HL Deb 01 December 1970 vol 313 cc389-414

2.54 p.m.

THE LORD PRIVY SEAL (EARL JELLICOE)

My Lords, we usually take Bills dealing with taxation formally and arrange at the same time for a wide-ranging general economic debate; but on this occasion things have fallen out rather differently, for we debated economic affairs at considerable length some two weeks ago on the Motion moved by the noble Lord the Leader of the Opposition. Your Lordships may therefore think it appropriate for me to outline as simply and as briefly as I can this afternoon the provisions of this Bill.

This is a simple and a short Bill, which gives effect to the proposals for reducing both personal and company taxation which were announced by my right honourable friend the Chancellor of the Exchequer in another place on October 27. May I deal first with personal taxation? My colleagues and I believe that income tax in this country is too high. My noble and learned friend who sits on the Woolsack pointed out in his speech in the economic policy debate how badly we compare in this respect with other leading industrialised countries; and this part of the Bill stems from our conviction that it is now necessary to begin to lighten the burden of personal taxation that presses on the shoulders of our people.

Clause 1 of the Bill reduces the standard rate of income tax for the coming year 1971–72 from 41.25 per cent. to 38.75 per cent.—in more homely terms by sixpence, from 8s. 3d. to 7s. 9d in the pound. Some 19¾ million individuals in this country who are at present paying tax will of course benefit from this provision, and I should perhaps add that for this purpose husband and wife are counted as one in the 19¾ million calculation. We are bringing forward the legislation now so that the reduction in the rate can be reflected in the lower P.A.Y.E. deductions right from the start of the income tax year which begins on April 6 next.

Clause 2 is a comparatively minor provision, the object of which is to ensure that every taxpayer in the country will benefit from a reduction in income tax in the coming year 1971–72. There are some cases where a reduction in the stan- dard rate would not lead to any reduction in the tax bill. This is true for some taxpayers over 65 years of age with incomes somewhat above the age exemption limits, who are entitled to what is called "marginal age exemption relief". It may be true also for some younger people living on small investment incomes who are entitled to what is called "marginal small income relief". The remedy is to reduce the percentages governing these marginal reliefs by 2.5 per centage points in each case. I should like to apologise for my lapse into jargon in this respect, and I trust that your Lordships will not expect me to explain these provisions in much greater detail. They are extremely complicated and affect only a small number of taxpayers.

Before turning to company taxation, I should just like to add this. This Government do not believe in high taxation as an end in itself, and the present Bill is firm evidence that we shall not tolerate high direct taxation any longer than is necessary. Our purpose is to encourage that initiative and that effort on the part of producers in this country—be they on the shop floor or in management or on the board—on which this country's future prosperity depends. We are convinced that this is the right way to go about it. Likewise I must make it clear, as I made it clear in our debate two weeks ago, that this is but a start.

As regards companies, Clause 3 reduces the rate of corporation tax charged for the financial year 1969—that is the year beginning April, 1969—from 45 per cent. to 42.5 per cent. The main effect of this change will be to reduce the tax which companies are due to pay on January 1 next. However, some companies have already paid corporation tax on 1969 profits at the rate of 45 per cent. and a repayment will be made to them as soon as possible after the Income and Corporation Tax Bill becomes law. There is no doubt that the present levels of company profits and liquidity make it desirable that a large part of the savings resulting from the ending of the investment grant scheme should be channelled back to the corporate sector. This will be achieved through the tax system by means of the new arrangements for depreciation described in the White Paper on Investment Incentives. These arrangements are designed to assist company liquidity as far as possible.

However, my Lords, we recognise that they cannot produce any relief in the immediate short term. Having regard to the concern which had been expressed by both the C.B.I. and the T.U.C. about the prospective level of investment and to the indications that companies' cash flow was inadequate, we decided to boost the prospects for industrial investment and to improve business confidence by making an immediate cut in corporation tax. The effect of the reduction was again explained in our long debate two weeks ago the effect will be to add some £60 million to companies' cash flow in the current year, £90 million in 1971 and £100 million in 1972.

I should perhaps draw your Lordships' particular attention to Clause 3, which makes special provision for two cases. For close companies it provides that the rate of 45 per cent. is retained for shortfall purposes only. Without such a provision a reduction in the rate of corporation tax would have the effect of increasing the distributable profits and therefore the required level of distributions, in default of which there is a shortfall assessment. In order to prevent this, subsection (2) of Clause 3 provides that the 45 per cent. rate of corporation tax is retained for shortfall. This rate of course is for shortfall only: a close company's profits will be charged at 42.5 per cent. in the same way as those of any other company. Special provision is also made in Clause 3(3) so that where it is of benefit, the reduction in the rate of corporation tax applies even in those cases where the company has been completely wound up and tax at the 45 per cent. rate has already been paid on the profits. I beg to move that the Bill be now read a second time.

Moved, That the Bill be now read 2a.—(Earl Jellicoe.)

3.0 p.m.

LORD DIAMOND

My Lords, the noble Earl, who explained the proposals in this short and straightforward Bill in the simplest and clearest terms, started off by saying that the proceedings were, so far as he was concerned, a little unusual. Your Lordships will, therefore, have considerable sympathy with me: if such an experienced Member of this House as the noble Earl finds these proceedings a little unusual, how much more do I find them so myself? I trust I shall serve the purposes of the House by considering the background to the proposals in the Bill as fully as, in my opinion, the importance of them justifies.

