I beg to move Amendment No. 1, in page 1, line 13, leave out '38·75' and insert '25'.

I am grateful for the fact that the only two Amendments which have been selected are those standing in my name. I must say that I am somewhat surprised to find that for the first time in my memory of this place, which may not go back very far, on a Bill which has anything to do with income tax the hon. Member for Worcestershire, South (Sir G. Nabarro) has not seen fit to table an Amendment to reduce income tax.

The hon. Gentleman is a little presumptuous. He should await my speech which will follow shortly—if I catch your eye, Sir Robert.

I would never presume to imagine that the hon. Gentleman could not speak on the subject. He could hardly be contained. I was naturally surprised that he had not tabled an Amendment. Perhaps it has something to do with the fact that there has been a change of Government.

It is impossible in my view to make the kind of budget judgment that the Chancellor made in reducing income tax by 6d. more than six months before the Budget. I have yet to read one single economist in any worthy journal who would disagree with this statement. The Chancellor has received a notoriously bad Press on this point. Since it is impossible for him I see no reason why I should not join in.

My Amendment would reduce the rate of income tax which the Chancellor has seen fit to reduce from next April to 38·75 per cent. to no less than 25 per cent. This may seem a considerable decrease. The Chancellor no doubt thought, and his party by its claim obviously agree with him, that he was being exceptionally generous to the hard-pressed taxpayers in taking 6d. off income tax. In doing so he was giving back £315 million in the first year and £350 million, according to his estimates, in a full year. He could have done far more.

The whole purpose of this Amendment is to question why he did not. I have not taken the figure of 25 per cent. out of a bran tub. The fact is that he could have made this reduction to 25 per cent., to 5s. in the pound at the standard rate, and still have had a surplus as between Exchequer revenue and Exchequer expenditure. The question I am asking is why he did not do so. This raises the whole question of the quite incredible Budget surplus which we have been carrying over the last few years. If we go back to 1964–65 we see that we were carrying a Budget surplus on current account of £444 million. In the financial year ending 1969 we carried a Budget surplus of £2,444 million. It is something of a coincidence that it was exactly £2,000 million more than in the financial year 1964–65.

It is now estimated that this year we shall have a Budget surplus of £2,600 million, unless the Treasury has come up with a different estimate in the last few days. This is many times over an all-time high for ourselves. Those words, "many times over an all-time high for ourselves" are not mine. They come from the eminent economist Sir Roy Harrod writing in The Guardian on 2nd November. He went on to say:

"…or for any other country in the world."

If one looks at the figures this is absolutely true. The question I am asking in this Amendment, which would at a stroke virtually wipe out the Budget surplus, just about bringing us into surplus—unless the Treasury can again recalculate my figures—is: how did we get to this extraordinary surplus and should we have such a surplus round our necks? It was done by the former Government primarily to overcome the crisis in our balance of payments. The theory was that if we taxed, taxed and taxed again we would drive sufficient of the expenditure off the products on the home market and therefore would force our products out into the export markets.

Some of us had grave reservations about whether this was the right thing to do, whether it was necessary to overcome a balance of payments problem by such deflationary measures. Many of us argued at the time—I myself certainly did—that it would have been far better to have gone for the floating exchange rate, albeit with certain pegs both sides. Nevertheless, whether one believes that this was the right course to follow, as the then Chancellor of the Exchequer did, it clearly has worked. The balance of payments figures we have seen only in the last few days and the figures mentioned at Question Time this afternoon indicate that even in this year we shall have a very substantial balance of payments surplus on our hands.

How long are we to maintain this massive surplus of tax over expenditure? Are we to maintain it for ever? What reasons do the Treasury adduce for not reducing income tax to 5s. in the pound?

I do not say that this is the only way in which we could have reduced the Budget surplus. We could have made a start by the Government honouring their promise to get rid of, for instance, selective employment tax. You name the tax, the Tories promised to get rid of it.

What is the surplus used for? I am at a slight disadvantage here, in that on Thursday of last week I tabled some rather detailed Questions to the Chancellor of the Exchequer for Written Answer yesterday and three days, part of the intervening period being the weekend, have not elapsed. So I have not yet received those Answers.

Surely the hon. Gentleman realises that the present practice of the Treasury is to postpone Answers to such Questions until after any debate on the substantive matter has taken place.

I think that that must be the case, because when I telephoned the Treasury this morning I was informed that, unfortunately, I could not expect the Answers until tomorrow. How very convenient. Nevertheless, I have no doubt that the Financial Secretary will be able to fill in the gaps in my argument should I be down on figures.

First, this money is being used to a great extent to finance the nationalised industries. This was a decision which was made by the Conservative Government, I think in 1958—that the nationalised industries should be able to extract their capital needs from the money that we as taxpayers were paying. The great disadvantage of doing it in this way is that the nationalised industries do not have to compete in the market place for their capital. Therefore their raising of capital is not subject to supply and demand, the normal laws of the market place; it comes out of the taxpayer's pocket and the nationalised industries can make decisions about capital expenditure and many of them can directly compete with private industry, which must raise its capital by entirely different means.

The electricity industry is an example. Electricity boards throughout the country are directly competing with the aid of the taxpayer's money. The difference between my Amendment and the Chancellor's figure would enable the electricity boards throughout the country to compete with private retailers, private wholesalers and private electrical contractors, and to compete on unfavourable terms.

I do not believe that we can justify this huge surplus—I emphasise that it is a quite unparalleled surplus, not only in our history, but in the history of the western world—on the ground of balance of payments. The Chancellor knows that he will have a comfortable balance this year and next year.

I suppose that the only justification for not accepting my Amendment, or for not wiping out the surplus at a stroke, is the effect that it would have on the general level of prices—the theory that it would accelerate inflation, indeed that it is possible to accelerate the present rate of inflation.

I want to point out some fallacies to answer this objection which I imagine the Financial Secretary will put forward. In the past Keynesian economics have undoubtedly worked. The idea was that one could somehow reduce inflation, stem price rises, by lowering the level of demand by either monetary or fiscal means—by extracting money out of the taxpayer's pocket, £2,500 million more than the Government need to run the country.

Up to 1965 many of us would probably agree that this in fact worked. There was the famous Phillips curve which showed, roughly speaking, with certain kinks on the way, admittedly, and certain reservations to be hedged around, that there could be stability of prices provided that an unemployment level of about 2·4 per cent. was maintained. It was a somewhat cynical argument, and I would not wish to go along with it. Nevertheless, from a purely mathematical and economic point of view broadly speaking it worked.

In the last five years this theory seems to have totally broken down. It cannot any longer be assumed that deflationary measures will curb prices. It is very difficult to know exactly how this has happened. If the Treasury is arguing, as I believe that it will argue, that to accept my Amendment, and thereby virtually to wipe out its surplus, would increase prices, it must say how it believes that that would work, because undoubtedly the whole theory has broken down in the last five years, possibly because trade union power enables trade unions to get wage increases anyway without having to consider the general level of taxation.

Since 1965 we have had high unemployment, high rises in prices, a low growth rate, and very high increases in taxation. So the Phillips curve no longer operates—or, if it operates, it operates at a very much higher level of unemployment than 2·4 per cent. and a level which I believe that no one in the House of Commons, of whatever political complexion he may be, would regard as politically acceptable. Indeed, it would probably be a level which the country would certainly not regard as politically acceptable.

Therefore, perhaps Keynesian economics can no longer be relied on to control inflation by reducing demand. If the Financial Secretary does not agree, will he say what level of demand—what level of unemployment—would be required to make this work?

I do not want to make much more of this case, because I am setting out in as brief a detail as I can the broad aspect of my case. The case that I am deploying is not that I necessarily believe that a reduction in income tax is the best way of wiping out the surplus. However, I believe that there was scope to reduce the income tax by this amount and I believe that the Chancellor needs to answer us as to why he was unable to do it.

When the Conservative Government came to power it was generally assumed—a large number of inspired leaks in the Press showed that this would happen—that they would reverse the policies pursued by the Labour Government and try to defeat deflation by cutting rather than by raising taxation and that they would go for an expansion in the economy.

In fact, it is now clear, as a result of the fact that the 6d. off income tax and the other reductions just balance, that there will be no major tax cuts, no monetary relaxation in the near future, and that there may even be some additional squeezes. Yet on the evidence of the last five years this has been totally futile.

In final support of my case I quote from the National Institute Economic Review of August. I know that the Institute's reviews have a way of being overtaken by events and that August may seem a rather long way off in economic history. Nevertheless, I believe that this passage from the Review cannot be gainsaid. It is the Institute's central argument and it is my central argument:

"Reflation in 1970 would surely make the balance of payments surplus next year smaller to a significant extent than it would otherwise be. The argument for it is simply that the balance of payments surplus allows some room to move and the offset would be a gain in output and the prevention of further rises in unemployment."

This is the key phrase:

"Reflation is unlikely to have any significant effect on the rate of inflation one way or the other."

Does the Financial Secretary accept that opinion, or does he argue that, by accepting my Amendment or any other Amendment that might have the same net effect—namely, wiping out the surplus—he would be running grave inflationary risks?

I believe that there is no way round the problem of inflation other than by acting directly on the wage push inflation which we have. I do not for one moment believe that the Government can do this simply by standing up to strikes, which on past records no Conservative Government will do, anyway, even if they ought to do so. I believe that the Government can do this only by changing the tax system so that it acts directly on rising costs, which is a very sophisticated and complicated procedure, or by indulging in a new incomes policy.

However the Government do it, I do not believe that they can any longer argue that the result of my Amendment, whatever other social results it might have—I should have thought that it would be eminently desirable for a Conservative Government to reduce the rate of taxation to 5s. in the pound; I hope that the hon. Member for Worcestershire, South will back me in this when he rises—would be reflation.

The hon. Member for Cornwall, North (Mr. Pardoe) was a trifle presumptuous in his opening sentence when he alluded to the fact that I had not set down an originating Amendment to reduce the standard rate of income tax by a margin larger than that decided upon by my right hon. and hon. Friends at the Treasury.

The facts are clear and are well known in the Committee on the Finance Bill during all of the last five years. In 1966, 1967, 1968, and again in 1969, there were originating Amendments of mine which sought to reduce the standard rate of income tax, always coupled to a reduction in the surtax rate. All of these I first moved in 1966, and they were then unsupported by my Front Opposition Bench, but in the later years they were warmly supported by my right hon. and hon. Friends. The only difference between us was as to the amount by which the standard rate of income tax and the rates of surtax should be reduced.

I dislike the Amendment and will vote against it. It would be silly to suggest that we could afford in the present state of our finances, for a variety of reasons, to reduce direct taxation by an amount which I believe would cost between £900 million and £1,000 million. The standard rate of income tax reduced by 6d. costs £315 million in the first year and £350 million in a full year. If the standard rate were reduced from 8s. 3d. to 5s. it would so warp the whole of the current expenditure on consumer goods, and notably on consumer durables, if unaccompanied by a reduction in the levels of indirect taxation, as to make any worth while calculation of the total cost to the Treasury impossible.

Britain has never reduced income tax by more than a few pence at a time, for the very clear reason that it distorts the whole of the economy in the year of reduction by an amount which would make far too great an impact on the pattern of consumer expenditure generally. I believe that 6d. in the pound off the standard rate, which the Treasury have proposed this year, is about the right margin of reduction for the first year of a Conservative Government. It is only a sweetener and a tonic, nothing more. It is making progress towards the levels which I have always advocated from the Opposition benches and which I will repeat: in a full Parliament, a reduction in the standard rate of income tax to 6s. 8d. in the pound and a reduction of the top level of surtax to no more than 6s. 8d. in the pound. The two should together ensure that no salary or wage earner, however much he earns, will ever be liable to assessment to direct taxation at a level greater total than £2 for tax out of the last £3 he earns, or 13s. 4d. in the pound as a total. That compares with the American total of 14s. in the pound, which the Americans express as 70 cents out of the last dollar that a man earns.

A man should always be able to retain £1 out of the last £3 he earns. Sixpence off the standard rate of income tax, as proposed in the Bill, is reasonable progress, in the Government's first year, towards that target. I would not propose any more, but I hope that it is indeed only a sweetener and that in successive years we shall embrace the principle of taxing earning less and taxing spending more and giving consumers absolute choice as to how they spend their net take-home pay.

At Question Time earlier there was a cacophony from the Opposition benches, with shouts of "Shame", because I said that a Minister, a colleague of mine, should support a policy designed "to spend less in the boozer and spend more on the kids". I prefer milk to beer. I am proud of that fact, and I unbutton my jacket to display my waistline—in the interests of my farmer constituents as well. That allusion was lost on hon. Gentlemen opposite. The consumer should always be allowed to judge for himself how he spends his take-home pay. I want the take-home pay, the net income, to be as large as possible. I should always support a policy of taxing earnings less and taxing spendings more, and the Bill makes progress towards that.

To overplay the hand, as the hon. Member for Cornwall, North wants to do in this particular manner of sweeping income tax down from 8s. 3d. in the pound to 5s. in the pound, which would be a reduction of 3s. 3d. in the pound and a rate of reduction 6½ times as great as the generous proposition of my right hon. Friend, seems to me cloud cuckoo-land and utterly unreasonable in the face of generous treatment by the Treasury Ministers.

