Tuesday, 9th April, 1957

The House met at half-past Two o'clock

[Mr. SPEAKER in the Chair]

3.31 p.m.

Budget speeches fall into a convenient and traditional pattern. It is customary to begin with a review of economic developments in the past year. I propose to do this and to start with the external position. With 50 million people living here upon a small island, and dependent on external trade and confidence in sterling, it is this which is always uppermost in the mind of any Chancellor. I will not weary the Committee with many figures. They are set out in detail in the Balance of Payments White Paper, published last week, and in the Economic Survey.

I would say, first, that, up to the middle of last year, the balance of payments was responding well to the measures introduced by my right hon. Friends the Leader of the House and the Prime Minister. The visible trade gap had been reduced and our invisible earnings were going up. As a result, the United Kingdom earned, in the first half of 1956, a surplus of about £150 million on our current transactions with the rest of the world. At the same time, our gold and dollar reserves rose by nearly £100 million, while other countries' holdings of sterling were reduced. Altogether, therefore, we seemed to be recovering fairly well from the difficulties which had arisen in 1955.

Now as to the second half of the year. The second half is normally more difficult for our balance of payments than the first; and this for a number of reasons. Our exports and shipping earnings tend to go down. We spend more on foreign travel. The annual payments fall due on our loans from Canada and the United States. At the same time, our friends in the rest of the sterling area are earning less from their sales of commodities. We must expect, therefore, some deterioration in our balance of pay- ments during this period. Even in normal circumstances some loss of reserves is not unlikely.

To these seasonal factors must be added in 1956 the events in the Middle East. So far as I can judge, these events in fact affected our commercial position less than might have been expected. Shipping delays distorted the monthly figures for visible trade, but did not appear to affect their average. As recorded by balance of payments estimates, which, of course, deal with payments rather than arrivals, neither imports nor exports altered appreciably in value between the first half of the year and the second. In the invisible account, our net earnings on oil transactions were naturally reduced.

On the other hand, the interest payments on the North American loans were,. on this occasion, paid into a special capital account and so did not affect our current balance of payments. In the event, despite the seasonal deterioration and all the difficulties of the Middle East situation, we earned, in the second half of 1956, a surplus of £79 million. This compares with a deficit of £102 million in the second half of 1955.

But our problem was not, of course, on our current account. It was not concerned with the underlying strength of our position as a trader. It was a different problem, concerned with our function as banker for a large part of the world. This is, indeed, established by the detailed balance of payments figures which have since become available. These show that during the second half of the year, countries outside the sterling area reduced their holdings of sterling by £84 million, and that there were other large adverse capital movements. It was these factors which were responsible for most of the strain on our reserves.

The steps which my right hon. Friend the Prime Minister took are within the recollection of the Committee. We mobilised, with the help of the International Monetary Fund and of the United States, very large dollar reinforcements. We have brought into the reserves only one comparatively small part of them; that is the £200 million in dollars which we drew from the International Monetary Fund in December. Since then, in the first quarter of this year, the reserves have increased without any call being made upon our International Monetary Fund standby or the Export-Import Bank line of credit.

This is, of course, a great improvement on the stormy events of the previous quarter, but, even so, our progress has not been all we would have wished. That, in brief, is the story of our external economy in 1956. During the year, we earned a current surplus of £233 million. This was much better than the deficit of about £80 million which we incurred in 1955. Nevertheless, by more exacting standards, we must judge it to be inadequate.

This improvement in the balance of payments was a result of policy decisions; that is to say, it was something which we not only set out to achieve but for which we were prepared to pay a price. We took—and we deliberately took— unpopular steps to get it. Put in the simplest terms, we kept the exports rising while we checked imports. The instruments we used were the credit squeeze, deliberately high levels of taxation, and controls on hire-purchase transactions. The price we paid was a check to the growth of total industrial production and of personal consumption. Few men would judge us to have been wrong in thus deliberately channelling our resources into investment and into exports.

The statistical story of these events is given in the Economic Survey. It is a story not of stagnation, but of immense variety. Although total production and consumption did not rise, there were wide alterations in the pattern of what we made and what we bought. For example, we bought fewer motor cars and household goods and, incidentally, saved imports of steel in the process. But we bought more food and more clothing, the latter to the great benefit of the textile industry. We built fewer houses, but more factories and offices. We built more ships and made more machine tools, but fewer consumer goods. All these tendencies were at work in different parts of the economy. It is a picture not of industrial apathy, but of a nation girding itself for renewed and greater effort.

The year 1956 was, then, a year of considerable activity, but, at the same time, of vitally needed redeployment. The inflationary pressure fell. The number of jobs and the number of men seeking jobs came more closely into balance. A situation of acute labour shortage ended without losing the benefits—social as well as economic—of full employment. The criticism is made that 1956 saw a check in the growth of industrial output, and I want to face that criticism fairly and squarely. In 1955, production was high and the rate of production was growing. But in the process we were bringing imports into the country faster than we could earn the money to pay for them. There was the beginning of a situation similar to that which got out of control in 1951. We had to apply a check.

As my right hon. Friend the Prime Minister put it in his Budget speech last year:

" I think we have learned this lesson from the events of the past year. We cannot afford to run our economy flat out, with more jobs than men to fill them, more orders than industry can meet, easy profits at home and rising costs … There is really no future in importing extra materials that we cannot afford, in order to turn them into extra goods that we do not export …"—[OFFICIAL REPORT, 17th April, 1956; Vol. 551, c. 857.]

We intended to reduce the pressure, and we did reduce the pressure. We greatly improved the balance of the economy. In the process some potential production was lost, and that was inevitable. It is the difference between driving the machine flat out with the risk of breakdown and slowing it temporarily in order to resume a normal sustainable speed.

I would make this further point. While we deliberately used our industrial capacity less intensively in 1956 than in 1955, the capacity itself was growing. It was growing because investment was maintained at a high level. We were building the means to produce more and to produce it for export markets. The process of economic growth cannot be absolutely regular. There will be years of growth and years of consolidation. Our long-term growth will be all the sounder for the consolidation we undertook in 1956.

Now, as to costs and prices. What happens to them is crucial to our competitive position and, therefore, to our economic future. This is, indeed, a national rather than a party problem. In both technical and human terms it is the most difficult issue which this country has to face. My right hon. Friend spoke last year about a plateau; and, indeed, retail prices rose only moderately since last April—an increase of about 2 per cent. Taken by itself this is not a bad record. At the worst, it was not more than a gentle slope. In the same period the index of wage rates rose by about the same amount. But since then there has been a settlement on the railways for about 5 per cent. and we all know that other discussions are going on. I do not intend to comment upon them, because that would be quite inappropriate in a Budget speech.

I want, however, to comment upon a rather longer view. The truth is—and everybody knows it—that we have all been trying to take more out of the economy than we put into it. Between us all, we have been forcing prices upward, with increases in incomes putting up the cost of living and the cost of living leading to demands for higher incomes. Between 1946 and 1956, incomes per unit of output increased by 50 per cent. In other words, we tried to get half as much again for doing the same amount of work. Is it any wonder that prices rose? Between 1955 and 1956 the nation's total output increased by £1,200 million in money value, but only by £240 million in real terms. We cannot take £1,200 million out and put £240 million in without doing a good deal of damage to our economy and to sterling in the process.

What can be done about it? Should we try to hold the spiral by subsidising the cost of living? Should we try to obscure the effect of rising costs by paying subsidies direct or indirect? This process, of course, requires that we should take back from the taxpayer what he is gaining in subsidised prices. As Sir Stafford Cripps found, it is a fantastically costly operation. It introduces a wide range of artificial factors into the economy. Unless it is accompanied by high taxation, it adds to the very inflation it is designed to obscure. When, at last, we find that we cannot afford it and have to modify the subsidies, this process of itself lends force to further wage and other income demands. It is not a policy which I could recommend.

