3.33 p.m.

I now turn to the cuts in public expenditure which have become inevitable. In addition to the regeneration of British industry we have always given priority to improvements in the social field. I plan to maintain this priority—not only in revising our public expenditure plans but also in making the necessary tax increases so as to maintain and extend the progressivity which was a feature of my earlier Budgets. In my Budget a year ago, I recognised that, in order to allow increases in social benefits, in housing and in subsidies on basic foods, savings would need to be made in other areas of public expenditure wherever possible. For example, we have done a great deal in recent months towards reducing the huge deficits in the nationalised industries, and there will be further substantial savings in 1975–76.

Our public spending plans were set out in the White Paper published in January. The White Paper described the implications of the expenditure programmes for the economy as a whole; and it warned that if the economic prospects deteriorated, the expenditure programmes would have to be reappraised.

The prospects unfortunately have deteriorated, and I have explained why public expenditure savings must make a substantial contribution in 1976–77 to the necessary reduction in domestic demand. The planned level of expenditure in that year, as set out in the White Paper, will be reduced by over £1,100 million at present prices or £900 million at 1974 survey prices. To permit comparison with the White Paper I will use 1974 survey prices in describing the distribution of these cuts.

The defence budget will be cut by £110 million, or about 3 per cent.

In the civil programmes, current expenditure on goods and services, including manpower, will generally be reduced by 1½ per cent., and capital expenditure by 10 per cent. But we have not thought it right to apply these reductions to certain services such as the general practitioner services or the provision of essential school places. These reductions will produce a saving of about £125 million on current expenditure on goods and services and about £280 million on capital expenditure.

No reduction is proposed in the building of new council houses, but a saving of £50 million will be found from other capital expenditure in the housing programme.

As regards subsidies, I announced last November the decision to phase out the deficits caused in the nationalised industries by price restraint, and we have also announced our intention to contain and eventually reduce the food subsidies. I now estimate that price restraint subsidies for the nationalised industries will come down from £550 million in 1974–75, at 1974 survey prices, to about £70 million this year and are likely to have been phased out completely by April 1976. The planned provision for food subsidies in 1976–77 will be reduced by £150 million and that for housing subsidies by £65 million.

Within the arrangements for the investment programme of the nationalised industries I have described, we plan to produce savings of about–100 million by securing a more stringent and realistic determination of their capital requirements. In addition, we have decided with reluctance that we cannot afford to increase our provision for overseas aid quite so much as we had hoped. A reduction of £20 million will be made, spread in this case over 1975–76 and 1976–77, in a programme still rising substantially in cash terms.

Finally, we have decided not to proceed with the mid-term census.

I am circulating a table in the Official Report setting out the incidence of these reductions in planned expenditure on the main programmes.

A sizeable proportion of these savings will fall on programmes administered by the local authorities, and I realise what this task means. I do not think that it would be right to leave them to face it without closer guidance and help from Ministers. I know that local authorities have complained that in the past Governments have urged them to spend on particular services and to save on the total.

This Government, however, have been working towards closer liaison between Ministers and local authorities on financial issues. My right hon. Friend will now put to the chairmen of the representative associations proposals to set up a consultative council on all matters of policy affecting local authorities which have major financial implications.

The council would be chaired by my right hon. Friend and would include senior Ministers and the leaders of the local authority associations, with senior officials from both sides meeting in support.

My right hon. Friend the Secretary of State for Scotland will be in touch with the new convention of Scottish local authorities about broadly similar consultative arrangements in Scotland. Related arrangements will be made for Wales.

Through this new machinery, central and local government should establish a closer mutual understanding of the constraints under which they each have to operate. Each will be able to contribute, more directly and effectively than before, to the difficult but urgent policy decisions which will be necessary; and together they will be able to do the necessary monitoring. The new council will be faced in its first year with preparing for the unavoidably stringent rate support grant settlement for 1976–77.

As soon as discussions on the form of the new council have been completed, my right hon. Friend will be making a full statement to the House.

Looking beyond 1976–77, there will at best only be very restricted room for overall growth in public expenditure. Nevertheless, we shall aim to ensure, by a careful reassessment of needs and priorities in the 1975 public expenditure review, which will take account of the latest assessment of the economic prospects, that the most essential needs are met as far as possible.

In this context I want to emphasise that the Government are fully conscious of the special needs of families with children. That is why, as I announced in my Budget Statement last November, we have made the increase in family allowances to £1·50 a week which has just come into effect, the increase being subject to normal taxation only. This is the first increase in family allowances since 1968.

I also said last November that the Government would carry out their commitment to introduce a new scheme of child cash allowances or child benefits, payable for all children including the first, as soon as resources and the practicalities of administration allowed. We have now decided that, subject to parliamentary approval of the necessary legislation, the scheme will be introduced in April 1977. This is in fact the earliest date by which it is administratively practicable to extend family benefits to all of the 7 million families which will be eligible—over 3 million more than those now receiving family allowances. Such a scheme is, of course, potentially expensive; and against the background of the economic prospects and the resulting need to hold back planned expenditure, which I have already described, we shall need to accommodate its cost within the total which, in the light of future reviews, we conclude that we can devote to public expenditure at large in the years beyond 1976–77.

Although we cannot introduce the full scheme before 1977, we can take earlier action to help one group of families—namely one-parent families—who we think it will be generally accepted have a claim. to this additional support in advance of others. We therefore propose, subject again to parliamentary approval, to introduce an interim benefit which will in effect extend family allowances at the new rate of £1·50 a week to the first children of one-parent families who do not already receive an equivalent benefit—for example, in the widowed mother's allowance. The benefit will be treated for tax just like family allowance. This interim benefit will begin in April 1976 and will be replaced one year later by child benefits under the new scheme. One-parent families will thus be the first to benefit from our commitment to extend family support to the first child in each family. The public expenditure cost in 1976–77 will be about £23 million.

