FINANCE BILL

§ The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)

I beg to move, That the Bill be now read a Second time.

As hon. Members know, we have been enjoying a very satisfactory economic expansion during the past eighteen months, with price stability. The object of the fiscal measures which have been proposed in the Budget and of the monetary steps taken last week is to enable that expansion to continue at the highest rate which can be maintained with safety to price stability and to our balance of payments. Furthermore, we have always to bear in mind the need to leave room in our economy for a high level of productive investment in industry, on which our future prosperity so largely depends. I believe that the series of measures which I have introduced are best fitted to achieve the objectives which I have just described.

As my colleagues and I made clear during the Budget debate, the Government regard a combination of monetary and fiscal measures as likely to be more effective than reliance on one single type of measure only. During recent months the Bank Rate has been raised by 1 per cent. I have introduced a Budget designed to exercise a moderate restraint on demand and these earlier measures will now be reinforced by the restrictions on credit which I announced to the House last week. The initial call for special deposits was deliberately made a moderate one. It is of the essence of monetary measures that they should be applied in a flexible manner. We want smooth adjustments and not violent shock action.

I have, of course, noticed one or two criticisms which have been directed in some quarters at the hire-purchase controls, but criticisms have, in fact, been extremely few. I do not believe that it would have been right to have taken no action at all in that part of the credit field, especially in view of my concern to exert some restraint on current consumer demand in order to avoid the need to 890 cut at the roots of our future earning capacity. The measures which I have just described will affect demand in the private sector of the economy. I can assure the House that the Government are not neglecting the importance of applying the same more rigorous standards to the public sector as well, especially when they are considering proposals for further new increases in Government expenditure.

We have before us a somewhat substantial Bill and, because of the complexity of the subjects covered, the phraseology may be in some places less than translucently clear at first glance to the layman. One or two Clauses I think may even seem slightly opaque at first sight. I want to deal particularly with certain points on which hon. Members have expressed interest and concern during the Budget debates. I hope that I shall be forgiven, therefore, if I make only the briefest reference to some of the simpler and less contentious Clauses.

I shall begin with the Clauses which relate to Customs and Excise. Clauses 1 and 2 together provide for the reduction in the wine duties. As I explained in my Budget Statement, this step was designed mainly to meet the Portuguese request in the negotiations for the European Free Trade Association for some help with their traditional exports of heavy wine to this country. It had the advantage of completing the reform of the duty structure which was begun in 1958.

Clause 4 provides for the abolition of the remainder of the Entertainments Duty charged on admissions to cinemas and public television shows. I think I can say that this change has been welcomed on both sides of the House. The increases in Tobacco Duty and drawback are contained in Clause 5. Hon. Members opposite have voiced some criticism of this provision. I shall only say that, although no tax increases are ever welcome, this one seems to involve less avoidable hardship than any other by which I could have raised a similar amount of revenue.

Clause 9 enables the Commissioners of Customs and Excise to make regulations introducing a more efficient system for detecting the misuse of duty from heavy oil used as fuel for road vehicles by adding a dye to it. This new system of control will in due course enable users 891 of dutiable heavy oil to be relieved of their existing necessary but tiresome obligation to maintain record of mileage and of their fuel purchases. I think that that is a useful step.

I now come to the Clauses dealing with Inland Revenue matters. Clause 13 bears witness to the important constitutional point that Income Tax is an annual tax. Clause 15 gives effect to my proposal, which received a general welcome, to introduce a new relief for widows and widowers with a child or children eligible for child allowance, but with no resident housekeeper. The Clause is framed so as to make the allowances available also to certain classes of single taxpayers who are responsible for young children and who have no housekeeper, but would qualify for the housekeeper allowance if, in fact, they had a housekeeper.

Clause 16 carries out my other proposal in the personal allowance field by making an increase of £15 in the amount of housekeeper and dependent relative allowances. Clause 17 meets the situation which will be created when the graduated contributions begin to be payable under the National Insurance Scheme. These graduated contributions could not be handled under the pay-as-you-earn procedure without grave risk of the machine breaking down. As a practical matter it seems that a flat-rate allowance is inevitable. I should much have preferred to have avoided this, but there seems to be no practical alternative.

I now come to Clause 18. In my Budget statement I said that I proposed that relief in respect of farming losses, or, indeed, of any other trading losses, should be restricted to activities conducted on reasonably commercial lines and that I did not believe that this proposal would adversely affect genuine farming at all. The wording I have proposed, on consideration, to adopt in the Bill is that recommended by the Royal Commission, namely, that the activities should be carried out on a commercial basis and with a view to the realisation of profits. The Royal Commission intended that its wording should put out of court claims in respect of farming activities which can be seen clearly to lack commercial inspiration and to be nothing more than hobbies or private amenities. 892 I have no desire to go one inch beyond that object.

§ Mr. Douglas Houghton (Sowerby)

Does the Chancellor also recall that the Royal Commission said that it did not think that its proposal would make much difference?

§ Mr. Amory

Yes, the Commission said that it did not consider that it would make a great deal of difference, but, as the hon. Member will remember, it went on to say that, even so, it thought that this was an instrument which should be used by the Revenue to prevent really excessive loss cases where there was no relation to commercial practice whatever. If the hon. Member read the whole of the statement, I think he would agree that that is what the Royal Commission said. The words we have chosen mean that the Clause does not affect in any way loss claims under Section 341 by occupiers of woodlands. They will remain exactly as they were before this Bill.

Farmers who incur temporary losses while establishing an enterprise, building up a herd, bringing back land into fertility or improving it, should be in no danger provided that the enterprise in which they are engaged is one that can be regarded as likely in due course to become an economic undertaking. This interpretation will provide reasonable scope for technical experiments and research in the course of such operations. We must remember that all the financial and other assistance provided under the auspices of the Ministry of Agriculture is designed to see that our limited area of land should be farmed productively, efficiently and economically.

As I said in my Budget statement, I share the view that many of those with other occupations who run farms and market gardens bring great benefit to agriculture with new ideas and new methods. I do not want to discourage such genuine efforts in any way whatever. The cases we are concerned with are of a kind where the alleged trading activities over a long period bear no relation whatever to any commercial criteria. There are cases, for instance, in which the annual losses consistently exceed the total sales of the undertaking.

I do not think that it can be right or fair to other taxpayers that in such 893 extreme cases such losses should be allowable as a set-off against other income. I have also thought it reasonable that the new provisions should not apply to allowances on plant and machinery bought before this year or to capital allowances in respect of farm buildings under Section 314 of the Income Tax Act, because we do not want to discourage the provision of useful new buildings.

The next series of Clauses is designed to frustrate the stratagems by. which certain persons seek to avoid their proper liability to tax or to establish unjustified claims on the Revenue. I will deal only briefly with Clauses 19 to 22 and with Clause 29. These Clauses cover specific avoidance devices, which we must clearly seek to prevent, and the major question which arises is, therefore, whether they are so drawn as to cover the malpractices at which they are aimed, without interfering with any legitimate business. This we shall examine during the Committee stage.

Most of these Clauses are designed to ensure that trading profits are dealt with as trading profits for tax purposes and do not escape liability by being disguised as or turned into capital gains. Clauses 19 to 22 deal with the problem in relation to companies which construct or deal in buildings, land, investments or other major assets. In the simplest type of case here, a company is formed to engage in a trading venture like putting up a building, but the building is never sold. Instead, the company is sold to the ultimate owner of the building and so the profit on the construction of the building becomes, in effect, a capital gain on the sale of the shares.

There are quite a number of variants of this device, and the proposal is that those who sell the company in such a case shall be charged on an amount of income corresponding to the profit which would have arisen, judged by the price they received for their shares, had the trading assets and not the shares been sold.

Clauses 23 and 24 relate to devices which turn on the differences in treatment for tax purposes between a company which carries on a trade of dealing in investments and a company whose business is that of an investment holding company. They are designed to ensure 894 that profits which would ordinarily have been liable to tax do not escape tax as a result of purely artificial manipulations within a group of dealing and investment companies. I think that the House will be satisfied with the proposal.

Clause 25 deals with a device of a rather different nature. Financial operators are able to make a profit out of pretending that they are entitled to a dividend on stock when they are not, by using the recognised Stock Exchange machinery for sales of stock. The result is that a voucher is created for a taxed dividend, tax on which is never, in fact, paid. The Stock Exchange is blameless in this matter and the purchasers, too, may not be to blame. The Clause provides that for the future the operators will have to pay over to the Revenue tax on the pretended dividend.

