Q1.

Q9.

Q2.

Q8.

Mr. Secretary Ross, Supported by Mr. Bruce Millan and Mr. Robert Sheldon presented a Bill to increase the statutory limits on the amounts outstanding in respect of borrowings by the Scottish Electricity Boards, and to make provision for compensating the North of Scotland Hydro-Electric Board for deficits incurred or to be incurred by that Board in supplying electricity to the British Aluminium Company Limited for the operation of that Company's aluminium reduction plant at Invergordon: and the same was read the First time; and ordered to be read a Second time tomorrow and to be printed. [Bill 111.]

When I presented my last Budget, the world economy was in the trough of the deepest recession since the war. In the first half of last year the gross national product of the eight largest OECD countries outside the United Kingdom fell by 5 per cent. at an annual rate, and world trade fell by even more—around 14 per cent. at an annual rate. Unemployment in the industrial countries was rising to levels unknown since the War. At the same time, most countries' rates of inflation remained well into double figures.

I then predicted that a recovery in the world economy would be under way by about the turn of the year. In fact, the turning point came sooner. The United States economy recovered strongly in the third quarter. In the fourth quarter most of the main European economies, especially Germany, began to pick up. It is too early to be sure, but the rise in GNP in the industrialised countries in the second half of last year probably came close to reversing the fall in the first half.

Similarly with world trade: the rise in import volumes in the fourth quarter of last year probably came close to offsetting the falls seen at the beginning of the year.

Although this recovery in world output and trade must owe a lot to a turn-round in stockbuilding, we expect it to be sustained through the coming year. Private fixed investment may remain generally rather weak for the time being. But private consumption, in particular—I am talking of the world as a whole—is likely to rise quite strongly, as the rate of inflation moderates and the full effects of last year's tax cuts and credit relaxations are felt. In addition, stock-building should continue to contribute to world recovery this year, and public spending will continue to be boosted by the accelerated programmes of public works announced in many countries last year.

In the United Kingdom we have inevitably shared in the world recession. The main fall in activity came between the third quarters of 1974 and 1975, when our gross domestic product fell about 4½ per cent. This was an exceptional fall by our own past standards, though not by comparison with recent experience in some other industrial countries like Germany and the United States. The fall in our activity was due mostly to a fall in exports and an exceptionally large rundown of stocks, and since both have a high manufacturing content, manufacturing production fell even more sharply than GDP—by 9 per cent. over the same period. Personal consumption fell a good deal less.

This deep recession inevitably led to a big increase in unemployment, which reached 1·2 million—on a seasonally adjusted basis—at the beginning of this year. This level disturbing though it is, was no worse than what many other industrial countries experienced and a good deal less than in the United States. Moreover, the development areas have suffered comparatively less than in previous recessions: the gap between the United Kingdom average and unemployment rates in Scotland, Northern Ireland and Northern England has been reduced.

The tide has now turned and output in the United Kingdom is rising. But the extent of the recovery so far is uncertain. The increase in gross domestic product between the third and fourth quarters of last year was probably about 1 per cent. though the expenditure figures suggest a rather faster rate of expansion. Exports of goods and services rose by 5 per cent. in volume between these two quarters, there was a moderate rise in personal consumption and the fall of stocks was much reduced.

A moderate rate of recovery probably continued into the first quarter of this year. Industry is now rebuilding its stocks. Survey information suggests that exports are on a strong upward trend and business confidence is improving steadily. Up to the fourth quarter of last year manufacturing investment was falling, but this is to be expected at the present stage of the cycle and surveys of investment intentions suggest an upturn in investment later this year.

The outlook for unemployment now seems distinctly brighter. Recent monthly figures have shown an impressive change from increases averaging over 40,000 a month—seasonally adjusted—throughout the latter half of last year to a rise of 22,000 in February and a fall of 6,000 in March.

But, encouraging though this is, we cannot be at all certain whether they signal a definite turn-round or not. In the past there has often been a long time lag before a recovery in output has led to a firm downward trend in unemployment. Some of the improvement in the unemployment figures must be due to the special measures I announced in September, December and February, although it is not possible to identify their specific effects. If we judge solely by the movement of GDP in the last few months, it may still be too soon to expect the trend in unemployment to be reversed. But some of the indicators suggest that a rapid improvement may already be under way. I would mention in particular the steady increase in the number of notified vacancies over the last three months, as well as the large increase in our imports of industrial materials. So nevertheless we would be wise to wait some months longer before reaching a firm conclusion on the basic trend.

I turn now to the balance of payments. I predicted a year ago that the current account would improve by at least £1 billion between 1974 and 1975. In the event, it improved by nearly £2 billion, from a deficit of £3,650 million in 1974 to one of £1,700 million last year.

This improvement was due partly to a favourable change in import volumes relative to export volumes and partly to an improvement in the terms of trade. Import volumes fell by 7 per cent. as a result of the domestic recession and heavy de-stocking. Export volumes also fell, but by less. United Kingdom exporters increased their share of world trade in manufactures in the first half of the year but may have lost some of this gain in the second half as world demand recovered. The terms of trade moved in our favour by 12 per cent. between the second quarter of 1974 and the third quarter of 1975, since when they changed little until the recent depreciation of sterling. There has been little change in the balance of invisible transactions.

Relative to GDP, the improvement in the balance of payments is even more striking. In 1974 the current account deficit was over 5 per cent. of GDP. In 1975 it fell to a little under 2 per cent. I believe that we will be able to hold on to this improvement in 1976, despite the upswing in home demand.

