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Ways And Means

Volume 814: debated on Tuesday 30 March 1971

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Budget Statement

Before I call the Chancellor of the Exchequer to make his Budget Statement, it may be for the convenience of right hon. and hon. Members if I remind them that at the end of his speech, as in the last three years, copies of the Budget Resolutions will not be handed round in the Chamber but will be available in the Vote Office.


3.30 p.m.

The first Budget of a new Parliament should be an occasion not only for fixing the rates of taxation for the coming year. It also provides the opportunity to take stock of the economic progress of our nation over past years and to set the new direction for the years ahead. For almost a quarter of the Members of the new House of Commons, this will be the first Budget debate in which they have participated. And recalling the first Budget Statement that I endured as a new Member, it seemed to me that it might be helpful if, at the outset, I were to give some indication of the course I shall follow this afternoon in what must, inevitably, be a rather long statement.

I shall begin with a review of recent economic trends and of the main economic problems which confront us. Next will come a consideration of the economic prospects for the future, and my general assessment as to what the management of the economy requires at the present time. I shall then outline my proposals, beginning with monetary policy and various other measures and a number of changes in taxation. Finally, I shall put forward certain far-reaching proposals for reform.

It will be agreed throughout the House that for many years, under one Government and another, the economic performance of our country has been poor. Over these years we have become accustomed to unfavourable comparisons with other industrial countries—slow growth, recurring balance of payments weakness, faster-than-average inflation, a low rate of investment, a falling share in world exports, and increasingly bad industrial relations. These are problems not for government alone but for the whole nation. What is needed is a new realism and a new determination: a new awareness of where the ruts we have been following will lead us and a new national effort to change the direction.

If we are realistic we should recognise that, unless there is a change in the trend—a change not only compared with the last five or six years, but with the trend over the last two decades and more—the prospect is that by 1980 our standard of living in this country will have fallen considerably behind that of most of the countries of Western Europe. Before too long, I hope that we shall know the outcome of our application to join the E.E.C. I have never doubted that, given fair terms, this historic venture would bring us great economic benefits in the longer term. But, whether we go in or whether we stay out, it remains essential to improve Britain's economic performance.

I would not pretend that our deep-seated problems can be overcome quickly, or that one Budget can transform the situation. But Budgets, as we all know only too well, are concerned with taxation; and I believe that one of the most important factors affecting the economic climate in this country is the system of taxation, and the burden of taxation. It would be naive to claim that the tax system is the sole cause of our poor performance as far as growth is concerned, but it is certainly an important factor.

Our system of taxation in Britain has many good points. It is fair as between one taxpayer and another; it is held in good repute and as a result is relatively little abused.

But it also has many defects. It has grown up in a haphazard fashion over the years and it has become ever more complicated. The very multiplicity of its provisions adds to the work not only for the Revenue Departments but also for taxpayers and their advisers. I should know because for five years I practised at the tax Bar, and I was never short of work!

But there is a more serious aspect of our particular system of taxation. Too often it stultifies enterprise. Too often it discourages the pursuit of profit. Too often it penalises savings, on which the nation's wealth and the growth of our economy so largely depend. Moreover, the difficulty of understanding it adds to the feeling of the oppressive and ever-growing burden of taxation.

And so, over these past eight months, much of my time has been spent, together with my Treasury colleagues and the Revenue Departments, in a comprehensive review of our taxation system. It is no longer good enough merely to tinker with the existing system. What is needed is a plan for radical reform over the next few years. And these must be our aims. First, to reduce the present excessive burden of taxation. Second, to simplify the system, to reduce the number of taxes and to make them more intelligible and easier to work. Third, to encourage initiative, enterprise and effort. Fourth, to encourage people to save more by reducing the present fiscal penalties on savings. And this is the year we must start.

Recent Economic Developments


But before coming to my plans for taxation reform I must turn to the more immediate economic problems which beset our nation. Two problems, above all, command attention at the present time, inflation and unemployment: a new and, in many ways, a baffling combination of evils.

This Government inherited a most serious problem of cost inflation. Throughout the whole of the post-war period we in the United Kingdom, in common with almost all other western industrialised countries, have had the experience of incomes rising faster than national productivity and we have, therefore, suffered from some degree of price inflation for over 20 years. But whereas the average rate of rise in money earnings in the decade 1955–65 was under 6 per cent. per annum, and under 6½ per cent. in the period 1965–68, there was a sharp change of trend towards the end of 1969, and by the end of last year average earnings were 14 per cent. above the level of a year earlier. At the same time retail prices had risen by 8 per cent. over the level at the end of the previous year.

Cost inflation is a canker which is eating away at our whole economic and social health. It is causing an arbitrary and inequitable redistribution of income from those who can least afford it to those in strong bargaining positions. At the same time it is sapping our economic strength, because by squeezing profit margins it undermines the confidence of businessmen and causes them to cut back on investment. It erodes our competitive position in foreign markets and here at home too. It weakens employment prospects, not only because labour becomes uneconomically expensive but because our export and import-saving industries lose out to foreign competition. These are the stark realities of the situation.

But it lies within our own power, as a nation, to deal with inflation and, if we do so, the prospects are certainly good. If we can get the rate of increase of money earnings down to something much nearer the rate of increase of national productivity, there is every reason to believe that we shall break out into a new period of faster growth, higher investment, rising living standards and a renewed confidence in our future.

Throughout these past months my colleagues and I have recognised that the first priority must be to defeat cost inflation. Our policy has been to ensure a progressive and substantial reduction in the level of pay settlements so as to ensure steadier prices. A policy of de-escalation is a hard and difficult course for any Government to follow and success is not to be had overnight. But the policy is succeeding. We still have a long way to go, but the upward trend in the level of settlements has been checked, and it is clear from informed opinion in industry that the climate is now quite different and that the pressure on costs through rising wage settlements is less than it was some months ago.

Output And Employment

I now turn to developments in the level of activity and employment. In the first half of 1970 economic activity was no higher than in the second half of 1969. Over the 12-month period, from the middle of 1969 to the middle of 1970, industrial production was almost flat. In the second half of last year, output picked up, though this was due in part to an unusually high rate of stock building which has probably not been maintained. The rate of growth of the national product between the first and second halves of the year was at an annual rate of about 3½ per cent., but it is almost certain that this has not been maintained in the early months of this year.

The upward trend of unemployment continued throughout last year and into the early months of this year. This can partly be explained by the relatively slow growth of output over the period, but it also reflects, I have no doubt, the increasing pressure which has been put on employers by rapidly rising wage costs, and which has forced them to economise and so to cut down their labour forces.

The pattern of expansion during 1970 was not ideal. In particular, there was a flattening out in the trend of private industrial investment and a further fall in the share of company profits in the total of domestic incomes. It is a striking fact that the share of company profits has fallen from 14½ per cent. in 1964 to about 10 per cent. in 1970. This is no doubt one important reason why industrial investment, on which our future prosperity depends, has been slowing down. Another feature of developments during 1970 was that the volume of imports rose fast in relation to total demand while the volume of exports rose much less; this of course tended to limit the growth of domestic output.

Monetary Developments

In the monetary field, the policy I have pursued has been to allow an increase in money and credit sufficient to support a rise in the level of economic activity but not so large as to compound the pressures of cost inflation. No estimates are yet available for the full financial year of domestic credit expansion or money supply; but figures for the first three quarters, which have already been published, show that the money supply increased at an average rate of about 3 per cent. a quarter. As the House will know, there have been massive sales of gilt-edged stock by the authorities during the last quarter. Despite this, the final figures will undoubtedly show that the pace of monetary expansion over the year as a whole was substantially faster than was foreseen last April.

So far as bank advances and the gilt-edged market are concerned, our operations have been notably successful. The restricted lending of the banks has been held within the limits set in the last Budget. It will be recalled that the clearing banks had almost reached their limit shortly after the Government took office. Despite this, their restricted lending at mid-March was about 1 per cent. below the limits set a year ago, though the shortfall reflects some delays in tax payments as a result of the postal strike.

In the gilt-edged market there has been a remarkable turn-round in recent months, and this has enabled us to sell an unprecedentedly large amount of stock. The result is that we have more than reversed the substantial official purchases of stock after last April's Budget and the exceptional redemption of Savings Bonds last September. It is clear that we shall end the year as substantial net sellers of stock. This is a considerable achievement in a year which included the stock redemption which I have mentioned.

External Developments

I now come to the balance of payments. Visible trade was roughly in balance in 1970, and invisibles again earned us a good surplus, bigger than in 1969. As the House already knows, we ended the year with a record surplus of £630 million on current account. But the House should also know this. If one examines the figures for last year more closely, the trends of volume and value of visible exports and imports make it clear why there is no room for complacency as far as the current account is concerned. I will explain why. In 1970 the value of our exports rose by 12 per cent.—hence the record surplus. But the volume rose by less than 4 per cent. By contrast, the volume of our imports rose by over 6 per cent. So the House will see that last year, in volume terms, our imports rose nearly twice as fast as our exports. The significance of these figures is obvious.

Nevertheless, the strong current account surplus in 1970 enabled additions to be made to the nation's overseas assets and also made it possible to reduce official liabilities. Taking account also of capital transactions of all kinds, the total currency flow in 1970, that is, net receipts of foreign exchange, was favourable by nearly £1,300 million, getting on for twice as much as in 1969.

We shall not have full figures for the first quarter of 1971 for some time yet, but there has been a large currency inflow during the quarter. In addition, we received £125 million in special drawing rights as our share of the annual distribution on 1st January.

I must now report to the House on the situation concerning our overseas debts. At the end of June, 1970, just after we took office, short and medium-term official debt stood at £1,461 million of which £992 million was to the International Monetary Fund, and £469 million to other monetary authorities. The House will be pleased to know that the whole of this £469 million of non-I.M.F. debt has now been repaid. That leaves the I.M.F. debt which, as I have said, stood at £992 million at the end of June, 1970. It has since been reduced by £24 million as a result of small sterling drawings by other countries, leaving £968 million outstanding.

We were not obliged to start repaying this outstanding debt until next June. I have nevertheless agreed with the Fund a schedule providing for repayments by eight quarterly instalments, beginning this month, March, of the £551 million which is outstanding in respect of the 1968 drawing. And the House will be pleased to know that I have arranged to repay in advance tomorrow the whole of the first four instalments of that schedule, amounting to a total of £285 million.

To sum up, when we took office the outstanding short and medium term debt stood at £1,461 million. Including the repayments I have just announced, we have made a total repayment of £778 million; and the debt therefore now stands at £683 million. So the debt has been more than halved since we took office. [HON. MEMBERS: "Oh."] The debt now stands at £683 million compared with £71 million in October, 1964. [HON. MEMBERS: "Hear, hear."]

It is right that I should emphasise here that the volume of I.M.F. debt which still remains is considerable. It amounts to a total of £683 million, all of it debt incurred between June, 1968 and March, 1970, comprising the rest of the 1968 drawing and the £417 million drawn under the 1969 stand-by. This remaining debt represents a real burden which we have to discharge. It is bound to be a continuing constraint on our freedom of action.

Government Finance: Provisional Outturn

Before I turn to the prospects for the future, I must refer to the Government's financial accounts. Hon. Members will find these set out in some detail in the Financial Statement and Budget Report, so I will be brief.

The estimates for 1970–71 were for a central Government surplus of £619 million and a public sector surplus of about £250 million. The estimated out-turn figures for 1970–71 show that the central Government is still in surplus to the extent of £51 million, but that the public sector has a deficit of £617 million.

One reason why the central Government surplus was considerably smaller than expected was the fact that receipts from corporation tax were less than forecast, partly because of the 2½ per cent. cut that I announced last autumn. Another factor was that lending to public corporations was greater than expected. Finally, the figures have been considerably affected by a backlog of receipts as a result of the Post Office strike. It is estimated that some £260 million, which would normally have been received in the current year, will not now arrive until 1971–72. The overall figure for the public sector was affected also by an increase in local authority expenditure, the greater part of which was due to pay and price increases.

The Economic Outlook

The Balance Of Payments

I turn now to the future, and before I consider the outlook for the domestic economy, I deal briefly with the external prospect.

World trade in manufactures is expected to grow at a fairly rapid rate in the year ahead, so there should be good export opportunities. We can expect another sizeable current account surplus in 1971, but it is not likely to be as high as in 1970. There are two special factors which are bound to increase our import bill. One is the increased cost of oil imports. The Teheran Agreement alone is likely to add some £55–60 million in the current year to our oil imports from those sources which are covered by that agreement. As the House knows, negotiations on oil imports from our other main sources—that is, other than those covered by the Teheran Agreement—have still to be concluded. The other special factor is the exceptionally large tonnage of new shipping due to he imported this year.

The visible trade figures are likely to show a moderate deficit on average over the year. But this need not be a cause for concern so long as net earnings on invisible account continue strong, as they are expected to do.

I am bound to take account, however, of the danger to our competitive position, and so to our surplus on current account, of the rapid rise in costs which we have been and still are experiencing. If our costs and prices go up significantly faster than those of most of our competitors, this must in due course make inroads into our surplus.

