Queen's Consent, on behalf of the Crown, signified.

Read the Third time and passed, with Amendments.

Read the Third time and passed.

3.34 p.m.

The primary objective of last year's Budget was to set our nation on a course of faster economic growth. I said then that the aim was that our national output should increase at an annual rate of 5 per cent. over the eighteen-month period to the present half-year. There are still some months to go but the indications are that we shall broadly achieve that objective. Indeed, in the closing months of last year industrial production, consumers' expenditure, and retail sales all showed increases over a year earlier of considerably more than 5 per cent. And the indications are that a rapid pace of expansion is being maintained this year.

At the time of the last Budget I said that no Government could tolerate the level of unemployment which we had at that time. The facts of the past year are these. At the last count on 12th February the number of unemployed was over 200,000 lower than a year earlier. And the number of vacancies was over 100,000 higher—nearly twice as high as a year ago.

The very fact that our national output has been growing rapidly over this past year or so has been one of the principal reasons why, last year, living standards—measured in the conventional terms of real personal disposable income—rose faster than in any year since the end of the war. Whatever the problems ahead—and there are plenty—our nation starts this year with a standard of living which is about 10 per cent. higher in real terms—that is, after allowing for inflation—that it was when we came to office.

There is, I know full well, a sharp contrast between these very real achievements—in increased production, improving employment, and a higher standard of living—and the frustrations which are so often expressed.

And the reason, I think, is two-fold. First, our progress has been made up of a very large increase in money incomes, offset in part by an increase in prices. It is all too easy to look at price increases and not to take into account the fact that the increases in pay have been greater.

The second reason is this. Over a period, the improvement in most people's real income has taken place in steps—when they have got their pay rise. But from then until their next rise they have seen their gain in part whittled away by rising prices—the inevitable result of the large pay increases of others, and sometimes, I may say, of their own. This has obscured the fact that, taking one year with another, pay has gone up much more than prices.

Not only does inflation create injustice as between one individual and another. It also binds us, as a nation, to our real achievement. Instead of satisfaction it breeds resentment. There is only one way of removing the causes of this attitude, and that is by attacking inflation itself.

I turn now to the future. We have achieved our first objective—to lift the economy on to a path of higher growth. My aim in this Budget, looking ahead over the next year or so, is to continue on that path.

But it is well recognised that the faster rate of growth we are now achieving depends partly on taking up slack in the economy. If this faster growth is not to be a transitory affair, and if we are to succeed in our long-term objectives, three conditions must be fulfilled.

First, there must be a higher level of industrial investment. This is required to increase our sustainable growth of productivity, to improve our international competitiveness, and to provide sufficient capacity to re-employ more people so that unemployment can continue to decline.

Second, we must not find ourselves compelled to bring growth to a halt in order to deal with difficulties which ought to be tackled in other ways, whether those difficulties are concerned with inflation or with the consequences of inflation for the balance of payments. Indeed, we have consistently affirmed that sound and sustained growth is a major element in our programme of action to deal with inflation.

Third, we must conquer inflation. The battle against rising prices is crucial not only in its own right because inflation is bad, unfair and socially disruptive; but also because our success or otherwise will have a major impact on confidence at home and abroad. Without confidence at home there will be insufficient investment and reduced prospects for sustained growth and for the achievement and maintenance of a high level of employment. As for confidence abroad, there would be no soft options for an economy which allowed itself to become uncompetitive. Pressures on sterling would be intensified by lack of confidence and would lead in one way or another to a depreciation of the exchange rate which in turn would exacerbate the inflationary spiral.

I will be dealing later and in detail with each of these pre-conditions for growth. But it is right that I should say at the outset that I believe they can be met.

One thing that has made a great impression on me was our experience in the 1960's. In those years the prosperity of our nation was improving more slowly than that of most other advanced countries. This was due, above all, to our failure to match their economic performance. So the standard of living of the British people fell further and further behind those of other countries, and we were getting into a frame of mind where it was almost assumed that we did not have it in us, as a people, to do as well as others. Our self-confidence was sapped, and the very fact that our economic performance had been poor led to social tensions which would otherwise have been avoided.

But I just do not believe that we are innately less capable that are those other countries of achieving a better economic performance. What they can do, we can do.

And so, on the economic front, the strategy of this Budget, like that of its predecessors, will be to keep the economy growing, and to keep it growing over the next year or so at a rate comparable with that we have now achieved. But as I have said on earlier occasions, it is crucially important to look beyond the next year and to lay firm foundations on which we can build a fast rate of economic growth in the future. We have had spurts of fast growth before and they have always either petered out or been brought abrupty to an end because we have not taken the proper measures to ensure that they could be sustained. We are determined not to let this happen again.

I now come to my second main theme—the attack on inflation.

At the time of the Budget a year ago, we had had a considerable measure of success in moderating the rate of increase of both pay and prices. But by the summer that trend was being sharply reversed, and it was against that background that the Government entered into the tripartite talks with the TUC and the CBI.

The breakdown of those talks made it essential for the Government to take statutory action. By October and November last year both average earnings and hourly wage rates were running 15–17 per cent. above a year earlier and, in spite of the restraint exercised by a large part of British industry, including the nationalised industries, the October retail price index was nearly 8 per cent. above a year previously. The standstill introduced on 6th November was essential to provide a breathing space and to reverse the upward thrust of pay and prices.

The Government's policies for the next stage of the attack on inflation are expressed in the Bill which is now before Parliament and in the Consultative Document on the Price and Pay Code which we debated yesterday.

This Budget is based on the determination that these policies shall succeed: and that success is crucial to all the nation's hopes for steadier prices and rising prosperity.

The country has cause to be grateful for the efforts to restrain prices which most of British industry was already making before the standstill, as a result of the CBI initiative. It may seen onerous that there should now be a further period under which companies are asked to do their utmost to absorb cost increases, with the back-up of a profit margin control. But industry stands to gain with the rest of us from sustained economic growth and the investment which it requires and stimulates. There is no bar whatever to increased earnings either from exports or from the bigger turnover on the home market which growth will make possible. And we certainly have no intention of impeding investment. By making it less easy to pass on increased costs and by asking that the benefits of increasing productivity be passed on in prices, we are reinforcing competition, not working against it.

The objectives of the counter-inflation policy—faster growth, steadier prices and more help for the lower paid and the pensioners—are all common ground between the Government, the TUC and the CBI. I therefore still hope very much that the TUC, as well as the CBI, will join in the wide-ranging consultations on the drafting of the Price and Pay Code. If the TUC cannot see its way to do this, the result will be a loss to the community in general and to its members in particular. I repeat that the Government are ready at any time to resume discussions with the TUC.

It is not given to those involved in public affairs always to form a unanimous view as to what should be done, but I do not think it can be said that we have been unreasonable in our attitude. We have given prority to rapid economic growth. We have held down nationalised industry prices. We have made massive reductions in taxation so as to increase employment. We have already increased old-age pensions proportionately more than ever before. We have provided relief on rents, and relief on rates. [HON. MEMBERS: "Oh."] We have given special help to the low paid. All these are major items of policy where we have taken action in the national interest, and where that action has coincided with the requests and recommendations of the TUC.

Under stage 2, with particular emphasis on the need to improve the position of the lower paid, we are permitting pay increases which would be considered large on any normal reckoning. Of course, I fully realise that intervention in the cycle of pay settlements creates anomalies between different groups. But to have allowed inflation and rising prices to continue without check would have been far more unfair. And we have made it clear that for stage 3, starting this autumn, we shall ask the Pay Board to make recommendations for tackling some of these anomalies.

