§ Question proposed, That the clause stand part of the Bill.9.15 pm
§ Mr. Jonathan Sayeed (Bristol, East)
I welcome the clause because it reduces direct taxation yet again. We should not look at it merely as a one-off. We must recognise that, since 1979, direct income tax in the lower tax band has decreased from 33 per cent. to 29 per cent. and has decreased to 60 per cent. in the upper tax band from 83 per cent.—plus the 15 per cent. investment income surcharge where applicable. At the same time, the rise in tax thresholds has been greater than the increase in inflation. This means that there is a greater incentive for people to work and for higher earners to remain in the 104 United Kingdom. This is happening against a backcloth of lower inflation, higher productivity and greater efficiency and is to be commended.
We have heard many plans from the other parties. To gauge the validity of their suggestions, it would be helpful if my right hon. Friend offered some guidance on how these plans would affect the tax bands and tax thresholds as detailed in clause 15. I understand that the Liberal party and Social Democratic party proposals would increase public spending by £10 billion. That could be funded by increasing VAT by 11 per cent. to 26 per cent. A letter sent by the hon. Member for Stockton, South (Mr. Wrigglesworth), who is present, and the hon. Member for Truro (Mr. Penhaligon) who is no longer in the Chamber, to other alliance Members of Parliament states:There are going to be severe public expenditure restraints for some years to come and a number of cherished hopes may have to be delayed.The truth is, unless we are prepared to argue for substantially higher taxation, which we do not believe to be feasible, we must be prepared to establish strict priorities for higher spending".The parties seem to agree: we do not want higher taxation. What then is higher taxation? Is £10 billion more higher taxation? Are the Labour party's plans for an extra £24 billion higher taxation? How "high" is higher taxation?
§ Mr. Ian Wrigglesworth (Stockton, South)
Just for the record and for accuracy, may I make it clear that the £10 billion is the forecast increase in the fifth year?
§ Mr. Sayeed
I was going to deal with that point. My hon. Friend has reminded me of the last part of the letter, which states:Real improvements in public sector pay are expensive—a 25 per cent. increase in nurses' pay would cost £750 million per annum; 10 per cent. would cost £300 million…25 per cent. increase in teachers' pay would cost £1.25 billion per annum; 10 per cent. would cost £500 million.The letter states that the alliance intends increasing public spending by 2 per cent. a year, which in the fifth year would be an extra £10 billion.
What are the implications for the tax bands and tax thresholds if the proposals are not financed by an increase in VAT from 15 per cent. to 26 per cent.? I shall help my right hon. Friend the Chief Secretary in answering those questions by pointing out that there are some aspects on which the alliance has said it will not increase spending. No doubt the hon. Member for Stockton, South will tell me if I am wrong, but in an annex to the letter the alliance said that a spending standstill would be imposed on agriculture, law and order, defence and environmental services. I should like my right hon. Friend the Chief Secretary to exclude the extras that some of the more wild promises of the Liberal party and Social Democratic party suggest because the letter from the hon. Member for Stockton, South and the hon. Member for Truro specifically says that the alliance will not increase spending on agriculture, law and order, defence, and environmental services. That is a suggestion from the alliance.
I would find it helpful if my right hon. Friend could explain the implications of the Labour party proposals on tax threshholds and tax bands. I have heard many different 105 figures. I have heard that it will cost £46 billion extra in the first year if the renationalisation plans are put through. Others suggest that it will cost £39 billion, and the usual figure quoted on a year-by-year basis is an extra £24 billion.
I accept that the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) has protested that we have our figures wrong. I should like to know whether my right hon Friend has heard of any suggestions he has made to refute those figures, because I have not. I understand that the lower figure, £24 billion, will increase VAT from 15 per cent. to 41 per cent. I believe in the transfer away from direct to indirect taxation. I do not want to see a large increase in taxation. Therefore, will my right hon. Friend tell me the implications for tax thresholds and tax bands of an increase of £24 billion a year by the Labour party if it gets into office?
§ Mr. Wrigglesworth
I want to take an entirely different view of this clause from that taken by the hon. Member for Bristol, East (Mr. Sayeed). This reduction of income tax is, in our view, misjudged on two grounds. Firstly, it is regressive and secondly, it is the least cost-effective way of increasing employment and economic activity. That is borne out by the comments which have been made by various expert commentators since the Budget. Typical of those comments were the remarks made by the Institute for Fiscal Studies on this cut in tax. It said:of all the obvious ways of cutting income tax, this is the most regressive.Those with the least will get the least. That is good ground on which to oppose the strategy which the Government have decided upon in this clause.
The evidence shows that less than one quarter of the benefit of tax cuts goes to the poorest half of tax units, as they are inelegantly called, in the working population.
§ Mr. Wrigglesworth
The Institute for Fiscal Studies is widely respected by Conservative Members and has been widely quoted and used by Conservative Members over the years. Is the hon. Gentleman seeking to suggest that the institute has a political prejudice which leads it to reach judgments which are not independent or worthy of attention by Members from both sides of the House? There are no connections between that body and members of the alliance. As far as I am aware the body presents its reports and findings to all parties in the House and I know from the comments that it has made to me that it is the institute's intention to continue to do so, irrespective of the parties involved. The hon. Gentleman does it a great disservice by seeking to suggest that there is any link between it and ourselves.
Single people with an income below £60 a week, under the cut of 1p in the pound, will gain only £0.01 per week as a result of the change in taxation. However, those with gross incomes of between £250 and £300 per week will gain, on average £2.08 per week, while single people on incomes of more than £350 a week will gain almost £2 a week despite the reduction in the real level of the high rate threshold—which, thankfully, is also contained in this clause.
