast to the political prejudices that are sometimes expressed in this House.

The Radcliffe Committee reported in the 1950s, but recently we have had another report, the Meade Report, which is also a highly expert and non-political investigation of these matters. It quotes a number of other surveys from this country and the United States. It sums up the situation as follows: Individually the surveys examined suffer from limitations, but the general conclusions are impressively similar: i.e., that the net effects of income tax on work effort are minor. So the findings of the Meade Report are remarkably similar to those of the only other impartial inquiry by the Radcliffe Committee.

I believe therefore that the common sense conclusion on this controversy is this. Let us certainly not tax earned incomes right down to the level where they clash with social security benefits. Let us also raise to a reasonable level revenue from petrol, tobacco, alcohol and gambling. I hope that with the exception of the tax on petrol I carry with me the hon. Member for Cornwall, North on that point. Let us sweep away our present completely indefensibly regressive taxes on food. Finally, do not let us in the summer of 1978 push up the borrowing requirement any further by reckless cuts in income tax such as are suggested this afternoon.

5.45 p.m.

Mr. J. Enoch Powell (Down, South)

The right hon. Member for Battersea, North (Mr. Jay) was right to remind the Committee that not all items either of expenditure or of revenue appear in the Budget Statement, and that one of the major items of taxation, taxation in the full and most ancient sense of the term, namely, an impost upon the food of the people, does not feature in the Budget Statement, and for a very simple reason: it is not imposed by the authority of the House and its yield does not accrue to the benefit of the people of this country. I think, therefore, that he did a service by reminding us that the real framework is broader than the framework at which we appear to be looking when we address our minds to the Budget Statement.

In the debate on Second Reading 10 days ago, I ventured to set the Chancellor of the Exchequer an examination question. It was certainly not an easy question. It was an advanced question. When I listened to the reply that evening by the Financial Secretary, my fear was that I was going to get the paper back with "Not attempted" written across it. However, the Chancellor's speech today produced a different result. He had covered several sheets of foolscap with small writing; yet in the end the reply could have been condensed into three words—"I don't know".

The question which I asked him was whether, and on what grounds, he could assert that an addition to the public sector borrowing requirement of £2 billion in the current year was safe and acceptable but that an addition of £2.3 billion or £2.5 billion was unacceptable. When he had gone round all the items and theories, he ended by a simple expression of his own authority and responsibility, saying that his judgment was that he could safely seek to borrow an additional £2 billion, but not an additional £2.5 billion. Admittedly, he had not told the House—this is a card which perhaps all Chancellors of the Exchequer clasp to their breasts—where he was at the moment expecting to get the £8.5 billion. He did not say whether he was expecting to get it all from the public and from overseas, or whether at the back of his mind there was the belief that a portion of it—undisclosed—would be borrowed from the banks. So in the end it was a matter of the Chancellor's judgment as a member of the Government.

But the right hon. Gentleman took even that back before he resumed his seat, because he told the Committee that if his defences were overrun tonight, he would do nothing—not yet, at any rate; he would just watch how things went, and, if they went badly later on in the year, he would have to do something. I think we would all assume that. We would all have assumed that that would be the case even if this amendment had not been moved and we were not having this debate.

The hon. Member for Birmingham, Perry Barr (Mr. Rooker), who followed this matter with great interest with me during the Second Reading debate, said that he would listen with interest to the answer to the examination question which I had prescribed. I hope that the hon. Member will catch your eye, Mr. Godman Irvine, because I shall be interested in due course to know what view he takes now that he has heard the answer.

The hon. Gentleman then held the view that Until these questions are answered it would be absolute folly and totally irresponsible for any major political party in this country to combine with another party in order to muck around with the Government's Budget strategy."—[Official Report, 27th April 1978; Vol. 948, c. 1752.] Broadly speaking, he was saying "If I do not understand it or if I do not obtain an answer, I shall stick by the Government."

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

I was saying, in rather less precise language, exactly what the right hon. Gentleman across the Floor of the House said to me a year ago on 25th July. I hope he will not mind if I remind him of what he said. He said: It is one of the requirements of sound public finance—which, in turn, is one of the requirements of public happiness and wellbeing—that Governments, as long as they remain Governments, should be able to maintain the structure of their Budget intact and carry through their tax decisions."—[Official Report, 25th July 1977; Vol 936, c. 82.] That is exactly what I have been saying this year.

Mr. Powell

I am relieved, as so often, when confronted with a quotation from the past, to discover that it is entirely consistent with the argument in which I am engaged. I was about to say, when I gladly gave way to the hon. Gentleman, that, albeit in other words, his conclusion from all that is the same as mine—namely, that we are not engaged this afternoon in an economic debate; we are not engaged in a debate conducted upon the most scientific principles about £300 million more or less on the net borrowing requirement we are engaged in a political debate.

The Chancellor of the Exchequer and the Government are claiming the confidence of the House for the Budget judgment of the Chancellor, and Her Majesty's Opposition are withholding it. This debate, like all our debates on Supply and on Ways and Means, is ultimately a matter of political will as much as, indeed more than, a debate on economic judgments.

My hon. Friends and I—I have reminded the House of this more than once over the past three and a half years—came here with a definite commitment, though we did not know when we undertook that commitment how precisely tailored to it would be the circumstances of the Parliament which was elected in October 1974. I trouble the Committee only with the two sentences which are material. We said that we would act in Parliament as an independent group without commitments to other parties and would seek to use our position in the way which seems most likely to secure the understanding and acceptance of Ulster's just demands by Parliament". I think the Chancellor will bear me out that in the past we have followed, and on the whole supported, the right hon. Gentleman's Budget judgments; but in the last resort our duty remains as we undertook it when we were elected.

I want to recognise that—perhaps partly due to our endeavours, but I believe much more to the sense of justice of the House—we have made progress in that respect. In the last 12 months the House almost unanimously decided to remove one of the principal injustices under which our constituents have laboured, namely, that they are not represented in this House as other parts of this Kingdom are represented in this House, in the Parliament of the United Kingdom of which we are an integral part. I believe that that decision was due to the ultimate sense of fairness and justice of the House of Commons, and it would be churlish on our part not to recognise it.

Nevertheless, we have not exhausted the implications of our mandate. That is not the only direct and palpable injustice under which our Province labours. Ulster has other just demands, which we are charged to have in mind.

Our constituents last week were able to read of the rest of this country electing members to serve on a variety of local authorities in all parts of Great Britain, who would then administer the law of the United Kingdom as far as possible in accordance with local circumstances and the wishes of the people who elected them, and would provide a system of administration, in matters local and in detail, which was responsive and responsible to the electors. All that does not exist in Northern Ireland, So the further injustice which it is our duty to seek to remedy is the fact that we in Ulster do not enjoy the benefit of democratic local government in the natural and ordinary sense of the term, in which it is taken for granted in the rest of the country.

We are not under the delusion that the correction of any such injustice can be achieved by a wave of the wand or overnight. In the last resort, it can only be the slow conviction of the House that an injustice has to be removed, by which that result will be achieved: and it will only be firmly achieved if that result is willed and understood by the House of Commons as a whole.

We would not, therefore, expect that more than a beginning, an earnest of intention to remove that injustice—perhaps the second most important which is felt by our constituents—were to be made; but the fact that we must face is that so far there has been no sign of even that. That being the case, we should not be discharging our duty to our constituents if, by supporting the Government in this essentially political, essentially confidence vote, we were to ignore our prime duty and cast our weight in the right hon. Gentleman's direction.

I have not sought to exaggerate the importance of what is, after all, only one-fortieth of the Kingdom. I have always, from the first moment I addressed those who would be my constituents, told them that in the end they could and must rely on the fairness and sense of justice of the House of Commons. But to that end we have the duty of using our position in the House. I do not know whether tonight it will turn out that our position is significant and effective or not. I suspect that the calculations of the Chief Whips on either side often differ substantially from those which we read in the newspapers. But, however that may turn out, we feel that our duty at this point and in these circumstances is clear: there will be no dereliction of economic or political responsibility when tonight we vote against Her Majesty's Government

6.0 p.m.

Dr. Bray

The right hon. Member for Down, South (Mr. Powell) is right in his judgment that in the long run the House of Commons can be relied upon to defend the just interests of all parts of the United Kingdom. Where the Committee and the country may differ from the judgment which he and his hon. Friends have reached is on the wisdom of using a debate which the right hon. Gentleman says is a matter of political import rather than economic import as the lever for bringing pressure on the Government.

Surely the right hon. Gentleman would accept that, were it simply a political issue, the matter on which to bring these views to the House would be rather a vote of confidence than the adjustment of 1 per cent. in the rate of income tax. However, the right hon. Gentleman has posed a problem for the Committee and particularly for the Government.

I therefore urge my right hon. Friend to consider carefully the balance of his statement today that he did not commit himself to any further action as a result of any change which might be made by the Committee in the rate of income tax. It is uncertain what the effect would be, whether on monetary matters or on economic or political matters.

I guess that the principal reaction in the country will be that the affairs of the country should not be left indefinitely to a House of Commons in which neither party has a commanding majority and that at the time of the General Election, whenever that may be—I see no reason for its being earlier than it would otherwise have been—the inevitable result of the words of the right hon. Member for Down, South will be to swing the country more decisively behind that single party which it decides should rule. That is the inevitable result of the diminishing influence of the minority parties.

Mr. John Pardoe (Cornwall, North)

Mr. Godman Irvine—

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

On a point of order, Mr. Godman Irvine. Have you yet had any request from a Northern Ireland Minister to make a statement to the House on the future of local government in Northern Ireland?

The Second Deputy Chairman

The hon. Gentleman knows that Ministers do not make such requests of the Chair and that if they were made the Chair would be in no position to deal with them.

Mr. Pardoe

The right hon. Member for Down, South (Mr. Powell) and the hon. Member for Motherwell and Wishaw (Dr. Bray) seem from their speeches to have grown used to the idea that the House of Commons should exercise no authority over the Government of the day. Their arguments appear to be in favour of Governments always being able to carry any darn fool thing they like to bring to the House. That is an extraordinary argument, particularly for the right hon. Member for Down, South, with his historical perspective of the development of Parliament, to advance. In its more glorious days, Parliament always exercised its authority over the Executive, particularly in taxation matters.

I do not believe that this debate is about Northern Ireland at all. I do not believe that it is a fundamental political choice that we are being asked to make. The debate is about taxation, and particularly the balance between taxes on spending anti taxes on income.

It seems to have been generally accepted in the Budget debates so far that income tax is too high. Some believe that it is too high at every level. I certainly do. Some believe that it is too high only at the top rates. Some—many in the Labour Party—believe that it is too high at the lower rates. But everyone, with one or two exceptions—notably the right hon. Members for Down, South and Battersea, North (Mr. Jay)—believes that income tax is too high.

Indeed, the right hon. and learned Member for Surrey, East (Sir G. Howe) said today, I thought helpfully, that he did not believe in simply going back to 1973: that he believed that that was not good enough and that we should move on from that position. I entirely agree.

I and my right hon. and hon. Friends start from a rather different position. We have come to the view that income tax in modem circumstances is generally a bad tax, certainly bad at its present levels and possibly bad at almost every level. The right hon. Member for Battersea, North said that income tax was progressive and refuted my arguments on Second Reading that that was no longer the case.

Of course, if one takes the whole effect of financial provisions—particularly the contributions that one can make, tax-free, to a pension fund and the relief on interest on a mortgage and all the other perks, for want of a better word, which those of us who have to pay higher rates can obtain—it is not true that people at the higher income levels are paying much more of their total gross income in tax than those on modest incomes.

It is that invention of a whole host of allowances and perks which has reduced the effect of income tax at the top level. My argument is that this is inevitable and that whenever the rates of any tax are no longer seen as reasonable by reasonable men and women, reasonable men and women, no matter how law-abiding, will seek ways around them—within the law if they can and without the law, some of them, if they must. That is inevitable and it has happened. It happened with smuggling against the Customs and Excise duties in Cornwall in the eighteenth and nineteenth centuries, and it is happening with income tax today. For that reason, we must make substantial deductions in income tax.

On Second Reading, the right hon. Member for Down, South made a more fundamental statement of his belief about the whole question of income tax. He said: I would venture on the contrary to say that income tax is the best of all taxes—that may only make it the best of evils—but that it has great advantages and some of the characteristics which an ideal tax ought to have. It is, for example, more neutral in its effect than any other form of raising revenue"—[Official Report, 27th April 1978; Vol. 948, c. 1171.] I simply do not accept that. Income tax in its present form is by no means neutral. It certainly is not neutral, for instance, between one form of saving and another. That is obvious, because it now pays handsomely to save through pension contributions but it does not pay to save outside an institutional method. That is one distortion—there are many others—which income tax at the present level has created.

I therefore disagree fundamentally with the right hon. Member for Down, South, and I have to admit to a personal predilection not just for reducing income tax substantially—that is the policy of my party—but for its abolition in the long term. There is one country—some Labour Members love this kind of thing, because they like to draw their analogies from certain sources—which has abolished income tax. Strangely enough, it is not a capitalist or free enterprise country: it is Romania. So those of us who are predilected against income tax are not making a capitalist or free enterprise argument. It can be made from both sides of the political fence.

Whether we are for abolition or for reduction, we are mostly agreed about the need to make substantial changes. The real question which the right hon. and learned Member for Surrey, East failed to answer today and on Second Reading is, how do we pay for the cuts?

When, in an intervention on Second Reading, I raised the Conservative Party's record when it was last in power, quoted the borrowing requirement levels at that time and suggested that that was how the Conservative Government had paid for their small reductions in income tax, simply by raising the borrowing requirement, the right hon. and learned Gentleman attacked me viciously—at least, he probably thought it was a vicious attack—and quoted some words of mine from a debate in 1973 in which I stated my approval of a more expansionary budgetary policy.

The whole point about the right hon. and learned Gentleman's reply is that he missed the point. The point is that cuts in income tax are incredibly difficult to make. They were promised by the Tories when they were in Opposition but they found when they were in Government that they were nothing like as easy to make. That was why I raised the spectre of the previous Conservative Government's level of borrowing, not because I necessarily thought it was an unreasonable level of borrowing—I shall come to that in a minute—but because the right hon. and learned Gentleman will find it excruciatingly difficult to make the cuts that he has now promised.

There is a variety of reasons why it will be so difficult. First, as the Chancellor demonstrated today, as the right hon. Member for Down, South demonstrated on Second Reading and as Mr. Anthony Harris demonstrated in the Financial Tunes on 4th May, the Conservative Party's arithmetic on public spending cuts as against the income tax cuts which they are trying to push through the House today simply do not add up. In this regard I will quote what Anthony Harris wrote—though not the same piece that the Chancellor quoted. Mr. Harris said this: Apart, however, from the practicalities of the matter—the National Enterprise Board's actual outlays, as opposed to its Budget provision, are in fact committed some way in advance—and noting only in passing that Sir Geoffrey appears to have got his figures wrong, the implications of this judgment are little less than terrifying. It is sad that the Conservative Party should be embarked on the first vestiges of tax reform—they are only the first vestiges—in the mistaken belief that it can somehow bring these about by instantaneous reductions in public spending in the very financial year in which it occurs to the Conservatives to make them.

I do not deny—I do not think that anyone in the House will deny; I am sure that the Chancellor will not deny—that it is possible to make cuts in public spending, but the whole lesson of the past is that it is deeply unsatisfactory to make them at the drop of a hat as the right hon. and learned Gentleman is trying to do. Already very substantial public expenditure cuts have been made in planned spending. That has caused inevitable distortion of public spending programmes and the public sector. That was necessary and inevitable, but I think that it would be very supid to think that we could find the money to make the reductions in income tax that both the right hon. and learned Gentleman and my hon. Friends and I regard as desirable by cutting public expenditure this year.

Mr. Tim Renton (Mid-Sussex)

Rather than merely quoting from Mr. Anthony Harris in the Financial Times, I wonder whether the hon. Gentleman has had the good sense to read the Hansard report of the debate on 10th April. That was when the order raising the NEB limit was actually passed against the vote from the Conservative Benches. If the hon. Gentleman has read that report, he will have seen that there was no indication by either the Secretary of State for Industry or his Minister of State in that debate that the £300 million for the NEB was already firmly committed forward, with the possible exception of funds for Rolls-Royce, and even that was not brought out. In that debate, there was no question that the NEB had to have the money because of commitments it had already made.

Mr. Pardoe

I have indeed read the report of that debate, because it is germane to the argument. It is true that no commitment was made that way, but no commitment was made the other way either. It did not seem to me that the argument in that debate pointed in the direction that somehow an instant cut could be made across the board in the NEB's allocation without inflicting any damage at all on what the NEB was doing.

6.15 p.m.

I understand that the hon. Gentleman and his hon. Friends do not like what the NEB is doing. They do not understand it, it does not accord with their prejudices and, therefore, they would like to make any cut, and the more damaging the cut the better. That would be true of the hon. Gentleman's position and it is certainly true of the position of some of his right hon. Friends. But it is not the position that we adopt We believe that the NEB has a useful function to perform and that to savage its expenditure plans at this state for less than 12 months ahead would be damaging and crazy. Indeed, as Anthony Harris indicated, it does not even make economic sense because this would not be an allocation of real resources, as the hon. Gentleman must be aware.

This afternoon, the right hon. and learned Gentleman talked about the borrowing requirement. That, obviously, is the second source one might go to for making cuts in income tax. He said that the borrowing requirement announced in the Budget was too high. How does he know that? It is rather like the question that the right hon. Member for Down, South fired at the Chancellor. We had some kind of answer from him today, though not perhaps a very adequate one.

It may be that we are all gazing into a crystal ball to decide at what level the borrowing requirement should be. But surely there must be some criteria that we adopt. I have not heard any from the right hon. and learned Gentleman. Is it something to do with a percentage of GDP—that at least would make some sense—or is it something to do with a full employment budget? That would make far more sense—if we had a full employment budget. Or is it to do with the belief that, if we push up the borrowing requirement above what the savings ratio and the non-bank public's propensity to lend will stand, we shall have to increase interest rates? But in the short term, and even in the medium term, surely interest rates are much more dependent on international rates today than on what we are doing with the borrowing requirement or planning to do with the borrowing requirement for 12 months ahead.

Therefore, it simply does not add up to say, as the right hon. and learned Gentleman said, that the borrowing requirement in the Budget was too high. Certainly I believe that we could have taken greater risk with the borrowing requirement had we known the level of earnings in the future, but we do not have such an incomes policy and it is not the right hon. and learned Gentleman's policy to introduce one.

Then we come to the possible other choice. That is increasing taxes on spending. I believe that that is the only way. Taxes on spending are the only reason why income tax is higher here than in our European competitor countries. It is not because we are higher taxed than they are. It is because we take less in taxes on spending and more in taxes on income.

Surely it is inevitable that sooner or later we shall have to harmonise our taxes to a considerable degree with countries in Europe—

Mr. Rooker


Mr. Pardoe

We shall obviously have to harmonise them with countries with which we have an arrangement for the free mobility of labour, because, if our taxes work against incentives for a particular type of employment in Britain, with the development of the Common Market and with increasing mobility of labour we shall find that people will want to move abroad. That will not be sensible, but it is already happening, and it is bound to increase in the future.

The right hon. and learned Gentleman raised the question of beer versus petrol versus tobacco or versus VAT. We believe that there is a very strong public health argument in favour of increasing taxes on alcohol and tobacco. That is a responsibility which the Chancellor has not shouldered this year because he believed that the arguments in regard to the RPI were greater than the arguments on public health.

However, the fact is that the public health argument must be accepted, that the huge degree of smoking and the very substantial increase in the consumption of alcoholic beverages—I do not speak now as a teetotaller by any manner of means, even though I come from Cornwall—have caused a substantial increase in crime, vandalism and many other troubles with which the police deal.

Are we not being very hypocritical? We are at the one time trying to find a solution to what the Conservatives call the law and order issue and what we prefer to call the rule of law and considering how we can increase facilities for the police, and at the same time we are reducing in real terms the cost of the consumption of alcohol which is causing some of these problems, though not all by any manner of means. Are we not hypocritical in arguing for preventive medicine—stopping people having to go to hospital—while at the same time, over the years, reducing the real cost of smoking? Not only have we reduced the real cost of smoking and of drinking, but we have reduced the percentage of tax in total consumer expenditure on these items.

I agree with the right hon. and learned Gentleman that VAT is a sensible tax. We should increase it. It certainly would be far better at 10 per cent., and I am still waiting to hear the right hon. and learned Gentleman say that he is prepared to go even higher than that, since we all know that that is the consequence of Conservative policies. In fact, VAT is a progressive tax, too. That is my answer to the right hon. Member for Battersea, North. To a large extent, it is a more progressive tax than income tax.

I come now to the question of the payroll tax, to which the right hon. and learned Gentleman referred. It is true that two years ago my right hon. and hon. Friends and I voted against the 2 per cent. surcharge on the payroll tax, but it was not then a quid pro quo for a reduction in income tax. It was simply a general increase in taxation, and there seems to be no argument for any increase in tax as such. There is an argument for increasing certain taxes on expenditure, and the payroll tax is a very wide-based tax, the widest-based tax on expenditure we have. There is an argument for using the payroll tax, I believe, as a quid pro quo for the reduction in taxes on income.

The effect on employment of an increase of 1½ per cent. would be absolutely marginal. It is impossible to estimate exactly what it would be, but we are, after all, dealing with employers who, but for the Government's guidelines, would almost certainly be increasing the earnings of their work force by about 20 per cent. to 25 per cent. instead of something between 12 per cent. and 14 per cent. [Laughter.] If that is not so, why has there been such a hullabaloo from employers about the Government's tough sanctions policy? Surely, it can only mean that they wish to go above the guidelines. If they do not wish to go above the guidelines, there is no need to protest against the guidelines as they now stand and are being enforced.

Certainly if we are to use the payroll tax as a major source of revenue, as it is used on the Continent, there is need to recast it. For instance, it would be sensible to exempt a band of income at the beginning. The first £500 or £1,000 of income per employee might well be exempted in an ideal payroll tax. The reason for that is that we have a shortage of skilled workers, who, one must assume, are paid well, and an abundance of unskilled workers. Therefore, if we are to rely on the payroll tax as an important revenue-raising device, which it is not yet in Britain, it would be sensible to cast it according to those needs.

We have heard from the right hon. and learned Gentleman that last year the Government issued threats about the beer tax as a consequence of our attitude to the petrol tax, and he said that he has been waiting for the Liberals to retreat this year as they did last year. The truth is, as the right hon. and learned Gentleman well knows, that we did not retreat last year. We got what we wanted. We got a reduction of 5p in the petrol tax, and had we left it to a vote in the Huose, since votes can be very uncertain, we probably would not have got it because it is highly likely that not all Conservative Members would have turned up to vote.

In any case, as I have already said—I hope that the right hon. and learned Gentleman will accept this—we actually prefer taxes on beer to taxes on petrol. Taxes on beer do not alter the incentive to go and find a job and be mobile in the search for employment. Taxes on petrol make a substantial difference in large parts of rural Britain between going to work and staying at home. One of the reasons why we are so concerned to reduce income tax is that it has a bad effect on the incentive to work, and an increase in the petrol tax would have an exactly similar effect.

But I am not at all surprised that the right hon. and learned Gentleman sought to escape from some of the criticism which has been levelled at him in the Press recently by attacking the Liberal Party. Only last week, the Daily Mirror said: The Budget row put the Tories on the spot. The Liberals forced their hand. As a party committed to tax-cutting they had to do something. They could not go higher. That would be too blatant. They could not match the Liberals' 2p. That would be too imitative. So they went halfway—to 1p. That is how the Conservative Party makes its policy, of course. We all know that. It does it on most issues, and particularly in those sectors where the right hon. and learned Gentleman has responsibility.

But we shall not be voting for 1p because we have decided that that is the best possible compromise between the various views in the Committee. It is not a major reform of the tax system. It is not even the beginning of the major reform that we need. But it is something. It is a step in changing the balance between taxes on income and taxes on expenditure.

It is surprising that the media and even some right hon. and hon. Members should be amazed at the daring of the House of Commons in seeking to knock one-thirty-fourth off the present standard rate of income tax. If the House of Commons has reached the point where it cannot change the Budget to the extent of one-thirty-fourth of the standard rate of income tax, we really have sold out to the Executive.

