Read the Third time, and passed.

19.

27.

54.

28.

33.

48.

50.

Considered in Committee.

[Sir CHARLES MACANDREW in the Chair.]

3.40 p.m.

Before announcing what measures Her Majesty's Government propose to take to deal with these, I will just indicate some of the other factors which have caused us to take action. The sum total of consumers' expenditure remains too high. The Index of Weekly Wage Rates, for example, rose by no less than 5 points between December and March, when a good many of the large wage claims were settled. But the figures now available show that it rose by another 3 points between March and June, and has since risen again by a further point. And new wage claims are now being pressed forward. At the same time, the level of dividend distribution has continued to rise—reports published by industrial companies in the first nine months of this year show an increase in net dividends of 22 per cent. over the corresponding period of 1954; on a gross basis, that is before deduction of tax, the increase is about 19½ per cent. The conclusion is inescapable, that we must design our policies so that they face up to, and cope with, the danger to the economy—and especially to our competitive power—of a further expansion of incomes and of consumer demand.

With the support of hon. Members on both sides of the Committee—indeed, I was very much pressed by right hon. and hon. Gentlemen opposite—I have made great efforts to encourage investment, both public and private. I have been even more successful than I or the Committee would have expected. In addition to the evidence of continuing expansion in the amount of work actually done on fixed investment, all the indications of future intentions—the increase in the plans approved for new factory construction and the rising value of orders on hand for machine tools—point to a gathering momentum of demand in this field of investment which, taken with an increase of industry's stocks and work in progress and with the rise in incomes and consumption, is now overloading the economy.

What is the effect of this? When a productive machine is working at such brimful capacity, it becomes easier not merely to obtain higher money incomes but also to pass on in higher prices the increased costs which result. Both costs and prices have been gradually edging upwards, reflecting the continuing rise in personal incomes. This leads to social strains at home; and abroad it threatens the competitive power of our exports in a world market where prices are becoming increasingly keener. For example, it is significant that the index of our export prices has risen by 3 per cent. since the end of last year.

Just a word about exports. It is difficult to define the trend of exports exactly, because of the interruptions of the dock strikes. So far as we can tell, the trend is rising at an appreciable rate. Our exports to the U.S.A. in particular will do better this year than they have been doing for some time past. But it is becoming increasingly clear that home demand and home spending are not only sapping the competitive power of our exports but are also drawing in a larger volume of imports than we can afford.

In the first nine months of this year, the excess of our total imports c.i.f. over our total exports has been no less than £676 million as against only £425 million in the same period last year. And although higher prices account for some part of this increase—the Index of Import Prices during this period has been, on average, some 3 per cent. higher than over the same period last year—it is an expansion in the volume of imports which is mainly responsible. In volume, imports have been no less than 11 per cent. higher in the period from January to September of this year than in the corresponding months of 1954; and the strain which they have imposed on our balance of payments has been aggravated particularly by the need to import substantial tonnages of coal.

As a result, we are faced with too wide a gap in the balance of our visible trade, and with a marked decline in the reserves of gold and dollars. The facts about our balance of payments position can be read by hon. Members in the recently published paper, Cmd. 9585. When we assess the balance of our overseas income and payments, we must always remember that nowadays practically any payment which we have to make in the non-sterling world may involve a loss of dollars. The revised estimate for the overall current balance of the U.K. recently published, shows a surplus for the second half of 1954 of £21 million; and the provisional estimate for the first half of 1955 is £17 million. This surplus of £38 million—including aid—for the 12 months ending in June, 1955, is at any rate a surplus, but it is insufficient to enable us to discharge the full range of our commitments and responsibilities overseas.

By 30th September of this year the reserves figure had fallen to £838 million, and during October we have had to pay to the European Payments Union £28 million in respect of our September deficit, which was incurred—the Committee should note—almost entirely in the first half of that month, because, as I said earlier, since then things have been comparatively stable and, in fact, improvements have been seen. On the other hand, at 30th June, 1953, the International Monetary Fund still held sterling in excess of our original subscription to the extent of £96 million; the whole of that excess has now been redeemed. Thus, our borrowing rights have increased, and this constitutes a significant reinforcement to our own reserves. In short, we have room in which to make effective our determination to reinforce and maintain sterling; but we have no room for complacency.

Now, when world trade is expanding, is the time for the level of our reserves to rise rather than to fall. As far as we can foresee, it would appear that the rest of the sterling area should, with improved commodity prices, do a little better in the months to come. On the other hand, the closest possible examination I can make of our own prospects shows that results in the United Kingdom are not likely to show sufficient improvement—though they may show a small one—unless we moderate the pull of home demand. In judging what further measures of domestic restraint are required for this purpose, we must remember that a near balance or a small surplus on our overseas current account is not good enough. It is essential that we should earn a good surplus, if we are to honour our manifold commitments overseas while allowing for adverse swings in our balance of payments, and if confidence in sterling is to be maintained.

