Tuesday 29th March 1977

The House met at half-past Two o'clock

[Mr. SPEAKER in the Chair]

Ordered,

That the draft European Patent Organisation (Immunities and Privileges) Order 1977 be referred to a Standing Committee on Statutory Instruments, &c.

That the Civil Aviation (Navigation Services Charges) (Fifth Amendment) Regulations 1977 (SI, 1977, No. 340) be referred to a Standing Committee on Statutory Instruments, &c.

That the Civil Aviation (Canadian Navigation Services) Regulations 1977 (S.I., 1977, No. 314) be referred to a Standing Committee on Statutory Instruments, &c.—[Mr. Foot.]

The industrialised countries as a whole achieved a relatively rapid recovery in output and trade at the beginning of 1976, but this fell off through the rest of the year. Over the year as a whole their gross national product rose by nearly 6 per cent., after falling 1½ per cent. in 1975; and world trade in manufactures increased by nearly 10 per cent. following a drop of nearly 4 per cent. in 1975. Nevertheless, there is growing concern that the pause has been unusually prolonged for this stage in the cycle.

More recently, growth in some major countries has shown signs of accelerating again. There now seems to be a reasonable prospect that this year GNP in the major countries will grow at around 5 per cent. World trade in manufactures may rise by about 8 per cent. Present policies in the United States and Japan should help to ensure that their recovery is sustained. But in Europe the prospects are more doubtful. Inflation and difficulties with the balance of payments have led several countries besides ourselves to take restrictive measures. Even countries with a strong balance of payments ments and low inflation rates are being very cautious in their fiscal policies.

The OPEC countries are expected to increase their imports by 15 per cent. in 1977, but as a group they will continue to run a massive surplus. In the non-oil developing countries, however, growth will remain constrained by shortage of foreign exchange. Many of them improved their position last year, as the price of primary commodities rose relative to manufactures, and this may continue to some extent in 1977. Nevertheless, their imports are likely to be held back by financing problems and the need to rebuild their reserves.

The most disturbing feature of the world scene is that over the last two or three years every major industrial country has seen its unemployment level rising well beyond what had been regarded in the post-war world as the limit for a well-managed economy. At the end of 1976 there were estimated to be 15 million unemployed in countries of the OECD, an average unemployment level of over 5 per cent. For the year ahead, Europe at least can expect little, if any, reduction in unemployment, and it will take concerted action to improve the outlook. I will return to this later.

This is the background against which I must review the present position and prospects of the British economy. A fuller and more detailed analysis will, as usual, be found in Part I of the Financial Statement and Budget Report, but I will now describe its principal features.

During the last 12 months production has made a modest recovery from the recession of 1975. But the economy is still working well below its productive capacity, industrial investment is rising but is still too low, and there is still a substantial current account deficit on the balance of payments to be eliminated.

If we were to make no change whatever in present policies, I would see the prospects as follows. Production would grow only slightly in the next 12 months. The main increases in demand are likely to be in net exports and manufacturing investment—the sectors which we want to lead the recovery of the economy. From other sectors, however, little or no stimulus is to be expected. Public expenditure on goods and services will be rather lower than last year. And on present policies, I would expect no increase in private consumption. Indeed, there might be some decline.

Taken together, these trends could be expected to mean that demand and production would continue to grow slowly. But with so modest a recovery in output I would not expect any fall in the level of unemployment. Indeed, I fear that some further rise would be more likely. The rate of increase in unemployment has, however, been falling markedly. In 1975 the increase was 40,000 a month; in 1976 it was 13,000 a month; and this year there has been a welcome fall in the level of unemployment. But two months is too short a period on which to form a judgment. The plain fact is that the present level is unacceptably high; and action is clearly needed to improve the future prospect.

The rate of price increases is also a cause for acute concern. I have said many times that we need to get our inflation rate down to the level of our main competitors'. Last year's experience with the exchange rate shows what is bound to happen until we achieve that. Our inflation rate was falling rapidly in the first half of 1976, thanks to the £6 pay policy, but our rate was still much higher than those of our main competitors. The disparity caught up with us and caused a fall in the exchange rate. There were other factors, such as the drought and the world increase in commodity prices, but the fall in the exchange rate was the main factor which checked the decline in our rate of inflation last summer and prevented us from reaching single figures by the end of 1976.

The response of the trade union movement, first to the £6 pay limit and then to its successor, gives us a very good chance of resuming the fall in inflation in the second half of this year when the effects of last year's depreciation have finished feeding through into prices. Indeed, there is a real prospect of getting inflation into single figures by the second quarter of next year, provided that we can avoid substantial depreciation.

This will be possible only if we maintain confidence at home and abroad in our determination to reduce our inflation rate; and that, in turn, means that we must get a satisfactory agreement on pay to operate when the present pay agreement expires at the end of July.

There is no chance of getting a new agreement unless we make sure that the benefits of pay policy and a more stable exchange rate feed through into prices in the shops. So we intend to prevent any unreasonable profit mark-up, by keeping the price control on profit margins, and by taking a new power to freeze a particular price for up to a year when an independent investigation shows this to be justified. At the same time we have to be careful that price controls do not damage the rate of return on investment. This has been driven down by inflation and recession to exceptionally low levels. We must make sure that the return on capital is allowed to recover sufficiently to reinforce the upturn in investment and to ensure that the new jobs we need are created.

The balance of payments prospect is now a good deal better. During the next 12 months we can confidently expect a large increase in the flow of North Sea oil, and an increase in visible and invisible exports, all of which will substantially improve the balance of payments. Our current account deficit, which has been running at an annual rate of a little over £1½ billion in the last six months, should be progressively eliminated and we have good prospects of a healthy surplus in 1978.

The foreign exchange markets have been much more stable everywhere this year. The stability of sterling has been partly due to the December measures and the IMF agreement and also to the reassurance offered by the recent new agreement on the sterling balances, for which we are grateful to our central bank partners. Sterling has also been helped by the repayment of the sterling loans made to finance trade between third countries, which I took measures to stop late last year. I am now proposing to strengthen our exchange control powers over the raising of sterling finance by companies resident in the United Kingdom but controlled by non-residents.

