HC Deb 07 April 1965 vol 710 cc490-625

3.45 p.m.

Mr. Edward Heath (Bexley)

rose—

Mr. Robert Maxwell (Buckingham)

On a point of order. I was in possession of the Committee last night when the Committee rose. Following long-established precedent, am I not entitled to continue, Dr. King?

The Chairman

The hon. Member for Buckingham (Mr. Maxwell) concluded his speech when the Committee closed its meeting, reported Progress and asked leave to sit again. If the hon. Member wants a precedent he will find that my predecessor, Mr. Chairman Whitley, on 21st April, 1920, ruling on another hon. Gentleman, on a similar occasion said: The hon. and gallant Member closured himself at eleven o'clock last night"— [OFFICIAL REPORT, 21st April, 1920; Vol. 128, c. 431.] The hon. Member for Buckingham closured himself at ten o'clock last night.

Mr. Heath

Yesterday, the Chancellor of the Exchequer gave the Committee what I think may well be described as a mammoth Budget statement. The right hon. Gentleman received many congratulations, quite rightly, upon it—on his physical performance and triumph of endurance and also on the lucidity with which he explained many technical matters. Perhaps the right hon. Gentleman will allow me to felicitate him, also, on that.

I would not claim that the Committee was able to understand all the complicated details of some of the taxes as he went along. Discussion of these may not be entirely appropriate to a Budget debate, but we shall have time, on the Finance Bill, to consider these matters in detail. Perhaps the right hon. Gentleman will allow me, however, to look at some of the major items in his statement perhaps in a rather different light from the way in which he presented it to the Committee.

I should like to start by looking at the Budget from the point of view of the citizen. The Budget was, from the point of view of the citizen, the worst Budget since the last Socialist Chancellor in 1951. The right hon. Gentleman imposed £167 million worth of additional taxation, amounting to £217 million worth in a full year. The Budget in 1951, which was that of the right hon. Gentleman's worst predecessor, amounted to £388 million of additional taxation.

Mr. Emrys Hughes (South Ayrshire)

The Korean war.

Mr. Heath

That has already been beaten by the present Chancellor's own two Budgets. Last November, he imposed £275 million worth of additional taxation in a full year and now he has imposed £217 million worth.

Mr. Sydney Silverman (Nelson and Colne)

Should he not have done that?

Mr. Heath

This is a total of £492 million in the last six months. These figures are worse than at any time since the darkest years of the last war. [HON. MEMBERS: "Why?"]. There is plenty of time to analyse the Budget, and I shall do it, and the circumstances behind it, but let us, first, look at the Budget from the point of view of the citizen, as hon. Members will have to do when they meet their constituents.

This is the first increase in Income Tax since 1951. It is the biggest increase on cigarettes and tobacco since April, 1947. It is the biggest increase on spirits since November, 1947.

The Chancellor has said, "We are changing direction". We certainly are changing direction. Over 13 years, we on this side reduced taxation by £1,300 million in the rates of taxation and in less than six months he has increased it by £500 million. This is a typical Socialist Budget. It soaks the rich and it also soaks the poor. Perhaps one might adapt Thomas Hobbes' words and say to the Chancellor that his Budget, for the citizen, is nasty, brutish and long.

It is not a Budget which should be looked at in isolation. Not only is there a ld on beer, but there is a 1d. on the postage stamp as well. Not only is there 6d. on cigarettes, but there is 6d. on Income Tax, something which the Chancellor did not emphasise very much yesterday. Not only is there more on car licences, but there is 6d. on petrol as well. Not only is it a deflationary Budget, but there is the 7 per cent. Bank Rate which we have had now for almost the longest time since the war, and a credit squeeze. Not only are there higher taxes, but there are higher rates and higher mortgage interest rates as well.

No one can say that we were not warned. The Prime Minister, whose absence again today for the reason we know we all regret, has been in the habit of following league tables. My right hon. Friend the Member for Barnet (Mr. Maudling) produced one on 13th October, 1964, and the Committee would do well to follow this league table. My right hon. Friend forecast, with remarkable prescience, what has come about in the turn of events.

The First Secretary of State and Secretary of State for Economic Affairs (Mr. George Brown)

He knew.

Mr. Heath

He knew the situation into which the Government would get themselves. That is what my right hon. Friend knew. This Government are rapidly climbing up the league table which he set out. My right hon. Friend said that petrol would be 6d. up. That is already done. He said that beer would go up ld., and that we have just got. He said that insurance would go up 6s. on the contribution. We have got 5s. 3d. and by the changes which the Chancellor announced yesterday and certain other matters we shall have the few extra pence.

My right hon. Friend said that Income Tax would be 9d. up. At least, we have flat quite got there. He said that spirits would be 3s. up, and the Chancellor is well ahead of him with 4s. Two-thirds of the reduction which came about as a result of the removal of resale price maintenance has already been lost. What an incentive to reduce prices!

My right hon. Friend said that cigarettes would be up by 4d. for 20, but the Chancellor has done better than that, with 6d. Finally, my right hon. Friend said that Purchase Tax would be up one-fifth all round. Perhaps the Chancellor is keeping this for an autumn Budget, or some other occasion.

What did the right hon. Gentleman say about all this? In Cardiff, on 14th October, he said: These figures are infant school stuff, nursery school stuff, hardly worth serious attention. These figures are getting screwier and screwier". Who is getting screwier now?—the Chancellor himself.

All this has come about since the Chancellor's right hon. Friend, the First Secretary of State, said in his White Paper, on 26th October, 1964: … there is no undue pressure on resources calling for action. That was the judgment of right hon. and hon. Members opposite when they got back into power and saw what the situation was, that there was no undue pressure on resources calling for action", yet since that time we have had nearly £500 million worth of additional taxes imposed, a larger imposition than by any of the Chancellor's predecessors.

While I am dealing with the Chancellor's past history, what about his objectives in all this? He has based his Budget impositions very largely on consumer taxes. Why?—in order to deal with the balance of payments problem which he described to us yesterday. This has really been the core of his Budget, looked at from the point of view of additional effective taxes. Yet, if we go back only a year to last year's Budget, what did the right hon. Gentleman himself say: The tax on beer and cigarettes is basically irrelevant to the balance of payments problem".—[OFFICIAL REPORT, 15th April, 1964; Vol. 693, c. 431–2.] The right hon. Gentleman's right hon. Friend the Chancellor of the Duchy of Lancaster said: Taxes on alcohol and tobacco equal, if they do not exceed, the total yield from the whole of P.A.Y.E. That is wholly disproportionate."—[OFFICIAL REPORT, 20th April, 1964; Vol. 693, c. 888.] What obstacles he must have overcome on his own Front Bench in order to reverse his own position and somehow discover that the tax on beer and cigarettes is relevant to the balance of payments problem.

The Chancellor stated his intentions very clearly at the beginning of his speech, and I wish to come straight away to my general comments on his Budget. This is the first Budget introduced by a Chancellor with no responsibilities whatever for the state of the economy. This is the first time it has happened in the whole of British history. The position was very obvious yesterday. In the more than two hours which the right hon. Gentleman took for his Budget statement, he spent only a few minutes discussing the state of the economy as a whole. He looked only to the future, and he made apologies to his right hon. Friend for doing it. So we have to wait until this afternoon to hear what the First Secretary has to say about the state of the economy.

There is no doubt whose policy is really dominating the economy. The Chancellor may not have responsibility for it, but what has happened is that the Treasury machine has proved stronger than the First Secretary's public relations outfit. All this was to be combined in one splendid national plan. The Chancellor made a fleeting reference to that as well yesterday, but what has happened to the national plan? The First Secretary of State was to present it to us in outline form on 1st April, not an entirely inappropriate day, but he has had to withdraw it, and we now have the Chancellor's Budget without any national plan, outline or otherwise. This really points the whole fatuity of the arrangement which right hon. Members opposite have created among themselves.

