TAXATION: DISINCENTIVE EFFECTS

HL Deb 10 March 1976 vol 368 cc1280-393

2.59 p.m.

Lord ORR-EWING rose to call attention to the disincentive effects of the present high level of taxation on—

1. >(i) those with middle and lower levels of income, and
2. (ii) middle and small sized businesses; and to move for Papers.

The noble Lord said: My Lords, I tabled this Motion because every day and every week it becomes clearer and clearer that one of the main factors holding Britain back is our taxation—the highest taxation in Western Europe. I believe personally that it is the chief reason why Britain is being held back, and one which the Chancellor of the Exchequer should start putting right on 6th April. I have phrased the Motion to concentrate on the disincentive effect and the handicap to all those trying to create the wealth of the nation. We all recognise the contribution made by those who serve in our distribution chain, those who administer our central and local government services, those who provide the infrastructure for our nation—the electricity and the railways—and those who serve in education, the arts and the media. But it cannot be said too often that none of these would have a task or a job, except perhaps in running a soup kitchen, if industry could not make and sell the goods on which the support of half our nation depends. We can feed 27 million people, but the other 27 million depend for their food—and many more for their employment—onthe success of our exports.

I am grateful that so many distinguished people will be speaking in the debate. I am sure that all of us, on all sides of the House, welcome the noble Lord, Lord Barber, an ex-Chancellor, who will make his maiden speech on this occasion. I remember that he came to the Chancellorship after the tragic death of Iain Macleod in 1970. We had had six years of Labour Government from 1964 to 1970, during which, in eight Budgets, taxes had been raised by no less that £3,000 million. Six months before they left office Mr. Healey wrote: When I go to these Labour clubs "— in his constituency— on a Saturday night four out of five complaints are that income tax is too high. I think that most of us would endorse that view today. Under Tony Barber (as he then was) taxes were cut, cut, and cut again. They were cut not just to the extent of the £3,000 million which had been added, but by another £1,000 million, making £4,000 million in all.

Now we have the same old pattern emerging. It happens every time. In the two years of the present Labour Government taxes have risen by £2,000 million, and they would have been higher still if much of the shortfall on the revenue had not been borrowed but had been dependent upon taxes.

So, my Lords, we have the position where this year the average household will be paying £335 more in tax alone, let alone what they will be paying in National Insurance rates, and other contributions. What is perhaps more ridiculous is that the tax threshold is now so low that a family whose head is in full-time work starts to pay tax when his earnings are below the official poverty line. This is known as the poverty trap. I hope that the noble Baroness, Lady Faithful],who has great personal experience in this area, will deal with this aspect in her maiden speech. The position is such that the Labour Research Department paper recently published stated: Twenty years ago a married man with three children did not become liable for tax at the standard rate until he was earning up to 19 times national average earnings. The paper continued: Today the basic rate liability of a man in the same circumstances started as low as 0.4 times average earnings. My Lords, that is a tremendous change of circumstances. I was interested to hear the Chancellor say—I forget whether it was on television or radio—that now when he visits Labour clubs in Leeds the biggest complaints he receives are about the rate of income tax. Yorkshiremen are always full of perspicacity and are very shrewd people. They have now rumbled in two years what it took them five years to say on the last occasion when there was a Labour Government.

I now want to turn to the middle range of management. Here there are differentials, which are steadily narrowing, between those who have provided themselves with professional training and high skills, and those without skills to offer. A recent articles in The Times, by Mr. Bond of GEC, pointed out that an £8,000 a year man now got, after tax, only 2½times as much as an unskilled labourer. What is interesting is that this is the lowest ratio in any free country in the world. In Russia the ratio is very much higher. Under United Kingdom tax codes a £4,000 a year man—and £4,000 is not high—will be paying an average rate of tax of 22. 4 per cent., while in Germany he will be paying 11 per cent., and in France 2. 8 per cent. Thus in France the rate is one-tenth of what the same man would be paying here.

This Motion is not concerned with those in the higher echelons, but it is interesting that in West Germany, which has shown such remarkable industrial growth, the top rate of tax is 56 per cent., whereas in our country it is 83 per cent., and here that rate is hit very much earlier than anywhere else. Young men in the £4,000 to £8,000 bracket have—I quote the words of the Chancellor— taken quite a caning. I'd like to help them. That remark was made in January 1976, and I earnestly hope that the Chancellor will help them on 6th April.

I wish to refer for a moment to the third volume of the Diamond Report. I may say that these volumes cost almost as much as the wealth tax volume, and perhaps their price constitutes a tax in itself. There is much interesting information in this document. It shows that management in the United Kingdom receives, on an average, between 50 and 60 per cent. of what management in France, Canada, and the United States receives. A junior Treasury Minister recently revealed that Britons in the £4,000 to £6,000 bracket—again, a modest level—pay more tax than anyone else in the whole of the EEC. Therefore, it is not surprising that young men—and in ever larger numbers—seeing no hope of building up their wealth or their savings, are leaving this country in great spate. I believe that the noble Lord, Lord Plowden, when he speaks will have something to say from personal experience in this area.

I turn now to the self-employed, who sometimes are also the small businessmen, employing small numbers of people. This category covers an enormous range from barristers to builders, from farmers to physiotherapists, from priests to publicans, and from sweeps to shopkeepers. All these, and a host of other people, make our life and our leisure richer—I have in mind, for instance, authors, musicians and painters—and life would be fairly miserable if they did not contribute to our well being and enjoyment. All these people feel that the present Government, in their taxation, in both extent and conception, discriminate against them. The self-employed point out that they have a higher rate of National Insurance contribution—8 per cent.—than anyone else. Thus they are paying a 35 per cent. tax rate, plus an 8 per cent. National Insurance contribution, which means that they are paying 43 per cent. on the standard rate.

Yet their benefits are greatly reduced. They cannot claim unemployment benefit, and they are subject to other reductions. They may work for several people, and in such cases they are subject to a weekly National Insurance charge in relation to every organisation for whom they work. Such people have to cope with the complexities of multi-rate VAT, and with all the plethora of taxation and regulations which is now falling on their plate. We have all heard about, and I have had personal experience of, shopkeepers who, if they have a family shop, have to spend between six and 10 hours at the week-ends working out their VAT and dealing with the complexities that now prevail.

When I turn to the medium and small business, I think we must first start with a definition. One of the most admirable and deep investigations in this area was undertaken by the Bolton Committee whose report was published in November 1971. They, incidentally, accepted (this was in their terms of reference) that a small business was one employing only up to 200 people. The Association of Independent Businesses, which has been formed, make the definition rather wider. They take into account a few of the large, privately-owned companies; a great number of the medium-sized, also privately-owned—those earning between £10,000 and £100,000 a year; those, incidentally, not big enough to go public—and, lastly of course, the self-employed, of whom I have spoken.

Why am I submitting that these groups deserve favourable treatment rather than hostile treatment'? First, because they make a very real contribution to our GNP—26 per cent. More than a quarter of our total GNP is generated from these groups. Secondly, because, according to the Association of Independent Businesses, they employ, apart from those working for the Government, 51 per cent. of the total number employed in this country, the other 49 per cent. being employed by the public companies. Professor Merret and Professor Lehr reckon that these medium and small businesses now employ, in total, 9.6 million people, and it will be known in this House that it is they who are largely the subcontractors and the sub-subcontractors to the hundred large public companies which achieve so much of our exports and upon which we are so deeply dependent. I was checking figures with the motor industry. They claim that they make use of between 2,000 and 3,000 subcontractors; and that industry would not exist if it were not for the kind of people embraced in this Motion.

Moreover—and now I come to a point which will appeal very much to the Government—large firms arc increasingly buying, and are being encouraged to buy, new and complicated equipment. They are becoming increasingly capital intensive, while the small firms are labour intensive. Yesterday the Chancellor said that unemployment might be around 1.5 million, and the OECD Report on Monday said that it might rise to 1.7 million about this time next year; if we are to make an inroad into the unemployment figures these are the kind of businesses, which are labour intensive, which could make a real impact and could make use of labour which is so desperately wasted and so unhappily moribund drawing unemployment pay. So this is an area which would help the Government, and every political Party, to make more use of totally wasted manpower at this stage —on a short-time basis. It is these medium and small firms which could show, I think, the most dynamic growth; and we have to remember that the Chancellor said yesterday that to carry out his Public Expenditure White Paper policy he is looking for a growth in the gross national product of 5½ per cent. over the next three years and for a growth in the industrial field of 8½ per cent. My Lords, that is a tremendous task, and many of us must doubt whether it is possible; but it is certainly not possible unless the energies of these kind of people are liberated at the earliest possible moment.

Apart from the abilities of medium and small firms, more and more evidence is now emerging which explains why they are not only desirable but in many cases more efficient than their big brothers. I give your Lordships five reasons why I believe firms employing about 500 people have such considerable merit. First, they have a quicker reaction time because of their size, and a greater flexibility, and they gear themselves more promptly to the needs of their customers, both at home and overseas. They have better industrial relations. This is brought out in the February issue of the Department of Employment Gazette. There are there set out some figures in a table, and its states: This shows that the larger the plant the greater the incidence of stoppages measured by days lost. The frequency of stoppages also increases with plant size. That is the second reason why they have such merit.

Then, they have lower absenteeism through sickness—the figures bear this out, too, and they have lower voluntary absenteeism. This, I think, is because they feel more involved, and certainly there is greater participation in a small firm. 1 may say, my Lords, that when I went to a large firm in the motor industry on a Friday a few months ago I was horrified to find that voluntary and sickness absenteeism from the production line for cars on that Friday was as high as 38 per cent. It is a tremendous problem for anyone to organise efficient production when 38 per cent. of the people stay away. Lastly, they have lower management overheads. They have one layer of management only, and responsibility is clearly defined. Everyone knows who their boss is and, therefore, they have lower overheads as a result. My Lords, looking back on history I feel it is not by accident that, to get the best results, the Romans, some 2,000 years ago, fixed on 500 people as being the proper size for a battalion. I think the same is true today. You get a better human relationship with smaller units, and it is those units that I am talking about and pleading for.

Now, rightly or wrongly, they believe that the Government are not being helpful to them. They look at Germany, Holland, the USA and Japan, where industrial progress has been so outstanding, and they see that there are powerful Government Departments to promote their interests. I know that the noble Lord, Lord Melchett, who is going to reply, now has this responsibility, and I wish him well, but he will have to gather up the biggest guns if he is to persuade the Government into action. It was in August 1974 that there was published the White Paper Cmnd. 5710 on the regeneration (as it was called, we thought rather hollowly) of industry. It said this in paragraph 14: In times of economic difficulty it is often the small businessman, dependent to a great extent on personal wealth as a source of finance, who suffers the greatest hardship. The Government are therefore reviewing the problems of small businesses and will put forward separate proposals to cater for their special needs". We have had pouring out of the Government a spate of legislation which has been debated in this House and elsewhere, but in 17 months we have not had one contribution which would adequately carry out the undertaking given in that White Paper. I hope that when the noble Lord comes to wind up he will deal with this point.

Secondly, these businesses complain most bitterly about the complexity of multi-rate VAT and the manner of its collection. They also complain, understandably, that they are crippled by inflation. So many people are, but they are particularly vulnerable to inflation at fast rates. Personally, I do not feel —and I do not know what the Government can do about it, except by encouragement—that they get the support they deserve from the joint stock banks, particularly local managers, and I wonder whether these managers have enough responsibility and enough freedom of action. After all, it was possible for the joint stock banks to produce £1.3 billion to support secondary banks and development companies which were in difficulty. Under Government persuasion—and that of past Governments, too—they also support exports. Could they not be encouraged to show rather more favour to the adventuresome, dynamic companies, of moderate size, which I believe are the seed coin for our future growth?

These businesses also complain most bitterly—and this is not new to the Government—that capital transfer tax and capital gains tax are going to destroy in a single generation many of the family companies, and I would ask the Government to look at what I believe is called consanguinity. This is a law they have in, I think, Germany, Holland and, to some extent, France, whereby if you pass a private business to your children, to people of the same blood, you pay a lower rate of tax so that it can be kept together. Of course, this applies very much in the agricultural sphere, on which others will speak in this debate. This high and progressive taxation has a devastating effect not just on the section that I have particularised but on everyone in our country. As we all know, people are not dumb. They realise at what level high taxation begins to bite. This causes the voluntary absenteeism and, sometime, the sickness claims which may not be fully justified. In some places there is absenteeism from the main job in order to do moon-lighting, which is done for cash. This is a symptom of high taxation. This high taxation leads to slow payment of taxes and the maximum avoidance. It leads to a reluctance to work overtime. Sometimes to meet overseas orders and emergencies of this sort, to get the goods out on time, overtime is absolutely essential. It leads to dishonesty and, I am afraid, to disrespect for our taxation system. Above all, it leads the young, the progressive, the ambitious to despair and to seek employment with firms who can give them jobs outside this country. This is a sad state of affairs.

At this time of year, the Chancellor of the Exchequer is flooded with proposals for his Budget and I feel sorry for him. The TUC table theirs, the CBI table theirs, the Institute of Directors, the British Institute of Management, the Association of Independent Businesses and everyone else have their ideas. Many of them, I may say, reading of this Motion, have sent me copies. I realise that the Chancellor is under tremendous pressure from two sources. The OECD only the day before yesterday, and the IMF are saying, "Do not reflate. Do not lose a grip on your desire to control inflation too soon." The Marxist wing and others are saying, "Re-inflate at the earliest possible moment." He has to draw a line between these two extremes.

If I may summarise some of the things I should like to see him do, they are these: to set up a Government organisation on behalf of the small and medium businesses, comparable with that which exists in Western Germany; to simplify the collecting system of multi-rate VAT and, possibly, to come back to single-rate; to alleviate the poorest section of our community who are caught in the poverty trap; to help the £4,000 to £8,000 middle management. If he cannot do this immediately, could he not, as previous Chancellors have done, promise that, perhaps, next year he will make a move in this direction, so that they have something to work for, to look forward to; some hope, perhaps, that they then may be able to raise money from those from whom they wish to borrow in order to expand their business?

I would suggest as a new idea that he might give tax credits. People will immediately think of post-war credits. It was Lord Barber who, in his period of office, finally paid them off. But I do not mean that. Perhaps one could set a standard of the type or level of tax which exists in EEC countries and say that we want to come down to this but that, in the interval, we will give people tax credits, preferably indexed, which they can cash in a year's time. That would allow the Chancellor, when he wishes to press the accelerator, to get a quicker reaction, as so often Government actions come too late and results too slowly. Above all, and lastly, could he restructure capital transfer tax and capital gains tax and look at the merits, as I have said, of the consanguinity taxes in other countries. My Lords, we in Britain surely have enough people with brains and with guts and with dedication to work. Let us move to a tax structure which will encourage the workers and not the watchers. The Chancellor can afford considerable reductions in taxation. Let him have the political courage and the will to do so on April 6. I beg to move for Papers.

3.25 p.m.

The LORD PRIVY SEAL (Lord Shepherd)

My Lords, when the noble Lord, Lord Orr-Ewing, started, I thought his speech was more directly directed to Carshalton; and I was going to express a warm welcome to the noble Lord, Lord Carr, on his first day in your Lordships' House. The speech of the noble Lord, Lord On-Ewing, changed and became (shall we say?) more pertinent to the Motion on the Order Paper.

My Lords, I intend to be brief, for three reasons. First, the Motion is divided into two parts. The second part deals specifically with small business and as my noble friend Lord Melchett at the Department of Industry has special responsibility for this important area, I think it would be right to leave that area for him to reply to and to deal with the various questions that are raised. Secondly, the noble Lord has a very strong body of supporters for his Motion and I am sure the House does not wish to be sitting to a very late hour. Thirdly, and perhaps most important at this particular time, within a few weeks of a Budget, it is very difficult indeed to talk in a constructive way as to taxation or possible changes.

Taxation, whatever its rate, is never liked. I, and my noble friends on this side of the House, have always looked on income tax particularly as being one of the fairest forms of taxation. It puts the burden more fairly on the broad backs that can bear it and it gives us the opportunity to provide services and benefits not only to the community as a whole but, in particular, to those who are less well off. It is, as I have said, a fair tax. When we took Office we, through taxation, were able to increase old age pensions by the biggest amount in all time. I think that even noble Lords opposite may feel that this is something of credit. I must say that I have sat in this House during the last two years and have heard a great deal about public expenditure and attacks on the Government over the need for massive cuts. If I may say so, the only noble Lord I know who has had the guts to get to the heart of this matter is the noble Lord, Lord George-Brown. In Wales last week he said there should be major public expenditure cuts and that we should be looking at the field of social benefits and the like; because, as noble Lords themselves have said, if there were to be major cuts in public expenditure now, it could not be in the field of capital expenditure, it could be only in the field of social benefits, unemployment benefits and the like.

My Lords, public expenditure is high and I take the view that there is a real need for a stabilisation of it at about the time that my right honourable friend the Chancellor himself has decided on; that is, from 1977 to 1978—not only because of the possible burdens of taxation but also because of the real need to provide the resources for the economic expansion that we hope and expect to see about that time. We cannot have economic expansion and have public expenditure as was projected for at that time; but I have no doubt at all that if we were to consider cuts in public expenditure now we should not only create very severe hardships for those who can least afford it but that we should see very quickly a deepening spiral in recession and greater unemployment.

The noble Lord, Lord Orr-Ewing, will agree that our public expenditure policy and our public expenditure borrowing policy, which was started by the noble Lord, Lord Barber—and I am delighted he is taking part in our debate today—is the policy of all the developed countries, particularly those in Europe. If my memory is right, the policy of Germany has been for a greater deficit than we have had in this country. If we had not done this, the recession throughout the world would have been infinitely greater. It would have hit not only the developed countries particularly hard, but it would have hit the developing countries with infinitely greater severity.

Taxation goes with public expenditure. Taxation should always be fair, taking into account one's ability to pay. The noble Lord's Motion refers to the disincentive effect of taxation. It is true that if you look at the Diamond Report, you will see that it dealt with some of the earlier examinations and inquiries into this matter—and I have read the general conclusions during the past few days—and it says that the disincentive effect of taxation is marginal. Its impact—if there is an impact—is in the early days of its imposition and, over a period of time, people grow used to it. The normal incentive qualities of an individual remain. The noble Lord referred to the business and industrial executive. I do not subscribe to the view—and I do not think the noble Lord would either—that the work which these executives put in is solely due to the incentive of the money they earn. There is a great deal in pride of achievement and success, and the genuine desire for promotion within one's organisation.

I acknowledge that if the level of taxation were to rise too high and if it became unacceptable, then these disincentive effects could apply. I do not believe that the present rates have that effect. But the Chancellor in a recent television programme took the view that if we are to allow income tax in particular to rise as a consequence of allowing public expenditure to develop unchecked, then we could be in the area when it became a curb and a curse upon an individual's initiative and endeavours. This was one of the reasons the Chancellor gave, apart from the economic needs, for holding taxation at its present level. He acknowledged the problem of the executive earning from between £4,000 to £8,000 a year. I cannot anticipate what the Chancellor has in mind on that matter, but he recognised the situation—I think he used the word "caned "regarding these individuals.

The noble Lord referred to the self-employed. It is true that certain impositions, as compared with others, appear to be harsh on the self-employed. On the other account, the self-employed have certain benefits in the period in which taxation is paid. Any careful examination of the policy of this or the previous Administration shows that the policy has not been viciously directed against the self-employed or the small businessmen. The Chancellor has directed our attention to taxation in relation to the pay policy. It was illuminating for a Chancellor to be expressing views (which is not usual at this time of the year) when it was suggested that he could consider alterations in the level of taxation allowances as a way of achieving a voluntary incomes policy. In this way we can allow the individual to have greater take-home pay than he has at the moment, but certainly not less. This is something to which I hope the TUC, and those interested, will give most careful consideration, because if we could achieve this it would he a notable step towards a new voluntary incomes policy for the next 12 months.

We should listen to the debate this afternoon to see whether there is anything which re, can offer to the Chancellor for consideration. As the noble Lord said, this is a time when many organisations put their views to the Chancellor. Whether the Chancellor considers these matters I do not know; but from personal experience I know that the Treasury looks at suggestions, perhaps slightly cynically and with a high degree of circumspection. But there are occasions when ideas arc brought forward which, with adaptation, can provide a change to the good. I do not believe that the middle classes, the middle businessmen, have been treated in a harsher way than any other part of our community. It may appear so in the field of taxation; but we have gone through a period of 18 months of growing and deep recession, a recession which was foreseen very many years ago. When one talks of taxation, I am particularly concerned with the people who have no jobs at all, who are dependent upon the assistance which the State can provide. That can only be provided from taxation. Therefore I suggest that although all of us can have grievances about the rate of tax we arc called upon to pay, those grievances are small compared with the sense of grievance of the less fortunate of our community.

So far as the small business is concerned—and I have been involved with them—I agree with the noble Lord regarding the virtues of those companies. The real problem of the small business in this period of recession, although tax has its part to play—as the noble Lord said—is that the small business is dependent upon the large organisation. When we dealt with the difficult problem of Chrysler, that was very much in our minds. If Chrysler had been allowed to go to the wall, countless small companies would have been swept to oblivion within weeks.

Therefore one needs to look at policy as a whole. I would say to the noble Lord, Lord Orr-Ewing, that we look to the small companies to fill the gaps, particularly in the export field, which the large companies (perhaps because of their rather inflexible production Jines) are unable to provide. My noble friend Lord Melchett who, if I may say so without appearing to be rude, is a vigorous young man, has taken on this particular role in the Department of Industry and will, I know, pursue with great sympathy the various problems of the companies. He will have an opportunity to deal with those points, but I should like to say that we in the Government have as much interest in the small companies as has the noble Lord, Lord Orr-Ewing.

3.41 p.m.

Baroness SEEAR

My Lords, the noble Lord, Lord Shepherd, is telling us, I think, that we must see the question of taxation in context, particularly in the context of the need to maintain Government expenditure. I do not think, however, that the way in which the noble Lord has presented this to us should be allowed to pass unchallenged. Of course, it must be seen in context, but the question still remains as to whether the way that expenditure is being laid out is in the best interests of the country and of the producers of wealth in this country. The fact that the Government believe they need to raise a very great deal of money means there has to be a high level of taxation; but it is right for us to challenge, for example, the greatly expanded numbers and pay levels in the Civil Service and in local government and to ask whether the way in which the Government have been spending money for the support of industry has been the economic and beneficial way. Simply to say that the Government need money in order to finance the expenditure they have undertaken begs most of the most important questions.

It is, of course, true that we cannot look at the issue of taxation in isolation. I know that the noble Lord, Lord Melchett, will tell us when he winds up —as he told us during the economic debate last week—that, in comparison with many other countries, our total burden of tax is not unduly high. It is true that up to 1973 in several countries such as Sweden and Denmark the level of GNP which was taken in tax was relatively higher than the level in this country. I am saying this now so that the noble Lord, when he winds up, will not be able to make too much of that point. It is also true, as I am sure he will agree, that since 1973, when those figures were brought out, the level of taxation in this country has increased very considerably. But, surely, the incidence of taxation and its importance both for companies and individuals has to be seen also in relation to the level of growth that is going on and the opportunity that is available for improving income out of the proceeds of that growth. One reason why the burden of taxation is felt to be so severe both on companies and individuals is that the level of growth and profitability, and the ability to increase personal income through higher salaries, has been so greatly restricted. This, of course, makes the burden of increasing tax very much greater than it would be in a situation of prosperity and growth, in which a high level of tax would be much easier to sustain. Therefore, I suggest that we should not look solely at the question of taxation but look at it in this much wider economic context.