Foreign currency borrowing helped substantially to finance the current account deficit in 1975, and borrowing by public sector bodies under the Exchange Cover Scheme has already made an important contribution this year. Moreover, apart from the special oil facility, our credit lines in the IMF remain wholly undrawn, and the amounts potentially available have indeed been temporarily increased by 45 per cent. to the equivalent of just over SDR 4 billion—£2·4 billion—under the agreement reached at Kingston, Jamaica, in January. We should thus have no difficulty in meeting our external financing needs this year. But I must emphasise that this depends on our success in fighting inflation and in maintaining confidence in our determination to pay our way in the world.

The latest estimate of the PSBR as a whole is about £10¾ billion. Though this is more than the forecast I published a year ago, it is significantly below what many commentators were predicting.

Both revenue and expenditure were higher than expected. The net increase in the PSBR was partly due to the unexpected depth of the recession but mainly to an under-estimate of the effect of inflation on public expenditure.

Despite the large borrowing requirement, the supply of money has been contained. Last year I said that it was essential that my strategy should not be undermined by a relation of our stance on monetary policy. In fact, the rate of growth of money supply on the broader definition was lower in 1975 than in 1974; M3 increased by 8 per cent. in 1975 compared with 13 per cent. in 1974. Monetary growth in both these years was far lower than the 28 per cent. increase under the previous Administration in 1973. I do not believe that anyone would now deny that my monetary policy has helped in the fight against inflation whereas my predecessor's made inflation much worse—and for a long period after he had left office.

More than half the public sector borrowing requirement in 1975 was financed by the sale of public sector debt outside the banking system, while demand for credit from the private sector remained slack. In keeping with my policy of concentrating credit on the essential needs of the economy, the qualitative guidance to the banks and finance houses was renewed in December. They were asked to ensure that any expansion of their business was directed to the needs of manufacturing industry for working capital, expansion of exports, import saving and industrial investment at home.

For the future my stance on monetary policy is unchanged. First, I am concerned to ensure that industry's requirements for finance are not crowded out by other demands, notably by those of the public sector. This is the financial counterpart of the Government's concern that resources should be available in the economy for industrial investment during the upturn, as the Public Expenditure White Paper makes clear.

Second, it remains my aim that the growth of the money supply should not be allowed to fuel inflation as it did under my predecessor. To this end, I aim to see that the growth of the money supply is consistent with my plans for the growth of demand expressed in current prices. If it became clear that this aim were not being achieved, I would be ready to use the appropriate mix of policies—not necessarily monetary policy alone—to redress the situation. After two years in which M3 has grown a good deal more slowly than money GDP, I would expect their respective growth rates to come more into line in the coming financial year. But, as we have seen over the last year, there can be big fluctuations in the growth of money supply from quarter to quarter, and this will no doubt be true of the future.

The most encouraging developments of the last 12 months have been those on inflation. In my Budget speech last year I made it clear that I saw success in reducing the rate of inflation, and the rate of wage increases in particular, as the key to achieving our objectives of higher employment and a stronger balance of payments. But at the time I presented that Budget the rate of wage increase was far in excess of the rate of increase in prices and threatened to destroy any hopes of getting inflation under control. As I said then, we could hope to reverse that trend only by a sustained act of will involving all sections of the community.

That act of will came three months later. The £6 pay limit was the TUC's response to the nation's need. It was an act of great responsibility on the part of the whole trade union movement—an act which has been sustained with impressive unanimity ever since. With only a few months of the current wage round left to run, we know of no instance where wages are being paid in breach of the £6 pay limit. In consequence, confidence in our future has been transformed both at home and abroad. There is no man or woman in the country who has not benefited as a result.

I forecast in my Budget speech last year that the annual rate of inflation in the second half of 1975 would be between 12 per cent. and 16 per cent.; in fact it was 14 per cent., compared with 38 per cent. in the first half. The £6 pay limit guarantees that our rate of inflation will continue to fall in 1976. This will be a massive improvement, but we shall still have a long way to go before our inflation rate is down to the levels of our competitors abroad. In the OECD as a whole, inflation averaged 8 per cent. a year in the second half of 1975 compared with our figure of 14 per cent. Therefore, we cannot relax our efforts. Further progress depends crucially on the pay limit for the next pay round, to which I shall revert later.

The special tax relief for increases in stocks which I introduced in November 1974 has been of great benefit to industry. However, some business men believe that the temporary nature of the scheme reduces the value of the relief, and others fear that the scheme may be withdrawn without anything to replace it so that all the tax which has been deferred on increases in stock will suddenly have to be paid. In particular, some say that the need to create balance sheet reserves against the possibility of the relief being withdrawn is reducing some companies' ability to borrow.

In our debate on employment on 29th January I did my best to dispel fears of this kind. Now I can go further. I am anxious to introduce as soon as I can a scheme of relief which will be a permanent feature of the tax code. It is, however, clear from recent discussions between the Inland Revenue and representatives of industry and the accountancy profession that there are legitimate differences of view about the form which a permament relief should take. I am naturally anxious to carry industry and the accountancy profession with me in this matter, if I can; and, since what we are considering will be a permanent part of our tax system with important implications for the operations of British industry, I think that it is worth taking a little time to get it right.

I therefore propose that the relief should continue in substantially its present form for two more years while the Inland Revenue is consulting industry and the professions about its permanent form. But I do propose one change. Its purpose is to strengthen the incentive for investment. There has been increasing criticism that the profits deduction operates unfairly against companies investing in fixed assets, because the profits base to which it applies is calculated before deducting depreciation allowances. I therefore propose that in future profits for this purpose shall be calculated after deducting allowances for depreciation.

