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3.36 pm

The Recent Past

During the 18 months to last June the underlying growth rate of sterling M3 was nearly 15 per cent. a year. That compares with the much more modest rate of about 8 per cent. in the year after the IMF measures. The incomes policy of the previous Government had collapsed. Earnings also grew by at least 15 per cent. a year. Not surprisingly it was consumer spending that gained most from this combination of monetary expansion, tax cuts and high pay settlements. In the year before the election the volume of consumer spending rose by more than 5 per cent. a year. That was much too good to last.

There was, indeed, a big price to pay for that short burst of apparent prosperity. Production failed to respond to the surge in demand and imports, especially of manufactures, rose sharply. The current balance of payments, in surplus after the IMF agreement and helped by North Sea oil, moved back into deficit and inflation moved sharply upward.

Last year we made an important start on tackling that inheritance. We set about reducing the rate of monetary growth. We achieved large reductions in dangerously oversize public spending plans. We reduced the share of Government spending and borrowing in the nation's output. And when, last November, the money target looked like being exceeded, we acted promptly and decisively.

We have removed many unnecessary controls and obstacles to enterprise and individual effort. We have removed controls on pay, prices, dividends and foreign exchange, which can now be used freely to acquire productive assets overseas to the benefit of our exports and invisible earnings alike. My first Budget switched the tax burden from earnings to spending and greatly reduced oppressive tax burdens on enterprise.

But during the year that has just ended we have had to contend with a further major increase in world oil prices and with a substantial rise in the price of other commodities. The strength of sterling has to some extent cushioned their impact on domestic inflation. Even so, the price of oil and other inputs to manufacturing industry has risen by 41 per cent. since the beginning of 1979.

The rise in the oil price has also had severe effects on the world prospect generally. The outlook in the coming year is for a significant slow-down in growth and a worsening of inflation everywhere. The year-on-year increase in consumer prices in OECD countries rose from about 10 per cent., on average, in mid-1979 to 14 per cent. by the beginning of 1980.

Every major country is demonstrating its determination to resist this inflation by adopting a firm monetary and fiscal policy. The inevitable immediate result is lower output and higher interest rates. Since early last summer rates have risen by six percentage points, on average, in the major industrial countries. This is much the same as in the United Kingdom over the same period. The increase has been even more marked where the dollar is concerned. Between May last year and the end of last week Eurodollar three-month rates rose by over 8 per cent. to 19 per cent.

The immediate prospect

That is part of the background against which to judge the poor short-term economic outlook for the United Kingdom. The Treasury projections published today suggest that output may fall in 1980 by up to 2½ per cent. This is more or less in line with outside forecasts.

It is important to understand the significance of this recession. There are some who argue, or at least seek to imply, that it is an entirely avoidable development, which need not be inflicted upon the British economy. Others seem almost happy to suggest that, so far from being avoidable, this recession is no more than a foretaste of much worse to come. Some uniquely critical pessimists contrive to convey both impressions at the same time.

The right view to take is that it is, in part, a consequence of the weakness in world demand, in part a consequence of our own inflation—still well in excess of the money supply target—

This is one of the reasons—though by no means the only one—why I intend to consolidate the start that I made last year by publishing today the Government's financial and monetary strategy for the medium term. This strategy is contained in part II of the Financial Statement and Budget Report, better known, perhaps, as the Red Book.

This strategy is by no means to be confused with a national plan—Opposition Members may laugh—for it is concerned with only those things—very few of them—that the Government actually have within their power to control. The strategy sets out a path for public finance over the next few years. At its heart is a target for a steadily declining growth of the money supply. That is set alongside policies for Government spending and taxation, which will underpin that objective.

It will be clear from what I have already said that the Government continue to regard the fight against inflation as the first priority. It is an illusion to suppose that we have any real choice between defeating inflation and some other course. It is quite wrong to suppose that inflation is something with which only Treasury Ministers need be concerned. So long as it persists, economic stability and prosperity will continue to elude us. So long as it persists, social coherence will also elude us. Nothing, in the long run, could contribute more to the disintegration of society and the destruction of any sense of national unity than continuing inflation.

Inflation sets worker against worker, employer against employee, and sometimes even Government against their own employees. The violence of the picket lines and last winter's examples of hospital patients denied supplies, and of the dead denied burial, would have been unthinkable 20 years ago. They reflect the social disintegration caused by inflation. That is one of the reasons why the conquest of inflation is so important.

Monetary policy has an essential role to play in the defeat of inflation. Other countries recognise this very clearly. They recognise, too, that sustained monetary restraint is not an easy, automatic or painless solution. But they are convinced that it is essential. They are struggling to get back towards more balanced budgets, as we must. They recognise, as we must, that inflation cannot persist in the long run unless it is accommodated by an excessive expansion of money and credit. That is at the heart of what "monetarism" means in practice. It is a great pity that its practical, commonsense importance has been so confused by arid, theoretical dispute. Certainly the word "monetarism" should never have become a term of political abuse—least of all for use by those who have in the past claimed to make a virtue of practising it.

It is an illusion to suppose that there is any real alternative to the strategy that I have outlined. Some commentators seek to blame our present difficulties on the pursuit by Government of unnecessarily tough policies. That is totally to misunderstand the position. Britain's present difficulties are so deep-seated and serious as to make tough policies inescapable. Relaxed monetary and budgetary policies might bring higher output—even higher living standards—in the very short run, though even that is questionable, but in reality they would simply fuel fresh inflation. Such policies would inevitably undermine the confidence of financial markets, industry, and consumers. The action that would then be necessary to deal with the ensuing crisis would, equally certainly, destroy jobs and cut living standards still further.

Restraint of the growth of money and credit is, then, essential, and it needs to be maintained over a considerable period of time in order to defeat inflation. That underlines the importance of the medium-term financial strategy.

That strategy, as I have said, sets out a four-year path for monetary growth, public spending and tax policies. I shall deal first with the monetary targets. By 1983–84, the last year covered by our spending plans, the target rate of growth of money supply will be reduced to around 6 per cent.—just half the rate of growth over the past year.

The monetary target for 1980–81

In keeping with that medium-term monetary objective, the target range for the growth of sterling M3 in the period to mid-April 1981 will be 7 per cent. to 11 per cent. at an annual rate. The base for this will be the most recent published figures. The target will thus relate to the 14 months from mid-February this year.

I am glad to say that monetary growth has already begun to slow down. In the first four months after the Budget sterling M3 continued to grow at the excessive rate—over 14 per cent.—that we inherited. But in the succeeding four months it fell to an annual rate of 10 per cent. Moreover, in the earlier period sterling M3 growth had been below that of other measures of the money supply. Currently, however, all the other measures, M1, total M3 and the various indicators of wider liquidity, are growing less rapidly than sterling M3. The narrow measure, M1, actually fell over the last four months. So the turndown in the growth of sterling M3 probably understates the extent to which the measures in the last Budget and those that I took in November have already brought monetary growth under control.

This year's target will consolidate the substantial slowdown in the underlying rate of growth. At the same time the Governor and I have agreed— Interruption.]

I am referring not to any foreign or outlandish figure but to the Governor of the Bank of England. We have agreed that the supplementary special deposit scheme—generally known as the "corset"—should not be extended beyond mid-June, when the present guideline ends. One of the effects of the corset has been to encourage the development of credit channels just outside the banking system, such as the purchase of bank acceptances by the private sector. This process will be reversed to some extent when the corset ends. So sterling M3 will be swollen as earlier distortions unwind.

The increase in sterling M3 on this account will not, however, signal a change in underlying monetary conditions. The scale of this exceptional increase cannot be precisely measured or predicted, and we shall need to assess its effect both as it occurs and when the target is rolled forward in the autumn. If, as I hope, it can be accommodated within the target that I have just announced, that will point to a further slowing down of monetary growth.

By any standards this is a firm monetary policy. But it is an essential response to the inflation rate. As I have shown earlier, there is nothing unique to this country about what I have proposed. Other countries faced with similar problems have adopted similar remedies, as is shown by the determined measures introduced in the United States a fortnight ago.

Monetary control

It goes without saying that to accompany these policies we need to have efficient methods of monetary control. We already have the means to meet our medium-term objectives. The Green Paper on monetary base control, which I laid before the House last week, will provide a basis for public discussions of how to improve control over short periods. The Governor and I hope to hear a wide range of views before deciding whether any further changes should be made.

The recent pressure on companies has resulted in a strong demand for bank lending which has contributed to the upward pressure on both money supply and short-term interest rates. I am sure that banks and their customers would be well advised, in the difficult economic conditions foreseen, to be cautious about the scale of their lending and borrowing. When the growth of bank lending falls back, this will add to the downward pressure on interest rates from today's measures.

