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Income Tax Postwar Credits

Volume 415: debated on Wednesday 31 October 1945

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Third Resolution read a Second time.

Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

8.15 p.m.

We have already had some discussion on this matter, and in so far as this Resolution says that no more postwar credits should be created after the tax year 1946–47 or any subsequent year's assessment, I should imagine that everyone would agree with it as a general proposition, because whatever one may say about it—and I notice that the Financial Secretary to the Treasury had very little good to say about it the other night—it still remains a fact that the post war credit system was introduced during the war as a set-off for the withdrawal of certain allowances and the reduction of others. As the Chancellor has pointed out, postwar credits already amount to something like £575,000,000, with £225,000,000 more to come before the story is ended. Thereby, as Sir Kingsley Wood so often said to the House at the beginning of this affair, is created the difficult problem that there is this large amount of pent-up spending power on which a great number of people want to get their hands, in order to spend it. It is a problem of very great difficulty, with which the Chancellor has to deal and not I, or hon. and right hon. Gentlemen on this side of the House, but even if we grant that it would not be wise to continue the postwar credit system—and I have never heard it suggested in any quarter that it should go on in peace time, it was thought to be a war arrangement—we stilldo not feel that the right hon. Gentleman has dealt quite fairly with the persons from whom those allowances were taken and for whom postwar credits were set up, in the changes which he has made in his financial statement. There were three elements: the increased personal allowances, the raising of the exemption limit—these two the right hon. Gentleman has done—

Never mind whether it is more than done at the moment. He increased the personal allowances, and therefore that element in the postwar credit has been restored—whether more or less is another matter; he has raised the exemption limit and therefore that element is back—whether more or less is irrelevant; but the element of the earned income allowance he has not given back. He said when he wound up the Debate on Thursday night that in his view there was no kind of pledge that what had been taken away would be given back exactly, but he did say also that there was a reasonable understanding that there should be some "comparable lifting of the allowances"—there I use his own words. It is very difficult to argue about the interpretation to be put upon what, I suppose, we in this House and the taxpayers concerned thought was a general understanding, but my recollection is that the idea was that when the post war credit system came to an end things should be put back as they were before, and then from that position additions or subtractions would be made as circumstances allowed. The right hon. Gentleman does not accept that. He says, "So long as I put in the same amount"—or, as he has fortunately been able to do for some people, more—"I have done all and more than was expected of me." In his argument, one of the advantages in taking that line has been that he has been able to give benefit to 2,000,000 people, whereas if he had put back the situation as it was there would have been only 1,600,000. Therefore 400,000 more people have benefited to some extent or another, and we must not mind about the people who are worse off, if any.

The hon. Member for South Cardiff (Mr. Callaghan) said the other night that it would be quite wrong for it to go out from this House that on the whole people will be worse off as a result of this Budget. It all depends on what you mean by "on the whole"—on the whole, or in the hole, perhaps, because it is undoubtedly true that by the non-return of the earned income allowance element in the postwar credit some people will be worse off. There has been some argument on that. Some of my hon. Friends pointed that out during the Debate the other day, and one hon. Gentleman opposite—I cannot remember if it was the hon. Member for South Cardiff or not—brought out the tables and said, "There you are—everybody is going to have a less charge during the year to which these tables apply than before, therefore how can they be worse off?" That sounded like a complete destruction of the argument put by some of my hon. Friends, but what the hon. Gentleman forgot, and what these tables do not in fact disclose, is that no account whatsoever is taken of the value of the postwar credit, which ofcourse is, and must be assumed by everybody to be, worth its full value. If it is not worth that, the whole of our financial system has in fact gone astray, because we all stand behind the fulfilment of the State's obligations, and no one has been more strenuous in saying that than the present Chancellor of the Exchequer.

I have some figures which I think are correct. Take the case of a married couple, with one child, earning £500 a year. According to the table, the charge at present is £101 2s. 6d. and the proposed charge next year is £72 15s. Look ing at that in its simplicity, it would appear that that man will be saving £28 7s. 6d. a year in tax. But at the moment that particular man is receiving £31 10s. postwar credit. [Interruption.] He is being credited with that amount. I hope that is not so different. He is not getting it in pounds, shillings and pence at this moment, but he is getting a credit which is supported by the whole of this country's credit, and that postwar credit is worth and I trust always will be worth, its face value. Next year, the £31 10s. credit will not come to him, but instead he will get a tax relief in pounds, shillings and pence—out of his own pocket—of £28 7s. 6d. The difference between those two figures is £3 2s. 6d., and to that extent he will be out.