This change would be an expensive one unless I sought to compensate for it in some way, and I therefore propose to do that by increasing the size of the profits deduction from 10 per cent. to 15 per cent. Even so, the benefit of stock relief to the company sector as a whole will increase by some £65 million in a full year. The real importance of the change is that the relief will now be concentrated more heavily on firms which are expanding and investing.

As a result of what I have just said, it must be clearly understood that there will be no question of any clawback with respect to tax relieved under this scheme in the case of all those companies whose stock valuations and rates of investment are maintained or increased. This means that for the great majority of companies stock relief really implies a deferral of tax not only for some short or limited period but into the indefinite future. I can also give an assurance that, if we decide ultimately on a different form of relief, we shall ensure as far as possible that the transition from one system to the other will not significantly affect the cash flow of individual companies.

The Sandilands Committee on Inflation Accounting strongly recommended that the present system of 100 per cent. capital allowances should be continued and suggested that the commitment to the system which was given by my predecessor in 1972, and which runs to the end of 1977, should now be extended. I accept this recommendation, and I propose that the main structure of the present system of capital allowances for fixed investment should continue in its present form. This is not to rule out any minor changes that may be necessary; but I cannot accept the representations that have been made to me for extending capital allowances to commercial buildings. I do not believe that the benefit from such a change would justify its heavy cost to the Exchequer.

The continuation of stock relief and the present system of capital allowances means that substantially the whole of any profits which a manufacturing company reinvests in its business, whether in fixed or in working capital, will effectively be relieved from corporation tax. Given the importance of expanding and strengthening our manufacturing base, I believe that this is a development which the whole House will welcome.

Uncertainty about the future structure of corporation tax is one of the factors which have unsettled business confidence, The present imputation system is not the one which I would have preferred, but I have to take account of the high cost of any change in terms of disruption and diversion of effort in industry. For these reasons, I have decided not to pursue further the idea of a return to the so-called classical system of the corporation tax—the more so since the arrangements we now have provide, in effect, the same powerful incentives for the retention of profits for the purpose of investment as the original corporation tax introduced by my right hon. Friend in 1965.

I also do not propose any change in the rates of corporation tax. Given the improved financial prospects for the company sector, I see no case for reducing the rates. But I am anxious to assist small companies where I sensibly can, and I therefore propose to increase the profit level by which small companies are defined for the purpose of the preferential rate of corporation tax from £25,000 to £30,000. The limit for marginal relief will be increased from £40,000 to £50,000.

I now turn to the question of company finance. Although the financial position of companies has greatly improved in the last 12 months, I am concerned that, as world trade expands and new trading opportunities arise, none of those opportunities should be missed by creditworthy companies because of a shortage of available finance. In part, this is a question of avoiding what has become known as crowding out, and I have already mentioned my concern to avoid this. But in part it is also a question of ensuring that external finance is available for industry in the form which it wants.

The renewed confidence of investors, created in large part by this Government's economic policies, revived the equity market last year so that it was possible for companies to raise a record amount—some £1¼ billion—in equity capital. Over £700 million of this was for manufacturing industry.

The debenture market has not yet revived in the same way, but I hope that it, too, will once again become an important source of finance for investment, since medium-term interest rates should fall as the next round of our counter-inflation policy is seen to succeed. Discussions in the NEDC have suggested that the existence of transfer stamp duty might inhibit such a revival because the duty reduces the marketability of loan stocks and so their attraction to investing institutions. I therefore propose to abolish the stamp duty on transfers of fixed-interest stocks, excluding convertible stocks, at a cost of £10 million in a full year. This will take effect from 17th May in time for Stock Exchange settlements due on 25th May.

I also welcome the growth of medium-term finance for industry. In part this has come from Finance for Industry under the expansion of its resources arranged in November 1974. In part it has come from the banks, no doubt spurred on by the existence of FFI as a competitor. I understand that the facilities offered by the clearers in this way have almost doubled in the last two years.

I have, however, been concerned to ensure that ample finance of this kind continues to be available. Finance for Industry still has available for commitment a substantial part of the additional £1,000 million announced in November 1974. At my request, the Bank of England has discussed with the London and Scottish clearing banks their ability to provide this type of finance in future. The Bank has been assured that the clearing banks are still able to increase this type of lending. Nevertheless, in the longer term the availability of such finance longer term the availability of such finance might conceivably be limited by prudential liquidity considerations.

The Bank of England and the London and Scottish clearing banks have therefore agreed to explore the extent to which such constraints on bank credit might need to be alleviated and, if so, the means by which this could be achieved, such as the possibility of making medium-term loans by the clearers eligible for refinance at the Bank of England. These two developments will help to ensure that any creditworthy company should not be held back from worthwhile investment by the absence of finance in a suitable form.

Looking to the longer term, I want to examine the case for establishing some permanent arrangements for encouraging counter-cyclical investment. I therefore welcome the decision of the recently-established NEDC Committee on Finance for Investment to undertake an immediate study of the feasibility of countercyclical and other investment reserve schemes. I realise that there are plenty of difficulties about any such scheme—including the fact that we already have very generous tax incentives for investment.

I appreciate that the availability of finance is by no means the most important determinant of investment. The outlook for demand and the prospect of profits are both crucial to investment decisions. But, given the undoubted need for a higher level of investment to halt the process of industrial decline, and the need for greater stability in the pattern of investment to make the economy more manageable through the trade cycle, it is essential to study every possibility fully and carefully—particularly the concept of an Investment Fund such as already operates sucessfully in Sweden. If an effective counter-cyclical scheme can be devised, it could be an important element in our longer-term industrial strategy.

