HC Deb 28 April 1977 vol 930 cc1500-622

Order for Second Reading read.

4.3 p.m.

The Chief Secretary to the Treasury (Mr. Joel Barnett)

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

At the time of the Budget last year, production in the main industrial countries had been rising rapidly and it was also recovering fast in the United Kingdom. We made our Budget judgment on the assumption that this growth would continue. We were not alone in this assumption.

We now know that in the middle of the year growth in the major economies slackened, and it fell in the United Kingdom. The balance of payments deficit widened, and there were doubts about whether we could finance our planned level of public expenditure without stimulating inflation again. There was pressure on the exchange rate and a large withdrawal of officially-held balances.

Measures to counter this crisis included the announcement of cuts in public expenditure for this year. We also made clear our determination to maintain firm control over monetary aggregates. But, before this could be achieved the exchange rate for the pound fell rapidly, bringing in its train a massive additional rise in import prices, a rise of which we are all too conscious now as it comes through into retail prices.

The measures announced in December have been successful in re-establishing conditions in which we may look forward to an improvement in the economy, with a more stable pound, lower interest rates—Minimum Lending Rate has fallen from 15 per cent. to 8¾ per cent. over the last six months—and an improving balance of payments, both on capital and current account.

I mention these events because we are counselled by some to introduce more expansionary measures which could be justified only if our prospects turned out to be better than they presently appear to be. It is vital that our fiscal policies should not prejudice the stability and confidence we have achieved. We must avoid another setback such as we suffered last year, a setback which inevitably has postponed our return to more stable prices and a higher level of employment.

Against that background and on present information, we believe that this Bill strikes the right balance between the scope for stimulating the economy and the continuing need for firm financial and monetary control. This balance cannot appeal to those who have been disappointed, because the benefits proposed in the Budget do not, and cannot, compensate everybody for the fall in their individual incomes which has followed the fall in national income over the past three years.

If, in the event, it emerges that there is scope for further fiscal relaxation, the remedies would be by no means as drastic or painful as the measures necessary to resolve another crisis of confidence, a crisis which could easily follow an ill-considered attempt to expand activity faster than our real economic position permits.

This has been a cautious Budget. I do not apologise for that, for, in the light of experience in this country over many years, it would be the height of folly to plan as has been done by successive Governments, on over-optimistic assumptions.

I now turn to our view of our economic prospects. As long as our inflation rate remains excessive and our external balance in deficit, we cannot sustain a significant expansion of public spending or personal consumption.

The sectors providing the main contribution to growth will be manufacturing investment, North Sea oil and gas, and net exports of manufactures. The most important sector for employment and potential growth in output this year is industry. Many of the conditions are right for increasing the share of British industry in markets both in the United Kingdom and abroad. The rise in import costs occasioned by last year's depreciation of the pound has largely been absorbed and the rate of inflation in industrial input prices is falling. Labour costs under the incomes policy have been rising more slowly this year than among many of our competitors. Exports are often more profitable than sales in the depressed home market; spare capacity exists for taking advantage of opportunities.

The vital factor is the extent to which advantage is taken of these opportunities. It is no use having the potential to produce and sell more if that potential is not realised. Last year, our trade performance was disappointing. After raising our share of world trade in manufactures in 1975, we appear to have lost some ground in 1976.

Exports of goods and services for the United Kingdom are expected to rise at 5½ per cent. in volume between the first halves of this year and next. These may possibly be considered cautious assumptions; certainly the right conditions exist for us to better the performance assumed, and we should be very pleased to see these assumptions confounded by a surge in production as British industry regains ground from its competitors. Full employment and a substantial rise in living standards in Britain depend on success of this kind.

But no Finance Bill can ordain these things. Its measures can only strengthen conditions in which an improvement in industrial output, net exports and living standards can occur, and that is what this Bill aims to do.

Industry needs to press ahead with its planned increase in investment and to take full advantage of opportunities to consolidate and expand its export markets; and the banking system must concentrate on providing industry with the financial support it needs. At the same time, it is essential that people at work continue to moderate their pay increases, and this means that the TUC and the Government must reach a further pay agreement for the period after 31st July when the current agreement runs out.

I was gratified to note that the right hon. and learned Member for Surrey, East (Sir G. Howe) agreed with what I have just said—at least, I think he agreed with it—because I saw a letter he wrote to the Chairman of the Trade Union Advisory Committee of the East Surrey Conservative Association. I assume he manages to find the odd Conservative trade unionist in East Surrey. I understand why he did not write to any in South Wales, for example—

Mr. Eric S. Heffer (Liverpool, Walton)

Or Liverpool.

Mr. Barnett

Or Liverpool. There was some doubt about what the right hon. and learned Gentleman's letter meant amongst those journalists who commented on it. Ian Aitken wrote in The Guardian on Monday: However, in a passage of more than usual opacity, Sir Geoffrey went on to suggest that a Tory Government might be forced to set some kind of overall limit to the amount of money the nation's economy could afford in pay increases. That is a little more than has been said previously by any Conservative Front Bench spokesman. I imagine he had to be a little opaque if he was not to upset some of his right hon. and hon. Friends. Ian Aitken went on: Sir Geoffrey's words seemed likely to be studied with anxious, if puzzled, care by trades union leaders as well as Tory trade unionists I am sure it will be read with great interest by many hon. Members, but we can at least assume, as the right hon. and learned Gentleman has not contradicted me, that the Conservative Front Bench is now in favour of our achieving a pay agreement with the TUC.

I know that many workers are restive about the impact of the current pay policy. It is natural that they should be, at a time when living standards are under severe pressure. I can well understand that this makes many of them wary about a further year's pay agreement. But this wariness is misguided if it stems—as I think it commonly does—from the belief that pay policy is the sole cause of the pressure on living standards.

The real reasons why living standards are under pressure are much more complex. Over a number of years, world developments and our own poor industrial performance have made our imports more expensive in relation to our exports: that is to say, the world terms of trade have been turning against us. In the long term, the only way to compensate for this is by increasing our real output at home, and particularly that part of it aimed at export markets and import substitution. Other countries have done this. For too long Britain has not. As a result, our problem has been not simply that which confronts all Governments of how to divide the national cake. There has actually been less cake.

We can meet this situation for a time by persuading what might be called "the international baker" to let us have more cake on the slate. But the time comes when we simply must face the underlying reality of our situation. Eventually, the exchange markets will in any case bring this reality home to us—which is exactly what they did last year.

It is the aftermath of that reaction, the impact of depreciation on prices, which has made inflation run ahead of increases in wages. Had there been no pay policy, domestic inflationary pressures would have been that much greater, and these would merely have added to the pressures arising from depreciation. Workers might have had bigger cash incomes, but they would simply have faced still higher prices.