Clause 29 removes the six-year limitation in the 1955 anti-dividend stripping legislation. That has become necessary because it seems that prospective strippers, such is their enthusiasm, are prepared to wait for six years, if need be, to achieve their objective. This will apply only to transactions entered into after 5th April, 1960.

I will explain rather more fully the new power which I propose in Clauses 26 to 28, since those Clauses have given rise to a good deal of anxiety, for reasons which I fully respect. As I explained in the Budget debate, Clause 26 is designed to cover, and is limited to, two main classes of avoidance tricks where the operators are particularly persistent and the amounts involved are very large.

§ Mr. John Diamond (Gloucester)

How large?

§ Mr. Amory

I could give instances of how large individual cases have been, and I wish I knew how large the total was.

First, there are all the types of case based on the central idea of what has been called dividend stripping—in other words, getting profits or reserves or assets out of companies in such a way that in the end the Revenue will lose the tax which has been paid or fail to collect tax which ought to be paid. Secondly, there are the types of case known as bond washing. Let no one think that this is a small matter. We are dealing with devices by which 895 the gains of the operators on individual schemes can run into many hundreds of thousands of pounds and the possible loss to the Exchequer into many tens of millions of pounds.

We have found that it is largely ineffective to legislate against new devices after they have been brought into operation. One series of operations is enough to bring huge gains, and when the legislation comes along it does not catch that particular series of operations. What we need is a provision which will make the contrivance of new schemes unprofitable. I should have liked to give some examples of what is involved here, but time does not allow. I will refer only to one of many forms of device, and that very briefly. This is called current dividend stripping and is on the increase. I will not go into the details of the schemes, although I should be glad to do so at a later stage if hon. Members are interested.

The effect is, first, that the shareholders can take the net profits of a company over a period of years completely free of Surtax, while the dealing concern associated in the transaction can claim back from the Inland Revenue much, if not all, of the Income Tax paid on those profits. This device could lead to enormous losses of tax revenue, and it is a device which seems rather to be gathering way at the present time.

The main criticism of Clause 26 is that these problems should be dealt with by specific legislation. I only wish that that were practicable. I must explain why it has not proved to be so. The dividend stripper, or bond washer, uses features of the tax code which are necessary in themselves, in the interest of the taxpayer, to create a great variety of contrived situations to milk the Exchequer. The tax code, for instance, must allow a dealer in securities, who is taxed on the profits of his trading in securities, to deduct any losses on realisation. It is accepted that charities and approved superannuation funds should have exemption from tax and that in certain circumstances there should be a right to set off tax losses against other income.

The strippers and bondwashers set out to distort for their own enrichment those kind of provisions intended for bona fide 896 cases. The trouble is that the combinations and permutations are very numerous. Parliament thought in 1937 that it was putting bondwashers out of business. In 1955, it thought that it was administering the coup de grâce to dividend strippers. Parliament had another go at bondwashers in 1959 and two further goes at dividend strippers in 1958 and 1959. The Council of the Stock Exchange has done everything it can to co-operate in preventing devices which it deplores as much as we do.

Now we are faced with at least five further forms of dividend stripping, including ingenious variants where it is the company's trading stock that is stripped, with a vista of further ingenious schemes in the future. One more has come to light since my Budget speech. Reluctant as we have been to contemplate any general provisions, we have, in fact, used specific measures to the limits of what is practicable, but we have to admit that in many cases we have been operating well behind or badly behind events.

I will describe what I mean in a little more detail. A new device is discovered and put into operation. When specific legislation comes along, it is dropped and replaced by another or modified. This would be true almost to the same extent were the specific provisions to be effected by Order—the combinations and permutations are too many. As I have already stated, the tax at stake is large and is increasing.

The operation of Clause 26 has been as narrowly restricted as possible. First, it relates only to transactions in securities as defined in Clause 40, and then only when a tax advantage, as there defined, is or could be obtained. The operation of Clause 26 is still more closely defined even when these conditions are fulfilled, since it operates only in the circumstances set out in subsection (2). These circumstances restrict its application to cases where the benefits obtained are of the dividend stripping or bondwashing type.

The House will have noticed that there is a specific provision that the Clause is not to apply to cases where the transactions are carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, provided that none of them has 897 as its main object, or as one of its main objects, to enable tax advantages to be obtained.

Next, the Clause defines in considerable detail the conditions in which directions may be made, and there are special provisions for appeal rights. A person aggrieved by a direction given by the Commissioners of Inland Revenue will be able to appeal to the Special Commissioners who are the normal appeal tribunal for this type of matter. We are also providing that there should be set up a special tribunal to rehear completely cases in which either the taxpayer or the Revenue is dissatisfied with the Special Commissioners' decision. That is on a question of fact.

This special tribunal will consist of the Chairman of the Board of Referees, who will in future be appointed by the Lord Chancellor and not by me, and two or more other members appointed by the Lord Chancellor as having special knowledge of and experience in financial or commercial matters. From these tribunals, both of which are independent of the Inland Revenue and of the Treasury, there will be the right of appeal to the courts as before on a point of law.

§ Sir Spencer Summers (Aylesbury)

Did I understand my right hon. Friend to say that the right to refer to the special tribunal is only on a question of fact?

§ Mr. Amory

No. It is on a question of fact or law to the tribunal, but the appeal to the courts can be only on a question of law. The appeal to the Special Commissioners and the special tribunal can be on either. I am sorry that I did not make that clear.

§ Mr. G. R. Mitchison (Kettering)

May I ask the Chancellor two questions? First, this tribunal was not mentioned in the right hon. Gentleman's Budget statement. He referred to the Special Commissioners and to an appeal to the court. Am I right in thinking that it has been added since then? Secondly, when did the right hon. Gentleman first hear of any of the devices to which he has referred, not only in connection with this Clause, but in connection with the other Clauses about which he was talking a short time ago?

§ Mr. Amory

I can answer the hon. and learned Gentleman's first question 898 by very simply saying "Yes". The decision to propose a second appeal was taken after I made my Budget speech. I find it very difficult to answer the second question, because these devices come to light in many forms and overlap. I could not give the dates on which a particular form first came to our notice. We hear rumours and then very gradually the form takes shape.

§ Mr. Mitchison

May we take it that the light has been coming continuously through the fiscal year and not in a sudden flood during the Chancellor's period of purdah just before the Budget?

§ Mr. Amory

I think that the hon. and learned Gentleman is right, because during our discussions on the Finance Bill last year I expressed considerable anxiety about this. At that time I introduced proposals to deal with one or two cases which had only recently then come to light.

§ Mr. Glenvil Hall (Colne Valley)

I am sorry to interrupt the Chancellor again, because he has had to deal with a number of interjections. Can we learn a little more about the tribunal? It is obviously quite a new feature in our law to set up a body of this kind. Will judges serve on it, or will they be excluded because the matter may afterwards be taken to the courts? Will they be commercial people, such as well-known accountants, or will they have to concentrate on this work and not be in business on their own or in partnership?

§ Mr. Amory

There will be an opportunity to discuss this in greater detail later. My right hon. and learned Friend the Attorney-General may be answering quesions on this point at the end of the debate. I do not think that the intention is that there should be a judge. It will be a distinguished lawyer, such as has been occupying the post of Chairman of the Board of Referees up to now. The other two members will be men who are experienced in financial and commercial matters. That information is contained in Clause 26 (4).

The transactions at which the Clause are aimed are of a contrived character, but we recognise that there may sometimes be genuine transactions which might be thought to have some of the characteristics of the transactions we 899 want to stop. To ensure that no avoidable uncertainty will arise in bona fide cases toy reason of the new power, there is a specific statutory provision enabling persons contemplating a transaction to approach the Inland Revenue and seek a clearance for it.

I emphasise that the proposal does not break new ground. The power we now propose is much more specific than the comparable Profits Tax provision to which the Royal Commission on the Taxation of Profits and Income saw no objection. I have become convinced that it is the minimum that is necessary. The machinery of appeal in relation to Profits Tax cases is less complete than is now proposed under Clause 26, and we have accordingly provided in Clause 62 that in Profits Tax cases there will be an appeal not only to the Special Commissioners as at present, but a further appeal thereafter to the new tribunal.

I hope that what I have said will convince hon. Members that what we are proposing is not a matter of the Inland Revenue making up the law as it goes along. It can make a direction in these cases if it believes that tax is due, but the effectiveness of the direction is subject to two appeals on fact and one on law. I sincerely believe that these provisions give full and ample safeguards to the taxpayer against any arbitrary action by the Commissioners of Inland Revenue, and I would not have put the proposal forward had I had any doubts whatever on that score.

