How can we expect the balance of payments on current account to develop over the next year? First, provided that the world monetary system holds up, our exports would in any case have been likely to be helped during this year by an expansion of world trade. Devaluation will enable us to make the most of the opportunities presented by this expansion. Reductions in the foreign exchange prices of exports will enable exporters to expand their volume of sales and perhaps break into new markets, and improvements in the profitability of exports will be an incentive to make and sell more goods for export, and to give betters sales service and thus gain export orders. The benefits of devaluation for our export trade will not happen all at once. The export figures are now including the clearance of cargoes delayed from last year, but cannot be expected to reflect much of the effects of devaluation. During the second half of this year, however, and through the next year the effects should be showing increasingly.

We are looking for large rates of increase. But they are not greater than we need, nor more than we can achieve. Other countries have achieved this sort if increase in their exports. Take the case of Italy: between 1963 and 1965—admittedly a good period for world trade—Italy's exports increased in volume at an annual rate of nearly 20 per cent., and she turned a current account deficit of 700 million dollars in 1963 to a current account surplus of 2,000 million dollars in 1965: a turnround of nearly 3,000 million dollars in two years. This was achieved without a change in the exchange rate. Our devaluation presents us with a greater opportunity to achieve similar results.

Now, Mr. Speaker, devaluation also means higher import prices in sterling terms. By itself this will tend to increase the import bill, as we have seen from the January and February trade figures. But the price rise relative to home production should encourage import substitution, offsetting the rise in the volume of imports that would normally have accompanied rising demand and output; this should lead to a much reduced growth of imports in the coming months.

Devaluation should also benefit our invisible earnings. Many of them arise in currencies which have not been devalued, and their sterling value is therefore greater. In some cases our debits will also cost more, but the effects of the Middle East situation on our oil costs should be much less adverse than in the second half of last year. On balance, therefore, the invisible account should gain. I have a small positive contribution to make here: the Finance Bill will include amendments to the exchange control provisions to remove a technical obstacle to the development of a market in sterling certificates of deposit, which should be a useful addition to the range of services provided by the London banking system.

Turning now to the capital account, we must dearly maintain in effect the measures we have taken to minimise the burden of outward investment on our balance of payments. The purpose of these measures has been not to bring overseas investment to a halt, but rather to make the overseas investment which continues more selective and in the process to reduce to a minimum the burden which it places on our reserves. Thus, we have made it a point of policy to secure that as much direct investment overseas as possible is financed by borrowing abroad. The result of our measures and of substantial inward investment has been that last year there was a surplus on our private long-term capital account.

On 30th January I announced a small change in Exchange Control rules for direct investment outside the Sterling Area, whereby exporters are now allowed to buy foreign exchange within limits at the official rate for export-promoting projects expected to bring benefits to the United Kingdom balance of payments provided that within eighteen months these benefits will equal or exceed the total cost of the investment and continue thereafter. This was a limited change for the specific purpose of promoting export sales; we are not yet in a position where there can be any more general relaxation of our controls over overseas investment, whether direct or portfolio.

Nor has the time yet come to relax the Voluntary Programme, which restricts direct investment financed from the United Kingdom in Australia, New Zealand, South Africa and the Irish Republic, and sets a limit to portfolio investment in these countries and outside the Sterling Area by United Kingdom institutions. This programme must continue for a further year, on the same basis as hitherto. This will be a disappointment to some, specially those firms which have already postponed projects in order to conform with the programme. But I am clear that it is necessary in the national interest, and that it should continue on the volun

tary basis which has served so well so far. I believe that I can count in industry's continuing co-operation in this. The Governments of the other countries concerned have been informed of the decision to continue the Voluntary Programme. I record my appreciation of their understanding attitude.

I want also to say something about private portfolio holdings of foreign securities. Since 1965 it has been the policy to transfer to the first-line reserves a proportion of these national overseas assets. This was done by the "25 per cent. scheme", under which a quarter of the foreign currency proceeds of any sale of foreign securities has to be exchanged into sterling at the official rate and is thus brought into the official reserves. This scheme has its disadvantages, and places some inhibition on the active management of portfolios. But in present circumstances we clearly cannot contemplate giving up this useful source of benefit to the reserves, though I should be glad to consider any sensible modification which would diminish this disadvantage, without at the same time diminishing the inflow of foreign currency to the reserves.

To sum up, then, on the external position: we are still in a position of great difficulty, but also of great opportunity. We cannot right the balance or seize the whole advantage of the opportunity all at once. We are still likely to be in deficit in the first half of this year, but on present prospects for world trade and given the restoration of stability to the international monetary situation I certainly hope and expect that we shall be in surplus in the second half. For the future we need, as I have said, to achieve a continuing balance of payments surplus of the order of £500 million a year as soon as we can and to sustain it for as far ahead as we can see, so that we can repay our debts, rebuild our reserves and develop our economy.

I turn now to the narrower field of Government finance, in order to fulfil my traditional duty to give the House the figures for this year's prospective out-turn and the estimates for the coming year. But first I should remind the House that this year, as a result of the National Loans Act, we are making changes in the conventional Government accounts and the layout of the Financial Statement. These changes are described in more detail in the foreword to the Statement. Although the new accounting arrangements do not come into operation until 1st April, 1968, the figures for 1967–68 in the Financial Statement have been adjusted so as to bring them as far as possible on to the new basis and thus facilitate comparisons between the figures for 1967–68 and the estimates for 1968–69.

With the Budget before the end of March, the outturn figures for 1967–68 can be only provisional. The outturn of total revenue in 1967–68 on the new accounting basis is expected to be £11,177 million, that is, £84 million more than the estimate. Total expenditure, at £10,878 million, is £519 million above the original estimate. The bulk of this excess arises in the Supply Services and is the outcome of a number of changes over the year which have already been debated.

The surplus on the Consolidated Fund, that is, the difference between total revenue and total expenditure, is thus expected to be £299 million, a decrease of £435 million on last year's Budget estimate when converted to the new basis. Under the new arrangements this surplus is transferred to the National Loans Fund.

