INDEXATION OF INCOME TAX THRESHOLDS AND ALLOWANCES

HC Deb 03 June 1980 vol 985 cc1328-65

Mr. Denzil Davies

I beg to move amendment No. 17, in page 13, line 34, leave out ' Parliament ' and insert ' the House of Commons '.

This amendment relates specifically to the procedure laid down in the clause for the application of an order should the Government wish to resile on the indexation provisions of the clause. I hope that when we reach clause stand part we shall discuss the merits of the clause. This amendment is concerned merely with the procedure under which the clause is to operate. Unless we receive strong assurances from the Government, we shall probably wish to oppose the clause when it is put to the Committee.

The clause seeks to extend the indexation provisions. It is a sort of extension of Rooker-Wise to Lawson—if I may put it in that way. Clearly the Financial Secretary has derived great pleasure from the clause. Under the original Rooker-Wise amendments to the ordinary personal allowances, if I may so describe them, there was a procedure whereby the Government, by means of an order, could resile from or not follow through the indexation of allowances. They are incorporated in the procedure in this clause. This amendment seeks to put pressure upon the Government not to provide that that order can be brought forward in the House of Lords. Subsection (4) states: Unless Parliament otherwise determines ". The order under this clause would prevent indexation on the basis of an increase in the retail price index. According to the arguments that this Government put forward when they were in opposition, if there is no indexation link to the retail price index or a link to inflation, that is, in effect, an increase in taxation. We heard cynical and perhaps hypocritical speeches from Conservative Members in opposition about the need for truth in taxation. They pressed upon us the point that if we did not index allowances—whether personal allowances or the higher rate band with which we are really concerned—that was, in effect, an increase in taxation. To some extent, it was.

The Government are now saying that to allow that increase and to negate the provisions of the clause there should be an order in the House of Lords, I do not understand that. I understood that the Upper House—it is clearly written into statute—does not have anything to do with taxation. I should like the Financial Secretary, who is clearly in favour of indexation, to tell us why the Government may move an order in the House of Lords. It may be theoretical, but for the first time we have a Treasury Minister sitting in the House of Lords.

Why is it necessary to include the word " Parliament " in the clause? The words " the House of Commons" are more appropriate. The House of Commons is the arbiter of taxation, and the House of Commons imposes taxation, and should relieve taxation if necessary. This order is directly relevant to the levels of taxation when they are related to the levels of inflation. I hope that when we debate the clause we shall debate it on the basis of indexation. I hope that the Financial Secretary will say why we are allowing the House of Lords the privilege of the power to bring forward this order.

7.30 pm

Mr. Lawson

The right hon. Member for Llanelli (Mr. Davies) has not been as careful as he usually is, as a lawyer by profession—not to mention a former Treasury Minister—in reading the clause. There is no question of any order in the House of Lords for the simple reason that there is no question in the clause of any order-making power. What the right hon Gentleman is getting confused with is the procedure which has existed since section 22 of the Finance Act 1977, when, as a result of my amendment to the so-called Rooker-Wise amendment, it was laid down, to show that there was no automaticity of the indexation, that an order could be introduced which would make the allowances less than they would otherwise be.

Under the new procedure there is no such order-making power. The making of the allowances, personal allowances or whatever they are, less than would be indicated by indexation would be done in the Finance Bill itself. Therefore, since the Finance Bill has to be approved by Parliament, that is why the words are as they are in the clause. I hope that the right hon. Gentleman will be satisfied with that explanation.

Mr. Denzil Davies

I am grateful to the Financial Secretary. I entirely accept what he says. Clearly, if this is to be done by statute, as he says, I accept that the word has to be " Parliament ". If there were a specific order, we would expect the term to be " the House of Commons ".

This shows the virtue of what was said by my hon. Friend the Member for Gateshead, West (Mr. Horam) in Standing Committee. He said that there should be available to this Committee notes on clauses explaining fully the purpose of this clause. This point was not made clear in the puny little note from the Treasury that we got in the Vote Office. It is expecting a lot of the Opposition to ask us to pick up all these particular points.

It is only right that when we see the word " Parliament " in a taxation measure we should question it. We have had experience of this in Standing Committee, where we were faced with an amendment whereby the House of Lords was to be given powers in relation to the Road Traffic Acts and the road fund licence—powers in relation to taxation. It is only right that we in this House should jealously guard our powers over taxation. When we see the word " Parliament " in a clause of the Finance Bill, we must be very careful.

However, I am satisfied and I accept entirely the explanation. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mr. Denzil Davies

Perhaps the Financial Secretary will tell me again whether I am wrong, in which case I shall be prepared to admit it, but to me the clause looks like a major extension of the——

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

It is.

Mr. Davies

It is. My hon. Friend is an expert in these matters. I believe that he was the man who moved the original indexation amendment to the personal allowances. I have some quotations with me to show that.

The clause is a major extension of the indexation provisions, which were contained in what was called the Rooker-Wise amendment—or the Rooker-Wise-Lawson amendment, if the Financial Secretary wishes to add his name to it, as I am sure he does. Therefore, we have here an attempt by the Government to extend indexation from the ordinary personal allowances to the higher rate bands or thresholds, to people who earn £11,250 a year and upwards, and to the investment income surcharge, as I understand it, under subsection (2)(b). So we have a major extension of indexation to two groups who pay tax at these higher rates—the old surtax rate, now the higher rate, and the investment income surcharge.

It seems that these groups are to be given priority in protection from the effects of inflation. They are to be indexed and protected. No matter how much their salaries increase, the tax advantage will follow, because the tax advantage will be increased more or less in line with the increase in their salaries. The Government will be doing this to those groups who, I should have thought, by and large, are quite capable of looking after themselves and who have benefited enormously—they are the only groups that have benefited; as far as I can see, no one else has—from the last two Finance Acts. If there is to be hyper-inflation, as there will be under the present Government for some time, the surtax payers will be protected from that, come what may, under a Tory Government.

The Government would argue—I suppose that this is the kind of argument that we shall have from the Financial Secretary—that this is an extension of the Rooker-Wise-Lawson amendment and that, as a result, it is nothing to get too concerned about. I do not wish, especially as my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) is present, to go back over those indexation debates. My views on indexation are on record. They may be wrong; they may be right. Those who attend or read our debates will know my views on the subject.

I believe that indexation is generally a bad thing, although I accept entirely that there are certain groups who must be protected from the ravages of inflation, and they are the people who cannot protect themselves and who are in the worst position in society. But basically my view is that indexation is not a good thing. It helps to build inflation into the system and, as such, as a general principle, I would object to indexation. I do not want to pursue that debate this evening. We have had that debate on a number of occasions.

I know that the Financial Secretary takes a different view. I think that it could be said of the hon. Gentleman that his view is " If it moves, index it ". He is the great indexer. He shakes his head now, but in his time he has been—and in this clause with which he is personally concerned on the Front Bench—the great indexer. He is the man who believes, with Sam Brittan, that one indexes everything and then one solves the problems of inflation.

Of course, one cannot index everything. That is the problem. One can index only some things. No Government will index everything. That is where the difficulty comes with inflation. However, under this clause indexation is given to some in our society—the managers, lawyers and accountants, the opinion formers—who will then have no incentive. Why should they worry about inflation? They can have their 20 per cent. wage increases. They can have a 20 per cent. increase in their fees if they are self-employed lawyers or accountants. None of that will be eroded by inflation, because the Financial Secretary has introduced indexation for them and everything is fine and rosy in the garden and they still get the full benefit. So why should they worry about inflation?

The poor may suffer from inflation. The unemployed may be de-indexed, as has been done under the present Government with unemployment benefits. But that does not matter. The company director, the lawyer, the accountant and the stockbroker are all right. They can raise their fees and get their increases. They can get their wage increases if they work in companies, and if they are self-employed they can get their increases merely by raising their fees to take account of inflation. There is no deterrent in the tax system. The Financial Secretary says " We shall index your allowances and you will not come back into the basic rate of income tax. Do not worry. You will not fall down into the next band. You will stay in the band in which you are ". That is the real mischief in the clause, and that is why we oppose it.

Leaving aside the general question of indexation, I believe that it is a bad thing for another reason, which I have touched upon, namely, that since everyone cannot be protected there is the question of the pressure group which is the strongest and which has the most influence on the Government. If one has influence on the Government and the Treasury, if one is a higher rate taxpayer, one can get one's income indexed. But people who are unemployed, or disabled, or on social security, under the present Government, are not strong enough as a pressure group.

That is the iniquity of indexation. It is only those who can bring pressure and influence to bear on the Government, whatever party is in power, who get the indexation. Under the present Government we have seen that it is the better-off who get the benefits of indexation and it is the poor and unemployed who are deprived of the benefits of indexation. That is another reason why we oppose the clause.