The Pay Board's inquiries during stage 2 will enable it to get an overall measure of these problems. During this stage it will be expected, on the basis of its knowledge of the whole range of cases, to advise on the ways in which these problems should be dealt with within the framework of stage 3. It will be on the basis of that advice that the Government will consult the two sides of industry and Parliament on the revision of the code for stage 3.

Before I return to the immediate issues of economic management, it is right that I should make some general observations about our strategy for taxation and tax reform.

Since we came to office, we have reduced taxation on a scale unprecedented in our history. Taxation as a proportion of gross domestic product has been cut from 35 per cent. to 30 per cent.

In the field of taxation reform it was decided, right at the outset, that it was no longer enough merely to tinker with the system, patching it up here and changing it there. The right course, we decided, was to make a complete and thorough-going review of three main areas—the taxation of income, the taxation of expenditure and the taxation of companies.

On the first, the taxation of income, the old dual system of income tax and surtax is being replaced next month by a new unified tax, simpler, more logical, and easier to understand. That reform is complete.

On the second, the taxation of expenditure, the purchase tax and the selective employment tax are being replaced next month by the value added tax, with a single standard rate. That reform is complete.

On the third, the old corporation tax is being replaced next month by a new style corporation tax allied to a simpler and more generous system of investment incentives than we have ever had in this country before. That reform is complete.

In less than three years, we have tackled not one tax but the whole framework of our tax system. I would like to express my gratitude to those in all parts of the House who have contributed to the detailed legislation but, in particular, to those on this side who, by their support, have made these reforms possible. All these reforms will be in full operation next month. To those who complain of the inevitable problems of transition, my reply is that to avoid those problems is to eschew all fundamental reform. I have no doubt that the changes which come into operation next month, coupled with the unprecedented cuts in taxation, will make a significant contribution to a more dynamic economy. What is now required is to give the new system the opportunity of settling down.

It is right, therefore, that I should add—no doubt to the relief of those who bore the brunt of two of the longest Finance Bills in our history—that so far as the traditional system of taxation is concerned, these reforms are for the time being complete.

But outside and beyond the traditional framework of our tax system are the proposals for a tax credit system which I announced to the House last year. The case for the tax credit system rests not upon narrow arguments relating to administrative advantage, great though they are, but upon a broad case of philosophical considerations. When we took office we felt that the first task was to reform the present tax structure and to reduce taxation, for only in this way could we lighten the dead hand of exces- sive taxation which had rested too long on our community, stifling incentive, curbing enterprise and penalising thrift.

But successive Chancellors—or at any rate those who have reduced income tax, whether by cuts in the rates or by increasing the allowances—have been acutely conscious that cuts in direct taxation cannot help people who do not pay tax; and by definition the people who do not pay direct taxation are the poorer members of the community—the low paid, the pensioners, large families, particularly those with young children, and so on.

The tax credit system—which is a logical extension of our existing tax system—is specifically designed to help these people: and in so doing it will buttress the social security system in a way which channels help to people without individual means-testing and without the problem of take-up. It was in this spirit that the new system was proposed. It was in this spirit, I am sure, that it was welcomed on all sides of the House.

The scheme is now being examined by a Select Committee of the House. This will be one more case, I believe, where the process of reform will benefit greatly from the more open government which the Green Paper approach facilitates, and from the contribution of a Select Committee.

There is, however, one point which I should add. This concerns the payment of child credits. The House should know that the Government will not adopt any arrangement which leaves mothers being paid less than they are at present.

I turn now to external developments.

Last September the Committee of 20 was set up by the IMF to advise and report on all aspects of reform of the international monetary system.

This was particularly gratifying to the United Kingdom, because of the lead which successive Chancellors have consistently given to the reform of the old international monetary system—particularly my right hon. Friend the Member for Barnet (Mr. Maudling) and the right hon. Member for Cardiff, South-East (Mr. Callaghan) as well as myself. This is work, the urgency of which has been increased by the strains on the existing system which have been experienced this year.

We have already debated in this House the course of events leading up to the dollar devaluation of 12th February. As I said during that debate, nothing could have emphasised more starkly than those events did, the paramount need for a more efficient monetary system.

We were able to achieve last month—and with remarkable speed—a set of moves which, I have no doubt, has established an exchange rate for the dollar against other currencies at which the United States economy will be fully competitive in world markets and which would, in due course of time, provide the United States with a strong balance of payments. Yet the exchange markets did not settle down and were again acutely disturbed just before this last weekend. Consultation started almost immediately. The purpose of that consultation is to ensure that trade and production, whether on a worldwide scale or a European scale, are not strangled by the sort of disruption which has been experienced in the foreign exchange markets.

I do not think that any previous Chancellor has found himself attending an international conference of major importance two days before delivering his Budget or has been faced with having to be abroad for further discussions for three more days before the Budget debate has ended. I know the House will appreciate the reason if I reluctantly have to miss some parts of the debate—[An HON. MEMBER: "You will be very lucky."] Perhaps I might interject here that when I explained to some of my colleagues in Europe that attending the meetings would create great difficulty for me because I would have to miss part of the Budget debate, they made much the same observation.

Although these are matters of great importance and urgency, there is no crisis affecting our own currency. Sterling has not been under pressure. What we are having to deal with is the international payments system as a whole.

Our discussions this week will include countries other than those in the Nine, and our objective will be to try to agree on action on a worldwide basis. Last Sunday, in the meeting of the EEC Council, a number of ideas were put forward for dealing with the situation. These included, as is well known, the possibility of a joint float by the European currencies as a means of protecting European countries from extreme speculative pressures and of ensuring that the development of the European economic system is not distorted by movements in relative exchange rates in Europe which are not related to underlying economic realities.

With regard to the proposal for a common float, I said that a number of conditions were essential in the interests of the Community as a whole in order to ensure both that a common float could come into existence and that it could endure. In the current economic situation, these were the only conditions which would guarantee that the collective float could succeed and they were therefore in the interests of all the other countries concerned as well as of the United Kingdom.

Those conditions are: first, the starting pattern of central rates must be acceptable to each member in terms of its immediate economic problems.

Second, each member must have an unimpaired right to change its central rate after consultation with the Council of Ministers.

Third, we must all be prepared to grant support without limits of amount, without conditions, and without obligation to repay or to guarantee. Only the knowledge that support is unlimited and does not impose impossible burdens on the receiving countries can make the system proof against short-term capital flows of the magnitudes now experienced. This is an essential condition for the whole Community; and certainly the United Kingdom could not join in a collective float unless it is met in full.

Fourth, some, at least, of the support should be interest-free.

Fifth, the pattern of exchange rates established in connection with a joint scheme should not lead to an immediate increase in food prices for the United Kingdom and any necessary increase should be spread over a long period.

On this basis the arrangements proposed would have three positive advantages for the United Kingdom, in addition to the advantages for Europe inherent in the scheme itself. The advantages for the United Kingdom would be these: first, they would enable us to maintain an exchange rate at a level which would help the attack on inflation by keeping down import prices.

Second, the rate structure would be supported by the resources of the whole EEC and would be secure against speculation.

And, third, the United Kingdom would be effectively insulated from the perennial risk presented by our widespread sterling liabilities.

Such arrangements would, of course, represent an important step towards Economic and Monetary Union.

But a collective float is only one of a number of solutions which are being considered this week, and it remains to be seen which of the various ideas will emerge as the agreed line of action in the wider group. This is not an esoteric exercise, nor is the work of the Committee of 20. Decisions taken in these conferences vitally affect employment, prices and national prosperity.

The Finance Ministers of the EEC will be considering proposals for the reform of the system at a meeting later this month, and the Committee of 20 will be meeting again in Washington in the following week. I am sure that by the time we meet at the IMF in Nairobi in September we can and should reach agreement on the main framework of a plan for reform on the basis of which we can take practical decisions.