This has been a tough Budget. It is tougher than it need have been if the Labour Government had been able to retain the confidence of the rest of the world. This is one of the issues which I shall discuss in detail in a few minutes. The other feature of the Chancellor's statement was that he gave no account of his own stewardship of our overseas financial affairs. I do not believe that the word "sterling" or "pound" was mentioned in the whole of his statement. What an astonishing performance! Whatever responsibilities may have been taken from him, this is a responsibility which the Chancellor certainly has, and it is astonishing that he was able to deliver his whole statement without any reference to his stewardship of the state of the £ sterling since last October.

The right hon. Gentleman started by saying: … we need a pattern of taxation serving the requirements of a modern and dynamic economic policy."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 245.] That is all we heard of it in two hours—nothing more. My main criticism of the Budget is that it does absolutely nothing to secure a pattern of taxation which will serve the requirements of a modern and dynamic economic policy. The right hon. Gentleman devoted over an hour to two new taxes. The purpose of the Capital Gains Tax and the Corporation Tax is not to make industry dynamic, or even to reform the tax system with the object of achieving greater simplicity.

As we go further into it, past the Chancellor's first statement, then past his Budget statement yesterday and into the Finance Bill, we find how complicated the whole thing is. The more he tries to make detailed provision for necessary and good things, the more complicated it becomes. So this is not the purpose of those two taxes.

The first real purpose of both taxes is to secure a redistribution of income. That is the Chancellor's object, and he should say it plainly. It is not the purpose to achieve a dynamic economy. The other real purpose of the Corporation Tax is to deter overseas investment and not only to deter but to damage existing overseas investment. That is its other purpose, and that will certainly be its effect.

We all know the background and what has been so often written about the Corporation Tax, in the Report of the Royal Commission, and so on. My final conclusion about both these taxes is that they are irrelevant to our situation at this moment, a situation for which the Chancellor is responsible so far as sterling is concerned. There is no attempt in the Budget to meet problems by increasing enterprise and developing overseas markets.

The Chancellor said that he will make room for exports. It is not only a question of making room for exports. The problem is to get the exports sold in world markets. The whole approach of the Budget has been to clamp down. One can feel the clammy hand of the Chancellor throughout the Budget. It is clamping down on overseas activity. It is depressing people at home. This is quite unlike the methods adopted by President Johnson to deal with the American situation of the overseas balance of payments, and the American problem of overseas loans and overseas capital investment. The Chancellor is damaging existing investment as well as clamping down on the rest.

To sum up the Budget, there is nothing to produce incentives, nothing to increase efficiency and exports, nothing to excite and nothing to inspire—absolutely nothing. What has happened is that the "little Englanders" have won again. [Interruption.] The right hon. Member for Easington (Mr. Shinwell) must be careful what he says about the Common Market. He has only to look at what his right hon. Friend has been saying in Paris.

I want to look at the Chancellor's taxes in a little more detail. He has two new taxes. I hope that he will get the returns from them. I notice that he has been involved in a slight dispute with those who have the job of organising the taxes. I saw in a statement last week that the general secretary of the Inland Revenue staff said: If he doesn't settle this problem before the Budget next Tuesday, he will have to whistle for his new taxes. No good will exists towards him in the Inland Revenue. I hope for the right hon. Gentleman's sake that he has been able to deal with that little episode.

The Chancellor of the Exchequer (Mr. James Callaghan)

Perhaps I might add that on the following Friday the Federation announced that it was making me an honorary life member, in view of my services.

Mr. Heath

The Chancellor may still have to whistle for his taxes.

First of all, I turn to the Corporation Tax. We all welcome the White Papers which will be produced before the Finance Bill, but might it not have saved the Chancellor a large amount of what was read out yesterday—that test of endurance—if it had been produced in White Papers beforehand? It would greatly have assisted those who have to study this matter.

My first objection to the Corporation Tax is that it is intended to increase the amount of profits which are, as the Chancellor says, ploughed back into firms. I believe that there is a genuine difference of view here between the two sides of the Committee. The right hon. Gentleman and his colleagues believe that all that is necessary to get investment, and to get investment in the right places, is for profits to be ploughed back. At the same time, the right hon. Gentleman objects to dividends being distributed. I and, I believe, my right hon. and hon. Friends believe that this is an entirely fallacious thesis, and that if one is to have a dynamic and growth economy one does not get it by allowing firms which have money just to refuse to pay it out in dividends and then sit on it. This does not produce the system of the survival of the fittest. It produces the system of the survival of the fattest.

If we may pursue the argument, the new growth firm which wants to develop is a firm which has to get resources from more than its own profits, and to do this it must be able to go to the market and get the capital that it wants. This applies to all growth firms and industries. If they are to do that, then, in our view, much the better system, which has been demonstrated in the countries which have achieved rapid growth, is that encouragement should be given for dividends to be paid out, for the money to be saved and reinvested, and for the dynamic and growth firms to be able to attract this capital and investment. That is a fundamental difference between the two sides of the Committee.

The Royal Commission was against the right hon. Gentleman, and he admitted so yesterday. This, I believe, is a fundamental weakness in the Corporation Tax as the right hon. Gentleman proposes to institute it.

Mr. Eric Lubbock (Orpington)

If the right hon. Gentleman's argument is correct, why is it that yields are so much lower on the other side of the Atlantic?

Mr. Heath

I dispute that entirely. However, if the hon. Gentleman wants to take other examples, let us take some of the European countries with a high rate of growth—Germany, for example —where exactly the opposite is the case.

The Financial Secretary to the Treasury argued last week, in a debate on an Order, that taking this action was bringing our own system nearer to the European system. I entirely disagree with him. What he said was: Hon. Members will realise that as a result of the long period of government by the party opposite the Germans have got rather ahead of us in the modernisation of their taxation system. They have, and have had for some time, a corporation tax."—[OFFICIAL REPORT, 1st April, 1965; Vol. 709, c. 1984.] Later, he said: these new taxes… will bring our tax system into closer approximation with theirs."—[OFFICIAL REPORT, 1st April, 1965; Vol. 709, c. 1993.] Hon. Members should examine the Report of the Neumark Committee for the Common Market. It came to the reverse conclusion. It said that In the system applied in the Federal Republic of Germany and Belgium as well as in the Dutch projected legislation company tax levied on the gross dividend is lower than that which is levied on gross reserves. In Great Britain this system has already been in existence for a long while.… The German discrimination in a singular manner approaches that of Great Britain. The plain fact is that, however one describes these two systems, we in our present situation are closer to the system in practice in the growth countries of Europe than we shall be when the Chancellor has changed us over to the Corporation Tax.

My second point is that this is double taxation in so far as profits are distributed. The Chancellor made a distinction between shareholders and firms. I always thought that the Labour Party was trying to impress on us the fact that shareholders and firms were one and the same thing, that shareholders should take a greater interest in their firms. But the Chancellor had to come on with the Capital Gains Tax to take account of the fact that when a company is wound up or goes into liquidation, he has to take account of the fact that shareholders and companies are the same thing. Otherwise, they might get these resources without paying his tax. So he has instituted the Capital Gains Tax. In this respect, he is saying that they are the same thing, and that he will make certain that they do pay. I do not believe that this is a valid distinction.

The third point is that this will do great harm to our overseas companies. The Chancellor dealt with this very lightly yesterday. What he is doing, briefly—this is a technical matter, which we can deal with later—is to put another 41¼ per cent. of the dividend as a burden on the companies if they pay at the standard rate. The impact of this on these great companies will, as the Chancellor has been told and knows, be very great indeed.