The necessary legislation to enable both these benefits to be brought into effect will be introduced by my right hon. Friend in due course.

I now turn to the tax changes which. must accompany these cuts in public expenditure if we are to strengthen our economy and maintain our political and social priorities. First the company sector, and in particular the position of industrial and commercial companies. The past year has been a difficult one. I recognised this in my November Budget Statement. In particular I noted the problems caused by inflation, and I proposed two measures designed to relieve companies of some of these pressures.

In this coming year there is general agreement that the financial position of the company sector will improve compared with the past year, though inevitably there is doubt and uncertainty about the extent of this improvement. There are signs that this improvement has begun. It is encouraging that although demand for bank credit generally has been slack in recent months, bank lending to manufacturing industry has been holding up relatively well. There has also been a good response to the arrangements announced in November for making additional funds available through Finance for Industry. Applications for loans totalling £600 million have already been made and some £100 million already granted. FFI is evidently well placed to make a significant contribution to industry's needs for medium-term finance.

In addition, there has, of course, been the very welcome revival in the stock market since the turn of the year, and the prospects for raising new equity capital are now considerably brighter than they were in November. The CBI agrees that prospects look somewhat better, but it sees rather less improvement than I would myself expect. I recognise that the company sector, taken as a whole, has faced a period of financial deficits, which it financed largely through borrowing from the banks. In recent weeks the opportunity has been taken to fund some of this borrowing through new issues. Even so, companies' net short-term liabilities for some time yet are likely to continue to represent an abnormally large proportion of total turnover.

The company sector is the major source of employment in Britain and of goods and services for domestic consumption and investment as well as exports. In the long run our growth prospects, and prosperity, depend on the company sector being able and willing to invest in new plant and machinery and equipped, therefore, to meet overseas competition on an equal footing. The Government have committed themselves in their White Paper on the Regeneration of British Industry to the creation during the next decade of a vigorous, alert, responsible and profitable private sector within our mixed economy. I emphatically endorse this commitment.

At the same time, companies must be expected to make an adequate contribution to the finance of the public sector. Companies do not operate in a vacuum but in an environment in which facilities are provided by central and local government; the nationalised industries provide them with more of the goods and services they need, just as the education system and the social services benefit their work force.

The stock relief measures and the Price Code relaxations which I introduced last November will greatly improve the financial position of the corporate sector this year. A number of further proposals for relief have been put to me. I have examined them very carefully but I have felt bound to weigh them against the need to improve the financial balance of the public sector and to ensure that the burden of adjustment is spread as equitably as possible. Moreover, too many of the proposed changes—particularly suggestions that corporation tax should be reduced—lack selectivity. I favour a selective approach, covering measures of the kind I propose in this Budget. In the long run the strategy which underlines this Budget will redound to the benefit of the company sector, since it will contribute towards an economic environment in which industry can invest with confidence.

For these reasons I have concluded that no new general reliefs should be introduced this year. I have indeed considered whether, on the contrary, there is a case for seeking an increase in the tax contribution of the corporate sector. But, although the financial outlook is beginning to improve, companies are still feeling the effects of a period of financial deficits and I do not want to do anything which might prejudice the prospects of industrial investment this year. I propose, therefore, to leave the rate of corporation tax unchanged at the 52 per cent. which I introduced in March last year. The rates for small companies, co-operatives and building societies will also remain the same.

I do not propose, however, to repeat the advance corporation tax supplement this year. This will avoid adding to the liquidity problems of those companies that pay dividends and, therefore, ACT in the current financial year. Moreover, as I reminded the House several times last year, the surcharge introduced in my 1974 Budget will reduce the tax bill of companies this year, when the reduction in business activity makes this particularly welcome.

There is one way in which I propose to help company finance, though this will not come as a surprise. The House will remember that when I introduced a measure of relief from corporation tax in the autumn which was related to increases in stock valuations I promised similar action again this spring. The financing problems of traders who replace their trading stock in times of inflation are very serious. They would be aggravated if tax had to be paid on profits calculated in terms of the traditional methods of stock valuation. My autumn proposals therefore gave relief for the abnormal inflationary element in the stock valuation, a relief which added some £800 million to company resources, and I then gave a pledge that similar relief would be given again this year.

In order to obtain the maximum immediate impact from the autumn stock relief, it was made retrospective in the sense that it related to accounting periods ending in the year 1973–74—that is, to the period on which the tax bills becoming payable this last winter were generally based. For practical reasons I could not make it available to all businesses but had to limit it to companies which carried considerable amounts of stock. I promised that this year I would include all traders in my proposals and would take account of the fact that those who had not benefited in the autumn had had to wait for their relief.

The relief given in the autumn was deliberately simple in design, for it was intended as a temporary measure until we can examine the recommendations of the Sandilands Committe on accounting for inflation. It will be looking at many other things besides stock valuation, but this must he an important element in its studies. The committee has not yet reported, and I think the best course this year is to continue relief on very much the same lines as before.

I propose, therefore, that this year's relief should be given on the lines of my autumn formula, measuring the stock increase over two years, however, instead of one only, but altering the scope of the relief in certain respects; for example, excluding land held as an investment and including professional work in progress.

For unincorporated businesses and those companies which did not qualify for relief in the autumn, relief will thus be available for the increase in stock valuations over the two years as a whole, less 10 per cent. of the aggregate trading profits of the two years. The relief will be given in the assessment for the second year; that is to say, for an unincorporated business in the assessment for 1975–76 and for companies in the assessments on accounting periods ending in the financial year 1974.