The provisional total for loans from the National Loans Fund is put at £1,748 million. The reduction of £18 million on the Budget estimate is mainly the net result of a shortfall of £135 million in drawings by local authorities from the Public Works Loan Board, offset by additional lending to the nationalised industries.

After taking into account the surplus of £299 million on the Consolidated Fund, the balance on the National Loans Fund which is met mainly by borrowing is expected to be £1,449 million as against an estimate of £1,032 million.

Turning now to the prospects for the coming year and again using the new accounting basis, Consolidated Fund revenue from taxation and other receipts is estimated at £11,952 million. This is the estimate on the basis of existing tax rates, and takes no account of the proposals already announced to increase the rate of Corporation Tax to 42½ per cent. or the adjustments of tax allowances to be made in connection with the increases in family allowances. The increase of £775 million over the forecast outturn this year arises mainly on Inland Revenue account, but also allows for the general withdrawal of export rebates from 1st April next.

Total expenditure from the Consolidated Fund is estimated at £11,312 million, an increase of £434 million on the expected outturn this year. This figure includes the gross cost of the 7s. increase in family allowances from 9th April, but not that of the further increase of 3s. to be paid from 8th October. It also includes £31 million for the additional cost of agricultural support next year as a result of the recent Price Review; this figure is not included in the published Estimates of Supply expenditure.

On the basis of existing taxation, the surplus to be transferred to the National Loans Fund next year would thus be £640 million. Outgoings from the Fund next year for loans to nationalised industries, local authorities and other bodies are expected to amount to £1,744 million. In making provision for the loans to nationalised industries, I have taken into account the increase in prices of gas and of Post Office services which were announced yesterday. Details of these loans appear in the National Loans Fund White Paper which is being published today.

Net borrowing for the National Loans Fund next year before taxation changes is therefore estimated at £1,104 million.

I should at this point explain to the House that the net borrowing requirement of the National Loans Fund is not quite the same in definition as the Central Government's borrowing requirement, which was the borrowing requirement referred to in the Letter of Intent which my right hon. Friend the Home Secretary sent to the International Monetary Fund on 23rd November last year. The net borrowing of the National Loans Fund includes drawings upon Departmental balances and net borrowing from Governmental accounts such as the National Insurance Fund. To the extent that the requirements of the National Loans Fund are met by borrowing from those internal funds, the borrowing requirement of the Central Government from non-Governmental sources is diminished; on the other hand, if these funds are recalling balances held with the National Loans Fund, the Central Government's borrowing requirement will be increased. For 1967–68, I expect the borrowing requirement of the Central Government to be about £1,482 million. Next year, if there were no changes in taxation, I would expect it to be about £1,129 million. This figure, I should add, will look very different after my taxation changes.

The current issue of National Savings Certificates has been an outstanding success since it was first introduced two years ago, and it continues to offer one of the best returns obtainable in the market. This year, like last, the Certificate has attracted over £60 million net and the total amount invested in National Savings Certificates is now well over £2,000 million. The high sales of the current year suggest that many people must now be reaching the limit of £750 announced in last year's Budget speech and from 22nd March I am therefore raising this to £1,000.

I am also introducing a new British Savings Bond. This will replace the present National Development Bond from 1st April. British Savings Bonds will carry a rate of interest of 6 per cent., with a £2 per cent. tax-free bonus if the Bonds are held for their full life of five years. Like the Development Bond, they will be sold in units of £5 and can be cashed at one month's notice. They will be on sale at all Post Offices, Trustee Savings Banks and Joint Stock Banks. Any one person will be able to buy up to £10,000 of the Bonds. Holders of maturing issues of Defence and Development Bonds will be offered conversion into the new 6 per cent. British Savings Bond.

In the case of Premium Savings Bonds, I have decided to increase the size of the prize fund, the number of draws and the number of prizes. Experience has shown that what most people are attracted by is a combination of a few very large and a lot of very small prizes. Bearing this in mind, I have decided to improve the prize structure by introducing a weekly draw of one £25,000 prize in addition to the normal full-scale monthly draws. To finance the rearrangement of prizes and to maintain the present favourable odds I am increasing the rate of interest on which the prize fund is calculated from 4½ per cent. to 4⅝ per cent. I shall seek the powers to make the necessary changes in the Finance Bill, and the new weekly draws will begin on 1st September.

There is another form of revenue-raising which is not saving, but which can voluntarily attract money which might otherwise be spent: a National Lottery. This might well raise in this country, as it does in many others, a sizeable sum of money for public purposes. There is a Private Member's Bill, presented by my hon. Friend the Member for Cleveland (Mr. Tinn), before the House at the present time. This was carried on Second Reading by a large proportionate majority but in a very small total vote. I have no reason to believe that that vote was unrepresentative of opinion in the House, but before Government action were taken I would prefer to see it confirmed on a better attended day. I therefore propose to table an enabling Clause in the Finance Bill, which will no doubt be debated and voted upon at Report stage on the Floor of the House. The Clause, although presented in the Bill for convenience, will not be a normal Government Clause. There will be a completely free vote on this side of the House—even for Ministers—[ Laughter.]

—and I hope that there will be an equally free vote on the other side of the House, even for the Opposition Front Bench. If the decision is favourable we will proceed to implement it by means of further legislation. I hope that in these circumstances my hon. Friend will agree to withdraw his Bill, although we would be glad to have his assistance in working out the exact form of the scheme. My own view is that we should go for a high rate of profit, that some of that profit should go into general revenue, and that some should be earmarked for desirable but not essential objects of public expenditure.

I know that some Members of the House and some people in the country will find this idea repugnant. They may carry the day; but if they do not, I do not see why people who think otherwise should be prevented from contributing to the national finances in a way they may find a good deal less painful than some others. I need hardly tell the House, however, that we are not looking to this as a major way out of our difficulties. In the context of this Budget it is a very small item.