It is obviously essential that we should maintain a strong current surplus. It is not enough just to balance the current account. We need a surplus to provide for repayment of the remaining debt to the I.M.F., and also to support certain outflows of capital and investment items which are normal, inevitable, and, provided that we can finance them, beneficial. The big items of this kind are three. First, official long-term capital, which is mainly repayment of long-term debt and development aid. Second, private overseas investment, which is at record levels, although this is by no means all a demand on the current surplus and is matched to some extent by inward investment. The third is export credit.

Export credit is important particularly for trade in capital goods; but the provision of credit means exporting without an immediate cash return. It is a significant fact that export credit outstanding from this country has recently been increasing by over £300 million net a year. We are also recipients of credit on some imports but this is considerably smaller.

Of course, a considerable proportion of these outflows of capital can quite properly be financed by additions to liabilities, that is, by various forms of overseas borrowing; but the main basis of finance must be the current surplus.

Overseas Investment

It is against this background that I have considered the question of exchange control. I do not need to dwell on the value of investment abroad as a means of maintaining our invisible earnings for the future. The purpose of the present exchange control arrangements is to limit the methods of financing available to investors, so as to minimise the cost to the reserves; but this has not prevented a substantial and welcome growth in overseas investment in recent years.

The Treasury will be announcing today certain comparatively minor changes in the exchange control arrangements affecting direct investment in the non-sterling area. They are changes which will facilitate useful investment without significant cost to the reserves. But I cannot at the present time authorise any extensive or general relaxation of exchange control in relation to overseas investment; and I am afraid that, in the present circumstances, I must ask companies and institutions to continue for the time being to observe the voluntary programme of restraint on direct and portfolio investment in the four developed countries of the sterling area. This is not a satisfactory arrangement, but its abolition could involve a large cost, and it would be imprudent to make such a change this year.

The Domestic Economy

I turn now to the prospects for the domestic economy. I should emphasise here that the analysis which I am about to make is concerned with our prospects on the basis of no changes in policy and, of course, it is this which leads to my Budget judgment and to any proposals for change.

Economic forecasting, as every Chancellor who has stood at this Despatch Box knows, is a highly uncertain business. But all the indications are—and this view is supported by most expert opinion—that if no changes of policy were made in the Budget there would be a relatively small increase in output in the year ahead. Even taking into account the cut in the standard rate of income tax, which has already been provided for, the conclusion I have reached is that, in the absence of new measures, national output would grow by not much more than 2 per cent. during the coming year, that is, between the first half of 1971 and the first half of 1972.

Of the various elements in demand, the main contributions to expansion are expected to come from exports, public expenditure, private house building and consumers' expenditure. The increase expected in world trade should provide favourable opportunities for an expansion in our exports, provided we remain competitive. Public expenditure on goods and services is likely to rise by about 2 per cent. There should be a sharp increase in private house building, following the welcome recovery in housing starts and building society advances last year. But in absolute terms, the largest expansionary factor is likely to be consumers' expenditure. Here much will depend on personal savings and to what extent firms pass on in prices the increased costs which are already in the pipeline.

These are expansionary elements. It is, however, a matter of considerable concern that, on present indications, private industrial investment might well fall over the year ahead if there were no change in the climate of expectations. And the volume of imports is likely to rise faster than total demand and this will, therefore, tend to limit the growth of activity in the home economy.

As I have said, these forecasts are inevitably subject to much uncertainty. A great deal will depend on our success in moderating the rate of cost inflation. But, if the forecast which I have outlined is right, it is to be expected that, with no changes in policy—and I stress that—the trend of unemployment would continue to rise fairly strongly. Some recent estimates about the prospects for unemployment next winter are, I think, a good deal too pessimistic, but, nevertheless, a considerable rise in unemployment would be the most likely trend if no changes in policy were made in this Budget.

It will be clear from everything I have said that the economic problems which we face at present, and the problems which I have had to consider in arriving at my Budget judgment, are in many respects paradoxical and uniquely difficult. We have high and rising unemployment combined with rapid cost inflation. We have poor prospects for investment and a likelihood of relatively slow expansion of output in the immediate future; and at the same time a balance of payments situation which, although strong now, could easily deteriorate.

The first essential is that there should be no let-up in the fight against cost inflation. I have already said a good deal about this basic problem, and I would only add this. The Budget by itself cannot provide the answer to the problem of cost inflation. Nothing that has happened over these past few months has weakened my conviction that the only way in which we can deal with cost inflation is by means of a progressive and substantial de-escalation of pay settlements—[An HON. MEMBER: "Rubbish."] and this is the policy which we intend to pursue and to pursue with determination.

As far as fiscal and monetary policies are concerned, the first requirement is that they should not create any danger that demand inflation will be added to the present inflation stemming from rapidly rising costs. But the forecast which I have outlined—the pre-Budget forecast—suggests that this is not the main danger at present. It is much more probable that, in the absence of any change in policy, the pressure of demand would fall, and I do not believe that the fight against inflation would be aided at present by any further lowering of the pressure of demand. Despite the seriousness of the inflationary dangers which confront us, it would, in my view, be wrong to introduce a Budget which envisaged that the degree of slack in the economy should increase further. On the contrary, I believe that the fight against inflation itself requires that a greater confidence in the future progress of the economy should be created. And I believe that, unless this is done, there is a danger that investment will fall off to a degree that would damage the long-term growth and competitiveness of the economy.

The Budget Judgment

These considerations lead me to the conclusion that the Budget should provide some addition to demand. This leaves two questions to be answered—the magnitude of the addition which is required and the type of measures which would be most appropriate in the present circumstances.

The first question requires a difficult exercise of judgment. I have never made any pretensions to fine tuning, but my judgment is that the broad aim should be an addition to demand adequate to raise the rate of expansion of output to the rate of growth of productive potential, which is estimated to be about 3 per cent. The measures I shall be proposing are intended to increase demand in the economy over the year ahead by the amount needed to achieve that result.

If, after the measures I am about to announce have been allowed a reasonable time to have their effect, a further stimulus is needed, the usual instruments are always available. Here I should mention that I propose to extend for a further year the power to vary revenue duties and purchase tax by means of the regulator.

The need for this degree of addition to demand this year provides the opportunity to do certain things which are in themselves highly desirable. I think that the whole House will agree that much of the scope for tax relief should be used to assist the fight against inflation and to help some of those who are worst hit by it. At the same time, my aim is that this Budget should not only maintain an adequate rate of expansion of output in the year ahead but that it should also make some contribution to our capacity to grow in the longer term. It will do so, I believe, by re-establishing confidence and creating the conditions in which industry can make firm plans for a rising level of investment. With these aims in mind, I propose to use much of the scope for tax remission which exists this year to make a start on the more fundamental reforms of the structure of taxation which we shall carry out.

Before I come to my major proposals for taxation, however, I must deal with monetary policy in the year ahead and with a variety of other measures, both in the field of taxation and outside it.

Monetary Policy 1971–72


I think it is now well understood that, important as monetary policy is as a means of influencing demand generally, it has no special magic for dealing with cost inflation, and it would be inconsistent with my Budget judgment to restrict the growth of money supply so as to reduce demand below the level needed to achieve a growth of output in line with the growth of productive potential. But, equally, the supply of money must not be so plentiful as to produce an additional boost to demand beyond that intention. Nor must it accommodate any further impetus to the rise in costs and prices.

The Techniques Of Control

I now want for a few minutes to consider the techniques of monetary control, and to put forward certain proposals for consideration. It is recognised in every country that effective control of the monetary system is an indispensable part of economic management. By "effective" I mean that the authorities must be able to bring about any necessary tightening of the system when this is called for. But the techniques used should also be flexible and should allow scope for competition and innovation in the banking system.

The existing arrangements which we took over when we came into office are clearly defective on the score both of flexibility and of scope for competition. Despite the use of special deposits, these arrangements have continued to rely, more than I believe most of us on both sides consider to be desirable, on quantitative guidelines and on ceilings applied to bank lending. The use of these techniques over a long period is bound to lead to rigidities, and it perpetuates a rationing approach which is inimical to innovation in banking, and which tends to stultify competition. What I hope we can do is to break away from this approach.

I believe it should be possible to achieve more flexible but still effective arrangements basically by operating on the banks' resources rather than by directly guiding their lending. As bank lending to the private sector is only one element, but an important one, for effective management, this means devising a scheme capable of influencing the monetary system as a whole and the interplay between the different sources of credit creation.

A great deal of preparatory work and study has been done during recent months towards a more flexible regime on these lines. These ideas will now be fully explored between the authorities and the banks and finance houses.

If we can achieve a change in the direction I have indicated, it will be a major step forward. Inevitably there are real difficulties in making the transition. These difficulties will not be easy to overcome, especially since it would be wrong to take any undue risk of excessive monetary expansion. The House will realise that I can make no promise about the outcome, because it does not depend on the authorities alone. All concerned have to convince each other that flexibility can be combined with effective control.

Consumer Credit

One requirement of a new and more flexible regime is that it should deal comprehensively with the whole of the banking sector—taking account of the wide variety of banking business—and with other relevant credit-giving institutions. It is particularly important that it should operate effectively in relation to finance houses with their central role in the field of consumer credit.

And here I should refer to the valuable report on consumer credit by the

committee under Lord Crowther's chairmanship. The committee recommend that control over consumer credit

"should be subject 10 the general methods of quantitative monetary control"

and should not be singled out for selective methods of control. It also recommended the abandonment of terms control over hire-purchase contracts. Clearly these two points go together—the general methods of quantitative control and the control of consumer credit.

The present hire-purchase arrangements continue to make an important contribution to demand management, although their use as an economic regulator has been causing increasing concern over the years. But it is also vital for economic management that general methods of control can be developed effectively. This will be an important aspect for the consultations to which I have referred. Meanwhile the present hire-purchase arrangements must remain.

Guidelines For 1971–72

In the same way it will be necessary to maintain guidelines on bank lending while the new ideas I have mentioned are being explored. I am sure that the banks will understand the reasons for this and that we can count on their continued co-operation.

The present is a difficult time for assessing what is required. I do not wish to see companies in the present situation impeded by undue, stringency of working capital. I have therefore reached the conclusion that while the rate of growth of restricted lending must still be limited, the limit need not be so severe as it was under the 5 per cent. guideline announced by the right hon. Gentleman last year. For the time being it would not be inconsistent with our general objectives if this lending were to grow at a rate of about 2½ per cent. a quarter.

We shall, however, have to watch this carefully and it is possible that something less will be more appropriate later in the year. I hope that the banks—and finance houses, to whom this guideline will also apply—will channel this additional credit mainly to companies. The general guidance on the direction of lending still stands; in particular, restraint should continue to be observed in the field of personal lending.

What are the implications for money supply? In the first three quarters of the financial year 1970–71, as I have said, money supply rose on average by about 3 per cent. a quarter. The rise was 4 per cent. in the April-June quarter, about 1½ per cent. in July-September and 3 per cent. in October-December. Given the current growth of incomes, there would be dangers for liquidity and employment if we sought immediately to reduce the growth of money supply to much below 3 per cent. per quarter.

But this does not mean that I intend the growth of money supply simply to accommodate the going rate of inflation. As the rise in costs and prices is moderated, so the aim will be to slow down the growth of the money supply. This will depend on the progress we make in de-escalation. I do not want to prejudge this or appear to set a limit to what can be achieved by laying down now a firm objective for money supply for 1971–72 as a whole. But there is no question of relaxing our grip on the growth of money supply in relation to the growth of expenditure.

I believe that this approach is more appropriate this year than setting a quantified D.C.E. objective for the full year. In any case, D.C.E. is a less relevant indicator when the external position is strong. And I might also add, not by way of reproach or criticism, that on each of the two previous occasions when a D.C.E. objective was stated, the actual result was several hundreds of millions out, first in one direction, and then in the other.

Miscellaneous Measures

Social Security Benefits: Uprating

Before I come to the details of my taxation proposals, there is one important announcement I must make concerning direct help to those most hard hit by inflation—the old-age pensioners.

In our election manifesto we promised to review retirement pensions every two years to ensure that they at least maintain their purchasing power.

My right hon. Friend the Secretary of State for Social Services will be making a statement to the House about this and related matters, but we thought that it would be for the convenience of the House if I were today to outline the Government's proposals.

We intend to increase the standard pension for a single person by £1—from the present rate of £5 a week to £6. The standard rate for a married couple will be increased from £8.10 to £9.70. Other National Insurance benefits and war pensions will be correspondingly improved. The basic scale rates of supplementary benefits will go up by smaller amounts because of the interim uprating in November, 1970, but the increase from November, 1969, will be the same as for pensions. These increases will take effect from 20th September—

—the earliest practicable date. The period between the announcement and the implementation of the pension increases is about a month less than it was in 1969.

The cost of these improvements in National Insurance benefits is estimated at about £560 million in a full year, and will obviously involve an increase in contributions. On the last occasion when improvements in benefits were announced, in the Budget of 1969, the information concerning contributions was only given later. I think the House will agree that it is best to announce the payments and the benefits at the same time.