Having watched the recent course of events—the continuing high level of demand, both public and private, the persistent shortage of labour, the renewed pressure for higher wages, and the strain to which our reserves remain subject—I see both reason and need to reinforce the restraints which we have so far applied, in order to give the economy, in good time, the degree of relief which it needs and to strengthen the foundations of our balance of payments.

The methods by which the Government propose to deal with this problem will be consistent with their economic policy as a whole, as it has developed during the past four years. We shall not fall back on physical import cuts, which, so far from correcting inflation, may aggravate it still further, and, in any case, can be effective only if they are reinforced by rationing, allocation and controls. Our measures, therefore, must be of a more general character, consistent with our set policy of freer trade and payments, and designed to moderate the expansion of demand without distorting the natural pattern of growth of a free economy. The measures I shall outline are of this kind.

But however firmly and wisely the Government act, it is only if their measures are recognised by public opinion as being taken in the best interests of the country as a whole that the economy will be restored to full health. It is an illusion to suppose that full employment, price stability, and a healthy balance of payments, can be secured by the Government, irrespective of the contributions made, or withheld, by the people. Our plans are, therefore, framed to create the economic climate in which all elements of the community can play their full parts, and so balanced as to command the support of the whole country.

I now come to the variety of measures in different fields which I propose to lay before the Committee. The measures of restraint which were imposed in the earlier part of the year will, of course, be maintained and allowed to develop their full effect. We shall see their full result as we approach the end of the year. But the progressive operation of credit policy will now be reinforced by further, and more direct, measures, designed to restrain demand in both the public and the private sectors of the economy, and to reduce expenditure on both investment and personal consumption.

I will deal first with expenditure by the whole range of public authorities. I shall be making our decisions and actions clear as I go along. But, first, I must define the real nature of the problem which confronts us. I sometimes hear it said—indeed, I read—that there is one simple solution for all our economic difficulties, namely, to make dramatic reductions in Government current expenditure. Most people who say this are the victims of two fallacies. First, that Government expenditure is making increasing demands upon the nation's resources; secondly, that vast economies can be made by squeezing administrative costs without changing the functions of the Government or reducing the scope of any important service.

In fact, the truth is that we have been wielding the knife continuously for four years now; and during that period we have been much more successful in restraining Government expenditure than is commonly realised. I will give this figure—and this is the first time it has been published: Four years ago Government current expenditure was eating up 29 per cent. of gross national production. This year we have got it down to 26 per cent. The squeeze on administrative costs goes on all the time, and it will tighten still more; but it is not in administrative costs that the big money lies. It lies in quite a small number of very large and important functions which the Government have to discharge—defence, law and order, social services, National Insurance, assistance to agriculture, Colonial and Foreign Services, and so forth. When we look at Government expenditure, not in detail but in the large, the question of major changes of policy arises at once—for I emphasise that we are now at a point where major reductions in expenditure can only flow from major policy changes.

I ask: Do those who say that Government expenditure could be drastically reduced propose a reversal of policy in education, or a cut in the cost of pensions? Or are we to hold up work on the roads? Perhaps I can answer by saying that in each of these spheres we have to do all we can to meet imperative needs—in the case of education, of a rising school population, in the case of the old, of an increased number of retired persons, and, in the case of the roads, with a programme which I cannot increase but which is already insufficient to deal with the industrial needs of the country.

Are we, then, to make a big cut in our defence obligations? The Defence Estimates will be published at the usual time; and they will show that we are carrying out our commitments with the utmost economy which is consistent with maintaining the efficiency of the Services in a period of revolutionary changes in strategy and equipment. This same criterion of economy and efficiency will have to be applied at the right time to the range of subsidies which fall within the field of my right hon. Friend the Minister of Agriculture, Fisheries and Food.

But at the present time I tell the Committee—and I have been over the whole field of Government expenditure very thoroughly—that the main possibilities for major economies do not lie in cutting back existing services. They lie in restraining the rate of development, in moderating the capital outlay on the expansion of services over the whole of the field where its cost affects Government finance—whether directly, or through grants or loans or guarantees—and so reducing the increased operating costs to which that expansion inevitably leads. It is in this way that we can best constitute a balanced and considered pattern of economy in public expenditure, such as the country needs.

I now come to the field of the local authorities. In the public sector, the investment expenditure of the local authorities is a very important element. It represents about a quarter of the total of the nation's investment. Ever since the first formulation of full employment policy in the White Paper of 1944, it has been common ground that this area of public investment is of particular significance in the task of keeping the economy on an even keel.

By far the largest element is subsidised housing, which represented a capital expenditure of £390 million in 1954. House building continues at a high rate; and there is no reason to doubt, in accordance with what I said in July, that the total number of houses completed in Great Britain will substantially exceed 300,000 this year, and will, if all goes as we expect, probably be somewhere near that figure in 1956. Thus, in the five years since the end of 1951, about 1½ million houses will have been built; and just under 2½ million since the end of the war. Of these, about 2 million are houses built by public authorities for letting. Nevertheless, local authorities still need to build a very large number of houses, more especially for two purposes: first, to rehouse families now living in slums, and, secondly, to provide homes and industrial facilities in new and expanded towns for the excess population of the large congested cities.