What other courses are open to us? There are some who say that the answer lies in savage deflationary policies, resulting in high levels of unemployment. They say that we should depress demand to a point at which employers cannot afford to pay and workers are in no position to ask for higher wages. If this be the only way in which to contain the wage/price spiral, it is indeed a sorry reflection upon our modern society. To slash production, to drive down investment, to push up unemployment to a level at which, despite high world demand, we have manufactured our own depression is, to say the least of it, a high price to pay for price stability. This does not mean that we must drift again into inflation, which puts profits so high and makes labour so scarce that dividends and wages are practically forced beyond our economic capabilities. It does mean that universal and permanent depression should not be regarded as a prerequisite to true stability.

But if we are not to rely upon the policies either of subsidy or of all-out deflation, then we must seek a degree of restraint and common sense and recognition of common interest far greater and far stronger than exists today. We must try, wherever we sit in this Committee and whatever part we play in (he economy, whether we come from the ranks of management or workers, to face the realities which now confront us. Many of our competitors, friendly nations with whom we are allied or associated, are practising more restraint, making greater efforts, showing a better realisation of world economic conditions, than we are.

This afternoon, I will content myself by saying this. We ought all to ask ourselves whether we have adjusted our outlook to the responsibilities as well as to the benefits of high levels of employment. A money income raised prematurely and beyond the real resources we possess is at best only a partial and ephemeral gain to the man who gets it and it is another blow to those who are living upon fixed incomes. We can earn only what we produce. Yet restrictions on production still exist on both sides of industry. In the difficult times which lie ahead, businesses must be ready to change their methods and their products, just as those who work in them must be not only ready but anxious to seek a fresh approach which is the only way that they can secure benefits that will not turn out to be illusory.

If we are to find a solution to this problem, we all have a part to play—and perhaps some sacrifice to make—management and workers and the spending Departments of Her Majesty's Government. I am sure that no one in this country wants to see our money steadily losing its value or sterling going the way of so many currencies in the past. If we are to find a solution to such problems as these, we must at least have the courage in Government, in management, and in the trades unions to state them bluntly and to be prepared to discuss them fully and frankly with one another. I make no party point of this. If, as a nation, we solve this problem—and we can only solve it together—there is no limit to the achievements which could be ours, under any Government. If we fail, there is no Government of any party that this country has to offer that can stand between us and a drab decline in all our fortunes. The Government have their role to play in grappling with inflation. I shall be discussing shortly the steps they have taken and intend to take. But no Government can solve the problem on their own.

So much for the economic events of 1956. It was a year in which, amid many economic difficulties, we did well, a year in which we laid sound foundations for 1957; but a year in which we still did not, as a nation, do well enough to prepare ourselves for the tasks that lie ahead.

Let me now indicate briefly the Exchequer figures for the past year. Details of the Exchequer out-turn will, of course, be available in the White Paper later this afternoon.

First, as to revenue. Revenue last year was £5,158 million. £265 million more than in the preceding financial year, but £40 million below the estimate. Inland Revenue duties came to £2,705 million— £25 million above the estimate. Small increases in the yield from Income Tax and Surtax were partly offset by a reduction in receipts from Profits Tax.

Customs and Excise duties yielded £2,101 million. £57 million below the esti- mate. The main factor in this was that receipts from Purchase Tax fell short of the estimate by £52 million, a reflection of the decreased demand for motor cars and other things. Tobacco receipts were £5 million below the estimate; on the other hand, receipts from beer and other alcoholic drinks—in spite of last summer's weather—were £7 million better than expected. Other miscellaneous items of revenue remained fairly close to the estimates.

Now for expenditure. Total expenditure above the line was originally estimated at £4,738 million. It turned out to be £4,868 million, or £130 million higher. This increase was spread over all types of expenditure. The cost of the Consolidated Fund services was £824 million, which was £46 million above the estimate. One reason for this was that large numbers of National Savings Certificates were encashed last autumn and the interest which had accrued on them had to be paid out. I am glad to say that much of the capital and the interest has been reinvested in the new issue.

Defence expenditure exceeded the estimate of £1,499 million by £26 million, despite the economies of £45 million which my right hon. Friend the Prime Minister announced in June and October. This was partly due, of course, to the cost of operations at Suez, but partly, also, to higher pay and greater expenditure on research and development and other items.

Civil expenditure, at £2,519 million, was £58 million above the Budget estimate, again despite economies of £48 million. The main increases were £24 million for health and £21 million for education. These increases were due to a great extent to the effect of higher salaries, wages and prices. The cost of food and agricultural subsidies was £6 million above the Budget estimate. We spent £19 million more than the estimate on eggs as a result of the big increase in the supply of eggs in recent months, partially offset by savings on cereals and on the bread and milk subsidies.

To sum up the result above the line, there was a surplus of £290 million. This compared with an estimated surplus of £460 million, which was to be increased during the year by £100 million as a result of savings on expenditure provided for in the original estimates.

Below the line, however, the position has turned out rather differently. Total payments below the line were £836 million, £185 million less than was estimated; receipts were only £3 million below the estimate. The deficit was thus only £621 million, compared with an estimated £803 million. The main contribution to this saving was a substantial decline in the provision of capital for local authorities. Against an estimate of £220 million for this purpose, issues have had to be made of only £109 million. These figures reflect the successful application of sound financial principles to the capital expenditure of the local authorities. The authorities attract savings by borrowing in the market as far as possible, and they now pay the market price for their capital, whether they raise it from the market or from the Exchequer. I shall press forward with this policy in the coming year. I realise that the market cannot meet all the requirements of the local authorities, but I shall continue to rely on the sound judgment of the Public Works Loan Board to prevent any un-necessary demand on the Exchequer.

Net Exchequer advances to the National Coal Board amounted to £26 million, £37 million below the estimate. This does not mean that the rate of investment in coal was reduced, but that the Board was able to finance rather more of its investment from its own resources. Last year's Finance Act provided that the Exchequer should supply the capital needs of the other nationalised industries for the two years ending 31st March. 1958. My right hon. Friend estimated that in 1956–57 issues of about £350 million might be required for this purpose. In the event, £284 million have been advanced under the Finance Act and £52 million under the new Transport (Railway Finances) Act, making a total of £336 million for this group of industries.

The out-turn can, therefore, be summed up as follows. Above the line there was a, surplus of £290 million. Below the line the deficit was £621 million. Thus, the overall Budget result, which determined the amount of expenditure that had to be met by borrowing, was a deficit of £331 million.

If I felt disappointment on learning that the fruits of the tax gatherers had not quite come up to expectations, it was offset by the knowledge that the National Savings Movement had had an exceptionally good year. In his Budget speech last year my right hon. Friend improved and enlarged the whole range of National Savings and made a challenge to the movement to which it has risen nobly. As a result, the total of National Savings now stands at £6,240 million, £116 million more than a year ago.

Both the Post Office Savings Bank and the Trustee Savings Banks did better than last year. But the major contributions to the net increase in savings were made by the new Savings Certificate and the Premium Savings Bond. Some people have been suggesting that the Premium Savings Bond is a failure. That is a curious way to describe a security which, even after the first rush had subsided, has continued to bring in several million pounds a month. Let us see, in any event, how these figures will look after the monthly prize drawings start in June.

I have said that the National Savings Movement did exceptionally well last year. It is quite clear that we shall need its invaluable help every bit as much in the coming year as we did in the past year. I am sure that we shall get it. The movement has more to offer than ever before and I feel confident that it will go on from strength to strength.

The National Debt decreased by £34 million in total over the year. Reduction in the debt resulting from the return to the Exchequer of £450 million out of the sterling capital of the Exchange Equalisation Account and from the application of sinking funds of £42 million were largely offset by additional borrowings of £331 million to cover the balance of the below-the-line deficit and by an increase of £107 million arising from the issue of two securities during the year at a discount.

