FINANCE BILL (Hansard, 26 July 1960)

§ THE MINISTER WITHOUT PORTFOLIO (THE EARL OF DUNDEE)

My Lords, the Finance Bill is meant not only to raise revenue for the public service; it has also the secondary purposes of either increasing or diminishing the amount of purchasing power in the country and of influencing in various ways the balance between consumption and capital expenditure. Since all Parties came to accept more or less the financial principles which used to be associated with Lord Keynes, it has been the practice of successive Governments sometimes to raise less revenue than is required for the public service, or, if you like to put it the other way round, to spend so much that it cannot be met by revenue, creating a deliberate deficit when the economy seems to need stimulation, and sometimes, conversely, to raise more than is needed when it is desired to check or anticipate inflationary pressure. I understand your Lordships would like to have a very wide debate on the general economic situation to which this Bill is related. I shall therefore say very little about the particular changes in taxation which the Bill makes, which have been discussed elsewhere for nearly four months, leaving only two days for your Lordships.

As your Lordships know, the Bill contains proposals which the Chancellor thinks will succeed in putting an end to the practices of dividend-stripping and bond-washing. He has, of course, no means of estimating how much money will be saved to the Revenue by doing so, but he thinks that it may be considerable. The Bill also makes a number of concessions to the taxpayer. Some of them are trivial, like the repeal of the duty on playing cards which was imposed in the reign of Queen Anne but which was never meant to be combined with the modern purchase tax. Some of them are commercial, like the reduction in the duty on heavy wines, which was part of the general arrangement under which Portugal and the United Kingdom agreed to join in the European Free Trade Association. Some are designed to relieve special hardship, like the new 713 income tax allowance for widows and others who have the care of young children but who do not qualify for the housekeeper allowance, and the repeal of the entertainments tax, which, as I think we had all come to agree, could no longer be borne by the cinematograph trade.

The total cost of all these remissions is only £18 million. The extra cost of paying back post-war credits more quickly to certain categories of holders who suffer from certain special kinds of hardship, which, of course, does not come under this Bill, will be another £9 million. The Chancellor thinks that in the economic circumstances of the present year he ought to take in taxation more than he gives. He has, therefore, increased the tobacco duty by 3s. 4d. in the £, which will bring in £40 million, and the profits tax from 10 to 12½ per cent., which will bring in very little this year but which is estimated to yield about £40 million next year and £65 million in the year after.

Last year's Budget was calculated to produce a surplus above the line of £102 million. In practice the realised surplus was £386 million, and the Treasury is not particularly proud of this miscalculation, although it is always nice to get a little more than you expect. The estimated below-the-line deficit, which has to be met by borrowing, was intended last year to be £721 million. In fact it was much less, mainly on account of the unexpectedly large surplus above the line. This year the estimated surplus above the line is £304 million, which is three times as much as it was meant to be last year (though less than it actually was), and the estimated deficit to be borrowed this year below the line is £318 million.

The chief difference between last year's Finance Bill and this one is, of course, in taxation. This year on balance there is a modest increase in taxation compared with last year's reduction of £365 million. In the opinion of many people it is an exceedingly irritating circumstance that a General Election should have occurred after the Budget which reduced taxation and before the Budget which increased it. But your Lordships may remember that last year there was a considerable amount of slack to be taken up in the economy. Unemployment was round about 2½ per cent. And 714 there was a good deal of unused industrial capacity. This year it is the other way round. Our economy is becoming overstrained, and if nothing is done about it now, inflationary pressure will soon become serious. But your Lordships will easily see from the figures which I have given that the effect of this Bill, taken by itself, in preventing inflation would be small. If we had to rely only on fiscal measures we should have to increase taxation much more heavily than we are doing, and the net deficit below the line, which has to be borrowed, would have to be much less than it is.

I ought perhaps to mention here that while the Government recognise, as I think everybody does, that fiscal policy is one of the most valuable and important methods of regulating our economy, the high scale of taxation in Great Britain does not leave us a great deal of room for man œuvre. Twenty-six per cent. of the gross national income in time of peace is a large proportion for the central Government to take in taxation, whatever the condition of the economy may happen to be for the moment; and although we cannot reduce taxation every year, it ought still to be our aim, as it always has been, to achieve a general downward trend taking one year with another. I have no doubt that many of your Lordships may he hoping that we shall not have to wait until just before the next General Election before some further reduction becomes possible.

There are, broadly, three different ways in which we can regulate the economy. There is fiscal policy, which is mostly embodied in the Finance Bill; there is monetary policy, which is mostly outside it; and there are direct physical controls. Some of our leading economists tell us that we ought to use more of one method or less of another, or that we should use all three methods in some rather different manner. We are always most grateful for suggestions of every kind which are put forward by our political economists. It is a pity that they cannot all agree with each other. If they could, it would be so much easier to accept their advice. But I am looking forward greatly to hearing your Lordships' views on the subject, and I am going to give only a quick sketch of the immediate economic problem as the Government see it.