To implement my promise that I would give some compensation to those traders who have had to wait a year for relief, I propose that for them there should be a separate and further deduction from taxable profits equivalent to 5 per cent. of the amount of the stock relief itself. For those companies which have already had relief under the autumn proposals the relief due this year will be measured by the company's history over the two years on the same basis as for unincorporated businesses. The relief it has received this year will be taken into account in the assessment for the second year.

The measures I have announced will mean a continuing improvement in the financial position of companies. This is both necessary and desirable. We need a strong and financially healthy industrial sector able and willing to invest funds in new plant and machinery to provide new jobs and in working capital and stocks to support existing operations. This is particularly important in the period before the expected upturn in world trade next year.

There is one other matter that I should refer to—affecting oil companies. In the White Paper on United Kingdom Offshore Oil and Gas Policy, published on 11th July 1974, it was announced that it was intended that the losses that had accrued to oil companies from transactions at artificial prices in overseas oil should cease to be allowable against profits arising after that date. The Finance Bill will contain the provisions to implement that intention.

I turn now to indirect taxation. At a time when some sacrifices are required of all of us, the consumer has to play his part, particularly where less essential expenditure is concerned.

I start with VAT. As I explained in my Budget Statement in March last year, the structure of VAT which we inherited from the previous administration suffered from the major inadequacy of its dependence on a single positive rate. I recognised that adequate preparation was essential if a change in this structure was not to cause excessive difficulties to traders, and accordingly I authorised Customs and Excise to consult representative trade bodies. In preparing my proposals this year, I have taken careful account of all the views which have been expressed, particularly those relating to difficulties for retailers.

The House will recall that in November last year I introduced a special rate of 25 per cent. VAT on petrol, and I have now decided to make this 25 per cent. rate a more general feature of the VAT system, by taxing a wider range of goods at this higher rate.

I recognise that very few classes of goods are now generally accepted to be luxuries. Their sales are limited and, because of this, a higher rate of tax restricted to such goods would produce relatively little additional revenue. It is therefore inevitable that the higher rate has also to cover some goods which are used in most homes. However, I have concentrated on the less essential items, so that the better-off, who buy more of these goods—particularly of the expensive kinds—will bear a larger share of the tax burden. I have also concentrated, as far as possible, on items which represent large or fairly large purchases and are usually purchased separately, rather than on small items that are commonly sold across the counter in "corner shops" and other small, mixed businesses. This, I hope, will minimise the impact of my proposals upon small retailers, such as newsagents and chemists, whose difficulties I fully understand and whose hard work in adapting themselves to the new responsibilities of VAT I very gratefully acknowledge.

Accordingly I propose that from 1st May the 25 per cent. rate of VAT should apply not only to petrol but also to most domestic electrical appliances, other than cookers, space heaters and fitted water heaters—to radios, television sets, hi-fi and similar equipment; to boats, aircraft and caravans, other than those which are at present zero-rated; to cameras and binoculars; and to furs and jewellery. Full details of my proposals are set out in the Budget Resolutions.

The 25 per cent. rate is not out of line with other countries' VAT structures. Belgium also has a top rate of 25 per cent.; Italy has 30 per cent.; France 33⅓ per cent. and the Irish Republic 36¾ per cent.

The right hon. and learned Member for Surrey, East (Sir G. Howe) suggested the other day that 500,000 small shopkeepers might be driven out of business by a multi-rate VAT system and that thousands of extra civil servants would be needed to administer it. He allowed his imagination too free a rein, though perhaps this is easier to understand and even to forgive since it was under a Government of his party that the purchase tax reached its maximum complication of seven different rates. No doubt he was envisaging something comparable in VAT terms.

Nothing like 500,000 shopkeepers will be affected by my proposals. It is difficult to make a precise estimate of the numbers who will be affected, since, of course, one has to take account of secondary lines of business as well as of the main trade classifications. I would expect that the total number of retail businesses affected might be 50,000 at the very most.

As regards numbers of civil servants, last spring I approved an increase of 2,250 staff for the Customs and Excise for work on the control and administration of VAT, making a total of nearly 11,000 to be employed on this tax. This figure included an allowance of 1,000 for the contingency of a multi-rate VAT. At present there are still some 500 posts to be filled, but when this is complete I do not expect more staff to be required because the 25 per cent. rate is now to be extended beyond petrol.

I do not propose any change in the standard rate of VAT, which will thus remain at 8 per cent.

However, I should mention a small change I am proposing to make in the VAT regulator. At present this provides for variations by order within overall limits set 20 per cent. either side of the rate in force at the time. This means that, with the standard rate at 8 per cent., full use of the regulator up or down would produce the inconvenient rates of 9·6 per cent. or 6·4 per cent. Accordingly I shall be moving a resolution to increase the limit for variation by order to 25 per cent. on either side of the going rates. This will mean that the use of the regulator would result in a standard rate between 6 per cent. and 10 per cent.

I estimate that my proposals for extending the 25 per cent. rate will bring in an additional £325 million of revenue from VAT in a full year.

In the last 12 months I have relieved from VAT aids for the disabled, protective hoots and helmets, and charitable donations of medical and scientific equipment. I realise that many hon. Members are hoping that I shall be able this afternoon to announce more reliefs from VAT for articles or activities to which they attach particular importance. I have considered most carefully and with much sympathy the many cogent arguments which have been put forward on their behalf. It is with the greatest reluctance that I have been forced to conclude that I cannot propose any further reliefs from VAT at a time when I am looking for such sacrifices in other fields.