The Budget is not sacrosanct. There is nothing in the British constitution, unwritten as it may be, which says that Parliament has to hear what the Chancellor says and leave it all to him and God. We do not have to leave it to anybody. It is the job of the House of Commons, and this is where the decision must be made.

Mr. Rooker

I do not know whether the hon. Member for Cornwall, North (Mr. Pardoe) has ever been to Romania, but it is not exactly the country I should choose, notwithstanding its considerable problems, as showing the standard of living and quality of life with which the British people should be on a par. To give the example of Romania takes a bit of beating. If that is all the hon. Gentleman can come up with, he had better say far less.

Mr. Pardoe

I thought that the hon. Gentleman would like it as an example.

Mr. Rooker

It was just because of remarks of that kind that I thought I should put on record that we do not want this country equated with such places as Romania and their taxation systems. That is the sort of cheap snide remark we constantly get from the Opposition Benches—normally from the Tory Party, but now we are getting it from the Liberals as well.

As the right hon. Member for Down, South (Mr. Powell) said, this is a political debate. It has to be a political debate because of the qualification which he himself put on the point that he made a year ago. I accept that qualification, and he is entirely justified in putting it. Every Member has a right to air the grievances of his constituents, and if he needs to use the levels of legislation which does not directly affect his constituents he is quite in order in so doing. No criticism can be levelled at the Ulster Unionists on that score.

On the other side of the equation, however, it is right to draw the attention of the Committee and of the public outside to the fact that the people of Northern Ireland receive considerable benefits by way of subsidy from the rest of the popu- lation of the United Kingdom. There are considerable transfer payments going across the Irish Sea. I do not imagine that my right hon. and hon Friends will now say that we should cut the transfer payments. We are, I hope, not on that level of argument in considering the Finance Bill. But that point should be borne in mind. I understand that sums in excess of £480 million go in transfer payments to Northern Ireland.

I was disappointed to hear the Opposition Front Bench make a snide comment and attack on the new pension programme, the all-party programme which started in April. After 10 years of party bickering, we have now got a good pension scheme for everyone. It has secured common consent across the Floor; it will not be changed on any future change of Government, if that happens; and it is a system which everyone accepts must be paid for since pension payments do not come out of thin air.

It was known about 10 months ago that the charge on the national insurance stamp would have to rise. That was published in a national insurance leaflet as a possible example of the sort of payment which would have to be made.

For the Tory Party now to say, as it has been saying since the Budget, that the Government have put up the national insurance contribution so we shall now have to take it off income tax is sheer damned hypocrisy.

As I say, the pension programme is an all-party programme, and it is utterly dishonest to try to represent to people outside that the Government have just jacked up the national insurance contribution to pay for the National Health Service or because the pension scheme needs funding a bit. It has nothing to do with that. It has happened because of the new system which has been agreed in the past three years since we put the legislation through the House. For the right hon. and learned Member for Surrey, East (Sir G. Howe) to make the imputation that because the Government have done so the money must come off taxation is totally dishonest and irresponsible for a party who want to be the Government.

6.30 p.m.

I made this point on Second Reading. I stick to it. I said that it was not responsible to muck around with the Budget and I stand by it. The action that my hon. Friend the Member for Coventry, South-West (Mrs. Wise) and I took in Committee on the Finance Bill last year will not be repeated today. Hon. Members may look surprised, but I remind them that we were then working within the Chancellor's known tolerance of 2 per cent. We did not seek to extend that total. Our amendment did not seek to extend the amount of money that he said was available. He has learnt his lesson. Perhaps it is not a good idea for a Chancellor to announce that there is extra money on the table if certain things happen.

The situation today is totally different. This amendment would upset the Government's strategy. It would increase the amount of money that the Government would have to find to run the economy, unlike the case last year when we made our change. It is dishonest for the Opposition to make the argument the other way.

I want to bring the debate back to what the Committee must decide. The right hon. Member for Down, South said that this is a political debate. The right hon. and learned Member for Surrey, East said that the debate is of fundamental importance, a token. We are talking about 1p. That is what the debate is about. It is not a vote of confidence in the Government. It is not a constitutional issue in that sense. I accept that Budgets and Finance Bills can be changed, but we are talking about 1p.

Let us look at the way in which the Chancellor made his tax cuts. A total of £2,410 million was given back to the people in tax reliefs. The people earning under £90 a week—three-quarters of the working population—will receive about £1,035 million. The other quarter of the working population, getting above £90 a week, receive £1,375 million in tax handouts. That is slightly the wrong way round but it is better than last year's position, and for that reason I am prepared to go along with it.

The amendment would only really affect the people earning £8,500 a year—£7,000 a basic allowance plus the personal allowances totalling about £1,500, They are the people who would gain most. We are talking, therefore, about people on £170 a week. They would gain most from the amendment. There are not many skilled craftsmen in Birming ham on £170 a week, even with substantial overtime. Thus, the amendment would not affect them with maximum benefit. The people for whom the Opposition Front Bench are rooting are those earning £170 a week or more.

It could be claimed that the Opposition are going for the middle managers, those at the sharp end of manufacturing industry—the production directors, works managers and so on. But it happens that 1p off the standard rate will not make a great deal of difference to those people in the way they do their work because what is wrong with the situation is the miserable rates of pay that they get compared, for example, with the smart-alec accountants in industry, the marketing people, the legal people and others who are way above those at the productive end of industry. That is where the trouble lies. Industry will not pay properly. [Laughter.] I was not aware that I had said anything funny. If anything that I have said can be interpreted as a personal attack on my right hon. Friend the Chief Secretary to the Treasury, I withdraw it. Nothing is further from my mind. I was talking about the smart-alec accountants in industry. My right hon. Friend was an accountant outside industry. I was not referring to him. My argument is that the people at the sharp end of manufacturing industry do not get good rates of pay anyway and that 1p off the basic rate will not make the slightest difference to them in terms of working harder.

We also have to consider where the money would have to come from. My right hon. Friend the Chancellor of the Exchequer did not tell us, and I did not expect him to. There are reasons why we are always wary of adding to his burdens. We do not want to force him into looking for more money through public expenditure cuts. That is the difference between us and the Opposition, because public expenditure cuts are precisely what the Conservatives want. They want public expenditure cuts, despite the fact that the hon. Member for Horncastle (Mr. Tapsell), in a debate on taxation on 28th February, speaking from the Conservative Front Bench, said that the Tory Party used public expenditure as a means of alleviating high unemployment and that that was Tory Party policy. I am surprised that the hon. Gentleman is still on the Tory Front Bench.

The right hon. and learned Member for Surrey, East said today that we have to get back to the 1974 position, with public expenditure and taxation down to the levels that they were then. I give an example. In 1974, the nurses and the teachers, as well as others, had been screwed down under successive pay policies. That year, under the Labour Government, they legitimately received, with the full accord of the House, quite substantial increases in pay—about 30 per cent., and justifiably so. But the increases added to public expenditure. It was welcomed by the Opposition. They said that what we had done was only just in the light of the fact that these people had been screwed down so tightly by stages 1 and 2.

Are the Opposition now saying that we have to cut public expenditure and reduce proportionately the wages of nurses and teachers to what they were getting early in 1974? That would be one way to do it. The Tories will seek to do it, because they cannot be trusted to look after the low paid in the public sector. They will go for the disabled, the sick, for any section of society that is weak and cannot defend itself, because that is the easy way out. That is the way to slip through cuts in public expenditure without massive lobbies and problems in the House. It would be done carefully through the local authorities in a way that would not really be widely noticed. The Tories cannot be trusted and I hope that my right hon. Friend will not use such a policy instrument in order to recoup the extra money if the amendment is carried.

Mr. Ralph Howell (Norfolk, North)

Is the hon. Gentleman satisfied with the way the low paid are being treated under this Government?

Mr. Rooker

The simple answer is "No". But we are not debating the low paid. Last year the hon. Gentleman had a Friday motion on the low paid and the poverty trap. This amendment will not affect the low paid and the working poor. They will gain nothing out of it. But the hon. Gentleman will vote for it. The people who will gain maximum benefit from it are those on £170 a week or more.

The other alternative is to put up prices. That is what the Tories and Liberals want. We have heard examples from the Liberals of the sort of price increases they want. They will bear heaviest on the poorer sections of the population, whether the increases are in value added tax or on alcohol, or cigarettes or television licences. Whatever the instrument it will be deleterious to those who are on pensions, who are sick or disabled, all those who do not pay income tax. Some pensioners pay income tax, but the vast majority do not.

If the amendment is carried, the increase received by pensioners in November will be eaten into even further than it might otherwise have been because of the increase in value added tax or other price increases that the Tories and Liberals wish us to put on to offset the reduction in income tax proposed by the Amendment.

Mr. Pardoe

The hon. Member is distorting the argument. He must be aware that pensions and sickness benefit and all other welfare benefits are increased automatically by the agreement of all parties every November, in line with the rise in the retail price index. They are, therefore, guaranteed against these increases and the only argument is between those who believe that it is more efficient to deal with poverty and hardship by means of the welfare benefits and those who believe, as the hon. Member seems to, that it is better to do so through income tax.

Mr. Rooker

I do not believe that for a moment. There is only one increase a year in the pension allowance. The November increase has already been announced, in line with the Budget tax reliefs. The two things are the respective sides of the same equation. If we are now to put up prices, we ought to announce an increase in November over and above that which has already been announced. I do not see that happening. There is no way in which I can see the Government being able to do that.

The pensioners, the disabled, the weak generally, are at the mercy of the Tories and the Liberals today, as they always have been. The Tories and Liberals have always trodden over them. These categories will not be protected in the way the hon. Member for Cornwall, North suggests. As he knows, there is not the time to do it because the procedure for the changing of pension books is in process. What is more, it takes a long time to do, and anything that was announced now would delay the increase in pensions in November.

Mrs. Audrey Wise (Coventry, South-West)

Will my hon. Friend take into account the fact that the pensioners have, in any case, been promised increases which are higher than the increases in prices? They have been promised increases that will take account of changes in wages. That means that the hon. Member for Cornwall, North (Mr. Pardoe) is prepared to narrow the gap to remove some of the advantage which the Government are trying to give pensioners in increasing their standard of living.

Mr. Rooker

That is perfectly true. That message has to go outside to the millions of pensioners and the working poor in the country, who will not gain one iota from this proposal.

Last year the Finance Bill was changed during the course of its passage through the House. I should like to know whether the Opposition Front Bench or the Liberals have been approached by the income tax and Inland Revenue staff. I should like to know whether the strictures that were directed towards certain hon. Members last year will be directed towards the Opposition for what they are now planning. It is well known that last year the Inland Revenue Staff Federation wrote a very bitter letter—it was rightly upset at the time—about not being allowed more tax inspectors to deal with changes in the Budget, with the result that its members had to work massive overtime. The federation was upset about the changes made last year, changes which I and my hon. Friends were entitled to attempt to make.

The federation criticised hon. Members in a letter written to the Prime Minister in which it said: We recognise, anyway, that the crux of our trouble arose not from the Chancellor, but from the eccentricities of Members of Parliament at the Committee stage. I consider that to be a serious accusation Throughout the recess last year my hon. Friend the Member for Coventry, South- West and I entered into protracted correspondence with the general secretary of the Inland Revenue Staff Federation, Mr. Christopher. If his arguments and the arguments of the federation are to be consistent, he and the federation ought to have adopted the same procedure in respect of this amendment, having had foreknowledge of the change proposed. I hope that today there are letters in the "in" tray of the Leader of the Opposition and the right hon. and learned Member for Surrey, East from the federation complaining about possible changes in the Bill creating further work for an overburdened Inland Revenue staff.

If the official Opposition make a change in the Bill, they will not be eccentric. That is what I deeply resent. When it is the Front Benchers, the bosses of this place, those in the Establishment, there is no criticism from people outside. I should like to think that these words I have spoken will bring forth criticism of the type I have suggested, but somehow I believe that I have spoken in vain.

Mr. Robert Hughes (Aberdeen, North)

Might it possibly be that the reason for the apparent silence is not unconnected with the question of who will benefit under the Opposition amendment as compared with the proposals my hon. Friend made concerning last year's Budget?

Mr. Rooker

That is an important point. It is one that I would not have dared to make. The changes in last year's Budget which, we were told by Mr. Christopher, did not really make much difference—concerning increasing the allowance or knocking down the standard rate of tax—did make a difference. That is the point, and that was why we made the change—to improve tax reliefs for the low paid. Income tax inspectors are not among the low paid, as my hon. Friend the Member for Aberdeen, North (Mr. Hughes) has made clear. It is a point I would not have dared make. I hope that it will not be taken to heart too much by the Inland Revenue Staff Federation. At least I hope that it will have the wit, before the night is over, to get its representations away to the Tories and the Liberals.

6.45 p.m.

Mr. David Mitchell (Basingstoke)

The subject of the level of the rate of income tax is one which has troubled the House over many years. A relative of mine, a Member of Parliament for Newcastle upon Tyne, commenting on the Chancellor's Budget, said: The right hon. Gentleman admitted distinctly that if the present income tax was not improvable it was not endurable in its present shape, and that as it could not be improved it must be abolished, the only question being one of time. the House may be amused to note that the speaker was John Blackett, addressing this House on 25th April 1853. The years have rolled by but the discussion does not appear to have changed all that much.

What makes income tax unendurable in 1978 is its level. I wish to ask the Minister something about the deterioration which is taking place in some parts of the United Kingdom in the relationships between the Inland Revenue and the taxpayer. The background to the Budget and to the question of income tax seems to be directly related to the high level of unemployment, a level which, with minor fluctuations, looks as if it will be sustained for many years if we do not see substantial changes in policy.

I welcome the Governments' recognition that, in dealing with unemployment, small businesses, sole traders and the self-employed have a major role to play in the creation of new jobs. There is a cycle in the business community of this country whereby businesses start and then grow in much the same way as people. After a time they grow old and tired and their products get out of date. Their places should be taken by young, vigorous and thrusting businesses with new ideas and new products. The new firms which start with the new ideas and new products almost invariably start as sole traders and partnerships. They start as people working on their own who pay income tax on the money they retain in their own businesses to make the business grow.

The House would do well to ponder the effect on anyone seeking to build up a business who has to pay current levels of income tax, not only at the standard rate but at the higher rates, from the money he is trying to retain in his business to ensure its growth. I hope I carry my hon. Friends with me when I say that I do not believe that we can view this amendment in isolation. The level of income tax at the standard rate must be considered at the same time as the higher rate. The two, in terms of their effect on human endeavour, are inextricably linked.

We shall not get the birth of new businesses and the creation of more jobs which that can bring unless we change the whole tax climate so that people see it as being worth while to start up a business and to expand it over the years. The truth is that it is not only the standard rate which is at issue here.

People starting a business are aiming for the stars. They are aiming for success and to become, if they can, high taxpayers. That is the urge, that is the engine power, of the private enterprise system. People should be able to see those opportunities ahead. This amendment and the others which seek to reduce the higher rates of tax seem to me, therefore, to be inextricably and vitally linked together.

Outside the House, I find that people are amazed when it is explained to them that small businesses—sole traders and partnerships—have to pay income tax not only on the money they take out of the business but also on the money they retain in the business. We should do well to ponder on the very substantial pressures on any small firm which these days is seeking to retain the extra funds that it needs to keep pace with inflation before it even starts to grow. That is one area to which we ought to be giving consideration.

I have a practical point to put to the Financial Secretary to the Treasury. Increasingly, the complexity of the existing tax system as it applies to the sole trader is such that he very often does not know where he stands, and he is failing to get allowances that he might be able to claim if he were a more sophisticated business man.

I shall give one example. Most traders do not discover, until about two months after their year ends, how much profit they have made. The sophisticated, on the other hand, and the large computerised firms know exactly what their profits are. Such firms, if they are to secure first-year allowances on the purchase of equipment and things of that sort, will purchase that equipment before the end of the tax year. But a small business man will not know how much he could and should have spent.

I suggest to the Government, therefore, that they should allow sole traders and partnerships—I understand if it cannot be allowed to all traders—the opportunity of free depreciation—that is to say, the ability to job back into the previous year the tax offset against purchase of equipment in a future year. That would enable many of the less sophisticated to gain the same advantages as the sophisticated are able to get.

I want next to refer to the relationship between the taxpayer and the Revenue, because I am very worried about the loss of good will which is occurring at the present time. The new system of in-depth interrogation of every eighth firm seems to me to be becoming dangerous in a number of ways in terms of this human relationship. When people are interrogated, they tend to become frightened and perhaps to say silly things. Innocent people may break down and give stupid answers. If those stupid answeres are recorded and used as evidence against them later, they are in a very difficult position indeed.

Does the Minister know and approve of questions of the following kind being put to people? "How much do you spend in the pub?" "What do you drink?" "Does your wife drink?" "How much housekeeping do you give your wife?" "Who decorated your house, and how much did it cost?" "Do you play golf?" "Do you own your own golf clubs?" "What sort of camera do you have?" "How much have you and your wife spent in clothes in each of the past five years?"

Does the Minister know how much he and his wife have spent on clothes in each of the past five years? If not, would he become flustered under interrogation? The Minister might not become flustered, perhaps, because he is an experienced speaker and is used to thinking on his feet, but an ordinary, innocent, small business man could well become flustered, worried and upset in those circumstances. Does the Minister approve of that sort of questioning? Is he not worried that it might lead to a deterioration in the good will—which is important, I believe—between the taxpayer and the Inland Revenue?

Mr. Douglas Crawford (Perth and East Perthshire)

I am grateful to the Chair for grouping with Amendment No. 1 Amendment No. 2, which is in the names of my right hon. and hon. Friends and seeks to take 2p off the standard rate of income tax and not just 1p.

This is a very important debate. However, such is the nature of the United Kingdom as a unitary economic State that after I have sat down the debate will no doubt continue to be conducted—apart from any intervention by my hon. Friend the Member for Caernarvon (Mr. Wigley)—almost wholly and exclusively in the context of the United Kingdom.

It is significant that in the past few years, since publication of the Toothill Report in 1961 and the report on centralisation by the Scottish Council (Development and Industry) in 1969 attitudes in the House and in Whitehall in favour of the centralised economic management of the United Kingdom economy have increased and hardened and have latterly become fossilised.

The Chair's selection of the SNP amendment enables the Committee to discuss the question of income tax and income tax cuts in a Scottish context. The right hon. Member for Down, South (Mr. Powell) spoke politically for Northern Ireland. I think he made a fair point when he said that he was entitled to speak politically for Northern Ireland. My colleagues and I may—at present perforce—be Members of the United Kingdom Parliament, but neither they nor I—nor, indeed, the right hon. Member for Down, South—in tonight's debate speak exclusively or primarily for the United Kingdom. My colleagues and I speak primarily for Scotland, and it is in the Scottish context that we have tabled our own amendment.

It may or may not be possible in the United Kingdom context to have a 1p reduction in the standard rate of tax without significantly increasing the public sector borrowing requirement. Even the Chancellor of the Exchequer admitted that he could not give a definitive answer on that. From the point of view of this Bench, however, that is neither here nor there. From a Scottish point of view, the increase in PSBR which might be required in a Scottish context for a 1p reduction in the standard rate—about £40 million in Scottish terms, or double that for a 2p reduction—could be easily and readily financed. This ready financing of the PSBR in the Scottish context means that we shall also be in the happy position, in a purely Scottish context, of voting, when the time comes, on Amendment No. 3 in the names of my hon. Friends in Plaid Cymru, which seeks to take some people at least out of the poverty trap.

That is why I consider that it was irresponsible blackmail on the part of the Treasury at the weekend to indulge in some agitprop and to suggest that a 1p reduction in the standard rate might imply an increase in whisky duty or in employers' national insurance contributions. This shows the centralised thinking of the Treasury, and the threats are most certainly not valid in the context of the decentralised management of the economy which we in the SNP wish to see. We wish to see Scottish resources used for Scottish needs and not to pay for the profligacy of the House over many years.

Perhaps the Minister who is to sum up for the Government will recognise explicitly that the £90 million or so, which would be the cost in Scotland of 2p off the standard rate, would be pretty small in comparison with the Government's overall Budget strategy.

The case for a separate Scottish Budget has often been argued from this Bench. Decades of centralised economic management from Westminster and Whitehall have left us in Scotland with 190,000 unemployed and with a higher cost of living and a poorer infrastructure than those of the United Kingdom as a whole. At the same time, in Scotland especially, being rather further from the major markets of Europe and the world, we have to develop a different and more sophisticated and more technical type of industry.

I have with me a note from Michael Moran, who is chairman of Microwave and Electronic Systems Limited in Edinburgh and an executive of the Confederation of British Industry in Scotland. He states that we need to transfer the resources locked up in 'today's' industrial technologies into 'tomorrows' industrial technologies in which the developing countries do not possess the range of managerial and indigenous skills to support a broad industrial base. That is particularly relevant to the scenario in Scotland today.'

Mr. Tam Dalyell (West Lothian)

Michael Moran's company is in Linlithgow and Newbridge. Is the hon. Gentleman drawing the conclusion that Michael Moran is in favour of the break-up of the British economy?

Mr. Crawford

I do not see what that has to do with the present case. Mr. Moran's company is in Newbridge and Linlithgow rather than in Linlithgow and Newbridge. He only recently took over the factory in Linlithgow of Signetics. It is Newbridge and Linlithgow and not the other way round.

What Mr. Moran was actually saying was that in Scotland, even more than in other parts of the United Kingdom, we need to develop a more sophisticated type of technological industry. A colleague of his, Mr. Ron Lander, chairman of the CBI small industries committee in Scotland and deputy managing director of a company called Lander Alarm Company (Scotland) Ltd., said: In the past, Scots have been renowned for their ingenuity, creativity, thrift and hard work. If the shackles of Government restrictions can be removed and our people allowed to work freely, if realistic incentives can be restored and if the motivation to work hard and effectively can be revived then and only then will we begin to move along the path of economic recovery. The case for a separate Scottish Budget was argued by the SNP before oil appeared on the scene. The case for a separate Scottish Budget is all the more valid now that oil is coming ashore from Scottish waters. Oil makes the foundations of a separate Scottish Budget all the more valid and stronger, both in monetary terms and in terms of the macro-economic problems and potentials which will face a Scottish Government. That is why a Scotland with control over her own economic and financial resources will be able to sustain not just a 1p reduction but a 2p reduction in the standard rate of tax while at the same time stimulating industrial investment.

That is why the threat of a Westminster-based Chancellor of the Exchequer—to the effect that a 1p reduction in tax would have to be compensated in other ways—is totally groundless and baseless when seen in the Scottish context. It is in the Scottish context that I am speaking this evening. The sooner the House of Commons is persuaded of that fact, the better.

Mr. Malcolm Rifkind (Edinburgh, Pentlands)

As the hon. Gentleman is at present attacking and condemning the threats made by the Government, can he explain a threat made by himself? Does he recall that some weeks before the Budget he, on behalf of his party, presided over a Press conference and made about a dozen demands of the Chancellor? He said that his party would threaten to vote against the Finance Bill and the Budget if those demands were not met. As, so far as I am aware, not one of those demands was met, can the hon. Gentleman explain why he did not carry out that threat and vote against the Finance Bill?

7.0 p.m.

Mr. Crawford

We did not vote against the Budget or the Finance Bill because, along with many other Members of the House, we said that we would keep our powder dry and wait to see what happened. We threatened to vote against the Bill for the same reason as the Leader of the Opposition threatened to do so. We shall certainly vote for the 1p reduction. If we are successful, we shall seek to see what the Conservative Party will do with regard to the 2p reduction proposal.

I fully realise that to combine income tax cuts with the stimulation of industrial investment requires sophisticated fine tuning of the economy. I fully realise that if we have income tax cuts, even of a small nature, there is a tendency that indigenous industrial investment could be sacrificed to the introduction of imports. Nevertheless, I believe that in a Scottish context this fine tuning can be achieved. I quote as an example a country which the hon. Member for Edinburgh, Pentlands (Mr. Rifkind) has mentioned many times, namely, the Republic of Ireland. There, a marriage of tax incentives and fiscal stimulation to investment, primarily through the Industrial Development Authority, has now made the Republic of Ireland's economy the fastest growing economy in the Common Market.

We are also told that the Netherlands has made and Norway is making mistakes concerning their use of revenues from their own resources in the North Sea. I am not sure whether these stories are as a result of some United Kingdom-originated PR—or anti-PR—but, if it is the case that the Netherlands and Norway have made mistakes, the same is patently happening in the United Kingdom. The Government have refused to establish an oil fund through which moneys could be made available for the stimulation of industry in the United Kingdom as a whole and particularly in Scotland, as I and my party would like to see.