I now turn to a series of Clauses dealing with terminal payments. First, post-cessation receipts are dealt with in Clauses 30, 31 and 32. Clause 30 says that the receipts of an uncertain or contingent character that come in after the end of a trade or profession will be taxed. It does not, however, operate to tax post-cessation receipts that arise merely because the "cash basis" of accounting—that is to say, receipts and payments—was adopted.

Clauses 35 and 36 impose tax on payments made in connection with the termination of an office or employment and, in particular, payments of the kind that have come to be known as "golden handshakes". In recent years, there have been a growing number of instances where retiring directors have received very 900 large payments, indeed, on the occasion of take-over bids. I think that there will be general agreement that the complete freedom from tax which large payments of this kind can at present enjoy is anomalous, and unfair to other taxpayers.

Clauses 35 and 36 carry out a recommendation of the Royal Commission in regarding as proper subject for taxation payments designed to compensate a man for the loss of future emoluments of an office. I propose, however, that the first £5,000 of any payment should be exempt from tax. I feel that it is the very large payments that are open to criticism as being free of tax, and that it is justifiable to exempt fairly modest lump sums from charge. Though the new charge will also cover voluntary payments made at the termination of an employment, we are endeavouring to make as little change as possible in the existing tax position of sums that may be fairly regarded as superannuation payments for past service. Thus, the Clauses do not affect lump sums that are payable under statutory or approved superannuation schemes.

Moreover, where a voluntary payment is of a kind brought into charge by these Clauses, there will be an exemption either of the first £5,000, or of so much of the payment as may be regarded as the equivalent of a reasonable superannuation payment if that is bigger—and sums of that kind could be much bigger than £5,000 in appropriate cases.

§ Mr. J. T. Price (Westhoughton)

Where the superannuation payment due is commuted by a lump sum, either wholly or partly in place of the annual or monthly payment, what is the distinction in principle that confers a special favour on such payment when, in the normal course of business, super-annuitants who receive pension by way of monthly or other periodical payment are still taxable at the full rate on those payments? Surely, as a matter of equity, one has to distinguish between the right-ness or wrongness of the granting of special privilege to the lump-sum payment as against the more normal, periodic payment.

§ Mr. Amory

The hon. Member raises an extremely difficult, complicated, but, I agree, relevant point. He will forgive me if I do not deal with it now, but 901 I would think it a very appropriate case to raise, and to be dealt with at a later stage in our deliberations.

I propose, also, that any payment which becomes liable to tax under this Clause should be treated, in calculating the amount of tax due, as though it were spread, in compensation cases, over the number of years for which the recipient was entitled to hold the office, and for which the recipient is being compensated and, in the case of voluntary payments, over six years. This will represent a very substantial relief.

That brings me to the Whitworth Park case. Clause 37 enables the Crown to deduct Income Tax from certain income payments in circumstances in which a taxpayer would be entitled or required to deduct tax, and validates past tax deductions made from such income. There still seems to be a certain amount of misunderstanding about this proposal, which I hope I can clear up.

I should like to emphasise two points in particular. First, the Crown won the case in the House of Lords; thus, the suggestions that we are in this Clause reversing a decision of that House that this tax ought to be paid are wide of the mark. Secondly, and even more important, we are not making liable to tax income that was not so liable before. What is in question is the machinery by which the tax was collected.

Under the Coal Industry Nationalisation Acts the Ministry of Fuel and Power was authorised to make payments of "interim income" to former colliery companies pending a settlement of the amount of compensation. These interim income payments were made under deduction of Income Tax in accordance with what was understood to be the law. The colliery companies acquiesced in these arrangements. If tax had not been deducted, and the colliery companies had received payment in full, the Inland Revenue would have collected tax from the companies then by direct assessment.

In 1955, a Surtax appeal—not on this Income Tax matter—on the part of the Whitworth Park Coal Company raised the contention that the payments fell under Case VI of Schedule D, not Case III as had been assumed. This case went 902 ultimately to the House of Lords, which found in favour of the Crown and against the company on this Surtax issue. The House of Lords expressed the opinion, however, that Income Tax should have been collected from the companies by the Inland Revenue, and that the Crown had no power to deduct it in such cases at source.

A number of former colliery companies have now taken out writs against the Ministry of Power claiming that they should now be paid the sums deducted over the period 1948–57 on account of Income Tax. Had they, of course, taken that point when they received the payments, they would have gained no advantage from it. As I have described, the alternative method of collecting the tax by direct assessment upon the companies would have been promptly adopted.

As regards merits, if the companies won, they would gain an advantage only because, of course, they acquiesced in the deduction of Income Tax in the first instance; and put in their present claim when it was too late to make assessments for some of the years in question, and Income Tax rates have fallen. I have concluded that it is my duty to ask Parliament to bar such claims. The Clause covers various similar payments by the Crown where the same point could be taken equally without merits on a technicality.

There are, of course a number of precedents for action to validate things done with the clear consent of both parties when it later appears that the law was not what it was assumed to be. Some of these were for the benefit of taxpayers and not of the Revenue.

§ Mr. Mitchison

If the Clause were not passed, would the claim on 'the writs succeed, with the result that the companies could not be assessed and taxed by the Inland Revenue because of questions of time?

§ Mr. Amory

If the case succeeded, that would be the effect.

§ Mr. Douglas Jay (Battersea, North)

Did I understand the Chancellor to say at Question Time today that £40 million was at stake on this point?

§ Mr. Amory

If the right hon. Gentleman will read carefully the Answer I 903 gave, he will see that I said that, if the principle were carried against the Revenue in every possible case where the Revenue can think it might be, then the amount of tax involved would be of that order.

There was an almost exact precedent in 1934, when a court decision showed that certain colliery companies had been wrongly deducting tax at source from royalty payments. The companies were faced with claims by the royalty owners in that case and for a refund of the tax deducted. Following representations from the Mining Association, the Government of the day validated what had been done, with retrospective effect, in the Finance Act, 1934. I find it difficult to reconcile the attitude taken by the colliery companies in 1934 with the present claim that tax deductions made in good faith between 1948 and 1957, and accepted, should not now be validated.

I do not propose to deal at length with Part III of the Bill, which deals with penalties, although I am glad to bring before the House a comprehensive reshaping of the penalty code. The detailed discussions would, I think, best be left to the Committee stage. My right hon. and learned Friend the Attorney-General, who will wind up the debate, will, I am sure, be ready to answer any questions which are raised. My aim, in Part III, has been to bring together the new provisions in a rational and coherent scheme which meets, I hope, the valid criticisms which have been made of the existing penalties.

The Bill proceeds on the principle that tax lost to the Exchequer through the taxpayer's fault should be recoverable, but should be recoverable by assessment and not in the form of penalties, that interest should be charged on such tax, and that the penalty for the offences which led to the loss of tax should be reasonable in amount and related to the amount of tax lost and not to the total tax chargeable on the whole of the income. All penalties will be open to mitigation by the High Court as well as by the General or Special Commissioners and the Board of Inland Revenue. The new scale of penalties is, I hope the House will agree, reasonable and, indeed, moderate.

904 To put the matter briefly, we propose a substantial reduction in the scale of penalties which may be imposed. At the same time, we propose a certain extension, subject to safeguards, of the time limit for reopening assessments when there has been repeated loss of tax because of the taxpayer's negligence.

§ Mr. Houghton

Do I understand that the amounts prescribed as penalties will be in addition to assessments for tax lost and not in substitution?

§ Mr. Amory

The hon. Gentleman understands quite rightly. They will be in addition to the recovery of the tax lost.

The remaining Inland Revenue Clauses call for little additional explanation. Clauses 59 and 60 enact the concessions I felt able to propose this year on Estate Duty. As regards gifts inter vivos, I believe the graduation principle to be sound and I think that it will make this duty operate more fairly. The changed basis of valuation of trading concerns is one which has been strongly urged on me, and, again, I believe that it will be welcomed.

Clause 61 raises the Profits Tax to the extent I indicated in my Budget statement. My reasons for recommending this were given by my hon. Friend the Financial Secretary and myself in the Budget debate. I will merely repeat now that I am satisfied that this increase will not, in present circumstances, interfere with the current upward trend in industrial investment, but should have some limited effect on consumer spending.

Clauses 63 and 65 introduce a small reform which has been urged on me on behalf of unit trusts and I am glad to propose it. Clause 66 provides for a small but merited extension of capital allowances.