I reminded the House a year ago that the Customs and Excise revenue duties on alcoholic drinks and tobacco are levied not as a percentage of price, like VAT. but as specific sums on given quantities of the goods concerned. I said then that I was tempted to restore the real value of these duties to what they had been five years earlier, but because of the substantial net rise in the retail price index that would result, and because of the increased pressure this would have meant on the threshold provisions introduced by the previous Government, I resigned myself to a more modest objective.

The effective burden of these duties, including the increases I introduced then, has been further eroded by inflation over the past year. In addition, the period has seen a reduction in the overall weight of tax on these goods. They benefited, along with other goods and services, when I felt able, last July, to reduce the standard rate of VAT from 10 per cent. to 8 per cent.

Now, however, when I am forced to call for general sacrifices, when rich and Poor alike face increases in essentials like rent and rates and fuel prices, it would clearly be wrong to leave untouched such forms of consumption as smoking and drinking, when the effective tax burden on them would otherwise continue to fall. Instead of changing the rate of VAT on these goods, I have decided that the duties should be increased to give precise effects on the bar or retail prices of all these goods across the board. I hope it will be appreciated that the size of these increases reflects the fact that in the circumstances of this Budget the alternative to them would have been either a higher target for the revenue from direct taxation or an increase in the standard 8 per cent. rate of VAT.

I am as reluctant now as I was a year ago to increase the duty on beer, but the level of increase that I feel must be made in the burden borne by other forms of drink and the relatively low incidence of tax on beer persuade me that the beer drinker cannot reasonably expect to remain unaffected on this occasion. I propose that the total burden—including 8 per cent. VAT—should be increased by the equivalent of 2p a pint on average.

As for spirits, I recommend that the duty should be raised by an amount which, taking the consequential VAT effect into account, will produce a 64p increase in the price of a standard bottle of whisky or gin.

My proposal for all wines, including British wines, is for an increased tax burden, including VAT, equivalent to 24p on a standard bottle.

From what I have already said it will be clear that I consider some increase must also be made in the tobacco duty. Some, I know, will welcome this. Indeed, I believe it will be welcomed with enthusiasm and relief by anyone who watched the recent television programmes en the relationship between smoking and cancer. When VAT is taken into account, the total tax burden on most packets of 20 cigarettes will be increased by between 5½p and 10p depending on size and type—the average increase will be 7p.

These increases in the excise duties are large by any standards, but I believe them to be necessary if there is to be some equity in the burdens that each consumer must bear. Indeed, I know many people were surprised when my November measures did not affect these goods. The changes in the revenue duties which I have outlined so far, and which will affect the rates of duty payable on goods cleared from midnight tonight, will yield in a full year an additional £185 million from beer, £60 million from spirits, £80 million from wine and British wine, and £275 million from tobacco duty, together with a consequential increase of £25 million from the 8 per cent. VAT on these goods.

Before I leave the revenue duties, I should tell the House that I think it opportune to propose a change in the structure of certain of these duties. Traditionally we have charged revenue duties on imported goods as customs duties. These duties are essentially fiscal in character, but they include a small protective element which it would be more in accord with our general commercial policy to charge under tariff legislation.

If we are still in the EEC at the beginning of next year we shall not be able to treat revenue duties on imported goods as customs duties. But we shall be able to continue to raise whatever revenue we need by charging excise duties on imports. In fact this is a change of practice well worth making whether or not we remain in the EEC, and the Finance Bill will contain proposals to this end. There are five Budget Resolutions which provide the necessary foundation for this legislation. Though it may appear rather complex, it is essentially a legal restructuring; but it will involve some recasting of the duties on wine of fresh grapes and other wines. The revenue and price effects will be negligible, and there will be a valuable gain in flexibility in international negotiations for the future.

I have no changes to propose in the levels of betting and pool betting duties, which were increased last year. But I do consider that changes are now needed in other areas. The rate of bingo duty has remained unchanged since its introduction more than five years ago, and I propose that the basic rate should be increased to 5 per cent. with effect from 29th September 1975. Changes in the structure of gaming licence duty have been urged on me, and I am proposing here to restructure the duty so that it depends upon the current rateable values of gaming premises, and so as to provide for a smoother gradation in the various rate bands. But I take this opportunity to increase the level of the duty from 1st October next when existing licences will have expired.

I also recommend changes in the tax burden on gaming machines. I propose that the net "take" on these should be liable to the standard rate of VAT from 1st November, but that this should be partly offset in respect of licences issued after the end of September by some abatement of the present duty rates on second and subsequent machines installed on individual premises and on holiday season licences. The overall effect of my proposals in the gaming and bingo fields is estimated to increase the yield by £12 million in a full year.

The total effect of all changes in Customs and Excise duties and taxes is estimated at £965 million in a full year.

It will be apparent that I have so far made no mention of the hydrocarbon oil duty. Hon. Members will know that a variety of suggestions have been put to me for altering the structure of taxation on road fuel, and indeed on road use in general. At the same time I have had regard to the fact that the tax burden borne by the private motorist has been increased twice in the last year, firstly by bringing petrol within the coverage of the VAT standard rate, and then by subjecting it to a VAT rate of 25 per cent. These changes, together with the recent increases in the pre-tax price of petrol, will have been particularly severe on those who need to make full use of their cars—those in rural areas or on shift work, for example. I have also taken account of the present depressed state of the motor industry, which is suffering both from the general recession in world trade and from the direct effects of the worldwide increase in petrol prices.

It is against this background that I have considered suggestions for increases in road fuel duty, or for the introduction of a two-tier petrol pricing system, as possible ways of achieving energy savings, or increasing Government revenue, or both. I have, however, come to the conclusion that further tax-induced price increases for petrol, with the same sort of distributional impact on people as the price increases over the last 18 months, should be avoided at this time. This includes two-tier petrol pricing which, if it were to have any appreciable impact on consumption, would require a large tax-induced increase in the price of all but a modest basic allocation for each motorist.