Eight hundred and twenty-four million pounds of 2½ per cent. National War Bonds matured on 15th August, 1956, and £658 million of this was converted into 4½ per cent. Conversion Stock, 1962, the rest being paid off. Further tranches of two existing securities were issued for cash during the year: £250 million of 3½ per cent. Treasury Stock 1979–81 issued at a price of 81 and £300 million of 3½ per cent. Funding Stock 1999–2004 issued at 80. Two hundred and two million pounds were lent back to the Exchequer by the International Monetary Fund, being the sterling equivalent of the dollars which we purchased from the Fund last December to reinforce our reserves.

In addition. Savings Certificates, Defence Bonds and Premium Savings Bonds brought in £100 million. The effect of the year's operations has been a reduction of almost £600 million in the level of Treasury bills outstanding. In other words, over the year the total of the National Debt was slightly reduced and there was a fairly substantial change from short-term to long-term borrowing.

Having reviewed the Exchequer outturn for 1956–57, I will go straight on to the Exchequer prospects for 1957–58. In some respects, they are encouraging.

On the basis of existing taxation, Inland Revenue duties at £2,876 million are expected to yield £171 million more in the coming year than last. From Income Tax we expect to collect £2,230 million—an increase of £116 million on last year. This increase is mainly due to the effect of increased wages and salaries. We also expect to get from Profits Tax an extra £60 million, mainly as a result of the increase in the rates made last year. Surtax, death duties, and stamp duties are estimated to produce about the same yield as last year.

The revenue from the Customs and Excise duties on the existing basis of taxation is estimated at £2,150 million this year compared with receipts of £2,101 million last year. None of the estimated yields shows a substantial rise or fall on last year's figures. I expect £93 million from the motor vehicle duties, £2 million more than the receipts last year.

The estimate for non-tax revenue is £268 million compared with £261 million last year. Under this heading, I must admit to one receipt which is not really revenue at all but merely a book-keeping windfall. As the Committee knows, the interest of £37 million due last December on the United States and Canadian loans was paid into a special account and was included in the charge for interest on debt in 1956–57. Agreement has since been reached with the United States and Canadian Governments for the deferment of this interest payment. After, as I hope, the United States Congress ratifies this agreement, the interest will be returned to the Exchequer from the special account. I am bound to include this £37 million in my estimate of miscellaneous revenue. But I hasten to assure the Committee that I shall not regard this windfall as having any significance when I come to consider my Budget proposals. Altogether, then, revenue is estimated at £5,387 million, £229 million higher than last year's yield.

I estimate total expenditure above the line in 1957–58 at £4,827 million, which is £41 million less than the actual outturn for last year. The Consolidated Fund services will require £757 million in the coming year—£21 million less than last year's estimate. This relief to the Budget results largely from the fall in the short-term interest rate. On the other hand, Supply expenditure is estimated at a total of £4,070 million, £26 million more than last year's out-turn. This increase is, of course, the net effect of the rise in civil expenditure—notably in the social services—and the reduction in defence expenditure.

If, therefore, existing taxation were to remain unchanged we should have total revenue estimated at £5,387 million against expenditure of £4,827 million, giving an estimated surplus above the line of £560 million. This compares with an actual surplus last year of £290 million.

I expect the net total of expenditure below the line to be a little less than the actual total last year. I estimate the needs of local authorities' borrowing in the coming year as £100 million. The National Coal Board will need to make a larger call on the Exchequer in order to continue its investment programme, with net advances of £45 million, compared with £26 million last year. Issues to the other nationalised industries may amount to some £290 million, against which repayments of £14 million may be expected; and £50 million is likely to be required for the British Transport Commission under the Transport (Railway Finances) Act. The total net expenditure below the line is put at £587 million. Overall, therefore, remembering that on the existing basis of taxation we have an estimated surplus above the line of £560 million, the deficit—that is, the net expenditure we need to meet by borrowing—will be £27 million next year compared with £331 million in 1956–57.

These figures are much better than at one time I thought they would be. At any rate, they could be a good deal worse. I would emphasise that the improvement in the budgetary position which the figures indicate has not been achieved just by luck. They are the outcome of considerable efforts by my two predecessors and recently by myself, with the co-operation and support of our colleagues, to keep the level of Government expenditure under control.

The Defence White Paper sets out the effect upon expenditure this year of the review of defence policy which we have been conducting. After taking account of £63 million of German support costs and American aid we are providing £1,420 million for the defence programme. This is £79 million less than the original estimate and £105 million less than the actual expenditure of last year. On the civil side, we are providing for expenditure of £2,650 million—that is, £189 million above the Budget estimate of last year. This figure takes credit for the £20 million which we expect to save this year by the new National Health Service contribution, but also provides for an additional £10 million on account of the agricultural price guarantees.

During recent months we have clipped and cut expenditure over a wide field, but we still spend at a high level. There was a time when it was a principal preoccupation of Parliament to refuse supply, or, at best, to grant it very grudgingly to the Executive. In recent times that trend has changed. Modern assemblies, urged on by their electors, tend, on the whole, to be far more pressing in their demands to spend money than to save it. After all the debates which have taken place, there must be very few forms of Government expenditure which do not have powerful advocates in one quarter or another.

The figures speak for themselves. Even after the changes we are making, the cost of the social services, at £1,677 million, will be £124 million more than the estimates of a year ago. Among them, education, at £445 million, will be £63 million more and the National Health Service, at £529 million, will be £28 million more. Exchequer grants to local revenues, at £105 million, will cost £21 million more.

If expenditure upon this scale is to be supportable, and, certainly, if there is to be any expansion of the social services, several things are necessary. The Government must be free to continue to study ways and means of reducing costs without impairing the essential services themselves. Parliament must recognise that checks and limits must be placed on the growth of even the most useful forms of spending. Indeed, public pressure for economy in all fields is the greatest help a Chancellor can have. The country as a whole must recognise that the surest way to provide against the need for further distasteful economies is to increase the total of the national product out of which these services have to be provided. Put simply, if we want to retain our social service State we must earn it by our own efforts.

While we are still in the field of the Exchequer accounts, there is one change that I propose and should mention even at the risk of digressing from my main theme. In the Finance Act of 1946, the right hon. Gentleman the Member for Bishop Auckland (Mr. Dalton) created the National Land Fund. The intention was that much greater use should be made of the power of the Inland Revenue to accept land in payment of Estate Duty.

The right hon. Gentleman's concept was, if I may say so, an imaginative one and we have developed it by taking power, in 1953 and 1956, to accept works of art in settlement of Estate Duty. But the £50 million of securities with which the Fund began have by now grown, with accumulated interest, to a value at maturity of nearly £60 million. The Fund at present has an investment income of over £1,400,000 a year. Its average expenditure since its creation has been less than £200,000 a year. In other words, its capital and its resources are out of proportion to its likely expenditure.

In these circumstances, it is hardly surprising that the Public Accounts Committee has recommended that we should return part of this large and growing balance to the Exchequer. I am proposing to reduce the Fund's capital to £10 million by cancelling some of the securities held in it. This will for a number of years suffice to meet all demands on the Fund under present policies, which we mean to continue. This will, of course, have no effect upon the Budget figures.

I have summarised the prospects for the coming year in the narrow budgetary sense. What can and should be done in the Budget depends not only on issues of Exchequer arithmetic, but also upon the economic outlook for the coming year. We enter here upon the realms of prophesy. The future can be discerned only in part—and then uncertainly—by statistical analysis. It depends upon many-other factors—the actions of employers and workers, the skill and energy with which we all set about our various tasks, and upon developments abroad as well as at home.

I want to look at the main categories of demand on our resources one by one. I have every confidence that we can look forward to an increase in exports. World trade is growing and our manufacturers have been making a strong effort to expand their markets abroad. Orders have been coming in at a high rate. There is a wider appreciation of the opportunities for our goods in the vast North American market. Whether we shall this year exceed or fall short of the increase of 6 per cent. in the volume of exports achieved last year I cannot tell. It will depend on our ability to deliver the right goods at the right time at a competitive price. But I confidently hope for a substantial increase.