The reserves are now at a much more satisfactory level. Provided that we secure and maintain a balance of payments surplus, we can begin to repay overseas debt. Until this repayment is safely under way, our domestic economic policies will be subject to constraints. I made it clear in the context of the agreement on the sterling balances that I do not intend to rely on sterling inflows on private account as a means of financing the remaining deficits. So I have continued to borrow on a secure medium-term basis, in order to improve the overall pattern and level of reserve assets in relation to the debt structure. But I do not expect this type of borrowing to be necessary much longer. It is a most welcome change to be speaking to the House about the prospect of repaying debt rather than reviewing the prospect for getting more overseas financing.

The outlook for the monetary aggregates has shown a significant improvement. Domestic credit has expanded very little in the last six months, and in the year to mid-April 1977 its expansion is now expected to be only about half that allowed for by the ceiling of £9 billion in the Letter of Intent. In my December statement I said that I expected the associated growth of sterling M3 to be between 9 and 13 per cent. With the much lower expansion of domestic credit, the growth of sterling M3 will now be at or below the bottom end of the range.

Finally, the public sector borrowing requirement has fallen. The total for the financial year now ending is currently estimated at £8·8 billion, but it will be some months before we know it for certain. We know very little yet about public borrowing in the last three months of the year apart from that of central Government itself. The reasons for this downward revision from the forecast in the Letter of Intent to the IMF are discussed in the Financial Statement and Budget Report. Some of the effects carry through to the forecast for 1977–78.

The estimates now suggest that if present policies were continued, the PSBR for the next financial year would be about £7½ billion, about £1¼ billion lower than the figure of £8·7 billion agreed as a ceiling with the IMF. This improvement is mainly due to better prospects for employment, interest rates and the exchange rate since the December measures.

The forecast for 1977–78 takes account of the intention, which I announced in December, to sell an amount of British Petroleum stock which will leave the total of the Government's and the Bank's holdings at 51 per cent.—more than we held before the Bank acquired the ex-Burmah shares. This sale will go ahead in 1977–78, and in framing my Budget proposals I have made full use of the room for manoeuvre which it will give me. Since there is still the impediment of Burmah's claim against the Bank of England, the Government will sell part of its own holding, in the expectation, based on strong legal advice about the merits of the Burmah claim, that we shall in due course be able to consolidate the 51 per cent. holding by securing the transfer to the Treasury of the stock now held by the Bank.

I turn now to our prospects in the medium term. The immediate situation provides a solid foundation on which we can build a return to full employment and a steadily improving standard of life. Whether we achieve these objectives, and how fast, will depend partly on improvements in our own economic behaviour, partly on developments in the world economy. None of the improvements we need is impossible, but none is certain either. All depend on acts of will.

First, let me deal with our trading performance. We must not only eliminate our balance of payments deficit but earn substantial surpluses, so that we can start repaying our accumulated international debt while still maintaining adequate reserves. That is the pre-condition for restoring our economic independence and making ourselves less vulnerable to external shocks in future. With the help of North Sea oil, we should earn a surplus next year. But this will be when our economy is still operating well below capacity. Our aim must be to earn a balance of payments surplus in conditions of full employment.

The growing output of North Sea oil will not be sufficient to achieve this. The return to full employment must depend primarily on increasing our industrial investment and our net exports of industrial goods, otherwise we can have no assurance that we shall be able to take up the slack in the economy, even when North Sea oil is in full production, without running once more into the familiar difficulties of supply constraints in industry and deficits on the balance of payments.

Moreover, North Sea oil will not last for ever. It is essential to use the advantages which it offers us during the period when it is available to strengthen our industrial base and our trading performance, so that we can maintain full employment and an acceptable standard of living when the flow of North Sea oil diminishes.

In sum, North Sea oil will not itself create a large number of new jobs, nor will it make possible a rapid return to full employment based on a sudden expansion of domestic demand, whether in the public or the private sector. But it does give us the prospect of a period of years in which we can pursue our industrial strategy, and so expand our manufacturing base, without the constant risk that balance of payments constraints will force us to cut back domestic demand just when the process of industrial expansion could otherwise have become self-sustaining.

In other words, it gives us solid grounds for confidence that, if we hold to our present policies, and apply them steadily and consistently, we shall be able to create the conditions for what I described in December as a decisive break away from the restrictive pattern of present circumstances and post-war disappointments.

The necessary improvement in our trading performance depends in turn on a second improvement in our economic behaviour. We must bring down our rate of inflation so that of our principal trading rivals and keep it at that level.

Despite the deterioration in our inflation rate since last summer, we now have a chance of getting near that aim by the end of the next pay round. The recent increase in prices, despite the strict observance of the pay policy, reflects the operation of a vicious circle we have seen more than once in recent years. Even in a period when pay increases are limited, there can be a sharp fall in the exchange rate as a result of excessive pay increases in an earlier period. This fall robs us of the full price benefits which we hoped to gain from pay policy. And if the resulting disappointments makes it difficult to continue pay policy, it threatens us with a further fall in the exchange rate later on. I believe this time we can make a decisive break in the vicious circle and indeed turn it into a virtuous one.

As I shall explain later, the December measures and this Budget together should help to get another round of pay policy. The rise in the exchange rate from the low point it reached last October is worth about 3 per cent. off the retail price index by the end of this year. If, as I hope, my proposals today for income tax relief help to get another round of pay policy accepted, that will help with the future level both of the exchange rate and of prices.

In fact, a satisfactory pay policy can bring prices down in three ways. Provided we have effective price controls, it means lower prices for the goods we produce at home because wage costs are lower. It means lower prices for the goods we import from abroad because the £ sterling is worth more. And these two advantages help to bring down interest rates—which cuts the cost of everything we buy on credit, like housing, and helps employment by stimulating industrial activity and investment. By the same token a free-for-all leading to a wage explosion would send prices rocketing up for three reasons—through higher domestic costs, through a lower exchange rate, and through higher interest rates.