As regards the second part of the hon. Gentleman's speech, like most Liberal speeches, there is a grain of truth in what the hon. Gentleman expounded. Since 1945 we have grown up with these wretched policies of trying to cover the below-the-line expenditure in every Budget by taxation surpluses. That is what the hon. Gentleman was denoting in all that he said. I sympathise with him a great deal, because it is placing an enormous burden on taxpayers. But has he stopped to consider what would be the effect of what he now proposes? If the Liberals had the power, which they will never have, to carry through the kind of policy which he was enunciating, if all the nationalised industries had to go to the market every year and raise a sum varying between £1,000 million and £2,000 million, according to circumstances year by year and the value of the currency, the rates which they would have to pay would be competitive. A public company with a London stockmarket quotation in the blue-chip category recently had to pay 10½ per cent. for Debentures, 1992–1993, and there are many examples of this kind. It follows that the nationalised industries, if without Treasury guarantee would have to pay a similar interest rate.

Or more.

Or more. I am glad to have my hon. Friend the Financial Secretary to the Treasury correct me. I am under-stating the case deliberately. As always, I understate because I do not wish to be accused of exaggeration. But this is a serious argument. If a blue-chip company has to pay 10½ per cent. for debentures, it follows that a nationalised industry would pay as much, if not more. Their interest rates on borrowing today are very much less than that. I think I should be out of order if I went through the whole gamut and delineated what the nationalised industries are paying. But they are paying about two-thirds of that market rate, as an average. They are heavily subsidised through the Treasury in their capital structure.

Through us.

I agree. It is a method of keeping prices down for basic services such as electricity, gas, coal, airlines, and a whole string of industries. It may be logically and morally wrong. But I hesitate to go as far as the hon. Gentleman the Member for Cornwall, North when he said so sweepingly that all the nationalised industries should raise their money on the open market, and presumably he meant straight away. The immediate effect of that would be a very large increase in the price of electricity, gas, coal, transport, road building and many goods and services which are today conducted directly and indirectly, by nationalised industries.

I agree that the amount of the Treasury surplus on taxation account ought to be reduced year by year by a Conservative Government and that a part of the capital requirements of nationalised industries could be raised on the open market. The airlines are one good example. Even on a Swissair basis, as the Swiss raise their money for capital requirements for their national airline, so we could raise our money for B.E.A. and B.O.A.C. on similar lines. But the huge requirements of the electricity boards, the gas boards and the coal industry would be manifestly impossible to raise on the open market without creating consumer inflation of an order that none of us would contemplate.

In the limited context of this Amendment, it would be injurious to good order to go wider afield pending the further debate on Clause stand part, in which I hope many of us will participate. But I believe that 6d. in the pound is the correct amount of reduction. I hope that the 21 million taxpayers of this country will note that a Conservative Government did all this in the fourth parliamentary sitting week of office, between 2nd July and 27th October. The Government have seized the earliest opportunity to put into effect their twin policy of a reduction in public expenditure accompanied by a reduction in taxation.

I commend to the Financial Secretary for the Treasury the swift reaction of the Financial Times on the morning of 28th October, the day after my right hon. Friend the Chancellor of the Exchequer's statement. The Financial Times gave an unallowed and unqualified statement of approval for the method by which this exercise had been carried out. The words of its first leader are worth repeating to the Committee:

"The Government was committed to reducing the growth of public expenditure as a pre-condition of lowering taxation, and it has succeeded in doing precisely that. Large savings in expenditure cannot be made without major changes in policy and the directions in which the Conservatives were anxious to change policy were well known; Mr. Barber's package is very much what was expected and is none the worse for it. He has found economies in several different ways."

4.30 p.m.

The important thing is that the best financial organ of the Press fully expected what was coming. It immediately stated, on the day after the mini-budget, that that was exactly what the Conservatives fought the General Election on, and they implemented those Election promises immediately they were returned.

It is true that I sit for a constituency with a large Conservative majority and very little manufacturing industry, but I did not confine my election campaign to South Worcestershire. I spoke in many of the most heavily industrialised areas of the country further afield, and the policy that I advocated throughout was, first, a reduction in public expenditure right across the board; second, freedom for the consumer to spend the largest possible measure of take-home pay as he chose—in other words, my caption today, "Spend less in the boozer, and more on the kids" and I am proud of it; it is good advice to all those who are not so temperant as I am—and, third, the immediate measure brought in by my right hon. Friend the Chancellor of the Exchequer to reduce direct taxation consonant with the reduction in public expenditure.

All that, I say is good honest policy. It is exactly what the Tories promised at the General Election, and I am proud to speak from this seat below the Gangway today and most warmly congratulate my right hon. and hon. Friends the Treasury Ministers. I call on them to reject absolutely the fiscal extravagance of the isolated Member of the Liberal Party.

I should like to follow the hon. Member for Worcestershire, South (Sir G. Nabarro) on this question of the interpretation of remarks made during the General Election campaign about what kind of tax reductions would be achieved and how they would affect people. There are two views that can be taken. One can take the view put forward in the revenue law review in The New Law Journal, a matter which might bring tears to the eyes of some people when one considers the operation of the present rate of income tax.

I give two tear-jerking examples that must have reverberated throughout the industrial centres of the North. Dealing with high rates of taxation, the first reads:

"Mr. X had an investment income of £40,000;"—

poor Mr. X!—

"the only allowable deduction for surtax purposes was £3,000 interest"

which he paid on a loan for the purchase of his house.

The second example reads:

"Mr. D is a gentleman of leisure with an investment income of £4,000 per annum. He is married with one child …

That is one view of the tear-jerking, difficult situation in which some people find themselves with a high rate of standard income tax of 41·25 per cent., and clearly they want a reduction. Those are the people who support the Conservative Party in the measures proposed in the Bill, in the same way as the shareholders of a public company support the directors by proxy votes.

But there is another view. It is the view of the people to whom the hon. Member for Worcestershire, South spoke during the election. They are the people who, when told that there was to be reduction in the rate of income tax, imagined that that would make a substantial difference to the amount of tax that they paid on their overtime earnings. It was the view of the investor that was mostly endorsed by the Conservative Party, not the view of the working man.

Let us consider the reduction proposed in the Bill. This is a reduction in the standard rate of income tax of 2·5 new pence, or 2½ per cent. for a person with unearned or investment income, and a reduction of 1·5 per cent. or 1½, new pence for a person who works for his living.

What was suggested during the election campaign in terms of reducing income tax was that the tax on someone's overtime earnings was to be very much less. The result of the proposal in the Bill will be that the person on unearned income will be comparatively better off, and there will not be a substantial difference in the amount of money that a person gets on his overtime. That is what the Clause achieves, and the Amendment moved by the hon. Member for Cornwall, North (Mr. Pardoe) would make it even worse. It would make the discrepancies much worse than they are even under the Conservative proposals.

If one is to have some kind of incentive, if one really accepts that within the limited context of the Bill tax reliefs are to be given away, surely the way to do it is to give relief to those who work for a living? Let me give one example of how this operates in my constituency. A week or two ago I appeared before the rent officer. Three years ago the executor of a deceased owner of 100 houses in my constituency sought, quite properly, to increase his rents under the Rent Act by £2 a week, thus giving him an increase in his unearned income of £10,000 a year. He recently went back to the rent officer to ask for an increase of 15s. a week, which would add £3,900 a year to his income.

I cannot support a Bill which provides an extra £3,000 to people for, if I may use the expression, sitting on their arses and doing nothing, which provides very little benefit for those who pay no tax at all, and which provides no benefit for those who have to pay that rent increase. I cannot support that kind of measure, and it is for that reason that I cannot support the Amendment, either.

I must not spend too much time talking about the Amendment which I should like to have had selected, but which has not been chosen for debate. My view is that if we are to change the standard rate of income tax it should be brought down for those who work for their living. At the moment the difference between the treatment of those who live on unearned income or investment income and those who have to work long hours, under arduous conditions, is not great enough. There is still not the incentive for a man to work, compared with the incentive to invest.

It is worth looking at some of the comparisons in the tables provided by the Treasury to show the effect of this reduction in the standard rate of income tax. Let us consider, first, a single man with an earned income of £1,000 a year. He will be better off by £11·32. With an unearned income of £1,000 he will be £16·87 better off. There is therefore no great incentive there for someone to work harder.

A married couple, with no children, and an earned income of £2,000 a year will be £27·26 better off by this reduction. If they have two children over 11, they will not be quite so well off. They will get £22·56 extra a year. If they have unearned income of £2,000 a year, they will get an extra £38·37 a year. Again there is no switch of incentive to those who have to work for a living. One can take example after example. Married couples get only a few shillings, or nothing at all, from this proposal. The single man with an unearned income of £10,000 a year gets an extra £242.

For those reasons I cannot support either the Amendment or the general proposition that there should be an across the board cut in taxation, without taking account of the differences between those who work for a living and those who do not, and the professed need for incentives for those who work overtime. They have been shabbily disillusioned by the events of the past few weeks.

I cannot support the Amendment, but the hon. Member for Cornwall, North (Mr. Pardoe) has done a service in at least underlining a very good Liberal principle, that money should fructify in the pockets of the people rather than in the coffers of the State. He possibly moved the Amendment with his tongue in his cheek because, owing to wage inflation and demand, until we have been able to encourage saving far more we could not increase demand to the extent that the Amendment would increase it.

We must apply our minds to the matter far more and not dismiss it lightly, like my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro), when he said that it would put a heavy cost burden on the nationalised industries if they were forced to go to the market for their capital. There is more than a grain of wisdom in the point of the hon. Member for Cornwall, North that as far as possible the nationalised industries should go to the market for capital. But it follows that for them to do that there must be some capital there, and until we can reduce taxation it will not be there.

I am sure that the Government will make further reductions in taxation, but hand in hand with them must go measures to encourage saving. I welcome the Government's measures, but I hope that in the next Budget they will be very positive in making further reductions to encourage savings, and will bring investment and earned income on to a par, or even encourage investment income more than earned income. The country's need is to get more investment in manufacturing industry, which can be done only by saving and by encouraging investment from overseas. That is the way to help the pensioner.

Therefore, whilst I shall naturally go into the Lobby against the Amendment, because it is unreal, I sympathise with the hon. Gentleman's ideals. He has done the House a service in moving the Amendment. I hope that by the time the Government have gone their full course we shall have had reasonable and big reductions in personal taxation, and that we shall encourage saving. The key reductions in taxation must be to encourage personal savings.

The hon. Member for Cornwall, North (Mr. Pardoe) pointed out the omission from the Amendments to this year's Finance Bill; he said that the hon. Member for Worcestershire, South (Sir G. Nabarro) had not put down his customary Amendment to reduce income tax by his customary 3d. or 6d.

Another Amendment that is lacking is the one that my hon. Friend the Member for Heywood and Royton (Mr. Barnett), now elevated to the Opposition Front Bench, and I used to put down calling for a differentiation between the rates of income tax on earned income and on unearned income. One of the things that we hope will eventually come about is a reorganisation of the income tax structure so that that reform, among many others, is carried out. It has always struck me as very peculiar that whereas most people in private life or industry take great care to make their charges appear less, in income tax we do the reverse. We tell the people of this country that they are paying 8s. 3d. in the pound when they are paying only 6s. 5d. If it had been the other way round, it would be nearer to the kind of practice frequently seen on the fringes of the commercial world, but what we are doing is absurd. If the argument about incentives and disincentives has any meaning, we should put right the misapprehension of those less-sophisticated members of the taxpaying public who really feel that they are paying more than they are. That Amendment was an omission, but I hope that the point is still made even without it.

4.45 p.m.

My hon. Friend the Member for Norwood (Mr. John Fraser) pointed out the regressive nature of the income tax changes. It is scandalous that those with high incomes obtain greater benefit than those with average incomes, and those with unearned incomes obtain the greatest benefit of all. The Minister for Trade and Industry has said that he is trying to do many things for what he called the wealth creators. I should not like to put too narrow a definition on that phrase. We have wealth creators at all levels of our society. If the right hon. Gentleman really means that he will help the wealth creators in the higher income class, which is what I think he meant, I fail to understand why those with unearned income at all levels have done better out of these measures than those with earned incomes at the same high levels.

The Amendment would make the position much worse, because surtax is the slab on the top, and as the rates are brought down so that proportion of that surtax slab appears more important. If we brought down the rates to 25 per cent. the surtax payers would get far the greater proportional benefit.

But we do not need to go too closely into the consequences of the Amendment. Its effect on wage claims would be absurd. The hopes of getting anything like a final settlement at levels of inflation that might be acceptable to us would have gone for a long time to come. Its fairness is obviously questionable. So I regard it as an Amendment put down simply for the purpose of discussion, and I will treat it so.

It is a Liberal luxury.