Even in my constituency one of the main oil routes, the A94, is being starved of money, even for repairs, at a time when the oil revenues would justify the building of a dual carriageway all the way from Perth to Aberdeen.

The question in the United Kingdom context may well be whether we can afford a 1p reduction in the standard rate of income tax without other forms of compensation and whether the United Kingdom can have its cake and eat it. But Scotland can have its cake and eat it in a self-governing situation. In that situation, the only question is to what extent priority should be given to tax cuts and the stimulation of industrial investment. Our only problem, and it is a happy one, is where the balance of advantage should lie.

That is why the SNP will support the amendment for a 1p cut in the standard rate. We feel that that is quite tenable in the Scottish context as well as in terms of economic logic. As I said earlier, a 1p cut would cost about £40 million in Scotland and a 2p cut would cost between £80 million and £90 million. If the 1p amendment is successful, the SNP will consider pressing its own amendment for a 2p reduction.

Conservative Members said earlier that they were in favour of tax cuts. They are in favour of public expenditure cuts in general but are against them in particular. It may be easy to be in favour of these in the abstract but not in the actual. Over the last two or three weeks, the Chancellor has been saying that a reduction of 1p in the standard rate would not wreck the Budget strategy whereas a 2p reduction would. Surely it would be in the interests of the Conservative Party, if it is seriously concerned about bringing down this Government—[HON. MEMBERS: "Hear, hear".]—I am glad to hear hon. Members on the Conservative Front Bench say "Hear, hear." If Conservative Members are serious, I look forward to their support on the 2p amendment, because in that way the Chancellor will either have to eat his hat or go to the country. In the light of the words of the right hon. and learned Member for Surrey, East (Sir G. Howe), it will be interesting to see how the Conservatives will vote. I fear that they will not support us, more's the pity.

The economic salvation of Scotland rests not with the centralised economic management of the House of Commons or the Treasury but with a Scottish Parliament with full economic, fiscal and financial powers of its own.

Mr. Dalyell

I should like to begin by asking a direct question of my right hon. Friend the Minister of State at the Treasury. He has just heard the hon. Member for Perth and East Perthshire (Mr. Crawford) say that if there is a decision to reduce the standard rate in Scotland this could be readily announced by the Treasury. Both my right hon. Friend the Minister of State and I know that this would create the very greatest of administrative difficulties. Indeed, I would guess that it would be impossible for the Treasury to do any such thing. However, I should like my right hon. Friend to spell out, either when winding up or subsequently, exactly what the difficulty would be of the Government announcing readily that there should be a reduction in the standard rate of tax in only part of the Kingdom. The Minister of State heard the argument. Some of us do not believe that such a thing could be done, let alone readily done.

Mr. Crawford

Would the hon. Gentleman also ask his right hon. Friend whether he can give a substantive reply to another point, in addition to the point that he has raised? The House, in its wisdom, saw fit to delete the pay policy clause from the Scotland Bill. At present the pay policy will operate in England and Wales but not, after devolution with regard to a Scottish Assembly. Does not that also pose difficulties of administration?

Mr. Dalyell

As I am sure my hon. Friend the Minister of State, Privy Council Office will agree, those difficulties are less of my making than of the hon. Gentleman's making, because he voted for the deletion of the clause whereas I did not. That question ought to be addressed to himself. However, it is an interesting and worthwhile question and perhaps the Minister of State would care to make a note of it.

The hon. Member for Perth and East Perthshire said that he spoke primarily for Scotland. There is a question to be asked of and answered by the hon. Member if he is speaking primarily for Scotland. Let us suppose that he could wave a very unrealistic magic wand and make some kind of reduction in the standard rate of income tax, whether it be 1p, 2p, 10p, 20p or 30p. Where would the money be found? Am I right in thinking that it all comes out of oil revenues which are hypothecated to the Scottish economy?

Mr. Crawford

The people of Scotland pay income tax and corporation tax. I was saying that the existence of Scottish oil meant that we could lessen the standard rate and finance the additional PSBR without any serious problem.

Mr. Robert Hughes


Mr. Kenneth Baker (St. Marylebone)

Is this Scottish Question Time? It is becoming very boring.

Mr. Dalyell

The hon. Member for Perth and East Perthshire talks of financing the PSBR without any serious problem. It seems to me that we are getting deeper and deeper into the mire of mumbo jumbo.

The hon. Member went on to accuse my right hon. and hon. Friend of irresponsible blackmail. I do not think that "blackmail" is a very nice word in any circumstances. However, people should be a little careful about what they say, because what my right hon. and hon. Friends were saying was quite true. If this amendment is carried, the money has to come from somewhere and my right hon. and hon. Friends are entitled to say that it may have to come in whisky duty or in an increased employers' contribution. Again I put the question: what effect would the passing of this amendment have, in the Treasury's view, on the Scottish economy, because both alternatives would be highly damaging?

I resented the remark of the hon. Member for Perth and East Perthshire that Scotland should not be paying for what he called the profligacy of the House and that we had a poorer infrastructure than any other part of the United Kingdom. That is not immediately obvious to those hon. Members who represent Merseyside, East Anglia and many other parts of the United Kingdom.

The hon. Member for St. Marylebone (Mr. Baker) and others are showing some impatience with this internecine northern argument. Let me remind them that for many years we never heard the absurdities which we have had today from the hon. Member for Perth and East Perthshire. However, every time that wild statements of that kind are made they should be nailed. An answer to them should be called for. They should be challenged. Therefore, I do not apologise for taking up the time of the Committee.

The fundamental assumption in the remarks of the hon. Member for Perth and East Perthshire was that the Scottish economy should be disentangled from the United Kingdom economy. What he is suggesting is quite meaningless unless this kind of disentangling takes place. I say to Treasury Ministers that, although it would be somewhat expensive in Civil Service time and take up the time of busy Treasury officials who in normal circumstances would be better employed on other tasks, in the light of this constant flow that we get from the SNP, it is time that some serious study was made of what precisely would be the objective results of disentangling the Scottish economy from the United Kingdom economy.

In case anyone thinks that I am critical simply of the Scottish nationalists, I must reserve one comment for the Conservative Front Bench. We heard this morning of a new pamphlet that was put forward on an early morning wireless programme by the hon. Member for Edinburgh, North (Mr. Fletcher). Does he really think that, when asked what a Conservative Government would do differently, it is sufficient to say "We are investing specifically in all our futures"?

Mr. Alexander Fletcher (Edinburgh, North)

The media said that. I did not.

7.15 p.m.

Mr. Dalyell

It came across as though the hon. Member had said it and that his solution to Scotland's economic problems was simply investing in all our futures. His paper had better be more specific than that.

Mr. Fletcher

When it came to investing, the question was how the Labour Party would invest, which clearly is shoring up jobs and making goods that no one wants to buy any more. I said that we were looking for investment decisions by business men in jobs which would last in industries which were profitable.

Mr. Dalyell

I am sure that we all look forward to reading the pamphlet. I shall not prolong this debate.

Mr. Ralph Howell

I shall be supporting Amendment No. 1, but I shall do so with no great enthusiasm.

We have before us suggestions to leave income tax at 34 per cent., to make a cut to 33 per cent., or to make a cut to 32 per cent. All these ideas are totally wrong and will get us nowhere. As my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said, any of them will leave us with a Socialist Budget. So I have little enthusiasm for this petty, penny debate, and I say to my right hon. and hon. Friends that when we get back into power we must do much better than this. If we think of having a starting rate of income tax of 30 per cent. or anywhere near it, we shall still be supporting a Socialist Budget.

I do not understand why we insist on having such high income tax rates. They do not make sense. All our competitors have much lower rates. The starting rates of our main competitors average about 15 per cent. Therefore, I commend to the Committee my amendment suggesting a cut to 15 per cent. This is not unreasonable or irresponsible. There is no reason why we should not have the same rates as the United States of America, where the starting rate is 14 per cent. with a top rate of 50 per cent., or France, where the starting rate is 7 per cent. with a top rate of 53 per cent., or Canada, 17 per cent. to 43 per cent., or Japan, 7 per cent. to 67 per cent., or Sweden. 2 per cent. to 58 per cent. Why do we have to go on discouraging ourselves and performing much worse than any of those other countries?

In my view, we have to consider very seriously slashing our income tax rate by half. Again the figures speak for themselves. The mean rate between top and bottom paid by all our competitors is 30 per cent., whereas ours is 59 per cent.

Of course, the money has to come from somewhere, and it would be irresponsible to suggest slashing income tax by £10 billion and reflating by £10 billion. I am suggesting that we shift £10 billion from direct to indirect taxation. I suggest that this would have an electrifying effect in the country and would meet with the approval of practically the whole community.

Where does the money come from in the States of our main competitors? The standard rate of value added tax in the rest of the EEC is 16 per cent. In Britain, it is 8 per cent. It would be a simple matter to co-ordinate and imitate what goes on in other countries. Then perhaps we would have a chance to perform better.

This Budget, with either 34 per cent. or 33 per cent.—it makes no difference—will do nothing to remedy the poverty trap. It will do nothing to remedy the idleness trap into which more and more people are falling. It will do nothing to alter the treadmill society which we have built up since the war. It is a crazy society.

Let me draw attention to the present position of the average family—a man with a wife and two children who earns £45 a week. He pays a total of £6 in tax and national insurance contributions. If he gets all the benefits to which he is entitled and if he lives in an average size house, he will receive £8 in benefits from the State. What sense can there be in taking £6 from him and giving him £8 out of another pocket? Again, if he earns £55 a week he will pay £10 in tax and national insurance and receive £4 from the State.

The time has come to overhaul completely our tax system. In fact, we should abandon the present taxation and welfare system and start again with something more logical whereby people pay tax because their income is above a certain level. If their income is within an intermediate band they should neither pay tax nor receive benefit and if their income is below a certain level they should receive benefit from the State.

We are in a totally crazy situation. The time has come to listen to views of the ordinary people who are thoroughly irritated and demoralised by the system that has operated for so long. The key to changing the system is to cut income tax, adjust other taxation to take care of the necessary expenditure, and gradually cut out the massive bureaucracy that is crippling the country.

Mrs. Wise

The hon. Member for Norfolk, North (Mr. Howell) talks about paying tax as if this only applied to income tax. He speaks as if indirect taxation does not mean paying tax. He thinks that income tax comes out of one's pocket while taxes on spending are paid by the gnomes and the elves. He seems to think that the only real payment of taxation is by way of income tax and that taxes on spending are invisible, do not hurt anybody and have no consequences. Nothing could be further from the truth.

The hon. Member purports to be concerned about the low paid. But the low paid would object, and rightly so, to the increased prices that they would have to pay in the shops if the hon. Member for Norfolk, North and others had their way and there were steep increases in indirect taxation. It is extraordinary that he should take such an interest in the welfare of the lower-paid, and yet want to put up the prices of things that they buy in shops. I am aware that some things are exempted from VAT—food and children's clothing, for example. But the fact remains that there are many other items of normal household and personal usage which are subject to indirect taxation, the prices of which would increase steeply if the hon. Member had his way.

I think that the amendments are a fraudulent attempt to mislead the low paid. Hon. Members opposite think that if low-paid workers do not see a figure on their wages slip they will not believe that taxation is happening. But people have more understanding of the situation than that and we should not go along with such an argument.

The prime characteristic of the amendments before us is that they will give the greatest concession—they will mean most in money terms—to those people at the top of the standard rate band. That means that a married man on £8,500 a year would gain about £62 a year by a 1p cut in the standard rate of tax. A married man on £3,500 would gain only £12 a year from the cut. In other words, Opposition Members want to give the man on £8,500 a year an extra £62, but they want to give the man on £3,500 a year only an extra £12. Therefore, one gets £50 more a year if one is already much better off.

It is astonishing that the hon. Member for Perth and East Perthshire (Mr. Crawford) should say that his proposal to reduce the standard rate by 2p should be taken in the Scottish context. I can only assume that he is trying to tell the Committee in a roundabout way that Scotland has suddenly become the highest-earning area of the United Kingdom. He wants to give an extra £124 a year to the man on £8,500, but only £24 to the man on £3,500. It is extraordinary for him to say that this is particularly suited to the Scottish context.

I hope that other hon. Members who sit for Scottish constituencies will take up this point. I know that Scotland has overtaken the West Midlands in earning capacity, but I was not aware that the gap was quite to large. I was not aware that most people in Scotland were earning about £8,000. I think that the hon. Member for Perth and East Perthshire was getting a little mixed up. When he was talking about the need for Scotland to have a more sophisticated type of industry he got himself into an argument that he was not quite following, and he tried to confuse the House and blind us to the fact that, when all is said and done, his amendment means that those who have incomes at the top of the standard rate band are the ones he is trying to look after.

That is the effect of all the Opposition amendments. On the other hand, if someone is actually just emerging from the family income supplement level, that person will receive nothing at all from the amendment. Opposition Members say they are concerned about the poverty trap, yet they are overlooking the fact that this group of people will receive nothing at all.

The FIS entitlement goes up to £43.80 for a family with one child aged 13. That family may well be a single parent family. Most women who are working earn about £40 a week, so a single parent family where the parent is a woman in full-time work, who qualities for FIS, and who is struggling to bring up a 13-year-old child on her own—assuming that she is getting the normal wage for a woman—will receive not one penny piece in a whole year from the Opposition amendments. That is the test that we should apply.

I notice that the suggestions which are made about the way in which the money could be raised to pay for the cut in the standard rate involve higher prices or a higher tax on employment. It is very surprising that the Liberals keep returning to the statement that a higher payroll tax would be advantageous. At the same time, they are chiding the Chancellor for not bringing forward a full employment Budget.

The Liberals should realise that a higher payroll tax would be directly contrary to a full employment Budget. It would mean either that fewer people were taken on in employment or that the higher payroll tax would be passed on in higher prices. Of course, the Liberals do not care about higher prices. They think that pensioners are protected against them. Therefore, they make the extraordinary suggestion that we should have a higher payroll tax.

7.30 p.m.

Those who want public expenditure cuts should consider that the difference between such cuts and cuts in taxation lies in one simple fact, namely, that public expenditure cuts always bear more hardly on the lower paid. They always bear more hardly on the unfortunate or disadvantaged in our society whereas cuts in taxation, especially those that are proposed in the amendment, tend to favour those on high incomes. They have exactly the opposite effect on the standard of living of the rich as against the poor. That is why Opposition Members prefer public expenditure cuts and are trying to get their tax concessions paid for in that way.

My right hon. Friend the Chancellor of the Exchequer deserves defending for his Finance Bill. I and many of my hon. Friends make constant suggestions to the Chancellor and the Cabinet about changes in economic strategy that would be advantageous for the country and more in line with our election manifesto. However, it must be said that this time, in introducing the Finance Bill, my right hon. Friend chose to listen to the voice of the Labour movement rather than that of the Opposition. That is why the Opposition are so furious about the pattern of tax cuts. That is why they are seeking to rescue their friends and gain more money to go into the pockets of the best off.

I am glad that this year my right hon. Friend has favoured the low paid. It should be said that the situation last year was a disgrace. There was the disgraceful state of affairs that a quarter of the population was due to get two-thirds of last year's tax cuts, leaving only one-third for the remaining three-quarters. It is to my right hon. Friend's credit, or the credit of whoever is responsible for the decision, that that is not so this year. The Labour movement has made great gains at the Treasury this year, and that must be recognised so as to give the movement heart and encouragement to continue fighting for all the other improvements in social, economic and industrial policy that we need.

I am sure that all my right hon. and hon. Friends will vote against the amendments with great joy. They recognise that the amendments are tabled because this year in the Finance Bill the Chancellor did not do the job of the Opposition. This year the Chancellor sought with his tax cuts to meet the aspirations of the Labour movement rather more successfully than hitherto. I am pleased to defend these arrangements against the Opposition's onslaught.

Mr. William Clark (Croydon, South)

The hon. Member for Coventry, South-West (Mrs. Wise) says that the Chancellor of the Exchequer needs defending. I believe that the right hon. Gentleman needs a great deal of help. He has it wrong again. It is all very well for the hon. Lady and other Labour Members to talk about tax handouts and the rich getting this, that and the other while the poor do not. We must remember that it is the £7,000-a-year man or the £8,000-a-year women who will receive the £50 extra reduction, and they will find it infinitesimal.

I am sure that most thinking people will agree that we are suffering from the disincentive effect of taxation. We are not necessarily the most over-taxed nation, but we suffer from the incidence of taxa- tion. If direct taxation is acting as a disincentive to the wealth creator, surely it is much better to get the pendulum swinging a little more to taxing spending rather than earnings.

I was interested, as I am sure were many others, when the right hon. Member for Battersea, North (Mr. Jay) said that he could not go along with the suggestion of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) that VAT should be increased. He said that he could not agree to a massive shift from direct to indirect taxation. That massive shift is about £300 million. The one amendment would cost, if it were to be paid on VAT, about one-quarter of 1 per cent. or one-half of 1 per cent. on the RPI. That is not a massive shift.

The right hon. Gentleman was rathe illogical when he said that, while he would not like a massive shift from direct taxation to indirect taxation, he would favour alcohol duty as well as cigarette duty being increased. I cannot see the difference between VAT as an indirect tax and tobacco or alcohol duty. I agree that that was a forerunner for bringing in an EEC argument. I congratulate the right hon. Gentleman on his ingenuity.

The hon. Member for Cornwall, North (Mr. Pardoe) has various things to say. It would be totally diastrous for the economy if there were any suggestion that a payroll tax should be introduced. The small employer especially—my hon. Friend the Member for Basingstoke (Mr. Mitchell) brought out this point vividly—is suffering great hardship. I accept that this does not come within the purview of the Bill, but one of the things that the small employer is suffering is the Employment Protection Act. A payroll tax would have a detrimental effect on employment prospects.

The Chancellor blames everything on everybody else. He says occasionally "Now I have it right." The only time that he appeared to have it right was when he was told by the IMF to get it right. He did not volunteer to get things right himself.

There is absolute defeatism on the Treasury Bench. We see public expenditure at about £67,000 million a year, yet it is said that it is impossible in one year to cut that amount by about £300 million. That is something that we want to examine as a country and as a House of Commons. If a Chancellor, with his so-called Budget strategy, says that, having formed his strategy it cannot be altered, there is something wrong with the system.

The Chancellor was kind enough to give us a pseudo-lecture on economics. He was reading, no doubt, from the speech made in Mexico recently. He said that if the amendment were passed, at a cost of about £300 million, that sum would go into the consumer market in the autumn and would increase consumer demand. He said that, with industry being stretched, that would probably be a catastrophe for the economy. If £300 million were pumped into the economy—let us say in October—would that really cause such a catastrophe? What would happen when the tax cuts which have already been made got through the pipeline and into the market? If £300 million will upset the economy when it is probably about 30 per cent. or 35 per cent. slack, where is the Budget strategy when £2,000 million can go into the economy in this fiscal year and not also upset the economy?

The Chancellor has not made a very good defence against the amendment. Reducing the 34p rate to 33p is simply a token. One accepts that. I am a great believer in the wealth creator in this country. He has had a raw deal over the past few years. Consequently, there should be more emphasis on cutting the higher rates of taxation and on the disincentive effect.

It is all very well for the hon. Member for Cornwall, North to say that with his payroll tax employers would be quite happy to pay another 1½ per cent. or 2 per cent. He ought to talk to some employers. He said that employers wanted to pay their employees another 20 per cent. or 25 per cent. and that it was only the Government's guidelines that prevented them. I do not believe that. Anybody in business must agree with me.

The reduction of 1p is a step in the right direction. Nobody is suggesting that it is a panacea for all our economic ills. What is wrong with the Government's tax policy is that it has got to the stage where people are not prepared to work because the incidence of taxation on the marginal rates is far too high. A reduction of 1p will do something. If the hon. Member for Coventry, South-West wants to do something radical for the lower income groups, she should convince the Chancellor of the Exchequer to pick up the tax credit system thought up by the Conservative Party before we went out of office.

I shall happily support the amendment. My only regret is that, because of economic circumstances, it has not been possible to make the cut even greater and to make the cut at the top rate.

Mr. Robert Hughes

I had not intended to take part in the debate until I heard the speech of the hon. Member for Perth and East Perthshire (Mr. Crawford). I make no apology for referring to his speech in his absence. He knows by now that he cannot get away with making that sort of speech without its being replied to. It was, in the main, a speech in which he used some of the same tired old cliches that we have heard on many occasions. It showed that he has learnt nothing since he was economic adviser to the Scottish Tory Party. That says a lot about the disarray of the Tory Party as regards its electoral prospects. It also illustrates why the electoral fortunes of the Scottish National Party are in decline.

If the speech had contained only the same old, tired cliches, it would have not been worth mentioning, but occasionally when the hon. Member for Perth and East Perthshire opens his mouth he puts his foot in it and gives us an insight into how the mind of the Scottish National Party works. As someone who claims to represent a party that speaks for Scotland and Scottish people, he made the extraordinary statement that the Scottish people could have their cake and eat it as well, though this might not apply to the rest of the country.

That is a totally dishonest statement and is misleading to the Scottish people. The sooner we end such claptrap and accept the economic facts of life, the better will we in Scotland understand the problems facing us and how to resolve our economic difficulties.

It is no use pretending that the Scottish economy can be divorced from the economy of the United Kingdom, that everything in the garden is lovely, that the oil will pay for everything, no one will have to work, there will be no sacrifices to make, no one will need to be concerned about where the money comes from and, no matter what happens, we shall have no worries for the future. That is an extraordinary statement for any Member of Parliament to make. It is disgraceful that the hon. Member should try to fool the Scottish people in that way.

7.45 p.m.

In another extraordinary intervention, the hon. Gentleman said that there should be a reduction of only 1p for the United Kingdom as a whole but that Scotland should be treated separately with a reduction of 2p in the standard rate. That shows contempt for working people in other parts of the United Kingdom who are in need of tax reliefs. All of us would like to see the tax burden reduced in the right quarters. The hon. Gentleman argued that tax relief would do some good to some people, but he showed terrible contempt for the English and Welsh—and a colleague from Plaid Cmyru was sitting beside him when he said it. According to the hon. Member for Perth and East Perthshire, Wales can have a reduction of 1p in the pound but Scotland has to be treated separately.

Mr. Dafydd Wigley (Caernarvon)

The hon. Gentleman will surely realise that the hon. Member for Perth and East Perthshire (Mr Crawford) is driven to looking for a policy of self-help because of the patent failure of the Government to solve the problems of Scotland—just as they have failed to solve the problems of Wales.

Mr. Hughes

That is not the case. We can examine that matter later. I am astonished that the hon. Member for Caernarvon (Mr. Wigley) should defend his colleague from the Scottish National Party, because the SNP has nothing in common with Plaid Cymru. It always upsets me when I see at the annual conference of Plaid Cmyru Members of the SNP swearing eternal Celtic brotherhood in the fight against the yoke of English imperialism and saying "Watch it, it is Scotland's oil". No Welshman will get a halfpenny worth of it, yet they pretend to be brother nationalists. I see that they are to have a European nationalist federation. What nonsense!

If it is suggested that the Scottish economy is to be treated separately from England and Wales, we should consider the public expenditure that is being put into Scotland to solve its problems, which I admit exist and have to be eradicated.

I turn to the identifiable public expenditure per head by programme and country. The 1976–77 figures for trade, industry and employment are £30 per head in England, £65 in Wales and £85 in Scotland. The figures for housing are £87 for England, £113 for Scotland and £77 for Wales. For education and libraries, science and the arts, the figures are £176 in Scotland, £149 in England and £152 in Wales. In health and personal social services, in Scotland the figure is £155, in England it is £129 and in Wales £131. The average figure for all the total identifiable public expenditure is £948 in Scotland, £754 in England and £875 in Wales.

What would the hon. Member for Perth and East Perthshire say if the Chancellor of the Exchequer were to say "We are beginning to cut Scotland loose economically, but you cannot have your cake and eat it. If you want special tax rates, you will receive less from the general Exchequer towards the substantial problems of Scotland"? The SNP would be the first to scream from the roof tops and demand deputations to the Prime Minister, the Chancellor of the Exchequer, the Secretary of State for Scotland and so on.