It is true that in one case there will be actual coins of the Realm which he will not be giving to the tax collector, and that in the other case it is a figure on a piece of paper which is drawn upon the credit of the nation and which will be repaid at some time. Therefore, it is true that such a man is to the extent I have mentioned worse off. Hon. Members may think differently, but it remains the fact that if you take the whole of the liability and the whole of the receipts and count, as I am sure the taxpayer should be entitled to count, the postwar credit as the equivalent of cash to be paid at some future date, that man will be worse off to the extent I have mentioned, and he will be worse off for one reason only—because the right hon. Gentleman the Chancellor has not put back the earned income allowance. I shall be very glad if I am proved to be wrong, and so will my hon. and right hon. Friends, but we have no reason to suppose that we are all poor mathematicians. [Interruption.] The hon. Member for West Fife (Mr. Gallacher) has not been here all day listening to the Debate. He simply flits in and out and makes noises. I should be glad if he would take an interest in these financial matters and adorn our Debates on financial matters.

The right hon. and gallant Gentleman is missing a fact. If he is discussing this from the point of view of finance, surely it is an understood and recognised feature in all finance that if you leave a sum of money in the hands of the Government for a period of time, you will get interest, along with the original sum. Therefore, if the man to whom the right hon. and gallant Gentleman is referring gets the money now instead of leaving it in the hands of the Government, he will not get the interest that is included in the postwar credit.

That is so "recognised" that it has nothing whatever to do with the matter. There is no interest attached to the postwar credit, and never has been. It would have been much better if the hon. Member had listened to some of these Debates, not only this year but in years past, and then he would have known what the situation was. Quite apart from the fact that in certain cases there are people who will not get so much relief as the Chancellor appeared to indicate in his speech, there is a second point to which we on this side attach some importance and about which I hope the right hon. Gentleman will be able to give us some information. Throughout his statement the Chancellor kept on repeating that the idea was to give some incentive. The biggest incentive that could be given would be to increase the earned income allowance. Anything that will induce people to earn more, to work more in order to earn more, must be to the good of the nation as a whole. Everybody is agreed that if we are to catch up with the world at large, if we are to recreate our trade and get out exports going again, we must work hard. Employers and trade union leaders alike have repeatedly urged people to put their backs into it and to work hard in order that we may return to something of the standard of life which the masses of our people enjoyed before the war started. Why at this particular time the Chancellor should not have put back that element in the postwar credits which was taken away, why he should not have improved the allowance for earned income is beyond my understanding. I very much hope that the right hon. Gentleman may be able to make some concession and that he may be able to indicate what is in his mind on the subject. I feel he has made a misjudgment in this matter. He would be very fortunate if he got through the whole Budget without making any misjudgment. I feel this is the weak point, and I should be very happy if he could give us some encouragement and tell us that he has not entirely closed his mind on this subject.

This is largely, if not wholly, a question of arithmetic and the interpretation to be placed upon figures. It is not always easy to be clear in these matters, but I will endeavour to be as clear as I can. Certain points are not in dispute. In the Finance Act, 1941, the postwar credits were instituted, and co-incidentally with that certain changes were made in the exemption limit, in the personal allowances and in the earned income relief. Those were the only three changes held to be associated with the postwar credits. It would have been possible for me—and I considered it carefully when preparing the Budget—simply to have restored the status quo. I did not do that. I have created a different system of allowances, and I will explain how they differ. I consider I have done much better for the community at large—I will deal with exceptional cases in a moment—by what I have done than I would have done if I had simply restored the status quo. The exemption limit was reduced in 1941 from £120 to £110. I have put that back. I have put them back; that is as it was, and I have nothing further to say about it.

8.30 p.m.

