HC Deb 12 June 1979 vol 968 cc258-63

That brings me to the keystone of our policy. Excessive rates of income tax bear a heavy responsibility for the lack-lustre performance of the British economy. We need, therefore, to cut income tax at all levels. For the reasons I have already explained, I cannot do as much this year as I should have liked, and I cannot do as much as is needed. But, although it is only a first instalment, there should be no doubt in anyone's mind that this Budget marks a turning point.

I begin with the higher rates of tax. The upper rates no longer affect only those on very high incomes. They apply—and Labour Members may find this surprising—not only to senior executives and middle managers in industry but increasingly to skilled workers, as well as to professional people and the proprietors of small businesses. These are the people upon whom so many of our hopes for initiative, greater enterprise and national prosperity must depend.

It is universally recognised, or almost universally recognised, that the present top rate of 83 per cent. on earned income is an absurdity. The rate of 98 per cent. on investment income is even worse. Such rates bring in very little revenue. But they kill incentive and are patently un-just. Some members of the previous Government recognised this, but they did nothing about it. I now propose an overdue measure of reform. The top rate on earned income will be cut from the present 83 per cent. to 60 per cent. This now top rate will apply to taxable income over £25,000. [HON. MEMBERS: "Oh".] If hon. Members will wait, I shall come to the other end. At the other end of the higher rate scale, the present threshold of £8,000—and many skilled workers cross that threshold—is too low. I propose raising it to £10,000. Even at this figure, the starting point for taxation at higher rates will be no higher in real terms than it was in 1973. Between £10,000 and £25,000, I propose a new scale of rates less steeply progressive than the old scale.

The top rate of 60 per cent. on earned income I now propose fulfils our commitment to reduce the top rate to the European average. For example, the top rate in France is 60 per cent., in Germany it is 56 per cent., and in the United States it is only 50 per cent. The new top rate will still be reached at an income level which is lower, and in some instances significantly lower, than is common elsewhere. This is a matter to which we may need to return on a future occasion.

So, while the reductions I propose are substantial, they are no more than the circumstances require. They will still in general leave people in the top income groups more highly taxed than people in corresponding positions in other industrialised countries. We have to compete with such countries, not only in the sale of goods and services but in attracting and retaining the talent required to run our industry efficiently and profitably and thereby provide the employment opportunities that our people so desperately need.

We have over the years spent far too much time and effort trying to "level down" This is no good to anybody. It is much more important to have a successful and prosperous society, and we cannot have a successful and prosperous society without successful and prosperous individuals.

But it is not only at the top of the income range that the burden of income tax is particularly oppressive. The same is true for those on the lowest taxable incomes, where the tax system can help to ensure that some people are actually better off out of work. That is the importance of the tax thresholds, to which I turn next. The increases proposed in the April Finance Act, which were not of course implemented, were plainly inadequate. I propose to double those increases. This means that the amount a single person can earn tax-free will go up not by £90 but by £180. The married allowance will go up not by £140 but by £280. A single person's tax-free earnings will thus go up by nearly £3.50 a week. The amount that a married man can earn tax-free will go up by £5.38 a week. These increases in personal allowances are quite apart from the change that I have in mind for the basic rate of tax.

I have in fact three other changes to propose before I come to that. First, to help the elderly, the age allowance will be raised by £240 for the single person and £380 for the married person. These again are double the figures proposed in the April Finance Act. Last year the income limit for the full age allowance was £4,000. This year I propose raising it to £5,000, more than twice the increase proposed in the April Finance Act.

Secondly, I propose raising the threshold for the investment income surcharge. The justification for retaining the surcharge is itself debatable. Certainly there can be no argument but that it bites at far too low a level of income. Almost half the surcharge is paid by people over the age of 65. This is, moreover, a tax which falls with particular severity on those who have had to make provision for their retirement out of their savings and have no occupational pensions to fall back on. The undue severity of the tax was recognised by the previous Government, but they introduced no more than palliatives, in the form of a reduced rate applied to the first slice of income liable to the surcharge and a slightly higher threshold for those over 65. I propose instead to raise the threshold to £5,000 for everyone; the rate above that level will remain at 15 per cent. This approach goes further than is necessary to take the matter back to where it stood in 1972, and it combines a considerable simplification of the tax with a measure of justice that is long overdue.

Thirdly, I propose to implement immediately our election pledge to war widows. Provision will be made in the Finance Bill to exempt their pensions entirely from tax.

