FINANCE BILL.

HL Deb 16 June 1942 vol 123 cc387-412

Order of the Day for the Second Reading read.

THE LORD CHANCELLOR (VISCOUNT SIMON)

My Lords, I move the Second Reading of the Finance Bill. Our finance under conditions of war involves figures so gigantic as to be almost beyond human comprehension, but it may be useful briefly to observe the relation in which the main totals stand to one another. The outline of our national finance in the present year, as it seems to me, may be discerned by comparing the following figures. It is estimated that our total national expenditure this year will amount to £5,286,000,000, of which about £4,500,000,000 is war expenditure. This does not include the invaluable aid which we are receiving from the United States under the Lease-Lend arrangement which, as your Lordships know, is available to others of the United Nations also. The problem, therefore, before the Chancellor of the Exchequer, which he seeks to solve in part by this Finance Bill, is how to provide in the present year for £5,286,000,000 of expenditure.

The Finance Bill, together with other tax enactments which do not require to be annually renewed, is expected to produce a total tax revenue of £2,361,000,000. It is the first time that our tax revenue in a single year has topped £2,000,000,000. Last year the tax revenue worked out at £1,962,000,000, I think. If we add to this proposed tax revenue certain non-tax revenue, including a very welcome contribution from the Canadian Government of £225,000,000, as to which I am sure that all your Lordships would wish our deep gratitude to be expressed, we reach a total revenue of £2,627,000,000, almost exactly 50 per cent. of the expenditure we have to face. Now that is a most remarkable achievement. It is an achievement which far exceeds the proportion raised from revenue in the last war, though the totals then were so much smaller. Perhaps—I do not know—these monstrous figures may become more easy to comprehend if the proportions are stated, not by reference to the whole year, but by reference to the average day, or, if you like, to the minute. So stated then, our total national expenditure is estimated at nearly £14,500,000 per day, of which tax revenue will produce over £6,000,000 a day, or, if we are to reckon by what Kipling calls each "unforgiving minute," then our national expenditure this year is at the rate of £10,000 a minute and more, of which the revenue provides nearly half.

So much for figures. The principles which govern our financial policy during the war were laid down at the beginning and they have been strictly applied ever since. The Chancellor of the Exchequer's Budget this year is the fifth Budget since the war began, because there was an emergency Budget, also immediately followed by another Budget in the spring of the next year, and we are now in a position to judge whether the principles to which I referred were not well-founded and are not justifying themselves by experience. What are those principles? I would briefly state them under four heads. First, there is this principle. In view of the fearful expense of the war, and of the adjustment which war imperatively demands between public and private expenditure, it is essential to impose the heaviest possible taxation. It is only by that means that a sufficient proportion of our war expenditure can be met out of revenue. But the process has a second and even more valuable result. This very heavy taxation is a method of severely restricting private spending and thereby of drastically curtailing and reducing the demand which private citizens might otherwise attempt to make on supplies which are necessarily restricted under war conditions and which are more than ever required by the Government for the purpose of carrying on the war.

High additional taxation, therefore, is the first line of defence which we have erected against the insidious assaults of inflation. When the tax gatherer has done his best, or his worst, amongst us all, we shall not have much left to spend on the things that we ought to do without. That is the first principle. The second, I think, is this. In spite of high taxation, even so, it is impossible that the whole expense of a war like this can be raised by taxation. Therefore it is essential to pursue a borrowing policy at a low rate of interest. I recall that when at the beginning of the war we aimed at a series of loans at a rate not exceeding 3 per cent., many people, remembering the very different experience of the last war, were somewhat incredulous. But it has been done. Up to the present, at any rate, the performance is better than the promise. Loans for a medium period raised by the Government are carrying interest at 2½ per cent., longer loans are being raised at 3 per cent., and thus, notwithstanding the enormous amounts that have to be raised, the annual charge is kept down to the great advantage of the country, not only during the war but in the years to come. And in further confirmation of the success of this policy, I would point to the comparatively small extent to which we have recourse to short-term borrowing from the market. The Chancellor of the Exchequer and the Government will persist in these endeavours, and the Treasury will do its utmost wherever possible even to improve our record in these respects. That then is the second principle.

And what is the third? The third is this. In order to make the fullest use of borrowing all that can be spared from the savings of citizens after they have paid their taxes, there was set on foot from the early days of the war the National Savings campaign, which has continued to produce week by week great sums. Adequate national loans are not to be raised merely by applying to financial institutions with money to lend. There is a mass of money to be saved and lent in the cause of victory which comes in small amounts week by week into the countless hands of the mass of the people. The Government's loan policy in this respect has followed the advice of Tennyson's Northern Farmer who, you would remember, advised that you should not marry for money but you should go where money is. The country owes its warmest thanks to the Savings Movement over which my noble friends Lord Kindersley and Lord Mottistone preside. Besides mentioning the chiefs, I would in your Lordships' name express our thanks to all those who give their help, to those immense organizations all over the country, men and women, children too, who by their energy and devotion and ingenuity are constantly finding fresh means to present this appeal in every area of the country. I would only add that there must be no slackening in this effort or in the appeal of personal economy. Especially in the field of saving still greater efforts are needed if we are to maintain our sound finance.