106 Single earner couples earning below £60 a week will get nothing as a result of the change, whereas those earning between £250 and £300 a week will get £1.72 and those earning over £350 a week will obtain £2.36. Those figures illustrate the regressive nature of the proposal to cut income tax by 1p in the pound.
Despite the pre-Budget speculation that relief would be concentrated on the lower paid through the thresholds or that a lower starting rate of tax would be reintroduced., the Chancellor threw out the sweetener of the 1p in the pound cut in the hope of a further cut of 2p next year and moving towards the 25p foreshadowed in the first Budget of the former Chancellor, now the Foreign Secretary, when he came to office.
Despite those changes, the fact remains that the great majority of taxpayers are paying more than they did in 1978–79 as a proportion of average earnings. The average tax burden of income tax and national insurance remains higher. It is now 21.9 per cent. compared with 20.9 per cent. when the Government came to office. Those figures are for a married couple with two children under 11.
Moving from the average figures to tax units, as they are inelegantly called, in answers to questions that I and the hon. Member for Birmingham, Perry Barr (Mr. Rooker) have tabled, it has been shown that for a married couple with only the husband working, with two children under 11, only those earning up to £77 a week or above £326 a week are now paying less tax as a proportion of average earnings than when the Government came to power. Some 13.18 million taxpayers as a whole are paying more and some 2.14 million are paying less. Even the Government's boasts about the taxation policies that they have pursued are not true. Broadly speaking, people are paying more tax now than when the Government came to office.
§ Mr. Wrigglesworth
I am suggesting that the proposals in the clause are entirely misdirected it one wants to help those who are suffering most as a result of the depression in the economy over the past few years—if one wants to help those who are suffering from poverty, the 3.5 million unemployed and those with large families. That is the least effective way to help those who are shouldering the major burden of the Government's economic policies; those who have been thrown out of work, particularly between 1979 and 1981, the years that the Government like to forget, when large sections of manufacturing industry were wiped out, which have not been replaced. As a result, many areas such as my own have 30 per cent. and 40 per cent. unemployment, and 70 per cent. of school leavers cannot get jobs. Those are the people whom the Budget should have helped, not those who are fortunate enough to have employment. This was the wrong priority, desirable though lower tax rates might be for everyone in the working population.
The alliance would like to see lower tax rates in the long term, but with 3.5 million people unemployed, we should help those who are suffering most. The alliance budget proposals contained ways in which lower tax rates could be achieved more cost-effectively than those contained in the clause.
107 We oppose the cut in income tax, because that is the least effective way to create employment. It is the most expensive and the most sluggish means of creating jobs. The Treasury model shows that the 1p tax cut in the first year would reduce unemployment by only 6,000. After three years, 40,000 jobs would be created. All the models surveyed by the parliamentary unit at Warwick university showed a much higher public sector borrowing requirement cost per job created, a much smaller first-year impact and a bigger flow into imports and hence into current account deterioration.
The Government are getting the worst of all worlds by pursuing this course. We have seen a current account deterioration in the balance of payments figures produced last month. I said in my speech on the Budget, and the alliance warned the Government before the Budget, that the fall in oil prices would give the country a major headache in its balance of payments because if the price of our oil exports is cut, inevitably that resource will make a smaller contribution to our balance of payments. The deterioration has already been shown in last month's figures, and it will continue.
The cut in income tax was the least effective way of creating jobs. Ready reckoners based on the London Business School and the National Institute of Economic and Social Research models show that increases in public capital expenditure — the alliance advocated several ways in which that could be done—and cutting labour costs by reducing employers' national insurance contributions would have considerably greater employment benefits than the method chosen by the Chancellor.
Before the Budget, the alliance advocated cutting employers' national insurance contributions by 10 per cent. in each of the rate bands. Such a proposal was also put forward by the CBI and by Conservative Members. In addition, the alliance suggested capital and current expenditure by the Government that could have been much more effective in creating jobs. Yet the Government chose to go down the least effective path of creating wealth and jobs by concentrating all the money that they had to give away on the cut in income tax. The Government have had an ideological obsession with reducing personal taxation, of which the principal beneficiaries have been the very rich. For the average taxpayer, the burden is still high.
The Government have given away 10 times as much through tax cuts to those who work as they have spent on additional job creation methods. In this Budget, £100 million, as against £1 billion for tax cuts, is being diverted to employment creation methods. That is a miserably small amount, compared with the scale of the unemployment problem facing the regions and the central midlands. Many people in those regions are disappointed with the Government's attention to this problem. They are getting a clear message that the Government's policy is cynically to pursue those who have for their votes at the next general election rather than taking care of the havenots—those who do not have the jobs or the resources, and will probably never vote for the Conservative party anyway.
§ Mr. Robert B. Jones (Hertfordshire, West)
The hon. Gentleman is making a strong case for being opposed to the reduction in income tax. Will he vote against this measure?
§ Mr. Wrigglesworth
As the hon. Gentleman knows, the alliance voted against this measure in the Budget debate. The clause also contains the changes in the tax thresholds for the upper rate bands, which mercifully have not been increased in line with inflation, and we welcome that. We do not intend to vote against the clause.
We have made our intention clear. Our reason is central to the difference between the Conservative party—those in charge of the Government—and the Opposition. The majority of people, on all the evidence that we have—we shall see further evidence of this at the polls on Thursday—are more decent and concerned for their fellow citizens, particularly those disadvantaged by unemployment, than are Conservative Members. They will pay the price for their Government's policy in the ballot box not only on Thursday but in future general elections.