I come now to Clause 72. During the Budget debate, doubts were expressed in various quarters about the three-year period for which I proposed that the Exchequer should be empowered to make advances to the seven nationalised undertakings. I hope that Clause 72 has allayed these doubts. In addition to limiting advances by reference to the borrowing powers given by Parliament to each undertaking, the Clause fixes an aggregate of £2,050 million for advances up to the end of August, 1961. The 905 advances in each of the two succeeding years are to be subject to an aggregate amount for each year, which will be fixed by a Treasury Order which will require the affirmative approval of the House.

This all adds up to what I recognise to be a formidable Bill which is likely to keep us busy during the weeks to come. The reforms which it proposes are ones which, I am sure, ought to be made in the interests of justice and fairness between one taxpayer and another. I believe that this view is shared by most people in the country. I commend the Bill to the House.

§ Mr. G. R. Mitchison (Kettering)

It was only about a year ago, but before the General Election, that the Chancellor introduced some tax concessions that were estimated to cost £295 million and, with them, an additional repayment of post-war credits estimated to cost £71 million. Speaking on the Second Reading of that Finance Bill, he described it as providing a stimulus which should be felt throughout the economy and having a significant effect in promoting stability of prices".—[OFFICIAL REPORT, 28th April, 1959; Vol. 604, c. 1221.] Since then, during 1959, share prices have risen by more than 50 per cent. and bank advances, taking April to April, have risen from £2,412 million to £3,328 million, including an extra £99 million last month. The right hon. Gentleman now proposes, in his own words, to put a …moderating influence on the rate of expansion…".—[OFFICIAL REPORT, 4th April, 1960; Vol. 621, c. 64.] the expansion which he himself helped a year ago.

These convolutions have been fairly described by the Sunday Times as "economic hiccups". This is a very small hiccup on this occasion, and I trust that the right hon. Gentleman's hiccup and those of his successors will grow progressively smaller. After all, the real remedy for hiccups is to keep off the economic drink. A year ago, the right hon. Gentleman was taking to the economic drink in a big way. I trust that he will moderate his economic potations and his advertisements of them 906 before the next General Election. I believe that it will cause him less trouble afterwards if he does.

It is for that purpose that the right hon. Gentleman has introduced what he rightly calls one group of measures— partly of a fiscal character and partly of another character. The Bank Rate was raised in January and the right hon. Gentleman now proposes to call for special deposits of 1 per cent. of total deposits from the London clearing banks, a rather lower rate from the Scottish banks and to impose certain hire-purchase restrictions. He has brought in this Finance Bill which, by contrast with last year's tax concessions of £295 million, adds up, so far as direct charges go, to a net total of £14 million, obtained substantially out of an increase in the Tobacco Duty. This really is a very small measure, and, although it may be described as a formidable and substantial Budget, from that point of view, at any rate, the positive contribution that will be made by it will not be large.

I am not going back on what was said in the Budget debate about possible things that might have been done. I want to mention only one thing which seems to me perfectly obvious. Given the position described by the right hon. Gentleman and indicated by the measures that he proposes to introduce, a change in the Profits Tax and a higher rate on distributed profits would have been, I should have thought, a useful and material contribution to what is now sought to be done mainly by monetary measures.

Let me take the special deposits first. We on this side of the House agree with the right hon. Gentleman that if bank advances should be limited the special deposits are the best way to do it. We claim that originally this was suggested by my right hon. Friend the Member for Huyton (Mr. H. Wilson) and later by other hon. Members on this side. There are, however, points about them, and the question is whether they are quite sufficient in present circumstances. They do not touch anything but the banks. They do not touch other sources of credit, and to that extent they drive borrowers to borrow long-term or to finance their own resources from various other sources indicated in the Radcliffe Committee's Report.

907 It was for that reason that the Radcliffe Committee stated: … in any ordinary situation"— I do not think that the right hon. Gentleman would describe this as an extraordinary situation— we cannot find that there would be sufficient advantage to justify discriminatory action against the banks". The question is whether something more ought not to have been done with other sources of credit. I have not forgotten the hire-purchase restrictions, to which I shall come in a moment.

There is another point. If provision is made for special deposits, the banks can do one or tooth of two things. They can either limit their advances, or sell their short-term securities and raise more liquid money in that way. In the proceedings before the Radcliffe Committee, there were considerable differences of opinion and, indeed, changes of opinion as to what the banks were likely to do when something of this sort was introduced.

As I have said, the London clearing banks raised their advances by about £99 million in the last month. It is not without importance that during that month their investments decreased by £61 million. I agree that that is a short period to take, but the efficacy of this Measure for the purpose for which the Chancellor intends it must depend either on agreements with the 'banks or, at any rate, on a highly informal understanding with them that they will not merely sell their short-term securities and continue to advance on the same scale as before.

The Radcliffe Committee made one other comment that applies to this Measure as a whole. It stated: Although aimed at total demand"— as the Chancellor told us this Measure was aimed at— any monetary measures will have inescapable directional effects; It seems to me that that may well be the case here.

Let me take one instance. The Scottish banks are also to be restricted, although at a lower rate, it is true. They have no conventional 30 per cent. liquidity ratio, as I understand the Radcliffe Committee's Report. They have, in effect, largely a separate banking system, 908 although they are closely inter-locked by ownership both of Scottish banks by English banks, and English banks by, at any rate, one Scottish bank. Any limitation of Scottish banks in their advances is bound pro tanto to hinder the advances they might well be able to make to promote employment in areas where unemployment is, and has been for some considerable time, very much above the national average. That applies particularly to Scotland because of the separate character of its banking system, but it also applies to areas of high unemployment.

What one says to oneself is what is to be done about it? I have pointed out that the efficacy of the special deposits must depend on an understanding with or promise by the banks. I suggest that in this case it would have been better if some understanding had been arrived at with the banks that instead of restricting their advances generally they would promote them in areas of exceptional unemployment.

In answer to a Question today, the right hon. Gentleman said that he would call the banks' attention to the position in the development areas. Here, the Government reply steadily, as the right hon. Gentleman has replied, "We have attended to this by the Local Employment Act." But this Measure is little more than a re-enactment, with quite minor additions, of distribution of industry Measures which were already on the Statute Book. It all depends on how those Measures are operated. It seems to me that here the Government have missed an opportunity of directing the national resources to a larger extent to these special areas or, at any rate, to put it in a more negative form, of ensuring that the measures taken with regard to the economy in general should not operate unfairly in areas of exceptionally high unemployment.

I now want to say one or two words about hire purchase. I see the point of restricting hire purchase at the moment, but the restrictions which the right hon. Gentleman has proposed seem unlikely to have much effect. To put it generally, I believe that they do little more than a prudent trader or financier in these matters would do. I go further. I agree with the comment of the Leader of the Liberal Party when these 909 restrictions were first mentioned. Some of the distinctions are extraordinarily difficult to follow. For instance, why should kitchen furniture, bath units and the like be subject to half the restrictions on small refrigerators?

I do not propose to go into detail now, because it would be wasting the time of the House, but it is one of the curiosities of our legislation that these hire-purchase restrictions have been introduced in statutory Orders labelled in large letters "Emergency" and under legislation which allows us to pray against them and to raise points on them. However, I would describe them shortly as a bit of patchwork.

I turn from these two measures to some of the Clauses in the Bill. I do not propose to say anything, so far as I can spare the House the time, about the Clauses which will come up in Committee and can be discussed then.

I should like to say this about the first two Clauses in the Bill. These affect the concessions in respect of port and other wines. With great respect to the right hon. Gentleman, I cannot accept the proposition that the object of these Clauses is to make a timely concession to Portugal, connected, perhaps, with the European Free Trade Association. The fact is that port does not account for even the largest of the items, let alone for a very large proportion of the total. In fact, Portugal had to be admitted on special terms to the Stockholm Convention.

What is really happening—and the right hon. Gentleman must face it—is that instead of making any concession to pensioners, or for housing subsidies, or in the amount of the rate of interest paid by local authorities for their borrowings, the concession is being made to the wine trade and to those who, like myself, buy from it. This concession which is being made—I do not want to repeat this, but the frown on the face of the hon. Member for Eastleigh (Mr. D. Price) compels me to do so—would have been enough to provide housing subsidies for the number of houses being built before the Government cut down the housing programme. It would have been enough to reduce by 1 per cent. the rate at which local authorities are borrowing.

§ Mr. David Price (Eastleigh)

Is the hon. and learned Gentleman really say- 910 ing that this concession in Clause 1 of the Bill has nothing to do with the Stockholm Treaty? Is he not aware that a concession cannot be given to the Portuguese alone without breaking the rules of G.A.T.T.? It had to be done over that range of revenual goods. Surely he knows that.