I want to make it quite clear that, so far as we on this side are concerned, we are wholly opposed to the Government's proposals of which this Bill forms an integral part. We are opposed to the Bill because it does nothing to help in the real problems which are facing the country, the problems of high unemployment, low economic growth, cost pressures. In all those problems it does nothing at all to help, but, in my view, a considerable amount to hinder, especially in the ever-increasing problem of disturbed industrial relations. I regard the proposals before us as completely irrational in their selectivity—I shall come back to what the noble Earl said about the factory floor—and as wholly inequitable in their application.

Let me start first, as the noble Earl did, with the standard rate and the proposals affecting it. He said that the present Government—I hope I have his words accurately—do not believe in high taxes as an end in themselves. I am delighted to hear that. That was the case with the previous Government and that certainly continues to be the philosophy of my Party. We do not believe in high taxation as an end in itself. But it would be just as ridiculous to allege, as is sometimes alleged, that the Labour Party is in favour of ever-increasing taxes as it would be to allege that the Tory Party is in favour of ever-reducing taxes. The noble Earl and his colleagues would be the first to agree, for example, that if a proposal were to be put forward by anybody on the other side that there should be a substantial reduction in taxation matched by a cessation of expenditure on defence, on the police, on fire fighting and on similar essential national activities, it should be turned down immediately. They would make it clear that it is not a question of absolute amounts but of judgment of all the circumstances in relation to a particular proposal or set of proposals. That is exactly the situation with regard to the present proposals, which one has to examine in relation to the total situation.

I did trouble those of your Lordships who were in the Chamber at the time, and even more those of you who were courteous enough to be listening to what I was saying about a fortnight ago, with a short but in my view, very important, summary of the tax structure. May I repeat it, even more shortly, because it is directly relevant to the single major proposal we are now discussing? It is that although direct taxation as it stands is highly progressive, indirect taxation is highly regressive. That is to say, direct taxation bears more than proportionately on those who are better off, indirect taxation more than proportionately on those who are worse off. One only has to think of the indirect taxes on drinks and tobacco, for example, where one is dealing not with the frequently quoted rate of 80 per cent. on surtax and income tax but with rates which exceed 400 per cent., to realise the truth of what I am saying.

We are at present—or, rather, we were before the introduction of this Bill—in a situation in which the combined impact of our direct and indirect taxation on average family budgets was broadly neutral. It therefore follows that if we make a move on direct taxation alone, and that is a move downwards, that must be a regressive move, and if we make a move on indirect taxation alone, that could be either regressive or progressive, depending on which way we move. I therefore want to look at both sets of proposals.

The first is the standard rate. We know that of all the methods by which one can adjust income tax, an adjustment of the standard rate downwards is the most regressive of all. That is to say, a reduction in the standard rate is the one method under which those at the top of the income scale can be helped most and those at the bottom of the income scale helped least. That is what is proposed here. There are several alternative ways of achieving a reduction in taxation, if the Government thought such a reduction was an essential fillip or boost to our economic attitudes—many ways of dealing with it which would not have had these regressive, or, to use a more simple word, unjust, results. One could have dealt with the personal allowance. One could have had regard to families with many children and dealt with family allowances, and had the familiar clawback—I hope that is not too jargonistic a word to use in your Lordships' House—to prevent the benefits of increased family allowances from going all the way up the scale.

No doubt the present Government, just as we did when we were in power, took great care to measure the effect of any proposals towards or away from equity. It is not a matter of personal individual judgment; it is a matter of fairly accurate measurement. It is on a basis which is accepted by most statisticians as an accurate measure of the movement in a total series of budget proposals, towards or away from equality. The present proposal runs flat in the face of a move towards equality. It is a move towards inequality, a major move; and, as I say, it is unjust and seen to be unjust by all those factory workers, for example, to whom the noble Earl referred and whom I have very much in mind and shall refer to again.

If one even wanted to have an alteration in the standard rate, the way to temper the inequity of it would have been to make compensating adjustments in the benefits. What the Government are proposing, in addition to the standard rate increase, is that this should be matched by reductions in benefits. When I explained that the present structure of taxation is such that broadly the combination of direct and indirect taxes is to leave the average household neutral in its effect, I should have gone on to say that when one comes to consider the benefits and subsidies paid out of the taxes so collected in direct and indirect taxation, one realises that that is where the progressive effect is felt. If, therefore, you increase the subsidies you increase the progression; if you reduce the subsidies you increase the regressive effect, and you increase the injustice of a package which we now see is doubly unjust. It is unjust in the first proposal, the standard rate proposal, which helps those most at the top of the income scale, and it is unjust in its compensating benefit proposals which hurt those most at the lower end of the income scale.

So far from balancing what, in my opinion, was not appropriate at the present time but which, in the view of Her Majesty's Government, was considered to be appropriate, namely, a reduction in the standard rate, with some progressive measure, they have added to the injustice of the situation by an additionally regressive, unjust measure with regard to the benefits. I do not need to go into them all in detail; they have been discussed on a previous occasion. First of all, dealing with the standard rate proposal, I say that when taken into account with all the other background, of which we are fully aware, it fails in terms of inequity.