The Financial Secretary will use those various debating points against me. His general views on indexation are strange for a Financial Secretary in a Conservative Government. There are quite a few Conservative Members on the Government Benches. I should have expected some of them not to believe in indexation. As the Conservative Party is in Government, Conservative Members must support the clause and may have changed their views. I would have expected some Conservative Members to believe in sound money. The Conservative Party used to believe in that. However, that was a long time ago, when the Conservative Party was in Opposition. There is no sound money any more, with inflation at 22 or 23 per cent. However, rates are indexed for the better-off.

No doubt the Financial Secretary will say that this provision is an extension of the Rooker-Wise amendment. My hon. Friend the Member for Perry Barr played a major part in that amendment. He will no doubt argue in favour of his amendment. However, this provision is more than an extension. From reading the reports of the debates on the so-called Rooker-Wise amendment in that famous Committee upstairs, it is clear that the amendment was introduced to protect the weakest in society and those within the poverty or surtax trap. The Financial Secretary did not like the words " surtax trap." The amendment had something to do with the " why work? " syndrome; the gap between those who do not have a job and those who work and are taxed because we could not increase the allowances.

I am sure that the Financial Secretary will be interested to hear some quotations from that debate. No doubt he has got the quotations in his brief. The Financial Secretary played a leading part in those debates along with my hon. Friend the Member for Perry Barr. The Financial Secretary said: Nevertheless, it means that an increasing number of people find themselves better off not working than working—or very little better off. That is the " why work? " syndrome. It was his rationale for introducing the amendment. He continued: the average man gets 80 per cent. of what he would get working if he is not working. That is a very substantial amount. The issue arose because unemployment benefit was not taxed. It was indexed under the Labour Government. Our record was fairly good, but the problem may have arisen because we were unable to index personal allowances entirely to the cost of living. As a result, the gap narrowed between the net income of a man who was unemployed and the net income of a man who was employed. That was the Financial Secretary's argument. That is why he moved the amendment. He then said: Therefore, even for the average man the difference between working and not working is rather marginal. Of course, for a number of people who are below the average there is no encouragemnt to work at all. I believe that this is economically, socially and morally destructive."—[Official Report, Standing Committee D, 14 June 1977: c. 449–50.] That was the basis on which the Financial Secretary moved the amendment and argued for an indexation provision.

At that time Mrs. Audrey Wise was a Member of Parliament. She made the same point. She said: What is the logic of a taxation system whereby people are taxed on exactly the amount decreed to be the official poverty line? A credible argument was put forward. Why should people work when they are taxed on the poverty line? That argument is related to the fact that personal allowances were not completely indexed to the cost of living. Mrs. Wise continued: So people on low incomes who were not embroiled in the tax system now are embroiled in it and the poor, in fact, are paying the cost of their own Welfare State."—[Official Report, Standing Committee D, 14 June 1977; c. 456–57.] My hon. Friend the Member for Perry Barr made a speech in a similar vein.

7.45 pm

I disagree with the general principle of indexation. However, I understand the desire to index personal allowances to prevent such a situation. The amendment sought to protect the least well-off. If the Financial Secretary wishes to argue glibly that he is extending that amendment to the man earning £10,000, £15,000 or £20,000 a year, he will be making a cheap debating point, which will not impress the Committee. I hope that we shall not hear that argument. I hope that the hon. Gentleman will base his argument on the merits of the case and not pretend that the provision is an extension of an amendment that was designed to protect the weakest and poorest people from the effects of inflation.

The Financial Secretary may say that an order can negative indexation. However, he has told me that I am wrong. Apparently it must be done through a Finance Bill. That is a technical point. The hon. Gentleman may say that if the Government do not wish to go through with indexation they can ask the House for its authority not to do so. He is in agreement with that proposition. Treasury Ministers may come to the Dispatch Box and say that they will deny indexation to a man on £10,000 or £11,000 a year. Those people are supporters of the Conservative Party. Treasury Ministers may accept that they will have to put up the cost of living by 23 per cent., or perhaps 30 per cent., next year. They may say that they will not give their natural supporters—those entrepreneurs who make the economy tick and who rejuvenate the economy-indexation. They may say that they will move an order or a clause in the Finance Bill. I must tell the Financial Secretary that they will not do that. It is a figment of his imagination.

I cannot believe that a Conservative Financial Secretary will come to the Dispatch Box next year or the year after and say " Sorry boys, you may want £15,000 a year, but we shall not give you the benefit of indexation." The Government have not said that they will not index personal allowances this year in accordance with the Rooker-Wise amendment. They have said that they will abolish the reduced rate band. They seek to pretend that they have indexed the personal allowances by 17 or 18 per cent. They have got rid of the reduced rate band. I accept that there are arguments both for and against the reduced rate band. The Financial Secretary should not mutter from a sedentary position.

Mr. Lawson

Who is talking?

Mr. Davies

The arguments are fairly balanced. The Government have avoided the need to put forward an order or clause not to index personal allowances. They will not be able to do that next year. However, they will do something else. They will cut public expenditure a little more. I can hear the Financial Secretary saying " Of course " from a sedentary position. Of course the Government will do that.

Mr. John Bruce-Gardyne (Knutsford)

I hope so.

Mr. Davies

The pressure groups are already building up. No doubt the hon. Member will go to see his hon. Friend the Financial Secretary if he sees any danger of indexation being abrogated by a clause. As we cannot have any other devices, we shall have cuts in public expenditure. It will cost a lot of money next year if we index higher allowances at a time of hyper-inflation.

The Financial Secretary will have to look around for money. He may cut unemployment benefit a little more. He may reduce the indexation on unemployment benefit from 12 per cent. to 10 per cent. He may reduce capital spending in the National Health Service. The Financial Secretary and the Chancellor of the Exchequer can choose from a range of options. Next year we shall see full indexation of the higher rate bands. That will be paid for mainly by those who cannot afford to do so. It will be paid for by reduced public expenditure. Those who will benefit from the clause will not suffer. They never suffer under a Tory Government. Treasury Ministers would not dare to de-index personal allowances. Pensioners, the unemployed and the disabled may suffer, but not those who stand to benefit from the clause. That is why we oppose it. Indexation is a slippery road. The hon. Member for Knutsford (Mr. Bruce-Gardyne) believes in it.

Mr. Bruce-Gardyne

No, I do not.

Mr. Davies

I thought that he believed in it. I thought that I heard him say from a sedentary position that the Financial Secretary should continue indexation next year.

Mr. Bruce-Gardyne

The right hon. Gentleman is under a misapprehension. I was referring to his immediately previous comment—the suggestion that there would be a need for further economies in public expenditure.

Mr. Davies

Yes, but that was related to my comment that the Financial Secretary would not have enough money to index without cutting public expenditure. I am glad to know that the hon. Member for Knutsford does not support the clause. No doubt he will support the Opposition when we vote against it. It is gratitfying to know that at least some Tories believe in the principle of sound money and do not believe in the drug or palliative of another shot of indexation every time there is an increase in inflation. Those who benefit from that approach are at the upper end of the scale. The poor do not enjoy the benefit.

My personal view is that indexation is bad. I understand that others do not accept that view. However, why should we give indexation to the better-off when inflation is raging at over 20 per cent.? The better-off do not need this form of indexation. The Government propose to take away from the poorer groups in our society—especially from the army of unemployed that has been created in a large part by the Government—to give to those who do not need it.

The clause is not an extension of the Rooker-Wise amendment, which was designed to protect the worst-off in the community. For the reasons that I have outlined, we shall oppose the clause unless we receive convincing answers from the Financial Secretary.

Mr. Bruce-Gardyne

The right hon. Member for Llanelli, (Mr. Davies) reminded me of the sort of chairman who introduces a visiting speaker and says " Our speaker today needs no introduction " and proceeds with an introduction that lasts half an hour. The right hon. Gentleman said that he did not intend to go back over the general arguments on the merits or demerits of indexing, but he made a good attempt at doing precisely that. I make no apology for following briefly down that path. I did not have the privilege of serving in the previous Parliament and of participating in the arguments that proceeded on what has gone down in history as the Rooker-Wise-Lawson amendment.

I confess that I broadly share the right hon. Gentleman's distaste for the concept of indexation. Some of those for whose opinions I have the greatest possible respect—the right hon. Gentleman referred to Sam Brittan, and I think that my hon. Friend the Financial Secretary is identified with that school of thought—hold that indexation is a wise and sensible method of rendering a high level of inflation tolerable. On the whole, I object to it precisely for that reason. The theme seems to be that we should lie down and enjoy it.

Inflation is the greatest enemy of our society. We should not willingly take measures that are designed to anaesthetise our society against it. In some respects, great crimes have been committed in the name of indexation. For instance, I learnt today that hundreds of employees of the industrial training boards are apparently on index-linked salaries as well as being on index-linked pensions. We have seen a gradual extension of the principle in a manner that gives cause for genuine concern.