The Public Sector Borrowing Requirement

But it is not intended to achieve this reduction in monetary growth by excessive reliance on interest rates. The Government's financial strategy, therefore, plans a substantial reduction over the medium term in Government borrowing as a percentage of national income. The relationship between the Budget deficit and the growth of money supply is not a simple one. It is erratic from year to year. But there can be no doubt of its importance, or that Government borrowing has made a major contribution to the excessive growth of the money supply in recent years. The consequence of excessive borrowing has been high nominal interest rates and, in capital markets, the crowding out of business by the State. This has held back investment. From now on, however, given the shape of the Government's plans for public spending, the Budget deficit should be reduced progressively to between 1 per cent. and 2 per cent. of output. This would be a little below the average in the 1960s.

During a recession, of course, it is widely recognised that the Budget deficit is increased by low tax receipts and high Government spending. Some increase in the ratio of the PSBR to the national income may be consistent with the maintenance of a given monetary target and without itself requiring increases in interest rates, but in practice public sector borrowing has been too high during the last two years, as experience has shown. That lesson, and the continuing high inflation rate, make a big cut in the underlying deficit imperative this year.

In 1977–78, following the agreement with the International Monetary Fund, the public sector borrowing requirement as a percentage of output was 3¾ per cent. of notional income. In 1978–79, after the last Governments relaxation of policy it rose to 5½ per cent. In money terms the latest estimate is just over £9 billion.

Despite the expectation of recession, experience shows that it would be wrong to keep the actual PSBR at its current level as a percentage of national income. This could not be reconciled with the monetary target or with the counter-inflationary objectives of the medium-term strategy. We must not make the mistake of promising to correct the underlying weakness at some time in the future but failing to take the necessary steps today.

The monetary target that I have announced for the coming year will involve a substantial further slowdown in underlying monetary growth. If we are to meet that target without putting too much of the burden on interest rates, a public sector borrowing requirement of not more than 4 per cent. of national income in 1980–81 is appropriate. This would imply a money figure for the PSBR next year of not more than about £8½ billion.

Today's proposals will leave the total yield from taxation not much changed. Taking account of the effect of inflation over the past year and of the Government's public spending decisions, this represents a tightening of the budgetary stance. Indeed, in the absence of the substantial cuts in public spending since my last Budget, a very large increase in the burden of taxation would have been unavoidable.

Fiscal Policy in the Medium Term

The Government's spending plans are published today in the public expenditure White Paper. They are essential to the financial strategy. The path that we can now plan contrasts very sharply with past experience and intentions. We are not making panic cuts affecting the next year or two, leaving the long-term trend unaltered. We are not just reducing planned increases. The level of spending is actually planned to fall steadily throughout the next four years. Without these economies, a coherent policy to reduce inflation would be unattainable.

Over the next few years receipts of taxes and royalties from North Sea operations will make an increasing contribution to Government revenue. Even so, the growth of revenue over the medium term is broadly dependent upon the growth of national output. This is conditioned by the growth of productivity, the growth of the world economy, and the speed with which we reduce inflation. Since the first oil crisis in 1973 there has been a world-wide decline in rates of economic growth. The growth of output in the United Kingdom has been less than half its previous rate, in spite of the contribution of North Sea oil. The recent rise in oil prices makes it unwise to assume that world and United Kingdom output will expand faster over the next few years than in the past five.

The projections for tax revenue in the medium-term strategy, therefore, rest on the fairly cautious assumption that after the recession forecast for 1980 the economy will grow by an average of only 1 per cent. a year up to 1983–84. This will undoubtedly seem rather modest. The economy should be capable of growing faster than this. But we must learn from recent history. In the past, Governments have almost always based their spending plans on improbably high growth rates, which were well above those achieved. To plan spending on over-optimistic growth assumptions can involve actions that, in the event, prevent that forecast growth being achieved. We should take credit for improved growth performance only once we have firm evidence that it has taken root.

So in preparing projections of the future of the economy, we must adopt a cautious approach. The Government cannot dictate the rate of growth of output. It is only as inflation subsides that there will be secure foundations for sustainable growth. The 1 per cent. a year that we are assuming is the same rate as was achieved in the years 1973 to 1979. We cannot prudently assume that we shall do better over the next few years, though we have every reason to hope that we can. The sooner inflation comes down, the faster the rate of growth we can achieve within the monetary framework.

A firm monetary policy, as the past year has shown, contributes to a strong exchange rate. Furthermore, sterling now has some of the characteristics of a petrocurrency. A strong exchange rate plays an important part in diminishing inflationary pressures, but at the same time it obliges United Kingdom industry to restrain costs and improve its competitiveness. That requires a fundamental change in attitudes.

Over the past years we have sunk into an unquestioning "cost-plus" mentality, where the impression is given that whatever wage increases are agreed can simply be passed on to customers. But exporters have been learning that their prices must be related as closely to their competitors' prices as to their own costs. The same lesson has to be learnt in pay negotiations. Just as exporters must base their prices on what their customers will pay, so pay settlements must be based upon what companies can afford, while remaining competitive.

There is a need for much greater public awareness of the link between pay increases, price inflation and unemployment. This subject has already been discussed in the forum of the National Economic Development Council, and we shall be returning to it again at future meetings. The more pay settlements can be moderated, the lower the transitional costs of the fight against inflation in terms of bankruptcies, lost production and reduced employment.

It is still a widespread, if tacit, assumption in too many places that if wages and prices go up fast the exchange rate will fall before long and restore any loss of competitiveness. This rests, not unreasonably, on repeated experience. But the authorities are no longer in a position to engineer a major reduction in the exchange rate in order to bail out those who have sought and granted excessive pay claims. Even if we could do this, it would create more inflation before long.

It is not only in collective bargaining and selling overseas that we must move away from a blind attachment to cost plus and the idea of full protection against RPI movements. The problem goes far wider than that. There are many parts of our economic life where it is right to take some account of inflation, but a very damaging rigidity has grown up in how we do it. For example, until recently public spending programmes were controlled entirely in volume terms, without regard to changes in their costs. With cash limits an important step was taken away from an increasingly harmful practice. Again, it has been assumed that the real value of all social security benefits must always be maintained, whether production and incomes go up or down. This places the entire burden of adjustment on the working population. They, for their part, have responded by pressing for the income tax system to be fully indexed and by adding to their demands for higher wages. Inevitably, a substantial part of the burden of adjustment then falls on profits, and so on jobs.

So long as inflation persists there has to be some measure of price protection in relation to social benefits and taxation in a civilised society, but full protection for some is possible only at the expense of others. The proposals in this Budget recognise both the need to offset some of the effects of inflation and the fact that it is impossible to maintain the real value of all personal incomes when total national income is likely to fall.

If we are to master inflation the adjustments required of all of us are difficult but perfectly feasible. We should beware of the fashionable but misleading parallels with what happened in 1974 and 1975. They are merely a recipe for self-fulfilling pessimism.

After the oil price increases of 1973–74 our inflation went on rising for two years, reaching a peak year-on-year rate of 26 per cent. in the autumn of 1975. The oil price increases in the second half of 1979 have been just as large, but this time we have a good chance of seeing our inflation rate decline in the latter part of 1980. Monetary growth is now under better control. Unlike then, we have no backlog of inflation in the system, caused by earlier falls in sterling. There are encouraging signs of realism in private sector wage settlements. This is clear, for example, from information provided by the CBI data bank and from evidence of settlements linked to genuine productivity deals. The underlying rate of inflation over the last six months is well below the present year-on-year rate.

Projections of growth and tax revenue can only be illustrative and imprecise, but those published today show that for the first time the Government of the day have coherent policies for money, tax and spending over the medium term. There should be scope simultaneously to reduce Government borrowing and to lower taxes, including progress towards a 25 per cent. rate of income tax. Publication of this strategy will assist decision-makers throughout the economy to work with the grain of Government policy, understanding the limits that it imposes and the opportunities that it presents. This strategy is the best foundation for higher growth, fuller employment and a return to rising living standards.

At the heart of the medium-term strategy is the need to return to a sensible level of public spending and to see taxes and Government borrowing reduced. The spending plans that this Government inherited were too high, and were set to grow considerably faster than production. Most aspects of public spending are worth while if the nation can afford them, but too often we have endorsed plans for rising expenditure that we cannot afford. In the last 20 years the ratio of public expenditure to GDP has risen by a quarter.

It would be all too easy for that ratio to go on rising indefinitely unless we addressed ourselves to fundamentals. That is what we have done in what has been the most far-reaching review of medium-term expenditure plans since they began 20 years ago. This review is crucial to the strategy, crucial to success in reducing the public sector borrowing requirement, lowering interest rates, and bringing down inflation—and crucial if we are to find room for lightening the tax burden and so to provide scope and encouragement for enterprise and initiative.