The painful adjustment to our living standards was inescapable. It is the achievement of pay policy that the adjustment has taken place at lower rates of inflation. That is what pay policy is about—cutting inflation down below what it would otherwise be.

There can be no pretence that, when the current pay round comes to an end, there is some miraculous route through a wages scramble to higher living standards. Living standards are not just a matter of cash. That is a wholly shortsighted view. The only way to secure rising living standards for the future is to develop the industrial strategy to provide a foundation for expanding real national output. Until we do that, there is no choice but to moderate the cash increases in our pay. If we do not, higher pay can be secured only at the cost of higher prices and more unemployment.

Mrs. Barbara Castle (Blackburn)

I appreciate that there is not as much cake to distribute as we should like, but has it not always been part of the Labour Government's policy to protect the weakest members of the community? Can my right hon. Friend tell us when either he or his right hon. Friend will announce the details of the next uprating?

Mr. Barnett

As my right hon. Friend knows—indeed, as I said in my Budget speech—we shall maintain our commitment to an uprating in pensions and short-term benefits. It will be made at the appropriate time, and it will be in line with our commitment.

Mr. Patrick Jenkin (Wanstead and Woodford)

That really is not good enough, because the Secretary of State for Social Services has told me that he has made his review—as he was bound to do—under the statute. The question of the uprating, as we now know from the court case of Metzler v. Department of Health and Social Services, is something quite different. Why cannot we have the result of the Secretary of State's review? He has told me that he has done it. We need that—even if the right hon. Gentleman intends to delay the announcement of the uprating still further.

Mr. Barnett

The right hon. Gentleman is quite remarkable. He is remarkable because, together with his right hon. Friends, he wants to see massive cuts in public expenditure, massive reductions in the highest rates of tax and massive increases in pensions. My right hon. Friend the Member for Blackburn (Mrs. Castle) at least is more honest in these matters.

There is no question of our going back on our commitment on upratings. My right hon. Friend understands that. I know what the right hon. Member for Wan stead and Woodford (Mr. Jenkin) is asking for and an announcement will be made by my right hon. Friend the Secretary of State for Social Services at the appropriate time.

Mr. Jack Ashley (Stoke-on-Trent, South)

What my right hon. Friend says about the Opposition is quite right, but a question was put by my right hon. Friend the Member for Blackburn (Mrs. Castle) and I think that the Minister should give a definite, clear and specific answer because many Labour Members are waiting for an answer.

Mr. Barnett

I understand the point put by my right hon. Friend and my hon. Friend, but the Second Reading of the Finance Bill is not the appropriate occasion to announce the uprating of social security benefits. The uprating will be announced in due course.

Mr. Patrick Jenkin

Why not now?

Mr. Barnett

I am surprised at the right hon. Gentleman. I do not know what he is seeking to do, other than to be his irresponsible self.

Mrs. Castle

Could my right hon. Friend tell the House what is the latest possible date administratively for announcing the uprating if it is to come into operation in November, within the 12-month period laid down by the Act?

Mr. Barnett

The interesting thing about questions in this House, as my right hon. Friend knows, is that normally they are asked when the questioner knows the answer better than the person answering. In this case my right hon. Friend knows that very well because she has been Secretary of State. She also knows that there is ample time to make the announcement. I can assure her, if she does not know, that there is ample time to make the announcement about the uprating and honour our commitment, which we are pledged to do. That is the situation.

I assure my right hon. Friend and all my hon. Friends that we seek to help those on the lowest incomes very much more than the Opposition would seek to do. They seek to cut thousands of millions of pounds off public expenditure to reduce the higher rates of tax. Then they have the hypocrisy and humbug to talk about lower income groups and benefits.

Mr. Patrick Jenkin

I am grateful to the right hon. Gentleman. Presumably his attention has been drawn to the recent booklet published by the Child Poverty Action Group which states that taxation has now become the engine of oppression of the poor. Until we know what the uprating is to be, how on earth can we judge the size of the personal allowances and tell whether the Government have made the poverty trap worse this year than it was before?

Mr. Barnett

The right hon. Gentleman equally knows the pledge we are committed to under the terms of the Act as regards the uprating. [Interruption.] The right hon. Gentleman should know that very well. A minimum uprating is demanded of this or any Government. We did it last year. The courts found in our favour, as the right hon. Gentleman knows very well. I am not sure what the right hon. Gentleman is saying. Does he want to increase public expenditure by a further £500 million? Is that what he is saying? I wish the right hon. Gentleman would be honest with the House. It is quite remarkable that the right hon. Gentleman constantly seeks to evade any responsibility that he may have had in the past. We shall meet our commitment in this respect, but it is not necessary for me to announce the uprating at this time. That must be a matter for the Secretary of State and he will make the appropriate announcement at an opportune time.

Mr. Nigel Lawson (Blaby)


Mr. Barnett

In good time to ensure that the uprating takes place and that pensioners do not suffer.

Dr. Jeremy Bray (Motherwell and Wishaw)

It may have crossed the minds of some hon. Members that the timing is linked in some way with talks with the TUC. Would my right hon. Friend care to comment on that point, because it seems to me that we would not get a more favourable settlement out of the TUC by any delay in an announcement?

Mr. Barnett

I assure my hon. Friend that if there is a delay in the uprating it has nothing to do with the TUC talks. The announcement will be made at an appropriate time to ensure that we meet our commitments. I cannot be fairer to the House than that. That is the situation.

Mr. Ralph Howell (Norfolk, North)

. May I ask a question?

Mr. Barnett

If it is on the same point, yes. On reflection, if the hon. Gentleman does not mind, I think that other hon. Members might wish the debate to continue. I have given way more than enough. The House knows that I am probably more courteous than most in giving way. In fact, many of my hon. Friends have complained about how frequently I give way. On this occasion I hope that the hon. Gentleman will forgive me if I say that I feel that I have dealt more than adequately with the somewhat intemperate remarks of the right hon. Gentleman. I do not intend to give way.

I do not mean to suggest that the next pay round can or should be a mere replica of either the £6 round or the current round. We have had two years of a very tight and inflexible policy.

We recognise the case now for a more flexible approach, which leaves more room for normal collective bargaining between individual employers and trade unions. But this is not the same as saying that there should be no policy.

As the TUC's Economic Review recognised, the prospect of a single figure inflation rate during 1977–78 depends crucially on a single-figure increase in earnings. Whatever may be done to provide for flexibility must be compatible with these objectives. There can be no question of allowing them to slip out of our grasp, just when we are about to reap the full benefits of the last two years.

If we are not diverted from the steady progress we have been making towards creating a sound economy we can begin to see a reduction in direct taxation and an increase in real net take-home pay. That, plus a deliberate switch from direct to indirect taxes can, and will, put more cash in pay packets.