Details of the balance of payments outturn for 1972 are published today. We had a small surplus on current account, with the deficit on visible trade slightly more than offset by the further large surplus from services and income from abroad.

The House will recall that in my Budget Statement a year ago, I said that the balance on visible trade would be less favourable as imports increased with the pick-up in domestic demand. On the other hand there was a general expectation—not only in this country but in organisations such as the OECD—that world trade would become more buoyant. In the event world trade was sluggish. This was especially so in primary producing countries, on whose markets we particularly depend.

I turn now to the outlook for the coming year, and first to the balance of payments. I should at the outset make it clear that last month's currency re-alignments should not have a significant effect on our current balance. As last year, I expect to see a substantial overall surplus on services like shipping, banking and insurance, and from income from overseas investment. This surplus is at present running at an annual rate of about £700 million. It is expected to continue at broadly this rate, and this is after allowing for the initial payments to the EEC budget. This surplus will offset much of the visible trade deficit which is likely to persist through the year.

In this connection, it is particularly important to bear in mind that the exceptionally high current surpluses in 1970 and 1971 reflected low domestic demand and high unemployment. It was wholly predictable that high growth and falling unemployment should lead to a growing volume of imports. But as industry becomes geared up to higher output and home supplies increase, the rate of increase of import demand should ease, especially because the pattern of growth of demand is likely to be more even than last year, with less emphasis on cars and consumer durables, and with demand on the heavy engineering industries, where there is most slack, beginning to pick up.

Furthermore, there are now strong signs that the recovery of world trade is under way. The beginning of this expansion was reflected in our export performance in the second half of last year. Although overall volume growth was modest we increased very substantially the volume of our exports to the faster growing and highly competitive markets of Western Europe. Between the two halves of last year the volume of our exports to EEC countries rose by over 5 per cent. This year the recovery in world trade should be more widely spread, and recent increases in world market prices of food and basic materials will eventually be reflected in an increased demand for imports by the producing countries.

British industry is now exceptionally well placed to seize the opportunities provided by this situation. The productive capacity is available, and the movement of sterling since last June has improved the competitiveness of our exports.

It has also improved the competitiveness of United Kingdom goods on our home market compared with imports from overseas. As these changes work through they will make a direct contribution to a more fully employed economy and to an improvement of the trade balance by curbing the volume of imports and increasing the volume of exports.

It is obviously desirable to ensure that the capital outflows which are necessary—for example to provide for aid and investment in less-developed countries and for export credits—are offset to an adequate degree by inward capital flows. The House will know that, after the excessive inflow of dollars in 1971, we withdrew exchange cover facilities for foreign currency borrowing by certain public sector bodies. Similar facilities will now be restored and the Government will accordingly consider applications in appropriate cases.

I should also remind the House that despite the outflow in those few days last June, before it was decided to float the £, because we did not hesitate to act, our reserves are still more than twice as large as they were in June 1970 and, of course, since then we have repaid the whole of the short and medium-term official debt, amounting to nearly £1,500 million.

I come now to the prospects for the domestic economy. As I said earlier—and I think this is generally accepted—the economy is now on a growth path of around 5 per cent. a year. Looking ahead over the next year or so I believe that this rate of around 5 per cent. will be maintained, with most elements of demand sharing in the expansion.

The growth of consumers' expenditure, though below the exceptionally rapid rate of the past year, should still be high by past standards. In saying this, I have taken account of a rising level of employment and of the provisions for pensions and other benefits which will come into effect in the autumn.

For reasons I gave earlier the volume of exports should rise much faster than last year and the volume of imports more slowly.

It is, I think, generally agreed that there is likely at some stage to be a marked increase in investment in stocks, which was very low last year, although the time path of stockbuilding is notoriously hard to predict. This, too, will contribute to the growth of total demand and activity.

The forecast path of public expenditure on goods and services is for a relatively rapid growth up till about the middle of this year, after which there is a marked slowing down.

By contrast industrial investment is expected to grow at an accelerating rate from now on.

One of our major objectives must be to ensure that this rise in investment comes about and is maintained, because on this depends our prospect of achieving sustained growth at a high rate and with a high level of employment.

As a result of the changes we have already made, we now have in the United Kingdom a more generous system of national incentives for industrial investment than in any member country of the enlarged Community or in the United States. Furthermore, I reaffirm the intention that the new system of investment incentives should endure at least until the end of the EEC transitional period, that is 1st January 1978.

With these exceptional incentives already in operation, I have no doubt that the most effective way to encourage a higher level of investment is to pursue a policy which industry and commerce know will result in a sustained rate of growth of demand. This means aiming at a growth of demand over the next year or 18 months which is sufficiently high to maintain a steady movement towards the full use of our productive capacity, but not so extravagantly high that when all the slack has been taken up we have to change gear abruptly and so damage confidence in the prospect of sustained expansion.

In the light of all these considerations I have come to the conclusion that the Budget should on this occasion be broadly neutral. I believe that on this basis the economy will continue to grow at an annual rate of around 5 per cent. over the 18 months from the second half of 1972 to the first half of 1974.

I must stress, as my predecessors have, that this is a "central forecast" and subject to the many uncertainties to which, as every former Chancellor knows, such predictions are necessarily subject. For this reason, I shall if necessary not hesitate to act at any time of the year, in whatever direction the economy may require, on expenditure, on taxation or on monetary policy.

There has recently been much discussion about the trend of public expenditure. There are two aspects to be considered—the medium term and the short term.

First, the medium term. In the recent White Paper, we estimated that the average rate of growth in demand terms of the programmes as a whole up to 1976–77 would be 3 per cent. to 3½ per cent. a year. On any reasonable assumption about the future growth of the economy this rate of increase should be acceptable.

Next, the short term. In order to help to bring spare resources into use and to bring unemployment down, public expenditure has been deliberately increased during the period 1971–72 to 1973–74. Part of this increase has taken the form of specific additions to programmes concentrated on the regions, and those additions run down rapidly after the coming financial year 1973–74.

But much of the other additions to expenditure which will continue beyond 1973–74 is also helping to deal with the particular problem of regional unemployment. And a significant part of the continuing increase in expenditure, as compared with the previous year's White Paper, has been due to substantially higher pensions, which I have yet to hear criticised in any quarter. Looking ahead to the total picture after this coming financial year, 1973–74, the White Paper shows the planned rate of growth of public expenditure coming down to only 1·5 per cent. to 2 per cent. a year.

In my judgment, the situation does not demand precipitate cuts in public expenditure. Nevertheless, as we move closer to full employment, it becomes increasingly important for us to get the right balance between the different claims on the national output. The House should know three things.

First, the main Supply estimates for the coming financial year, 1973–74, are now more than £130 million below the corresponding total in the White Paper. In addition to this—also in respect of 1973–74—there is likely to be a substantial reduction on the White Paper provision for the capital expenditure of the nationalised industries, bringing the total reduction in the two items to over £200 million.

Secondly, the Select Committee, in a report last July, said that

"the use of public expenditure to correct short-term deficiency of demand is an essential element of policy".

I accept that without reservation, but it is equally the case that, if circumstances warrant it, public expenditure should be cut back. Effective action requires proper preparation, with continual need for contingency work. And so, when last year the Government completed their review of the programmes, this contingency work was at that time put in hand. But lest anyone should jump to conclusions, I should say that this is not a hint of things to come. It is only common prudence.

Thirdly, my colleagues and I are in any event determined that, having now achieved the faster rate of growth of the economy, as we set out to do, there will be the strictest control of expenditure, both on existing policies and for any new proposals.

I turn now to recent monetary developments and to monetary policy. A year ago I warned the House that the high growth of output I intended to sustain would entail a growth of money supply which was also high by the standards of previous years.

