FINANCE BILL. (Hansard, 6 July 1944)

§ THE LORD CHANCELLOR
My Lords, I rise for the purpose of moving—with the brevity which is suitable, having regard to the business set down for to-day, and suitable perhaps also because an unelected Assembly is not primarily concerned with the details of the Bill—the Second Reading of the Finance Bill. This Finance Bill has one feature which is of interest to all of us: it is one of the very rare cases in which the Finance Bill of the year leaves the rates of the various taxes practically unaltered. The usual excitement about the Budget speech is whether the charges on the citizen are going up or going down. On the present occasion my right honourable friend the Chancellor of the Exchequer has answered that question by saying that, in substance, taxation would not be changed. I do not think that situation has previously occurred since the year 1913. One is reminded of the problem of the schoolmen as to what would happen if an irresistible force should find itself working against an irremovable obstacle, and I suppose we must accept this equilibrium as an indication that the enormous powers of the Treasury, when backed by the House of Commons, are for the moment exhausted in their efforts to squeeze more 703 out of the orange than has already been secured. The consequence is that the ordinary speech about the Finance Bill does not fall to be made at all. But what has been done in connexion with this Finance Bill and indeed with a number that have preceded it, is to take the opportunity of a rather wider survey—some survey of the past of course, but mainly a survey as to the part which finance has to play in the period immediately following the crisis of the war.
Your Lordships will observe that, as it happens, the Motion for the Second Reading of the Finance Bill is raising a subject essentially involved in the debate we had yesterday and which shortly is going to be continued to-day. In the very brilliant speech made yesterday by my noble friend Lord Samuel, he asserted, with I think general agreement, that by this time we might fairly claim that the financial policy of the country during the war had been well devised and achieved. Essentially it consists of three things. From the very earliest days of the war the decision was taken that the existence of war was no reason for reducing taxes but, on the contrary, was a reason why the heaviest possible taxation of all kinds should be imposed, particularly direct taxation, both in order to provide as much as could be provided by taxation to meet the tremendous expense of the war, and also because by that means a most important contribution is made to resist the dangers of inflation. That has been done, and we shall all be prepared to testify, I think, that that principle has been most thoroughly and consistently applied.
The second principle, which is also of enormous importance, is that under the conditions of war a Government like ours ought to be able to borrow, and can borrow, at an extremely cheap rate. I do not say whether that can always be continued, but at least it can be done under war conditions when great control is exercised by the Government over the raising of money for other purposes. Thus we have achieved what, in earlier wars, might have been regarded as quite impossible, and certainly is very different from what was achieved in what is called the Great War. The Government are raising the loans they need at rates of between 2½ and 3 per cent., and in no 704 case going higher. That is very important both as a proof of the solidarity of the country and as a proof of the security in which we fundamentally stand and because, of course, it leaves us with a very much smaller debt charge to face at the end of the war than would arise if we had to borrow at a high rate of interest.
The third of these matters which I also regard as quite fundamental, and which we have treated as fundamental from the very beginning of the war, is that everything possible should be done to induce the pactice of saving throughout the whole population in order that the spare money which arises from abundance of work and overtime, and in some cases from rises in wages, should not be used to force up the prices of commodities and thereby contribute to inflation, but should be used, as far as possible, by way of loan to the Government at a low rate which gives a perfectly good security to the lender and at the same time contributes, by the very fact that the money is so used, to destroying the evil tendencies called inflation. I do not think, after this long period of war has gone by, there would have been many people who thought at the beginning that we could hold firmly by these propositions and do so well by them. We are justified in saying that in that respect our financial management has been successful.
Let me state, in two or three simple sentences, the matters which impress me most. Does the House realize that at present, with this enormous expenditure, day by day, on the war, we are borrowing less than half of the money we need? The Chancellor of the Exchequer put the amount—it was the best he could do—at the round figure of £5,000,000,000 of war expenditure in the current year—a prodigious sum, an incomprehensible sum. The plain fact is that we have not found it necessary to borrow as much as half of our needs because we have succeeded in raising, by taxation, 52 per cent. of the whole. In that way we have enormously lightened the burden which will fall upon this community in various ways when the war is at an end. I remember, and I reminded myself of it to-day, a statement made by a previous Chancellor of the Exchequer in the course of the last war—it was in the third year of the last war—when some criticism was offered that we were not 705 raising enough by taxation, in which the then Chancellor of the Exchequer took very considerable credit on behalf of the country when he said "no country has done what Great Britain has done—namely, provide 26 per cent. out of revenue for the total expenditure of the war." As your Lordships see we are doing exactly twice as well as this in this present year.
Now comes what is the really interesting thing in a financial review such as the Chancellor of the Exchequer made in presenting his Budget and such as, much more briefly, is appropriate on the present occasion. What can be done by the wise use of our financial machine to prepare to meet those new problems which will arise from the need of industry to transform itself quickly from a war machine to its essential role, the mainstay of our peacetime prosperity? That is the really interesting financial question. In answer to that question two observations may be made. The Chancellor of the Exchequer dealt with both. He spoke of some notable proposals designed to make our taxation system play a helpful part in the modernization and so in the progress and development of industry. I will just call attention to these two.