In the meantime, we are pressing ahead with specific programmes for improving our industrial base under Section 8 of the Industry Act. A total of £285 million has so far been allocated for accelerated projects and industry schemes. We have identified other sectors which may be suitable for this approach—for example, parts of the electronics and automation industries; these will be fully appraised and costed over the next two months. Not all will necessarily survive this scrutiny, and others may emerge. After consultation with my right hon. Friend the Secretary of State for Industry, I now propose to allocate a further £40 million to such industry schemes.

Once decisions have been taken, the industries concerned will be coming forward with plans which should result in investment expenditure from the autumn of this year. Government funds will not, however, be needed until the company investment is well under way; moreover, some funds are in hand from the tranche announced only last month. Consequently, although the relevant expenditure will be going ahead later this year, I do not envisage any significant drawing against this new tranche until early in 1977.

I recognise that decisions on the future of price control will also be of crucial importance to business confidence and investment. As the House knows, the present Price Code expires at the end of July, and my right hon. Friend the Secretary of State for Prices and Consumer Protection will be discussing with both sides of industry how it should be changed. I cannot predict the outcome of those discussions; but I can give an assurance that in reaching decisions the Government will take full account of the needs of industry, and in particular of the need to allow a sufficient recovery of profits to encourage the new investment we need and the new jobs which the investment will bring.

The measures which I have announced so far are intended to give companies the confidence to invest and to ensure that the necessary finance is available. A greater volume of industrial investment, together with fuller and more efficient use of the investment we already have, is of critical importance to the solution of our industrial problems and to our strategy for a return to full employment. In the short run, however, there is a risk that action in these fields and the stimulus of expanding trade will not operate fast enough to save all the jobs which will be needed in the upturn. I have therefore looked hard for measures which will act directly on the level of employment without stimulating inflation or imposing too heavy a burden on the public sector borrowing requirement. As the House is aware. I announced a series of such measures in September and December last year and again last February.

The schemes for increased training and job creation are continuing, but there is more that can be done. I fully share the concern of the trade unions at the present level of unemployment and the economic and social costs which it entails. I have therefore decided, following a proposal in the TUC Economic Review, that the amount paid per head under the temporary employment subsidy, at present £10 a week, should be doubled to £20 a week, which represents about one-third of average earnings in manufacturing.

The temporary employment subsidy is already preserving jobs at the rate of about 60,000 a year, covering over one-quarter of the overall total of eligible redundancies occurring within industry. This increase in the amount payable should make it substantially more attractive to firms as an alternative to declaring redundancies. The increase will operate for new applications received from today, and for existing cases from the date of their next three-monthly renewal.

I also propose to extend the scheme to the end of this year. This means that instead of ending in August—a year after it began—the scheme will now be open for new applications until the end of the year and payments will be made throughout 1977. Similar changes are being made to the corresponding scheme which applies in Northern Ireland.

The higher rate of subsidy will have time to produce a substantial effect. We estimate that this will preserve another 60,000 or so jobs between now and the end of the year, though rather more than half of these may be at the expense of other jobs. The gross cost will be about £95 million up to the end of 1977 and about £60 million in this financial year, although as I have pointed out before, because of the offsetting savings from unemployment benefit and additional tax revenue, the net cost to the public finances is likely to be only about one-third as much, or £30 million over the whole period. This decision will reinforce and extend a scheme which has already proved its worth and which is becoming well known to employers. It will provide jobs for those who would otherwise have been made redundant, until the recovery is more solidly established.

I can also announce a further extension of the Community Industry Scheme which is designed to help socially disadvantaged young people who have difficulty in getting or holding down a job. I announced in December last year that 1,000 additional places would be provided up to March next year, and we have now decided that these can be continued beyond that date if there proves to be a need for them. I am also putting the scheme on the same footing as the job creation programme, by enabling Community Industry to give sponsors—mainly local authorities—a grant towards the cost of materials, of up to 10 per cent. of the labour costs of the project. These changes will cost about £2·3 million in a full year and £500,000 in 1976–77.

I now turn to tax instruments which affect particular sectors of industry, beginning with the taxation of motoring. One way in which the Government must demonstrate the priority they give to manufacturing industry is by forgoing changes which might otherwise have been desirable if they are likely to inflict damage on important sections of industry.

As the House will be aware, the Government have been considering the possibility of abolishing vehicle excise duty on passenger cars and recouping the lost revenue by raising the tax on petrol. Since I rejected this change a year ago, I am bound to confess that it has appeared increasingly attractive when looked at in isolation from its industrial consequences.

But in reaching a decision I also had to take account of the powerful industrial arguments which point to retaining the duty. To abolish it and make a compensating increase in petrol tax would immediately encourage people to change their present cars for smaller ones, or at least to prefer a smaller model when the time comes to buy a new car, and it is amongst the smaller models that our car industry is particularly vulnerable to imports. I cannot make a change, whatever its merits on other grounds, which would further expose us to imports of foreign cars and to the loss of jobs in our own industry. On these grounds I have decided against abolishing the duty. Our industrial policies must have first priority.

I propose, however, to make some minor changes in the relevant legislation. In particular I am altering the criteria for exemption for disabled passengers, because the mobility allowance scheme was designed to supersede other forms of mobility assistance to the disabled.

Again reflecting the priority we must give to industrial policy, I have decided against relaxing hire-purchase restrictions on motor cars in present circumstances since this would be most likely to stimulate imports. The Government have, however, decided to abolish hire-purchase restrictions on motor caravans, where similar considerations do not apply. An Order will be made by my right hon. Friend bringing this into effect from midnight tonight.