§ Mr. Alan Howarth
I was glad to see the hon. Member for Truro (Mr. Penhaligon) come into the Chamber to support the hon. Member for Stockton, South (Mr. Wrigglesworth). I was beginning to be apprehensive that the hon. Member for Stockton, South was finding it a lonely business being a member of the alliance. He was bravely advancing arguments for increasing taxation—the more bravely because I am sure that he will have seen a Gallup poll which found that 69 per cent. of Liberal voters regard it as important or very important that there should be a cut in the basic rate of income tax. His posture is heroic, and no doubt that of the hon. Member for Truro will be so as well.
Given the vehemence of alliance feeling on the subject, it was somewhat surprising to see how thin the alliance presence is in the Chamber. It may be that alliance Members are not here this evening because they are either in Ryedale or Derbyshire, West busy explaining to the electors by how much they will be reducing the rate of income tax if they have the opportunity. It would be no unfamiliar experience to sense a certain discrepancy in what is said by the two alliance parties at different times or by some hon. Members who are here and by other hon. Members who are away campaigning in by-elections. I hope that the hon. Member for Truro, if he catches your eye, Mr. Deputy Speaker, will be able to explain why I am being too cynical.
However, there is a serious point. My rough calculation is that the cost of increasing public expenditure by £10 billion would mean either, as my hon. Friend the Member for Bristol, East (Mr. Sayeed) pointed out, raising the rate of VAT to 26 per cent. or—although my hon. Friend did not mention this—raising the present basic rate of income tax by 8p to 38p in the pound.
I am surprised that the hon. Member for Stockton, South believes that to raise VAT to 26 per cent. or the basic rate of income tax to 38p would be a policy helpful for the unemployed. If the basic rate in income tax was increased, it would drive up the unit cost of employment in business, which is one of our main competitive weaknesses. How could that create conditions in which manufacturing or other firms were better able to employ people? That is a difficult argument to follow.
§ Mr. Wrigglesworth
I listen with great interest to the hon. Gentleman because he is an expert in these matters. having supported the increases in VAT from 8 per cent. to 15 per cent., he is a little like an alcoholic lecturing us 109 on temperance. He knows that there is no way in which we would increase VAT or income tax to the levels that he is proposing.
§ Mr. Howarth
The hon. Gentleman, who is always fair-minded, will also recollect that, when VAT was increased to 15 per cent., it was in order to make important reductions in the rates of income tax. Again, this is very important to his argument and to the point at issue between us; it was to shift part of the burden from direct to indirect taxation, thereby giving people in work better incentives to improve economic performance. That is how to make an impact on the unemployment problem that we need to deal with. I do not believe that a high expenditure, high taxation, policy would be good for employment.
I wish to put to the House two other arguments in the context of my surprise that the alliance parties want to raise taxation burdens, as they say they do, and in support of the Government's policy of lowering the basic rate of income tax. An important argument for raising thresholds as opposed to lowering the basic rate was that that was the most likely way to make a worthwhile impact on the poverty trap. That is no longer the case now that changes in social security policy which the Government are introducing mean that benefits will be related to income after tax. That is a critical contextual change which means that there cannot be any strong remaining argument against the Government's policy of bringing down the basic rate. I am glad that the Government have set off decisively along this road. The basic rate was 33 per cent., it paused at 30 per cent. for some time, and now the Government have set off again decisively towards the 25 per cent. basic rate which I understand is their continuing objective.
Not only is that the best way to promote improved employment, but there is another important argument in support of a lower basic rate as opposed to higher thresholds. If we are to have democratic discipline on public expenditure, large numbers of people should pay a small amount of tax rather than having society divided into two nations of taxpayers and non-taxpayers. We have seen the problems in local government. If significant numbers of voters do not have to foot the rates bill, they have no objection to local government expenditure rising beyond what is reasonable.
On democratic, constitutional and economic grounds it makes abundant sense, if we are faced with the choice, to bring down the basic rate of income tax and at the same time to ensure that the legitimate objects of public expenditure, the importance and validity of which we all recognise, are paid for consciously by the largest possible number of people who are, on any reasonable judgment, in a position to pay tax because of the level of their income. Therefore, I very much commend the strategy expressed in clause 15.
§ Mr. Penhaligon
I always love listening to Members campaigning against public expenditure when public expenditure is suddenly thrust upon their own constituencies. Of all the things that this Government have done, the one that succeeded in aggravating me more than any other was giving development area status to Stratford-on-Avon and leaving out my constituency, given that I am surrounded by 25 per cent. unemployment and am 300 miles from Westminster, and that Stratford knows little of either. It is one of the more remarkable decisions by the 110 present Government, yet I do not remember the hon. Member for Stratford-on-Avon (Mr. Howarth) coming to the House and protesting against the expenditure involved in his constituency. No doubt when it is in order, as I recognise that this comment is not in order at the moment, he will welcome the opportunity of catching your eye, Mr. Armstrong, to express his concern about that view.
It has been said that there are not many alliance Members present, yet 8 per cent. of the parliamentary alliance is here. If that were so for the other parties, there would be 32 Conservative Members, and I can see only 14, and there would be 17 Labour Members. I can see only two of them, and I welcome them both to the debate.
This is supposed to be a debating chamber, where we argue the merits of our case with enthusiasm, vigour and interest. It is not just a voting Lobby machine. We want to listen to the arguments, and we have made our views on this pretty clear. I have nothing powerful to add to the arguments presented by my hon. Friend the Member for Stockton, South (Mr. Wrigglesworth), because they are, in our view, quite overwhelming. One must make a judgment on each Budget relative to where one is. We could have an argument on how the Government had got where they were when they introduced the last Budget, and we could argue in some detail that there was no need for them to be in the economic difficulties that they faced, but, recognising that they were there, one must make a judgment relative to that.