Accordingly there will be no increase in road fuel duties, and two-tier petrol pricing will not be introduced. Petrol consumption has reacted appreciably to recent price increases and seems now to be running some 10 per cent. below what would have been expected on the basis of pre-1973 trends. Obviously future tax increases on road fuel cannot be ruled out, should the economic situation, or the energy supply position, require this.

Nevertheless, I have concluded that I cannot, in our present difficult circumstances, avoid asking for some further contribution from road users.

I have chosen the duties on road vehicles. The vehicle excise duties have remained at their present rates since April 1968, since which time the general price level has increased by about 80 per cent. Thus, even if I were to double the duties, would be doing little more than restoring the relative burden of them to the level set in the spring of 1968.

In practice, however, I doubted whether would be justified in going so far. Accordingly, I am proposing an increase in the rate of duty on private cars from £25 a year to £40 a year. The same 60 per cent. increase will apply to the short-period licences, and to motor cycles, three-wheelers and pedestrian-controlled vehicles. These increases will bring in a further £209 million in a full year.

Somewhat different considerations apply to commercial vehicles. The bulk of the burden of the duty on private cars falls directly on private consumers and does not lead directly to any increases in prices of other goods and services bought by people who do not run cars. The duties on commercial vehicles, like other business costs, are likely to have some impact on prices in general. including export prices.

I therefore propose that the increase in duty rates for commercial vehicles should be restricted to such amounts as are necessary to keep a reasonable balance in the schedule of duty rates as a whole, including those for private cars. This points to a minimum rate for commercial vehicles of £40 a year, which would cover all vehicles with an unladen weight of less than 16 cwt. The lowest rate of duty, now charged on vehicles under 12 cwt., will be amalgamated with that for vehicles in the 12-to-16 cwt. category. All other commercial vehicles, including farmers' goods vehicles and showmen's vehicles, will be subject to duty increases of one-third in present rates. The duty on hackney carriages will be increased from £12 to £20 a year, but in order to avoid any substantial increases in the costs of public transport, the additional charge for every seat above 20 in a passenger-carrying vehicle will remain at 50p a year. These increases in commercial vehicle duties will yield £61 million a year, making total increases in the full year yield of the Vehicle Excise Duties of £270 million.

Together with the increases in Customs and Excise duties and the extension of the 25 per cent. rate of VAT, these increases in vehicle excise duties will bring the total increase in the RPI generated by the Budget to about 2¾ per cent. in the next three months or so. I greatly regret the need to raise the level of the price index in this way when inflation is already high. But the House must understand that in nearly all cases these increases in indirect taxation are in practice the effect rather than the cause of inflation. If taxes fixed years ago in money terms are not regularly raised to take account of the rate of inflation, the only alternative is a further increase either in the level of direct taxation—which in the present situation means personal income tax—or in forms of indirect taxation levied as a percentage of price, like VAT, which are already rising automatically as inflation takes its course.

Since increases in the income tax and in the standard rate of VAT would affect rich and poor alike, I thought it better to concentrate the tax increases in those areas of indirect taxation which affect less necessary expenditure or which have fallen heavily in real terms because of inflation in recent years. None of these increases touches essential goods, but they are all necessary because as a nation we are at present living beyond our means. For this reason attempts to offset them, or any other tax measures, through pay increases would be wrong, damaging, and in the end self-defeating.

I am arranging for the effect of the duty increases on the index to be monitored specially in the coming months. The results will be published monthly.

I now turn to personal taxation. The House has tackled a very heavy programme of financial legislation over the past twelve months. In order to lighten the load on this year's Finance Bill, I have thought it right to impose a strict order of priorities and accordingly to postpone some measures which in another year I would have regarded as highly desirable. Our programme, set out in the manifesto, is of course the programme for a Parliament. The measures which I announce today will represent a further instalment of that programme—and a further positive contribution to our ambition, on this side of the House, of creating a more just society.

On capital gains tax, I propose to end the so-called "bed and breakfast" arrangements whereby companies have sought to get relief for losses on shares with which they had no real intention of parting. This will require new rules for matching shares bought and sold by companies. The Finance Bill will also put a stop to a device which goes under the name of "double banking" whereby wealthy taxpayers obtain relief for a capital loss on gilts held for more than 12 months. The new rules for both shares and gilts will apply as from today.

I know that some people take the view that with present rates of inflation the time has come to introduce indexation for capital gains tax. I am not yet persuaded that this would be right. There is, however, evidence that this tax is bearing unduly heavily on those who hold assets for long periods and is too lenient on those who hold for very short periods, and over the coming year I propose to review the incidence of capital gains tax. In this Budget I propose to give reliefs to working farmers, small business men and the owners of historic houses on broadly the same lines as the corresponding special concessions given for capital transfer tax.

I now turn to the direct taxes on income. It is my responsibility, as Chancellor, to ensure that the burden of taxation which I regard as necessary at the present time is shared fairly between those best able to bear it. This is not just a matter of fixing the rates of tax and of personal allowances. It has been my consistent aim to make the tax system fairer than it was when we assumed office, and this theme of fairness runs through all my proposals in the personal tax field.

First, I propose to introduce legislation in the Finance Bill to require that the Pay As You Earn system should apply to the pay of office workers and other staff engaged through agencies. This is an area where there has been some loss of tax because of the opportunity for claiming self-employed status, and the changes I shall propose will follow broadly what has already been done in the national insurance field. I will also bring forward provisions to make taxable at all income levels the benefit enjoyed by an employee where his employer operates a medical insurance scheme. I think it is particularly necessary for social reasons to ensure that this type of benefit does not escape taxation.