When we look at the sort of companies affected, they are I.C.I., Shell, Unilever, the cement companies, Dunlop, Metal Box, Courtauld, Schweppes, the insurance companies, Hawker Siddeley and other great companies of that kind. They are the ones which will be changed by the Chancellor. What does the Chancellor do? He says, "These proposals might create hardship", and so these great foreign exchange earners are to be given some form of transitional relief which he describes to us. But this is not building up the future of this country, or looking to the new term. What the right hon. Gentleman has allowed himself to do is to be so attracted by this new tax that he is completely disregarding the fundamental issue of the long-term future of the country. That is what he is doing in dealing with these companies.

Apart from this, it will affect the developing countries very much indeed. Yet, the Government and the Labour Party have always impressed upon us the absolute priority of helping the developing countries. When the Conservative Government were in power, they gave a lead at the Geneva conference in order to help the developing countries What the Chancellor is doing is damaging the firms which can best help the developing countries. What is more, he is now killing overseas trading corporations. Is it a great asset, a great achievement, of the new tax to damage the existing companies that we have and to kill off the existing overseas trading corporations? It is a deplorable act by the Chancellor.

Then the Chancellor turned to investment allowances. This is my next point about the tax. What the right hon. Gentleman is doing is excusing this on purely technical grounds and saying that he will look at the problem of allowances a little later. Does not he realise the uncertainty that he is causing throughout the rest of the financial year? First, no company knows what its investment allowances will be worth. Secondly, he may at the end say that he will change the system as well as the whole structure of the Corporation Tax. These are the objections I have to this tax in the way it has been put forward by the right hon. Gentleman and the impact it will have.

My greatest objection in the situation that the right hon. Gentleman has been describing is that we in this Committee will now spend days and possibly nights on the Finance Bill arguing about the technicalities, while board rooms will spend their energies examining the tax, looking at the capital structures of their companies and readjusting those structures so as to deal with the tax. Accountants will be fully occupied. All of us in the Committee and those in companies outside will be occupied in this way instead of dealing with the fundamental problems of today. We will all be preoccupied with a change of taxation which can achieve nothing for the economy as a whole.

Now I turn to the Capital Gains Tax. The Chancellor has put this at a level which is high, especially compared with that in the United States. It is much more embracing than the U.S. tax. The maximum in the United States is 25 per cent. and the average is very low—about 8 per cent. and 9 per cent. From the point of view of the operation of such a tax in other countries, the level fixed by the Chancellor is high.

The tax will produce some problems for him. I believe that, at this level, it will damage the mobility of capital. As he takes no account of inflation it will do damage in this respect and it is at a level which will also be unfair to the individual. It will mean, as a consequence, a reduction in the real capital of any individual. It is part of the Chancellor's purpose—and, indeed, part of the purpose of right hon. and hon. Members opposite—to make a deliberate redistribution of wealth and not to deal with so many of the things which, they said, produced an attitude of unfairness in that some people are able to make specific gains.

But this tax does not deal with specific gains. It taxes wealth and deliberately redistributes it. The right hon. Gentleman had better not hide behind the idea that he is dealing with passing unfairnesses. As my right hon. Friend the Leader of the Opposition said yesterday, this, together with the Estate Duty and the levels of Surtax and tax, produces a combination of taxation which is very high indeed. Indeed, some might describe it as penal.

I am sorry that the hon. Member for Buckingham (Mr. Maxwell), who has not been able to speak, has left the Chamber, because he might describe it as penal. I discovered an interesting advertisement in the Bookseller on 6th March. It read: Are you the owner of a publishing company wishing to…Realise some of your capital? Protect your Company from the effects of penal taxation?

Mr. George Brown

My hon. Friend the Member for Buckingham (Mr. Maxwell) is not here.

Mr. Heath

I expected him to be here, like other right hon. and hon. Gentlemen. The advertisement went on: Then write now, in confidence, to: The Chairman, Pergamon Press Ltd… There is one point that I want to put to the Chancellor about the arrangements for Government stock.

The Chief Secretary to the Treasury (Mr. John Diamond)

Read the whole advertisement.

Mr. Heath

I will. It read: Are you the owner of a publishing company wishing to obtain access to world-wide promotion, distribution and production facilities but continue to run your business in your own way? Realise some of your capital? Protect your Company from the effects of penal taxation? Secure a source of finance for further growth? Write now, in confidence, to: The Chairman, Pergamon Press Ltd…. The Chancellor of the Exchequer has refused to exempt Government stock from these provisions. In the coming year we will have to borrow more than twice as much as was borrowed last year. Does he really think that it is in the best interests of the management of Government finance and of his own borrowing in this and future years that he should refuse to take this action on Government stock? I ask him seriously to consider this in his own interests and those of the state of the economy and of the nation.

The final point about the Capital Gains Tax is that we have reached the position in which football pools and bingo are all exempt from any form of taxation.

Mr. Callaghan

They pay heavy tax.

Mr. Heath

The recipients of football pool and bingo winnings pay no tax. Thus, if a person saves up and puts his capital somewhere where it fructifies because he invests it and helps industry, he pays a Capital Gains Tax.

Mr. Peter Shore (Stepney)

Were gains from football winnings also exempted from the speculative gains tax introduced by the right hon. Member for Barnet (Mr. Maudling)?

Mr. Heath

It is true that they were. But the present Chancellor is not dealing with speculative gains, as did my right hon. Friend the Member for Barnet, nor with even the inflationary gains of capital. He is dealing with all gains on capital, in an all-embracing way. To use the phrase of the Prime Minister—who is supporting the candy floss society now?

Now I turn to the question of overseas portfolio investment. I hope that the Secretary of State for Economic Affairs will answer all these questions in his speech. As I understand, according to what the Chancellor announced yesterday, if one holds an overseas portfolio investment and sells so as to gain overseas currency one must repatriate a quarter of the proceeds. This was a most technical and difficult part of the Budget statement. The Chancellor at one stage said that all he was asking was that one should turn a quarter of them into dollars bill at parity rates.

It is difficult to reconcile these statements. What will be the impact on a person who sells his securities if he wants to invest in another stock overseas? Will he be at liberty to do so in the entire amount?

Mr. Archie Manuel (Central Ayrshire)

My hon. Friend the Member for Buckingham (Mr. Maxwell) has returned. The right hon. Member for Bexley (Mr. Heath) should ask him now.

Mr. Maxwell

On a point of order, Dr. King. Is it not customary, even for right hon. Members opposite, to give notice to an hon. Member when it is intended to raise issues of a personal nature?

Mr. Ronald Bell (Buckinghamshire, South)

Further to that point of order—

Mr. Manuel

Order.

The Chairman

Order. I shall be grateful if the hon. Member for Central Ayrshire (Mr. Manuel) will let the Chair conduct the debate.

Mr. Ronald Bell

Further to that point of order, Dr. King. In dealing with the submission of the hon. Member for Buckingham (Mr. Maxwell), will you consider whether it has ever been the custom of the Committee that one must give notice to the previous speaker in the same debate of the fact that one will reply to him?

The Chairman

Neither of the matters raised by the hon. Member for Buckingham (Mr. Maxwell) and the hon. Member for Buckinghamshire, South (Mr. Ronald Bell) is a point of order for me.

Mr. Heath

When the hon. Member for Buckingham reads HANSARD tomorrow, he will find that I have in no way attacked him, or made personal remarks about him. I have, indeed, given him excellent publicity for his firm.

Mr. Maxwell

I accept your Ruling, Dr. King, that I did not have the right to finish the speech which I was making yesterday, but would it not be a point of decency for the right hon. Member for Bexley to give me the opportunity to answer?