First of all, he mentioned a provision which for the most part is not to be found in the Finance Bill but is part of the scheme to which he is working. It is very necessary when the time comes to give every kind of encouragement that our financial arrangements admit of to industry in respect of its improvement and enlargement so that we alter the burdens imposed on industry in a way that will act to assist rather than to obstruct the revival and full effectiveness of our trade and output. Consequently the Chancellor of the Exchequer referred to these two matters. First of all we must improve by proposals which will encourage the modernization and re-equipment of industrial plant and machinery. Consequently he contemplates a special initial allowance to be given to machinery and plants whereby one-fifth of the actual expenditure on plant and machines in any year will be written off against profits. In connexion with some of the matters mentioned in the debate yesterday we see the importance of that. You want to encourage industry to adopt modern plant to substitute up-to-date machinery for that which may be 706 almost worn out, and by this proposed plan one-fifth of the cost which is incurred in installing new machinery and the like is to be regarded as written off then and there as an initial deduction. The profits to be accounted for to the Treasury by Income Tax will be reduced for the purposes of assessment by one-fifth of the new expenditure which is thus described. I must say I think that a very valuable encouragement to the revival of industry. It has never been done before and it is done with the express purpose of enabling our industrialists to get to work under the most favourable conditions in the shortest time.
The other provision I would specially mention, which is like it in character but different in its application, has to do with research. There must be something wrong with a financial system which does not by the way it arranges its taxes actually encourage research, which is very expensive and often is slow in producing the hoped-for result. Therefore, a second provision is announced which will have this effect, that from an appointed day industries will be encouraged to improve their competitive capacities by the fullest use of scientific research and the application of research to methods of production, and any research expenditure of a capital nature will be allowed as a deduction of profits from Income Tax over a period of five years or over the life of the assets. There again I hope your Lordships appreciate the extraordinarily beneficial character of that. It is very uncommon in Income Tax law to allow a deduction from tax profits on the whole of capital expenditure. Most people would say it was contrary to the general principle of our Income Tax law, but here is a case in which it is proposed to say: "You will prove that you have expended capital amongst other matters on research in connexion with your business with a view to improving its ultimate productivity, and we will allow you to deduct that capital expenditure from your profits and will only require you to pay Income Tax upon the balance." Any research expenditure of a capital nature will be allowed as a deduction from profits for Income Tax purposes over a period of five years or over the life of the assets, and in addition current research expenditure, such as expenditure on salaries and wages and materials being used for the purpose of research, will be allowed as a deduction.
707 It does seem to me that those two features that I have picked out as mere instances are extremely important and have a very close relation to the main subject of our debate yesterday and today. The truth is that it is possible to use the financial instrument if you act wisely so as directly to encourage employment and productivity in circumstances which we are likely to meet with after the war. I have thought it better to pick out those two points and make them as clear as I can rather than survey the whole area of the finances of the Bill because I am sure both these matters are of great interest to your Lordships, and they have, as I have said, a very close bearing on the subject of our debate today and yesterday.
There is one feature perhaps in the financial statement of the Chancellor of the Exchequer which I should mention which is not so satisfactory. We started the war amongst other things with this idea—and we put it into force at once—that in order to keep down the cost of living, and in order therefore to stabilize rates of wages at a certain level, we would use great sums for the purpose of cheapening by way of subsidy some essential commodities. We had a subsidy for milk, we had a subsidy for bacon, we had a subsidy for bread and for a good many other things. Even at the beginning of the war, in my time at the Treasury, those subsidies amounted to as much as £70,000,000 a year and the cost has since extended until I think it is now £240,000,000 a year. Those subsidies were for the purpose of keeping down the price charged to the public for prime necessities and therefore of indirectly removing one of the main causes for which increased wages are often demanded. There would not be any justification for using such vast sums of public money if we did not to some extent secure that result. That result has not been altogether secured because rates of wages which, before the war, were something like 25 per cent. above a certain standard, are now 40 per cent. above that standard, if not more. Consequently, it will be necessary to look very closely into the matter of subsidies, and the Chancellor of the Exchequer has given notice that he himself considers that this matter ought to be somewhat altered to 708 achieve the purpose for which it was designed. I am not aware of any other matter in which our methods of financing the war can be said to have failed. Indeed, it would not be right to say they have failed here. It is only that the subsidies have not had their full beneficial result.
If you take the thing as a whole, my submission to your Lordships is that the Finance Bill and the policy it contains should be unhesitatingly welcomed by your Lordships' House. In so far as it lies within the Government's power industry shall after the war enjoy as favourable conditions as possible in which to face the challenge which the post-war situation will present. Our policy is aimed at that and thereby at assisting the employment policy as set out in the White Paper which this House is now engaged in discussing. We do it in two ways. First, we do it by continuing the sound financial and economic policies so far pursued and by helping industry to achieve a successful change-over from war to peace production in conditions of assured stability at home. We do it also because these proposals made by the Chancellor of the Exchequer in the realm of taxation assure you that all reasonable steps will be taken to make that policy a deliberate instrument of industrial prosperity. By this marriage of financial policy with industrial and social policy we may look forward with confidence to achieving a stability at the end of a period which has brought so much that is hazardous and dangerous. I beg to move.

§ VISCOUNT BENNETT
My Lords, far be it from me to cast a shadow upon the bright picture which the noble and learned Viscount, the Lord Chancellor, has painted, but I observe that the Bill not only does increase taxation but does so retroactively. Clause 20 provides that there may be rates of Income Tax charged for 1943–44 which exceed the standard rates for the year by excess amounts such as Parliament may hereafter determine.

§ THE LORD CHANCELLOR
Speaking without the book I think that is a provision which has to be made now in case it should be desired to alter Surtax in the following year.

§ VISCOUNT BENNETT
That is Clause 19, but Clause 20 says there may be higher rates of Income Tax for 1943–44. I draw attention to it only because the noble and learned Viscount on the Woolsack does not often overlook anything and perhaps he has not had his attention directed to that.