It is as necessary, then, to improve our inflation rate as our trading performance, and pay policy is the key. But in the medium term we shall not achieve the necessary improvement in either our trade or our inflation unless we also improve the competitiveness of our manufacturing industries. This is the third improvement we need to make. Price competitiveness is critically important; but we must aim to achieve this not through a lower exchange rate, which carries such a heavy cost in prices and living standards, but through higher productivity—by producing more goods for the same cost.

No less important is to improve what I have called "non-price competitiveness". By this I mean better product design, higher quality and greater reliability, allied to better salesmanship, delivery times and servicing arrangements. In the longer run, it is only by doing better in these aspects of competitiveness that we shall win and maintain an increased share of home and foreign markets. And only through increasing our market share shall we have a secure prospect of a return to sustained full employment and rising living standards.

British industry must respond better to economic opportunity in future than it has in the past. That is why in the industrial strategy we have embarked on a joint effort to improve our industrial performance, involving management, the unions and the Government, and are concentrating in particular on key sectors of manufacturing industry. This will take time, but it is already achieving results and we are determined to carry it through, and so are our partners.

As I have said, each of the three improvements we need in our economic behaviour depends on the other two. For example, if our industrial performance fails to improve, our balance of payments will deteriorate, and then we should be faced with a choice between a deflation which throws men and women out of work, or a depreciation which raises prices.

Other countries have found difficulty, like ourselves, in achieving all their various economic objectives at the same time. At the moment, a significant improvement is also required in the outlook for the world economy if any of us are to achieve our national aims in full.

The world-wide explosion of inflation in recent years has led most Governments to pursue exceptionally cautious demand policies: and in many countries there is no easy way of combining higher levels of activity and employment with a further fall in inflation. So the leading countries must work together in seeking ways of improving the prospects of the world as a whole. The Prime Minister and I will be pressing for this over the next two or three months—in the European Community, in the IMF, and at the Downing Street Summit.

If the stronger economies increase domestic demand and reduce their external surpluses, they would help greatly to sustain activity in the world as a whole. President Carter has recently given his support to the views of the OECD and IMF in this regard. On the other hand, countries with higher inflation rates and weaker balance of payments positions face more painful adjustments. They will need time to adjust their economies to the many shocks they have suffered over the last few years. In particular, they will need access to adequate finance on appropriate terms, so that they are neither forced unnecessarily to deflate their economies nor tempted into trade restrictions—either of these courses would be damaging to the world as a whole. This will be a major topic at the meeting of the Interim Committee of the IMF in Washington next month.

Many countries also need to achieve higher investment. As the Prime Minister made clear in Rome last weekend, we are exploring with our European partners the scope for co-operative efforts to stimulate investment and to maintain or create jobs, particularly in the field of youth employment. I look forward to the opportunity to review with our Community partners our progress in fighting unemployment in a further tripartite conference of Governments, trade unions and employers before the end of June.

This is the background against which I face my main task in this Budget—to consolidate the gains we have made so far and to create the conditions in which we can get our rate of inflation down and make the necessary improvements in our industrial and trading performance. [ Laughter.] I think that the House will have noted that these are aims that both the British and the external markets greatly appreciated last week when there seemed to be some danger that they would be jeopardised by the possible defeat of the Government.

I have emphasised many times over the past few months that all these objectives will require some reduction in the present burden of income tax. The representations that I have received have been unanimous in advocating this. Both the TUC and the CBI have argued that substantial reductions in income tax are needed both to make it easier to agree on a satisfactory pay policy and to assist our industrial strategy. The sector working parties have reinforced these arguments by pressing for improvements in the structure of income tax to increase incentives at all levels of industry. I am convinced that working people throughout the country take the same view.

My problem in the Budget is to decide how far I can move in this direction this year without weakening the firm control that we have established over fiscal and monetary policy and without putting undue strain on the nation's productive capacity or on the balance of payments.

The economic prospect that I have just described gives some room for moving in this direction. There is all too much spare capacity in the economy, though this varies rather widely within the different sectors of industry. The balance of payments should have moved into surplus by the end of the year. The forecasts for the public sector borrowing requirement and domestic credit expansion give me significant headroom. So there is scope for a carefully controlled fiscal stimulus, to make at least a start in expanding domestic demand by reducing the burden of income tax.

I must also decide how far the prospect for a satisfactory agreement on pay policy justifies me in offering some of the tax reliefs before formal discussions on pay policy have even begun, still less been concluded. What I have heard about the intentions of the trade union movement and the CBI leads me to believe that a satisfactory agreement can be reached, although I would not seek to minimise the difficulties.

I am therefore recommending to the House in the Budget Resolutions which are being tabled today net fiscal action which will cost some £500 million net revenue in a full year. The £500 million package will take effect immediately. When, as I expect, a satisfactory agreement is reached in the coming months on the third round of pay policy, I shall bring before the House further proposals which will cost some £ 1 billion. The combined effect of both parts of the Budget will thus be to reduce the revenue by about £1·5 billion in a full year and to bring the PSBR for 1977–78 to a new forecast level of some £8·5 billion. This is within the ceiling of £8·7 billion agreed with the IMF.

Incidentally, it is not sufficiently recognised that the first year PSBR effect of a net reduction in tax is less than the full year revenue effect, partly because some of the revenue effect falls beyond the first year, and partly because the resulting rise in activity cuts unemployment and raises tax receipts. Thus the measures that I am proposing will affect the PSBR next year by only two-thirds of their full-year revenue effect.

A fiscal stimulus of this size will be fully consistent with maintaining the improvement in financial markets. In order to keep firm control of any inflationary pressures, I intend that domestic credit expansion in the coming year should be safely within the limit of £7·7 billion I set in December. The accompanying rate of growth of sterling M3 will depend on a number of factors, particularly the scale of the improvement in the balance of payments, since a surplus has the effect of expanding money supply. Although we expect a much better balance of payments next year, my best estimate is that the growth of sterling M3 will be in the range of 9 per cent. to 13 per cent.—the same as the estimate I gave in December for 1976–77.