I admit that I did not find it quite as easy as the right hon. Gentleman appeared to to reconcile past support for the Rooker-Wise amendment with opposition to the clause. As the right hon. Gentleman clearly recognised himself, the two are logically interdependent. The distinction that he attempted to make was one without a difference.

The right hon. Gentleman said that if the clause is approved as it stands the higher rate taxpayer could have his income indexed. That is rubbish. We are not talking about the indexation of incomes. The right hon. Gentleman shakes his head, but that was precisely the phrase that he used. I took a note of it. If he checks the record tomorrow, he will find that that is precisely what he said.

Mr. Denzil Davies

The hon. Gentleman knows exactly what I meant. I was referring to tax thresholds and tax allowances. The indexation of those elements helps to increase the income of the higher rate taxpayer.

Mr. Bruce-Gardyne

I listened carefully to what the right hon. Gentleman said. It was not a slip of the tongue. The emphasis and the gravamen of that part of his speech was that there is a body of high income earners who somehow will be enabled to secure indefinite security against the ravages of inflation. That is a disputable proposition in itself. There are many senior managers in many parts of manufacturing industry who would be only too delighted to receive increments this year that could anything like compensate them for the implications of inflation. That part of the right hon. Gentleman's argument is nonsense. The purpose of the clause is the indexation of taxation and not the indexation of incomes.

For the reasons that I have outlined, if that were the sole content of the clause I should have considerable reservations about supporting it. However, it contains a crucial element which the right hon. Gentleman more or less ignored. Subsection (4) states: If the retail prices index for the month of December preceding a year of assessment is higher than it was for the previous December, then, unless Parliament otherwise determines, subsection (1) of the said section 32 shall apply ". That, to my mind, is the crucial distinction.

This is not a matter of semantics. The justification for the Rooker-Wise amendment was not the argument that the right hon. Gentleman advanced. I know what my hon. Friend the Financial Secretary said on this issue and in general I do not agree with his contentions on it. The purpose of the amendment was to deal with the so-called poverty gap. The only serious justification for the Rooker-Wise amendment, as for the clause, is that it was designed to introduce honesty into taxation.

If the Chancellor wishes not to adjust allowances and tax rate bands in line with inflation, he will have to come before the House to explain what he is doing. The serious defence for the Lawson-Rooker-Wise amendment, as for the clause, is that we have for too long had appalling headlines in the press about the Chancellor giving away £3,000 million when in reality he has done no such thing. In fact, he has merely been compensating for the ravages of inflation.

The consequence of the Rooker-Wise amendment, and similarly the consequence of the clause, was to ensure that the House of Commons knew what it was doing, knew what the Chancellor was doing, and was not bamboozled by a claim of vast generosity that merely reflected the reimbursements of the ravages of inflation. It is only on those grounds that I find it reasonable to support the clause.

The time is fast approaching, if it has not already come, for us to look again at the gamut of indexation. It is a method of constantly accelerating the ratchet of inflation as it spreads in wider and wider circles.

I understand that the clause is to ensure that Parliament knows what it is doing, and that if the Chancellor seeks to compensate on the higher rate band, for the effects of inflation as under Rooker-Wise with regard to allowances, he will not be in a position to claim that he is performing a wondrous act of generosity to benefit the taxpayer. On those grounds only, I am prepared to support the clause.

8 pm

Mr. Rooker

I have a vested interest in opposing clause 23. I do not believe that the hon. Member for Knutsford (Mr. Bruce-Gardyne) was in the House in 1977. He may have read our Standing Committee debates on 14 June 1977. If he has not, he must take it from me that it was not the central part of our case that the Rooker-Wise amendment should be made for the sake of truth in taxation. That was a subsidiary issue.

Mr. Bruce-Gardyne

I understood that the amendment introduced in Committee at that time did not require the Chancellor, if he was not complying with the provisions in the amendment, to report the fact to the House. Therefore, the hon. Gentleman's amendment had nothing to do with truth in taxation. It was the amendment applied to that amendment by my hon. Friend the Financial Secretary that had that effect.

Mr. Rooker

That is correct. Our amendment did not have an escape clause for a Government. The allowances had to be raised. Had our amendment stood without the other amendment attached to it providing that gateway for a Government, the position would have been the same as under this Bill. We have to have a Finance Bill each year. A Government would have been able, in the Finance Bill, to amend that amendment and not put up the allowances. A debate would have been necessary if a Government wanted to depart from our amendment. The Opposition would have ensured that. However, that was not written into our original amendment.

Our main case was simple and narrow. There were two opportunities to discuss the matter in that week, both in Standing Committee and in a day-long debate on poverty on Friday, initiated by the hon. Member for Norfolk, North (Mr. Howell). As Back Benchers, and within the limitations of the rules of the House, we aimed to do all that we could to protect the low-paid and those on average earnings. We did not put the case for general indexation, and I should not do so today. My right hon. Friend the Member for Llanelli (Mr. Davies) and I are not that far apart, but in 1977 Mrs. Wise and I felt forced to make a decision. We were put on the Committee to argue the case for the low-paid. There was little that we could do. As I said last night, we could not raise other people's taxation to help the low paid. We managed to increase personal allowances on another amendment. As a fail-safe device, we then tried to make sure that the Government would not increase the burden of tax on the low paid in succeeding years.

I read the debates yesterday on the train, which was something of a chore. We stated that we were out to increase the Government's popularity. I can speak only for 50 per cent. of the electorate in my constituency—and the matter was raised with me during the last election at 6 am in a bus queue—but the workers understood what we had done and why, even if they did not understand the technical procedures of the House that forced us to take such a big step. I have the press cuttings from that week. According to the Sunday Mirror, we were saboteurs for taking action to protect the low paid.

We never denied, as was pointed out by my hon. Friends a few days later, that the effect of the Rooker-Wise amendment was to put more money in the pockets of those paying tax at higher rates. Lifting the basic personal allowance automatically raises the level at which the higher tax bands come into operation. However, the tax cut—and that is not the right expression—benefited the family income of the low-paid more than the rich. In the end we were able to get the point across to my right hon. Friends. They accepted the amendment, with all its faults.

The First Deputy Chairman (Mr. Bryant Codman Irvine)

The hon. Gentleman has got his point across to the Committee once again. Perhaps he will now address himself to the clause.

Mr. Rooker

Clause 23 does not make sense if the original amendment remains on the statute book. However, it does not. In schedule 18 there is a line that repeals the words in the 1977 Act resulting from the Rooker-Wise amendment. I prefer my name to be totally dissociated from what this Tory Government are now doing. This clause will benefit only a married man who earns over £265 a week. The workers on average earnings and the low-paid would have benefited in any case under our original amendment.

As a result of this clause and the subsidiary effect of repealing our original amendment, those in higher tax groups will benefit twice over. That is my overwhelming objection. My hon. Friend the Member for Thurrock (Dr. McDonald) will give us more details, if she catches your eye, Mr. Godman Irvine. However, the people who will benefit under the clause are those with a taxable income of over £11,250, which means a married man earning in excess of £13,400, taking into account personal allowances. They will benefit in any case from indexation of the basic personal allowance. By passing this clause and indexing the gap between the basic personal allowance and the higher rate bands, those people will have a double benefit. The House should not pass such a measure in silence and without making clear that the Government are benefiting only married men earning more than £265 a week. I do not want my name attached to that. Nor, I suspect, does Audrey Wise.

The Government are in the process of indexing the well-off while de-indexing the poor and needy. In the Social Security (No. 2) Bill they have de-indexed invalidity, unemployment and industrial injury benefits. They will not rise in line with inflation, and those with an annual income below the tax threshold will have their benefit cut even though their total income is less than the personal allowances set out in the Bill. If the benefit were taxed, they would pay no tax on it.

While the Government are doing that, they have the brass face to push through clause 23. It is not good enough. When the point gets across to those outside—as we shall ensure that it does—Conservative Members in marginal seats will reap the result in the next election.

The Minister may say that the Government's proposal represents fairness between taxpayers and that since the 95 or 97 per cent. of basic rate payers benefit from what was the Rooker-Wise amendment, the other 3 per cent. should benefit similarly. I do not accept that. Those paying higher rates are already earning enough. Most do not pay the top rates, which have already been reduced by the Government from 83 to 60 per cent. They have also concertinaed the higher rate bands.

We should not accept the Minister's arguments. We know what the Financial Secretary will say. He has only one speech on this subject. I had to read it recently and I shall have to listen to it again shortly. When it had the chance in Opposition, the Tory Party did not table such an amendment to the 1977 Finance Bill. Conservatives knew that they would not have got my vote. There was no warning that it was to be done in this Bill. An obscure reference on page 9 of the Red Book deals with the extension of indexation provisions and " no cost " is shown against forgone revenue for 1980–81. The Government do not know what the cost will be. More important, they are frightened to give a forecast of the rate of inflation. They are scared stiff of putting in a cost on the basis of current inflation rates. By the end of the year they will reap the whirlwind when we see what higher rate taxpayers will get next year as a result of the clause.