Turning first to the question of the small firm, I should like strongly to support many of the points made by the noble Lord, Lord Orr-Ewing, and to stress both the economic and social importance of small companies in this country. They are of economic importance because they are ancillary to the large companies and because they provide services in a far more economic way than the large companies could very often provide for themselves. If the large companies are attempting to provide for themselves those things which are provided by small firms, it could well lead to a complication of organisation which in turn would lead to inefficiency rather than efficiency. The small firms are complementary and, in an economic sense, extremely valuable to the overall development of industry, large and small, in this country.

I should like also to stress the very real social importance of the small firm. It is not everyone—indeed, far from it—who works happily and profitably for himself or herself in a large organisation. Some people, by temperament and inclination, feel themselves at home within a large organisation and see career prospects ahead which they are able to seize. That is the world that suits them. But there are many others who do not and who will never give of their best in the large-scale organisation. For them, the atmosphere of the small firm is the place in which they gain their satisfaction and where they can make a far greater contribution. Moreover, the small firm offers the opportunity for people who are caught up in the large firm to break away and start out on their own. It is not true, as is so often said, that people cannot begin businesses today, as they did in the 19th century, and move forward under their own initiative and as a result of their own ingenuity and effort. It is still possible; the post-war period has been full of stories of highly successful small firms which have given great satisfaction and fulfilment to the individual who has started them and which have made a very real contribution to the success and prosperity, such as it has been, of this country.

The small firms need money to expand. The importance of expansion to the small firm and the problem of getting capital for adequate expansion is very real. Certainly, I agree that at the present time the Chancellor of the Exchequer is being deluged with suggestions as to what he might do to aid industry. But when he is considering in what direction he should give encouragement to industry and where he is going to lay out this money for the development of industry, instead of pouring a lot of money into companies such as Chrysler—I know that the noble Lord has defended this, but many of us remain totally unconvinced on that score —is there not something to be said for special concessions, through corporation tax adjustment, for instance, to the smaller firms, if they are to use that money for the development of their own enterprises?

Surely it is at the very least a reasonable suggestion that a large number of small businesses, in deciding what they are going to do in terms of development with additional capital resources at their disposal, would make a better job of it than the Government deciding, in very large terms, in which particular enterprises they are to put money. Surely this is what we need. We need people up and down this country who can see an opening to be exploited— "exploit "is a neutral word but very often it becomes a term of abuse—and who will exploit it to great purpose in many cases. I suggest that a great deal of the money which has been put in very large quantities into businesses, the future of which is in very grave doubt, would have been much better put in the hands of a large number of small businessmen, developing their own businesses as they see fit.

Lord SHEPHERD

My Lords, I will certainly look at that. But will the noble Baroness freely admit that to administer such a scheme we should have to increase very considerably the present number of civil servants in the Department of Industry?

Baroness SEEAR

No, my Lords; I certainly do not admit that. It is the whole burden of my theme that small businessmen, left to themselves, will make very much better decisions than civil servants untrained in the ways of industry, who do not stand to benefit or to suffer as a result of the expenditures that are made. Such small businessmen will use that money to much better effect than the civil servants, who will decide in their wisdom and in their knowledge, such as it is, how that money should be used. May I, as a very minor parenthesis to that, suggest that the Government should also look again at the level below which it is necessary to pay VAT at all? After all, inflation being what it is, the VAT minimum is now so low that it hardly counts at all. Surely, this is something which could be taken into account.

I move now from the small businessman to the middle and junior executive and, in a sense, I declare an interest here. I suppose that something like 80 per cent. of the people whom I should have been glad to have as students over many years find their way into manufacturing industry. There can be no doubt that, in recent years, the combination of taxation and pay controls has hit very hard the people in the £5,000 to £8,000 a year group. The differentials have narrowed between them and the people for whose work they are responsible, and in many cases their standard of living has fallen. I agree with the noble Lord, Lord Shepherd, that of course in bad times burdens have to be shared. But this is a matter of degree, and we arc saying that people of this level—very often, young men in their early or middle thirties, who have made perfectly reasonable plans for the development of their careers and of their families —have been caught very badly indeed by the coincidence of controls over salary increases on the one hand, and levels of taxation on the other. They are people to whom we need to pay the very greatest attention.

The older among us—and, I suppose, to some extent, for that reason the better paid—are not likely to get up and go because of the level of taxation, or because we cannot get further pay increases, owing to the sheer weight of habit and the fact that very few of us are wanted by anybody else. But these young men and women are at an age when they are very much in demand, and I am sure your Lordships recognise that they are extremely restless. I do not have figures—I do not think anybody has accurate figures—of how many of them are disappearing. I know of many who have found themselves abroad for one reason or another, and would not dream of coming hack. But they are our seed corn; they are the people on whom we have to rely very heavily for our development, and it is surely reasonable that we should consider very carefully how the level of taxation and the pay policy affect them.

It is not only a matter of incentives. A great deal has been said about the disincentive effect of controls over pay and of levels of taxation. I want to go one further and say, on the contrary, that it is a matter of justice, because these people, the competent ones, are contributing very greatly, and will have to continue to contribute very greatly, to the economic recovery of this country and to the maintenance of that recovery. We hear a great deal—and I agree with this —about the importance of participation in industry, but the fact remains that modern industry requires for its effective prosecution people who are prepared to learn new things, to learn and learn again, and to apply what they learn.

Management today, if it is proper management, must be a job based on study and experience, and those of us who have been associated with young men of this kind know how the good ones among them are prepared to give their free time and to forgo earning opportunities, in order to increase their knowledge and expertise. They are prepared to go to parts of the country which are, perhaps, socially less desirable, where they will not have the leisure time activities which they would like to have, in order to extend the range of their experience and to make themselves more valuable, more able to contribute work of real value, to the companies with which they will sub sequently work. This is something which we want to encourage.

When I was at the Conference of the Economic Association in America at Christmas-time, I talked to a well-known economist—an Englishman now naturalised in the United States. I asked him, "Looking at Britain now, as you often must, where do you feel that we have gone wrong? "He replied, "For one thing, America started training its managers properly at the beginning of the 20th century, and you have started only in the last decade ". The people who are prepared to make themselves technically and professionally equipped—and my quarrel with the intervention of civil servants who arc not professionally equipped in the affairs of industry is connected with this point—are of the greatest possible value and earn every single penny, and a great deal more, that they are being paid at the present time. Unless we have regard to this fact we shall indeed be doing ourselves a very serious disservice over the next two decades.

It is not just a matter of pay. It is also a matter of the regard and respect in which these people are held—and they mind deeply about this, too. We have recently discovered that all the rest of us —your Lordships, the civil servants and so on—are living on the wealth produced by people in the manufacturing sector. We depend upon them. But do we always behave as if we really recognise this fact? In the debate last week, when most of us had been studiously nonpartisan, the noble Lord, Lord Melchett, saw fit to devote a considerable part of his reply to criticising the poor standard of British management. If the managers read the Reports of your Lordships'debates—I know that a good many of them do not have the time to do any such thing—that is hardly the way in which to make them feel that the very considerable burdens which they are bearing, and efforts which they are making, are appreciated.

I find it very hard indeed to understand how these criticisms can come from Her Majesty's Government, who have got the forecasts of their own expenditure so disastrously wrong that if they were in private enterprise they would have been bankrupt long ago, and those responsible for the decisions would have been sacked. The noble Lord, Lord Melchett, said to industry last week, "Doctor, heal thyself." Speaking from an edition which I prefer, I would say, "Physician, heal thyself."

3.59 p.m.

Lord BARBER

My Lords, as it is 25 years since I made my last maiden speech, and 17 years since I last spoke from the Back-Benches, to seek the indulgence of your Lordships on this occasion is certainly no mere formality. Two years ago I left the Treasury, and if I have not addressed your Lordships before now it is quite simply because I take the old-fashioned view that an ex-Chancellor should let a decent interval elapse before breaking his silence.

This important Motion before your Lordships' House today raises two questions: first, the consequences of the present high level of taxation; and, secondly, what can be done about it. On the first—the consequences—I think I need spend little time, because I should have thought it must be an accepted fact that the present level of taxation is too high, and that it acts as a disincentive. There may be some theorists around who would deny this, but if they would step out into the real world and travel—for instance, to my own part of the country, Yorkshire, where much of the economic wealth of the country is created—they would be left in little doubt that the present level of income tax acts as a real disincentive. After all, this is hardly surprising when one bears in mind the fact that in the United Kingdom a person coming into the income tax net is faced immediately with a marginal rate which is the highest in Europe; and if one considers middle management, about which the noble Baroness has just been talking, the income tax burden for these men and women today is considerably greater in this country than it is for their counterparts in Germany, in France, in the United States and in the countries of most of our industrial competitors. These are the hard facts which give rise to this debate, and my noble friend Lord Orr-Ewing gave others which were equally telling.

As the chairman of an overseas bank which operates in some 60 countries around the world, I have been doing a great deal of travelling, and over the past year have been to more than 20 of those countries. I can tell your Lordships that when they arc told of the rate of taxation in this country they literally marvel at the patience of the British taxpayer. As for British managers and technicians whom one meets all around the world, their story is almost invariably the same. They would prefer to live in Britain, but they believe that if they returned taxation would make it virtually impossible for them to save anything significant to pass on to their children—an aim which I should have thought most people would applaud. As anex-Treasury Minister I am hardly the person to forecast the future course of events with any great degree of confidence, but my own experience over this past year supports my noble friend Lord Orr-Ewing and the noble Baroness, and leaves me in no doubt at all that many more of our best qualified young men, when they learn of the after tax income of their counterparts doing the same jobs overseas, will decide to leave this country. I believe that this is something which we as a nation cannot afford to allow to happen.

So the fundamental question is this: Is it possible in our present economic circumstances to reduce taxation? In introducing this debate my noble friend said that I have had some experience of reducing taxation. I have not the slightest doubt that it is possible, in our present economic circumstances. to reduce taxation and, indeed, that it must be done if we are to provide adequate financial incentives for the individual and if we are to encourage and stimulate the private sector on which, as has just been said, the nation's prosperity primarily depends. In his reply to my noble friend, the Leader of the House referred, quite rightly and properly, to a man's pride in his work and, as we know, this applies to many people in this country. The fact remains that there are also millions of working people in Britain who, unlike your Lordships and myself, have jobs which are dull and uninteresting, and sometimes positively unpleasant, and they work in order to earn a living and improve the lot of themselves and their families. To these people cash incentives are the real spur to extra effort and I believe it is dangerous folly to pretend otherwise.

I had always cherished the hope that my successors at the Treasury would, over the years, be able to continue the reduction of personal direct taxation (income tax) until it approached that of our main overseas competitors. Your Lordships should know that my own personal reason for introducing the most buoyant of all forms of indirect taxation —VAT—was to enable those who followed me to switch some of the burden of taxation from earnings to spending. That was my own reason—not, as was erroneously contended at the time, because of any EEC obligation. Indeed, I am quite sure that had he wished to defer the introduction of VAT my two principal opposite numbers at that time in the EEC, M. Giscard d'Estaing and Mr Helmut Schmidt, would have agreed to deferment. But of course I fully accept that, for reasons which are self-evident, now is not the time to increase indirect taxation. At this time there is only one way in which the high level of personal taxation can be cut, and that is to cut Public expenditure.

My Lords, I have never questioned the political sincerity of those who regard the present level of public expenditure as sacrosanct, but they must at least accept that the choice exists. As the Leader of the House put it in his remarks, "Taxation goes with expenditure ", and one must consider the two together. Of course, it is important to distinguish between transfer payments and claims on real resources, but I think it is right to look at the totality of public expenditure both to gauge the Government's mounting financing problem and its consequences for taxation, and also to realise the growing extent to which the Government. are involving themselves in the nation's affairs. I should have thought that three sets of figures would surely establish beyond doubt that there is at this time scope to reduce public expenditure.

First, in 1971 total public expenditure as a proportion of gross domestic product stood at 50 per cent. By 1973 it had risen only slightly, to 51.1 per cent. But in 1974 the ratio shot up to 57.3 per cent., and now the Government tell us that it will be about 60 per cent. in this financial year. Second, even taking public expenditure on goods and services alone (which is the State's own direct claim on the resources of the nation) the level will have risen, albeit at a slower rate than that of transfer payments, to stand at 35 per cent. of GDP in this financial year, a level which the Government on their own argument find too high. Third, the Government arc actually planning au increase in total public spending, including the mounting debt service, of no less than 17 per cent. in real terms between the level of 1973ȱ74 (just before they took office) and the plateau which the Government hope, in the teeth of all experience, to achieve in 1977–78 and the years following. This increase, of course, as my noble friend pointed out, is likely to exceed considerably the growth in our national product and is bound to result in a further increase in the burden of taxation.

Much of the criticism for the soaring increase in public expenditure and the consequent increase in the burden of taxation has been directed at the present Chancellor of the Exchequer. I believe this to be unfair. No one would deny that the Chancellor of the day is the Minister primarily responsible for these matters, but it is one of the hard facts of Treasury life that no Chancellor can cut public expenditure by more than he can persuade the Cabinet to agree to. Perhaps I should explain what I mean. Shortly after the previous Government took office in 1970 they announced major policy changes which resulted in considerable savings in public expenditure. Those savings led directly to a reduction in income tax. Indeed, at the time I was criticised for not making a larger reduction in taxation.

Perhaps I can give your Lordships another example. When the country was suddenly faced with the fourfold increase in oil prices, the then Government, in December 1973, cut public expenditure by an amount greater than has ever been done before in both real terms and money terms. One of the main considerations which weighed with my Cabinet colleagues at that time was to minimise the need for any increase in taxation. In the event, as your Lordships know, it is a fact that most of those cuts in public expenditure were reversed by the incoming Government. So the one thing which I should have thought must be beyond dispute is that there is a clear choice between public expenditure on the one hand and taxation on the other.

Although the various cuts in public expenditure to which I have referred, and the two examples I have given, were made on my initiative, it was to the credit of the Cabinet and Government as a whole that they were accepted. But, of course, it would be misleading your Lordships not to admit that there were also many other occasions when I failed to persuade my Cabinet colleagues—including, dare I say it, Sir Keith Joseph who was then Secretary of State for the Social Services—to moderate the growth of public expenditure. I should add that I applaud Sir Keith's present approach to public expenditure.

The noble Lord the Leader of the House said that to cut public expenditure would create unemployment and hardship. Put simply like that, and if no other action were taken, of course he is right. But that surely is only part of the story. I agree entirely that with the present high level of unemployment, it would be both cruel and wrong merely to cut public expenditure without some countervailing stimulus to demand. I think no one would suggest that today. But is there really anyone in Britain who would deny that there is ample scope for achieving this by reducing the burden of taxation? Yet, if I may say so, with what seems to me to be the most astonishing complacency, we are now told by the Government that it is inevitable that the burden of taxation will increase still further. It most emphatically is not inevitable. Given the political will, the Government could reduce the proposed inflated levels of public expenditure, and so enable the Chancellor of the Exchequer, as I am sure he would like to do, to reduce the burden of taxation without any overall stimulus to demand.

If we are to regain something of our former economic and industrial strength, a reduction in the burden of taxation is a prerequisite. But it will happen only if the Government as a whole have both the will and the determination to tackle public expenditure.

4.12 p.m.

Lord LEE of NEWTON

My Lords, the noble Lord, Lord Barber, has just proved that in the Palace of Westminster maidenhood comes but twice. I cannot recall whether he was a Member of the other place when they sat here, but certainly in my case I had the opportunity to make two maiden speeches in one Chamber. I am not sure whether the noble Lord was in the 1945 Parliament. However, as we expected, he made a most competent speech dealing with the problems of taxation, and dealing in his new capacity with the problems as seen by an international banker. While I do not think his neutrality erred on the side of the Government, nevertheless, I will refrain from commenting too much on the other methods used to reduce taxation by the Government of which he was a member. Perhaps we can discuss that at some future date. I compliment the noble Lord most sincerely on an extremely competent analysis of the situation, and I am quite certain we all look forward to further contributions from him, especially as in these days the problems of international finance and the state of the pound are causing the greatest anxiety to all of us.

My Lords, the noble Lord, Lord Orr-Ewing, said a number of things with which all of us would agree. He pointed out the problems of the small and medium-sized firms. In these days of the great international corporations, with their huge economic power over Governments of all countries, it is possible that we can satisfy their demands only at the expense of the smaller companies. I hope I am wrong about that. I hope that Governments throughout the world will begin to look at how it would be in the interest of all of us to work more closely together in order to try to ensure that their power remains superior to that of the great companies, which I am afraid are becoming more powerful than certainly the smaller Governments in Europe today.

The noble Lord, Lord Orr-Ewing, referred to the fact that some of these small companies produce the kind of products requiring more labour intensive industries than the bigger companies. Again I agree with him in that, although I do not agree that, when one has a huge company, necessarily it has to be a soulless enterprise in which employees are regarded as mere numbers. In my lifetime I have worked for one of the biggest companies, and the noble Lord knows to which I am referring. There every employee was made to feel part of the company; he was made to feel that he had a great contribution to make, and certainly he was never dismissed as being merely a number on a clock. I assert that a great deal depends on the quality of management as well as the quality of leadership of the trade unions within these companies, to ensure that we do not get the kind of soulless enterprise which I agree sometimes occurs in the case of a very large company.

No person should be expected to like being taxed. For my part, I regard any exception to this view as being a particularly dangerous form of masochism. The Motion deals with the lower paid and the middle levels of income. When I read the Motion, my assumption—obviously quite erroneous—was that the noble Lord was going to ask for higher taxes on the one remaining class of society; namely, the very high income group. However, I was quite wrong, because the noble Lord stressed that these people also were very heavily taxed—and from the nature of the noises one already hears coming from that group, they appear to think they are paying rather too much. If the noble Lord does not wish to take any further taxes from them yet wants to reduce the taxation of the other groups, his is a general statement that he wants to see overall taxation reduced for everyone.

May I put another side to this matter, one which was hinted at by my noble friend the Leader of the House, but which has not been expressed since. I assure noble Lords that a great fear is growing that if this kind of advocacy is to be listened to, it can result only in a severe attack upon the Welfare State. Indeed, if we are to believe that under these conditions there can be a huge decrease in the general level of taxation, I should love to hear someone on the other side say how it can be done without attacking the very basis of the Welfare State itself. Therefore, it seems that the Government are being asked to join in with that kind of policy. I would say that the Government have already done a great deal to assist the lower paid section of the population in which the noble Lord, Lord Orr-Ewing, was interested.

According to the Central Statistical Office, the combined effects of cash benefits and direct taxes are now to reduce the share of income of the most wealthy 10 per cent. of households from 27 per cent. to 25 per cent., while the share of income for the less-well-off 10 per cent. of households was raised from 0.1 per cent. to about 5 per cent. That is a quite appreciable transfer of wealth, and one which I hope commends itself to noble Lords in all parts of the House. Indeed, it is also the case that the Government are now introducing cash limits to cover a very wide range of public spending. About three-quarters of central Government voted expenditure, excluding social security benefits, will be covered by this, and the rate support grant is also included in it.

I notice that the Chancellor, speaking yesterday, said that under the Tories public spending programmes, including the contingency reserve and short-fall, rose, on average, by 4.3 per cent. a year throughout their last three years of office, whereas in Labour's first three years the average has been 4-1 per cent. He agreed that if debt interest is included the picture is a different one, but the present Government, unlike their predecessors, have not financed spending by printing money. If I may say so, although I have heard quite a lot about restrictive practices in the printing industry, I have never heard Chancellors of the Exchequer in the last Tory Government being charged with any restrictive practices in their use of the printing press. Indeed, the Chancellor went on: The price of the monetary profligacy through which the Tories financed their massive spending programmes is still being felt in our inflation rate. My Lords, I think, therefore, that the present tax structure in its incidence is a very vital factor in maintaining industrial peace, vital for financing the nation's health, its education, its housing, the provision of passable standards for the pensioners and other important services of that kind. Indeed, at the present time, the level of unemployment being so high, there is a huge on-cost there as well. Therefore, to make a major cutback in that kind of taxation would cause the structure of welfare in this country to collapse.

Although we are all quite familiar with the arguments which the Conservative spokesmen put forward about the need for reduction in public spending, while, of course, demanding increases in specific issues such as defence, I have yet to hear of any announcement from the Leader of the Tory Party that it is now determined to pull down the Welfare State itself. Indeed, it is somewhat ironic to think that in the 1945 Parliament, when we were creating that structure, the nation's economic problems in a postwar situation were certainly far worse than they are today, but that did not alter the fact that the Government of the day created that which we now call the Welfare State. I am made apprehensive about the present problems and the way in which the Tory Party is telling us to face them, by the fact that last Wednesday we had a declaration from the Tory Front Bench itself, from Lord Gowrie, in these terms: Our next collective task—and it will be painful for both Parties—must be to wind down the Welfare State."—[Official Report, 3/3/76: col. 1027.] I wonder whether that was a considered statement of Tory policy. Does it, for instance, mark the end of 30 years during which the arguments about the Welfare State have been a question of degree and not of principle? If there is this great change now, then I am afraid there are very rough days ahead.

Apart from local government, whose costs have escalated since the changes brought about by the Tory Government of 1970–74, the main areas of Government spending are, I suppose, education, health, housing, social security, defence, food subsidies. What I have never been able to understand from the spokesmen of the Tory Opposition is which of these, and by how much, do they wish to cut. Generalisations are quite simple, but I should have thought the nation is now entitled to know just what a Tory Government would do. Which of these vital services are to be cut, and cut to the point necessary if we are going vastly to reduce public spending in the way the Party opposite seems to wish us to do? We have seen that the lower income groups depend very heavily indeed on these services, and to attack them severely is, of course, to attack their living standards in a major way. If we are going to do that in order to reduce taxation for the higher income groups, that really would be the equivalent of an all-out attack on the weak in favour of the strong, and for our part we would oppose it.

There is an industrial aspect of this. Last week we had, I thought, a very fine debate on industrial matters. I notice that the noble Viscount, Lord Watkinson, is going to address us. Here we are, all worrying about what is to be the next stage in the incomes policy. I tried to make my view on this clear a week ago, and I retract nothing from what I said. If we are now to see an attack upon those social services upon which the lower paid people rely so heavily for their living standards, then I can well imagine that there will not be the kind of forthcoming arrangement which I want to see, and which I am sure noble Lords in all parts of the House want to see when trade unions have to face the issue of what is to be the next stage of incomes policy.

It is for these reasons that I am apprehensive. I hope I can be satisfied that I am wrong in imagining that this attack is to get back the incidence of taxation on to people who cannot afford it and away from those who can. I hope I am wrong in suggesting that a clear statement must be made from the Opposition that they do not wish to see the services which I have mentioned, education and housing and health and so on. attacked in order to reduce the taxation of the higher income groups. Unless we can get a clear statement that that is not the objective—and, I suggest, before the end of this debate—then I fear for the unanimity which has been achieved between the CBI and the TUC, and which I, for one, have watched with great admiration, and for our great hopes that in that way we will learn to contain inflation and get it down to manageable proportions. That is what we are discussing today, not merely the taxation of the higher income groups.