§ Mr. Mitchison

On the second point, I think that the hon. Member will find a concession to Portugal alone at the end of the Stockholm Convention. I would sooner that this money had been spent for the purposes I have indicated than used for this purpose. I do not believe that it would have made, or should have made, that material difference to the attitude of this country to Portugal. If it is suggested that it had to be done, I would simply say: if that can be done, surely other things can be done, too.

§ Mr. Amory

Following the intervention of my hon. Friend the Member for Eastleigh (Mr. D. Price), I should like to express the hope that the hon. and learned Gentleman will, in fact, accept my assurance 'that that was the main reason for this action.

§ Mr. Mitchison

Of course, I accept the right hon. Gentleman's assurance as to his own reasons. I only indicated that the concession to Portugal was less than half of the total amount. For instance, the value of champagne imports to this country—and I have never tasted Portuguese champagne—was considerably larger than the volume of imports of wine from Portugal. I do not want to deal further with this matter, because it has already been discussed.

As to the abolition of the Entertainments Duty, I think that it is sufficient to say that we on this side of the House all welcome it. We have been pressing for it for years and we are very glad indeed that it has happened at last. As to tobacco, comments have already been made during the Budget debate and I will not repeat them. The rest of Part I deals with what I think I may fairly call minor administrative matters.

When we come to Part II of the Bill, all of it except the first five Clauses—one is rather a marginal one—deals with highly technical tax avoidance and similar questions. It raises the question of 911 machinery from two points of view. One is our own proceedings in the House. There are some people who have taken the view that parts of the Finance Bill should be taken from the Floor of the House and dealt with by a Committee specially interested in questions of that kind. While I doubt whether I share that view personally, there is another aspect of the matter which seems to me to provide a much more hopeful solution.

Year after year from this side of the House two suggestions have been made that overlap. One is that from time to time there should be tax management Bills, as I think that my hon. Friend the Member for Sowerby (Mr. Houghton) has from time to time described them, and another and a similar one is that there should be arrangements for dealing rapidly with the tax avoidance question which at present we only consider Budget by Budget at the end of each fiscal year.

We shall go away when we have got through this Bill, and the right hon. Gentleman, if he remains in office until then, will go away, too, and there will gradually begin to dawn on him yet again, in spite of the Clause that he has put in because he has himself said it is very restricted in its application, the annual light of the bondwashers, the dividend strippers and the rest of the City and other gentlemen who contrive to pay less taxes than they should and who sometimes actually mulct the Exchequer. That goes on year after year. Yet although the light begins to shine at once, no steps are taken to deal with the matter until a year later, at the end of the Financial Bill.

When a Bill of this kind is introduced, which in substantial fiscal respects does a little, but not very much, but is padded out, if I may use the words, with very necessary avoidance measures and the like, we ask ourselves what has happened during the past year. The right hon. Gentleman has known about these things. He has known about individual cases in which, as he has told us, very large sums indeed have been collected, or avoided, by these methods. We get an Exchequer loss, amounting to many millions of pounds, not perhaps quite as much as the Blue Streak on one series of transactions, but, taking the whole lot together, something of that order.

912 Yet so rigid is our system that we go on year after year trying to deal with what might be called day-to-day ingenuity by annual Budgets. It really is ridiculous. I suggest to the House that we should consider at least one of the three possibilities. One is a tax management Bill of the kind that my hon. Friend indicated. Another, and a different one, is that there should be arrangements for dealing with these matters either by Orders or, perhaps better, by short ad hoc legislation as they arise from time to time.

I do not regard Clause 26, the motive Clause, as I call it, as sufficient protection. I would have these other things added to it. Indeed, in this Bill it is necessary not only to have a motive Clause, but to have another collection of extremely complicated provisions, although the motive Clause itself is in the Bill. There is not the least doubt that with a restricted Clause like that ingenuity will again be exercised to no good purpose and that, again, the Revenue will lose what it ought to collect. So, in fact, other taxpayers and, perhaps, in particular, the rather humble Schedule E taxpayers will have to pay more than they otherwise ought for the same fiscal expenditure. We go on saying this, but nothing is done. We cannot find better evidence for it than in the contents of the Bill.

About the reliefs at the beginning of Part II, I say no more than this. Although we welcome them, they are in one or two respects, which we can discuss in Committee, a little close still and there are possible additions. That, however, we shall consider at a later stage.

I come next to the "hobby farmers'" Clause, Clause 18. One appreciates the reason for it and it will have to be considered in the light of all the Royal Commission's observations. I make only the comment that it involves, again, a question of motive and one must face this. When, however, we get to questions of motive, we are putting a rather difficult task on the Inland Revenue and its officers.

I should like to say something on my own behalf. I have been dealing with Income Tax officers for many years, and so have all of us. I do not go to accountants. I have never felt at any time that I have been treated otherwise than 913 perfectly fairly and most helpfully. I have never had any feeling that the Inland Revenue was trying to do a sharp one on me, or to get more tax than it ought to collect. Quite the opposite. I have always felt that the Income Tax officers would give gladly any amount of help, which people do not always realise. They are prepared to give it in the same spirit as those who function in quite another capacity, the National Assistance officers.

I feel, therefore, that if they take that attitude, as they do—and I hope they will keep it—it is sometimes a little difficult for them when questions of motive are put up to them for decision. I am not saying that the matter can be avoided, except in so far as it could be avoided by prompt and particular action on the lines I have indicated.

§ Sir S. Summers

The hon. and learned Member has suggested that there should be additional opportunities for bringing in precise changes in the law. Are we to understand from what he has said that he advocates them instead of the broader powers in Clause 26, or in addition to them?

§ Mr. Mitchison

I am obliged to the hon. Member. I would have said it later, but will say it now. Certainly not. I welcome the provisions in Clause 26.

I was trying to point out, however, that it is, as the Chancellor of the Exchequer indicated, a restricted Clause, that it is not sufficient even to cover the other points which have to be met, especially in this same Bill, that there are sure to be other exercises of misplaced ingenuity directly after the passing of the Bill—in fact, they are apparently going on already—and that, therefore, I want both things, both some such Clause as Clause 26 and day-to-day provision for dealing quickly with these things before large sums are lost.

I shall not say more about Clauses 19 to 22 than this. It is difficult for the Opposition to deal with Clauses which put a new restraint upon the taxpayer if we think that the restraint falls short of what is required, because for obvious technical reasons—Money Resolutions and the like—we cannot put any additional burden on the taxpayer by means of an Amendment. It is, therefore, difficult for the Opposition to tighten up these 914 Clauses, although, sometimes, we would wish to do so. I do not think that these particular ones, so far as I can judge, could be tightened up much in their incidence, although, possibly, they could be in their scope.

I turn to another type of Clause, Clauses 30 to 34, which deal with discontinuance. I believe that these Clauses have an avoidance content. That is to say, discontinuance has been used by people who carried on some sort of trade or business and then wound it up, transferred it to a company or whatever it could be, made an arrangement between themselves—one can think of all sorts of possibilities—and thereby profited by the discontinuance arrangements. Nobody would wish to interfere with any steps that are taken to avoid that practice. Although this type of Clause deals with people who trade on an earnings basis, however, it does not deal effectually with those who carry on a profession and, therefore, work on a cash basis. It does not, therefore, cover the lawyer. Although I am not allergic to lawyers, my party is and I rather think that the House is, too.

People will view it amiss if a Clause dealing with discontinuance is introduced and it is discovered that it does not apply to lawyers. There are, of course, plenty of others to whom it does not apply. It does not apply to any professional man unless, rather exceptionally, he is assessed on an earnings basis. As I see it, the difference between these two bases is not a matter of principle. Indeed, to some extent it is in the option of the taxpayer in practice. Therefore, I find it difficult to understand why some provisions, at least, have not been made for discontinuance in cases where there is a cash basis: that is to say, among other professional cases.

If it is said that the difference is between tax avoidance in relation to trades and businesses and the inevitable discontinuance that happens when anyone retires from a profession, I should have thought that that could have been met by suitable language and that there was enough risk, at least, of avoidance, even in professional cases, to make it advisable to put in something of the sort.

I go one further stage about it. It is most expedient in financial matters that we should not only do what we think 915 to be right, but should appear to do it. It will not be popular if we rest our distinction purely on the technical difference between the two bases of assessment. That is what these Clauses do. I am aware that there is another minor point, depending upon whether lawyers are ever entitled to their fees. The Government would not, however, wish to rest on that point, although it may be useful as a device of language and no more.