I do not want to carp about the form of words in the clause just because the words that I helped to draft no longer appear. However, the wording is imprecise and the appropriate words are in the wrong place. They hang in suspension, not attached to any part of the clause, because of some faulty draftmanship. The parliamentary draftsmen have used about 1,000 words to do what we did in 50. Their productivity is obviously not good.

I was surprised to see the retail price index mentioned in the clause. I thought that we were to be fobbed off with the taxes and prices index. That was supposed to be the real rate of inflation. Of course, that has got worse. It was all right for only a few months in 1979, when the Government wanted to sell a false prospectus caused by the VAT changes. We have not heard anything about that index since then. If it were any good, it would be in the Bill. The Government know that it is a sham. The only Minister who ever pushed the index was the Financial Secretary to the Treasury, who was accused at the time of peddling a false prospectus.

8.15 pm

Mr. Lawson

We are always open to suggestions. Is the hon. Gentleman suggesting that the clause would be more acceptable to him if the taxes and prices index were included instead of the RPI?

Mr. Rooker

Of course not. That is the whole point. I was surprised at the inclusion of the RPI, even though to the public, that index, with all its faults, warts and imprecisions, is the cost of living index. We may argue about how it is made up, but the public knew that it was being sold a pup with the taxes and prices index. It was a con trick, following the increase in VAT last year bumping up the RPI. The message has obviously got home. A Cabinet Committee must have approved clause 23 and it knew that it could not sell it with the taxes and prices index included. It is probably in the Government's interest to use the RPI.

I am not here to barter. There were no deals on the original amendment and there will be none now. I want to distance myself from the clause as much as possible. We have made the point. It is known outside that the original help for the low-paid was given because Labour Back Benchers convinced their own Government that a change was right. There was some credit for the Labour Party in that change, but I want nothing to do with the new change.

The Government's proposal is like the change that we debated last night on the abolition of the lower rate tax bands. Such amendments are shovelled on to the Government by disreputable fringe banks, such as Rossminster, which operate on the fringe of the law with the sole job of assisting the high-paid.

Mr. Nick Budgen (Wolverhampton, South-West)

The most important point that the hon. Member for Birmingham, Perry Barr (Mr. Rooker) indicated was the ratchet effect of indexation. In general, he does not approve of indexation, but in 1977 he jumped on the bandwagon—I do not intend to be offensive—in order to achieve what he would describe as greater justice for the poorer sections of the community.

In a sense, the hon. Gentleman's position is similar to that of my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne), who says that he does not like indexation but will nevertheless go along with this example. The danger of going along with indexation is that it takes us yet a further step.

The hon. Member for Perry Barr said that he would go along with indexation as long as it benefited the poorest members of the community. However, my hon. Friend the Financial Secretary to the Treasury, who is a supporter of indexation on a much wider front, says that if we are to have indexation of personal allowances we must have a balancing indexation of the higher rate bands—a necessary symmetry of indexation in this area.

The hon. Member for Perry Barr must understand that if we accept his argumen there may be a logical case for indexing, for example, capital gains tax. My hon. Friend the Member for Knutsford must accept that the further we go along the path of indexation, the more we build it into our system.

I agree with the general observations of my hon. Friend the Member for Knutsford when he says that he fears indexation because it takes away the pain of inflation. I do not think that people react to social conditions out of altruistic ideas about what is good for society. On the whole, they react to social conditions because of the way those conditions affect them.

The idea of indexing the higher rate bands of income tax is extremely dangerous. There may have been an argument for what the Rooker-Wise amendment did for the lowest-paid in our society, although, I would say it was, most of all, the Lawson amendment. It is possible to argue that inflation hits the poorest hardest and that the poorest have the least means of avoiding the effects of inflation. That argument cannot be extended to the rich.

One of the constraints felt by the Government in imposing a gradual monetarist policy is the fact that the very rich and even the medium-rich can mitigate or even take advantage of the effects of inflation. If one already has substantial capital assets, it is much easier to make substantial borrowings that are still at negative interest rates. It is no good pretending that in a period of inflation everyone is a loser. Many of those who, by virtue of this clause, would be effectively indexed in their income tax are people who can avoid the effects of inflation. I say to my hon. Friend the Member for Knutsford: " Beware of this." Once one steps on this ladder, it is difficult to get off.

I understand the general arguments that are put forward by my hon. Friend the Financial Secretary. I recall them well from 1977. That was the first and last time that I was allowed to sit on a Standing Committee of the Finance Bill. I am a member of it this year and I suppose that I shall not be again in future. I had the misfortune in 1977 to disagree with my hon. Friends on this clause. My hon. Friend, the Member for Blaby, as he then was, by some splendid footwork, got me paired at one stage. That resulted in the passing of the Lawson amendment, as I think it should be called. My hon. Friend was, at that time, an advocate of general indexation.

My hon. Friend the Member for Knutsford should understand the way along which our hon. Friend the Financial Secretary wants to take the economy of this country. He wanted, as he put it at the time, what he called honesty in taxation in all taxes. We were to have indexation of capital gains taxes. We were to have indexation of capital transfer tax. There was to be generalised indexation of all taxation. We must understand what the consequences would be.

Mr. Bruce-Gardyne

The conclusions that my hon. Friend draws are his affair. I submit that we are not arguing about the philosophical approaches of my hon. Friend the Financial Secretary but about clause 23. The crucial element in that clause, to my mind, is the requirement imposed upon the Chancellor that if he does not, in any year, decide to accommodate the bands that we are discussing to the effects of inflation, he shall come before Parliament and explain what he is doing. It is that proposition, and not the generalised proposition that my hon. Friend is arguing, that I am prepared to support.

Mr. Budgen

I listened to my hon. Friend's distinction based upon subsection (4). I do not think that it is a good distinction and a proper argument. What is being done is to give the richest members of society the general impression that their tax rates will change according to inflation every year. My hon. Friend is right in saying that subsection (4) gives Parliament a let-out. But the assumption, if I may express it in legal terms, is that the rates will be indexed. The rich are, of course, subject to changes in the law like everyone else but they will, nevertheless, be able to say to themselves that in general they can expect these higher tax rate bands to be indexed. That is an extremely dangerous thing for any section of the community to be able to say to itself. It is a particularly dangerous thing for the richest and most influential sections of the community to be able to say.

This is particularly unfortunate at a time when the Government are striving to de-index many areas of the benefits system. Hon. Members have spoken about some areas of de-indexation but I remind my hon. Friend the Member for Knutsford that he and I, on many occasions, have had something to say about the indexation of pensions in the public sector. What is the difference, in principle, between this sort of indexation and the indexation of public sector pensions to which we, in my opinion, rightly take exception? I hope that my hon. Friend, at some stage, perhaps privately, will explain what is the distinction in principle.

I believe that the cure for inflation is extremely painful. I hope that it will be carried out quickly. I am, on this subject, a Hayekian and not a Friedmanite. I believe that the people of this country do not respond to abstract principles. They respond to economic situations when they pinch upon them. The more that we work indexation in to the system the more difficult it becomes to encourage popular support against what I regard as the greatest social evil. There may have been a case in the past for easing the shoe where it pinched for the weakest sections of the community. I find it difficult to apply indexation where it pinches upon the richest sections.

Dr. Oonagh McDonald (Thurrock)

I have listened with interest to the debate so far, and particularly to the remarks of the hon. Member for Knutsford (Mr. Bruce-Gardyne), who said that he was prepared to go along with indexation, and in particular the indexing of tax thresholds for the higher rate bands, because he thought that it would prevent the Chancellor from pretending to be particularly generous to certain groups of taxpayers. He thought that it would lead to honesty in taxation, just as indexing the tax thresholds for the basic rate taxpayers had.

It would have been much more honest and truthful if the Chancellor had presented the indexing of the higher rate band and the raising of the tax thresholds in this Budget as an act of generosity to higher-rate taxpayers, because that is what it is. It turns out to be that when one assesses the impact of the Budget, perhaps taking into account last June's Budget as well, on families of various income levels. One can then see that it is particularly generous to those who would otherwise be liable to pay tax at the higher rate, and that to continue to index it in future will be even more generous to those same taxpayers.