I turn now to value added tax. In my Budget last year I extended the 25 per cent. higher rate, which already applied to petrol, to a wider range of goods, including items such as domestic electrical appliances, television sets and boats. I recognised at the time that not all these items could be regarded as luxuries, but I concentrated the higher rate on the less essential items so that the extra burden of taxation would fall least on those with low incomes. This formed part of a series of changes in indirect taxation which were designed to reduce consumption and so assist in bringing the economy into better balance.

The higher rate of VAT has produced an extra £400 million in 1975–76. Customs and Excise has monitored the impact of the tax since its introduction, and I have received representations about its effect from the TUC, the CBI, the Chairman of the EDC for the electrical appliances industry and others. Although the severity of the 25 per cent. rate was necessary in the especially difficult circumstances of last year, I have decided that in the longer term the 25 per cent. rate is too high. It could damage some parts of manufacturing industry and jeopardise employment.

I have considered carefully all the representations I have received, including those which advocated abolishing the higher rate altogether. However, there are strong arguments against doing this. A return to an 8 per cent. standard rate of VAT would involve a big loss of revenue which would have to be recouped in other ways. To do this by increasing the standard rate to 10 per cent.—a course which has been advocated by the right hon. and learned Member for Surrey, East (Sir G. Howe) and his right hon. and hon. Friends—would put up the prices of many everyday items which are purchased by ordinary working people and by pensioners and other less-well-off members of the community. I therefore propose to leave the standard rate of VAT at 8 per cent.

In deciding the new figure for the higher rate, I have taken several factors into account. If demand for those goods now taxed at 25 per cent. were raised too rapidly, there would be a real risk that British industry could not cope and that the demand would be met by a big influx of imports which would then be difficult to dislodge. This is exactly what happened when the previous Administration removed hire-purchase controls in a single step in the summer of 1971. British industry is still paying for that mistake. I am determined not to repeat it.

I therefore propose to reduce the higher rate, as from Monday next, to 12½ per cent. In choosing this figure I have taken account of the needs of smaller businesses, including retailers. It has been pressed on me, for example, that the 25 per cent. rate has had a particularly adverse effect on smaller businesses such as boat builders and firms which service electrical appliances. The reduction which I propose should be of great help to them—and particularly to poorer people who may have refrained from getting their appliances serviced when the rate was 25 per cent.

I also understand that the many thousands of retailers who sell higher-rated goods prefer VAT rates which provide convenient fractions for calculating. Twelve and a half per cent. gives such a fraction—one-ninth of the tax-inclusive price. At the same time, it is a rate which is more than 50 per cent. higher than the standard rate and, therefore, produces a useful amount of additional revenue—about £140 million in a full year.

The reduction to 12½ per cent. will apply to all goods and services at present covered by the higher rate. Leaving aside petrol, the cost will be £175 million in a full year.

For a number of hard-pressed sectors of United Kingdom industry, this will provide a welcome boost to their domestic market. Notably in the important market for television sets, I am concerned that the United Kingdom manufacturers should benefit. For colour sets, where Japan is the main source of imports into the United Kingdom, the need for a continuity of restraint is well understood between the Japanese and ourselves. But we imposed surveillance licensing on imports of television sets last December, and we shall be watching the position closely in case this understanding proves insufficient.

The higher rate of VAT applies to petrol, and if I did not take offsetting action on petrol duty the reduction to 12½ per cent. would reduce the price of petrol to the motorist. At a time when it is essential to conserve oil, I cannot allow this to happen; indeed, I believe that I should go further and more than offset the reduction of VAT. I therefore propose to raise the hydrocarbon oil duty on all road fuel by 7½p a gallon. This will mean a net increase of about 1p a gallon on petrol for the private motorist.

It will have two other consequences. First, the way VAT operates makes it very advantageous to misuse petrol bought on business account for private motoring. My proposals will greatly reduce this advantage. Second, the duty on fuel for diesel-engined road vehicles—derv—will also rise by 7½p a gallon. However, since the increase in oil prices began two and a half years ago the incidence of taxation on derv has fallen sharply, so that the incentive for users of this particular road fuel to economise has not been strengthened by taxation.

The proposed increases will come into effect at 6 p.m. on Friday 9th April, but it is not expected that prices will go up before Monday 12th April. This increase will not cause increases in the cost of stage bus services. Under existing legislation, there will be an increase in the rebate of duty paid to stage bus operators equivalent to the full amount of the duty increase.

The cost of the reduction in the higher rate of VAT on petrol will be £185 million in a full year. But my proposals for road fuel duty will offset this and produce a further net increase in revenue of £265 million in a full year. Overall, therefore, my proposals for the higher rate of VAT and for road fuel duty will produce a net revenue increase of £90 million in a full year.

Increases in other indirect taxes would add to the Retail Price Index and I have been tempted to conclude that I should take no such action in a year when the fight against inflation is so important. But there are important arguments in the opposite direction. Inflation over the past five or six years has substantially shifted the balance of our tax system from indirect to direct taxation, since the yield of income tax rises with rising earnings while the yield of the specific duties is not linked to the inflation rate. In addition, increased revenue in this area will help make room for the socially desirable expenditure I shall be describing later in my speech.

Because the Customs and Excise revenue duties on alcoholic drinks and tobacco are levied as specific sums on given quantities of the goods concerned, their impact has fallen heavily as a proportion of the selling price. I am therefore proposing modest increases in these duties. For beer I propose an increase which, together with the consequential VAT, will result in a price increase equivalent to 1p a pint on average. For spirits my proposal will represent an additional 32p, including VAT, on a standard bottle of whisky or gin. For wine I propose increases which will represent an addition, including VAT, of up to 12p a bottle on fortified wines and 6p on a standard bottle of table wine and of most made-wine. These changes will be brought into effect for goods which are cleared from midnight tonight.