The results are set out in the public expenditure White Paper published today. Publication of plans for expenditure at the same time as those for taxation has long been widely favoured. The happy coincidence of the two on this occasion is mainly due to the time needed to review inherited expenditure plans fully, but it has enabled me to present together the Government's strategy for expenditure, taxation and the money supply in a way not attempted by my predecessors. One other result of this coincidence is that I have an unusually large number of tax and expenditure proposals to announce in this speech. Details of these are contained in press notices that are being issued today, an index to which can be found in the Vote Office.

The plans in the White Paper show, for the first time ever, a progressive reduction in total expenditure throughout the lifetime of a Parliament. By 1982–83 they will be over 11½ per cent. below those inherited from the previous Government. This reduction works out at over £11 billion at today's prices. Expenditure in 1983–84 is planned to be about 4 per cent. lower, in real terms, than in 1979–80. The effect will be a marked shift in the burdens imposed by the Government and in the balance between the public and private sectors. Above all, we shall have set the volume of public spending on the right course. We shall be creating a climate much more favourable to economic growth.

In the coming year, 1980–81, the reduction from the amount that our predecessors planned to spend is over £5 billion at today's prices prices—roughly equivalent to the revenue raised by an extra 7p on the basic rate of income tax. Since the White Paper published in November, further net reductions of over £900 million have been decided for the coming year. The Government have thought it prudent, however, to set aside £325 million of this for the Contingency Reserve. It should not be necessary to spend all that. These decisions reduced planned spending in 1980–81 by at least £575 million at current prices. Special sales planned for 1980–81 remain at the £500 million mentioned in the November White Paper. That compares with the £1 billion target for 1979–80 announced in my Budget last June. In the event, a total very close to £1 billion has been raised in that way.

In today's circumstances, any Government would have to check the size and growth of public spending. This does not mean, and has not meant, that public expenditure should be cut indiscriminately. Our choices have been guided by the belief that the Government should provide efficiently and realistically those services that they alone are able and best fitted to provide. The role of the State can sensibly be reduced where it has taken over what private initiative can better achieve, and where it has been reducing incentives, increasing bureaucracy and distorting markets.

Only the State can provide adequately for the defence of its citizens against external and internal threats. The Armed Forces and police need to be strengthened and improved. Expenditure on defence, and law and order, therefore, is planned to grow—defence by 3 per cent. a year, in real terms, up to the end of the period, and law and order by 2½ per cent. a year. Spending on health will continue to grow exactly as planned by the last Government, at about 2 per cent. a year over the period. The cost of this increase will he partly offset by increases in charges, including in particular a £1 prescription charge, from next December. [ Interruption.] These charges will yield in total about £30 million in a full year. [ Interruption.]

I have already stressed the scale and importance of the social security programme. In the coming year it will absorb a quarter of public spending and cost about £20 billion—which works out at no less than £1,000 a year for every household in the country. Its volume has grown by about 50 per cent. in the last 10 years, allowing both for inflation and the switch from family allowances and child tax allowances to child benefit. That rate of growth is more than three times the 15 per cent. increase in GDP over the same period. Some of this growth is accounted for by an increase in the number of beneficiaries, particularly the elderly. But much of it has come about not through any conscious decision but because the level and scope of benefits have been improved in anticipation of a growth in output which has not been achieved. It is a striking example of the nations capacity for spending money before it has been earned.

Any effort to curb the growth of public spending must, therefore, include this programme. One must recognise the differences between its various components. The programme covers a big range of benefits and beneficiaries. Any changes must reconcile the need, which we all recognise, to protect the most vulnerable members of society with the need to ensure that scarce resources are distributed in a way which does not unduly inhibit the creation of wealth. Standards of living and the benefits people are willing to finance must depend on a healthy, growing economy.

Any civilised society has a special obligation to those who have completed their working life. The standard rate of retirement pension will accordingly be increased next November by £6·15 to £43·45 for a married couple and by £3·85 to £27·15 for a single person. These increases fully reflect the Government's estimate of the rise in prices between the last uprating and the next. In addition, a £10 Christmas bonus will again be paid. Moreover, we propose substantial extra help for poorer consumers with their fuel costs next year. Much of this will go to the elderly. My right hon. Friend the Secretary of State for Social Services will be giving details tomorrow.

Again, any civilised society should provide a safety net below which a poor person's standard of living should not fall. We can all debate what is the proper level. Should it be a relative level or, as Beveridge had contemplated, an absolute level, which seeks to meet the basic needs of a person and his family? These are difficult questions. The answers are not made any easier by the fact that the supplementary benefit scheme covers so many varied circumstances, with more than 3 million beneficiaries at any one time, ranging from the old and infirm to healthy young people capable of work. But clearly no action we take should be at the expense of the really weak and needy. Accordingly we propose that supplementary benefit rates, too, will be increased next November in line with the projected level of prices. A large part of the additional help with fuel costs which I have just announced will also go to supplementary benefit recipients, particularly the old and those with young children.

Besides the old and the poor there are others with special needs. One-parent families face particular problems. We propose that the additional payment to them should go up from £2·50 to £3 per week—an increase of 50 per cent. since the government came into office. The disabled also face special difficulties. The mobility allowance will therefore go up by £2·50 per week to £14·50 per week next November—again an increase of nearly 50 per cent. since we came into office. The family income supplement scheme will be improved so as to extend help to a further range of low income families where the breadwinner is in work. These families will also benefit from the fuel help scheme.

This demonstrates our determination to look after the elderly and the needy. But there is another aspect of the social security programme. The Government and the vast majority of the British people want hard work and initiative to be properly rewarded and are vexed by disincentives to work. One of the biggest problems is the lack of balance between social security benefits and incomes in work.

As my predecessor so often reminded this House, the net extra reward to a low earner from going out to work can be so close to the benefits he can get when on social security as to extinguish his incentive to find or stick to a job. Indeed, there are people whose incomes out of work exceed what they could reasonably expect to get when in work. There is undoubtedly widespread and justified public concern about this disincentive. It is doubly demoralising: first, to those directly affected; and, second, to the large numbers around them, who quite reasonably see such provisions as unjust as well as harmful to the proper workings of the economy.

This is a complicated problem which cannot easily be resolved, but the Government are determined to tackle it. We intend to start with tax. Successive Administrations have always intended that short-term social security benefits should form part of a person's taxable income, in the same way as pensions and widow's benefits always have. The 1948 legislation said they should be taxable. It is only fair that a man who in the course of the year derives his income partly from work and partly from social security benefits should pay as much tax as a similar man who has earned the same total income. So far the administrative difficulties have always appeared insuperable. Now we are going to act.

First, we have the scheme, which my right hon. Friend the Secretary of State for Social Services announced before Christmas, whereby employers would have the responsibility for the payment of a minimum level of sick pay during the early weeks of sickness. This will bring the bulk of sickness payments into tax through PAYE. This scheme should be operating from April 1982. Secondly, we intend to bring benefits paid to the unemployed into tax at the same time. This will be done in such a way that in general the claimant will neither receive refunds nor suffer deductions of tax until he is back at work. We are also considering how best to bring into income tax at an early date the remaining short-term benefits, and invalidity benefit, which, primarily for administrative reasons, are at present untaxed.

But we do not have to wait until 1982 to do something about this problem. Subject to the approval of Parliament, these short-term benefits and invalidity benefit will, at the next uprating, be increased by 5 percentage points less than would fully reflect forecast price movements. In addition, the entitlement formula for earnings related supplement to these benefits will be altered from January 1981 so as to reduce the proportion of earnings reflected in benefit. None of these benefits comes within the tax net at present. What I am now proposing takes account of the general agreement by successive Governments that they should.

The ERS scheme itself has been diminishing in worth and effectiveness over recent years. Redundancy payments are now more generous, and the development of the employers' sick pay scheme means that ERS is much less needed than formerly. Of the unemployed, only about 10 per cent. to 15 per cent. are in receipt of ERS at any one time. All in all, the Government would find it difficult to justify its retention. We therefore propose that the State provision of short-term benefits should in future be on a flat-rate basis and that ERS should be withdrawn in 1982, with no fresh claims being taken from the beginning of that year.

The large increases in the social security programme over the years reflect in part the heavy cost of automatically indexing the value of benefits in an open-ended way. One aspect of this is the system of index-linked pensions in the public sector, which includes those payable to retired Ministers and Members of Parliament. Serious doubts have been raised as to whether adequate allowance is made for the value of present pension arrangements in settling public sector pay. The Government intend, therefore, to set up an independent inquiry into that question.

I come now to child benefit, where a judgement is needed how far the impact of inflation should be offset. I have already explained the general problem that has to be faced in relation to both benefits and taxation. The Government propose that this benefit should be raised in November from £4 to £4·75 per week for each child. For nearly all basic taxpayers, this increase of 18¾ per cent. in child benefit will ensure that they are better oil than they would have been if child tax allowances and family allowances had continued and had been uprated in line with prices—and people who pay no tax at all are substantially better off.