The Government are doing a great deal to try to resolve the problems of Scotland. I do not believe that even the SNP is naive or gullible enough to believe its own propaganda. The Scottish nationalists know very well that the problems arising in Scotland arise primarily because of the general economic nature of the country. Many of the slums of Scotland were built by Scottish landlords. The depressed wages paid in Scotland are paid by Scottish industrialists. Scottish industrialists are no better or worse than industrialists anywhere else. They are all part of the same breed. If they can get away with low wages, they will try hard to do so.

I say to the SNP Members that they cannot have their cake and eat it. They must look at each side of the equation, at what we are expecting from Scotland and at what goes into Scotland.

The Opposition cannot have their cake and eat it either. On the one hand, they are saying that the Government must try to resolve economic problems in underdeveloped parts of the country, to try to stimulate the economy, but on the other hand, they are arguing that extra tax relief can be paid for by cutting public expenditure and they have actually started by reducing the amount of industrial incentives made available to areas in distress.

The Opposition talk of public expenditure as though somehow they can cut only those parts of it of which they do not approve. Do they approve of the expected announcements about increases in the pay of doctors? Do they approve of the increase in pay which is to be made available to university lecturers? Do they approve of increases in public service wages for those sections of the community with which they claim to have some affinity? If they approve of these—and of course they do—they must accept the responsibility for seeing that that money is raised somewhere and ensuring that the burden is not simply passed on to some other section of the community.

It is becoming very fashionable to suggest cutting direct taxation and raising the money through indirect taxation. That is the massive shift that the Opposition want. But the difference is that, if that is done, one does not notice to the same extent how much taxation is increasing. I wonder whether hon. Members have forgotten the big debates that we used to have about purchase tax. When it was increased, there was always a howl that prices would be put up. Purchase tax was seen as regressive and inflationary. Now the name has been changed and the tax is called VAT the same people pretend that things are now different. If there is a tax on goods and services, that is inflationary and it hits people on the poverty line much harder than those elsewhere.

To say that giving such tax reliefs provides a stimulus to the economy is to fly in the face of the facts. We do not have time to go into this in fine detail tonight, but hon. Members might recall that the last time there was a major shift from direct to indirect taxation, when money was put into people's pockets to "stimulate the economy", it stimulated only a speculative property boom. There are still buildings in London empty today which were built with that kind of stimulus. The stimulus produced nothing in terms of manufacturing investment.

In some senses we are fencing with the real issues of the economy. They are not whether one cuts 1p, 2p or 3p off the standard rate but how the Government are to take control of the economy. Too often we find that the Treasury's estimates are miles out of date. By the time that the Treasury takes the kind of action it should have taken originally, events have overtaken it completely. The recent changes in the minimum lending rate have shown that even at the time of the Budget my right hon. Friend the Chancellor had not got that part right. He has bun forced in the meantime to take corrective action.

The trouble is that the Treasury does not have the kind of control required by the sort of fine tuning that some people demand. We do not have the control necessary to ensure that a stimulus in the economy and to industrial investment is carried through quickly and under the direction of the Government. We do not have the kind of control we should have in a Socialist economy. If the Conservatives pretend that we have a Socialist economy with Socialist control, it shows that they are more concerned with propaganda than with the reality of events.

I shall oppose the proposed reductions in income tax if they are voted on tonight. If there is room in the economy, if the Chancellor has a little kitty set aside for changes in the Budget, he should be directing it at the bottom end of the scale, perhaps, if he must, concentrating on the special interest groups such as the blind who lobbied us here last week about their problems. It would be far better to direct the money in one particular way. If we cannot do that in terms of investment, let us turn to the special interest groups. It is a fiction to suggest that a 1p income tax cut will ease the burden. Such a cut would benefit only those at the top end of the scale. The sooner the patent dishonesty of Opposition Members is exposed, the better.

Mr. Baker

The hon. Member for Aberdeen, North (Mr. Hughes) made a political speech, and I have no quarrel with that, because the significance of this debate is essentially political. It is the political circumstances and consequences of this debate that are important. Both the Chancellor and the right hon. Member for Down, South (Mr. Powell) said as much. When the details of the debate are forgotten, as they will be quite quickly, I believe that the debate will be remembered for the speech by the right hon. Member for Down, South. It was most interesting and politically significant. He decided, to use that historic phrase in Ireland's affairs, to play the Orange card. In effect, he said that the support of his party, the Ulster Unionists, would depend upon the measures taken by the Government, not in the context of the Finance Bill, but in terms of other measures to redress what he believed to be injustices in Ulster's internal affairs. That was a significant statement.

The right hon. Gentleman is a great believer in the market economy. Even so, I had not expected to see such an open demonstration of the principle of barter across the Floor. However, since the right hon. Gentleman is also an historian of Northern Ireland affairs, he will know that the history of the House was dominated from 1870 to 1914 by the Irish interests. I hope that we are not reentering that phase again. The right hon. Gentleman would not have said it quite so inelegantly, but in effect the United Ulster Unionists votes are up for grabs.

I dare say that the Chancellor and the Prime Minister have taken notice, because although there will not be a statement by 10 o'clock tonight about the internal government of Northern Ireland there are six weeks to the Report stage, and I have no doubt that the message will be absorbed on the Treasury Bench.

I cannot help making one observation on this, which is that those of us who believe in a system of electoral reform and change are criticised for saying that when these things happen there will be deals behind the Speaker's Chair. The only difference between that and what has happened is that the deals today are open and blatant on the Floor—

Mr. James Molyneaux (Antrim, South)

What is wrong with that?

Mr. Baker

There is nothing wrong with that, but it is politically significant that the right hon. Gentleman said it openly. It has cleared the political air. The hon. Member for Cornwall, North (Mr. Pardoe), significantly, did not refer to the speech by the right hon. Member for Down, South. Perhaps that was because he felt that the Liberal Party was being upstaged. The Scottish nationalists were modest. We await the demands of the Welsh nationalist upon the Government. After all, that was how the eighteenth century House of Commons survived. The day of the vote jobber is back. That is the strange Parliament in which we now work.

The debate is significant politically in the widest sense, as the Chancellor said. He tried to answer the question put to him earlier about the difference between an increase in the PSBR of £2 billion or £2.5 billion. His reply was most unconvincing. He tried to persuade the Committee that if the amendment were carried tonight there would be grave economic consequences. His arguments did not carry much conviction because ultimately that is a personal and political judgment of the Chancellor of the Exchequer.

None of us on the Opposition Benches has a great deal of confidence in either the personal or political judgment of the present incumbent of the Treasury. He said that one of the consequences of the cut would be that about the autumn there would have to be substantial tax repayments amounting at the most to perhaps £100 million or £150 million. Such was the extent of this largesse that imports could be sucked in and everyone would drop what they were doing and start to buy Swedish glass, Japanese cars and Italian fashions. Everyone would rush out to buy imported goods. That will not happen. It is a gross exaggeration and the right hon. Gentleman weakens his case by saying that it will.

A much more damaging effect than our proposed reduction of the income tax rate by 1p will be the reaction tomorrow to the Chancellor's speech, because I suspect that it will be received badly by the markets. The Chancellor said that, faced with an increase in the PSBR of £370 million or £340 million this year, we could do various things. He did not say "We were going to do certain things". He used the word "could", which will cause increasing uncertainty—he "could" increase stamp duty, he "could" increase employer's contribution or, he "could" increase company taxation. How will that be received by the markets tomorrow? It is a display of all the possible options open to the Chancellor with no indication of which he would choose, or indeed whether he would choose any of them, or a combination of them. I believe that the Chancellor, by delivering that sort of speech has done grave damage to the confidence that will be shown in the markets tomorrow.

8.0 p.m.

What about the political consequences, too? There has been a great deal of comment in the newspapers in the last few days of the possible political consequences of a Government defeat tonight. We heard from the hon. Member for Cornwall, North, a few days ago that the Liberal Party, boldly and fearlessly would be prepared to precipitate a General Election by defeating the Government. The Chancellor said the same only about a week ago. The hon. Gentleman and the right hon. Gentleman are the Tweedledum and Tweedledee of British politics. They decided to have a battle, but, just like Tweedledum and Tweedledee, they will fight only from 4 p.m. until dinner time. Then they will pack up and go away. It does not require very much political percipience to appreciate that, despite the consequences of tonight's vote, there will not be an electoral battle. As Alice said, one of the most serious things that can happen in a battle is that one can have one's head cut off. If that is the prospect that faces either the Liberal Party or the Labour Party, there will not be a battle. Therefore, I do not believe that the political consequences of the vote tonight will precipitate an early General Election.

I believe that the political significance of the right hon. Gentleman's speech underlies that. I believe that the Committee will be well advised in the next few hours to appreciate that it will not be a cataclysmic event if the Government are defeated. The Labour Benches can face the vote tonight with less anxiety, and our side with less hope.

Mr. Ridley

I must confess that I had some doubts about putting my name to this amendment and in the wisdom or otherwise of supporting it in the Division Lobby, although I must equally confess that many of those doubts have been dispelled by the comments made in this debate.

The first of my doubts arose out of a mean and churlish dislike of imagining the hon. Member for Cornwall, North (Mr. Pardoe) parading round the country saying that he had achieved a cut of 1p in income tax. Equally, I find it slightly unfortunate that the hon. Member for Coventry, South-West (Mrs. Wise) and her hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) talked about the cut which they had achieved in income tax allowances last year. I always thought that it was the majority of those who voted in opposition who achieved these things. They are the jockey rather than the horse. But it would be wrong to worry too much now about the Liberals. I thought, as indeed did the electorate, that the Liberals had a great grievance. They received 6 million votes and won only 13 seats, but it looks to me as though the electorate has found the answer to that, and that grievance will be redressed by the electorate in no uncertain fashion next time.

My next worry arose over the public sector borrowing requirement, which I believe is already much too high. In my own budget I did not seek to increase it at all from the £6,000 million odd which it would have been if there had been no tax reductions. This must be a matter for judgment, but I do not believe it is right that it should be increased by any more than it is at present.

That brings me to the difficulty in which hon. Members are placed because we are not able to move amendments and to vote to increase taxes. When I ponder on this, I realise that this has been accepted ever since I have had the privilege of being a Member of Parliament. It is one of the immutable laws of the Houses of Parliament that this sovereign Parliament cannot even think about increasing taxes.

I wonder how this arose? Was there at some time a Parliament elected which was so keen to increase taxes that the Government of the day had to pass Standing Orders to the effect that they could not increase taxes? Clearly, in present circumstances, and with the present likely membership of this place, the right rule would be that we could not reduce taxes but only increase them. That would make much more sense in the present economic climate, and if that were the system we would not have a borrowing requirement of £8,500 million.

I have tabled an Early-Day Motion on this matter. I do not know whether it is in order to make a little advertising plug here, but it would have the effect of allowing hon. Members to vote for increased taxes. I refer to Early-Day Motion No. 405 which, I am told, is technically correct. I shall not bother to read it out, but if we could get it through it would redress the difficulty that we suffer in not being able to increase taxes.

I believe that it was wrong, and almost immoral, of the Chancellor this afternoon to chide my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and the Conservative Benches with being irresponsible, in that we were apparently seeking to put up the borrowing requirement, when he knew, as well as the Committee, that until my motion is adopted we cannot put up taxes. Therefore, I believe that it is wrong for the Government to accuse us of irresponsibility because they know full well that if there was a chance for us to put up taxes or to cut spending by a vote we would do so. I make a pledge to the Financial Secretary that if he tables a motion to compensate for this amount of tax reduction by increasing an indirect tax, I shall vote with him. I pledge my own personal support now because I believe that it should be done. It seems to me to follow automatically that if the Government cannot get their way in the vote tonight they must be prepared to take the proper action by increasing other taxes.

My next reason for being hesitant about this amendment is that its effect is so small. Let me refer to the amount of 1p off the income tax—whether it be 1p for England and 2p for Scotland, as has been suggested. The little debate that took place between the hon. Member who represents the Scottish National Party, the hon. Member for Perth and East Perthshire (Mr. Crawford), and the hon. Member for Aberdeen, North (Mr. Hughes) was almost a replay of the devolution debates, but I thought that the hon. Member for Perth and East Perthshire had the best of the argument. He was suggesting that an extra 1p off the Scottish income tax would be better than the enormous subsidies which go in public expenditure to Scotland. As a representative of English taxpayers, I am certain that that solution would be cheaper than the solution we now employ for Englishmen. Therefore, I would prefer a cheaper tax and no subsidies across the border.

I think that the small reductions can only be symptomatic of what one seeks. The transformation of our direct taxation which is necessary is beyond the comprehension of everybody on the Labour Benches who has spoken. The scale of what is needed to release the energies of the British people is far greater than they have begun to understand. We live in an international tax atmosphere, and even if I were to confine myself to the Common Market the truth is that the tax rates in the EEC are directly relevant, first, to those with skills who might wish to work in Europe, secondly, to those who might start businesses and might want to make a whole pile of money and live on the proceeds to the end of their working lives, and, thirdly, to multinational companies which might be considering making investments in manufacturing plant in various countries. So long as they turn a blind eye upon the relative tax structures in different Common Market countries, they will not get production going.

A worse sin still came out this afternoon, particularly from the hon. Member for Coventry, South-West. She seemed to think that there was a static income and that all one had to do, with good Socialist principles to the fore, was divide up the static income as one thought fit. What the hon. Lady fails to understand and what is so grievous for this country is that it is the way that one divides up the static income which makes it cease to be static. If one divides it one way, it grows, and it can grow fast; if one divides it another way, it shrinks, and it can shrink quite fast, just as it is doing now.

Until the Labour Party stops thinking that the income of the people of this country is automatic and that all it has to do is allocate it, there is no hope that it will understand or accept the scale of the cuts in direct taxation which are necessary to get this country going again.

I am convinced, despite what I have just said, that it would be right to press the amendment. The Chancellor's arguments were puerile. He told us that £1,000 million had been used to bolster the pound in the last month and that that had had some small effect on the money supply. However, if £170 million were to flood into the economy in October through the payment of the tax rebate, that would upset the money supply the other way, in a way which was impossible for him to accept.

What a ridiculous argument that was. The right hon. Gentleman knows that we are not bumping against the limits of capacity, as so many hon. Members have already said. But this is political, of course. The right hon. Member for Down, South (Mr. Powell) has asked his political price. The hon. Member for Perry Barr has said that his political price was paid last year. The real reason for voting for the amendment is that it is the political choice of the Conservative Party to do so. That must be right.

Never in my life have I seen such a pathetic spectacle as the Chancellor standing at that Box today begging, pleading, entreating the Opposition not to destroy his Budget strategy and his tax policy. That the Chancellor of the British economy should no longer be able to get through his tax proposals without appealing to his political enemies and trying to involve them in supporting him in a policy which throughout they have rejected is a sorry sign of weakness and frivolity and of a pathetic desire to hang on to office at any price.

The nature of the political statement which the Opposition are now making is that it is time to do away with this weak, supine and craven Government. Then the questions which are so frequently pressed upon us will be answered—about what public expenditure we would cut, which taxes we would raise and which we would drop, what changes we would make, what our economic policy would be. All those questions will be answered, and they will be answered by a new strategy, complete and whole in every detail. That is why it is wrong for the Government to go on in office vaguely asking us what we would do. If they cannot do what they want to do, let them give way to others who will.

8.15 p.m.

Mr. Wigley

I hesitate to play any card following the Orange card—certainly not the green card and not even a red dragon card. Although some of my hon. Friends may be tempted in the future to follow the path opened by the right hon. Member for Down, South (Mr. Powell) in playing such a card in this debate, I shall confine myself to the issues, particularly the impact of income tax on people on low incomes.

I dare say that it is a common experience for all hon. Members to have people on low incomes in their surgeries complaining bitterly about the level of taxation. The answer given on 26th April to the hon. Member for Birmingham, Perry Barr (Mr. Rooker) about the taxation threshold compared to family income supplement and supplementary benefit levels is revealing. According to that answer, a married couple with one child aged 13 have a tax threshold of £35 a week, compared with an FIS level of £43.80 and a supplementary benefit level of £41.45. It is nonsense that some people should be paying tax on income way below FIS and SB levels. That has to be changed, or a serious cynicism towards our tax system will develop.

Mrs. Wise

Will the hon. Gentleman explain why, if that is so, he favours the reduction in the standard rate, since the family he mentions will gain not one penny from the amendment?

Mr. Wigley

Yes, I shall of course be coming to that.

Only last Tuesday morning in my surgery I was confronted with the case of a "lollipop lady", aged 58, whose job is seeing children safely across the roads, and who worked a few hours a week to get a little income over her pension. Her income of £7 a week was taxed at a level of £2.30. An error by the Inland Revenue had meant that her tax this year was going up to £3.40 to recoup what she had been undercharged last year. That has been enough to drive her from working.

Situations of this kind mean real difficulties for many people and we cannot close our eyes to them. They hit pensioners particularly hard. We all have had pensioners bringing them to our attention.

For me, the most vociferous lobby that I have met in recent months was a group of shop stewards at a local factory. I asked them what they felt most needed to be put right at Westminster. Their unanimous opinion was that it was the impact of income tax on their salaries. The wage level at that factory is fairly low. The average wage in the area is well below the £80 average for manufacturing industry in Britain. It is probably 30 per cent. or more below the average per capita income in the whole of Great Britain.

How do we sort out the priorities? In 1948, income tax started at 110 per cent. of the average earning level. We can judge how that has deteriorated from an answer given on 2nd May. That showed that a married couple on 50 per cent. of average earnings pay £148 a year in tax. A married couple with two children under 11 on 75 per cent. of average earnings pay £428 a year in tax—over £8 a week. That cannot be acceptable. Something must be done for taxpayers on low incomes.

Tonight's amendment would not be our first choice. Obviously, it would spread the money which may be available very thinly. It would not concentrate the money in the way we would like to see it concentrated. If it is £370 million in the case of 1p, or £740 million in the case of 2p, off the standard rate, it is still only scratching the surface of the problem.

Later amendments of ours seek substantially to raise the threshold of income tax. We seek to raise it by increasing the married allowance by £120, thus bringing it to £1,655, and by £60 for the single person's allowance, thus bringing that to £1,045. We should have preferred to have tackled the problem in that way. Indeed, we would have preferred to have done more than the figures suggested in our amendments, but we have tried to keep it within reason, within the ambit of the figure of the £700 million to £800 million that we are debating on these amendments.

The expenditure involved in accepting these amendments and others would be peanuts. It is nonsense to say that the amendments would throw the Budget strategy overboard. We are talking in terms—to use language in vogue about 10 years ago—of a touch on the tiller, of relatively small figures. It would have a relatively small effect.

We are willing to find the additional £800 million which would be made necessary if our amendments were carried, or the additional £370 million if this amendment were carried, either by increased borrowing—we believe that there is scope for that, that there is slack in the economy—or by a standardisation of VAT at 10 per cent. to meet part of the effect, provided that there was also an increase in the supplementary benefit level and in the level of pensions to ensure that recipients of those benefits were not penalised by such an increase in VAT.

If we had returned to the level of personal allowances that obtained in the financial year 1972–73, we should have needed to raise the single person's allowance to £1,250 and the married couple's allowance to about £1,600. That shows the deterioration that has occurred over the past five or six years. If we had raised the allowances to equate with the supplementary benefit level, we would have needed allowances of £1,153 for a single person and of £1,637 for a married couple. This shows the scope and scale of the problem before us at the low end of income where something needs to be done.

Our amendment on thresholds is modest. We therefore expected the Government to take some notice of it and to come some way to meet us on it. Had we been able to meet those on low incomes by that amendment, we should not be looking at the amendment before the Committee tonight to alleviate the level of income tax they pay. However, we are not to have that opportunity. It is a question of whether we accept the reduction of 1p in the standard rate rather than nothing.

Although this would give more to those paying higher rates of tax, than, perhaps, we would have wanted, we do not regard that as a reason why we should deny even a small reduction to those on small incomes. We do not wish to be dogs in the manger towards those on low incomes because we want to deny the relief to those on high incomes. For that reason, albeit somewhat reluctantly, we shall be supporting the amendment before the Committee, as the Government have not come forward with an amendment of their own, nor accepted our amendments on the threshold levels of income tax.

Mr. Peter Brooks (City of London and Westminster, South)

It is some years since I was a chance attender at evensong in a rural church where the vicar launched his sermon with the words "Those of you who have been to Thermopylae will remember …". As I had never been to Thermopylae, the image was somewhat lost on me.

The echo returns tonight as one looks across the Committee. The Chancellor, whose talents I admire, has always owed more in style to Sparta than to Athens, and the 300 or so hon. Gentlemen whom he commands tonight are very close in number, including the walking wounded, to the 300 Spartans whom Leonidas commanded at Thermopylae.

The analogy does not end there. I hesitate to use Boeotians as a parliamentary expression, but the Liberals are remarkably similar to them—they were a bit stolid, whereas the Liberals are mercurial, so mercurial that they are totally absent from the Chamber at present. But they then, as now, were fundamentally unreliable allies, always liable not to be found on the field of battle.

I, like many of my hon. Friends, have been inundated with correspondence—from the British Institute of Management, from individual companies and from the Confederation of British Industry. I have even had a telegram as I have been sitting in the Chamber this evening from the chairman and chief executive of the Tioxide group. I shall not read out the telegram to the Committee, but I will gladly share it with anyone who wishes to read it. Each one of these has repeated again and again the need to reduce taxation in order to restore incentives. Some of them have gone beyond us and have talked about 2p instead of 1p. Unlike the Liberals who are also recommending 2p, the correspondence I have had has stressed that the way it should be done is by reducing expenditure.

As we came up to this Budget, whose Finance Bill we are debating this evening, I was encouraged by the things that were coming out from the Chancellor. I read an article in a recent copy of Fortune, in which the Chancellor was said to be keen to cut taxes from top to bottom in order to restore the work ethic. Yet we have arrived at the Budget strategy without any of the results that had been hoped for. Like Leonidas at Thermopylae, the Chancellor has chosen his ground to defend the narrow pass, the pass of 1p off income tax between the PSBR on one hand and the IMF on the other. He has argued that it is a very delicate balance, that anything will knock it over. That argument was first demolished by my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) and has since been demolished by others of my hon. Friends.

The instruments that my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) argued should be deployed to achieve this 1p cut in the income tax were, first, an increase in indirect taxation and, secondly—he used this argument on Second Reading—that the £300 million which was being given to the NEB should be rescinded.

To take the indirect taxation first, the Meade Committee, which has reported in the not too distant past, has reinforced the arguments which all of us in the Committee know about the balance between direct taxation and indirect taxation in this land. A recent parliamentary answer demonstrated that, even though we may not be the most highly taxed nation in terms of overall taxation, in terms of direct taxation we are taxed way above other people.

The frightening thing about the attitude that the Chancellor is taking on indirect taxation—he took it again this afternoon, and he referred to the effect on the RPI—is the fear that the right moment to do it will never come and that, like increasing the salaries of Members of Parliament, it will never happen because the proper moment does not occur and so we shall always be backing away from increases in indirect taxation.

Mrs. Wise

The hon. Member referred to the Meade Report. Is he saying that the changes in indirect taxation that he favours are of the kind envisaged in that report? They are totally different in nature from the kind of indirect taxes that we have now and they would have a regressive content which is totally absent from VAT and any of the present indirect taxes.

Mr. Brooke

I entirely take that point. I cited the Meade Report because it re-emphasised a point which has consistently been made from these Benches: that the balance between direct and indirect taxation in this land today is wrong.

However, I wish to speak at slightly greater length about the funding of the National Enterprise Board. When we debated this matter on 10th April, the Secretary of State for Energy was asked by my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) whether the Government would be prepared to sell off any of the assets of the NEB, and he referred in particular, I think, to Ferranti.

I owe my hon. Friend an apology because at a later date I contradicted him. I thought that the Secretary of State had not made any commitments on that subject, but in fact Hansard shows that the right hon. Gentleman clearly said that the Government had no intention of selling off any interests at all.

We then read in this week's Economist—perhaps we ought to have remembered it—that there is a trigerring clause anyway in the original Ferranti agreement under which the Government have to bring some of it to market if certain things happen, and, as I understand from this week's Economist, it will in fact be coming to market later this year. Thus, the purity and rectitude of the NEB's balance sheet, to which reference was again made by the Chancellor today, is much more questionable than might at first sight appear.