The Chairman

If the Chair had to rule on points of decency and courtesy, it would never finish its work.

Sir Arthur Vere Harvey (Macclesfield)

On a point of order. Has it not been the custom that when an hon. Member has spoken he waits to hear the following speech in case he is referred to? That the hon. Gentleman did not do.

The Chairman

I do not intend to start ruling on matters of courtesy.

Mr. Heath

I was about to ask the Chancellor of the Exchequer what is to happen about the Government holding of overseas investments. In this situation, where he is taking action which will damage private investment in the great companies of this country, what is he to do about the overseas holdings of Government investments in foreign stocks and portfolios which, as we know, amount to something over 1 billion dollars?

Mr. Callaghan

I should not like there to be any misunderstanding. The repatriation of assets on the sale of portfolio securities is a voluntary act. When people decide to sell, a proportion of the sale will be surrendered to the reserves at the official rate. If the investor wants to swap his investment and buy a new one, he can still buy the complete amount by paying the premium in the investment currency market to make up the quarter which he has lost.

Mr. Heath

In other words, this is a rather subtle means of getting a rake-off from any exchange. The Chancellor has carefully explained what his purpose is.

I now come to the 50 per cent. increase in motor duty for commercial vehicles. We understood that the criterion for an increase in indirect taxation was whether it affected industrial costs. This increase undoubtedly does. This is a 50 per cent. increase compared with a sixth on private vehicles. The Chancellor said that this meant only 2 to 4 per cent. on the capacity ton mile, the operating ton mile. But these 2 to 4 per cents. all add up and the Chancellor has already added burdens to industrial costs, and this further addition is not wise. It also means another charge on industrial and farm tractors of front £2 10s. to £2 15s., which affects the small man particularly at a time when a very small amount of these costs are to be recouped in the farm review.

The measure on business expenses was the one measure in the whole of the two hours which got a full-throated cheer from all the Chancellor's supporters. Of course, the Chancellor knows that the Inland Revenue has full power to stop any abuse of business expenses. Abuses ought to be stopped, but the Chancellor himself said that good firms, who were the great majority, did not abuse these expenses. He was perfectly fair about that and I believe that he was right. What he was doing was giving a sop to his supporters, and, heaven knows, they will need it in the constituencies.

Mr. Maxwell

rose—

Mr. Heath

What the right hon. Gentleman did was to dress up this proposal in emotive terms by talking about penthouses, yachts and grouse moors. He knows perfectly well that very little of these expenses are spent in that way. If he has found abuses, why has he not got tile Inland Revenue to stop them? To deal with what he described as abuses, he has wiped out the whole thing.

The people who will suffer from this will be the small man and the growing firms. The bigger firms, as the Chancellor himself said, will be able to do it on their own resources, but the smaller man and those who ought to be encouraged will suffer. To cure abuses, the Chancellor has wiped out the whole thing, and the same applies to the allowance for business cars.

What is most interesting in this is the attitude of the Chancellor compared with that of the First Secretary. The First Secretary was reported in an article in the journal of the Institute of Directors, on Monday, an article entitled "Inner thoughts of Mr. Brown", as saying: … businessmen have more hope of making money or making progress, of building themselves up, whatever their aims, are under"— this Labour Government. "Mr. Brown, the businessman's friend".

Whatever the First Secretary's inner thoughts are, it is the Chancellor's actions which govern the businessman, and the Chancellor is proving to be the businessman's scourge. We get the back-scratching by the First Secretary of every businessman he meets, and then some form of back-kicking by the Chancellor of the Exchequer. What is important in this is that the interests of exporters should be safeguarded, and I hope that the Chancellor and other Treasury Ministers will see that this is done, whether the exporters are in this country or overseas.

I want to refer to the TSR2 and the Chancellor's own part in it. This was included in his Budget statement and was an important balance in his Budget. I do not blame the Chancellor of the Exchequer in any way for what happened last night. He, naturally, wanted to take account of this factor in the Budget. That I fully understand and that is why he forced a decision last week. He went to a midnight Cabinet meeting and the Prime Minister had to change his plans for visiting the President of France. It was a somewhat humiliating position to have to postpone arrangements for meeting the President of France because of a Cabinet squabble, but there it was. The decision having been taken —

Mr. George Brown

In view of that remark, can we just have it made quite plain that the reason why the Cabinet did not meet earlier that day was that the Prime Minister did the Opposition the compliment of staying here all day to listen to what they had to say in the foreign affairs debate?

Mr. Heath

The right hon. Gentleman, the Prime Minister and the rest of the Government have had about five months to deal with this matter and were not dependent on the timing of one debate.

The statement on the TSR2 should have been made to the House on Monday, when we would have had an opportunity of putting full questions on both the defence and financial aspects. We are now limited. I can discuss only the financial aspect and we shall not have the opportunity of putting Questions to the Secretary of State for Defence within a reasonable time. In the Motion of censure debate it will not be possible to cross-question the right hon. Gentleman. The right hon. Gentleman does not appear at the top of the list of Questions until Wednesday, 2nd June.

Mr. Sydney Silverman

On a point of order. The right hon. Gentleman has just said that it would be out of order for him to ask questions about or deal with the TSR2 statement by the Secretary of State for Defence yesterday. This is a debate on the Budget Resolutions. As far as my experience goes, nothing is out of order in such a debate. Or is it?

The Chairman

The hon. Member for Nelson and Colne (Mr. Sydney Silverman) is not quite correct. Not everything is in order on the Budget debate. What is in order is the financial implications of any aspect of policy, which is what the right hon. Gentleman has rightly said.

Mr. Heath

That is what I propose to deal with. The Post Office charges statement was made beforehand and the Chancellor took credit for it in the Budget. I do not understand why, from the financial point of view, the TSR2 statement could not have been made in exactly the same way, and we would then all have been in a much better position.

The Chancellor took credit for a reduction in costs on the TSR2, but I should like to ask him and the First Secretary for the details of the Chancellor's calculations. We were given an overall figure with no breakdown. How much was allowed for the TSR2 in this year's Defence Estimates? The Chancellor said that the cancellation costs had been allowed for, but I understand that they have not yet been settled and still have to be negotiated. How much has been allowed in this sum for cancellation costs, which is very important from the point of view of the balance of the Budget? The figure mentioned for the cancellation costs has been £70 million or greater. This would have a major impact. In the figures given yesterday, did the Chancellor take account of tax changes in the companies' tax and in individual tax?

But again the Chancellor of the Exchequer did not deal with the question of the impact on the balance of payments, and I ask the First Secretary of State to deal with this in his speech. What we have been having is the usual double-talk. The Chancellor of the Exchequer made no mention of the balance of payments aspect. The Secretary of State for Defence tried to give the impression that the balance of payments aspect was very vague and very remote.

This is not the impression given in Washington by Mr. McNamara, the American Secretary of State. According to a report in The Times today, from its Washington correspondent, Officials in the Defence Department were high in praise for what was described as the great political courage demonstrated by the British Government in deciding to scrap the expensive TSR 2. They can afford to be magnanimous". The correspondent went on: Mr. McNamara was clearly elated by today's agreement". What exactly was he elated about? Of course, he sees this as a grave blow to the production of military aircraft in this country but, as far as exports are concerned, it is also a blow to civil aircraft because of the impact on the costs of civil aircraft. Has he any other reasons for elation? Is there more in this optional agreement than the Secretary of State for Defence told us last night, because Mr. McNamara is not the sort of person who gets elated without due cause? I should like the First Secretary of State to be explicit as to what sort of undertakings have been given.