8.30 pm

Let us consider the overall effect of the Budget. The basic changes that have already been considered—the increase in personal allowances, the abolition of the reduced rate band and the increase in the thresholds and bands of the higher rate taxes—have had a different impact on various families. The net effect of the tax changes has been to reduce the tax bill of a married couple on £40 a week by 55p a week. Most couples have had a tax reduction of £1.18 a week. Those on £250 a week have had their income tax bill reduced by £3.46 a week. Those on £500 a week will pay £10.22 less in tax and those on £600 a week £13.18 less. That is simply taking account of the incresase in personal allowances and the higher rate band adjustments.

Most families, on the basis of those tax changes, will face increased taxes and will be worse off as a result of the Budget. For most families the reduction in income tax will be inadequate to offset the increases in the other taxes that were made at the same time. If we include national insurance contributions, excise duties and the taxes on tobacco and petrol, we find that only those with weekly incomes above £300 will have enjoyed an income tax cut sufficient to offset the increase in other taxes.

By the autumn families will receive a child benefit increase of 75p per child, but that is not enough to maintain the value of the benefit against inflation. The other increased charges that families will have to bear—prescription charges, housing costs, fuel bills and dearer school meals—mean that only those with a weekly income of £500 and above will be better off by the end of the year. Therefore, when one sets the total impact of Government policies and the Budget changes against the incomes of the various families considered in clause 23, one sees that to alter the higher rate bands in this way and to promise to index them in the future is quite simply an act of generosity to those who do not need it.

The Budget has virtually abolished the higher-rate taxes. The Treasury estimates that only 730,000 people will now pay tax at any of the higher rates, whether on earned or unearned income. That number will constitute about 2 per cent. of all taxpayers. That means that 98 per cent. of taxpayers simply will not benefit from the changes in the clause now or in the future.

Let us further consider how few people will benefit from the clause. The Treasury estimates that 3,020,000 people will earn more than £10,000 a year in the current financial year. Admittedly, not all of them would be eligible to pay tax at the higher rate anyway. A single person, assuming only basic allowances, would not be eligible to pay the higher rate of tax until he or she earned about £11,000 a year. A married man would have to earn about £13,500 a year before he was liable to tax at the higher-rate band. Even if we reduced that number of 3 million-odd considerably, to find that only 730,000 people will pay a higher rate of tax this year is to see how the Chancellor has benefited a tiny number of people at a fairly high cost. He estimated that cost as £100 million in his Budget Statement.

The changes are an act of generosity concentrated on a tiny number of those who earn enough to pay taxation. For that reason there is no justification, either, for the present changes in the higher-rate band. The Chancellor said that he had limited resources available and that there must be cuts of all kinds in public spending. There were to be increased prescription charges, and the charge for school meals would increase considerably.

The Chancellor said that he found that he could no longer afford to index unemployment benefit, invalidity benefit and social security benefits of all kinds, yet he can squander £100 million on a small number of people who already earn at least three times the average income for males. A small proportion of the population now receive enormous benefit by the Chancellor's act of generosity, and that act of generosity is to continue in the financial years ahead by an unjustified and gratuitous indexing of that benefit.

At the same time the Chancellor, by way of changes in family income supplement during the current financial year, has increased the number of families caught in the poverty trap. He has increased the numbers for whom the marginal rate of taxation would have been, in some cases, much higher than any of those marginal rates of taxation liable to be faced by a higher-rate taxpayer. The marginal rate of taxation for many low-income families could be over 50 per cent. and there are families who could face rates of 100 per cent. or even more.

Therefore, at the cost of £100 million, the Chancellor is benefiting a tiny number of families. Meanwhile, the numbers caught in the poverty trap will increase and will probably constitute about 90,000 families this year. That is an increase of 5 per cent. on last year and it has been brought about by a Government and a Chancellor who claim that they are concerned with incentives to work and who say that they are worried about the disincentives of high social security and unemployment benefits. They are so concerned that they have introduced the first steps in the current social security legislation towards taxing such benefits.

The resources gained by the Government as a result of the changes are wasted upon those who cannot and do not need them. It is a totally unjustified squandering of the nation's wealth on a tiny number of people whose incomes are already above the majority of incomes. There can be no justification for the changes introduced for this year. Still less is there justification for their continuing in the years to come. The top earners in the population have received gratuitous handouts while the Government have increased the burden of poverty for very many families.

Mr. Lawson

All indexation debates——and we have had a number of them in the past few years—have a certain similarity. That has to be admitted. Even the cast has a remarkable similarity. I warmly welcome one newcomer to the debate—my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne).

Before I reply to the points raised in the debate, it might be helpful to the Committee if I were to state clearly what the clause does. It provides that for each tax year the single and married allowances, the additional personal allowance, the age allowances, the age allowance income limit, the higher rate thresholds and the investment income surcharge threshold should, unless Parliament decides otherwise, be increased by the same percentage as the increase in the RPI over the year ending in the previous December.

Thus, for the new tax year 1981–82—the first year in which the new indexation provision will operate—the allowances and thresholds, unless Parliament decides otherwise, will be increased in line with the rise in the RPI between December 1979 and December 1980. Each year's indexation adjustment will start from the allowances and thresholds in force for the previous year, whether they were arrived at by the indexation formula or by a discretionary change in the annual Finance Act.

The indexation formula provides for the figures to be rounded up to the nearest £10 in the case of allowances and to the nearest £100 in the case of rate thresholds and the age allowance income limit. Each year the index figures are to be set out in a Treasury order. In a year when the indexation adjustments are not overridden this order will show clearly the new figures for allowances and rate bands. In a year when the Chancellor proposes different figures in either direction, the index figures in the order will provide a basis for comparison.

Mr. Denzil Davies

If the clause is approved, what will be the cost next year of its provisions?

Mr. Lawson

If the right hon. Gentleman had read the Red Book he would have seen that there is no cost for 1980–81 for, as footnote (a) says, the change is effective only from 1981–82. He would also have seen that, for 1981–82, footnote (b) states: The cost will depend on increases in prices; and implementation will be subject to review by Parliament. To the extent of 90 per cent.—and I use that figure advisedly—it is essentially a redrafting of section 22 of the Finance Act 1977 provision. It is an extension of the same type of indexation to the investment income surcharge, the higher rate thresholds and the higher rate bands. The question whether a real or a nominal cost is involved is important, but I shall not go into that now. When we talk about cost, we talk in terms of the extra revenue as a result of inflation which would have ensued if the changes had not been made.

Of that " cost ", 90 per cent. comes from the indexation of the various items on which the hon. Member for Birmingham, Perry Barr (Mr. Rooker) was so keen in 1977. Only 10 per cent. comes from the extension of indexation that we are incorporating in the Bill. If the hon. Member for Perry Barr seeks to vote down the clause, he will be voting as to 90 per cent. against what he fought so hard for in 1977.

Mr. Rooker

That is ludicrous. If I vote against the clause, I shall be voting against the repeal of the provisions in my amendment in schedule 18. I shall vote against the clause if my right hon. Friend calls for a Division. There is no argument about that.

The Minister has said that 90 per cent. of the " cost " is to what was there already and that 10 per cent. is to the addition. Is he saying that 10 per cent. of the extra cost—10 per cent. of the tax give-away—is to the 2 per cent. of taxpayers referred to by my hon. Friend the Member for Thurrock (Dr. McDonald)? Is that where the 10 per cent. is to go? Is not that unfair?

Mr. Lawson

It is not unfair. But, in any event, the hon. Gentleman's figures are not correct. I said that 10 per cent, arises as a result of the higher-rate tax and investment income surcharge threshold provisions together, the second of which was not included in the 2 per cent. referred to by the hon. Member for Thurrock (Dr. McDonald).

8.45 pm

I shall tell the Committee why I think that this is fair, but before doing that I ought to reply to another point made by the hon. Member for Perry Barr. The hon. Gentleman said that what he found particularly objectionable in the clause was the fact, as he claimed, that the higher-rate taxpayers would benefit twice—I think that that was his phrase—because of the indexation of the basic personal allowance thresholds and also the higher rate thresholds.

I see the right hon. Member for Llanelli (Mr. Davies) nodding at that, and I am surprised. It should be clear at least to the right hon. Gentleman, and possibly also to the hon. Member for Perry Barr—although I must say that, thinking of him and his former companion, Mrs. Wise, in those days in 1977, I am inclined to believe that they knew not what they did.

Nevertheless, it should be clear to the right hon. Gentleman and to the hon. Member for Perry Barr that what we are talking about here is a change in the value of money, and that applies to all the monetary amounts in the Finance Bill—all the allowances, whether the basic personal allowances, the investment income surcharge thresholds, the higher rate thresholds, or whatever. Therefore, if these are adjusted by the same amount, there is no double benefit. I hope that that is clear. I see, however, that it is not, so let me give an example, since it is important that the point should be established.