Then, if one proceeds from Ferranti to Rolls-Royce and raises the question whether Rolls-Royce might be sold, that also being a way of funding the £300 million, it might be said that Rolls-Royce has only recently returned to profitability and it would be a very large marketing—though large marketings have occurred before—and it might be said that the Pan Am contract is only a single flash in the pan and would not provide the quality of earnings which would enable one to bring it to market. But what is sauce for the goose is sauce for the gander, and the NEB has spent £8 million of our money, £8 million which comes within the purview of the £300 million which we are considering, on the purchase of Allied Investments.

8.30 p.m.

In the purchase of Allied Investments, the NEB purchased £3 million worth of assets for which it paid £8 million of our money. I think it doubtful that the NEB would get £3 million for the private health interests which it is at present seeking to sell, but let us give it the benefit of the doubt and assume that it gets £3 million. That leaves £5 million of our money which the NEB has paid. What do we have left on the Allied Investments balance sheet?

We have some loss-making food interests which Allied Investments acquired at some stage in the past, but otherwise all we have is the goodwill associated with the single contract for building hospitals and providing medical equipment for the Saudi Arabians. Against that we have the liability of a substantial bad debt and a lawsuit arising out of the last time that Allied Investments tried to do such a thing in the Middle East. That seems to me to be, on the whole, a very questionable bargain.

I hope that out of this evening will emerge a good political and economic result. But I hope that out of it, too, may emerge rather more forthcoming information than has been given to us so far about what the NEB will do with the £300 million which the Liberals so cheerfully voted for it.

At the end of the day, one returns to Leonidas and the Spartans at Thermopylae. They fought all day but at the end of the day they lost. They lost the pass and they lost the day. I sincerely hope that the same will happen tonight.

Mr. John Moore (Croydon, Central)

Although I should like to be able to, I shall not follow my hon. Friend the Member for City of London and Westminster, South (Mr. Brooke) along the road to Thermopylae—though I have been there in another guise—but I must tell the Committee that today I had very much the same instincts as those of my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) I had considerable hesitation, and I had a great deal of interest in the speech of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe).

I was particularly concerned because I have long been of the view that our direct taxation structure is completely wrong, completely imbalanced, and requires radical structural changes. To that extent, I was concerned first about the nature and amount of the 1p reduction proposed. Equally, of course, I was interested in the points which my right hon. and learned Friend so admirably made about the effect on the public sector borrowing requirement.

I support much more happily now what my right hon. and learned Friend proposed after his reference to it as a token reduction. To that extent, I think that he was talking about it as an indication of the way in which our Conservative taxation structure should be implemented.

I do not wish to pursue at any length the somewhat esoteric part of our debate concerning the PSBR, no matter how interesting and important that debate might be. We are, after all, talking about taxation at fundamental levels, and, having listened with care, I am, in essence, commenting on what I have heard. I wish first to address myself specifically to what the Chancellor said about a reduction in the basic rate of tax.

As my hon. Friend the Member for Cirencester and Tewkesbury said, it seems that hon. Members on the Government side have not begun to grasp the nature of the radical tax changes which are needed. I noted the remarks of the Plaid Cymru Members, the hon. Member for Caernarvon (Mr. Wigley). I agree with what he said. I also hold a weekly surgery, and, if there is one recurrent theme on taxation, it comes from those earning small amounts who constantly come up against the problems to which the hon. Gentleman so rightly referred.

Let me, therefore, be specific as opposed to esoteric on the PSBR. On the taxation question, I am concerned about the poor production and poor productivity of our country today. This is the fundamental problem that all of us must face.

We should concern ourselves with the absence of wealth. It is no good constantly discussing the same size of cake and how we are to refine it and cut it up again. We must concern ourselves with productivity and production. That means that we have to concern ourselves with people—people in the real world out- side—and how we can encourage them to produce.

I am reminded—it is germane to the debate—of a visit I made with hon. Members from both sides of the House to the Philips colour television tube plant in my constituency about two weeks ago. Philips is an example of an employer with first-class industrial relations. I talked, as I always do in such circumstances, to employees about their attitudes, as opposed to our esoteric debates, to the nature of fundamental revisions of the tax structure. I remind the Committee of what we sometimes forget—the levels of taxation and their implications for productivity.

For example, I talked at a test bay assembly area with the foreman. His most skilled craftsman there was earning just over £70 a week. He was a married man with two children. He was getting in his pocket about £50 a week. The least skilled craftsman there was 18 years old. He was literally assembling the boxes. He was earning gross about £48 a week, taking home £38 after tax. What a tiny spread after tax that is between the most skilled and the least skilled on that work.

In the same plant there was an assembly line where the ladies were putting together intricate tube work. I asked how they were paid on a productivity bonus piecework basis. The spread in that case was not very wide, the pay being between £58 to £59 at the top and about £50 at the bottom. But the actual spread after tax was only about £2.

We should be asking ourselves, rather than criticising British working men and women, not about their low levels of productivity in comparison with other countries but why on earth they work at all at such hard productive rates with such lack of incentive. I commend the British working people for the way in which they work despite the lack of distinctive incentive.

Mr. Arthur Lewis (Newham, North-West)

Is the hon. Gentleman aware that the Government have got over that situation through the very well paid sinecures that they offer to people who already have big jobs outside? They do so by giving them not a wage or salary but tax-free allowances. Hence, in the other place almost every other peer is getting the equivalent of £100 per day because he is getting £20 to £30 a day tax-free. That would help the position that the hon. Gentleman is referring to.

Mr. Moore

I know that the Chair would not wish me to pursue that line. I do, however, read with great interest in Hansard the assiduous questioning by the hon. Gentleman on these and other subjects.

Mr. Arthur Lewis


Mr. Moore

No, I shall not give way again. I take the point that the hon. Gentleman is seeking to make.

I want to pursue, if possible, the point concerning the basic wealth creation potential of the country, the men and women who seek to work and who do not, in my view, have the necessary incentives to do so in terms of our current tax structure. I remind Labour Members below the Gangway that it is no good talking about the Conservatives not being interested in those who are sick or are disabled, in those who are in need of care and attention. The fact is that we have to create greater wealth in this country if we are to be better able to look after such people. The production of greater wealth is our prime concern.

If we argue, quite justifiably, that people require incentives to produce and to work harder, surely we are arguing consistently in seeking to provide first of all the basic wealth that will allow people to have the kind of social wellbeing that we want to see for all.

Secondly, do not let us forget the essential nature of the production of jobs that comes from greater wealth-producing. We are going through an extraordinary debate in this country. In that debate, just as in the debate about the wealth that exists, we are trying to argue sometimes that there is a static number of jobs to be shared among us all. I do not deny the sensible argument about needing to encourage people to have more time off, longer holidays or greater leisure. That is different from the fallacious, specious debate that is being pursued about the way in which we somehow share out the existing reduced amount of work that there is.

In terms of the production of wealth, let me remind the Committee of the figures that I gave on an earlier occasion because these are germane to the point. I remind the Committee of the facts that I gave during last year's Finance Bill debate when we were seeking to reduce the basic rate. Between 1960 and 1975, our population increased by about 5½ per cent. The number of our people at work increased by about 6.6 per cent. In those same 15 years, the population in the United States increased by about 17 per cent. and the number of people at work there increased by about 30 per cent.—22 million new jobs. I am aware of the higher incidence in recent years in the United States of women going to work and of the faster movement in that direction in the United Kingdom after the Second World War, but we must get away from the sterile nature of the debate about sharing existing work and concern ourselves with the production of new wealth.

Not only does a reduction in the basic rate of income tax encourage people to work to produce more jobs but—and this point has not been argued sufficiently in the debate—it allows people to choose, and the degree to which people can choose how they dispose of their own earnings and the freedom which they have to do so is a key and crucial feature of any debate in the House.

I propose to touch briefly on some points that the Chancellor made, and I hope that through the Treasury Bench the right hon. Gentleman will respond to the points that I am seeking to make. The Chancellor addressed himself to the Back Benches on this side of the Committee and said "Are Back Benchers willing to accept the risks of such a reduction?" It sounded as though I was hearing a Chancellor defend a secure, successful, dynamic, growing economy when to take any risk would be to endanger the nature of that successful economy.

That is rubbish. We are not talking about a situation where a minor risk can concern us. We have to take risks in a society where our basic economic structures have grown diseased and have decayed. We are faced with unacceptable unemployment and unacceptable stagnation in production, and in such a situation the whole nature of the strategy of taxation—not just of this Government, but of many Governments for a long more time—is essentially wrong.

We must far more radically reduce the whole level of our direct taxation—far more radically than we can seek to do by this mere token. The risk from the Back Benches is more than worth taking. If the Chancellor asks "How would the markets react?" I can tell him that I have some experience and knowledge of the way in which markets react to such a comment and I would say "Overwhelmingly happily". If the Chancellor were radically to reduce direct levels of taxation, there is no doubt how the markets would react. They would be ecstatic.

My hon. Friend the Member for Cirencester and Tewkesbury dealt admirably with the astonishing nature of the Chancellor's comments on our amendments. I listened to the Chancellor with great care. He made three points, essentially, in seeking to argue against our amendment. First, he thought that it was a negative observation that we sought to reduce the tax rate from 34 per cent. to 33 per cent. We all appreciated the fact that he had taken that point on board.

The right hon. Gentleman went on to discuss, as many of my hon. Friends have said, the sudden surge through the economy which the rebates would produce in October. What on earth are we talking about? The very nature of the defeatist attitude of so many economic commentators in this country came from the Chancellor himself when he assumed automatically that this sudden surge, which my hon. Friends have put into perspective, would automatically create a mass purchase of foreign goods. What an extraordinary attitude for a British Chancellor of the Exchequer to take!

Finally, the right hon. Gentleman spoke about the large increase in October, putting the money supply completely out of control. He was explaining quite legitimately some months ago about the nature of the monthly fluctuations in the money supply and the degree to which we could not take them as a guide to his overall long-term strategy. That point has been adequately dealt with by my right hon. and hon. Friends.

What did the Chancellor say in terms of replacing the supposed lost revenues? That was one of the most appalling state- ments I have heard. Essentially, he said "Well, there are other things." He will have worried the City far more by what he referred to then, raising company tax, the tax on stamp duty and so on, saying specifically that all of these would be better than a reduction of 1 per cent. Why on earth did he not do that last year instead of accepting a reduction of 1 per cent.? If this is better, why not change the nature of company tax and raise it?

The Committee must take note that, whatever is said in the media, the debate has confirmed a key point on taxation. The Labour Party is the party of high taxation and the Conservative Party is the party which ultimately believes in reducing taxation. Fundamentally it is simple. Socialists do not believe that cash incentives work. The Tory Party does believe that, and for that reason we shall press the amendment.

8.45 p.m.

Mr. David Stoddart (Swindon)

I have listened with interest to the speeches by the hon. Members for Croydon, Central (Mr. Moore) and City of London and Westminster, South (Mr. Brooke). I was concerned at what the hon. Member for Croydon, Central had to say about the position of people earning about between £70 and £80 a week in factories. I have been concerned about such people for a long time, not necessarily because of the tax they pay—although we are all concerned about that—but mainly because ol the low level of basic wages in this country which many of us believe has a lot to do with low productivity. Workers in the factory would put more emphasis on basic wages and better productivity incentives paid by firms than on a reduction in taxation.

Mr. John Moore

I agree with the hon. Member in toto. I agree that our basic wage structure is far too low. If he looks at the figures for the average man with two children and earning £70 or £75, he will find that the disincentive becomes worse as he goes up the scale. I agree that essentially the argument is not just about taxation but is about low basic pay.

Mr. Stoddart

I am glad to have the hon. Gentleman's agreement. I shall show that as one goes up the scale the incentives given by my right hon. Friend in his Budget are, perhaps, better than they are for those at the bottom.

I was interested in the remarks of the hon. Member for City of London and Westminster, South. He said that he had received a number of letters from various firms complaining about the incentives which my right hon. Friend had given in his Budget. I received a similar letter from a firm which alleged that people earning between £9,000 per annum and £15,000 had been shabbily treated. I had a look at the figures. Although I do not have the correspondence with me, if my memory serves me right they meant that a married man earning £9,000 a year received a tax benefit from this Budget of £184 while a man earning £10,000 had a tax benefit of £224. The man earning £15,000 a year received a tax benefit of £450 per annum. I thought that that was not too bad.

I decided that it would be as well if I compared that with the benefit that the man working in a factory would get, and I found that he would get only £94. Then I looked at what the man on £25,000 would get as a benefit from my right hon. Friend's Budget, and I found that he would get £751.

The Chancellor, therefore, has built incentives into his Budget. Indeed, some people might think that those incentives are too great. I shall not comment on that aspect particularly, but it is erroneous for people to write to Members of Parliament and say that the Chancellor has treated people in the brackets that I have mentioned, from £9,000 to £15,000, in a shabby way. I do not believe that he has.

The amendment seeks to reduce the standard rate of tax by 1p. That does not seem to be very radical. It means about £340 million in actual hard cash flow for the current financial year and £370 million for the ensuing financial years.

I was constrained to do a little exercise, while listening to the debate, to see once again how the man in the factory, earning the average wage, would fare as compared with the man earning £10,000 per annum. A married man with two children over the age of 11 and a £10,000 mortgage would gain—these are relatively rough figures—about £7.50 to £10 per annum out of it. That is not very much. The man earning £10,000 per annum, again married and with two children over the age of 11 and a mortgage of £10,000, would gain about £55 per annum. The people at the bottom end are being squeezed again. The people at the factory bench, to whom Opposition Members want to give more incentive, will be given very little incentive from this proposal.

But there is another matter that worries me. The Chancellor may very well seek to recover the lost revenue, if the Division is lost tonight, from other sources, but he may not get that through the House of Commons. If the Committee can vote against the Government tonight, it may very well do so over the measures that the Chancellor proposes to bring in to recover the money.

On the other hand, the Chancellor may decide to do nothing off his own bat. That will increase the net borrowing requirement, which will have to be financed. Already, because the net borrowing requirement has increased in the Budget, the minimum lending rate went up last Friday by 1¼ per cent. It may very well be that the minimum lending rate will have to go up further if the Chancellor makes no move to recover the £340 million lost revenue.

If that happens, it could very well be that the mortgage lending rate will have to follow the MLR upwards. Then, what will be the position of people who are getting this 1p reduction in the standard rate of income tax? If the mortgage lending rate were to go up by 0.5 per cent., I calculate that the man earning the average wage of £4,000 per annum—about £80 per week—would be worse off by £23 per annum and the man on £10,000 per annum would be only £22 better off.

Although superficially the amendment seems attractive, it could bring in its train measures or consequences which, far from assisting people at work, far from encouraging people to work more or far from enabling people to have more money left in their pockets after tax, would result in people finding themselves with less purchasing power. These are the dangers which face us, and the Committee ought to consider seriously what it is doing.

The Chancellor has made his Budget judgment. The right hon. Member for Down, South (Mr. Powell), although apparently voting against the Government tonight, has always appreciated that that judgment has to be seen as a whole. I hope that the Committee will see it as a whole tonight and will recognise that if it upsets that Budget judgment there may be consequences arising which the Committee and, indeed, people throughout the country might not like.

Mr. Nick Budgen (Wolverhampton, South-West)

The hon. Member for Swindon (Mr. Stoddart) is right in saying that the Opposition should be wary of the charge that in the future there might be consequences upon their vote on this amendment which perhaps are not easily visible at present. Of course, the charge of irresponsibility against the Tory Party is one which it has to consider with care. This particular vote is one which has caused me grave concern, because there is no doubt that against the charge of irresponsibility the Tory Party has to establish—it could be argued reestablish—its position as a party of sound finance.

There are, after all, many Conservative Members who believe that the fight against inflation—by that I do not mean the stablisation of inflation at about 10 per cent., but the squeezing out of the system of levels of inflation of more than 2 per cent. or 3 per cent.—should be the primary objective of the Tory Party. I give that not as an economic objective but as a libertarian objective, because I believe that inflation is the principal cause of injustice within our community and the most divisive source of uncertainty and unrest that we can spread among the community.

When I hear the charge of irresponsibility levelled against the Tory Party, and hear the right hon. Member for Down, South (Mr. Powell) muttering about 1972, I listen carefully. But before I go on to deal with the charge of irresponsibility I ought to say that I agree with my right hon. and hon. Friends when they speak so movingly and persuasively about the disincentive effects of high taxation.

Perhaps I may for a moment deal with the argument which the right hon. Member for Battersea, North (Mr. Jay) put forward about the Radcliffe Report. He said that in 1957 the Radcliffe Report indicated that taxation upon those who had either low incomes or middle incomes did not have a severe disincentive effect. I do not know whether in 1957 that was true or not, but I remind myself that that was only 10 years after the war at a time when people were still accepting high levels of taxation as being necessary for the reconstruction of the country. Most of all, it was before taxation was increasingly levied on the low paid and on those of middle incomes. It was before the State had started persistently to interfere in the income which each person could obtain for himself from the market.

Tax rates are now so high and so deeply resented that it should be an important though perhaps secondary objective of Tory policy to reduce the levels of tax. There is a wider argument than merely the disincentive argument. At every level now we see that people are engaging in methods of making sure that they do not pay taxes. Whether it is evasion in one class, avoidance in another, moonlighting in another, straight fiddling in another or being paid expenses in lieu of proper income in another, everyone in the country is engaged in some form or another of making sure that he does not pay taxes.

9 p.m.

Mr. Nigel Spearing (Newham, South)


Mr. Budgen

Almost everyone. There may be a tiny minority who are indifferent to the amount of tax that they pay. But I contend that so many people are primarily engaged in avoiding, evading or fiddling tax that it has corroded our very attitude towards the law and towards authority. After all, it is not a very big step from fiddling the tax man to fiddling one's employer, and it is not a very big step from fiddling one's employer to fiddling one's mate.

Until we reach a stage where people are paying their taxes perhaps more generously or perhaps more willingly, we shall continue to see a sense in which people resent authority and resent the law, having in my opinion incalculable general effects.

On a more practical and mundane level, I believe that lower taxes would stimulate more non-inflationary activity in the economy. Lower levels of taxation would bring with them a greater willingness on the part of the taxpayer to pay taxes, and thus lower taxes should lead to no overall loss of income to the Revenue.

I do not believe that the importance which the Tory Party rightly attaches to reducing the level of personal taxation should be disregarded. But one has to listen very carefully to the charge of irresponsibility, and, in my opinion, the Tory Party is right to emphasise the continuing importance of the public sector borrowing requirement.

But why do we attach so much importance to the PSBR? In the past we have always attached enormous importance to this figure because we have recognised that a large public sector borrowing requirement leaves a difficult choice before the Government of the day. They have either to raise interest rates or to print the money. But those who keep on confirming their belief in the importance of the PSBR are making the mistake of overlooking the very important change which has occurred since 1976.

Here I refer to the important change of publishing targets for the money supply. The importance of this was clearly set out in the Chancellor's Budget speech when he said: Monetary policy will continue to play a central role in our attack on inflation."—[Official Report, 11th April 1978; Vol. 947, c. 1191.] I quite understand that no Chancellor of the Exchequer, especially a Labour Chancellor, will clearly and consistently proclaim his belief in monetarist doctrines. But it is significant that the importance of this doctrine has been set out very clearly in the March Bank of England Quarterly Review. There the Governor of the Bank of England sets out exactly the importance which he attaches to this. He makes it plain that he regards published targets for the money supply as the great new discipline on the economy. He says: Our first order of business must, therefore, be to restore confidence in the framework of the system. The crucial economic decisions, for example, to undertake investment, involve an act of faith in the future. That faith has been undermined by uncertainty—uncertainty in particular about the future value of money, externally and internally. In times past other features of the economic system such as fixed exchange rates, or as the right hon. Member for Down South would wish to see, Gladstonian budgetary principles were thought to provide a guarantee of stability. These restraints have now gone. The main role, therefore, that I see for monetary targets is to provide the framework of stability within which other policy objectives can be more easily achieved. That is a statement of the philosophical importance of these monetary targets.

Before I go on to describe what I believe to be the practical additional constraints on the Government, I should like to deal with the argument that some might put to me that there is today a bracket of increase in M3 of between 8 per cent. and 12 per cent. It might be said that but for the irresponsible addition of another £500 million the Government might get down to an increase in M3 of only 9 per cent. That is not a politically likely posture for the Government.

I am sure that the Government were determined always to increase the money supply towards the top of the bracket. I am sure that in a pre-election year they would be aiming for the top of the bracket, namely, 12 per cent. Indeed, they might find that markets were prepared to accept 13 per cent.

If we on this side of the Committee, add another £500 million to the PSBR because of the constraints of monetary targets, all that will happen is that within that constraint the Government will have to take some form of amending action. Leaving aside the philosophical arguments put forward so sketchily by the Chancellor of the Exchequer, and so much more clearly by the Governor of the Bank of England, the market arguments for keeping to monetary targets are overwhelming.

As the Chancellor said in introducing his Budget, this country owes 20 billion dollars to people outside this land. I shall not rehearse what he said in that passage, but he made it plain that a large part of that borrowing had to be repaid in the not-too-distant future. He proposed to repay some of it, and he proposed to roll some of it over by reborrowing the money. But we cannot owe that sort of money to international markets and at the same time let the money supply go rip.

Equally, if the Chancellor is suggesting that the PSBR of £8.5 billion—and for this purpose it does not much matter whether it is £8.5 billion or £9 billion—is to be borrowed outside the banking system, the priorities about increasing the money supply, considered to be important by financial markets, must be adhered to. We cannot buzz up to 14 per cent. or 15 per cent. increase in the money supply—the 8 per cent. to 12 per cent. must be adhered to.

The same practical constraints arise as a result of our loss of foreign currency over the period since the beginning of the year. The same constraints apply to the way in which the exchange rate has fallen 8 per cent. this year. The same constraints are reinforced by the decline in our balance of payments. All these point to the fact that market disciplines will be allied to philosophical disciplines, and that the Government will have to keep to the targets for the increase in the money supply.

No matter how irresponsible it may be alleged the Opposition are, the fact is that the Government will have to take correcting action. It seems almost idle for the Opposition to make suggestions as to how that should be done. It may be that it will be done by maintaining higher interest rates. It may be that it will be done by introducing cuts in public expenditure. It may be that it will be done by increases in indirect taxation. However, done it will have to be, and because of the importance of the new and vital financial discipline which will take over from the balanced Budget that the right hon. Member for Down, South hoped to see 20 years ago when he resigned as a Treasury Minister, it will take over from the concept of a fixed exchange rate. The new discipline will force the Government to take corrective action. It will prevent them printing an extra £500 million as a result of our vote. The charge of irresponsibility does not stick.

Mr. John Watkinson (Gloucestershire, West)

I am moved to join the debate as a result of the speech of the hon. Member for Wolverhampton, South-West (Mr. Budgen). At least the hon. Gentleman was honest enough to bring before the Committee the irresponsibility that the Tory Opposition are launched upon in these present measures.

Those who listened to the summings up at the end of the Budget debate will recall the speech of the hon. Member for St. Ives (Mr. Nott). The hon. Gentleman spent a great deal of time lecturing the Chancellor of the Exchequer on the effect of the Budget upon the markets. He went on and on about it. I can only assume that those who are making Conservative policy on the proposed tax cuts did not have the opportunity talk to their Front Bench spokesman on Budget night. If they had done so, he would have told them, as no doubt my right hon. Friend the Chancellor has observed, that the effect of the Opposition's proposed tax cuts must have great significance for the markets.

It is probably generally agreed that the state of the economy is at present somewhat fragile. A responsible Opposition must ask themselves what exactly they are doing in intending to rock what stability there is to an even greater extent.

The Opposition still have to face the charge, to which the hon. Member for Wolverhampton, South-West referred, that they are acting irresponsibly. I am afraid that the hon. Gentleman did not convince me that they are not being irresponsible. We have another example of Tories asking for tax cuts but not telling us how they will cover the cuts. We have had that repeatedly. The Tory Front Bench has been flayed over and over again by my right hon. Friend the Chief Secretary to the Treasury, and no doubt he will do it again this evening. They have not told us how they will cover their tax cuts. Since I have been in the Chamber no one has indicated the manner in which the revenue will be raised.

The Opposition have also gone before the country expressing the view that they wish to increase expenditure.

Mr. Lawson


Mr. Watkinson

The hon. Gentleman says "No", but how are they to finance the spending that they propose? The hon. Gentleman will recall that his own party has indicated that it will increase defence expenditure and expenditure on the police. Significant increases in expenditure are proposed but no one has spelt out how they will be covered.