I said that this was a tougher Budget than it need have been if the Government had kept the confidence of the world. The need to regain confidence has dominated this Budget. That has been the dominating influence on the Chancellor of the Exchequer. He may well be right. But we must not avoid the fact that, although, naturally, he would not like to say it, it is this which has dominated his actions. He has made a Budget judgment—he has had £250 million; actually, it came to £234 million —within the brackets which most commentators have suggested. Everybody in this Committee, however much we oppose taxation and dislike it, must hope that the right hon. Gentleman has made a judgment which will restore strength in the £ sterling.

But there is the question which the right hon. Gentleman raised earlier, about how the Government ever got into this position at all. [HON. MEMBERS: "Oh."] I will deal with the matter in detail. In 1963, my right hon. Friend the Member for Barnet produced an expansionary Budget. The present Chancellor of the Exchequer said that it should have been a much more expansionary Budget. In 1963, he wanted a much greater injection of consumption power into the economy. Then, in 1964, my right hon. Friend took £100 million out of consumption in the Budget. The present Chancellor of the Exchequer did not challenge that. My right hon. Friend also put Bank Rate up to 5 per cent. in February. Both these things were done to stabilise the economy. We recognised that he was pursuing a policy of expansion and of stabilising the economy.

In 1963, we had a 6 per cent. growth and, according to the Chancellor of he Exchequer's own Yellow Book, in 1964 we got close to a 4 per cent. growth. Therefore, in those two years, with an expanding economy under the guidance of my right hon. Friend, we were getting the growth at which we were aiming. We knew full well about the trade problems which were likely to emerge.

I want to quote what the Prime Minister said in Swansea on 25th January last year, when he was absolutely clear about this point. There was no difference between the two sides of the Committee. He said: If balance of payments difficulties arise in the next few months we must meet them—as the Government"— that is, my right hon. and hon. Friends— has always said that they must be mett— by using reserves". He went on: … we should not be afraid … to use our very substantial drawing rights under the International Monetary Fund, to say nothing of other sources which can be mobilised in case of need. The right hon. Gentleman went on to say that he would use short-term interest rates to staunch any flow of capital—in other words, Bank Rate. This was the policy. There was no difference between the two sides of the Committee on this. It was a perfectly serious policy. But where did it go wrong?

It went wrong in the Norwich speech, in the middle of the election, on 30th September. There, instead of talking in the serious economic terms which the right hon. Gentleman used to describe his policy, he used emotive terms to the effect that we were getting our prosperity on the slate. He went on to say that we were being "put in pawn economically", having said that we were Not content with crawling to the Americans". He went on to say, about borrowing: … you have no independence of action economically, in social policy or in foreign policy. The right hon. Gentleman used emotive terms to get votes instead of making a serious economic analysis. This is the position into which right hon. Gentlemen opposite have got themselves. The Chancellor of the Exchequer has been dominated by this in the whole of his Budget arrangements.

One could say that the events of last autumn were not matters to be raised during the election. What happened was that this was continued after the election, very largely by the First Secretary of State. We saw panic-stricken actions. By the way, the Chancellor of the Exchequer, last night on television, said that when he got to the Treasury he expected to find that the trading account perfectly balanced. Had not he read his right hon. Friend's speech as Swansea? Had not he even read the balance of payments White Paper published on 1st October? The right hon. Gentleman cannot be as simple as that.

Then we had the dramatisation of the position by the First Secretary of State. We had the hastily improvised surcharge and the autumn Budget with heavy Government expenditure and higher taxation. We had the fateful E.F.T.A. meeting to which the President of the Board of Trade, shorn of his powers, was sent as a front runner to explain away what the Government were doing to our E.F.T.A. partners. When it came to the question of taking 5 per cent. off, it was the First Secretary of State himself who went to see our E.F.T.A. partners. Then we had the panic Bank Rate—up to 7 per cent. —and then the standby.

We had two statements by the Prime Minister about confidence. I wish to refer to these, although the right hon. Gentleman is not here. However, I know that he will read the report of my speech. On 23rd November last year the right hon. Gentleman said: The fact is … that so far as the trade gap is concerned, whatever the trade gap or the payments gap—whatever has been estimated as having to be met—there were reserves and borrowings more than adequate to meet this, but in the course of the past week that is, 16th to 23rd November— there has been this new development arising from confidence factors, and it was decided that we must take these measures decisively and at the right possible moment."—[OFFICIAL REPORT, 23rd November, 1964; Vol. 702, c. 933.] The confidence factors could only have been lack of confidence in the Government during the week of 16th November.

The Prime Minister tried to deny this to my right hon. Friend the Member for Barnet on 16th March. He said: … I would first inform the right hon. Gentleman, as he can look up for himself, that in November I said nothing of the kind, even though the right hon. Gentleman went on television and completely misrepresented what I said."—[OFFICIAL REPORT, 16th March. 1965; Vol. 708, c. 1066.] I have read out the full account in HANSARD of 23rd November, 1964. The Prime Minister said that the reason for the attack on sterling and the need for the Bank Rate increase and then for the standby was lack of confidence in the preceding week; and it was lack of confidence in the Government and the Prime Minister.

The handling of these affairs was the biggest blunder which the Government have ever made. The First Secretary of State knows it, and how much he must regret it. By far the best thing for him to do would be to get out of this blunder in the most gentlemanly way he can. I do not blame the Chancellor of the Exchequer. All that I blame him for is the fact that he was too weak to be able to stop the First Secretary of State.

However, I blame the Chancellor of the Exchequer for one thing, and I wish to deal with this in the last part of my speech. It is the responsibility of the right hon. Gentleman to deal with the question of sterling. I do not believe that since the standby he has done enough publicly to deal with this question. I hope that in the period which is to come he will perhaps consider these matters.

Mr. Callaghan

The right hon. Gentleman has not done anything.

Mr. Heath

I will deal with the Chancellor of the Exchequer. The responsibility for dealing with sterling must be that of the Government. The Opposition will always support sterling in the national interest. We have always done so. But it is not enough to deal with words.

Mr. E. Shinwell (Easington)

Hear, hear.

Mr. Heath

There must be action by the Government to deal with the position. Nothing was done after the standby. Nothing was done until this Budget. Nothing was done on the Vote on Account. Nothing was done to deal with Government expenditure overseas. There has been no intelligent discussion by the Government of these problems. They were being discussed everywhere else in the world. The one place where they have never been discussed is in the House of Commons.

The only person who has made any contribution whatever was the Prime Minister, who, in Paris last week, according to Press reports, used the significant word "nuts". That was his sole contribution to the discussion of sterling. It is a rather passé mid-1930s word, but it is the word which the Prime Minister used.

There are very few occasions on which these matters can be discussed, certainly by an Opposition, although they can be discussed by the Government. They ought to be discussed responsibly, because there have been dangers in the past, which I hope have now been surmounted, or are being surmounted, as a result of what is being done. The right hon. Gentleman is always embarrassed that those behind him think that everything is due to a strange plot, to people who are almost Wagnerian characters, giants in Wall Street or gnomes in Zurich, not realising that a great trading nation has people all over the world who have their own intense personal interest, for trading purposes, in the parity of sterling. This has been the main consideration in these last few weeks.

I do not think that the right hon. Gentleman realised, concerning the surcharges, that what worried people across the world was that surcharges had never been imposed anywhere—either in France or in Canada, for example—without a degree of devaluation following. That is why it was so important, although right hon. Gentlemen opposite could not see or know any of the results of imposing them, that the surcharges should start to come off. This is a demonstration that the Government will not protect sterling— [Interruption.] I said that what worried people in Europe was that surcharges had not been used elsewhere without some degree of devaluation. Everybody knows this. That was why it was so important for the Government to take that action.