There will also be legislation to prevent avoidance of tax by the issue of vouchers to employees instead of normal pay—though I should make it clear that it is not the Government's intention to make any change in the existing luncheon voucher concession.

Much preparatory work is required to give effect to all these changes and they will therefore take effect from the next tax year starting in April 1976. So, too, will another measure making a procedural change in the basis under which holiday pay under certain stamp schemes is taxed.

The evasion of tax and national insurance by many members of the so-called "lump" in the construction industry has for a long time caused widespread resentment. A scheme introduced in 1971 to deal with the problem set a pattern for a remedy, but experience has shown that it was not tightly enough drawn. It has been abused by those who sought to be self-employed but were unwilling to meet their consequential statutory obligations.

The Government gave a pledge in their election manifesto, and in the Queen's Speech, that they would deal with the problem. It is costing the Exchequer large amounts of revenue and bedevilling industrial relations in the construction industry.

For my part, I propose to implement this pledge by introducing fundamental measures to overhaul the 1971 scheme. First, all existing certificates, which excuse certain sub-contractors from deduction of tax at source, will be withdrawn. Secondly, holders of certificates will have to reapply and will have to satisfy much stricter conditions. Thirdly, a new type of certificate will be issued which it will be very difficult to forge, steal or otherwise misuse without detection. Fourthly, companies will be brought within the scheme, and it will no longer be possible to use them as a means of avoiding the tax deduction. And, fifthly, the Revenue is making major changes in its policing arrangements so that it will have a firmer control of the new scheme.

My aim is to ensure that only subcontractors who can satisfy the Revenue that they have genuine businesses and will meet their future tax liabilities in full will be entitled to be paid gross. Those who have abused the system will have to become employees if they wish to avoid the automatic deduction of tax. These new tax measures will, of course, complement the measures put forward by the Department of the Environment.

I propose also to deal with a form of avoidance that has been increasing during the last year or so. I refer to the number of companies offering so-called scrip options and similar schemes under which shareholders have been able to take dividends in the form of stock instead of cash and so escape liability to the higher rate income tax and investment income surcharge. These arrangements amount to an option not to pay tax and must, I believe, be brought to an end in the interest of fiscal equity. As already announced, I propose to charge such issues of stock dividends to tax with effect from 6th April last.

Next, I gave notice last year that I shared the view, which has been gathering force in recent years, that a taxpayer is entitled to some compensation by way of interest when repayments of income tax owing to him are unduly delayed. Accordingly—and despite the very real administrative difficulties—the Finance Bill will include provision for a necessarily simplified scheme of compensation when tax repayments to individuals are delayed beyond 5th April in the year following the year of assessment. The Bill will also include provision giving, so far as possible, comparable compensation when late repayments of tax are made to companies and other bodies within the charge to corporation tax. The "repayment supplement", as it will be called, will be calculated using the same rate of interest as that attaching to underpayments of tax—currently 9 per cent—and will not be taxable. It will apply to repayments made after the Bill becomes law.

I also said last year that I intended to introduce new measures to encourage the more prompt payment of tax. The Inland Revenue has had consultations with the main representative bodies concerned about proposals in this area. I believe it is generally agreed that the present rules work very unsatisfactorily in a large number of cases. At the extreme they permit a minority of people virtually to opt out of the tax system for months or even years at a stretch. The new rules will apply to assessments made after Royal Assent. They will, in particular, include more effective rules for securing a reasonable payment on account and for charging interest when tax is not paid pending the result of an appeal; and also for charging interest both where large amounts of tax are delayed for a relatively short period and where smaller amounts of tax are delayed for a longer period. In framing these proposals I have borne in mind the representations that have been made to me about the pressures under which many businesses and accountants are working at the present time and the problems that would arise if the necessary changes attempted too much too quickly.

Before I come to the major issues of personal tax rates and allowances, there is a further point, relating to national insurance contributions with which I must deal.

When the House voted last year, against the Governments recommendation, to relax substantially the earnings rule for pensioners, I made it clear that we would have to find ways of financing this addition to our spending plans and this addition to the public sector borrowing requirement. and that we should not want this burden to fall on those with low incomes. The cost is considerable. We estimated that the extra cost to the National Insurance Fund—at the enhanced rates of benefit introduced earlier this month—will be £60 million in 1975–76, £110 million in 1976–77 and £145 million in 1977–78.

In the coming months my right hon. Friend the Secretary of State for Social Services will be reviewing the finances of the national insurance scheme with a view to settling the rates of contribution from April 1976 and the earnings limit up to which these contributions are paid. In this review, she will need to take into account the extra cost imposed on the National Insurance Fund by the relaxation of the earnings rule. The earnings ceiling for contributions will in any case need to be substantially increased in 1976 because of the increase in average earnings. In order to recoup the extra cost of relaxing the earnings rule in 1975–76 and 1976–77, the earnings ceiling will need to be increased by up to £8 a week more than it would otherwise have been. In this way the cost will be met without imposing extra burdens on the less-welloff contributors.

A major concern of any Chancellor in the personal taxation field must be the level of tax thresholds. Inflation reduces the real level of these thresholds just as it does the real level of cash payments, so that the employee or the pensioner, if nothing is done, can find that he has begun to pay tax even though in real terms, as distinct from money terms, his income has not increased. In my Budget speech in November I made provision for the elderly by my proposal for a new age allowance, and I proposed an increase, from £130 to £180, in the blind allowance. But I then deferred my decision about the other allowances, which I undertook to review in this Budget.