The hon. Member for Wolverhampton, South-West has pointed out the significance of the proposed tax cuts on the borrowing requirement. There is no subject on which the Opposition are more paranoid than on the borrowing requirement, but they are setting out deliberately to increase it. The repercussions that that will have upon the money supply is exactly as the hon. Gentleman pointed out.

We have had a great deal of talk about incentives from the Opposition. However, we have not heard any real hard facts about this incentive argument. It seems a priori, as if it is obvious—Godgiven. Is there any evidence from companies that people are not applying for top jobs? Is there any evidence that people are not prepared to move in our economy?

9.15 p.m.

There has been some work done on incentives, including the Radcliffe Report. An article in the Economic Journal in December 1974 tried to quantify the effects of taxation cuts on the number of hours people were prepared to work. The interesting fact is that in the responses given to that investigation 74 per cent. of men and 93 per cent. of women said that the incidence of taxation had no effect on the number of hours they worked. I do not know why there is a difference between the percentage for men and that for women.

It is desirable that taxes should be cut. We all want more money in our pockets. But the Conservative Party has not put forward an incentive argument that can be substantiated with facts.

Mr. Anthony Nelson (Chichester)

I intervene briefly because I sense a willingness on the part of the Committee to move to a Division. Many of the contributions have raised a fundamental difference in attitudes between the Conservative and Labour Parties. There is a common acceptance of the need for higher net real wages. The Labour Party believes that, by retaining in the public sector and reinvesting substantial amounts of State money, it can generate the level of growth and real income nationally to achieve this objective.

We, on the other hand, believe that these policies have failed, no more clearly so than in the last few years. For such regeneration, a substantial and progressive impetus should be given to the private sector by handing back more of the money that it generates. It is on this difference that the Division will take place.

We still have a nonsensical system of taxation—a point well made by my hon. Friend the Member for Croydon Central (Mr. Moore)—in which, until this year, people paid no tax up to a certain level of earnings but started paying tax at 34 per cent. We should over a period of time not only simplify the system but move to the system adopted by our European neighbours. In our present system there are appalling anomalies.

Last weekend an old lady came to my surgery. She was a widow who lost her husband a year or two ago. Because there was a late assessment in her financial circumstances this year, although she is earning only £17.59 a week she is having £6.60 of that deducted in tax. For somebody on that range of income, that is scandalous. There may be technical reasons for this, and I am taking up the matter with the Financial Secretary. Nevertheless, the way in which our tax system, despite its seeming equity, bites in many instances on those receiving very low gross incomes is scandalous.

One of the main reasons for supporting the amendment is that it will assist to restore differentials. That is a point not made at any great length during the debate. A cut in the basic rate of taxation will assist to restore many of the differentials among skilled workers and middle management which have impinged seriously on many people in recent years. The shortage of skilled labour will be a restraint on the degree to which we can achieve industrial expansion. Many companies are losing good people who have worked with them for a considerable time, because the only way they can achieve higher wages is by moving to another company.

Those people have been hit at both ends. Not only is the standard rate of tax damping down the effect of differentials, but at the other end their incomes have been squeezed by incomes policy. So many of them have neither the encouragement to give of their best in industry nor, in the case of young people, do they have the incentive of being able to enjoy the fruits of their labours.

What is the response to such suggestions from the Labour Benches? There is a blind acceptance, certainly by the hon. Members for Birmingham, Perry Barr (Mr. Rooker) and Coventry, South-West (Mrs. Wise), of the belief that the only way to proceed is by increasing the thresholds for allowances. It seems madness to me that we cannot obtain a balanced tax system. One cannot describe the people who have to pay the standard rate of tax as rich. In her references to such people, it was notable that the hon. Member for Coventry, South-West referred only to those who were receiving £170 a week—the people at the highest level of that income band.

Many people just begin to pay the standard rate of 34 per cent., while receiving a very low income. It seems to me not only divisive but inaccurate to talk only of those standard rate payers who are receiving the higher incomes in that band. It is this ignorance of the economic impetus that would be provided by a lower standard rate that does not make us sanguine about accepting some of the Labour arguments. Those on higher rates would benefit more in real poundage terms per annum, but equally it is true that those with skills who earn relatively high wages still receive substantially less than their counterparts in competitor countries in Europe.

The man who occupies a middle executive position and is paid £150 a week, a substantial gross salary, would get two and a half times as much after tax in West Germany. Prices are higher in that country than here and, therefore, his net wage would buy 50 per cent. more there than it would here. In France a man holding down the same job would get three times more in net real terms, and the purchasing power would be twice that of this country. Clearly, therefore, over a period differentials have widened abroad while in this country they have been damped down by incomes policy and by a failure to adjust our tax system in a sufficiently radical way.

Many of my right hon. and hon. Friends and I look forward to the passing of the amendment as a step in the right direction. It is in that light that I support it.

Mr. Paul Hawkins (Norfolk, South-West)

Like many other hon. Members, I am under pressure to sit down before I begin to speak. I shall be brief.

There have been excellent speeches on both sides of the Committee, but, like every speaker who is called towards the end of the debate, everything I wanted to say has been said already, and far better than I could have said it. I must, however, refer to the speech by the hon. Member for Coventry, South-West (Mrs. Wise). Her apparent hatred of anyone earning more than the average wage seems to blind her to the good that a reduction in tax could do in terms of creating more jobs.

The Budget is definitely harmful in so far as it has done nothing to help those whom everyone knows are vitally important to the nation. I refer to the managers and the highly skilled workers, whether in manufacturing, agriculture or the service industries. These people are vital if we are to boost production, increase efficiency and provide more employment. They have no incentive to produce and create jobs, and if they get so fed up that they go abroad that leaves us far worse off.

There is one other matter I wish to mention in passing. I am sorry that this Budget does nothing to equalise the capital taxation on land between land owned by owner-occupiers and land owned by pension funds and the like. If we do not look out, more and more land will be owned by pension funds and trustees and the owner-occupier will be squeezed out and the family farm will disappear.

For these reasons, I am delighted to have the opportunity of voting against the Budget. [HON. MEMBERS: "Oh."] I repeat that I am grateful for the opportunity to vote against this Budget, or against the Chancellor of the Exchequer. I believe that our amendment will be carried against the right hon. Gentleman. Therefore, I want by my vote to show my displeasure at what he has done.

Nevertheless, I have fellow feelings with my hon. Friend the Member for Norfolk, North (Mr. Howell). I agree that we have not done nearly enough for the tax structure of this country. I believe that we must be far more radical, that we must reduce taxation far more, and that Labour Members have never considered the benefits that can be brought to this country by a real reduction in taxation.

Mr. Lawson

We have had an interesting, if a trifle unusual, beginning to the Committee stage of the 1978 Finance Bill.

Yet this is the second occasion within a year that we have debated whether the basic rate of income tax should be 33 per cent. or 34 per cent. I do not know whether the right hon. Gentleman the Chancellor of the Exchequer can bear to be here to witness what may be a humiliating defeat for him, but so much for his allegation that this is the kind of amendment that Conservatives put forward only in an election year. All the same, it was interesting to hear from the right hon. Gentleman's own lips that this is to be an election year—and a good thing, too.

The previous occasion when we debated on an Opposition amendment whether the basic rate of income tax should be 33 per cent. or 34 per cent. was on the Report stage of last year's Finance Bill, on 21st July 1977. On that occasion the Scottish nationalists and Plaid Cymru supported the amendment moved by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe). The Ulster Unionists on that occasion abstained and the Liberals—those were the heady honeymoon days of the Lib-Lab pact—voted with the Government. It looks as though we may have slightly better luck this time.

The hon. Member for Cornwall, North (Mr. Pardoe)—who even today, despite all the advance publicity, does not have a single amendment on the Notice Paper to cut the basic rate of income tax at all—on the previous occasion justified his party's position in these terms: As the Chief Secretary knows, we have supported the Budget strategy … At this stage, it would be ridiculously irresponsible to adopt the Conservative Amendment (a). He added: I say that in some pain."—[Official Report, 21st July 1977; Vol. 935, c. 1936.] It appears that tonight the hon. Gentleman has grown up—almost. He no longer swallows whole the Chief Secretary's claptrap about irresponsibility—that from the Sancho Panza of the July Budget, the expert on irresponsibility. Tonight the hon. Member for Cornwall, North is no longer in pain, which must be a great relief to us all.

Mr. Pardoe

I am sure that the hon. Gentleman appreciates the rules of the House concerning the printing of motions on the Notice Paper. He well knows that this is a matter of ballot by the printer. Our amendments were tabled at the same time as his and those of the SNP. It is simply a matter of the draw whether one's amendment is tabled in the correct order. It has nothing to do with my support for the Amendment.

9.30 p.m.

Mr. Lawson

It is curious that whenever the Liberals do badly it is always the electoral system or the luck of the draw which is to blame: it is never anything to do with them.

There is no need at this late stage to rehearse again the overriding need for a substantial reduction in the burden of income tax at all levels. The case has been made eloquently and persuasively by many of my hon. Friends. It may be true that that alone would not transform our economic performance, but there can be no doubt that it is the single most important and absolutely indispentable element in any strategy for economic salvation. Even the Prime Minister has paid lip service to this creed, which new commands widespread acceptance on both sides of the Committee.

However, despite this, and contrary to all the expectations which he had built up in his heavy pre-Budget hints, the Chancellor introduced a Budget containing no reduction in the basic rate of income tax. It was widely expected that he would at least reduce it by 1p, to 33p in the pound, if only to compensate for the ¾p increase in the employee's national insurance contribution.

I had not expected to see a Budget which would leave the average working man paying more in income tax and employee's national insurance contribution combined out of each extra pound earned this year than he did last year. Acceptance of the amendment would at least put that right.

Although the cost is far from negligible—I shall come to that in a moment—there is nothing dramatic about the amendment. It is only a modest first step towards the levels of income tax which we on this side wish to see and are determined to see.

Mr. Crawford

The hon. Gentleman says that the amendment is just a modest step towards the levels of income tax that his party would like to see. May I take it from that that he will be supporting the SNP amendment for a 2p reduction of the standard rate?

Mr. Lawson

We shall not be supporting that amendment, for reasons that I shall explain in a moment. To achieve the cuts in taxation which are really needed, it is necessary—it is essential—to get to grips with the problem of public expenditure in a determined and thorough-going way. That is something which only a Government can do. It follows that only a change of Government can bring about the substantial cuts in income tax which are essential to our national economic recovery. That is why the Opposition cannot support the SNP's 2p amendment tonight. I am sorry, but there it is.

But at least we can make a start today—a modest start but a symbolic one, and one which will at least give hope where, since the Budget, there has been only despair. In doing so we shall also be reasserting Parliament's sovereignty over the Executive. As the right hon. Member for Down, South (Mr. Powell) and other hon. Members have said, this is a political debate. Its constitutional significance may prove to be even greater than its economic significance.

However, in economic terms, Her Majesty's Opposition have, through this and other later amendments, sought to give a boost to the economy. But the boost we seek to give is to supply, through the creation of incentives, and not to demand. That is what is needed. It is time that the tired old Budget arithmetic language of stimuli and boosts to demand was given a decent burial.

If the cuts in income tax that we propose seem to some relatively large in proportion to the so-called reductions contained in the Budget Statement, that is only because the Chancellor denied himself the room for any significant cuts by the massive increases in Government spending—an extra £4 billion this year—contained in this year's public expenditure White Paper, a White Paper against which we voted.

But the total scope that the Chancellor had was determined not by any fine tuning calculation of the balance between demand and available resources—that approach has long since been discredited by events—but by the relationship between his money supply target, which largely determines the level of monetary demand in the economy, and the public sector borrowing requirement.

Nothing could have been more absurd or pathetic than the Chancellor saying that what we were proposing was dangerous and irresponsible because it would lead to a heavy increase in demand when the tax rebates were given in September or October.

That is absolute nonsense and the right hon. Gentleman was shot down in flames by my right hon. Friend the Member for Chipping Barnet (Mr. Maudling), because the one problem which the Chancellor does not face—it is almost the only economic one from which he does not suffer—is that of demand pushing up against available physical resources in the economy.

The Chancellor of the Exchequer is upset—indeed petulant—because the July Budget which he promised a little while ago seems to have been pre-empted.

Mr. Healey

The hon. Gentleman referred with approval to his right hon. Friend the Member for Chipping Barnet (Mr. Maudling). Does he agree with the burden of his right hon. Friend's speech, which was that the PSBR did not matter and that those who were infected with the new disease of monetarism did not deserve support?

Mr. Lawson

I thought that the right hon. Gentleman would have come up with a better intervention than that—[HON. MEMBERS: "Answer the question."] I shall answer it. I agree with some of my right hon. Friend's statements, and there are others with which I disagree. The fact that my right hon. Friend was able to shoot the Chancellor of the Exchequer down in flames was the important thing.

Nor indeed—and this is where I think the Chancellor of the Exchequer is right for a change—is there any uniquely right figure for the PSBR. A strong case can be made on practical political grounds for the adoption of some modern variant of the old balanced Budget rule, but the truth, as the right hon. Gentleman himself admitted, is that the PSBR is a matter of judgment. It is a matter of judging what is an acceptable risk, given the basic fact that the higher the PSBR the greater the risk, whether it be a risk of inflation, or of crowding out private sector investment, or both.

It is our judgment on this side of the Committee that, if we are to believe the Treasury's published figures, the Chancellor's PSBR involves a very high degree of risk. We therefore move the amendment, and will move others standing in the names of the official Opposition, on the clear understanding that there must be no consequential increase in the Budget deficit. We have made clear what follows from the amendment.

Mr. Healey

Is the hon. Gentleman suggesting that the condition on which the Opposition are moving the amendment is that the laws of mathematics are suspended?

Mr. Lawson

We are moving the amendment on the clear understanding that the Government must take necessary countervailing action if the amendment is carried. The amendment will cost a shade over £300 million in 1978–79, and all our amendments taken together will cost about £½ billion this year. The question is, how is that sum to be made good? We have said that public expenditure should be trimmed back by that amount. The Chancellor of the Exchequer said this afternoon that that was impossible that although we were only one short month into the financial year, it was already far too late to trim public spending by £½ billion in 1978–79. That is what the right hon. Gentleman said, and it is manifest nonsense. I do not wish to see this, but if by any chance there were to be a repeat of the 1976 debacle and the IMF were to demand that it be done it would be done soon enough.

Let us not take any hypothetical circumstances. Let us look at what happened last year, 1977–78. As page 16 of the Financial Statement and Budget Report, the Red Book, says, public spending last year turned out to be between £3½ billion and £4 billion less than was officially planned. That shortfall occurred after the year had already begun, largely as a result of the rigid application of strict financial disciplines, assisted by the Chief Secretary, who is a strict financial disciplinarian, or was last year. This year the Treasury expects a shortfall of only £1½ billion on the same terms. There is nothing whatever to prevent the Treasury ensuring that this shortfall is £2 billion and not £1½ billion, thus achieving the £500 million saving required.

I hear the Chancellor say "incredible". Is he, therefore, contending that, while it is possible within a given year to cut public expenditure by £4 billion by accident, it is quite impossible to cut it by £500 million on purpose? If that is what he is saying—and it seems that he is—public expenditure really is totally out of control and the sooner he resigns the better. The sooner he resigns the better anyway, of course, but I do not believe for a moment that that is true. Nor does the Chancellor. Nor should the Committee.

Of course, the Government may not wish to trim back public expenditure, but that is a different matter altogether. If, regrettably, that should prove to be the case, the only alternative is to increase indirect taxation by £500 million instead. The simplest way to do that, as my right hon. Friend and learned Friend the Member for Surrey, East pointed out, would be to raise the standard rate of VAT from 8 per cent. to 10 per cent., which can be done by the regulator with the minimum of delay. That would bring in £800 million in a full year, of which one-half to two-thirds, I guess, would be raised in 1978–79. If at the same time the higher rate of VAT were reduced to 10 per cent., the extra yield would be slightly less.

I should have expected the Government to welcome with open arms a move of this kind, because in our last debate on reducing the basic rate of income tax to 33 per cent.—this was last July in the debate to which I have already referred—the Chief Secretary said: … there is a problem about the balance between direct and indirect taxation. I do not dispute that. I have never disputed it. I said during my speech on the Finance Bill and on the Budget that we have to switch from direct to indirect taxation as fast as we can."—[Official Report, 21st July 1977; Vol. 935, c. 1975.] Now that the time has come to put his money—or, rather, the taxpayer's money—where his mouth is, the Chief Secretary and his right hon. Friends suddenly sing a different tune. We are told that the switch which he and the Chancellor have hitherto held should be implemented as quickly as possible should not be undertaken at all since it would be unfair to lower-paid workers. Let him ask the people of this country which they would prefer. They will put him straight soon enough.

Again, we are told that, while it might be a good idea one day to switch from direct to indirect taxation, this is not the time since it would increase the rate of inflation. I see the Chief Secretary nodding. But if that were true, it would never be the right time to make the switch since it never can be right gratuitously to increase the rate of inflation.

But, of course, that, too, is nonsense. If it were not nonsense, the Government would have long since abolished inflation by abolishing VAT altogether. It is extraordinary how otherwise rational men can so easily become the victims of the disease of RPI-itis. It is even more extraordinary since the Chancellor has time and again insisted—he did it again in the Budget—that the rate of inflation is primarily determined, so he says, by wage increases, and these, he says, are likely to be less if income tax is reduced since employees are concerned about take-home pay.

There was a Written Answer by the Treasury last May which actually quantified a cut of 1p in the basic rate of income tax as likely to reduce the RPI by ¾ per cent.—exactly the same amount, so it happens, as it is alleged that a rise in VAT to 10 per cent. would increase it. That was a Treasury Written Answer to which I can refer the Chancellor when the debate is over. Thus, even on the Chancellor's own cockeyed arithmetic, which in my opinion is wholly mistaken as to the true determinants of inflation, there is no net inflationary effect.

As ever, the most bizarre argument was produced by the Financial Secretary when he wound up the Second Reading debate the week before last and sought to show that there was no need to shift the burden of tax away from income tax since the proportion taken in income tax has not been increasing anyway. This is utter nonsense, of course. I refer the right hon. Gentleman, for example, to the Treasury's own economic progress report for last September, which pointed out categorically: The emphasis has shifted noticeably from indirect taxes, which fall on final expenditure or enter costs of production, to direct taxes on income, mainly personal income tax. That was the Treasury's own report.

The error which the Financial Secretary made was to compare income tax and employees' national insurance contributions as a percentage of total tax revenue now with the percentage taken in 1960, which was long before the introduction of corporation tax, when in those days a significant slice of income tax was a tax not on personal incomes at all but on undistributed company profits. That was the gross error that he made. But those of us who have been with him in Finance Bill Committee upstairs are, of course, used to him getting his figures wrong.

9.45 p.m.

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

The hon. Gentleman has a Question down to which he will be getting a reply in due course. That reply will show that, although in the past few years there has been an increase in direct taxes as a proportion of total taxes, this is a phenomenon of the past few years which is now being reversed.

Mr. Lawson

The right hon. Gentleman has made my point for me.

Finally, there was the more personal argument put forward on Second Reading by the right hon. Member for Down, South, who said: I would venture on the contrary to say that income tax is the best of all taxes. … So I would not wish to see any offsetting take place in the form of a proportionate increase of direct taxation."—[Official Report, 27th April 1978; Vol. 948, c. 1711–12.] I must say that I was more than a little surprised to hear that eulogy of income tax, since I well remember his celebrated "Morecambe budget" of 11th October 1968, almost exactly a decade ago. On that occasion, he also referred expressly to the relative merits of direct and indirect taxation. He said: Though there are several indirect taxes which I heartily detest … I confess to preferring a good solid attack on direct taxation. I believe that he was right then, and that the intervening 10 years should have served only to reinforce that sensible preference, which, happily, marches in step with the somewhat uncharacteristic political grounds that he has given for voting with the Conservative Opposition tonight.

For at the time of the "Morecambe budget" the equivalent of the basic rate of income tax was 32 per cent.; today it is 34 per cent. Income tax and surtax together at the time of the "Morecambe budget" accounted for 37 per cent.—I hope that the Financial Secretary is listening—of total central Government taxation. Today, that proportion is 47 per cent.

It seems clear from what the Chancellor of the Exchequer said, however, that if he loses the vote tonight he will recoup the money, if indeed he recoups it at all—and he seemed less sure of himself than is usually the case on this matter—not by trimming back Government spending, nor even by increasing value added tax, but by increasing the employers' national insurance surcharge, a move that he expressly argued against on employment grounds in the Budget Statement. We shall just have to wait and see, but only this Government could concoct a so-called industrial strategy based on taxing employment and subsidising employment at one and the same time.

The Committee finds itself tonight in an unusual constitutional position as a result of the Government's decision to remain in office and put forward Budget proposals without the parliamentary majority necessary to ensure their passage. But it is not an unprecedented position, for a similar situation arose in Committee upstairs on last year's Finance Bill. On that occasion, the Government acknowledged that it was their responsibility to find the offsetting savings required by the cuts in income tax introduced in the Committee stage. It is their responsibility, given the procedural rules that bind us, by virtue of the fact that they are the Government. If they are unwilling to discharge that responsibility, there is a ready solution open to them: they can dissolve Parliament and go to the country.

But if the instinct for self-preservation decides them against that course, which would be the sensible one, despite all the huffing and puffing from the Chancellor up to a few weeks ago, they must accept the consequences, and accept above all that a majority Government cannot expect to be treated as if they commanded a parliamentary majority, and that not even on the Finance Bill can they bully or cow the sovereign House of Commons. I urge all right hon. and hon. Members, on this side of the Committee at any rate, to support the amendment.

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

It is, perhaps, not too surprising that we have been treated to a somewhat untypical speech by the hon. Member for Blaby (Mr. Lawson).

We have had a very interesting debate in which a number of right hon. and hon. Members have participated and made speeches of a type one does not ordinarily hear from them about their worries regarding the borrowing requirement. On the one hand, the right hon. Member for Chipping Barnet (Mr. Maudling) told us that it did not matter terribly. The right hon. Member for Down, South (Mr. Powell), if he does not mind my saying so—I try very hard never to upset him too much—seemed to be having an appalling task convincing himself. Those of us who listened to him were convinced that he had not convinced himself. I have rarely heard a speech by him that finished up convincing himself to vote against the Government on an economic or financial matter on the ground that we were not supplying better local government in Northern Ireland. Nevertheless, I noted what he said.

The right hon. and learned Member for Surrey, East (Sir G. Howe) told us once again that, if anything, the public sector borrowing requirement was too high. He told us earlier in the Budget debates that he was dismayed at its level. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) said that it was a risky strategy. The hon. Member for St. Ives (Mr. Nott) said that the borrowing requirement was too high. The hon. Member for Horncastle (Mr. Tapsell) spoke of the alarm that there was at the level of the borrowing requirement.

Only one hon. Member was able to say specifically what he meant by saying that the borrowing requirement was too high. That was the hon. Member for Blaby, who was, as ever, ready to tell us on behalf of the Opposition what it should be. He said specifically that it should be between £4 billion and £8 billion. My right hon. Friend the Chancellor took that to be specifically £6 billion. I do not know why he should do that. It is very odd; he gets these strange ideas. When somebody talks about a figure between four and eight, he assumes that it is six. However, we assume that the argument is that the borrowing requirement should be lower than £8½ billion. I see that the hon. Member for Blaby is nodding in assent.

Mr. Ridley


Mr. Barnett

The hon. Member for Blaby, the Shadow Chancellor and all the Members of the Opposition Front Bench—

Mr. Ridley


The Chairman (Mr. Oscar Murton)

Order. If the right hon. Gentleman does not desire to give way at this moment, he cannot be pressed to do so.

Mr. Barnett

I do not desire to give way at the moment. I am talking now about the desire of the Opposition Front Bench to reduce the borrowing requirement. Yet the first amendment they propose to the Finance Bill is designed to increase it. There is a slight difference of a few million pounds, but the effect of their amendment, with the consequential effect on advance corporation tax, would be approximately £370 million.

Mr. Ridley


Mr. Tapsell


Mr. Barnett

Hon. Gentlemen are getting excited. I do not understand it. I have only just started. There is nothing to get excited about.

Having said that the borrowing requirement is too high, the first step that Tory Members take is to propose an amendment designed to increase it by £370 million.