I turn first to the duties on betting. I have approached them with the conviction that the House and the country are ready for considerable increases. My only regret is that the increases I am able to propose are not as great as I would have wished. This is not through any weakening on my part, but because of the need to ensure that a new tax, which has built up well since its introduction in 1966, does not break in our hands and lead to widespread evasion, with all the undesirable social and indeed criminal consequences which that could have, through trying to put too heavy a weight upon it. The experience of my illustrious predecessor in 1928 shows that these are real dangers.

There is also the consideration that while a great volume of money changes hands through betting, much of this is a purely circular movement of funds—the laying-off of bets which small bookmakers have to do extensively if they are to operate prudently is an example of this—and the amount of new money coming in, and still more the amount of money going out into purchasing power, is only a small fraction of the total. In consequence, the present 2½ per cent. duty is roughly equivalent to a 35 per cent. Purchase Tax on a commodity.

I therefore propose a doubling of the duty to 5 per cent., the maximum, I am strongly advised, which the tax could bear at the moment without endangering its whole basis. I also propose to increase the pool betting duty on football pools and fixed odds football coupons betting from 25 to 33½ per cent. of stakes. The changes will in each case apply from Monday next, 25th March.

This brings me to the gaming licence duty. It would be premature to undertake any fundamental revision or sweeping increase of this duty while the House is still considering the major changes proposed by the Gaming Bill. At the same time, it would be wrong in the context of the increases in the duties on betting if I were not to ask for some contribution from this form of gambling. I propose, therefore, somewhat to increase the rates of licence duty. The rate for the smallest bingo halls, now £100, will go up to £125, and that for the smallest casinos from £500 to £750. At the other end of the scale, the largest bingo halls will pay £2,000 instead of £1,000 and the largest casinos £75,000 instead of £50,000.

Between these extremes I propose to introduce one new step in the duty scale for bingo halls and two additional steps for casinos. Full details are set out in the Financial Statement. These new rates will be payable on all renewals of existing licences, as well as on new licences taken out after today and expiring after 30th September next. The estimate for the effect of all these changes is an increase in the year of the betting and gaming duties for a full year and in 1968–69 by £30 million.

I now come to the taxes on alcoholic drink and tobacco. First drink. I have already explained that, though I think it right to raise the greater part of the revenue I require from indirect taxation, I should like to do so in as selective and unregressive a way as possible. I therefore abstain from raising the beer duty, I do, however, propose to raise the duties on spirits by £1 1s. 6d. a proof gallon, equivalent to 2s. 6d. on a bottle of whisky or gin; and to increase the wine duties by 6s. a gallon for sherry, port and other heavy wines, and by 3s. a gallon for table wines, equivalent to 1s. a bottle and 6d. a bottle, respectively. There will be similar alterations in the duties on British wine. All these increases will come into force tomorrow and it is estimated that they will produce additional revenue amounting to £8 million from spirits and £7 million from wines.

In the case of the tobacco duty, I propose an increase from tomorrow of 4s. 4d. a lb., which will mean a price increase of 2d. per packet of 20 for most brands of cigarettes, and 3d. to 4d. an oz. for pipe tobacco.

I expect this to raise an extra £30 million of revenue a year. The relative modesty of this proposal is accounted for partly by some lack of buoyancy in the revenue—which I have of course taken fully into account in calculating the yield—and partly by the sharply adverse effect of a tobacco increase on the cost of living. But smokers of cigarettes, which account for about 90 per cent. of the revenue from tobacco, may derive some offset later on from possible developments on coupon trading and on resale price maintenance.

I also propose to raise the duty on hydrocarbon oils by 4d. a gallon from 6 o'clock this evening. This will apply to light oils, mainly petrol, and to diesel oils used as fuel in road vehicles, but the duty on heavy oils not used on the roads will remain unchanged at 2·2d. a gallon. The increased duty will yield an additional £76 million a year. I shall include a provision in the Finance Bill to enable the bus fuel grants paid to bus operators to be raised to cover the extra duty paid by them. This will cost £3 million a year and will require a Money Resolution.

My proposals so far yield an additional £151 million for a full year and in 1968–69. This is a start, but there is still a very long way to go.

I clearly need to make substantial, though still progressive, use of Purchase Tax. There are at present three rates of Purchase Tax: 11 per cent., 16½ per cent. and 27½ per cent. The lowest rate includes furniture and clothing (except for children's clothing, which is and remains exempt). It also applies to a wide range of household utensils: Lord Butler had a hard time for bringing them into tax in 1955, but no one has since found it possible to take them out. Here I propose a relatively small increase of approximately one-seventh to bring them to a 12½ per cent. rate of tax. The middle range includes confectionery, ice cream and soft drinks. Here I propose an increase of approximately a fifth, bringing them to a 20 per cent. rate of tax. The third rate, now 27½ per cent. applies to motor cars and most durable consumer goods as well as to a wider range of luxury or substantially less essential goods. Here I propose to split the rate. For motor cars, motor cycles, refrigerators, washing machines, etc., there will be a similar increase of approximately one fifth to 33⅓ per cent. But I think that in our present circumstances it is desirable that there should be a new, much higher, rate for luxury and other less essential goods.

For these, therefore, there will be an increase of rather over four-fifths—to 50 per cent. This rate will apply to furs, jewellery and imitation jewellery, gold and silver watches and clocks, gramophone records, smokers' requisites, cameras and other photographic goods, pictorial reproductions, diaries, calendars and greeting cards, fancy and ornamental articles, perfumery, and various toilet preparations and requisites. Full details will be given in the White Paper.

In addition, I propose to bring within the scope of the tax, tape recorders, which will join gramophones at 33½ per cent., pre-recorded tapes to join records at 50 per cent., and still and ciné projectors to join cameras and other photographic goods, also at 50 per cent. I think this is a wholly justified extension, and that many people will be surprised to know that these goods have so far escaped tax.

All these changes both of rate and of scope of Purchase Tax will apply from midnight tonight.