I want now to turn, very shortly, to the incentive argument. As was made clear on a previous occasion some two weeks ago, there is no evidence—apart from the Government's bold assertion—to justify the view that a reduction in personal taxation leads to increased individual effort. There is some evidence to the contrary, but I do not think one could put it more cautiously than I did on that occasion by saying that all the evidence is best summarised by saying that there is nothing to support the view that an increase in taxation is a deterrent, or a reduction in personal taxation an incentive to additional effort. Nevertheless, the Government, anxious to find some clothing for this naked attempt to assist those whose need for assistance is by no means the greatest in the community, have attempted to clothe their proposal with the argument about the incentive effect, and the incentive, in particular, to the producers.

I want to make it clear that I do not believe in this argument at all; but what I am now going on to say is that even if noble Lords opposite believe, as I am sure they do, in the argument they are putting forward, there is nothing whatever to substantiate it, even on their basis. First of all, the argument about helping producers falls flat to the ground when one realises that the greatest help that is proposed is help to the non-producer. Those who produce, get income for their work which is called "earned income"; those who do not produce may receive their income from either their past efforts or their parents' past efforts. The facts indicate that in terms of large incomes it is mostly the latter category, and, so far as I know, those facts have never been contraverted. But whatever the source of it, that is called "unearned income".

The proposals before us are designed to give the greatest help to unearned income as opposed to earned income. It really is nonsense for the noble Earl to assert, as he has just done, and it was asserted previously—I hope that is not too strong a term, but I will repeat it—it is really nonsense to assert that this proposal is directed towards producers, when the greatest benefit is towards the non-producers. That is the first argument; and not one word has been said, either in this House or in another place, about that very obvious and elementary fact. I am grateful to the noble Earl for having referred to his desire to help those at the top of the scale who have the greatest responsibilities, and those on the factory floor. If he is alleging that there is an incentive effect so far as those at the top of the scale, those who have major responsibilities, are concerned; if he believes (and I absolutely do not believe and I deny) that people who have the most responsibie jobs in our community and which, as a result, attract very high levels of remuneration, are solely guided by the amount of remuneration which they earn as opposed to the sense of responsibility, the sense of achievement, the respect of the community, the challenge of the job and the satisfaction of the job, then the question I must put to him is, why does he think that those human beings who have these responsibilities are affected by the notion of incentive but that those who work on the factory floor are not so affected? Because the proposals which the Government are making are the most largely deterrent proposals that could be put together so far as those with small incomes are concerned.

Let me give some examples. In principle, the noble Earl would agree straight away that the more you extend means-tested benefits, as the Government are proposing to do on a very large scale, the more you are saying that those at the appropriate levels of income, once they attempt to earn more, will retain less of that additional pound earned because they will lose some of the means-tested benefits. That is what is meant by means-tested benefits. Accordingly, there will be a situation—and it comes out most starkly if we consider the Family Income Supplements Scheme—where many people will be at a level at which every additional pound earned will mean ten shillings lost in family income supplement. That is a rate of 50 per cent. Some of those people will be taxpayers, and, the standard rate being 30 per cent., their situation will be that for every additional pound earned at those relevant levels 80 per cent. will be deducted: 50 per cent. will be lost in "F.I.S." and 30 per cent. in standard rate. So of every additional pound earned—this is the incentive argument of noble Lords opposite—4s. will be retained. That is a great incentive to earn the additional pound, by sweat and tears, at the end of a hard day on the factory floor! That is the picture which the noble Earl has in mind, and which I share with him.

LORD ABERDARE

My Lords, if the noble Lord will allow me to interrupt, may I ask whether it is not true that it was his Government who reduced the threshold of tax to the level which brought these people who are eligible for family incomes supplement—those who are earning less than £15 a week—within the tax threshold?

LORD DIAMOND

My Lords, of course it was. I am delighted that the noble Lord reminded me of that, and I wish he would follow our good example. Instead of taking the view that those at the top of the scale were first in the queue for help in this country, I wish he would have regard to those at the bottom of the scale and raise the threshold again. This is an obvious way of dealing with the difficulty. If he had wanted to give a boost to the economy and to people earning at all levels by reducing taxes, what could have been better than to give help, as we did, at the bottom end of the scale? That is the essential difference between the noble Lord and myself and between our two sides. I believe, as profoundly, no doubt, as he does the other way, that those at the bottom of the scale come first. It is just as simple as that.

LORD FORBES

My Lords, the noble Lord is trying to tell us that there is no incentive by reducing taxation. Does the noble Lord believe that if taxation was 20s. in the pound there would be any incentive to work?

LORD DIAMOND

My Lords, I do not know whether I had the undeserved privilege of being listened to by the noble Lord when I detailed all the papers that had been produced as a result of lengthy research in this country, in America and in Canada, on the incentive effect, or deterrent effect, of taxation. If I was not so privileged on that occasion, perhaps the best reply to the noble Lord would be to ask whether he would pay me the courtesy of reading what I then said, when I think he will find a full answer to what he has said. I do not think I should go on to say that you can carry on any argument ad absurdum, because I do not consider that that would be in the spirit of what I am trying to put over.

What I am saying is that in terms of incentive effect I deny completely what the noble Earl said, that the proposals would have equal effect on those at the top of the scale of responsibility and those who work on the factory floor. So far as those who work on the factory floor are concerned, you will have a situation where the husband will go home one night and say to his wife, "We cannot make ends meet. Would you, dear, consider taking a job?" She will say, "Yes", and she will take a job. But if he is in the situation which I have described, with family income supplement and bordering on standard rate taxation, and if, in addition, the family are getting help with school uniforms or any other of the many benefits which are being affected by the proposals put forward in order to make these tax reductions possible, then the situation may well be that the wife's going out to work will make the family income less in total.