We have decided that the fairest way of financing this increase in pensions is by moving towards our long-term objective of fully graduated National Insurance contributions. The ceiling for such contributions will be raised from £30 to £42, and the rate of contributions on earnings between £18 and £30 a week will go up from 3·25 per cent. to 4·35 per cent. a side.

The rate of contribution on the new band of liable earnings, from £30 to £42, will also be 4·35 per cent. The ordinary flat-rate contribution will remain unchanged, although there will of course be increases for the self-employed and the non-employed. The Exchequer will contribute about 18 per cent. of the total contribution income. The pre-Budget forecasts to which I have referred take into account the increases in both pensions and contributions.

Tax Changes Consequential On Uprating

These increases in pension make it necessary to review the income tax age exemption—the provision which gives specially favourable tax starting points to people of 65 or over with limited incomes. I propose to follow the usual practice by raising these starting points in line with the increases in basic pensions. The single person's age exemption limit will be raised from £475 to £504 for 1971–72 and to £530 for 1972–73. and the married couple's limit from £740 to £786 for 1971–72 and to £825 for 1972–73.

As regards the marginal relief associated with the age exemption, the percentage figure which governs the relief has already been fixed at 47–5 per cent. for 1971–72, but in view of the very substantial increase in the exemption limits for 1972–73, I propose to make the figure 50 per cent. for that year in order to ensure that the marginal relief does not run too far up the scale.

Next, dependent relative allowance. It has long been the rule that the full allowance is given for maintaining a dependent relative who has only the standard National Insurance retirement pension. The dependant's income limit for the full allowance will therefore be raised from the present £260 per annum to £289 for 1971–72 and £312 for 1972–73.

I also propose to make a modest increase from £1,000 to £1,200 in the income limit up to which an elderly married couple can have their investment income treated for tax purposes as if it were earned. The limits for this relief—the age relief, as it is called—have hitherto been the same for single people and married couples, but I think it is reasonable to give a slight preference for the married.

Miscellaneous Tax Measures

I now come to a variety of important taxation proposals, before I deal with my major reforms.

(A) Taxation Of Wives' Earnings And Disaggregation Of Minors' Income

The Finance Bill will contain provisions to implement two particular undertakings in the Government's election manifesto. The first relates to the case where both husband and wife are earning. It is, as we said, a nonsense, and a substantial disincentive, that above a certain level of earnings a married couple can pay more tax than two single people with the same earnings.

I propose therefore that husband and wife should be able to elect to have their earnings charged to tax as if they belonged to separate individuals, but on condition that the husband receives the single personal allowance instead of the married allowance. For administrative reasons this new provision cannot come into effect until the tax year 1972–73. The full year cost is estimated to be about £12 million.

I also propose to repeal, again with effect from the tax year 1972–73, the previous Government's legislation under which the investment income of young children generally is taxed as if it were the income of their parents. I am convinced that that legislation was misconceived. I propose at the same time to reduce to 18 the age at which a child's income derived from its parents ceases to be treated as the parents' income. This follows the recommendation of the Latey Committee on the Age of Majority.

(B) Pension Schemes

Next, occupational pension schemes. The House will remember that last year's Finance Bill contained Clauses dealing with these schemes and that, because of the imminent dissolution of Parliament, they were accepted without much debate.

We gave an undertaking to review these provisions, and this we have done, in consultation with those most concerned with the provision of pension schemes. I recognise the practical difficulties facing the F.S.S.U. (the Federated Superannuation System for Universities) and similar schemes in coming to terms with the new rules and, though I cannot accept their claim to be allowed to remain as they are indefinitely, even as closed schemes, I think that the case has been made out for a fairly long transitional period before existing schemes must conform with the new tax code. I propose accordingly to defer to 1980 the appointed day for universal conformity with the new rules.

An earlier appointed day will however be appropriate in the case of entirely new schemes or schemes which are making substantial changes in their rules and I propose therefore that in those cases conformity with the new rules shall be required where tax approval is sought after 5th April, 1973.

The reduction in the "death in service" benefit proposed by last year's legislation has been much criticised as too severe, and I agree with those criticisms. The maximum lump sum—as distinct from widow's or dependant's pensions—which could be provided on death in service was then fixed at two years' salary. I propose to raise this figure to four years' salary exclusive of any return of contributions. This should give schemes much more flexibility.

I propose also to improve the arrangements under which the self-employed and employees for whom a pension scheme is not available can get tax relief for premiums paid to provide themselves with a retirement annuity. In the first place, I propose to raise the limits on the qualifying premiums. These were fixed as long ago as 1956 at 10 per cent. of relevant earnings up to a maximum of £750 per annum and are now clearly out of date; I propose to raise these limits to 15 per cent. and to £1,500.

That is why I glanced at my hon. Friend.

This will permit substantially better annuities all the way up the earnings scale. These changes will take effect as from the tax year 1971–72.

There is one other change I propose for the same category of people—the self-employed and employees for whom a pension scheme is not available. This will enable part of the annuity to be taken in the form of a tax-free lump sum. This is not permissible at present: but now that lump sums may be allowed in all occupational pension schemes, I do not think it right to maintain this ban. I propose therefore that, for annuities which begin to be payable in 1971–72 and later years, an amount approximating to that allowed in occupational schemes can be taken in the form of a lump sum.

(C) Capital Gains Tax

I turn now to capital gains tax where I have a number of proposals which will simplify the tax system considerably, produce a really useful saving of work for taxpayers and their advisers as well as for the Inland Revenue, and encourage savings.

First, I propose a change in the arrangements for exempting the small gains of individuals. The present exemption for small gains of £50 or less saves very little work, because in most cases it involves a computation of the annual gains and losses to see whether the exemption applies. I propose instead to adopt the disposal proceeds as the criterion and to give exemption where the total proceeds of disposals in the tax year do not exceed £500. This proposal will take out of liability, at small cost, about a quarter of the total of individuals at present liable to capital gains tax—nearly all of them people of modest means. The new relief will apply for 1970–71 alongside the £50 exemption for that transitional year.

Next, I believe that the time has now come to abolish the distinction between short-term and long-term gains. The short-term tax was fully justified when we introduced it in 1962; but, now that we have a general tax on capital gains, the additional yield from the higher charge on short-term gains, which is only about £11 million, is in my view too small to justify the complexities which result from having two sets of rules. For 197172 and subsequent years all gains will be subject to the long-term capital gains tax whatever the length of the period of ownership, and the short-term tax will be abolished. Gains on gilt-edged securities realised within 12 months will similarly be charged to capital gains tax if they are held for more than 12 months they will of course continue to be exempt.

The third important change which I propose is the abolition of the charge to capital gains tax on death, including the death of a life tenant. To impose this charge on an occasion when the estate, including the accrued gains, is already being charged to estate duty at rates which rise to 80 per cent. results, in my view, in an altogether excessive burden, and this can cause particular difficulties for family companies. I therefore propose to remove it for deaths after today. The associated 15-year charge on discretionary trusts, which are now within the ambit of estate duty, will also be removed. The cost will be negligible in 1971–72 and the net cost for a full year, after allowing for the additional estate duty, will be about £15 million.

(D) Estate Duty

I have been very anxious to find some way of mitigating the burden of estate duty. It is widely regarded as severe and represents a real disincentive to saving. This is a duty which hon. Members on both sides of the House recognise can cause particular hardship in the case of the smaller estates.

I therefore propose to raise the starting point for liability from the present £10,000 to £12,500. This change will exempt almost a quarter of the total of estates now liable to estate duty. The cost will be £20 million for a full year and £10 million in 1971–72. This proposal will take effect in respect of deaths occurring after today.

I am also very conscious of the difficulties which the burden of estate duty can cause for a continuing family business when the proprietor dies. I am therefore proposing a measure of relief for unincorporated businesses and for certain unquoted shares in a family company by spreading the payment of the duty over an eight-year period. I propose to allow the same spread for estate duty on leasehold property.

(E) Building Subcontractors

There has for some time been concern about the extent to which some subcontractors in the building and construction industry, especially those who are commonly known as "labour-only" subcontractors, have been evading the payment of income tax. The Finance Bill will contain measures to end this abuse and my hon. Friend the Financial Secretary will be explaining them later in the debate.

(3) Savings

I come next to savings. The Government are pledged to encourage all forms of personal saving, and saving at every level of earnings. There has been a welcome rise in savings recently. Personal savings provide the family with independence and security; and they provide the nation with the funds with which either to increase investment or reduce taxation. A wide diffusion of ownership and savings is an essential part of personal freedom.

We have a highly developed and in many ways sophisticated savings market in this country. The saver has a considerable range of media to choose from, and what seems to me to be important is not so much to add to this already wide range but to improve existing media which have proved their worth, and—perhaps more important—to remove obstacles and disincentives, both general and particular, which discourage savings.

I had these considerations very much in mind in deciding on the changes I have already announced in the capital gains tax and in estate duty.

There are many powerful motives for saving, but two stand out. The first is the desire to provide for old age and for dependants. The changes I have already announced in the tax arrangements for pension schemes will help and encourage this.

The second motive for saving is the desire for home ownership. The stamp duty on mortgages is an extra burden on people setting out to buy their own homes. I therefore propose, with effect from 1st August, to abolish the stamp duty on mortgages together with the related duty on deeds of covenant. The cost will be about £3½million in a full year and £2 million in 1971–72.

Improvements in National Savings were made as soon as we took office, and the performance in recent months has been good. In the six months up to the end of February, the amount remaining invested in National Savings increased by over £200 million, compared with an increase of only £4 million in the corresponding period of the previous financial year.

I now propose some further improvements.

First, Premium Bonds. Starting in August, there will be a monthly prize of £50,000, in addition to the existing weekly prize of £25,000. To make this possible the size of the prize fund will be increased. In addition, the present limit on individual holdings will be increased from £1,250 to £2,000 from 1st April. These changes will make Premium Bonds even more attractive.

Next, Save As You Earn. From September, the upper limit on monthly contributions under S.A.Y.E. contracts will be raised from £10 to £20, and contributors will be allowed to take out more than one contract a year within the new maximum amount. These changes will benefit all the Save As You Earn schemes, and will therefore encourage savings in building societies as well as National Savings.

British Savings Bonds are another way of encouraging stable savings. A new issue of bonds will be on sale on 3rd May, and as an added incentive to savers to hold them to maturity the tax-free bonus payable at the end of five years will be increased from £2 to £3 per cent.

The Decimal Issue of National Savings Certificates announced last July has done well. We shall build on that by increasing the limit on individual holdings from £500 to £1,000 from 1st April.

The success of National Savings depends not only on the Government's decisions, but on the loyalty and enthusiasm of the army of voluntary workers under the leadership of Lord Birsay, the Chairman of the National Savings Committee for Scotland, Sir Robert Bellinger, the Chairman of the National Savings Committee for England and Wales and their colleagues. This voluntary work is of great national importance and I would like to pay my tribute to all those who work for the movement.

The National Savings Movement has developed over a period of 150 years and I believe that the time has come to take a fresh look at the whole system through which the Government offer these services to the small saver. Some of those involved in the National Savings field have made suggestions which raise fundamental questions about the future role of the organisations—the National Savings Movement, the Department for National Savings and the Trustee Savings Banks—and their relationship with the Government and with their competitors. I have therefore decided to appoint an independent committee to examine these matters and to make recommendations to me. It will have wide terms of reference and I am pleased to announce that Sir Harry Page, the retiring City Treasurer of Manchester, has agreed to serve as Chairman. Copies of the terms of reference are being placed in the Library.

Company Taxation

The Structure Of Corporation Tax

I now come to a consideration of the basic structure of corporate taxation, personal direct taxation and indirect taxation, and I will deal with each in turn.

First, corporation tax. From the moment when the introduction of the corporation tax was announced, we made it clear why we were opposed to the particular form which had been chosen. Nothing that has happened since then has caused us to alter that view, and I therefore intend to reform the structure of the tax.

But there are two reasons why it is not appropriate to legislate this year. First, I want to give adequate time for consideration and consultation, because in this case there is more than one method of achieving what we have in mind. The proposals are therefore being published in a Green Paper which will be available today. The second reason why it is preferable not to legislate this year is that the changes we make in this country should have regard to the developments in company taxation within the E.E.C. But my intention is that, unless something unforeseen occurs, we should legislate next year.

The main reason why we regard it as essential to reform the present structure is that we are, and always have been, opposed to the substantial discrimination which it entails in favour of retained as opposed to distributed profits. This discrimination distorts the working of market forces and so tends towards the misallocation of scarce investment resources.

The present system makes it difficult for companies that need to raise equity capital from the market. And it lessens the pressure of the market and the shareholders on the efficiency of the company and on the profitability of new invest- ment. But there is another and very important reason why I am convinced that the change must be made. The particular form of corporation tax chosen in 1965 required very considerable anti-avoidance measures in respect of close companies, and this has led to a great deal of complex administration with little advantage to anyone.