I now propose to increase the single allowance, with the associated wife's earn- ings allowance, by £50, from £625 to £675 and the married allowance by £90, from £865 to £955. I recognise that these changes from last year, though substantial, fall some way short of full compensation for inflation, and I would have liked to be able to make larger increases. But in the present situation these increases, which will cost the Revenue £437 million in the first year and £546 million in a full year, are as far as I can go. By taking 400,000 people out of tax altogether they will at least ensure that some of the least-well-off members of our society do not have their small incomes yet further reduced by tax deductions.

I have also decided, after careful consideration, that it would be right to accept the proposal of the Finer Committee that the additional personal allowance—which can be claimed by a single parent who is also entitled to child allowance for a child living with him—should be increased, so as to make the aggregate of the single parent's tax allowances equal to those of a married man. I recognise that the two cases are not entirely similar, as the married allowance is an allowance for two people. Nevertheless, I think—and I am sure the House will agree—that one-parent families are a group which must command special consideration. The additional personal allowance will therefore be increased by £100, from £180 to £280, at a cost of £7 million in the first year and £8 million in a full year.

Apart from these changes, I propose to leave unaltered for the coming year personal tax allowances and the points at which the higher rates of tax take effect, and also the levels and rates of the investment income surcharge. I recognise that the result for most people will be, in spite of the increases in allowances. I have just proposed, that the burden of income tax in the coming year will be significantly increased, because I am not adjusting the various tax levels in step with money values. But I am afraid that my need for revenue is paramount, and I cannot offer any general relief beyond the increase in allowances proposed. The level of the main personal allowances will, of course, need to be looked at again in next year's Budget, as has been done this year.

For the rest, I would remind the House of the undertaking the Government have already given to review the levels of the high rates of tax on earned income once the additional taxable capacity represented by ownership of wealth has been brought into charge by the wealth tax—proposals for which I shall be bringing forward, in the light of the report of the Select Committee at present sitting under the chairmanship of my right hon. Friend the Member for Battersea, North (Mr. Jay). I think the House will agree that when I review the higher tax rates on earned income I should also take action to deal with fringe benefits and with tax evasion.

I come lastly to the rates of income tax for the coming year. I made it clear in my Budget speech last November that if wages rose above the level laid down in the guidelines of the TUC I would find it necessary to raise taxation in order to remove the excess demand involved. The House knows that wages and salaries have risen overall substantially above what was envisaged by the guidelines. I therefore have no alternative but to raise the income tax, as I warned five months ago. The increase I am about to announce can be regarded as an anti-inflation surcharge. I must warn the House that similar measures may be necessary in future unless the increase in wages and salaries is kept under better control.

My proposal is to raise the basic and higher rates of income tax by 2 percentage points—with the exception of the highest rate of all, where the increase of eight points made last year means that the level, in cases where the 15 per cent. investment income surcharge also applies, is already 98 per cent. The new basic rate of income tax will therefore be 35 per cent., and there will be a corresponding adjustment in the rate of advance corporation tax. The rate of deduction from payments to uncertificated sub-contractors will also go up to 35 per cent. in September.

The additional revenue from this increase in the rate will be £662 million in the first year and £771 million in a full year. The higher tax deductions will take effect for PAYE taxpayers in the week beginning 25th May. Because of the cumulative nature of the PAYE system, the initial effect of these changes will, I recognise, be significant, since the extra tax due as a result of the rate increase on pay received since the start of the tax year will be taken from the first pay packet after the change. At the lowest income levels, however, the effect of the higher tax rate will be more than offset by the higher personal allowances, and the increases in the single and married allowances will take effect at the same time as the new tax rates. The increase in the additional personal allowances will take a little longer, as tax offices will need to recode the people affected, and the new allowances will take effect on the first pay day after 14th June. The elderly and the blind have, of course, benefited, from the start of the tax year, from the allowance increases I announced last November.

The combination of the measures I have announced today will reduce the public sector borrowing requirement by about £1,200 million in the current year.

These then are my proposals. The House will want to know how, as they are implemented, I expect to see the economy develop.

Firstly, I look forward to 1975 being a very much better year than 1974 for the balance of payments. We have made a good start in the first quarter, though the figures for March were favourably distorted by the London dock strike. For 1975 as a whole, despite the fall in world trade, there are good prospects that our deficit will be at least a billion pounds lower than in 1974. In other words, the non-oil deficit on the current account will have turned into a substantial surplus.

Secondly, the outlook for prices. The adjustment for the cost inflation already in the pipeline still has some way to run. Rent and rate increases are already under way. Nationalised industry prices are now reflecting increases in wage and other costs more fully. Mainly by adjusting the excise duties to reflect past inflation, my Budget measures themselves will put up the RPI by about 2¾ per cent. This means that for some months yet we must expect high figures for the RPI compared with twelve months previously.

However, the year-on-year figures published every month are slow to reflect a change of trend and may sometimes mask it completely. By the middle of the year, once the increases I have mentioned have been digested, and the effects of lower food and commodity prices are feeding through, I would expect the rate of increase in the month-on-month index to begin to fall. In fact there are good prospects that between about June and December the cost of living will rise on average by not much more than 1 per cent. a month, implying an annual rate of the order of 12 to 16 per cent. But, as the House will realise, these figures will not be achieved if there is any acceleration in wage and salary increases.

Thirdly, for the public finances I expect the borrowing requirement in 1975–76 to be about £9 billion. Though higher in money terms than last year, as a proportion of GDP it should be about the same—about 10 per cent. Though this figure is large, my concern at its size is mitigated by two considerations. In the first place, the tax measures I have announced today will even at constant prices yield more revenue in a full year than in 1975–76. The public expenditure reductions, which will not affect the borrowing requirement to any significant extent this year, will have their impact in 1976–77. For that year I see good prospects that the borrowing requirement will be significantly lower as a proportion of GDP, since my measures will then reduce the PSBR by approximately £3 billion compared with £1 billion in 1975, while our GDP is then expected to be much higher.