Our position is simple. The Chancellor of the Exchequer reached the conclusion that he had £1 billion left over that he could use for some purpose. We reached the conclusion that, given where we were, and not where we would like to think we were, of all the ways that one can imagine using that £1 billion, the Chancellor chose to use it in the way that was least effective in facing the real pressures on the country.
The biggest single problem in Britain today, certainly for those of us who represent constituencies some distance from London, is unemployment. It is a progressive disease. As it goes on, one sees the public getting used to it, and this is in many ways the biggest problem for the long-term future of Britain. We see developing among great swathes of the community the belief that there will be no work for them ever again. If everyone took exactly the opposite view we might have a great deal of civil disturbance, but the fact that many people are beginning to believe that there will be no work for them again is an erosion of the spirit which, on the whole, has made this nation great. In creating that belief, the Government have a great deal to answer for.
Let us suppose that the Chancellor is right in thinking that he has £1 billion to spend on something. In our alternative Budget we argued that there would be rather more than that, but let us accept just £1 billion. Every economic review on which we can lay hands suggests that it is difficult to think of a way of spending that £1 billion which would have less effect on the employment difficulties of the country than the one chosen by the Government.
I have here the figures from the National Institute for Economic and Social Research's review of February of this year. I am an engineer by training and am a litle dubious about the precise nature of these figures that are produced by computer models, but they give one an idea of the thrust and trend of things and one cannot totally dismiss them. The institute believes that in the second year 111 the effect of the change in tax will be to cut unemployment by 17,000. It believes that 17,000 jobs will be created by the decison to reduce income tax by 1p in the pound. That is about 26 or 28 jobs per constituency. That is a negligible effect. It is the sort of increase that we have seen in as many weeks, leave alone months, as the terrible statistics have mounted up.
The same review suggests that if the £1 billion is spent on public expenditure the number will increase to 27,000. One can make it a little more than that if one hones the way in which public expenditure is done, but that is 17,000 as against 27,000. If value added tax were cut by £1 billion, 30,000 jobs would be created, but if the national insurance contribution paid by employers were cut by 10 per cent., as we suggested in our alternative budget, 125,000 jobs would have been created. That would at least have covered up the increase which the Government have allowed over the past four or five months, even if it made no real impact on the mountain which has built up since the Conservative party came to power.
I do not understand why the Government made the choice that they did. The alliance is in a peculiar position. On the one hand people accuse us of being irresponsible, and on the other they express surprise at our honesty in voting against the reduction in tax. It is rather brave of the Opposition. It certainly shows more bravery than the Labour party demonstrated. Decisions must be made in relation to the present and, as I have explained in some detail to the good electorates of Ryedale and West Derbyshire, if we had that £1 billion we would not have spent it in this way.
The Government have made a mistake. More than anything else, they have demonstrated that our unemployment is not a matter of chance, something which they did not expect as their economic policies took effect, and that they do not care about unemployment. I do not know what influence the Chief Secretary had on that decision. That is not what my experience over the years in the various matters that we have talked and argued about would have led me to expect. Here, by their own fiscal judgment, the Government had the capacity to spend £1 billion, yet they chose to spend it in the least effective way possible for the greatest social problems that effects Britain. That is amazing. It is a comment on the peculiar last six or seven years of British politics, and it is a comment that is getting through to the British electorate.
I am not one of those who pretend that the Government have money to spend as if there were no tomorrow, but the Government have made a mistake which they will regret. I hope that by next year's Budget they will take note of public opinion, which I suspect they are as well aware of as we are, and which is expressed when given the opportunity, that, given the state we are in, there is a better way of using that money.
Of course, if the British people are asked whether they would like to pay less tax, they will say yes. I would not be the least surprised if quite a few people would say, if asked, that they should pay no tax at all, but we all know that a civilised society cannot be run, maintaining standards and giving people an opportunity in life, on that sort of basis. Therefore, I have no hesitation in saying that to reduce income tax by 1p in the pound is fundamentally flawed. It is wrong. It is one of the great mistakes that the Government have made.
112 We have already voted against that reduction and if a Division is called we shall no doubt vote against it again, although I am not convinced that that would serve any great purpose.
§ Mr. Terry Davis (Birmingham, Hodge Hill)
With clause 15 we come to what I expect the Government would regard as the centrepiece of the Budget. If the phrase had not been so overworked in recent months, I would have described it as a jewel in the crown of this Budget. There is no doubt from the Chancellor of the Exchequer's Budget speech and what has been said subsequently that the Government put all the emphasis of the Budget on the reduction in the standard rate of income tax.
Indeed, I am surprised that the hon. Member for Bristol, East (Mr. Sayeed) did not make more of it. He spent much time talking about the public expenditure plans of the Labour party and the alliance. I recognise that there is a connection between public expenditure and taxation, but nevertheless the hon. Gentleman should have taken more pride in his own Government's policy.
It is clear from the Financial Statement and Budget Report that the total cost of £935 million—taking account of advanced corporation tax, which is consequential—is the whole of the Budget and the Finance Bill; everything else is swings and roundabouts. Some people are on both the swings and the roundabouts, and some are on swings but not on roundabouts. There are different effects of different people in different places. We shall pursue the effects of different clauses in Committee, but I wish to make a few important points about this clause.