It would perhaps be appropriate at this stage to say that, in consultation with my right hon. Friend the President of the Board of Trade, I have decided not to use the Budget statement to impose further restrictions on hire purchase. This is in many ways an easy and attractive method of reducing demand. But there are several countervailing arguments. The first is that hire purchase restrictions do not have a long-term effect. They make an immediate impact and then die away over a period of months. That is almost the exact opposite of the effect that I wish to produce with this Budget. This Budget is concerned with an 18-months to 2-year strategy, over which period domestic demand is reduced as export demand builds up. The second point is that hire purchase restrictions on cars have already been tightened in November.

On top of this, the Purchase Tax increase and other imposts, I do not consider that a further turn of the screw here would be right. But, without cars, the effect of a further hire purchase restriction would be much reduced. It would bear only on a narrow range of industries, many of them subject to Purchase Tax at the rate which is now being raised from 27½ to 33⅓ per cent. and industries not at present fully stretched. Third, there are objections to over-frequent changes in the hire purchase regulations. There have already been four in the past year. For a twelve-month period I consider that to be enough.

The total yield of these Purchase Tax changes will bring in £163 million for a full year. But as Purchase Tax is collected quarterly in arrear the extra revenue in 1968–69 will be only £127 million. This brings the total additional revenue from Customs and Excise duties to £314 million for a full year, and £278 million in 1968–69. I still have a substantial sum to raise; but before I go on to tell the House how I propose to raise it I have three further small points to make in the Customs and Excise field.

The first point relates to the Anglo-Irish Free Trade Agreement of 1965. Some of the adjustments of Customs duty that we agreed to make under that Agreement in favour of goods imported from Ireland require Finance Bill legislation accompanied by resolutions under the Provisional Collection of Taxes Act to bring them into effect from 1st July next. For technical reasons several Resolutions are required on this point; explana tions of their effect will be found in the White Paper.

The second point relates to sugar. I intend to include in the Finance Bill provisions to enable sugar used for some industrial purposes to be relieved of the sugar surcharge. This will help a number of manufacturers whose competitors abroad are able to use sugar bought at world prices.

The third point is to announce that I propose to extend for a further year the power given to the Treasury to vary the Customs and Excise revenue duties and Purchase Tax, if the national economy should require it, by means of the Regulator.

One source Mr. Deputy Speaker to which I must look for part of this further sum is the vehicle excise duties. I realise that the motoring public have already had to stomach the increase in the hydrocarbon oil duty as well as an increase in Purchase Tax on cars and motor-cycles. But I think that there is nonetheless a good case for adding an increase in the vehicle excise duties, in the situation with which I have to deal. Private motoring is growing at an enormous rate in this country. It is in most ways a highly desirable but not always an essential feature of life.

The vehicle excise duties therefore offer a buoyant source of revenue, and one which cannot be regarded as unduly regressive. About 50 per cent. of families—and these overwhelmingly within the poorer groups—are still without cars. These groups will therefore escape the direct effects of the impost which I propose. But it will be an all-round increase, although the increases will not all be at the same rate, and some indirect effects, flowing from the resulting increase in industrial and distributive costs, will therefore extend to those who do not own cars.

In 1965, when the duties were last revised, my predecessor made a much smaller increase in the rates on private cars than on other vehicles. I therefore feel justified in proposing a substantial increase in the annual rate for private cars—from £17 10s. to £25, or about 43 per cent. The new rate will be approximately equivalent in terms of purchasing power to the rate charged on a ten horse-power car at the inception of the duties in 1921.

The rates for motor-cycles, three-wheeled vehicles and pedestrian-controlled vehicles were simplified in 1965 and in some cases were increased by as much as 100 per cent. I therefore propose a smaller proportionate increase for this category of vehicles, from the existing rates of £2, £4, and £8 respectively, to £2 10s., £5 and £10—increases of 25 per cent. At the same time, I am proposing that small powered three-wheelers, which are comparable with mopeds, should pay duty at the rate of £2 10s. rather than the £10 rate which they would otherwise attract.

Finally here, I propose to make a general increase in the duties on goods vehicles. Not to do so would leave the new private car rate considerably higher than that for the lightest goods vehicles. At the same time, I have considered with my right hon. Friend the Minister of Transport the effect on the heaviest goods vehicles of an increase in vehicle excise duty combined with an increase in fuel duty, on top of the wear and tear charges and the abnormal indivisible loads charge propose in the Transport Bill.

We feel that, in a situation in which I have to impose this extra taxation, it would not be right to levy these new charges as well. My right hon. Friend has therefore decided in the new circumstances not to proceed with these charges, and she will shortly be tabling amendments to the Transport Bill to this effect.

I propose that the duties on heavy goods vehicles should be increased by amounts of about 50 per cent. That compares favourably with the wear and tear charges which would have been equivalent to an increase of about 75 per cent. in the vehicle excise duty. I also propose that the duties on light goods vehicles should be increased by smaller amounts, falling to 33⅓ per cent. Smaller increases will be applied to showmen's vehicles and to the smaller goods vehicles operated by farmers. I shall also be proposing minor changes in the law to clarify the rate of duty appropriate to vehicles used for both private and commercial purposes, and to extend slightly the eligibility for trade licences.

The yield from these increases is estimated at £126 million for a full year and £119 million in 1968–69. This brings the score to £440 million for a full year and £397 million in 1968–69. If I stopped now, the central Government's borrowing requirement next year would be reduced to £732 million. But I have to tell the House that this is still not yet nearly enough, if the Budget is to achieve the objectives which I have set for it. I have still a substantial sum to find, and only two main sources to which I can look for large amounts are the Selective Employment Tax and the field of direct taxation.

The Selective Employment Tax has some considerable advantages to commend it. It is the only means we have of taxing services, which are increasingly used in a relatively prosperous society, particularly by the better-off and which, in view of the changes I have just announced, could be very lightly burdened compared with goods if I were to leave S.E.T. where it is. The effect of the tax on the prices of services has not been as great as some people feared, and figures published recently indicate that it may have had a substantial and beneficial effect on productivity in the service trades—notably distribution—and perhaps also in the construction industry. For many years past there has been a steady tilt in the balance towards employment in the service trades compared with that in manufacturing industry. This has not been a healthy development in an economy placed as ours is. In the year ended 30th June, 1967, however—admittedly a period of falling employment—it looks as though that tilt has been sharply reversed: employment in the service trades has declined relatively to that in manufacturing industry. S.E.T. seems likely to have had a big effect here. Another by no means negligible advantage is that S.E.T. is a very cheap tax to collect, much more so than income tax or purchase tax, and still more than any sales tax or tax on value added.