4.27 p.m.

Viscount WATKINSON

My Lords, may I congratulate my noble friend on raising this very important matter at this time, and apologise to him, and to the noble Lord, Lord Melchett, if it turns out that a CBI engagement does not allow me to come back to hear the winding-up; but I will do my best. May I also add my very sincere congratulations to my noble friend Lord Barber and, if I may, venture to say what a welcome addition to this House his clear mind and wide knowledge will be. We hope that he will often intervene in debates again.

I think I can conveniently follow the noble Lord, Lord Lee, because I, too, should like to look at this debate from a slightly different angle; that is, the angle of economic strategy. More and more in our modern state—I do not think the Chancellor would necessarily disagree with this—economic strategy must condition our taxation policies. This is dealing with the point, to which I listened very carefully, which the noble Lord raised. I think 1 can answer him in the words of the Prime Minister. because I think we may have misunderstood and, perhaps, underestimated— and, if so, it is all our faults—the Government's repentance at the famous Chequers meeting of the National Economic Development Council. I was rather reinforced in that view. As I judged the Chequers meeting it concluded—I could not welcome it more—that hard times are forcing all of us to fall back into the middle ground, the only place from which we are going to cause our country to get through the next few years. I was comforted at the last meeting of the NEDC, at which the Prime Minister kindly took the Chair—now I am directly on the point which the noble Lord, Lord Lee, raised—when he said once again that the main economic strategy of the Government should be to secure a high output, high wage economy. I do not think the noble Lord would disagree with me if I say that, if we cannot achieve that, we can go on talking about social benefits until kingdom come, but there will just not be the money to pay for them. This whole question of tax, and the whole question of whether we have enough money to do all the things we want to do, depends ultimately on whether we have this kind of high-output prosperous economy.

If we all agree with that, then it carries with it certain other undertakings given by the Government at Chequers; first, that resources will be transferred from non-productive to productive industry. Perhaps the noble Lord would not necessarily disagree with that. Secondly, that support must be given to the free enterprise sector of the mixed economy, and that profits, on the whole, are reasonably respectable so long as they are honestly earned. If this is to be the national policy—if it is, I could not welcome it more—then there will not only have to be large changes in economic policy but there will have to be equally large shifts in tax policy. I do not want to labour the point because I know that every noble Lord would agree with this, on whichever side of the House he sits; but if we cannot succeed on this, then, whatever Government of whatever Party we have, we are down and out and there is nothing much we can do about it.

I should like to turn my attention, first, to whether present levels of tax are really in agreement with this strategy, which I hope we all support, and, then, to what the Chancellor might do about it. I do not want to go over the ground that my noble friends have traversed so effectively, but I want to say this: the 50 per cent. plus tax rate, which we are likely to meet if expenditure goes on at this rate, is not only the highest in Europe but an absolute disincentive to the key people in management who will have to get us through these difficult times. We must accept this and not pretend that they are solely moved by patriotic motives or anything else. Of course they are, but in the end you must be able to keep your wife and family, and have some hope for the future. For example, 83 per cent. top level on earned income, and 98 per cent. top level on unearned income, plus the present levels of CCT are not taxation; they are confiscation and they are seen in this way by many of the managers on whom the success of our industrial strategy depends.

I wish that more noble Lords had been at the first national conference of the British Institute of Management in the Festival Hall last Friday, and had listened to manager after manager coming to the platform and speaking with, I thought, amazing lucidity—I am quite frightened by the lucidity of these young men—and with absolutely genuine bitterness about their feelings that they could not save, they could not make anything for the future. They felt that this was absolutely no encouragement for them to do the things which, on the whole, they are very willing to do, given a little encouragement. I hope that the Government will accept what all noble Lords have said so far in this debate; unless we can do something more in this area we may be very disappointed at the result.

If I may say so, I think that the Confederation of British Industry were quite right, when we met the Chancellor some time ago, to put our main emphasis on two tax changes. First, the poverty trap, on which I need not elaborate. How can a man feel encouraged when he gets a rise in his pay and immediately finds himself worse off by the incidence of the highest initial rate of taxation in Europe? I hope that the Chancellor will listen to that. Secondly, there is the tax on middle managers. I hope that we can take some comfort from what the Leader of the House said today in quoting what the Chancellor said earlier; he recognised the extremely heavy burden on these men of the present level of tax.

When they go to West Germany and find that whatever your rate of tax you can still keep 40 per cent. of your income by the time you have paid your taxes, it is not surprising that they come back feeling somewhat disheartened. Managers today really see no chance of saving for the future. I hope that we shall not fall into what I would call the "jealousy trap'' and assume that there is some magic level at which, if you earn more, you somehow become a very anti-social person. I was brought up to believe that the more a person earns, for which he or she has honestly worked, the better for them and the better for the nation. I hope that the Government will apply this strategy when they look at the long-term taxation problem as well as the present Budget.

I could not agree more with what my noble friend said in opening the debate about the small business. We have told the TUC—I think they agree because they are much nearer reality than many people —that if you want to look for a quick upturn, if you want to look for a quick effect on unemployment (and any man unemployed is a social disaster to our country), it is in the small firms that you will find it first. I do not think that the noble Lord, Lord Melchett, will disagree with this, as he is studying small companies; they are flexible, they can turn round quickly, they are labour intensive, and there is an oustanding case for revising the rate of capital transfer tax on transferable assets in small businesses, because at the present rate no small business will survive. The present owner will do the best for himself, and he will know that at the end of his time the business will have to be split up to pay the necessary capital transfer tax. If you want a quick result, if you want these people, who after all are responsible for a very large section of the GNP, to do something for us all, then give them that little bit of encouragement.

Before I leave tax, I should like to thank the Chancellor very sincerely, as we did the other day, for his tax treatment of stock appreciation. It has been the greatest possible help to industry. It has helped industry's cash flow. We are grateful for it and, like everybody over tax matters, we hope that he will give a firm pledge to continue it for a number of years. It is only right to say that it has been a great help to industry, and we thank him for it.

I now come to the main point that I want to make. I see the Chancellor's difficulty. Indeed, much of the representations from the CBI were that he should not seek to reflate the economy now. I could not agree more with the noble Lord that, if we cannot get a satisfactory voluntary wages policy again this year, our outlook is black indeed. I should just like to say (because I am not sure that the Chancellor felt that we were serious about this, but, speaking for my business colleagues, I can say we are very serious indeed) that we think he should decide and say in his Budget speech that he will take a second look at the situation before the final stages of the Finance Bill leave Parliament. This is perhaps a somewhat unusual request to make, but assuming that that would be some time in the middle of July, we should understand much more clearly by then whether we had a satisfactory pay settlement for the next year starting in August. The Chancellor would have a much clearer view from his advisers as to whether the economy will turn up this autumn, whether we can rely on that or whether it still lies in the future. Therefore, we were very serious indeed when we said that, if he wished to defer certain measures in his Budget—certain concessions to middle managers—until later on in the Finance Bill when he can perhaps judge more accurately whether we have a satisfactory prices, wages equation (we all know that we have to get one somehow), we would welcome this and think it a sensible thing to do. So far as I know, there is nothing against it in terms of the proper actions of a Chancellor. if he cannot do that, then our advice would be to have an autumn Budget. But autumn Budgets are never a good thing, and our advice to him remains to defer certain sections of his Budget, certain benefits, and see whether these are an aid in getting the kind of voluntary settlement over wages and prices that we all want to get.

I do not want to detain your Lordships for long. There are many who have yet to speak. I have said what I want to say. I would end by saying that nobody could be more anxious than the businessman to help our country catch the tide of recovery which I believe is coming. But if we are to do that, even if we have the utmost good will on behalf of the trade unions—and I believe we shall—even if we can get a settlement of our immediate wages prices problem, which I hope we shall, I do not think that we shall be happy with the response unless we can engage the enthusiasm, interest and drive of the managers, the directors, and the people who run free enterprises, who provide over 90 per cent. of our exports and who provide most of the sinews of the State. They want to feel, rather more than they do at the moment, that somebody loves them, that somebody feels that what they are doing is worth while, and therefore gives them some concession as a reward for what they are doing and what they are going to do. If the Government can find some way of doing that, they will underpin the kind of strategy that they say they want to have, and we must judge them by results. If that is the way the Government want to go, then I do not think they will find that employers, trade unions, managers or anybody else will do other than give them what backing they can to see our country through to happier times.

4.40 p.m.

Lord PLOWDEN

My Lords, I congratulate the noble Lord, Lord Barber, on the lucidity of his speech; we are fortunate that he has decided to break his silence and we hope that he will intervene often in our debates. It is difficult to speak following the noble Viscount, Lord Watkinson, because he covered comprehensively the whole field which we are debating this afternoon. As an industrialist, I find this debate most timely because what we are really discussing is the present and future management of British industry, on which as most noble Lords have stated, we are all dependent; the social services, pensions, our standard of living—the lot. Unless we can maintain and improve our present management we shall not be able to achieve the standard of living and social services we desire.

Junior and middle management, besides being the work horses of industrial management, are the future top managers of industry. In the past 15 years I have seen a steady improvement in the standard of management. This comes from a variety of reasons; because managers who learnt their trade in the quite different conditions that prevailed before the war are retiring or have retired, because managers are today better educated and, as the noble Baroness, Lady Seear, said, because managers have available to them and are willing to take the opportunity of training either within groups such as my own or outside in management schools and the like. However, there are not enough of these good managers; I am very conscious of this from our experience in my own group.

In two of our divisions we have as equal partners two of the great American corporations, the General Electric Company of America and Reynolds Metals, the aluminium manufacturers. The best of our managers are quite the equal of the best of theirs, but what always astounds me is the number of good managers whom they are able to deploy. It is not just a question of being bigger countries or companies; proportionately they have many more. Why is that? I think there are two mainreasons. The first—this has already been mentioned today—is the constant denigration of British industrial management. This goes on the whole time; it comes from politicians, trade union leaders, some parts of the City, academics, newspapers, television and radio. One cannot pick up a newspaper these days without reading of somebody having said, "British management has failed the country ". This continual denigration hinders recruitment; people are obviously doubtful whether they should go into something that seems so wrong and is said to be so poor.

The second is the erosion of differentials. Last Friday I spent the whole afternoon at one of our management development courses. Thirty-two young men and women, half of them graduates, aged between, say, 28 and 38, chose the subject for discussion and almost the only subject they wanted to discuss was this question of the squeezing of differentials. They feel that they are being squeezed between the rising pay on the shop floor and the stop at the present time at £8,500; and the whole pressure of society saying that higher salaries are a bad thing. The TUC is now saying that no salary should be higher than £20,000 a year. After Friday I asked for a sum to be done to calculate the average net salary of those people as a proportion of the net take home pay of the average adult male worker in industry in this country, and it was 1.34 times. Thus, one is asking people to take responsibility, to work longer hours and to learn more things for 1.34 times what they could earn if they did the ordinary 45 hours a week on the shop floor. They fear that this continual pressure of the erosions of differentials will continue.

The noble Lord. Lord Diamond, said in his last report that there was no evidence that senior management was deciding to leave industry or to emigrate. Of course there is not; senior management cannot emigrate, it has nowhere to go and it has nothing in particular to offer at the kind of ages that we at the top are. Nevertheless, young men and women are mobile and they can learn languages. The Continent is only 21 miles away or, if one does not want to learn languages one can, if one has the necessary skills, go to one of the English speaking countries. Some years ago my company bought a company in Holland. It was not doing very well; in fact, it was making losses. We sent two bright young men there to do something about it. They could not speak Dutch so we sent them for three or four weeks to a school run by some extremely strict and tough Dutch nuns. In that period they learnt enough Dutch so that when I visited them four or five months later they were able to talk, if inaccurately, quite fluently, and the proof of the pudding is that they turned that company round. This is an indication of how mobile young management is; there are no language barriers at that sort of age.

In my group we have real evidence that these young people are now contemplating going abroad. But even if they do not go away, something else is happening. We have well over 100 sites or companies in this country and naturally we want to move people about. Increasingly, even on promotion, we are finding it difficult to persuade young people to move because they say, "The extra money you can pay me is, after taxation, so little that perhaps it will not even make up for the extra cost of living in a different place and certainly it will not make up for all the dislocation of our home life "—the dislocation that is caused to one's wife and children through having to move schools and so on. This cannot be a good thing.

Although our discussion is centred on lower paid managers, one cannot ignore what is happening to higher salaries because it is the higher salaries and what is being paid on the shop floor that defines the area available in which one can give the differentials to get people to move and accept extra responsibility. For goodness' sake! let us discuss these things in net terms. The TUC has said that the top salary that anybody should get should be £20.000 a year and that is seven times what a man gets on the shop floor. However, at today's rate of taxation it is, in fact, 3.62 times what a man gets on a shop floor. In my own group the top salary net is 5.4 times what the average man on the shop floor gets.

Nor can one ignore what is happening in other countries. I agree, as Lord Diamond said, that this squeezing of differentials is going on throughout the world, and nobody would justify the enormous differences that used to take place in Victorian times or even between the wars. I should like, however, to give just one example from my own experience. My company has a turnover of over £600 million a year. It employs 70.000 people throughout the world and exports from this country well over £100 million worth of goods. The net salary of the highest paid employee is £14,168. We recently bought a small company in this country which had a subsidiary in Germany. It needed a new managing director. The turnover of that German company is £7 million and it employs 400 people. In order to get a suitable man we had to pay him at a rate which, net, came to £17,000 a year—just under £3,000 a year more than the top salary paid for running our whole group.

I could give your Lordships many other examples from my own group of com-panics operating in France and other countries overseas, but the problem is too well known for that to be necessary. When one gives that kind of example, the critics say that the countries in question are much richer, but may there not be sonic connection between the fact that they are richer and the fact that they pay people more? My Lords, I should like to conclude by saying—and I am sure that noble Lords will all agree —that we must get more of the best people into industry. I believe that we would also all agree that there are too few people in industry supporting too many people in other jobs.

4.52 p.m.

Baroness FAITHFULL

My Lords, I count it a privilege to make a maiden speech on the same day and in the same debate as the noble Lord, Lord Barber, a former Chancellor of the Exchequer. There are in your Lordships' House noble Lords who wisely advise against a Member as new and inexperienced as myself rising so soon after introduction to this House. I presume to do so as a social worker, a member of the Fisher Committee and a former Director of Social Services. Indeed, I am impelled to do so as I have met extraordinarily difficult human situations arising out of what has come to be known as the "poverty trap ".

The problem is one of long standing but there is mounting awareness of the urgent need to seek some solution, difficult though that may be. I am indeed grateful to the noble Lord, Lord Orr-Ewing, for having initiated this debate. I submit that this is no Party matter. There are others who have shown an awareness of the need for action at this time. On a television programme on 29th February this year, Mr. Len Murray mentioned, among other things, the need for consi deration of the poverty trap. I believe that there was a report that the Foreign Secretary had referred to the problem at a meeting of the EEC Social Affairs Directorate in Brussels. There has been a call from Professor Donnison, Chairman of the Supplementary Benefits Commission, in his Seth Memorial Lecture for action to be taken. The rising sense of urgency about a long-standing problem may perhaps be due in part to the distressing and disturbing unemployment figures.

As is well known and as was stated earlier in this debate, the poverty trap relates to low wage earners who, seeking to improve their quality of life, are little or no better off if they achieve a small wage rise by working overtime or by taking a second job, or as the result of a wife going out to work. In some instances, a man who is out of work can be better off than a man who is in work on a low wage—that is, between £20 and £50 a week. This point was referred to by the noble Viscount, Lord Watkinson.

If a man's wage reaches a certain point, he loses his entitlement to means-tested benefit, rent rebate, free school meals, and family income supplement. The tax threshold has fallen so low with rising inflation that even a low wage earner is now liable to income tax and, in certain circumstances, people drawing supplementary benefits are also subject to tax. What one Department spends much time in giving, another spends much time in taking away.

If I may, I shall quote three sets of figures. A single man who normally earns £40 a week has a net income when working of £28.34 a week. He can have £29. 30 a week when out of work. That may seem a very small difference but, speaking as a woman who runs a house, it is one loaf of bread a day and one and a half pints of milk a week, and on a low wage that is something. In fact, it can save one from starvation.

A married man with a wife and four children who is earning £55 a week when in work gets a net income of £39.98, but when out of work he can receive—at any rate for a time—£50.69 a week. The tax threshold for a married couple with two children in 1952, as a percentage of average earnings was 107.3 per cent. In 1975, it had dropped to 48.8 per cent. That fact has already been referred to by the noble Lord, Lord Orr-Ewing. I admit that those are extreme figures but I have quoted them to draw attention to the general problem.

In addition to the low wage earner, I should like also to state the position of small and middle sized businesses, many of which are either going out of business or are prevented from achieving a developing growth rate. I do this with some diffidence as I am entering the field of economics. The present low tax threshold prevents financial growth which, in turn, means a high cost of goods. That in turn prevents cash flow and investment in new plant and savings. I give two examples of the human position. I have visited various small businesses over the past ten days. One is giving up. A husband and wife run a small shop with a post office attached. They work 14 hours a day for a minimal return. They have to pay VAT on some items which they sell in the post office —telegrams, for instance. With that and the law tax threshold, they have been advised by their accountant to give up, so the neighbourhood will lose a personal and efficient service and a man and his wife will be out of work. In another case, a butcher running a flourishing small business on his own, a business at which the elderly and the handicapped receive an individual service, is finding that the low tax threshold is stifling his growth rate.

That is the human aspect. There is also the fact of the value of the small business to the neighbourhood. The corner shop, the small shop, particularly when it has a post office attached, and the small business are of infinite value to the social life of a neighbourhood. As a social worker, many is the time that I have asked a small shop to take on a delinquent child for a Saturday morning job: one could never have approached a supermarket for such a service. The effect on family life of enforced unemployment is bad enough, but the effect on children of having a father out of work by choice because he cannot obtain more money, even if it is marginally more money, by working, is hardly conducive to that child wanting to work in later life.

Furthermore—and here I underline the words of the noble Baroness, Lady Seear —there are those who can best fulfil themselves and give a service to the community by being their own masters, running their own concerns, and using their own initiative. There are some such workers, and. I have met them in the mental health field when they have been suffering mental illness, who would never fit into a large, complex organisation. I would add that, even in this day, there are areas of work requiring to be done by housewives, particularly the elderly. I have in mind such tasks as window cleaning, gardening and, even nowadays, chimney sweeping. There is a proportion of men who would enjoy filling this gap, but they tell me that they are better off out of work than in work in such occupations.

My Lords, what is the answer? Already it has been recommended by some previous speakers that, first, there should be a national minimum wage. This wage, for any one person, should be above the maximum benefit which would be paid to that person when out of work. It is humiliating for a man to know that he cannot earn from full-time work as much as he would get when out of work. It has also been said that there should be a higher tax threshold for the benefit of both low paid workers and those running their own businesses and giving a neighbourhood service. Perhaps in time we should think of moving away from means-tested benefits.

It has also been suggested that a tax form should be devised for the whole population, which could also serve to prove entitlement to different benefits. There are complaints concerning the high number of civil servants and local government officials. But under the present system the multiplicity of benefits requires too many staff, demoralises them, and humiliates those for whom the benefits are devised. I suggest to the noble Lord, Lord Lee of Newton, that that would be one way of maintaining the social services more efficiently and of saving money.

At present there are separate forms to be completed for income tax, rent rebate, free school meals, education grants, child care, supplementary benefits, aid to the handicapped and many other matters. I could go on listing them. The present system of aiding the disadvantaged, the handicapped, the elderly and the out of work has grown from a much smaller, reasonably efficient and effective service. However, with the growth of the Welfare State, the system has been patched up, added to and subtracted from, giving an endless number of people endless amounts of complicated and complex work.

It is hard to accept that there should need to be people appointed by both local authorities and voluntary organisations to advise people what benefits they can claim. Hard pressed social workers find themselves negotiating with equally hard pressed supplementary benefits officers on behalf of their joint responsibilities. It is incredible what a complex and complicated task is carried out by the staff of the Supplementary Benefits Commission. It is thought provoking when one reads the figures for those entitled to benefits but who do not take them up. Some fail to do so from inertia, while others do not know what benefits are available. There are many who state categorically that they prefer to be independent and do not wish to discuss their circumstances. Indeed the figures show that those who do not claim benefits to which they are entitled far outnumber those who abuse the system.

My Lords, one of the problems lies in the fact that different Departments are responsible for different areas of work, and there is no overall policy. Only last week the Department of Health and Social Security announced the introduction of child interim benefits. With regard to the £1.50 allowance for a child of a single parent family, only one out of every 14 for whom this benefit was devised will be able to apply. In fact there are some, particularly single parents who are working, who claim at their peril because they would be worse off.

The position is not a healthy one. As we heard in the debate on the changing emphasis on British aid policies, initiated by the noble Lord, Lord Reay, there are people in other parts of the globe less well paid than the lowest paid wage earner in this country. But that is no reason why we in this country should be inefficient and place some people in a position where there is no profit in working and prevent financial growth to small businesses. The solution to this problem is a monumental one. It will already be apparent to your Lordships that I am not an expert in this difficult field. I have put simply before your Lorsdhips an enormously complex problem. I am not an economist. But we may all ask ourselves whether there is a message for us in something which R. H. Tawney said in 1913: The continuance of social evils is not due to the fact that we do not know what is right, but to the fact that we prefer to continue doing what is wrong. Professor Donnison, in his Seth Memorial Lecture two weeks ago, said that the reappraisal of the supplementary benefits scheme was now called for, and that that task extends well beyond the powers of the Supplementary Benefits Commission to a consideration of wages, prices, fiscal policies, family allowances, rent allowances, and much else. In the debate initiated last week by the noble Lord, Lord Rhodes, one noble Lord spoke of the need for participation. I submit that a Royal Commission is not necessary. It is costly and takes time. There already exists the necessary information, statistics and data. The Trades Union Congress has extensive information, as do the relevant Departments dealing with different aspects of the problem, such as the Inland Revenue, the Treasury, the Department of Employment, the Department of Health and Social Security (including the Supplementary Benefits Commission), and the Department of Education.

Mr. Ralph Howell, a Member of the other place has, from the Low Paid Unit, written an excellent paper on low pay taxation. The Child Poverty Action Group has over the years carried out careful and meticulous research, as have organisations such as Age Concern (dealing with the elderly), Help the Aged, the Disablement Income Groups, Mind, and those organisations dealing with families and children.

Should there be a series of conferences held in different parts of the country to include all those organisations, as well as members of the public? Should such conferences be serviced by a research unit, asked to produce a scheme for debate? Alternatively, should consideration be given to the suggestions made by Professor Donnison, again in his Seth Memorial Lecture, when he said: Perhaps the Diamond Commission, or the Central Policy Review, should take it on "? Surely, my Lords, all in this House would agree with his clarion call when he said, "Someone must "; and I would add the words, "and soon ". it is the needs of individual people and neighbourhoods which count, not the dictates of a system.

5.10 p.m.