We have therefore been considering a number of forms of company taxation which would remove these objections. The conclusion we have reached is that the present system of corporation tax should be replaced by one which would be neutral as between distributed and undistributed profits. On domestic grounds our preference would be to secure this result by a two-rate system of company taxation. Corporation tax would be paid at a lower rate on distributed than on retained profits. When the company paid a dividend it would, just as at present, deduct income tax and pay it over to the Revenue. The rates of tax could be so fixed that the tax burden on distributed profits, taking income tax and corporation tax together, would be at the same level as the corporation tax alone on undistributed profits. Among other advantages, this method would reduce considerably the regulation to which close companies are subject, and it would allow a treatment of overseas income which I believe would be fair and reasonable.

This is not, however, the only way to achieve the objective. For example, there is an alternative system under which all company profits, whether distributed or not, are taxed at the same rate, but part of the corporation tax on the distributed profits is treated as a payment on account of the shareholder's eventual income tax liability on his dividends. This system, normally known as the imputation system, can in substance be very similar to a two-rate system and we should certainly consider adopting it here. Clearly developments in Europe will be a factor affecting our choice.

However, as I have said, our present preference on domestic grounds is for a two-rate system, and for this reason the Green Paper sets out the way in which the proposed corporation tax changes would operate primarily in terms of such a system. But it also describes the main respects in which an imputation system would differ in its operation. I hope that representatives of industry, commerce and the professions will study both systems and make known their views. I believe that this reform will do much to revive equity investment and with it the health of our economy.

The Rate Of Corporation Tax

That, then, is how we propose to reform the structure of corporation tax. But we need not only to reform the structure but also to reduce the burden of the tax. I have already referred to the marked fall of the share of company profits in the total of domestic incomes, and this in turn has contributed to a slow-down of industrial investment. Sustained growth can only be based on an adequate level of profitability not only before tax but after tax as well.

In October we reduced the rate of corporation tax payable for the financial year 1969 by 2½ percentage points to 42½ per cent. I now propose a further cut to 40 per cent. to be operative for the financial year 1970, that is, in respect of the tax generally payable on 1st January, 1972, on profits earned in the twelve months from 1st April, 1970. The cost of this change will be £55 million in 1971–72 and £105 million in a full year.

Close Companies And Capital Allowances

One part of the tax code which has come in for considerable criticism is that which governs close companies. I am very conscious of the burden which some of the close company provisions, particularly those relating to shortfall, now place upon directors and their advisers. I therefore propose to take steps this year to alleviate it in advance of the major reform which I have already announced.

As the law now stands, trading companies do not have to justify the level of distributions out of their trading income if that income is less than £1,500. I propose to raise this limit to £5,000, with marginal relief up to £15,000, and to extend the exemption to investment income provided that it does not exceed 10 per cent. of the trading income or £500, whichever is the less. These changes will simplify substantially the administration of the shortfall provisions both for the Inland Revenue and for the professional advisers of companies. The important consequence of this change is that it will remove altogether from the scope of the shortfall provisions more than half of the trading companies which at present fall within them. The cost is estimated to be £2 million in the first year and £3 million in a full year.

These proposals are part of what I hope will be a continuing process of simplifying business taxation. I should remind the House that I began this process when I announced last October the new and simpler system of tax allowances for capital expenditure, and on this I can now announce a further small step. The Finance Bill will contain new rules for calculating these allowances which, for the continuing business, will largely dispense with balancing charges and allowances when machinery or plant bought since last October is disposed of.

Personal Direct Taxation

I come now to a major reform in the structure of personal direct taxation. Few people would deny that our existing system is too cumbersome, too complex, and in many respects absurd. We have two taxes on personal income—ordinary income tax and surtax. Each of these is subject to separate and often different rules. They are computed and collected separately and at different times. There is no sense in this division—it is simply an historical anomaly.

And there are other absurdities in the system, too. Many of them arise from the fact that the system of personal taxation is structured in terms of investment income, with a complicated pattern of allowances for earned income, despite the fact that earned income constitutes almost 95 per cent. of the total income brought under charge. This causes considerable misunderstanding of the real value of allowances, of the level of tax thresholds, and of the real marginal rates of tax. Many people think that their marginal rate of tax is much higher than it actually is because they confuse it with the standard rate.

What we need, therefore, is to replace the existing income tax and surtax, as we now know them, with a single graduated personal tax. Hitherto, such a major upheaval has always been regarded as well nigh impossible.

Nevertheless, I am convinced that, despite the difficulties, nothing but a root and branch reform will meet the need for a more sensible and intelligible system of personal direct taxation.

I propose, therefore, to replace the existing income tax and surtax with a single graduated personal tax with the following four principal features.

First, the existing pattern of personal allowances will be substantially retained although, as I shall explain, the amounts require adjustment to ensure that they will approximately retain their equivalent value.

Second, the tax structure will be founded on a basic rate covering a broad band of income and corresponding to the standard rate less earned income relief.

Third, there will be higher rates above the basic rate applicable to the higher incomes.

Fourth, while it will still be necessary to retain the distinction between earned and investment income, this distinction will be made by way of a surcharge on investment income in place of the present earned income relief. But it will be an essential feature of the new system that this surcharge will only apply above a certain level of investment income, so that the first slice of such income will be taxed at the rate applicable to earned income. I regard the discrimination against investment income in its present form as a serious discouragement to saving and I am sure that this must be changed.

This, then, is the essential structure, and I must now explain how it is to be achieved. The process will involve a good deal of detailed legislation. This will be in this year's Finance Bill. The Inland Revenue will then be able to proceed with all the administrative planning required for this major change. A complete P.A.Y.E. recording will be required and this will be done during 1972–73. The new system will come into full operation from 6th April, 1973. It cannot be done earlier for reasons which I shall make clear in a moment.

The provisions of this year's Finance Bill to give effect to these reforms will inevitably be quite complex; and for the benefit of the House and of the public and the professions, I am arranging for an explanatory White Paper to be published with the Bill.

It is obviously desirable that the change-over to the new system should be achieved in such a way that the yield of personal direct taxation over the period of change-over can be maintained, or adjusted as the case may be, to meet short-term requirements. For the purposes of this year's Finance Bill provisions, the basic rate under the new structure will be put provisionally at 30 per cent., but of course this will not commit us to that rate in 1973–74. A final decision on that point must be taken in the light of the circumstances at that time in exactly the same way as in any other year.

The Bill will also make provision for the higher rates of tax and the surcharge on investment income. But here again, the actual rates and the starting point for the surcharge, all effective from April 1973, will be fixed in the Budget of that year. Finally, the Bill will fix, provisionally, the personal allowances so that they will approximately retain their equivalent value in the new system. Because the new system will be expressed in terms of earned income, it follows that the amounts of the allowances must be adjusted to take account of the present two-ninths earned income relief. The actual figures will appear in the Finance Bill, but the purpose of these adjustments, as I have made clear, will simply be to ensure that they retain their equivalent values in the new system.

The new system, when it comes into force, will involve substantial changes in administration. From 1973–74 deductions under P.A.Y.E. will extend to the full graduated scale of rates, and these will also be applied to assessments on business profits. Income tax will be deducted from dividends and interest at the basic rate, provisionally fixed at 30 per cent., and the higher rates of tax and any surcharge payable will be assessed separately. Because surtax will cease to apply after the year 1972–73, the work of the Surtax Office will come to an end in due course and the change will therefore lead to a substantial saving in staff.

The change-over will, of course, in no sense involve double taxation but, because we shall be moving to a new system of current payments at both the basic and the higher rates on the graduated scale, it will mean that in the one year 1973–74 some taxpayers will be paying this tax on their current earnings, and also surtax in respect of their earnings for the previous year. Those affected have more than two and a half years' notice but, even so, I realise that there may he difficulties for some and, to help them further, payment of part of any substantial sums of surtax for 1972–73 on earnings will be allowed to be deferred for one year.

It is desirable not only that we should legislate for the change-over now, but also that we should, where possible, move closer to the sort of pattern which I hope we shall be able to establish in 1973. My decision last October to reduce the standard rate was the start of this process; it brought the standard rate down to 38¾ per cent. and made the effective rate on earned income, after taking account of the two-ninths earned income relief, approximately 30 per cent. I now have two further proposals to make, both of which are highly desirable in themselves and in line with the immediate need, which I have already explained to the House, to give some additional stimulus to the economy this year.

First, I believe it is accepted on all sides of the House that there is an urgent need to take action to help families with children. The child allowances have remained unchanged since 1963. It is generally agreed that the tax threshold for families with children is unduly low. I have therefore decided that the great bulk of the personal tax remissions this year should go to taxpayers with children. I propose to increase all the child allowances by £40.

The benefit to the family man will be substantial. For instance, for the family with two children the tax threshold will be raised by about £103 a year or nearly £2 a week and the tax—where there is full liability—will be reduced by £31 a year. Or consider another example, where the father is earning £28 a week, which was the average for adult male manual workers shown by the latest Department of Employment inquiry for October. In this case, the father with two young children will, in addition, save £13 a year as a result of the reduction in the standard rate, making a total cut in his tax bill of £44 a year. The comparable tax reduction for a three-child family is over £58 a year. The House will agree that these are worth-while reliefs for families where help is most needed.

I hope and expect that the new P.A.Y.E. code numbers will be issued in time for people to benefit in their pay packets at latest by the first pay day after 5th July. The major recoding operation necessary for this change is one of the main reasons why unification of income tax and surtax cannot start sooner; but I took the view that this tax reduction for families should have priority. Further details of the effects of the reduction in the standard rate and of the increase in child allowances will be found in the Financial Statement and Budget Report.

Although there will be no change in the rates of surtax for the year 1970–71, my second priority, in the field of personal taxation, is the need to rationalise the present absurd marginal rates on large earned incomes. In the coming year, the new rate of income tax on earned incomes—effectively 30·14 per cent.—applies to all earned income up to £4,005 a year. Above that level the marginal rate of tax increases rapidly and erratically, partly because of a reduction in the earned income relief to one-ninth and its disappearance above £9,945 a year, and partly because on earned incomes above about £5,500 a year surtax begins to be payable as well as income tax. The combined effect is to produce a steeply rising graduation reaching a top rate of 88¾ per cent. on earned incomes exceeding about £18,500 a year. It would have been 91¼ per cent. but for the cut in the standard rate which I announced last autumn. I regard such a top rate as confiscatory. It has no parallel in any western community; it serves no fiscal purpose, no social purpose, no economic purpose.

The top rate of tax on earned incomes which I have in mind for the new system is 75 per cent. reached at a level of about £20,000 a year. This objective can, for all practical purposes, be achieved straight away by increasing the earned income relief above £4,005 a year from one-ninth to 15 per cent. and at the same time abolishing the upper limit. This will give a top rate on earned income of 75·4 per cent. reached at about £20,500 a year. It also produces a smoother and better graduation over the full range of income above the band at present effectively charged at 30·14 per cent.

This change, like the improvement in the child allowances, will take effect for 1971–72. When the new system comes into force in 1973, the new unified scale of higher rates will replace the scale which I have just described.

The cost of the improvements in the child allowances will be £163 million in 1971–72 and £207 million for the full year. The cost of the relief for the higher earned incomes will be £16 million in 1971–72 and £38 million for the full year, divided roughly equally between income tax and surtax.

Income tax has been with us on and off since 1799. Surtax was introduced, as super-tax, in 1909. Sir Winston Churchill took the first steps to amalgamate the income tax and the supertax in 1928. It is high time we finished the job, and my proposals will do just that.

Paye Non-Cumulation

Before I leave the field of personal direct taxation, I must mention a major administrative simplification which is being considered. We have been thinking about the whole structure of the P.A.Y.E. system. This has now been operating much in its present form for 25 years, although the Revenue have begun a mechanisation programme under which, by the end of this decade, the P.A.Y.E. work of tax offices would be concentrated in a number of centres where many of the clerical operations would be carried out by computers. P.A.Y.E. in Scotland is already dealt with in this way.

This mechanisation programme would yield significant staff savings in the long run, but I came to the conclusion that the possibility of more fundamental changes in P.A.Y.E. should be considered. The Revenue have therefore begun a study into, among other matters, what would be the likely impact on the public, on employers and on the Department, if P.A.Y.E. were replaced by a non-cumulative system of deduction of tax from wages and salaries—that is, a system under which the tax deduction from any payment to an employee is made without taking account of previous payments and tax deductions. Because any such change in P.A.Y.E. would almost certainly involve substantial alterations in departmental organisation and in the Department's intended computer profile, management and computer consultants have been engaged to take part in this study and—as my hon. Friend the Financial Secretary announced on 7th December—the present mechanisation programme has been largely suspended. As soon as the studies are sufficiently advanced, the Revenue will get in touch with representative bodies for industry, commerce and the public to seek their comments on possible changes.

I know that the suspension of the present P.A.Y.E. mechanisation programme has caused some anxiety in towns where the computer centres were to be set up and I am therefore aware of the need to reach a decision as soon as possible. Several years' preparation will be necessary if it is decided to make the change to a non-cumulative system of P.A.Y.E.; but, if we do so decide, the further saving in the staff of the Inland Revenue would in due course be very great.