It is right that we should do so, for the United Kingdom now relies excessively on direct taxes. The structure and the incidence of these taxes make the burden seem even heavier than it is. This is particularly true of income tax, where there is a heavy emphasis on marginal rates, particularly the starting rate of deduction, which is 40.75 per cent. including the national insurance contribution. The Budget has brought down effective rates significantly and will bring us closer to international averages.

There are, however, limits on the extent to which the shifts can be reversed in any one year. The distributional consequences of too sharp a correction could be adverse. Increases in indirect taxes feed quickly through into the retail price index and can have unacceptable effects upon particular industries and on employment in those industries. The indirect tax changes this year were chosen, among other reasons, for their minimum RPI effect—something less than 1 per cent. This was so as not to jeopardise a successful pay policy.

All these factors must be taken into account. But we would be foolish not to recognise that there is a widespread feeling in the country that taxes on income are too heavy and that it would be better to rely more on those taxes where there is an element of choice. A tax which one appears to choose to pay is almost always more tolerable than a tax which one has to pay, and it goes without saying that that does not necessarily mean that the indirect tax increases will be popular.

In any case, we cannot go too far down this road. Income tax must remain a major source of revenue and play its part in ensuring that the burden of taxation is fairly shared. But I have no doubt that we have been relying too heavily on income tax, and the price being paid in terms of work effort, morale and incentive is becoming dangerously high.

Against this background, I turn to the major measure to increase indirect taxes: my right hon. Friend's proposal to increase the excise duty on petrol by 5p a gallon—an increase which, allowing for VAT, has the effect of raising the price of petrol to the private motorist by just over 5½p a gallon. This increase has proved to be a somewhat controversial element in the Budget package. I do not say that the other increases in indirect taxes—in the duty on derv and on heavy oil, in the vehicles excise duties and in tax on cigarettes—have been rapturously received either by this House or in the country at large. But their merits, on grounds of energy, transport and health policy, have been recognised and have, I think, been by and large explicitly or tacitly accepted.

With the petrol duty, it is a different story. Hon. Members, especially some of my hon. Friends and hon. Members on the Liberal Bench, have been concerned about the impact of the increase on the rural motorist and the shift worker and, indeed, on all those who are completely dependent for essential journeys on their cars.

The official Opposition have not exactly made a powerful case against the 5p. Indeed, the main burden of the Shadow Chancellor's case was to quote copiously from a speech by the hon. Member for Cornwall, North (Mr. Pardoe). The right hon. and learned Gentleman did not seem able to make a very strong case or, indeed, any case at all, against the tax.

We are, of course, sympathetic to the concern about this increase in petrol duty and obviously my right hon. Friend weighed it carefully in the course of constructing his Budget. But he was moved by other, and I believe powerful counter-arguments which I should like to explain further to the House.

First, my right hon. Friend could not, consistent with his overriding objectives in terms of the public sector borrowing requirement, propose income tax reliefs on the extensive scale contemplated without raising some fresh revenue from indirect taxes.

None of the alternatives is attractive. To raise the basic rate of VAT has an adverse effect on the prices of a wide range of household essentials and an adverse effect, therefore, on the prospects of securing a satisfactory third-round pay agreement this summer. Room for manoeuvre was, therefore, necessarily circumscribed.

Within this constraint, my right hon. Friend the Chancellor produced a carefully selected and carefully balanced package of indirect tax increases aimed at raising the required revenue with minimal effect on the RPI while paying clue regard to other, wider, objectives in other policy spheres. Petrol, as a major revenue source, was bound to figure in this package.

Secondly, in seeking a contribution from petrol, my right hon. Friend was heavily swayed by considerations of energy policy. The fact that we are already beginning to reap the benefits of North Sea oil and the prospect that we shall achieve self-sufficiency in oil during the next decade does not diminish the need for energy conservation, particularly in oil.

The prospects for the 1980s must be set in the context of the every-growing pressure on world fuel supplies and the importance of ensuring that we deploy the riches of the North Sea—and they will be only temporary riches—for the maximum benefit of the balance of payments, and hence for our capability to achieve sustained faster growth and a permanent improvement in the level of employment.

The House will be aware of the striking initiative which President Carter is taking in this vital area of policy. It will have noted that his proposals include a new tax on petrol which would increase by 5 cents for each year in which petrol consumption fails to fall 1 per cent. below the consumption of petrol in an agreed year. This could mean an increase of of up to 55 cents in the United States Federal tax on petrol.

Mr. Heffer

Surely my right hon. Friend is aware that in the United States petrol is much cheaper than it is in this country. Is he aware that the Liberals are not alone in their opposition to the increase in petrol prices? Many of my right hon. and hon. Friends feel that the Government's policy should be changed. I urge my right hon. Friend to look at the matter again before we come to the appropriate clause.

Mr. Barnett

My hon. Friend knows how fond I am of him, but he cannot have listened to what I said. I said that I had received representations from my hon. Friends and from Liberal Members. Of course I know that in the United States the price of petrol has been very low. But President Carter has recognised that there is an important energy reason for starting to make substantial increases in the price of petrol. He is seeking to persuade Congress and the country to go along with that.

Apart from the small increase of about 1p a gallon attributable to the tax changes made in the Budget of last year, there has been no deliberate increase here in the burden of road fuel taxation borne by the private motorist since the higher rate of VAT for petrol was introduced in November 1974. The increase in duty now proposed by my right hon. Friend goes only some of the way towards restoring the real rate of duty which, in recent years, has been severely eroded by inflation. Our duty, even at its new level, is still by far the lowest in the EEC, and the retail price, with the possible exception of Luxembourg, is also the lowest.

I do not deny that my right hon. Friend's proposal will be felt by the private motorist. But the additional burden needs to be kept in perspective. For the private car owner driving 8,500 miles a year in an ordinary family car giving 10 miles per gallon, the increase in the annual petrol bill, taking account of the consequential VAT change, will be about 30p a week. That is the result of the measure. At the same time, the effect of the duty increase on the cost of public transport is being offset by a fully-compensating increase in the grant payable to operators of stage bus services.

We do not pretend that the increased price of petrol poses no special problems for private motorists in urban areas. But it is not only they who have serious problems. The problems also apply particularly strongly in rural areas where there is no bus service. If I was not aware of that before I have been made aware of it by strong representations. Although that is a problem there is a general recognition on all sides of the House that, even if it were judged desirable in principle, there would be no administratively practicable means of extending special relief to motorists in this category.

The House should know however that it is none the less the Government's intention, in the context of the White Paper on Transport Policy, that my right hon. Friend the Secretary of State for Transport has in preparation, to examine carefully what might be done to help with what is a genuine problem in rural areas.