First, I question the long-term effects of the Government's strategy. In effect, this tax cut is being financed by asset sales, as is the Government's public expenditure programme. I hope that the Chief Secretary will explain what will happen when all the assets are sold. There has been a great deal of public discussion about the consequences of revenues from North sea oil and gas running down as North sea oil and gas run out, but the sales of assets are bound to come to an end before our reserves of North sea oil and gas are exhausted. The Government must eventually face the critical problem of financing tax cuts in the longer term when all the assets have been sold.
Secondly, the Labour party welcomes the boost to the economy. However, as the TUC pointed out in its economic analysis several weeks ago, tax cuts are not as cost-effective as public expenditure increases in reducing unemployment. The same amount of money used for a cut in taxes will not bring about the same number of new jobs as would the same amount of increased public expenditure. Indeed, tax cuts are more likely than an increase in public spending to lead to increased savings. They are also more likely to result in increased imports. Therefore, the boost to the economy will be less for every £1 billion of tax cuts than for every £1 billion of increased public expenditure.
The clause provides for a reduction of 1p in the standard rate of income tax. Although that will cost the Chancellor £935 million, it means little to the individual taxpayer. Indeed, in his Budget speech the Chancellor described the cut as modest. It is important to remind the House about the precise benefits that will be enjoyed by the taxpayer. A married man earning £100 a week whose wife does not work will benefit by 26p a week. If that man earned £150 a week he would benefit by 51p; on £200 a week— 113 more likely to be expressed as £10,000 a year—by £1.22 and on £20,000 a year by £3.14. Those are Government figures that have been given in answers to questions and cannot be denied. There are many more people earning £100 or £150 a week than there are earning £20,000 a year, and for them increases of 26p or 51p a week mean very little.
The benefits are especially small in comparison with the effects of previous Budgets. The Low Pay Unit, in its low pay review, drew attention to the effects of Finance Bills since 1979 on the marginal rate of tax, including national insurance, for those who are low paid, those on average wages and those who would be regarded as highly paid. In 1978–79, a low wage earner was paying as a marginal rate of tax, including national insurance, about 31.5 per cent. Before the Budget the figure was 35 per cent., and the effect of the Budget will be to reduce it only slightly.
For the person earning average wages, the marginal rate of tax, including national insurance, in 1978—was 39.5 per cent. and it has been reduced to only 39 per cent. as a result of previous Finance Bills.
The highly paid person has had a high benefit. In 1978 to 1979 that person was paying a marginal rate of tax of 83 per cent. and that marginal rate of tax has been reduced to 60 per cent.
§ Mr. Davis
The hon. Member takes pride in those statistics. He must therefore be taking pride in what can only be described as gross inequality, because it is grossly unequal that a person who is already highly paid should have the benefit of a reduction in his marginal rate of tax from 83 per cent. to 60 per cent. when someone who is low paid has had an increase in the marginal rate of tax. The hon. Member for Bristol, East takes greater pride in those figures than he did during the course of his speech, but we regard them as a scandal.
The reason why the low paid and average paid people are less likely to benefit is that national insurance contributions must be taken into account. The low paid are worse off and people on average wages are only slightly better off in spite of the reduction in income tax from 33 per cent. to 30 per cent. as a direct result of the offsetting effect of national insurance contributions. The lower rates of tax for highly paid people are not offset by higher contributions to national insurance because there is a ceiling on those contributions, and if the highly paid people are receiving investment income that income is not subject to any national insurance contributions.
A cut in the basic rate means greater benefits for the higher paid and widens income inequalities. That point has been effectively made, rather surprisingly in my view, by the Confederation of British Industry. It disagrees with the argument advanced by the hon. Member for Bristol, East about a reduction in the tax rate being an incentive. It also disagrees with the claim made by the hon. Member for Stratford-on-Avon (Mr. Howarth) that there are no longer any valid arguments for an alternative to a reduction in the standard rate of income tax.
I do not think I have ever quoted any statement made by the CBI in the past. However, in its Budget analysis it regarded this clause as a debit and not a credit to the Government. The CBI stated: 114The personal taxation measures are regressive. The Chancellor's 1p reduction in the basic rate will benefit those at the top end of the first income tax band rather than those at the bottom—where, arguably, the need for incentive is greater. The 1p off the basic rate gives somebody on £6,000 a year a reduction of 0.1 per cent. in their tax burden. For somebody on £16,000 the reduction is 0.6 per cent. More must be done to help enterprise at the lower end.For once the CBI and the Child Poverty Action Group agree about something. The Child Poverty Action Group, like the Labour party, would prefer the Government to extend the long-term rate of supplementary benefit to the long-term unemployed. The Child Poverty Action Group. like the Labour party, would also prefer to increase child benefit by £3 a week. The Labour party also wants to increase pensions by £5 a week for a single person and £8 for a married couple. I will not say anything else about that as it would be out of order when discussing clause 15.
Even within clause 15 the money could have been used differently. The Government could have given higher allowances. The hon. Member for Stratford-on-Avon does not think there is any valid argument left for higher allowances. I must tell him that the Birmingham chamber of industry and commerce, which is not well known as a Socialist bastion, does not agree with him. In its pre-Budget representations, it advocated in effect that there should be higher allowances.
The London chamber of commerce and industry would go further still. In its pre-Budget representations to the Chancellor, it argued not for a reduction in the standard rate of income tax or higher allowances but for what it described as small income relief similar to the age allowance. The Child Poverty Action Group also argued for that alternative if the Government wanted to use £935 million to alleviate poverty within the tax system. However, those options are not before us, although they would be supported by all Opposition parties, by some Conservative Members and by a wide range of bodies—a genuine consensus—outside the House.