That is what the noble Earl put forward as the incentive effect for those on the factory floor and, with respect, I throw the argument back at him. It does not carry at all. So I am saying—and if my words indicate that I feel this very seriously and sincerely, I make no apology for the words I have used—that both in terms of equity and in terms of selectivity these proposals are wholly wrong.

I now turn shortly to corporation tax. We should all be delighted if the rate of economic growth could be increased. It would help all round.

LORD BOOTHBY

Hear, hear!

LORD DIAMOND

There is only one intervention in this House which does not need to be named, because we all recognise, and have always recognised, the tonality of it.

If, for example, the rate of growth could be increased, then wage demands would immediately be seen to be less inflationary, because it is only the excess of the nominal wage over and above the rate of growth which produces the inflationary effect. If resources could be increased in this way we should have more for social services, and there would not be these difficult arguments in which we are now engaged about the need for reducing benefits. So we should all be delighted if higher economic growth could be achieved, especially now, when the main economic barrier which faced the Labour Government for virtually the whole of their period of office—namely, that of a critical balance-of-payments difficulty—no longer exists. There were any number of steps which one then wanted to take to stimulate and encourage growth, but which one could not take because one immediately ran flat into the balance-of-payments problem.

That problem is no longer with us. It is an extraordinary situation—extraordinary to me, after listening for six years to every economic debate in another place—to have an economic debate now when the words "balance-of-payments crisis" do not arise. I am sure we all realise what a vast difference it is to work in the new climate rather than in the old one. Therefore I repeat that it would be welcome to all of us if an increase in the economic growth rate could be achieved.

What noble Lords opposite are saying is that this growth can be encouraged by a reduction in corporation tax—a totally unsupported assertion. There is no evidence anywhere that there is a correlation between rates of taxation—and overall, as everybody knows, we are merely in the middle of the league table so far as the total impact of taxation is concerned, as measured by a proportion of the gross national product—and rates of growth. What there is, however, is a most careful and recent and lengthy study by the Brookings Institute. They went into every possible cause, in their view, of low growth, and they identified a number.

The most familiar one which they identified was the increase in working population which took place up to 1964, but which then ceased for reasons which we all understand. But the two items which they did not, and could not, specify as elements in the causes of low growth in this country were effective taxation rates and marginal taxation rates. Neither of those was identified as a possible cause of low growth. So I repeat that not only is there no evidence in support of what the noble Earl has alleged, but there is considerable evidence to the contrary.

What we do know is that the one factor which is essential for accelerated growth is an accelerated rate of investment. That we all know, and I hope we are on common ground on that. An accelerated rate of investment produces greater industrial growth. But the total investment proposals to which the noble Earl referred, including a reduced corporation tax—here, again, I say that you cannot look at the tax by itself; you must look at all the circumstances which go with it—means that firms who wish to invest will have less benefit over the life of the asset concerned than they would otherwise have. That has been examined by accountant after accountant, time and time again, in recent weeks, and every one has come out with the same conclusion so far as his own firm is concerned; namely, that it will be worse off under the totality of the new proposals than it would have been before. Yet we know that the one factor essential for growth is additional investment, which should be stimulated, and the obvious incentive is to give the manufacturer, the businessman, financial encouragement when he makes his investment.

LORD HAWKE

My Lords, I have listened to the noble Lord's argument, with very great interest. I have read them for many years as recorded in another place, and I never thought that we should hear in this House a similar speech, such as he has been making to-day. But surely he is grossly minimising the effect of purchasing power on growth, and also the effect of the cash situation on investment policy. I expect that he is on the boards of many companies at the moment, and there must be many of them who are extremely short of cash. What dictates investment is not so much the long-term element of investment grants and so on, but the short-term cash.

LORD DIAMOND

My Lords, I am doubly indebted to the noble Lord: first, because, in spite of what is no doubt a very busy business life, he has found time to read speeches that some of us made in another place; and, secondly, because he has touched on two additional points which I think are extremely relevant and which I had not touched on merely because one does not wish one's speeches to go on over-long. Of course he is absolutely right in saying that purchasing power—namely, the prospect of selling what you are going to make with a new machine—is a most relevant consideration in the decision to invest in a new machine. But my case is that there is nothing in the proposals to increase growth. There is nothing at all in the proposals to stimulate the economy.

The Chancellor of the Exchequer made it absolutely clear that he regarded the demand pressures as being such that they ought not to be increased, and he produced a piece of paper which I have challenged—and which I am going to challenge again shortly—to demonstrate that the demand was neutral under his total mini-Budget proposals. Therefore, there is no additional proposal made by the Chancellor of the Exchequer to meet the noble Lord's point.

The noble Lord's second point concerned cash. Here again, I am grateful to the noble Lord because he will have heard, as the rest of us did, the noble Lord, Lord George-Brown, speaking from first-hand experience of one of the largest firms in the country, explain the cash shortage which was going to result from these proposals at the important time when the board was going to invest. I listened very carefully to the point which the noble Lord was making. I suggest to him, with respect, that the important time in terms of cash shortage is not now: the important time for cash is when you need to sign the cheque for the investment you are making. And because the cash would not be available in this very large firm, they were foreseeing difficulties in carrying out their investment plans. We have all heard of Rolls Royce, who have said exactly the same thing: that their cash-flow difficulties are being contributed to in a large measure by the Government's proposals for the withdrawal of investment grants. There are many other identical cases, all making the same point: and it is at the point of time of signing the cheque for the investment in question that a wise board would see that the money is in the bank account first.