When all these considerations are taken into account, together with the obvious fact that if oil taxes are not increased at least in line with inflation there would be a declining proportion of total taxes taken by this particular indirect tax, I hope the House will accept the need to retain the suggested increase. Certainly, the alternatives would not be popular. Above all, those who oppose it must in fairness answer the question whether they would ever increase it. If the answer is "No", then they would have to argue for a steadily diminishing petrol tax in real terms. I do not believe that there is a credible case for such a policy. If the answer is "Not this year", I am entitled to ask "When"?

Frankly, there is never a popular time for increasing any tax. But for all the reasons that I have given, I have no doubt that the Chancellor was right to increase the duty this year, by simply maintaining the rate in line with inflation.

Mr. Ian Wrigglesworth (Thornaby)

There is another reason why the Chancellor of the Exchequer was right—because there would be a howl of anger from the working men of the North-East and areas such as my constituency if any money were added to their pint of beer.

Mr. Barnett

I note that view. It is interesting that the official Opposition are strongly in favour of a switch from direct to indirect taxes generally. But, as soon as a switch is implemented they say "No, not this one" and "Not this year" I was surprised in the debate on the Budget Resolutions that many hon. Members whose views I have respected in the past, including some Opposition hon. Members, who, despite what they have already said on this matter, felt that they could vote against this increase. They do not have a case and they must know it. They have not made out a case.

Some hon. Members have sought to make out a case for the rural areas. The hon. Member for Cornwall, North sought to do that. I recognise that as a strong case but the Opposition have not made such a case.

Mr. John Pardoe (Cornwall, North)

Will the Chief Secretary scotch the canards about the 1p on a pint of beer? That was a threat by the Chancellor of the Exchequer for the benefit of working men's clubs in Leeds, which have become the equivalent of match sticks in the Treasury. It is legitimate for the House to debate where it wishes the burden of taxation to fall. Many would prefer to tax the beer drunk by the supporters of Manchester United than to tax the private motorist.

Mr. Barnett

The hon. Member is on dangerous ground. I am a supporter of Manchester United. However, it does not follow that I support their drinking beer in quantities, whether high or low. The hon. Member for Cornwall, North accepts the basic Budget strategy. If £300 million were lost by a reduction of the 5p increase in petrol prices it would have to be replaced from somewhere.

No single indirect tax or any other tax is popular. That may not be strictly true, but even among those taxes that are generally thought to be popular, in my short experience at the Treasury, I have found that a few people at least find some unpopular. I ask hon. Members not to imagine that there is a simple, soft option alternative to replace the loss of revenue that would be caused by going back on this 5p increase.

Perhaps I can now conclude by saying that whilst the petrol duty has been controversial, there has been no credible alternative suggested by the official Opposition to the Budget strategy as a whole. I am not surprised, since the Budget and this Finance Bill which puts forward the legislative proposals set out by my right hon. Friend, provides a basis of hope for the future.

It is now up to both sides of industry to grasp the opportunity. I am confident they will. That is why I recommend the Bill to the House.

4.40 p.m.

Mr. David Howell (Guildford)

At the outset, I should perhaps explain that I shall not be advising my right hon. and hon. Friends, at the end of this debate, to divide against this Finance Bill. I take that view not because the Bill is packed with good ideas. On the contrary, it is bereft of almost any creative thought. Nor do we take that view because we are cowed by the awful threat of the Chief Secretary in The Guardian the other day that if there is too much criticism of Treasury figuring, the Treasury will cease to publish these things. If I thought that we could stop the Treasury publishing Finance Bills such as this one by being rude about them, nothing would hold me back.

Mr. Joel Barnett

Perhaps if the hon. Gentleman had done me the courtesy of reading carefully the article to which he has referred—I am sure that he has it with him now—he would have seen that what I had in mind was that someone who was perhaps more worried about criticism, a future Chancellor or Chief Secretary, for instance—someone from the official Opposition for the next 20 years, or some time perhaps—might be so upset by the criticism that he might refuse to publish.

Mr. Howell

I shall pass over that episode in the Chief Secretary's turbulent life and move on to more serious matters.

The reason why we shall not divide the House against the Bill is that we recognise that it contains the first feeble moves, in some clauses, in the right direction, but otherwise it is wholly inadequate to the colossal problems of taxation and incentive that face the country. The most notable thing about the Bill this year is what a very fluid affair it is and how it leaves in a state of extreme uncertainty some of the major areas of fiscal and budgetary policy.

Of course, the Chief Secretary will know that we are perfectly used to Finance Bills taking off at the beginning of April, staggering along until July and then flopping down and having to be hurriedly replaced by July packages. That is the normal form of the present Government, and it looks as if it will be the normal form again this summer. We are quite used to this situation. However, this poor document is unique in that it hardly got off the ground at all before it began to come apart in early April.

That disintegration has shown itself in a number of ways. First, I want to deal with the mystery of the so-called conditional cuts—the reduction in the standard rate of income tax to 33 per cent., which was proposed by the Chancellor in his Budget Statement. As every day goes by we hear, from leaks in the newspapers, that the cuts are not conditional at all, and that, on the contrary, the Government and the TUC are not discussing some deal related to the proposals for reducing the standard rate of income tax from 35 per cent. to 33 per cent. They are not talking about that at all. They are really talking, so we learn, about an autumn reflationary package, which we are told is to come on top of the cuts which, after all, will not be conditional but will be bundled into the Budget anyway, regardless of whether or not any conditions are fulfilled.

This is very odd and worrying. The Chief Secretary was very far from satisfying the House earlier at Question Time when this issue was raised, because the Chancellor said in his Budget Statement, it would not be prudent to commit myself absolutely to this decision until a satisfactory agreement on a new pay policy has been reached, as I expect to happen well before the Finance Bill leaves the House. To do otherwise would be to take risks with the growing confidence which is being shown in our economy both at home and abroad." — [Official Report, 29th March 1977; Vol. 929, c. 283.] That was the position, and yet by last Friday the whole situation had changed, because last Friday we had the Prime Minister confirming that Ministers had abandoned any attempt to get agreement with the trade unions before the end of the conference season in mid-July— indeed, he said, I think, before the end of the present pay round, and that would be the beginning of August. The Prime Minister went on to declare—and this is quite a different story from the Chancellor's—that he was "relatively relaxed" about the timetable, and he said, What I do ask is that the Government, which must take final responsibility for these matters, should know where it stands by the time the present agreement runs out It is not unreasonable for us to ask, as well, that we should know where the Government stand.

However, that leaves some very important questions totally unanswered by the Chief Secretary. Will the tax cuts be introduced well before the Finance Bill leaves the House, as the Chancellor says, regardless of whether a satisfactory agreement, whatever that may be, has been reached? Or are the tax cuts to await the pleasure of the TUC at the end of the present pay round, in which case the Report stage will almost certainly be over? It is extremely important from the point of view of the House and public policy that we know just what is planned.

