§ Having announced major reforms of both the taxation of savings and investment and the taxation of business, I turn now to third and final area in which I propose to make progress on tax reform. This is the taxation of personal income and spending.
§ The broad principle was clearly set out in the manifesto on which we were first elected in 1979. This emphasised the need for a switch from taxes on earnings to taxes on spending. My predecessor made an important move in this direction in his first Budget, and the time has come to make a further move today. To reduce direct taxation by this means is important in two ways. It improves incentives and makes it more worthwhile to work, and it increases the freedom of choice of the individual.
§ Having regard to the representations I have received on health grounds, I therefore propose an increase in the tobacco duty which, including VAT, will put lop on the price of a packet of cigarettes, with corresponding increases for hand-rolling tobacco and cigars. This will do no more than restore the tax on tobacco to its 1965 level in real terms. These changes will take effect from midnight on Thursday. I do not, however, propose any increase in the duty on pipe tobacco.
§ I propose to raise most of the other excise duties broadly in line with inflation, so as to maintain their real value: not to do so would run counter to the philosophy I outlined a moment ago. But with inflation as low at it now is, the necessary increases are on the whole mercifully modest.
§ I propose to increase the duties on petrol and derv by amounts which, including VAT, will raise the price at the pumps by 4½p and 3½p a gallon respectively. This does no more than keep pace with inflation. The changes will take effect for oil delivered from refineries and warehouses from 6 o'clock this evening. I do not propose to increase the duty on heavy fuel oil, which is of particular importance to industrial costs.
§ There is one excise duty which I propose to do away with altogether. Many of those who find it hardest to make ends meet, including in particular many pensioners, use paraffin stoves to heat their homes. It is with them in mind 302 that I propose to abolish the duty on kerosene from 6 o'clock tonight. I am sure that this will be welcomed on all sides of the House.
§ The various rates of vehicle excise duty will, once again, go up roughly in line with prices. Thus, the duty for cars and light vans will be increased by £5, from £85 to £90 a year. However, in the light of the reassessment by my right hon. Friend the Secretary of State for Transport of the wear and tear that various types of vehicle cause to the roads, there will be reductions in duty for the lightest lorries, offset by higher increases for some heavier lorries. All these changes in vehicle excise duty will take effect from tomorrow.
§ However, I propose to exempt from vehicle excise duty all recipients of the war pensioners' mobility supplement. In addition, the existing VAT relief for motor vehicles designed or adapted for use by the handicapped will be extended, and matched by a new car tax relief. The effect will be that neither VAT nor car tax will apply to family cars designed for disabled people or substantially adapted for their use.
§ I now come to the most difficult decision I have had to take in the excise duty field. As the House will be aware, the rules of the European Community, so far as alcoholic drinks are concerned, are designed to prevent a member state from protecting its own domestic product by imposing a significantly higher duty on competing imports. In pursuit of this, the Commission has taken a number of countries to the European Court of Justice.
§ In our case, the Commission contended that we were protecting beer by under-taxing it in relation to wine. We fought the case, but we lost; and I am now implementing the judgment handed down by the court last year. Accordingly, I propose to increase the duty on beer by the minimum amount needed to comply with the judgment and maintain revenue: 2p on a typical pint of beer, including VAT. At the same time, the duty on table wine will be reduced by the equivalent of about 18p a bottle, again including VAT.
§ We have thus complied with the court's judgment, and I am happy to be able to tell the House that the Italian Government have, after discussions, given us an undertaking that they will comply with earlier court rulings on discrimination against Scotch whisky.
§ As for the rest of the alcoholic drinks, cider, which increasingly competes with beer but attracts a lower duty, will go up by 3p a pint. The duties on made wine will be aligned with those on other wine, and I propose to increase the duty on sparkling wine, fortified wine and spirits by about 10p a bottle, including VAT. All these changes will take effect from midnight tonight.
§ These changes in excise duties will, all told, bring in some £840 million in 1984–85, some £200 million more than is required to keep pace with inflation. The addition is, of course, due to the increase in tobacco duty.
§ The remainder of the extra revenue I need to enable me to make a substantial switch this year from taxes on earnings to taxes on spending must come from VAT. I propose no change in the rate of VAT. Instead, I intend to broaden the base of the tax by extending the 15 per cent. rate to two areas of expenditure that have hitherto been zero rated.
§ First, alterations to buildings. At present repairs and maintenance are taxed, but alterations are not. The borderline between these two categories is the most 303 confused in the whole field of VAT. I propose to end this confusion and illogicality by bringing all alterations into tax.
§ I recognise that this will be unwelcome news for the construction industry, but construction will of course benefit very greatly from the reduction in the rate of stamp duty which I have already announced: £290 million of the cost of that reduction in 1984–85 relates to transfers of land and buildings, and of that £290 million over 90 per cent. relates to buildings and building land. Nevertheless, to allow a reasonable time for existing commitments to be completed or adjusted, the VAT change will be deferred until 1 June.
§ Secondly, food. Most food is zero rated, but food served in restaurants is taxed, together with a miscellaneous range of items including ice cream, confectionery, soft drinks and crisps, which were brought into tax by the right hon. Member for Leeds, East. Takeaway food clearly competes with other forms of catering, and I therefore intend to bring into tax hot take-away food and drinks, with effect from 1 May.
§ The total effect of the extensions of the VAT coverage which I have proposed will be to increase the yield of the tax by £375 million in 1984–85 and by £650 million in a full year.
§ The total impact effect on the retail price index of the VAT changes and excise duty changes taken together will be less than three quarters of 1 per cent. This has already been taken into account in the forecast which I have given to the House of a decline in inflation to 4½ per cent. by the end of the year.
§ The extra revenue raised in this way will enable me, within the overall framework of a neutral Budget, to lighten the burden of income tax.