Certainly, the opportunity to export must be the first and most important answer to those who complain about stagnation. The condition of an expanding economy is, indeed, that we should sell more abroad. Increased production upon any other terms will merely increase our import bill. If we sell more abroad, we shall achieve not only our first objective, which is a larger trading surplus and an increase in our reserves, but our second, which is expansion at home on a safe and sound basis.

Next, consumption. Last year, there was virtually no increase in consumers' expenditure in real terms. Instead, there was a big increase in personal saving and repayment of debt. Part of this was a temporary adjustment due to the pressure on credit. Once people have paid their debts they not unnaturally tend to buy more. Indeed, the latest retail trade figures confirm this expectation. It seems likely, therefore, particularly in view of recent wage settlements, that there will be some increase in consumption this year. It would be a stony-hearted Economist who would altogether deplore this. The object of production is after all, consumption. But we must watch that we do not consume too much at the expense of other objectives vital to our economy.

This brings me to investment. Of course, we have to have a high investment economy. It is a condition of our survival. But people sometimes forget what a rapid increase there has been in investment. Since 1952, gross fixed investment has increased by 7 per cent. a year, compared with a growth of just over 3 per cent. a year in total national output. Thus, year by year, the proportion of our resources devoted to fixed investment has steadily increased. It was 12 per cent. of the gross national product in 1947, 14 per cent. in 1951 and 16 per cent. in 1956.

True, some countries do more than this, just as we must ourselves seek the opportunity to do more. Let us, however, not forget that circumstances in other countries are often quite different from our own. Some have rapidly growing populations to provide for. Some have smaller defence burdens. On the whole, we have a good record in home investment. I wish that we had an equally good record of investment in our gold and dollar reserves.

At any rate, in the coming year, and, indeed, beyond, I see no sign of stagnation in investment. In the public sector the plans designed for atomic energy, for coal, for transport are large. The problem posed by investment plans for the basic and in part publicly-owned sector of the economy is not, in the main, whether we contemplate too little, but how we can manage to do so much. Yet we are right to do it. Ask any industrialist! Few would say that in this section we are guilty of being over-bold. We need more power, more steel, and more transport facilities. Investment such as this is, indeed, vital to the economy of our country.

As to the private sector itself, the rate of investment has mounted sharply in the last three years. Future plans vary. Some firms may wish to pause before making a further advance. But the pressure for capital on all sides certainly suggests to me that too hasty or too vigorous encouragement might well lead us to just that over-extension of the economy which we have been at pains to correct and avoid.

At this stage, investment is at a high level. If we can ensure that in both the basic and manufacturing sectors it is pushed quietly and steadily up over the years, if we can do it in a volume and at a pace within our material and monetary resources, we shall make a great contribution to our economy. But investment must be matched by savings. To spend too much too quickly, to watch inflation grow, to try to correct it by raising taxes and restricting credit—this is a sequence of events tempting to embark upon, but to be avoided at all costs.

To sum up the economic outlook, I foresee expansion in exports, some increase in consumption and probably a slight increase in fixed investment as well. Thus, there is a fair promise of renewed growth this year. It must be remembered that our first objective is the earning of a surplus on overseas current account substantially larger than that of recent years in order to build up the reserves, to repay borrowing, to finance overseas investment, and to provide for further drawings by the holders of sterling balances. We need this not only for our own security as a trading nation, but also to honour our commitments as a world banker. We hold, after all, the reserves of many other countries within the Commonwealth and outside it and are the centre of the sterling system on which so much of world trade is based.

How, then, should we summarise the prospects? After making full allowance for the factors I have mentioned, I see some grounds for cheerfulness. As I see it, the temperature of the economy has been brought down to a more normal level by our disinflationary policies in the last 18 months. Resources appear to be at least adequate to the demand on them. It is reasonable to hope for further substantial export gains. All this seems to be a basis not for standing still, but for going forward. Expansion must be the theme, but we must do it at a pace and in a manner consistent with our large responsibilities as a trading and a banking nation.

Before I relate the economic prospects which I have outlined to my objectives in the present Budget, I want to refer to monetary policy. To influence the economy, Governments, of course, use fiscal measures. They put the taxes up or— as many are, no doubt, fervently hoping— they put them down. They use, too, in varying degrees direct controls. But they must also use monetary measures, since no Chancellor can ignore the powerful effect upon the economy of what men borrow and what men save.

In this task, both the banks and the Exchequer have their part to play. So far as the Exchequer is concerned, we must clearly continue with our efforts to influence the monetary system by the maintenance of a satisfactory Budget balance, by vigorous national savings, and by full use of market opportunities for funding.

The monetary measures available are really the following. First, Bank Rate and the rest of the interest rate structure; secondly, the measures connected with Exchequer financing and open market operations; thirdly, the specific controls over credit exercised through the Capital Issues Committee and the statutory restrictions on hire purchase. Continued use has been made of these measures during the past year and we can claim that they have been by no means ineffective in checking inflation. The question which must be asked, however, is whether they have been of themselves enough. I think that the answer to that question must be, "No."

These measures would not have been as effective as they have been without the active co-operation of the banks in restricting credit. Given the practical limits to the monetary pressure that could be brought to bear on bank liquidity, it has been necessary for the Government to inform the bankers from time to time of the continuing need for credit restriction and to ask them to respond to the national need. My predecessor met representatives of the banking organisations last July, and, as was announced at the time, they undertook to meet the Chancellor's wishes and the national needs, which were that the contraction of credit should be vigorously pursued and that there should be no relaxation in their critical attitude towards applications for bank finance.

I think that the figures show that, despite some recent increases in advances, the banks have lived up to their undertaking. Over the year to 20th February, 1957, advances to customers other than the nationalised industries showed a net increase of £25 million on a total of £2,000 million. But the detailed figures reveal big increases in bank accommodation for just those industries which play the leading part in the export drive and provide the national economy with its basic services, offset on the other side by substantial reductions in the credit given for less essential purposes. Thus, in spite of rising costs and heavy demands, the banks have succeeded both in keeping the total volume of bank credit in check and in distributing it in accordance with national needs.

It seemed to me appropriate, before opening this Budget, to discuss the credit situation with representatives of the banking organisations and to indicate to them the directions in which I need their continued co-operation. They were forewarned when, on 7th February last, I said that the change in the Bank Rate was

"… not a signal for bankers or others controlling sources of finance to relax credit or to ease restrictions on lending."—[OFFICIAL REPORT. 7th February, 1957; Vol. 564, c. 606.]

That statement holds good. The bankers cannot be expected to welcome such a statement implying, as it does, a continued restriction on their enterprise and competition. But they recognise it as an unpleasant necessity and I am glad to say that they have renewed their assurance that they will continue to maintain a restrictive attitude towards advances and will be particularly critical towards advances for the less essential purposes.

I recognise that some increase in the level of advances may result from the provision of bank finance for purposes of the highest priority, I am confident, however, that the banks will keep credit within bounds by their vigilance over the whole field and by strict control over lending for purposes that are not of first importance to the national economy. I cannot say for how long this effort will be necessary, but I intend to keep in close touch with the banks through the customary channels in order to meet their desire to respond promptly to the national needs.

I also intend to support the bankers' efforts by a change in the arrangements for the statutory control over borrowing exercised by the Treasury on the advice of the Capital Issues Committee. The banks are aware that, notwithstanding the statutory exemption of borrowings made in the ordinary course of business, bank advances should not in general be made for capital expenditure. Accordingly, it has been and will continue to be their practice to treat all applications from their customers for bank credit to finance investment in buildings, plant and other fixed capital as not being in the ordinary course of business and, therefore, as requiring Treasury consent under the Control of Borrowing Order.