Second, it is important to recognise that, at current rates of taxation and public expenditure, the borrowing requirement would be very much lower still if exports increased to the extent that output and employment at home could return to full employment conditions. Higher exports would mean higher incomes and higher tax receipts out of those incomes, to the benefit of the economy as a whole and the public finances in particular. Under conditions of full employment brought about in this way, the borrowing requirement would be some billions of pounds less than my present forecast.

These two considerations, therefore, both lead me to view my forecast public sector borrowing requirement without alarm, but they do, of course, make it more necessary than ever for us to follow the strategy I have laid down today over the next two or three years.

The income tax changes will be at particular benefit to lower income taxpayers, especially, of course, one-parent families. Altogether 9 million taxpayers or 35 per cent. of the total will pay less income tax as a result of the Budget. This figure includes families with two children up to around average earnings. The increases in indirect taxation on inessentials will raise prices, but the impact will vary depending on how much individuals choose to spend on such goods. Allowing for the fall in income tax paid by lower income families, and bearing in mind the earlier decisions to increase family allowance and to introduce fully graduated insurance contributions, poor families will be affected least of all by my strategy of moving resources away from private consumption. Taking the measures as a whole, I am confident that their impact will be fair and progressive.

The effect of the Budget measures on employment has given me great concern, since I absolutely reject the use of mass unemployment as an instrument of policy, and this year employment will be seriously affected in any case by the world recession springing from the oil crisis. I think that hon. Members know that it is particularly difficult to forecast the unemployment figures, though so far the record of my Treasury advisers has been a good deal better than that of most outsiders. With all the necessary caution, I predict that, given a continuing low level of trade in 1975, the pressure of demand in the United Kingdom will continue easing and unemployment will continue to rise for the remainder of the year. I must warn the House that it could be touching a million, or 4 per cent. by the end of the year.

The Budget measures will reduce demand in 1975 by about £330 million and may be responsible for about 20.000 out of the total unemployed—about a fiftieth of the million. But this is part of the price we have to pay for inflation at current levels. On the other hand, in 1976, as world trade begins to grow vigorously again, I would expect to see a reversal of this trend set in and a continuing fall in the number of unemployed. I repeat, however, what I said earlier, namely, that if the stronger countries fail to expand their economies sufficiently, I shall have to consider very carefully what measures I should take to maintain employment in Britain. I pledge myself in any case to take steps to increase employment once our inflation rate has settled down to the international average.

The Budget I have presented today is a hard one for all of us in Britain. It is dictated by the harsh reality of the world we live in. A severe Budget is a necessary element in any strategy for improving the overall performance of our economy, which has been lagging increasingly behind most industrial economies for more than a single generation. Added to the need for measures to produce the essential structural changes in the balance of our economy are the burdens we carry with other countries because the explosion of world prices has cut our real income by 4 per cent. But in this situation the key to our immediate success is the rate of inflation inside Britain, and it is our failure here which is responsible for the special severity of this Budget.

So long as pay and prices increase at their present rates, no Chancellor of the Exchequer who puts his country first would act otherwise than I have done this afternoon. The situation would be very different if through improvements in productivity and moderation in pay negotiations we could substantially reduce our inflation rate. With higher productivity, lower wage settlements and the consequential improvement in the balance of payments we could have the same standard of living with lower prices, lower taxes and, most important of all, more jobs. At the same time we should have a sounder currency, a better assurance of international credit and a greater degree of that business confidence which is a precondition of the investment we need most of all.

There is a better alternative to the stony road we have to follow at present. It requires only a sustained act of will to take it—an act of will from which no section of the community, on the shop floor, in the board room or in the home, can stand aside. If this Budget helps to convince the British people of this fact, it will have performed a long-term service to our nation even more important than the solution of the problems which are its immediate aim.

Motion made, and Question,

That pursuant to section 5 of the Provisional Collection of Taxes Act 1968 provisional statutory effect shall be given to the following Motions:

(a) Spirits (customs and excise) (motion No. 3).

(b) Beer (customs and excise) (motion No. 4).

(c) Wine (customs) (motion No. 5).

(d) British wine (excise) (motion No. 6).

(e) Tobacco (customs and excise) (motion No. 7).

(f) Vehicles excise duty (motion No. 22).—[Mr. Healey.]

Motion made, and Question proposed,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance: but:

(a) this Resolution does not extend to the making of amendments with respect to capital transfer tax or estate duty; and

(b) without prejudice to any authorisation by virtue of any Resolution relating to value added tax, this Resolution does not extend to the making of amendments with respect to that tax so as to provide—

(i) for zero-rating or exempting any supply;

(ii) for refunding any amount of tax;

(iii) for varying any rate of tax otherwise than by varying the standard rate in relation to all supplies and importations on which tax is for the time being chargeable at that rate: or

(iv) for any relief other than relief applicable to goods of whatever description or services of whatever description.—[Mr. Healey.]

5.48 p.m.

5.58 p.m.

6.10 p.m.

6.38 p.m.

6.52 p.m.

Debate adjourned.—[ Mr. Walter Harrison.]

Debate to be resumed tomorrow.

Order for Second Reading read.

Motion made, and Question put, That the Bill be referred to the Scottish Grand Committee.—[Mr. John Ellis.]

Whereupon not less than ten Members having risen in their places and signified their objection thereto, Mr. DEPUTY SPEAKER declared that the Noes had it.

Bill to be read a Second time tomorrow.

(By Order)

Order for Second Reading read.

Motion made, and Question proposed, That the Bill be now read a Second time.

7.0 p.m.

7.17 p.m.

7.23 p.m.

7.25 p.m.

7.35 p.m.

7.56 p.m.