The hon. Member for Ashton-under-Lyne (Mr. Sheldon) is putting forward a very strange theory, that if we increase tax rates we are liable to have increased difficulty with wage claims and that if we reduce them we are also likely to have increased difficulty with wage claims. Therefore, whether we put taxes up or down, according to the hon. Gentleman some sort of wages stability is then more difficult.

No. The whole point lies in the manner in which it is done. If tax rates are reduced so that all will benefit in one form or another, that is non-discriminatory. When a measure is introduced as a result of which certain sections of the community do very much better than certain others, we are bound to find the difficulties to which these measures will lead.

The point I return to is that also made by the hon. Member for Cornwall, North in talking about the Phillips curve. I prefer to call it the inflation-unemployment relationship, which is perhaps a little easier for most people to understand. It used to be thought that if one increased unemployment one reduced inflation. It was becoming quite a precise system of measurement between the one and the other. The difficulty is that we must adjust to quite new circumstances. I do not think that economists have fully grasped the importance of what has been happening over the past few years.

I see economic laws falling into two broad categories—one where the relationships are fixed by the very nature of money, or whatever it might be, and the other where relationships depend on people's attitudes. It is the latter kind that is now the most important. The idea that most people can be frightened into not going in for wage increases is trying to return to the situation in the pre-war years. This is what it is all about. Why did unemployment go hand in hand with little inflation? Because the people were cowed. As the threat of depression came near to them they reacted in the same way as they had done in the past. They increased their savings, saving for the rainy days to come. They did not put in their wage claims because they were more frightened of the sack than of an inadequate wage. That was the situation that had existed for hundreds and hundreds of years. It came to an end in 1940.

Those people who started their working life at about the age of 15 are 45 today, and far the greater part of the working population have not had that fear of large-scale unemployment. Instead, they have had the expectation of improvements in their standard of living year by year.

The importance of this is that they will not be frightened by any talk of unemployment in the future. They will not react in the same way. Therefore, the deflationary measures that the Government may take will not have the same effect upon wages now and in the future as they did 10 or 15 years ago when those memories were much stronger than they are today. As a result, a whole host of such relationships, which were the stock-in-trade of the economists and the Treasury, will have to be rewritten and revised.

The whole of our standard rate debates will eventually have to come to an end. The very existence of a standard rate is an anachronism. The standard rate is the greatest barrier to tax reform. What we need is a progressive rate of taxation from those who just come into the tax category to those at the highest levels. We try to get the curve by means of a fixed rate and to adjust it by means of allowances and so on. When we talk about the standard rate we are really trying to fit a fixed rate into what is a variable percentage of income deducted for taxation. We are trying to fit a square peg into a round hole. The time is coming when we must reform this. We must accept that the idea of a standard rate producing that curve is something of the past. We must work it on a new basis of a variable percentage. Then, and only then, will a Chancellor be able to say, "There are certain people we want to benefit and there are certain others who might be asked to pay a little more." He will be able to adjust those rates which he wants to increase and reduce those which he wants to reduce. That is a reform which I hope the Financial Secretary will bear in mind because of the flexibility he can eventually obtain, together with the ending of some of the anomalies that crop up every time we play around with the standard rate just because it is the easiest, and frequently the only, way in which we can obtain a quick reaction to events.

In the past many Governments have come to office with imagination and little wealth. That was the problem of the great reforms of the past, reforms that were never really carried through because the money was not available. Imagination was strong, but wealth was weak. The present Government are the first in recent decades to have had the means with which to carry out a number of schemes of reform. One of the saddest aspects is that so far they have lacked the imagination. Faced with having for the first time for many years no balance of payments problems, they could have made an attempt to get to the root of some of our problems to start the expansion that Macleod talked about and other Ministers used to talk about. Instead, they have shown their lack of imagination by concentrating on the most dreary, lack-lustre ideas that they had in the past—reducing public expenditure and reducing income tax. Their lack of imagination is shown up in their application of these old remedies.

I apologise to the hon. Member for Cornwall, North (Mr. Pardoe) for being unavoidably absent for most of his observations. However, his Amendment is reasonably easy to understand and I wish at the outset to warn him, although I have not had the advantage of hearing his arguments, that it is always easy to outbid the Government of the day when one does not have responsibility for conducting the affairs of the nation.

The hon. Gentleman wants to reduce direct taxation still further, and I have every sympathy with his aim. We must first establish that we have in office a Government who desire and intend to reduce direct taxation. The degree to which it can be done is another matter. At least we now have, after 11 years, a Government who are seeking to reduce direct taxation, and this is quite something.

The hon. Gentleman is now making a theological pronouncement to the effect that one can have salvation by intention.

We must first get the intention facing in the right direction. Then we can ensure that the intention is put into operation. We must not overdo it and I fear that the hon. Gentleman's Amendment would overdo it in such a way that we should reverse the principles contained in the Government's present intention on direct taxation.

I congratulate my right hon. Friend the Chancellor of the Exchequer on his 27th October statement and, for the first time in 11 years, on ensuring that we shall have a reduction in the standard rate of income tax. This is a major achievement. Although it is easy to make a distinction between one form of income and another, there is no quicker way of bringing home to the electorate the intentions of the Government than by ensuring that everybody is to some extent a beneficiary of the Government's declared policy.

The direct form of taxation is obviously a blunt instrument. However, I particularly take issue with the hon. Member for Norwood (Mr. John Fraser) who talked about unearned income. As our thoughts on this subject have progressed, we have been trying to be somewhat more sophisticated than merely lumping all investment income together and calling it "unearned" income.

We must recognise that income derived from investment is often derived from savings gathered during one's working life; put away perhaps in the form of an investment for retirement. Often this represents the financial sum of the effort made by people who have been prepared to stint themselves to a considerable extent throughout their working lives.

I prefer to use the phrase "investment income" rather than "unearned income", although I accept the argument of the hon. Member for Norwood that some people inherit their money or do not have to work hard for it or otherwise derive their income purely from investment. However, a great deal of investment is capital derived through hard work, often by people who have served the nation outside the country and who have stinted themselves to put a little by so that when they retire they have a decent income on which to live in addition to any pension rights that they may have.

Does the hon. Gentleman concede that those who put money by in the way he has described are often helped by the considerable tax benefits resulting from insurance policies, self-employed annuities and so on? When they draw this money during their retirement they are receiving money which, in any event, has earned income tax relief.

There are many refinements to this argument. Nevertheless, it is too easy to lump all unearned income together under one heading without supposing that effort has been expended to gain the capital which provides the income.

I am looking forward to the day when there will be a greater equalisation of taxation on investment and earnings. Up to now the distinction has been far too great and has too frequently been based on the assumption that no work has gone into providing the capital that has been earning the interest.

5.0 p.m.

I regret that the hon. Member for Ashton-under-Lyne (Mr. Sheldon) is no longer in his place. I wanted him to know that I appreciate that the Labour Party is at last beginning to learn something about this financial issue. I recall how in my earlier years in this place I kept hearing the Labour doctrine that there was some virtue in direct as distinct from indirect taxation.

The hon. Gentleman seemed to be making it clear that hon. Gentlemen opposite are moving in the direction of my hon. Friends in recognising that there may be a case for shifting away from the direct taxation of earnings to ensure that people have a bigger say in how they spend their money before the State takes it from them.

This is the philosophy underlying Conservative policies to which I am fully committed and which were enunciated during the last election. It seems obvious to me that we should leave more of people's earnings in their pockets so that they may decide how to spend their money—recognising, at the same time, that they may be paying an indirect form of taxation, value-added or whatever kind it may be. At least they are then able to choose how to spend their own cash.

I am convinced that there is no single element of taxation that is more bitterly resented by the working population than direct taxation on earnings, and particularly earnings derived from overtime. At least in the Chancellor's statement of 27th October we had, for the first time in a long time, the clearly-declared intention of reducing direct taxation.

This will be one of the cardinal features of a complex policy which will, I am sure, be designed to increase the individual's sense of responsibility, the reward he gets from his labours and earnings and his capacity to save. These are fundamental to any solution of the biggest problem that we have, which is inflation. I am convinced that the Chancellor is right, having inherited a Budget which he did not devise, in not overdoing it. However, it is clearly his intention to aim at a substantial reduction in direct taxation and I hope that this reduction next year will cost between £40 million and £50 million. This would be a move very much in the right direction. I congratulate my right hon. Friend on what he has achieved so far and I hope that the Amendment will be resisted because it would overstrain the economy, particularly in our first year in office.

There is a considerable element of truth in what the hon. and gallant Member for the Isle of Ely (Sir H. Legge-Bourke) said about workers resenting paying a high proportion of their overtime earnings in income tax. Every Government have found it difficult to divorce one form of earnings from another, be they overtime, bonus payments or straightforward wages and salaries.

It would be an utter impossibility successfully to carry out such an exercise because of the variations in earnings which exist, including the variations in overtime. There are many earnings opportunities and often it is hard to tell what is overtime and what is not. It is, therefore, rather pointless to introduce a matter of that kind into a debate like this.

When hon. Gentlemen opposite extol the virtues of the mini-budget, they should fully appreciate what 6d. off the standard rate means to ordinary workers who are not surtax payers and who do not live on investments. I am talking about the majority of those I represent, who may have a few building society shares or a bit of money in the Post Office, but most of them save for Christmas and a damned good holiday once a year. That usually represents the sum total of their savings. Only when they rise to a higher income bracket are they able to save in the longer term. There is, therefore, a wide chasm between the various categories of earners and savers and this must always be borne in mind when we discuss what something off the standard rate of income tax means.

I agree with the hon. and gallant Member for the Isle of Ely that many workers are beginning to rethink this problem. They are, however, rethinking it not for the reasons he adduces but because they are realising to the full how an equal reduction in the standard rate benefits the surtax payer far more than it benefits the ordinary worker. It must be a gigantic reduction if the ordinary worker is to benefit to any extent.

In any event, I urge hon. Gentlemen opposite to remember that many of the people about whom I am speaking have attended lectures at the National Council of Labour Colleges and elsewhere and know something about the effects of inflation. They are not interested in illusory wage increases. They are struggling to sustain their standard of living and, if possible, to improve it. They want the nation to think in terms of expanding the economy because they feel that only by that means will the standard of living of the ordinary people be increased.

It is not possible to think narrowly in a debate of this kind in the way that the hon. Member for Cornwall, North (Mr. Pardoe) did in proposing what is a simple Amendment. He wants to reduce the standard rate and so release a considerable amount of purchasing power by that means. If the Government considerably increased the social wage—and the Labour Governments of 1945 and 1951 increased it considerably—who knows what psychological effects that might have in a free society in terms of—

Order. I am not calling the hon. Member to order because he has said something that is out of order but because this might be an opportune moment to mention that as this debate has gone rather wider than the Amendment under discussion, I agree with my predecessor in the Chair that perhaps the discussion which has occurred will be sufficient to cover the Motion, That the Clause stand part of the Bill, when that Motion is put. In other words, I hope that it will not be necessary for that Motion to be debated, though I agree that we can see what happens when we reach that stage.

For a moment I thought that you were calling me to order, Mr. Gurden. It seems that, on the contrary, you are commending my line of reasoning.

Many ordinary working people have learned a great deal from the minibudget, and I am referring to people other than those whom the hon. Member for Worcester had in mind—

rose—

I keep calling the hon. Gentleman "the hon. Member for Worcester" when his constituency is, of course, Worcestershire, South. I always think of Worcester sauce when I think of him.

The hon. Gentleman must get it right. Worcester sauce comes from the city of Worcester. I represent the parliamentary constituency of Worcestershire, South. I hope that in future he will get it right instead of being in a permanent muddle.

While I agree that the whole question of the party division arises on this issue, it is obvious that a great deal of new thinking is taking place among ordinary people about the social wage. Many of them—I am referring to those at the ordinary working class level—have not valued this in the way in which it has always been valued by people of my generation and those rather older than me. We recall what life was like before the Welfare State came into being.

Those without this knowledge cannot know what it is like to pay for ambulances, doctors' visits and prescription charges on the scale now proposed by the Government. They are beginning to have new thoughts about this, and I mention it only to strike a note of warning to the Government not to go too far with the policies they have been pursuing up to now.

The reduction in the standard rate of income tax has been made possible by pinching the primary school milk, and taxing the sick by imposing a waiting period of three days. The money is not coming from a growth in the wealth of the nation. This is an example of doctrinaire Toryism which has little to do with the state of the nation.

The hon. Member for Cornwall, North was a little worried about budgetary surpluses. I share his worry, but I do not reach this conclusions. Like my hon. Friend the Member for Ashton-under-Lyme (Mr. Sheldon), I look forward to the day when the standard rate of income tax is graduated so that people who have hitherto not paid income tax are not suddenly plunged into paying 8s. 3d. in the £. This can be done when there is that progressive movement of the economy which Britain so desperately requires.

If the hon. Member for Cornwall, North is so worried about this, I can think of dozens of ways of spending the surplus which will not have a damaging inflationary effect. I think immediately of old-age pensions and child allowances. Old-age pensions are an urgent matter. We should not talk about an increase a year or two years hence but of an immediate increase on the basic rate. The Financial Secretary might refer to figures which will show that this is too costly—

Order. The comments being made are even outside what I said earlier about engaging in what could be a debate on the Question, That the Clause stand part of the Bill.