Child benefit is, of course, paid in respect of every child in the country, regardless of the parents' circumstances. The increase that I have just announced will add over £400 million to public spending in a full year. An extra 10p per child per week would cost nearly £60 million a year. I have no doubt that in all the circumstances, I have done everything that is reasonable to match the claims of those who are entitled to child benefit with those other recipients of social security.

Within the limited resources available, given the other pressures on the social security programme, these decisions represent the best balance between protecting the old, the poor and the needy, strengthening work incentives, and securing fairness as between the taxed and the untaxed. Full details of the changes will be announced tomorrow by my right hon. Friend the Secretary of State for Social Services.

Finally, I turn to an area where our social security system touches on industrial relations. More than 10 years ago one of my distinguished predecessors said:

"we need to facilitate the smooth working of the process of collective bargaining in industry and to help to prevent the occurrence of unnecessary and damaging disputes, of which we have seen all too much recently, and which are totally incompatible with our economic objectives."—[Official Report, 15 April 1969; Vol. 781, c 1006.]

That is what Mr. Roy Jenkins said in 1969, when he announced the then Government's intention to press ahead with their proposals, "In Place of Strife". Eleven years later, little indeed has changed, except for the worse.

I shall refer today to only one aspect of this self-inflicted industrial damage. The social security payments that a striker may claim on behalf of his family can be one of several factors that sometimes tilt the balance of industrial power against employers and responsible union leadership alike. These payments have helped to sustain some very damaging strikes. The sums involved can sometimes be substantial. During the present steel dispute, for example, such payments have so far amounted to over £8 million. That figure would be enough, for example, to pay the full-year cost of another 50p a week on the one-parent premium or an extra £1 a week on mobility allowance. Payments to strikers are widely and understandably resented and we have carefully considered how best to change present procedures.

Supplementary benefit for strikers' families will not be withdrawn altogether, but once Parliament has passed the necessary legislation we intend that assessments for benefits will assume the striker to have provided £12 per week himself, whether in strike pay or in some other way. Strikers' tax refunds will continue to be taken into account in assessing needs. Until now, part of the tax refund—equivalent to £4 per week—has been disregarded. In future regard will be had to the full refund. We propose, too, that when benefits paid to the unemployed are brought into tax, benefits paid to strikers' families shall be taxed similarly.

This is an overdue reform. The Government believe that it is entirely fair to assume that strikers have made some provision for their families' financial support, either through their union or by some other means. It can hardly be denied that unions need to accept fuller responsibility for supporting their members when on strike than some of them have done recently. This change will make an important contribution to restoring the balance that has so long been lacking in our industrial relations.

After the changes announced today, the social security budget will still be higher, in real terms, in each of the next four years than it was last year. These changes reflect new and responsible priorities, such as are inevitable in a period in which resources are scarce. Successive Governments share credit for the Welfare State, but social security cannot be regarded as exempt from re-examination and entitled always to take absolute priority over spending on defence, the police, hospitals or schools—or over the need for proper control of public spending as a whole. Once that fact is recognised, there can be no denying the case for modest economies in this programme.

The tax measures that I am about to announce are consistent with the medium-term strategy and the overall budgetary framework. They also take account of the changes in the balance of the economy that have come about over the last year. Many are made necessary only by the impact of inflation upon the tax system. One of the many reasons why we need to master inflation, it may be thought—though not perhaps the most important—is that it would enable Chancellors to make much shorter Budget speeches.

Three developments in particular have influenced me: high pay settlements, high oil prices, and the high exchange rate. Together, those developments have swung the balance strongly in favour of consumers and against companies, in particular against those companies facing competition from overseas, whether in home or overseas markets. Consumers have lost something as a result of the increase in oil prices. But the great majority have more than made up for this by big pay increases and the benefit they have received from income tax cuts, the high exchange rate and lower prices for imported manufactures. In 1979 average personal after-tax incomes increased by 20 per cent. while the profits of companies not engaged in North Sea operations fell by over 5 per cent. in money terms, and, of course, by much more in real terms.

In deciding the balance of my tax changes I see a stronger case for reducing the real burdens on companies and small businesses than on private individuals. Of course, not all companies have lost out. The oil companies are making large windfall profits. The banks are gaining from high interest rates. Some of these are in a position to contribute more by way of taxation. The financial position of most sections of business will be eased as interest rates come down. So far as tax changes are concerned, I shall concentrate the limited funds available to me on encouraging enterprise and on relieving specific pressures which are particularly damaging or unfair.

Taxation of North Sea Oil

The Government's objective in taxing North Sea oil operations must be to strike a balance between the nation's claim to a share in the profits from this national resource and the right of those engaged in the risky business of oil exploration and development to a fair return on their efforts. Since my last Budget, world oil prices have increased dramatically. North Sea oil prices, which follow world prices, have risen by more than half, from about $20·70 to about $33·75 a barrel.

This substantial change has greatly favoured the oil companies. I therefore propose, for chargeable periods ending on 30 June next and subsequent periods, to increase the rate of petroleum revenue tax from 60 per cent. to 70 per cent. At the same time, I propose to rectify some anomalies in the PRT rules concerning transfers of North Sea interests between oil companies and the taxation of gas. These are changes that the industry has requested. I also propose to introduce special PRT provisions for fields that span the median line between the United Kingdom and the Norwegian continental shelves.

I have one further proposal on petroleum revenue tax. It relates to the collection of tax. The PRT structure gives companies very early relief for capital expenditure. This means that PRT is not collected until some considerable time after a field has come on stream. The increases in oil prices have greatly strengthened the industry's cash position. I am satisfied that PRT payments can in future be made somewhat earlier. The Petroleum Revenue Tax Act 1980 went some way in that direction. I now propose to go slightly further.

We shall require companies which are liable to PRT for the chargeable period to 30 June 1981 to make at the beginning of March 1981 an advance payment for that chargeable period at a rate of 15 per cent. based on 1980 liabilities. Advance payments for later chargeable periods will be made in the same way but not necessarily at the same rate. These advance payments will be offsettable against normal payments of PRT.

In total, the changes in oil company taxation are expected to bring in an extra £535 million, making a total of petroleum revenue tax, corporation tax and royalties for 1980–81 of rather over £4 billion. We are thus ensuring that the nation as a whole secures a proper share of North Sea profits this year.

North Sea oil adds to national income mainly through increased Government revenues and oil company profits. Though the sums of money are large, we must not exaggerate them. Even in the years of peak production later this decade, no more than 6 per cent. of GNP is expected to come from the North Sea—equivalent to perhaps two years of the kind of economic growth we achieved in the 1950s and 1960s. This makes it all the more important that we should use the oil wisely, with an eye to our long-term economic interests. In particular, we should take the opportunity offered by the growth of oil revenues to bring the level of public sector borrowing steadily down, and this is what our medium term strategy envisages.

Banks

In recent weeks there has been a good deal of comment about the profits declared by the clearing banks. Some represent a "windfall" to the banks, which arises from the combination of high interest rates and the fact that interest is not paid on current accounts. The windfall element is not a sign of enterprise or efficiency, as the banks themselves recognise. But it is equally irrational to attribute these profits to some wickedness on the part of the banks. They need the major part to strengthen their capital base, which would otherwise have been eroded by inflation.

There could, of course, be a case in principle for a special tax related to the windfall element in these profits, and I shall be considering that further. However, it has not yet been established that such a tax is either practical or entirely desirable in today's conditions.

Leasing

Leasing, in which the banks have been heavily involved, has grown rapidly in the past few years. Underlying that growth has been the 100 per cent. capital allowance, which leasing companies can claim on assets bought for leasing. The present rules apply to equipment leased to United Kingdom industrial and commercial companies, which would qualify in their own right for these tax incentives if they were to purchase the equipment for themselves. I do not propose any changes in transactions of that kind. Leasing finance of that sort has become an important—in many cases an essential—source of finance for investment in manufacturing industry. However, under the present tax rules these 100 per cent. allowances apply to all leased equipment. Thus, leasing effectively extends the benefits of tax incentives to certain users—such as overseas companies, certain public bodies in the United Kingdom, and consumers—who would not qualify for tax incentives if they had purchased the equipment themselves.

I propose to end those anomalies. As from 1 June expenditure on leasing involving these users will normally qualify only for 25 per cent. tax allowances. There will be transitional provisions for leased television sets. Though the extra revenue in 1980–81 will be negligible, the saving in a full year will be over £200 million.

These provisions will replace, from 1 June, the stopgap provision for foreign leasing which I proposed on 23 October, when announcing the abolition of exchange control. They will also include measures to end the growing abuse of leasing by individuals for tax avoidance purposes. However the Motability scheme for leasing cars to disabled people will continue to benefit from the existing provisions.

Company liquidity

I have already referred to the difficult problems that many companies will be facing in the coming year, with great pressure on their liquidity. I have considered how far it would make sense for the Government to help them by major tax reductions. Such help could be provided only at the expense of much higher personal taxation or higher borrowing and thus higher interest rates. I believe that the greatest service which I can perform for business is to reduce the burden of financing the public sector and thus to get down interest rates. I have, therefore, given precedence to that objective.