Lastly, on these four principles I would make this point. It is not enough for financial policy in time of war to be limited to purely financial considerations in the narrow sense—in the estimating of expenditure, in exploiting resources of revenue and in producing the national balance sheet. Financial policy should at all times be the partner of wider economic policy, and most of all is this the case under war conditions. Let me give an example. Food supplies, as we know, are controlled and rationed in order to distribute fairly the limited quantities which can be made available in view of the other claims on our shipping resources and other modes of supply. But the Exchequer has provided ever since the early days of war a very large amount of money in order that the machinery of food control can at the same time be used to subsidize the prices of essential foodstuffs. Milk, meat, bacon and other supplies have been by this means kept down below their actual cost; Exchequer subsidies for this purpose now amount to something not far short of £150,000,000 a year. That is what I mean by combining with our strict financial policies broader economic consideration. Who can doubt that such joint measures to avoid cause for anxiety on the part of wage-earners, either about their food supplies or about the level of the cost of living, are of inestimable value in preserving a healthy atmosphere for the great efforts which they are making in the great field of war production?

Such, my Lords, are some of the principles which underly our financial policy in this war and which help to explain the provisions of this Finance Bill. You will hardly wish me to expound the contents of the Bill, for it is so devised as to rouse and to stir the lively attention of everybody. You will remember perhaps the reply of the gallant rescuer of a Scotsman who fell into the water and was drowned. When he was asked by the Coroner—I think in Scotland they call him the Sheriff-Substitute—whether he did not do something to resuscitate the victim he replied with indignation, "Well, I searched his pockets." The Chancellor of the Exchequer has followed this wise principle. As your Lordships may have noted, my right honourable friend has decided to leave the Income Tax at the standard rate of 10s. in the pound. When Surtax is added the curve of effective charge mounts higher and higher until, when it reaches those rarified heights where the richer Surtax payers live and move and have their being, the Chancellor of the Exchequer takes from the topmost slice 19s. 6d. out of every pound. But those provisions are due to earlier Budgets, and it is not surprising that on the present occasion my right honourable friend has concentrated on those indirect taxes which fall on goods and services which, although in common demand and widely enjoyed, ought not to be regarded as necessaries of life—on beer and spirits, wine and tobacco. There are also increased duties on entertainments and on a wide range of luxury goods. Your Lordships will note also in the Bill the adjustments that have been made in regard to the taxing of farm profits, and married women's earnings, and also changes in the taxation of weekly wage-earners which have been made the subject of a White Paper.

If on the subject matter of the Bill any of your Lordships desire further information I will do my best to supply it in any reply at the end of the debate, if reply is needed. In reviewing the stupendous efforts which the country had made in the cause of liberty and victory, and in dedicating ourselves afresh to the greater efforts that still have to be made, we may, I think, fairly claim as a nation that whatever may be the burdens to be borne and the set-backs to be righted before the cause of the United Nations triumphs, the financial policy which we are following in this country is a potent contribution to ultimate success. That policy, so strenuously pursued by my right honourable friend the Chancellor of the Exchequer, is embodied in this bulky Bill which is now before your Lordships. It is no longer the fashion or the practice of Parliament for speeches to be embellished by classical quotations, but I would venture to say of this bulky Bill what Homer wrote of the bulky form of Achilles:

"There you lie, huge in your hugeness." With this measure before us, we can surely claim that our cause will not fail either from want of courage to impose taxation upon the people or from want of willingness on the part of the people stolidly, and even cheerfully, to bear the burdens put upon them. I beg to move that the Bill be read a second time.

Moved, That the Bill be now read 2ª.—(The Lord Chancellor.)

LORD ARNOLD

My Lords, I do not propose to detain your Lordships for more than a few minutes to-day. There are other speakers who wish to take part in the debate on the Finance Bill, and there is also other business upon the Paper. The Bill has been introduced by the noble and learned Viscount who sits on the Woolsack with one of those clear statements which we expect, and always receive, from him. As a matter of fact, so far as the Bill itself is concerned, I think he will agree that he has not had a very difficult task because its main features are so very simple. Indeed, so far as its main features are concerned, it is, I suppose, one of the simplest Budgets on record. A certain amount of additional revenue had to be got and it is practically to be got this time from indirect taxation—chiefly by means of an increase in the Beer Duty, an increase in the Spirits Duty, and an increase in the Tobacco Duty.

The Beer and Spirits Duties were increased by £63,000,000, bringing up the total in a full year from drink to £271,000,000. The Tobacco Duty was increased by about £90,000,000, bringing up the total in a full year to, I think, £304,000,000. That is a total from drink and tobacco taxation in a full year of £575,000,000. I think that probably the total expenditure—not in taxation but on the commodities themselves—by the public in a full year on drink and tobacco will now be £1,000,000,000, which is somewhere about one-seventh of the total national income. It is impossible to say what the total national income is—the White Paper published with the Budget gave it for last year only—but it is probably not far short of (and indeed some authorities put it higher than) £7,000,000,000. Incidentally, it is interesting to note that the tobacco duty alone of £304,000,000 in a full year is about three times as much as the whole national expenditure of the country some fifty years ago. That is a very remarkable result.