Lord LEATHERLAND

My Lords, it is my duty—and a very pleasurable one it is—to congratulate the noble Baroness. Lady Faithfull, on a successful and very informative speech. Those of us who have been involved in local government have been aware for many years of the high esteem in which she is held in the realm of social welfare; and if it should so happen, and well it may, that some of us, at some time, get involved in this poverty gap which the noble Baroness has mentioned, I am sure it will be comforting to feel that she is around to give us the benefit of her expert advice. I must also congratulate the noble Lord, Lord Barber, who, in accordance with ancient custom, made a maiden speech that was "non-controversial ", even if I have to put the word "non-controversial "in quotes. But the noble Lord is a somewhat experienced "maiden ", and it was very interesting to hear from him some of the secret history of what used to go on round the Cabinet table at 10 Downing Street. I hope he will give us some more of that, but I ask him to beware of the fate which befell Dick Cross man in a similar realm of activity.

My Lords, the noble Lord, Lord Orr-Ewing, has put us in his debt by initiating this very timely debate, and he has done so in a speech which was completely devoid of self-interest: for it is obvious, is it not, my Lords, that he is right outside the range of those middle and small taxpayers whom his Motion is designed to help? But is it not equally obvious that if you ease the burden of the small taxpayer, either by raising the threshold or by cutting the bottom tax rates, then the effect of that goes right through the whole range of tax collection, and the 83p in the £ man at the top gets twice as much cash benefit as the poor taxpayer right down at the bottom? It may very well he that it would be easy to put that right by increasing the tax on the man at the very top and using the money to assist the man at the very bottom of the scale; but I hardly think that this will be necessary, because in these days of inflation fiscal drag should provide the Chancellor with quite enough money to make those reductions in taxation which he has already said, in recent weeks, he wants to make.

It is probably a little incongruous that I should he speaking in this debate, because I am one of those people who, in tax matters, are almost uniquely virtuous. I pay my income tax promptly, and 1 pay it willingly. I do not pay it with any excess of enthusiasm or joy, but I pay it with pride; and I pay it with pride because I am a citizen of one of the greatest nations on earth, and I regard that tax payment as my membership fee. I also pay it willingly and with pride because I feel that some of the money is going to people who deserve it even more than I do, and who are not in the happy position in which I find myself.

The noble Lord, Lord Orr-Ewing, stressed throughout his speech the very heavy burden that falls on the middle and lower tax groups. I think that argument is a very reasonable one, but we must not embark upon a programme of tax cutting unless it has alongside it an agreement for the restraint of wage increases. I do not mean a wage freeze: I mean that during the coming year wage increases must be reasonable; and if the trade unions can deliver an agreement on those lines then I think the duty will devolve upon the Chancellor of the Exchequer to ease some of these income tax burdens which are hitting very deserving classes of our people. To do otherwise, to reduce taxes without getting some restraint on wages, would be like throwing a lighted match in a pool of petrol.

It is probably appropriate that this Motion should come from the Conservative Benches, for it was a Conservative Government (then known as a Tory Government) under Robert Peel, in 1842, that made the income tax a permanent feature of our revenue system. True, on a few occasions before that there had been taxes assessed on income by the Whigs tinder Pitt, but they were only temporary taxes to meet the costs of wars, and they were very quickly repealed. I sometimes wonder what would have been the situation if, back in the first half of the last century, there had been a Labour Government. Probably they would never have thought of inventing income tax; but, anyhow, it is with us, and we have got to see how it works.

There has been emphasis by the noble Lord, Lord Orr-Ewing, and by other noble Lords, on the plight of the small businessman. These small businessmen —the middle-aged docker who opens a little corner shop; the engineer who opens a garage or a workshop where he can undertake subcontracting from one of the big companies—are the salt of the earth; they are the people who sow the seeds from which big, prosperous businesses grow. I belong to a Party which has always had a soft spot in its heart for these small people—by-election voters please note!—whereas the Party of the noble Lord has the backing of great capitalistic enterprises which during the last 20 or30 years have squeezed out of existence hundreds of thousands of these little businessmen, and have killed their enterprise.

So far as those little businessmen who still remain in activity are concerned, I do not think they do too badly with their income tax. They hire clever accountants; they run their cars on the business; they sometimes put their wives on the payroll as partners; and there are all kinds of other perquisites besides. Show me the little grocer who puts 50p in the till when he takes two bacon rashers off the counter and puts them under the breakfast grille or when his wife takes off the shelves a packet of Persil to ensure that his aprons are always kept "whiter than white "! The small tradesman has another benefit. Because of these perquisites his general cost of living is lower than that of the average, ordinary worker, whether he be a blue overall man on the shop floor or somebody on the clerical staff. And the little man in business, my Lords, can have six months' grace before he has to pay his income tax, whereas the ordinary, salaried or wage-earning worker has to pay it every week. That enables the small businessman to invest six months' tax dues, to draw interest on them and thus to find himself in possession of a small subsidy towards his tax bill. That gives him another advantage.

So far as the salaried middle-classes are concerned, they, as a rule, do fairly well, too. Many of them, also, have their clever accountants; many of them have their car partly paid for by the firm; some of them obtain low-cost insurance policies through the firm, some of them have very cheap mortgages through the firm; some of them have very low interest loans from the firm. I am not suggesting that all of them do, but your Lordships know in certain houses of commerce the class of men to whom this kind of privilege is accorded. But, of course, the "perks "which come the way of the small and middle man in commerce are not equivalent to those which are available to the man at the top. The Wealth Commission told us a few weeks ago that the average £10,000 a year man gets fringe benefits equivalent to another 23 to 29 per cent., and that he does not pay full tax on all of it. We heard this afternoon the sad case of the £20,000 a year man who has to pay 83 per cent. income tax. That 83 per cent. wants putting in its proper perspective. It is 83 per cent. on the top slice of his income, with lower rates of tax on the corresponding lower slices of his income, and the net effective tax rate for him, if he is an average married man with two children, is only 47 per cent.

Life would be much simpler, I know, if there were no income tax at all; but we need it in order to maintain this modern, sophisticated, civilised society that we enjoy. We cannot go back to "the rich man in his castle and the poor man at the gate." Anyway, council rates on castles are pretty high. We want a National Health Service where diseases that might otherwise lead to long suffering and early death, can be caught at an early stage. If there be justification for the complaint by the Conservative Party that there are many defects in this Service at the present moment, then more money needs to be spent on it and not less. Surely, too, we want a decent system of pensions so that a man with 40 or 50 years of hard toil behind him can spend the remaining few years of his life in financial peace at least.

Present pensions are not as high as they should he but, thanks to the present Government, they have been increased by 50 per cent. in the last two years. We also have to cope with other expenditure. We want a bigger police force in order to grapple with the increasing wave of crime that is spreading across the country. In the coming year the Government expect to spend well over £4,000 million on defence—rightly, from my point of view. What would be the value of all our civilised society and its services if these were at the mercy of a foreign Power? But the Conservative Party are saying that we should spend more on defence, that we are not spending enough. Surely that means a bigger load for the income tax payer to bear, and not the smaller load that the noble Lord, Lord Orr-Ewing, through his Motion, wants us to have.

When one looks at these middle and low-grade income tax payers one finds that they also have another burden to bear, the burden of local rates. The bill they get from the rates office is sometimes as big as the demand from the tax inspector; sometimes it is bigger. I know that Mrs. Thatcher has said that she will abolish rates entirely. She did not use the expression "at a stroke ", and I give her credit for that. But if that be done, where is the money to come from to maintain all these delightful social, educational and other services touched upon by the noble Baroness, Lady Faithfull? It can only mean another increase in income tax. The noble Lord, Lord Orr-Ewing, must not devote himself entirely to the question of reducing income tax when he sees those two big Conservative demands for a higher load on income tax presented by his Party leaders.

The noble Lord was dealing with taxation as a whole and not merely with income tax. People have to pay taxes after they are dead as well as when they are alive. It was a Conservative Government in 1894 which completely and fundamentally reorganised the system of death duties and introduced the system which remained with us until twelve months ago. Flow many widows of small businessmen had to sell up the business that their husband had built up and to sell their house in order to pay the rate of death duties that were estabished under that Conservative system? It had to be left to this Labour Government to say to that widow, All the business that your husband built up, the house he bought for you, all his savings and all his other property shall remain with you without a penny of tax deducted from it until the time that you, yourself, die." That was one of the most beneficent tax changes ever introduced in this country.

Mr. Healey did something else for these small businessmen and for those of us on a small scale, even if not in business ourselves. He reduced the rate of death duties—I call them so in order that we may understand the term—very considerably on the small- and medium-sized estates. For instance, on an estate worth from £15,000 to £20,000 he reduced the rate from 25 per cent. to 10 per cent.; on estates of £30,000 to £40,000 he reduced it from 35 per cent. to 25 per cent. We must bear those matters in mind when considering the general level of taxation because those reforms of Mr. Healey have taken an enormous load off the minds of many of our small businessmen and small salaried officials.

The noble Lord's Motion talks about the disincentive effect of high taxation. I agree that in some cases it can be a disincentive. Look at the men who have deserted their native land and have gone to Jersey or to the Bahamas in order to dodge income tax. Lower down in the scale I will admit that, if I were a Tory trade unionist and I went snooping around the factory floor, I would find one or two men declining to work overtime because they would say, "I shall be taxed on my overtime earnings ". But I should also find the great majority who would say, "After working overtime at time and a half rates of pay, I shall be able to keep two-thirds of it in my pay packet ". I can visualise the day when we shall be able to reduce income tax all round. It will be at a time when our factories are working at full speed, at a time when the debit on the trade balance has been turned into credit—and this Government have made marvellous progress in that direction during the past year. But it will not be at a time when inflation is rampant, although being reduced, for that will be a danger.

It may be said—and many people say it —that income tax is very high. According to the latest figures—and I take cognisance of what the noble Baroness, Lady Seear, has said, that these figures are a couple of years out of date—the income tax equivalent amounts to 12½ per cent. of our gross national product. In some other countries, countries to which we sometimes turn envious eyes, it is higher than that. In Canada, it is 13 per cent., in Holland, 14 per cent., in Sweden, 20 per cent., in Denmark, 281 per cent.; and even in the United States it is not far below ours. It is 10.1 per cent. against our 12.5 per cent. So do not let us get too dismal.

My Lords, in conclusion, may I say that I should like to see taxes reduced on these middle and low incomes as soon as it is possible. Those particular grades of taxpayer have been hit hard by fiscal drag, if by nothing else. But alongside such tax reduction we must have an agreement for a reasonable standard of wage increase during the coming year. Without that, we should merely be throwing petrol on the fire of inflation; and that would lead to a national disaster.

5.29 p.m.

Lord CAMPBELL of CROY

My Lords, I should like to congratulate my noble friend Lord On-Ewing for introducing this debate and for having chosen this subject at such a timely moment, only four weeks before the Budget Statement. The debate also appropriately follows that on the question of growth and economic policy which we had a week ago in your Lordships' House. At the beginning I should like to say what great pleasure it gives me to congratulate my noble friend Lord Barber on his maiden speech. As a colleague in another place, I was immediately reminded of his wisdom and fluent capacity to convey cogently his views derived from his own penetrating assessments of the economic situation. He clearly stated the principal options before us and the essential matter of the size of public expenditure, while at the same time, with notable humanity, extending sympathy to the present Chancellor because of the difficult position which Chancellors hold within Governments. He gave us a warning about the unfortunate exodus from Britain of ability and expertise. Your Lordships will hope, now that his self-imposed purdah as an ex-Chancellor is over, to benefit on many occasions from his contributions.

I also warmly congratulate my noble friend Lady Faithfull on a fluent and confident maiden speech. She added a dimension to the debate with her special knowledge and work in the social services, describing lucidly the effects of present levels of taxation on low income families. She can be assured that we look forward to future speeches from her in your Lordships' House. I should also like to mention the contribution from my noble friend Lord Watkinson. He has a heavy CBI commitment and many engagements in that role. As such, he speaks with the greatest authority about the effects of current conditions upon British industry and on the response of British industry to Government measures.

In drawing your Lordships' attention to the deterrent effects of taxation and making suggestions to the Government, we now know that we have a receptive ear in the place where it matters, that is, the Treasury. On 25th February the Chancellor of the Exchequer—and his speech was reported the next day in the Press as if a text had been issued—spoke about families earning less than the average wage now having to pay much more in tax than ever before. Explaining the Government's proposed cuts in Government expenditure, he is reported to have said that the taxation which would otherwise be needed would corrode the will to work and seriously weaken the incentive for people to acquire the skills which industry desperately needed.

Those words of Mr. Healey, as reported in the Press, clearly identify the dangerous conditions that can be created. They sound a warning; but what should be added is that those conditions already exist and the Chancellor should be preparing now the remedy needed for his Budget Statement. Certainly the Ministers taking part in this debate cannot credibly contend that taxation on its present scale does not remove or reduce incentives and stifle enthusiasm to excel. The Chancellor of the Exchequer has already acknowledged this and conceded it in advance.

As Mr. Healey has acknowledged, there is no doubt that high levels of taxation discourage extra effort and the taking of additional responsibility. The tax threshold is now so low that a man in full-time work starts to pay income tax when his earnings are below the official poverty line; and the official poverty line I take as that registered by the short-term supplementary benefit eligibility and the level of entitlement to family income supplement. So the Government find themselves taking away with one hand what they are giving out with another. Surely that cannot be regarded any longer as a rational system, and the taxpayers concerned can be excused for thinking the system is out of hand and is crazy.

If we look at the average wage-earner, in 1952 a man, married with two children, paid no tax until his earnings were well above the average wage. As a result of last year's Budget, a family of that kind now pays tax on earnings which are about half the average wage. In that Budget last year children's tax allowances were not increased, while personal and married allowances were not increased nearly enough to keep pace with inflation. Perhaps the Chancellor was still believing his own assessment that inflation was running at only 8 per cent. As a result, some families have started to pay income tax for the first time, though their income has not risen at all in real terms and may indeed have fallen.

Then, turning to the poorer families, when the present Chancellor of the Exchequer took office, he gave the impression that he intended to "clobber "the rich. He gave the impression—rightly or wrongly—that he was going to enjoy doing so. It is ironic that now people earning less than the average wage are contributing about one quarter of the total income tax that is paid. To give an example, a married man with two children earning £30 a week, had 6'5 per cent. of his earnings taken as income tax last year. He is having 10.6 per cent. removed in this way in the current financial year. For a similar man earning £25, the percentage increase is sharp; from 1.4 per cent. to 5.7 per cent. While some of us realised that this could happen with a Labour Government, I do not have the impression it is what the present Government intended or that they are particularly proud of it.

The PARLIAMENTARY UNDERSECRETARY of STATE, DEPARTMENT of INDUSTRY (Lord Melchett)

My Lords, I wonder whether I may ask the noble Lord if I am right in concluding from what he has said that the message that he would like the Chancellor to take away is that the Chancellor has not succeeded in clobbering the rich; indeed, there might be some scope for further action in that sector of the economy?

Lord CAMPBELL of CROY

My Lords the impression was that the Chan cellor was concentrating on "clobbering "the rich. If the noble Lord will tell us the Chancellor intended to do this to the poor as well as "clobbering "the rich, then that impression was certainly not given two years ago. There was no suggestion by the Party opposite that families were going to be paying income tax when they were eligible for supplementary benefits.

In addition, what has been called the "poverty trap "has been made worse. My noble friend Lady Faithfull expanded on this and gave examples. For many families—the last Government estimate was 50,000—a pay increase will leave them worse off than if they had not received it. This is because, out of an additional pound earned by certain low-paid workers, nearly half leaves them in tax and national insurance. In addition, they lose the family income supplement and their rent and rate rebates are reduced. What incentive can there be for them to work overtime or strive for and win promotion?

Clearly, the Chancellor should raise the threshold for income tax, but where can he find alternative sources of revenue? The amount that he can obtain from increasing taxes on higher incomes is relatively small. Whether or not he decides to do that, the amount available is relatively small in relation to the total Budget figures. Of course, he can pile more taxation on smoking and gambling, but that source is limited, too. As one or two speakers have said, the limit has just about been reached in indirect taxation. Admittedly, the Chancellor is confronted with an intricate puzzle. If it is a Chinese puzzle it might need a Chinese mind to solve it! Whatever the reason for Mr. Healey's oriental reference—ideological or sardonic—it seems clear his main task will be to curb public expenditure. If he is looking for ideas, I suggest he could start by persuading his colleagues to abandon the proposals to nationalise the shipbuilding and aircraft industries. He can also abolish the National Enterprise Board, the British National Oil Corporation and the Community Land Scheme. At Question Time today my noble friend Lady Young elicited from the Government the admission that there would be considerable deficits in that Scheme in the coming years.

In the past, Governments have been helped by the fact that income tax has the feature which is described in tax jargon of "buoyancy ". If the economy is expanding, the same rates of tax will produce more revenue, and it has been possible, notably in the 1950s, to reduce income tax but not lose revenue from it in real terms, because inflation was not then on the present scale. With significant growth in the economy more is being earned each year, and there is more total income to be taxed. In that way, it has been possible for Governments to reduce rates of income tax without losing revenue; but the Government can look for little, if any, cheer in that direction now. Because of the overriding needs of the battle against inflation, incomes as a whole are unlikely to increase in real terms from this year to next, or indeed to the year after that, and rightly so, until inflation, which is the scourge of our country, is overcome.

As for growth, I believe that the Chancellor's predictions arc too optimistic. In the debate yesterday in another place —here I must refer to the full report in The Times, as no copies of Hansard are available because of industrial trouble—the Chancellor said that it would be necessary to have an average rate of 5.5 per cent. of growth over the next three years, in comparison with the preceding three years, and that within that figure manufacturing industry would need to have annual growth of 8.5 per cent. Of course, we all hope that this will happen, if it is to bring good effects, but it would be wrong—indeed, it would be folly—to count upon its happening and to prepare a Budget and subsequent programmes on that assumption.

My noble friend Lord Orr-Ewing has also drawn our attention to the deterrent effects of taxation on small and medium-sized firms. Here, the most damaging tax in most cases is the capital transfer tax introduced by the present Government. My noble friend Lord Watkinson spoke about this. Family firms have grown in the past through prodigious efforts in production and exports, but they are unlikely now to be emulated by others. They know that their effort could be nullified and that part, or the whole, of a firm may have to be sold in order to pay the tax demanded upon a retirement or death. The way in which it is proposed to apply this tax to farming runs completely counter to the previous policies of both Labour and Conservative Governments. Here I must declare an interest, because I am the owner or a farm. Because most of a farmer's capital is invested in his land, buildings, stock and equipment, part of a farm will in many cases have to be sold to pay the tax.

What a ridiculous situation, when grants—and therefore taxpayers' money —have been paid in recent years to permit the amalgamation of farms into more economic units! The work aided by that money will be undone and the process which has been carried on by both Conservative and Labour Governments will be reversed. I shall not dilate on that because I understand that my noble friend Lady Sharpies intends to speak further on the effects on agriculture. In the debate last week, at least one of your Lordships—I think it was the noble Lord, Lord Roberthall—paid tribute to British agriculture for its increase in productivity. He pointed to it as an example to others, and I would caution the Government in this respect by saying that the effect of CTT will be in the future to discourage effort in farming.

My noble friend has raised this subject and initiated this debate at the right moment. The Chancellor must now be formulating his Budget proposals and I hope that he will take full account of what is said today by a galaxy of speakers with immense experience in industry, finance and the social services. The Government are facing difficult problems; many of them are of their own making. They will not solve them by adding to the heavy burdens on small and medium-sized firms and incomes.

5.45 p.m.

Lord REDESDALE

My Lords, I am sure that your Lordships will not consider me discourteous if I try to be as brief as possible. With 21 speakers, I think this perhaps might be an advantage. After listening to two such notable maiden speeches made by the noble Lord, Lord Barber, and by the noble Baroness, Lady Faithfull, one feels very inadequate indeed; and to be further sandwiched between two such redoubtable Scottish speakers as the noble Lord, Lord Campbell of Croy, and the noble Lord, Lord Hoy, my confidence ebbs fast.

However, I should like to make one major point which is that I believe at the moment it is a question of morale. At present the pound is falling and we are obviously in a situation which will allow us to charge lower prices for our products. This is perhaps a great advantage, but it also means that we have to sell very much more. To increase productivity we must have incentives, and there is no point in having at the end of the day a take-home pay which is only marginally increased by the working of considerably longer hours. Incentives must be real, so that if a person works that much harder he gets that much more to take home at the end of the day. It is take-home pay which is important. What can be done about this? It is not possible, as has been said already, to waive taxation: additional revenue has to be found. I am rather nervous of making my suggestion, as it was disregarded with a wave of the hand by the noble Lord, Lord Barber, but I believe that the balance of revenue could be made up by making some tax reductions as incentives and by increasing VAT, in other words, increasing indirect taxation. This may not be popular in a period of rising inflation.

On the question of how much we earn or how much we are taxed in this country as compared to other countries, it is possible to prove anything with statistics. There is a letter in the Press today which shows that we are not perhaps the most heavily taxed people, although we may feel that we are. The same writer in The Times also says that the possibility of indirect taxation is not out of the question, and he makes out a very full case. To make out a very full case in a debate such as this requires many statistics and even perhaps some visual aids to put across the idea. Therefore, I shall net indulge in that, but merely try to make the point that if incentives are increased take-home pay can be increased, and the balance can be made up by a marginal shift to indirect taxation. The argument against this one is always that the lower-paid people and those who are least able to look after themselves in an inflationary period are the ones who are most affected.

I feel that the situation has changed so fast that we must not get out of touch. Some very useful and informative reading is provided in the survey done by the Daily Mirror on disposable incomes. This has just been completed and it shows that the telescoping of income has been such that it is no longer a question of how much the head of the household earns, but of how much money comes into the household. We know that the £100-a-week shop floor worker is not so very uncommon. We also find that the Cls—this expression is perhaps rather out of date now in socio-economic terms —have been rather "squeezed ", to the benefit of the C2s. The whole scale of disposable income has moved down. Therefore, who are the people who will suffer from a shift to indirect taxation? Who are the real poor? The noble Baroness, Lady Faithful], in talking about the poverty trap made this point far better than I ever could. Anybody who has been at all concerned with social work has seen that successive Governments have never really cleared that section right down at the bottom, where there is real hardship. There are so many problems, and it is easy enough to criticise but so difficult to find a method of eliminating that section of the population who arc in real hardship at the moment.

In other countries of the EEC, the VAT rates are far higher than our 8 per cent. France and Ireland have much higher rates of VAT. The point about moving over to indirect taxation is that it gives individuals greater freedom of choice in paying for what they want to pay for. If they have earned more money then they are prepared to pay more for certain luxuries which they really want. On the other hand, necessities such as laundry and other services right down the scale can be zero rated. There is considerable flexibility in the scheme.

I shall not burden your Lordships any longer and will just leave you with this thought. In a situation where we have to increase productivity we must increase real earning power. This also means that gross wages must be held, but, at the end of the day, it is the take-home pay that matters. So, if we can hold gross wages, increasing incentives with reduced taxation, then we shall achieve the productivity which we so desperately need at the moment.

5.52 p.m.

Lord HOY

My Lords, I am grateful for the opportunity to follow the noble Lord, Lord Redesdale. One thing I have noticed is that immediately a Minister ceases to preside over a Department he becomes an expert Chancellor of the Exchequer. It is amazing how simple ex-Ministers find it to solve all the problems with which the country is confronted, though we all know that it is not at all simple. I have seen a great many Chancellors come and go, and they always had the boast—and rightly so—that in at least one Budget they took the lower paid right out of income tax, but by the following year their earnings were up and they were back in again. Then the next Chancellor who came along did the same thing. But the earnest of their intentions was absolutely first-class, and of course I supported them.