715 The country is enjoying greater prosperity than it has ever enjoyed before. Unemployment is down to 1.3 per cent.; the real value of wages is higher than it has ever been; production on the 1954 base has gone up in a year from 110 to 122. Exports last year reached the record figure of £3,600 million; capital investment, which has increased by 70 per cent. in the last eight or nine years, is, according to our information, in the private sector going to increase this year by another 16 per cent.; and private savings, which are so important if we are going to carry out a large investment programme without inflation, reached the record figure last year of £1,450 million, which is an increase of £200 million on the year before. I am glad to see that the noble Viscount, Lord Mackintosh of Halifax, who has so much to do with the National Savings Movement, is going to speak in your Lordships' debate this afternoon.

To maintain and to increase this prosperity, whether you think that we ought to have a little more freedom and less controls, or more controls and less freedom, the Government must always be ready to regulate by some kind of action the balance between spending power and production, between imports and exports, between consumption and capital expenditure; and we must always remember that, of the various different kinds of action which are open to us, some may not produce their effect for two or three months, some not for six or seven months, and some perhaps not for a year or more. So you have always to keep looking a long way ahead.

I am not going to make too much of the trade figures for June which have caused a certain amount of uneasiness. Trade figures for one month may not mean a great deal. But long before June the Government thought it probable that if nothing was done to rectify what was happening, our trade surplus for 1960— that is, the surplus of visible and invisible exports together over imports— would be small, and that it would not be enough to cover the overseas investments which we expect to make and the aid for undeveloped countries which we hope to give, unless we were to draw on our reserves, which are not so high as we should like them to be. Of course, 716 if, as some of your Lordships have occasionally predicted in our economic debates, there should be some movement in the terms of trade against us, although that would not necessarily be a disadvantage in the long run, because it would mean that a great many of our customers would have more money to buy British exports which they cannot afford to buy now, undoubtedly it would add to our difficulties for a short time. That is another reason for not depleting our reserves if we can possibly avoid it.

It is no use making an arbitrary resolution that you are going to spend some notional percentage of your national income on helping backward members of the Commonwealth. If we really want to help Nigeria, which is going to become independent next October, and which will be certainly the most populous, and very likely the most important, country in Africa, or if we want to give any of the help which India needs so badly in her present five-year economic plan, then we must earn a bigger trading surplus than we are earning now. In order to earn this bigger trading surplus on a sufficient scale it would be necessary to increase our present export figures only by a small percentage. But that small percentage will not be possible unless inflationary pressure at home is checked. Inflationary pressure means lengthening delivery dates, and it means rising prices. Our customers abroad will not buy British exports on an 18 months' delivery basis if they can get similar goods in 12 months from somewhere else; and they will not buy British exports at all if our production costs are too high. These facts are important to every trading country; but they are more important to Britain than to any of the others, because our economy depends so much more on our overseas trade.

I do not expect that your Lordships, any more than the economists (although, of course, some of your Lordships are economists) will be unanimous about the best methods of doing what we want to do; that is, to keep stable prices without losing full employment, and to increase production but with greater emphasis on goods for export. An increase of 2 per cent. in our production of goods to be sold abroad would probably do more good to our economy than an increase in production of 4 or 5 per 717 cent. in certain classes of consumption goods which are neither exported nor essential to the growth of our economy.

I have already outlined that part of the Government's fiscal policy which is contained in this Bill. As for monetary policy, Government control over the terms on which hire purchase contracts are permitted, although many people might think that a form of physical control, is usually classified as a monetary measure; and if that is so, then it would be correct to say that the Government's chief instruments at the present time in trying to prevent inflation and to strengthen our balance of payments are monetary instruments— that is to say, hire purchase restriction, the bank rate and the new special bank deposits to reduce liquidity with the purpose of restraining excessive bank lending.

We do not reject physical controls in principle and we certainly intend to continue our controls over industrial development certificates, although their purpose, of course, is geographical— to create more employment in the development areas and less in the congested areas. Any Government who have to deal with our balance of payments problem must, of course, consider the advantages and disadvantages of selectively controlling imports, admitting without restriction any goods which are likely to be used for capital investment or for the manufacture of British exports, and limiting the importation of such consumption goods as are unlikely to be used for either of those purposes. We are not adopting this course because it seems to us that countries whose exports to great Britain were thus restricted would retaliate by restricting British exports to them, and that this mutual process would do more harm than good to our balance of payments. As for control of home production, that generally requires a great many people for its administration. They cannot always be expected to make quick decisions. They are bound to make some errors, and again it seems to us that the delays and possible mistakes consequent upon those controls would do more harm than good to our economy.