Corporation tax and stock relief

However, there is, as I observed last June, a clear need to re-examine the corporate tax structure. I have already undertaken that there will be full consultation before changes are made. I understand that the accountancy profession will be publishing its new standard on current cost accounting later this month. We will, therefore, publish a Green Paper later this year, reporting the results of our general review of the present corporation tax provisions.

Meanwhile, I do not think that it would be right to change the rate of corporation tax or to make major changes in its structure. But I do propose one important concession to help companies which face a particular difficulty. A number of businesses in manufacturing, and certain areas of distribution, are concerned about the recovery charges which they will face as a result of reductions in stock levels likely to arise either because of the general pressure on liquidity, or in some cases as a result of the steel strike.

I propose, therefore, to allow a substantial part of the stock relief recovery charge consequent on a reduction of stocks to be deferred for one year. This change will be subject to certain conditions, dependent on the extent to which stocks are financed on trade credit. The new relief will be given for business accounts ending after 1979–80. The cost is estimated at £210 million in 1980–81 and a further £125 million in 1981–82. While further relief is justified in the cases to which I have referred, there is criticism that the present stock relief may confer an unjustifiable advantage in certain circumstances. This is a complex matter on which detailed consultation will be needed, but my intention is to legislate next year in respect of accounts on which tax will generally be payable on 1 January 1982. This will give enough time for consultation.

Redundancy

I propose another modest measure affecting business taxation. I intend to provide relief for redundancy payments in excess of the statutory minimum paid when a business stops trading.

I turn now from companies to my other proposals for finding extra revenue. I begin with the indirect taxes. Last June I took an important step in implementing a change in the tax structure that everyone knew to be necessary. I carried out a substantial switch in the balance of taxation from direct to indirect taxes. I do not intend to go further in that direction this year. But I do intend to ensure that the real yield of indirect taxation is not eroded. Inflation can all too easily have that effect.

VAT

First, I shall deal with value added tax. Without the extra revenue from last June's Budget changes, it would have been quite impossible this year for any Government to avoid either much larger cuts in public spending or big increases in income tax. This is the first year in which the full yield of the 15 per cent. rate will be available. The yield will be some £12,450 million in 1980–81. I propose no change in the 15 per cent. standard rate of VAT. I am, however, making a number of technical changes to ease the administrative burdens borne by small businesses—about which I shall have more to say later.

There have been signs that some large companies may have been delaying their VAT payments to the Exchequer. This must be corrected at the earliest opportunity. Customs and Excise are already taking steps, with my approval and within the existing law, to reduce the attractions of delay. But more needs to be done. I shall, therefore, be asking the House to raise the maximum penalty for late payment. My proposal is that it should be expressed as a proportion of the tax at stake. In practice, that will raise the penalty for only the larger companies. For them the existing maximum penalty, of £100 plus £10 a day, is clearly inadequate.

I also propose to remedy an anomaly in the coverage of VAT. Lubricating and certain other oils are currently zero-rated, without any real justification. We shall be laying an order to charge them at the full rate from Thursday 1 May. That will yield an additional £12 million in 1980–81 and £17 million in a full year.

I want also to inform the House today of my decision on one of the options for staff savings in the Customs and Excise. Concern has been expressed by a number of my hon. Friends and by representative business organisations at the possibility that we might withdraw the facility of monthly returns for those VAT traders who are entitled to claim repayments. I have carefully considered representations about the effect on business cash flow, and I do not intend to pursue that option any further.

Excise Duties

This year most of the additional revenue I need from the indirect taxes must come from the excise duties. Because they are applied to a physical quantity, the real value of their yield declines in times of inflation. A number of them have not been increased since early 1977 and many have been declining in real value over a much longer period. Accordingly, taking the duties as a whole, I am proposing increases which will reflect the impact of the last year's inflation and keep the real yield roughly constant.

Alcoholic drinks and tobacco

I start with the duties on alcoholic drinks and tobacco, which were last increased three years ago. I propose from midnight tonight to increase the duties on drinks by amounts which, including VAT, represent about 2p on the price of a typical pint of draught beer, 8p on a bottle of table wine and 50p on a bottle of whisky. The tobacco duty will be raised with effect from midnight on Friday. Including VAT, the increase will represent 5p on the price of a typical packet of 20 king-size cigarettes. There will be consequential increases for most other alcoholic drinks and tobacco products, but rather less than the full amount on pipe tobacco. The increases on alcoholic drinks will yield £273 million in 1980–81 and £288 million in a full year. The tobacco increases will yield £180 million in 1980–81 and £195 million in a full year.

Betting and gaming

Next come betting and gaming. I do not propose any changes in the general betting duty or the pool betting duty. But the Government have been persuaded by some of the criticisms of the present duty on casinos made by the Royal Commission on Gambling. That duty depends heavily on rateable value. It is not an equitable tax, and the more profitable casinos are seriously undertaxed. From 1 October, therefore, the present duty will be replaced by one related more closely to the profitability of casinos, and designed to produce about two and a half times as much revenue in a full year. At about the same time, the duty on bingo will be increased from 5 per cent. to 7½ per cent. Provision will also be made in the Finance Bill for restructuring the duty on gaming machines. We intend to remove the duty on penny machines, and propose to increase the revenue from the very profitable jackpot machines usually found in clubs. These changes will yield £5 million in 1980–81 and £20 million in a full year.

Vehicle Excise Duty

I turn now to vehicle excise duty. Our predecessors announced their intention to abolish the duty on cars and other petrol-driven vehicles. They proposed to make good the revenue loss by increasing the tax on petrol. As the House will recollect, after carefully reviewing the arguments, we decided that that was not a sensible change to make. Even if the tax had gone, the need for a vehicle register would have remained. That is essential to the police and for vehicle control. Much of the form-filling would have continued unabated. We decided that it was much better to keep the vehicle excise duty, but to achieve staff savings by streamlining its administration, along the lines which my right hon. Friend the Minister of Transport has already proposed. As part of that, he is announcing today that from October, four-monthly licences will be replaced by six-monthly licences. From August a stamp-saving scheme will be introduced to help motorists to budget for payment of this tax.

If the duty is to remain, we should be wrong to allow inflation to go on eroding its real value. Because of doubts about its future, the rates of this duty have remained unchanged since 1977. I therefore make no apology for proposing increases in the duty on most vehicles of about 20 per cent., and on the heaviest lorries of about 30 per cent. this year. As a result, the annual duty on cars will increase by £10, to £60. The larger increase on the heaviest lorries will reflect the high road costs which they impose on the community. These changes will produce an estimated additional yield of £240 million a year, but will still leave the vehicle excise duty lower in real terms than after the last increase in 1977.

I have one further small change to announce in vehicle excise duty. Electric vehicles at present play only a small part in road transport. However, they are much cleaner and quieter than vehicles powered by internal combustion engines, and they could bring big future energy savings. Because we want to encourage their further development, I propose to abolish vehicle excise duty on them. The cost in 1980–81 will be less than £2 million.

Road fuel duties

In my Budget last June, I stated that there was a continuing case for measures that would help us to conserve oil. The price of petrol in the United Kingdom remains well below that in any other EEC country. If we are to ensure that our oil resources are not wasted, a duty increase is justified this year.

If we had decided, as the last Government had in mind, to replace VED progressively by higher petrol taxation I should have been obliged to consider increasing the price of petrol by at least 20p a gallon. That would have been necessary simply to replace the revenue formerly provided by VED. To match the VED increase I have announced would have taken the figure to 24p a gallon—and higher still if the present petrol duty were itself maintained in real terms.

Since we are retaining the VED, such large increases are not needed. Instead, I shall be increasing the duty on petrol, from 6 pm tonight, by the equivalent, including VAT, of 10p a gallon. For the past three years the rate of duty on derv has been higher than that on petrol. I have decided that we can no longer justify that differential, which has borne heavily on commercial and industrial users. Taking account of VAT, the increase in the duty on derv will be about 4p a gallon. That will mean that once again the duties on petrol and derv are the same. These increases will yield an additional £450 million from petrol, and £55 million from derv in 1980–81, and in a full year.

Rebated Oil

I also propose to raise the duty on heavy oil other than derv by about ½p a gallon from 6 pm tonight. This will yield an additional £50 million in 1980–81 and in a full year. I have decided not to increase the duty on burning oil and on domestic paraffin, which are the oils most commonly used in the home.

Summary

These VAT and excise duty changes will raise additional revenues of £1,260 million in 1980–81 and £1,305 million in a full year. They do not imply any real increase in indirect taxes as compared with 1979–80. The immediate impact effect on the RPI will be just over 1 per cent., but in the longer run these excise duty changes, by contributing to the reduction of the budget deficit, will help to ensure that inflation is brought down and stays down.