I also propose a small but nevertheless worthwhile new excise tax. Most ciders and perries are not at present taxed and I think it only right that they should bear some duty like other alcoholic drinks. I therefore propose that from 6th September these ciders and perries should be charged with a new excise duty of 22p a gallon. Allowing for consequential VAT, this will be equivalent to about 3p a pint. I propose to exempt small farmer producers from the new duty.

These revenue duty changes will produce in a full year an additional £95 million from beer, £25 million from spirits, £25 million from wine and £10 million from cider and perry, and an additional £10 million from the 8 per cent. rate of VAT on these goods.

There is a strong case on health grounds as well as revenue grounds for increases in the taxation of tobacco. I propose both some increases in the level of taxation and a first step in a restructuring of the duty system. Our present duty is charged basically on the weight of unmanufactured leaf. This is a system which has served us well for many years, though it has two disadvantages. First, the real burden of the specific duty falls at times of inflation, giving an unwelcome boost to consumption of a product dangerous to health. Second, because the duty falls on the unmanufactured leaf it has not been possible to discriminate between different types of smoking product.

When we joined the EEC we accepted an obligation to replace this duty by the end of 1977 with a duty falling not on the raw material but on the finished product. So far as cigarettes are concerned the duty is to be levied partly as a proportion of the retail price and partly on the number of cigarettes. However, this is a major change and if we introduced it overnight at the end of 1977 there could be a degree of disturbance to our existing market which I would find unacceptable. I have therefore decided to make a start in moving to the new system now, and in this Budget a part of the existing specific duty will be replaced by a new excise duty on the finished product.

I envisage that at the final stage the duty on cigarettes should be predominantly ad valorem. For a start I am setting the new duty at a rate of 20 per cent. of the retail price and reducing the existing leaf duty by such an amount as will produce a net increase in the total yield. Because of the change in the system it is difficult to provide precise figures for the effects of the increase on the whole range of different kinds of cigarettes, but I expect that the total tax burden on the most popular sizes will rise by 3p or 3½p for a packet of 20.

I make no apology for this increase. Many people who are rightly concerned about the health of our nation will regard it as inadequate. I know that many of my hon. Friends do. However, I had to pay some regard to the level of prices and to the burden on those, particularly the poorer, who find it difficult to cut back on their smoking.

There are administrative difficulties about charging an ad valorem duty at this stage on other forms of manufactured tobacco, and for these the new end-product duty will be based on weight. For cigars and hand-rolling tobacco I am proposing to set the balance of the old and new duty rates at levels such that there will be increases in line with those for cigarettes. However, there will be no overall increase in the average tax burden on pipe tobacco. This is probably the least hazardous form of smoking and in addition many pipe smokers are retired or about to retire, or to be redeployed, and may therefore face financial problems.

In order to allow time for the administrative arrangements for the new duty to be worked out these changes will come into effect from 10th May. The net increase in the yield, including the consequential VAT, will be £115 million in a full year.

Together all these indirect tax changes will add about ¾ per cent. to the Retail Price Index.

Nothing is more offensive to the vast majority of men and women who pay their income tax automatically through PAYE than the knowledge that a small minority have scope for evading and avoiding taxation either through limitations in the powers of the Revenue or through loopholes in the law. I propose to take steps to deal with both these problems.

First, tax evasion—and by that I mean tax-dodging which involves breaking the law of the land. Evasion is not only unfair to the many millions of taxpayers who pay their tax bills honestly; it brings the whole system into disrepute. I am aware of the anxiety that has been expressed about the current extent of evasion and I have now decided that the Inland Revenue should be given additional powers to enable it to uncover evasion more effectively.

It is important in this area to weigh the requirements of an effective and fair tax system with the proper concern, shared by hon. Members on both sides of the House, for the privacy of the citizen.

I believe that the proposals I shall make strike the right balance. My main proposals are as follows. I have decided to strengthen the powers which require a person to produce for inspection documents in his power or possession which bear on his liability to tax. There will be a parallel power to obtain from a taxpayer's spouse and children documents bearing on his own liability. Where a person is carrying on a business the Inspector of Taxes will be given power to require the production of relevant documents from other businesses, including banks, in order to determine that person's tax liability. But the power to approach any person other than the taxpayer himself will be exercisable only with the consent of a General or Special Commissioner of Income Tax.

These proposals represent the minimum that is needed to help the Inland Revenue to deal with evasion and to be fair to ordinary working people who pay their tax under PAYE.

In other democratic countries in Europe and North America the Revenue authorities already have such powers. Indeed the powers available in the United States, Canada and Australia are a good deal wider than those I now propose. I think the vast majority of taxpayers will feel it was high time that in this respect we were brought more into line with our friends and competitors.

The Finance Bill will also contain measures to deal with an avoidance scheme by which wealthy individuals have been able, by contrived arrangements, to use the 100 per cent. first year allowance given for capital investment simply as a means of minimising tax on their personal incomes. My hon. Friend the Financial Secretary to the Treasury explained last December in a Written Answer that where the asset giving rise to the relief is leased or chartered by certain kinds of partnership, the relief would be allowable only against the rental income. I propose to apply the same restriction in other circumstances where wholly artificial arrangements have been entered into for tax avoidance purposes and the relevant expenditure is incurred after today.

I undertook last year to review the legislation on fringe benefits, following the start we made in last year's Finance Act with the legislation on medical insurance and vouchers.

As the Diamond Commission showed in its Report on Higher Incomes from Employment, the two main benefits provided by firms for their employees are cars and loans at a nil or low rate of interest. The provision of a company car for a director or an employee earning over £5,000 is already taxable; but the rules for measuring the benefit derived from its use for non-business purposes do not in most cases bring into liability anything like the real value to the beneficiary.