I was not altogether surprised when the noble Lord, Lord On-Ewing, attempted to convey the impression that the only Government which ever put up income tax was a Labour Government—and we all know that that is complete nonsense. Indeed, if he were to make a fair assessment of the situation, the noble Lord might have added that we have all known Governments which have left behind balance-of-payments deficits for their successors to clear up. Not so very long ago a Labour Government left a balance-of-payments surplus which was more than wiped out by their successors who left behind a balance-of-payments deficit. I am a self-employed person and I pay my £2.41 per week in order to put a stamp on my card.

Lord ORR-EWING

My Lords, the noble Lord will, however, agree that if you have several employers you pay £2.41 on each—five or six, if necessary. I pay four times over.

Lord HOY

My Lords, all I can say is that a self-employed person needs to buy only one stamp for himself. Unfortunately, at the beginning of the year, I did not seek to be excused from paying for a particular source from which I earn part of my living, so I have continued paying for a stamp. I look forward to the insurance year closing, when I shall be able to send in my application and get my money back, and the noble Lord, Lord On-Ewing, will be doing exactly the same thing. So that that was not a fair account of the situation, as we know it. Indeed it is untrue to say that the self-employed person is the highest contributor. The noble Lord was talking about a figure of 8 per cent., but he must remember that, so far as the employee is concerned, there is an employee/employer stamp. The self-employed person pays only 8 per cent. and gets 85 per cent. of the benefits in return. It is not a bad insurance policy. I am not claiming that it is perfect, but if one is to present an argument to your Lordships' House it should be accurate and fair.

I listened to the speech of the noble Viscount, Lord Watkinson, with a great deal of sympathy and pity. He spoke about a meeting last Friday when the young executives of this country were going to the platform—they must have had a great gift of speech, if we are to believe this—saying that they could not at all afford to save. I am hound to say that that is not my experience. As many of your Lordships know, I have a lifelong connection with the Trustee Savings Banks in this country—and when I say "lifelong ", I mean exactly that. I find that at the close of the financial year, last November, we had an all-time high increase in savings and our funds today are higher than they have ever been, as the noble Viscount, Lord Amory, can confirm. May I remind your Lordships that I am not talking about two or three people at a meeting organised by the CBI or the Trades Union Congress. The Trustee Savings Banks represent 11 million customers in this country, and that figure is a fair cross-section of a community of 55 million. So it does no one any good to belittle what has been achieved by our own people here in Britain, and that ought to be put on record. Instead of always demeaning what is done in this country, a little more praise for those who do well might pay very much better dividends.

Having said that, one has to look around, and, obviously, we do not rush with enthusiasm to pay taxes. I can remember the day when I did not have the privilege of paying taxes. That was not because I did not earn enough but because I was not paid enough and therefore was not liable for tax. There is a great difference today and there are people paying considerable sums who, a few years ago, might never have paid taxes. I do not say that I paid with enthusiasm, but I know that if we are to enjoy our facilities they must be paid for.

I find it a little difficult to understand people who talk about those who are running away from this country. A considerable number of people are leaving after the British Government have paid for their training, and I do not regard that as very creditable. I imagine that, if it were done in other circumstances, a certain number of noble Lords opposite would be the first to complain bitterly about such conduct. Nobody wants to keep taxation high, but even when noble Lords opposite were challenged and the noble Lord, Lord Campbell of Croy, made a reply, it did not relate to any direct saving of Government money. It is for whoever is going to reply to deal with that.

In terms of actual expenditure any noble Lord who advises us that expenditure ought to be cut should be able to say clearly and concisely where the cuts should take place. I do not think that is asking too much. If noble Lords cannot do that they have no right to come to your Lordships' House and say that cuts have to be made. They have to think it out. I can remember other occasions in regard to defence expenditure, which I have always supported—there has never been any doubt about my position in regard to that. But you cannot say that we have to have more and more defence expenditure and at the same time ask for cuts in taxation. I have listened to the demand not only in this House but in another place, if not day after day then certainly week after week. Indeed quite recently during the doctors' dispute noble Lords were saying that doctors were being badly dealt with; they ought to get increased salaries in order to retain them for the Health Service of this country. If you do that you have to find the cash to do it with. There is no secret drawer anywhere.

I remember on one occasion winding up the debate for the Public Accounts Committee. There were many speeches delivered that afternoon about Government money and I came to the conclusion that there were two forms of money—money the taxpayer paid and a chest of money which the Government had in some other place! There is no Government money except what the taxpayer pays, and the sooner we understand that the sooner we shall learn that we cannot make demands for increased expenditure unless we are going to pay the taxation to meet it. So when we make these claims for cuts, is it to be in housing? Is it to be hospitals or medical services? On claims for cutting taxation let us remember, as we have been reminded this afternoon, that this Government, whatever their weaknesses, have sought to help the lower paid and indeed they have increased old-age pensions by no less than 50 per cent. in two years. It would seem that the noble Lord, Lord Orr-Ewing, introduced the debate at a timely moment, for this afternoon some 2,500 old-age pensioners arc appearing at another place saying that they want a bigger slice of the cake. This is the job that all Chancellors, irrespective of Party politics, have to face: how is it to be divided? If someone is going to get more, then somebody else has to get less. So before people demand cuts let them say what they mean.

As the noble Viscount, Lord Amory, has said during the course of my association with him through the Trustee Savings Banks as well as in the House of Commons, there is one other way. The one positive way for people to get more is to increase the size of the cake. This you do by well organised work. When you have made the cake bigger then you can afford to give away bigger shares, but until you are able to do that do not say that someone else ought to have a bit more without at the same time saying who is going to have a bit less.

6.4 p.m.

Viscount AMORY

My Lords, I should like to thank the noble Lord, Lord Hoy, for his kindly remarks about that happy day in the life of Chancellors of the Exchequer when they can remove a few million people from income tax. When I was at the Treasury I always took the view that it was better to do good than not to do good at all, even if that good might later be frustrated by cruel events. I should also like to pay a tribute to the noble Lord, Lord Hoy, for his very distinguished career in the Trustee Savings Banks. It really has been a remarkable record of service.

My Lords, I wish to speak only briefly in support of the case which my noble friend Lord Orr-Ewing has so cogently made. May I start by saying what a pleasure it was to hear the excellent maiden speech of my noble friend Lord Barber. I now calculate that we have five former Chancellors of the Exchequer in this House. Surely that is sufficient to justify the formation of an association, with of course a secretariat and a modest research staff. My noble friend suggested that a former Chancellor of the Exchequer should speak only "after a decent interval." I wondered whether I should have scratched my speech forthwith, but I hope he feels that 15 years qualifies as "a decent interval "! May I also say what a very great pleasure it was to listen to the excellent and well informed speech of my noble friend Lady Faithfull, and how much we shall look forward to hearing her again.

Total taxation is dangerously high today but it is direct taxation, that is on earnings and other income which is by far the most dangerous. All political Parties support the principle of progressive taxation: the principle of from each according to his means, a principle that should be applied reasonably and fairly. All Parties, too, support the principle of taxation of business profits. Where things have gone wrong is that the current levels have become so high as to produce economic effects which are counter-productive and seriously weakening to our national economy. The Labour Party believes in high levels of taxation, not only to finance increasing programmes of public expenditure but also as a means of redistributing wealth. But there are signs that even in the Labour Party some are beginning to realise that there is little profit in redistributing incomes which themselves are shrinking in real terms.

In this speech, which I hope will be a short one, I propose to quote no figures or statistics. There are a plethora of them available and some very effective ones have already been quoted. Recent statements by the Chancellor of the Exchequer, some of which have already been quoted, and by the Home Secretary, are very significant in showing that both realise the economic dangers arising both from the current level of public expenditure and from the current levels of personal taxation. If we look at personal taxation first, rates which were already high have become quite unreasonably, and of course unintentionally, savage because of inflation which has brought income, which has not increased in real terms, into higher tax rate brackets. This has happened at all levels and the disincentive effects apply at all levels too.

The noble Lord, Lord Plowden, made a most impressive speech and I was extremely interested in the very relevant figures which he quoted from his firsthand knowledge. In some quarters there is a belief that, even if the rates of tax on earned income can be too high, there is no economic or social justice argument against most penal levels of tax on what is called unearned income, which I believe at the top rise as high as 98 per cent. This idea is surely an economic fallacy. There is in economic terms no real sharp distinction that usefully can be drawn between what is called earned income and what is called investment income. Excessive levels of both produce the same kind of adverse economic effects and the same counter-productive influences on savings which, as everybody will agree, is an absolutely essential element in industrial and other investment. As the noble Lord, Lord Hoy, said, it is true that in some directions, National Savings are encouraging. It is fortunate that many people are succeeding, in spite of current difficulties, in putting away something for a rainy day.

In appraising effects of our level of direct taxation, let us not ignore the examples of other countries. With very few exceptions, whatever their levels of total taxation—and those levels are generally below ours, as my noble friend pointed out—they studiously avoid levels of direct taxation anything approaching ours, and this they do as a matter of deliberate economic policy. The noble Lord, Lord Selwyn-Lloyd, whom we were glad to see introduced in this House today, ensured I think that the highest rate of tax on earned income should not exceed 75 per cent.—a wise provision.

But perhaps the most damaging effect of excessive rates of tax on earned income is the incentive to seek, almost at any cost, tax-free benefits in place of normal earnings. I remember when Mr. Khruschev and Mr. Bulganin visited this country many years ago, one of the things that amazed them most was the high level of taxation of incomes in this country, which to them seemed sheer lunacy. I remember one of them saying politely that he had heard that the British were mad, and this confirmed his opinion that we must be mad. When he admitted that in Russia they had not got social services like ours, I can remember Mr. Macmillan saying, "Well, then I can see what will happen. Your workers will come to this country to enjoy our social services, and our millionaires will go to Russia to enjoy your complete freedom from income tax ". All this happened when Mr. Khruschev and Mr. Bulganin were here, when this country was under a beneficent Conservative Government, and rates of tax were very much lower than they are today.

My Lords, turning to business and company taxation, probably the worst effect of the present system is that tax is still so often payable on profits, which, because of inflation, are simply not real profits. The relief afforded by the Chancellor of the Exchequer on profits due to the appreciation of stocks, as my noble friend Lord Watkinson has said, has helped very much indeed, but it is really necessary to do more than that. The burden of capital transfer tax could be absolutely penal on small and medium-sized businesses. These small- and medium-sized businesses are just those which have to rely on ploughed-back profits to find everything that they require permanently for the expansion of their businesses, and even for their survival in an inflationary time. What is left from their paper profits after tax is quite insufficient to finance working capital requirements when inflation is continuing, and the replacement of plant at three or four times its original value, let alone investment for expansion. Most of the people in these businesses feel that they have reached a stage where they should not in prudence borrow more from the bank; and that makes the situation still more crucially serious. It is not an answer to say, "O.K., the banks will lend more ". Anybody knows that a stage is reached in business where it is the most imprudent thing in the world to land yourself with commitments which carry interest and have to be repaid.

Many stupid utterances emanate from some quarters about securing more industrial investment, the need for which is unquestionable. A few days ago, I read that one leading official of the Labour Party advocated, it was reported, that industry should be forced to invest more. Such silly proposals are often accompanied by simultaneous calls for the curbing of profits from which, directly or indirectly, funds for investment must come. Such critics never seem to me to propose from where the funds for investment should come.

If it is agreed, as I think it must be, that current levels of direct taxation are a real handicap to our national recovery, what should the Chancellor of the Exchequer do? Because public expenditure has been allowed to grow so fast, and because the Chancellor has already borrowed, and is going to continue to have to borrow, such vast sums; because sterling is weak and still languishing, and because the cost of living is still rising and unemployment is high, he is in a real dilemma. What the Chancellor of the Exchequer must surely not do is to borrow still more. He is borrowing far too high a proportion of public expenditure at the moment. Without any question, today we are living dangerously "on tick ". The right honourable gentleman Mr. Healey said the other day that the burden of debt repayment is likely to be £3,000 million higher in 1978–79 than was envisaged only one year ago. Of course, he went on to say that that debt repayment, so far as it is internal, is not quite so disadvantageous economically, but he had to admit that one-seventh of the total debt has to be paid abroad, most of it in gold, or in the equivalent of gold, not in sterling.

The Chancellor ought to raise the lower limits of every income tax bracket from bottom to top for both earned and investment income, to compensate for the effects of inflation. That will be very expensive, indeed. He will not be able to do it all at once, but he ought to make a start. I should have thought a low increase in wages and salaries, plus an income tax relief, would be far healthier than a higher rate of wages and salaries increase. Perhaps the Chancellor may have to switch some taxation from direct to indirect. A few years ago that would have been a good thing, but it is not so easy today, with the present high level of indirect taxation, and in particular with the current level of VAT, with its all-pervasive nature.

A better alternative would be to reduce the planned increase in public expenditure further than is proposed by the White Paper. In spite of current restrictions, one still comes across instances of public expenditure on objects which, however desirable in easier times, cannot conceivably be regarded as essential in conditions of financial stringency. I know that if one says that one is immediately asked, "What? "It is a fair question. But I have not the time more than just telegraphically to indicate two or three examples of the sort of things I am thinking about.

I am thinking about projects like the consumer advice bureaux which I should have thought were definitely not in the essential category, although they may be desirable. I am thinking about many of the amenity projects which have stemmed from recent legislation—highly desirable, most attractive in themselves, but not absolutely essential. Then there is some of the expenditure which will soon be coming along for the Community Land Act which, in my opinion, cannot be regarded as at all essential. Then, economically, of course, the general food subsidies really do not make sense, going to all and sundry, and no time should be lost in starting to eliminate them. It is rather disappointing how many things in the White Paper are put off until 1977–78.

I find myself in complete agreement with some reported observations a day or two ago by Lord George-Brown and Lord Annan, two very different personalities. I told Lord George-Brown I was going to say this and he had not the smallest objection, so I am quite happy about it. What they were both saying was that Governments have allowed expectations to rise far beyond the resources available to meet them, and that, therefore, far sterner priorities have become necessary than anything we have known since the war. It is simply no longer a question of this and that, but of this or that, and perhaps of neither at the present time. The Chancellor of the Exchequer must feel rather like the Irishman who, when asked the way to Roscommon, replied, "Begorrah, if it's to Roscommon I'd be going it would not be from here I'd be starting ". We can all feel for him.

The absolutely essential thing is that Mr. Healey should continue to make the cure of inflation his top priority to which everything else must give place. Any general reflation at present must be entirely inconsistent with the achievement of that goal, as the OECD Report within the last few days has affirmed. Increases in income in this coming year must be at a lower rate than the current flat rate increase of £6 per week, which in itself as a step is proving extremely helpful. My own preference next time, however, would not be for a flat rate but for a percentage increase. The economists will tell you that it ought to be a negative one, but it clearly ought to be an extremely small one, or we are in danger of losing everything that I believe has been gained over the past few months.

My Lords, all Parties are rightly committed to the highest possible level of employment consistent with the avoidance of inflation. If inflation can be killed—and it can if the national will is that it should—then the way will be open for rapid national recovery and a certain decrease in the current deplorable level of unemployment.

6.23 p.m.

Baroness MACLEOD of BORVE

My Lords, like other noble Lords, I am deeply indebted to my noble friend Lord Orr-Ewing for initiating this debate this afternoon. It has resulted in two brilliant maiden speeches, and also, to the good fortune of myself at any rate, and perhaps other Members of the House in two former Chancellors of the Exchequer giving us of their wisdom and advice—and giving their advice, I hope, to the present Chancellor—as to what we should do in various spheres in this country. I should like to compliment the noble Baroness, Lady Faithfull, because I understood every word that she said. On the other hand, I did not understand every word that the noble Lord, Lord Barber, said, purely because my knowledge of finance does not extend to the rarefied atmosphere of his thoughts and his numbers of noughts are more than I can take in.

I am confining myself to one area only and that is the very difficult one of widows. I must declare an interest, presumably, in that I have, unfortunately, been twice widowed. I am also president of the National Association of Widows. This Government have dealt in a particularly harsh way, as I will show, with those who are widowed. There are just over 3 million widows, and 503,000 of them are under retirement age. This is a vast number of younger women, and one can presume that in the main they are responsible for bringing up the families which their husbands have fathered. They have to pay the mortgage, or the rent, and the rates and the ever-escalating fuel bills. Also they have to pay for the school clothes and food and make a home for the children without the support, either physical, moral, or financial, of their partner. This forces them to go out to work to keep up the standard of living that they had when their husbands died. Furthermore, they need to go out to work to get away from the home and in order to seek companionship. Government taxation, however, at this time is so high that there is a positive disincentive for anyone to work full-time.

I shall not weary the House with many statistics, but I have a few. Under the present system of taxation there is a most serious anomaly. Certainly it is one which causes the deepest resentment among widows. It is the difference in treatment accorded to the earnings of widows and working wives. A working wife may have tax-free earnings of £675 a year, in addition to the tax allowances enjoyed by her husband in respect of the family. On the other hand, a widow's tax allowances for herself and family are more than cancelled out by her pension, and all extra income is liable to tax at 35 per cent.

I will give your Lordships one example of a widow, whose age group might be anything from 30 to 45, with two children aged, shall we say, 12 and 8. She receives now a widowed mothers' allowance of £24.80, and her part-time salary is £17. On those two amounts she has to pay tax of £4.55, leaving her with a net income of £37.25. A wife who is doing the same job part-time and earning £17, has only £1.50 tax deducted, so her net income is £15.50. As her husband's tax-free income is £27, this brings £42 into a family where the husband and wife are earning and where there are two children; but a widow in exactly the same position has only £37.25.

I have also a table, provided by the Treasury, which shows the tax paid by widows earning one-third of the average earnings of full-time female married workers in each year from 1969 to 1975–76. I am sure it will be of interest to all of your Lordships to know that between 1969 and the beginning of 1974, a widow with no children and average earnings had to contribute between £29 and £45 in tax. Tax went up, and occasionally it went down. In 1972–73 it went down to £17.05. Now, between 1974–75 and 1975–76—that is, in the time of this Government—a widow with no children had to pay £108 in the first year, and in the second year—this year £191.45. In the same period, 1969 to 74, a widow with one child not above 11 paid no tax whatsoever, but in the last two years, the two years of this Government, she has had to pay £48 in the first year and £117.95 in the current year. A widow with two children not over 11 had to pay nothing for the first four years—in which, as all your Lordships will know, it was a Conservative Government—but in 1974–75 she had to pay £47.78 and this year £142.45.

Widows want to be independent, as independent as anyone else, but with taxation at such a high level, and the very unfair anomaly that I have mentioned, I should like to close by asking the Minister to convey our very serious problems to the present Chancellor and ask him to consider whether a small income tax relief, by way of granting perhaps an additional tax allowance similar to that given to single retirement pensioners, could not be considered. As many noble Lords have said, 6th April is coming closer upon us. I can remember the day when we saved up for Budget day because we thought that taxes were going to be reduced. I think everybody will agree that we now dread it. We shall probably still have cause to dread 6th April this year, but I am hoping that my plea this afternoon on behalf of widows will not go unheeded.

6.31 p.m.

Earl FERRERS

My Lords, this debate has been notable for the two maiden speeches which we have had. My noble friend Lady Faithful! gave graphic examples of how taxation has hit the individual, and my noble friend Lord Barber made a very weighty speech on a subject about which he is hugely knowledgeable, and to which we all listened with great attention. If it is not an impertinence, I should like to congratulate them both on their speeches. They both chose a subject for their maiden speeches which I think is extremely important because it has highlighted a theme which is running through all types of industry, through all stratas of society, and through all levels of earning power: this is that the current levels of taxation are so high that, whatever may be their merits or economic justification, they are having one fundamental effect; they are restricting growth. They are restricting progress and they are eroding the will to work—to such an extent that people are saying, "What on earth is the point of trying or of taking a risk when the rewards, not of success but of effort are mutilated and even sometimes totally nullified by taxation? "

The remarks which I wish to make this afternoon will he directed mostly towards the industry with which I am involved, which is agriculture. I would tend to underline the words of caution which my noble friend Lord Campbell of Croy spoke, because here is an industry which we all know is vital to the economy; it produces the food which we all need, it saves on imports, it saves on the balance of payments. It is an industry in which the Government, in their White Paper Food From Our Own Resources, wish to see expansion; yet the output from this industry is down. The Annual Review of Agriculture for 1976—the Government's own White Paper which they published only yesterday—made this quite clear. Productivity per man is down 12 per cent., the quantity produced per man is down 14 per cent., the income of the industry in real terms is down 17 per cent., and fixed investment is down 22 per cent. Of course, there may be many reasons for this; but it is not just weather or terms of trade which account for this. The dangerous aspect of this is that the lowering of output from our farms is coinciding with a substantial fall in capital investment. This is worrying.

In the report of the Select Committee on wealth tax a survey was quoted as showing that there had been a dramatic cut-back of no less than 61 per cent. in proposed investment in fixed capital between 1974 and 1975. Of the reasons given in the survey why each project had been postponed, over half were postponed because of capital transfer tax, the proposed wealth tax, or uncertainty about farming profitability. All those are areas over which the Government have direct influence, if not control. If we need the food, and if we need the expansion of agriculture—and nobody seriously disputes that—and if we are failing to get the investment, it is prudent to ask why. The simple answer is that you will not get the investment if the rewards to be obtained from the investment are not there. Or, put another way, you will not get investment if the rewards from that investment are so heavily taxed that you are left with little result from the effort and the risk undertaken.

Although agriculture is our largest single industry, it consists of vast quantities of small units. One tends to forget that the average full-time holding is only 239 acres. Many full-time holdings are therefore well below this figure, and yet these full-time farmers are precisely those to whom the Motion of my noble friend Lord Orr-Ewing refers. They have the problem of running their small or their medium sized businesses; they have the problem of investing, of taking risks, of trying to earn a living and run their business at the same time as coping with inflation and the complexity of the taxation system, as well. It is small wonder, therefore, that some of them say, "Hang on. I am not going to invest any more money for the moment. I am just going to try to survive."

Agriculture has its own peculiarities. It is a long-term business; it requires vast assets, and ones that turn over very slowly. There was a recent publication called, Farm Finance and Fiscal Policy which is put out by Mr. De Paula who is the managing director of the Agricultural Mortgage Corporation. He made this very clear in comparing agriculture with a number of industries. He pointed out that the Coal Board turns its gross assets over once every seven months, ICI does it once every 13 months, but in agriculture it takes four years and nine months to turn over its gross assets. Profits are, therefore, low in comparison to the capital employed, and it is because of the low profits and the large assets that taxation both on income and capital is now at a crippling rate, which is at the same time stultifying initiative and severely curtailing prudent investment.

The income tax scales at the moment are such that at £7,500 one third of the profits are consumed in tax. The net figure allows the farmer—and here I agree with my noble friend Lord Amory —not only his living expenses but it includes that which is available for ploughing back into his business; this is of course totally inadequate. The net income on the balance sheet of a farmer is not the equivalent of the net income which an employee might see paid into his private bank as his salary for his work. In the farmers' case, as in the case of a small business, out of that net income has to come as well the additional new cash to put back into the business. In almost all cases this is inadequate, and so the balance has to be found by bank borrowing. However justified the bank borrowing may be, the difficulty is to pay back the borrowing, because the effects of heavy taxation vitiate the cash flow.