I take note of what you say, Mr. Gurden, but the introductory speech, which you did not hear, laboured the subject of budget surpluses and this was used as an argument for the Amendment.

I am grateful to the hon. Gentleman for proposing the Amendment. In my constituency there are many poorly paid workers, some of whom have come from the Commonwealth. They work quite hard for low pay, and they would be delighted if they could earn incomes on which they would have to pay more tax.

There is a good deal in what the hon. Member for Southall (Mr. Bidwell) said about the virtues of caring for the persons he described in his closing sentences, but for many years successive Chancellors of the Exchequer have imposed extra taxation, including extra direct taxation. Whereas it may be true that there has been a modest increase in what the hon. Gentleman described as the "social wage", increased taxation has not led to a dramatic increase in productivity or to a marked increase in savings. It is all very well for successive Chancellors of the Exchequer to preach the virtues of thrift and harder work, but a tax system which discourages those virtues inevitably leads to failure. It would be folly to suggest that the Government's new approach is an open sesame to a system which is certain of success, but there is a greater chance of success with the new approach than there would be if we continued along the lines which have proved to be ineffective.

The psychological aspect of this may be of great importance. The hon. Member for Cornwall, North (Mr. Pardoe) wanted to go a step further in the reduction of the standard rate, but he will agree that it is a matter of judgment for the Government and the Chancellor of the Exchequer whether so much can be done at once. I do not object to the principles which he enunciated, and I feel that our approach is an earnest of our intention to move in that direction.

This modest reduction in direct taxation is a notice of greater reward for those who study for extra qualifications. It is a notice to those who practise thrift that there will be a greater reward for them. It is a notice to those who work overtime that at the end of the day they will retain a little more money. This is a modest move in the right direction which, although we must not over-estimate its importance, could be of great importance psychologically.

I rise to speak on the subject of incentives to manual workers. I am not qualified to speak of incentives to business men or to those who can save but I can say something about incentives to workers to work longer or harder. I query the assumption that a reduction in tax will increase the incentive for working overtime. There is a great mythology that a reduction in tax rates will increase the willingness of men to work overtime. Every trade union official knows that the problem is not to get men to work overtime but to prevent them from working extremely long hours.

The hours of work in bakeries, of which there are many in Newcastle-under-Lyme, are very long. The report of the National Board for Prices and Incomes showed that men had to work for very long hours, and often on their rest days, to earn a wage equivalent to the average wage. Pottery workers are working on average six hours a week overtime. I could go on to describe the overtime working among bus conductors and bus drivers. From industry to industry one finds long hours of work and men working on rest days.

A comprehensive study on overtime working was done by a review body for the Donovan Commission. This demonstrated that, far from overtime being an advantage to industry, it was a disadvantage. I look forward to the report on this subject to be published in a few weeks time by the N.B.P.I. I am convinced that the N.B.P.I. will arrive at the same conclusion, that overtime working in British industry is undesirable. It is undesirable for the men who have to work for such long hours away from their homes. The accident rate increases and the men suffer greater occupational ill-health. It is easy to see why it is a disadvantage for the men.

Many employers oppose overtime grabbing. They know that it is an inefficient way to run industry. If a man can earn overtime his natural inclination is not to work so hard during the day. Men resort to the practice of creating overtime by working slowly in the afternoon so that they can work "policy" overtime at night or at the weekend.

We should be doing a far greater service to industry, both to management and men, by pointing out that the hours worked in this country are far in excess of those worked in most countries in Europe and by directing our attention to reducing the working week and making sure that the hours worked are more productive than by trying to extend them. Frankly, I do not think any reduction in tax rates will increase the hours worked in overtime.

On the question of people working harder, it is somewhat ironic to me when industry is trying to get rid of piecework that we in this House are talking in terms of a reduction in the standard rate of tax as an incentive to work harder. What is happening in industry generally is a growing recognition that there is no direct way to reward the individual worker for effort.

Looking at most situations in industry, I believe that the worker cannot earn more by working harder. Perhaps there are some situations involving piecework where he can, although many employers are trying to get rid of piecework because they realise that it leads to a situation in factories in which the organisation of work is less efficient than under a system of measured day-work or similar systems.

It is not helpful to an employer to try to persuade workers to work harder under a piecework system. But if there is not that incentive, then there is no incentive at all for workpeople to work harder in the present industrial situation. This fact is being overlooked by those who talk in terms of tax incentives. They are thinking of the situation in which the business man finds himself whereby because of increased effort he can increase his earnings.

The single point I wish to make is that the majority of manual workers can find no way under the present system in which to increase their earnings. The only possible way in which these tax reductions can affect the earnings of manual workers is for the employer to do what he should have done a long time ago and that is to tackle the problem of organising production. The only way to increase productivity is not by men working longer or harder, but by an improvement in the whole system of industrial organisation. I do not support the Amendment.

It is very agreeable to catch the Temporary Chairman's eye this afternoon after an absence from the House of 4½ years. My hon. Friend the Member for Barry (Mr. Gower) and others have talked about giving reward to workers or to people who will benefit as a result of these reductions. But we must not overlook that this is not a reward. It is simply that the Government of the day are allowing us to keep more of the money we have earned.

The truth is that the working population, whether it works by its hands or its brains, must by its efforts provide the wherewithal to educate our children, to pay pensions and so on. It is important that this category of people, who comprise about half the population, should have sufficient incentives to enable them to make a greater effort for more productivity to enable us to produce goods at a price at which they will sell readily in world markets. This is the way to provide the social services that we all wish to see developed.

There is no doubt that if industry is incompetent, if there is a large measure of unemployment, and if we are unable to sell our goods abroad, none of these social services will be possible. It is therefore vital to put all workers in a situation in which they are able to earn adequate rewards for their efforts to make our nation efficient.

My right hon. Friend the Chancellor of the Exchequer is making a move towards simplifying the entire tax structure. I should like to put forward some ideas which I first put forward in the columns of The Times some years ago.

The hon. Gentleman says that his right hon. Friend is making moves towards simplifying the tax system. Could he say what those moves are?

I hope that he will not pursue that point too far since I cannot find it in Clause 1 of the Bill.

They are moves over a whole Parliament, not just things which should be done at one moment of time. There have been announcements from the Treasury Bench that such moves are in train.

I should like to see two things happen: first, the complete abolition of surtax, and second that both earned income and unearned income should be regarded as the same thing. It has always seemed anomalous to me that savings, pensions, and so forth, which are rewards for work done, should be in a different category from earned income. They are moneys which are chosen to be retained until such time as we wish to use them in the future. I feel that there should be one simple system of earned income to cover all moneys, whether pensions, savings or anything else.

In an effort to get rid of surtax, which in relation to the total Budget is a very small sum of money indeed and probably costs a very great deal to recover, I wish to see the first £1,500 of income tax-free. In that figure I should like to see retained all the allowances that are payable at present; there would be no further allowances beyond that £1,500. From then on we could move up in steps of about £500 until we get to a situation where the top level of taxation is 15s. in the £. There would be no such thing as a standard rate. I believe that this would provide a sensible and simple way of reforming the tax system and would provide the necessary incentives.

I hope that hon. Members opposite will not be surprised when I say that there are a large number of working men in industry whose weekly wage takes them into the range of £2,000 a year, and beyond. That applies to many of them. They will benefit considerably from these tax reliefs. Obviously, the Government cannot do everything at once, but I have been amused today to hear speeches by hon. Members opposite instancing lack of growth in the economy, the high level of taxation, and so forth. We must remember that the present Government has been in power for only four months. The lack of growth has been as a result of the policies pursued by the Labour Government over the past six years, and the high level of taxation is that which was imposed by the Labour Government. It does not lie in the mouths of hon. Members opposite to tell us to reduce taxation and to achieve growth. I feel that the policies which are being pursued by the Conservative Government are the right policies.

I am not an expert on income tax, but it seems to me that a great deal of nonsense is talked about the relationship between incentives and reduced rates of tax. Such evidence as I have from my personal experience points in the opposite direction. Just after the war when I was in the teaching profession my rate of pay was low and my taxation fairly high and I had an incentive to teach at evening classes for four or five nights a week. That is an argument in the opposite direction.

A look at the tax tables shows the folly and stupidity of the argument of right hon. and hon. Gentlemen opposite that the bigger the tax concession the harder a man works. The hon. Member for Ilford, East (Mr. Cooper) put the average earnings of a worker at £20 to £30 a week. Perhaps a number of workers in the South-East and in the Midlands are in that category, but certainly not very many in Scotland. It can be seen from the tax tables that a married man with two children earning £1,500 a year, who does not get any of the free school meals for his children, will receive a tax concession of roughly £12 a year. What kind of incentive is that to him? By the time he has paid the prescription charges for his family and all the other charges for school milk, school meals, and so on, he will be worse off.

When the Prime Minister, in that boring speech at the Guildhall last night, spoke about creating one nation and giving people incentives, he was not talking about people earning £30 a week, who are the people who will miss out in the deal. The reaction of ordinary workers to the Chancellor's package is quite different from that which right hon. and hon. Gentlemen opposite would have us believe. The ordinary worker is outraged by the inequity of the package because the average worker knows that he will be worse off.

When the Prime Minister and the Chancellor of the Exchequer mention incentives, they mean incentives for the man earning £20,000 a year. For example, the Prime Minister himself, as can be seen from the income tax tables, with a salary of £14,000 a year, receives a tax concession of about £300. The Prime Minister in these concessions is giving himself £6 a week. Does he intend to increase his productivity in this House or by attendances at Downing Street? Does he intend to make an extra speech each year at Guildhall? Perhaps we may be told what extra productivity the country will get from him. This is the kind of nonsense we hear from the Conservative benches.

The incentive to the £25,000 a year man is some £500 a year, or £10 a week, and the incentive to the ordinary working man is a kick in the teeth. That is the difference between the people at the lower and higher ends of the scale. Of course the Tory Party can say, "This is what we were elected for. We were elected to reduce direct taxation; we were elected to reduce public expenditure". But right hon. and hon. Gentlemen did not spell out at the election that the most inequitable way of reducing direct taxation is a cut in the standard rate, as these tables demonstrate beyond argument.

When my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) as Chancellor of the Exchequer introduced his Budget last April, he reduced direct taxation not by reducing the standard rate but by increasing allowances. This was and is the fairest way of reducing direct taxation if that is what we want. For the hon. Member for Cornwall, North (Mr. Pardoe) to suggest reducing it even further is to compound the injustice, the inequity, of the proposal. I do not know whether the hon. Gentleman realised that. He could not have read the tables before putting down his Amendment or he would not have put it down.

The hon. Gentleman talked about the man earning £25,000 a year and the man earning £1,500 a year. Will he tell the Committee what proportion of his income the man earning £25,000 a year pays in tax and surtax and what proportion is paid by the man earning £30 a week?

The figures are in the tables.

Will the hon. Gentleman tell the Committee?

The hon. Gentleman ought to have acquainted himself with these figures. If he wishes to take part in the debate he must inform himself properly before talking all the nonsense that he talked this afternoon.

My point concerns the average skilled man—the skilled engineer, the skilled miner. Many skilled miners in my constituency take home less than £15 a week. The Chancellor of the Exchequer said that the £20-a-week man with two kids under 11 years of age benefits under the Bill.

I direct the attention of the Financial Secretary to the Answers given to two identical Questions. One Question asked by me on 10th November was answered by the Chief Secretary. The other Question was asked by my hon. Friend the Member for Manchester, Gorton (Mr. Marks) of the Department of Education and Science on 12th November. We got completely different figures. The Department of Education and Science assumed that the rent payable by the family on £1,000 a year would be £2 4s. 6d. and rates 14s. 6d., a total of £2 19s. 0d. But the Chief Secretary to the Treasury gave a figure of £3 6s. for rent and rates—a difference of 7s. The Department of Education and Science assumed that tax and National Insurance would be £2 15s. 10d., but the Treasury assumed that it would be £2 5s.—a difference of 10s. 10d. So we get a conflict between the Answers from two Departments to identical Questions concerning the £1,000-a-year man with two kids.

Based on those figures it is said that the man will break even. But above those figures every man on average earnings with two kids loses out on the whole package. That is no incentive. It creates a sense of social injustice. It divides the nation. This will make the trade unions more bloody-minded. If the Government give this kind of concession to the man earning between £25,000 and £100,000 a year and give nothing to the fellow on £30 a week, the country will be worse off. What kind of reaction do the Government think that they will get from the man earning £30 a week with that kind of social inequity?

Right hon. and hon. Gentlemen opposite cannot understand the minds of the ordinary working man and woman. They should visit the industrial parts of the country to see how many millions are still struggling to make ends meet.

The Government say that they are taking 6d. off the standard rate. The £20-a-week man—there are many in my constituency earning less—is getting a tax concession of £3 a year—about 1s. a week. The Government suggest that he will work harder in consequence.