It is against this background that the Government have been examining the problem of housing subsidies. This matter is very complicated and will take a long time to explain. My right hon. Friend the Minister of Housing and Local Government will, therefore, tomorrow be announcing the revised rates for future housing subsidies in England and Wales. It will be our policy in future to concentrate the subsidy as far as possible on the special purposes to which I have referred, namely, slum clearance and providing new homes and industrial facilities for the excess population. Our intention is to abolish the Exchequer housing subsidy for other purposes as soon as possible, and, meanwhile, to reduce it substantially. My right hon. Friend the Secretary of State for Scotland will also be making a statement tomorrow about housing in Scotland.

As for the other capital expenditure of local authorities, which represents well over £200 million a year, the Government have now decided to reinforce their appeal of last July by a message to all local authorities, asking them not only to observe particular restraint in their current expenditure, but also to review their capital expenditure, with the object of ensuring that, in the financial year 1956–57, it will not exceed the expenditure of the year which ended last March in England and Wales and last May in Scotland.

The Government are leaving it to the authorities to decide, in the light of local conditions, which of the various capital projects can be delayed with the least damage to the standards of their services. I have made arrangements for the convenience of hon. Members that a Command Paper giving the terms of these important messages, which have already been despatched, will be available in the Vote Office at the end of my speech.

So far, I have dealt with direct action by the Government on the capital expenditure of local authorities, but I intend to support this action further by monetary measures. It would be wrong to exempt the local authorities from the pressure of interest rates, and, as the Committee knows, I have not hesitated to vary the lending rates of the Local Loans Fund in order to keep them in line with the market. But further action is needed if we are to restore financial responsibility to the local authorities and financial health to the Exchequer.

Hitherto, the local authorities have used the Exchequer as a source from which they can borrow as it suits them. But within their loan sanctions there has been no limit to the amount of their borrowing from the Exchequer; and they have had the benefit of rates based on Government credit.

This system has had two disadvantages. First, since the tap is open from which the local authorities can draw the money when their capital commitments mature, they have less incentive to consider, before they incur the commitments, how the money to meet them will be found. Their sense of financial responsibility is also weakened if they borrow at rates which reflect not their own credit but the credit of the Government. Secondly, the system is unhealthy for the Exchequer. The Budget of last April provided £320 million below the line for loans to local authorities this year. In the 29 weeks so far, demands on the Exchequer for this purpose have already amounted to £223 million, an increase of £83 million by comparison with the same period last year.

This drain is not due to any increase in the capital formation of local authorities. It is due to the fact that, when interest rates have been rising, the local authorities have chosen to concentrate their borrowing on the Public Works Loan Board. As a direct result, the Exchequer has been obliged to raise these large sums by increasing the Floating Debt, and this increase, by the operation of the monetary system, has diminished the pressure on the liquidity of the banks and added to the difficulties of credit control.

In the next eighteen months or so, however, the capital expenditure of the local authorities may be expected to fall. It is probable that the reduction in housing expenditure will continue; at the same time, if the local authorities succeed, as I am sure they will, in carrying out the Government's wishes in the rest of their programmes, their other capital expenditure will be no larger than it was last year. This contraction of expenditure provides the opportunity for a change in the local authorities' arrangements for raising the capital finance.

I have, therefore, decided to exercise a check on the volume of Government lending to local authorities. I am not suggesting that any local authority, or class of authority, should be denied the right of access to the Public Works Loan Board. But I have asked the Board, before it grants any advances in future, to put all applicants on inquiry as to their ability to raise the finance on their own credit, either in the stock market or in the mortgage market. I intend that all authorities who can borrow on their own credit shall make full use of the capacity of both markets, with corresponding relief to the demands on the Exchequer.

This is a serious addition to the burden of unpaid work done by the Public Works Loan Commissioners. I am grateful to them for undertaking it, and I am sure that the Committee will join me in paying a tribute to their public spirit.

I know that this change implies a substantial modification in the financial practice of the local authorities. Transitional arrangements may well be needed to avoid dislocation, and to ensure that there is no risk of delay in meeting commitments which the authorities, relying on past practice, have already incurred. We are fortunate, however, in having standing machinery for consulting the local authorities about arrangements for borrowing from the Public Works Loan Board; and I intend to use this machinery in order to ensure that the transition is carried out as smoothly as possible.

At the same time, I propose to change the present practice whereby an authority is charged a rate based on its own credit if it borrows on the market but a rate based on Government credit if it borrows from the Public Works Loan Board. In future, an authority which makes its case for borrowing from the Board will pay a rate reflecting not Government credit, but the credit of local authorities of good standing in the market for loans of comparable periods. The local loans rates now in operation are 5 per cent. on advances for periods of five years and over and 4½ per cent. on advances up to five years. Given current market levels, I consider that these rates provide at least a fair starting point for the new policy of local loans rates based on local authority credit, and for the present I do not propose to change them. But the local loans rates will be kept under close review as the new policy develops.