My noble friend Lord Watkinson and my noble friend Lord Barber said that we have the highest tax rate in the world. Our rates of taxation certainly compare very unfavourably with some of our EEC partners. Particularly at the lower end of the scale between the £3,000 and £5,000 mark the average rate of tax may be 25 per cent. in Great Britain compared with 11 per cent. in Germany and 3 per cent. in France at comparable profit levels.

What has done more to undermine both confidence in the future of agriculture and the desire to invest is the Government's proposal for capital taxation, by which, I suggest, agriculture as an industry is hit harder than any other. However meritorious the Government's desire may be to redistribute wealth, what they seem incapable of realising is that their capital taxation policy will have a profound and disastrous effect on the productive power of and investment in the industry. This industry does not consist of a great many wealthy people but, as I have pointed out. a great many small people, all of whom will be affected right across the board. The Chancellor of the Exchequer may think he is watching the redistribution of wealth, but I warn the noble Lord, Lord Melchett, that as the capital taxation provisions begin to bite —and we have not seen them begin to bite yet—the Chancellor will see that he has presided over the destruction and fragmentation of agriculture as we know it.

My reason for saying that is very simple. It is that agriculture is a capital intensive industry which becomes particularly vulnerable to any form of assets tax simply because it needs more assets than does any other industry to do its job. In the document to which I referred, Farm Finance and Fiscal Policy, Mr. De Paula points out quite clearly that each person employed in agriculture has £38,000 of assets behind him. As an example, this compares with £16,000 of assets behind each man employed in ICI and £3,000 per man employed by the National Coal Board. Agriculture has, therefore, ten times as many assets per person as does the NCB.

It stands to reason that the effects of capital taxation will bite more deeply into agrculture than into any other industry, yet this is the industry which produces the food we require and which the Government wish to see expanded. Despite this, the Government are content to witness, I think with a degree of pride, the effects of capital transfer tax, capital gains tax, development land tax and a possible wealth tax on the industry. That is why investment has dropped. That is why the Annual Review of Agriculture, which was produced yesterday, states that 41 per cent. fewer applications for capital grant schemes were applied for in 1975 compared with 1974. The incentive has gone. Farmers realise that they will have to pay in tax—or will have to make provision to pay by setting up sinking funds—cash which they would otherwise have ploughed into new buildings and plant.

Taxation has dug too deeply into the cash flow. They know that as inflation rampages ahead and pushes up the value of their farms they will be obliged to pay capital gains tax on the increase, although their farms are essentially the same objects as they were ten years ago. This is, in effect, nothing other than a tax on inflation. The Government do not seem to realise that the capital taxation of agriculture which they have introduced has taken a massive swipe at the landlord and tenant system, which they and the Minister have always claimed to support, but less money will be invested in tenanted holdings, more tenanted holdings will be taken back in hand, there will be fewer farms for rent and there will be higher prices for those that are rented. Those employed in agriculture, whether farmers or farm workers, are primarily individualists who are prepared to be entrepreneurs, who are prepared to take risks and who are prepared to work long hours, but the desperately heavy taxation on both capital and income is having a markedly deterrent effect on enterprise and investment.

Almost all farmers, of whatever size, have a desire to pass on to their children the fruits of their labour—their farming unit, their home—and I agreed fully with my noble friend Lord Barber when he said that there was nothing markedly wrong with that as a sentiment. For what other reason would they borrow on their holdings, take on a life of hard work and financial commitment, if at the end the whole farm is to be split up and fragmented? It is a fundamental approach to life and that is what has given the industry its impetus. I agreed with my noble friend Lord Orr-Ewing when he made a plea that something should be done for consanguinity to mitigate the effects of fragmentation when a farm is kept within a family.

There are two devastating effects of high taxation which can be seen not only in agriculture but right across all industries and individuals. The first is that it is human nature not to want to pay tax; only a fool pays more than he need pay. But far too much of the country's effort, expertise and brainpower is being dissipated on trying to find ways of avoiding paying tax rather than being directed to ways of improving business and creating wealth. The second is that high taxation saps energy and makes people plain dishonest. A taxi driver put the effects of heavy taxation succinctly to me the other day when he said that he worked for himself long hours and at night in order to earn enough money to keep his family, and then was infuriated to see such vast amounts go in taxation. He said, "Do you know what I do now? I do the same as everyone else—fiddle." That is not a very agreeable bird's eye view of the society in which we live, but it is an obvious and increasing effect of high taxation which does neither individuals nor society any good.

I am no economist—thank goodness for that!—hut I suppose it is too much to ask the Government to simplify the income tax system. I have never understood why we must have a system which seems to be incomprehensible to everyone except the professional, whose services one has to pay for. I have often wondered why it is impossible to have a system similar to that in the Channel Islands, where income up to a certain figure, say £1,000, is tax free and thereafter all income is taxed at a flat rate of 25 per cent. The starting figure can be altered as can the variations of tax rates—they can be 30 per cent., 50 per cent., or 80 per cent.—but it is the principle that is important because the rewards would be great, for they would be simplicity, comprehension, a stimulation of the will to work and the knowledge that work will be rewarded. That is what is lacking today and it is not just holding up progress but is actually encouraging decline.

6.48 p.m.

Lord ENERGLYN

My Lords, I, too, wish to begin by thanking the noble Lord, Lord Orr-Ewing, for bringing this very important subject forward for debate. I also wish to extend to the noble Lord, Lord Barber, my congratulations on his maiden speech and my admiration for at least attempting to do what the noble Earl, Lord Ferrers, was suggesting: namely, to simplify our fiscal pattern. I wish to echo the analysis of agriculture given by the noble Earl, Lord Ferrers. He presented his argument powerfully and I cannot resist observing that it is not a particularly popular subject on the opposite side of your Lordships' House. The noble Earl brought out more vividly than I could two very important human factors. The first is the question of tax avoidance and the unnecessary mental labour involved in that exercise, and the second is the area of frustration that exists. I suggest that the Chancellor's first job is to paint a fiscal picture containing the minimum of colours in order to avoid frustration.

I deferred extending my congratulations to the noble Baroness, Lady Faithfull, for a really splendid maiden speech because she touched on a very important point so far as my thesis is concerned. She mentioned the difference between an income which is earned and one which is obtained from unemployment benefit. There are over a million unemployed people in this country: why are they so silent? They were not silent in the 1930s. Then, their voice was loud and clear and their clarion call was not for unemployment benefit but for work. I ask why these more than 1 million unemployed people are so silent? Has the noble Baroness the answer? Is it a wish to get money for nothing? Is unemployment benefit so seductive that it has sedated this vast section of our society into silence?

If that is the case, it is a very dangerous aspect of our present fiscal pattern, because it was the unemployed who enabled the Egyptians to build the pyramids. It was the unemployed who allowed Hitler to construct the Third Reich. They created a basis for Russia and China. One could go on. In any fiscal system it is very dangerous to preserve a policy which offers money for nothing.

So far, no speaker has mentioned one particular middle income group—the politicians. I have never been a politician so it may not be improper for me to include them in the category which the noble Lord, Lord Orr-Ewing, regards as the middle income group. What are we to provide by way of incentive to politicians? I find it difficult to answer that question. The incentive used to be a desire to be a Member of Parliament in order to improve the country's standard of living and to try to grapple with the problems of the world. Is that still the case, or is attendance in another place now just another job? If it is, that may explain—and I cannot resist this comment—why the public now look upon the other place as a sort of arena in which the politicians furnish juicy anecdotes for the Press and television, and this at a time when the country is, in my opinion, saturated with frustration.

I also believe the present situation to be very dangerous because it is not one which can easily be controlled. When one has a group of frustrated people, one cannot apply logical laws and practices to them. They are difficult to control and if there is this great area of frustration in the other place, it may perhaps be likened to a field of wheat which is growing out of control. As I see the picture, it is one of a tractor pulling a plough and with a driver who is dressed in red who is about to drive into the field and furrow it into narrow, straight channels in which we shall be planted. There will be no escape and no incentive to do otherwise.

Lord BOOTHBY

My Lords, may I make a brief interruption? In 1933, just before he became Chancellor, I had a two-hour interview with Hitler. He said to me, "I am going to conquer unemployment and I have in my hand the man who can do that. His name is Schacht." Hitler did conquer unemployment. That was the source of his strength and power. He did not fail on unemployment. He reduced unemployment in Germany from 6 million to 1 million and, but for that, he would never have been able to go on.

Lord ENERGLYN

My Lords, I thank the noble Lord, Lord Booth by, for that most revealing anecdote, which I interpret as supporting my point of view and underlining how dangerous it is to have idle hands.

I turn now to my own field—that of the universities. After a long period in the universities, I find it very sad to see that the dons are more preoccupied with their salaries than ever in the whole of my long life in the universities. In the past, a person did not become a don in order to earn a lot of money. He did so to indulge in the evolution or the prosecution of the search for an adventure into the realms of knowledge. Now, we find dons preoccupied with money because of the pressure of taxation which makes their life full of discomfort. The irritation has grown dramatically and it is partly fed by the frustration which I have mentioned. The situation has become so difficult that, at this very moment, the Association of University Teachers is seeking trade union affiliation. My Lords, the day when the universities are controlled by a trade union will the last day of British universities because it is under the protection of a Royal charter that a university preserves its integrity, individualism and barriers against all political influence.

There, we see yet another impact of fiscal policy upon a part of our lives which I suggest is important. I turn to other, smaller factors: an individual who is inventive may design an instrument. It may be good and useful but not marketable because of the overload of tax that makes it non-competitive with instruments which can be copied outside. Even if one invents a new process, there is not the cash flow to enable it to take off because such a process must always begin with a factor of hazard and that kind of money is not around in this country today. What happens? These inventions go abroad and very often, as other speakers have pointed out, the inventors go with them. We only need to lose one such person in 10,000 for it to be a serious matter.

Let us turn to the case of searching for minerals in Britain. We give money to explore for minerals but we give absolutely nothing by way of tax relief to allow a company to go in and exploit the minerals by digging a mine. We have not yet learnt the sense of giving such an enterprise a tax free period of time—say, ten years—to bring the mine into production. That is done in other countries. For instance, it is done in Eire and is why it is such an attractive place for mineral investment from Canada, America and even Japan.

As one practical measure I would ask the Chancellor of the Exchequer to look at tax in relation to mineral development, and to try to stop the escape and the annihilation of inventive genius through frustration, by trying to do something about the tax picture. As a scientist I would look at the tax situation as an artist would look at a picture. Looking at the picture today, I would say that it is one of those completely abstract pictures which not even the artist understands. Why does not the Chancellor of the Exchequer try to capture the insight of Cézanne and get the three-dimensional picture right? I say this because the picture, as I see it, is not only an undecipherable abstract; its frame is cracked, too. Thus we must get the frame right to begin with, then put a picture inside it. What has happened is that the Cézannes of the past have had their pictures carved up by the Picassos, and I suggest that we sweep the Picasso type picture away and bring back the fluent, tolerant pattern, with depth, such as a picture as painted by Cézanne.

7.2 p.m.

Baroness SHARPLES

My Lords, I wish to add my congratulations to those already extended regarding the two really outstanding maiden speeches we have had the privilege of listening to this afternoon. I want to draw attention to a peculiar phenomenon which compounds the damage done to independent businesses by excessive taxation. Here I must declare my interest. I am a tenant farmer, and I will use farming to illustrate my argument. Quoted public companies can obtain the additional working capital they need from the public through the Stock Exchange. Independent businesses are in a totally different position. They cannot obtain additional capital from the public, however much they need it. They can only borrow from the banks where the rate of interest charged is between 12 and 15 per cent. Base rate, and therefore the rate of interest charged by the banks for business loans, is controlled by Government action.

The aspect of the matter to which I want to draw special attention is that taxation takes such a large part of the earnings of independent businesses that what remains is insufficient to finance expansion. So the business which is successful, and which is expanding, and which in the national interest should be most encouraged, is obliged to borrow a large part of the additional working capital it needs to finance this expansion. I am primarily engaged in beef production. It is universally agreed that home grown beef is needed by the nation, but a beef unit is essentially a long-term investment. It takes several years to build up such a unit to the point at which it will be profitable. It also requires a great deal of capital. In fact, it requires approximately £1 of working capital for every £1 worth of marketable beef. In consequence, a unit designed to produce £100,000 worth of beef a year will require £100,000 worth of working capital, and the resources of a beef producing unit cannot suddenly be switched to some other form of agriculture.

If I am efficient and wish to increase output, I must find more working capital. But during the past few years, as a result of inflation, even if I produce only the same amount of beef, the price I receive for my cattle will increase, but so will the cost of production. Therefore, I will require additional working capital, year by year, merely to produce the same quantity of beef. As a result, most farmers are obliged to borrow, and pay the punitive rates of interests which are, in reality, fixed by the Government.

Of course, bank interest is treated as a chargeable expense before arriving at the taxable profit of a business. Nevertheless, it reduces this profit, and so independent businesses are trapped in the situation which I described at the outset as an extraordinary phenomenon which compounds the damage done by excessive taxation. The interest which must be paid for bank loans bleeds off more and more business earnings, with the result that there is less and less to divide between taxes, which go to the Government, and after-tax profit, which remains in the hands of the owner of the business.

In short, the excessive rate of bank interest reduces both the income of the Government and the after-tax income of businesses. So both Government and businesses arc forced to borrow still more in order to meet their needs. If the base rate was reduced, both the Government and industry would benefit. The Governments of Japan, the United States, Germany and several other European countries give tax relief to independent businesses and make it possible for them to borrow from the banks at much reduced rates of interest.

I know that the appropriate section in the Department of Industry has been collecting information about these matters. So I should like to ask the noble Lord, Lord Melchett, as a first step, to consider what can be done to encourage the banks to make long-term loan capital more freely available to independent businesses at the more favourable rates which obtain, for example, in America.

7.7 p.m.

Lord THOMAS

My Lords, I wish to add my thanks to those already extended to the noble Lord. Lord Orr-Ewing, for giving us the opportunity to ventilate our views on this very important topic of taxation. I also wish to say how greatly I appreciated the two brilliant maiden speeches we heard this afternoon, and the two speeches from the ex-Chancellors of the Exchequer.

I believe strongly that one of the root causes of our present economic malaise is excessive taxation. I leave it to others to deal at length with the frustrations and disincentives of too punitive personal taxation. I would, preferably, invite your Lordships' consideration to the stultifying and harmful effects of over-burdensome taxation on medium sized and small businesses, particularly in the engineering and mechanically produced consumer goods field. I put it to your Lordships that there is too little recognition of the truth that our large companies are far from being self-contained. I can draw on personal experience in the automobile, and many allied, industries. Consider, for example, a family size motor-car. More than 85 per cent. of its total cost is made up of components produced in the main by medium or small-sized firms doing machining, stamping, forging, or sheet metal press work. Some are public companies quoted on the stock market; others are private. Items like valves, piston rings, universal joints, mouldings for seat belt clasps, and a multiplicity of suchlike things are produced by firms only a tithe of the size of companies such as Ford, Leyland, and Vauxhall. The effects of high taxation, especially corporation tax, work inescapably through the costing system to the home and export selling price of the end product, whether it be a car, van, bus or truck, of the brand name the market knows.

We hear a great deal these days about British industry suffering from lack of investment, especially investment in new, modern equipment. But consider the position of an owner-controller of a small business, or the managing director and executive board of a medium-sized business. They are constantly faced with decisions about installing new plant. They are approached by machine tool manufacturers with offers of new multi-spindle automatic lathes, tape-controlled milling machines, high-speed presses and the like. But think of the disincentives facing them nowadays to install a transfer line or a battery of these modern sophisticated tools which can reduce their costs. They know that they can reduce production times per unit, but with the inevitably inflated costs nowadays, and particularly in view of high corporation tax, plus capital transfer tax, the financial equation simply does not make commercial sense.

As businessmen these operators of medium- or small-sized plants are by training and experience perfectly willing to face the hazards of market fluctuations of the assembled end product of which their component is an integral and essential part, but when they come to look at their cash flow situation and see the swingeing slice of money they have to pay in taxation, plus the high rate of interest on any borrowed money to bridge the financing of the new plant, they not unnaturally play a safer game by carrying on with the old pattern of product, using the old plant, and sticking a fair percentage on the price as a hedge against wage-cost increases or production time lost through breakdown of the older plant. As a corollary, the machine tool industry does not get orders for its new products, causing its businesses to languish and employment to suffer; and there, my Lords, we have another twist in the rising spiral of prices and in the downward spiral of productivity for the markets of the world.

I cannot help contrasting the situations existing after the Kaiser War and the Hitler War. We had our troubles in industry from 1918 onwards for a few years, but the whole tenor in engineering then was to reduce costs, to increase production and generally to strive for an expansion of business and a lowering of prices to the public. In the interim period between the wars British industry developed into a production unit that was able, both qualitatively and quantitatively, to produce munitions of war for land, sea and in the air that saved the day. I recall that when I was running a chain of Midlands engineering businesses in the 1930s I was always happy to spend £1,000 on new machine tools to save one penny per operation, or multiples thereof. That kind of philosophy today makes no sense at all, and vastly increased taxation levels cumulatively all along the line, are largely the basic cause.

After the Hitler War there came a change in the industrial scene. Every-body seemed to want more for doing less; there set in a kind of sullen lethargy. The phrase "industrial action "was used in a topsy-turvy way to describe industrial inactivity. Every increasing taxation, both personal and company wise, sapped the will to progress by purposeful effort and pushful initiative. That situation simply cannot continue. It is not a question of partisan politics, Right versus Left, or any confrontation of that kind. Why do we have to waste our time nowadays being plagued by this sick-bed, fly-by-night vote mongering that we read so much about—the so-called political leadership, and the like? For heaven's sake! let us get back instead to useful work, earning money and spending it at our own discretion instead of having it taken from us in taxes to pay for unemployed, unproductive unfortunates. My Lords, we are facing a brutal economic crisis, and I believe that one major corrective factor is a thorough-going review of our penal and punitive system of taxation.

7.14 p.m.

Lord BALOGH

My Lords, may I first apologise for not having attended during the first few speeches, there by for feiting the privilege of hearing what seem to have been outstanding maiden speeches. I should like to join noble Lords who have already spoken in congratulating the maiden speakers. I would have been specially interested to hear the noble Lord, Lord Barber, on the economic situation, as he was the fountainhead of so much of our evil. I must say that, unlike most other noble Lords, I have not been terribly glad that the noble Lord, Lord Orr-Ewing, introduced his Motion. He is not here—I am terribly sorry about that—but I still have to continue with my thoughts. I am very sorry because, of course, he emphasised one aspect of life without any relevance to the total picture. It seems to me that this will just redound to the disadvantage of the social compact, social peace, which I think everybody would like to promote, but some people more than others.

In this country—we were speaking about this last week, especially—we have had a situation in which the social equilibrium has been drastically changed in favour of trade unions. There is no doubt that in a fully employed or more or less fully employed economy—even now, in contrast to the inter-war period, we are much more fully employed—the trade union bargaining power is very much greater than at other times; but this has not meant a change in the distribution of the national income, or not very much so. Therefore, it seems to me that if we are beginning to talk about taxation as a disincentive we must really consider how far taxation is a precondition to the moderation, the restraint, which must be exercised if we are to be successful in our fight against inflation—and I agree with the noble Viscount, Lord Amory, that the fight against inflation is one of our highest priorities. You cannot have a fight against inflation, you cannot have a situation in which restraint is exercised, when salaries and wages, which are a large part of the national income, are pushed up, because obviously that situation can result in an increase in productivity, and then we have a situation of inflation.

Some noble Lords who are in industry and who represent industry in this House talked interestingly about the disincentive effect of taxation on investment. They could not have seen or looked at statistics. After all, we have been trying all sorts of policies in this country since the war. We had policies of control, and we had bonfires of controls. We had increasing public expenditure, and we had decreasing public expenditure. We had increasing taxation, and decreasing taxation. But what was absolutely unchanged in this very kaleidoscopic economic situation was the fact that investment was insufficient. Investment did not increase in the late 1950s: on the contrary, it stagnated. Investment did not increase under the tender care of Lord Barber; it remained completely constant. In fact, of course, so far as I can make out, investment in manufacturing, which was 4.2 per cent. in 1970, had decreased to 3.2 per cent. by 1972, and it has only partially recovered since.

Therefore, while I do not believe that noble Lords opposite are crocodiles—they are aesthetically very appealing—nevertheless, their tears seem to be very suspiciously resembling crocodile tears. It seems to me that so long as this sort of tone is adopted, so long as one says that you have effort only on increases in incomes, so long as one has a situation in which one is asked to increase the high incomes in order to cut the expenditure on low incomes or expenditure on goods like, for instance, food subsidies which benefit the lower income classes, so long as you have this sort of sauve qui peut as the leitmotif of our lives, then we are not going to get rid of inflation—because inflation means that everybody must exercise self-restraint and that those people who are better paid must exercise more restraint than others. If noble Lords opposite do not accept what I said last week, noblesse oblige, at least I ask them to obey sagesse oblige.

7.22 p.m.

Lord BIRDWOOD

My Lords, I was not surprised to see how many people wanted to speak in the debate today. When the subject is money most of us have opinions; when it is money which we feel is, in a sense, our own, it is almost impossible to find somebody who is genuinely indifferent. When people talk of the lack of incentives or of high tax making people reluctant to take on heavy responsibilities, they do so with little more than an intuitive feeling that people behave in that way. I felt that I had a special reason to speak today as I do not need to base my opinions on this kind of intuition. Perhaps I should explain that I am a director of, possibly, the world's largest executive search company. It may be that I should have declared an interest at the outset. What this means is that virtually all my working day consists of delving into people's attitudes towards motivation and money.

I think that I am in a position to make some statistically valid observations as a result of this daily experience. The first is that talented managers are being attracted to work abroad in increasing numbers. The second is that it is virtually impossible to play this game the other way round. Vigorous, creative and imaginative men, men who have the power to make wealth, as the phrase goes, simply cannot be attracted to work in this country—or certainly not if they find themselves on a British pay roll.

There is a letter in The Times today which my noble friend Lord Redesdale has already referred to. It is from a Mr. Hough of Loughborough University in which the writer demonstrates that central Government taxes per head are lower in this country than in many other European countries. He also makes the perfectly sound point that looking at income tax rates in isolation is meaningless. This is a point which was touched on or paraphrased by several other speakers in this debate. It may be so, but it does not prevent a feeling of helplessness in the men or women who see their tax level approaching confiscatory levels when they are within sight of achieving quite modest ambitions.

It seems to me that embedded in this subject are some of the most profound and important issues today. We are trying to run a society without reconciling two absolutely opposed principles. Let me try to summarise. On the left hand there is what you may call the Socialist interpretation of a Christian ethic: that all men are born equal and, by golly!, in today's Britain they are going to stay that way. On the other hand, Britain's survival depends on her ability to match competitive challenges. But competitions, unfortunately, have winners and losers. What is being asked of people is that they should have an overwhelming will to win in their public lives with no matching will to win for themselves. I do not believe this to be possible. All societies come up with some kind of reward structure for excellence. To pretend you can run a sensible enterprise without this is fanciful.