I am not going to discuss these taxes in detail. They have been accepted by the country and they conform to the sound principles of taxation. They are equitable and sound, and they are certainly productive. I propose to leave them there. But I do want to say that there appears to have been in some quarters an idea that, because the Chancellor of the Exchequer went almost entirely to indirect taxation this year, the resources of direct taxation are exhausted. That is not so. The noble and learned Viscount who sits on the Woolsack made passing reference to Income Tax and to the figure of Income Tax. Now it may be—we do not know—that Income Tax, at 10s. in the pound, has reached the limit so far as the standard rate is concerned. Time alone will show. But there is a big reserve in the allowances which are made to all taxpayers, and which could be, and, I expect, as time goes on, will be, tapped. For instance, last year the personal allowance was cut down from £100 a year to £80 a year and the exemption limit was reduced from £120 to £110 These two reductions together were responsible for bringing in a sum of about £75,000,000, and the change in the earned income allowance, taking a full year, brought in about £50,000,000. Paraphrasing what the noble and learned Viscount who sits on the Woolsack said, and adapting what is, to use a very overworked word, a slogan: "If you want money you must go where money is." Most of the taxable money now is in incomes below £500 a year. The total of those incomes is about £4,500,000,000. So that there is a lot of money there in possible reserve for further taxation by way, as I say, of allowances and so forth.

I do not hold any brief for the wealthy classes at all. So far as I am concerned, in my own small way, I wish to do all that I can for the small wage-earners. But it is only right to point out, as the Chancellor of the Exchequer pointed out, that when you come to the wealthier classes, to the Surtax classes, after they have paid Income Tax and Surtax there remains to them a sum of only £213,000,000 against, as I say, about £4,500,000,000 representing incomes below £500 a year. In fact, the Chancellor of the Exchequer went further and pointed out that if you allow what remains to them which is below £2,000 a year and take that which is over £2,000 a year less Income Tax and Surtax, there remains only a sum of about £30,000,000 a year. In present conditions you could not carry on the war for very long on that. The truth is that about 85 per cent. of all personal incomes now are below £500 a year, and that does reinforce what I have ventured to emphasize to your Lordships that there is a reservoir which by means of changed allowances can be, and no doubt, in due course, will be, tapped.

The noble and learned Viscount who sits on the Woolsack also referred to the National Debt which has increased during the war by about £5,700,000,000 and now stands at approximately £13,000,000,000. But, as the noble and learned Viscount said, the rate of increase in the debt charge is less, considerably less, than might have been expected before the war began, more particularly—and this is a point which he did not mention—if you take into account the fact that very nearly all the interest on War Debt of whatever kind, Income Tax, and to a certain extent Surtax, has to be deducted and comes back to the Exchequer. Indeed, it has been calculated that the net charge, taking that into account, is about 1 per cent. If that is right, then the increased charge for this £5,700,000,000 is not more than £57,000,000 a year. Moreover, all the interest comes back in one form or another to the people of the country. It is not taken from them by taxation and thrown into the sea; it does come back to the people of the country. The same thing applies almost entirely to our enormous national expenditure. Hence it is that some people are better off owing to the war, although some people are worse off. Those who arc better off are mainly the wage-earners.

That brings me to the question of wages, and to the question of possible inflation, on which the noble and learned Viscount touched. The continual rises in wages are a source of anxiety from the point of view of inflation. It has been claimed by the best authorities, including, I think, the Chancellor of the Exchequer himself, that there has been very little inflation so far, and I think that that is true. The Chancellor of the Exchequer has in various ways battled manfully to stop inflation; nevertheless, as he dramatically said in his speech, the enemy is still there. He has, as I say, done much, and the Government have done much, but there is one thing which they have not yet done: they have not yet evolved a real and effective wages policy. We have discussed this matter before, but this is a suitable opportunity for raising it again. I speak as one who wishes the wage-earners to have the highest wages possible, but the question is, what are the highest wages which are wisely possible? That is a point which has to be carefully borne in mind. We read in the Press of youths receiving £3 or £4 a week in munition works. That is often due, no doubt, to overtime, but soldiers do not get any extra pay for overtime, or for going abroad and facing incredible hardships and wounds and death. But, in view of the high wages which munition workers on the whole receive, it is not surprising that one industry after another should press for higher wages.

Last year the general over-all increase in wages rates was approximately 6 per cent., while the rise in the cost of living was 1 per cent. I am referring to the last financial year, from April to March. The cost of living, as we know, has been kept down in no small degree by the Government's policy of subsidies, subsidies which now amount to about £125,000,000 a year, and which have been very useful in keeping down the cost of living; but, with these demands from one industry after another for higher wages, we are getting nearer and nearer to what is called the vicious spiral of inflation. So far as wages are concerned, however, the Government seem to stand by and do little or nothing. If I am wrong there, the noble and learned Viscount will correct me. I speak only as one who looks on from the outside. I do not think that that is a good attitude for the Government to take.

I have a great respect for the Minister of Labour, Mr. Ernest Bevin, but I question whether he is the right man to be Minister of Labour. He is first and foremost a trade unionist, and it does not appear likely, on the probabilities, that he can very strenuously resist demands for higher wages. I think that the whole matter needs more systematic attention from the Government than it has yet received. The Chancellor of the Exchequer is quite alive to the danger, because in his Budget speech last year he said: It is clear that the persistence of the tendency towards rising wage rates, which necessarily increases the cost of production at every stage of the productive process, would compel abandonment of the stabilization policy. I think that that is very true, but is it equally true that the Government are doing all that is possible to secure stabilization? I cannot feel that in this matter of wages they are doing all that is possible.