I have said before, and I say again, that day-to-day fluctuations will be avoided, but the local loans rates must not be insulated from the market and the Treasury will continue to adjust them, in either direction, as may be required to keep them in line with future changes in the level of the relevant rates in the market.

I now come to the nationalised industries. I gave some account on 26th July of the preliminary surveys of capital expenditure and borrowings which the nationalised industries had made at the request of the Government. In particular, I mentioned various measures which the Central Electricity Authority and the Gas Council, together with their area boards, were prepared to take, including the deferment of certain capital projects. I can now give the result.

The gas industry will make do with older equipment, such as carbonisation plant, for a longer period, and will be able to reduce expenditure this year by something approaching £3 million. The Central Electricity Authority has asked the area electricity boards for an all-round percentage cut in their expenditure in the current year, and even in the priority field of generation they have been able to postpone certain less vital projects while pressing on urgently with the nuclear power programme. The Secretary of State for Scotland has, of course, also been in touch with the Scottish electricity boards on these matters.

In both industries, what is called "promotional expenditure" is being cut back, and working capital employed in hire-purchase activities, and stocks held for those activities, have been curtailed, as a result both of the boards' own efforts and the Government's restrictions on hire-purchase arrangements.

These initial measures will produce some useful savings in this year's capital expenditure. In addition, the Committee will be aware that, owing to the funding operations undertaken during the summer, the overdraft limits of the two industries authorised by the Government, have fallen from a peak of £280 million earlier this year to a figure of £130 million.

But it is only in the period ahead that substantial changes can be made. For that period the nationalised industries have been carrying out a more detailed survey of capital projects as well as of internal resources, the results of which will be incorporated in the investment programmes they are about to submit to the Government. These, as the Committee may be aware, are submitted every year to the Government. The industries are fully conscious that on this occasion their proposals for future investment will necessarily be examined with a much more critical eye than in previous years.

This examination is not, of course, confined to gas and electricity. I said on 26th July that the coal mines must have their full investment, but I am glad to learn from the National Coal Board that it is pursuing the possibility of some saving by deferring projects such as brickworks and office buildings which do not affect output.

The modernisation and re-equipment plan for British Railways is at an early stage of its development. It does not, therefore, at present, involve any substantially increased demand on labour and resources; but the British Transport Commission is well aware of the general needs of the economy, and in carrying through its programme will have those needs in mind.

Other public authorities are being asked to co-operate in restraining both current and capital expenditure. My right hon. Friends the Minister of Health and the Secretary of State for Scotland are communicating with hospital boards in this sense. In the hospitals, as in the local authority services, we are not reducing the programmes which have already been announced but, subject to this, we are asking the hospital boards to ensure that only those works are undertaken which are of the most urgent and necessary character.

My right hon. Friend the Minister of Transport and Civil Aviation is going ahead with the roads programme which has been announced, but in present circumstances the Government cannot agree to an extension or acceleration of it, much as we should like to.

The Government must exercise a similar restraint on their own capital programmes. We have, therefore, examined the present programme of new Government building, and have considered which projects can be postponed with least detriment to our interests and without waste of expenditure. By way of illustration, I will mention one or two of the larger schemes which we have had under review.

First, the Westminster Hospital site. The Committee will be aware that this site was acquired in 1947 for the purpose of providing a new Colonial Office building at an estimated cost of about £3 million. We have now decided that, for the present, we must discontinue the work at the point it has now reached—that is to say, at basement level. Then there is the site in Horseferry Road, which has been acquired for the erection of new Government offices. These were estimated to cost nearly £3 million. Here, again, we have decided to halt the work at basement level.

We have also had to look particularly closely at plans for Government building overseas, since this is a field in which savings have a double effect—on the balance of payments as well as on the total of Government expenditure. One major project, which has now reached the sketch-plan stage, is that for a new office in Washington to house the staff of the Embassy and other United Kingdom missions, at a total cost of about £1 million. We had hoped to make a start with this building by the end of 1956, but we have reluctantly decided that we should not be justified, in present circumstances, in proceeding with plans that may involve us in heavy dollar expenditure, if not now then in twelve or eighteen months' time.

There are a number of other, more long-term projects where we may have to consider spreading expenditure over a

longer period than we had hoped. One of these is the Royal Mint, in which I have a particular interest because, as Chancellor of the Exchequer, I am ex officio Master, Worker and Warden and I have long wished to see the Mint more adequately housed than it is at present. We shall have to look at the timing of the plans for this and other projects.

All that I have said indicates the Government's intention to set an example of restraint in their own capital expenditure. It is in this spirit that we have also considered the investment requirements of the Post Office, and the steps necessary to bring Post Office finance into line with current economic needs. My right hon. Friend the Postmaster-General is laying a White Paper today which sets out his plans in detail. In common with other authorities, the Post Office must restrain the rate of its capital investment, and I am sorry to say that it will not be possible for the Postmaster-General to reduce the size of the telephone waiting list quite as quickly as we should have liked; but we shall do all we can.