As I predicted, the growth of money supply has indeed been fast by either of the more commonly used conventional meausures, that is, MI, which consists of currency in the hands of the public and current accounts held by private sector residents in United Kingdom banks, or M3, which adds in the corresponding interest-bearing deposit accounts.

But it is sometimes overlooked that the movements of these figures can be influenced by considerations which have no general economic significance. For instance, the structural changes in the banking system introduced by the far-reaching reforms of 1971 have increased the rôle of the banks as financial intermediaries at the expense of other institutions whose activities are not included in either the MI or M3 measurements.

The rapid growth of certificates of deposit is a major instance of this. After the severe pressures on company liquidity in 1969–70 it was highly desirable that companies should add to their liquid assets. They have done so and they have also found it convenient to hold much of their short-term assets in certificates of deposit with the banks, and this has caused M3 to rise.

Moreover, in the conditions of 1972, individuals as well as companies increased their savings and added substantially to their money balances. This is another way of saying that the response of demand to the many measures taken by the Government to expand the economy was slow until the second half of the year, and that money balances were built up rather more than I had expected.

Towards the end of 1972, however, when there were clearer signs that real demand was expanding, I thought it right to take action to prevent the liquidity of the banking system from leading to an over-rapid expansion of credit and hence of demand in the months ahead.

Short-term interest rates had been allowed to rise sharply during the currency outflow in June, and the banks were subsequently asked to ensure that they had sufficient resources to meet the needs of industry and, as necessary, to make credit less readily available to property companies and for financial transactions.

In the autumn there came a change in money market arrangements with the introduction of the more flexible "minimum lending rate", This improved the authorities' techniques for influencing short-term market rates, which are in turn under the new system one of the principal mean of influencing the growth of bank credit.

Towards the end of the year, there were two calls for special deposits, totalling 3 per cent. in all, to get the reserve base of the banks and financial houses on a tight rein by sterilising £700 million. This curtailed the ability of the banking system to expand credit.

As a result of all these developments money interest rates have risen substantially over the past year. Interest rates are at the heart of monetary control, but in conditions of changing prices it is misleading to look at them solely in nominal terms. The rate of inflation determines the real amount of any particular rate of interest, and therefore the consequences of the rate of interest for the decisions taken by individuals and companies. And the important point is this. Because expectations about the future rate of inflation are a major factor in determining the level of interest rates, the success of counter-inflation policies is crucial to improvements in this sphere as in others.

In the coming year, as I shall explain shortly, the public sector borrowing requirement will be high. With real demand expanding, the objective must be to prevent this large borrowing requirement from leading to too rapid a growth of money supply. I therefore intend to take action at once to ensure that, to the maximum extent, the Government's borrowing requirement is met by means which do not increase the money supply.

Before I deal with the measures I have in mind, however, I should comment on the development of the Governmnt borrowing requirement in the past year and its probable size in the year ahead, and the implications of this for economic and monetary policy.

At the time of the Budget last year I expected the public sector borrowing requirement for 1972–73 to be £3,358 million. In the event it is probable that the figure will prove to be some £500 million less than the Budget estimate.

There is one important aspect of this matter which is often misunderstood. Over the past year, notwithstanding the size of the borrowing requirement, very little of it has in fact been financed through the domestic banking system. About £1,200 million net of public sector debt has been sold to the non-bank public, and of the remainder of the borrowing requirement about £1,600 million was financed by a running-down of foreign exchange reserves, most of which occurred in June last year.

By contrast, the private sector made very large demands on the banking system, and the increase in money supply, broadly defined, was almost equal to the banks' lending to private-sector borrowers. I think it right to put the public sector borrowing requirement into its proper perspective and to scotch the idea that it, and it alone, was responsible for the large growth in money supply last year. That was not the case. Indeed in 1972 the public sector made net repayments of debt to the banks.

Coming now to the year ahead, the borrowing requirement will be increased by some £800 million as a result of the once-for-all change in the timing of tax receipts and payments which arise from the new system of indirect taxation. But, as I shall explain, the effect of this £800 million on the claims on resources should be very small. However, including this £800 million and on the basis of my Budget proposals, I expect the public-sector borrowing requirement to be £4,423 million.

But it is important to recognise that this in no way resembles a current deficit. The increase in prospective borrowing does not come about because the public sector is raising insufficient revenue to cover its current expenditure. Indeed the reverse is the case. The public sector is expected to have a surplus of revenue over current expenditure in 1973–74 of £3,223 million, which is some £260 million greater than in 1972–73.

I should add that the substantial increase in the borrowing requirement arises only partly from the public sector's own current and capital expenditure. Two other factors are equally important.

The first is the Governmnt's rôle as a source of finance for third parties—export credits, finance for industry, and so on. The second factor is the one I have referred to—the very substantial change next year, not in overall tax liabilities, but in the timing of tax collec- tion. This is the biggest single factor accounting for the rise in the borrowing requirement and it is, of course, unique to this particular year. As a result of the new arrangement for collecting VAT there will be a temporary interruption of the flow of revenue from indirect taxes, which will mean that the borrowing requirement in 1973–74 will be some £800 million more than it would have been if SET and purchase tax had continued. Of this, £112 million is due to the ending of the SET "forced loan" by industry.

This is a once-for-all change and does not alter the underlying tax liabilities as distinct from the timing of revenue receipts. Because of this, its effect on the claims on resources should be very small.

Nevertheless, the large borrowing requirement in 1973–74 poses a considerable financing task for the authorities. It would be quite unacceptable to rely to any substantial extent on borrowing from the banking sector.

I am therefore determined that a sustained effort shall be made in the coming year to sell Government securities to the non-bank domestic public. To do this, it will be essential that the terms on which Government securities are made available remain fully competitive. I therefore have a number of immediate proposals which I do not doubt will increase the attraction of gilt-edged stock, national savings and other Government securities for investors. There are in particular three sectors of the public which will be in funds this year and to which Government obligations must be available on the right terms.

First, there are the industrial and commercial companies, whose liquidity next year will be considerable, partly because of the exceptional delay in the collection of taxes and partly because company expenditure on new capital equipment may not catch up with company income until later in the year. The need to do something to appeal to companies has become particularly clear in recent months as company liquidity has steadily been channelled into bank deposits, so contributing to the growth in the money supply.

To some extent the fiscal system has itself contributed to this development because under existing tax law the interest element on the sale of certificates of deposit held by non-financial institutions escapes liability to tax. I propose with immediate effect to remove this anomaly and give the public sector a chance to compete on equal terms with the banks for company funds. Gains on sales of these certificates will be made liable to corporation tax, or income tax in the case of an individual holder, and the new charge will apply to gains on certificates acquired after today.

But I intend to go further. A new facility will be made available to all incorporated businesses. With effect from 1st April companies will be able to open accounts, which will be operated by Inland Revenue Collection Offices, into which they can deposit surplus funds. If these funds are subsequently applied to the payment of a company's mainstream corporation tax liability, the interest credited on them will be the average Treasury Bill rate for the period of the deposit plus a bonus of 2½ per cent, a year. If, on the other hand, the funds are withdrawn, the bonus will not be paid and the interest will be simply that payable on Treasury Bills. I believe that corporate treasurers will find these tax deposit accounts a useful medium for employing liquid funds, preferably in anticipation of a tax liability but with no substantial penalty if they are needed for other purposes.

Secondly, there are the big financial intermediaries through which much personal saving is channelled. I refer to the life insurance companies, and the pension and provident funds. These bodies naturally look to the gilt-edged market as an important outlet for their funds. Two new stocks will be issued.