Mr. Tapsell


Mr. Ridley


Mr. Barnett

I shall give way to the hon. Member for Horncastle, but he should not rush at me like that. It upsets me. Let him wait a minute. He should not get too excited.

I was saying that the effect of the first amendment proposed to the Finance Bill would be to increase the borrowing requirement. We are told by the Shadow Chancellor that the Tories would offset it by cutting public expenditure. The Shadow Chancellor said where he would cut public expenditure. The hon. Member for Blaby plainly did not believe him, and I shall come to what he said about cutting public expenditure and precisely how he would do it. He used the strangest argument I have heard in my life. The way to plan to cut expenditure, he said, was to wait until there was a shortfall and to hope that that shortfall would be sufficient to offset the irresponsibility of the Opposition Front Bench. That is a strange argument.

The right hon. and learned Member for Surrey, East put forward approximately £500 million worth of cuts in public expenditure as an offset. He hold us three times—he is getting almost as repetitious as his hon. Friend the Member for Blaby—that there was a total of £67,000 million involved in public expenditure and that all that was needed was three-quarters of 1 per cent. He would have us believe that this would be an easy task. What did the right hon. and learned Gentleman do? He proceeded to list items in the £500 million. That was the best he could do. He must have stuck a pin in the White Paper.

The first and biggest item which the right hon. and learned Gentleman gave us was £300 million from the National Enterprise Board which, he said, the House had voted a few weeks ago. I am sorry to have to tell him that he is confused on these matters. The House voted a few weeks ago on a statutory limit for the NEB. I would be interested to know how we can cut £300 million from the NEB expenditure when the total expenditure of the Board in 1978–79 is £275 million.

The bulk of that money is already committed, for British Leyland, Rolls-Royce and other commitments to subsidiaries of the NEB. Is the right hon. and learned Gentleman telling the Committee that he would cut the whole of that and take the £275 million? Would he cut the funds to British Leyland, Rolls-Royce, Alfred Herbert and others?

The Shadow Chancellor told us that he would cut 25 per cent from the selective assistance to industry. This is selective assistance under the 1972 Industry Act. We all recall that Act. It was introduced by the then Tory Government. What the right hon. and learned Gentleman would be doing in respect of that money, which is virtually all committed, would be removing employment opportunities and affecting private sector investment. Is that what he has in mind?

Another big item which the Shadow Chancellor put forward for offsetting the tax cuts was a cut in the staff of the Inland Revenue and the Customs and Excise, which, he claimed, had increased by 20,000 since 1974. The increase between 1974 and 1978 was about 13,000, slightly less than the increase between 1970 and 1974, when it was 15,000. Even if the right hon. and learned Gentleman were to sack tomorrow the whole of that 13,000 increase, without redundancy pay or notice, he would save approximately £49 million. Is he telling us that that is what he wants to do? If he did that, we would have a very large borrowing requirement because there would be no one to collect the taxes. If that is the way he would act as a Chancellor, it is fortunate that he will never hold office. That is the oddest proposal I have ever heard.

Perhaps the right hon. and learned Gentleman's finest hour, or finest cheer, came when he listed his proposal on public expenditure, which involved a cut of £5 million in money to the front-line Presidents. One shudders to think of the effect of the combination of the right hon. and learned Gentleman and the right hon. Lady the Leader of the Opposition upon our foreign policy if that is the kind of thing they would be doing. Maybe the right hon. and learned Gentleman has not heard that some of those frontline Presidents are very friendly with the Chinese.

10.0 p.m.

When the right hon. and learned Gentleman tries to list how he would cut £500 million and says that it is so easy, I am bound to tell him that he should not listen to his hon. Friend the Member for Blaby. Out of £67,000 million, the best he can do, £500 million, which is only 0.75 per cent., is totally ineffective and could not possibly work.

Opposition Members who have said that the borrowing requirement should not be increased by cutting taxation unless public expenditure is first cut know that the Shadow Chancellor, despite all his efforts, was not able to come up with any such proposal. We know why that was so. As the right hon. Member for Down, South pointed out on Second Reading, it is very difficult indeed to cut public expenditure in the year of the announcement.

Of course, it has been done. It was done by removing the nationalised industry price restraint subsidies, but there is nothing left now that they have been removed. Maplin Airport is an example, and defence expenditure is another. The only other areas in the last four years where cuts in public expenditure were announced and made effective in the same year were when they were a small part of ongoing cuts which took place in the following year. Anyone who understands these matters knows that it cannot be done in the year in question.

So much for the public expenditure cuts that the right hon. and learned Gentleman proposes as an offset in order not to have an increase in the borrowing requirement. I am bound to say that the Opposition Front Bench should have been proposing something more than simply not increasing the borrowing requirement. If they meant what they said about reducing the borrowing requirement, they should have mentioned something very much more than the £500 million, which could not work anyway, but they have not done so.

What is it, then, that the Opposition would like to do? What is this fresh start that they would like to make on cutting taxes? It is 1p off the basic rate. I agree with the hon. Member for Chichester (Mr. Nelson) that as soon as possible we should make some cuts in the basic rate for differential reasons, but let us understand what is involved in this great risk of which the right hon. and learned Gentleman speaks. What are we getting for it? We are getting 1p off the basic rate.

For people at the bottom end of the scale, on £40 a week, there is nothing at all. The average worker, the married man on £80 a week, would get 36p. If he had a mortgage of £10,000, he would get only 16p a week. A single person with a total income of £50 a week would get 17p a week and a widow over 65 would get 11p a week from this great risk that the Conservatives are prepared to take in making their fresh start. Even the people that Opposition Members have said they want to help, on £10,000 a year, would get very little. A married man on £10,000 a year would get about £1.20 a week from this. Those above £10,000 a year would get a lot more from the other amendments. A man on £25,000 a year would, from the amendments put forward, get £1,643 a year.

That is all that is involved in this so-called gesture or fresh start—this token change, as the Shadow Chancellor described it. For this, he is prepared to jeopardise the national interest as he has defined it.

I tell the Committee that I am in favour of income tax cuts, but better balanced than these and not at any cost. I ask my right hon. and hon. Friends to vote against the amendment, and I hope that there will be some Opposition Members, including the right hon. Member for Chipping Barnet, who will do the same.

Question put, That the amendment be made:

The Committee divided: Ayes 312, Noes 304.

Division No. 199] AYES [10.04 p.m.
Adley Robert Crawford, Douglas Hall-Davis, A. G. F.
Aitken, Jonathan Critchley, Julian Hamilton, Archibald (Epsom & Ewell)
Alison, Michael Crouch, David Hamilton, Michael (Salisbury)
Amery, Rt Hon Julian Crowder F. P. Hampson, Dr Keith
Arnold, Tom Davies, Rt Hon J. (Knutsford) Hannam, John
Atkins, Rt Hon H. (Spelthorne) Dean, Paul (N Somerset) Harrison, Col Sir Harwood (Eye)
Atkinson, David (Bournemouth, East) Dodsworth, Geoffrey Harvie Anderson, Rt Hon Miss
Awdry, Daniel Douglas-Hamilton, Lord James Haselhurst, Alan
Bain, Mrs Margaret Drayson, Burnaby Hastings, Stephen
Baker, Kenneth du Cann, Rt Hon Edward Havers, Rt Hon Sir Michael
Banks, Robert Dunlop, John Hawkins, Paul
Beith, A. J. Durant, Tony Hayhoe, Barney
Bell, Ronald Dykes, Hugh Heath, Rt Hon Edward
Bendall, Vivian (Ilford North) Eden, Rt Hon Sir John Henderson, Douglas
Bennett, Sir Frederic (Torbay) Edwards, Nicholas (Pembroke) Heseltine, Michael
Bennett, Dr Reginald (Fareham) Elliott, Sir William Hicks, Robert
Benyon, W. Emery, Peter Higgins, Terence L.
Berry, Hon Anthony Evans, Gwynfor (Carmarthen) Hodgson, Robin
Biffen, John Ewing, Mrs Winifred (Moray) Holland, Philip
Biggs-Davidson, John Eyre, Reginald Hooson, Emlyn
Blaker, Peter Fairbairn, Nicholas Hordern, Peter
Body, Richard Fairgrieve, Russell Howe, Rt Hon Sir Geoffrey
Boscawen, Hon Robert Farr, John Howell, David (Guildford)
Bottomley, Peter Fell, Anthony Howell, Ralph (North Norfolk)
Bowden, A. (Brighton, Kemptown) Finsberg, Geoffrey Howells, Geraint (Cardigan)
Boyson, Dr Rhodes (Brent) Fisher, Sir Nigel Hunt, David (Wirral)
Bradford, Rev Robert Fletcher, Alex (Edinburgh N) Hunt, John (Ravensbourne)
Braine, Sir Bernard Fletcher-Cooke, Charles Hurd, Douglas
Brittan, Leon Fookes, Miss Janet Hutchison, Michael Clark
Brocklebank-Fowler, C. Forman, Nigel Irving, Charles (Cheltenham)
Brooke, Peter Fowler, Norman (Sutton C'f'd) James, David
Brotherton, Michael Fox, Marcus Jenkin, Rt Hon P. (Wanst'd & W'df'd)
Bryan, Sir Paul Fraser, Rt Hon H. (Stafford & St) Jessel, Toby
Buchanan-Smith, Alick Freud, Clement Johnson Smith, G. (E Grinstead)
Buck, Antony Fry, Peter Johnston, Russell (Inverness)
Budgen, Nick
Bulmer, Esmond Galbraith, Hon T. G. D. Jones, Arthur (Daventry)
Burden, F. A. Gardiner, George (Reigate) Jopling, Michael
Butler, Adam (Bosworth) Gardner, Edward (S Fylde) Joseph, Rt Hon Sir Keith
Carlisle, Mark Gilmour, Rt Hon Ian (Chesham) Kaberry, Sir Donald
Carson, John Gilmour, Sir John (East Fife) Kellett-Bowman, Mrs Elaine
Chalker, Mrs Lynda Glyn, Dr Alan Kershaw, Anthony
Channon, Paul Godber, Rt Hon Joseph Kimball, Marcus
Churchill, W. S. Goodhart, Philip King, Evelyn (South Dorset)
Clark, Alan (Plymouth, Sutton) Goodlad, Alastair King, Tom (Bridgwater)
Clark, William (Croydon S) Gorst, John Kitson, Sir Timothy
Clarke, Kenneth (Rushcliffe) Gow, Ian (Eastbourne) Knight, Mrs Jill
Clegg, Walter Gower, Sir Raymond (Barry) Knox, David
Cockcroft, John Grant, Anthony (Harrow C) Lamont, Norman
Cooke, Robert (Bristol W) Gray, Hamish Langford-Holt, Sir John
Cope, John Grieve, Percy Latham, Michael (Melton)
Cormack, Patrick Griffiths, Eldon Lawrence, Ivan
Corrie, John Grimond, Rt Hon J. Lawson, Nigel
Costain, A. P. Grist, Ian Lester, Jim (Beeston)
Craig, Rt Hon W. (Belfast E) Grylls, Michael Lewis, Kenneth (Rutland)
Lloyd, Ian Paisley, Rev Ian Spicer, Michael (S Worcester)
Loveridge, John Pardoe, John Sproat, Iain
Luce, Richard Parkinson, Cecil Stainton, Keith
McAdden, Sir Stephen Pattie, Geoffrey Stanbrook, Ivor
MacCormick, Iain Penhaligon, David Stanley, John
McCrindle, Robert Percival, Ian Steel, Rt Hon David
McCusker, H. Peyton, Rt Hon John Steen, Anthony (Wavertree)
Macfarlane, Neil Pink, R. Bonner Stewart, Rt Hon Donald
MacGregor, John Powell, Rt Hon J. Enoch Stewart, Ian (Hitchin)
MacKay, Andrew (Stechford) Prentice, Rt Hon Reg Stokes, John
Macmillan, Rt Hon M. (Farnham) Price, David (Eastleigh) Stradling Thomas, J.
McNair-Wilson, M. (Newbury) Prior, Rt Hon James Tapsell, Peter
McNair-Wilson, P. (New Forest) Pym, Rt Hon Francis Taylor, R. (Croydon NW)
Madel, David Raison, Timothy Taylor, Teddy (Cathcart)
Marshall, Michael (Arundel) Rathbone, Tim Tebbit, Norman
Marten, Neil Rees, Peter (Dover & Deal) Temple-Morris, Peter
Mates, Michael Rees-Davies, W. R. Thatcher, Rt Hon Margaret
Mather, Carol Renton, Rt Hon Sir D. (Hunts) Thomas, Dafydd (Merioneth)
Maude, Angus Renton, Tim (Mid-Sussex) Thomas, Rt Hon P. (Hendon S)
Maudling, Rt Hon Reginald Rhodes, James R. Thompson, George
Mawby, Ray Rhys Williams, Sir Brandon Thorpe, Rt Hon Jeremy (N Devon)
Maxwell-Hyslop, Robin Ridley, Hon Nicholas Townsend, Cyril D.
Mayhew, Patrick Ridsdale, Julian Trotter, Neville
Meyer, Sir Anthony Rifkind, Malcolm van Straubenzee, W. R.
Miller, Hal (Bromsgrove) Rippon, Rt Hon Geoffrey Vaughan, Dr Gerard
Mills, Peter Roberts, Wyn (Conway) Viggers, Peter
Miscampbell, Norman Rodgers, Sir John (Sevenoaks) Wainwright, Richard (Colne V)
Mitchell, David (Basingstoke) Ross, Stephen (Isle of Wight) Wakeham, John
Moate, Roger Ross, William (Londonderry) Walder, David (Clitheroe)
Molyneaux, James Rossi, Hugh (Hornsey) Walker, Rt Hon P. (Worcester)
Monro, Hector Rost, Peter (SE Derbyshire) Walker-Smith, Rt Hon Sir Derek
Montgomery, Fergus Royle, Sir Anthony Wall, Patrick
Moore, John (Croydon C) Sainsbury, Tim Walters, Dennis
More, Jasper (Ludlow) St. John-Stevas, Norman Warren, Kenneth
Morgan, Geraint Scott, Nicholas Watt, Hamish
Morris, Michael (Northampton S) Scott-Hopkins, James Weatherill, Bernard
Morrison, Charles (Devizes) Shaw, Giles (Pudsey) Wells, John
Morrison, Hon Peter (Chester) Shaw, Michael (Scarborough) Welsh, Andrew
Mudd, David Shelton, William (Streatham) Whitelaw, Rt Hon William
Neave, Airey Shepherd, Colin Whitney, Raymond
Nelson, Anthony Shersby, Michael Wiggin, Jerry
Neubert, Michael Silvester, Fred Wigley, Dafydd
Newton, Tony Sims, Roger Wilson, Gordon (Dundee E)
Normanton, Tom Sinclair, Sir George Winterton, Nicholas
Nott, John Skeet, T. H. H. Wood, Rt Hon Richard
Onslow, Cranley Smith, Cyril (Rochdale) Young, Sir G. (Ealing, Acton)
Oppenheim, Mrs Sally Smith, Dudley (Warwick) Younger, Hon George
Osborn, John Smith, Timothy John (Ashfield)
Page, John (Harrow West) Speed, Keith TELLERS FOR THE AYES:
Page, Rt Hon R. Graham (Crosby) Spence, John Mr. Spencer Le Marchant and
Page, Richard (Workington) Spicer, Jim (W Dorset) Mr. Michael Roberts.
Abse, Leo Buchanan, Richard Davies, Bryan (Enfield N)
Allaun, Frank Callaghan, Rt Hon J. (Cardiff SE) Davies, Rt Hon Denzil
Anderson, Donald Callaghan, Jim (Middleton & P) Davies, Ifor (Gower)
Archer, Rt Hon Peter Campbell, Ian Davis, Clinton (Hackney C)
Armstrong, Ernest Canavan, Dennis Deakins, Eric
Ashley, Jack Cant, R. B. Dean, Joseph (Leeds West)
Ashton, Joe Carmichael, Neil de Freitas, Rt Hon Sir Geoffrey
Atkins, Ronald (Preston N) Carter, Ray Dell, Rt Hon Edmund
Atkinson, Norman Carter-Jones, Lewis Dempsey, James
Bagier, Gordon A. T. Cartwright, John Dewar, Donald
Barnett, Guy (Greenwich) Castle, Rt Hon Barbara Doig, Peter
Barnett, Rt Hon Joel (Heywood) Clemitson, Ivor Dormand, J. D.
Bates, Alf Cocks, Rt Hon Michael (Bristol S) Douglas-Mann, Bruce
Bean, R. E. Cohen, Stanley Duffy, A. E. P.
Benn, Rt Hon Anthony Wedgwood Coleman, Donald Dunn, James A.
Bennett, Andrew (Stockport N) Colquhoun, Ms Maureen Dunnett, Jack
Bidwell, Sydney Concannon, Rt Hon John Dunwoody, Mrs Gwyneth
Bishop, Rt Hon Edward Conlan, Bernard Eadie, Alex
Blenkinsop, Arthur Cook, Robin F. (Edin C) Edge, Geoff
Boardman, H. Corbett, Robin Edwards, Robert (Wolv SE)
Booth, Rt Hon Albert Cowans, Harry Ellis, John (Brigg & Scun)
Boothroyd, Miss Betty Cox, Thomas (Tooting) Ellis, Tom (Wrexham)
Bottomley, Rt Hon Arthur Craigen, Jim (Maryhill) English, Michael
Boyden, James (Bish Auck) Crawshaw, Richard Ennals, Rt Hon David
Bradley, Tom Cronin, John Evans, Fred (Caerphilly)
Bray, Dr Jeremy Crowther, Stan (Rotherham) Evans, Ioan (Aberdare)
Broughton, Sir Alfred Cryer, Bob Evans, John (Newton)
Brown, Hugh D. (Provan) Cunningham, G. (Islington S) Ewing, Harry (Stirling)
Brown, Robert C. (Newcastle W) Cunningham, Dr J. (Whiteh) Faulds, Andrew
Brown, Ronald (Hackney S) Dalyell, Tam Fernyhough, Rt Hon E.
Buchan, Norman Davidson, Arthur Fitch, Alan (Wigan)
Fitt, Gerard (Belfast W) Lyon, Alexander (York) Rose, Paul B.
Flannery, Martin Lyons, Edward (Bradford W) Ross, Rt Hon W. (Kilmarnock)
Fletcher, L. R. (Ilkeston) Mabon, Rt Hon Dr J. Dickson Rowlands, Ted
Fletcher, Ted (Darlington) McCartney, Hugh Ryman, John
Foot, Rt Hon Michael McDonald, Dr Oonagh Sandelson, Neville
Ford, Ben McElhone, Frank Sedgemore, Brian
Forrester, John MacFarquhar, Roderick Selby, Harry
Fowler, Gerald (The Wrekin) McGuire, Michael (Ince) Sever, John
Fraser, John (Lambeth, N'w'd) MacKenzie, Rt Hon Gregor Shaw, Arnold (Ilford South)
Freeson, Rt Hon Reginald Mackintosh, John P. Sheldon, Rt Hon Robert
Garrett, John (Norwich S) Maclennan, Robert Shore, Rt Hon Peter
Garrett, W. E. (Wallsend) McMillan, Tom (Glasgow C) Short, Mrs Renée (Wolv NE)
George, Bruce McNamara, Kevin Silkin, Rt Hon John (Deptford)
Gilbert, Rt Hon Dr John Madden, Max Silkin, Rt Hon S. C. (Dulwich)
Ginsburg, David Magee, Bryan Sillars, James
Golding, John Maguire, Frank (Fermanagh) Silverman, Julius
Gould, Bryan Mahon, Simon Skinner, Dennis
Gourlay, Harry Mallalieu, J. P. W. Smith, John (N Lanarkshire)
Graham, Ted Marks, Kenneth Snape, Peter
Grant, George (Morpeth) Marshall, Dr Edmund (Goole) Spearing, Nigel
Grant, John (Islington C) Marshall, Jim (Leicester S) Spriggs, Leslie
Grocott, Bruce Mason, Rt Hon Roy Stallard, A. W.
Hamilton, W. W. (Central Fife) Maynard, Miss Joan Stewart, Rt Hon M. (Fulham)
Hardy, Peter Meacher, Michael Stoddart, David
Harrison, Rt Hon Walter Mellish, Rt Hon Robert Stott, Roger
Hattersley, Rt Hon Roy Mendelson, John Strang, Gavin
Hayman, Mrs Helene Mikardo, Ian Strauss, Rt Hon G. R.
Healey, Rt Hon Denis Millan, Rt Hon Bruce Summerskill, Hon Dr Shirley
Heffer, Eric S. Miller, Dr M. S. (E Kilbride) Swain, Thomas
Hooley, Frank Mitchell, Austin Taylor, Mrs Ann (Bolton W)
Horam, John Mitchell, R. C. (Soton, Itchen) Thomas, Jeffrey (Abertillery)
Howell, Rt Hon Denis (B'ham, Sm H) Molloy, William Thomas, Mike (Newcastle E)
Hoyle, Doug (Nelson) Moonman, Eric Thomas, Ron (Bristol NW)
Huckfield, Les Morris, Alfred (Wythenshawe) Thorne, Stan (Preston S)
Hughes, Rt Hon C. (Anglesey) Morris, Rt Hon Charles R. Tierney, Sydney
Hughes, Mark (Durham) Morris, Rt Hon J. (Aberavon) Tilley, John (Lambeth, Central)
Hughes, Robert (Aberdeen N) Moyle, Roland Tinn, James
Hughes, Roy (Newport) Mulley, Rt Hon Frederick Tomlinson, John
Hunter, Adam Murray, Rt Hon Ronald King Tomney, Frank
Irvine, Rt Hon Sir A. (Edge Hill) Newens, Stanley Torney, Tom
Irving, Rt Hon S. (Dartford) Noble, Mike Tuck, Raphael
Jackson, Colin (Brighouse) Oakes, Gordon Urwin, T. W.
Jackson, Miss Margaret (Lincoln) Ogden, Eric Varley, Rt Hon Eric G.
Janner, Greville O'Halloran, Michael Wainwright, Edwin (Dearne V)
Jay, Rt Hon Douglas Orbach, Maurice Walker, Harold (Doncaster)
Jeger, Mrs Lena Orme, Rt Hon Stanley Walker, Terry (Kingswood)
Jenkins, Hugh (Putney) Ovenden, John Ward, Michael
John, Brynmor Owen, Rt Hon Dr David Watkins, David
Johnson, James (Hull West) Padley, Walter Watkinson, John
Jones, Alec (Rhondda) Palmer, Arthur Weetch, Ken
Jones, Barry (East Flint) Park, George Weitzman, David
Jones, Dan (Burnley) Parker, John Wellbeloved, James
Judd, Frank Parry, Robert White, Frank R. (Bury)
Kaufman, Gerald Pavitt, Laurie White, James (Pollok)
Kelley, Richard Pendry, Tom Whitehead, Philip
Kerr, Russell Perry, Ernest Whitlock, William
Kilroy-Silk, Robert Phipps, Dr Colin Willey, Rt Hon Frederick
Kinnock, Neil Prescott, John Willams, Rt Hon Alan (Swansea W)
Lambie, David Price, C. (Lewisham W) Williams, Alan Lee (Hornch'ch)
Lamborn, Harry Price, William (Rugby) Williams, Rt Hon Shirley (Hertford)
Lamond, James Radice, Giles Wilson, Rt Hon Sir Harold (Huyton)
Latham, Arthur (Paddington) Rees, Rt Hon Merlyn (Leeds S) Wilson, William (Coventry SE)
Leadbitter, Ted Richardson, Miss Jo Wise, Mrs Audrey
Lee, John Roberts, Albert (Normanton) Woodall, Alec
Lestor, Miss Joan (Eton & Slough) Roberts, Gwilym (Cannock) Woof, Robert
Lever, Rt Hon Harold Robertson, John (Paisley) Wrigglesworth, Ian
Lewis, Arthur (Newham N) Robinson, Geoffrey Young, David (Bolton E)
Lewis, Ron (Carlisle) Roderick, Caerwyn
Litterick, Tom Rodgers, George (Chorley) TELLERS FOR THE NOES:
Lomas, Kenneth Rodgers, Rt Hon William (Stockton) Mr. Joseph Harper and
Loyden, Eddie Rooker, J. W. Mr. James Hamilton.
Luard, Evan Roper, John

Question accordingly agreed to.