It is also necessary to bring charges into closer relationship with the cost of the services offered to each class of subscriber, including a proper allowance for the present high costs of equipment. Many telephone subscribers at present have a telephone for half of what it costs the Post Office to instal and maintain it. The adjustments which my right hon. Friend is proposing will bring us nearer to a position in which the waiting list consists of persons who are prepared to pay the economic price for the service. Together with some necessary increases in postal tariffs, these changes will produce no less than an extra £26 million a year. The Postmaster-General's White Paper will be available in the Vote Office when I sit down.

I want to say a word about private investment. It would not be in accordance with the Government's policy to try to control directly investment in the private sector. But I look to all those who provide or control the finance for capital expansion by private enterprise to bear well in mind the spirit of the decisions which the Government have taken for their own part, and the requests which the Government have made to local authorities, to other public boards and to the nationalised industries. I know that the banks and the Capital Issues Committee took note of my statement on 25th July and have applied it in their scrutiny of applications. I take this opportunity to underline, with fresh emphasis, what I then said, and to make it clear that there can be no question, for the time being, of the authorities relaxing their critical attitude. To the extent that those concerned with investment programmes are willing to enforce a stricter order of priority in giving effect to their projects and to move rather more slowly for the time being in implementing their projects, they will be contributing directly to the stability of our economy and thus ultimately to their own prosperity.

I come now to personal consumption. The measures which I have so far described are directed to controlling the growth of expenditure in the public sector. They need, therefore, to be supplemented by a policy to deal with the growth of personal consumption. Restraint in this field can be achieved by self-discipline no less than by external compulsion; and I am anxious to give every encouragement to those who are willing to forgo a little of the luxury of immediate spending for the sake of the future well-being of their country.

Last April, I paid tribute to the results of the National Savings Movement's campaign for 2 million new savers, and the great success achieved in raising the level of new savings. I should like to thank hon. and right hon. Members on both sides of the Committee for the part they have played. I renew my thanks to the Movement, its leaders and workers alike; and I urge them to remember that their efforts are even more important today. If hon. Members will turn to Table 27 of this year's National Income Blue Book they will see the great rise in personal savings, under this and the last Administration, since 1951. In particular, the amounts invested through the National Savings Movement increased by £86 million in 1954, and the first nine months of 1955 show a further increase of some £80 million.

The Committee are aware that a new Defence Bond will be available on and after the 1st November, with the same bonus and limit on holdings as the present Bond but carrying interest at 4 per cent. I have also looked at the National Savings certificate very closely in order to be sure that it does all that it can to attract real savings. Lord Mackintosh has represented to me that an increase in the limit of holdings would be of very timely assistance to the Savings Movement. The Government have, therefore, decided to give the Movement this encouragement, and to increase the maximum permitted holding of certificates of the current issue from the present figure of 1,000 units or £750, to 1,200 units or £900. This measure, like the new Defence Bond, will come into effect on 1st November. These are fresh and attractive incentives, and I am confident that the National Savings Movement will rise to both the needs and opportunities of the present time, backed by public opinion and by hon. Members on both sides of the Committee.

I am satisfied, however, that some direct restraint on consumption is also required. For this purpose there is one revenue measure which lies ready to hand and is immediate in its effect—an increase in the Purchase Tax. I therefore propose a general increase in the existing rates of Purchase Tax. These are at present 25 per cent., 50 per cent. and 75 per cent.; and I propose that they should be 30 per cent., 60 per cent. and 90 per cent. respectively—an increase of one-fifth—subject to certain exceptions which I shall mention in a moment. I am also taking the opportunity to modify the tax, bringing into its ambit certain goods which at present lie outside and reducing its impact in some cases where industry is undoubtedly suffering from its effects. Two of the changes are major.

The first affects a range of kitchenware, tableware and other household goods which were, for the most part, at one time subject to tax but have for some years been exempt. The general case for an increase in Purchase Tax applies equally to these goods; moreover, the exemptions are abitrary in their nature, and give rise to a number of anomalies which are a source of frequent friction with the trades concerned. This range of articles will now be brought within the Purchase Tax field, and made subject to the lowest rate of 30 per cent.

The second major change relates to the D allowance schemes, which now apply to clothing and footwear, textiles, furs and furniture. The levels at which the D figures now stand have for some time been too high, and have resulted in a far larger range of items becoming exempt from tax than was the intention when the levels were fixed. This situation was thus, in any case, overdue for revision. Moreover, with the D levels in mind, manufacturers at present tend to concentrate design and production on lower quality goods for the home market. The Government have, therefore, decided to abolish the D schemes, in order to open up the home market in quality goods, and so provide a better base for the export market. We shall, therefore, be encouraging exports and thereby assisting the balance of payments. I believe that traders in general will welcome this change.

While abolishing the D schemes, however, I am not proposing to apply the full rigour of the new rates of Purchase Tax to the articles affected. Apart from fur garments, which will remain chargeable at 50 per cent. but with no D allowance, the whole range of articles now affected by the D schemes will be made liable to tax at rates of 5 per cent. or 10 per cent., corresponding broadly to the previous rates of 25 per cent. or 50 per cent. with D allowances. For example, headgear—that is, hats—will be charged at 10 per cent. This and other details will be found set out at length in the White Paper. These low rates cannot be held to constitute any serious burden on the industry or on the consumer, and the general financial effect of the changes will be that the yield from textiles and clothing will not be significantly increased.