In December, 1953, the Capital Issues Committee was asked to confine its attention to the purpose of such loans, leaving the terms to the discretion of the banks. I have decided to do away with that limitation and I propose to reinstate the previous practice by which the Committee also concerns itself with the need for bank finance and the period of such borrowing. I must emphasise that my reason for wishing to restrict bank finance for such purposes is not that an overdraft would be commercially unsound—the bankers, not the Treasury, must remain the judge of that—but because of the danger that long-term investment financed from bank credit may add to the volume of investment without a corresponding increase in real savings.

That is why I have today written to Lord Kennet to ask the Capital Issues Committee that, in addition to examining the purposes of such borrowing, it should also consider whether bank overdraft is the appropriate method of finance. I have asked that it should not recommend consent, however good the purpose of the loan, unless it is satisfied either that there are exceptional features in the case which make it impossible for the applicant to raise the loan from non-banking sources, or that the proposed bank loan is a strictly temporary and short bridging operation, pending the completion of funding arrangements. My purpose in all this is to ensure that investment is matched as speedily and completely as possible by savings.

By this means I am hopeful that control over credit will be maintained. But the very fact that these arrangements have to be made is evidence that the monetary machine is working under great difficulties. I think that there is general agreement as to the objectives of monetary policy. This country stands determined to maintain a fixed and stable exchange rate. The primary requisite for this is that we shall be able and determined to avoid inflation at home. Equally, it is also agreed policy to avoid slumps and severe unemployment, if these perils should again confront us.

These objectives are not open to question. But there are the widest differences of opinion among those best qualified in this difficult field about how to attain them. These differences have little or nothing to do with political opinions. Examples of the various schools of thought are to be found right, left, and centre. We have in the Macmillan Report an authoritative exposition of the system as it worked before 1931. But the problem then was how to find a way to pump more credit into the system. That is not, to say the least, our main anxiety this afternoon. Moreover, much else has changed in this field since 1931. The problems of Exchequer finance, including the management of the vast debt so largely a legacy of war-time years, are altogether different in scale. There have also been considerable changes in the structure of the banks' assets, making them less susceptible to monetary pressure.

Such changes in conditions have been widely recognised by critics both in this House and outside and for this reason suggestions for a committee of inquiry have been canvassed for the past year or more. My right hon. Friend considered them carefully last spring. He heard the views expressed to him by a small deputation led by my hon. Friend the Member for Aberdeenshire, East (Sir R. Boothby). He considered at that time that an inquiry would be premature until we had more experience of the application of Bank Rate and of the credit squeeze.

In the last two months I have considered the matter afresh and have had the benefit of renewed interest which has been shown in it, in comment in this House, in a valuable debate a month ago in another place, in the Press, and in other quarters. I have now decided, after consultation with the Bank of England and with its full agreement, that the stage has been reached when an inquiry should prove useful and constructive. A committee will be set up with terms of reference:

" to inquire into the working of the monetary and credit system and to make recommendations ".

The inquiry will be primarily directed to reviewing the working of the system in the conditions of today, taking particularly into account the great influence now exerted upon it by the public finances and the need to maintain a high level of savings and investment. It will be concerned with the achievement of the best possible system of money and credit, while observing to the full the international obligations, in the matter of the exchange rate and in other matters, which Her Majesty's Government have assumed and have every determination to honour. I am glad to say that Lord Radcliffe has consented to serve as Chairman. The names of the other members will be announced as soon as the appointments have been made.

Having thus, as it were, both guarded my flank upon the credit front and set in hand a study of our future strategy in these matters, I can turn from monetary policy to fiscal considerations and consider to what extent and in what directions I can properly reduce taxation, having regard to the state of the economy as a whole. The Committee will remember that I estimated that on the basis of existing taxation I should have a surplus above the line of £560 million, against an actual surplus last year of £290 million. The fact that our economic prospects cannot be assessed in advance with precision does not lessen my responsibility for exercising the best judgment I can in the light of the information and forecasts available to me.

In this part of my task, at least, I have not been lacking in advice. Words of caution from some and of encouragement—perhaps even more than encouragement—from others have been falling on my ears for weeks past. Let me say at once that I reject the extremes of both opinions which have been urged upon me. I reject unequivocally the view that the sole duty of a Chancellor is to remove txation at whatever risk to the economy and without regard to the consequent inflation that would certainly result.

That advice is the language of irresponsibility. Actions of that character might conceivably buy from the undiscerning a momentary popularity. It would be short lived. It would, indeed, be the easiest possible task for any Chancellor to boost home consumption and investment at the cost of lower exports, of higher imports and a thumping external deficit. It is, however, a policy in which I should be prepared myself to play no part whatever.

Nevertheless, I must fairly say that the other extreme of opinion contains elements of almost equal folly. I personally do not share the view of those who appear to consider that high rates of taxation will of themselves provide a sovereign remedy to all our ills. They are rather a reflection of an overstretched economy. The answer to an overstretched economy is not to tax it, but to relax it.

A satisfactory feature of the present Budget figures is the very great improvement in the overall Budget position compared with the out-turn for the past year. With a great deal of effort, and through restraint of expenditure, we have eased the problem of financing the public outlay. We have thus carved out some kind of an opportunity now—not next year, but now—to make at least a modest start towards a reduction in the burden of taxation which presses so heavily upon the people of this country.

I cannot do much more today than to chart a pattern of progress, to place some directing arrows upon it, and to take one or two firm steps along their paths. These arrows point to what I believe to be our necessary and desirable goals. First, greater industrial efficiency and competitiveness. Our industries must be given greater opportunities to compete more successfully in world markets. Secondly, the provision of better incentives and opportunities for initiative and effort. Thirdly, the easing of the pressure of the tax system where this bears most hardly on individuals and families. In sum, I seek to create conditions in which our economic future, collective and personal, is seen by all to be worth striving for and worth saving.

I must emphasise once more that the general pattern of my Budget must be dictated by the need to place and keep our external position on a really sound footing. Therefore, the room for manoeuvre is limited. But, still, there is some room for manoeuvre, and we must try to use it wisely. I judge that, against the background of a Budget so nearly balanced overall, I can properly reduce the burden of taxation by a figure of about £100 million. This will leave us with a much bigger surplus than that realised last year, and an overall deficit that can be covered by real savings.

Having set the stage, I will now—hon. Members may say "at long last"—come to my fiscal proposals. It may perhaps be convenient if I deal first with two important subjects on which I inherited from my right hon. Friend undertakings that changes would be seriously considered.

First, the Entertainments Duty. Hon. Members will recall that during the debates on the Finance Bill last year my right hon. Friend gave an assurance that he would, in the course of the year, undertake a comprehensive review of the whole structure of the duty. When I succeeded him as Chancellor of the Exchequer I continued this work. I now have a number of proposals to make. This duty now brings in about £40 million a year. There can be no question of abandoning a yield of this order of magnitude. Entertainment is not in itself an unreasonable object of taxation and I must obviously continue to look to the patrons of entertainment for a substantial amount of revenue which I should otherwise have to collect in some different way.

On the other hand, there have been many changes since the duty was introduced in 1916 and, indeed, since it was last revised in 1954. Some forms of entertainment are expanding. As they expand they affect the profit of the other types. In particular, television has, in recent years, grown to be a powerful competitor with other entertainments and I have had to consider whether it is bearing a share of taxation comparable with its rivals. I have not overlooked the fact that anyone who buys a television set pays a substantial amount of Purchase Tax upon it. But there is no tax on its use comparable with the tax on the admission price to a cinema. I am satisfied that a fairer balance in the taxation of these competitive entertainments is desirable.

I accordingly propose that an Excise duty of £1 should be levied on each combined television and radio licence which at present costs £3. There will, of course, be appropriate rates for the comparatively few cases where television licences are issued at something different from the standard charge. This new duty will not, of course, apply to licences for sound reception only. The new duty will operate from 1st August and I estimate that it will yield £6¼ million in this financial year and £8 million in a full year.