The single person's allowance was reduced in 1941 from £100 to £80 a year. I have not only put back that allowance from £80 to £100, but I have gone further and have put it up to £110. I will emphasise what that means. As far as the married couples' allowance is concerned, I have not merely put it up from £140 to £170, but have put it up another £10 to £180 a year. I have altered that allowance, and I observe that as a result of doing so I have conferred a much greater benefit upon a large number of people near the bottom of the Income Tax paying scale than I would have done if I. had reconstituted the arrangements of 1941. If I had reconstituted those arrangements exactly as they stood we would have cleared 1,600,000 persons from paying Income Tax, but I have cleared 2,000,000 persons from paying Income Tax, and I believe, apart from acting in fairness to those people who were not really in an economic position to pay Income Tax without depressing their necessary standards of life, it is a much better incentive to get them off paying Income Tax. I am sure that the right hon. Gentleman opposite would find it so if it happened to him. He would find a tremendous incentive in taking Income Tax off these people altogether preferably to dealing with the arrangement of our allowances. Therefore these two particulars, in which I have gone beyond the 1941 Act, have, I submit, been justified in their objects by reaching a larger number of persons at the lower end of the scale.

That is not all that I have done. I have also regraded the standard rate apart from reducing it. I have instituted something which was not operating in 1941; I have instituted a specially reduced rate of tax at only 3s. in the £ next year on the first £50 of taxable income after all allowances have been made. That will have a very beneficial result on persons in the lower strata of those who are subject to tax. I emphasise the 3s. in the £ only on the first £50 of taxable income. In addition I have reduced the standard rate by 1s. That is a bonus in the terms of this arrangement. There was no undertaking when Post War Credits were created that, when they were stopped, we would get a reduction of the standard rate, and, therefore, the reduction of the standard rate is a substantial concession.

I have deliberately not altered in this interim Budget—and I emphasise "this interim Budget"—the earned income allowance. I reserve full liberty to do that on a future occasion. It is what we would all like to see done and what I would like to do, but it does not come within the first priority in this Autumn Budget. The result of this group of changes that I have made is completely and sufficiently shown as far as next year is concerned, and that is all that the White Paper purports to show. What is shown in my White Paper is exactly what is intended to be shown. The tables show the difference between what is being paid now and what will be paid next year when the changes take effect and show that every person from the top to the bottom of the scale, and in all scales, will be better off next year as a result of what I have done.

The Post War Credits are not shown in these tables because there is no assurance that—indeed, I am pretty certain it is the other way—Post War Credits will be paid back next year. They will be kept. The people are credited with those Post War Credits and the exact date when they can be repaid, as I indicated, depends on the general situation with regard to production and the danger of inflation, which would be very great. If we allowed a substantial part, if not the whole, of the £800,000,000 locked up in Post War Credits to be paid back, there would be a great danger of price control being overrun by an inflationary flood and none of us want to do that. If you look at what is to be done next year, and the White Paper tells the truth and nothing but the truth, the calculations which the right hon. and gallant Gentleman has been going into are all based on fallacy. It is the case of a person who it is said will be worse off by reason of relief of Income Tax next year because the relief is less than the Post War Credit which would have been credited to him if it had not been terminated.

It is a fallacy to argue that you can compare an actual reduction of taxation which is shown in everybody's pay packet, bank account and income, with the fact that you have been credited with a sum of money which you are not going to get next year but later on. By the time they get the Post War Credits we may have gone further—I make no commitment—considerably further with regard to reduction of taxes on certain groups of people. We very likely will. I would like none the less, pursuing the right hon. and gallant Gentleman's line of thought, to tell him the result of an inquiry we have made in the Inland Revenue. Assuming the basis of calculation is correct, which I do not admit, I repeat that next year everybody is going to be better off as a result of what I have done, including the people whose case he was taking. But suppose it is a reasonable presentation of the case to take it as he took it, and that you will deduct from the tax advantage which the individual person will get as a result of my Budget the Post War Credit which would have been credited to him if I had not brought the system to an end. Even so, what is the position? There are now, before my changes in Income Tax begin to operate, 13,000,000 people liable to Income Tax. I am going to clear 2,000,000 of them entirely, but even on the assumption underlying the speech of the right hon. and gallant Gentleman there will not be more than 1,250,000at the outside, and perhaps not more than 1,000,000 out of all these 13,000,000 people who, even on his basis of calculation, will be worse off as a result of what I have done. The vast majority, even on his basis of calculation, which I do not admit, would be better off as a result of what I have done.