LORD HAWKE

It will be in the bank account, my Lords, if it has not been paid out in taxation.

LORD DIAMOND

Of course it will. It will be in the bank account if it has not been paid out in taxation or in increased dividends in the meantime. I am delighted to see so many noble Lords shake their heads in a negative direction. No doubt they are going to see to it, when their boards meet, that the additional £70 million, which is a retrospective present for this year for which they have no need, or for which they have no budgetary need, will be earmarked for future investment and not used to meet pressures for increased dividends.

LORD HAWKE

I think the noble Lord is grossly distorting the situation. In most cases it will be used to reduce the heavy bank overdraft, to start with, thus enabling them to plan ahead for further investment.

LORD DIAMOND

I am sure the noble Lord is speaking from his own experience, and I hope there will be many such cases in which the money is so used. Neither he nor I can assert with any individual authority what will happen in all the cases involved in this £70 million, given as a retrospective present in the way I have described. I have no doubt there will be some who will do as the noble Lord suggests and some who will find it appropriate to increase their dividends.

So what I am saying—and I hope to draw to a conclusion very quickly now—is that the proposals so far as corporation tax is concerned are either irrelevant or inimical to growth, inasmuch as they are part of a total set of proposals which make the would-be investor worse off. May I say, just very quickly, that I do not yet know what the practice of this House is (I hope to learn in due course, by application of my mind and such intelligence as I have) but two weeks ago there was a debate in which I not only asked but challenged the Government on the very basis of their justification for these proposals all told: namely, that demand was neutral. On the basis of the information so far available, I do not believe it. Nor do most City commentors. I am in good company, because neither did the Chancellor of the Exchequer at the time when he said that the demand effect was neutral if you took into account income tax only—and we have £70 million plus £90 million plus £100 million of corporation tax in addition.

I said at the time that I should be putting down Questions to the Government. The noble Earl knows that I want to co-operate as much as I reasonably can in giving the Government notice of matters I intend to raise. I therefore put down two Questions fully on this point, saying to the Government, "You know the figures; you know what the demand effect is. Please be good enough to tell us, to tell both Houses of Parliament, what your figures are". Those Questions went down two weeks ago. I have not had any reply, and this debate is taking place to-day. It is absolutely fundamental to one's belief in the sincerity of the Government, as to whether they have achieved what they set out to achieve—namely, cuts to compensate for the tax hand-outs, as I believe they are vulgarly called, though we all know what that means—or whether they have not. As I say, I do not know what is the practice of this House, but in another place there would be a most unholy row if this situation were to be repeated. I want to say no more about it than that except that I still assert, the more strongly because it has taken so much longer for the Government to say what they must have known before they made their first statement to divulge it, that I do not myself believe that the Government are in a position to make these tax hand-outs.

So, finally, to summarise what I have been saying, there is nothing in these proposals to help growth. There is nothing to help employment. Wage demands will be stimulated by the additional cost of living which the proposals entail; and there will be an increased sense of unfairness, an increased friction in our society, because of the way in which the standard rate works.

There was only one argument left—the "boost to the economy" argument. As to that, I would ask noble Lords to take a look at the Stock Exchange figures. From my own recollection, I cannot recollect a larger fall in such a short period as has taken place since the mini-Budget. I am not going to be so foolish as to say that that fall has been wholly attributable to the mini-Budget, but what I am saying, and what I sincerely believe, is that this is the comment of the City and of those who invest—and it is a very wide public indeed that is involved—on the Government's failure to deal with the essential problems. These are peripheral proposals, almost irrelevant and in certain cases, as I say, inimical to what we all want to achieve. I think that shows that the Government have lost the confidence of their natural allies. They have certainly incurred the hostility of the workers, and they deserve censure from all of us who believe, as I do, and as all my noble friends behind me do, that to transfer burdens deliberately from the richer to the poorer, for no benefit to the nation as a whole, is an offence to our social conscience.

3.38 p.m.

LORD ARDWICK

My Lords, I am somewhat abashed to find myself to-day in such illustrious and in such sparse company. The sparseness I attribute to the fact that your Lordships expended all your passions in the previous debate. But I am a frustrate from that debate; I had been abroad. When I got back I found that there were about 45 names on the list, and I feared that the Whips would be pursing their lips at me if I made my name the 46th.

I was very glad to hear my noble friend Lord Diamond say that we on this side of the House are not in love with high taxation, because many of my political friends, in their zeal, often like to say exactly that: that Labour is essentially a Party which believes in high taxation, and this is what distinguishes it from the Party opposite. I think that statements of this kind are not merely heroic; they are an invitation to political martydom; and every time somebody makes a statement of this kind the publicity people in Conservative Central Office must hear the birds singing.