In order to maintain this degree of control over the monetary aggregates, I intend that we should again finance a major part of the PSBR outside the banking system. I have already made a start with last week's gilt stock. It will also be prudent to maintain for the time being the present range of credit controls, and to operate them flexibly.

I am satisfied that on present trends these controls will allow sufficient room for industry's essential needs. The Government continue to regard the provision of adequate finance for industry as a key part of the industrial strategy, and I welcome the priority which the Wilson Committee on the Functioning of the Financial Institutions is giving to it.

The Government's expenditure plans for the next two years were set out in the first volume of the White Paper issued in January. We shall stick firmly to these plans, making full use of the new techniques of control which have proved their worth dramatically this year. A White Paper setting out cash limits for 1977–78, over a wide range of public expenditure, has been presented to Parliament today by the Chief Secretary.

The Government believe that it is essential to make room within the totals already published for further measures to relieve unemployment. The measures that we have already adopted have received international recognition and have made a major contribution to the recent improvement in unemployment. But although there has been a welcome fall in unemployment in the last two months, far too many people are still out of work and it is too early to conclude that the trend has changed.

My right hon. Friend the Secretary of State for Employment announced a series of measures on 3rd March, mainly to extend training and job creation, at a gross cost of £83 million. On his advice the Government has decided to supplement these measures substantially. The period in which firms can apply for the temporary employment subsidy was due to end next month. It will now be extended through the whole of 1977–78. The period of payment of the subsidy will also be extended from 12 to 18 months, at a reduced rate of £10 instead of £20 a week, for firms whose initial period of payment comes to an end after today but which reapply and continue to satisfy the other conditions for the subsidy; this extension will run until the end of March 1978. The combined gross cost of these extensions is £214 million spread over the next two years.

In addition, the Government propose four minor but important new schemes. First, there will be a selective job introduction scheme to provide an incentive for employers to engage disabled people by providing £30 a week per persons for a trial period of up to six weeks. The scheme will be administered by the Manpower Services Commission. We believe that this might help about 2,000 disabled people in 1977–78.

Secondly, there will be a special programme to train extra teachers many of whom are now unemployed—in mathematics and science. In these subjects, which are particularly important to our industrial strategy, there has been a shortage for some years which is still with us, despite the overall surplus of teachers in other subjects.

Thirdly, there will be an experimental scheme for six months from 1st July applying only to manufacturing firms in special development areas employing fewer than fifty workers. They will be given a weekly subsidy of £20 for six months for each additional worker taken on.

Fourthly, we are discussing with the Manpower Services Commission the possibility of introducing a selective scheme for an experimental period of six months to help the long term unemployed, who face problems of particular difficulty.

Details of all these new measures are being annonunced by my right hon. Friends the Secretary of State for Employment and the Secretary of State for Education and Science. The cost was in part allowed for in the White Paper programmes; the balance will be met out of the Contingency Reserve. In all these cases the gross cost will be significantly offset by savings on unemployment benefits.

Within the general problem of unemployment, the construction industry has suffered particularly hard. Although the prospective upturn in industrial investment and a probable fall in mortgage interest rates will give it some relief, the Government intend to give it additional help by means which will also assist in coping with the growing problems of inner city areas.

For this reason £100 million of additional expenditure will be made available at once from the Contingency Reserve for construction work over the next two years, in certain inner city areas in England, and for similar work in selected areas in Scotland, Wales and Northern Ireland. The Government will consult the local authorities about the allocation and programming of this expenditure.

It is likely that the work in England will include the rehabilitation and improvement of old housing, industrial site preparation, the building of advance factories, school improvements, community buildings, day centres, health facilities and the reclamation of derelict and neglected land. My right hon. Friends the Secretary of State for the Environment and the Secretary of State for Scotland will be making a further statement about inner cities shortly.

The list of employment and construction measures I have just mentioned has a gross cost of about £400 million over the next two years. This includes £165 million from the sum I set aside for this purpose in my Statement last December. The measures should create or maintain between 150,000 and 200,000 jobs or training places by the fourth quarter of this year, depending on the allowance made for the displacement of jobs elsewhere in the economy. I think that the House will agree that this is a real contribution to reducing our unemployment problem.

I come now to my proposals in the field of taxation. First, indirect taxation. I have said on several occasions that it is desirable to readjust the balance between direct and indirect taxation. In recent years the share of direct taxes has risen under successive Goverments, mainly because inflation has eroded the real value of income tax thresholds and the value of many of the specific duties. This produces fiscal boost as well as fiscal drag—a point often forgotten by commentators. This, however, is not the year to take a major step to reverse the balance, since the prospect of a steady fall in the rate of increase of the RPI is of critical importance to the negotiation of a satisfactory new pay agreement.

Nevertheless I believe that in two fields some increase in indirect taxation is desirable to support important objectives of national policy, providing it does not have a major impact on prices.

Energy conservation must remain a major objective throughout the industrialised world. This is a message which emerges clearly from the recent OECD report on the "World Energy Outlook". The pressure on the world's resources of fossil fuels, particularly oil, is bound to increase, as that report makes clear. Unless countries respond vigorously, the energy imbalance which struck the industrialised world so severely in 1973 could be upon us again in a much more severe and intractable form. If we allow this to happen, the economic and social consequences will be incalculable.

We must instead open up new sources of supply, and act on demand with conservation measures and through realistic pricing policies. We can claim that the United Kingdom's record in these areas is good. We are well endowed with indigenous energy resources, and we are developing them vigorously. In conservation, we have made a good and effective start, but we must maintain the momentum and develop our polices if we are to stay among the leaders. Fuel saving can bring forward the time when the balance of payments moves into surplus and so remove a major obstacle to high employment. In addition there are reasons of transport policy for increasing taxation on the use of road vehicles.