In the last war, Mr. Lloyd George did a great deal in various ways by his wonderful power of appeal. He appealed to the workers not once but many times in regard to various matters, and he got them to agree to a great many things. Has our present Prime Minister made any such public appeal with regard to this matter, or with regard to the possible dangers of inflation? I suggest that he might point out that rising wages can be too dearly bought, and that, if inflation should come, it is the wage-earners, the old-age pensioners and the poor who will probably suffer most of all, although all will suffer. The munition workers themselves, those who are now getting the high wages, will suffer. They will feel then that their policy has not been a wise one, and that they have been at any rate one of the causes of bringing hardship upon themselves and upon others.

When the demand is made that all workers must be relatively as well off as before the war, the reply should be that a not inconsiderable number of members of the community are not so well off as before the war—nothing like so well off—and that therefore it cannot be accepted as a principle that people must be as well off as before the war. That principle cannot be laid down. Mr. Oliver Lyttelton, I think, has stated that we are now spending, in one way and another, about 60 per cent. of the total national income on the war, and I think he said that we may regard 70 per cent. as probably the utmost limit which could possibly be reached. When we have that state of affairs, it is clearly impossible for everybody to live as they did before the war.

On this subject of inflation, the noble and learned Viscount on the Woolsack spoke some time ago of the danger of the boat being over the weir almost before it was realized that that was the position, or words to that effect. Well, I do not say he was taking a gloomy view; he was pointing out the danger. As far as I am concerned, I am not taking a gloomy view, I am merely pointing out the danger. So far, as I have indicated, the position has been largely held. True, there is a scarcity in certain articles, but scarcity is not inflation, and inflation is not scarcity. The two things are different. I repeat, the position is being largely held. The Government and their advisers know a great deal more than was known in the last war about inflation and about how to avoid it, and if we could have a definite wages policy the position could be faced with, I think, small perturbation. After all, in Germany the disastrous inflation which came after the last war need not have come; it could have been prevented. It really was almost a deliberate policy, under the pressure of the big industrialists and of Reparations.

Just one word in conclusion, and it follows on something which the noble and learned Viscount has said. He referred to the National Savings Committee, and I think there is a special responsibility in this matter which rests upon the Government and upon the National Savings Committee. We see advertisements from time to time stating that the capital is quite safe. A lady spoke to me about an investment she had made in some War Bonds. "Of course," she said, "the return is not high, but at any rate I know it is perfectly safe." Yes, so far as the pound is concerned, that is true. The question is, is it going to be absolutely safe so far as purchasing power is concerned? That is what matters. And that is the problem to which the Government ought to give their urgent and their constant attention.

LORD WARDINGTON

My Lords, I should like, if I may, to add a humble note of my own to the general chorus of congratulation which has greeted the Chancellor of the Exchequer. He has had a tremendous task. He has budgeted for a tax-derived income of about £2,400,000,00—more than a third of oar total estimated annual income; and he has done so with the approval and consent of all, in disregard of the old fundamental rule that taxes should only be imposed for the purpose of obtaining revenue, and not for social, political or any other object. Steps have been taken to control the purchasing power of the people and also to keep down prices, not only by taxation but by the control of prices, by rationing, by subsidies and other methods, and he has been successful in checking inflation, the danger of which the noble Lord, Lord Arnold, stressed with great logic. It is idle to suppose that that danger has disappeared. It still lies manifest and growling almost on the threshold, but we have the Chancellor's assurance that he is keeping his eye focused constantly upon it and he is prepared to take measures to check any menacing activities. That he has been largely successful in his efforts so far is shown by the figures which he himself has given. The cost-of-living index figure is only one per cent. more than it was the previous year: 29 per cent. over the pre-war level as against 28 per cent.

One of his chief difficulties, as far as I see it, is that 85 per cent. of the purchasing power of the people is in the hands of those, as Lord Arnold has already reminded your Lordships, with incomes of less than £500 a year—the very class you would like to spare if it were possible. The question is to what extent it can be possible in the future. Those in the higher category of Surtax-payers are still dealt with severely, not to say brutally, as many of your Lordships may be painfully aware. I doubt whether it is equally recognized by the public generally, but these so-called rich, after paying their rates and taxes and other inescapable commitments—now I am going to say something which will be regarded perhaps as a fantastic exaggeration, but which I believe is literally true—these so-called rich, after paying these liabilities from which they cannot escape, will not have a penny of free income left with which to buy a crust of bread. I think that should be starkly stated and frankly recognized. In acquiescing without a murmur in legislation which has brought this about, your Lordships have committed voluntary financial suicide.

I do not suppose that you want me to utter any protest on your behalf, but it is a fact, and I believe it is without precedent in the history of this country or in the history of any country in the world. It has been brought about not only by the high level of taxation itself, but also by the fact that it frequently happens that the tax on a high income of one year has to be paid out of a much smaller income in the year following, and those who have given up large incomes derived from business in order to serve the country in various ways are deserving of the greatest gratitude for their patriotic action in so doing. It cannot be charged against any of these gentlemen that they ought to put on one side sufficient out of the good years to pay the appropriate tax when it became due, for this reason among others, that the imposition of increased taxation is not known in advance, and without any prophetic powers that makes the difficulty of forming a domestic budget all the greater.