The first will be a convertible stock on terms which I believe will have considerable appeal for institutional investors. The issue will be of £1,000 million with a coupon of 9 per cent. and an issue price of 99½. The initial stock will mature in 1980; but at that point, lenders will have the option of converting the initial stock into a new 9 per cent. stock maturing in the year 2000, and of accepting £110 of that new stock for every £100 of the initial stock. The yield to maturity over the full 27 years will be about 9·6 per cent.; but investors will, of course, have the option of repayment at par in 1980 if that is what they prefer.

Second, there will also be a further new issue to help meet the steady demand from investors for stocks of a low coupon. There is some evidence that, for this type of stock, the balance between supply and demand is now such that large purchases have a disproportionate effect on price, with an unsettling effect on the market. The position is being aggravated by the fact that two further 3 per cent. stocks mature on 1st April. There will therefore be a new issue of £400 million, maturing in September 1979, with a coupon of 3 per cent. and an issue price of 75.

Next, there is the personal sector. The encouragement of personal saving in all its forms is a major objective of Government policy, and we have recognised this in the changes which we have already made in the system of personal taxation. A high level of saving is important for a number of reasons. In the first place, it provides the funds out of which the nation's investment needs can be financed, and in this way it contributes to the achievement of steady and sustained growth.

Secondly, saving brings security and independence for the individual. Thirdly, as successive Chancellors have pointed out, savings and taxation are in a very real sense alternatives. The more people save, the less Chancellors have to tax them. To be more specific, the most recent figures for total personal savings show that in the first three-quarters of last year, they were nearly £600 million higher than they were in the corresponding period of the year before. This meant that, given our objectives for the growth of the economy, the need for taxation was at least £600 million less than it would otherwise have been.

Within the total of personal savings, National Savings are of particular significance in present circumstances. As a source of Government borrowing, they are an important factor in the fight against inflation.

Once again, over this past year, National Savings have been highly successful. Although in recent months the flow of National Savings has no doubt been affected by the general rise in interest rates which has added to the competition for funds, at the end of January the amount held by the public in all forms of National Savings was over £10,000 million, some £800 million more than a year earlier.

At this point I want to pay tribute to the dedication of the members of the voluntary savings movement under the leadership, in England and Wales of Sir Robert Bellinger, and, until he retired recently after seven years in office, of Lord Birsay, who was Chairman of the National Savings Committee for Scotland. This tribute is no mere formality, for those men, and the Savings Committees under them, are a remarkable example of voluntary service.

As the House knows, I have already taken some action to ensure that good progress is maintained. In particular, the rates of interest in the ordinary and investment departments of the Savings Banks were recently increased.

I expect to receive very shortly the Report of the Committee to Review National Savings which I set up two years ago under the chairmanship of Sir Harry Page. I do not want to propose too many extensive changes in National Savings when that report is so near to completion. On the other hand it is essential that the range of National Savings facilities should remain fully competitive, and I am therefore making the following changes.

First, the maximum permitted holding of the decimal issue of National Savings Certificates will, from tomorrow, be increased from £1,000 to £1,500. This will provide the opportunity for additional investment to those people already holding the present maximum.

Second, there will be a new issue of British Savings Bonds with improved terms. The new bond will be sold in multiples of £5, will have a life of five years and a maximum holding of £10,000. In these respects there is little change from its predecessors. The rate of interest, however, will be increased from 7 per cent. to 8½ per cent. with a tax-free bonus on maturity of 3 per cent. The new bond will be on sale by about the end of May.

Third, Premium Bonds, by adding ⅛th per cent. to the rate of interest, it will be possible to double the weekly prize money. In addition to the existing prizes, therefore, there will, from July, be a further 25 prizes of £1,000 each, every week. Bonds bought this month will be in time to qualify for the July draw. With all the other prizes, the total prize money going to Premium Bond holders will then be £50 million a year.

Fourth, I have decided that a depositor with an account in the ordinary departments of the National Savings Bank or the Trustee Savings Banks should be able to hold up to £1,000 without incurring any income tax liability on the interest earned. The exemption limit will accordingly be raised from £21 to £40. This increase in the exemption limit will come into operation for the year of assessment 1974–75, but will effectively cover interest received in 1973–74 in all those cases where, as is usual for accounts continuing over a period of years, the liability for any year of assessment is based on the amount received in the preceding year.

Taking account of all these measures—the new tax deposit accounts, the new long-term stock, the new low-coupon issue and the new arrangements for National Savings—I expect during the coming year a considerable increase in the net sales of Government obligations of one sort or another to the non-bank public.

National Savings are, however, only part of the picture. We also need, if we are to achieve sustained growth, to encourage more people to save and invest in British industry.

Last year we introduced legislation to regulate employees' share option and share incentive schemes. But most existing schemes have been prepared on the basis that participation is offered only to senior staff. In any event, the terms of many schemes would make them unattractive to other employees. What is wanted is a wider share-ownership scheme which will encourage companies to make it possible and practicable for each and every one of its employees who wants to, to acquire a real stake in the company for which he works. The necessary provisions for a new "Share Savings Scheme" will, therefore, be included in this year's Finance Bill.

The new arrangements will enable any any company with an approved scheme to offer, to all its regular full-time workers not already covered, the chance to buy shares on specially favourable terms. Indeed these arrangements will make it possible for schemes to be operated so that an employee can save up through Save As You Earn in order to buy shares for as little as 70 per cent. of the normal price ruling when he joins a scheme, but still retain the option, at a later date, either to take up his shares at a profit, or alternatively—if he changes his mind—to keep his savings in cash.

These schemes will work in this way. First, the shares will be bought by the employee from Trustees on the special terms available, but no substantial payment will be required at the outset. The employee will provide the purchase money for his shares by means of regular Save As You Earn payments.

Second, the employee's SAYE contributions under such a scheme will be limited to £20 a month, which will enable him to acquire shares costing up to £1,680. But if the company prospers, the value of the shares is likely to be greater when the SAYE contract matures.

Third, the increase in the value of the shares will not attract any liability to tax until they are disposed of, when the usual capital gains tax rules will apply. The SAYE rules will be revised to permit anyone who already makes the maximum SAYE contributions to join a scheme of this kind.

Fourth, there will be protection against a fall in the value of the shares during the saving period because there will be the right to opt out of the share purchase when the SAYE contract matures and instead to keep the cash proceeds.

The result is a scheme which combines the attractions and incentives of employee share schemes with the security and bonuses of SAYE. It is a further step towards wider share-ownership. It will enable all those who participate to share in the prosperity of their company—to take up their shares at a profit—but always with the safeguard that, if they change their mind and decide not to take them up, there is absolute protection against losing their savings.

I turn now to taxation, and first to estate duty. Last year I made major changes which provided substantial relief from estate duty for bequests to widows and charities. They were widely welcomed.

The House will also recall that at the time of the last Budget we published a Green Paper on a possible inheritance tax, and comments were invited. I am grateful to the numerous bodies and associations, as well as individuals, who have made their views known. The change to an inheritance tax obviously have very important and far-reaching implications concerning the disposition and devolution of property, and it is therefore right that the Government should take time to consider these important questions.

There is, however, one reform, not too costly, which will be made this year. This concerns a rule which has been a constant source of complaint.

Ever since the introduction of estate duty nearly 80 years ago, it has been the general rule that assets must be valued as at the date of death. This rule has been considered on a number of occasions, but the conclusion hitherto has always been that it could not be changed. This has been so despite the fact that it can cause real hardship if executors are compelled to sell quoted shares or securities some time after the date of death when the Stock Exchange quotation has fallen. The result is that estate duty is paid on a valuation which is higher than the actual sale value of the shares. In certain circumstances this can actually mean that the duty exceeds the realised value of the shares. This is clearly inequitable.