I come, finally, to the basic rate. For the great majority of taxpayers—some 21 million in all—it is the basic rate which determines their tax liability. It is the basic rate—plus, of course, the national insurance contributions—which represents the deterrent effect of tax on additional earnings, whether those extra earnings come from overtime or greater productivity or reflect greater skill or the rewards of promotion. Everywhere one meets complaint and criticism that income tax erodes differentials, reduces the rewards of skilled workers and discourages effort, initiative and responsibility. This year I propose taking a first and significant step to deal with these complaints by reducing the rate from 33 per cent. to 30 per cent. Our long-term aim should surely be to reduce the basic rate of income tax to no more than 25 per cent.

The total cost of these income tax reductions, including the cost of increases in personal allowances proposed in April but not then implemented, will be £4,540 million in a full year. The lion's share, no less than £3,460 million or over three-quarters of the total, represents the cost of increasing the personal allowances and reducing the basic rate. The cost this year of all the income tax changes will be £3,500 million.

As a result of the increase in the tax thresholds, 1.3 million people who would otherwise have paid tax this year will not be required to do so. The number of people paying tax at the higher rates would have been 1.2 million. This will be virtually halved, to 650,000. The number liable to the investment income surcharge will be reduced to about a third of what it would have been—from 850,000 to 300,000. All these changes will simplify administration and reduce the work load on the Inland Revenue.

The changes in allowances will be implemented for most taxpayers on the first pay day after 12 July. The reduction in the rates of tax will be given effect as soon as new tax tables are ready in October.

A full year's income tax reductions will be received, even though my Budget is being presented two months or more after the start of the year. On this basis the income tax changes mean that for the married couple where the husband earns £100 a week, which is close to average earnings, there will be an increase in take-home pay averaged over the remainder of the financial year of over £4 a week. The increases in VAT and petrol duty will increase average family expenditure by about £2.75. So that, taking both the direct and indirect tax changes into account, the average family will be about £1.30 per week better off. Similarly, where the husband earns £60 per week there will be a real gain of over 75p a week, while the position of the couple on £150 per week will improve by nearly £2 a week.

These reductions in the burden of income tax, which are as substantial as they are unprecedented, mean that wage and salary earners will have more money in their pockets to buy the goods and services they help to produce. True, the prices of a good many of these goods and services will be increased by my tax proposals. But we have done everything we can to ensure that every family in the land will have more money coming in to pay the increased bills. What is more, the choice of the way they spend their income will rest increasingly with people, and not with the Government.

These changes represent only the first stage in the major reduction in the burden of direct taxation that we are determined to make. I emphasise this point particularly for those who will be involved in pay bargaining in the year ahead. Take-home pay will be substantially increased by these unprecedented cuts in income tax. This will more than make good the price effects of higher spending taxes. Any further attempts to cover those price effects by higher pay claims will be utterly self-defeating. The money will simply not be there to finance higher pay as well as lower income tax. Any attempt to have it both ways will simply end up by threatening jobs and putting firms—on which jobs depend—out of business. That is why it is so important for this Budget to be considered as a whole.

I have stressed the urgent need for new policies to reverse the decline of the British economy. These policies start with our conviction that it is people and not Governments who create prosperity. This Budget seeks to reduce the role of Government. Government will spend less, Government will borrow less. This will lay the foundations for controlling inflation.

In today's world, higher prices for oil and petrol are inescapable. So, too, in the short run, are the consequences of the inflation that has afflicted us for so long. Until that is controlled, some check to the growth of output and employment is unavoidable.

That underlines the other half of the Budget strategy. It is not a give-away Budget. Indeed, it is not in the power of the Government to give anything away. However, it is an opportunity Budget. The shift from taxes on income to taxes on spending will widen choice and improve incentives. Above all, it will enlarge opportunities.

The Budget is designed to give the British people a greater opportunity than they have had for years to win a higher standard of living—for their country and for their families as well as for themselves. I dare to believe they will respond to the opportunity that I have offered them today.

Mr. Deputy Speaker

Under Standing Order No. 94, the first motion, entitled "Provisional Collection of Taxes", must be decided without debate. When that matter has been disposed of, I shall call on the Chancellor to move the motion entitled "Amendment of the Law". It is on that motion that the Budget debate will take place today and on the succeeding days. The remaining motions will not be put until the end of the debate on Monday, and they will then be decided without debate.