I turn now to say a word or two about the motive Clause. I have already indicated that I regard it as restricted and that it seems to me to have difficulties from the point of view of those who will have to administer it. I do not, however, wish to be taken to disapprove of it in any way. On the contrary, it is not only necessary, but long overdue, and I rather wish that it was less restricted. Perhaps, however, like the Chancellor's financial measures, having found that it works, as we hope it will, he or his successor in office will extend it.

The "golden handshake" Clauses, Clauses 34 and 35, are, again, something that we on this side welcome. It should, however, be said that the £5,000 limit is rather high. That is a matter that can be considered in Committee. In addition, we will have to see that cases in which damages for an accident have been assessed having regard to tax do not get taxed twice in any way. The Gourley case is what I have in mind, and there are others.

§ Mr. Mitchison

I am glad to know from the Attorney-General that that has been borne in mind and that, no doubt, he or somebody else will explain in due course how effectually the matter has been dealt with.

Turning for a moment more to the Whitworth Park case, that is, of course, retrospective legislation. It is not only retrospective in form—retrospective, I agree, to a less extent than one might think at first sight—but definitely retrospective. It puzzles me why retrospective legislation can be introduced in that case and not introduced in some of these dividend stripping and bondwashing transactions of which we have heard 916 so eloquently from the Chancellor. It really is rather absurd.

No doubt a considerable sum of money is involved in this case, but at least as large an amount is involved in the others. If we are not to have day-to-day provision for dealing with them, then no Chancellor of the Exchequer ought to hesitate the moment the light dawns on him to warn the people concerned and to bring in retrospective legislation in the next Budget. I cannot understand how the Treasury, sitting there and watching this sort of thing going on month by month, never warns anybody, then brings in a provision in the next Budget and expresses itself as contented with it.

Turning to Part III of the Bill, as regards penalties I will say no more than this. I do not think that there is enough difference in these oases between penalties for negligence, of which in fiscal matters I am constantly and incorrigibly guilty myself, and penalties for fraud, on which, so far, I have not embarked and do not propose to embark.

As to the next part of the Bill, I would say that an Estate Duty concession as regards gifts inter vivos, whatever its moderation and whether or not it avoids an inconvenient shock and a rather improper feeling as to whether so-and-so will survive the necessary five years, is, in spite of that, viewed with considerable suspicion on this side of the House. We take the view that Estate Duty ought to be tightened up, that gifts inter vivos particularly are not matters for concessions.

I say no more. I have not touched on all the Bill. I have spoken quite long enough, if not too long, and it is the first time that I have ever had to do so on a Finance Bill at this stage. It is not too easy, but I would say to the right hon. Gentleman that though I am not an expert economist, and I think that this is a very difficult Bill, I cannot feel that the Bill, taken with the monetary measures, really amounts to quite enough. I think that the use of the Budget financial measures, in the strict sense of the term, is generally preferable to the type of general monetary restriction indicated by the special deposits and the reintroduction of hire-purchase restrictions.

917 I wish that the right hon. Gentleman had put rather more into the Finance Bill and done rather less in other ways and that in doing so he had paid regard to the social conditions of the country. I do not think that the extra tobacco tax is right from that point of view. The social conditions which ought to have been borne in mind are not merely those of the pensioners, but the social conditions of unemployment in some parts of the country and the social conditions arising out of expenditure by local authorities.

I earnestly hope that, whatever is said from the other side of the House about this matter, the right hon. Gentleman will not come down financially on local authorities and restrict the services which they are already finding it very difficult to carry out fully and properly. I am trusting, therefore, that one or two remarks which the right hon. Gentleman made at the beginning of his speech were more concessions to his hon. Friends than intimations of anything very dreadful to come. I trust that we stop here so far as the public sector and local authorities are concerned.

§ Mr. Michael Shaw (Brighouse and Spenborough)

I should like at the outset to crave the indulgence of the House on this the first occasion on which I address it. I come from my constituency of Brighouse and Spenborough, an industrious and hard-working part of the West Riding of Yorkshire and a constituency where the old-fashioned principles of neighbourliness, friendliness and an interest in local affairs still grow strongly.

It is my one regret that the chain of circumstances which led to my being here this afternoon started by the tragic and sudden death of John Edwards. He was a man much beloved by everyone in our constituency, and it is a matter of regret that it was because of his death that I was eventually elected to this House. I came here on one pledge and on one pledge only. That pledge was to support the present Government, in the firm and sincere belief that they were the team that we needed to carry on the affairs of the country.

I take this early opportunity of supporting this Bill. I believe it is a Bill that is necessary in the present circumstances 918 of the country and that it meets the needs with which we are faced. I have asked many people in my constituency what their views are on the Bill and, by and large, the reaction has been, "Well, I do not see what else we could have done." In other words, it has been considered as reasonable and necessary.

In our district textiles are one of the predominating industries and one of the first industries to reflect depression and the lack of well-being in our economy. We fully realise how necessary it is that any adjustments made to our economy should be made gently and should be made early because, otherwise, the people who feel it most are those in our textile industries. Therefore, it is good that at this time the Finance Bill is moderate and is, in a sense, a standstill Measure striking a note of caution.

I do not propose to talk at any great length on this occasion, and, I trust, not on any future occasion either. I will not, therefore, go through the Clauses in detail. However, I should like to refer to one part of the Bill. It is, perhaps, the only part which I feel that I have completely mastered as yet, a feeling, perhaps, which is shared by many other hon. Members on both sides of the House. It is Part III of the Bill which deals with penalties.

I feel that it is high time that there was an alteration in the penalty provisions. For too long, in my opinion, the taxpayer and his professional advisers have been at a disadvantage in dealing with the Inland Revenue on back-duty cases, cases of omission, and such-like things.

The irritating part about the negotiations has always been that even though the Inland Revenue people, as they nearly always are, have been most courteous, the more trivial and less culpable the case the more disproportionate has always been in the past the maximum penalty which the Inland Revenue has had at its disposal. Therefore, I hope that in future we—and I must disclose an interest in this matter as an accountant—shall sit round the table more in a feeling of equality one with the other, without the uncertainty of the awful weight of the maximum penalties that are never mentioned but that one knows are hanging around just outside.

919 I am also pleased that these penalty provisions do nothing to disturb the settlement by agreement that is nearly always made in back-duty cases. The relationship and customs that have been built up over the years between the three parties—the Inland Revenue, the taxpayer's advisers and the taxpayer; and perhaps once it gets to that stage, that is the correct sequence in which to list them—have been for the good of the country as a whole, because they have worked.

What we need in back-duty cases is a swift and complete inquiry, a satisfactory settlement, and a deterrent against the recurrence of the faults that have been disclosed. Nine times out of ten all those factors are dealt with in the best manner by agreement between the parties concerned. Nothing that I can see in the new penalty provisions goes against these customs that have been built up throughout the years.

In short, the path of a Chancellor is like a pilgrim's progress. It lies straight and narrow up the hill of difficulty. Danger and destruction lie on either hand. This Bill cannot be considered on its own. It is one of a series—those that have gone before and those that lie ahead—but when we are able to see it in perspective I believe that it will have its true and proper place as a necessary Measure in the continuance of the country's pursuit of additional and higher prosperity in the years ahead.

§ Mr. J. Grimond (Orkney and Shetland)

It is a great honour for me to be able to express on behalf of the whole House our congratulations to the hon. Member for Brighouse and Spenborough (Mr. Shaw) on his maiden speech. We listened to it with great interest and with great enjoyment for its content, its length and its final simile. I feel that the Chancellor of the Exchequer must have been fortified by this vision of himself climbing the narrow path, with destruction on one side and no doubt promotion on the other. I should like to say sincerely to the hon. Member that I know that the whole House will look forward very much to hearing him again. No doubt the people who are represented, as he says, so ably by their lawyers and accountants will also take note of 920 what he said about the penalty Clauses of the Bill.

But, if I may say so, I slightly differ from the hon. Member, and this is really the theme of my speech, when he says that this Finance Bill is one of a series. I wish it were. I think it ought to be, but I cannot see it in that way. The Chancellor has certainly earned a good deal of praise from orthodox economists. This is always a doubtful compliment of which to be the recipient, but still on the whole it is worth having. I think that most of them feel and felt that there was some case this year for some reduction in demand. Indeed, most of them would have said that the Chancellor should have taken more account of demand than he has done.

It is always strange that these nice adjustments of £25 million or more of demand this year are made when at the end of the year we find that the Estimates are out by several hundred million pounds. I also find in strange when we consider what happened last year. We then had a little off beer, and this year we have a little on cigarettes. This I would describe as electoral tiddly-winks. I cannot help feeling that if the Chartists had accomplished their aims of annual Parliaments taxpayers would have seen considerable tax benefits. The truth of the matter is that these adjustments to the Budget, as the Chancellor has said, are as much signals to the economy as definite instruments for achieving set purposes.