What the Government must do is to make plain, continually and by actions, that they will maintain the strength of sterling, because that is all-important in the interest of this country, and they will get every support from the Opposition in doing so. [Interruption.] Can the right hon. Gentleman not take part in any sort of debate about this, in which the whole of the rest of the world is taking part? He ought to consider these matters seriously and debate them properly.

Mr. Callaghan

When the £ has been under attack in the past, Opposition spokesmen from the party on this side or the Committee have said quite clearly that they thought that there was no case for devaluation of the £ and that its parity value should be restored. Do I take it that the meaning of what the right hon. Gentleman has said this afternoon is that he believes that there is no case for devaluation and that the parity of the £ should be maintained?

Mr. Heath

I will tell the hon. Gentleman exactly what I believe and what I have said on every occasion in public and in private. I have said that I believe that the present Government are determined to do everything they can to maintain the parity of the £. I have said that I believe that they are determined to do so, first of all—and this is an effective argument—because it is politically, in their own interests, essential to do so. This is obsolutely true in my view.

Secondly, I believe that the Government are determined to maintain the parity of the £ because any sort of devaluation is no answer whatever to our present problems. The prices of our goods in international markets are, on the whole, not out of gear with other prices and there is, therefore, no justifica- tion for any sort of change in the parity of the £.

Therefore, for these two reasons, I have always said that I believe that the Government now in power, for their own reasons, and for national reasons, will do everything they can to maintain the parity of the £, and they are right to do so.

Mr. J. J. Mendelson (Penistone)

Why bring it up now?

Mr. Heath

Because these things should be said. The whole of the rest of the world discusses a subject which the House of Commons never even mentions. That is completely unjustifiable. If we now have the position straight, it is a very good thing.

I come now to the last part of my speech. Although the Chancellor has been dominated by these questions, these are not the whole of the picture and the important considerations are also the long-term ones about the future of the economy. What I have regretted is that in this Budget the Chancellor has not—we may hear something from the First Secretary; I do not know—done anything which will increase efficiency and improve enterprise or secure exports. I believe that the First Secretary is relying almost entirely on the incomes policy. We shall be interested to hear anything he has to say about the incomes policy. What we are having is a tribute to the necessity of private enterprise while, at the same time, not giving the mainspring of private enterprise any initiative to give it a fresh dynamic.

The outstanding characteristics of the economy are that we ought to make much better use of all the skill and energies of our manpower and of our woman-power. Too much of it today is hampered in its work by out-of-date practices, from the training of apprentices onwards. In the economy, we must aim at a high efficiency economy which pays high wages but, because of its high efficiency, achieves low costs. That must be the object of our economic policy. Again, however, there is nothing in the Budget to deal with it.

We must, first, get the highest quality of management. This means more professionalism and less amateurism, at all levels of management. We want people who will look each day for new ways of cutting down unit costs of production, who are better trained and who indulge in a much freer exchange of ideas and techniques. The N.E.D.C., which my right hon. Friend created, helps in this, but it is not enough. We want a climate in which people feel impelled to increase efficiency and production. We want more incentives, more competition and more co-operation in using equipment and exchanging ideas. We need more fundamental emphasis on the place of marketing in society and not only on the place of production in society.

Secondly, we need an outlook in the unions and those concerned with them so that they can organise themselves into a suitable medium to get a high-wage and low-cost economy. The two must go together. That is what we want to see. It can be achieved by people in a plant sitting down together and producing the answer. We have just had the example of Mobil making its own arrangement—a very successful one. This needs to be encouraged, because it can lead to the sort of economy which we want to see.

Have we really got to wait two or three years for the Royal Commission on the trade unions before we can make progress? Even if the right hon. Gentleman waits for that, the country does not have the time to wait three years before it is done. [Interruption.] Indeed not. We on this side made considerable progress in many of these things. We want better retraining and wage-related benefits, which the Government do not have in their programme. We need changes in the structure of industry. The President of the Board of Trade is haunted by the idea of mergers. At the same time, our competitors in France and the Common Market are giving taxation incentives to bring about mergers to get a better structure of industry.

The need for the reform of company law which we have proposed, is urgent. This is necessary for the efficiency of the economy. We need greater competition. We need more development in regional affairs, not only in advisory councils. The Chancellor's help to them from the Public Works Loan Board goes part of the way, but there are heavy interest charges for an area like the North-East to meet. I know the problem of what it means to them in trying to build their share of the infrastructure in having interest charges of 7 per cent.

The Chancellor said last night on television that all the regions are booming. I am delighted to hear it. It is not due to the last five months. It is due to the investment which was put in and which is pouring in because of our incentives in the North-East and in Central Scotland. There is more to be done.

One thing which I suggest to the First Secretary is that legislation needs to be changed quickly to be able to establish growth zones and points outside the actual development districts. This we could not do. The legislation needs changing. The right hon. Gentleman, however, rejected the whole idea of growth zones and points when we debated it. Does his right hon. Friend still reject it? What we really need is to deal with growth zones and points throughout the country in the regions. This could be some solution to the problems of depopulation in certain areas. We need, too, measures which will get a clearance of the derelict sites and improve amenities on a far wider scale than we have at the moment with the existing legislation.

We need all these things, but I hope that the right hon. Gentleman will also consider tariff policy. We have been inhibited because of the Kennedy Round. We should be inhibited no longer. Where we can use it to deal with particular industries we need to get ready to use it. We should have incentives to companies and individuals through the tariff system.

When I talk about the Kennedy Round I wish to say a word about the international situation. The right hon. Gentleman touched on it only at the end of his speech. He said that he had every confidence that measures would be taken to deal with the future of international liquidity. I wish that I could have the same confidence as he has. I wish I could. The plain fact is that the postwar arrangements in international liquidity are rapidly breaking down. There is a process going on of redressing the balance between Europe and North America in the industrial sphere. This means that there will have to be a solution of tariffs through the Kennedy Round and a much more realistic attitude towards striking a bargain upon it. Two years have gone by on the Kennedy Round and it has not even got off the ground. We need a new, realistic approach to it.

Secondly, this process is also redressing the balance in agriculture between the two sides of the Atlantic. The countries of Europe want to take full advantage of fertilisers and machinery and to be able to supply a greater part of their needs. This also affects the solution of the Kennedy Round.

Thirdly, there is the financial problem. I know that this is a matter which the Prime Minister said that he had not understood. It seemed to have been behind a smokescreen. I hope that after his visit to Paris he understands it very much more clearly. This is a political as well as a financial matter, because it is the people of Europe, with European currencies, who are supporting the Anglo-Saxon currencies which are very overstrained in carrying out overseas commitments. Some of these currencies have been used for purposes which the supporting countries did not approve. This is the argument, and it is an argument which has got to be faced realistically. There have got to be arrangements whereby the United Kingdom itself is in a position to take the lead in these matters. We have got to get an arrangement in monetary matters which is realistic in the world of 1965.

We need to use our taxation resources to achieve the economy which we want to achieve. We want to reverse this attitude of ploughing everything back. We need collective savings. We need re-organisation of much of the City machinery to get savings, and to assist those who are closely engaged in the growth areas of the country.

We want to look, from the point of view of taxation, at incentives for those who are going to provide the mainspring in the economy, the skilled workers, the managers, the technicians. All of them need an incentive through taxation. Although the Daily Mirror has said that our total taxation is not among the highest in the world, our direct taxation is one of the highest, and our direct taxation is one of the steepest in progression. Taxation is one of the things which need looking at from the point of view of the mainspring of the economy.