On the other hand I am aware that it is not a wholly popular tax, but that is not perhaps a unique distinction for any tax. Collecting the tax from all employers and giving back all or part of it to some looks, I recognise, a cumbersome procedure, and I hope that at some time in the future—though I fear that it cannot be yet—we can arrange to collect the tax only from those who are liable to it. There is also argument about its effects, which cannot easily be resolved on the basis of the relatively short experience of its working so far. I am glad to say, however, that Mr. Reddaway, of Cambridge University, has agreed to undertake an inquiry into the effects of the tax. The terms of reference will be: to examine and report on the effects of the Selective Employment Tax on prices, margins and productivity in industries on which the tax falls as a net burden, and the consequent effects on the economy generally.

This inquiry will be independent of Government, save of course that we shall be ready to give Mr. Reddaway any information he needs for the purposes of the inquiry. I intend to publish his report in due course.

I should have liked to have had the results of this inquiry, and indeed to have been able to devise a less cumbersome method of administering the tax, before making any further changes in the rate. But these easy options of waiting are simply not available to me if I am to take the steps which are essential to get the economy right this year. I therefore propose an increase of 50 per cent. in S.E.T. with effect from 2nd September of this year; this increase will raise the rate for men from 25s. to 37s. 6d. a week, and the other rates in proportion. The increase will be refunded to those employers who already qualify for refunds of the existing tax. This change in itself would yield an additional £165 million net for a full year, and £155 million net in 1968–69. The additional tax will be payable in Northern Ireland, but the revenue accruing in that country will, like the existing yield from the tax in Northern Ireland, be paid to the Northern Ireland Exchequer, who are responsible for their own refunds.

I am, however, making certain modifications in the incidence of the tax as a whole which will reduce the additional revenue by £4 million in 1968–69 and £13 million for a full year. These changes are as follows: ( a) I propose to leave the effective rates of tax for part-time employees as they are, by increase

ing the refunds; ( b) I propose to extend the effective rates for part-time employees to all employees over the age of 65. I trust that this will forestall any tendency the tax might have to discourage the retention of elderly people in jobs in the service trades for which they are well fitted.

In addition I am aware of the difficulties created by the tax for those parts of development areas where there is little opportunity for employment in manufacturing industry. The tourist trade is of particular importance in these localities, and I therefore propose to refund Selective Employment Tax to hotels in certain rural parts of development areas. My right hon. Friend the President of the Board of Trade will be giving the House more details of this, and of another scheme for assisting the hotel trade in the country as a whole, when he speaks tomorrow.

There are two further points on S.E.T. I should make. The first is, Mr. Deputy Speaker, that even with the 50 per cent. increase in S.E.T. the total on-cost of employing labour in the service trades, counting social security contributions and labour taxes, will be less in this country than in any E.E.C. country and very substantially less than in three of them. The overall figure here will be about 14 per cent., as against about 16 per cent. in Luxembourg and in Germany, 19 per cent. in Holland, 27 per cent. in Belgium, 37 per cent. in France, and 45 per cent. in Italy. The on-cost of employing manufacturing labour here will of course be only a fraction of those in any of these countries.

The second point is that the increase I have announced will not prevent for the future any desirable re-casting of the tax in the light of Mr. Reddaway's report and any other available evidence.

S.E.T. is of course collected through the National Insurance stamp, and its increase will thus necessitate new stamps. We propose at the same time to make small increases in contributions to the Redundancy Fund, which are collected by the same means. Payments from this Fund have continued to run at a higher rate than receipts to the Fund, and an increase in contributions is required not only to meet the higher level of payments but to discharge the indebtedness to the Exchequer which the Fund has been incurring. It is proposed that the employers' contribution should be increased by 2d. a week for men and by 1d. a week for women with effect from 2nd September, 1968. This is not, strictly, a budgetary matter for the contributions go into the Redundancy Fund not into the Consolidated Fund. But it becomes a budgetary matter if through improvident finance we allow a deficit to accumulate. It is, however, proper to announce it now, since the introduction of these increases in these contributions will coincide with the introduction of the increase in S.E.T.

The net proceeds of the changes in S.E.T. bring the total additional revenue to the Consolidated Fund resulting from my proposals so far to £592 million for a full year and £548 million in 1968–69, which would bring the Central Government borrowing requirement next year down to £581 million.

First, I propose to alter the law relating to the period before a death during which gifts are liable to Estate Duty. The full period is, and has for many years been, five years. In 1960, when the Government of the day introduced proposals for tapering the liability in the third, fourth and fifth years, the Opposition welcomed the principle of tapering, but argued strongly for tapering outward from the five-year limit, not inwards. The force of the views then expressed seems to me to have lost nothing with the passage of time. I therefore propose to retain the principle of tapering, but to extend the full period by two years, from five to seven years. Gifts made within four years of a death will be liable to duty in full; the liability will be progressively tapered, on the present scale, in respect of gifts made during the fifth, sixth and seventh years before a death.

Second, I propose to put an end to the device, which has been widely exploited, of making gifts of insurance policies in such a form that they rank as a separate estate for Estate Duty purposes. I propose that, in future, these policies, and other property charged as gifts, shall be aggregated with the rest of the deceased's estate for the purposes of determining the rate of duty.

Third, I propose to close a loophole concerned with discretionary trusts which has been opened by a recent decision of the Courts.

These changes will take effect in the case of deaths occurring after today, but the new seven-year rule for gifts will not apply to gifts made more than five years before today. It is estimated that together they will bring in £5½ million in 1968–69 and £11 million for a full year.

