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Further Possible Reductions

Volume 929: debated on Tuesday 29 March 1977

The text on this page has been created from Hansard archive content, it may contain typographical errors.

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.

I remind the House of the procedures to be followed. Under Paragraph 1 of Standing Order No. 94, the first motion, entitled "Provisional Collection of Taxes", must be decided without debate. When that matter has been disposed of, I shall call the Chancellor to move the motion entitled "Amendment of the Law". It is on that motion that the Budget debate will take place today and on the succeeding days. The remaining motions will not be put until the end of the debate on Monday 4th April and they will then be decided without debate.