Let us suppose that this year there is a man with an income of £20,000 and, for the sake of simplicity, let us assume that he has a personal allowance of £2,000, with a basic rate of 30 per cent. on the first £10,000 of taxable income and 50 per cent. on the remainder. His tax bill will then be £7,000—30 per cent. of £10,000 and 50 per cent. of £8,000. I hope that the hon. Gentleman is with me so far. Thus, the proportion of that man's income which is going in tax is 35 per cent.

Let us next assume one year on that there is a rate of inflation of 10 per cent.——

Mr. Rooker

Oh!

Mr. Lawson

I hope that the hon. Gentleman will follow this example, since his accusation that there is double benefit is a serious one. Let us assume also—though it is not necessarily the case, as my hon. Friend the Member for Knutsford rightly pointed out—that the man's income also goes up by 10 per cent. with inflation from £20,000 to £22,000, so that he has no increased income in real terms.

If the personal allowance only were to be indexed, that man's tax bill would be as follows. He would pay £3,000 on the basic rate band as before, because there is no increase there. But on the higher rates he would pay £4,900, that is, 50 per cent. of £9,800, which is the £22,000 new income less £2,200 personal allowance less the £10,000 basic rate band. So in those circumstances his total tax would be £7,900—or 35.9 per cent. of £22,000. In other words, the burden of tax on an income which was not being increased in real terms would have risen by almost 1 per cent.

But if the personal allowance and the higher rate threshold are both increased by 10 per cent., the tax on the new income of £22,000 is calculated as follows: £3,300 of tax is paid at the basic rate—30 per cent. on £11,000 in the basic rate band, the basic rate band having been extended by the increase in the higher rate threshold under the clause—plus £4,400 at the higher rate, which is 50 per cent. of £8,800, the £8,800 itself being £22,000 less the £2,200 personal allowance less the £11,000 basic rate band.

The hon. Member for Perry Barr will be able to read this in Hansard and check it. He has told us how much he enjoys reading the reports of debates of this Committee on his train journeys, so he can do that on this occasion.

In the circumstances which I have set out, the tax bill would be £7,700, which is precisely 35 per cent. of £22,000. In other words exactly the same percentage of that man's income would go in tax next year as this year.

I quite understand that the hon. Gentleman might wish such a person to be worse off, but that is a separate point. To ensure that somebody is no worse off—and no better off, either, in real terms—the personal allowances and the higher rate threshold both need to be fully indexed in line with inflation. There is no double indexation. I hope that the hon. Gentleman will read that in Hansard tomorrow, and satisfy himself that this is so.

Mr. Rooker

It does not matter how many figures the Minister produces, because they do not hide the fact that raising the basic personal allowance and not changing the thresholds creates a spillover effect from one band to another. People in the higher rate bands benefit in cash terms more than someone who is not in those bands. If the bands are indexed, they have a double spoon out of the pot. They have gained twice. No amount of clever and sophisticated figures or presentational points will alter that fact.

Mr. Lawson

I hope that the hon. Gentlemen will pay attention. It is clear that someone on a higher income—leaving aside the question whether he is in the higher rate bands—will receive a larger cash benefit if allowances are increased. That is necesarily so as a result of the indexation provision for which the hon. Gentleman fought. I do not know what he is arguing about. Under this provision, if somebody is paying a certain amount of tax on his income in one year, that burden will not change in real terms simply and solely as a result of inflation. It will not go up or down. That is the effect of the clause.

Mr. Budgen

Will my hon. Friend tell the Committee about the Government's general position on indexation? When the Tory Party was in Opposition, the general cry of the majority of the party was " Truth in taxation " which, as I understood it, meant the advocacy of indexation over a wide tax area. Are we to understand that indexation is now only to be advocated in this sphere, or is it to be widely extended?

Mr. Lawson

We are debating clause 23, which is concerned with the indexation of income tax. It will be helpful if we confine ourselves to that. I have debated the matter with my hon. Friend up hill and down dale for many years. He knows that I have always drawn a clear distinction between different forms of indexation and different contexts for indexation. I have always repudiated the suggestion that all forms of indexation are alike. I do not think that they are.

Mr. Budgen rose——

Mr. Lawson

I shall give way to my hon. Friend for the last time.

Mr. Budgen

My hon. Friend has always said that there is a proper distinction to be drawn between the indexation of the taxation system and indexation in other areas of the State's activities. I do not remember his ever having drawn a distinction between the various forms of taxation. I should like him to comment on that.

Mr. Lawson

The only comment that I can make is that my hon. Friend must know that my right hon. and learned Friend the Chancellor of the Exchequer puts forward tax proposals to the House in his annual Budgets. Each year my hon. Friend is able to see the proposals of my right hon. and learned Friend for that year and for the future. It is not the custom for Treasury Ministers to predict the contents of future Budgets.

My hon. Friend said that he found the clause objectionable. I think he understood that there was an argument in equity in saying that if there were to be indexation of the income tax system it should apply equally to people at all levels. But he felt that it was appropriate that the rich should be especially highly taxed.

The Committee will recall—and this is germane to the debate—that the taxation of the better-off increased substantially as a result of inflation under the previous Labour Government. I see the hon. Member for West Lothian (Mr. Dalyell) in his place. In the previous debate, he was commending the sagacity of Lord Lever. I share that judgment. It was Lord Lever who, in a television interview in 1978, when asked by Mr. Brian Walden about the iniquity of the then 83 per cent. top rate of income tax, said: Well, I must say that when it was put on, it was put on at a more realistic level than now applies. It was actually inflation that really made the tax burdensome. And I don't think that any Government ever responds quickly enough to the deforming of their tax structure by inflation. And we may be open to criticism for not responding fast enough to that. That is exactly what happened. Therefore, I do not think that my hon. Friend should consider it perfectly all right to see the tax scales at the higher levels—which my right hon. and learned Friend the Chancellor of the Exchequer in his first Budget properly and deliberately introduced—progressively eroded by the effect of inflation unless Parliament clearly and openly decides that that should be so.

My hon. Friend the Member for Knutsford said that he felt there to be a distinction between my approach to this matter and his, because his approach was based on the principle of honesty in taxation. That is precisely the same as mine. It is a distinction without a difference. The phrase that I used with which I wearied many hon. Members on both sides of the Committee was " truth in taxation." I think that the distinction is very small.

The whole purpose of this provision—a purpose which commanded not only my support, but the support of pretty well the whole of the then Conservative Opposition in Standing Committee in 1977 when the earlier provision was introduced—is that there should be truth in taxation; that there should be openness. If we decide to tax people more heavily, fair enough, let us come to Parliament and say that we want to do that, and let us justify it to the House of Commons. If we wish particularly to tax the rich more heavily, as does the right hon. Member for Llanelli, let him come before Parliament—if he is ever given the opportunity to do so—and do it openly and explicitly and justify it.

What is objectionable is allowing inflation steadily, by stealth, to increase the tax burden—without any explicit changes in law and without any changes in the allowances—and to erode the value of those allowances. That was the argument time and again. That was why I introduced my amendment to the so-called Rooker-Wise amendment in 1977, making it absolutely clear that this was not mandatory and that the Government had the opportunity to put before Parliament a different figure if they wished to do so. That is why the clause is drafted with the phrase " unless Parliament otherwise determines ".

The right hon. Member for Llanelli, in opposing the clause, emerged not merely as a class warrior—which we know is one of the guises that he likes to put on from time to time, saying that the rich must be taxed more heavily and that it is monstrous that this provision will allow the rich to be taxed not so heavily—but as a cowardly class warrior. He is saying " I am fearful of coming to the House of Commons and saying openly that this index figure is not what the higher rate threshold should be. It should be at some lower figure. The rich should be taxed more heavily." The right hon. Gentleman did not want to do that. He wanted to clobber the rich by stealth. He wanted inflation to do the dirty work for him.

I suggest that the Committee should have no truck with that whatsoever. There is nothing in this clause that prevents him and his party—if the nation is ever unfortunate enough to have them in government again—from making the tax allowances, tax rates, tax thresholds or whatever they wish to suit their malice. It simply obliges them to do so openly. I commend the clause to the Committee.

9 pm

Mrs. Kellett-Bowman

By indexing these allowances, my hon. Friend the Financial Secretary destroys much of the Budget's buoyancy and, therefore, he is striking a strong blow at inflation and making taxation infinitely more honest than it has been in the past.

Mr. Lawson

This clause does indeed make taxation more honest than it has been in the past. Since my hon. Friend has mentioned the question of inflation, I should like to say that I agree with the right hon. Member for Llanelli that in past the buoyancy of revenue, due not to economic growth but solely to inflation, enabled the Government who were responsible for inflation to get more money in by stealth and, therefore, to spend more money and to increase public expenditure. That was one of the evils of the unindexed system, and it is a further reason why I commend this clause to the Committee.