This incidence of postponed liability of Income Tax weighs heavily also on the shoulders of those with humbler incomes, and I could have wished that the Chancellor of the Exchequer had been able to see his way so to conduct matters that tax would have been deducted from wages at the time of receipt. We know he was sympathetic with that idea and looked into it carefully, but after due consideration he came to the conclusion that it was not practicable. It is sometimes argued that there is no need to waste sympathy on those with the highest gross incomes because they can still live on their capital. Those who have long advocated a capital tax now find their wishes to a large extent gratified, and one hears the comment, "I only wish I had half their complaint." But it is not always possible to live on capital. A man's capital may be in assets which are not easily realizable, and he cannot pay his taxes in kind; or they may be tied up in trust, where they cannot be touched. And in any case the process cannot go on indefinitely. I should like to ask the Lord Chancellor if he could give any figures showing the outstanding unpaid Surtax. My own guess would be that it would amount to a substantial figure. If that is so, I cannot help thinking there is something wrong with a tax which it is not always possible to pay, and which is incapable of complete collection.

In reading the Official Report of the debate on the Finance Bill in another place and statements which have been made in this House recently, also articles and letters in the Press, it would seem to be suggested in some quarters that the Chancellor of the Exchequer's great task was a matter of supererogation. I have been struck by the recrudescence of popular catchwords and phrases like "Money doesn't matter," "Cut out the financial foolery," "Costless creation of credit," and so on. People who believe in these facile cries fortify their belief by saying that banks can do all that is necessary, and create all that is required, merely by making entries in a book. It is true that they have had some confirmation for these statements from economists, even from the Reports of Committees, and one member quoted the Encyclopœdia Britannica—I have not verified the quotation—to this effect, that banks lend by creating credit, and create means of payment out of nothing. After making this quotation he went on to say that the money which a bank lends is not depositors' money, implying therefore it is money of the bank's own creation.

This idea arises from an exaggerated interpretation of the formula—at best only partly true—that every loan creates a deposit. It is only partly true because it is not true when the man who obtains the loan passes it on to someone who uses it to extinguish his own overdraft. It is not true when it is paid to a man who prefers—as many do prefer at the moment—to keep it in cash rather than entrust it to a bank. If banks did not enjoy the confidence of the public, no loan would ever create a deposit. A curious thing is that those people who are fondest of using this formula never miss any opportunity of trying to belittle the banks and to destroy public confidence in them.

It is a wonder to me to see the amount of mystery which can be woven round a perfectly simple business. When a bank makes a loan it goes though exactly the same process as any one of your Lordships would do if he were kind enough to lend an impecunious friend £5. Nothing new is created. There is merely a transfer of purchasing power in the form of cash or cheque from one individual to another. It is exactly the same with a bank. A bank lends what it has got to somebody who wants it, and if a bank has not got it it cannot lend it. There is no creation of money for the purpose.

The analogy between the private lender and the banker is still more complete if the private lender, in order to oblige his friend, borrows the £5 from somebody else first, just as a bank borrows from its depositors. As long as private individuals or the banks can continue to borrow, they can continue to lend. I really am ashamed to trouble your Lordships with what must appear elementary in the extreme, but there is so much misconception over a perfectly simple matter, and so many false deductions have been drawn from it, that it is desirable to say something on the point. I crave your Lordships' forgiveness if I appear to give a very primitive lecture on some banking aspects, but they have a real bearing on the whole of our national finance. If people get the idea that banks do, and can, create money out of nothing, it raises false hopes that there is an easy solution for all financial troubles, whereas the truth is, according to my belief, that the restoration and continuance of our prosperity do not depend on any effortless method of that kind or on any purely monetary juggling.

To make a simple matter still plainer, I would ask any one of your Lordships to imagine you are going to become one of those much maligned and mysterious animals—a banker—setting up in banking business. The first thing you have to do is to provide the necessary capital with which to start. Having, I hope, successfully overcome that initial difficulty, you will apportion it more or less as follows. You will use part of it to purchase premises in which to conduct your business. You will retain a certain amount in cash for your daily requirements and, for the sake of simplification, let us suppose you invest the remainder in first-class Government securities. You then open your doors, and sit down and wait for a customer. Supposing the first customer wishes to open a current or deposit account with you, that is easy. You take his money, retain a certain proportion of it to meet all ordinary withdrawals, and invest or make loans with the remainder.

Here there is no difficulty; but supposing your first customer, instead of wishing to deposit money with you, wishes to borrow. What arc you to do? Remembering that all your resources are tied up in the way I have enumerated, it is no good offering him part of your premises; the cash you want for your own requirements; and he does not want your investments. What are you to do? "Nothing easier," says the theoretical amateur banker. "All you have to do is to create money out of nothing by the magical process of banking, and you can then lend to your heart's content and to the satisfaction of all your customers." What a delightful business! Why is not everybody in it? I am not a sufficiently competent authority on natural history to say which came first, the hen or the egg, but in banking matters I am quite certain that deposits must come before loans. The Chancellor of the Exchequer was abundantly right when he said, in answer to a question, that the money out of which banks lend is, broadly speaking, derived from the deposits of their customers, and there is no question of banks creating money for the purpose of lending to the Government. All I can say is if he was not right bankers have been wasting their time all these years, and no bank need ever have failed.

It has been truly said that an expert is one who succeeds in making the simple appear complicated. I would like to say just a further word on another cognate subject, which seems to worry a good many people, in connexion with the very large increase of deposits in the banks' hands on the one hand and the correspondingly swollen investments on the other. They seem to think there is something wrong and improper in the situation. It is quite true that deposits have increased very largely. In June, just before the war, they amounted to £2,218,000,000. At the end of last year, they had increased by £1,100,000,000, and stood at the figure of £3,329,000,000. That has all come about by the action of the Government in placing large contracts for the manufacture of war materials of all kinds. Money is paid out in payment of those contracts, the contractors pay it out to the suppliers of raw materials and in wages to their workmen, and they in turn pay it out to the butcher and baker, and through hundreds of channels it comes back eventually again to the banks. The more the Government borrow from the public the more the process continues. Open operations on the market by the Bank of England when they buy investments have the same result.