I propose therefore that this benefit should in future be measured by a scale which will vary with the size of the car and will reflect standing charges and running costs borne by the employer in respect of the employee's private use of the car. The substitution of a scale for the present rather cumbersome method of measuring car benefit" will bring a much-needed simplification into this part of the tax system and will also make it more equitable.

The scale will not take effect until 1977–78, and in view of the importance of not adding to the difficulties of the British car industry it will be phased in over a period of two years, so that its full effect will not be felt until 1978–79. In the meantime my right hon. Friend the Secretary of State for Industry will be consulting the motor industry on the industrial implications of this decision.

The benefit of low-interest or interest-free loans is not at present taxable. I accept the view of the Diamond Commission that there is no tax advantage from such loans where the interest on them would be eligible for tax relief. But where it would not be, I propose to make the benefit of these loans liable to tax. This will mean, for example, that house mortgages provided cheaply will not attract liability so long as they do not exceed the ceiling for tax relief; but loans made, say, for buying shares in a public company or for paying school fees will be taxable to the full extent of the benefit conferred by the remission of interest.

In addition to my proposals on cars and loans, I intend to strengthen the 1948 legislation on benefits in some other respects including its extension to employees in the public sector and non-trading organisations. My right hon. Friend will give details of these in the course of the debate.

I propose that all these changes in the treatment of fringe benefits should take effect from 1977–78—with the exception of certain anti-avoidance provisions which will take effect immediately—and that they should at the outset apply only to directors and employees earning over £5,000. But I am well aware that some of the benefits I have referred to are not confined to those on over £5,000 a year, and in due course, when staffing in the Inland Revenue permits, I intend that the provision of car and loan benefits at least should be taxable in the hands of all employees whatever their salary.

I will now mention three minor tax measures, the first two of which will make very necessary savings in Revenue staff.

First, I propose to correct an anomaly which has caused a lot of unnecessary work. In the year in which a couple marry, the woman is at present entitled to the single person's allowance against her income before marriage and her husband is entitled to the wife's earnings allowance against her post-marriage earnings. I propose to end this duplication of allowances in the year of marriage. This proposal should save 65 staff and yield £60 million.

Second, I have been looking at the arrangements for allowing tax relief for life assurance premiums. Because this relief differs from other tax allowances, it requires special attention in tax offices. The total work on giving the relief mainly through the PAYE system now occupies the equivalent of between 1,000 and 1,500 staff. To simplify the administration and save most of these staff I have decided that a system of relief by deduction should be introduced. This will allow policyholders to deduct an appropriate amount from each payment of an eligible premium; the Life Offices will then receive corresponding direct payments from the Revenue to reimburse them for the reduction in their premium receipts. It will require some changes in the form of the relief.

Both the Revenue and the Life Offices—who will of course be consulted on all the arrangements—will need some time to prepare for the new system. It will not therefore begin until 1979–80.

Third, I propose to raise the limits on the annual amounts which a self-employed person may pay by way of a tax-relieved premium to provide himself with an annuity on retirement. These amounts have not been changed since 1971 and the Government gave an undertaking last year that they would be reviewed. I have decided to increase the limit of £1,500 to £2,250, with corresponding increases in the limits for people born before 1916 and for the special forms of contract first introduced in 1971.

The capital transfer tax was introduced in order to reduce the weight of inherited wealth and the unfair power which this gives to a minority of the population. This had been the main purpose of the estate duty. But the estate duty was avoided on a massive scale particularly by the very wealthy and this, of course, failed to bring about the redistribution of wealth which was its aim.

The lengthy and acrimonious debates which accompanied the introduction of the capital transfer tax revealed how important these avoidance possibilities have been, since despite the fact that the new tax is levied at far more moderate rates than the old estate duty, it produced far more hostility among those whom it affected.

I believe that now the tax is on the statute book its fundamental fairness in comparison with the old estate duty is becoming more generally recognised and accepted. We have been anxious of course to meet legitimate grievances as well as to remedy technical defects in the legislation as far as possible, as we said we would do in the light of all that was said in the course of last year's debates. I have been particularly concerned to ensure that it does not damage productive activities which are of value to the national economy.

I will now mention only some of the more important changes.

The first, and most important, concerns the impact of the tax on businesses and farms.

I have decided to introduce a new relief for businesses which will go wider than the old estate duty relief for industrial buildings and plant and machinery. Where a transfer relates to a sole proprietor's or partnership business, or to a controlling unquoted shareholding in a company, the value transferred will be reduced by 30 per cent.

The new relief will apply to businesses generally, not restricted to the manufacturing sector; but investment concerns and dealers in land and shares will be excluded. This is a very important change, particularly for small businesses. It will substantially lighten the burden on transfer of businesses and will go a considerable way to meet the representations which have been made about the inhibiting effect of capital transfer tax on the small firms sector. I believe that it will give the proprietors of small businesses greater confidence to invest and expand their activities.

As a further help to the small business men, I propose to increase from £1,000 to £2,000 the annual amount which a person may give away in life tax-free after using up any other exemptions. This will produce a further lightening of the burden on lifetime gifts over and above the existing concession of special lifetime rates. While the relief will be of general application, it will be particularly helpful to the small business man transferring his business over a period to his successors.

If we add to these changes in capital transfer tax what I have already said about the increase in profit levels for the small company rate of corporation tax, and about the provision of medium-term finance for industry, this Budget has gone a long way to meet the Government's undertaking to cater for the special needs of small businesses.