I do not think that such statements are really true. The Conservative Party, of course, take a great pride in the tax reductions they were able to make during their 13 years of office, but they were of course, in the long run, chicken-feed. But at other times the Conservative Party take credit for maintaining comprehensive State welfare, which meant that, in spite of the tax reductions that were made, the pattern of taxation at the end of their last period of office was not very different from what it was at the beginning. The truth, my Lords, surely is that all Parties in power in advanced industrial countries of the West are Parties which maintain, and must maintain, high State welfare, and therefore must maintain, in order to support it, pretty high taxation and other charges.

I do not believe that the new Government in this country is going to dismantle the Welfare State, and so I do not believe that when their period of office has expired we shall finish up as a low-tax country. But I think that those who share my political views will stand a much better chance of being returned to power if they express their ideas in a more acceptable and more realistic way. Labour believes in developing a first-class comprehensive Welfare State and in raising the money to do so by taxations and contributions. If you believe in the Church, you cannot begrudge the tithes. Certainly high tax revenue will be necessary, but the rate of taxation will of course depend on the nation's capacity for economic growth. Only if there is sustained and conspicuous growth can a Government, any Government, gratify the competing wishes that everybody has for better welfare and more money for personal consumption.

But, of course, the high rate of taxation prevailing when the Labour Government went out of office was not wholly due to expenditure on welfare. Quite a lot of it was imposed in order to keep down consumption in the interests of exports and of balance of trade. So there was ample room when the Conservative Government took over, in view of the buoyancy of exports and the size of the surplus, to take off 6d., or even more, from the standard rate of income tax. And they could have left it at that, but for one fact: the Government were not able to do so because they felt they could not contribute, even marginally, to current inflation, in the absence of any clearly visible policy to bring it to a halt in the near future. The reason that the promised tax reduction has not been greeted by us or, to judge by the opinion polls, by the rest of the country, with unalloyed bliss is simply the other side of the package: the increased charges for school milk, meals and so on.

The double effect of the mini-Budget was sharply brought home to me an hour or two after the Chancellor had spoken by the lady who was helping me to get down on paper a few words of commentary about it. In the middle of this exercise the new tax tables arrived and it required only a minute or two of mental arithmetic to work out that, whereas I was to be given a bonus which might enable me to have a jolly good holiday, she, with children at school, would be quite a bit worse off. She was given a minus! It was not a transfer from the poor to the rich, it was a transfer from the "sub-affluent" to the rather more affluent. What the Government have done in this mini-Budget has been to transfer wealth from people like her to people like me.

There is a powerful case for the radical revision of the whole of our tax system and a new look needs to be taken at all our methods of financing State welfare. But what was obnoxious, I think, about the mini-Budget was that it tinkered with both problems. What was unacceptable was the trade-off between tax reduction and the increase in welfare charges. It is true that the Government have tempered the wind to the shorn lambs at the botttom end of society. The lowest paid workers have, to some extent, been taken care of. But the lower-paid workers (if I may continue the analogy) have been—and feel they have been—fleeced.

In any talk of tax reform we hear a great deal about the penal taxation of the highest-paid people in the country; and I have some sympathy with the reformers who wish to reduce surtax on earned income. This is a very old view of mine, and I got myself into trouble, when I was editor of the Daily Herald, by saying just that—and Mr. Macmillan lived on it for some weeks. But there is another group of taxpayers—those whom my noble friend Lord Diamond mentioned—at the lower end of the tax tables who are also paying what for them are penal rates; and very little is heard about them. It is these people who ought to have been the first to benefit from the tax windfall. They have been penalised under both Labour and Conservative Governments, and nobody seems to mind. All that happens is that as inflation proceeds the Inland Revenue find it convenient to drop out a few thousands tax-papers at the lowest end of the scale who ought never to have been in the tax brackets at all.

There has been a great deal of talk about a minimum wage of £16 a week. But even after the new tax cut a married couple living on what is now agreed to be the socially acceptable minimum will be paying tax at the rate of something like £70 a year. This, my Lords, on £16 a week! And these are the people who are receiving less than two-thirds of the average industrial wage.

If the tax tables are correct, even a married couple with a total miserable income of £13 10s. a week will be paying £30 a year in income tax. And, of course, for a single person the position is worse. A widow, working perhaps in a supermarket and earning £9 a week, is already a taxpayer to the extent of £15 a year. Direct tax is being imposed on people who have not enough to live on at the minimum standard; and this has been going on for far too long, under other Governments as well as this one. Indeed, it has been said that there is a point at which the limited generosity of the supplementary benefits officer collides with the unlimited rapacity of the tax gatherer. In other words, the sum which the "supplementary man" thinks is essential may bring the recipient into the tax brackets. If that is true, it is not only absurd; it is appalling.

My Lords, at the risk of damaging my case (because it takes a very rash man to-day to speak a good word for people who are known as the "revolting students") may I remind those who are so anxious to turn student grants into loans that the moment a young person graduates and earns a wage of £21 a week—as a school teacher, for example—he will be paying immediately nearly 16 per cent. of his salary, or nearly £4 a week, in income tax. I am not going to pretend that this is unjust; but surely it is enough. Taxation at this rate is heavy enough without imposing a load of debt upon him. From the beginning of his working life this man is contributing substantially to the system from which he has benefited; and he will go on for the whole of his working life contributing in perhaps larger and larger amounts. And even beyond his working life, when he comes to pension. He will be paying tax to his dying day.