Fringe Benefits

As I have explained, I do not believe that I should be justified in allowing the real costs of motoring and road transport to fall simply as a result of inflation. But if it is right in principle for road users to face a constant fiscal burden, it would not be fair to disregard the increasing unreality of the income tax charge levied on those who are partly sheltered from rising costs because they have a company car available for private use. The scales of benefit charged to income tax have been allowed to fall well behind any reasonable measure of true values. The present figures barely cover the current cost of tax, insurance and maintenance. That is unfair to the great majority of individuals who have to bear the full cost of car ownership, not to mention those who cannot afford to run a car at all.

I propose, therefore, to increase by some 20 per cent. the scale figures that are used for measuring the benefit of a company car for tax purposes. This change will be effective from April 1981. At the same time, there will be one modest relief. The qualifying annual mileage for business use, above which a reduced rate of tax is charged, should be reduced from 25,000 to 18,000 miles a year. In the light of our widespread consultations last year, I believe that these changes will generally be recognised as fair.

I have also been considering whether I ought to take action to charge tax on the value of petrol provided by employers for private use by their employees. This would present severe administrative problems, both for employers and for the Inland Revenue. Even so, I shall feel bound to contemplate action next year, if the provision of free petrol continues to spread at anything like its present rate.

As the burden of income tax is reduced, I would hope to see a decline in the provision of benefits in kind. It is consistent with that view for me to impose a reasonable charge to income tax on benefits which remain.

In that spirit, I approach one area this year that has so far escaped the eye of my predecessors. I refer to the provision for employees of items such as suits of clothing and television sets. I propose to double, from 10 per cent. to 20 per cent., the proportion of the value of such objects taken as a measure of the annual taxable benefit. And I shall impose an effective charge where the items concerned are subsequently acquired by the employee for less than true value. I am also taking steps to increase from 9 per cent. to 15 per cent. the rate of interest used to measure the value of beneficial loans to employees, and to raise to £200 the limit below which the benefit of such loans is not charged to tax.

Fringe benefits are charged to tax only if the employee earns more than a certain amount, now £8,500. The case for abolishing that threshold has been pressed upon us. I have asked the Inland Revenue to consult employers and others about the administrative problems that might be involved in such a change.

I now turn to my main proposals for income tax. The cuts that I made last year were an important start on reducing the oppressive burden of direct taxation. At every income level, taxpayers now retain a significantly larger share of their incomes, which they are free to spend or save as they choose. I intend to do more in the future, but at a time when output is falling and we are making further heavy cuts in public expenditure I cannot afford to protect income taxpayers fully from the effects of inflation. This, then, must be a year of consolidation.

At first sight that would suggest increases in the personal allowances which fall some way short of the rise in prices during 1979, but this would have a number of undesirable effects. It would lower the starting point of income tax in real terms, compared with a year ago. It would increase the number of taxpayers. It would narrow the gap between tax thresholds and the main social security benefits, and it would impose particularly heavy burdens on those with the smallest incomes. All those effects would be most undesirable.

Given the limited scope available, I have considered how to avoid these consequences. I mean to do so by adopting an alternative approach. I propose to increase the main income tax allowances by 18 per cent. or so, which is in line with the rise in prices and in conformity with the indexation requirement of the 1977 Finance Act. This will bring substantial relief to all taxpayers. But in order to afford this I intend to remove the lower rate band of taxation, levied at 25 per cent. on the first £750 of taxable income. This combination will protect the position of the very poorest taxpayers whilst ensuring that basic rate taxpayers receive some, though not complete, protection from the rise in prices.

The single allowance will thus be increased by £210 to £1,375 and the married allowance by £330 to £2,145. The corresponding allowances for people over 65 will go up by £280 to £1,820, and by £440 to £2,895. The income limit for the age allowance will go up to £5,900. Also, the additional personal allowance available mainly to single parents will go up by £120 to £770. The revenue cost of these increases in 1980–81 will be some £1,800 million, offset by a saving of £750 million from ending the lower rate band. I cannot this year make any further reductions in the income tax rates, so the basic rate will remain at 30 per cent. and the higher rates will also remain unchanged.

The case for the lower rate band was never at all clear. The 25 per cent. rate was not the effective marginal rate for more than a small number of full-time adult workers. For those on lower incomes an increase in the personal allowances would always have been more valuable than the lower rate band, and the existence of this lower rate band added significantly to the complexity of the tax system. Its disappearance will simplify and shorten the PAYE tables and reduce the administrative burden on employers and on the Inland Revenue, where there will be a valuable staff saving of 1,300 persons.

I am in no doubt that it is right, in a year when difficult choices have to be made, to concentrate on raising the tax thresholds for everybody, as I have proposed, by about 18 per cent. I am also in no doubt that it is necessary to abate the tax reductions that follow from that change by the abolition of the lower rate band. Taken together, these changes are equivalent to an effective increase in tax reliefs of 11 per cent. for a married couple and rather less than that for single taxpayers. The 18¾ per cent. rise in child benefit implies a broadly comparable annual rate of increase—about 11 per cent.—over its April 1979 level.

Next, I come to higher-rate taxpayers. Given the substantial improvements last year it would not be appropriate to give major relief to higher-rate taxpayers this year. However, our progressive income tax system operates in such a way that those who pay tax at higher rates experience sharply increasing tax burdens in times of inflation. In the ordinary course it would be right to increase the higher-rate threshold and bands by the same proportion as the increase in personal allowances. That would imply 18 per cent. this year. But this year the improvements in personal allowances are partially offset by abolition of the lower rate band.

That change will have only limited significance for those on higher incomes, so I have decided not to raise the higher-rate thresholds fully in line with inflation, as I have done for the main personal allowances, but to put them up by only about 11 per cent. That is, as I have explained, broadly equivalent to the total net increase in tax reliefs that I have proposed for married couples paying tax at the basic rate.

In money terms the threshold for the higher rates will be raised to £11,250 and the threshold to the top rate of 60 per cent. to £27,750. There will be corresponding increases at the intervening points. So far from making the rich richer, these restricted improvements will result in an increase in the real burden of income tax for the higher rate taxpayer. The cost of increasing the higher-rate thresholds is £100 million in 1980–81 compared with a cost of £140 million if they had been fully indexed. I am also limiting this year's increase in the threshold to the investment income surcharge to 10 per cent., that is, to £5,500. However, with a view to consistent treatment in future years I shall include provisions in the Finance Bill that should ensure, with effect from next year, that the higher-rate thresholds and bands, together with the investment income surcharge threshold, are covered by indexing legislation in the same way as the main personal allowances.

For the typical married couple with two children the net effect of my Budget changes will be to increase their weekly income by £2·68 per week from November. For a single man with the same earnings the increase will be 49p per week.

The income tax changes that I propose will be given effect when new tax tables have been printed and distributed. They will be made together and will produce a net increase in take-home pay on the first pay day after 31 May.

Other income tax proposals

I am proposing two other small income tax changes that have long merited action.

I propose to exempt from tax and payments made to holders of certain gallantry awards, such as the Distinguished Conduct Medal and the Conspicuous Gallantry Medal. These will in future be treated in the same way as annuities payable to holders of the Victoria Cross and George Cross.

I want also to do something more for widows in the difficult time immediately following bereavement. I therefore propose to increase the present single allowance that widows receive for the tax year in which they are bereaved. The addition for that year will, at its maximum, bring the single allowance for widows up to the level of the married allowance.

Taxation of Husband and Wife

We have also been reviewing the treatment for tax purposes of husband and wife. This is a complex and important subject. I am grateful in particular to the Equal Opportunities Commission for the light which its publications have shed on this aspect of sex discrimination. In view of my relationship with the former deputy chairman of that body I hope that it is not improper for me to mention its work, but, as I have observed, it is easier to define the problems than to find the answers. Certainly, radical changes should not be made in haste. I propose, therefore, to issue later this year a Green Paper on this subject. I hope that it will stimulate further constructive debate. leading us ultimately to acceptable solutions.

Although, as I have just explained, this is not a year in which sweeping reductions of income tax are possible, that need not prevent our making sensible reforms in the tax system wherever the opportunity offers.

I have frequently drawn attention to the extent to which the tax system has woven itself deeply into the fabric of national life. Tax has been piled upon tax, often with little regard for their interaction. The accidental effects of this tax onslaught have often been as damaging as the direct consequences.

This Government came to office pledged to bring more simplicity and consistency to the tax system. We have already undertaken a series of major reviews. I should like here to thank both the Inland Revenue and the Customs and Excise for the heavy load of policy review work that they have carried out during the last nine months. This should all bear useful fruit in the years ahead. This year I have progress to report in three important areas where I believe that fiscal reform can encourage private endeavour—in connection with housing, the national heritage and voluntary organisations.

Housing

We wish to encourage the private provision of housing as well as wider home ownership. Home ownership adds to the quality of life. Private provision of housing means we can save public resources for other areas where a private sector alternative is not available.