Now as to the rest of the Entertainments Duty. This duty is at present charged under three scales. The highest scale applies to the cinemas, which in 1956–57 contributed about £34 million out of the total revenue of about £40 million a year from the whole duty. The lowest scale applies to theatres and other living stage entertainments, while sports are charged at intermediate rates. No one has pretended for some time that the present arrangements for the duty are logical or satisfactory.

A distinguished author, poet, and playwright, who, for many years, enlivened our debates from a place on the front bench below the Gangway, has recently commented that, "You cannot remodel a mess". The Committee will not expect me to share—or at least not to express— such severe strictures. Nevertheless, amid the various claims of sentiment, tradition and economics, I would not say that it is easy to judge the right path to follow. After hearing a deal of evidence, and considering with great care all the arguments that have been advanced by the many interests concerned, I have come to the following conclusions.

First, I propose that the living theatre should be freed from duty altogether. The cost of this, including certain other entertainments at present charged under the first scale, will be £2¼ million in the full year. Secondly, I propose that all sports should be freed from duty altogether. This, with other entertainments charged under the second scale, will cost the revenue £3½ million. Thirdly. I propose that the cinemas should be relieved of duty to the extent of about £6½ million. I propose to achieve this by substituting a much simpler scale for the present complicated scheme. The new scale will be 50 per cent. of the amount by which the total admission price exceeds 11d.

The exemption in favour of indoor entertainments in rural areas will continue to be necessary to cover cinemas in such areas and I propose to widen its scope by raising the population limit from 2,000 to 3,000. In this way it will be possible to help a number of villages and rural areas which are within the purpose of the exemption but which are not, at present, within the letter.

These changes in Entertainments Duty will operate from 5th May and will cost £12¼ million in a full year or £11¼ million this year. The net cost, allowing for the extra revenue from the television duty, will be £4¼ million in a full year and £5 million this year. The resolutions will also provide for the revision in simpler terms, though to much the same effect as now, of a number of other statutory provisions relating to Entertainments Duty.

The second major commitment which I inherited was an undertaking to consider the taxation of United Kingdom companies that carry on business overseas. As the Committee well know, such companies when they are controlled and managed in this country, have to pay tax at our very high rates on their profits earned abroad, subject to a set-off against the United Kingdom tax bill for similar taxes paid overseas. This position has been much criticised over many years on the ground that the United Kingdom concern trading in an overseas country where tax rates are lower than ours is at a disadvantage as compared with local competitors. It was fully reviewed by the Royal Commission, under Lord Radcliffe's chairmanship, which reported in 1955.

The Commission put forward a novel idea for dealing with the problem which I propose, in substance, to adopt. The idea is that our law should recognise as entitled to special tax treatment a class of overseas trade corporations. Broadly speaking, these will be United Kingdom companies controlled and managed from this country, but having all their actual trading operations abroad. Concerns that qualify as overseas trade corporations will be exempted from Income Tax and Profits Tax on their trading profits earned abroad. Of course, when they pay dividends or other distributions to shareholders out of those trading profits those dividends will be liable to United Kingdom Income Tax and if they are received by a United Kingdom company to profits tax as well. In appropriate cases there would, of course, be relief for taxes paid abroad.

The companies to be covered by my proposals will include those wholly engaged overseas in mining, oil winning, agriculture, manufacture and processing, public utilities and distribution. I do not propose to include shipping, since I am proposing to deal with the industry in a different way, which I shall shortly explain. Nor do I propose the inclusion of financial activities such as banking and insurance, since I do not think that they could properly be brought within the underlying conception of the scheme.

I must also give some precision to the proposed treatment of selling activities overseas. The Royal Commission contemplated that some overseas trade corporations would be the exporting side of United Kingdom manufacturing busi- nesses, which would obtain merchandise from the United Kingdom and send it overseas for sale there. We must, however, be careful that this new relief has no possible suggestion of an export subsidy about it and the legislation will make it clear that to qualify as overseas trade corporations concerns dealing in United Kingdom goods must buy those goods "free on board" at a United Kingdom port at the price appropriate to a transaction between independent persons. Thus, only profits arising from that point onwards which can be seen to flow from selling activities outside this country will come within the exemption.

There doubtless are some concerns which already have all their trading operations outside this country and can qualify as overseas trade corporations immediately. But there are also many mixed businesses with their operations partly here and partly overseas. To secure the benefit of my proposals such concerns will have to "hive off" their overseas business into a separate company that fulfils the conditions for qualification as an overseas trade corporation.

These then are the outlines of my proposals on this matter. I am afraid that the legislation to put through a major reform of this kind will inevitably be long and complicated. I must ask the Committee to wait until the Finance Bill is published for details. As well as a close definition of this new class of corporation there will clearly have to be provisions defining distributions that are to be taxable, and the method of dealing with them, and possibly safeguards against abuse.

I commend these proposals to the Committee with confidence. I believe them to be a justifiable reform in our tax system and a legitimate help to companies that plough back their profits overseas in competition with those that operate under easier tax laws. Many of them operate in Commonwealth countries and in the Colonies. Under the impetus of this reform many more may well do so. As things stand at present a British company engaged in such overseas operations may be at a serious disadvantage compared with its competitors. We must seek to remove these disadvantages.

Moreover, under the existing law any such British company is a somewhat tempting object for a take-over bid by foreign buyers, who can often base their offer upon a future tax position more favourable than would be open to any British bidder. Although the remission of the tax will represent an initial loss to the balance of payments, these proposals are a step towards more investment, more trade, and more exports. I am confident that this is a sound measure which will bring us increasing rewards in future years. The cost to the Revenue will not be negligible. I cannot, of course, give precise figures, but I estimate the cost at £25 million this year and something over £35 million next year.

I now turn to two further proposals in the field of indirection taxation. The first relates to Purchase Tax. It is designed to benefit the ordinary householder and, in particular, those families with low incomes who may fail to derive advantage from taxation relief in other fields. The concessions which I propose will be of help in the home and especially perhaps to those setting up house for the first time. I propose to reduce from 30 per cent. to 15 per cent.—that is, to halve— the rate of Purchase Tax on domestic kitchenware and tableware, whether of metal, pottery, glass or other materials, and also on cutlery and such furniture as is now liable at the 30 per cent. rate. I am also halving the present 30 per cent. rate on floor coverings—linoleum, carpets, and so on.

These changes will operate as from tomorrow; their cost will be about £18 million this year and about £24 million in a full year. 1 believe that this will not only be welcomed by consumers, but will be of help to a number of British industries affected. I am also taking the opportunity to apply the Provisional Collection of Taxes Act, 1913, to Purchase Tax. This will rectify a defect in the existing legal machinery for tax collection.

I am proposing to make one other change in indirect taxation. When the additional duty of Is. a gallon was imposed on petrol and certain other light oils last December, it was made clear that the extra duty was temporary. In fact, the Act lays down that it is to be removed not later than one month after the end of rationing of all the products liable to the duty.

But we do not want to continue it any longer than we must. Although our oil supplies are not yet back to normal, they have improved sufficiently to justify the removal of the additional duty. I have, therefore, approved the issue of a Treasury Order, under which the duty will be restored to the former rate of 2s. 6d. a gallon for light oil and derv delivered from the refinery or bonded storage from 6 p.m. this evening.

I am in some difficulty in giving the Committee an estimate of the cost of this proposal. In the immediate future there will be a definite loss of revenue. On the other hand, as soon as rationing comes to an end—and we do not know when that will be—the yield of the duty will increase. It is impossible, therefore, to calculate the cost of the reduction of duty, but the least figure I can put on it is £10 million.

There are two minor proposals in the Customs and Excise field, which I should mention. I am proposing to continue the Customs duty of £4 a cwt. on imported hops which would otherwise expire on 15th August this year. I also propose to introduce a provision to simplify the administrative arrangements for levying duty on imported articles in respect of dutiable ingredients. This will relieve traders and the Department of a considerable burden of work.

While I am on miscellaneous and other points, I should mention that I shall be proposing in the Finance Bill to give statutory effect, so far as that is needed, to the new trade agreement with Australia which was signed in February.