As the hon. Gentleman thinks that a cut in the standard rate is immoral, will he tell us whether he approved of the Amendments in the 1969 Finance Act which carried people up to the standard rate much more quickly, because they removed some of the intermediate steps? Did the hon. Gentleman regard those Amendments as immoral?

We are not discussing the 1969 Act. It would be out of order to pursue that matter. We are discussing a proposed reduction of 6d. in the standard rate. I am pointing out that if that is to be a reduction in direct taxation, the Conservative Party can legitimately say that this what it was elected to do. But there are several ways of reducing direct taxation. This is the most inequitable way of doing it. The ordinary man is inteligent enough to know that it is most unfair and unjust, particularly since it is associated with a package of cuts.

When we talk about a cut in direct taxation, we must remember that room has been made for it by swingeing increases in charges for social services. We are having an increased means-tested Welfare State to give these massive so-called incentives to the better-off sections of our community. This proposal will serve to divide the nation far more than anything which has been done since the war. This is the most reactionary Government that we have had since 1945, and those who voted for it and those who abstained are now beginning to see the error of their ways.

I rise to make a brief speech on a small Clause which I believe carries with it severe issues of principle.

The Chancellor of the Exchequer, three-quarters or half-way through the tax year, has made a Budget judgment. We must examine the whole package as a whole. I ask the Committee to consider what I believe is the most serious issue: the facts on which presumably the Chancellor made this judgment.

The first issue arises from the recent so-called cuts in public expenditure. This matter has been raised outside the House by many distinguished commentators, some with recent experience of the Treasury and of the way in which we present public expenditure figures. It is a tragedy that, having over the last few years progressively moved towards a lucid description of public expenditure so that all hon. Members may take part in the discussion on a basis of fact, we should have a public expenditure review in the manner in which the Chancellor sought to present the figures.

One need not be as experienced as Mr. Wynn Godley, but anybody who has read his analysis of public expenditure—I know more about defence expenditure figures—can raise fundamental questions on the whole basis on which the Budget judgment was based, on the room for manoeuvre in the years ahead, and on whether one can make a judgment on the basis of these figures.

The Chancellor has taken the extraordinary step of announcing a reduction in income tax six months before it is due to take place. This is almost without precedent, and it is at a time when all economic commentators are looking at the parameters of the economy with increasing doubt and are increasingly unable to predict the future trends.

Why did the Chancellor make this judgment? He made a good deal of the fact that he was bringing this tax change into effect to coincide with the increased charges which he was introducing throughout the health and social welfare field. It seemed that this would be intended to offset these charges. But this way of changing the tax is almost deliberately designed not to offset the impact of the charges on those with low incomes.

Behind this strategy and these decisions lies a fundamental principle. Over the last few years, we were rightly moving towards merging the tax system with the social benefits system. We were increasingly beginning to realise that one could not consider taxation in one small compartment answerable only to the Inland Revenue, leaving aside benefits, whether social security or local authority benefits. The important thing was seeing the total effect.

My major indictment of the Chancellor is that he has sought to make this change in the most inequitable way. He has gone back on the movement together of the taxation and benefits systems and has deliberately stepped right back to an age of division. Much has happened in the earlier debates, with the arguments about tax allowances and the claw-back and the eventual room for claw-back. The Chancellor did not consider seriously using the taxation system and trying to modify it to allow claw-back of family allowances.

If he were using the room which he felt, on his judgment—I have said that it is highly questionable whether he should have made the judgment at this stage, particularly on the evidence before him—there was for manoeuvre, so that he could help those on low incomes, I find extraordinary that he should have sought to do it in this way.

There are ways in which one could have extended claw-back and used family allowances to channel aid where it was most needed. Examples are partially tax-free family allowances, the question of adjusting personal allowances to be married into claw-back, and the whole extension of child tax allowance and the introduction of claw-back. Any of these three would have given room for manoeuvre on claw-back on family allowances, which I admit was needed if aid were to be put where it was most needed.

This is what concerns me—the reduction of the use of the tax system to channel aid to people so that it can affect everyone. The arguments against means-tested allowances and benefits are not, as hon. Gentlemen opposite seem to think, doctrinal: they are purely technical. One cannot get that high degree of uptake in using means-tested benefits that presumably hon. Members on both sides wish. It is only through the tax system that one can ensure that benefit will be given to those who most need it.

My indictment of the Chancellor is that he has not considered this with an open mind. I agree that it would have meant some changes, but particularly when he was making his judgment six months ahead, it would have been easier to announce these changes now and made them operative in April. This is my major criticism. We are now seeing all the ill effects of going back to the principle whereby the Inland Revenue and the taxation system stand alone outside the benefits system. We are introducing a means-tested benefit system for the man in full employment and going back to the principle which many of us felt was long since gone—over two centuries ago. We are taking one of the most retrograde steps in overall taxation which has been taken for centuries.

This is not just a small measure. Everyone in the House wants taxation reductions, but the question is what penalty you pay for them. It is how one makes them and how they affect people that counts. If one increases charges indiscriminately for everyone in society, one must, particularly if one makes great play with both taking effect in April, so adapt the tax system that it gives the maximum help to those with lowest incomes. This is what this miserable Bill fails to do. This is the central argument, and this is why we have to discuss the family income supplement.

This miserable Bill stems from the Chancellor's inability to marry the taxation system with the benefits system, and rather to go back to the old system of dividing the two—at the very moment when, over the last few years, we were beginning to merge them and the Inland Revenue was at last beginning to realise that it could not stand out as a bastion, taking into account only tax changes, without looking at the whole picture.

In consequence, we are giving a supplement to those on low wages, which will have a bad effect on those areas like mine, in the West Country, with a high percentage of people on low wages. For the first time ever, they will now be given a supplement while in full-time work. The long-term consequences of this action, although I can see arguments for it in the short term, will be with us for decades. The movement towards encouraging employers to pay a basic wage and towards a minimum wage will be held back because of this miserable Chancellor, who has failed to comprehend the extent to which small tax changes can be changes of principle and can make a very damaging assault not just on individual poverty but on the whole way in which we were moving in trying to eradicate poverty in our midst.

We must expect from the Chancellor in the presentation of the facts on which his judgment is based a far higher degree of honesty and competence than we have had over the last few weeks. This is my most serious allegation. The right hon. Gentleman holds high office, which the House respects, but the House expects from him an honest interpretation of the facts. It expects him to present the expenditure figures particularly honestly, because the only way in which the House can discuss the real choices on priorities which face any Government and Chancellor is to have the facts presented honestly. This was not done in the public expenditure review; there must be many officials hiding their faces in shame that that miserable document should have been produced in that way.

I do not have the range of knowledge to know in detail how much those figures have been corrupted, but in defence expenditure, this is one of the most dishonest displays that I have ever seen. The Bill will divide the nation. It is inequitable. It is making a judgment six months before it should be made. It is distributing something unfairly, and in the long term it will damage the structure of our attempts to ease poverty: it deserves to be rejected.

I want to avoid covering the same ground as that which I covered last Friday on the Second Reading. I should explain to the hon. Member for Cornwall, North (Mr. Pardoe) why there have been no Amendments moved by the Official Opposition. It would be easy to improve this Bill if we intended to cut taxation. There are many aspects of the tax system which were attacked by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and others. We on this side of the House think that the worst aspects of the present income tax system is the low threshold. If there is a case for cutting taxation, it is a case for raising the threshold as a top priority and that is the kind of Amendment we would have moved.

As we have made clear, we oppose the whole package, we oppose the public expenditure cuts and the charges. Therefore, we oppose the income tax cuts which are the object of the operation. It would be inconsistent for us to seek a better way of bringing about income tax cuts to which we are in any event opposed.

Since the Second Reading there have been some developments. I hope that the Financial Secretary will have a chance to explain some points which badly need explanation. Over the week-end the Government had a very critical Press. It is very hard to find a friend of theirs among any of the economic commentators here or abroad. The Financial Times on Saturday, in a somewhat extreme article, extreme in the prescription it put forward not necessarily in its analysis, said that if there were no incomes policy the only measure was one of serious deflation with all the terrible consequences which that entailed. The Observer, the Sunday Times, the Sunday Telegraph and today's The Times have all, in their different ways and with different degrees of urgency, some of them feeling very urgent indeed in their representations, pressed for a policy to deal with the immediate problem.

Last night we had the Guildhall speech of the Prime Minister. This was a much-heralded speech; heralded by rather different trumpet calls at different stages. First, we had the call which announced that here was to be a dramatic statement, the Prime Minister was to undo the harmful effects which it was clearly felt at No. 10 had occurred after his television broadcast. I was struck by the similarity with King Lear but as the cartoon in The Guardian made the point, I will not pursue it. Then the briefing changed. It told the Press that there was no need for any dramatic announcement at the Guildhall speech, that there was no need for the Prime Minister to say anything new and, indeed, he did not.

He made it clear, as far as he makes things clear, that all the Government intend to do seems to be what is contained in this Bill, apart from nonintervention in industry. He said there was a new incomes policy but all that it seems to amount to is a redistribution from the poor towards the rich. He said, or seemed to imply, that that alone would change the climate, change the attitude of the nation. It is a long-term policy as he said it has nothing to contribute to the short term. This might be described as a policy of fiddling with the tax rates while Rome burns.

I say to the Government that this is not good enough. We have a situation in which wage claims are rising. To start with it was, as my hon. Friend the Member for Ashton-under-Lyne pointed out, a matter of raising expectations but it has clearly become something more than that and, in some ways, something more serious than that. It is now a kind of defence mechanism whereby people are afraid of being left behind. In this short-term situation, we shall get no help from this Clause. The majority will find them-selves worse off. There will be no help from this proclaimed doctrine of freedom of choice because it is nonsense when someone cannot choose to spend less money on food since food prices are going up, and since, in due course, the average industrial earner will not be able to have the choice of paying less rent as council house rents go up.

What I would like to ask the Financial Secretary is: does he confirm that this Bill, the public expenditure cuts and charges and the shortfall which have been presented as cuts are the whole answer which the Government have to the present situation? Or can he reassure us, as the Prime Minister did not last night, that this is not the whole answer and that they will not sit back and allow increasing inflation to engulf us?

There are some particular questions arising out of this Clause. The Treasury in Economic Trends seem to confirm that the balance of the income tax cuts on the one hand and the public expenditure custs, the charges and the shortfall on the other hand, have a neutral effect on demand as the Government see it; that the corporation tax cuts are not included in the balance but they do not regard them as having much effect. We can come to that on the next Clause. If this is so clearly the effect on demand of the tax cuts, much depends on what kind of increase in earnings the Government see coming about by April. If the increase in earnings gathers pace, there will be more revenue coming in and the cuts will have less effect by way of increasing demand. If earnings slow down, if there is to be more moderation, it will have the reverse effect.

What were the calculations of the Treasury based upon when it came to this estimate that the overall demand effect is neutral? It is a crucial question because the effect of the package on the economy depends on the earnings rise. What can we expect? Does the Financial Secretary take a more optimistic view of a moderating rise and is that, perhaps a justification of a lack of policy to deal with the present situation? If the Government cannot even say that, then it is a case of total defeatism, total abrogation of their responsibilities. We are faced with this accelerating inflation which has increased since June, when the comparative position of Britain has become worse.

There is a serious threat to the future of the whole country. I warn the Government that if they have no policy for the short term and persist in this attitude, it can only mean that the eventual remedy will be more difficult and they will then have to throw in everything, including the kitchen sink. It can only mean that the longer they wait, the more unpleasant the consequences will be for us all.

The debate has been on a somewhat narrow but startling Amendment moved by the hon. Member for Cornwall, North (Mr. Pardoe). It has, reasonably enough, ranged widely and the Chairman indicated that we would include in the debate on the Amendment the debate on the Clause as a whole and that he would not feel disposed to allow any debate when we come to the Clause stand part. Before I come to the substance of the hon. Member's Amendment, I must make a brief reply to the very sharp and intemperate remarks of the hon. Member for Plymouth. Sutton (Dr. David Owen).

I do not know whether he realised what he was saying, but the burden of his accusation, when he talked about members of my right hon. Friend's Department hanging their heads in shame, is that he is suggesting that my right hon. Friend somehow managed to achieve the suborning of officials and their agreement that figures should be put to this House and to the country which they knew to be untrue. If the hon. Member has said this, I utterly refute it and I believe that he is demeaning himself by making such allegations.

That is precisely the accusation that the present Chancellor made against the previous Chancellor.

I was talking about the allegation by the hon. Member for Plymouth, Sutton. I hope that he will take an early opportunity of making clear that that is not what he meant, that he was not accusing officials of the dishonest presentation of figures. My right hon. Friend is well able to take care of himself. The figures in the White Paper were entirely honest. When he talked about the limited presentation of figures, I repeat what has been said, the normal five year forecast of public expenditure will be produced to the House and no doubt debated in the usual way.