Or, will the conditional tax cuts not come in this Bill at all but, in fact, form part of the next package, the July or autumn package, in which by all accounts the prudence to which the Chancellor refers will take a back seat and we shall be reflating the economy from a base rate of, presumably, 13 per cent. to 15 per cent. inflation?

If that is the prospect, it is a hair-raising one. It would, of course, be the ultimate sell-out for the working people of this country. We on this side of the House, here and now, warn against it. It would be going well beyond the prudence to which the Chancellor referred in his Budget speech. In fact, it would be taking a risk. The Chief Secretary will remember vividly what happened in 1976 when the Chancellor decided to take a risk with the borrowing requirement—and look at the disaster in terms of jobs, unemployment and inflation that resulted from that.

Therefore, we want to know a lot more about what the Government are planning on this front and what the real timing is It is not fair to the House to leave these matters in obscurity.

Personally, I share the Bank of England's view that even if we were to halve the inflation rate, from 16 per cent. to 8 per cent., it would still be far too high, and a very poor starting point for any very major reflation, of any kind. I take the view, to borrow a phrase, that inflation is unsafe at any speed.

I shall return shortly to the links between this Bill, pay policy and inflation. I should perhaps pause only to record that when the Prime Minister says on the subject of pay demands that he will not print the money and will insist on sticking to cash limits, in our view he is on the road to wisdom about pay restraint, and he has our full support. That is the right way to start thinking of these problems.

The second uncertainty concerning the Bill is the position of the Liberals—which is always interesting when it can be discerned. It proves, this time, interesting again. If I understand it aright, the Liberal position—or as it was on the night of 4th April—was that while for a number of very prudent reasons, of which, I think, the first was probably survival, the Liberals were not prepared to support us then in our opposition to the relevant resolution, which would have killed the petrol tax, since then they have decided that at the Committee stage they will, in their own words, kill the increase.

However, since then again, as I understand it from listening to the Leader of the Liberal Party on the radio, there have been intensive discussions on this matter between the Liberal Party and the Government, presumably in the Lord President's liaison committee, so hon. Members and the House do not know the position. A private deal may have been done—an entirely open and aboveboard private deal, but a deal all the same. If there has been a deal, no doubt that will emerge in due course.

However, this morning's newspapers tell yet another story. They suggest that the Liberal Party has decided that, single-handed, it will bravely kill the giant and that it will do away with the increase, despite any soft words from the Chief Secretary. We therefore look forward to seeing that come about on Monday. It is fair to note that the exciting thing about this new era of stability under the Lib-Lab pact, is that one never knows from day to day what on earth is to happen next.

We ourselves are hostile to the whole of the clause governing the petrol duties and the fuel duties. We think—I shall have to say this slowly and loud enough for the Chief Secretary to hear now that he has left the Chamber—that 10 per cent. VAT would be a far better means of raising revenue than selective taxes.

It is a myopic absurdity that the Chief Secretary should say that we are proposing no alternative. He knows that my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) has proposed this alternative decisively and clearly. It is our view that 10 per cent. VAT would be much better than imposing this selective tax on petrol. I believe that the Liberal view is that they would put VAT up to 20 per cent., so no doubt they will be following perhaps some way behind on our proposals when we put them forward.

We note the Chief Secretary's explanation, which strikes us as a little belated, that the increase is all to do with the Government's conservation of energy policy. I hope that the Government will not insult our intelligence by asking us to believe that, although I suppose they are justified in bringing forward this argument after the event. The original proposal was obviously designed, as the Chief Secretary said earlier, for raising revenue without having to put VAT back to where it always should have been, but now we are told suddenly that it is all to do with President Carter and energy.

Dr. Bray

Is the hon. Gentleman saying that there are no energy considerations in this matter? I should have thought that the most elementary view of the likely impact of the United States' energy policy on this country was that it was very much in our interests to ensure energy conservation.

Mr. Howell

After the relatively small increase in petrol prices the overall impact on energy will not be very large.

A Select Committee which examined this problem came to the conclusion that if we wanted to have an impact on energy consumption by raising the price of motor fuels the increase would have to be of the enormous size that President Carter is proposing in some of his plans. Operations of this kind are very marginal indeed. I am not denying that there is any energy impact at all, but I ask that we be spared the sudden discovery, after the event, that this is all to do with energy, when it is no such thing.

The Financial Secretary to the Treasury (Mr. Robert Sheldon)

Perhaps the hon. Gentleman may recall that the Chancellor stated the energy considerations at the time of the Budget.

Mr. Howell

It was one of the reasons given at the time but now it seems to have become part of a carefully thought-out energy programme. Please do not ask us to swallow that nonsense.

The third area where the Bill is disconnected from reality concerns the middle income groups and middle management, about whom we have heard a great deal both before and during the Budget. The public relations before the Budget was largely saying that this time the Budget would really help the middle income man, who last year, in the Chancellor's own words, "took quite a caning." In the Budget tables, the calculations show that the man or family on about £6,000 a year—that is about £120 a week—would receive about £150 a year extra out of the proposed changes if all the conditional tax reliefs were introduced. I suppose that it is on this basis that the Chancellor felt able to say that most people's living standards would stabilise at the present levels and that we were "through the worst" as regards living standards. That may be the assertion at Westminster, but in the country the situation is quite different.

In Britain we are facing something approaching a management catastrophe. The House had better realise that, before hon. Members are overwhelmed by the Government's assertions that everything is getting better. Everyone realises that workpeople on the shop floor and income earners at all levels have made sacrifices, and that there are many more sacrifices to come. But for management and skilled workers the situation is out of all proportion. Hardly a day goes by without the most devastating survey appearing, bringing home the position of middle management. The most recent of these, pub- lished in The Times yesterday, was the National Management Salary Survey, which explained that management salaries rose by 1.8 per cent. in 1976, compared with an increase in the index of average weekly earnings of all employees of 11.8 per cent.

When we look at the £150 which is supposed to have brought such marvellous benefits to middle managers or those on £6,000 a year, we see that, out of this £150, straight away £40 goes back in higher petrol and heating costs and higher vehicle excise duty—if it is passed by the House. The additional tax on company cars will be another £100; the child benefit scheme at the higher income levels will make the manager worse off, the higher national insurance contribution will take another £25, and next year he will be paying higher tax on the interest-free loans—or on the additional increment of interest-free loans, or low interest loans, which he may use to buy his commuter rail ticket. His rates and fuel bills will be up. The marginal tax rates will still remain the highest in the world outside Algeria and Tanzania.

We tell the Chancellor and other Treasury Ministers not to tell British management that they are better off or "through the worst" or that something is being done for them. If Ministers go on like that they may endanger the deep respect of British management for Treasury policies and Treasury statistics.