I turn now to my proposals in the field of Inland Revenue. As always, there are several minor matters on which legislation is necessary, either to strengthen the tax code or to adapt it to current circumstances.

In the strengthening category I have two candidates. The first concerns the Estate Duty that is levied when a gift is made within five years before death. At present, the law gives rise to anomalies and lends itself to avoidance devices. One device, sometimes known as "the disappearing trick", takes advantage of the fact that no duty is payable if the property given away—for example, a security due for early redemption—has ceased to exist before the death of the donor, even if he dies within five years of making the gift. I propose to put a stop to these devices and generally to rectify the anomalies that arise under the present law.

My second candidate concerns the investment allowance. Under the law as it stands there might, in certain circumstances, be a legal claim to two investment allowances for the same asset. This, clearly, should be stopped.

I shall also be including in the Finance Bill a number of relatively minor adaptations of the tax code, which can be more appropriately described and discussed at a later stage. Among them will be a provision for the temporary freezing of Schedule A liabilities in Scotland and Northern Ireland and another provision dealing with the person to be charged under Schedule A in cases where flats are let in consideration of capital premiums.

Turning to matters of wider interest I will deal, first, with the question of fiscal measures in the field of investment. As the Committee will remember, my right hon. Friend suspended the 20 per cent. investment allowances in February, 1956, in all but certain special cases. It will, I think, be clear to hon. Members who followed my earlier remarks about investment that I do not consider that the time has come to restore these allowances.

But there is one exception that I propose. Strong representations have been made to me in the case of the shipping industry. This industry is, indeed, in a special position. It is faced with severe competition in a world market, often from ships sailing under flags of convenience with small tax liabilities. It finds it increasingly difficult to build up finance for the replacement of its ships when they become obsolete. It has been suggested that I should give to shipping some specially favourable depreciation allowances which would enable the owners to build up, while a ship was operating, tax free reserves against its eventual replacement. Much as I appreciate the problems of the shipping industry, I cannot agree to do that.

I have, therefore, looked for alternatives. There are clearly very real difficulties in giving any special tax relief to a selected industry, for inevitably the question arises where to draw the line. There is, however, already in existence one form of special relief to the shipping industry, namely, the 20 per cent. investment allowance which it was allowed by my predecessor to retain last year. After careful thought I have reached the conclusion that as a recognition of its unique position I can increase that allowance.

I propose, therefore, that the investment allowance for capital expenditure on the construction of new ships shall be increased to 40 per cent. as regards expenditure becoming due and payable after today. This will cost nothing this year, but the cost will rise to £11½ million in a full year. I must repeat that this is a unique step for a unique industry which is the life line of our country and I must be rigid in my attitude to any requests by other industries for similar treatment. Capital expenditure on scientific research and approved fuel saving equipment, which at present qualities for the investment allowance, will continue to enjoy the present rate.

I pass from shipping to the more human problems of personal taxation and, first, to taxation of old people with small incomes. Many people have for long held the view that our tax system is too hard upon elderly folk living on comparatively small incomes. Many old people do, of course, have relatively heavy calls upon their purses. On the other hand, we must not forget that very many younger people, with no greater income, have their responsibilities, too.

One has, therefore, to hold a fair balance between the old and the young. But I am sufficiently impressed by the case of the old to feel that I should take some action this year. I propose that there shall be two special income tax exemption limits for the old: an exemption limit of £250 for single persons over 65 and, secondly, of £400 for married couples where either husband or wife is over 65. In each case a marginal provision for incomes slightly over the limit will be necessary.

As a second step, I propose an improvement in the "age relief" arrangements. The Committee may remember that people over 65 with a total income of not more than £600 have the whole income treated as earned income whatever its source. Thus, relatively small investment incomes from savings bear no more tax than pensions. I propose that the income limit for age relief shall be increased from £600 to £700. I hope that those two proposals, which will cost £21¼ million this year and £4¼ million in a full year, may do something to help the older members of the community.

Next, I turn to tax relief for the parents of children. Bachelors are clearly better able to bear our present levels of taxation than married people. At least in a period when the amount of tax relief is necessarily limited, I believe that public opinion—including, perhaps, bachelors themselves, if they look towards the future —would favour a policy which concentrated somewhat upon the problems of the family. The Committee may remember that the Royal Commission gave special consideration to the tax position of married men with children.

At present, relief is given as a flat rate allowance of £100 for each child that qualifies. I have been examining the problem in the knowledge that children, particularly if they continue in full-time education, cost more as they grow older. This is true both for the parent who pays fees and for the many parents who, while not paying fees, make considerable sacrifices to keep a boy or girl at school or university who could otherwise have been contributing to the joint family income.

I propose, therefore, that the child allowance shall remain at £100 for children under 12; but that it shall be increased to £125 as from the year in which the child becomes 12 and that there shall be a further increase to £150 as from the year in which the child becomes 17. A child above the age of 16, as hon. Members may remember, ranks for allowance only if he or she is receiving full-time education or full-time training as an apprentice.

These increases, which are rather different from the proposals of the Royal Commission, will apply irrespective of the amount of the parent's income. The father of the boy or girl who has won a scholarship to a grammar school or university will qualify as well as the father who chooses to educate his child at his own expense. I propose no change in the limit of child's income of £85 that disqualifies a parent from receiving a child allowance. The cost of these proposals is £14½ million this year and £ l7½ million in a full year.

With this proposal for an improved Income Tax child allowance I associate another reform. This is in the field of Surtax and also stems from a recommendation of the Royal Commission. It, too, is based upon the proposition that the responsibilities of marriage can be costly. The Royal Commission recommended that the starting point for Surtax should vary as between single persons, married couples and married couples with children. They suggested reducing the starting point for the single person to £1,500, leaving the married couple to start at £2,000, and increasing the starting point of £2,000 by £160 for each qualifying child.

I do not propose to reduce the Surtax starting point—which is still where it was in 1920—for anybody, and I shall leave the single person at £2,000. I think, however, that there is a good case for some variation for the others. I propose, therefore, that the ordinary Income Tax personal allowances other than the single allowance—that is, the married allowance, the child allowance and the housekeeper and dependent relative allowance —shall run for Surtax as well as for Income Tax.

Thus, the Surtax starting point for a married couple will become £2,100. For couples with children it will, of course, in accordance with the proposal that I have just made on the child allowances, vary with the children's ages. For example, in a family with two children, one aged 10 and the other 14, the starting point for Surtax under the new arrangements will be £2,325. But that will apply as from 1957–58, the year now starting, the Surtax for which is payable on 1st January, 1959. I propose, however, that the change shall apply to the Surtax payable on 1st January, 1958, in respect of 1956–57. Since that year is already past, the child allowance to be taken into account will, of course, be the present flat rate of £100. This change will cost £6 million this year and £9¾ million in a full year.

I turn now to the last of my proposals in the field of personal taxation. Our objective is opportunity and expansion. A tax system which offers the minimum inducement to those with the maximum responsibility is inconsistent with this aim. This criticism has particular force round about the £2,000 level of income. Yet this figure of £2,000 and upward represents the income range of the very men whose activities and decisions do most to determine our rate of economic expansion. In their hands rest, for good or ill, much of the future of the national economy. In penalising them, the nation penalises itself.

In few countries in the world is there less incentive to increased effort after the £2,000 figure has been passed. The fact that the earned income relief stops at £2,025 while Surtax at 2s. in the £ starts at £2,000 means that on every extra £ of earned income at, say, £1,900, 6s. 7d. is paid in tax, while on every extra £ of earned income at £2,025, 10s. 6d. goes in tax. And after that point the graduation continues to be very steep indeed.

Undoubtedly, the right way to tackle this is to apply to incomes above £2,000 the same kind of relief as that applied to incomes below £2,000. The Royal Commission proposed that the present earned income relief at two-ninths of the income should continue from £2,025 to £2,500, and that a smaller relief at one-ninth should be given for the band of income from £2,500 to £3,000.