The new 30 per cent. relief will also apply to farmers. Here I have taken account of the work of the Interdepartmental Working Party on Capital Taxation and Agriculture, which was foreshadowed in the 1975 White Paper "Food from Our Own Resources". The 30 per cent. relief will apply to the assets, including land, which are used in farming as it does to other businesses. In respect of his land the full-time working farmer will still be able to claim instead his existing special relief. However, I am taking the opportunity to adapt the form of the present multiplier relief for full-time working farmers to that of the new business relief, that is, to a straight percentage reduction. In this special case the reduction will be 50 per cent., which will achieve broadly the same effect as the present multiplier relief. I am not proposing to reinstate relief for agricultural landlords, which was a justly criticised feature of estate duty.

The new relief, which will cost an estimated £15 million in the first full year, will apply to all qualifying transfers after today.

The present exemption on death for works of art, historic houses and other property of importance to the national heritage will, subject to certain conditions, be extended to lifetime gifts and to property held in discretionary trusts, but at the same time I propose to toughen the conditions for the relief.

I shall be introducing new provisions to govern the treatment of property passing under survivorship clauses in wills; and to stop from today what the Press has labelled "The General Franco device". [HON. MEMBERS: "What is that?"] There seems to be some uncertainty as to what that is, so let me hasten to add that it is a device which makes it possible to escape the capital distribution charge on money paid out of discretionary trusts. The trustees simply make the distribution conditional on the beneficiary surviving some named person, usually someone who is close to death.

In my Budget Statement last year I said that I was not persuaded that it would be right to introduce indexation for capital gains tax but that I proposed to review the incidence of the tax in the ensuing year.

The issue is whether I should alter capitan gains tax to take account of the fact that someone who sells a chargeable asset has to pay tax on a gain measured in money terms although inflation may have reduced the real gain or indeed even turned it into a loss. Different suggestions have been put forward for dealing with this problem. Some people propose that the cost of the asset should be written up on an index; others that the gain should be scaled down according to how long the asset has been owned. It has even been suggested that, because of inflation, capital gains tax should be abolished altogether.

The crucial question is whether those people with chargeable assets should have their tax liabilities insulated from the effect of inflation. I have come to the conclusion that this would not be right. For income tax, although I have increased the personal allowances during my two years as Chancellor, I have not been able to do so sufficiently to eliminate fiscal drag completely. Income tax liabilities have not, therefore, been insulated from inflation.

Then there are the millions of investors who have no prospect of any capital gains on their assets—those who put their money into building societies, savings banks and the like. If assets such as shares and land are to be indexed for capital gains tax, logic requires that these millions of other investors should be treated as having incurred losses on their assets. We just cannot afford to go down this road.

I have, therefore, concluded that there should be no change in the structure of capital gains tax. The right answer to inflation is not to tinker with the effects but to cure the disease, and this we are doing.

However, I propose to increase, with effect from 1975–76, the total amount of disposals that can be made annually without any charge to capital gains tax from £500 to £1,000. This will mean that those with modest amounts of capital—£500 to £1,000—are unlikely to become chargeable to capital gains tax, so that they at least will be protected from the effects of inflation. This change will cost about £750,000 in a full year.

Finally, I should mention that I have received many representations that the extra cost to companies of repaying foreign currency loans when sterling has fallen in value should rank for tax relief. This is a complex matter on which the arguments are finely balanced. I will announce my decision on this in next year's Budget. Meanwhile the Inland Revenue will consult those affected to see whether a scheme for tax relief can be devised which is workable, fair to taxpayers and the Exchequer and reasonably free from risk of avoidance. I should make it clear that these discussions will be entirely without commitment on my part.

As we made clear last year, we propose to return to the annual cycle of upratings now that inflation is being brought under control. We shall therefore raise social security benefits in November. We also confirmed in the recent White Paper on Public Expenditure our continuing commitment to improve pensions and other long-term benefits in line with the movement of earnings.

Now that the rate of inflation is coming down, I believe that an increase of £3 in the rate of pension for a married couple would be more than enough to match the actual and likely movement in earnings in the 12 months to November; an uprating on this basis would require additional provision of around £360 million in the current financial year.

But I have listened carefully to representations from those who have urged me to go beyond this. In the light of these representations I have decided to raise the married rate by £3·30 to £24·50. For single pensioners the increase will be £2 above the present rate, giving a new rate of £15·30 a week. These increases of over 15 per cent. will cost about £400 million in 1976–77 and about £1,070 million in a full year.

There will also be increases in short-term benefits which my right hon. Friend the Secretary of State for Social Services will be announcing tomorrow. Altogether the increases in long-term and short-term benefits will provide an additional sum of around £510 million in 1976–77 and over £1,360 million in a full year.

As regards support for families, we shall also make a substantial increase in July in the limits up to which families can claim family income supplement. The limits for a one-child family will go up by £7·50 a week—from £31·50 to £39. They will be £4·50 higher for each subsequent child. The maximum supplement payable to a one-child family will be increased from £7 to £8·50 a week. This will ensure that families which have received a £6 pay rise under the present policy will have their FIS entitlements fully protected. It will also bring about 25,000 more families into benefit, taking the total to about 85,000. The cost of the increase will be £12 million 1976–77 and £14 million in a full year.

My right hon. Friend the Secretary of State for Social Services will announce details of these various changes tomorrow.

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, 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—

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

(b) for refunding any amount of tax;

(c) for reducing the rate at which tax is for the time being chargeable on any supply or importation otherwise than by reducing that rate in relation to all supplies and importations on which tax is for the time being chargeable at that rate; or

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

[ Commission Documents Nos. R/622/76 and R1606176 on Policy Guidelines for 1976.]

5.46 p.m.