My first proposal is designed in particular, to help first-time buyers. I have received representations from many quarters about the burden of stamp duty on house purchasers. Difficulty in acquiring a new home restricts the mobility of labour. Those at the lower end of the market—mainly, young couples—particularly deserve help. I do not think that these considerations justify us in making, this year, an increase in the mortgage interest relief ceiling, which I propose to maintain at £25,000. However, I think that it would be right to raise the starting point for stamp duty on transfers of property by £5,000 to £20,000. The limits for reduced rate bands will be similarly increased, by £5,000, so that the full 2 per cent rate will now be reached at £35,000. This will cost £75 million in 1980–81, and £85 million in a full year.

Too many homes are under-occupied, or even standing empty. This is often a direct, even if unintended, result of rent control: sometimes, it is a consequence of planning policies, which my right hon. Friend the Secretary of State for the Environment is improving. There are also fiscal obstacles to the economic use of the available stock of property. I intend to deal with one of these this year. I propose a new and additional relief from capital gains tax to help people who let part of their homes. At present, these house-owners, when they come to sell, can find themselves unexpectedly faced with a capital gains tax charge. This change will encourage letting, and contribute to the better use of the housing stock.

The national heritage

Next, the national heritage. The House has already passed a Bill to set up the National Heritage Fund. The Finance Bill will include a provision to treat it for tax purposes as if it were a charity. The fund will be set up with an initial amount of about £12 million at its disposal. The Government will in future make an annual contribution to the fund, including the amount needed for the continuation of the acceptance in lieu system. But we should also do more to make it possible, both today and in the future, for owners of historic houses to look after their properties on behalf of the nation as a whole. The last Government took a similar view and introduced provisions to assist owners to set up maintenance funds for the support of their houses. But that scheme proved to be so restrictive that it has scarcely been used.

I intend, therefore, to recast substantially the maintenance fund provisions. If we are going to adopt this method of encouraging the preservation of our heritage—I believe it is the right one—then it is only sensible to make it work. Our fresh proposals will apply to the maintenance of buildings, historically associated contents, gardens, and land of historic, scenic and scientific interest. The overriding condition will, of course, be that the public should have reasonable access. These measures are intended to cement a bargain between those who have to bear the cost of maintaining the national heritage, and the people as a whole.

Voluntary effort

The third way in which we aim to assist private action this year is by providing tangible Government support for the widespread and often unsung voluntary effort that goes on at every level of our national life.

It is important to do all we can to help charities and to stimulate private benefactors and helpers. A partnership between Government and voluntary effort can be the best way of meeting many pressing social needs, particularly when State spending has to be cut back. With this in mind, I have given careful consideration to the fiscal recommendations of the Goodman committee and of the National Council of Social Service.

I propose to double—to £200,000—the capital transfer tax exemption for bequests to charities; and to exempt wholly from development land tax all future disposals of land by charities. Income tax relief for payments to charities made under deeds of covenant, which has hitherto been limited to the basic rate of income tax, will be extended to the higher rates, subject to a ceiling of £3,000 a year. A minor stamp duty easement on deeds will be made. In response to representations, I am reducing the period for tax relief on deeds of covenant from seven years to four years. These measures, which will cost £30 million in a full year, are designed to provide the right conditions for substantial growth in the important partnership between voluntary service and the rest of the community.

I turn now to an area where the tax system can be used to involve the individual more closely in the workings of the economy. I refer to proposals which will encourage direct personal investment in the stocks and shares of British industry. In the last 20 years, the proportion of the equity of British companies, held in direct individual ownership, has been almost halved. This is a trend I should like to reverse.

It is generally agreed that share ownership and profit sharing can help in developing employees' understanding of, and commitment to, business and industry. I believe that share ownership can also spread a wider understanding of the role for risk-taking and initiative in the economic system.

I have two sets of proposals to make. First, I propose to make more generous the provisions which the last Government introduced two years ago to encourage profit-sharing. In passing, I would note that those provisions were based upon proposals originally put forward by my right hon. Friend the Secretary of State for Energy. They attracted all-party support. I propose to raised from £500 to £1,000 a year the value of shares allocated to any one employee which can qualify for tax relief; to reduce from five years to two the period after which employees can sell their shares; and to cut from 10 years to seven the period after which they can draw them out free of income tax.

Second, I propose to reintroduce legislation similar to that which Lord Barber introduced in 1973 enabling employees to be given options to buy shares in their companies without incurring liability to income tax. This scheme will have links, as in 1973, to a scheme for contractual savings. These measures will help to fulfil our promise to encourage employee share ownership and provide the incentive to save and build up capital.

There is one anomaly in the field of life insurance, which I propose to put right. The rate of life insurance relief used to be equivalent to half the basic rate of income tax. It has recently got out of line and I propose to restore the relationship by reducing it to 15 per cent. Because of the practical problems posed for the life insurance industry, the change will not take effect until 6 April next year. Steps will also be taken to deny life assurance premium relief to certain short-term bonds. This change will take effect from today.

Before I leave discussion of the capital markets I should add that I propose that traded options, which at present are anomalously treated as wasting assets for capital gains tax purposes, should in future be treated on the same basis as share warrants.

I hope that these measures will help to encourage the wider direct ownership of shares, by altering the relative attractions of investment through the institutions and through more direct means.

I come now to a series of measures which are intended to increase the wealth-creating vitality of our economy. That means giving greater encouragement to the processes of economic change, and improving incentives to the enterprise sector. For the mainspring of economic vitality it is now widely agreed that we must look to private initiative, widely dispersed and properly rewarded. In truth, enterprise means jobs.

Capital Taxation

I start with capital taxation, which is widely regarded, and rightly so, as a severe discouragement to those seeking to build up a business and pass it on to the next generation. We have, as I promised last year, subjected capital taxation to a thorough review. Representations from a large number of bodies have confirmed that the damage done by these taxes in their present form is out of all proportion to their yield.

There is, of course, a place for capital taxation, including, in particular, a charge on death. But change is needed. What I can do this year must be constrained by our financial position. I am, therefore, proposing changes which will be of particular help to smaller businesses. This is an earnest of our determination to make further progress when economic conditions permit.

First, the march of inflation over the years has brought far too many estates into charge to the capital transfer tax. This is a particular burden on the small business, when it passes from one generation to another, whether on death or by lifetime transfer. I propose, therefore, that the threshold for the capital transfer tax should be increased to £50,000. This will exempt from the tax at least two-thirds of the estates which would otherwise have been liable; and up to 400 fewer staff will be needed than if we had left the threshold unchanged.

A reduction in the scale of rates above the new threshold, however much that is needed, is not possible at the moment: nor are other changes I should like to have made. I am, however, making one or two minor changes designed to reduce administration.

In the case of the capital gains tax, I am fully conscious of the impact inflation has had. It can rightly be argued that the tax often falls on what are no more than paper gains. Proposals for indexation or tapering as a means of meeting this problem have been put forward on many occasions in the past. I have had both proposals re-examined but the conclusion to which I have come is that both would result in an unwelcome increase in the cost of administration—for taxpayers as well as for the Revenue—while reducing the yield of the tax to negligible proportions.

I cannot, however, leave matters as they are. I propose, therefore, to replace the present £1,000 exemption—which is progressively withdrawn above £5,000—by a straightforward allowance of £3,000. This change, which will operate from 6 April, will remove from tax half the cases at present liable, and at a reasonable revenue cost, it will reduce staff requirements by 300. As a corollary of this new proposal, there will be an exemption for the first £1,500 of gains for trust and investment and unit trusts will now be exempted from the tax, although investors in such trust will remain liable if their own gains in the year exceed the new exemption limit.

Finally, I propose to remove the present double charge on gifts, which arises from the overlap between capital transfer tax and capital gains tax, by providing rollover relief for the latter. This has been a particular source of grievance and one on which representations have been received from a large number of people.

The cost of these changes in the capital transfer tax will be £60 million in the coming year, and twice as much in 1981–82. In the case of capital gains tax, there will be no cost this coming year and a cost of £25 million in 1981–82. These figures need to be judged against the already rising yield of the capital taxes as a result of inflation.

I realise that these necessarily limited changes will fall short of what many people had hoped for, but I must ask for patience in present circumstances. Meanwhile, the benefit the present changes give to the small business should not be underestimated. Because of the 50 per cent. relief—which will remain, as will the comparable relief for agriculture—a person transferring a business worth £100,000 will pay no capital transfer tax if there are no other assets. We would, of course, have liked to bring similar help to businesses of all sizes. My proposals do give some measure of relief to everybody, but this year most assistance goes to small businesses.

As I have already indicated, there have been extensive consultations on capital taxation before the Budget. We propose to continue that process. There are, in particular, certain specialised areas, such as settled property, which require very detailed consideration.

