3.30 p.m.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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—

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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—

5.26 p.m.

5.54 p.m.

6.2 p.m.

6.20 p.m.

6.45 p.m.

Debate to be resumed tomorrow.