The taxation of road fuel was not affected by my December measures and the total effect on the private motorist of the changes in my Budget last spring amounted to no more than about 1p a gallon. My measures last year had a greater effect on the business user of road fuel, but for him it was the first increase in the taxation of derv for seven years. In these circumstances I feel justified in proposing an increase in the duty on road fuel of 5p a gallon. If fully passed on, this would raise the price of a gallon of petrol to the private motorist by a little over 5½p, including VAT. This increase does no more than restore the real value of the duty on petrol to its level after my last Budget. [ Interruption.] I thought that the Conservative Party favoured indexation of taxes. Petrol will still be cheaper in Britain than in nearly all other countries of the European Community. My proposals for road fuel duty will produce an overall revenue increase, including VAT, of £300 million in a full year. The rebate of road fuel duty paid to stage bus operators will be increased so

that their costs will not be affected by the rise in the duty.

Road fuel is not, of course, the only oil which is subject to duty. The duty on most other oil products, for example heavy fuel oil, reached its present level of 1p a gallon as far back as 1969. Its real value has fallen very substantially since then, and I propose to restore it by raising the duty to 2½p a gallon. The oils affected will be all those which at present bear the 1p rate. I have made one exception only—paraffin commonly used used for domestic heating, particularly by the less well-off and by pensioners. This paraffin will continue to carry only 1p duty as at present. The increase in duty on heavy oils will produce an estimated £150 million in a full year. Both the oil duty changes I have proposed will be brought into effect on oils cleared from 6 p.m. tonight.

Vehicle excise duty on cars has remained unchanged at £40 a year since April 1975 and its value in real terms has fallen appreciably since then. An increase of £15 would be required to restore the real value to the 1975 level. But as I am already going a long way to meet the Government's objectives in transport and energy policy by substantial increases in the duty on petrol and derv, I am proposing a more limited increase in VED of £10 or 25 per cent., taking the duty to £50 a year. The same percentage increase will apply to all other licences except those for goods and haulage vehicles. The increased revenue will amount in a full year to some £150 million.

The tax burden on heavy lorries, in contrast to the position of the private car and the lighter lorries, fails to cover the costs which they impose on the community, such as wear and tear on the roads, even if no account is taken of the damage to amenities in the areas through which they pass. I think I should make a start on closing that gap, although in the case of the heaviest lorries the gap is too large to close in one move. The reasons for moving in this direction were set out in the Transport Consultative Document published last year and the European Community is expected to take a similar view later this year.

The lighter lorries already cover their costs to the community. So for vehicles up to 4 tons unladen weight I intend to raise the duty by about the same percentage as for the motor car. But for lorries above 4 tons and up to 6 tons I propose increases of around 30 per cent., and for those above 6 tons increases of around 35 per cent. For individual weight categories within these bands there will be some variation from these figures, This is necessary to ensure a smooth progression in the tax rates. For virtually all these vehicles the increases fall short of restoring the effective burden of the duty to its level two years ago. The total increase in revenue from these changes in VED on lorries will be about £60 million in a full year.

There are compelling health arguments for increasing the duty on tobacco in real terms. Besides consolidating the increases on tobacco and tobacco products announced last December, I therefore propose to raise the duty on a packet of 20 cigarettes by 4p, with a corresponding increase on hand-rolling tobacco. A further increase on other tobacco products would not be justified at present; in particular pipe tobacco plays an important part in the life of many retired people. The increase, which will take effect from Monday 4th April, will produce an extra £150 million in a full year, including VAT.

The increase of 4p per 20 cigarettes which I have just announced will be added to the tobacco products duty as a flat rate per cigarrette. This is in itself a move towards the new structure of taxation on tobacco required by the EEC. The Financial Statement and Budget Report refers to the remaining stage of the transition, which will be reached on 1st January 1978. My hon. Friend will explain the details later in the debate. I propose no other changes in the excise duties.

I come now to my proposal for value added tax. It is—in spite of the recommendations of a Task Force which I read about yesterday—to make no change.

Thus, the only increases which I propose in indirect taxes are those justified by considerations of health, of energy or transport policy. These increases will produce extra revenue, including VAT, of about £810 million in a full year. The effect on the RPI by the fourth quarter of this year will be an increase of just under 1 per cent.

I turn now to a matter which has attracted a good deal of interest on both sides of the House. This concerns the new National Insurance surcharge which, as I announced last July, will take effect from 6th April as a two percentage points addition to the rate of employers' National Insurance contributions.

I have received many representations from charities, including the Churches, and my right hon. Friend the Prime Minister has received a deputation from some very senior representatives of charitable interests. I have considered the representations very carefully, and I have concluded that there is a strong case for relief in view of the special position of these organisations. Many charities perform valuable work in the community, and the Government would not wish to see them hampered as a result of the operation of the surcharge.

All organisations accepted as charities for income tax purposes will therefore be eligible for relief from the surcharge. The concession will be available from the first payment in respect of the 1977–78 tax year, so that no charity will be required to pay the surcharge. Details of the arrangements are set out in a Press release to be issued this evening.

I turn now to direct tax changes. I am proposing no change in the rates of corporation tax. Stability in company taxation is an important part of the industrial strategy, as I pointed out last year, and should not be disturbed without compelling reason. I shall continue to direct the relief I give to companies through the provisions for capital allowances and stock relief which already exist.

However, I believe that small companies deserve special consideration. So for the second year running I propose to increase the profit level by which small companies are defined for the purpose of the preferential rate of corporation tax. This will go up from £30,000 to £40,000. The limit for marginal relief will be increased from £50,000 to £65,000. The cost of these changes, which will benefit the small company sector in real terms, will be about £20 million in a full year.

In my Budget Statement last year I said that the interim scheme of stock relief would continue for two more years. I then thought that this would give sufficient time to devise a permanent scheme which could take account of the views of the accounting profession and of industry. However, although the Government and others have welcomed the principle of current cost accounting, the Morpeth Committee's detailed proposals are still at exposure draft stage and are not yet firm. We need more time for discussion and consultation on a permanent scheme; the implications are very important for industry, and we must get it right. I propose therefore to continue the scheme in its present form, not only for 1977–78 but also for 1978–79.