There is a straightforward choice for the Opposition. Either we vote against the 1p cut in the standard rate of income tax or we do not. The Labour party will not vote against it. We have made it clear that we oppose the Budget strategy. We voted against it and we voted against the Second Reading of the Bill. We believe that the Budget and the Bill, to the extent that it puts the Budget strategy into effect, are wrongheaded and misconceived because they virtually ignore the twin problems of poverty and unemployment. We have made it clear that we would give greater priority to higher pensions, a higher child benefit and higher benefits for the long-term unemployed—those who have been unemployed for more than 12 months. We would help people who are in the greatest need and who have least, and we would do it at the expense of those who have most. We define as those who have most the 5 per cent. of taxpayers who have enjoyed the real benefit of successive Budgets and Finance Bills from the present Government. I refer to the people who pay the higher rates and not the standard rate of income tax and have benefited from cuts in taxation on capital as well.
We should also be clear that voting against the reduction in the standard rate of income tax tonight, is not voting for higher taxes to be paid by the richest 5 per cent. because, for once, they have been excluded from the 1p reduction. A vote against the reduction will simply be presented, or rather misrepresented, by the Government as a vote against lower taxes for people on lower incomes.
115 I am not clear about what the Liberal party and the Social Democratic party plan to do at the end of the debate. I listened to the hon. Member for Truro (Mr. Penhaligon), who described the alliance as brave to have voted against a reduction in the standard rate of income tax previously. It appears, however, that there is a limit to its courage or at least that it recognises that it is mistaken, or perhaps it is just inconsistent. I listened carefully for some explanation of why it does not propose to vote against this proposed reduction tonight. We had an explanation not from the hon. Member for Truro but from his twin, the hon. Member for Stockton, South (Mr. Wrigglesworth), who told us that the alliance would not vote against clause 15 because, unlike the Budget resolution, it ensures that benefit is not given to people on the highest incomes. I ask the hon. Member for Stockton, South to explain now the difference between clause 15 which he will not vote against, and the Budget resolution which he voted against on 24 March.
§ Mr. Davis
We have a split in the alliance already. The hon. Member for Truro says that there is no difference at all, and he is right, whereas the hon. Member for Stockton, South told us earlier that there is a difference, and he is wrong. There is no difference. The wording is exactly the same. The hon. Member for Stockton, South can wriggle as much as he likes, but he cannot get away from the fact that he claimed that there was a difference when there is none. Perhaps he would like to get to his feet now and tell us the difference. He is avoiding the invitation. I think that we can see where he stands.
The Labour party prefers the more difficult course of explaining to the electorate that we are not opposed to lower taxes and a higher standard of living for people on low incomes. On the contrary, we want to use the money better and in ways that will give the greatest help to people on the lowest incomes; and we would have done other things to help the people on the lowest incomes, including those who pay the standard rate of income tax.
The alliance forgets too easily that many people paying the standard rate of income tax are very lowly paid. Many of those paying the standard rate of income tax have incomes that are below the level of supplementary benefit, and the alliance voted against the cut in taxes paid by those people.
The aim of the Labour pary is to unite working people in the wider sense, including those who need to work and cannot find jobs and those who used to work and have now retired. We refuse to play the game of setting the working poor against the non-working poor. We refuse to jump into the Tory trap with the Liberal party and its allies. We will not oppose this small step towards returning to the lower level of tax to which the low paid were subject at the time of the last Labour Government—a cause supported at the time by the Liberal party and by the hon. Member for Stockton, South in his previous role as a Labour Member of Parliament. It is for them to decide whether they will vote against this tax cut tonight, but the Labour party will not vote against it.
§ The Chief Secretary to the Treasury (Mr. John MacGregor)
I agree with the hon. Member for Birmingham, Hodge Hill (Mr. Davis) that this is a 116 significant part of the Finance Bill. Indeed, the short debate that we have had is in direct contrast to the significance of clause 15 in the Bill as a whole. It is not by any means the only significant part, and we shall debate many other significant parts of the Bill in Committee. Nevertheless, it is a key part of the Bill in terms of the amount of tax forgone in the forthcoming fiscal year and of our overall strategy.
I wish briefly to remind the Committee of some of the reasons that we put forward for clause 15. In so doing, I intend to refute the comments made by the hon. Member for Stockton, South (Mr. Wrigglesworth).
First, the record of the Government on tax thresholds is extremely good. As I think is now recognised, we have increased the tax thresholds by 22 per cent in real terms. A good part of that took place in last year's Budget and in the Budget of the year before that. When the hon. Member for Stockton, South talks about the combination of tax changes in this Budget being regressive, I remind him that the arguments are not all one way in relation to thresholds. It is worth bearing in mind that, if the thresholds were raised by the amount that he has in mind, a good proportion of the people who would benefit largely from being taken out of the tax net are single earners and part-time earners. There is no clear argument for saying that one helps the less well-off all the time simply by raising thresholds and not dealing with the basic rate.
Secondly, there is the argument about international comparisons that I quoted on Second Reading. It is clear now that we do not do at all badly on the thresholds and the starting point of income at which one pays tax; we are, however, out of line on the basic rate.
Thirdly—this is an important part of the argument—is the question of the self-employed and unincorporated businesses, 90 per cent. of which pay their tax at the basic rate. When one is trying to encourage the self-employed and unincorporated businesses, it is important to recall that the marginal incentive is what matters to them in building up their business. That is why, once again, we are acting on the basic rate.
This leads me to the main argument for concentrating the bulk of the tax relief this year, over and above indexation, on the basic rate. As the hon. Member for Stockton, South pointed out when quoting some figures given to him in a parliamentary answer, the group that has perhaps least benefited from tax changes in recent years is those in the income bracket of approximately half average earnings to about twice average earnings. It is on that group that the combination of changes most concentrates this year—and rightly so, because I believe that their time has come. It is significant that they are 95 per cent. of all taxpayers.