Sir John Hall (Wycombe)

Does my hon. Friend agree that in the report in The Times, although there was an overall increase of 1.8 per cent. in the salaries of middle and senior management in that period, some managers and senior managers experienced a fall in gross income?

Mr. Howell

I agree with my hon. Friend. The overall picture is one of a dramatic fall in living standards amounting to as much as one-third in net living standards in the last three years. We cannot go on like this. No country in the world would treat its management cadre like this, even the Soviet Union. Indeed in the Soviet Union they would do much better.

Mr. Ashley

I appreciate that there is a problem in middle management, but I am getting the impression from the hon. Gentleman that he is obsessed with the problems of middle management. Any increase for middle management must necessarily come out of increases for lower-paid workers or the less well off unless production is to be increased. If the hon. Gentleman goes on arguing this case, to which unfortunately the Government are giving way, the lower-paid workers will suffer as a result of this campaign.

Mr. Howell

With respect the hon. Gentleman is not right. He is unfair in accusing me of being obsessed with middle management. They are only a part of the argument. He is wrong in suggesting that there is an option between more incentive for middle management and the standards of working people on the lower grades. Unless incentives are built back into middle management, the standards of all workpeople will fall faster than they are at the moment. I am arguing in the interests of all workers.

Mr. John Cronin (Loughborough)

Does the hon. Gentleman appreciate that he is rather implying that it is especially the Government's job to reward middle management? Is it not the case that middle management in this country is paid much less than in most other countries in Europe? Is not that the result of the chronic inefficiency of much of British industry?

Mr. Howell

I am talking about the Finance Bill and the taxation aspect. I am sure that the hon. Member for Loughborough (Mr. Cronin) is not suggesting that tax has nothing to do with net rewards of management in the United Kingdom. If he said that, it would be totally against the experience of most people who have anything to do with industry.

I now leave the question of the management catastrophe, but I ask Treasury Ministers to face this problem and to recognise that they have done less than nothing to restore morale and incentive to middle management, without which economic recovery and jobs will not come.

Some people may at least escape the additional taxation on benefits from employment under the Bill next year through the provision that raises the starting point for assessment for taxation on benefits from £5,000 income plus all expenses to £7,500. But we are totally bewildered as to why that provision is brought in only for next year. The figure of £5,000 is at a lunatic level. It is not a person's income that provides this figure, but a calculation of income plus all expenses received and paid out in the pursuit of a job. That means that the £5,000 base puts almost the average earner with two children into the level at which he is treated as being in higher-paid employment.

Labour Members discovered that to their dismay last year, and some of them came rushing into the House to tell the Treasury Bench to ease these proposals because thy would cut into the earnings of large numbers of trade unionists and other workers on extremely modest incomes. If the situation was bad last year it will be much worse this year. This is the year when the threshold should have been raised, not just to £7,500 but possibly to £9,000 or higher. By next year, with the Government's plans to give us more inflation, £7,500 will not be very much above the level of average earnings plus expenses that a man on modest average earnings might incur in going about his business.

I therefore ask Treasury Ministers to look at this matter again. The figure of £7,500 seems to have been plucked out of the air. The phrase "higher paid" means anything that the Treasury and the Inland Revenue want it to mean at any one time, and that is absurd.

Another group which is rapidly becoming worse off is a group which will not attract great sympathy from Labour Members but which is important to the welfare of us all, particularly the work people. I am referring to those who operate in partnerships and who are technically self-employed. Penalisation of partnership operations is particularly silly since many of our successful businesses, particularly those engaged in invisible earnings, operate through the partnership structure.

It is true that the Bill provides for employees working overseas so that provided they fulfil the criteria proposed in the Bill there will be some easing of the income tax on their overseas earnings. Provision is made for any organisation which sets up overseas to gain the same kind of benefit. But the hard-working partner of a United Kingdom partnership—say, a consultant engineer, an insurance specialist or a consultant in civil engineering—who is technically self-employed, can sweat as much as he likes overseas but will get no help from the Bill and no easing of the high tax rates for self-employed people.

One argument that my right hon. and hon. Friends would advance is that this is another case for lowering the ludicrously high income tax rates on middle and upper incomes. But if the Government are determinted to keep those rates, let them at least extend their concession to self-employed partners of United Kingdom partnerships when they work overseas. We know why the self-employed are left out. This is all part of the war that Labour Members have delared on the self-employed and on smaller business and which the Government pursue through every means at their disposal.

I realise why that is. The self-employed do not fit into their scheme of things. We see their distate of the self-employed in the proposals on VAT in the Bill. A vast schedule concerned with VAT is attached to the Bill. It is mostly concerned with harmonisation with the EEC. I gather there are a number of important statutory instruments to come in relation to the schedule. The more we hear about the schedule, the sooner those instruments come the better.

There are also some worrying implications in the schedule about which we wish to know a lot more. There is one which may seem small, but it may affect many of our constituents. It is on page 51 of the Bill. Paragraph 3(5) and (6) contain proposals which appear to mean that the Commissioners of Customs and Excise, having received from a trader certain amounts of money in taxes on output—which are sales—and being due to pay back to the trader from taxes on inputs —that is materials and other things paid in—can pay back that money at their discretion instead of immediately. If that is so it is one more heavy impost on small traders. It is a minor and technical point, but it should be explored.

There is a much more serious matter which is not in the Bill and which relates to VAT. It is that no attempt is made to raise the threshold at which one must register for VAT. Why is that? The level is £5,000, and everyone knows that that is far too low. Is this something to do with the EEC Sixth Directive? Can the House be told the position on this matter? If we are free of any Community rules on the matter, why do we not index up our threshold? The Financial Secretary has been taking a personal interest in this matter, and he must explain what has happened. We shall be moving amendments to raise the threshold to the point it should have reached.

Mr. David Mitchell (Basingstoke)

My hon. Friend the Member for Guildford (Mr. Howell) put down a Question to the Treasury earlier this year asking what had happened in the EEC discussions. Did he notice that in his reply to a Question put down by me on the same day, the Minister said that it was generally agreed that member States should be free to maintain their existing turnover limits for the registration of small businesses? Concealed in that there might be an undertaking by the Government not to increase that limit. I hope that we may have an assurance that the wording in the reply is accidental.

Mr. Howell

I am sure that the Financial Secretary will note that question and clarify the matter which needs clarification.

I turn now to the investment income surcharge where thresholds have been raised, but they are still disgracefully low. They still impose the surcharge at levels well below average earnings. Mostly that hits old people, but it generally discourages personal risk incentive. In particular, it is wrong of the Government to treat maintenance income for divorced women as investment income and to stick a surcharge on it at any level. I hope that the Financial Secretary will produce a better argument on that point than he did last year.