We recognise, of course, that the monetary measures which we have taken can be criticised on the ground that they do not always discriminate between one 718 kind of expenditure and another. Although the lending policy of the banks is usually a sensible one, there is no kind of legal compulsion, and a general credit restraint may, of course, discourage expenditure on the imperatives of export and investment as well as on less essential consumption. Our present information is that the monetary restraints which have been laid upon our economy this year are not likely to have more than a marginal effect on our investment programme in the private sector. As your Lordships will know, the Board of Trade are frequently in touch with a wide selection of representative firms to find out all about their investment plans, Last year, although credit was very greatly relaxed, there was not much sign of any movement in private investment. It was not until 1960— this present year— that this impressive advance in investment in the private sector began to occur. In the view of Her Majesty's Government, on the information we have, the indications are that these investment projects will not be seriously retarded by the measures which have been taken.

No method of controlling our economy can infallibly guide every part of it in the most advantageous direction, but we believe that the combined fiscal and monetary measures which we have taken will cause less disturbance to industry than any alternative methods which might have been preferred. They can be quickly varied in accordance with any change in the economic outlook. If they should be found to have been too severe they can be quickly relaxed, or, if too mild, can be quickly strengthened.

When your Lordships discussed the economic situation in April last I ventured then to suggest to you that in the British economy of the 1960s, Government action sometimes to restrain bank credit, and sometimes to release it from restraint, ought not to be regarded as a sign of financial crisis in the one case, or of industrial depression in the other, but simply as part of the normal machinery by which any Government which is responsible for a managed currency must seek to regulate credit with the purpose of maintaining the highest level of production that is consistent with stable prices. Some newspapers assumed that I was making a premature disclosure to your Lordships of the intentions of my right honourable friend the Chancellor of the 719 Exchequer to impose the first instalment of special bank deposits, although, in fact, I knew nothing at all about it until two days later, when I had the duty of announcing it to your Lordships at extremely short notice. If I venture to repeat the same general observation now, I hope that no one will infer that the Treasury are going to do anything particularly interesting in the near future. But it does seem to me that a modern industrial country which has achieved a high standard of living with full employment, big wages and expanding production, can never be very far away from the possibility of inflation, unless we have State control of wages, which would be abhorrent in a free society.

To steer a course of progress in which we must always be trying to avoid a little bit of inflation on the one hand or a little bit of unused capacity or unemployment on the other must surely require the most continual and unremitting attention of the steersman; and I think we shall entirely fail to understand the economic problems of what is sometimes called the "affluent society" if we regard these necessary movements in a direction of credit restraint or relaxation as a series of improvised jerks, or as changes of policy which contradict each other. They are nothing of the kind. You might as well say that a good driver is continually changing his policy because he uses his brakes when going downhill and his accelerator when going uphill, or because sometimes he turns the steering wheel to the right and sometimes to the left.

Disturbance to industry which results from changes in bank rate or from changes in the amount of money which the joint stock banks can advance to their clients is certainly not greater now than it used to be in the old days of the gold standard. Politicians were not blamed for it then, because all they were expected to do was to make the law that the paper promises of the bank must always be legally convertible into gold at 720 the rate of £3 17s. 10d. an ounce, and everything else was supposed to work automatically, although every now and then the Bank got into such a muddle that it had to come and ask the Government to suspend gold payments. But the unemployment and unused capacity in those days were far greater than they are now.

To-day the Government are responsible for a managed currency; they are responsible for monetary and credit policy, and it is very right that every detail of that policy should be criticised in Parliament, as it usually is with strong partisan fervour, and sometimes with wisdom. I do not really think that any of us have done quite so badly as one might think from reading all the Parliamentary debates. The greatest failure of post-war monetary policy was the inflation which went on for twelve years from 1945 to 1957. But the harm which it did to the British economy, although very great indeed, is not so great as the harm which it would do now if inflation came back in the 1960's when the sellers' market has gone.

On the other hand, we have succeeded in maintaining the whole time such a high level of employment that we now regard as very bad an unemployment percentage of 3 per cent.; which would have been regarded as almost incredibly good at any previous period of our history. I hope, my Lords, that we shall all be willing, in all Parties, to learn both from our failures and from our successes, and also from the advice of our opponents as well as of our friends. Meanwhile, whoever happens to form the Government has got to take the necessary decisions, which we have tried to do, not after, but before the development of the economic difficulties which those decisions are designed to meet, and in plenty of time before them. That is what we have tried to do and we must always be willing to be judged by the results. I beg to move.