I propose three amendments to the Corporation Tax provisions of the 1965 Finance Act. First, there has been an increase in the practice whereby companies offer shareholders the option of taking either a cash dividend or scrip in lieu. This is a device designed to avoid liability to Income Tax and Surtax. I propose that, where such an option is offered, the liability of the shareholder will in all cases be calculated as if he had taken the cash dividend. The other two are minor amendments. One concerns partnerships between individuals and companies, and the other concerns overseas life assurance companies selling annuities through branches in this country. In both instances, the original provisions fail to give full effect to their obvious intention, and could give relief for which there is no possible justification. These defects will be corrected.

During the Finance Bill debates last year, my right hon. Friend the Chief Secretary promised that the tax treatment of purchases and sales of know-how would be reviewed in consultation with industry. As a result, we have come to the conclusion that, while in practice the existing law as interpreted by the courts works well enough in the generality of cases, it ought to be clarified and certain minor defects remedied so that, in negotiating for know-how, both seller and purchaser know where they stand. In general, receipts from the sale of know-how will be treated as income, except where it is sold as an element in the disposal of a business, when the charge will be to Capital Gains Tax. I propose to introduce a new capital allowance giving the purchaser relief over six years in those cases where he cannot get relief under the present law.

One minor change relates to the method of calculating how much United Kingdom tax is available for credit when income has suffered overseas tax. The House will remember that in 1965 the Finance Act made provision for using an individual's marginal tax rate instead of his average tax rate for this purpose but that the operation of the new provision was to be postponed until a date to be fixed later. With the progress that has now been made in renegotiating our double taxation agreements, I have decided that the way is now clear to ask Parliament to bring that provision into operation. It involves a useful simplification of what can sometimes be a complicated calculation.

I am proposing another amendment which will make a considerable contribu tion to the revenue in the coming year. This relates to the interest charged on Income Tax, Surtax, Corporation Tax and Capital Gains Tax which is not paid promptly. At present, except in the case of tax deducted under Schedule F, interest is not charged if the tax is paid within three months of the date when it becomes due. I propose that this period should be shortened to two months. This change, which will apply to tax becoming due on or after 1st July next, should provide a permanent benefit to the Exchequer by encouraging taxpayers to meet their liabilities more promptly. I estimate that it will also bring into the year 1968–69 about £25 million of tax which would otherwise not be received until the following year.

I now turn to a matter which will be of interest, but not I fear of favourable interest, to hon. and learned Members on both sides of the House. That is the question of post-cessation receipts. Under the present law, barristers and certain other professional people pay no tax on those earnings of their profession which they receive after they have ceased to practise. Sometimes several such cessations take place in the course of a professional career. This is, I fear, an indefensible anomaly, the more so as for some years now self-employed persons have been able to get tax relief for payments to provide annuities on their retirement. I therefore propose to end the anomaly as from today and make such receipts taxable. There is, however, a problem for those, well-advanced in their professional carrer, who have been counting upon the anomaly when they retire. I therefore propose to soften the blow. There will be a tapering arrangement for those now over 50. Anyone aged 51 on 6th April, 1968, will be entitled to receive 5 per cent. of his last year's earnings tax-free. The percentage will increase by five points for each additional year of age; for those already 65 or over, 75 per cent. will remain tax-free.

The first relates to the tax allowance given to a husband in the year of his marriage. At present the full marriage allowance is due, however late in the fiscal year the marriage takes place. There tends, in consequence, to be a spate of marriages as 6th April approaches—or in October if the wife is proposing to continue to work. I do not think it particularly appropriate that the accidents of the tax calendar should make so much difference to the tax position of a newly-married couple. I therefore propose that as from 6th April next the husband will get the full tax allowance only if he is married for the full year, which I define as meaning on or before 5th May. If he marries later in the year he will get only the appropriate monthly proportion. This change should produce about £12 million in 1968–69, and £15 million for a full year.

The second proposal relates to the tax position of families where children have investment income of their own or investment income is held or applied on their behalf.

Our tax system has always treated the income of husband and wife as one, on the basis that they are a single spending unit. Logically the unit for tax purposes ought to include children as well as husband and wife, for the children's income, just as much as the parents', is available for the family and is reflected in its living standards. The fact that the same amount of family income is divided in one family between parents and children and in another belongs only to the parents ought not to involve a difference in tax liability. Moreover, the fact that a child's income has up to now been taxed separately from that of its parents has encouraged arrangements under which grandparents or other relations have provided income or capital to children with the object of benefiting the family as a whole. I therefore propose to carry the principle of aggregation further, so that the investment income of minor children will be aggregated with that of their parents for tax purposes.

The new rule for the aggregation of a child's investment income with his parents' income will not come into operation this year. The legislation must, however, be included in this year's Finance Bill, because a considerable amount of preparatory work by the Inland Revenue is necessary beforehand. The new rule will take effect from 1969–70.

The new legislation will establish the principle that a child's investment income is to be aggregated with that of its parents. The picture will not be complete, however, until we have dealt with certain associated questions, such as the use of settlements to accumulate income. I give notice now that in next year's Budget I will attend to these details so that the legislation as a whole can come into effect from 6th April, 1969. Obviously, therefore, no revenue can accrue in 1968–69. But the significance of this change is indicated by the fact that it is estimated that it will produce £25 million for a full year. This shows how greatly families with established wealth available to them have benefited over those with the same gross income coming entirely from the efforts of the parents. I do not think any theory of incentives justifies that.

The net additional yield from the changes in direct taxation I have described so far—many of which will have only a small effect—will be £51 million for a full year, and £42 million in 1968–69.

I now come to the major aspects of personal taxation. We already have a commitment to recover the full amount of the April increases in family allowances from people who pay tax at the standard rate, with small recoveries from those who pay only at the reduced rates. The most accurate and therefore the best way to do this is not by an across-the-board reduction in the children's Income Tax allowance. This might be the more easily comprehensible, but it would also be the more crude method. It would create a number of anomalies, associated with the fact that some families would lose their Income Tax allowances without getting family allowances. I therefore propose a reduction in the total tax allowances of a family by the necessary amount for each child who qualifies for family allowances. The reduction called for on behalf of the 7s. increase previously announced is £30. This would do the job for standard-rate payers with an almost tailor-made precision.