It is curious that while we debate some parts of our financial machinery at great length we do not debate others at all. For instance, to alter the tariff on toothpicks would need an Order before the House of Commons, but to alter the Bank Rate or to bring in special deposits one merely has to make an announcement after Questions, although the effect of these is far greater. This is a point which we should look at.

This is a moment for looking at these sorts of points. This Budget may be justified on orthodox lines looked at short-term, but I would remind the Chancellor of Stephen Leacock's advice to young gardeners: Take a garden two years ago". I think that this is good advice for Chancellors. We are two years away from 1962. We are at the beginning of 921 a new Parliament. We are at a period of prosperity and a time when the Chancellor does not think it necessary to make very large financial changes. But, we are not, as the hon. Member for Brighouse and Spenborough suggested, setting out in the Finance Bill to deal with some of the long-term matters as well as the fiscal provisions for this year.

When we look back to the 1930s everyone is struck toy the fact that, although the knowledge to deal with unemployment was there, Governments appear to have been so short-sighted that they did not apply that knowledge. They never had time to think. This country has gone on ever since the war between the twin dangers of inflation and stagnation and we do not seem to be making progress out of this dilemma. The Chancellor this year and lately has taken certain steps to curb too rapid an increase in demand. I must remind him again that the increase in production in this country has been very small over the last four to five years compared with Chat in other European countries—about 4 per cent. against 13 per cent.

It must cause concern that even though it has risen quite a bit in the last few months we are back again in the era of threats and controls. What are the controls? There are hire-purchase controls designed to stop or check an increase in hire-purchase debt of about £300 million. I am not saying that these are not justified, but is the Chancellor satisfied that what will happen will not be a great increase in rentals of one form or another? Is he satisfied that the checks are sufficient to prevent a mere transfer of debt from one kind to the other?

Then there are the special deposits. There has already been an increase in bank advances of over £1,000 million. Is the Chancellor satisfied that this device will not hamper new enterprise while not making a great deal of difference to those firms which are established? I take it that in all these measures the right hon. Gentleman is looking to the future and giving warning signals. He does not expect a great deal from them at present, but if our economy does not respond I take it that he may ask for further deposits or will take further steps at the Treasury.

I cannot believe these controls are suitable. If they are not, should we 922 not begin to consider the whole question of Government debt, of Treasury bills, of bank ratios, and, indeed, follow up the findings of the Radcliffe Commission? I ask here whether any work is being done in the Treasury on the subject of whether we can get out of the dilemma of having either stagnation or inflation by reforming the system of monetary control and Government borrowing.

The Chancellor has come out fairly well from under the attacks from behind him. Those attacks have never really got down to the question of what is to be cut. I do not think that any back bencher can say exactly what can be cut, but my hon. Friend the Member for Bolton, West (Mr. Holt) did point to certain things in his Budget speech. I will deal only with one matter, and that is the financing of the nationalised industries.

This is a long-term problem which has been with us for some years and with which we are making no progress. Take the railways. Are we awaiting until the Stedeford Committee has reported, apart from moving the deficit above the line, or are any other steps being taken about their finance? Are we considering the possibility of raising some money for the more viable of nationalised industries, smaller amounts, on the market?

I now turn to the tax structure. The is surely another matter to which long-term thought should be given. As has been said, this Bill is very largely taken up with incredibly complicated provisions for the administration of taxation. We were delighted to hear that the hon. and learned Member for Kettering (Mr. Mitchison) has so far avoided prosecution for fraud and is on perfectly good terms with the Tax Commissioners. So am I. I hope, like him, to be on equally good terms with the National Assistance Board if that should become necessary. But if we got rid of all the bond-washers and tax-strippers in the world, he and I would still be far from mastering the tax law. The complications are growing every year and are nothing but "Brock's benefit" for lawyers and accountants.

Can nothing be done about that? I do not accept that we should be so completely defeatist. If we keep such a 923 very heavy tax on earnings, and especially higher earnings, we shall get avoidance. My fear is that, however astute the Chancellor may be, however many general Clauses he brings in to allow the Commissioners to look at motives, however many orders are passed to stop this or that evasion, evaders will still always be slightly in front and will remain so, so long as it is worth while.

One of the easiest ways of checking earnings is on transactions carried out by cheques. Should the Chancellor not remove the Stamp Duty on cheques, and indeed on other forms of transactions as well? Then, when he comes to the question of looking at the methods, before the Committee stage he should read A. P. Herbert's article in Punch in which he tells the story of the man who went out of business and found that he was assessed with very large sums which he should have earned but did not. We are getting on to very dangerous ground.

§ Mr. Amory

I should be grateful if the hon. Gentleman would give me the date of the issue.

§ Mr. Grimond

I will send the right hon. Gentleman a copy and when he is next having tea in Lyons, I hope that he will read it. We are in a very dangerous sphere here in interpreting motives, especially as part of the tax system is designed to stop people doing things which are heavily taxed. I do not object to this particular provision but the House should scrutinise very carefully any further departures in this way.

Most of us approve what he has done with post-war credits, but it is slightly curious that a straightforward Government obligation is discharged to some people on the ground that they are deserving people, and not to other people. I do not object to that in itself, but it is a practice which should now be stopped. I was glad that the Financial Secretary said that this was not going very much further and that in future post-war credits would be regarded as a straightforward obligation of the Government.

When this Bill comes to be passed, apart from tidying up some of the administration of taxation—if one can call it tidying up—or making it more difficult, will it assist our economic advance? That is what we have to judge it by. Will 924 it assist the country to raise production and maintain stability? I doubt if it will do so in the long run though it may do so in the short run.

The extra taxation is described as skimming off some demand which the Chancellor thinks to be excessive in the general economy. He has also indicated that that may help us to export more and to encourage goods to be pushed into foreign markets. In the Budget debate the market in Europe was raised and I make no apology for raising it again. Since then—and even since I referred to it before Easter—the situation in Europe has become even more serious than it was.

I do not ask the Chancellor for an answer today, but I was not convinced by the answer given in the Budget debate, nor by the later answer of the Economic Secretary. There is obviously an agonising reappraisal going on within the Seven. We have to accept now that the acceleration by the Six will happen. Has not the time come when the Seven should make an approach to the Six of a rather different sort from that in the Vienna proposals?

Should we not make an approach to say that we are willing to enter the Common Market with certain assurances? I am not at all sure that the Six would accept. They might or they might not. But even if they did not accept, should we not then be in a position to get negotiations going? If we did that, we should press for the 20 per cent. reduction of tariffs in the Common Market to be made permanent and not subject to abolition on the vote of one member. We in the Seven should then accelerate, too, and reduce our tariffs and try to get together on that basis. The Chancellor referred to acceleration in the Budget debate and at that time was inclined to say that he hoped that it would not take place. He is bound to admit now that the strong likelihood is that it will take place and that the recent message by Mr. Dillon shows that Washington will not be helpful to us, and will indeed encourage the growth of the Common Market and acceleration.

We still do not know exactly what the Prime Minister said in Washington. It may be unfortunate that he was reported at all, but the substance has not been 925 denied and it made an unfortunate impression not only in Europe but in the United States.

Should we not do something to encourage production in this country by taking some taxation off companies which encourage profit sharing, or, what we Liberals want, co-ownership? I hope that this prods the Chancellor in a very soft spot, because he is one of the leading exponents of co-ownership between Budgets but as each Budget season comes along he goes into double purdah on this subject and year after year nothing appears.

We have put forward proposals which would encourage companies to make shares available to their workers, and would encourage savings to be set aside out of earnings, to be used for investment. I cannot understand why we have seen nothing in this Budget to bring about what we are always told the Conservative Party believes in—a property-owning democracy.

What of Schedule A? Between Budgets, great pleas are made by hon. Members opposite for the abolition of Schedule A, but provisions to that end are singularly lacking in this Finance Bill.

Finally, although there may be objections to discrimination in taxation in different parts of the country, I welcome the unorthodox steps which the Chancellor has taken in treating Scottish banks differently from English banks in the matter of special deposits. I believe that he should study the suggestions in the Economist for some sort of tax on employers who want to go to areas of very high employment, or, alternatively, helping local authorities in areas of heavy under-employment or unemployment so that they may reduce the rates. In many ways, that seems to be a fairer method of helping those areas to attract industry than that of singling out particular firms and giving them subsidies.