There are two important reasons for concentrating on that group this year. First, it is important to consider the marginal rate of tax that individuals are paying and the incentives that are given to them to earn more. It is the basic rate that is the marginal rate for 95 per cent. of all taxpayers and for them, therefore, it is an important fact that their incentives are improved when marginal rates are reduced. Secondly, it is still not desirable that for so many of our fellow citizens on modest incomes so much—38 per cent.—is taken from the pay packet before it reaches the pocket. That is why, notwithstanding the academic experts, our proposal for the basic rate is so 117 popular. That is why I suspect that the Opposition parties are in such difficulty in deciding how to play this tax change.
As my hon. Friend the Member for Bristol, East (Mr. Sayeed) rightly said in opening the debate, the reduction in the standard rate has been a continuous process. In our first term, the Government reduced the rate from 33 per cent. to 30 per cent. and it is now to be reduced to 29 per cent, which is halfway to our long-term objective of a standard rate of 25 per cent. There has been a continuous process also for incorporated small businesses—I have already referred to the self-employed and unincorporated businesses. Although there is to be only a 1 per cent. reduction in the small business rate of corporation tax this year, it compares with the 42 per cent. rate that prevailed when the Government came to office. There has been a significant reduction in the rate and, as my hon. Friend the Member for Bristol, East has said, it has been a continuous process.
The hon. Member for Stockton, South argued that we are showing entirely the wrong priority this year. He endeavoured to show that there have been no real reductions in tax on most incomes since 1979. There was a curious paradox in his argument because he was trying to show that tax should not be reduced this year while complaining that in his view the rate of tax was still at the 1979 level. Income tax liabilities in 1986–87 will be about £8 billion lower than 1978–79 rates and allowances indexed to 1986–87 levels. This means that those earning £5,000 a year or less—modest incomes—have had their tax bills reduced on average by about 19 per cent. under this Government. Everyone will pay less income tax in 1986–87 than under a 1978–79 indexed regime. A married man on average earnings would pay £6.91 more per week in income tax under an indexed 1978–79 regime.
§ Mr. Terry Davis
Does the Minister agree that national insurance is an important part of the calculation and should be taken into account, and was taken into account by the previous Chancellor of the Exchequer?
§ Mr. MacGregor
I have seen all the figures that have been given in answer to various parliamentary questions on this issue. I accept that we have not yet succeeded in bringing down the combined rate to the level that we would wish. However, the 1p change in the basic rate of tax is a further move in that process.
It is important to disinguish national insurance contributions from income tax. National insurance contributions are made on a pay-as-you-go basis to pensions, on which we have preserved our election pledges—indeed, we have done more than that. If the hon. Gentleman's intervention reveals the line that he will take, I hope that he will not be so churlish as he was when replying to the debate, but will positively support what we are trying to do in reducing the basic rate of tax this year.
§ Mr. MacGregor
In making comparisons with 1978–79, it is important to take into account increases in earnings and changes in take-home pay. The marginal rate of tax has been reduced from 33 per cent. to 29 per cent.
§ Mr. MacGregor
For some, yes. However, the hon. Gentleman will be aware that my right hon. Friend the Chancellor of the Exchequer made changes last year to national insurance contributions to benefit the lower income groups.
§ Mr. MacGregor
No. The important point is the proportion of income and earnings that is taken away in the combined national insurance contributions and tax. Although the figures have not changed as much as I should like, that is the course that we are following, and that is why we say that the long-term objective is to get the basic rate of income tax down to 25 per cent.
The hon. Member for Stockton, South, rather surprisingly, said that the principal beneficiaries of the change this year would be the very rich. He must know that we have quite deliberately kept the increase in the thresholds for the higher rates below indexation to ensure that that does not happen this year. Indeed, I join the hon. Member for Hodge Hill in saying that the hon. Gentleman gave a tortuous and remarkable answer when explaining why he was not going to vote against the clause—because he was in favour of the higher rate elements in the clause. I accept that most are not indexed, but there has nevertheless been an increase. Yet again, we have seen a typical example of the hon. Gentleman trying to have it both ways.
In reality, the hon. Member for Stockton, South does not want to vote against the clause for two reasons: first, he does not want to highlight the fact that the SDP and the Liberals are trying to oppose the 1p reduction in the basic rate; and secondly, he could not muster enough support among his colleagues to vote against it.
On Second Reading, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said that there were five other ways in which the Government could have dealt with the £1 billion-odd that is involved in cutting the basic rate. He listed increasing public expenditure, raising child benefit, raising tax thresholds, introducing a reduced rate band and cutting the basic rate. He then concluded, just like the hon. Member for Hodge Hill, that by far the worst of those options was to cut the basic rate. He seemed to make it clear that he would have preferred any of the other options.
In view of that, and the whole way in which the hon. Member for Hodge Hill spoke today, it is astonishing that the latter does not intend to vote against the clause. It is even more remarkable that the Labour party has given a pledge not to put the basic rate back to 30p. Thus, although Labour Members rail against it and argue that it is wrong, and the wrong use of priorities, they do not have the courage to fight against it or to put it back to 30p. That shows the paucity of their arguments and the frailty of their attack on the clause.
119 In not voting against the clause, the Labour party is accepting that it will forgo more than £1 billion in tax over a full year. Consequently, it is relevant to look at its spending programme my hon. Friend the Member for Bristol, East asked me whether I had received any further suggestions from the Labour party to refute the £24 billion spending programme. The answer is that I have not. The Labour party does not have the courage to vote for higher taxes, but it wants much higher spending.