As I have said many times before, in moving to a permanent scheme there will be no question of any general withdrawal of the relief given under the current scheme. I cannot, obviously, foretell at this stage what sort of transitional arrangements may be appropriate, since this will depend upon the form of the permanent scheme, but again I repeat that, if necessary, special provisions will be included to ensure that the change of system does not lead to cash flow difficulties for individual companies.

On the question of deferred tax, a good deal has been said also, notably by several sector working parties in their end-year reports, about the troubles that some companies meet when they seek to raise finance because of the existence in their balance sheets of large deferred tax provisions. But for the normal continuing business there is little or no risk that any substantial part of the deferred liability will in fact arise. This should now be better understood in the financial world.

I come now to proposals for improving the taxation of capital gains. These take account of recommendations made by a joint working party of the Inland Revenue and representative bodies, for whose help and advice we are grateful.

First, I propose an improved roll-over relief for what is often called "domestication", that is, the transfer of an overseas branch to a separate non-resident company.

Second, I intend to modify in certain respects the rules applying to company take-overs, amalgamations and reconstructions.

I intend to take further action to deal with tax avoidance. It is intolerable that when the overwhelming majority of men and women pay their taxes honestly, a small number of wealthy corporations or individuals should escape their responsibilities to society by tax dodging on a massive scale.

First, there is increasing evidence of some particularly objectionable avoidance schemes designed to manufacture wholly artificial capital losses by shifting value from one asset to another. I am sure that there will be general agreement that they should be stopped.

Second, I propose to deal with certain highly artificial schemes under which taxpayers undertake to pay annuities for a consideration which is not taxable, or not wholly taxable, in their hands. The Inland Revenue is challenging these schemes under the present law, but I propose to introduce provisions designed to annul them. These provisions will apply to payments made after today.

I have also asked my officials to begin urgent consultations with the companies concerned about the possibility of legislating in the Finance Bill to restrict unilateral relief for certain taxes paid by oil companies to Governments of oil producing countries.

In my Budget speech last year, I referred to the question of tax relief for the extra cost to companies of repaying foreign currency loans where sterling has fallen in value. I have now considered this question fully in the light of the report I have received of the extensive discussions the Inland Revenue subsequently had with those affected.

As I made clear last year, the arguments for general relief for exchange losses are finely balanced. There are major areas where the balance of argument would be against relief, and in these areas there are real problems in distinguishing between different cases and in drawing lines between them. Moreover, although the recovery of sterling has reduced potential losses, the sums of tax at stake are considerable. I have had to conclude that, since this year there is an urgent need to concentrate on income tax reliefs, I cannot at the same time propose relief for exchange losses.

I said last December that I believed it important to find ways of improving the tax treatment of employees living in this country and working abroad, particularly those at the sharp end of exporting. The Inland Revenue issued a consultative document with proposals for changes. In the light of many representations and discussions, I am putting forward some changes in the original proposals designed mainly to benefit those who work abroad for relatively short periods at a time.

I now propose that any employee who works abroad for a total of 30 days or more in a tax year should qualify for the tax relief, whether or not the 30 days are continuous. This means that he will pay no tax on 25 per cent. of his earnings from work overseas. And those who have separate employments with overseas companies requiring them to carry out all their duties abroad will also qualify for the reduction, regardless of the length of their absence abroad. Details of my proposals are set out in the Press release which the Inland Revenue will be issuing today.

Finally, I propose to increase again this year the limits on the annual amounts within which self-employed people may claim tax relief on premiums paid for an annuity on retirement. Although these limits were raised last year, I have de-decided, after reviewing the position again, that it would be right to provide a further increase. Accordingly the limit of £2,250 will be raised to £3,000 and there will be proportionate increases in the limits for people born before 1916 and for the special types of contract first introduced in 1971.

Details of the effects of these changes of the yield of the revenue, and of certain other minor tax changes, are given in Table 16 of the Financial Statement and Budget Report.

The combined effect of all the indirect and direct changes I have announced so far this afternoon will be a net increase in revenue of £740 million in a full year.

I now come to the heart of my Budget—the reductions in income tax and their relevance for pay policy. Given the size of the fiscal stimulus I consider justified and the net revenue resulting from the tax changes I have just described, I shall be able to make reductions in income tax amounting to some £2¼ billion in a full year—assuming we reach a pay agreement for the year from August 1977 which is consistent with our inflation objectives. To the extent we fall short of such an agreement the scope for overall tax relief would be that much smaller.

I need not go into all the reasons why substantial income tax relief is desirable. We shall discuss that fully in the Budget and Finance Bill debates. In a nutshell, the effect of inflation has been to put too high a proportion of the tax burden on to the income tax; to impose tax on too low a level of income; and to bring too many people into the higher rates of tax at each successive level, starting at a level not very far above average earnings. The effect has been to weaken the incentive to work throughout the economy. In correcting this, I have to distribute tax relief so as to give priority to the areas where the problem creates the greatest hardship or is most damaging to our economic performance.

The greatest hardship falls on the poorer members of our society. I could help them through three possible changes in the income tax—by increasing personal allowances, by introducing a reduced rate band, and in the case of retired people with only modest savings by raising the threshold for the surcharge on investment income. I shall take these in turn.

The various personal allowances reduce the burden of income tax at all levels but give special help to the very poor by relieving them altogether of all liability to pay income tax. I therefore propose to increase the single person's allowance and the wife's earned income allowance by £70 to £805 and to raise the married allowance by £140 to £1,225.

I am proposing a substantially larger increase in the married allowance so as to provide the family man with special help during the transition to the child benefit scheme. It would not be appropriate to adjust child tax allowances again as I did last year. Hon. Members have already been given details of reductions being made in child tax allowances this year as the first stage in their replacement by child benefit. The effect on family income of the reduction in the allowances will in general be more than offset by the child benefits which mothers will get. But I am conscious of the need to ease the effect of this change on the father's pay packet. That is why I am proposing a substantially larger increase in the married allowance.