We need more savings, and the Post Office Savings Bank proposal is helpful. My right hon. Friend the Member for Barnet himself announced something very like this when he was Chancellor of the Exchequer. We ourselves put forward the idea of contractual saving which, I think, is a good idea, which might be followed up. The Chancellor of the Exchequer has proposed 5 per cent. interest. Yes, but what is it to be if he cuts down Bank Rate? Will it be the same? Will there be the same sort of incentive to saving which he says he wants to get? We need to reorganise, as my right hon. Friend said, the whole complex of taxation.

On the question of exports, I believe that the President of the Board of Trade should look again at the question of the documentation of exports and also their financing. We made great progress in the long-term financing. There has recently been progress in the middle-term financing, although it has not got very far, and I believe that it could be still further improved. There is no reason why we should not learn from the French system, where the bank rediscounts at 3 per cent. The trader goes to the bank and the banks go to the Bank of France, which rediscounts at 3.9 per cent. It is a remarkably straightforward, simple system. I have not been able to check up whether this is against any of our commitments, but it is certainly being done by the French who are, of course, in the G.A.T.T.

We must also put economic priorities first from the point of view of exports—and as to colour television, whatever decision is made should not be made on the basis of our domestic convenience. All of us at present wish it to be made on the basis which will give us the widest export market and we need to adapt our requirements to that. I believe that it is essential that exports of electronics should be extended.

In conclusion, the Chancellor of the Exchequer has emphasised that the Budget is a redistribution of wealth and a withdrawal of resources. I believe that the emphasis ought to be on the need for the creation of greater wealth. Let us concentrate on removing obstacles to growth and to devoting our energies to achieve that sort of economy which we want. Let us encourage those who are to respond. Especially let us do so in the field of taxation. Our fellow citizens do not understand taking £250 million out of consumption—it is an enormous load of additional taxation—to make room for exports. This is a concept which eludes the ordinary individual.

The concept which ought to be given to him is one which gives him the inspiration through leadership to still greater output, more efficient output, so that he himself and his family can have better amenities and a better life. Right hon. and hon. Gentlemen have scorned that because it involves saving. They have poured scorn on it and sneered at it. What we ought to do is to give the ordinary citizen the objective of a better life for himself and his family. If we can do that we shall lead him and the country to greater wealth. That is a challenge which the Budget has done nothing to achieve.

4.58 p.m.

The First Secretary of State and Secretary of State for Economic Affairs (Mr. George Brown)

We have just listened for 72 minutes to a speech by the right hon. Gentleman the Member for Bexley (Mr. Heath) which we were told by the mid-day papers was going to be a hard-hitting speech, but we did not get it even after 72 minutes. The first 70 minutes was wholly destructive. [HON. MEMBERS: "Nonsense."] The last two minutes consisted of a recital of the things which the right hon. Gentleman might have done in the thirteen years he and his right hon. Friends were in office. They did not in fact do them. It was not only I who felt that way. The right hon. Gentleman should have seen the look on the face of his right hon. Friend the Member for Barnet (Mr. Maudling) and on the face of the right hon. and learned Gentleman the Member for St. Marylebone (Mr. Hogg), who actually took his face in his hands and dug it open in sheer fury at what was going on.

Mr. Quintin Hogg (St. Marylebone)

May I assure the right hon. Gentleman that though my head is bloody it is unbowed?

Mr. Brown

The fact is that he bloodied it.

I felt some real sympathy with the right hon. Gentleman in his attempt to play with "emotive" words—he said—in order to get votes. I can think of no better summing up than that.

The speech to which we have just listened offered nothing new, though it was the less destructive of the two speeches we have had from the Opposition Front Bench today and yesterday. My own judgment, for what it is worth—[HON. MEMBERS: "Yes."]—was that whereas during the speech by the right hon. Gentleman the Leader of the Opposition yesterday I felt that, for all his rough words, like "scurvy" and "funk", which he tried to import—strong words in some people's mouths give different impressions from those which are intended when they use them—but for all the strong words I could not help feeling that the Leader of the Opposition could not hide the fact that basically he is a decent fellow, whereas having listened to the right hon. Gentleman the Member for Bexley I could not help feeling that he could not hide the fact that basically he is not. [An HON. MEMBER: "Which are you?"] Let the hon. Member choose.

Many of the questions which have been raised I shall be dealing with as I go along. Others will be taken up by my hon. Friend the Minister of State and also by other Ministers who speak.

I want to look straight away at the taxation changes which formed a portion of the right hon. Gentleman's speech, and to look at them before I go into a discussion about the economic strategy against which they ought to be judged.

In framing his judgment, both on the total amount of the taxes to be raised, and on the nature of those taxes and where they should be put, contrary to what was suggested by the right hon. Gentleman, my right hon. Friend made full allowance for the needs of economic expansion, and of the long-term plan on which at last this country is now embarked. But this plan for expansion cannot succeed unless we can quickly restore our international solvency, which the party opposite lost. To do this we have to relate the growth of demand at home to the need to devote more of our increasing output to sales abroad and to replacing imports. Raising taxes to this end need not mean stopping the growth of production. On the contrary, we cannot possibly get sustained growth unless we pay our way in the world, nor can we do that without maintaining a steady expansion here at home.

The tax changes proposed by my right hon. Friend are not only, in our view, of the right magnitude to get our international accounts back into balance; they are designed to foster the expansion that we need and a competitive economy. The right hon. Gentleman occupied himself for a long time with the magnitude of these taxes. I was not clear at the end whether he thought the magnitude was riot enough or too much, and I think that before we get this debate over somebody on the Opposition Front Bench ought to say which of those two criticisms he is really running.

The taxes that we have imposed do not hit industrial costs. The effects of the vehicle duty, which is the only one on which the right hon. Gentleman could put his finger, will be very small indeed, and, of course, it will be rebated as far as exports are concerned. Secondly, great care has been taken not to penalise the industrial investment on which our future growth and our competitive position depend.

I believe that everyone will welcome in addition the proposal that redundancy payments under the Bill introduced by my right hon. Friend the Minister of Labour will be freed from tax. Some people will have to change their jobs if we are to get a dynamic economy. Last night, when I heard hon. Gentlemen opposite bellowing out because they thought they saw a chance of gaining a bit of cheap political popularity in espousing the fact that people should not be asked to change their jobs, I wondered just how low one could get, even in this political game of ours. Some people will have to change their jobs—I have no hesitation in saying so, nor have I ever—if we are to get a dynamic economy, and they must be adequately protected in the process.

It is also essential to give assistance, as my right hon. Friend is doing, to local authorities in the less prosperous regions who will from here on be able to get 50 per cent. of their long-term borrowing needs from the Public Works Loan Board. The improvement—and the right hon. Gentleman might have mentioned this, because he as much as anybody on the benches opposite knows about this—of the social infra-structure in those areas is a vital part of any sensible regional policy, which in turn is a vital part of any development plan for the nation.

Contrary to what the right hon. Gentleman said, and with the greatest of confidence as a result of what I saw last night, and what I read in the papers this morning, I say that the shape of the Budget will be accepted by the country because of its sense of priorities and its evident sense of fairness. Without this we can never have a successful policy for productivity, prices, and incomes, and without that we cannot succeed. The right hon. Gentleman has never hidden his view that I pay too much attention to this. He would not have thought that if he had been able to succeed in this matter himself. So long as the electorate are persuaded of a sense of the right priorities, and a sense of fairness, none of us need fear going back to meet them, and I have no fear of meeting my constituents, nor of meeting the right hon. Gentlemen's either.