Indirect Taxation

I come now to the reform of indirect taxation. In our election manifesto we said this:

"We will abolish the selective employment tax, as part of a wider reform of indirect taxation, possibly involving the replacement of purchase tax by a value-added tax."

We also made it clear that no decision would be taken on a value-added tax until the case for it had been thoroughly investigated with the help of the Civil Service.

That review is now complete, and it has involved the Customs and Excise Department in a very full study of the introduction of a V.A.T. in this country. They have examined the systems of V.A.T. in other countries, and they have visited some of them so that they could see at first hand how the tax worked. For reasons which I shall explain shortly, I have decided that, as from April, 1973, both S.E.T. and purchase tax will be abolished and a value-added tax will become operative. A Green Paper is being issued today. It will be the basis for comprehensive discussions and consultations about the administrative and other details of the tax, and legislation will be introduced next Session. This will involve the most fundamental change in our scheme of indirect taxation since purchase tax was introduced just over 30 years ago.

We have frequently explained why we consider S.E.T. to be a thoroughly bad tax. It is unfair and it is arbitrary. It discriminates between one employment and another in a way which is quite indefensible—both in general and in detail. The distinction between manufacturing and services is in fact quite untenable. Moreover, the scheme of the tax involves the Government in collecting some £2,000 million with one hand and giving back nearly £1,500 million with the other—but after an interval. The result is that even those who are in no way liable to the tax have to make a forced loan to the Government. For these and other reasons the tax is almost universally disliked.

Purchase tax has some obvious advantages, but it also has one major disadvantage, and that is that it bears particularly heavily on a limited number of goods and not at all on services. The desire to broaden the base of indirect taxation was, I believe, one of the reasons why the previous Government decided to raise additional revenue from the S.E.T.

I have, of course, considered a number of alternatives—

One suggestion that has been made from time to time is that S.E.T. should be replaced by a general employment tax. Such a tax would certainly be simple to collect, but it has one overriding and I believe conclusive disadvantage. Under the international rules, such a tax would not be rebateable on exports nor chargeable on imports. It would for this reason have a serious adverse effect on our balance of payments in comparison with the continuation of the present combination of purchase tax and S.E.T., even though these taxes also enter to some extent into export costs. Apart from other considerations, this effectively rules out a move to a general employment tax.

S.E.T. and purchase tax at present add an estimated £60–70 million a year to our export costs, and the replacement of purchase tax and S.E.T. by a value-added tax will enable us to remove the whole tax charge from the prices of our exports and to impose it on imports, and to do so on a basis compatible with our international obligations. But there is much more to it than that. The value-added tax is, by its nature, a comprehensive tax, and its introduction in this country will produce a much fairer system of indirect taxation.

At this point, there is one aspect that I should make clear. The decision to replace our present system of selective taxation by a broad-based value-added tax should not be interpreted as meaning that we are proposing universal coverage at a single rate. We have made it clear that food will be relieved of the tax, except perhaps those few items already subject to purchase tax, and also newspapers, periodicals and books. And there will be an exemption for small traders. There are also arguments for special treatment in other cases. But I must stress that it will not be possible to entertain too many of these special cases or one of the main points of the new tax will be lost. As the new tax will not become operative until April, 1973, the precise rates and coverage are matters for decision much nearer the time of introduction and, until those decisions are taken, it is impossible to say what effect the change-over might have on the cost of living.

A great deal of preparatory work will be needed before the new tax can be brought into effect. It must be based on firm foundations and its design must take into account the practical problems of particular sectors of the economy. It is for this reason that I decided to issue a Green Paper, as a basis for consultation with those concerned. The period of two years that I have allowed for the preparatory work is less than the time taken by many other countries to introduce a value-added tax.

I mentioned that, in our review of indirect taxation, we have had the advantage of the experience of other countries. The list of countries overseas which have introduced a value-added tax is long and growing. Its advantages are becoming more and more widely recognised. The E.E.C. has adopted it as the common form of turnover taxation for its members and, if our application to join the Community is successful, we shall in any event be required to introduce it here. But this is not the main reason for its introduction here. The value-added tax, on its merits, is a better tax than either S.E.T. or purchase tax. It is, I think, significant that, outside the E.E.C., Norway, Sweden and Denmark have already introduced a value-added tax as being, in their view, the best form of general indirect taxation. Ireland will do so shortly, and other countries have it under consideration.

The Green Paper to which I referred will serve two purposes. First, it will explain the system to those who will be affected by the new tax. Second, it will provide the basis for consultations in the coming months with trade and professional associations and with other interested parties so that legislation can be drafted. As I have said, the Bill will be introduced next Session.

The Government arc pledged to abolish S.E.T. I must tell the House that my regret is that this tax which, as I said, is so disliked, but which now yields some £500 million a year, cannot be abolished this year.

I have, however, decided that as from the earliest practicable date, 5th July, all the rates of S.E.T. shall be cut by half.

I will wait until you are ready. May I congratulate the Government on having half kept a promise.

Order. The whole House is very pleased to see the hon. Gentleman back in his place, but I hope that he will not take too much advantage of the good will of the House towards him, which is very real, by raising points of order which he knows are not points of order.

I should now like to give the House the new rates. I am sure that both sides of the House would like to know what the new rates will be. The new rates will be £1.20 for men, 60p. for women and boys, and 40p. for girls.

This reduction of S.E.T. by one-half will help in the fight against inflation, for it will have a direct influence on prices—both prices to consumers and prices which enter into industrial costs. This reduction in S.E.T. will also cut by one-half, or upwards of £100 million, the average amount outstanding of the forced loan from manufacturing industry to the Government, which arises from the arrangements for collection and repayment. In this way it will strengthen the liquidity of companies in manufacturing as well as in service industries and so help with the financing of working capital and investment.

In revenue terms, the net cost of the reduction in S.E.T. will be £290 million in 1971–72 and £245 million in the following year. In demand terms, it will play an important part in providing the additional stimulus which, as I said earlier, I consider to be necessary, although the effect on demand will be less than the revenue cost, and will build up gradually.


This Budget has been concerned with longer-range plans for reform as well as with the immediate measures which the economic outlook now requires. These latter measures will lead to a reduction in revenue of £546 million in 1971–72, and about £680 million in a full year. The effect on demand in 1971–72 will be substantially less than the cost in terms of revenue, but, as I have said, my aim is to raise the rate of growth of output over the year ahead to about the rate of growth of productive potential.

For 1971–72, the central Government's borrowing requirement is now forecast to be a little over £600 million and that of the public sector as a whole about £1,200 million. This figure may seem large—and it would have been somewhat larger, but for the postal strike—but the public sector borrowing requirement is in no sense a measure of the extra spending power which will be injected into the economy by the Budget. The monetary policy which I have announced reflects my determination not to allow an undue expansion of the money supply. Overall, the balance of fiscal and monetary policies is intended to produce the right stimulus to demand in the circumstances we face at the present time.

I have dealt with a large variety of taxation proposals this afternoon, including estate duty, capital gains tax, and other proposals. But it may be helpful to the House if I conclude by summarising the basic programme for taxation reduction and reform over the next two years.

As from 6th April, the cut in the standard rate of income tax will become effective for all taxpayers.

As from the same date, the increases in the child allowances will take effect. At the same time, the penal rates of taxation on the higher earned incomes will be reduced.

As from 5th July, all the rates of S.E.T. will be cut by half.

In this year's Finance Bill, we shall legislate to replace the existing income tax and surtax with a new and simpler system of personal taxation. The Bill will provide also for the reduction of corporation tax.

During the coming months, we shall he consulting representatives of industry, commerce and the professions about the reform of corporation tax and about the value-added tax.

Next Session, we shall legislate for the introduction of the value-added tax.

In April, 1972, we expect to be ready to announce our decisions for the reform of corporation tax, and to implement them in next year's Finance Bill.

Finally, by April, 1973, all the legislative and administrative processes will be complete and the reforms will come into full effect.

I must pay tribute to the magnificent co-operation of the Revenue Departments. The Inland Revenue and the Customs and Excise tell me that these changes constitute the most comprehensive and far-reaching reform of the tax system this century. The magnitude of the operation, to be completed within two years, is self-evident.

It is right that I should end with this warning. All our hopes for the future will be but dust in our mouths if we do not repel the assault upon the value of our money. This must remain our first priority.

This Budget alone will not solve all our economic problems; but it does herald a new approach, an approach based on the belief that lower taxation and simpler taxation will, over the years ahead, help to create a new spirit—a new spirit of personal endeavour and achievement which alone can provide our nation with growing prosperity.

I remind the House that there are a further 15 Resolutions to be put to the House on the last day of the debate. The only one which we are now to debate is No. 1, and the remainder will be put from the Chair—in condensed form, I hope—on Monday.

Amendment Of The Law

Motion made, and Question proposed,

That is it expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but—

  • (1) this resolution shall not authorise the making of amendments of the enactments relating to purchase tax, other than amendments about the remission of tax on exported vehicles, and other than amendments making the same provision for chargeable goods of whatever description, or for all goods to which any of the several rates of tax at present applies; and
  • (2) neither this resolution nor any resolution relating to selective employment tax shall authorise the making of amendments of the enactments relating to selective employment tax so as to give relief from tax—
  • (a) by way of exemption from, or a reduction in the rate of, tax except in respect of all persons of the same descriptions relevant for determining the rate of the employer's flat-rate contribution with which the tax is combined, whether that contribution is under the National Insurance Acts or under the corresponding enactments in Northern Ireland; or
  • (b) by way of providing for payments to employers of an amount equal to the whole or a specified part of the tax paid if the proposed provision—
  • (i) is in respect of employers in, or at establishments in, part only of Great Britain; or
  • (ii) extends to employers in, or at establishments in, Northern Ireland; or
  • (iii) is in respect of all persons in any particular description of employment in all parts of Great Britain, and relief in respect of the whole of the tax paid could be given in respect of that description of employment by an order under section 9(1)(a) of the Selective Employment Payments Act 1966 adding that description of employment to the employments to which section 1 or 2 of that Act applies; or
  • (c) by adding or removing any employer to or from the employers to whom section 3 of that Act applies, or
  • (d) by amending the provisions of Schedule 1 or Schedule 2 to that Act.—[Mr. Barber.]
  • 5.26 p.m.

    It falls to me—in this, I speak for the whole House—to congratulate the right hon. Gentleman the Chancellor of the Exchequer on the manner in which he presented his Budget, on his clarity and felicity of expression, and on the helpful way in which he marshalled the compendium of facts and proposals necessary to the presentation of his case to the House. It can assuredly be said that he maintained the interest of the House to the end of his speech, and I am sure that he will be glad to feel, as the whole House feels, that this has been his best speech—I am referring still to the form rather than the content—that he has made in this Parliament.

    As to the content of the speech, on both his analysis and doctrine and his proposals the right hon. Gentleman will find us significantly less enthusiastic. The reasons for this will be successively deployed by my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins), the former Chancellor, when he seeks to catch the eye of the Chair tomorrow, and by others of my right hon. and hon. Friends who will be speaking both from this bench and from the benches behind me.

    My first impression is that, judged against the opportunities open to the Chancellor and the clear priorities which he should have followed, this Budget fails to rise to the occasion with which he was presented. [Laughter.] When they have got over their Budget euphoria and looked across the two-year period and what the Chancellor has announced, hon. Members opposite will be less than enchanted by it, because it is a two-nations Budget, in both direct and indirect taxation.

    The right hon. Gentleman's presentation was clever. He has offered the family man in direct taxation reliefs 12s. a week on child allowances, but this will be eroded by price increases—on present form—within weeks; and he has done this in 'order that he may feed his lambs in the four top surtax classes. Perhaps the right hon. Gentleman will tell us when he replies to the debate how much of that 12s. a week reduction must be paid for by that same man in the increased stamp contributions which he announced this afternoon and of which he did not give us the details.

    I shall come to the S.E.T.-V.A.T. question in a few minutes, because the proposed change will mean for the average family very large increases in the cost of living.

    Certainly, it will. That is why the right hon. Gentleman refused to mention it throughout the election campaign. The least the Prime Minister can do now, as a debt of honour, is to bring back the Tory Central Office official whom he sacked during the Election campaign for blowing the gaff on V.A.T.

    The Chancellor must have realised the priorities he had to meet in this Budget. The first was to attack the present intolerable and rapidly-growing unemployment, which under the right hon. Gentleman has now reached 750,000, so often forecast by the Prime Minister for us. The right hon. Gentleman should have attacked this by soundly-based policies for growth, of which we saw no evidence in his speech this afternoon.

    Second, he should have announced measures designed to stabilise prices, which we have not had—

    Certainly not S.E.T. I will come to S.E.T. in a moment, as the Prime Minister knows I will.

    The third priority for which we called was for something to be done for pensioners. We all welcome the fact that the Chancellor has offered the increase of £1 a week, but he will know from an answer given by one of his colleagues yesterday that since November, 1969 the value of the pension has already been reduced by 50p, half the amount he is talking about, and the greater part of that fall has occurred since the present Government came to office. To delay the payment of the increased pension until September means that by then the value of the pension will be very little above what it was two years ago.