Mr. David Penhaligon (Truro)

I suppose that with this new edict of honesty in taxation the Minister now admits that he has increased taxation. It is a pity that he did not attend yesterday's debate, when we discussed the abolition of the narrow tax band. The Government then argued that they had reduced taxation for the lower-paid, but today, in the new edict of honesty in taxation, the Government have admitted that taxation has been increased, and that is an improvement.

Having listened to the Minister describing how easy it is to avoid the provisions of the clause, I wonder whether it is worth including it. He outlined how easy it would be for the Government to do more or to do less. I shall tell him now precisely what will happen over the next few years. We have been down this path before. As long as we are in a period of rising inflation the Government will index the tax allowances, because even that saves them money, when, in effect, they can claim that it does not. By that I mean that if we have a rate of inflation of 10 per cent. one year, and we then enter into a 20 per cent. inflation year, on the historic index about which the Minister has spoken, if it is indexed on last year's inflation rate of 10 per cent., it has saved the Government money. I remember that happening with regard to pensions when the Labour Party was in Government. We went through a period of rising inflation, and then the jackpot year arrived.

What will the Government do if ever the day should arrive when there is a substantial reduction in inflation? Let us pretend that somehow the Government can move from the present level of inflation of 21 per cent. to the level that existed when the Lib-Lab pact ended. Let us pretend that they can manage as well as that within the next 12 months. Is the Minister really telling the House that he will index the thresholds for tax next year by 21 per cent. in a year when inflation is running at 8 per cent? We all know that he will not, because he will not be able to find the money to do so. The Labour Government did not do so on pensions. They carried out one of the greatest money-saving fiddles of all time. They indexed the pension year after year in a period of rising inflation. When the year arrived when we fell off the edge and started getting back to more rational levels of inflation in the year when pensioners should have had a rise of 18 per cent. in a period of about 10 per cent. inflation the Government could not find the money to give the increase.

Precisely the same will happen to this clause if ever we should get back to saner levels of inflation. I suspect that the Financial Secretary and at least the Minister of State, who is notorious these days for being honest, know that that is so.

The argument between the hon. Member for Birmingham, Perry Barr (Mr. Rooker) and the Minister on the question whether the highest income groups were helped twice was interesting. I suspect that technically the Minister is right, because he ends up arguing that in a period of 20 per cent. inflation the poor man who is earning £20,000 a year has in effect received a reduction in income of £4,000 a year, whereas the man earning only £2,000 a year has received a reduction in his income of only £400. Therefore, clearly, we must have far greater sympathy for the man on £20,000 a year, because he has received a far larger reduction in his income in real terms. I know which of those two people I would rather be in a period of inflation.

The fact that the non-indexing of the threshold has put the squeeze on take-home incomes for some of those earning between £15,000 and £20,000 a year, from now on, given the adjustments in recent years, causes me no anguish whatsoever.

Therefore, I shall vote against the clause not least on the basis that I believe that it takes up a couple of pages of the Bill which are of no value.

Mr. Budgen

Will the hon. Gentleman be good enough to tell us what the Liberal Party's view is on indexation? As I recollect it, Mr. John Pardoe was one of the first to be in favour of general indexation. I think that we need a much more comprehensive statement from the Liberal Party, particularly as it is presumably preparing itself for another period of office with the Labour Party.

Mr. Penhaligon

I am quite convinced that our stand on indexation is every bit as united and common as were the arguments advanced from the Conservative Benches during the previous debate. All that I can say is that in the Liberal Party there are not more than 11 views. There appear to be far more views on the Conservative Benches. [HON. MEMBERS: " Answer."] Given the chance, we shall vote against the clause, because it is giving money to those on levels of income that mean that they do not need help. If the Government can increase their thresholds, they can do it anyway.

Mrs. Kellett-Bowman

Answer.

Mr. Penhaligon

Finally, I believe that the whole clause is of very doubtful value indeed, because as we enter a period of falling inflation the Government will renege on the indication of a promise that they are making now.

Mr. Denzil Davies

I think that the Financial Secretary gave the game away in his final sentence. He accused Opposition Members of wishing to increase taxation by stealth so that we could use that money for public expenditure. The corollary of that is exactly what the Financial Secretary is doing. He is doing the best that he can within his power, within the limits of Parliament, to put this money outside the possibility of it being spent on public expenditure. In other words, by having this clause and by making it necessary to come to Parliament to change it, money which otherwise would have been taken by taxation from the better-off and which could be used for public expenditure and for the worse-off in the community, is taken outside that area as far as the hon. Gentleman can do it.

That is the burden of the hon. Gentleman's argument. I think that that is what he always meant to do with the Rooker-Wise-Lawson amendment. I think that he made it clear in the statement at the end of his speech.

As in all debates on indexation, we have had some interesting views. The hon. Member for Knutsford (Mr. Bruce-Gardyne), who is not now present, tried to draw a distinction. I agree with the Financial Secretary here. The hon. Member for Knutsford tried to reconcile the purity of his views on sound money and inflation with the desire to see the higher income groups being indexed. To put it kindly, he made a very ambivalent speech trying to reconcile the two, and he failed.

The hon. Member for Wolverhampton, South-West (Mr. Budgen) made a very honest speech. I hope that he is not paired this evening, because I have heard him making an honest speech such as that before in Committee, and he was paired for some reason. I hope that this evening he will come into the Lobby with us. He is an honest man.

Mr. Budgen

I am not paired.

Mr. Davies

Perhaps that escape route is not open to the hon. Gentleman this evening.

The Financial Secretary tried to argue this matter away on the basis that the clause deals with the personal allowances of 90 per cent. of the people. But as my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) pointed out, it is not necessary to have this clause to deal with those. Schedule 18 does not have to be repealed. The drafting of the original Rooker-Wise amendment might not have been as good as the parliamentary draftsmen might have liked. However, it was perfectly all right. The courts would have known what it meant. There would not have been any problem

Division No. 332]	AYES	[9.11 pm
Alexander, Richard	Brinton, Tim	Critchley, Julian
Ancram, Michael	Brecklebank-Fowler, Christopher	Dean, Paul (North Somerset)
Arnold, Tom	Brooke, Hon Peter	Dickens, Geoffrey
Aspinwall, Jack	Brown, Michael (Brigg & Sc'thorpe)	Dorrell, Stephen
Atkins, Robert (Preston North)	Browne, John (Winchester)	Douglas-Hamilton, Lord James
Baker, Nicholas (North Dorset)	Bruce-Gardyne, John	Dover, Denshore
Bendall, Vivian	Bryan, Sir Paul	Dunn, Robert (Dartford)
Benyon, Thomas (Abingdon)	Bulmer, Esmond	Dykes, Hugh
Berry, Hon Anthony	Cadbury, Jocelyn	Eden, Rt Hon Sir John
Best, Keith	Carlisle, Kenneth (Lincoln)	Fairbairn, Nicholas
Bevan, David Gilroy	Carlisle, Rt Hon Mark (Runcorn)	Faith, Mrs Sheila
Biffen, Rt Hon John	Chalker, Mrs Lynda	Farr, John
Biggs-Davison, John	Clark, Sir William (Croydon South)	Fenner, Mrs Peggy
Blackburn, John	Clarke, Kenneth (Rushcliffe)	Fisher, Sir Nigel
Blaker, Peter	Cockeram, Eric	Fletcher, Alexander (Edinburgh N)
Body, Richard	Cope, John	Forman, Nigel
Boyson, Dr Rhodes	Corrie, John	Fowler, Rt Hon Norman
Braine, Sir Bernard	Costain, A. P.	Fox, Marcus
Bright, Graham	Cranborne, Viscount	Fraser, Rt Hon H. (Stafford & St)

of interpretation. There is no need to repeal that provision.

The Government are using the amendment as an excuse to enable the Financial Secretary and his colleagues to extend indexation to the higher paid. He will not get away with that type of debating trick. He should not argue that a vote against the clause is a vote against indexation for the lower paid, Indexation for that group is safeguarded, even if the clause is defeated. The Government believe in indexation for the group for whom they feel responsible. That group—the better off—voted for the Conservative Party. It will get indexation. The unemployed, the disabled and those on invalidity benefit will not get indexation.

The Financial Secretary said that I wanted to increase the taxation of the rich. Why do not the Government provide the same type of indexation for the unemployed as they are providing for the rich? Why not provide the same indexation for the rich as they are providing for the unemployed? The Government are not doing that. The Financial Secretary is giving the rich an indexation rate of 21 or 23 per cent. However, the unemployed will be given an indexation rate of 11 or 12 per cent., perhaps less. Ultimately we are discussing social justice. The clause may be a small clause in the Finance Bill, but once again we see the Government's priorities. The rich benefit. The rich get richer and the unemployed and the weak suffer under a Tory Government.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 185, Noes 146.