New rules will therefore be introduced. These will apply to shares and securities quoted on a recognised Stock Exchange and to holdings in authorised unit trusts. Where such investments have been charged to estate duty, executors, or other persons accounting for duty, who realise them within 12 months of the death, will, subject to certain safeguards, be able to claim that the total of the sale prices should be substituted for the total of the date of death values of the investments realised. The cost of the relief will depend on the movement of Stock Exchange prices, but it is likely to be about £2 million in 1973–74. The new rules will apply in relation to deaths occurring after today.

I should also mention one other change in estate duty which, although comparatively minor, is important to protect our national heritage. The Finance Act 1930 allows a wide range of objects of historic or artistic value to be exempted from estate duty. In addition, under the Finance Act 1956, the Government can accept an individual outstanding work of art in payment of estate duty. It was thought in 1969 that historic documents were covered by the 1956 Act as well as the 1930 Act. Subsequent legal advice has shown that this is not in fact the case. To put the matter right, the two Acts will be aligned so as to enable the same categories of objects to be accepted in payment of estate duty as can already be exempted from duty.

The necessary steps will be taken to apply these two estate duty changes to Northern Ireland.

I now turn to corporation tax. The new system of corporation tax for which we legislated in last year's Finance Bill comes into effect next month—in April. As from then, the old system will no longer be operative. As the House knows, however, corporation tax is paid in arrear. It follows therefore that in this Budget it is necessary to fix the rate for the financial year 1972, the last under the old system. There will be no change in the present rate and it will therefore remain at 40 per cent. for the financial year 1972. Next year the rate will re-sect the change in the system, but it is too early yet to reach a decision as to what the appropriate rate will then be.

As far as the structure of the corporation tax is concerned, the Finance Bill will provide two significant changes affecting groups of companies. These are the outcome of consultations between the Inland Revenue and representatives of industry.

I was urged last year by a number of important groups of companies, and in particular those with large overseas interests, to make more flexible the provisions under which companies may surrender advance corporation tax to their subsidiaries. The problem was that I could not contemplate any relaxation in the treatment of groups unless I could also take action to counter certain artificial manipulations of the group relief provisions involving in effect the sale of capital and other allowances at a discount. This abuse was spreading rapidly and there was reason to fear a possible loss of tax of the order of £100 million a year.

We have now found a solution to deal with this problem. This is another instance of the value of the kind of consultation, at professional level, which we have tried constantly to foster in the programme of taxation reform. The changes will be described in detail by my hon. Friend the Chief Secretary later in the debate.

Last year much consideration was given and rightly so, to the position of unquoted companies under the new tax system. I have looked again at the possibility of devising a transitional scheme of relief for such companies. But the hard fact is that any scheme of this kind would inevitably be costly: to give a significant degree of relief across the board could well entail a cost of £75 million in the initial year. The House will understand why I cannot contemplate a cost of this order in present circumstances.

I come now to two further important changes concerning business taxation.

Under the law as it stands at present the United Kingdom sector of the Continental Shelf is outside this country for the purposes of taxation. The result is that profits from exploration and exploitation of the resources of the Shelf are normally liable to United Kingdom tax only if they are earned by an enterprise which is resident in the United Kingdom. This follows because a resident enterprise is liable to tax on all its income from any source throughout the world. But under the present law profits which a non-resident enterprise makes from such operations on the Continental Shelf are not liable to tax here unless made through a branch in this country.

This situation is no longer justifiable. All profits from exploration and exploitation of the United Kingdom sector of the Continental Shelf will therefore be brought within the charge to United Kingdom tax. At the same time employments on the Shelf which in many cases have been outside the scope of United Kingdom income tax, will become chargeable to tax under the normal rules.

The Public Accounts Committee last week drew attention to the probability that the yield of tax to the British Exchequer from the North Sea profits may in the case of many of the companies be seriously impaired by the setoff of artificial losses made by those companies from their trade in oil from other parts of the world, and it recommended that the Government should take action substantially to improve the effective tax yield from operations on the Continental Shelf.

I am sure that the Committee was right, and I accept this recommendation. The House will wish to know how these artificial losses arise. The companies producing oil in the Middle East and elsewhere sell the crude oil at what are called "posted prices". These prices are largely dictated by the governments where the oil is produced. But these "posted prices" are considerably higher than normal commercial prices and the broad effect of these arrangements, therefore, is to produce an artificially inflated profit in the producing country which the government of that country can tax, and a corresponding artificial loss in this country which under the existing law is available for relief against other profits.

Up till now this has been a theoretical rather than a practical problem as there have been little or no other profits against which the losses could be set. But the situation will be quite different with the profits from North Sea oil. If we are to safeguard our position we must take action. The magnitude of this problem can be judged from the fact that the losses which have already accumulated amount to £1,500 million. This means that, unless we make a change, the first £1,500 million of profits from North Sea oil would effectively be exempted from corporation tax. And this in its turn might well mean that, as the PAC observed, we should get little tax revenue from North Sea oil production even by 1980.

To implement the recommendation of the PAC it is therefore necessary to deal both with the new losses and with those which have already accumulated. The PAC Report makes special mention of two techniques for this purpose. First, for dealing with current losses which arise from the use of artificial prices it would be possible to prescribe an alternative administered price for United Kingdom tax purposes. Second, the accumulated losses could be segregated so that they were set only against future profits from the existing business and not against profits from the Continental Shelf.

I agree with this approach and propose to follow it. In the normal way I would have legislated in this year's Finance Bill. But the issues involved are complex and it is therefore in the general interest to have full consultations with the industry first to ensure that the legislation takes full account of the practical problems involved.

Profits from North Sea oil will probably not arise until 1975 so that deferment of the legislation should not create difficulties. But in any event I wish to make it clear that the Exchequer must not suffer as a result of any delay caused by the need to consult. The legislation will therefore provide that the new arrangement to prevent current losses will apply to the current trading year of the companies; the arrangements for accumulated losses will apply to any losses which had arisen for tax purposes up to the end of the companies' last accounting period.

The PAC also pointed out that under the present arrangements the Exchequer's share of the "take" from oil operations on the Continental Shelf is substantially less than is obtained in other countries. As I have already said, profits from North Sea oil will probably not arise until 1975, but I can assure the House that the Government already had under consideration the other important questions affecting licensing terms and the Government's "take" from operations on the United Kingdom Continental Shelf to which the PAC has drawn attention.

Turning now to personal taxation, there is one particular matter on which I should briefly report to the House. This past year has seen the beginning of the end of post-war credits. Thanks to the special arrangements made by the Inland Revenue, this has been a remarkably trouble-free operation, despite the fact that the credits relate to a period beginning more than 30 years ago. Since last April, about £130 million, including interest, has been paid to 3¼ million people, mostly to those who produced certificates but, since 1st January, also to those who—like myself—had mislaid them.

Next, one matter consequential on unification. The Finance Bill will provide that the investment income surcharge shall apply to all income of trusts that is or may be accumulated. A beneficiary who receives income from such a trust and is not himself liable to the surcharge will be able to reclaim it in the same way as he can reclaim basic rate tax.

The yield from this change is estimated to be £5 million in a full year.

I come now to a change concerning the dependent relative allowance. It has long been the practice that the full allowance is given for maintaining a dependent relative whose only income is the basic National Insurance retirement pension or other income of an equal amount. In consequence there have in the past been frequent changes in the dependant's income limit as pensions have been increased. Now that there is a review of pensions every year the changes would be even more frequent. The traditional practice will therefore be formalised so that instead of fixing the dependant's income limit in figures it will be stated as a general principle that the full allowance will be due if the dependant's income is no more than the amount of the basic pension at any particular time. The purpose, of course, is to ensure that a person contributing to the support of a relative does not have his or her tax allowance reduced as a result of an increase in the pension.

Next, the age exemption. The purpose of this exemption is to recognise the special position of the elderly. The limits will be raised so that no married couple, where either spouse is aged 65 or over, will pay any tax on an income of £1,000 or less. For any single person, aged 65 or over, the new limit will be £700. The cost of this will be £7 million in 1973–74, and £12 million in a full year.