Turning to the Amendment of the hon. Member for Cornwall, North, he will not be surprised when I say that I will advise hon. Members to reject it. My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) estimated the cost of reducing the standard rate of income tax to 25 per cent. as between £900 million and £1,000 million. I fear that I must disabuse him. The advice which I have had as to the effect of the Amendment is that it would be to reduce the yield of income tax by £1,735 million in the first year and £1,925 million in a full year. Of all hon. Members who have sat on the Liberal benches the hon. Member for Cornwall, North must be the most expensive. It may be that he will withdraw the Amendment before it is put to the vote. The hon. Gentleman advanced an ingenious but, I thought, unconvincing argument, that somehow this would not be inflationary, that the whole sum could be found out of the Budget surplus which the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) budgetted for at the beginning of the year and that therefore this could be well comprehended within the policy of the Government.

He, however, recognised that he had somehow to lift from the public purse the obligations of providing capital for investment in the public section. He mentioned the nationalised industries but he must recognise that he would have to go much further than that. He suggested that they should be funded by an appeal to the market. He will know that the National Loans Fund forecast for the current year shows that £1,544 million was estimated as the advance from the National Loans Fund to the nationalised industries and local authorities, public corporations and even lending within central government. Even if the whole of that were to be found from the market it would not be sufficient to reduce the tax by anything like he wishes.

In the short term it would be quite impracticable. My hon. Friend the Member for Harwich (Mr. Ridsdale) and my hon. and gallant Friend the Member for the Isle of Ely (Sir H. Legge-Bourke) made the point forcibly that to the extent that we can increase the savings ratio, to the extent that people can be persuaded to save more of their income, then we will be able to make further progress in reducing taxes. It would be optimistic and irresponsible to imagine that this can be done in the short term and to the extent of this Amendment or anything like it. If we were to accept it, it would lead to massive increases in the level of demand and pile enormous demand inflation on top of what is already, and a number of hon. Members have adverted to this, a serious wage-cost inflation.

This is not the occasion for an elaborate exposition of budgetary policy. I can say that the changes announced in the whole of the package put before the House on 27th October were intended as the hon. and learned Member for Lincoln (Mr. Taverne) has said, to have a broadly neutral effect. My right hon. Friend stands firmly by that assessment. The hon. and learned Member said that that was all very well but what assumptions does that make about the growth in the level of earnings over the next few months. Speaking as a former Treasury Minister he must know that I cannot answer that question. No recent Chancellor has ever included among the published forecasts any forecasts of the growth in the level of earnings and I certainly do not intend to break that tradition tonight.

The package is intended to be broadly neutral. I know that it has been challenged by Mr. Wynn Godley and one or two others but the Treasury remains firmly of the view that this is the case and that my right hon. Friend has perfectly properly reserved his Budget judgment and reserved complete freedom for that Budget judgment next April.

6.15 p.m.

I turn to the rather wider debate. The case against the reduction of 6d. which the Clause will effect was made in traditional Socialist terms—none the worse for that—by the hon. Member for Norwood (Mr. John Fraser) and for Ashton-under-Lyne (Mr. Sheldon) and in tones to which we have now become accustomed by the hon. Member for Fife, West (Mr. William Hamilton), who expressed himself on this matter perhaps rather more shrilly than did his hon. Friends.

The attack on the Clause and on the reduction of 6d. is based on two propositions—first, that it is unfair that a bigger tax reduction should go to those who have investment income than to those who have earned income; and, second, that it is unfair that a bigger tax reduction should go to those who have larger incomes than to those who have smaller incomes.

I am glad to have the assent of the hon. Member for Fife, West to that statement, which I made in rather less colour-full language than his own, but none the less that was the burden of his complaint. Added to that complaint was the contention that this was happening simultaneously with the removal of certain subsidies which affect all but the poorest of the population.

As to the point about earned and investment income, it must be recognised that when tax rates rise, and so long as there is a differential, a bigger increase will be borne by those with investment income than by those with earned income. Correspondingly, when tax rates fall the opposite must be true. I do not see how anybody can expect it to be any other way. Exactly the same applies to the higher incomes as to the lower incomes. When the standard rate of income tax rose, the increases borne by people at the top of the income scale were much greater than the increases borne by people at the bottom of the incomes scale. When the rates fall again, the opposite is true.

I will repeat one point which both my hon. Friend the Chief Secretary and I made on Second Reading. If that is not accepted and it is to be argued by hon. Members opposite that there never must be a tax reduction—[An HON. MEMBER: "No."] I am glad to hear that. Perhaps I need not waste my time by going into this. The hon. Member for Fife, West is very quick and sees the point. He recognises that if he argues that there must never be a tax reduction that means more to the higher income people than it does to the lower income people, the standard rate of income tax would never be reduced.

As the hon. Gentleman and others argue, it would have been possible to have raised the threshold. However, that would have done nothing for the marginal rate of income tax.

What my right hon. Friend can justly say is that he is cutting the marginal rate of income tax on overtime and on all earnings and on all savings income for every taxpayer in the country. That is a prize which is worth having. The marginal rate of income tax on earnings has been cut from 32 per cent. to 30 per cent., which represents a reduction of 6 per cent. in the weight of tax on every extra pound earned by everybody who pays income tax.

If the argument is that that makes it very unfair as to the difference between those at the top end of the scale and those at the bottom, I will quote one more figure. Taking the dividing line at about £2,000 a year—after all, this is the salary of Members of Parliament leaving out of account the expense allowance—more of the total yield of personal tax is paid by those above the level than by those below the level. That proportion is the same after the reduction of 6d. as before. Yet more than half the full year cost of reducing the tax by 6d. of £350 million goes to those below the £2,000 a year level. [Interruption.] Of course there are more of them. The ratio is about five to one.

The argument has been advanced that the benefit goes largely or very substantially to those at the top of the scale. I argue that more than half of the benefit goes to those earning less than £2,000.

True equality demands that the benefit should also be shared in the proportion of five to one.

I have dealt with that argument—it is totally unreal. The hon. Member for Fife, West was quick to see the point. He shook his head at once when I presented the argument starkly.

The Financial Secretary must not assume that I am agreeing with him in anything he says.

The hon. Gentleman was quick enough to recognise, as the hon. and learned Member for Lincoln was not on Friday, that the logic of his argument was that the standard rate of tax would never be reduced. The hon. Member for Fife, West was quick and shook his head, saying, "That is not right". I am glad that he recognises that.

I have now dealt with the argument that more than half the benefit of this cut should go to people earning less than £2,000 a year, even though a minority—one-fifth of taxpayers—over that level continue to pay more than half the total level of tax.

The hon. and learned Member for Lincoln told us that he opposed the whole package, including the Bill. It was slightly surprising—I do not intend this to be provocative tonight—that on Friday the Bill was given an unopposed Second Reading—I think rightly, because right hon. and hon. Members opposite know full well that if they got back they would not put back the sixpence.

The Financial Secretary is being unrealistic. We opposed the whole package, and we made this clear. This does not mean to say that we intend to follow the obstructive tactics that the hon. Gentleman and his colleagues followed of voting against every detail.

The hon. and learned Gentleman may have convinced himself, but as the Bill is perhaps one of the central points of the package I doubt whether he seriously regards it as something which he should not have voted against.

Has it escaped the attention of my hon. Friend that, despite the protestations of the hon. and learned Member for Lincoln (Mr. Taverne) that the Labour Party would not think of putting the 6d. back on, the very first thing that the Labour Government did in 1966 was to raise the standard rate of tax from 7s. 9d. to 8s. 3d.—in other words, they put it back?

Indeed. I am grateful to my hon. Friend. They did so, and that was after the right hon. Member for Huyton (Mr. Harold Wilson) had assured the electorate that his programme could be carried out without any general increase in taxation, whereas my right hon. Friend the Prime Minister declared to the country that ours was a Government who would reduce taxation. Clause 1 fulfils that pledge and will reduce taxation. I hope that when the Question is put we shall reject the Amendment and support the Clause reducing the standard rate of income tax by 6d.

I will reply briefly to one or two of the excessive points which have been made during the course of the debate, particularly to some of those who replied to the speech I made in introducing the Amendment but who were not here to hear it.

The hon. Member for Worcestershire, South (Sir G. Nabarro) seemed to be saying that it was right to subsidise the interest rates of the public sector, and in particular of the nationalised industries, as that kept their prices down. Presumably, it would follow that it would either be good to subsidise the interest rates of the private sector so that we could keep its prices down, or alternatively bring the whole of the private sector into public ownership, in which case it could all have subsidised interest rates. The hon. Gentleman's argument does not hold up.

The hon. Gentleman perverts what I said. I said that it was utterly impossible for a sum of between £1,000 million and £2,000 million to be raised on the open market and that only certain parts of nationalised industries could go to the market for their money, very selectively.

I do not think that the hon. Gentleman has argued his way out of the conflict he has got himself into. I will leave it there.

There are two other points to which I wish to reply apart from that point. One was raised by several hon. Members on this side, first by the hon. Member for Norwood (Mr. John Fraser). He overestimated the effect of the rates of direct taxation on social justice. This overestimation of the results of the rates of direct taxation on social justice was common to most of the speeches which were made from this side, except for my own.

I ask hon. Members to consider that, because of the regressive nature of purchase tax and duties, particularly the tobacco duty, it does not make very much difference what is done to income tax, because the poor are already paying a much higher proportion of their income in taxation than are the middle class or the upper class. The lower 15 per cent. of income groups pay substantially more than one-third of their incomes in total taxation, because much of it goes in the tobacco duty.

I ask hon. Members to consider the remarkable thesis put forward by Professor Merrett of Sheffield University which shows that it would be possible to replace all the taxes—income tax and all the other taxes, except for surtax, corporation tax and death duty—by a 30 per cent. overall flat rate sales tax across the board and still leave the poorer sections of the community better off in terms of the proportion of their income paid in tax.

Therefore, the argument which has come from these benches of the Labour Party—indeed, I myself have until fairly recently accepted it—that somehow there is something in common between direct taxes and social justice does not stand up.

Robin Marris, reviewing Professor Merrett's proposals in the New Statesman on 30th December, 1966, said:

"Professor Merrett has made a very radical suggestion indeed. It flies in the face of Socialist orthodoxy, but I am forced to confess that, despite my lifelong assumptions, I find it difficult to disagree with him."

It is in fact possible to reduce income tax in this way and in the way proposed in my Amendment and still not work adversely upon social justice.

In the Amendment I have not been mainly concerned with incentives. One or two hon. Members opposite took up the question of incentives and one or two hon. Members replied from this side. In moving the Amendment I did not mention incentives, because they are far too difficult to measure in relation to income tax. I have been concerned with the question of the surplus.

The hon. Member for Worcestershire, South said that the cost of my proposal was £1,900 million. I am able to multiply £350 million by six, but unfortunately the hon. Member for Worcestershire, South is not. I, too, arrived at the figure of approximately £1,900 million. However, it would still leave a surplus of £700 million.

If the Financial Secretary questions, as he did, where would the money come from for the nationalised industries and where would all the local authorities, the Health Service and everyone else, find their money, the answer is that a £700 million surplus would still be twice the surplus that we had in 1967–68, about the same as we had in 1966–67, and much higher than any surplus we had in the years 1958–59 and 1964–65. Where did all the nationalised industries and the rest of the public sector find their money when there was not a surplus on the current account of £2,600 million, which is what we have today?

6.30 p.m.

I do not for one moment intend to press the Amendment to a vote, simply because if there were a Liberal Government and I was Chancellor of the Exchequer I would not necessarily think in terms of giving back the surplus only in this way. Unfortunately, the Bill is somewhat limited as to ways in which I could give it back. I have, therefore, to concentrate on the two sources open to me in the Bill. And so indeed it is somewhat limiting to have to do it in this way. But I find absolutely despairing the common front which we have had from the spokesmen from the two Front Benches, who, after all, presumably for the foreseeable future, will have the future of the British economy in their hands. Heaven help us.

The common front which has been shown by the two hon. Gentlemen is that they support the age-old arguments in favour of deflation. They are not prepared to break into the open seas. They are not prepared to follow the policy which the Conservative Party, under the direction of the late kin Macleod, when they were in opposition, said that they would follow, that they would take risks and encourage growth in the economy by giving back a large part of those surpluses into the purchasing power to stimulate demand. Indeed, that whole policy of growth, in both parties, is dead today. I find that absolutely tragic.

I beg to move Amendment No. 3, in page 2, line 6, leave out '42·5' and insert '40'.

I shall be brief. In this Amendment I am endeavouring further to reduce the rate of corporation tax. I should state at the outset that I am not pinning my colours to any particular set of figures, although in the Amendment I am asking for a further reduction of 2½ per cent.

I want merely to question the Government on the philosophy of the reduction they are making. Presumably the Government are asking for an increase in investment. We all know that this is what is desperately needed if we are to obtain economic growth. The creation of fixed capital in this country is appallingly low and has been so over far too long a period, and far behind our major industrial competitors. I hope, therefore, that the Government's intention in reducing corporation tax is to increase and encourage investments.