My Lords, these are problems which all political Parties, and not just the Government in office, will have to think seriously about. And if, as I hope, we go into Europe, the need for revision will be even more compelling: because if we are going to adjust to the European system on one side, which implies a value added tax, we have to adjust to it also on the other side and visualise pensions and family allowances on the more generous European scale. I have never been able to understand how the Party opposite, with their commendable enthusiasm for Europe, can talk in terms which imply lower State welfare instead of the harmonisation which is going to be essential, even mandatory, towards the higher European scales. It is one of those mysteries of this Government, who work in such a mysterious way their wonders to perform, that even some of their supporters are dubious whether they will in fact be achieved.

3.50 p.m.

LORD BOOTHBY

My Lords, I hope that your Lordships will forgive me if I intervene for two or three minutes, with humble apologies for not having put my name on the list. I was so interested by the speech of the noble Lord, Lord Diamond, that I could not resist rising to my feet. I thought that at some points in his speech the noble Lord agreed with his noble friend Lord Ardwick, that on balance we in this country are too heavily taxed right across the board. I do not think that in his heart of hearts any noble Lord would deny that fact. The Budget surplus is grossly excessive. In my judgment to maintain a surplus of something around £1,000 million is an enormous disincentive to economic growth in this country.

This has nothing to do with the balance of payments but it brings me to the Government proposal for a cut in income tax of 6d. in the pound. I am bound to say that I cannot but agree with the noble Lord, Lord Diamond, that this cut will bring real benefit only to the very rich, who do not want it, who have not asked for it and who do not need it. An increase in family allowance accompanied by a claw-back, which was advocated, as the noble Lord, Lord Diamond, will remember, at the time of the last Budget by the late Jain Macleod—and which the noble Lord has advocated in your Lordships' House this afternoon—would have brought far greater benefit to the lower income groups. It is the lower—not the lowest but the lower—income groups, as the noble Lord, Lord Ardwick said, who will suffer most by these proposals.

Now I come to a point at which I am afraid I must dissent entirely from the noble Lord, Lord Diamond. At a time of industrial stagnation and wholly inadequate investment in industry, the cut in corporation tax, accompanied as it is by the withdrawal of investment grants, is in my opinion wholly inadequate. There seemed to be a moment when the noble Lord, Lord Diamond, was trying to suggest that corporation tax at its present level did not prevent industrial investment. If he really believes that, then I must say that I entirely disbelieve it. I think that corporation tax is a vicious tax in itself. I would remind noble Lords that it was rejected by the last Royal Commission on income tax presided over by Lord Radcliffe which sat for four and a half years. The Royal Commission rejected two taxes which are a gross disincentive to investment: one was the corporation tax and the other the capital gains tax in its present form. I think that the capital gains tax is a disincentive to the investment of risk capital. Needless to say, my Lords, almost immediately afterwards both taxes were put on the Statute Book, which shows how much use are Royal Commissions, even though they may sit for four and a half years.

I believe, my Lords, that over the next few months Her Majesty's Government must give intense and concentrated thought to the vital question of economic growth, which is the only thing that really matters to this country to-day, and is the only method by which the present galloping inflation can ever be checked. We must have greater economic growth and greater productivity. I think that the Government must consider the corporation tax in a far more radical way before the next Budget, and capital gains tax and other disincentives to investment in industry, because the whole objective of any Government in this country to-day, whatever their political complexion, must be designed to achieve greater economic growth, greater investment in industry, without which, as a nation, we shall never achieve anything.

3.55 p.m.

EARL JELLICOE

My Lords, I am grateful to the noble Lord, Lord Diamond, for the studied moderation with which he has spoken. Nevertheless, it failed to conceal some very sharp barbs. If I may say so (this sounds very patronising, but it is not meant to be) I think that the noble Lord has already found his way round your Lordships' House very adequately indeed. Of course he speaks with very considerable authority on these matters, and that I recognise. I think that in his way, as Chief Secretary, he was almost as awesome a spectacle and had almost as sharp a knife as my right honourable friend John Boyd-Carpenter when he was in that particular seat and I was at times the victim of his knife. I know that the noble Lord, Lord Diamond, has made an indelible impression on the Treasury.

My Lords, I shall be brief in winding up this short discussion. I was very glad to hear the noble Lord, Lord Diamond, say that the Labour Party, like the Conservative Party, saw no great merit in high taxaion per se. All I can say is that the proof of the pudding is sometimes to be found in the eating; and the proof of the pudding was a rise in taxation rates equivalent to £3,000 million a year in the course of the six years of the Labour Administration, and an immediate cut in taxation, both in corporation tax and also in income tax, at the start of the new Administration.

I would also agree with what was said by the noble Lord, Lord Ardwick, about the need for a searching look at the whole ramshackle system of taxation in this country. I cordially assent, and I hope that in the lifetime of this Government we shall see such a searching look taken it is certainly overdue. The noble Lord, Lord Boothby, made a powerful plea for lower taxation in this country, and I would cordially assent, too, to what he said. I believe that, on any basis of comparison, so far as personal income tax is concerned the rate in the United Kingdom is higher than in any other major industrialised country. This will remain true even when the proposed reduction comes into effect. For example, in this country a married man with two children is more heavily taxed at almost all levels of income tax than he would be in the United States or in any European country, with the exception of the Netherlands and Sweden. Personal taxation has been too high in this country for too long, and it is high time that this first reduction for eleven years should be made.