It is true that we are asking motorists and smokers for a bit more, but we are taking steps to do the thing which the right hon. Gentleman hated so much. He was right. He put his finger smack on it. We are taking steps to get a reasonable contribution from those who have hitherto avoided tax through capital gains, deeds of covenant, business entertainment, and generous allowances for motor cars. As the right hon. Gentleman said, this amounts to a redistribution. There is nothing basically wrong in a redistribution in a society in which, up to now, things have been unfairly and improperly distributed. If the right hon. Gentleman believes that that is an issue on which to fight an election, he can go ahead with it. All this amounts to a major social change, and the right hon. Gentleman hated the sound of it. For my part, I am confident that it will be widely accepted outside.

As my right hon. Friend said, this is not an attack on profits. On the contrary, we believe in profits as one of the motivating forces in our mixed economy. Unlike the experience of the last 13 years, and unlike the situation which right hon. Gentlemen opposite want to retain, our reforms will mean that from here on profits must be earned by enterprise and efficiency in production, service and salesmanship. The days when easy gains could be made at the expense of the ordinary taxpayer by speculation and tax dodges are coming to an end. In all these ways the Budget introduced by my right hon. Friend is closely geared to the growth plan which we are preparing, and is an essential part of it.

Let me now turn to the TSR2, and in doing so may I express my personal regret at the deplorable exhibition which right hon. and hon. Gentlemen gave yesterday when my right hon. Friend was trying to give them the information which they said they wanted. In making our decision about the TSR2, we had to bear in mind two main issues. First, the cost to our resources, and therefore to the economy, of producing an aircraft with these capabilities. I am referring to the cost not only over the last eight years, but also the cost from here on. Secondly, we had to bear in mind the requirements of our political and military strategy. Without going into the latter in detail, which clearly would be ruled out of order, may I in passing say that it is not necessarily true that those two issues are in conflict.

Our conclusion at the end of a most detailed and comprehensive examination of all the aspects, using all the material which right hon. Gentlemen opposite left behind them, as well as what we could find out since, was that to complete the development of this aeroplane and go into production would, at £750 million and 20,000 or more people, have been prohibitively expensive for what we should get and what, on the revised estimates, we should need at the end of the operation. Even now, after all this time, and after the expenditure of £120 million, the manufacturers still cannot give a firm price for the aeroplane at the end of the day.

No Government—and no Opposition wanting to be a Government—could just toss all that aside because they feared to tell some of their constituents that they might have to change their jobs. We have therefore been reconsidering the military requirement and alternative ways of meeting it. If anybody opposite believes that the military requirement has not changed since this aircraft was born as a thing called the OR3578 years ago he should have another look at the world and what has been going on in the meantime.

The military requirement is bound up with the defence review of our worldwide commitments, which, as my right hon. Friend said yesterday, is still going on. The best choice from the point of view of our resources and our economy would be to meet our essential defence needs, as they emerge from the current review, with a less expensive aircraft developed at home. We shall examine every possible means of doing that, but at this stage we cannot be sure that it will be possible to meet our needs in that way.

As my right hon. Friend tried to explain yesterday, when right hon. Gentlemen on the Opposition Front Bench were so determined not to listen, we have therefore secured, by agreement with the United States Government, a fully satisfactory option, without a commitment to buy, on the F111A, which, if we need to take it up, would meet our needs and would do so at a very great saving in total resources. That provides us not with what the party opposite is so determined to believe; it provides us with an insurance while we are conducting an examination of other means of doing it and deciding what the final requirement is. Nobody would expect that the party opposite would be so mad as to refuse to take an insurance premium out in those circumstances.

These are the economic reasons for our decision. The blunt fact—which the party opposite would not face when they were the Government and will not face now—is that we cannot allow the defence programme to overstrain the economy without endangering our competitive position in world trade. The very heavy costs of the TSR2 and the other aircraft that we have cancelled mean resources—including highly skilled people—spending more and more of their valuable time on development problems of these very sophisticated machines. Beyond a certain point we simply cannot afford this. To some extent we must reallocate this effort and skill so as to secure wider benefits to our industries. If that means taking a long and cool look at the defence programme, and alternative ways of meeting it, we must do it.

Sir Alec Douglas-Home (Kinross and West Perthshire)

Can the right hon. Gentleman say something about the cost if the option is exercised, and how it is calculated? How does he know the cost of the American aircraft?

Mr. Brown

We have taken an insurance. I think that we know the cost of the American aircraft. We were able to get much harder figures on that than we were on the other. The Opposition have given notice of a censure debate. We welcome it. The whole case will be deployed in it. What we tried to do yesterday, if the right hon. Gentleman had behaved himself and had held his followers in check, was to give him some advance information on which to deploy his case. I shall not deploy the entire case now. We will have to look at it the censure debate.

The cancellation of the TSR2 will have immediate economic advantages.

Mr. Eric Lubbock (Orpington)

Can the right hon. Gentleman say whether, in these calculations, account has been taken of any increases in costs that will fall on the Concord programme, since the Concord was to use the civil version of the engine used in the TSR2?

Mr. Brown

Yes—and this cuts both ways, because some components from other aircraft were going into this one. This we will go into in the censure debate. These calculations over the last six months were carefully balanced before we made our serious decision.

As a result of this decision skilled manpower will be released from other industries which are essential to the growth of our economy and which are short of this skilled manpower. These men are scarce, and are highly concentrated in the aircraft industry—much more so than in electrical engineering and electronics. We are satisfied that these economic advantages can be gained without unacceptable social consequences. In most parts of the country there is a high level of demand for most kinds of labour, and especially for skilled labour. Most workers who have to leave their existing jobs should be able to find other work without difficulty, and the Ministry of Labour is making special arrangements to help them, including, where necessary, establishing special teams of employment officers at the factories.

Arrangements on these lines have already been made to deal with the redundancies which have occurred as a result of earlier cancellations of military aircraft, and good and satisfactory progress has been made. The squeal which went up from hon. Members opposite on that issue has proved to be a pretty wet business.

We have already started discussions with the companies concerned and with the unions about the problems of redeployment arising out of this cancellation. My right hon. Friends and I met the companies and the unions yesterday. The companies have agreed to discuss with the Government the timing of the redundancies and the factories which will be affected. We shall see that the social as well as economic consequences of change are fully taken into account. We are determined to do everything in our power to ensure that the process of redeployment goes as smoothly as possible, and we will accept our share of responsibility for ensuring that redundant workers are generously treated in the matter of severance pay in this case, even though the Bill is not yet through. I say this because people are worried and those who are meeting tomorrow will need to know it.

Experience with the redundancies which have so far taken place has shown that the facilities for training and retraining have been sufficient to meet the needs. It is expected that in the great majority of cases alternative employment will be found without the need for elaborate retraining. Where more is needed, the facilities of the Government training centres will be available, and we are already considering what other special facilities for retraining need to be created.

I am asking the regional planning bodies to give immediate and particular attention to the economic consequences within their regions caused by redeployment. They will do this as soon as we know the extent and nature of the problem and on what basis the redeployment is required. Their experience of industry in the regions will be invaluable as a means of ensuring that redeployment is carried out with the least possible hardship to individuals and the greatest benefit for economic growth within the regions. Perhaps, for once, the party opposite will be pleased and happy to know that these bodies now exist to do the job.

For reasons which I have just given I shall not now go into the other side's record and responsibility for what one newspaper this morning calls this ghastly and costly policy. They have given notice of a censure debate, and that will be the time to go into the record. When they censure us they should beware. The record is against them on this, and the story, through successive Ministers of Defence opposite, is a pretty horrible one. If they want it deployed, we are ready.

Mr. Eldon Griffiths: (Bury St. Edmunds)

Can the right hon. Gentleman assure the Committee that before deciding to take the American aircraft in preference to the TSR2 he will consider not only the possibility of a British aircraft being manufactured but also, perhaps, an Anglo-French aircraft, or something carried out in collaboration with our allies in Europe?