The other adjustments of Purchase Tax which I propose to make—these are important adjustments—will give some help to the silverware and cut glass industries, by reducing the amount of tax paid on most of these craft products. The results of all these alterations in Purchase Tax will be a simplification which will give much more freedom to the designer and much more opportunity to the exporter. They therefore fit into the general pattern of the needs of the moment, and I recommend them to the Committee. They will come into effect as from tomorrow, and should produce in a full year additional revenue of approximately £75 million. Their yield in this year will be £15 million. Their effect on the cost of living index will be an increase of a little under 1 point.

Now I have certain proposals to make in the field of direct taxation. The Finance Bill will be very short, and will involve little detailed amendment of the tax codes. When hon. Members examine the Resolutions they will see that there will rightly be opportunity for discussion of various aspects of the Purchase Tax, and of the other measures which I am about to mention; but there will be no need for a General Resolution. I must, however, include provisions to deal with two subsidiary matters which are related to the main purpose of the Bill.

The first of these—and they are comparatively minor, but I will mention them—will deal with an avoidance device known as "dividend stripping," operated by certain financial concerns, by which the liquid reserves of companies are extracted free of Surtax at considerable loss to the Revenue. I cannot allow either this practice or this loss to continue.

Secondly, I propose, subject to conditions, to extend the relief from Surtax which is allowed to Lloyd's underwriters on profits which they pay into special reserve funds. Lloyd's is an important source of overseas income, and I hope this measure will enable them to maintain and expand their foreign business in the face of adverse circumstances, so as to assist our balance of payments.

I now come to something more important. In considering whether I need do anything further in the field of direct taxation, I am governed by the conclusion reached in the earlier part of my speech. I will repeat what I said. "The conclusion is inescapable that we must design our policies so that they face up to, and cope with, the danger to the economy—and especially to our competitive power—of a further expansion of incomes and of consumer demand." The Committee will also remember that I said that our policy, which all sections of the community must support, must combine incentive with restraint.

I do not propose to single out personal incomes, not even the highest personal incomes, for further taxation or for some reduction of the relief from taxation which I have already given them. Personal incentives, especially to those who give a lead on the shop floor or in the office, are hard enough to give, with taxation at its present level, and they should not lightly be withdrawn.

In the case of death duties also, the rates are already very high; nor, indeed, would any practicable change in these duties make any direct contribution to the solution of our problem, which, as I have said, requires an early reduction in the call which we are making on our resources.

There remain the taxes on profits. It is clear that the leaders of industry, large and small, as well as of organised labour, realise that what may be described as a "Demand Race" will price us out of overseas markets, unless we take care. This is true whether the demand derives from increased wages or from bigger incomes resulting from a considerable enlargement of the distribution of profits. It is true that there are reasons for some of the increased wage claims. It is true also that many of the increased dividends have been due to a pent-up restraint over a number of years. Provided that productivity per man increases at least in proportion, there are great advantages in higher wages and there is positive virtue in making profits.

Profits are an indication both of the efficiency of production and of the directions in which economic changes are needed. Unless the economy incorporates some index by which to evaluate the reward for efficiency, and to distinguish between the results of greater and smaller success in the business of risk-taking, it will soon lose the powers of adaptation and innovation which are essential to our survival. Nevertheless, at a time when our resources are overloaded and the demand for the products of industry exceeds the supply, the level of profits can contribute to this excess demand. It is, therefore, appropriate that profits should make some contribution to the effort of restraint which is required of all sections of the community.

I spend most of my time looking forward; but when I look back I feel thankful that on more than one occasion I have been able to reduce the general burden of industrial taxation, which we have only recently got below the high peaks of war-time necessity. The Committee should recall the favourable adjustments we have made in respect of industrial taxation. In my Budget of 1954, when I was criticised for being dull and unadventurous, I gave industry the advantage of the investment allowance. Certainly, few critics at that time raised their voices; in fact, I was pressed to encourage industrial investment more, as I was in my last Budget. We do not propose to withdraw the investment allowance. We propose to rely on the good sense of managements and on the credit squeeze to moderate the pace of investment.

I have, therefore, come to the conclusion that if we are to tackle excess demand as stimulated by the general level of profits I must deal with the difficulty by other means. In the United States, for example, they find it necessary, in the interest of the community, to check undue fortuitous increases in personal fortunes. I have studied the arguments of the minority of the Royal Commission in favour of a capital gains tax; I confess that I am far from convinced by them. In any case, I am sure that it would be premature for the Government to jump to conclusions about a capital gains tax. It would also be most unwise to revert to any conception of an Excess Profits Tax or a special contribution or levy. I have, therefore, turned my attention to the existing profits tax.

This tax is now charged at two rates—22½ per cent. on distributions and 2½ per cent, on amounts put to reserve. The whole question of its structure, and of the taxation of corporations generally, has recently been exhaustively reviewed by the Royal Commission. The majority Report recommends that the existing differential rates should be replaced by a single flat rate; the Minority propose a wholly new system of taxing companies.