The new unified system of personal taxation will come into effect on 6th April, but there is one matter left over from the old system, and that is surtax for 1972–73, the last year for which it will be imposed. There will be no change in the starting point or rates. As far as the new unified system is concerned, all the rates were provisionally fixed last year. Those rates will stand.

I have no hesitation in saying that I believe that most people will consider top rates of 75 per cent. for earned income, and 90 per cent. for investment income, to be quite high enough. These top rates are still significantly higher than in almost all other developed countries.

I see that the Federal Republic of Germany has recently imposed a 10 per cent. temporary surcharge on higher incomes. Even with that, the top rate in Germany will still be only 60 per cent.

It is, at this stage, relevant to remind the House that, taking all the changes in taxation which have been made since we came to office, taxation has been reduced in the current year by over £3,000 million.

Of this nearly a quarter represents reductions in taxation on spending—in purchase tax and SET.

The balance represents reductions in direct taxation. Some of this has gone to industry—with the object of encouraging investment and creating jobs. But most has gone to individuals. The greater part of this represents the big increases in the income tax allowances, which cost over £1,000 million. First, the increased allowances for children and then, last year, the biggest increases ever made in the married and single allowances—giving everyone remaining liable to tax a flat rate tax reduction of £1 a week.

Two facts are beyond dispute. First, taking the whole of the changes in personal direct taxation, 80 per cent. of the total has gone to people with incomes of less than one-and-one-half times the average adult manual wage. Second, the tax threshold—the point at which people start paying tax—has been raised, not just in money terms, but in real terms. For example, since we took office, the threshold for a married man with two young children has been raised by 8½ per cent. in real terms. It is perhaps not without significance that, taking the period 1964–70, the tax threshold for the same family was lowered, in real terms, by no less than 12 per cent.

In the White Paper on the second stage of the counter-inflation policy (Cmnd. 5205) it was stated that the Government intended, before the next stage of the policy comes into operation, to bring forward proposals concerning building land.

Accordingly, my right hon. Friend the Secretary of State for the Environment will be making a full announcement before the end of this month. But there is one important legislative change, the details of which will be in that announcement, which I should outline now.

It is generally accepted that the recent increase in the price of land has been due to the failure of supply to catch up with demand. It is also self-evident that there is no point in taking any step which would either lead people to withhold from the market land which would otherwise have been made available or which would lead to an even steeper increase in prices, or both. I have no doubt that—however superficially attractive to deal with an emotive situation—an increase in the capital gains tax on land transactions would do just that.

It would put up the price of land, just as the now defunct betterment levy put up the price of land. The hard fact is that additional taxation would simply aggravate the situation. I should mention, incidentally—it is sometimes overlooked—that all gains from speculative land transactions by individuals are already taxed at the full income tax rates ranging up to 75 per cent. from next month, or in the case of companies are subject to corporation tax.

The only effective way, in both the short and the longer term, of tackling the price of housing land is to make more land available for building. A number of steps have already been taken, but it is necessary also to take action to prevent the hoarding of building land, because this contributes directly to increased prices,

After consultations have taken place with the local planning authorities, legislation will therefore be introduced to penalise, by a special land hoarding charge, any unjustifiable delay in developing land which is the subject of planning permission for housing.

The charge will be levied for failure to complete the permitted development within a specified period appropriate to the land in question. That period will be extended only in special circumstances.

The charge will be levied on the full market value of the property as on the day immediately after planning permission was granted or, in the case of land with planning permission granted before my right hon. Friend makes his announcement, on the value on that day.

The charge will begin to accrue day by day from the end of the permitted completion period by reference to a fixed percentage of the full market value.

The charge will be secured on the land itself and will be collected by the Inland Revenue.

There is one further matter concerning land and housing. The Government are to take action to help those domestic ratepayers who face big increases in rates due to revaluation. Revaluation itself is both fair and necessary, but because the 1968 revaluation was shelved, the relative changes in the rateable values of different properties are much bigger this year than a quinquennial revaluation would normally have produced.

After discussion with the local authority representatives, the Government therefore propose to phase the effects for those hardest hit by meeting half the cost above 10 per cent. of any increases in domestic rate bills in 1973–74 which are attributable solely to the effects of revaluation We are assured that the local authorities can readily implement this. The cost to the Exchequer is estimated to be at least £10 million.

The Government have already agreed to provide Rate Support Grant in England and Wales at a level higher than ever before, and have done so particularly to ease the position of the domestic ratepayer. The additional help I have just announced will help those hardest hit by revaluation. There will be a proportionate addition to Rate Support Grant in Scotland.

My right hon. Friend the Secretary of State for the Environment will be amplifying this later today.

Next month purchase tax and SET will be abolished and be replaced by VAT. In last year's Finance Act, the standard rate of VAT was provisionally fixed at 10 per cent. The House will recall that in our debates last year it was suggested by hon. Gentlemen opposite that I had it in mind to use the powers which I then took to fix the initial standard rate of VAT at 12½ per cent. Fortunately that is neither necessary nor appropriate. There will be no change in the provisional figure, and the standard rate of VAT will therefore be 10 per cent. The rate of car tax was also fixed at 10 per cent. in last year's Act, and it will remain at that figure.

I should add that, if we had decided to collect the same amount of revenue as at the higher rates of purchase tax and SET, which existed when we took office, we should have had to fix the rate of VAT at 15 per cent. Instead, as a result of the massive cuts in indirect taxation which we have already made since June 1970, the 10 per cent. rate will be the lowest standard rate in Europe.

It is convenient next to deal with the revenue duties.

In accordance with the arrangements for joining the E.E.C., protective duties charged on imports from the other member countries will be progressively reduced and finally abolished. The relatively small protective elements in the customs revenue duties will therefore be reduced by one-fifth in respect of imports from the E.E.C. in accordance with the timetable set out in the Treaty of Accession. The Treasury will be empowered by order to make the further adjustments to these duties required by the Treaty, beginning on the 1st January 1974.

Next I deal with the question of those goods liable to revenue duties which from 1st April will also be chargeable with VAT at the standard rate. They are alcoholic liquor, tobacco, matches and mechanical lighters. The basic rates of these duties will be abated by such amounts as are necessary to secure from the goods concerned broadly the same total revenue—that is from revenue duty and VAT combined—in 1973–74 as would have been obtained solely from the existing rates of revenue duty.

It follows from the decision to abate the revenue duties fully to offset the introduction of VAT that stocks which are held by registered VAT traders, and which have paid duty at the higher rates, will qualify for relief, to the extent of the abatement, under the stock rebate scheme which has already been announced, and to which I turn next.

Last November I announced proposals for avoiding double taxation on goods which have been acquired before VAT comes into force on 1st April, but which are sold by a registered VAT trader after that date and so attract VAT. The transitional problem arises when such goods have borne either purchase tax, or one of the revenue duties which will be abated to take account of the introduction of VAT.

The rebate scheme has been widely welcomed by the trade interests concerned, and as a result of the scheme there will be no excuse for increasing retail prices on the argument that traders need to recover purchase tax or revenue duty as well as VAT on goods in stock on 31st March.

This leads to the action we are taking to safeguard the consumer, first, by special powers in the Counter-Inflation Bill which is now before Parliament, and, second, by a major campaign of newspaper and television advertising starting next week.

In the Counter-Inflation Bill we are taking special powers to ensure that, where the yield of VAT is less than that of the purchase tax and SET which it is replacing, the cuts in taxation will lead to prices being reduced in line with the tax reduction, and that, where the reverse is the case, any price increases will be no more than is strictly justified by the tax change.