I am convinced, and it is a conviction that springs as a by-product of observed fact, that a man will work harder if he is allowed to keep more of what he earns. Of course people give of their best for differing reasons. There is the hunger for power; to safeguard their family: there is a moral conviction or ego; and, sometimes, it is merely to go one better than the Joneses. Until we repeal the law of supply and demand, the most convenient, and certainly the most common incentive is money.

Industry is suffering in different ways from the present condition. A leading industrialist remarked to me yesterday that the professions would always mop up the talent that he badly needed because of the opportunity to keep more of what is earned as a professional man rather than as a company manager. This same man also pointed out to me that the managers who contributed most to his company were those who felt themselves to be independent. Again, this is the result of observation. Pragmatism may be unpopular; but it is merely the result of seeing what actually happens. Independence follows from the means to accumulate capital. A man who has to think of pleasing his superior to keep his job will inevitably make the safest and most timid decisions; that is, if he can be forced to make any decisions at all.

Like the noble Earl, Lord Ferrers, I cannot help feeling that it is unhealthy in the large moral sense for so many people to have to find ways of avoiding tax—and I mean in ways completely legal. To become a nation of fiddlers is hardly a noble achievement; but fiddling there will be, and more of it. I do not want to labour figures. We have had some already and probably there will be more to come in the closing stages of this debate. Briefs from interested groups are as thick on the ground as autumn leaves. I have three of these all mentioning much the same points with ample arithmetic to support them. I will make one exception and quote some figures for which I am indebted to GEC whose research in this field has been scrupulous and comprehensive. These are from a table of salaries comparing 1961 and 1962 with the present day. They are quite compelling. A managing director who was paid £15,000 a year then would need a net income of £17,000 now to have the same standard of living. For this to be possible he would have to be paid a salary of more than £75,000 at the present moment. The actual salary has risen to £25,000. which is roughly the rate for the job. Turning it the other way round, this figure, a gross of £25,000, is equivalent to the 1962 salary of £5,500. In the GEC book, thirteen years ago it would have been possible to get a major divisional managing director for £5,000.

I accept that figures like these are strictly outside the boundary of my noble friend's Motion. The salaries of managing directors are not usually classed as middle or lower level incomes, but I argue that if we are talking of incentives we must talk about personal targets. The whole point of promotion is lost if we do not recognise the highest targets. The fact that we have what could be called a State-imposed vow of poverty does not stop people of certain temperament believing that all control should be vested in themselves. I would rather live in a society that tolerated the promiscuous expenditure of private money than in a society which tamely accepted the reckless exercise of power.

Baroness GAITSKELL

My Lords, before the noble Lord sits down may I ask him a question? I apologise to the next speaker on the list. There have been many statements today about the number of people emigrating because of high taxation. I have listened to about half of this debate and no one has given any figures. The noble Lord quoted many figures. Has he any figures about the numbers of people who are emigrating from this country because of high taxation?

Lord BIRDWOOD

My Lords, I have no such figures. I interview a large number of people during a year; a significant proportion—in my estimation approaching 20 per cent.—express to me a willingness—in fact, a wish—to go abroad. In many of those cases, because I work for a wholly international company, we can help such people. I certainly would not be prepared to break the confidence of those people; quoting numbers in this case would, I consider, be a breach of confidence.

7.31 p.m.

Lord HEWLETT

My Lords, may I take up the question of the noble Baroness, Lady Gaitskell, and say with all respect to her that it is not a question of numbers of emigrants. It is the quality of emigrants. I suggest it is the better people who are afraid of going abroad and taking on these new assignments. I would not judge emigration of executives on purely a quantitative basis, but I would do so on a qualitative basis.

In this bicentennial year of the publication of Adam Smith's Wealth of Nations, my concern—and, I hope, the concern of your Lordships—is for the creation of wealth for this nation and not just with its division or redistribution. Without the creation of increasing volumes of wealth in Britain, I will tell noble Lords opposite that there will be no Welfare State. There will be no Britain as we know it. Frankly, let us concentrate upon a constructive position which I am afraid certain noble Lords opposite have not done. The noble Lord, Lord Balogh—

Lord MELCHETT

My Lords, I apologise for interrupting the noble Lord so early in his speech, but I do not believe that he was here last Wednesday when several noble Lords from all parts of the House, particularly my noble friends, spent the Wednesday debate discussing ways of increasing the amount of economic growth in this country.

Lord HEWLETT

My Lords, I apologise; I happened to be in the United States of America earning some money for this country, which perhaps was not the wrong place to be in all the circumstances. I will have some reference to make to the United States regarding Lord Melchett's comment in a moment. As I was saying, if there is not increasing wealth, there will be no maintenance of the present Welfare State. We ought to thank the noble Lord. Lord Orr-Ewing, most warmly for introducing the matter and for his opening speech. I am sorry that the noble Lord, Lord Balogh, paid such a short visit to this Chamber, just enough to deliver his speech and disappear. I would have taken him to task upon some of the assertions he made; but I will not delay your Lordships with that. Since there are so few Members opposite, they must be getting both cold and lonely.

In round terms, 10 years ago 40 percent. of the gross national product went to central and local government and nationalised industries; five years ago it was 50 per cent. and now it is 60 per cent. We are in danger of ceasing to be a mixed economy, and is it small wonder that the younger generation who are taking responsibility have a big question mark over their future? Is this the right country in which to stay if they wish to exercise their initiative and skills, and take their responsibility and bear their risks in a free enterprise or mixed economy? If we look at the capital tax breakdown per head per year for the countries in Western Europe it is as follows: France and Italy, £2; West Germany, £6; Sweden, £8; the United Kingdom, £10. That is before any thought of what the effect of the wealth tax, however unwelcome it may be, would be on this country. And whose figures do I quote? Not the CBI, not GEC, but Dr. Gilbert in the other place on 1st April. May I say that the comparison is even worse, for if you tell the whole story the average levels of pay on the mainland of Europe are one and a half times what they are in the United Kingdom, and that is before we consider the full effects of the capital transfer tax.

Industry and executives, particularly medium level executives and small businesses, are grossly overtaxed. How right the noble Viscount, Lord Watkinson, was to refer to the BIM Conference held in London last Friday! He described the tone of disillusionment and anger expressed by many of those who are professionally trained in management who feel they have had a shabby deal from Her Majesty's present Government. As I was saying to the noble Lord, Lord Melchett, I was not in this Chamber last Wednesday or any other day last week. I was in the United States of America endeavouring to sell some of our products to that country. My Lords, shall I tell you what so many of the senior management executives had to say? They thought the opportunities of taking good quality executives from Britain at knockdown prices was overpowering. I am sorry that the noble Baroness, Lady Gaitskell, has withdrawn from the Chamber. Indeed, there is only the noble Lord, Lord Leatherland, left of those against whom I wanted to make some small argument on what they had to say. But here we are, good old Lord Leatherland, he is always here! Bless his heart!

Lord MELCHETT

My Lords, the noble Lord keeps making cheap gibes about the number of my noble friends in this Chamber. He was not here last Wednesday when we were discussing economic growth, when there were no noble Lords on the Back-Benches opposite. My noble friends refrained from making the gibes which the noble Lord is making now.

Lord HEWLETT

My Lords, I am so sorry that the noble Lord, Lord Melchett, is so sensitive regarding the total absence of support that he has save for one Back-Bencher and one colleague on the Front Bench. Again, it is a question of quality and not quantity.

Lord LEATHERLAND

My Lords, I was about to say that that support is qualitative and not quantitative.

Lord HEWLETT

My Lords, I am not making cheap gibes. The question of incentive in investment and industry, and responsibility of people in management, is a serious matter which should command some attention on the part of noble Lords opposite other than just a handful throughout practically all the debate. I have sat here the whole time; I came specially to London to listen to this debate and take part in it. I am disappointed that so many Members who have taken part have not stayed. I thought it was the tradition of this House that one did so. Please, my Lords, do not, from the Benches opposite at any rate, teach me my manners.

Let us take my elder son—and I have to declare an interest that he is such—just as an example of remuneration. He is employed by a American bank and is already £1,000 better off than his Cambridge contemporary of exactly two years ago employed by a British merchant bank. I am not suggesting there is any difference. Their qualifications at Cambridge were absolutely identical. I am not criticising the British bank or the American one. There has been no violation of the Pay Code. What I am saying is the start line was that much better. While being trained in the United States he was subjected to increases which could not be had in this country. Frankly, he is better off within two years by that wide margin. This is not untypical. We are becoming seriously uncompetitive in the "management and executive stakes ", as we might call them. We are damaging Britain's prospects for the future. It is not good enough to be isolationist in the form in which the noble Lord, Lord Balogh, presented his isolationism this afternoon. As the noble Lord, Lord Birdwood, suggested, it is a question of being wholly competitive with other countries in the field of professional management, risk bearing and responsibility.

I must take issue with the noble Lord, Lord Leatherland. If he seriously suggests that the Labour Party are the best friends of the small businessmen and shopkeeper, I can only say to him, if those are their friends, who needs enemies! Those in small industry, shop-keeping, and the commercial world have been put through a most "ginormous "turmoil in the form of increased taxation and a ghastly increase in VAT from 8 per cent. to 25 per cent. on a certain range of products which has had a damaging effect, not just on them, but also on those industries that are supplying them with capital goods of some consequence to the increasing standard of living of the families that support those shops and enterprises.

Lord LEATHERLAND

My Lords, the noble Lord talks of VAT. Will he tell us which Government introduced that tax?

Lord HEWLETT

Certainly, my Lords; it was a Conservative Government and the Chancellor was this curly-headed gentleman here—I beg his pardon: it was the noble Lord, Lord Barber, whose maiden speech we have heard today. It was not the question of introducing VAT, any more than it was the intervention by the noble Lord, Lord Leatherland, as to who brought in permanent taxation and Sir Robert Peel! It is the degree of, and the violent changes in, taxation which upset stability in industry and commerce and provide so much disproportionate disincentive to the taking of responsibility and of high risk decisions that benefit the country. The noble Lord, Lord Leatherland, must really take away that rather nasty attempted slur that the Tory Party is supported by, or great friends of, the multinationals. We are not a Party solely concerned with big business: of course not. I am not going to make cheap gibes about the Labour Party. The noble Lord, Lord Melchett, has it all wrong. How could I do such a thing?

Lord LEATHERLAND

My Lords, if the noble Lord will pardon me, I did not say a single word about multinationals. He took the wrong note.

Lord HEWLETT

I beg the noble Lord's humble pardon —

Lord LEATHERLAND

Granted!

Lord HEWLETT

Thank you so much. If the noble Lord did not mention multi-nationals, he certainly mentioned "large "national or international companies or a similar phrase. At all events, no Party here is claiming or desiring to be exclusively associated with big business, small business, trade unions or whatever. All Parties, I am sure, are trying, reasonably successfully, to have a really cross-sectional base. So I do not think we should impute slurs to the effect that we have a vested interest in big business as such. Indeed, it can fairly be claimed that the degree of support for the major Parties from all sides in this country is reasonably evenly divided.

We have been accused by the opposite side of wanting to increase Defence Estimates, as though this was counter to the principle of a change in the taxation differential for management and small businesses. This is to take the argument in total isolation. Defence is certainly one of the highest priorities. We must have defence; we must defend the Realm and it is the prime duty of all Governments to do that. It is a question of shifting the weight of taxation and the weight of responsibility in favour of those things which are more essential and away from those things which are less essential. As the noble Viscount, Lord Amory, suggested, there are things which are highly desirable and which we should all like to do but which cannot be done now. These have to be deferred until we can afford them, but in the national interest defence cannot be deferred.

I would say that we could save a great deal of money, for instance, on the Community Land Bill, on the new forms of nationalisation and by cutting out gross extravagances and stupidities such as the appointment of a lady, with a standing and an important salary, to be adviser to the schoolchildren in the county of Nottingham on the purchase of their sweets. Do we really need that? Will the noble Lord, Lord Melchett, give us a heated defence of that?—no, the noble Lord, Lord Leatherland, will!

Lord LEATHERLAND

My Lords, of course I will. That appointment was made by the county council, under Conservative control.

Lord HEWLETT

My Lords, I am not sure of your facts, any more than you are, so I will pass on to other matters. May I join with other noble Lords in congratulating most warmly the noble Lord, Lord Barber, on his maiden speech. How appropriate it is that a former Chancellor of the Exchequer, who devoted so much time and effort to reducing the burden of company and personal taxation, should have chosen this debate to make his first contribution to proceedings in this House. I hope that it will be the first of many contributions. How warmly also, I suggest, we should congratulate the noble Baroness, Lady Faithfull, for her no less distinguished and interesting maiden speech. There are comparatively few small-scale industrialists—by which I mean almost full-time small-scale businessmen—who are Members of this House. I happen to be one, and therefore it is better if I concentrate upon personal experience.

Lord CAMPBELL of CROY

My Lords, I wonder whether my noble friend would give way. When he is expressing his admiration for my noble friend Lord Barber, who explained to us the reasons why he introduced the value added tax, I think it ought to be recorded, for the benefit of the noble Lord, Lord Leatherland, that at the same time he abolished two taxes; namely, the selective employment tax, which was the most unpopular tax ever introduced into this country, and purchase tax.

Lord HEWLETT

Indeed, my Lords: and I hope that the noble Lord, Lord Balogh, will read Hansard and take note of that point, in view of his own comments on the subject of the contribution made by the noble Lord, Lord Barber. However, if I may return to my personal experience, I maintain that in the postwar era in which I have been in industry, there has not been a time of greater difficulty and disillusionment in industry than the last two years. I disagree fundamentally with the noble Lord, Lord Lee of Newton—again, I am sorry that he is not here—who suggested that 1945 onwards was a much more difficult time. If we are going to hark back to the past, 1945 onwards was the one period when this country had not been totally destroyed, as so many of our competitors had been. Had we concentrated upon improving our position, economically and industrially, instead of wasting what we had in those six years of Socialism, we should now be very near the top rather than at the bottom of the heap. I would commend those comments to the noble Lord, Lord Lee of Newton.

I should now like to turn to that element in the Labour Party utterly and remorselessly opposed to private capital and personal wealth. No matter what Her Majesty's present Government assert, I am sorry to say that so far a great deal of power still rests with those who are to tally antipathetic to the private sector, be it in farming, industry orcommerce; and they have gone a very long way towards destroying the private and small public enterprise in industry and agriculture. With them, if they are destroyed, goes all hope of developing much of the inventive genius and skill of Britain's people. Too late comes the repentence of the present Chancellor of the Exchequer, to whom I think the noble Lord, Lord Barber, was unduly generous. Frankly, in his utterances, particularly the early ones at Party conferences before the 1974 General Election, and in his early Budgets too, Mr. Healey went a very long way indeed towards destroying both private enterprise and public and private confidence at home and abroad. In view of soaring inflation now, crippling taxation, consequent puny investment, a totally unacceptable rate of unemployment and, just now, a run on the pound in terms of the US dollar, we cannot exactly say that we have had an unqualified success from Her Majesty's present Government, unless we want to change the meaning of words.

I consider it to be quite brazen for certain Ministers to proclaim that there has been success. I would go along with the noble Viscount, Lord Amory, and say, "Yes, the results are slightly less disastrous than the absolutely catastrophic ". But it is not success that we have had, and we are nowhere near success. Of course we are right to put all our priorities on the question of holding inflation; but the constant attacks on companies and managements have reached such proportions that the risks which have to be borne by the smaller companies and by individuals are simply not matched by the rewards that can be given to those who bear a heavy responsibility.

In the ordinary way, an entrepreneur now cannot build up any personal fortune of even modest size, no matter how hard he works or how brilliantly he is equipped. As has been stated by myself and others in the course of this debate, taxation is cripplingly high, and the problem of closing the differentials and the present taxation levels leave the entrepreneur, male or female, very little extra disposable income. Bluntly, the responsibility assumed by such people is not being fairly rewarded. Inflation is destroying their standard of living at a disproportionate rate, for there are many sections in society which now have an increased standard of living because of the great power of the unions in recent years.

A managerial person might opt for the inflation-proof pension of the safe job in the Civil Service or local government, which accounts for 60 per cent. of the British gross national product. As for the professionally trained, skilled draftsman, who notified our small company yesterday of his intention to emigrate—and I should have drawn this matter to the attention of the noble Baroness, Lady Gaitskell, if she had not left—where is he going? He is going to Norway, where he is going to do an equivalent job for a remuneration, not half as much again as his British salary, not for twice as much as his British salary, but two and a half times his British salary.

We simply cannot be isolationist in this field and say that so long as we are tightly controlled here, and carefully restricted so far as differentials are concerned, we shall keep personnel. Short of withdrawing passports and putting up barriers, we shall do no such thing, unless we come to the reality of the matter. We are uncompetitive in the field of executive remuneration and we are not by any means helping the medium and smaller-sized companies to compete. Marginal tax rates applying to incremental overtime earnings on the shop floor amount to a real source of dissatisfaction in our own plant.

There is disillusionment expressed in the attitude—and I refer particularly to the comments of the noble Baroness, Lady Faithfull, this afternoon—which asks: why the blazes should we do all this extra work for so little real reward? That is their plea and it is echoed by thousands on the shop floor the country over, when the layabouts and the ne'er-do- wells—and there are some; let us not think it is a perfect society—are so well-cushioned by an indiscriminating Welfare State. Of course, those genuinely in need must be helped, and probably to a greater extent than they are now; but the ridiculous concept of Government assistance from pre-natal care to funeral expenses, whether or not it is really needed, is becoming the subject of total ridicule on the shop floor among the real workers, as noble Lords opposite might refer to them. The skiver, the bogus sick and the persistent absentee are no friends of the workers on our shop floor. They receive quite as much criticism from them—maybe even more, because they are known to the workers—as from management.

Can one counter the criticism of those on the shop floor, who feel that their enterprise is being made uncompetitive by fractious behaviour in certain vital areas—which is now much improved—and that their jobs are being threatened by lack of investment caused by the very high taxation which we are discussing this afternoon, caused by Government interference and busy-bodying, when loafers in their own locality are getting away with, and are being seen to get away with, living off the State, as the noble Baroness Lady Faithfull, suggested? Why should the rewards of true hard work and enterprise be so low? They should be higher for those who are prepared to do more work and try harder and bear more responsibility. Those who are candidates for emigration are the best workers, be they executives, be they on the shop floor, be they agricultural workers. It is those who are not frightened of not being able to get another job, or of not being able to hold down a job in a new environment, who are willing to emigrate, and one is left with the less good and, worse still, with some who are determined to dig themselves even deeper into a comparatively soft social security, which is still not discriminating enough.

It is one of the follies of Socialism to believe that everyone will work for the good of all, under a benign State bureaucracy which will redistribute wealth and property and make everyone happy and comfortable. The world just is not like that. Go to Russia and the satellites and see for yourselves. I have been about 10 times since the war, plying my wares in their direction. Are people happier and more prosperous there? Of course they are not. If it is so damned good out there, I wonder why the Left Wing do not go and stay there, instead of trying to turn Britain into a USSR of the United Kingdom, which is not a very rewarding pastime, nor is it very fruitful for any of us in this country. Emigration should not be for the young executive or the skilled worker on the shop floor. We should make it well worth his while to stay here. This is still the best country in the world in which to live. We have to make it a truly profitable country in which good men can do well, and we should not destroy the character and enterprise of this nation.

Perhaps I can leave the last word to the senior executive of our company, who has no personal wealth whatever, and who came to our company from a much bigger one many years ago because he saw an opportunity. I asked him to express in one paragraph what he felt about the present circumstance and he said this: There is real and deep-rooted frustration among those who are accepting responsibility for organising and running the company, who see their standard of living eroded by inflation and high taxation, coupled with salary limitation, and this at a time when recent legislation is putting more and more responsibility on managers and directors, and also substantially increasing the work load as a result of direct intervention in management affairs by the bureaucracy. These frustrations are mounting, and one of the worst effects is the narrowing of differentials due to the flat rate salary increase policy, coupled with progressive taxation, and the differentials in this country are already far below those in the free European countries. The pressure therefore on executives to drop off in order to increase their salary, and particularly to emigrate, is now becoming extremely severe, it not overpowering. My Lords, that was the burden of the speech of the noble Lord, Lord Plowden, and I commend it to you.

7.55 p.m.

Lord AUCKLAND

My Lords, I should first like to join in the congratulations to my noble friends Lord Barber and Lady Faithfull. In the days when I worked as an associate director of a small firm of management consultants, I had the pleasure of assisting the bank of which Lady Barber is now chairman on the art of effective speaking, and I should like to think that that did the bank some good. But, be that as it may, my noble friends will be a great asset to this House.

At the end of a long debate such as this, and with the Budget only a few weeks away, it is quite clear that no Government spokesman can commit himself too freely. But even at this late hour there are a few points to be made and, as one who has worked for small or medium sized companies all my working life, much of it spent in Lloyds of London through one relatively small company there, and also as a non-associate director of a small construction company, I can claim a little experience of the workings of such companies as my noble friend Lord Orr-Ewing had in mind in initiating this very valuable debate.

Of course, many of us who are in politics are also in business, so, inevitably, there are from time to time conflicts of interests. There are many things that may be said in the boardroom which are dynamite in the political Chamber, and vice versa, and I should like to echo the remark some months ago of my noble friend Lord Amory, who made a particularly notable speech, that no one political Party in this country at the present time can really claim to solve our problems, whether those concerning medium or small sized companies, taxation or anything else. But there are certain methods and activities which differ from Party to Party, and which it is right to expose.

If I may take the insurance industry as an example, the company with which I am associated earns a great deal of currency for this country, through insurance placed overseas. As I understand it, insurance companies pay 52½ per cent. corporation tax, and it seems to me a not unreasonable proposition to be considered—not of course today, but perhaps later by the right honourable gentleman the Chancellor of the Exchequer—that where insurance companies acquire valuable orders for this country, which can be obtained only through a good deal of travel, the corporation tax thereon could at least be modified. This seems to be a suggestion which may not necessarily be confined to insurance companies. We are constantly exhorted by Governments of all political Parties to export. This is perfectly proper, but with corporation tax at the level it is at now there are certain problems which face many companies. If one wants to obtain a really large order it is no use just getting on the Telex machine. It may be a case of having to go to Newcastle—that is not very far—or to Norway, or even perhaps to New South Wales if you really want to get in before your competitors. If such orders help our balance of payments, as I believe they do, there is a case for making it easier for such companies to carry out these contracts. It has never been the case for small and medium sized companies to plead for subsidies or for free gifts. There has been a lot of misunderstanding, not in your Lordships' House but outside. Small companies have never indulged in a plothora of self-pleading. All they have said, and quite rightly, is that they want a fair crack of the whip, particularly in view of the large number of supermarkets and other large organisations which in some cases are squeezing them out.

I should like to quote from a letter which I received recently from 12,000 miles away: I sometimes wonder if the supporters of free enterprise tend to be quiet because they are too busy working. Unlike their critics, those who support free enterprise are actually on the job producing goods, producing services and making things happen. After 10 hours a day six or seven days a week they do not have time to make speeches or television appearances "— et cetera. I am not suggesting that the chairmen of State controlled industries are not similarly working hard. This is not intended to favour free enterprise completely, but I think it proves what free enterprise does. It is part of an address given 18 months ago by the Chairman of the Institute of Directors of Tasmania to a large meeting in Australia, to which many people now in this country are turning their eyes. Of course, as is known, the Australians, and indeed people in the Commonwealth, will not welcome people from this country solely because they are disillusioned with one Government or another. They only take people who wish to work hard.