    The Chancellor knows that in economic terms he is starting from a situation in which we are spiralling down into the deepest recession since the War. On top of that, successive shocks to confidence, such as the Government's bilking on the Mersey Docks and Harbour Board and then the big-time default on Rolls-Royce, have produced a new situation in industry, where confidence is rapidly disappearing.

    The Chancellor has set out today to create some degree of reflation. Obviously, whatever figure he decided on must be a matter of judgment, and we can argue about that judgment. But he must learn, and I think that he will be willing to learn, from the United States, where there has been a substantial amount of reflationary policies, low interest rates, about which the right hon. Gentleman said nothing, and a flood of new money into the economy, which no one in the United States wants to use. All that money has been flowing into Europe, hence the Chancellor's ability to repay debt. Very much of the money used is American money attracted here by high interest rates.

    The Chancellor is still left with the question, which will, I think, be the subject of the debate, whether he has done enough and in the right way to re-create confidence to avoid the spiralling into recession. As I warned one of the right hon. Gentleman's predecessors 15 years ago—and the advice was not taken at the time—you can pull a piece of string, but you cannot push it. The right hon. Gentleman may find that he is pumping money into the economy which industry cannot use because of its lack of confidence in the future.

    The Chancellor should have addressed himself to the question of prices, but we have heard nothing from him on this. We have not seen a fulfilment of any of the pledges given in the General Election campaign by the Prime Minister. [Interruption.] Certainly not. The Prime Minister no doubt does not want to be reminded—and unless he wants to be reminded I will not remind him—of the words on which he won the General Election, when he promised to break into the price-wage spiral by acting directly to reduce prices. He has not done so. [Interruption.] It was going to be done at once, not nine months afterwards. He told us how he would do it, with the abolition of S.E.T., and a firm grip on public sector prices and charges. He was going to reduce the price of coal, steel, gas, electricity and transport, and reduce postal charges. That led to the phrase that he would at a stroke reduce the rise in prices, increase production and reduce unemployment. On none of those matters have we had any action at all. The Prime Minister said that that would lead to higher pressure of demand on labour, but that that would be all right. But it has not. We now have 750,000 unemployed. The sad thing is that whereas the man who blew the gaff on V.A.T. was sacked, the man who drafted this statement is now paid a high salary in Her Majesty's Treasury.

    I now come to S.E.T. Before the Election, the Prime Minister pledged an incoming Conservative Government to abolish S.E.T. in the first Budget. He has not done so. That is another of the pledges on which he was elected on which he has now once again defaulted. He has defaulted on prices, unemployment and S.E.T. [Interruption.] Right hon. and hon. Gentleman may cheer now, but the country will realise that on everything on which the Prime Minister was elected he has defrauded the electorate once again. The Prime Minister laughs. Does he deny that he said that S.E.T. would go in the first Budget? [HON. MEMBERS: "Answer."] The right hon. Gentleman is laughing it off, like all the rest.

    Since the Chancellor, presumably on the Prime Minister's direction, has broken the pledge on S.E.T., let us come to the claim that S.E.T. will—

    Let us come to the claim that the reduction in S.E.T. will reduce prices. The Chancellor has not given the House any indication of steps he will take to ensure that a reduction in S.E.T. is passed on to the consumer. Why not? It is because he scrapped the National Board for Prices and Incomes within a month of taking office and scrapped the Consumer Council soon afterwards. Even if he had wanted to ensure that the reduction was passed on to the consumer—and, of course, he did not, because he wants the S.E.T. reductions to go not to the consumer but into the pockets of the distributive trade—he could not have done so.

    I turn briefly to the Chancellor's direct tax proposals, which my right hon. and hon. Friends will examine more closely tomorrow in the light of the documentation now available. These proposals start from his mini-budget, his 2½ new pence reduction in the standard rate of income tax, that jolly, jolly sixpence we all read about in the Press the next day. [Interruption.] I am telling Conservative hon. Members what they know. That is why they do not want to listen. Hon. Members opposite will have this whether they like it or not. Independent commentators pointed out last October the Government's off-setting action to produce the 6d.—the higher charges for school meals, prescriptions, rents, rates and fares, to say nothing of food levies, all of which are coming in this week. These are all the constituents of the Prime Minister's appeal to the housewives during the Election campaign. The price of school meals is going up and free school milk is being cut. It was pointed out that all this would take away from an average family on the average wage or salary far more than the small gain from the tax relief. The commentators said that the average family would have to be earning £3,000 in order to gain net from the mini-budget policies.

    But, of course, these charges were not due to begin until April—until this week—and it is therefore this week that the public starts to pay for the mini-budget promises. Most of the charges of public industries, which the Prime Minister pledged himself last June to reduce, are also to be increased from this week onwards.

    I shall come to that. The hon. Gentleman must be very disappointed about purchase tax today.

    There is not even a reduction of purchase tax on the red, white and blue boxer shorts in which, so we read, he sleeps in bed.

    I want to say only one sentence to the right hon. Gentleman. I prefer a promise of an abolition totally of purchase tax in 1973 to a slight reduction in it now, and I am wholeheartedly in favour of a general sales tax or a value-added tax—it is the same thing—which I have always advocated.

    I am delighted to hear it, but we do not agree with the hon. Gentleman.

    For most families in this country, the whole of the gain from the remission of 6d. in the income tax has already disappeared and for many it has disappeared several times over as a result of the unrestrained price inflation since the mini-Budget. A man who, at the time of the mini-Budget, was on the average wage of £28 a week, and with two children under 11, would expect to gain 20 new pence a week in tax remission. But the charges announced last October will take 56 new pence away from him, while the increase in prices since last June will take away from that same family £1·57 a week. This excludes fares which, as we know, are to go up by 50 new pence or more per week for many families. That is the answer to the Chancellor's tax remissions.

    Everything that the right hon. Gentleman has offered today will be more than accounted for by price increases, fare increases, rent increases and rates increases which are due to occur.

    Whatever the right hon. Gentleman can take credit for, it cannot be wage increases. That is a new one from him.

    It is the fact that nothing has been done about prices that destroys the value of the Budget. I want to put this to both the Chancellor and the Prime Minister because I still have not decided which "Toni" produced the Budget. Two days after the election was announced, both of them went into hysterics when the retail price figure was published because it had gone up by 2·1 points, or about 1½ per cent. By which figure do they expect it to rise this April, taking into account the higher cost of school meals, the higher prescription charges, the higher road and rail fares, the higher rents and the higher rates? The rates are, we understand, due to go up by 14 per cent. on average throughout the country, with household rates rising by 9 per cent.

    I turn to the value-added tax which the right hon. Gentleman has announced as Government policy. It is to be in place of selective employment tax and purchase tax, I understand. I have always taken the view that, if we were to get into Europe on fair terms—if those terms were advantageous, right and beneficial to the country—we should have to introduce value-added tax as part of those terms. It would be part of the price we should have to pay, just as the agricultural policy of the Common Market is part of the price we should have to pay.

    What I have never been able to understand is why right hon. Members opposite should rush into paying the price, both in food levies and in value-added tax when there is no certainty at all that we shall get the terms which will enable us to go into Europe. Everyone knows—we have seen it recently on the Continent with the enormous price increases following the introduction of the value-added tax—that to introduce it here in 1972 or any other year will mean an inordinate rise in the cost of living for ordinary families, even with the omission of newspapers and food. Obviously, one cannot impose it on food when one is introducing Common Market food levies at the same time. Even the Prime Minister would not penalise the average family like that.

    The Chancellor did not say whether value-added tax would apply to rail fares and fuel. If it does, it will increase the cost of living still further. If it does not, it will mean that the amount of revenue which he has to raise to replace the S.E.T. and purchase tax on the narrow coverage of value-added tax will be at totally intolerable and unacceptable rates for the average family.

    For the Chancellor to announce today that he is going to introduce the value-added tax anyway, whatever the terms of entry into Europe, with the certain result of acceleration in price increases and the destruction of any hopes of a fair prices and incomes policy in this country—all without any assurance about getting into Europe—is an act of fiscal masochism which would seem to invite the attention not of an economist but of a psychiatrist.

    The Chancellor must ask himself—indeed, the Prime Minister has considered this—"Supposing we do not get terms, that we can accept?". Or is he prepared to accept any term offered? We do not know. The Prime Minister was very angry once before the election when I said that he was prepared to pay the price of getting into Europe without getting in. Now we see it happening under his leadership. Supposing we do not get these terms. Will the Government then be content to have Continental food prices and levies and Continental value-added tax with none of the advantages of entry into Europe?

    We welcome the announcement about the increased pension and about the age relief and dependant relief allowances, which are to go up. But the right hon. Gentleman will find that we cannot support him on the aggregation of a child's income with that of the parents. This, if anything else is in this Budget, is a class proposal. It was a national scandal and one of the main forms of encouragement to tax avoidance until it was removed by my right hon. Friend. We shall want to examine the increase of the Millard-Tucker 10 per cent. to 15 per cent., which is largely a gift to the surtax payers, and we shall want to look at what he has said about capital gains tax, particularly in relation to the amalgamation of short-term and long-term gains.

    I can understand the right hon. Gentleman's desire to reduce corporation tax further because of the chronic liquidity problem in industry at this time of breakdown in confidence in wide areas of industry. What we shall be much more critical about is his decision to announce once again a change in the basis of corporation tax, which appears to us to give an encouragement to increased dividend payments rather than encouragement to ploughing back for investment purposes. If he feels that that, too, will contribute to a more united and harmonious industrial situation and to better chances of an incomes and prices policy on a voluntary basis, he is wrong.

    As we debate this in the next week, some of the euphoria and hubris we have witnessed on the part of hon. Gentlemen opposite will be getting a little tarnished. It will be totally tarnished before the next month is out.

    Certainly I concede to the Chancellor, in addition to what I began by conceding—his superb form of presentation, which the House enjoyed—that this Budget will have an appeal where it is intended to appeal—to his friends in the City and the hard-liners in industry.

    I do not challenge comparison with hon. Gentlemen opposite in their sources of income.

    The right hon. Gentleman will, by this means, ease the lot of a few hundred surtax payers, but by his other measures, and particularly by his refusal to tackle prices, he will worsen the lot of many millions of other tax payers and, with the increase in the stamp, he will worsen the lot of tens of millions of tax payers. Undoubtedly this Budget will appeal to his friends in the City and the hard-liners in industry. [HON. MEMBERS: "Again?"] I wanted to say it again to give hon. Gentlemen opposite a chance to cheer. It will no doubt also stimulate the flow of funds to the Central Office. [Interruption.] Indeed, I have no doubt about that.

    The Budget will bring a degree of confidence to the money dealers—to those who make money and not to those who earn it. It is the Budget of a Bourbon. It is the Budget of people who have learned nothing and forgotten nothing. It is a Budget which will be cheered by hon. Gentlemen opposite now—

    Exactly. That is what I was trying to say and the hon. Gentleman has said it for me.

    It is a Budget which not only hon. Gentlemen opposite but the country as a whole will regret before many months are out.

    5.54 p.m.

    I hope that the Leader of the Opposition will forgive me if I do not comment on the points he raised in a speech which he no doubt prepared at least three weeks ago. I have already thrown away the speech that I had prepared. I trust, therefore, that hon. Members will bear with me as I speak from flimsy notes.

    It is a deep honour to be called shortly after my right hon. Friend the Chancellor of the Exchequer presented what I consider to be the best Budget since the war, not just for hon. Members on this side of the House but for the whole community. I am glad he carried out some of the policies which, in a humble way, I have been advocating for at least three weeks. I thought, however, that on social grounds he might have increased the duty on tobacco to prevent people from smoking themselves to death. This is a Budget of sound common sense and is designed to help the whole of society.

    The Leader of the Opposition made a profound mistake when he criticised some of my right hon. Friend's tax cuts. If he examines the Budget introduced by the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), he will find that many old-age pensioners found themselves paying tax at a rate which they did not pay before last July. That was a cruel step for the then Chancellor to have taken.

    My right hon. Friend has undoubtedly given journalists and commentators plenty to talk and write about in the coming months. They have been rather short of interesting news recently and I am delighted that he is pursuing some of the radical measures which my right hon. Friend the Prime Minister promised before the last election we would, if elected, take. This is a reforming Government and I am glad that our first full Budget should have been of such a radical nature.

    I am delighted that the Chancellor has announced certain steps that will be taken in the coming two years. Nobody but a fool would imagine that great administrative changes such as he is proposing could be made at the drop of a hat.

    The hon. Gentleman cannot ignore the fact that his right hon. Friend said it.

    Radical changes of this kind cannot be made without tremendous preparation. It is only right, therefore, that the public should be warned of what this modern Government intend to do in the coming years.