There is nothing in the Bill to carry through the Government's intentions on capital gains tax, which remains a tax on inflation and on business assets when sold or transferred. There is nothing to lift the starting point of capital transfer tax from the £15,000 that it was in 1974. This must mean that capital transfer tax rates are being dramatically raised. They are doing fearful damage to jobs in small businesses which are having to close down.

We are not impressed by the further delay in settling the Government's views on the tax deferral system for stock relief. Deferral should be made permanent, and it is no use the Chancellor bravely asserting that the scheme should be better understood by the financial community. The plain fact is that auditors and some bankers do not accept the Chancellor's word as a bankable asset. They look at the tax liability in the balance sheet. We think that ought to be dealt with. It could be done without danger of abuse, and we shall be proposing an amendment accordingly

Those are minor but not unimportant areas where the Bill is lacking. There is a great deal that the Government could have done in these areas to give enormous extra incentive to create new jobs, output and wealth in important areas of the economy, particularly in the services and invisibles sector. But they have decided not to do so for reasons we can recognise and through a general reluctance to make changes in this area, and that is to the disadvantage of our country as a whole.

Finally, I return to the pay deal aspects of the Finance Bill to which it is all supposed to be geared. It is understandable that the Chancellor, with the Lord President, having masterminded stages 1 and 2 of the pay policy, should hanker after another deal. That is something that he took pride in before, despite the hideous consequences of such deals for differentials, incentives, productivity and jobs. Working people are bitter about the undertakings given to them in order to secure their restraint.

Of course it is natural that the Chancellor should want to have another go. But we are telling him what a great many trade union leaders and shopfloor workers have been telling him, and what even the Prime Minister has told him in his more lucid moments. That is, that while pay restraint is crucial, the Government's prime rôle in its achievement is not to get stuck in yet another self-defeating, high-cost deal. Their aim must be to hold the money supply and the cash limits that have been set. We recognise that while cash limit arrangements have yet to be put to the full test, the point where the cash limit ceiling will come into conflict with some wage demand has not yet been reached, and a great deal of political will will be required there.

I welcome the recommendations in the Public Accounts Committee report. These suggest that the whole cash limit system should be reinforced by parliamentary procedures so that Parliament can join the process of assessing the strength and validity of cash limits as they are developed. It is up to us all to work towards a more effective arrangement of that kind.

Within these limits the aim must be—and I shall be surprised if this is challenged by the Government—to return to responsible collective bargaining—free but within a responsible framework. The need for that cannot be refuted. The Leader of the Liberal Party does not do anyone a service by pretending that the only choice is between a centralised formula, which he thinks is fine, and free collective bargaining, which he describes as pay anarchy. This is a false antithesis, that clouds the argument. Also, it does not help us to move out of the ghastly dilemmas in which we have been placed by stages 1 and 2.

Those who say that we cannot have a deal for stage 3 along the lines of stages 1 and 2 are right on three counts. First of all, such a deal is impossible. We all know the need to unravel the differentials, and restore shattered pay structures. This is not amenable to the approach of stages 1 and 2.

Secondly, it is undesirable in the sense that nothing could be worse than for the Government to try to buy a magic centralised pay formula by taking financial risks or freezing prices. The Chancellor took risks last year with the public sector borrowing requirement, and look what happened. It would be utterly disastrous for this country if any attempt were made to buy a spurious formula with limited validity for that kind of price.

Thirdly, a settlement along the lines of stages 1 and 2 is unnecessary. I call in aid the Prime Minister when he says that we are not going to print money. Of course he is right. It is the monetary and public spending framework that will provide the Government with their broad pay judgment, and will determine whether there is a wages explosion. Within that framework pay negotiators at all levels are best placed—on the basis of concerted understanding of the overall position—to decide the trade-offs between pay and jobs That is the position that we, on these Benches, take on these matters. We look very critically at the huffing and puffing of the Secretary of State for Prices and Consumer Affairs who sees a direct relationship between the need for a formula or a new arrangement, and an immediate pay explosion if that is not achieved. Workpeople do not want another wretched deal that gives them the false apparatus of price controls. Instead, they want the chance to see their discipline matched for once, and not thrown away by the actions of the Government, by Government financial prudence and policies that will raise confidence, give bigger incentives, new jobs, lower taxation and a chance to see new wealth shared in the pockets of the workers rather than the State.

The Conservative Party has put forward positive proposals on profit sharing. The Liberal Party used to think along those lines as well before it joined the collectivist camp. We think that this is the fresh approach that is needed.

The Financial Secretary to the Treasury (Mr. Robert Sheldon)

It is difficult for the Government to keep track of the changes taking place on the Conservative Front Bench in attitudes to pay policy. We have heard a number of statements from the right hon. and learned Member for Surrey, East (Sir G. Howe) and the Leader of the Opposition. Now the hon. Member for Guildford (Mr. Howell) is adding another gloss of a different kind. Is he repudiating completely the approach of his right hon. Friend the Member for Lowestoft (Mr. Prior) who wants a phase 3? Is the hon. Member against any attempt to carry out phase 3 negotiations?

Mr. Howell

I will repeat one sentence, and the Financial Secretary can read the rest of my argument in Hansard tomorrow. His idea that I am repudiating phase 3 is misplaced and does not follow what I said at all. I have been arguing against a stage 3 in the mould of stages 1 and 2. I said so in precise words, and if hon. Members opposite were not listening to our proposals then we shall have greater difficulty in reaching a common understanding. This is the fresh approach that is needed on pay and this should be helped by any tax legislation brought before the House. I am sorry that the Financial Secretary has not followed my words but he can study exactly what I said in Hansard.

We see no sign whatever of the right approach in this Finance Bill and there is no sign of it forthcoming from the Lib-Lab régime. The fresh approach needs a different kind of Budget, a different kind of Finance Bill, a different kind of policy and a different Government to see the nation through the crisis ahead. That is what we are offering, and that is what the nation indubitably wants.

5.18 p.m.

Mrs. Barbara Castle (Blackburn)

I make no excuse for returning to the question of the uprating of pensions and benefits, even though the Chief Secretary has implied that it is inappropriate to raise it on the Second Reading of the Finance Bill. It would not have been necessary to do so had the announcement been made at the usual time. To suggest that the level of increase in pensions and benefits, their timing and the criteria on which they are based have nothing to do with the Budget judgment, and, therefore, the Finance Bill, is ludicrous.

I return to this issue because the delay in making the announcement is not only puzzling but is rather worrying. It has certainly worried old-age pensioners, a number of whom I met only yesterday at a meeting. They were, quite frankly, bewildered and afraid because they thought that they had been left out completely, and they wondered what was going on. When one tells them that they have not been left out and that the Government are standing by their commitment embodied in the legislation which I had pleasure in piloting through the House, one is aware that there is a very strange hiatus in the argument.