I agree with the idea underlying the Royal Commission's proposal, but I am disposed to carry it a good deal further. There are salaries well above the £3,000 maximum suggested by the Royal Commission which, without any doubt, are wholly the reward, and the well deserved reward, of some of the work most vital to our country. If our theme is to be opportunity and incentive, I think that it is right that such income should be treated for tax purposes differently from investment incomes of the same amount.

I have accordingly decided to extend the two-ninths earned income allowance from the present limit of £2,000 up to £4,000 and thereafter at one-ninth up to £10,000. The precise figures will, for technical reasons, vary a few pounds on either side of these levels. Even after these changes the effective rate of tax on total earned income for a single man will range from about a quarter at £2,000 to over a half at £10,000.

These proposals will at least ensure that of every extra £9 earned £2 will go into the pocket of the earner free of the ordinary incidence of Income Tax— though not of Surtax—up to £4,000 and £1 after that until £10,000 is reached. These changes will cost £17 million this year and £24½ million in a full year. A reform of this kind has been long overdue. We are determined that in the society which we seek to create there should always be room at the top. There must be rewards there, too.

The tax reliefs which I have proposed amount in total to £98 million in 1957–58 and to about £130 million in a full year. About a quarter of this total relief will take the form of assistance to our important trading operations overseas; about a quarter will take the form of additional incentives to those whose efforts are of particular importance to the expansion of the economy; about another quarter will give some measure of relief from the burden of indirect taxation and will thus help those outside the range of direct taxation. The remainder is designed to give some general easement of the tax burden, including something for the old but concentrating on those who are seeking to educate their children for the opportunities which lie ahead.

Having made these remissions of taxation, I am left with a surplus above the line of £462 million and an overall deficit of £125 million. On these figures, I think it will be agreed that the Budget is making a striking contribution towards the strengthening of our balance of payments and the stability of the economy. Even after the tax remissions which I have proposed, and allowing for the windfall from the interest on the dollar loans, the surplus above the line is nearly a third bigger than the actual surplus last year.

At the same time, the overall deficit is reduced to little more than half that of last year. I am satisfied that such a deficit will be amply covered by small savings and other non-inflationary methods of finance. We have cut spending and reduced taxes. We must carve out even greater opportunities for the years which lie ahead.

1. Entertainments duty (scope and amount of duty)

Motion made,

That the following provision shall be made about entertainments duty in respect of payments (whenever made) for admission to entertainments given after the 4th May, 1957: —

" a population not exceeding two thousand" in subsection (1) there shall be substituted the words "a population not exceeding there thousand".

And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913.—[Mr. P. Thorneycroft.]

The CHAIRMAN put the Question thereupon forthwith, pursuant to Standing Order No. 86 (Ways and Means Motions and Resolutions).

Question agreed to.

The CHAIRMAN then proceeded successively to put forthwith the Question on each further Motion made by a Minister of the Crown, save the last Motion.

2. Entertainments duty (exemptions)

Motion made, and Question,

That any enactment conferring exemption from entertainments duty may be amended or repealed as regards entertainments given after 3rd August, 1957.—[Mr. P. Thorneycroft.]

put and agreed to.

3. New duty on television licences

Motion made, and Question,

That on television receiving licences issued after the beginning of August, 1957, there shall be charged a duty of one pound or, in the case of licences for longer than a year, of multiple licences, and of licences of special types, such larger duty as may be imposed by any Act giving effect to this Resolution.—[Mr. P. Thorneycroft.]

put and agreed to.

4. Hops, etc. and beer (customs)

Motion made, and Question,

That the following duties of customs, now chargeable for a period expiring on the fifteenth day of August, nineteen hundred and fifty-seven, shall be made permanent, namely:

(a) the duties now chargeable by virtue of section one of the Finance Act, 1953, on hops, hop oil and extracts, essences or other similar preparations made from hops; and

(b) the additional duty now chargeable in respect of beer by virtue of that section.— [Mr. P. Thorneycroft.]

put and agreed to.

5. Australian trade agreement

Motion made, and Question,

That with a view to the fulfilment of the agreement made on the twenty-sixth day of February, nineteen hundred and fifty-seven, between Her Majesty's Governments in the United Kingdom and in the Commonwealth of Australia (of which a copy was presented to Parliament on that day), the Ottawa Agreements Act, 1932, and any other enactment relating to customs which amends or relates to that Act, shall have effect as if that agreement were substituted for the agreement set out in Part II of the First Schedule to that Act.

And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913.—[Mr. P. Thorneycroft.]

put and agreed to.

6. Composite goods (calculation of duties and drawbacks)

Motion made, and Question,

That further provision may be made as to the customs duties to be charged, and the customs and excise drawbacks to be allowed, on composite goods containing a dutiable part or ingredient and as to rebates and drawbacks of customs duties so charged.—[Mr. P. Thorneycroft.]

put and agreed to.

7. Purchase tax ( household goods)

Motion made, and Question,

That, subject to any Treasury order under section twenty-one of the Finance Act, 1948. Part I of the Eighth Schedule to that Act shall be amended with effect from the 10th April, 1957, as follows: —

( a) a rate of tax of 15 per cent. shall be substituted for any rate of 30 per cent. In the following places, namely—

( b) at the end of Group 12 there shall be added a new paragraph—

"(m) sewing machines not designed for operation by electricity … 30 per cent."

Except as provided by paragraph ( b), this Resolution shall not authorise the said Schedule to be amended otherwise than by altering in one or more of the places mentioned in paragraph ( a) the reference or references in that place to a rate of 30 per cent., but the reference or references may in any of those places be altered so that tax shall be chargeable at a less rate than 15 per cent., or shall not be chargeable under the Group or part of a Group in question.—[ Mr. P. Thorneycroft.)

put and agreed to.

8. Purchase tax (provisional collection)

Motion made, and Question,

That the Provisional Collection of Taxes Act, 1913, shall apply to purchase tax — [Mr. P. Thorneycroft.]

put and agreed to.

9. Income tax (charge and rates for 1957–58)

Motion made, and Question,

That income tax for the year 1957–58 shall be charged at the standard rate of eight shillings and sixpence 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 as Parliament may hereafter determine.

And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1913.—[Mr. P. Thorneycroft.]

put and agreed to.

10. Income tax (surtax rates for 1956–57)

Motion made, and Question,

That income tax for the year 1956–57 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 as were charged for the year 1955–56.

And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes Act. 1913.—[Mr. P. Thorneycroft.]

put and agreed to.

11. Income tax (personal reliefs)

Motion made and Question,

That—

( a) in subsection (1) (earned income relief) of section two hundred and eleven of the Income Tax Act, 1952, as amended, for the reference to tax at the standard rate on two-ninths of the claimant's earned income or on £450, whichever is the less, there shall be substituted a reference to tax at the standard rate on—

( b) in subsections (2) and (3) (old age relief) of that section, for the references to £600 (which refer to the income limit for the full relief under subsection (2)) there shall be substituted references to £700;

( c) sections two hundred and twelve and two hundred and thirteen of that Act, as amended, shall have effect as if in sub-section (1) of section two hundred and twelve and in subsections (2) and (3) of section two hundred and thirteen the references to £100 were—

( d) an individual, if at any time within the year of assessment either he or his wife living with him is of the age of sixty-five years or upwards.—

but this Resolution shall not require any change to be made in the amounts deducted or repaid under section one hundred and fifty-seven (pay as you earn) of the Income Tax Act. 1952, before the twenty-second day of June, nineteen hundred and fifty-seven.

And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes Act. 1913.—[ Mr. P. Thorneycroft.]

put and agreed to.

12. Income tax (overseas trade corporations)

Motion made, and Question,

That charges to income tax (including charges for past years of assessment) may be imposed by provisions the main purposes of which is to afford special treatment for companies operating overseas and companies with subsidiaries operating overseas.—[Mr. P. Thorneycroft.]

put and agreed to.