    I was particularly delighted by my right hon. Friend's references to the banks. We have seen a proliferation of what are sometimes called "near banks" and the joint stock banks have not been able to lend to small business men because of the administrative action taken by successive Governments. I hope that in the coming months the restrictive practices involving the banking cartel will be broken down, so enabling competition to take place in banking. This competition should apply to the rates which banks charge when lending and to the rates they pay when borrowing. I am sure that the small man will gain from the measures announced by my right hon. Friend.

    It is part of the dictum of the Prime Minister that people should stand on their own two feet. Small business men should, when told by a bank manager, "I can lend you money but I shall have to do so at a rate higher than that which you might otherwise have paid", be thrown back on their own resources, do their sums again and see what other courses are open to them.

    I am glad that the earnings anomaly applying to married couples is to be brought to an end. The spread of business income is right. I am equally delighted to see an end of stamp duty, though if it is due to finish on 1st August, what is to happen to those who wish to enter a property transaction between now and that date? My right hon. Friend's proposals for corporation tax are welcomed, and it seemed obvious, in view of the inequity on shortfall, that these steps were necessary. The child allowance changes must be welcomed by all. I wanted to see a change in surtax, with a move to a graduated scheme right up to 75 per cent. This step is perfectly right for the nation as a whole and particularly for the go-getters and technologists. They will be encouraged as part of the Government's strategy in this sector.

    The P.A.Y.E. system has always operated over a full year. Do the changes mean that it will be non-cumulative in its repayment effects? This question is important in relation to some of the strikes that we have been witnessing. I am delighted by the introduction of V.A.T., whether or not we enter the E.E.C. It is only right that we should begin to change to V.A.T. now because, in any event, I believe that we shall eventually be in the Common Market.

    I accept that S.E.T. should not be a method for reducing the cost of living, as it were. The cost of S.E.T. to one business with which I am acquainted is £1,400 a year. However, this firm faces the introduction of equal pay for women. which I welcome, but that will mean an increased wage bill of £5,000. The Leader of the Opposition should do his homework in this connection, particularly when he refers to the distributive trades. Down goes selective employment tax, quite properly, but it should not be canvassed as a way of bringing down prices, because it will go towards the achievement of equal pay. We on this side of the House believe in equal pay for equal work between the sexes.

    My right hon. Friend said that the value-added tax will not apply to food. There is a remark worth making about food prices because of the Common Market context of my right hon. Friend's speech. If we were to go into the Common Market tomorrow and prices were equated, it would be found that our prices were not as high as they are in most continental countries. Our prices would be 6 per cent. below those in France, for instance, because the distribution system in this country is 6 per cent. more efficient.

    I should have liked to see in the Budget proposals for free depreciation. We must get round to it sooner or later to encourage business to modernise its equipment. When I was previously a Member of the House I remember that Harold Macmillan, then the Prime Minister, used to shake his head and say, "Before this country comes to its senses it might have to go through terribly hard times." I know, because I came from the same part of the country as he did, that he was thinking of vast unemployment and of his experiences when he was the Member for Stockton-on-Tees.

    The Budget today has indicated that the Government will never try to achieve their ends by creating gross unemployment figures. The gentle reflation about which we have heard today is about right for the economy.

    6.2 p.m.

    I must begin by expressing a measure of agreement with the Chancellor of the Exchequer. Politically, this is always fatal, but I try to be a reasonable man at all times. If what the right hon. Gentleman said and what is printed in the Red Book means that he intends to add to aggregate demand about £500 million in the next fiscal year, that is about right. However, I am surprised that, in the last analysis, he should emerge as a good National Institute of Economic and Social Research man. Accepting that a greater reflation than is proposed would have placed a strain on our balance of payments, we then come to the great divide. Obviously the Chancellor lives in a different world from us. He was no doubt born in a bed in a quite different house and of quite different parents.

    I began to wonder, as the right hon. Gentleman was unfolding very efficiently his sage of tax reductions, whether he knew the sort of problems which faced us and whether he felt that what he proposed would help to solve the unemployment problem and the problem of the poor. I hesitate to liven up the small number of Members present by telling a joke, but the right hon. Gentleman reminded me of a review by an American which I read of "Lady Chatterley's Lover". He said that, having read the book, he must recommend it because it gave remarkable insights into a natural historical phenomenon; it gave great help to anyone who wished to practise the practical art of gamesmanship. He added, however, that unfortunately it contained a lot of extraneous matter which was of no interest to anybody of serious mind.

    It seemed to me that the Chancellor of the Exchequer had misread almost completely the situation in which the country finds itself. All I can say about him is that he is a Chancellor who never missed an opportunity to do his friends a favour. They have been lavishly endowed and richly blessed by this Budget.

    I turn to the more general considerations and leave the particulars to the tax lawyers on the benches opposite. I wonder what the proposed reflation adds up to in terms of bringing a breath of life to our economy, with over 750,000 unemployed. The great mistake which the Chancellor has made is that he has directed his very substantial tax cuts to the problem of increasing incentives in the economy whereas he should have directed them to the much more relevant consideration of reducing prices.

    In the opening sentences of his major speech, at any rate in chronological terms, the Chancellor used all the old platitudes about incentives, effort, savings and investment. He got delightfully wound up on this theme. But I should have thought that if there were any philosophy which one could regard as bogus and old-fashioned in economic discussion, it was precisely this.

    I do not want to recite the bits of research which have been published to show how irrelevant even marginal tax rates are to effort and incentive. The latest is one of the most revealing because, when a range of executive types who are supposed to respond to these reductions were asked how much tax they paid, not one of them had the slightest idea.

    We know the purpose of the hand-out: it is merely to increase the income of the friends of the Chancellor of the Exchequer rather than to increase incentive to work and effort. [An HON. MEMBER: "And savings."] It increases the incentive to save a little and the right hon. Gentleman was able to trot out the increase in savings. But the purpose is then to increase investment, and investment becomes a sort of spring which will unleash the production potential of the economy in the months and years ahead.

    In economic theory there is a myth that investment responds to increases in savings. In 1936 the great economist Lord Keynes exploded this theory. He regarded the disequilibrium between saving and investment as a major cause of the capitalist crisis. We have evidence, not only in the monthly economic letter of the First National Bank of New York revealing that savings are piling up in the banks and nobody wants them, but in the figures published today by our own banks. There is a massive growth of liquidity and the banks are not lending as much as even the Government would like.

    If one takes any economic indicator in relation to investment and tries to find a single correlation between investment and such things as the rate of interest one cannot. No one knows what determines the level of investment. It is possible that it can be correlated only with changes in gross national product, but even this is not absolutely certain. The proof of this is that in suggesting what the level of investment might be at some future date the Department of Trade and Industry is dependent entirely on subjective surveys of businesses.

    If the right hon. Gentleman believes that investment will surge ahead because he has reduced corporation tax and done other things to promote an increase in savings, he should dig a little more deeply into the problem. He hoped that investment would grow and absorb the spare resources and, if investment did not grow, he expected that exports would take up the slack. This is equally doubtful. The conclusion we must draw from what he said this afternoon is that he is depending on a consumption-led boom, which we are told by all the economic commentators is the worst possible type of boom which will lead us soonest into balance of payments difficulties.

    Apart from opposing these regressive changes in taxation, I believe that the Chancellor should have done much more to attempt to restrain the rise in prices. If there is one thing that is adding fuel to the fire of cost inflation, it is that prices keep on increasing. If prices could have been curbed by a reduction in imposts such as National Insurance contributions, purchase tax and so on, this would have made a significant contribution to the problem. But that was not the Chancellor's line of country. He said. "Let us reduce S.E.T.", but all that will do is further to increase the liquidity of companies; it will not decrease prices.

    Not only did the Chancellor take hardly any direct action about prices, but he failed to do anything to try to rebuild the bridges with the trade union movement which have been virtually destroyed by the Industrial Relations Bill. We have seen in the House in the last few weeks, including today, a naked confrontation of power between the classes which possess the wealth and the trade union movement. This will not do.

    The Prime Minister likes to think that he is tough—and he is tough. There is a story going round in trade union circles that when the trade unionists came away from seeing the Prime Minister one of them said to a reporter, "He is reputed to be a man of very few words. He greeted us with two of them." This may be an apochryphal story, but I do not think this toughness, this abrasiveness, will get the country through its difficulties, as the Prime Minister would like to think it will. To try to meet the trade union movement the Prime Minister should have set up a prices review committee, not to freeze prices but critically to review the 600 key prices in our economy. This would have given the trade union movement a feeling that lie cared about the things that trade unionists think are important.

    It is a tragedy that the Prime Minister should go on in this way. He may succeed or he may fall flat on his face, but, whatever his personal fate, it is the fate of the country that matters. Sometimes when I see him on television or at the Dispatch Box I have a grim feeling, almost a foreboding, recalling the speech of a South American dictator who once said, "When we came into power Brazil was on the brink of an abyss. Since then we have moved forward." If we are not careful, I have a suspicion that this is likely to be our destiny, too.

    I will spend one minute on a subject that is slightly esoteric but near to my heart, although I do not want to masquerade as a desiccated calculating machine. In one passage in his statement the Chancellor of the Exchequer either did not know what he was talking about or he was deliberately misleading the Hous—

    As my right hon. Friend says, both. This concerns the question of money supply. Without doubt the Government have lost control. They have lost control for the simple reason that they will not face the fact that money supply is increasing not only because of the balance of payments surplus but because of the masses of "hot" money flowing into the country.

    They are adopting all sorts of techniques to offset this trend by using, for example, special tap issues, "operation twists" and heaven knows what, but the only way in which money supply can be brought under control is by preventing this money ever coming into the country. The only way that they can do that is to reduce the interest differential between London and other financial centres. The only way that can be done is by reducing Bank Rate, and the sooner that happens the better. That would help in the control of money supply and would be yet another price—the price of money—which would be brought down through the reduction of Bank Rate.

    6.20 p.m.

    It is interesting to follow the arguments of the hon. Member for Stoke-on-Trent, Central (Mr. Cant) and I agree with him that it is bad that so much "hot" money is coming into the country. However, I would point out that such money is being attracted here because people abroad have confidence in our present financial position. The curious thing is that towards the end of the period of office of the previous Government, despite the fact that Bank Rate was as high as it is now, that "hot" money was not coming in because foreigners had no confidence in the future of this country. There is a great difference in the situation today, and I am sure that the hon. Gentleman is encouraged, as is the rest of the world, by the considerable repayments of overseas loans, borrowed by the Labour Government, who then reneged on repayments. These repayments are to the credit of the present Government and will increase our financial standing and status in the world.

    The hon. Gentleman also referred to the 750,000 unemployed, and nobody with any decent human feelings wants to see a considerable number of people in that situation. The whole employment situation is based on the general economy of the country. Why was it that the Labour Government went to the country in June last year when they had another full nine months to run? Was it because they thought that the sun would be shining in June, whereas clouds were bound to appear in the autumn because of the wage inflation deliberately encouraged by the Labour Government? Did they fear that this would turn into a downpour which would ensure that they would be defeated even more heavily at the election? I believe that that was the reason, and I believe that the one person above all others, who miscalculated, was the right hon. Gentleman the Leader of the Opposition, to whose speech we listened a little earlier.

    Right hon. and hon. Gentlemen opposite speak with two tongues. I am not saying that this applies to the hon. Member for Stoke-on-Trent, Central, but it certainly applies to some of his hon. Friends. Some hon. Gentlemen opposite who sit below the Gangway and who, during the Labour Government's period of office, were always criticising their own side are now still blackguarding them for some of the suggestions they did their best to ensure were not carried out and which Labour Government knew to be necessary. They are now saying to the present Government, "You must reduce prices but must do nothing whatever to stop the most extravagant of wage demands". Anybody with any economic sense knows that that is the way to despair, not only in regard to the 750,000 unemployed, who I believe will have far more chance of getting back to work as a result of this Budget, but for many thousands of other people who inevitably will be forced out of work if we cannot ensure that the goods we produce can be sold economically in competition with other countries.

    I had an interesting experience only two weeks ago. I was invited to dinner at a working men's club in my constituency. During the evening, the talk turned to the subject of cars and the chairman, who was sitting at my table, said that he had just bought a German Opel. He was a retired seaman and bought that car because, in his view, it was between £100 and £200 cheaper than anything comparable made in this country. He said that the car had far more refinements than anything here, that it does 80 miles per hour; 40 miles to the gallon and runs on two-star petrol. The lesson in that story is that, although many of us always like to feel that people would buy British even at a higher cost, we must remember that that German vehicle paid considerable import duty to enable it to be brought into this country. Therefore, the basic cost of that car—when one excludes the import element—is much less than the cost of the home product.

    For too long we have taken the view that the rest of the world will buy British because of the old standards of quality and price. But we must now face the fact that there is no preference in the outside world for British goods just because they are British. The only way in which we shall sell our products abroad is by making them at the right price, with the best delivery time, performance and finish. Unless we can do that, it does not matter what is done by Government exhortation, by the trade unions or by anybody else, there will be a considerable growth in unemployment and a decline in our economy and our living standards.