Sir G. Howe

On a point of order, Mr. Murton. This is the first Government ever to be defeated on the crucial question of the basic rate of income tax. Since a Government to whom the House has denied Supply in this way can never recover their authority to govern, ought they not, in honour, give the people a chance to elect a new Government?

Hon. Members

Answer, answer.

Mr. Wigley

I beg to move Amendment No. 3, in page 10, line 15, leave out '£750' and insert '£1,000'.

The Chairman

With this we may take the following amendments: No. 4, in page 10, line 15, leave out '£750' and insert '£500'.

No. 5, in page 10, line 15, leave out '25' and insert '22'.

No. 6, in page 10, line 15, at end insert 'or in the case of a man or woman, the death of whose spouse occurred in the previous financial year, in respect of so much total income as does not exceed £1,750 at the rate of 25 per cent.'. Order. Will hon. Members who do not wish to listen to the hon. Gentleman who is moving the amendment kindly withdraw from the Committee as quickly and quietly as possible?

Mr. Wigley

Amendment No. 3, follows on very much from the previous amendments, dealing with the impact of income tax particularly on those receiving the lower levels of income. As I said in the last debate, we in Plaid Cmyru would very much have preferred the Government to meet us on our proposal to raise the level of personal allowances and so bring greater benefit to those who are in receipt of the lowest incomes rather than spread it out thinly over the whole range of incomes in the way that we have done by passing the previous amendment. The Government in their wisdom decided that they would rather live with the proposals of the Conservative Party than meet us on our proposals. That is their prerogative and they live with the consequences.

This amendment is not our most preferred way of helping people on lower incomes. None the less, it meets part of the problems facing those who are on low levels of income.

Some years ago we have multiple income tax bands. About 10 or 12 years ago there was a band at 4s. in the pound, another one at 6s. in the pound and a standard rate of 7s. 9d. or 8s. 3d. in the pound. Those were narrow bands. The lowest band was about £400 and the highest was about £800. The logic for doing away with those bands was that they were trivial in relation to the total impact of taxation.

I should have thought that the Chancellor, in considering the introduction of an intermediate tax band, would look for one which had a more significant impact than the £750 range which he is proposing. We propose in this amendment to extend the range to £1,000, and we have a later amendment to reduce the level of taxation from 25 per cent. to 22 per cent. Both of the amendments are geared to help those who fall within this range of incomes and taxation liability.

10.30 p.m.

We estimate the cost of our proposals at about £455 million for the increase to £1,000. That is more than the cost of the 1p reduction in the standard rate but less than the proposed 2p cut. Our proposal would make a meaningful extension to the reduction of taxation for those who most need incentive. I suggest that they are the charge hands or line leaders in factories who are made up to foremen. The Conservatives might argue that the greatest need lies with middle or higher management—the £7,000 or £8,000 wage level. I believe, however, that it is greatest among those who are perhaps ready to be made up to foremen but who hesitate to take on the tremendously increased responsibility of having to run their own section in a factory. Once these people take that first jump, the subsequent jumps become progressively easier and they will be motivated not by the level of income tax that they are paying or are not paying but rather by their pride in what they are achieving.

There is a positive disincentive at the wage level at which people are made up to foremen and, therefore, the relief should be extended to them. I therefore commend the amendment to the Committee.

Mr. Ian Stewart (Hitchin)

Since I have an amendment on the Order Paper which proposes to reduce the 25 per cent. band, it may sound paradoxical if I support all that the hon. Member for Caernarvon (Mr. Wigley) said. We would all like to see a much larger band with much lower rates of income tax. I should like to see the basic rate of income tax at 25 per cent., and I am sure that many other hon. Members would agree.

Let me explain why I tabled my amendment. The only way in which an hon. Member who is not a member of the Government can propose an offsetting change in taxation which will increase the revenue so that amendments to reduce taxation may be made is by seeking to amend a Government proposal to reduce a particular part of the tax burden. That would be the effect of amendment No. 4.

I came to the Committee this afternoon ready to press Amendment No. 4 to a vote if the Chancellor had convinced me that his PSBR calculation was in genuine danger from the amendment which was passed a few moments ago. He convinced me of nothing of the kind. He convinced me that he half expected to make further direct tax cuts this year if left to his own devices. We have only to think back to last year when he proposed a conditional 2p cut in the basic rate of income tax. It was left to us in Standing Committee last year to decide to distribute that money in a different way.

I cannot believe that the Chancellor would have addressed the Parliamentary Labour Party and that the Chief Secretary would have spoken from the Front Bench about further goodies in July if the PSBR described by the Government was not an artificial one which the Chancellor thought he would come well within, thus giving him scope to make tax reductions later. Nothing that the right hon. Gentleman said this afternoon convinced me that that is not the case. He would not, if he had any regard to responsibility, talk about ways of indiscriminately raising other taxes by corporation tax, national insurance surcharge, stamp duty or whatever it might be. I cannot believe that he would have done that if he had seriously expected to be in a position to do so.

In those circumstances, I believe that the Chancellor of the Exchequer has given himself much more room than he is willing to admit. The way in which the Government have been able to laugh off the effect of a 1p cut in the basic rate of tax convinces me that it is not necessary to press my amendment to a Division, as might have been the case if there had been a real financial risk in the Chancellor's strategy.

Mr. Pardoe

Amendment No. 3 is printed on the Amendment Paper in the joint names of hon. Members from Plaid Cymru and some of my hon. Friends, but originally it was in the form of two identical amendments and the names have been amalgamated for the purposes of printing.

I fully support what the hon. Member for Caernarvon (Mr. Wigley) said in moving the amendment. I am in two minds as to the best way of reducing the standard rate of income tax. Originally, in September last year, the Liberal Party produced a report in which we recommended that the reduction should be accomplished by means of a lower rate band which would gradually be extended, as the Chief Secretary said in his Second Reading speech, to take over the whole of the standard rate band. I think that that is still a reasonable way of going about the overall reduction we want to see.

There is another way of going about the matter—namely, that one starts by having 34 per cent. and then going down to 33, 30 and 25 per cent. right across the band, although we shall come later to the question of extending the band, on which we in the Opposition, I think, agree. I have never looked at this amendment as other than an alternative to the reduction in the standard rate. It was certainly never our intention to press both matters. Since the Committee has passed an amendment which goes at least half way towards our 2p off the standard rate—we have knocked off 1p tonight—I have no intention of pressing this amendment to a vote, and I shall advise my colleagues accordingly.

Mr. Arthur Latham (Paddington)

You were kind enough, Mr Murton, to indicate that you were selecting Amendment No. 6. May I take it that I am in order in moving that amendment?

The Chairman

I am afraid that I shall have to disappoint the hon. Gentleman. He can speak to that amendment, but cannot move it as a separate amendment.

Mr. Latham

That is a disappointment, but in any case I did not expect the pleasure of being able to force the amendment to a Division, even if it had been possible to move it. It is a way of trying to draw attention to the difficulties of pensioners in that the death grant which is now paid is still only £30—a figure fixed in 1967. My co-chairman of the all-party pensions group and I have sought ways in this Bill of giving expression to this difficulty and to seek some reassurance from the Government that steps will be taken in the near future to improve the death grant arrangements.

One readily accepts that the amendment is defective technically and is also deficient in its objectives, because it would mean that only those who pay tax would receive the benefits. We tabled the amendment as one way of drawing attention to the problem. Until the previous amendment was carried, the additional sum which would have resulted from this special exemption for those who had become widows or widowers in the previous twelve months would have been £90. Now, it will mean another £80.

It is estimated that the present cost of even the most simple funeral, without taking into account church, cemetery or cremation fees and death certificate, is more than £116. It is argued that the original grant, which was fixed in 1949, at £20, and increased in 1958 to £25 and in 1967 to £30 would need to be increased to more than £116 to equal the value of the grant when it was first fixed.

Mr. Kenneth Lomas, (Huddersfield, West)

There is an Early-Day Motion drawing attention to the need to increase the death grant. In my constituency, the cost of a funeral is given by the funeral directors as between £200 and £250. It seems incumbent upon the Government rapidly to increase the death grant. It is useless at the moment, especially for elderly people who need help. I hope that the Government will take a sympathetic view of this and that all hon. Members will sign the motion.

Mr. Latham

One welcomes that motion, but the prospects of its seeing the light of day and being debated are remote. Therefore, some of us have concluded that the only way to press this point is to table a series of amendments to draw a sympathetic response from the Government. It is not thought possible to take the matter to a Division, but I hope for a sympathetic response.

This problem has been outstanding for decades. If the grant covered 100 per cent. of the cost in 1939, in 1967 the proportion had declined to 60 per cent., in February 1976 to 24 per cent. and in September 1976 to 18 per cent. for a cremation and 16.9 per cent. for a burial.

This worries and frightens many old people. Some go without food and heating in order to scrape together a few pennies to avoid what they regard as the ultimate indignity of a pauper's funeral. One of the most tragic cases I have met in my constituency recently involved a warden of an old people's home who disappeared with money which had been collected. Not only was some of it for rent and so on—

The Chairman

Order. I understand the hon. Gentleman's point and his anxiety to deal with the question of the death grant, which he has ingeniously hung on a peg. However, we are dealing with the bands of income tax. He should confine himself to that subject.

Mr. Latham

I accept that it is ingenious, Mr. Murton, but I submit that it is also perfectly in order. It seeks discrimination in favour of those whose spouse has died in the previous year. I merely advance what I believe are impelling arguments why that is the next best thing to increasing the death grant.

10.45 p.m.

That is exactly the point that I am making. It is the case for the amendment. It is tragic that someone should make off with the money that old people have scraped together in an effort to avoid a pauper's funeral. Whatever may be the arguments about the dignity or indignity of living on a pension, there is an overwhelming case for some steps to be taken to ensure that old people can at least have dignity in death.

Many old people are worried about the low level of the death grant. I fully accept that this is not the appropriate way to deal with this, as you have indicated, Mr. Murton, but it has enabled us to highlight the problem. I hope that the Government will respond sympathetically.

Mr. Andrew Bowden (Brighton, Kemptown)

I support the case advanced by the hon. Member for Paddington (Mr. Latham). I have put my name to the highly ingenious amendment which he propounded. I believe that strictly we shall be in order if we discuss the impact of the amendment as if it were to be adopted. If adopted, it would be of direct held to those whose spouses died in the previous financial year. I assure the hon. Member for Huddersfield, West (Mr. Lomas) that I am a signatory to his Early-Day Motion.

At present, about 200,000 elderly people are not eligible to receive any death grant. At least a proportion of them would be helped if the amendment were accepted, because they will be paying tax. Much mental anguish is involved arising from the present level of the death grant, particularly for those who have lost their spouse in the previous year. The old 1d. a week insurance brought in between £15 and £25 and is now out of date. The time has come for the death grant to be increased substantially.

It is significant that there is such a large take-up of the death grant. The level of take-up is much higher than for many other benefits. Let us put at rest the minds of those who have no living relatives, and those who fear that they will leave debts for members of their families, by going a long way towards meeting the cost of the funeral.

Recently doctors in hospitals and in general practice have been allowed substantially to increase the fees they charge for the issuing of the death certificate. The amendment, which does not cover everybody, was designed as a way of bringing to the Committee's notice the seriousness of the situation. We hope that the Government will take sympathetic action as quickly as possible.

Mr. Lawson

This debate is the calm after the storm. The official Opposition will not be supporting the amendment. We were not keen on a reduced rate band in the first place; nor were the Government until very recently. I shall quote what the Chief Secretary to the Treasury said in Committee on the Finance Bill in 1976: If one had a choice between introducing a reduced rate band and raising the threshold, it would be better for those at the lowest end of the tax scale to raise the threshold. The other problem is that introducing a reduced rate band rather than raising the threshold would result in making the poverty trap deeper."—[Official Report, 11th May 1976; Vol. 911, c. 313–4.]

Mr. Rooker

indicated assent.

Mr. Lawson

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) nods his head. He agrees with that. Therefore, would it not have been better to use the money available for a combination of reducing the basic rate—which we have done anyway—and raising the thresholds? We should have seen the thing done in that way.

Mr. Rooker

The hon. Gentleman has just contradicted himself. If the money that was available had been spent in raising the thresholds, it still would not have got them level with the main supplementary benefits. It is, therefore, the first priority to get the thresholds raised. I and others have supported the combination of a slight raising of the thresholds and the introduction of a lower rate band because we have to start somewhere. We can build on the introduction of the lower rate band for the future, at the same time raising the thresholds under the indexation provisions in the Finance Act 1977 which I was instrumental in getting.

Mr. Lawson

Both of us were instrumental in that.

Mr. Pardoe

The House was.

Mr. Lawson

The House was, as the hon. Member for Cornwall, North (Mr. Pardoe) says. Some of us have been arguing the case longer than others, however. Nevertheless, we felt that it would have been better to deal with the poverty trap by taking more people out of tax altogether and at the same time leaving money for reducing the basic rate. We took the occasion last year to increase the allowances and to index them.

The result of the Government's going about it this way is that there will be, on the Treasury's own admission in a Written Answer, very nearly a million more taxpayers this year than there were last year. A very considerable increase in Inland Revenue staff is also required. I believe that it has necessitated an extra 1,300 staff, again according to a Written Answer, to deal with the reduced rate band.

Mr. Roy Hughes (Newport)

If the hon. Gentleman is so concerned about the poverty trap and keeping people out of taxation, why did he not take the opportunity to use the money which the Opposition has voted for a reduction in the basic rate of income tax for raising allowances?

Mr. Lawson

Because it is so important to restore differentials and create incentives. I said that we wanted to do two things. We wanted to have more people taken out of tax at the bottom end and to have the basic rate reduced. We wanted to operate on both ends. The Government have chosen this funny compromise and are getting the worst of both worlds. What they are doing does nothing to create incentives for the vast majority of taxpayers. Well over 80 per cent. of taxpayers have a marginal rate of tax at 34 per cent.—now it will be 33 per cent.—or higher. They are not helped at all as far as incentives are concerned by this proposal.

Nor does the amendment do anything for differentials. The hon. Member for Perry Barr knows how important it is to restore differentials, but this proposal would make the differential problem worse because the same flat amount would be given to all taxpayers. This amendment is, therefore, not a very sensible way to go about things.

There is another striking thing about it, however. Despite this reduced rate of 25 per cent., the starting rate for income tax in this country is still higher than in any other civilised country. Again that was revealed in a Written Answer to my indefatigable Friend the Member for Norfolk, North (Mr. Howell) on 4th May. At 25 per cent. it is still higher than any other starting rate.

For that reason, and because we are in favour of reductions in income tax, we are not going to oppose the reduced rate as such, but we do feel that it would be sensible to use further funds that may be available for reductions in revenue to extend the reduced rate bands still further. Therefore we shall not be supporting the Plaid Cymru amendment.

Mr. Robert Sheldon

That was quite a remarkable speech. It is rare that an Opposition spokesman comes to the Dispatch Box to state how strongly opposed he is to a piece of legislation that is passing through the Committee, and yet that opposition is not based on an amendment. The hon. Member for Blaby (Mr. Lawson) wonders what amendment I expected him to put down. Clearly, it was one on the threshold, rather than on the reduced rate band. If he is saying that he wishes to see changes in the thresholds, as opposed to a reduced rate band, we would have expected to see that enshrined in an amendment which would have been debated in this Committee. I find it surprising that if the hon. Gentleman holds those views he puts them forward in a general speech without trying to change the legislation that we are debating.

The hon. Member for Caernarvon (Mr. Wigley) mentioned reduced and narrower rate bands. This is a feature of the tax system from which we have departed relatively recently. Reduced rate bands started in the 1920s, when the first £225 were charged at about half the rate of tax then prevailing. In the early 1950s, there were three reduced rates and what was then the standard rate as well. We forwent the luxury of these large numbers of reduced rates in the 1960s, and the last reduced rate band in 1969–70 was £260, at a rate of 30 per cent.

Because of the structure of our system we are not able to have the range of rates that other countries have when they use a self-assessment system or some such method of collecting their revenue. The United States system, for example, commences with a rate of 14 per cent., and in 1 per cent. and 2 per cent. steps moves throughout the progression of the income tax. Because of the way in which we operate a cumulative system, we must have a wide basic rate which covers most of the taxpayers in the country.

Amendment No. 3 seeks to increase the lower rate band from £750 at 25 per cent., to £1,000 at 25 per cent. Perhaps I should at the beginning mention the cost. The full-year cost of the amendment would be £455 million, and for 1978–79 the cost would be £385 million. There is also Amendment No. 5, which changes the rate to 22 per cent. This amendment, too, has been tabled by Plaid Cymru. Together with Amendment No. 3, it would account for a total of £1,125 million in a full year, and £945 million this year.

The Government have no argument of principle against these changes. In fact, the Chancellor of the Exchequer said in his Budget Statement that he hoped it might be possible to extend the lower rate band in future years. What we have done in this Buduget is to make a considerable start at a full-year cost of £1½ billion which covers the larger part of the £2½ billion which was the Budget stimulus this year. It is true that we could not just have the lower rate band on its own, and part of the other £1 billion was included in the tax thresholds and the higher rates.

The £750 band is very important because it will be the marginal rate, the only rate, for 4 million taxpayers. Those in the poverty trap will find that their marginal rate of income tax is reduced by 9 per centage points. If we define the poverty trap, as I would, as the combination of income tax and national insurance contributions, together with the effect of the withdrawal of means-tested benefits, we see that the tax for those in the poverty trap is reduced by 9 per centage points as a result of this reduced rate band.

Mr. Lawson

The right hon. Gentleman said that 4 million people would have this as their marginal rate. Is he aware that, according to a Written Answer, about 1¾ million of those people are earning wives, that more than 1 million are old-age pensioners and probably another 1 million are juveniles? The number of ordinary working families who will have the reduced rate as the marginal rate is infinitesimal, and therefore this does nothing for the basic problem in our society with our tax system.

11.0 p.m.

Mr. Sheldon

I find the hon. Member's intervention surprising. In fact, his whole speech was surprising.

Mr. Joel Barnett

The hon. Member is always surprising.

Mr. Sheldon

My right hon. Friend did not hear the hon. Member's initial contribution, which was to the effect that he wished to see a different system applying to thresholds. Yet there is no amendment to cover this. Now he is saying that there are people who will benefit from the reduced rate band who, as far as I can see, he feels ought not to get that benefit. Is he saying that working wives ought to come into tax at 40½ per cent. or whatever and that the reduced rate band ought only to apply to married men? He ought to give this matter a little more thought than the rather hasty intervention suggests he has done.

We have to accept that the poverty trap tax rate will be reduced by 9 per- centage points. The overriding objection we have to the amendment is purely based on cost. If there were to be the change from direct to indirect taxation of the kind that we hope to see in the long run, this would be a welcome development but we have the problem of the containment of inflation. What I can say to the hon. Member for Caernarvon is that we have made a substantial step forward at this stage and that we want to await the results and reactions of those affected by the change.

My hon. Friend the Member for Paddington (Mr. Latham) and the hon. Member for Brighton, Kemptown (Mr. Bowden) have tabled an amendment to produce a larger reduced rate band for those recently widowed in the tax year following bereavement. I understand that they are not pressing the amendment but seeking to make use of it to draw attention to the inadequacy, as they see it, of the death grant. I am glad that that is what they have in mind because clearly it is wrong to make use of the tax system for this type of refinement of support for people in special need. The Department of Health and Social Security has a very elaborate machinery and a whole range of benefits to ensure that those in need of a particular type of benefit are able to be pin-pointed much more readily than the tax system could every manage.

Those who have heard me discourse on these matters will know the horror I have of two levels of social services—one administered through the tax system and the other through the Department of Health and Social Security. Clearly, the latter is by far the more discriminating in providing the money required and is able to give most to those in greatest need. I accept that the hon. Members have drawn attention to the death grant and I am sure that the Department concerned will have noted their remarks.

Mr. Arthur Latham

Although my right hon. Friend is correct in his assessment of the spirit in which the amendment is put forward we would not wish him to take it lightly nor would we wish him to assume that the benefits available under existing DHSS arrangements are satisfactory. I can think of nothing more humiliating and distressing than for a bereaved wife or husband to have to go to the Supplementary Benefits Commission and submit to a means test and plead that the reason she or he needs another £80 or £100 is that the spouse has died in the past few days. This is a distressing and disgraceful state of affairs. I hope that the Treasury will be prepared to respond favourably to an expenditure, which at most would be £43 million, which is about 1½ per cent. of the Treasury's acknowledged margin of error in calculating the PSBR.

Mr. Sheldon

My hon. Friend has repeated his point forcefully. Obviously, I accept the sincere way in which he represents the problems of those concerned. But this is, of course, a matter for the Department of Health and Social Security, and we look forward to its taking into account the points that my hon. Friend has made. It is clearly a matter for the Department concerned and not primarily at this stage. Obviously, for the Treasury.

Clearly we should try to take account of the difficult emotional problems of readjustment which arise as a consequence of widowhood, and try to relate them to economic needs. But the tax system is quite unsuitable for taking account of those real emotional needs, and the Department of Health and Social Security is best fitted to deal with them.

Mr. Bowden

I only want to re-emphasise that, accepting the right hon. Gentleman's argument that this is not the way in which to do it, he must not say that this is really in the hands of the Department concerned. The money comes from the right hon. Gentleman and his colleagues, and we want them to know very clearly what are the hardships and the realities. There are far too many cases in which the Department of Health and Social Security comes to the right hon. Gentleman and his colleagues asking for money and is turned down without proper consideration. That is one of the reasons that the hon. Member for Paddington (Mr. Latham) and I wanted the matter to be brought up in the debate.

Mr. Sheldon

I understand that point entirely, and I can assure the hon. Gentleman of the sympathy and understanding of Treasury Ministers of the needs of the widows. But it is for the DHSS, within the budget granted to it, to assert its own priorities and to produce its spending plans accordingly. That must be so, otherwise all debates on expenditure and its details would be taken by Treasury Ministers and would take the place of the many other matters which usually form part of our debates on the Finance Bill. I assure the hon. Gentleman that I have taken full note of what he has said.

As for the reduced rate band, I believe that what we have seen is a valuable return to the position which existed nine or 10 years ago. We have earmarked a substantial amount of revenue cost for this reduced rate band. It might be possible to extend it in the future, and I hope that the Committee will welcome what we have done in this respect and reject the amendment.

Mr. Wigley

I am grateful for the opportunity we have had in these few minutes to discuss the two issues which have arisen.

I have no doubt whatsoever that the overwhelming majority of people in all parts of these islands feel very strongly about the death grant. Although the Financial Secretary cannot accept or take on board the philosophy put forward in the amendment as part of the Budget and Finance Bill, I know that he will pass on the message to his fellow Ministers at the DHSS that there is a real feeling that something should be done to help the people concerned, by whatever mechanism is possible. It is necessary to have one that is most sensitive to the very difficult situation which faces bereaved people. We need sensitivity in that mechanism.

As for the tax bands, I was a little disappointed to hear the comments of the hon. Member for Blaby (Mr. Lawson) on his attitude towards this question. With respect, he seemed to be talking with two voices. He was referring to the reduction of the standard rate and at the same time saying that an equal priority should have been given to the threshold for the personal allowances.

We had amendments down with regard to thresholds which we shall not be able to move in Committee. There will be an opportunity for the hon. Member for Blaby to take over those amendments and to move them on our behalf. If he feels strongly on the issue of personal allowances and raising taxation thresholds, he will have an opportunity to move those amendments in Committee. If by default the hon. Gentleman does not do so, we shall have an opportunity of doing so when the Bill comes back to the House on Report.

While perhaps Labour Members as well as ourselves may feel that although there are benefits in establishing this intermediate band—we would have hoped that the benefit would have been wider—at the same time if a sum of £1,600 million is attributed to the lower band this year, possibly some of that £1,600 million could have been more beneficially spent in raising the threshold to take people out of tax.

It is obviously a matter of argument where one pitches the balance between these two things, but I am sure that there is sympathy for the need to take people out of the taxation net if at all possible. We shall not press these amendments at this stage, because clearly the Government have lost £370 million as a result of the last amendment that was carried. Anyway, if we wished to raise the threshold at a later stage we would be asking for a bit much if we asked for £1,100 million or £1,200 million by pressing the amendments. For that reason, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

To report Progress and ask leave to sit again.—[Mr. Bates.]

Committee report Progress; to sit again tomorrow.