The pattern on which the announcements of upratings have been based in the years since the legislation was carried through has been that an announcement is normally made by the Chancellor at Budget time. Since February 1974, when a Labour Government was returned to power, the Chancellor has announced in three Budgets the fact and date of the next uprating. Last year he announced on 6th April that pensions would be increased on 15th November, some 32 weeks away. Here we are at 28th April, three weeks later than last year, and there is still no announcement. Not even the faintest indication of an announcement has been given to us this afternoon.

I asked my right hon. Friend the Chief Secretary a question about the administrative period. When I asked what was the deadline for the announcement, if it was to be administratively possible to carry the uprating through by November, he said that I should know. I certainly do know, which is why my concern deepened at every word he said.

I remember as Secretary of State for Social Services, after we were returned to power in February 1974, rushing through an uprating in the record time of 19 weeks. We carried it through by July that year. As a consequence there was a strike by the staff, who said "You can't do that to us" They were right, because it meant a total dislocation of their work schedules, an excessive amount of overtime in the summer months, great problems for the married women because of overwork, and so on. Therefore, since then I committed myself—and no doubt my successor has done the same—always to allowing a reasonable administrative margin. That margin is 28 weeks. If we are to give 28 weeks' notice this year, our deadline is next Tuesday, in five days' time, if the uprating is to come into operation by 15th November.

What are the Government waiting for? It is not a normal procedure that they are following. What is causing the difficulty? Can it be that my right hon. Friend the Chancellor is now caught in a trap of his own making? He decided last year that we must abandon the historical method of uprating and go for the forecasting method. He must now be in a slight difficulty about his forecasting. He has certain pay negotiations in hand. Figures are bandied about for the sort of targets he has in mind for the level of inflation, which we know will not be down to single figures this year and which, he tells us, will be down to single figures next year only if earnings do not go into double figures. The conclusion of that little piece of bargaining is a considerable way off. Is that the diffi- culty? If it is, I suggest that this year my right hon. Friend should switch back to the historical method of uprating. That is a simple way out of the difficulty.

Or do my right hon. Friends the Chancellor and the Secretary of State intend to push the announcement back to an administratively dangerous date, an administratively impossible date, in order to see what kind of pay policy and earnings level they will have? Under the legislation that we introduced, the uprating must be in line with prices or earnings, whichever are more favourable to the pensioner. If the Chancellor has to wait until the end of July before he knows what the earnings and price levels are likely to be in the coming months, that will mean that there cannot physically be a November uprating.

Therefore, the position is extremely worrying. The House is owed more of an explanation than we have had so far and the pensioners are owed more reassurance than they have had so far. Their anxiety is running very deep.

But the delay carries one bit of comfort. If there is still time administratively to uprate pensions and benefits by November—and we were told that there was plenty of time before an announcement need be made—there is still time administratively to introduce an increase in child benefit.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

I am listening carefully to what the right hon. Lady says. I should like her to relate it to what is in the Bill.

Mrs. Castle

It is extremely closely related, Mr. Deputy Speaker, because the Bill contains clauses dealing with child benefit and child tax allowances. They add up to a complex of provision for family support, and I believe that they go together. I repeat that in the past the Chancellor has always included the level of uprating in his Budget judgment on which the Finance Bill is based.

I move from the date of the uprating to the possibility of uprating child benefit this year. I do so because I have already explained to the House, in the Budget debate, that the major flaw in the Budget is its effect of introducing tax changes which reduce relatively the level of support we give to families. This is also a serious flaw in the Bill. The machinery by which that disaster is achieved is embodied in the Bill, because we are to reduce child tax allowances in order to help pay for making the family allowance tax-free.

When I say "disaster", I want to make it clear that I am in favour of this switch, which is outlined in Clause 22 and other clauses, because it is an essential start to the introduction of an effective child benefit scheme under which the child tax allowances are phased out and tax-free benefit is introduced instead. Under our phasing-in programme for child benefit, these steps are essential, and for that reason I should not dream of opposing them, because I asked for a start to be made in phasing-in, and this is it.

As is clear from the Bill, however, it has meant that this year, when my right hon. Friend is to give away £1,800 million in income tax reliefs of various kinds, not a penny of that can go or is going in child tax allowances to help families. Of course, this means that we are continuing the process under which—over a period of years now—the net income of families with children has been declining as a proportion of the net income of single people.

In the Finance Bill we are dealing with a great boost for the single and childless and we are leaving families with children without anything to protect them against the price rises that face them in the most acute areas. That includes food, because the disastrous consequences of the common agricultural policy have not yet taken effect on family budgets. The levels of food price rises will reach—not because of any fault of the Government but because of the insanity of this country's decision to join the EEC and so fasten inescapable food price increases on our country—even higher levels. The consequence of all this on family budgets is absolutely frightening.

Only last night I was talking to some young mothers, and their anger and fear was tangible. It was not artificial or created or general pique. They were afraid about how they will feed and clothe their families in the coming year. Let us not forget that this is a year in which all the Chancellor of the Exchequer's calculations about how to balance his Budget and so on will put up prices enormously. The misery that will face these families in the coming months will be endless.

I cannot over-emphasise the urgency of the situation because we have debarred ourselves from increasing child tax allowances. The hon. Member for Guildford (Mr. Howell) referred to the talk that we have heard about an autumn Budget and about another taste of reflation because the Government have been so successful in controlling the money supply, through cash limits and other means, that we have economic overkill. The hon. Member seemed to be shocked at the idea. That was because Conservatives believe in strength through misery. I fear that we are dangerously near the economic situation of weakness through misery.

I welcome the suggestion that we face the possibility of another reflationary boost this autumn provided that the Chancellor can strike a reasonable bargain over the pay policy, but the Chancellor will not know that until July. I am alarmed because by then it will be administratively too late to increase child benefit. If the Chancellor comes along with more tax reliefs in the autumn, under the formula of the Bill we shall be compelled to leave the children out. That is the situation that the House cannot and must not ignore.

We have all, on both sides of the House, been party to the phasing in of child benefit, and this is the situation in which we find ourselves as a consequence. Presumably we shall all be voting for child benefit in this Finance Bill. I ask the Chancellor, through the Chief Secretary, please to make up his mind in time whether some £900 million will be given away in the autumn. If that is to happen will the Chancellor please take steps now before the uprating—the date of which he has not yet announced—so that that money can be spent in introducing at least a reasonable level of child benefit? Some £900 million would make available £2.70 a week for every child in the community. That would make a dramatic impact on the condition of large families and of families with low incomes.

There will be something like a revolution among the women of this country, if, in the autumn, the Chancellor says that restraint has been overdone and that he will put a boost into the economy by increasing tax reliefs but there is nothing for the kids. I repeat, the Government's own delay in announcing the date of the November uprating has given them time to face this situation.

We have not even had an assurance that child benefit will be uprated automatically, along with other benefits, in the November uprating. That is something for which hon. