Considered in Committee.

[Sir DENNIS HERBERT in the Chair.]

3.33 p.m.

Coming now to the revenue for 1935–36 Customs and Excise yielded a total of £303,342,000. That is an excess over the estimate of £8,500,000 and over the yield for the year before of £13,750,000. This is partly due no doubt to the stimulating effect of the Jubilee celebrations, but mainly to the general recovery of trade. The surplus was distributed over a large number of items, but particularly noteworthy is the excess of £1,000,000 over my estimate of the yield of the duty on spirits, which some of my Scottish correspondents will be relieved to hear showed a rise in consumption for the first time for many years. Other surpluses were £800,000 on beer, nearly £2,700,000 on tobacco, and nearly £900,000 on oil. Tariffs did very well and gave us a surplus of £1,250,000 on the duties under the Import Duties Act, and £1,000,000 on the Ottawa Duties, while the Special Duties on imports from the Irish Free State gave us an excess of more than £400,000.

Inland Revenue Duties gave us £404,899,000, an excess over the estimate of nearly £13,500,000, which was distributed between Death Duties, which had an excess of £8,000,000, and Income Tax, with an excess of £5,500,000. The Surtax, at just over £51,000,000, was within £500,000 of the amount which I had estimated from that duty. The Death Duties gave us almost £88,000,000, the highest yield that has ever been obtained from Death Duties since they began. On this occasion this large amount was not due to exceptional receipts from very large estates. It is to be attributed rather to the general rise in capital values which itself is a result of a growth of confidence and the existence of cheap money, an impressive illustration of the many ways in which the revenue benefits by an increase of prosperity as one channel after another fills up and proceeds to discharge into the national purse.

The Income Tax was swollen by a larger collection of arrears than I had anticipated and that again we must ascribe to the general increase in the wealth of the public. The current tax, the tax which is payable on 1st January and is collected in the last quarter of the financial year, was just about what I had expected, and therefore this excess of £5,500,000, which I was fortunate enough to get, is not to be considered as due to any underestimate on my part of the current tax. I do not think there is any other remark that I need make about the Inland Revenue, except that the excess of £800,000 over the estimates in the yield of Stamp Duties is another very welcome sign of the expansion of trade activity.

The Post Office Net Receipt at £11,670,000 is slightly less than the estimate, but this result really masks the encouraging fact that the gross revenue of the Post Office exceeded the estimate by nearly £2,000,000, and that, notwithstanding the fact that during the year there was a further reduction of telephone charges which, of course, meant the relinquishment of a substantial amount of revenue. The reason why the Net Receipt is not greater is that this increase in gross revenue was offset by the effect of the restoration of cuts in pay and also by the additional expenditure due to the increasing business of the Post Office. Sundry Loans and Miscellaneous Revenue together fell short of my anticipation by £3,198,000. The remaining items, Crown Lands, and the Exchequer share of Motor Vehicle Duties reached almost exactly where I had expected.

I have a few observations to make about the National Debt. During the whole of the last year low interest rates continued to prevail, and the average of Treasury Bill borrowing was 11s. 6d. per cent., which was actually one shilling per cent. below the extremely low average of the year before. As a result of the easy monetary conditions, I was able last December to effect an important consolidation of our short-term debt position by the issue of £200,000,000 of new long-term 2½ per cent. stock, and £100,000,000 of 1 per cent. Bonds both at a slight discount. I was able to raise sufficient cash to repay £150,000,000 of 2 per cent. Treasury Bonds on 2nd March, and £44,000,000, which was the total amount still outstanding, of the 3 per cent. Treasury Bonds on 15th April. I was also able to effect a substantial reduction in the volume of Treasury Bills which for some time past has been showing a tendency to increase. The issue of those two loans at a discount made an increase in the nominal amount of the debt of £6,500,000, and borrowing under the North Atlantic Shipping Act and the British Shipping Assistance Act, against both of which we have security, made a further increase of £2,000,000. But on balance, taking all the factors into account, the National Debt showed a reduction during the year of £4,500,000 and the Floating Debt was reduced by £51,250,000. I do not recollect to have heard recently any expressions of anxiety about the position of the Exchange Equalisation Account but all the same the Committee perhaps may be glad to know that that Account still continues to show a profit.

Now, I am ready to turn to the new year, and I think it will be convenient if I first make a survey of the position of revenue and expenditure as we find them to-day, and then go on afterwards to consider what supplementary provisions must be mad:, on either side of the account. I begin with the Fixed Debt Charge. That has remained during the last three years at the same figure of £224,000,000. During that period I have been able out of savings within that charge to make available for debt redemption £32,500,000. I must say again, as I have said before, that in normal times I should not consider such provision as adequate. But times have not been normal during these three years and they have not been normal during the past year; and much as I should like in this Budget to make an increased provision for the redemption of debt, I do not feel justified in doing so in present circumstances. I therefore propose to maintain the Fixed Debt Charge at £224,000,000. If interest rates should remain somewhere about their present low level, I have no doubt that I shall be able to find within that sum a modest but useful amount of revenue to reduce the debt still further; but in the meantime, and by way of precaution, I propose to do as I did last year, and to take powers to borrow for the purposes of the contractual sinking funds. The other Consolidated Fund Services do not require any special comment. Northern Ireland will want £7,500,000; Miscellaneous Services, £3,200,000 and £600,000 will be required for the Post Office Fund.

The Estimates for the Supply Services have already been published and hon. Members who have had an opportunity to study them are aware that they provide for the Civil Departments, £378,746,000, and for the Defence Services, £158,251,000, or a total of £536,997,000. We must now consider what provision will be necessary for Supplementary Estimates which will have to be laid for certain expenditure by the Civil Departments and also for the additional expenditure upon the Defence Forces which is foreshadowed in the White Paper recently presented to Parliament. Nothing has been provided in the Estimates, so far published, for the grants which are being paid to Public Assistance Authorities until the Second Appointed Day under the Unemployment Act of 1934. It will be necessary to pass legislation in order to continue those grants after 31st March, 1936. Accordingly, I have to provide a margin to meet this liability, which I put at £5,600,000.

As to the Defence Forces, I have already made known in answer to a question that another £10,000,000 will be required for the Air Force. In addition to that, further sums will be wanted for the Army and Navy which I am not at this moment in a position exactly to specify, but which may well, together, be rather more than the sum which is to be allotted to the Air Force. On the other hand, taking the Estimates as a whole, past experience shows that at the end of the year, there always remain some items unspent. Taking into account all the possibilities and probabilities of the situation, I have decided to set aside as a margin for the Supplementary Estimates for the Defence Services £20,000,000. That will bring up the total for the Supply Services to £562,597,000.

Of the two self-balancing items, the Post Office and the Road Fund, the Post Office again shows a substantial increase and stands at £69,344,600. That is an increase over the actual expenditure of 1935 of £3,250,000 and that again is partly to be attributed to the full effect of the restoration of the cuts but mainly to the necessity for providing further working expenditure. I estimate the yield of Motor Vehicle Duties for the current year, after deducting the Exchequer share, at £26,500,000 and that will form the Road Fund for the year.

I can summarise the expenditure for 1936, including Supplementary Estimates but omitting the self-balancing items as follows:

Let me now come to my estimate of the revenue for 1936 on the existing basis of taxation. I start with Customs and Excise. I have already drawn attention to the considerable expansion in the yield of Customs last year and provided that no untoward events occur which might check the purchasing power of the community, I anticipate that the new year will show, again, a considerable upward movement in the revenue from Customs and Excise which is peculiarly sensitive to changes in the spending disposition of the public. Accordingly, I am budgeting for increases, and in many cases substantial increases, in nearly all the items. To mention some of the larger figures, I expect increases in the Beer Duty of £1,900,000; in tobacco of more than £3,000,000; oil, nearly £3,000,000; silk, £400,000; duties under the Import Duties Act £1,400,000 and in the Ottawa Duties, £500,000. I expect only a small rise of £100,000 in the yield of the Sugar Duty, but that is because the effect of the sugar preferences is becoming increasingly costly to the Exchequer. By way of exception to the general rule, I expect to receive from Entertainments Duty £400,000 less than last year, and a similar amount less from the Special Duties on the products of the Irish Free State. The reason for the lower expectation from Entertainments Duty is because, this year, we shall have the full effect of the remission of the duty last year, which only dated from 1st July, 1935, and, in the case of the Irish Free State, the reduction is due to the lowering of the duties on certain animals and meat which took place in connection with the renewal of the coal-cattle agreement last February. Further details will be available, in the White Paper, to hon. Members when I sit down. The total estimate from Customs and Excise on the existing basis of taxation is £314,000,000 or an excess of £10,500,000 over the actual revenue received in 1935.

From Inland Revenue, at any rate from certain items of it, I expect also to obtain substantial increases. I take Income Tax at £248,000,000. That is £10,000,000 over the yield of 1935. Hon. Members must recollect that this year has to bear the full cost of the reliefs granted last year and, if you take like for like, my estimate really represents an excess of £15,000,000 over the yield for last year. That is a pretty big increase, but I put it forward with some confidence that it will prove to be correct, because it is founded upon information collected from a number of concerns which have been good enough to furnish me with forecasts of their trading results for 1935 and that, of course, is the basis for the assessment of Income Tax under Schedule D for 1936. In estimating that I shall get £54,500,000 from Surtax I am allowing for a growth this year of £3,500,000. It will be recollected that there was no growth last year. But hon. Members know that Surtax lags a year behind Income Tax, and in fact this year is the first year in which the receipts of Surtax should reflect the improvement in trade.

Death Duties, as I have already said, gave us a very high yield in 1935, but as there is no reason to anticipate any serious alteration in the high level of security values, counting on that high yield of 1935 I expect that it will be maintained in 1936. Accordingly I have put down £89,000,000 for Death Duties. The Stamp Duties have been rapidly recovering. The yield in 1935 was £25,800,000, which was a growth of about £1,750,000 over the year before; and as the steady expansion of business and improvement of trade is continuing, I think that the Stamp Duties, especially in view of the growth of Stock Exchange transactions, should give me a yield in 1936 of £27,000,000. The other Inland Revenue Duties I have put down at £1,500,000, and, adding together all the various items which I have enumerated, I get a total for Inland Revenue of £420,000,000.

I put the Exchequer share of Motor Vehicle Duties at the same figure as last year, £5,000,000. Crown Lands revenue is £1,350,000. The Committee are aware that His Majesty, in his Gracious Message of 11th March, following the example of his predecessors, placed these revenues at the disposal of the House of Commons. Therefore, it is proper that I should take them into account now, although there has not yet been time to complete the arrangements by granting to His Majesty a suitable Civil List. Sundry loans I estimate at £5,000,000, and miscellaneous revenue at £20,000,000.

I must say a word or two about the Post Office contribution to the Exchequer. The Post Office Fund has now existed for three years, and in accordance with the Finance Act of 1933 it becomes necessary to review the fixed contribution which under Section 34 of that Act was determined to be £10,750,000 for the first three years. For some time past the subject of the relations between the Exchequer and the Post Office has been under consideration by the two Departments. Up to the present we have not been able to accumulate sufficient data to enable us to determine a long-term policy. Accordingly, with the concurrence of my right hon. Friend the Postmaster-General, I propose to keep the Post Office contribution for another year at the same figure of £10,750,000. At the end of that time I think it ought to be possible to propose a fresh, and, I should hope, a lasting basis of settlement. Hon. Members are aware that the actual cash sum received by the Exchequer in any particular year by no means always is identical with the fixed contribution. There are services which are rendered by various Departments to the Post Office free of charge, and vice versa. and there are various other minor adjustments that

have to be made. I am proposing in the Finance Bill a small step which will have the effect of accelerating and simplifying this procedure, and, on that basis I estimate that the Exchequer receipts for 1936 will be £11,256,000, while the payment out of the Exchequer to the Post Office Fund will be £600,000.

I can now summarise the total of my revenue from all sources on the present basis of taxation. Customs and Excise stands at £314,000,000; Inland Revenue, £420,060,000; Miscellaneous items, £42,606,000;making a total of £776,606,000. I have already given the Expenditure as £797,897,000, and I am, therefore, left with a deficit of £21,291,000.

Those hon. Members who have heard many Budget statements will not be surprised when I say that at this point it is necessary to turn aside from the main course of my story and to deal with certain minor changes in the legislation which controls our taxation, which I shall have to propose in the Finance Bill. In the first place I want to call the attention of the Committee to a practice which is growing very rapidly among the public, of adopting one or more of various methods, all of them completely within the law, of avoiding Income Tax and Sur-tax. Of course, it is very natural that the higher you raise a tax the greater is the inducement to avoid it if you can. Smuggling becomes worth while just in proportion as the import duty is large enough to create a margin which will offer opportunities to make a profit. Total prohibition may evoke such effective methods of evasion as ultimately to bring about its own complete dissolution. In our direct taxation the burden at the present time is high enough to attract the attention of ingenious minds, and their discoveries and inventions have now proceeded to such a point that it is necessary to ask Parliament to intervene.

In the time which I have at my disposal this afternoon it would not be possible for me to describe in detail all the various ways, no doubt extremely interesting to hon. Members, in which Income Tax and Sur-tax can be avoided. I shall confine myself, therefore, to just sufficient to explain the Resolutions which later on I shall have to ask the Committee to pass. The first proposal concerns the avoidance of tax by an individual living in this country who transfers his property to persons abroad in such a way that, while he himself retains control over the property and himself enjoys the income from it, in the light of the Income Tax law as it stands at present he does not appear to be in receipt of the income. I am going to deal with that by providing that the income arising from property of this kind shall be taken as the measure of tax liability.

The second proposal deals with what are known as one-man companies at home. The existing law contains provisions which are expressly designed to deal with avoidance of Sur-tax by manipulation of companies of this kind, but these provisions have been found to be defective, and I shall propose, therefore, to strengthen them in such a way that it will be possible to put a stop to certain devices which have been successfully employed for evading Sur-tax. As these two proposals I have mentioned both mainly deal with Sur-tax, and as the Sur-tax which is assessed as payable in the current year is the Sur-tax for the year 1935–36, I propose that this legislation shall operate as from that year. The financial effect of these two proposals is expected to give me £2,000,000 in the present year, and in a full year about £4,000,000.

There is another practice which concerns both Income Tax and Sur-tax, to which I must draw the attention of the Committee. There has been a very rapid growth, especially recently, in a form of deed, which is, I believe, known as an educational trust. The procedure is of this kind: A parent signs a deed giving part of his income to his child. In his capacity as guardian of the child he receives that income from himself. He applies it to the maintenance and the education of his child. Of course, he is not doing anything more for the child than he would do anyhow, but by just signing that deed he relieves himself of the liability to Income Tax on that part of his income. The knowledge of that device is becoming exceedingly widespread. The other day I came across a printed document which I am told is being issued wholesale all over the country and which gives the most careful directions as to how Income Tax may be avoided by this method. It says, for instance:

"In our opinion you would meet technical requirements if you draw a cheque payable to Deed of Covenant or Bearer, and pay it into your own Bank Account as if it were a dividend Warrant. This constitutes a desirable contra entry in your Bank Book, but does not involve an out-of-pocket transaction."

It concludes by saying:

"Your friends will thank you for an introduction to our scheme, and I should he happy to send you a cheque for 10s. 6d. in respect of any new client introduced and accepted by us."

It is easy to see what is happening. A householder in one of our suburbs receives this document one morning at breakfast and, seeing that it is about Income Tax, of course he reads it with interest, and with growing delight, as he finds that, with perfect safety to him self and in strict accordance with the law, he can substantially reduce his liability to Income Tax. Of course, as soon as he has assimilated this plan, he remembers the precept that you should do to others as you would be done by, and, not despising the half-guinea, he does an act of neighbourly kindness by passing the document over the fence. In due course his neighbour also makes himself acquainted with the plan and earns another 10s. 6d., and before long it has gone right through the street, and there is not a householder in the neighbourhood who has not been introduced to this philanthropic agent who has come to the assistance of the British taxpayer. But there is by no means a monopoly in this business. Agents and canvassers are busy hawking about schemes of this kind on behalf of various companies, and they are making them a means of getting insurance business. I have seen another document left by an insurance agent, which says:

"We are going to save you money, and the only condition which I wish to make is that you regard this as confidential and apply every penny of the savings for the benefit of yourself, wife, and children on a Policy with my Company. This would be the only gain I should receive, and as this is my profession I depend upon your word not to divulge the scheme to any other insurance representative."

I would not have the Committee suppose that every transaction by which a man parts with some of his income for the benefit of his child is done for the purpose of avoiding Income Tax, I have no doubt that there are many cases in

which the motive is perfectly proper and even laudable, but the effect is the same. The effect in all cases is that Income Tax is in fact avoided, and thus there is created a disparity between taxpayers who are otherwise situated in the same circumstances. Whether you ought to ask a man to pay Income. Tax upon that part of his income which he devotes to the education and maintenance of his children is a matter upon which opinions may differ, but I think everybody will agree that all parents ought, to be treated alike in this matter, and chat it is extremely unfair that, while some are obtaining relief in this way, others, either because they have scruples about employing methods of this kind or because they simply do not happen to know how to apply them, are not only getting no such relief themselves, but are actually having to pay more than their fair share of taxation in order to fill up the gap in the revenue.

I propose to provide that the Income Tax liability of parents shall not be affected by these educational trusts, and the legislation will take the form of saying that the income of an infant and unmarried child which is in any way derived from the parent shall be aggregated for all purposes of Income Tax law with the income of the parent. Income, of course, falling to the child aid arising from other sources, such as earnings, or as a beneficiary of a settlement made upon it by some other person than the parent, will be completely unaffected by the change. I anticipate that in a full year the saving from dealing with these educational trusts will amount to £2,500,000.

Last year, it may be remembered, I endeavoured, by making certain improvements in Income Tax allowances, which were so severely cut in 1931, to bring some relief to the Income Tax payers with small incomes who are bearing the responsibilities of a family. I should like to carry that process a little farther this year. I think there is still something owing to those people on that account, and the saving that I am going to secure by dealing with educational trusts gives me an opportunity of taking that money and distributing it equitably among all Income Tax payers who have children to maintain. Accordingly, I am proposing to increase the statutory allowance for children from £50 per child to £60, at a cost of £1,000,000 this year and £2,000,000 in a full year, thus putting it up to a higher level than it has ever stood at before. Furthermore, in pursuance of the same idea, I am proposing to find the means to raise the general statutory allowance for married persons from £170, to which I raised it last year, up to £180. That will also cost £1,000,000 this year and £2,000,000 in a full year, and these two proposals together will do something to mitigate the effects of an alteration of a different character which I shall have to mention later in my speech.

I have also a proposal to make relating to the avoidance of Estate Duty. Under the law as it stands at present Estate Duty is not chargeable on personalty abroad where it has been the subject of a gift, of a joint investment, or of a foreign settlement, and I have some reason to suppose that advantage is being taken of that state of things to place property outside the scope of charge. I am proposing, therefore, that personalty abroad shall be treated in the same way as personalty at home, and I have taken the effect of that change into account in my estimate of Death Duties for the year.

In addition to the Resolutions which I shall have to submit dealing with the avoidance of taxation, there will also be two Resolutions dealing with amendments of the Income Tax law. The only one which I think I need explain now relates to the method of assessing Income Tax under Schedule A upon mills, factories, and other buildings in which machinery is installed. In the past quinquennium Schedule A Assessments have been made upon the same principle which is followed in rating, but there is no express provision of the Income Tax law as to how you are to compute annual value in the case of machinery installed in buildings, and the courts have lately held that certain machinery which is not taken into account in rating shall be taken into account in computing value for the purposes of Income Tax. I propose to provide that in future the rating principle shall be followed for the Income Tax, and therefore my proposal will merely maintain the position as it has been during the past five years.

I have one or two small changes to make in the realm of Customs and Excise. The first of them is designed to give protection to a branch of British industry whose product has hitherto been associated almost exclusively with foreign countries. I refer to lager beer. I see no reason why the manufacture of lager beer in this country should be an exception to the general rule of protection for British industries, and accordingly I am proposing to achieve my purpose by imposing a surtax of £1 a barrel upon beer imported from non - Empire countries. There will be no change in the Customs Duty on beer imported from Empire countries. Then I shall have a Resolution to cover a Clause in the Finance Bill to continue a provision in the Finance Act, 1926, which stabilised the existing preference margins on certain Empire products. I shall have also to deal with a technical point on the polariscopic test of sugar.

The Key Industry duties will expire this year, and in view of that fact a Committee was appointed last year to review these duties and to recommend whether they should be continued or amended. The report of the Committee has now been published, and they recommend a continuance of the duties for another 10 years, with certain additions and modifications and with a provision for variation of the duties in certain circumstances from time to time. I am able to announce that the Government have decided to adopt these recommendations. They will be embodied in the Finance Bill, and the necessary Resolutions are being tabled.

Later there will be another Resolution to enable the Exchequer to receive the benefit of surplus income or capital appreciation arising from the investment under the guarantee of the Consolidated Fund, of what is known as suitors' cash, which is a small portion of the funds paid into or deposited with the High Court in accordance with various Acts of Parliament. The main question which arises is whether this surplus, which amounts to about £60,000 a year, should be paid into the Exchequer or whether it should remain as at present accumulating indefinitely without any adequate object. I think the Committee will appreciate that my view is that it should be paid into the Exchequer, and I am proposing to take action accordingly, but I may say that that action will be in strict conformity with the recommendations of a Committee, known as the Committee on Dormant Funds, which was presided over by that very much lamented and distinguished Law Lord, the late Lord Tomlin.

I have another statement to make that is a little more interesting to the Committee than some of those I have had to make. As it is not quite so relevant to the Budget, I ought to ask permission, which I know will be readily given, to deal with it very shortly. It is a matter in connection with the Special Areas. There have been suggestions frequently made, particularly in the Report of the Commissioner for the Special Areas, that the development or the establishment of small businesses there was being hampered for the lack of the necessary finance. It was suggested that the difficulties in this connection ought to be surmounted by some special remedies or devices. On the other hand, it has been argued on good authority that if there is any difficulty about financing small businesses, it is not due to any backwardness on the part of financial interests, but rather to the difficulties that are inherent in the situation. It is said that there would be ample financial backing for any promising industrial enterprise even if it were situated in the most severely depressed area, and that if that financial assistance had not been forthcoming it was not because people were exaggerating the financial risks but because in fact the risk was greater than would be accepted in the ordinary course of business by financial concerns.

Where there is such a conflict of opinion as that, it is not necessary for me to express my own view except to say that I think this is eminently a case where it is desirable to experiment. Accordingly, arrangements are being made for the formation of a company called the Special Areas Reconstruction Association, Limited, with a nominal capital of £1,000,000 and with the special function of financing small businesses, either existing or to be formed hereafter, in the Special Areas. It is intended that the company shall work in the fullest co-operation with local and other authorities or institutions like development councils, banks, and insurance and finance companies. There will be in each area a local board and an office for the purpose of collecting applications and assisting in their examination. As the company is to be experimental in character, its life will be limited to 10 years, and as it is intended that it shall deal with small businesses, it is proposed that as a general rule advances will be limited to a maximum of £10,000 in the case of any one loan. No capital will be subscribed by the State, but State assistance will be given in the form of a contribution towards management expenses and of a guarantee against losses amounting roughly to 25 per cent. of the total loans which have been issued. Provision will be made for relending the capital over and over again so long as time permits and as long as there is a supply of suitable cases, so that it is not possible at this stage to estimate the total loss that might be sustained by the State, but in any case it cannot exceed £1,000,000.

The purpose of this company will be to finance businesses where the risk is such as would not be undertaken at this stage by ordinary financial concerns, but, in spite of that, the profits of the company are to be limited. I hope that we may be allowed to submit a Resolution on this matter on Thursday after the Budget Resolutions have been dealt with. When the Resolution has been obtained, a separate Bill will have to be introduced to regulate the necessary relations between the Treasury and the new company, and if the Measure has, as I hope it will have, the good will of all parties in the House, it should be possible for it to be passed into law by Whitsuntide.

The net result of the minor changes about which I have been speaking is to increase the revenue by £1,025,000, thus reducing the deficit to £20,266,000. I may say at once that I propose to cover that deficit out of the revenue of the year. In ordinary times and under normal conditions a statement like that would go without saying, but these are not ordinary times. In ordinary times I might have been content to make provision for a gap, which is not of immoderate dimensions, in this Budget and to leave the finance of future years to be decided when conditions could be more accurately foreseen than they can he now. But we are already entering upon new commitments which, in the course of the next few years, are going to involve an expenditure of very great sums, and if now I were to remain silent as to the methods by which that cost might be financed, it seems to me very possible that the public might draw quite erroneous conclusions as to their effect upon the trade and industry of the country. Therefore, while anything I may say now cannot commit any future Government or, indeed, any individual who may hereafter hold the office I am occupying to-day, I think it is only right that I should give the Committee an outline of the ideas which, as it seems to me now, ought to govern the method of financing the future cost of the defence programme.

Some of the figures which I have given to the Committee contain features which cannot but be gratifying to all classes of His Majesty's subjects. The buoyancy of the revenue has enabled me to provide not only for a substantial and a sustained increase in social services, but for the heavily increased cost of defence which in the last two years has risen by no less than £44,000,000. We have been able to pay this increased premium for our security without adding to our burdens which, indeed, have been considerably lightened in the course of those two years. All the same, if we had been able to keep the Estimates for the defence services at their previous level, we should have had available to-day a large sum of money for the relief of taxation. To that extent it may be said that the present generation of taxpayers is already shouldering its own liabilities at a very serious sacrifice to itself.

In the Statement relating to Defence which was presented to Parliament in March the Government entered at some considerable length into the reasons for which they deemed it necessary to enter upon the largest programme of defence ever undertaken by this country in peace time. To put it in a single sentence, we had to fill the gaps which had been left by the deliberate policy of successive Governments over a long period of years, and we had to prepare ourselves against new risks involved in its initial stages by the policy of collective security to which we have been looking to rid us ultimately of the spectre of war. It follows that the defence programme arises out of two causes: first, a gap, a legacy left from the past, which the past in its time was either unwilling or unable to bear; and, secondly, the development of a new policy the benefits of which we hope will inure to posterity but the initial cost of which will have to be met at once. Both of these circumstances are exceptional and both, in my judgment, are such as to make it inequitable that the whole cost of this great programme, which has to be carried through in a very short time, should fall upon the revenue which has to be extracted from the people in the course of a single five-year period.

On the other hand, it also seems to me to be neither just nor in accordance with the sound principles of finance upon which the improvement in our fortunes has been built up that we should light-heartedly push off the whole of this burden on to the shoulders of those who are to come after us. Unless it is possible to come to some agreement upon a general scheme of disarmament, the cost of defence is going to rise swiftly during the next few years to a peak, and after that it will begin to descend. The important point to bear in mind is that it will not descend to the old level. As was stated in the concluding words of the White Paper, it must be anticipated that the annual cost of maintenance of the reorganised forces will in all likelihood substantially exceed the £158,000,000 which was provided for in the original Estimates of this year.

It is clear that in each year we must find out of revenue this rising cost of maintenance. How much in addition to that we ought to find out of revenue for the emergency expenditure in any particular year, I am not now prepared to assess. It must depend upon conditions which cannot now be accurately stated. But in coming to a decision in the future it seems to me that it will be necessary to bear in mind that to raise taxation to a level which would seriously cripple the industry of this country would be to do a very ill service to posterity. I conclude, then, that in future years, a part of this emergency expenditure, the amount of which must be determined from time to time in the light of the considerations I have put before the Committee, may properly be met out of loan. If in the meantime we have shown our readiness to bear our proper share of an exceptional burden by utilising for that purpose our expanding revenue and, perhaps, by submitting to some fresh sacrifices, then I am positive we will neither suffer loss of credit in the present nor incur the reproaches of our successors hereafter.

Having said so much about the future, I must now come back to the problem which immediately confronts us. In considering how to overcome the difficulties arising from the emergency of a demand unprecedented in extent except in wartime, I come up at once against an anomaly in our national financial system. Surely when a Chancellor has to wrestle with a task so formidable as that in front of me he ought to be able not only to survey the whole field of expenditure but also all his sources of revenue, so that he can direct them where they are most needed. There is one exception to the general rule which gives him power to do so. The Motor Licence Duties, which now amount to £31,500,000, are out of my control; save for that small share which comes to the Exchequer they pass automatically into the Road Fund. In past years if they have not been sufficient to meet the needs of the Road Fund the Exchequer has had to lend the balance. At other times, when they have been more than sufficient and surpluses have piled up, steps have been taken to sweep them into the Exchequer.

I have no intention of making any alterations in the functions of the Road Fund, nor have I changed my attitude to those road problems which my right hon. Friend the Minister of Transport has been attacking with so much courage and success. Nor do I propose in any way to curtail the five-year road programme to which the Government has set its hand. But I have represented to my right hon. Friend that this system of feeding the Road Fund by the varying produce of duties specifically assigned to it is an irregularity which ought to be corrected and replaced by the more normal method of allowing the House of Commons to assess its needs each year and to satisfy those needs by Votes. I am proposing to make that change by legislation in the Finance Bill, but owing to technical reasons it cannot be made effective until next year; but in view of the alteration in procedure, and as I am assured that the current revenue of the fund is ample for its current needs, I am proposing to abstract for the benefit of the taxpayer the £5,250,000 which at the outset of this financial year stood to the credit of the fund.

That reduces to £15,000,000 the amount which I have to find by new taxation. As the restoration of our defences is in the interests of all it is only right and fair that all should contribute towards it. I propose an increase in the standard rate of Income Tax of 3d. in the pound, which I estimate will give me this year £12,000,000.

I can, therefore, now strike the final balance sheet. The revenue will be £798,381,000, the expenditure £797,897,000, leaving a prospective surplus of £484,000. When I consider the magnitude of the effort which Parliament has decided is necessary in order to rebuild our defence forces, involving an expenditure on defence this year of more than £50,000,000 in excess of what was provided in the Budget of last year, I cannot think the new taxation which I have proposed will be considered unreasonable, nor do I think that it will seriously affect the improvement in trade and industry, nor that it will cause and undue hardship. The fact that we should be able to meet so large an increase in expenditure with so moderate an addition to our taxation is the best testimony we can have to the immense improvement in the financial and economic condition of the country during recent years.

This is the fifth time in succession that I have presented a financial statement to the Committee, and perhaps, therefore, I may be pardoned if for a moment I look back and consider some of the changes that have taken place since I opened my first Budget in April, 1932. I do not claim that the financial policy I have followed has been solely responsible for the results which I shall quote, but I do believe that it has been the indispensable foundation upon which those results have been erected, and that it remains the best policy for the country and for the needs of the present time. The two main pillars of the policy have been the introduction of the tariff and the establishment of cheap money. The Committee will remember that when the tariff was established we had an adverse balance of payments of no less than £104,000,000 a year. The tariff has now converted that into a favourable balance of £37,000,000. Moreover, it has brought us a revenue which now amounts to over £34,000,000 a year, and by this means a valuable contribution to our national expenditure has been made without causing any perceptible rise in the cost of commodities to the consumer.

The reduction of interest rates by something like 2 per cent. has meant a permanent saving in Budget charges of upwards of £40,000,000 a year, and a still larger temporary reduction. The benefits of cheap money have been extended to the Dominions, who are our best customers, to the local authorities and to industry, which is now progressively reaping the advantage of lower interest rates and is daily expanding its enterprise. The building of 1,250,000 houses during this period, an astonishing feat, has been achieved largely in consequence of the cheapness of money.

Between them these two powerful financial engines have strengthened and developed both our industry and our agriculture, so that our agricultural output has increased by 14 per cent. and our industrial output by no less than 29 per cent. Our exports of manufactured goods have increased by more than £50,000,000 a year. The number of persons in employment has increased by more than 1,250,000. The percentage of unemployment has fallen from 22.4 to 14.4. Retail trade is now more active than it has been for many years, and the record figures of holiday traffic show how the increase of purchasing power has spread through all sections of the people. Although wholesale prices in general have risen by 10 per cent., and the prices of primary commodities by upwards of 45 per cent., the cost of living to-day is actually slightly below what it was in 1932. Notes in circulation have increased by £50,000,000, and the deposits in the savings banks alone have gone up by no less than £150,000,000.

The recovery of the country has been reflected in the rapid expansion of the revenue. Nearly £70,000,000 has been applied to the reduction of the National Debt out of savings in fixed debt charges and out of Budget surpluses. Increased expenditure on social services has been rendered possible. Take four major items: old age and widows' pensions, health insurance, housing and education. In 1932 we spent upon those four services a little less than £121,500,000, and in this year's Estimates we are providing for the same services nearly £138,000,000. Lastly, the present aggregate value of the tax remissions which were made in the various Budgets of 1932 to 1935 amounts to over £50,000,000 a year. At the outset of this new financial year, the prospects, apart from the complications of the international situation, appear to promise a full continuance of this tide of returning prosperity.

I had hoped, and until quite recently I had had good reason to hope, that in this fifth Budget it might have been possible for me to reward the taxpayer for his long and patient endurance of his burdens by giving him a greater relief than anything which up to now I have been able to afford. That that hope should have to be deferred and that instead I should have to ask of him new sacrifices, moderate though they may be, has been a bitter disappointment to me as well as to the country. But no man hesitates to set his fire-fighting appliances in readiness when already he can feel the heat of the flames on his face. Our safety is more to us than our comfort, and I think the country which has applauded and approved the precautions we are taking will not grudge us the means of bringing them about in the shortest space of time that we can compass.

Motion made and Question proposed,

"That—

(a)as from the twenty-second day of April, nineteen hundred and thirty-six, in lieu of the duties of customs theretofore chargeable on tea imported into the United Kingdom, there shall be chargeable duties of customs at the following increased rates, that is to say:—

( b)the enactments relating to the allowances of drawback on blended tea prepared from teas on which customs duties have been paid shall extend to blended tea prepared from teas in respect of which either of the duties chargeable under this Resolution has been paid;

( c)in this Resolution the expression "Empire product" has the same meaning as in Sub-section (1) of Section eight of the Finance Act, 1919, as amended by any subsequent enactment.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

5.2 p.m.

5.9 p.m.

5.15 p.m.

5.27 p.m.

5.33 p.m.

5.49 p.m.

5.51 p.m.

Question put, and agreed to.

Resolved,

"That—

(a) as from the twenty-second day of April, nineteen hundred and thirty-six, there shall be charged in respect of beer imported into the United Kingdom a duty of customs of one pound for every thirty-six gallons, in addition to any other duty of customs for the time being chargeable thereon;

(b) on the exportation from the United Kingdom (whether as merchandise or for use as ships' stores) of beer in respect of which the additional duty chargeable under this Resolution has been paid, there shall be allowed a customs drawback equal to the amount of the additional duty so paid, in addition to any other customs drawback for the time being allowed thereon;

(c) this Resolution shall not apply to—

(i) beer being an Empire product within the meaning of Sub-section (1) of Section eight of the Finance Act, 1919, as amended by any subsequent enactment; or

(ii)beer of any description specified in Sub-section (1) of Section two of the Finance Act, 1930.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That, as from the twenty-second day of April, nineteen hundred and thirty-six, any sugar chargeable with a duty of customs or excise the polarisation whereof has at any time been reduced, either as the result of the sugar having been treated (whether by the addition of invert sugar or otherwise) or as the result of the development of invert sugar or other substance in the sugar, shall be chargeable with the duty as if it were of a polarisation exceeding ninety-nine degrees.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That Section seven of the Finance Act, 1926 (which stabilised for a period expiring on the thirtieth day of June, nineteen hundred and thirty-six, the preferential reductions of customs duties allowed in the case of certain Empire products) shall, as amended by any subsequent enactment, have effect as if the said period were extended until the nineteenth day of August, nineteen hundred and thirty-seven, and for the purpose of that Section the preferential rates chargeable by virtue of Section four of the Finance Act, 1928, in the case of Empire products being sugar, glucose, molasses and saccharin, shall be deemed to have been in force immediately before the first day of July, nineteen hundred and twenty-six:

Provided that nothing in this Resolution shall affect the provisions of Sub-section (1) of Section four of the Ottawa Agreements Act, 1932 (which stabilised the said preferential reductions in the case of tobacco until the nineteenth day of August, nineteen hundred and forty-two).

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That—

(a)the duties of customs imposed by Section one of the Safeguarding of Industries Act, 1921, for a period expiring on the nineteenth day of August, nineteen hundred and thirty-six, shall continue to be charged for a further period of ten years from the said day;

(b)the Import Duties Advisory Committee and the Treasury shall respectively have the same power to recommend and to order the imposition of an additional duty on any goods for the time being chargeable with duty under the said Section one as they have to recommend and to order the imposition of an additional duty on goods chargeable with the general ad valorem duty, and Section nineteen of the Import Duties Act, 1932, shall apply accordingly;

(c)in the case of any composite goods on which, by virtue of Section eight of the Import Duties Act, 1932, the general ad valorem duty would be chargeable only up to the amount, if any, by which it exceeds the duty chargeable on the goods under the said Section one, the general ad valorem duty shall, instead of being so chargeable, be chargeable up to the full amount thereof and the duty under the said Section one shall not be charged except in so far as the amount thereof exceeds the amount of the general ad valorem duty;

(d)in this Resolution references to the said Section one shall be construed as references to that Section as amended by an enactment for the time being in force."

Resolved,

"That, as from the twenty-second day of April, nineteen hundred and thirty-six, the duties of customs chargeable on activated carbons and decolourising carbons, not being of animal origin, shall, instead of being charged under Part I of the Import Duties Act, 1932, be charged under Section one of the Safeguarding of Industries Act, 1921, as amended by any subsequent enactment, and shall be duties equal to one-third of the value of the goods.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That as from the twenty-second day of April, nineteen hundred and thirty-six, the duty of customs chargeable on parts of arc-lamp carbons, whether such parts are finished or not) shall, instead of being charged under Part I of the Import Duties Act, 1932, be charged under Section one of the Safeguarding of Industries Act, 1921, as amended by any subsequent enactment, and shall be a duty at the rate of seven shillings and six pence per pound weight.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That, as from the twenty-second day of April, nineteen hundred and thirty-six, the duties of customs chargeable on parts of wireless valves and similar rectifiers and parts of vacuum tubes (whether such parts are finished or not) shall, instead of being charged under Part I of the Import Duties Act, 1932, be charged under Section one of the Safeguarding of Industries Act, 1921, as amended by any subsequent enactment, and shall be duties equal to one-third of the value of the goods.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That, as from the twenty-second day of April, nineteen hundred and thirty-six, the duties of customs chargeable on ferrotitanium, manganese metal, and chromium metal shall, instead of being charged under Part I of the Import Duties Act, 1932, be charged under Section one of the Safeguarding of Industries Act, 1921, as amended by any subsequent enactment, and shall be duties equal to one-third of the value of the goods:

Provided that this Resolution shall not apply to ferro-titanium containing more than two per cent. of carbon, or to manganese metal containing more than one per cent. of carbon.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That—

(a)Income Tax for the year 1936–37 shall be charged at the standard rate of four shillings and ninepence in the pound, and, in the case of an individual whose total income exceeds two thousand pounds, at such higher rates in respect of the excess over two thousand pounds as Parliament may hereafter determine;

(b)all such enactments as had effect with respect to the Income Tax charged for the, year 1935–36 shall have effect with respect to the Income Tax charged for the year 1936–37.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That Income Tax for the year 1935–36 shall be charged, in the case of an individual whose total income exceeded two thousand pounds, at the same higher rates in respect of the excess over two thousand pounds as were charged for the year 1934–35.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That—

(a)where any individual has by means of any transfer of assets, either alone or in conjunction with associated operations within the meaning of any enactment for giving effect to this Resolution, acquired any rights by virtue of which he has (within the meaning of the said enactment) power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled out of the United Kingdom, that income shall, whether it would or would not have been otherwise chargeable to income tax, he deemed to be the income of that individual for all the purposes of the Income Tax Acts;

(b)for the purpose of this Resolution references to an individual shall include the wife or husband of the individual, and references to income of a person resident or domiciled out of the United Kingdom shall include income apportioned to such a person under Section twenty-one of the Finance Act, 1922, as amended by any subsequent enactment;

(c)there may be included in any Act of the present Session relating to finance such provisions as to income tax in re- lation to any such transfer of assets or associated operations (being provisions which it is necessary or expedient to include for the purpose of giving effect to or supplementing the foregoing provisions of this Resolution) as Parliament may determine;

(d) the provisions of this Resolution and the provisions included in any such Act as aforesaid shall apply for the purposes of assessment to income tax for the year 1935–36 and subsequent years, and shall apply in relation to transfers of assets and associated operations whether carried out before or after the date of this Resolution."

Resolved,

"That there may be included in any Act of the present Session relating to finance such amendments of Section twenty-one of the Finance Act, 1922 (which relates to surtax on the undistributed income of certain companies), and of the enactments relating to or amending that section, as Parliament may determine, and any such Act may provide that the said amendments shall have effect for the purpose of assessment to surtax for the year 1935–36 and subsequent years."

Resolved,

"That there may be included in any Act of the present Session relating to finance such provisions as to income tax as Parliament may determine in relation to settlements, dispositions, trusts, covenants, agreements, arrangements and transfers of assets made or entered into directly or indirectly, whether before or after the date of this Resolution, by any person in favour of any of his children (including stepchildren, adopted children and illegitimate children)."

Resolved,

"That—

(1) no account shall be taken of the value of non-rateable machinery in ascertaining the annual value—

(a)of any property in Great Britain according to the general rule of No. 1 of Schedule A; or

(b)of any property whatsoever for the purpose of Rule 5 of the rules applicable to Cases I and II of Schedule D, or for the purpose of Section eighteen of the Finance Act, 1919;

(2) the profits arising to any person from the letting of any machinery the value of which is not taken into account for the purpose of assessment to Income Tax under Schedule A shall be deemed to be profits chargeable to Income Tax under Case VI of Schedule D;

(3) in this Resolution—

(a)the expression 'property' means lands, tenements, hereditaments and heritages;

(b)the expression 'machinery' includes plant, machines, tools and appliances;

(c)the expression 'non-rateable machinery' means—

(i) in relation to property in England or outside the United Kingdom, machinery of any description the value whereof is not taken into account for the purposes of rating under paragraph (b) of Sub-section (1) of Section twenty-four of the Rating and Valuation Act, 1925, or would not be so taken into account if that Sub-section had effect with respect to the valuation of the property;

(ii) in relation to property in Scotland or Northern Ireland, machinery of any description the value whereof is not taken into account for the purposes of rating under any enactment providing for the exclusion of certain machinery from valuations in Scotland or Northern Ireland, as the case may be, or would not be so taken into account if that enactment had effect with respect to the valuation of the property.

And it is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the Provisions of the Provisional Collection of Taxes Act, 1913."

Resolved,

"That there may be included in any Act of the present Session relating to finance such Amendments of the law as Parliament may determine as respects Income Tax under Schedules A and B in the case of hereditaments in Northern Ireland affected by certain provisions of an Act of the Parliament of Northern Ireland known as the Valuation Acts Amendment Act (Northern Ireland), 1932."