§ Mr. Terry Davis
We are in favour of higher taxes for those who can afford them. We have made it clear that we will recover the £3.6 billion that has been given to the Chief Secretary's rich friends.
§ Mr. Davis
I have already told the Chief Secretary how we will spend that money. We will spend it on increasing the pension for a married couple by £8 a week, on increasing the pension for a single person by £5 a week, on increasing child benefit by £3 a week and on extending the long-term rate of supplementary benefit to the long-term unemployed. If the Chief Secretary costs that, he will find that that £3.6 billion more than covers it.
§ Mr. MacGregor
Of course, that is a long way short of £24 billion. However, I must get on, as I know that the House is anxious to come to a conclusion, and we have debated these issues before.
The hon. Gentleman has not even costed his £3.6 billion correctly. The hon. Gentleman is talking not about someone's rich friends but about a group who will benefit considerably from the 1p basic rate change. As he knows, that means a marginal rate of 70 per cent. for anyone with a taxable income above £18,600. Those are the people who will have to cough up to meet the cost of the £3.6 billion.
I turn to the point raised by my hon. Friend the Member for Bristol, East about the SDP and the Liberals. Previously the Liberals had the courage to vote against the 1p reductions. My hon. Friend asked me to look at the size of the expenditure programme that the Liberals and the SDP have put forward. He quoted from a letter which was published in The Times. For the benefit of many of my hon. Friends who were not present in the House, I shall quote from it:It is understood that Alliance leaders have been stung into tough action by the Government's damaging charge that Labour commitments could cost as much as £24,000 million.At least the hon. Member for Stockton, South has learned the lesson of the dangers of committing oneself to a heavily overspent programme in a way that the Labour party has not. That stung the hon. Gentleman into consulting his colleagues. I understand that that is what happened. The hon. Gentleman and the hon. Member for Truro (Mr. Penhaligon) sent a joint letter which stated:There are going to be severe public expenditure restraints for some years to come and a number of cherished hopes may have to be delayed.The truth is, unless we are prepared to argue for substantially higher taxation, which we do not believe to be feasible, we must be prepared to establish strict priorities for higher spending, to consider phasing in the more expensive changes, to identify areas where savings can be made, and to seek new solutions to problems.120 Is the article in The Times correct? Have the hon. Gentlemen sent a letter to their spending colleagues?
§ Mr. MacGregor
It is now on the record.
The hon. Member for Truro was kind to me earlier. May I repay the compliment by saying that I always enjoy my debates with him, because at least he is frank and honest. However, I must tell him that some of his hon. Friends are giving him a reply, and it cannot be an encouraging one. This morning, we read in the newspapers that an SDP policy group—perhaps that is only the SDP and is not directed at the hon. Member for Truro—proposes a scheme for distributing shares in nationalised industries free to every member of the public instead of privatising them through a stock market flotation.
Leaving aside whether that is a sensible way to proceed, we must question, if we give away assets for nothing and continue to tax actual earnings more heavily—that is what the Liberals and the SDP propose—whether people value things when they get them for nothing. It has been made clear in the same article that, in line with the recent injunction by alliance economic spokesmen, policy proposals have to bear in mind the tightness of funds if the alliance parties were to gain a share of power. It is stressed that this spending has yet to be allocated a place in the SDP's overall list of priorities.
So now we have a new concept, a new way of fudging, of getting out of the gap between spending and raising the tax. The alliance would put forward a proposal, so that everyone would sit up and take notice, and say, "We do not know whether we can afford it." That is typical of the SDP and the Liberal party. They try to be all things to all men but do not face up to the need for real choices.
The decision by the alliance to oppose the cut this year in the basic rate will not take it far on the road to an extra £10 billion. My hon. Friend the Member for Bristol, East asked what that would be. It represents another 9p on income tax in the fifth year. The other policies which the alliance put forward will not achieve much economic growth. We must still expect a substantial increase in taxes.
We have tonight seen the Labour party, the Liberal party and the SDP wriggling all over the place to explain why they will not vote against clause 15; they do not know how to explain away their position. Our position is clear. We are in favour of clause 15. We are in favour of the basic rate cut to 29p. We believe that it is right for the economy. That is why I commend the proposal to the House.
§ Sir Brandon Rhys Williams (Kensington)
I would not wish the Committee to agree that the clause should stand part of the Bill without making two points that I have made many times in recent years. It is easy to see the difficulties of the Opposition parties in finding the courage to vote against a cut in income tax, but I question whether the Government will be able to finance the redistribution of income at the level that the public expect with a further 4 per cent. reduction in the contribution of those in work.
First, I believe that it is humbug, now that we have put the national insurance contribution on an earnings-related basis, to keep it as a contribution separate from income 121 tax. I believe that the income tax and NIC should be combined, not in a single income tax but in a single national insurance contribution, so that the income tax becomes the insurance contribution made by every citizen.
Secondly—I first made this point in 1971 when I was on the Committee on the Finance Bill—the Government's objectives should be to give every individual the maximum possible incentive to create wealth and to simplify the tax system as much as possible. Therefore, contrary to the comments of the hon. Member for Stockton, South (Mr. Wrigglesworth). I believe that 122 the Conservative's Government's objectives should be to abolish higher rate tax altogether. I hope that that remark will be quoted. I hope also that my right hon. and hon. Friends will bear in mind the fact that this would be a reduction in taxation from which everyone would gain and no one would lose.
§ Question put and agreed to.
§ Clause 15 ordered to stand part of the Bill.
§ To report progress and ask leave to sit again.—[Mr. MacGregor.]
§ Committee report progress; to sit again tomorrow.