While the deposits have increased, as they did in the last war, so also, it is true, investments have increased. In June, 1939, the investments of the clearing banks stood at something over £600,000,000, and at the end of last year they had increased by nearly 2400,000,000, making £1,000,000,000 altogether, and all but a small proportion of these investments are in Government securities. But what is wrong or improper with that position? It surely cannot be contended that banks ought to keep all their depositors' money in cash instead of lending it to the Government for war purposes. It is true that it would be much better if the depositors who have money available instead of keeping it with the banks were to invest it direct with the Government, for this reason, that as long as the depositors keep the money in the banks it remains potential purchasing power under their control, and can be drawn out and used with inflationary results; but if they take it out to invest it themselves, instead of leaving the banks to invest it for them, then it is put out of harm's way from that point of view.

There was another misconception in the debate in another place which has a bearing on banking matters, and, if I am not wearying your Lordships, I should like to mention it. The speaker was addressing the House on the subject of Excess Profits Tax and the possible effects of that tax on reserves of industry and commerce in the country, and he tried to estimate what the amount of industrial reserves was. He took the £2,000,000,000 deposits in the hands of the banks, and, on the assumption that private individuals are not in the habit of having large credit balances, he argued that practically the whole of that £2,000,000,000 belonged to industry and represented its reserves. But what arc the facts? Various bank Chairmen have at different times announced what the average balance of their deposits was. They are very similar in the case of all banks. In the case of the bank with whose figures I am familiar, the average credit balance in 1939 was £220, the average deposit was £286. At the end of last year they had risen in both cases to £300. What does that mean? It means that instead of that huge sum of £2,000,000,000 belonging to industry, or to a comparatively few very rich concerns, it is divided up among so many millions of different individuals and companies that their average balance is only £300.

But he made another false deduction in his argument, because even if that £2,000,000,000 had belonged to industry, it would not necessarily have represented its reserves. A company may have a very large credit balance and yet be insolvent; and, equally a company may be very prosperous and entirely solvent and yet be overdrawn at its bank at any particular time. True reserves consist of course in the excess assets—the balance of assets over liabilities after allowing for capital—and they bear no relation at all to the state of a company's banking account. I would have liked to say a great deal more about the Excess Profits Tax, but I take it that is really a matter which, if it is raised, ought to be raised in Committee. I will conclude, therefore, as I began, by congratulating the Chancellor of the Exchequer on the skill with which he is extracting from the pockets of his more or less willing victim the immense sums which he has envisaged.

VISCOUNT BENNETT

My Lords, after the very illuminating speeches to which we have listened regarding the financial structure of the kingdom, I am sure it is with great reluctance that you listen to one who is proposing to say a few words regarding a grievance, this being, I believe, the appointed time and, with certain limitations, the appointed place, in which you can make reference to grievances. The grievance to which I refer is that which taxes the royalties of inventors as income. My attention has been directed to it by friends of mine who have been interested in inventions for a very long period of time. When you find the whole of the resultant royalty from the use of the invention being treated as income, it seems to me that a very great hardship is being done to the inventor, and, inasmuch as we are tremendously interested in encouraging inventions in every possible way, it would appear to me that this might be an appropriate time at which to direct attention to it.

In the ultimate analysis an invention is merely an idea in the mind of a man. Just what causes the idea or makes him think of creating something that has not been in existence before is another thing altogether. But he determines that he will make something in a concrete form that will give evidence of the idea that is in his mind. The idea is the creating of something to accomplish a given purpose. He therefore works at it, sometimes for years. He may be a man of very limited means. He may indeed work at it in his spare time, and usually he spends all the money that he has himself or that he can induce his friends to lend him. In the end he secures a patent for his invention. That is recognition by the State that he is entitled to a monopoly of the use of that invention for a period of years—I believe some sixteen years at present. In the first years he finds it difficult to interest the public and that involves the expenditure of money for advertising and other purposes. In the latter years his invention is steadily depreciating in value because it will become the property of the public at an early date. Therefore he has to secure by way of royalty a sum that will compensate him for all those years of effort and the capital he has put into the effort to secure the invention—the capital being the time and money expended. He may sell his patent, that is he may sell his property, because it has now become property. He may dispose of it for a good sum and invest that sum as he pleases. His capital has now become invested, say, in war bonds and he has to pay Income Tax on tire return he receives from his investment.

But it may be that he desires to retain the patent. He is always confronted with the likelihood of someone improving on the patent. It is a very strange circumstance of history that when a man has placed in concrete form an idea that was in his mind, then eight or ten other men will have the same idea about the same time. Some of the most important litigation in the Supreme Court of the United States has had to deal with that circumstance—notably the Bell telephone litigation. Suppose he does desire to retain his patent and to license those who desire to use it. He receives his rental, which is spoken of as royalty, and that royalty, as I am informed at the present time, is taxed as income in its entirety. His property is being exhausted, for it is a wasting asset, and at the end of sixteen years it will cease to be property as far as he is concerned. I suggest that there should be a very important allowance made on the amount on which he pays tax.