I propose also to raise the additional personal allowance by £70 to £420. This will ensure that, as in previous years, the allowance for one-parent families is kept in line with that for two-parent families. I propose to increase the age allowances for those over 65, so that they become £1,080 for the single and £1,695 for the married.

These increases in personal allowances will give relief at all income levels. For those over 65 the resulting threshold will remain above the level of their retirement pensions and they will continue to be able to earn some supplement to their pensions without paying additional tax. As a result of these increases in personal allowances, 845,000 people who would otherwise have been paying income tax next year will not now do so.

I turn now to the question of a reduced rate of tax for the initial band of taxable income. I have been urged from several quarters to move in this direction. There is much to be said for this in principle. But to insert a band of reasonable length would be very expensive and rule out action in areas which I believe are more important at this time.

For example, if the reduced rate were 25 per cent.—and anything higher would hardly be worth while—and the length of the band were the first £1,000 of taxable income, the special benefit of a lower marginal rate of tax would fall only on those coming between one-fifth and about three-fifths of average earnings. It would cost some £2,200 million—leaving nothing over for raising tax thresholds or meeting the special problems of those on average earnings and above.

So far as those on low incomes are concerned, the highest priority for the future must be to raise the tax threshold so as to maintain the real value of personal allowances as far as possible and, if circumstances permit, to increase their level to the point where they stand clear about the levels of the main social security benefits. Once this has been achieved I believe that the next priority should be the reintroduction of a reduced rate band. I have asked the Inland Revenue to examine the administrative problems which a reduced rate would pose for them, so that effect can be given to it as soon as circumstances permit.

I am, however, particularly concerned about elderly people who now find themselves liable to the surcharge on their income from savings which are quite modest in modern terms. I propose therefore, for the first time since 1974, to make some increase this year in the thresholds for investment income surcharge. For those over 65 I propose that the threshold for the 10 per cent. rate should be raised by £500 to £2,000 and for the 15 per cent. rate by the same amount to £2,500. For those under 65 I propose that the starting point for the 10 per cent. rate should similarly be raised by £500 to £1,500, while the starting point for the 15 per cent. rate will remain at its present level of £2,000.

Before turning to higher rates of income tax, I must deal with the problem which arises at the upper end of the basic rate band. If I took no action this year, people earning less than one and a half times average earnings would find themselves moving out of the basic rate band into liability to the higher rates of tax. In two years inflation has already almost doubled the number of people paying tax at the higher rates, from 750,000 in 1974–75 to 1·4 million in the current year; and, if I took no action, the number would rise this year to 1·8 million.

I propose, therefore, to extend the basic rate band by £1,000, making the entry point to higher-rate liability £6,000. As a result, 800,000 people who would otherwise be paying tax at the higher rate will now not do so.

I now come to the rates of income tax above 35 per cent. These apply to successive bands of taxable income which will now start at £6,000. I want to produce a more rational sequence of bands above this level. The first higher rate band—charged at 40 per cent. tax—is only £500 long and I propose to extend it to £1,000. The next three bands will remain £1,000 long but the following band—charged at 60 per cent.—which I had to shorten last year from £2,000 to £1,500, I propose to restore to £2,000. I propose to make the following two bands £2,000 long and the 75 per cent. band £5,000 long, as it is now. Thus the maximum rate will be reached at £21,000—£1,000 higher than this year.

The effect of these changes will be to raise the thresholds for the higher rate bands by between £1,000 and £2,000. This will benefit all higher-rate taxpayers, but those in the area of middle management will gain proportionately more than those at the very top.

I should have liked to have been able to do more for senior managers, as I should have liked to do more for those at the bottom of the earnings scale. But I have felt it necessary this year to concentrate relief where it is most needed. I believe that the improvements I have announced strike a reasonable balance between the needs of the various groups which most require relief immediately.

The total cost of this whole group of measures in the field of personal taxation is £1,290 million in a full year. I propose that all these income tax reliefs should take effect immediately. The benefit will generally be felt in pay packets in May.

To make this sum up to the £2¼ billion of reductions in income tax which I said we could afford if we can be assured of a continuing fall in our inflation rate, I would propose to reduce the basic rate of income tax from 35 per cent. to 33 per cent. at a cost of £960 million in a full year. Though of course all taxpayers will benefit, this will be of special advantage to people on up to nearly twice average earnings, with the biggest proportionate benefit going to the highlyskilled worker.

I have explained why it would not be prudent to commit myself absolutely to this decision until a satisfactory agreement on a new pay policy has been reached, as I expect to happen well before the Finance Bill leaves the House. To do otherwise would be to take risks with the growing confidence which is being shown in our economy both at home and abroad—risks which could be avoided by deferment for a short period. I shall not, therefore, include this proposal in the resolutions to be tabled or in the Finance Bill to be introduced after the recess. I shall move an amendment proposing a reduction in the basic rate at the appropriate time and in the light of the pay agreement.

Particulars of the effects on different families and individuals of the total income tax reliefs which I have described will be available in the usual way, but it may be helpful if I give one or two examples now. Average earnings for men are now nearly £80 a week, and the earnings of four-fifths of employed men are within £30 either side of that. A married man on £80 a week would be just over £2 a week better off when all my income tax proposals were implemented. A married man on £50 a week would gain nearly £1·50, and a married man on £110 a week over £2·65. So, besides giving substantial help to the lower paid, these reliefs would increase cash differentials and broadly maintain percentage differentials for people in the basic rate band.

Perhaps I should remind the House that all mothers will receive child benefit from next Monday 4th April, and all but the richest families will be better off as a result. The tax reliefs which I have now proposed will more than compensate fathers for the associated loss of child tax allowances.