It is with those matters that this Finance Bill should have been concerned. It would not have been possible to have dealt with them all, but, with no great pressure to make big fiscal changes, this was the time to have started the process of a thorough overhaul of the tax system to see whether we could not stop penalising earnings so heavily, to reform the methods by which the Government raise 926 money, the methods of financing nationalised industries, and to make progress with the general question of how we can get out of this unpleasant dilemma of being continually poised between inflation and stagnation.

§ Mr. Nigel Birch (Flint, West)

I should like to associate myself with the tribute paid by the hon. Member for Orkney and Shetland (Mr. Grimond) to my hon. Friend the Member for Brighouse and Spenborough (Mr. Shaw) on an entirely admirable maiden speech—short, clear and to the point.

The hon. Member for Orkney and Shetland complained that there was no theme in the series of my right hon. Friend's Budgets, but I am bound to say that I could not find any theme in the hon. Gentleman's speech. The only theme at all was the recurring phrase, "Should we not start thinking about" this, that and the other. When he said "We" I presume that he meant the Liberal Party, because they were all things with which the rest of us have been wrestling and about which we have been thinking for many years.

§ Mr. Grimond

If all the results we have seen are the results of wrestling for many years, I suggest that the right hon. Gentleman should give it up.

§ Mr. Birch

Perhaps we shall get the answers from the Liberal Party.

At any rate, I congratulate the hon. Gentleman on making a speech on some general points. It has been the tradition of the House that the Second Reading of the Finance Bill was a sort of miniature Budget debate. There seems to be a conspiracy on the Front Bench opposite to turn it into a sort of bloodsucker's bean feast. I understand that the hon. Member for Sowerby (Mr. Houghton) is to wind up for the Opposition, and so hon. Gentlemen opposite are putting up an exhibit of a real live specimen of the tribe of bloodsuckers. They intend to enjoy themselves very much. I do not doubt that the lemonade will flow like water. Fancy cakes will be almost loaded down by margarine cream. For myself, I have no great fancy for such orgies and I should like to return to the general economic theme.

In his economic White Paper and more urgently in his Budget speech, my right 927 hon. Friend the Chancellor of the Exchequer put forward the view that our economy was beginning to suffer from some overstrain, from some overheating. If he believed his own figures, he was bound to take that view. If he believed his own figures in the balance of payments White Paper, he was more or less bound to do something about it.

It is worth thinking for a moment why this present overstrain has come about. One of the reasons is that my right hon. Friend took too gloomy a view of the state of the British economy at the time of the last Budget. After all, a strong recovery was then taking place in America and Western Germany. Unemployment was only 2½ per cent. in this country and the collective wisdom of the markets was indicating fairly clearly that a strong revival was about to take place.

I do not suppose that my right hon. Friend was in any way influenced by the Opposition. They, as usual, were shouting for reflation at all costs, more expenditure, less taxation and so on. I do not suppose that he paid much attention to them, but he probably paid a good deal of attention to the opinions of practically all the professional economists.

At the time of the last Budget, practically all professional economists were of the opinion that a strongly reflationary Budget was necessary. It is worth noting that a great many of them persisted in that view until very recently, many of them long after we had won the last election. Some of those economists were no doubt well placed to make their views heard. I suspect that an attentive observer in Downing Street might often have seen the manly figure of Sir Roy Harrod striding up the steps of No. 10 in order to pour into willing ears his well-known views.

One of the points we have to understand is that many of the things which were done last year are only now beginning to work. For example, I should be rather surprised if the investment allowances granted last year had had very much effect in the last financial year. My guess is that they are just beginning to have effect now. The encouragement given to local authorities to increase their capital expenditure is also only now beginning to have a major effect.

928 Possibly because of last year's misjudgment the Chancellor's main difficulty has come about—the very large increase in expenditure this year, a general loosening of the purse strings. I am sure that it is true of the Treasury that once it gives way on one sector of the front, it is bound to give way all along the line.

However it came about, there was, in the Chancellor's judgment, a certain amount of overstrain in the economy and his problem was what could he do about it. He had a choice between putting up taxes or employing the monetary weapon—the Bank Rate, compulsory deposits, hire-purchase controls, and so on. Although he made a few alterations in taxation, my right hon. Friend did not do enough to make a serious impact by that means on the economy. Clearly, he did not intend to do so. I think that he was right, because if there is very high taxation, as we now have, and if there is an overstrained economy, it is not very much good trying to get out of that position by increasing taxation.

Some very wise words have been written about this matter in the current issue of Lloyds Bank Review by Mr. F. A. Cockfield, who at one time was in the Inland Revenue. He wrote: I do not for a moment deny that changes in the level of taxation have important and often immediate effects on the national economy. But unfortunately the effects are often very different from what their sponsors expect or hope. This is particularly true of increases in taxation designed to reduce consumer expenditure, for such increases lead to pressure for higher wages and higher profits, thus merely reinforcing the inflation the tax measures were designed to avoid. We have seen that happen many times under both parties since the war. I therefore think that my right hon. Friend was almost certainly right not to try to get out of his difficulties by a sharp increase in taxation.

That left us with only the monetary weapon and it meant that, once again, that wretched beast of burden, the holder of gilt-edged securities, had to be punished.

I have several times had the honour of addressing this House about the gilt-edged market. I believe that a healthy gilt-edged market is of vital importance to this country. I have always believed it and I become more convinced about it every day. If the Government have not 929 power to sell stocks to the public no civilised type of economy is possible, nor can we carry on the great banking business that we do, and which is so profitable to us.

After the measures which were taken at the time of the crisis in 1957 there was a considerable revival of confidence in the gilt-edged market. In the first three quarters of 1958 net sales of marketable Government securities to the public amounted to £267 million—quite a reasonable sum. But then confidence started slipping, and in the next four quarters, namely, the last quarter of 1958 and the first three quarters of last year, there were no net sales at all. In fact, the authorities had to buy £291 million of stock. We have no figures for the last six months, but from what the Chancellor said in his Budget speech I judge that the authorities had to buy pretty heavily again.

We are in the position that we are starting to operate the monetary weapon at a time when the state of the market in Government securities is far from healthy. What is the size of the problem which we have to face? How much stock will the Chancellor, or the authorities, have to sell in this financial year to avoid having to finance themselves by Bills? First, there is a total overall deficit of £318 million. There is £41 million for doctors, and £20 million for the rest of the Guillebaud recommendations, and there is one other item which, though technically not part of the Budget, ought to be counted in.

I understand it is estimated that £45 million will have to be raised by the sale of securities from the reserve of the National Insurance Fund. I am a little surprised that my right hon. Friend did not mention this in his Budget speech. I can see that it was a good way of sweeping a little local difficulty under the carpet, but it should be counted in, and if one counts all those items together the total comes to £424 million.

On top of that there is the borrowing by local authorities. In the first quarter of this year my right hon. Friend the Minister of Housing and Local Government sanctioned a record amount of borrowing. He sanctioned the borrowing of £160 million, £23 million more than in the first quarter of last year. The structure of the local government debt in this 930 country gives rise to a good deal of anxiety. Unfortunately, there are no up-to-date figures. Over the past year I have asked several Parliamentary Questions with a view to persuading the Chancellor to publish detailed figures of the structure of the debt, particularly the amounts borrowed at short term. I have always had Answers of the most eager sympathy, but no figures.

The last figures which we have are those for about the beginning of 1958 which were published in the Radcliffe Report. Those figures show that the amount of money borrowed for one year or less by local authorities then amounted to £630 million, £399 million more than three years before. Of that £630 million, no less than £275 million was seven-day money, no doubt used to build schools, houses, sewers, or whatever it is that local authorities like to do.

We do not know what the figures are but it is certain that there is still a vast quantity of seven-day local authority money about, and that a great deal of that is in the hands of foreign holders. I do not think that it requires a great deal of imagination to guess that if we once again run into serious balance of payments difficulties the great mass of that very short money might prove extremely awkward. So much for the size of the problem.

What means has the Chancellor for meeting and solving this problem? First, there are small savings. I should like to add my tribute to the work done by the National Savings movement. It has done a great deal of voluntary work. It has been very successful, and I am sure that we were all gratified when Lord Mackintosh was raised from a barony to a viscounty. But, having said that, we want to fee a bit careful about this.

The theory behind small savings, and the tax concessions that go with many forms of them, was that they would be held by small men liable either to no Income Tax or to Income Tax at the reduced rates. But with the fantastically high level that direct taxation has now reached, one sometimes gets rather odd results. The Chancellor has increased the amount that can be held in three forms of national savings. First, savings certificates. A savings certifi