I have redistributed these allowances in such a fashion that I have conferred a substantially greater advantage upon an overwhelmingly large proportion of those concerned. Even the minority, on the basis of the calculation which he has taken, who are less well off on the unreal assumption that they would be getting their post-war credit at once, which they are not, are only at the outside one-twelfth of the whole Income Tax paying population and they do not include the millions of those most in need of this relief. At the lower ranges, even on the right hon. and gallant Gentleman's computation, they secure relief as a result of what I am doing.

I do not know whether I have succeeded in making that clear. It is not altogether easy to make it clear, but it is clear in my own mind. Naturally, perhaps, I can understand it a little better than other Members, but it is the fact that I have taken a decision to the greater advantage of the greatest number and, repeating that earned income allowance is one which I should like very shortly to restore in whole or in part, I hope that the House will agree that we can go forward with general approval of what I have proposed. I make this further qualification about the earned income allowance. Some people speak of it as only a fraction of the earned income which is allowed.

It is common to say that the earned income allowance was one-sixth and has now been reduced to one-tenth. But there is another element in the earned income allowance; there is a maximum amount of allowance that can be gained by any one taxpayer in any one year. It used to be one-sixth off, with a maximum of £250 per taxpayer. It is now one-tenth with a maximum of £150 per taxpayer. I make no undertaking that if I restore the earned income allowance in respect of the proportion, I will also restore the total maximum advantage gained by any taxpayer. If I were to restore it simply to the way it existed in 1941, I should, in effect, be giving a bonus of £100 under this head alone to all persons, however rich, who could claim that they had a certain quantity of earned income. I am not committing myself to do that, but I am anxious to do something to assist earned incomes in the lower ranges by some modification of the present plan which will bring us a larger differential in favour of earned, as against unearned income, but to restore the old earned income allowance just as it was is not, perhaps, a thing we should be wise to do. I hope I have succeeded in making myself plain to the House, and that my statement will be accepted as, at any rate, bringing a little clarification into the matter.

As the right hon. and gallant Gentleman was good enough to refer to something I said, may I quote what I said in a nutshell? I base myself on what he said, that there is need for an incentive and that we must all work hard and put our backs into it. The question he should address to himself is whether it is really an incentive to make a man pay 7s. 6d. now, or to give him 7s. 3d. now and to say the 3d. we are taking is a discount for prompt payment. That is really the whole difference. The Chancellor is actually putting 7s. 6d. into the man's pocket. What the right hon. and gallant Gentleman was asking was that he should take it out of the man's pocket now, and say that in x years he should have the 3d. back.

I do not think there are any Members at this moment who will not say that this is a Budget which we do not considerably approve of, but I think it is a great shame to finish by saying that the person whose income is not derived from investments, but is capable of earning £2,500—I think that is the right amount—shall have no alleviation in the future.

8.45 p.m.

I said I was not going to commit myself at this stage either to restore the income allowance to the exact form it was before, though I would like to do something to increase the differential between earned and unearned incomes, and that to restore the top limit just as it was was not a thing we should be wise to do.

I should just like to repeat my remark that we wanted to have that quite clear so that no discouragement will be given to these people who also want to play their part in reconstruction through their own efforts.

Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.

Bill ordered to be brought in upon the said Resolutions and upon the other Resolutions reported from the Committee of Ways and Means, and the Resolutions reported from the Committee on Finance (Collectors of Taxes and Finance (Payment of Excess Profits Tax Refunds), and agreed to this day, by the Chairman of Ways and Means, the Chancellor of the Exchequer and Mr. Glenvil Hall.


"to grant certain duties of Customs and Inland Revenue (including Excise), to alter other duties and to amend the law relating to Customs and Inland Revenue (including Excise) and the National Debt, and to make further provision in connection with finance," presented accordingly, and read the First time; to be read a Second time upon Monday next; and to be printed. [Bill 28.]