I believe that the advantage which working people will get from the tax reliefs I have proposed should make it easier to reach agreement on a pay policy which will reduce inflation substantially in the coming year. A tax benefit of rather over £2 a week to the married man earning £80 a week is worth as much as a pay increase of £3·50 from which tax and national insurance contributions take their bite. So my proposals give him as much as a pay rise of almost 41½ per cent.; and this sum would be paid not from the date of his next pay increase towards the end of this year or in the first half of 1978 but with effect from 6th April—next week. Moreover, this sort of increase in take-home pay would not add to wage costs and so to prices. So he would get further benefit from a lower rate of inflation. And this in turn will keep interest rates lower and the value of sterling higher than they would otherwise have been.

Therefore, as I have explained, there would be a triple benefit for prices, worth 2½ per cent. off the retail price index by the end of 1978. That would be equivalent to a further gross pay rise of over 4 per cent.—making nearly 9 per cent. in all. And the resulting addition to demand would help to produce more jobs.

In fact, it is difficult to exaggerate the advantages of a satisfactory pay agreement which makes it possible for me to proceed with the full income tax package of £2¼billion.

No one should underrate the difficulties of reaching such a pay agreement for the third year running. I know that it will demand a high degree of discipline from working people and their trade union representatives. I appreciate, too, the heavy burden of responsibility it places on the TUC and would like to acknowledge again the way in which it has shouldered that responsibility in its own and the nation's interest over the past two years. But the prize is even greater than the burden. We cannot afford at this of all moments, when the rewards of our sacrifices are within our grasp, to throw away what we have gained in those two years.

The TUC has written in its "Economic Review":

"All that can be said at the present stage is that the intention is to be in a single figure inflation position rather than allow the situation to deteriorate as it did two years ago. A 'single figure' pay-prices equation is not only the same in the short term for living standards as a 'double figure' one but is incomparably better designed to protect living standards over a two to three year period because of its impact on the exchange rate and on the possibility of economic growth".

I fully endorse that statement, and I hope that there is not a single Member of this House who would quarrel with it. The TUC should have the support of the whole nation in seeking to achieve the objective it has set itself. All of us will benefit from its success.

These, then, are my proposals. They constitute a significant first step in reducing the burden of direct personal taxation. At this time, I believe that this is the most effective way the Budget can contribute to the attack on inflation and the improvement of our industrial performance, on both of which our economic recovery depends.

The full tax changes I have proposed will shift the balance between direct and indirect taxation. Direct taxation is provided over half of total revenue—about 51½ per cent.—in the current year. It will provide under half—about 48 per cent.—next year.

If I am able to implement my proposals in full, the effect of my Budget will be to increase output by a little over ½ per cent. by this time next year and approaching ¾ per cent. by the end of 1978.

On this basis, I see the economy developing as follows between now and the first half of 1978. On the central forecast, I expect output to grow by about 1½ per cent. and manufacturing output by about 2½ per cent. Manufacturing investment should be recovering rather strongly, with an increase of some 15 to 20 per cent. between now and the first half of next year. The balance of payments should also be improving strongly this year and be in substantial surplus next year.

The rate of inflation should start falling again after about the middle of this year as the effects of last year's depreciation work themselves out of the system and we enjoy the benefits of this year's lower interest rates and more stable exchange markets. The measures which I have announced today will raise prices by about 1 per cent. by the end of this year. Thus, I now expect the year-on-year rate to be about 13 per cent. in the last quarter of 1977–2 per cent. lower than the forecast of 15 per cent. which I published in December. With a satisfactory pay agreement, the prospect is that the rate of inflation will fall to single figures by the second quarter of 1978. In consequence living standards, which have fallen sharply over the past six months, following the depreciation of the pound, should at least stabilise at something close to their present level. We are now through the worst.

As I said last December, no one can predict the path of unemployment with any hope of accuracy in current circumstances. Those who have done so have had ample cause to eat their words in recent months. But it is possible to estimate the effect on employment of all the measures which I have described this afternoon compared with what it would otherwise have been. The specific employment measures I have described will, as I have said, by the end of this year create or maintain between 150,000 and 200,000 jobs or training places. The effect of my proposed tax changes will build up more slowly, but if they are implemented in full they will increase employment by about 100,000 by the end of 1978.

But the House must recognise that the key to a sustained improvement in our unemployment prospects must lie in the success of our manufacturing industry in increasing the volume of our exports and countering the penetration of our domestic market by foreign imports. I believe that this Budget will make a significant contribution to that objective. For that reason I commend it to the House.

Motion made, and Question,

That pursuant to section 5 of the Provisional Collection of Taxes Act 1968 provisional statutory effect shall be given to the following Motions—

(a) Spirits (motion No. 2).

(b) Beer (motion No. 3).

(c) Wine (motion No. 4).

(d) Made-wine (motion No. 5).

(e) Cider (motion No. 6).

(f) Tobacco (motion No. 7).

(g) Termination of surcharge (motion No. 8).

(h) Tobacco products (motion No. 9).

(i) Hydrocarbon oil etc. (motion No. 11).

(j) Vehicles excise duty (motion No. 15.—[Mr. Healey.]

put forthwith, pursuant to Standing Order No. 94 ( Ways and Means Motions), and agreed to.

Read a Second time.

Bill committed to a Committee of the whole House.—[ Mr. Coleman.]

Bill immediately considered in Committee.

[Sir MYER GALPERN in the Chair]

6.58 p.m.

Clauses 1 to 25 ordered to stand part of the Bill.

Schedules 1 and 2 agreed to.

Bill reported, without amendment.

Motion made, and Question, That the Bill be now read the Third time, put forthwith pursuant to Standing Order No. 56 ( Third Reading) , and agreed to.

Bill accordingly read the Third time and passed, without amendment.

Ordered,

That the Standing Order of 22nd November 1974 relating to the nomination of the Select Committee on Overseas Development be amended, by leaving out Mr. Lewis Carter-Jones and inserting Mr. Nigel Spearing.—[Mr. Walter Harrison.]

Order for Second Reading read.

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