I do not want to get involved in any way in an argument about exactly how best to encourage investment, in the terms of whether it should be investment allowances or investment grants. Obviously this would be without the terms in the specific Amendment. But I have before me the report of the Confederation of British Industry Industrial Trends Survey, No. 39, of October, 1970. The survey makes clear that the outlook for investment is still very gloomy and depressing. For instance, it says:

"The outlook for authorisations of capital expenditure on plant and machinery has worsened since June, while that for authorisations of buildings has remained unchanged. For 1971 a decrease in manufacturing investments is indicated."

The Confederation of British Industries' survey goes on:

"The implication for policy is that there should be greater incentives for investment."

It also says that perhaps the best of these incentives would be a reduction in corporation tax. I merely want to ask the Financial Secretary to tell us how he believes the new rate of corporation tax will affect the overall level of investments, and whether he thinks that it will overcome the gloom which the Confederation of British Industry found in its latest survey.

Obviously this, I hope, will be a means of getting investment. If it is, I suspect that there will have to be a much more substantial reduction in the level of corporation tax in order to overcome this gloom, because undoubtedly the major factor weighing against industrial investment is not a question of whether we have tax allowances or grants but, frankly, whether we have those investment incentives at all.

Business men will only invest if they have a confident climate in which to do so. If one follows the path of upward industrial investment over the last 20 years, one can clearly see a strict relationship between the level of investments and the level of demand in the economy. When we have a booming economy, with booming consumption and demand, then business men have felt that they were able to look forward to a period of profitability and they have been prepared to invest.

Obviously interest rates affect investment, too. One would hope that one could get some international agreement on this matter. I hope the Government will make efforts to that end, to lower the disincentive to investment.

At this stage, it seems primarily that the Government are putting all their money on the idea that if they can reduce the impact of taxation on industry through corporation tax, we shall leave industry with a little more to invest. It is unfortunate that we should have a level of corporation tax across the whole range of profits. It would seem far better that we should not only reduce it, as I have proposed in this Amendment, as a better incentive, but also that we should have a much lower rate of tax on companies with small profits. I think that the growth of the economy will never come from the giant industries but that it will inevitably come from the small entrepreneurs starting in business and getting growth in the early years. These are the people who need incentive and a lower rate of tax.

Even if the Government cannot accept my proposed lower rate of corporation tax across the board, it may well be that they will consider giving a lower rate of corporation tax to companies with lower turnovers and smaller profits.

The hon. Member for Cornwall, North (Mr. Pardoe) said that the main influence on investment is the expectation of profitable demand, and that that has a greater influence than systems of investment incentives. I entirely agree with him in that. It is nevertheless interesting that the Government have decided to introduce a system of investment incentives, though one different from the system which existed under the previous Government. I agree with the hon. Member for Cornwall, North that this is not an appropriate occasion to discuss the merits or demerits of the two systems, and I do not intend to do so. On the other hand, we have a Government which have proclaimed their interest in scientific management. No doubt they will therefore be very careful to assess the effects of the various measures which they take.

The Government have an alternative. They could have reduced company taxation by a greater amount and eliminated any system of investment incentives at all. This would have been an alternative and one for which many of the Financial Secretary's hon. Friends, when they were on the Opposition back benches, used to argue. Nevertheless, the interesting thing is that the Government have not just reduced corporation tax but have introduced a system of investment incentives. I should like the Financial Secretary to tell the Committee how the Government intend to assess the effect of the system of investment incentives which they have introduced. We have a government of scientific management and they should, presumably, be working to set up a system for assessing the effects.

After the previous Government had been operating the system of investment grants for about two years, the Board of Trade began an assessment, in so far as this was possible, of the effectiveness of investment grants. The assessment was not completed, although I was glad to hear, in answer to a question of mine to the Parliamentary Secretary for the Department of Trade and Industry, that as much as possible of the results of that assessment will be published. I should like the Financial Secretary to tell the Committee what work the Government are doing along these lines.

The first thing to notice is that what they are engaged in is a process of social engineering, which I suppose is quite contrary to their philosophy. It would have been in accordance with their philosophy simply to have reduced the level of company taxation, but by introducing a system of investment incentives they have presumably attempted to achieve certain specific effects. For example, they want to provide cash specifically for investment. They want to direct cash specifically into investment, so they encourage companies to put money into investment, as a result of which they will get a reduction in taxation.

Then, presumably, they want to help capital-intensive industries, because this is the effect of the system that they have introduced. It used to be held as a serious accusation against the investment grant system that it assisted capital intensive industries. Their system does exactly the same thing and presumably it does exactly the same thing because that is the result they wish to achieve.

How will the Government assess the effect of their proposals on capital-intensive industries? They say that they want to help the development areas. This is another argument for having a system of incentives. One can differentiate that system in the direction of development areas and achieve effects there. I ask the Government to tell us how they propose to assess these matters and these effects. I ask them how they intend to introduce their principles of scientific management into this matter, because the first factor of which one becomes aware is that there will be a serious reduction in the amount of information about all this that will be available.

A short time ago I ask the Chancellor of the Exchequer whether there would be published the sort of analysis of investment allowances and tax allowances under the new system that was published in respect of investment grants. The reply was that the cost of so doing would be unacceptably high, and therefore it would not be done. The Financial Secretary will remember the extensive information that used to be published about investment grants. I hope that we shall have a further report for the year up to 31st March, 1970. I hope that we shall have a detailed analysis of expenditure in particular industries, because it will help us to assess the effectiveness of that sort of investment incentive. This kind of information is not to be available in respect of investment allowances. What system are the Government setting up to achieve control over their system of investment allowances?

We have been assured that differentials for the development areas will not be reduced, but the statement that they will not be reduced has not been supported by any calculations presented to the House or to the public. It is very curious that no such calculations have been presented. One would have expected such calculations to be brought before the House. I suppose that one reason why they have not been presented is that the Treasury does not want to tie itself to particular estimates which might be shot down. If that is a reason, I do not think that it is an honourable one. I think that the Treasury should present the estimates upon which this statement has been based.

Another reason why the Treasury has not given us this information is that the statement depends, to a considerable extent, apparently, upon what happens to grants and loans under the Local Employment Acts, and this the Treasury cannot say because the Prime Minister said in the House a short time ago that "one never knows". If one never knows, how does one make the claim that the differential is being preserved?

I ask the Financial Secretary to tell us how the Government propose to assess the effect of combining a reduction in corporation tax with investment allowances in producing the results, the social engineering results which they apparently want to achieve. How will the Government find out whether they are doing what they want to do? What information will be available? What will they tell the House? Is it just going to be the surprising deficiency of information associated with the Chancellor's most recent pronouncements, or will it be more? Will we have information along the lines that we had for investment grants. What sort of information will the Treasury consider is worth the cost of producing it? What is the Treasury going to do about providing estimates of the likely effect of its decisions on particular industries which have a major impact on the country's export results, and economic results generally?

6.45 p.m.

Let us consider a few of the vital industries that will be affected by the decisions which the Treasury has made. Let us consider the motor car industry. From reading the Press one realises that in recent months—and during last year—the motor car industry has not been notable for the profits that it has made, and therefore it will not have many profits against which to offset its capital expenditure. Presumably the Treasury has made some estimate of the effect of all this on the motor car industry, which is the major exporter in the country? It is, presumably, going to be affected. Presumably the Treasury has estimated the effects, and presumably it can tell us what they will be?

The chemical industry is a highly capital intensive one. If one can believe recent reports in the Press, the Chemical Industry Association has been making representations to the Government about transitional arrangements. There have been reports of intentions to cut capital expenditure in the chemical industry. On Saturday morning we had in The Times an article about I.C.I. and its intention to cut its capital expenditure. Here is a possible effect of the decision which the Government have made. Presumably the Government have made an estimate of the effects that it will have, and presumably they can tell us about them and thereby encourage us to be less discouraged by the initial reaction of industries to this total package which, as far as one can see, has been to revise downwards their investment intentions, rather than, as was clearly necessary, to revise them upwards.

Let us consider the shipping industry, which has been most outspoken in its reactions to the Government's decision. I remember a year ago the shipping industry telling us how its recent expansion and the recovery of its position in world shipping was due exclusively to the initiative and vigour of those gentlemen who ran the industry. More recently we have seen the industry attribute this just a little to the existence of the investment grant system. The industry is really worried that it will lose that system. What is the Treasury's estimate of what will happen to the shipping industry? What will happen to the expansion of earnings from shipping, which are an important contribution to our invisible earnings?

I put those questions to the Treasury in an entirely non-partisan spirit and in an attempt further to establish the Government's skill in scientific management which we know they are trying to develop. The Financial Secretary will realise that our appreciation of the Government's success in the development of methods of scientific management will depend to some extent on his ability to answer those questions.

It will come as no surprise to the hon. Member for Cornwall, North (Mr. Pardoe) that I disagree with his argument as much as I disagree with the Government's argument for reducing the rate of corporation tax in the context of this year's economic situation. I hope that this will become clear when I refer later to some of his remarks.

I hope that on this occasion the Financial Secretary will do my right hon. Friend the Member for Birkenhead (Mr. Dell) the courtesy of replying to the important points that he has made. Similar points have been made frequently during debates in the House over the last few weeks, and questions have been put to Ministers time and again, but those questions have been evaded and we have had no answers whatsoever on this vital issue of the estimate of the effect which the Government's policies will have on investments. I hope that on this occasion the Financial Secretary will reply to the points that have been made. If the Government have done nothing, let them at least say so.

On one point I agree with the hon. Member for Cornwall, North. The important aspect of this Clause and, indeed, of the whole Government package, is its effect on demand. Much the most important part of the package is what will be its effect, and therefore what will be the effect on investment.

The impression has been given that the effect of the package as a whole will be neutral on demand. This is not quite what the Chancellor of the Exchequer said on 27th October. He then said:

"The reduction in income tax and the reduction in public expenditure, taken together, will, therefore, be broadly neutral in their effect on demand in 1971–72."—[OFFICIAL REPORT, 27th October, 1970; Vol. 805, c. 51.]

He did not refer to corporation tax at that time. However, realising that he had again, perhaps not deliberately, misled the House, he corrected that, or attempted to correct it, in the debate on 4th November when he said:

"It was in the light of the assessment which I have just given to the House and because I wanted to preserve my freedom of action next April that I was prepared to bring in legislation now to reduce direct taxation to an extent which, taken together with the reduction in public expenditure, would be broadly neutral. …"

In other words, he was now taking together both income tax and corporation tax.

However, realising that he had confused the situation, he went on to say about corporation tax:

"… after allowing both for the time that normally elapses before investment decisions can be translated into production and for the effects of corporate borrowing"—

an interesting phrase—

"the demand effect of the proposal concerning corporation tax during the financial year will be small, both absolutely and in relation to the effect of the reduction in income tax."—[OFFICIAL REPORT, 4th November, 1970; Vol. 805, c. 1089–90.]

I shall be interested to hear exactly what the Chancellor meant by that statement.

It seems to be the practice of the Chancellor to confuse both himself and the House, and on this occasion what he had in mind was far from clear. Is he telling us that there is so little effect on demand by a £60 million cut in corporation tax followed by a £90 million cut in corporation tax in the following year, which will be taken into account by companies whose years end after 5th April, 1970, a total of £150 million, that it will be meaningless?

I understand that the normal effect of corporation tax is about 20 per cent. The Chancellor may consider that to be a very small amount, but his whole judgment of whether the package is neutral on demand has been seriously questioned by many commentators, not least by a very senior former Treasury official, Mr. Wynn Godley. The Government owe it to hon. Members to answer this serious criticism of the effect of the package on demand.

It may be that the Government are being coy because they feel that once they show the makeup of the various parts of the package, it may be so open to criticism that it will be seen for the nonsense that perhaps it is, but if that is not the reason, why do they not tell us? After all, we have been told time after time that we now have an open style of government. Why can they not extend the open style of government to let hon. Members know how it is that the Chancellor disagrees on such a serious matter with so many serious commentators?

If we do not get this answer and explanation, we can only assume that the Chancellor's calculation, as with so many others which he has made in the past, will not stand scrutiny. We cannot believe that he can imagine that he will somehow delude foreign observers into believing that the effect on demand is neutral simply because he happens to say so. The least he can do is to tell us just how he arrives at this conclusion.

The major and most interesting comment about the cut in corporation tax is that it does nothing for the great majority of companies. There were precisely 514,826 companies on the register in 1969 and only 255,000 pay any tax. According to the 1970 Report of the Commissioners of Inland Revenue, out of those, 133,000 pay corporation tax on profits of less than £100 and 64,000 had nil profits anyway. One assumes that many did not submit returns; one has to judge from the total of companies on the register. It is clear that for the majority of close companies, about which the Conservatives said so much in the last Parliament, the corporation tax cut will do nothing. It will be interesting to know exactly what the Government have in mind to help close companies.

Let us deal with the minority of companies which the cuts in corporation tax will help. What will be the effect on the efficient part of that minority? It is said that those with profits, those able to stand on their own feet, will get enormous benefit from this £60 million reduction. I do not know, but there was an interesting article in the November issue of the Director which threw a little doubt on whether it was true that the cut in corporation tax would have a tremendous effect on the efficient directors. I quote one or two relevant extracts:

"… nearly half the directors ignore tax when assessing the attractiveness of new investment …"

This does not seem to coincide with what the Government have been saying about efficient companies and how those companies will be able to recognise the true benefit if they use the discounted cash flow system, for example.