As a result of consideration in the course of the year, there will be two changes concerning VAT and charities—one comparatively minor and the other of considerable importance to those running charity shops.

One of the points to which some charities have attached importance is that goods exported by a charity, for example to assist the victims of an overseas disaster, might bear VAT. This is not what was intended, and an order will be laid which will ensure that all exports by a charity are zero-rated.

Perhaps the greatest anxiety about the effects of VAT on charities has been in respect of sales of donated goods by charity shops. The many voluntary workers in these shops are being increasingly successful in raising substantial sums for deserving causes.

In the light of advice from a number of charities, I have decided that the best course is simply to zero-rate the sale in a charity shop of all goods, both new and used, which have been given for resale to a charity established for the relief of the distressed. There will be no limit to the relief in respect of the value of goods donated by private individuals, and the relief will extend to gifts from stock by registered traders up to the statutory £10 limit for business gifts. The necessary order will be laid today. This change will be of very great help to charity shops and I am sure it will be welcomed by the charities concerned.

There is one further matter concerning charities which it is convenient to deal with at this point. It arises as a result of the new system of unified income tax.

Under the new system, charities which receive income under covenants for a net sum—that is a covenant which expresses the amount to be paid as a fixed sum after deduction of tax—will receive a smaller repayment of tax because the new basic rate tax of 30 per cent. is less than the old standard rate tax of 38·75 per cent.

This is, of course, a problem which has arisen whenever the standard rate of income tax has been cut. Nevertheless, I have received many representations that the resulting cut in the income of charities will create considerable difficulties for them, because they are committed in the coming years to expenditure which they had expected to be financed out of covenants made before the 30 per cent. basic rate was announced in 1971. New covenants need of course cause no problem, because they can take account of the change. I believe that the charities have a convincing case.

There will therefore be a scheme of transitional relief for charities which should relieve them of their difficulties. Under this relief, charities making tax repayment claims in respect of charitable covenants will be able to claim a supplementary payment for the four years from 1973–74 to 1976–77. This payment will be based on the tax repaid to them in respect of net covenants for the year 1971–72. For 1973–74 it will be the difference between that amount and what would have been repaid had the standard rate been 30 per cent. in 1971–72: for 1974–75 it will be 75 per cent. of that difference: for 1975–76 50 per cent. and for 1976–77 25 per cent. These payments—which will be borne on a special subhead of the Inland Revenue Vote—are estimated to cost about £3 million in 1973–74 and some £7½ million in all.

I should perhaps add that there is no case for continuing payments of this sort indefinitely. The reason is that most covenants are for seven years, and that by 1977–78 almost all payments will be under covenants made in the knowledge of the new system, which those entering into covenants will have been able to take into account.

The House may know that the National Council of Social Service has circulated a report which assesses the effect of the various changes in taxation which I made in last year's Finance Act. The Council selected a sample of 95 charities, but they did not all respond. However, 52 provided information which, in the view of the Council, was sufficient for the survey. Of those 52 charities, 42 were charities engaged in the relief of the distressed. While I must, in fairness, say that I do not accept some of the assumptions on which the report is based, the House should know that even on the assumptions and conclusions of the National Council itself, with the changes which I have just announced, those 42 charities will, overall, gain next year.

The concessions to charities which I have made last year and this year are substantial. It has sometimes been suggested that charities should not be expected to bear VAT at all. But it has never been accepted by any Government that charities should be relieved of all indirect taxation, and they have always borne purchase tax on the goods they have purchased.

Taking into account the estate duty and capital gains tax concessions I made in last year's Budget and the concessions which I have just announced, there can be no doubt that the net benefit to charities as a whole substantially outweighs the cost of the changeover to VAT. Taking full account of the changeover to VAT, the cost to the Exchequer of the concessions to charities which I have made in these last two Budgets is estimated to be of the order of £20 million in 1973–74.

In the course of last year's debates, I promised to set up a Committee to consider the special problems of VAT and children's shoes. That committee, under the chairmanship of Mrs. Alison Munro, was asked to consider to what extent the price of children's footwear contributes to the incidence of foot abnormalities, if it is possible and desirable to define approved standards of footwear for young children, and if so to explore ways of encouraging the wearing of footwear to these standards.

The committee's report is being published today. When hon. Members have had an opportunity to study it, I am sure that they will join with me in congratulating and thanking Mrs. Monro and the members of her committee for producing such an excellent and wide-ranging report.

The report recommends that there should be prepared a standard for young children's shoes, which would include basic minimum design features. In the long term, relief from VAT should apply, not to children's shoes generally, but only to shoes conforming to this standard and sold through outlets conforming to agreed standards of stockholding and fitting services. Because the drawing up of an approved standard will take time, the report recommends that, for the present, young children's footwear conforming to the present purchase tax exemption should be zero-rated for VAT. Everyone on both sides of the House will be pleased to know that I accept that recommendation. As far as the longer term is concerned, I am considering the practicalities of the proposals with my right hon. Friend the Secretary of State for Social Services.

As far as VAT and young children's clothing is concerned, we went over this ground at great length during last year's debates, and I can sum up my decision by saying on Shrove Tuesday, the traditional day of repentance: "I was wrong". It will be zero-rated.

But it is essential that the criteria should be altered. And for this reason. One of the aspects of this matter which has throughout troubled successive Chancellors has been the very considerable abuse of the relief for young children's clothing. It has been estimated that as much as 25 per cent. of so-called young children's clothing which is exempt from purchase tax is in fact worn by adults. This is, of course, to make a complete nonsense of the relief, and unfortunately it is no part of my responsibility as Chancellor of the Exchequer to add to the many advantages already enjoyed by slim and nubile young women.

I therefore asked Customs and Excise to see whether they could not work out a more restrictive scheme, in order to cut the abuse to the minimum. This they have done, though they will, I suspect, have needed all their ingenuity to deal with a situation where, for instance—so the Customs experts tell me—the waist measurement of the current Miss World is that of an average young girl of 12.

The cost of zero-rating young children's clothing and footwear will be £35 million in 1973–74, and £55 million in a full year.

There is one other tax which falls heavily on families with children. It is a tax which started at a rate of 15 per cent., and was three times increased, in July 1966, in March 1968, and again in November 1968, first to 16½ per cent., next to 20 per cent. and then to 22 per cent. I refer to foods, other than pet foods, which are at present charged to purchase tax—mainly all kinds of confectionery, and ice cream, crisps, soft drinks and so on.

The day has passed when these items can seriously be regarded as luxuries in the old sense of the word. They are bought by all sections of the community, and expenditure on these foods is now running at over £1,000 million a year. I have decided that they should be entirely relieved of tax—in other words, zero-rated for VAT. An order is being laid today. The cost will be £75 million in 1973–74, and £110 million in a full year.

The two taxes which have borne directly or indirectly on food have been purchase tax and SET. In March 1971 I announced that SET was to be cut by half, and in July 1971 purchase tax on food was cut from 22 per cent. to 18 per cent. As from the 1st April both purchase tax and SET will be abolished and, as a result of the decision I have just announced, all food sold in the shops for human consumption will be relieved from VAT.

By way of contrast, at the rates in force when we took office, the yield of purchase tax and SET on food would next year have been £225 million. I am sure that this change will be welcomed in all parts of the House.

To put the change in the system of indirect taxation into perspective, the phased changeover from purchase tax and SET to VAT will mean that, compared with the rates of purchase tax and SET in existence when the changeover was announced, the yield of VAT on a full year basis will be about £900 million less than it would otherwise have been.

Whatever may be the views of individual right hon. and hon. Members about the change in the system of indirect taxation, I am sure that the whole House will join me in paying tribute to Her Majesty's Customs and Excise and to my hon. Friend the Financial Secretary, who has borne the brunt of the detailed work.