Development Land Tax

I now turn to another tax which can inhibit development—the development land tax. In my last Budget, I reduced the rate of this tax to 60 per cent. and increased the exempt slice to £50,000. I said then that there would be no further reduction in the rate and no early increase in the exempt slice. That remains the position. Representations have, however, been made to me from many quarters that the tax inhibits development because of uncertainty about the amount of tax chargeable which can normally be ascertained only once development starts. It is important to remove obstacles of that kind if we are to make the best use of our resources. I propose to deal with this point, and the necessary legislation will be added to the Finance Bill at an appropriate stage. There will also be a number of other detailed improvements. All these changes are designed to free the market and to encourage development.

Demergers

Taxes are stifling independent enterprise in other ways as well. For many years, the fashion both in Government and in industry was to favour mergers and amalgamations. No doubt mergers have brought advantages in some cases, but it is now quite clear that the fashion for industrial elephantism was greatly exaggerated. I believe that there are cases where businesses are grouped together inefficiently under a single company umbrella. They could in practice be run more dynamically and effectively if they could be "demerged"—I apologise for that word, which has now become part of the jargon—and allowed to pursue their own separate ways under independent management. The present tax rules can in practice effectively discourage demergers of that kind, by charging the assets of the "demerged" company to advance corporation tax and income tax as distributions.

I propose to bring forward, during the passage of the Finance Bill, measures to ease the tax charge on distributions of that kind, subject to certain safeguards, and where they are concerned solely with the genuine splitting off of independent trades within the corporate sector. My colleagues and I would welcome any views which those outside Government might have on these proposals. It may be that further measures will turn out to be justified.

Specific Measures to encourage small businesses

I now turn to measures specifically designed to improve the tax environment in which the small business lives and works.

Any business, but particularly the new small business just starting up, needs somewhere to operate. An imaginative and helpful new venture in recent years has been the development of estates of small industrial workshops for separate letting to small businesses. I propose to bring in a small workshops scheme which will enable industrial buildings allowances at the rate of 100 per cent. to be claimed on the construction of small industrial buildings. The scheme will run for three years, and will simplify the present administrative arrangements. I shall also make provision for industrial buildings allowance to be given on the construction of industrial buildings rather than on their first lettings. In addition to my own proposals, my right hon. Friend the Secretary of State for the Environment intends to consult on relaxation of planning controls over changes of use as between light industry and warehousing for small units. My right hon. Friend the Secretary of State for Industry intends to make £5 million available to build 1,000 new nursery factory units in assisted areas in co-operation with the private sector.

New businesses, and particularly new small businesses, also need capital. Many people with capital to invest might be ready to back enterprising ventures if they knew that losses could be offset against taxed income, instead of only against capital gains. I propose that, through a new venture capital scheme, losses on equity investment in unquoted trading companies, incurred after 5 April 1980, may be set off against income.

Next, I propose to relax the conditions for tax relief for interest paid on money borrowed for investment in, or lending to, a close company. The present rules require an investor to have worked for the greater part of his time in the company's business. I propose to abolish that condition, and thus provide added incentive for outside investment in small firms.

Just as important as attracting new capital from the outside is the generation of new capital from the inside, in the form of profits which are retained in the business. The tax system has now contained for more than 50 years a series of provisions under which a close company may be required to justify the amount of profits which it wished to retain in the business, undistributed. Following last year's reduction in the rate of income tax, I now propose important changes, including the abolition of the apportionment of trading income both of close trading companies and of members of trading groups. These changes will cut out a thicket of complex tax provisions, which are time-consuming for the small trading business, and a real impediment to growth.

However, if small companies are to generate the funds to finance their expansion, they must first earn profits and then be left with sufficient of those profits after payment of tax. Better profits must come through improved efficiency and greater productivity. That is a matter for industry itself and not for Government. But Government can help by reducing the tax burden. I propose, therefore, to cut the small companies rate of corporation tax to 40 per cent.—that is no less than 12 points below the full rate of 52 per cent.—and at the same time to raise the qualifying limits to £70,000 for the full relief and £130,000 for the marginal relief.

My next proposal is designed to help the unincorporated small business. It is important that the self-employed should be able, with tax assistance, to make adequate provision for their retirement. I am, therefore, raising the limits on retirement annuity relief. The normal percentage of earnings qualifying for tax relief will rise from 15 per cent. to 17½ per cent., and the ceiling on the premiums qualifying for relief will also be abolished.

Other changes

I also propose some minor measures affecting business taxation. Following consultations with industry, I propose that the costs of raising business loan finance should be allowed for tax purposes. Relief will also be given for pre-trading expenses of a business, provided that these expenses would have been allowable if the business had been trading when they were incurred. Certain changes will also be made in the tax deduction scheme for the construction industry—the 714 scheme—which will lighten the administrative burden of the scheme and change certain features which at present operate harshly.

As the last element in my package to help small businesses, I am making certain changes in the arrangements for VAT, in order to ease the administrative burden. I propose that from midnight, the registration threshold for VAT should be increased from £10,000 to £13,500. The de-registration limit will also be increased from 1 June. At the same time, I shall be increasing from £50 to £250 the relief from payment of tax on stocks and assets when a person de-registers.

Despite the severe financial restrictions, we are thus giving help to smaller businesses at many, many points where the system bears too hard. Individually, relatively few of the measures could be described as of major importance, but taken together they represent a significant step forward in making this country one in which enterprise will be properly rewarded and thus flourish again. Together they will cost about £160 million in a full year.

Finally, I come to an idea—I knew that it would be widely welcomed—which is intended to pioneer a new, and more adventurous, approach to the whole question of industrial and commercial renewal. There are some parts of our economy, most notably in the older urban areas, where more and more public authority involvement seems to have led to less and less fruitful activity. The planning process has all too often allowed, even caused, whole areas at the heart of some of our most populous cities to be laid to waste for years, even decades.

Even when plans are finally made the public purse is often unable to provide the funds, or the enterprise, to match the planners' aspirations. And when private initiative might have been ready to stir, it has generally been stifled by rules and regulations and by a tax system which pays no regard to these special problems.

Some hon. Members may recall that in a speech made on the Isle of Dogs a little less than two years ago I put forward a proposal for trying to bring new life back to these areas of urban dereliction. The idea was not politically partisan, for my thinking had taken place in parallel with that of the distinguished Fabian, Professor Peter Hall. Quite independently, we had concluded that there was much to be said for the establishment in these man-made wilderness of what I have called enterprise zones. I am, therefore, pleased to announce today action by the Government which will transform into reality the idea which I then put forward.

We are proposing to establish, in the first instance, about half a dozen enterprise zones, with the intention that each of them should be developed with as much freedom as possible for those who work there to make profits and to create jobs. Each will cover perhaps 500 acres. Within these zones two major tax incentives will be available—first, 100 per cent. capital allowances for both industrial and commercial buildings; and secondly, complete relief from development land tax.

But fiscal concessions are only part of what is needed. These zones will, therefore, enjoy the following additional benefits—100 per cent. derating of industrial and commercial property; a drastically simplified planning scheme; exemption from the scope of industrial training boards—with consequent exemption from industrial training levies; accelerated handling of applications for warehousing free of Customs duty; minimal requests from Government for statistical information and abolition of the remaining industrial development certificate procedures.

I hope and believe that an imaginative experiment along these lines may succeed where conventional policies have proved inadequate. No one can doubt the need for change from present arrangements. In far too many of our towns and cities today, and for far too many businesses particularly small and new ones, the gap between a productive idea and a foreseeable profit has widened into a chasm of red tape. That red tape all too often stands between a young school leaver and the prospect of a job.

Even before this proposal had any official status there was no lack of interest in the idea. The Government will consult local authorities and other interests before decisions on individual areas are made. Fuller details will be found in the policy document which is being issued this evening. There could not be a better time for making a fresh start of this kind.

In the decade that lies ahead Britain has the opportunity to follow a more hopeful path. We have ended the 1970s with a society that is becoming less tolerant because we live with an economy that has been growing no richer. The 1980s can be very different.

The disappointments of the last decade spring from illusions that have persisted too long; the illusion that we can pay ourselves what we have not earned; the illusion that Governments may go on borrowing when they dare not tax; and, most foolish of all, the illusion that we can somehow strike our way to higher living standards. The essential condition for success in the 1980s is that we should turn our back on those illusions and that we should have the courage over a period of year to carry through the realistic policies to which there is no alternative.

In this Budget I have tried to set those policies in a strategy for the medium term. Nothing will be easy in the years immediately ahead, but beyond that the strategy offers hope of real success. It is a strategy for the defeat of inflation by the re-establishment of monetary control. It is a strategy for the restoration of prosperity by the encouragement of enterprise.

Politics is not only the art of the possible; it is also the art of the necessary. The strategy outlined in this Budget is designed to do what is necessary and so lay foundations for the success which is well within the grasp of the British people.

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—