    Hon. Members opposite are doing everything they can to oppose the Industrial Relations Bill. Many hon. Gentlement, particularly those who are regarded as Left-wing Members, have stated in the House quite openly that they forced the Labour Government to withdraw their proposals to introduce such legislation based on "In Place of Strife". They are quite blatant about it, and lose no opportunity to make it clear that they forced their Government not to do many things which that Government felt to be right in the interests of the country.

    Sometimes I find it very difficult to sit in this House and listen to the speeches of right hon. and hon. Members opposite. The right hon. Member for Blackburn (Mrs. Castle), for example, said in "In Place Of Strife" that not only was an industrial relations Bill necessary but that the very future of the Labour Government depended upon it. But, of course, the Labour Government ran away from it and, because they knew what was likely to result in the autumn, they had to have the General Election in June so that the full impact and effect of their cowardice would not be evident.

    Is not it a waste of time to attack my right hon. and hon. Friends when they are not here? Why does not the hon. Gentleman devote his attention to the Budget?

    With respect, the hon. Gentleman has not long been in the Chamber. It was his hon. Friend the Member for Stoke-on-Trent, Central who attacked the Conservative Party because of the Industrial Relations Bill. If right hon. and hon. Members opposite are not present on the Front Bench, that is not my fault. They should be here. The hon. Gentleman should bring them in.

    Their absence shows that they are probably doing their homework. It is necessary for them to do that so that they can attempt to denigrate this Budget.

    The hon. Member for Stoke-on-Trent, Central told the House that he thought that the present Prime Minister was too tough. I find it a relief to see some toughness after a Government who were led by a man who was so vacillating and weak. Good, firm government is what the country needs. In the long term, it will respond to it. The Government have shown today that they are determined to govern in an enlightened way, looking to the future, and I believe that they will govern in a way to which, ultimately, the country will respond.

    I hope that right hon. and hon. Members opposite will not take steps to try to ensure that the trade unions do not respond to that which is necessary for the future of the country: we must have discipline on both sides of industry and an understanding that, if we are to progress, we have to go into the future in a forward-looking way. I believe that this Budget will provide the necessary stimulus for the future.

    I was glad to hear my right hon. Friend refer resoundingly to the word "profitability". The word "profit" had become a dirty word even at the end of the period in office of the last Conservative Government because of the activities and statements of right hon. and hon. Members opposite. In their own reign, it disappeared almost entirely. It seemed to be unmentionable. From the point of view of companies, it certainly disappeared almost entirely. Profitability means the creation of wealth. It is from the creation of wealth that the country prospers, out of which workers get their employment and out of which it is increased. It also enables workers to improve their standards of living. We were a great trading nation. We have to be again unless we are to see our present standards of living gradually reduced until we become a nation with one of the lowest standards of living in Western Europe and, indeed, the world.

    There was one disappointing feature in the Budget. I was hoping that my right hon. Friend would be able to give pensioners a little more. It is true that this party is committed every two years to examining and, if necessary, raising old-age and other pensions to take care of any inflation. I was hoping that single persons would be given a little more than an extra £1, that the pensions of married couples would have been raised a little higher than £9·70, and that a little more would have been given war pensioners and others.

    While I have sympathy with what my hon. Friend says, I am sure that he will acknowledge that this is the biggest ever single increase.

    That is quite true, and it is in line with Conservative philosophy. During the reign of the last Conservative Government the standards of living of pensioners were increased more than at any time in our history, whereas during the period of the Labour Government they declined below those which prevailed when the Conservative Government went out of office. We have restored the position, but I was hoping that we would do even better, in view of the party's philosophy to look after those who are least able to look after themselves.

    It is striking how often right hon. and hon. Members opposite fall into a trap. They are guileless. One could not help noticing the screams of laughter which came from the benches opposite when my right hon. Friend said that we would like to do away with S.E.T. Right hon. and hon. Members opposite thought that my right hon. Friend was doing nothing about it. Then we saw gloom settle on their faces when my right hon. Friend said that it would be cut by 50 per cent. on 5th July.

    Manufacturers and members of the distributive trades have had to pay the levy. It is quite true that manufacturers get it back; but they have provided the Government with a huge interest-free loan for a considerable period. This has embarrassed many companies since it has reduced their liquidity and available funds for expanding their businesses and for investment. If they wished to expand their busnesses or invest in new machinery, the tax meant that they had to borrow money from banks at high interest rates, all of which have helped put up costs and made it extremely difficult for many companies to continue. I welcome this the first instalment in the departure of S.E.T.

    The Leader of the Opposition was not the clear-minded person today that he sometimes appears to be—

    In fact Lord George-Brown makes it clear in his memoirs that the right hon. Gentleman is frequently not very clear-minded. His confusion over S.E.T., purchase tax and the value-added tax evidenced itself today. S.E.T. is undeniably a tax on costs and ultimately a tax on sales and, therefore, a value-added tax. Purchase tax is nothing but a value-added tax as it inflates the natural cost of the article. What the Leader of the Opposition does not know, or does not admit, is that if we replace S.E.T. and purchase tax by V.A.T., we shall be replacing one value-added tax by another.

    The situation with purchase tax is interesting. It is put on the cost at the wholesale point. If an article costs £1 at the time it is transferred to the retailer and the purchase tax rate is 13⅔ per cent., it reaches the retailer at £1·13½. With a 50 per cent. mark up on that total, which is the practice in shops, the total selling price would be £1·70. Out of that the Treasury would get only 13½p.

    With value-added tax on the same article, as it is charged on the price at which the article is sold, the £1 would become £1·50 with the shopkeeper's profit margin. With the value-added tax added to that at a rate of 13⅔ per cent., it would total 20p, so that the selling price would be exactly the same. [Laughter.] Labour Members laugh because they do not know. In these circumstances the Treasury would collect 20p instead of 13½p, although the cost to the purchaser would be precisely the same.

    There would therefore be a greater spread of taxation without increasing the cost to the public. The benefit is that when the public pays value-added tax they know precisely the shopkeeper's price, because the tax is paid on the price of the goods alone and there is no profit on an element of tax. This disclosure could help to keep down prices.

    I have looked into the system in Denmark. There is no question of the value-added tax becoming cumulative from the point of manufacture to the point of sale to the public. Some value-added tax is added on at each stage, but then recovered, until finally at the point of sale it is always consistent.

    The Press and the nation generally will see that this is a Budget which looks to the future, a Budget which will give confidence to Britain in its future, a Budget of which my right hon. Friend and the Conservative Party can be very proud.

    6.45 p.m.

    The hon. Member for Gillingham (Mr. Burden) chided my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) and referred with great scorn to what he had said about hot money. The hon. Member had his own explanation of why hot money was flowing into the country—the confidence of the foreigner in this country. If he is sending his hot money into the country because of his confidence, that can hardly be said of the native business man, the man of enterprise about whom Conservative Members so often speak. When the Prime Minister gives his explanation of our difficulties, apart from his regular explanation about the trade unions and their demands for increased wages, he speaks of the lack of confidence in the country. There is a fair amount of substance in this statement although that absence of confidence requires some study.

    The hon. Member for Gillingham did not seem to have much to say about the Budget. I find it difficult to discover major differences between this and for- mer Tory Budgets. There is a move towards simplification, although that will not start to operate for a couple of years, if it works at all, and many things can happen in two years. However, most of us will be happy about simplification, although it will not overcome the deep-rooted difficulties under which the country has laboured for so long.

    It also shifts the balance.

    The hon. Gentleman spoke for a long time and the debate is to conclude at 7 o'clock.

    As is usual with Tory Budgets, there is a marked shift in emphasis towards the taxation of poorer people, away from direct taxation, where one can measure the incidence fairly although not completely accurately, towards indirect taxation. The changes in the Budget, whether paying more to or taking less from the better off, are advanced on the basis that they will stimulate the man of enterprise. It is said that there is a need to stimulate the profitability of companies.

    I do not decry profitability as one of the measures which might operate with advantage in the economy, but it is not the only measure. When one thinks of the nature of the difficulties confronting the country, one must consider much more than immediate profitability.

    A characteristic of profitability is that one's mind is usually focused a short distance ahead. This nation, if it needs anything, needs people of vision who can think many years ahead and take the kind of steps and measures which will pull this country out of its difficulties.

    This country is not in a difficulty stemming from anything which has been done over the past two or three years. As the Chancellor said, our difficulties go back many years. However, I go back even further than the right hon. Gentleman. I go back well before the beginning of the century when, for divers reasons—I have not time to go into them—this country began to fall behind and these characteristics of enterprise, about which right hon. and hon. Gentlemen opposite so often talk, began to be lost and this competition began to be guarded against. As much as possible, an effort was made to eliminate competition. This has been a long chronic illness which we have not properly diagnosed, but no remedy is to be found in the propositions which have been put forward today.

    I take one example of the kind of argument coming from right hon. and hon. Gentlemen opposite. I refer particularly to the Prime Minister. The right hon. Gentleman can hardly talk about our economy without the phrase "wage demands" coming from his mouth. I do not think that anyone will challenge that virtually the entire blame, if blame is to be apportioned, is put on trade unionists or workers demanding higher wages. Yet, if we look at the higher wages or increases in labour costs, this country is measuring much the same as other countries.

    I have here the publication German International for February 1971. I think that most right hon. and hon. Members will receive this excellent journal. It talks of wage costs in 1970. At the head of the 11 or 12 nations listed here it puts the Federal Republic of Germany and the United Kingdom of Great Britain. Germany kept pace with us, but we do not hear this cry coming from Germany. The reason is simple. Germany's economy has been growing and ours has not.

    We come back to the root difficulty facing us—the failure of the economy to grow. It is not the trade unionists who determine how fast the economy grows; it is not the British workman. It is the fellow managing the business, the man of enterprise about whom right hon. and hon. Gentlemen opposite so often speak.

    We hear talk about there not being enough stimulus in our taxation system. Yet when we were paying 6d. in the pound at the beginning of the century, almost before there was a taxation system at all, we had begun to drop out of the race. Before the First World War, when the tax paid was trifling, we found that the people who had been managing our economy were dropping further and further behind.

    We cannot honestly say that our taxation system extracts from people substantially more than is expected in comparable countries. We are not the highest of the most heavily taxed countries of the western world. What is usually said by right hon. and hon. Gentlemen is that the tax at the margin is such that it dampens down enterprise.

    The amount which is to be saved by this so-called substantial change towards surtax payers is, I think, £16 million. There was great laughter by right hon. and hon. Gentlemen because they thought this a mocking figure. They thought that we would be disappointed because we might have hoped to hear of hundreds of millions of pounds. I was not surprised. The thought in my mind, and no doubt in the minds of most working-class fellows, is that people in that bracket do not pay all that tax. They find all kinds of ways of evading tax. We constantly hear what the man on £50,000 a year is supposed to be paying in taxes. Do not tell me or any ordinary working man that the man who can obtain £50,000 a year is returning £50,000 a year and is being taxed on it.

    I shall not give way. I make the point that the very rich are well able to avoid paying the tax. They pay some tax, but not that amount.

    Let us consider the workmen whose wage demands are causing so much trouble. I have here the January issue of what was the Ministry of Labour Gazette, now the Department of Employment Gazette, which makes a study of adult male earnings in April, 1970. I think that is near enough for my purpose. It divides the earnings into categories. There is the median or middle earning, the lower quartile, which is the first 25 per cent., and the lowest decile, the first 10 per cent. I take the lower quartile. The lower 25 per cent. of adult male full-time workers in Scotland were earning £19 10s. This is gross earnings, not take home pay. Is that anything to be shouting the odds about? Are those great earnings which should be dampened down? When we look at this kind of thing we appreciate how absurd it is.

    I rose to make one point, and I am nearly failing to make it. What I want to see coming from right hon. and hon. Gentlemen opposite is some enterprise in a large way. Take, for example, the steel industry. Unless the Government become involved and find a means of enabling the British Steel Corporation to carry out its programme, and more than its programme, we shall very soon become not a second, third or fourth-rate country, but a country which does not matter at all.

    Stainless steel is largely in the hands of private enterprise. Between 1960 and 1969 the output of stainless steel in this country, the most profitable form of steel, increased by only 6 per cent., whereas in Japan it increased by 422 per cent., in West Germany by 84 per cent., in France by 122 per cent., in Sweden by 106 per cent., in Italy by 250 per cent., and in other countries by 126 per cent. I give those figures quickly to show that we are not even in the league. We are in a different league altogether. We are not even in the league of the also-rans.

    The same point applies to crude steel. Between 1960 and 1969 our production of crude steel increased by 8·7 per cent. The Japanese increased their output by nearly 400 per cent.

    My point is that the British Steel Corporation, private enterprise or public enterprise, cannot get out of this difficulty by its own efforts. It cannot make the profits to enable it to pay on the level which the Japanese are paying. If this nation is to have any kind of industrial standing, the Government must come in behind the steel industry and say that they want these things done and that those are the things they are going to pay for from public funds or in some other way. Unless we can do that we are all washed out. Judging by what was said today, we shall be all washed out.

    Debate adjourned.—[Mr. Rossi.]

    Debate to be resumed tomorrow.