For instance, assuming his income is £1,200 a year from his patent by way of royalties, that would represent a capitalized value of £12,000 at 10 per cent., and 10 per cent. would not be regarded as an unreasonable amount to receive per annum for the use of the patent. But he does not receive that in the early days, and he is always subject to the possibility of someone making a new invention that will destroy or depreciate the value of his own patent. In any case it is a wasting asset, for at the end of sixteen years the monopoly has gone. What would be a reasonable way to expect that property to be treated? Should not the Government, who are so anxious to encourage invention, say that of that £1,200, two-thirds should be attributed to capital and one-third charged as income? In the case of buildings and machinery you do allow for depreciation. I cannot look into the future without realizing the value that attaches to invention and the inventive mind in all communities, and I suggest that the taxing authority should not treat as income the return of capital on the part of those who have created property by their time and effort and ingenuity and expenditure of their resources.

For that reason, I suggest that the matter should be given attention at this time, even although it is quite apart from the important and illuminating speeches we have listened with respect to finance. These must fill with pride the mind of every citizen of this kingdom because, though the strain is so great and the demand so large as to be astronomical, this country not only has been able to retain its stability as a great financial centre but has afforded an example to all the world by showing how willingly the men of wealth in this country will, in the language of the noble Lord, Lord Wardington, commit suicide for the benefit of their fellow citizens and the State.

THE LORD CHANCELLOR

My Lords, perhaps I may be permitted to make some reply to the observations made in the course of this debate. It has been an interesting debate, as indeed has always been my experience here when I have had the fortune to move the Second Reading of a Finance Bill. Perhaps I may take some of the points in the reverse order of the speakers. The noble Viscount who has just spoken called attention to the undoubted fact that in our Income Tax law we do treat royalties on patents as income. What I think perhaps he may not have sufficiently observed is that that really is in accordance with the general scheme of our Income Tax law. The matter is by no means limited to the case of patents. If, for example, there is an annuity of a fixed amount which is going to be paid for a limited number of years, in each year that it is received it bears the full rate of tax, and when the years have passed during which the annuity is to be paid that asset disappears completely. We do not make any allowance because the annuity is of a sort which will only run for a limited number of years.

In the same way there are many kinds of wasting assets in this country, commercial assets which, as everybody knows, will be exhausted with time. Coalmining I think we may take as a very obvious example. Whether it is strictly justified in theory or not, the practice and not only the practice but the law of the land is and has been, certainly ever since the Income Tax Act of 1842 if not before, that we cannot examine income which reaches the hand of the recipient and is enjoyed by him in a given year by asking how long it will last. Mineral royalties, limited annuities, ground rents, things of that kind have a life which in the end will cease. It might be a logical and perhaps a more scientific method to make such adjustment, but we do not do so. I think the result is probably justified. After all, we must not treat Income Tax as though it was a constant figure. At present it is 10s. in the pound, though indeed the effective tax will vary, very much according to the total income of the individual. But it would appear to be an extremely difficult matter to make adjustments when the tax varies from year to year.

I suspect that there is a further reason which has actuated the Legislature—because, of course, this is a point very well known to the Legislature—and that is that upon the whole it is thought to be better, having regard to the provision which has now got to be made for the year, to adopt as simple a formula as possible and to take as income all that the Income Tax calls income, which includes annuities of every sort and kind, rather than to endeavour to make these somewhat complicated adjustments, even though I quite appreciate that there may be a scientific argument in their favour. I remember that when I was a young man and first held an appointment as a Law Officer of the Crown in the House of Commons, one of the "hardy annuals" of every Finance Bill Committee was a Motion to provide specially for wasting assets, and I had the privilege, within the limits of my youthful ability, of dealing with this argument year after year from the Treasury Bench,

If I may, I will turn now to the speech of my noble friend Lord Wardington, who gave us so interesting and instructive a dissertation on the art and practice of banking. Indeed, I may say that I regard his speech as having almost revealed the arcana of that subject, and I should imagine that he must expect increased competition in the future. I will not enter into that now, but he did make an observation on another subject upon which I should like to add a word or two. He referred in terms of high approval to the efforts of the Chancellor of the Exchequer, and I certainly think that those efforts are deserving of the highest admiration. But the noble Lord expressed regret that in adjusting Income Tax to wage-earners the Chancellor of the Exchequer had not adopted some plan by which the Income Tax might be deducted weekly from the wages. That proposal, of course, has attracted many minds. I believe I am right when I say that the Treasury has had before it dozens of separate schemes suggested for this purpose—many of them by most accomplished people—and I know that the Treasury also examined the matter very closely for itself. But when these proposals are examined, it will be found that there are two or three very serious objections. In the first place Income Tax is not a flat percentage on receipts. You do not simply take a man's receipts for a week or for a year, whatever they may be, and then by way of Income Tax extract out of them a given fraction. Income Tax works on a curve and before you can determine what is the right amount of Income Tax that is to be charged you have to know rather more about the individual's case than can be ascertained merely from knowledge of what he has received in a particular week.

In the second place, as was observed in another connexion by Lord Arnold, the allowances have to be worked out, and that again means that two persons who may appear to be in exactly the same position, and certainly in exactly the same position if you limit your observation to a given week, are in fact persons who will be required to pay quite different amounts of Income Tax, although their receipts for the week or even for a longer period may be the same. In another connexion I made some observations on this matter when we had our discussion the other day on family allowances. Perhaps a still more serious difficulty in the way of deducting the Income Tax from the wage packet every week is this. A wage-earner may charge his work during the year. He may move from one employer to another. He may be out of work for a time or may be not working by his own choice for a time. He may get married, he may have a child—every one of these things will affect the Income Tax which he has ultimately to pay.