I was attracted at first by the majority recommendation; but on examination I have found that it would be very variable in its incidence and have the most anomalous, and in some cases, most surprising results. For example, companies which distribute a high proportion of their profits would gain, while those which put a large proportion to reserve would lose—and the latter include a number of new and important industries. Therefore, I have decided, at any rate for the present, that such a change would not be directed to our present needs. Nor am I ready to make up my mind on the permanent alterations in the structure of the tax recommended by the Royal Commission, and so I must do my best within the existing framework of the tax.

I have considered whether I should increase the rates of Profits Tax both on distributed and on undistributed profits. I am reluctant to increase the rates specifically charged on amounts put to reserve, since to do so would tend to impede the necessary replacement of capital assets and to discourage future investment rather than current consumption.

Here, our long-term interests diverge from our more immediate needs. I realise that the tax on distributions has to be paid by the company. Nevertheless, I consider that, in present circumstances, when increased dividends may imply increased consumption, there must be an increased tax on the profits which companies distribute.

I have, therefore, decided to increase the rate of Profits Tax on distributed profits from 22½ per cent. to 27½ per cent., as the measure which is most appropriate to our requirements. The increase will apply to accounting periods beginning on or after 1st November, and, in the case of accounting periods which overlap that date, to so much of the period as falls on or after that date. As on previous occasions when the rate has been increased, there will be provisions for splitting companies' accounts, and for ensuring that a company cannot avoid the increased rate of tax by declaring on or after today an increased dividend for a period before 1st November. The yield in the current financial year will be negligible—naturally; that is always the case with Profits Tax—but eventually, in a full year, it will approach £40 million.

I trust that the prospect of this additional charge on profits, combined with the effect on the whole economy of the sum of the measures which I am proposing, will exert a significant degree of restraint on the amounts actually distributed.

These, then, are the measures which the Government propose to restore the balance of the economy. We must not under-estimate our achievement over the last four years. We have removed restrictions and controls and restored liberty of choice; we have opened markets, widened the channels of trade and moved nearer the freeing of payments. Now, if we show responsibility at home we shall prove ourselves worthy of the position of leadership in the Commonwealth and among the nations of Western Europe.

Moreover, the Committee may observe that this Government has always taken action in time and has looked forward. It is our conviction that by taking action of this sort in time, we can look forward not only to many years of successful government but to a continuance of our standard of living and to the happiness of our people if all combine in unity in carrying out this task.

1. Purchase Tax

Motion made,

That as from the twenty-seventh day of October, nineteen hundred and fifty-five—

(a) section nine of the Finance Act, 1952 (which provides for reducing or discharging purchase tax on certain wearing apparel, textiles and domestic furniture by making a deduction from wholesale value), shall be repealed;

(b) subject to any order of the Treasury under section twenty-one of the Finance Act, 1948, Part I of the Eighth Schedule to that Act shall be amended as provided by the Table appended to this Resolution, but this paragraph—

(i) shall not authorise the amendments in paragraphs 1 to 5 of that Table unless provision is made by any Act of the present Session relating to finance for the repeal of the said section nine of the Finance Act, 1952, at least so far as it applies to all descriptions of wearing apparel, textile articles, soft furnishings and bedding, or for its repeal to that extent subject to a saving for articles made wholly or partly of fur-skin, and

(ii) shall not authorise the amendments in paragraph 6 of that Table unless provision is so made for the repeal of the said section nine at least so far as it applies to all descriptions of furniture;

(c) subject as aforesaid, in Part I of the said Eighth Schedule (with any amendments authorised by the foregoing provisions of this Resolution)—

(i) each rate of 25 per cent. in any Group shall be increased to 30 per cent.,

(ii) each rate of 50 per cent. in Group 11 or any following Group shall be increased to 60 per cent., and

(iii) each rate of 75 per cent. in any Group shall be increased to 90 per cent.,

but this paragraph shall not authorise any increase under one of the foregoing subparagraphs which does not apply equally to all rates mentioned in that sub-paragraph;

and in paragraph (a) of subsection (1) of the said section twenty-one of the Finance Act, 1948, the reference to the rates of tax provided for by the enactments relating to purchase tax shall include not only the rates provided for by this Resolution but also any other rate not exceeding the highest rate at which tax is for the time being chargeable in respect of goods of any class.

1.—(1) In Groups 1 and 3 (which comprise garments, footwear and gloves) each rate of 25 per cent. shall be reduced to 5 per cent., and in Group 2 (which comprises headgear) each rate of 25 per cent. shall be reduced to 10 per cent.

(2) Articles of headgear suitable only for babies' wear and gloves suitable only for babies' wear shall cease to be chargeable goods.

2. Handkerchiefs, scarves, shawls and braces shall be chargeable under Group 4 (which comprises haberdashery) at 5 per cent.

3.—(1) Paragraph ( a) of Group 5 (which charges textile articles containing wool at 50 per cent.) shall be omitted.