But, as I announced earlier in this speech, we have decided to make a further increase in family allowances early in October. There will thus be a "two stage" operation, an increase of 7s. a week in April, 1968 and a further increase of 3s. in October, 1968, making a total increase of 10s. a week from midway through the financial year. The benefit of this further increase, as with the 7s. increase, will be confined to the poorer families. This will mean a somewhat bigger reduction in tax allowances than £30. In the simple case where the child ranks for family allowance for the whole of 1968–69, the reduction in tax allowances for that year will be £36, that is, at the rate of £30 per annum for the 7s. increase in the first half of the year and £42 per annum for the 10s. increase in the second half of the year. Appropriate adjustments will be made for cases where the child ranks for family allowance for part of the year only.

Similar arrangements will be applied to the allowances paid to the Armed Services abroad in lieu of the statutory family allowances.

In the case of families where long-term social security benefits are part of their taxable income—widows receiving pensions under the National Insurance and Industrial Injuries Acts, National Insurance retirement pensioners, and war widows—these reductions in tax allowances will not be applied, since the adjustments in their child dependancy allowances will largely offset the increases in family allowances.

The Inland Revenue will need to re-code parents in the P.A.Y.E. field to take account of the second increase in family allowances, as well as the year's reduction in tax allowances. This will not be practicable straightaway; and at the beginning of the tax year 1968–69 tax will be deducted on the basis of existing codes, so that too little tax will be deducted for a time. But in order to bring the revised code numbers into operation as soon as possible, the Inland Revenue propose to concentrate their efforts on the P.A.Y.E. recoiling, and the new code numbers will come into effect in the P.A.Y.E. week beginning on 27th April. In this week the taxpayers affected will begin to pay tax on the basis of their new code numbers, and at the same time the tax underpaid in the three previous weeks by the use of their existing code numbers will be collected. But the number of weeks' arrears to be collected will be of manageable proportions, and of course in the cases affected there will be the extra 7s. family allowance from April and a further 3s. from October.

The revenue yield from these recoveries is estimated at £83 million for a full year and £57 million in 1968–69. These increases, though in part announced earlier, will, of course, be in addition to the revenue on the basis of existing taxation, the figures for which I gave the House earlier.

The increase in family allowances, combined with the recovery arrangements, will have the inevitable result of bringing about 300,000 additional people into tax. This I regret, both because I regard it as in general highly desirable, on grounds both of fairness and administrative economy, to avoid the collection of small amounts of tax from people with small incomes. But it was not possible to produce a sound scheme for their exemption without the sacrifice of appreciable amounts of revenue. This year I cannot afford that. But I regard a raising of the threshold of tax as a strong priority for a Budget in easier circumstances.

There is, however, Mr. Deputy Speaker, one small concession which I am able to make even at present. Last year the limits for the age exemption for persons aged 65 and over were raised to £401 for single persons and £643 for married couples to take account of the increase in the National Insurance retirement pension which took place at the end of October. In 1968–69 a full year's pension increase will be received and I have decided to raise the exemption limits again. I believe that when what I hope will be a relatively short-term stringency has to be applied the elderly are entitled to some special consideration. The new figures will be £415 for single persons and £665 for married couples. The cost will be £2½ million for a full year, and £1½ million in 1968–69.

I turn to the rate of Income Tax. I propose no change in the standard rate of Income Tax, or in the reduced rates or in the width of the bands. In the context of this year's Budget needs, a reduction would of course have been out of the question. It has required great effort to avoid an increase. But for reasons I gave in the passage introducing my measures I believe this effort to be worth-while. Nor will there be any change in the rates of Surtax as such. No earned income, save for the effects of the recoveries of family allowances, the principle of which had already been announced, will therefore be subject to higher direct taxation. This I believe to be justified on the ground of incentive.

Corporation Tax would be the most obvious method of dealing with an increase in profits. But an increase in profits—particularly from the somewhat depressed level at which they have been running in the past 18 months—is in many ways desirable. Without it it would be difficult to get the spurt in company investment which is essential to our future efficiency. Furthermore my predecessor announced in November that Corporation Tax on profits earned in the year now ending would be raised from 40 to 42½ per cent., an increase which we ex-pea to bring in an extra £57 million of revenue in 1968–69, and £98 million for a full year. I do not think it would be right to make a second change in the rate of Corporation Tax for this year.

The next possibility is an increase in the rate of Capital Gains Tax. This tax is making a material and growing contribution to the revenue. The yield this year is approximately £16 million as against £7 million last year. And for 1968–69 I estimate a yield of £45 million. There is therefore no question of the tax, overwhelmingly justified in equity, producing a negligible revenue in return for a great expenditure of administrative effort. Nevertheless I do not consider that it would now be appropriate to raise the rate of tax. It is in my view an essential feature of our long-term taxation arrangements. This requires a long-term view of the rate at which it should stand. This view was given by my predecessor two years ago, and I stand by what he said. Nor, by its nature, is it a tax suitable for a short-term and limited surcharge. This would produce all the distorting effects of a reluctance to realise during the period of the surcharge, with a possible fall in the immediate yield.

There are however certain limited changes in the incidence of the tax which I propose. In making these proposals I have particularly in mind the need to simplify the tax wherever possible.

First I propose that the gains of individuals shall be exempt from tax if, after deducting losses, they do not exceed £50 for the year.

Secondly I propose to simplify the rules for calculating the Capital Gains Tax liability on sales of quoted shares and securities acquired before 6th April, 1965. For the future such shares and securities will no longer be "pooled" with similar assets acquired since 6th April, 1965, and in computing gains on them it will be necessary only to compare their acquisition cost with their value at 6th April, 1965. As a further measure of simplification taxpayers may elect once and for all to disregard the actual cost of their pre-1965 holdings of equity shares taken as a whole and to base their gain or loss solely on the 6th April. 1965, value; a similar election will be allowed for all their fixed interest securities.

Third, I propose to exempt entirely from Capital Gains Tax all chattels which rank as wasting assets, that is, chattels that have a predictable life of not more than 50 years. It follows that no relief will be given for losses on such chattels.