Fraser, Peter (South Angus)	Madel, David	Rossi, Hugh
Gardiner, George (Reigate)	Major, John	Rost, Peter
Goodlad, Alastair	Marlow, Tony	Royle, Sir Anthony
Gorst, John	Mates, Michael	Sainsbury, Hon Timothy
Gow, lan	Mather, Carol	St. John-Stevas, Rt Hon Norman
Gower, Sir Raymond	Maude, Rt Hon Angus	Shelton, William (Streatham)
Gray, Hamish	Mawby, Ray	Shepherd, Colin (Hereford)
Green way, Harry	Mawhirnney, Dr Brian	Silvester, Fred
Griffiths, Peter (Portsmouth N)	Maxwell-Hyslop, Robin	Sims, Roger
Grylls, Michael	Mellor, David	Skeet, T. H. H.
Gummer, John Selwyn	Meyer, Sir Anthony	Speller, Tony
Hamilton, Hon Archie (Eps'm&Ew'll)	Miller, Hal (Bromsgrove & Redditch)	Spence, John
Hannam, John	Mills, Iain (Meriden)	Spicer, Michael (S Worcestershire)
Hawksley, Warren	Mills, Peter (West Devon)	Squire, Robin
Heseltine, Rt Hon Michael	Miscampbell, Norman	Steen, Anthony
Hicks, Robert	Mitchell, David (Basingstoke)	Stewart, lan (Hitchin)
Higgins, Rt Hon Terence L.	Moate, Roger	Stewart, John (East Renfrewshire)
Hill, James	Morgan, Geraint	Stradling Thomas, J.
Hogg, Hon Douglas (Grantham)	Morrison, Hon Charles (Devizes)	Taylor, Teddy (Southend East)
Holland, Philip (Carlton)	Morrison, Hon Peter (City of Chester)	Thatcher, Rt Hon Mrs Margaret
Hooson, Tom	Mudd, David	Thomas, Rt Hon Peter (Hendon S)
Hunt, John (Ravensbourne)	Murphy, Christopher	Thompson, Donald
Hurd, Hon Douglas	Needham, Richard	Thornton, Malcolm
Johnson Smith, Geoffrey	Nelson, Anthony	Townend, John (Bridlington)
Jopling, Rt Hon Michael	Newton, Tony	Trippier, David
Kaberry, Sir Donald	Page, Rt Hon Sir R. Graham	Viggers, Peter
Kellett-Bowman, Mrs Elaine	Page, Richard (SW Hertfordshire)	Wakeham, John
King, Rt Hon Tom	Parris, Matthew	Waldegrave, Hon William
Kitson, Sir Timothy	Patten, Christopher (Bath)	Walker, Bill (Perth & E Perthshire)
Langford-Holt, Sir John	Patton, John (Oxford)	Walker-Smith, Rt Hon Sir Derek
Lawrence, Ivan	Pattie, Geoffrey	Wall, Patrick
Lawson, Nigel	Pink, R. Bonner	Waller, Gary
Le Marchant, Spencer	Pollock, Alexander	Ward, John
Lennox-Boyd, Hon Mark	Porter, George	Watson, John
Lester, Jim (Beeston)	Prentice, Rt Hon Reg	Wheeler, John
Lloyd, Peter (Fareham)	Price, David (Eastleigh)	Whitney, Raymond
Loveridge, John	Proctor, K. Harvey	Wiggin, Jerry
Luce, Richard	Rees, Peter (Dover and Deal)	Williams, Delwyn (Montgomery)
Lyell, Nicholas	Rees-Davies, W. R.	Wolfson, Mark
McCrindle, Robert	Renton, Tim	Young, Sir George (Acton)
Macfarlane, Neil	Rhodes James, Robert
MacKay, John (Argyll)	Rhys Williams, Sir Brandon	TELLERS FOR THE AYES:
McNair-Wilson, Michael (Newbury)	Rifkind, Malcolm	Mr. John MacGregor and
McNair-Wilson, Patrick (New Forest)	Roberts, Michael (Cardiff NW)	Mr. David Waddington

NOES
Allaun, Frank	Douglas-Mann, Bruce	Johnston, Russell (Inverness)
Alton, David	Dubs, Alfred	Jones, at Hon Alec (Rhondda)
Archer, Rt Hon Peter	Duffy, A. E. P.	Jones, Dan (Burnley)
Armstrong, Rt Hon Ernest	Dunn, James A. (Liverpool, Kirkdale)	Kerr, Russell
Ashley, Rt Hon Jack	Dunwoody, Mrs Gwyneth	Kilfedder, James A.
Atkinson, Norman (H'gey, Tott'ham)	Eadie, Alex	Lambie, David
Bagier, Gordon A. T.	Eastham, Ken	Leighton, Ronald
Beith, A. J.	Ewing, Harry	Lewis, Ron (Carlisle)
Bennett, Andrew (Stockport N)	Field, Frank	Litherland, Robert
Booth, Rt Hon Albert	Fitch, Alan	Lofthouse, Geoffrey
Bottomley, Rt Hon Arthur (M'brough)	Flannery, Martin	Lyons, Edward (Bradford West)
Bray, Dr Jeremy	Fletcher, Ted (Darlington)	McCartney, Hugh
Brown, Hugh D. (Provan)	Foot, Rt Hon Michael	McDonald, Dr Oonagh
Brown, Robert C. (Newcastle W)	Forrester, John	McKay, Allen (Penistone)
Buchan, Norman	Foster, Derek	MacKenzie, Rt Hon Gregor
Callaghan, Rt Hon J. (Cardiff SE)	Freeson, Rt Hon Reginald	Maclennan, Robert
Callaghan, Jim (Middleton & P)	Garrett, John (Norwich S)	Marshall, Dr Edmund (Goole)
Campbell-Savours, Dale	Grant, George (Morpeth)	Mason, Rt Hon Roy
Canavan, Dennis	Grant, John (Islington C)	Maxton, John
Carmichael, Neil	Hamilton, James (Bothwell)	Mellish, Rt Hon Robert
Clark, Dr David (South Shields)	Hamilton, W. W. (Central Fife)	Mikardo, lan
Cocks, Rt Hon Michael (Bristol S)	Harrison, fit Hon Walter	Millan, Rt Hon Bruce
Coleman, Donald	Hart, Rt Hon Dame Judith	Mitchell, Austin (Grimsby)
Concannon, Rt Hon J. D.	Haynes, Frank	Mitchell, R. C. (Soton, ltchen)
Conlan, Bernard	Hefter, Eric S.	Morris, Rt Hon Alfred (Wythenshawe)
Cook, Robin F.	Hogg, Norman (E Dunbartonshire)	Morris, Rt Hon Charles (Openshaw)
Cowans, Harry	Holland, Stuart (L'beth, Vauxhall)	Moyle, Rt Hon Roland
Crowther, J. S.	Hooley, Frank	Newens, Stanley
Cryer, Bob	Horam, John	O'Halloran, Michael
Cunliffe, Lawrence	Howells, Geraint	O'Neill, Martin
Dalyell, Tam	Hudson Davies, Gwilym Ednyfed	Palmer, Arthur
Davies, Rt Hon Denzll (Llanelll)	Hughes, Mark (Durham)	Parry, Robert
Davis, Terry (B'rm'ham, Stechford)	Hughes, Robert (Aberdeen North)	Penhaligon, David
Dempsey, James	Janner, Hon Greville	Prescott, John
Dewar, Donald	Jay, Rt Hon Douglas	Richardson, Jo
Dixon, Donald	John, Brynmor	Roberts, Albert (Normanton)
Dobson, Frank	Johnson, James (Hull West)	Roberts, Ernest (Hackney North)
Dormand, Jack	Johnson, Walter (Derby South)	Robinson, Geoffrey (Coventry NW)

Rooker, J. W.	Strang, Gavin	Williams, Rt Hon Alan (Swansea W)
Ross, Ernest (Dundee West)	Thomas, Dafydd (Merioneth)	Wilson, Gordon (Dundee East)
Sever, John	Thomas, Jeffrey (Abertillery)	Wilson, William (Coventry E)
Silkin, Rt Hon John (Deptford)	Thomas, Dr Roger (Carmarthen)	Winnick, David
Silverman, Julius	Tinn, James	Woodall, Alec
Skinner, Dennis	Varley, Rt Hon Eric G.	Woolmer, Kenneth
Snape, Peter	Watkins, David	Wrigglesworth, lan
Spriggs, Leslie	Welsh, Michael	Young, David (Bolton East)
Steel, Rt Hon David	White, Frank R. (Bury ft Radcliffe)
Stewart, Rt Hon Donald (W Isles)	Whitehead, Phillip	TELLERS FOR THE NOES:
Stoddard, David	Whitlock, William	Mr. John Evans and
Stott, Roger	Wigley, Dafydd	Mr. George Morton

Question accordingly agreed to.

Clause 23 ordered to stand part of the Bill.