Of course I know that it may be said that all these things can be adjusted afterwards, but the wage-earning classes are not the only people who feel objection to paying in gross on the understanding that they can apply afterwards to get something back. It has, therefore, been found a more practical plan to deal with the matter otherwise, though, as he has now announced, the Chancellor of the Exchequer has made some modifications. He has made the lag four months instead of three, and he has secured that, in no event, will there be taken from the wage-earner in any week so much as will leave him with less than a minimum which varies according to whether he is single, or married, or a married man with children. The Chancellor of the Exchequer has also made adjustment as between winter work and summer work, because there are of course many occupations in which the rate of wage is different in the two seasons. It was for reasons of this sort, generally indicated, that I believe the decision was taken.

I may not have spoken with complete accuracy for I have not been present at the consultations about this matter. I may say, however, that I was attracted by this idea myself, and I canvassed it in such quarters as I could. But I found myself compelled to admit that these considerations put forward by the experts of the Inland Revenue—by which I do not, in Lord Wardington's phrase, mean people who try to make simple things difficult, but people who try to get the Income Tax to work—were probably justified. But the whole matter is still in its early stage. I think we may assume that the question which interests so many people in the country, which everyone wants to see dealt with wisely, will, in the end, reach its own solution.

The only other matter on which I would delay the House, on which I feel that I must say a few words, is one which was referred to in the very interesting speech which we had from my noble friend Lord Arnold. We have become accustomed, on these annual occasions of the Second Reading of the Finance Bill, to have a speech from him, and I speak for myself, and perhaps for others also, when I say that one has always found what he has to say very well worthy of attention. I would make so bold as to meet him on a point which I would not wish to make a point of controversy, because the manners of your Lordships' House strongly discourage anything so improper. But I am not prepared to admit that the Government policy makes no contribution to what is called a wage policy. I have several times heard it said in this House that the Government have no wage policy. If that means that the Government should ask Parliament to fix everybody's wages for the period of the war, or something less drastic of that kind, then I think those who reproach the Government for having no wage policy would be of great assistance to us if they would say what their wage policy is. A proposal of that sort involves considerations far beyond the Finance Bill; as my noble friend indicated, it would be the direct concern of the Minister of Labour, and it seems to me would raise a host of social and economic questions. In any other sense, however, I entirely deny that the Government have no policy in relation to wages.

What is the main ground upon which claims for increased wages are validly and pointedly put forward? It is on the ground of an increase in the cost of living. If Government policy was not directed to dealing most emphatically with that subject, the situation in regard to wages might be expected to be much more difficult than it is. Ever since the beginning of the war, as I ventured to point out in my opening remarks, the Treasury has been devoting enormous sums to checking or preventing a rise in the cost of living. In the case of food, the prices of essential foods have been kept below their actual cost by means of Exchequer subsidies. In the case of rent, rent has been fixed by the operation of an Act of Parliament. In the case of travelling, railway fares have been stabilized. In the case of clothes, the Government are taking direct control of prices under the Goods and Services (Price Control) Act, and they are making a large contribution to the same end by plans for utility clothing.

All those things have a direct relation to the problem of wages in time of war. In very large areas of employment the rate of wages is in fact, by standing agreement, regulated by reference to the cost of living; and everybody knows how important a consideration cost of living is in many other connexions. Let us look at two or three figures which help to bear this out. The food index, which twelve months ago was 23 per cent. above the pre-war level, is now only 16 per cent. above that level. As I think the noble Lord, Lord Wardington, observed, the cost-of-living index has remained virtually stationary for twelve months, at 28 per cent. or 29 per cent. above the pre-war level. In considering, therefore, this most important subject, which my noble friend Lord Arnold has raised before, I think it is only right to remember that, so far as wages are concerned, wages which are fixed by running agreements having regard to the cost of living are being most effectively and directly held by these measures, and so far as the large range of wages is concerned where changes in the cost of living provide the principal factor in argument or negotiation, Government policy exercises a very definite, although no doubt an indirect, effect on wage-levels, because it is addressed specifically, and at great expense to the Exchequer, towards stabilizing the cost of living. I make these observations, not as a complete answer, and certainly not to carry on a controversy, but because I venture to think, most respectfully, that the reproach that the Government are in different to the problem of wages is not altogether well-founded. All these measures which I have mentioned have been adopted, very largely, in order to remove what would otherwise be an ever-increasing grievance, which would be bound to be reflected in many cases by changing rates of wages.

I do not think that I need say more. Our functions in finance matters in this House are limited, but I claim that they are useful. We have here, like a Council of State, discussed some of the most important matters which can possibly affect the great mass of our fellow-countrymen, and which have a most material and direct bearing on the carrying on of the war and on the achievement of victory. I am glad to think and proud to remember, as the noble Viscount, Lord Bennett, indicated just now, that my fellow-countrymen, whatever be their state and degree in life, whether they are struggling with a small income, or envied because it is supposed that they can enjoy great possessions, are all at one in being willing to welcome and to submit to the stiffest Finance Bill of all time.

On Question, Bill read 2ª; Committee negatived.