When it comes to performance, the 1971 Bolton Report has one particularly interesting statistic for the furniture industry. The amount of exports carried out by the smallest furniture businesses between 1969 and 1970 increased by over 1,000 per cent. What the current figures are I do not know, but the furniture industry, like so many others, consists largely of small companies which are hit by corporation tax as family businesses are by capital transfer tax. My Lords, the hour is getting late and since the Budget is so near and since so much has already been said there is not a great deal to add. In my opinion, the country as a whole has to face the fact that the taxation system needs looking into and that the smaller and medium sized companies are run by people who earn their living by hard work. If they do not work hard they go under. It is the duty of any Government or any Party to play their part in seeing that this does not occur.

8.6 p.m.

Lord MELCHETT

My Lords, it would be presumptuous of me to congratulate the two maiden speakers, but I should like to join with all other noble Lords who have taken part in the debate in saying how much I enjoyed listening to what they both had to say. It was of course particularly interesting to hear what the noble Lord, Lord Barber, had to say on this subject. I hope that he will accept that in future debates, when he does not have his maiden to protect him, there may be some of my noble friends—

Earl FERRERS

Where are they?

Lord MELCHETT

—who would like to question him a little more forcefully on some of the things he had to say. I am sure the Chancellor will listen very carefully to everything that was said in today's debate. It is of course close to the Budget and that, as has been acknowledged by most noble Lords who have spoken, has constrained what people from this Bench can say. As I think the noble Lord, Lord Orr-Ewing, said, the Chancellor receives a vast range of conflicting evidence from all points of view at this time of the year, but I am sure he will have drawn to his attention the outstanding points from today's debate.

It may be hard to believe after the notable speech by my noble friend Lord Leatherland, but I regret it is a fact that this Government are regarded by some critics as hostile to small firms. During most of the debate I was worried that I should have to rise to my feet to make that statement, unsubstantiated by any evidence whatsoever, but I am glad to say that the noble Lord, Lord Hewlett, saved me from that. It is said that this Government are adopting policies aimed at the destruction of small firms. On the contrary, the Government recognise the vital rÔle of small businesses in the economy, and I accept all that the noble Lord, Lord Orr-Ewing, said about their importance. The Government are determined to establish a climate in which small business can prosper. This does not mean featherbedding, but it does mean fair treatment. The Government's policy is to avoid discrimination against the small firm sector. This does not mean that the sector can be shielded from the effects of the Government's wider policies affecting the community as a whole.

My right honourable friend the Prime Minister has stated, on more than one occasion, his desire to help small firms, most recently in another place on 17th February this year. To suggest, as I think the noble Lord, Lord Hewlett, did, that there are factions within the Labour Party out to destroy small businesses is also quite ridiculous. On 11 th December last year that reasonable and responsible Member of the Labour Party in another place, Mr. Eric Heffer, in a question to the Prime Minister asked: Does my right honourable friend accept that many honourable Members on this side of the House are in full support of the fullest possible assistance being given to small businessmen?"—[Official Report, Commons, 11/12/75; col. 649.]

A Noble Lord

The building industry.

Lord MELCHETT

And, of course, the Prime Minister accepted that, as, I suggest, should noble Lords opposite. If I might give two specific examples, since taking office the Government have introduced an entirely new tax relief to take account of the effect of inflation on the ability of businesses, both small and large, to replace their stocks. This relief is generally acknowledged to have been an important factor in assisting the liquidity problems, and it has been widely welcomed by the business sector.

Secondly, capital gains tax retirement relief for small businessmen has been put up from £10,000 to £20,000 by our first Finance Bill, meeting the recommendation of the Bolton Committee, on which the previous Government took no action in the two years before they left office. In contrast to the noble Lord, Lord Hewlett, but in sympathy with every other noble Lord who has spoken, I do not seek to make Party political points. I hope I have said enough to give the lie to the allegation that the Labour Party is out to destroy small businesses. We recognise the importance of the small firm sector. Personally, I would place particular emphasis on one or two of the advantages of small firms.

Lord HEWLETT

My Lords, may I rise on a point of personal explanation. If the noble Lord, Lord Melchett, reads Hansard tomorrow, he will see that I said there were Left-Wing influences being brought to bear on Her Majesty's present Government, which were having a deleterious effect on small businesses. No amount of quoting by the noble Lord of Mr. Eric Heifer's question will alter my opinion.

Lord MELCHETT

My Lords, I have no intention of wasting my time or that of your Lordships in trying to influence, one way or the other, the opinions of the noble Lord, Lord Hewlett. I was saying that personally I would place particular emphasis on one or two of the important factors mentioned by the noble Lord, Lord Orr-Ewing, as being the advantages which the small firm sector has to offer to the economy. The noble Lord mentioned some of these at the beginning of the debate. He mentioned good labour relations. I would agree; and I would add to that the willingness to experiment with new forms of industrial democracy and participation. The noble Lord, Lord Orr-Ewing, and the noble Viscount, Lord Watkinson, mentioned the flexibility with which small firms are able to respond to the increased demands made by big firms in an economic upturn. Certainly I would agree with that and would add an important point: the flexibility with which small firms are able to adapt to the very difficult conditions of a recession which we have been going through in recent times.

My Lords, the Motion on the Order Paper talks of the disincentive effects of taxation. I regret that we have not had any real discussion, except from my noble friend Lord Leatherland and the noble Lord. Lord Birdwood, about the point that my noble friend the Leader of the House made at the beginning of the debate dealing with the complexities of incentives. My noble friend the Leader of the House mentioned the third Report of the noble Lord, Lord Diamond. I acknowledge that taxation may have the effects that the Motion suggests it does, but may I briefly quote two reports from the Royal Commission Report which put a rather different point of view.

Professor Break sampled 506 self-employed United Kingdom solicitors and accountants in 1956. The members of the sample all had high marginal tax rates, were all conscious of the effects of taxation and, being self-employed, could vary their work effort and the hours they worked as they chose. Thirty-one per cent. reported that tax had an incentive effect; 18 per cent. reported that tax had a disincentive effect. By checking these replies against other data, Professor Break estimated that only 6 per cent. suffered a significant disincentive, and 8 per cent. a significant incentive. He concluded that high taxation had little overall effect on incentive.

The Earl of GOWRIE

My Lords, before the noble Lord, Lord Melchett, leaves that point, on a point of information solely, because I may have misheard him, when did he say that this research had been done?

Lord MELCHETT

My Lords, I said 1956, and I was going on to give an example of a second study which was carried out in 1971 on the effects of taxation on 2.100 weekly-paid workers in the United Kingdom. The authors concluded that the overall effect of tax was very small but led to a slight increase in the hours of overtime worked. I am not falling into the trap—or at least, I hope I am not—into which some speakers fell, of suggesting that tax, in one way or the other, has a simple effect on the reasons and motivations for which people work. This is a very complicated subject. Sometimes increasing the tax may have an incentive effect; sometimes it may have a disincentive effect. This is much too complicated a subject to be dismissed with the phrase that it is either an incentive or a disincentive, and I suggest there are other factors at work —

Lord CAMPBELL of CROY

My Lords, I am grateful to the noble Lord for giving way. From what he says, does he or does he not agree with the reported words of the Chancellor of the Exchequer, which I quoted, that if taxation were increased from its present levels, which are considerably higher than in 1971 or 1956, it would corrode the will to work?

A Noble Lord

If!

Lord MELCHETT

My Lords, I was going on to quote something which my right honourable friend the Chancellor of the Exchequer said, a quotation given earlier in the day by the noble Lord, Lord Orr-Ewing. The noble Lord reminded us that my right honourable friend the Chancellor has said that middle management have taken a caning. The noble Lord, Lord Orr-Ewing, did not go on to say—perhaps the noble Lord, Lord Hewlett, will allow me to do so—that my right honourable friend added, But a lot of other people have taken even worse canings. I would say that the two groups who need attention most are married couples with a couple of children, those whose standard of living has not kept up with that of single people in recent years, still less with that of the pensioners who had a substantial increase in their real standards, and secondly, people on well below average earnings. That is what my right honourable friend the Chancellor said when he mentioned the caning which middle management have taken.

My Lords, tax thresholds have fallen sharply in relation to average earnings, and people are being drawn into tax at income levels below social security benefit levels. The increase in the tax burden has fallen heavily on low wage earners. Those earning less than the average contribute over a quarter of the income tax yield. I acknowledge, as did my noble friend Lord Shepherd, that this cannot be made good simply by increasing the burden at the top.

That leads me on to say a word about the poverty trap, which several noble Lords and the noble Baroness in particular mentioned. This effect has been well publicised. Without belittling the difficulties—and I would stress "without belittling the difficulties "—or the natural resentment of those affected, the real extent of the poverty trap should not be exaggerated. In theory, there are perhaps 200,000 families who could suffer "poverty surtax" rates of 75 per cent. or more, but in practice, the number is much smaller. Benefits such as family income supplement and free school meals are given for periods of 52 weeks, so an increase in earnings does not lead to an immediate withdrawal of benefits, as I think the noble Viscount, Lord Watkinson, suggested, and may never do so, because of the regular reviews of income limits for entitlement.

The root cause lies in the interaction between the means test and the low tax threshold. As to the means test, we should bear in mind that the last Government introduced the two main causes of the poverty trap, the family income supplement and the big increase in means-tested rents under the Housing Finance Act 1972. We have not introduced any new means test since we have been in office. We have relied on the new non-means-tested benefits that we have introduced—the non-contributory invalidity benefit, mobility allowance, child benefit and child interim benefit. We believe the way out of the poverty trap is to avoid means testing where possible, and I believe our record shows our determination to achieve that end.

My Lords, I turn to the question of company taxation. I will have to disappoint the noble Baroness, Lady Seear, yet again this week, because I do not intend to quote the international comparisons which she expected, if only because they were quoted so effectively by my noble friend Lord Leatherland. Of course, it is true to say for the average company that the tax bill represents one of the most direct impacts of Government. We have continued to allow investment in plant and machinery to be written off in the year it is undertaken, a major protection from inflation. This Government have introduced stock relief, which in two years has provided reliefs with an ultimate value of some £4,000 million. I should like to thank the noble Viscounts, Lord Watkinson and Lord Amory, for their generous welcome of that relief.

Taking the first year allowances on fixed investments and the stock relief together, we now have a system under which profits ploughed back into a business, whether in stocks or fixed assets, are substantially free of any tax liability whatever. Very many companies are paying no mainstream corporation tax at all. On top of this, the direct burden of United Kingdom taxes on non-nationalised companies has fallen as a percentage of total trading profits from 14.9 per cent. in 1964 to 5.1 per cent. in 1974. The much discussed and recognised decline in profitability—an international phenomenon—is not caused by taxation, since it is measured before tax is taken off. As a recent article in New Society said: While there has been a steady decline in profitability since at least 1950, companies have been insulated from its consequences on retained earnings …because successive Governments have reduced the effective corporate tax rates quite dramatically throughout the whole post-war period. Of course, funds raised internally, undistributed profits, plus depreciation, have always formed an important part of the total sources of funds for investment. For industrial and commercial companies as a whole, the proportion of internal funds fluctuated within fairly narrow limits at around three-quarters of total funds between 1964 and 1971. In 1972–73, the proportion fell to just over half, mainly because companies turned to bank borrowing in order to finance the large increase in funds used in both years. There was some recovery in 1974, and in the first three-quarters of 1975 the proportion was again about 75 per cent. Liquidity problems and low profitability, particularly the historically low profitability of the last two years, are extremely serious for all companies, large and small, but I would suggest that no one could blame an increasing and unjustified tax burden for this. The facts simply do not support such allegations.

My Lords, I should like to turn to capital transfer tax, about which so much was said in the course of the debate. I should like very briefly to remind your Lordships of the reasons why this Government felt it necessary to introduce this tax. I think everybody agrees that estate duty was readily avoidable by the simple device of giving assets away in good time before death. It is, of course, not invariably the case that businesses of any size, large or small, are best owned and managed by the descendants of the founder, even if the descendants want to take control. There would not be much incentive for newcomers with little initial capital to build up a business if they were faced with competition from massive concentrations of wealth passed on from one generation to the next without any payment of tax. This would lead to a sense of injustice and resentment at the unfair distribution of control of resources, which it is the aim of this Government to remove. The establishment of a fair society is not just a politician's ideal. It will help to create the right climate of personal and industrial relations which is necessary to enable everyone involved in businesses, big and small, to operate and prosper.

The likely effects of capital taxation, and, in particular, of capital transfer tax and the proposed wealth tax, have, in my view, been greatly exaggerated. I am sure noble Lords will agree with my noble friend Lord Leatherland, that many small businesses, in particular small shopkeepers, have assets below existing or proposed tax thresholds. Many more above existing thresholds will pay tax at a lower rate than would have been the case under the old estate duty provisions, if they pay tax at all, since, as my noble friend Lord Leatherland said, transfers between spouses are now tax free. Nevertheless, the Government recognise the concern of independent businesses of more substance that capital taxes could create undesirable difficulties, and no doubt this possibility is one that the Chancellor will take into account when capital transfer tax is under review and when deciding on his attitude to various features of the proposed wealth tax of particular interest to the small business sector.

Noble Lords with experience of government will know that it is not for an Under-Secretary of State in the Department of Industry to say what is going to happen in the Budget. Indeed, I understand that this close to Budgets it is possible for Under-Secretaries of State to lose their jobs merely by quoting something that has been said by Treasury Ministers in the past. At the risk of putting my head on the line, I should like to quote something my honourable friend the Chief Secretary to the Treasury said on television on 10th February this year. He said he was satisfied with capital transfer tax as a basic tax, but he went on to say: I have indicated that we will be bringing in some further relieving measures in the next Finance Bill. The noble Lord, Lord Orr-Ewing, reminded us about the commitment in the White Paper of the Government to the small firm sector. Once again I avoid laying my own neck on the line by quoting some words of my right honourable friend the Prime Minister, on 11th December last in another place: My right honourable friends and I have given a great deal of attention to this matter. We are trying to find some way—I cannot guarantee that it will be easy—to provide some kind of help for small businesses. A number of proposals have been sent to us from many quarters. …We have been looking, for example, at the question of differential interest rates, and so on. It is an extremely difficult matter, but we are trying to find a way of helping small businesses." —[Col. 64.] I hope that will convince the noble Lord, Lord Orr-Ewing, that the White Paper commitment has most definitely not been lost sight of. With regard to what we might do, I dare say it is getting a little late in the evening to go into any detail.

I was interested in what the noble Lord, Lord Orr-Ewing, and the noble Baroness, Lady Sharples, had to say about encouraging the banks to do more to help small businesses. That is something which is certainly very much in the forefront of my mind. I was less keen on Lord Orr-Ewing's idea of setting up some new organisation. When I introduced the Post Office (Banking Services) Bill, the noble Lord, Lord Banks, yesterday saw it as one of its great assets, in that it did not involve setting up a new organisation; I think that may well be a feeling shared by many noble Lords.

My Lords, I wanted to take up the noble Baroness, Lady Seear, on what she said about last Wednesday's debate, but in view of the shortage of time I will have to restrain myself. I would like to say that I was very upset that she felt I was making any Party political points last week. I was merely following something which the noble Earl, Lord Gowrie, and noble Lords from the Cross Benches and from behind me, had said about lack of training in British management, and I in no way intended my remark to be Party political.

I know from my talks at national and local level with the Chambers of Commerce, the CBI Small Firms' Council and the Chambers of Trade that there are real worries in the small firms sector, particularly over capital transfer tax. But I also know—and this is something I would commend to the attention of the noble Lord, Lord Hewlett—that the last thing small firms want is to become a political football. There arc no Party points to be gained from this. VAT remains one of the major complaints of many small traders. This Government have a coherent and so far successful industrial and economic strategy. I have no doubt, as my noble friend Lord Shepherd said, that the general economic recession, coupled with inflation, is the cause of most of the genuine difficulties that small firms face at the moment. Bringing inflation under control and getting the economy moving are the best things the Government can do to help the sector, and our whole economic strategy is directed towards that end. Our success so far is illustrated by the decline in the rate of inflation and the current improvement in the balance of payments. As my noble friend Lord Lee of Newton emphasised, continuing success depends on maintaining our tripartite approach, and that must include continuing with the Socialist policies we were elected to pursue.

I have no doubt that the most important thing that everyone involved in small firms can do, with Government support, over the next few years, is this: Within the framework of the Government's tripartite approach to our industrial and economic problems, to fight, with their employees, with large companies and with the Government, to do all they can to help this country defeat inflation and set out along the path of a stable export-led growth in our manufacturing capacity.

The Earl of GOWRIE

My Lords, before the noble Lords sits down, may I ask him two brief questions? If he does not feel like answering me this evening, I shall quite understand, but will he please brood about it. I think most of us would acknowledge that he has dealt with the question of small firms very fairly; but on the question of taxation generally, why, if taxation has really very little to do with the question of incentives or disincentives, do nearly all our comparable overseas competitors find that we are at management level ludicrously over-taxed, and wait eagerly, as my noble friend Lord Birdwood said, to pinch our best management?

My second question is this: if everything in the taxation garden is rosy, why do nearly all people of self-made high achievement in the Arts, in sport, in popular entertainment, and the like, emigrate from this country?

Lord HOY

My Lords, before my noble friend replies, may I say that if the noble Earl wanted to take part in the debate there was plenty of opportunity. If he did not want to take part in it, I do not believe he is entitled to come in at half-past eight at night and think that he can make a speech.

The Earl of GOWRIE

My Lords, as I was referred to personally by the noble Lord, I think I can reply. I have been present at this debate ever since I left my office at 5 o'clock this evening, and I am perfectly entitled to ask the noble Lord the Minister any questions I like.

Lord ORR-EWING

My Lords, I should like to suggest, in support of my noble friend Lord Gowrie on the Front Bench, that he has been here very much longer than an ex-Minister, Lord Balogh, who came in and made a long speech and then promptly went out. He was not here at all during any of the major speeches. Therefore, I think my noble friend is perfectly entitled, under the courtesies of this House, to put points before the noble Lord sits down.

Lord SHEPHERD

My Lords, would the noble Lord, Lord Orr-Ewing, allow me to intervene? I am quite sure he may be justified in referring to my noble friend, but if we were to adopt it as a practice to point fingers at one side or another, or at an individual Member or another, in participating in debates or being absent from them, we might be in a slightly embarrassing situation. May I suggest that we leave this particular point?

Lord ORR-EWING

My Lords, I think the noble Lord the Leader of the House is very wise to leave this particular point in view of the serried ranks on our Benches and the four Back-Benchers on his side. Anyhow, I would say in a more reasonable frame of mind that I think everyone would agree that it has been a very good debate. We have had 24 speakers. It has been a little disappointing that out of those 24 there have been only four speakers from those Benches.

Lord SHEPHERD

My Lords, may I further intervene, because the noble Lord is slightly provocative. We had our own debate last week on growth. Could the noble Lord say how many of his side contributed to that debate?—five!

Lord ORR-EWING

My Lords, as a director of Richards and Westgarth in Teesside, I was too busy trying to sort out what was going to happen when that firm was nationalised (wasting more Government money, and disrupting the whole organisation of our firm) to be here on that day. I take the point that in fact in many ways the two debates have matched each other. One is growth and one is incentive. Many of us feel that to get the growth you need the incentive. It is not the only reason, but those two are very closely linked together.

The noble Lord in winding up last week, said that he hoped to start at a much earlier time (he has not) and that he did not want to give away any ammunition because he was going to use it all today. I think that by that criteria his reply, although I am sure he has tried, has been a little disappointing. He has very big responsibilities for these small firms. I did not mention the figure of 800,000 which is the Bolton figure, or the fact that it becomes 1¼million, and I sow the seed in his mind that if each of these small firms took on just one person, it would make such a tremendous impression on our pool of unemployment that it would be infinitely worth while; 800,000 extra people in useful employment could make a big impact on the growth figures which the Chancellor is so keen to get.

I am most grateful that from our Benches we have had such outstanding speakers as the noble Lord, Lord Plowden, speaking from personal experience—I am sorry, the noble Lord, Lord Plowden, speaking from the CrossBenches—and my noble friends Lord Amory and Lord Barber. I should like here to congratulate my noble friend on his maiden speech, and I hope that we shall hear him again very often. He always has an extremely clear mind, and he put his remarks so beautifully. I think everyone would like to add approbation to the noble Baroness, Lady Faithfull, and her speech. How nice it is to have somebody who has up-to-date and firsthand experience of the social problems which, in her case, beset Oxfordshire, but are typical of problems which beset the poor and handicapped in so many areas. Then we had my noble friends Lord Watkinson, Lord Campbell, Lord Ferrers, and then the noble Baroness, Lady Seear. They apologised for not being able to stay. The noble Baroness came back.

I found in contrast that it was nice to hear—we do want stimulating speeches—the first-hand experience which my noble friend Lord Hewlett brought to our debate. I compare his attitude and his anxieties with the somewhat complacent attitude, I have to say, that came from the Government Front Bench in the winding-up speech. Is the noble Lord really saying that the present level of taxation is not a disincentive? We concede that there are other incentives, but we are saying that current levels are a disincentive. This is the burden of our debate. People have brought out chapter and verse to show that we are right in saying that there is a strong element of disincentive. Of course you cannot put a measure on it. You cannot say how many people are going to go absent; how many people are going to claim sickness benefit to which they may not be fully entitled, but I gave some figures of one production line I visited, and this must be an element. I quote again the Labour club in Leeds, which has been quoted to us twice by the Chancellor of the Exchequer, where they said that the present rate of income tax is the reason for their greatest complaint and their greatest criticism of this Government. They have said it twice, so I am not just quoting our own views; I am quoting the views of the Labour club in Leeds. We have all quoted from all over the place. I think that everyone would agree that from the present level we cannot possibly go higher and we should go lower.

I was disappointed, too, that, after speakers of this calibre and experience had taken part, in winding up the noble Lord did not deal with more of the points. I know it is late, but I would urge him to forget all the stuff that is given him from the Box and just deal with some of the points.

Several Noble Lords

No!

Lord ORR-EWING

My Lords, I think it is a legitimate plea. Could he please deal with these points? He was very kind, he dealt with the point in paragraph 14 of the Regeneration of Industry White Paper, although I must say that it was not very encouraging after 15 months to quote the Prime Minister finding it rather difficult. But he did finally say—and this is my last comment on this—that the economic strategy of the Government is succeeding.

There is nothing. There is a small holdback on the rate of inflation. The current rate is about 15 per cent. Year-on-year, but compared with what our competitors have done in every single country this is a miserable improvement. In view of the White Paper on Public Expenditure and the whole thing being built on a fabric of an expansion of 5, per cent. year-on-year in our gross domestic product, it is extraordinary complacency to take the attitude that, in his words, "Our economic strategy is succeeding.'' It will be a very long time before those words will be matched by results. I hope that we shall continue from these Benches, and from all over the House, to go on pressing the Government to concentrate on the real problems of tackling inflation and giving industry, particularly small industry, a decent chance. My Lords, I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.