I hope that these changes will save both taxpayers—and their professional advisers—and the Inland Revenue a certain amount of effort at small cost to the revenue.

My fourth proposal, however, is for the partial withdrawal of an exemption. Gains on certain Government securities within what is known as the "neutral zone" are at present exempt from both the short-term and the long-term tax. When we introduced the exemption in 1965 we had in mind the genuine investor who had taken up the securities at a discount on the understanding that he would be repaid at par. But we find that the main benefit of the exemption for short-term gains is going to those who deliberately buy and sell within a period of months purely in order to get interest on the securities in tax-free form. I see no reason why this sort of gain should be exempted and I propose, therefore, to withdraw the exemption so far as the short-term tax is concerned and to charge all persons, including companies, who buy and sell within a year. This will produce additional revenue of £2½ million a year. The exemption will, of course, continue as regards the long-term Capital Gains Tax.

There will also be a number of minor changes, in relation to both the short-term and the long-term tax, which I need not describe in detail.

Having excluded an increase in the Capital Gains Tax or a further increase in the Corporation Tax, I am left therefore with the possibility of some impost upon the private wealth of individuals. In general I believe this to be a better method of approach than a fiscal reduction of company profits. The introduction of an annual wealth tax has been much canvassed. I will not spend time on a discussion of the merits of such a tax; since it would be quite impracticable at present because of the problems of valuation which would be involved. I have therefore decided that it is right, in the context of this uniquely rigorous Budget, to propose a special charge to be calculated and expressed as a charge upon investment income, as computed for the charge to Surtax for the year 1967–68. The charge will not be payable on investment incomes of £3,000 or less. The £3,000 limit will be increased by those personal allowances which an individual can claim in calculating his Surtax. Above that level it will be graduated. Between £3,000 and £4,000 it will be at the rate of 2s. in the £ between £4,000 and £5,000 at the rate of 3s; between £5,000 and £8,000 at the rate of 6s.; and above £8,000 at the rate of 9s. Its yield is estimated at £100 million, of which it is expected that £70 million will be received in 1968–69.

Although this charge Mr. Deputy Speaker will be calculated upon investment income and may at the lower ranges be paid out of income—at an investment income of £4,000 for instance, the charge for a married man with two children under 11 will be £65, and at £5,000 it will be £197 10s.—I recognise and intend that in the higher ranges it will be a small tax upon capital. I make no apology for that, because there can be little doubt that, with fortunes producing really large investment incomes, expenditure is determined much more by the possession of capital than by the size of the net income. I have no doubt that it will be said that as a small charge upon capital this will make no contribution towards reducing spending power. I by no means wholly accept that. But in any event the corollary is the extremely challenging one that the expenditure of those with accumulated wealth, unlike that of the rest of the community, must be recognised and accepted as being outside the control of fiscal policy, even at a time when all-round sacrifices are necessary. I hope and believe that this special charge will lead to some reduction in consumption. But to the extent that fortunately placed individuals decide that it should not reduce their spending, it is the more reasonable that they should make some small contribution from their capital.

This charge is imposed for one year only. It obviously should not, and indeed could not, be repeated in its present form except at long intervals. It would otherwise militate against deployment of capital so as to produce investment income—although there is a good deal of that already. This should not, however, be taken as precluding further exploration of the ways in which the taxable capacity of those who possess wealth should be differentiated from that of those who depend primarily on wages and salaries. This might make it both possible and desirable to reduce the highest rates of tax on incomes.

The net additional yield from all these changes in the field of direct taxation would be £331 million for a full year; that includes the yield of the increase in the Corporation Tax and of the recoveries of increases in family allowances and the whole yield of the special charge, which I do not intend to repeat next year. The net additional yield in 1968–69 will be £227 million.

Resolved,

That pursuant to Section 5 of the Provisional Collection of Taxes Act, 1968, provisional statutory effect shall be given to the following motions—

(a) Spirits (Excise and Customs) (motion No. 2)

(b) Wine (Customs) (motion No. 3)

(c) British wine (Excise) (motion No. 4)

(d) Tobacco (Customs and Excise) (motion No. 5)

(e) Hydrocarbon oils (Customs and Excise) (motion No. 6)

(f) Matches (Customs) (motion No. 7)

(g) Mechanical lighters (Customs) (motion No. 8)

(h) Hops, hop oil, etc. (Customs) (motion No. 9)

(i) Excise (General betting duty) (motion No. 10)

(j) Excise (Pool betting duty) (motion No. 11)

(k) Excise (Gaming licence duty) (motion No. 12)

(l) Purchase tax (motion No. 13)

(m) Vehicles excise duty (motion No. 15)

(n) Income tax (charge and rates for 1968–69) (motion No. 16)

(o) Income tax (surtax rates for 1967–68) (motion No. 17)

(p) Income tax (alterations in personal reliefs) (motion No. 18).—[Mr. Roy Jenkins.]

Motion made, and Question proposed,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance, so, however, that, without prejudice to any authorisation by virtue of any Resolution relating to purchase tax or selective employment tax, this Resolution does not extend to the making of amendments of the enactments relating to either of those taxes so as to give relief from tax.—[Mr. Roy Jenkins.]

6.3 p.m.

6.22 p.m.

6.32 p.m.

6.45 p.m.

6.59 p.m.

It being Seven o'clock, and there being Private Business set down by direction of The CHAIRMAN OF WAYS AND MEANS, under Standing Order No. 7 (Time for taking Private Business), further Proceeding stood postponed.

Postponed Proceeding on Question:

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance, so, however, that, without prejudice to any authorisation by virtue of any Resolution relating to purchase tax or selective employment tax, this Resolution does not extend to the making of amendments of the enactments relating to either of those taxes so as to give relief from tax.—[Mr. Roy Jenkins.]

— resumed.

Question again proposed.

8.51 p.m.

9.1,1 p.m.

9.25 p.m.

9.42 p.m.

9.53 p.m.

Debate adjourned.—[ Mr. Gourlay.]

Debate to be resumed Tomorrow.