In a very powerful speech the noble Lord, Lord Diamond, contested the view of this Government about the effect on incentives of a reduction in the rate of personal taxation. I did not have the good fortune to listen to the noble Lord when he spoke in the long debate two weeks ago, but I read carefully what he said then and I have listened carefully to what he had to say to-day. The noble Lord went on to contrast the fact that with the reduction in the standard rate there will be a bigger gross reduction in tax liability on unearned income than on earned income and this is true. But it is merely a reflection of the fact that earned income bears less tax than investment income of a similar amount; and if you are going to reduce the standard amount the fact that there is a larger decrease in the amount of tax borne by investment income follows as night follows day. But, my Lords, I would hold that this reduction is also desirable in order to encourage savings and indeed investment—just the investment for which noble Lords opposite are pressing.

The noble Lord also stated his belief that it was extremely improbable that reductions in the rate of tax for those who are earning good incomes will do anything to increase incentive or produce extra effort. He said that there are many other things which cause people to work hard and well. Of course I would grant that straight away. We all have a pride in our jobs. We all have a sense of responsibility—at least I hope we do—in our work. We have a sense of duty, and indeed (although it may be considered old-fashioned and "corny" to say so) I think that we have a sense of patriotism. These are all factors at work in our society, and they affect many people in varying degrees. But, although this is not perhaps susceptible of proof in a learned treatise, I should have thought on the basis of most of our experience that, to what ever extent men are driven to work hard and well by the factors to which I have alluded, it is against all human experience to deny that man's desire to improve his own material standard of living and that of his wife and family is a very real factor, working in almost all of us. Therefore I would suggest to the noble Lord that he must wait and see.

I believe that these reductions in the standard rate of tax will call for and produce that greater incentive, and therefore that better effort, which they are designed to produce. I think this applies lower down the scale as well. If the noble Lord has done me the justice, which I have done him, of listening to what I said two weeks ago, or of reading my words, although it is true that the tax benefits lower down the scale are going to be less, the sort of argument which the noble Lord was adducing ignores entirely the dynamic effect of these tax changes. Noble Lords in their criticism also ignore the net impact upon the favoured £25-per-week wage-earner. They are thinking entirely in static terms.

I do not want to repeat what I said in the debate two weeks ago, but when noble Lords opposite speak of a lowering of the platform of State welfare they are surely ignoring what we are doing in the total package by way of improved exemptions and relaxations in the social services for the less well off families. This should not be ignored, any more than the Family Income Supplements Scheme, which we shall be debating in a week or so and into which therefore I will not go this afternoon in any great detail. By the same token, it is a great mistake to ignore what is being won in this package by way of improvements to the hospital service, to old people's housing and in many areas of national life where we all want to see advances.

Turning to corporation tax, I believe, like the noble Lord, Lord Boothby, that the key here, as in so much else, is growth. I think that one of the saddest aspects of our economic history over the last two decades or so—and this does not lie with any particular Government—is that we have been overtaken in growth by our nearer neighbours. I believe that we should searchingly probe the reasons for this. I cannot agree with the noble Lord, Lord Diamond, that the Brookings Institute, in their remarkable and comprehensive study of the British economy, have got to the bottom of this. I do not believe that anybody has yet got to the bottom of it. But I believe that this should be one of the great objectives of economic policy to which we should all be addressing ourselves.

In this matter of corporate incentive, the noble Lord, Lord Diamond, conceded that investment must be related to the cash available to a company for investment—as the noble Lord said, to what was in the bank. But the corporation tax reduction is designed to operate precisely in this area. It is designed to add to the cash resources available to the corporate sector for investment. The noble Lord, Lord Diamond, put his case fairly, I admit, and also squarely, but I do not think he took fully into account that the new arrangements for investment will cover a wider field—for example, they will include investment in service industries in the development areas. Also, he did not refer to something which I believe to be very important; that is, the essential efficiency of a system which operates by way of relief against the profits of the company. This I hold to be a guarantee against the subsidising of inefficiency, and we have seen too much such subsidising in the last decade or so.

The noble Lord asked me a number of extremely difficult questions on the problem of demand. He referred to two Questions which he tabled after our debate on November 18. I should like to apologise to the noble Lord if he has not yet received Answers to those Questions.

LORD DIAMOND

My Lords, I am sorry to interrupt the noble Earl, but since I spoke I have been handed an Answer to one of the Questions. I am young and innocent, and I believe that this was just coincidental.

EARL JELLICOE

My Lords, of course I will grant that the noble Lord is young, at least in spirit, but he has yet to convince me of his total innocence. All I would say is that, normally speaking, it is our custom—though perhaps we should look at our custom—to take about two weeks to answer a Question for Written Answer, So far as I know, there has been no deliberate hold-up of the works in this case, but I apologise to the noble Lord and congratulate him on the effect his remarks have had. At this stage, not having before me the Answer which the noble Lord has received, I think it would be wise for me to refrain from commenting on an extremely difficult area, an area to which I shall be glad to address myself in reply on some subsequent occasion.

I do not wish, and I do not think that the House would wish me, to renew our debate of two weeks ago. I am aware that I have not answered all the specific points which the noble Lord put to me, but I have covered certain of them. I do not suppose that I shall be able to convince the noble Lord, Lord Ardwick, in the course of my brief reply, of the essential virtues of the Government's package. I believe that it is now time that we should perhaps pass on to other matters on our programme this afternoon.

On Question, Bill read 2a: Committee negatived.