§ I come now to income tax. Once again I must have the main priority in mind—the need to contain public borrowing so as to make it possible to secure lower interests rates and ease the conditions in which the trading sector of the economy has to operate.
§ Inflation raises the real burden of income tax. This is because allowances and rate bands are fixed in money terms. As the value of money falls so, too, does the value of these allowances and bands.
§ It was in order to counteract this effect that the House in 1977 carried a measure that required Governments to raise the tax allowances by each year's inflation unless Parliament explicitly decided to the contrary.
§ To implement this formula now would mean increasing allowances by about 15 per cent. In the circumstances of this year that simply is not possible. The incomes of most people have been rising in both money and real terms, but many companies have seen their profits virtually 775 disappear, with serious implications for jobs and investment. In these circumstances it will not be possible this year to make any increase in the income tax allowances or rate bands. As hon. Members will realise, the House will be asked to approve a resolution to this effect.
§ A Treasury order is also being made today, following the procedure laid down in the 1980 Finance Act, setting out what the increases would have been in the thresholds and allowances if indexation had been possible. The House will wish to know that full indexation of the allowances and bands would have reduced the full year yield of income tax by £2½ billion.
§ This decision has not been lightly taken, and I share the disappointment that everyone will feel. It enables us to avoid, as I am sure is right, the need for any change in the basic or other rates of income tax. And it enables me to tell the House, as I am glad to be able to do, that we propose that child benefit and one-parent family benefit will both be fully price-protected, in line with the forecast of inflation. Next November child benefit will, therefore, go up by 50p a week per child, to £5.25. The one-parent family benefit will go up by 3()p, to £3.30 per week.