(2) Cushions, cushion pads, pillows, bolsters, overlay mattresses and mattress shapes, being articles of a kind used for domestic purposes, shall be chargeable under Group 5 at 5 per cent. but subject to an exemption for air pillows and cushions and water beds, pillows and cushions, being articles of that kind.

4.—(1) All goods comprised in paragraph ( a) of Group 6 (which relates to tissues and fabrics) shall be chargeable at 10 per cent. under that Group and the goods so comprised shall include tissues and fabrics of whatever material not exceeding twelve inches in width and not comprised in any of the following paragraphs of that Group.

(2) The goods comprised in Group 6 as so extended shall not be chargeable as haberdashery under Group 4, and the material referred to in Group 6 as woollen material shall be known as Class A material.

5. Sub-paragraph (iii) of paragraph ( b) of Group 9 (which charges rugs other than fur rugs and floor rugs at 50 per cent.) shall be omitted.

6.—(1) Furniture of a kind used for domestic purposes and of the following descriptions shall be chargeable under Group 11 at 5 per cent.:

Wardrobes, cupboards, tallboys, cabinets other than refrigerator cabinets, chests, chests of drawers, dressing chests, sideboards, bureaux, bookcases, bookcase units, sets of shelves (but not including any of the above-mentioned articles which are made of metal);

Tables, including writing tables and dressing tables, and trolleys;

Chairs, settees, stools, pouffes and other seats;

Divans, bunks, ottomans, spring-bases, box-spring mattresses and other mattresses, not being overlay mattresses;

Headboards and bedstead ends;

Fireside curbs.

(2) Babies' high chairs, babies' cradles and stands therefore, cots and playpens shall cease to be chargeable goods.

7.—(1) Goods of the following descriptions shall (so far as not already chargeable) be chargeable goods and, subject to the provisions of this paragraph, shall be chargeable at 30 per cent.:—

Vessels designed for use primarily as containers for food or drink in the course of its storage, preparation or consumption, lids for use with vessels so designed, serving trays, bread boards, bowls and jugs and ewers;

Household brushes, brooms and mops;

Dustbins, buckets and pails, and lids for dustbins, buckets and pails;

Pedal-operated sanitary bins, coal hods and coal scuttles;

Baths, wash tubs, wash boards, ironing boards, shields and stands for smoothing irons or pressing irons, clothes line posts, clothes pegs, clothes props and clothes airers (other than heated airers);

Pot scourers and steel wool;

Pastry boards and rolling pins;

Coal or cinder sieves and sifters;

Electric kettles and other cooking utensils incorporating heating elements;

Smoothing irons and pressing irons;

Interval timers incorporating an alarum mechanism;

Kitchen scales and weights therefor, kitchen weighing machines, hand operated wringers and hand operated mangles;

Shopping-baskets and shopping-bags, not being baskets or bags fitted with lids or any other means of closing them.

(2) The charge of 30 per cent. on goods becoming chargeable under this paragraph shall be subject to any higher charge applicable under any Group except that sub-paragraph (i) of paragraph ( a) of Group 12 (which charges articles designed for operation by electricity or gas at a higher rate than other articles) shall not apply to electric kettles and other cooking utensils incorporating heating elements or to smoothing irons or pressing irons.

8. Glassware of cut glass falling within Group 11 shall be included in paragraph ( a) of that Group and paragraph ( d) of that Group

(which charges such glassware at a higher rate than the rate in the said paragraph ( a)) shall be omitted.

9.—(1) At the end of paragraph ( b) of Group 12 (which comprises space heating appliances and heaters and boilers suitable for operation from electric or gas mains) for the words "suitable for operation from electric or gas mains" there shall be substituted the words "designed for operation by electricity or gas."

(2) Appliances of the following descriptions shall not be chargeable goods:—

Appliances incorporating electric fans or electric pumps or both such fans and such pumps, being—

(a) solid fuel burning or oil burning space or water heaters or oil burners of a kind used for space or water heaters, or

(b) radiators or convectors for connection to hot water or steam central heating systems.

10.—(1) In Group 25 (which charges pictures, figures, busts, reliefs, vases and similar articles) references to vases shall be omitted.

(2) Frames for pictures, frames and stands for photographs and similar frames and stands shall, subject to the exemption in paragraph ( g) of Group 11 (which relates to wooden frames of moulding not less than three inches wide), be included in Group 25 and shall be chargeable at 30 per cent. under that Group.

(3) The tableware, kitchenware and other articles of given materials excluded from Group 25 by paragraph ( g) thereof shall include such articles whatever the material of which they are made.

11.—(1) No goods shall be chargeable under Groups 27 and 28 (which relate to goldsmiths' and silversmiths' wares and articles of semiprecious materials).

(2) Group 26 (which relates to jewellery) shall include the following entries:—

—[ Mr. R. A. Butler.]

The CHAIRMAN put the Question there-upon forthwith, pursuant to Standing Order No. 86 ( Ways and Means Motions and Resolutions):—

The Committee divided: Ayes 314, Noes 227.