If they do, and, according to this report, not many do, this cut will certainly not be their main or only criterion in measuring the return which they are likely to get from their investment. Even if it were, they would be interested in the answer to two Questions put by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) on 4th November showing that those efficient companies using the discounted cash flow system under the old arrangement, with corporation tax at 45 per cent., and the old investment grants, on every £100 of investment outside the development areas would get £39 of relief and £52 inside the development areas, whereas under the Government's new system the comparable figures are £32 and £36.

Therefore, efficient directors assessing the likely yield from a given piece of investment will be able to see that they need a much higher yield under the present arrangement than under the investment incentive system of the previous Government. So we will get a further inflationary boost, because companies will decide to carry on with the investment and increase their prices in order to get the yield which they would have had under the old system, or they will cut back on their investment. But whichever way they decide to do it, one thing is clear—the Government's policies certainly will not be beneficial to investment in this country.

7.0 p.m.

What is the effect on that part of the minority of companies which the Government would describe as inefficient, those which cannot stand on their own feet, which have no profits, companies like Rolls-Royce, companies in the development areas where in the first year or two all too frequently there are, understandably, no profits and so no benefits? There is nothing for those companies in the Government's policies. There is nothing for the majority of companies, and very little for the minority which are using what is said to be the most efficient method of investment analysis.

So whichever way we look at it, there is nothing in the Government's policies to help in any way in the vital matter of investment. There is not one jot of evidence that a cut in corporation tax of 2½ per cent., or even the 5 per cent. suggested by the Liberal Party, would go any way to help increase the appallingly low level of growth which seems likely this year and next year if the O.E.C.D. is anything to go by. There is nothing to help in these vital fields. There is nothing to help the close companies, nothing to help the efficient companies, nothing to help the progressive but loss-making companies in development areas.

After five months in charge of the Government of this country, a country with serious economic problems, as the late Iain Macleod described them, it speaks volumes for this Government that we are now discussing what is at best an irrelevant Clause in an irrelevant Bill. If the Prime Minister's speech at the Mansion House means anything, it is that the Government are abdicating economic responsibility and leaving it to the people. If they have the idea that the problems will somehow go away, if they have a pious hope that they will somehow solve themselves, we can tell the Government that they certainly will not, and the Clause will not do anything to help.

I have some sympathy for the Opposition in the position in which they find themselves, because this Government, then the Opposition, went to the country on a programme which included cutting public expenditure and reducing taxation. The Opposition are faced with the embarrassing position of having to try to find something on which to attack us, because we have succeeded within five months of taking office in doing just that.

The hon. Member for Cornwall, North (Mr. Pardoe), whose Amendment we are discussing, is in a very honourable tradition. Looking through previous corporation tax debates, I find that Mr. Peter Bessell and Mr. Richard Wainwright—neither of them, sadly, now with us—then moved Amendments to reduce corporation tax, as I myself have done. The difference is that this time we are doing it in the Bill. We are achieving a 2½ percentage points cut, which represents a reduction of just over 5 per cent. in the tax. The hon. Gentleman's Amendment would reduce that by a further 2½ percentage points. Clearly, there is something to be said in favour of his proposal, but I cannot advise the House to accept it.

We must look at the corporation tax cut in the Bill as part of the balanced judgment which my right hon. Friend the Chancellor felt it necessary to make when he was considering his policy for investment grants, tax allowances, and, indeed, the whole package which he announced on 27th October. The Government were committed to ending the system of investment grants, which was obviously warmly espoused by hon. Members opposite for reasons which we can all understand. We were committed to ending it, because we regarded it as wasteful. Huge sums of public money were being spent to try to encourage investment, and even after four or five years hon. Members opposite never produced any of the figures along the lines of those that the right hon. Member for Birkenhead (Mr. Dell) suggested I should now produce, estimates of the effect of investment grants. As my right hon. Friend the Chancellor has said, investment in the four years the grants were in force was somewhat lower than in the previous four years, when a different system had applied.

The hon. Gentleman says that we did not produce estimates of the effect of the investment grants system. We were engaged in a study of it which began at the beginning of 1969, about two years after the system came into effect. All that I asked him is what sort of assessment he will make of the effect of his system.

The right hon. Gentleman is anticipating what I shall say. My case is that the grants did not produce the results which right hon. and hon. Gentlemen opposite expected. We feel that they were ineffective and that the expenditure was misdirected, not least because they were not profit-related. I simply cannot believe that it is in the interests of this country that 40 per cent., as it is in the development areas, of the capital cost of major projects should never have to produce any return. That is the effect of an investment grant, which by its very nature is not related to the profitability of a particular investment. That is our case against the grants, and why they went.

We have replaced them by a new and greatly simplified system of tax allowances, based on free depreciation in the development areas and accelerated depreciation outside, with a simplified form of annual allowances. This has been accompanied, as the Bill provides, by a 2½ percentage point reduction in the rate of corporation tax. This is a balanced package. It achieves what we mean to achieve, which is to improve in the medium term the liquidity of companies, many of which have complained that their tight cash position is one of the restraints on their investment programme. The figures are set out in the investment incentive White Paper of £60 million this year and £90 million next year.

The hon. Member for Heywood and Royton (Mr. Barnett), by a piece of sophisticated logical juggling, managed to convince himself, even if he did not convince anyone else, that the cut in the corporation tax does not help close companies. Perhaps he meant to say that it does not help all close companies.

The hon. Gentleman must listen. I said that it did not help the majority of close companies. Would he deny that?

The hon. Gentleman knows that he is playing with figures. A company may not pay corporation tax because, for instance, it is a small family company in which the whole of the profits come out in directors' remuneration. That covers a large number of companies. The hon. Gentleman was one of the foremost pressing, with us, on the Government which he nominally supported to get rid of the limits on directors' remuneration which the previous Government imposed. That is why some close companies do not pay corporation tax. All that do—and some of them are very large—will be helped. Many tens of thousands will be helped by the cut in the corporation tax, as they will be helped by the Government's decision not to reopen the shortfall assessments or agreements that have been reached on distributions. On a strict matter of logic, we might have done this on a reduction of the rate of corporation tax on the ground that they may have more distributable profits. That, too, will help close companies. There are many tens of thousands of close companies which will very much welcome this easing of the tax burden upon them.

The hon. Gentleman also mentioned the study by the Director, and quoted the article about it. I imagine that he has read the article. Does he realise that the sample was of about 83 companies, which represents such a minute fraction of the total number of companies which operate in this country that I am surprised that an hon. Member as intelligent as the hon. Gentleman put as much weight on it as he did?

It was a sample.

I should want to know exactly how the sample was found. These were people who answered a questionnaire, which is a self-selected sample.

I come to the questions asked by the right hon. Member for Birkenhead. The hon. Member for Heywood and Royton asked one or two as well. I understand very well the anxieties of the right hon. Gentleman about some of the points he raised. First, he asked how we intend to assess the effect of the change of investment assistance. As I am sure he appreciates, because in the previous Government he was involved in this at an earlier stage, this is a matter for my right hon. Friend the Secretary of State for Trade and Industry, which Department is concerned overall, as was the Ministry of Technology before it, with assessing the effect of the Government's various Measures on investment by manufacturing and other industries.

Surely the hon. Gentleman is under a misapprehension here? It was a matter for the Board of Trade and subsequently the Ministry of Technology in the previous Government, because there was a system of investment grants administered by those Departments. Here we shall have a system of tax allowances administered by the Inland Revenue. Therefore, it is the responsibility of the Chancellor. The Chancellor is responsible for telling us what justification he has for the very large sums of money which will be given in tax allowances as investment incentives.

That was not the right hon. Gentleman's question which I was answering. He asked us how we intend to assess the effect. I say with the greatest respect to him, because he knows a great deal about this from his own experience, that that is not a matter for the Inland Revenue. He knows that. It is a matter for the sponsoring Department for industry, the Department of my right hon. Friend the Secretary of State for Trade and Industry.

Is the hon. Gentleman saying, then, that the Treasury does not know what the effect of its investment incentives will be?

On the contrary, I am saying that this is a decision of the Government. It has been taken by the Government and all the Departments concerned have contributed. The right hon. Gentleman's question about how the effect will be assessed is a matter for my right Friend, and I do not intend to be drawn on it this evening because it is not one which is open to me to answer.

The right hon. Gentleman asked whether as much information on investment allowances would be produced as has hitherto been produced on investment grants. We shall consider this. Of course, a lot of information on investment allowances is given in the statistics produced by the Inland Revenue. The right hon. Gentleman knows that last year, for the first time, the Inland Revenue produced an entirely separate volume of statistics containing a number of entirely new charts and tables of interest to those who study these things. We shall certainly consider the right hon. Gentleman's suggestion as to how far we should go in producing further statistics on investment allowances. I hope that he will take that as sincerely intended.

The right hon. Gentleman also asked something that he has asked two or three times before about the differential between the development areas and the rest of the country. He asked me to support, with figures if possible, the assertion of my right hon. Friend the Chancellor that the package as a whole broadly maintained the existing differential. I am sorry that he has not been satisfied with the answers which my hon. Friend the Minister of State, in particular, gave him in reply to his question, and felt it necessary to launch into the columns of the Press on the matter. Perhaps I may just refer to his letter to The Times Business News. It had a sting in the tail which was not wholly deserved, suggesting that my hon. Friend the Minister of State and I had forgotten all we had ever learnt about discounted cash flow techniques and so on. I assure him emphatically that that is not the case. We are very well aware of the importance of these methods of calculation in the right place. Indeed, we are impressed by the degree of sophistication and awareness by both the Inland Revenue and the Treasury in this complex field. Perhaps the right hon. Gentleman will feel that his gibe was undeserved.

I come to the question of the regional differential and the cost of the existing differential element in the investment grant. Perhaps I should apologise for addressing the House in a dark brown voice. I have a cold and I trust that hon. Members will forgive any inconvenience that this is causing.

The cost of this element paid to the development areas in 1969–70 was about £100 million, and it is expected that it will be a little higher in 1970–71. Of course, the net value to industry is somewhat lower, about £80 million, because the annual writing down allowances on capital expenditure are given net of grant. But for the grant, firms would receive higher annual allowances. We estimate that the cost to the Exchequer of the regional differential incentive in 1972–73 will be about £90 million, made up in part of the residual differential grant payments and, in part, of the additional cost of free depreciation over the national rates of allowance.

Obviously, as the grant is phased out that figure of differential will, to that extent, decline, but this will be matched by the growth of additional expenditure—which my right hon. Friend told the House would be up to £25 million extra by 1974–75—under the Local Employment Acts. These figures taken together—the decline as the grants are phased out, the maintenance of the margin of investment allowances and the growth of expenditure in respect of the Local Employment Acts—in my submission fully justify our assertion that the balance of advantage for the development areas will be broadly maintained.

Does that assume the same level of investment throughout the years concerned?

No. The investment is, of course, assumed to rise, for the purpose of argument, broadly in line with recent trends. This would seem to be a perfectly proper assessment, bearing in mind the fact that industry will be less burdened both with corporation tax and tax on distributed profits as a result of the cut in income tax. We anticipate, therefore, that investment will begin to rise.

I was then asked about the effect of the change on the liquidity of companies. Hon. Members will realise that what one is talking about is the liquid assets of companies available for investment. It would not be right to apply discounted cash flow to these assets because one is talking about cash that is available. Here there is very little difference between the two systems.

If one looks at the first three years, one sees that in the case of an asset qualifying for a 40 per cent. grant, the variation was between 49·8 per cent. and 54·8 per cent. An asset qualifying for free depreciation at the corporation tax rate of 42½ per cent. would get 42·5 per cent. With a grant of only 20 per cent., again, the figures varied—the variation would depend on the amount of the writing down allowance—between 33·1 per cent. and 39·7 per cent.

Under the new system it is 32·9 per cent. In the case of an asset which did not qualify for grant, it varied between 29·7 per cent. and 31·8 per cent. The figure under the new system is 32·9 per cent. Although if one looks at a particular asset there may have been in the case of the development areas some reduction in the minimum liquid cash amount available, one must have regard to the effects of a 2½ per cent. cut in corporation tax on the rest of a company's profits.

If the right hon. Gentleman says, "What about a company that does not make any profits?", then the answer is, "Let it become efficient and it will then be able to benefit from the allowances and from the reduced rate of corporation tax being paid."

If hon. Gentlemen opposite are arguing that we should continue to make substantial payments out of public funds to companies whether or not they make profits, then we on this side of the House do not agree. We feel that the system needed a change and, as part of that change, a 2½ per cent. cut in the rate of corporation tax was, we believe, appropriate.

I hope that the hon. Member for Cornwall, North will not press the Amendment. If he does press it, I trust that my hon. Friends will reject it. Equally, I hope that my hon. Friends will support the Clause, if necessary on a Division.

In view of the Financial Secretary's remarks, I beg to ask leave to withdraw the Amendment.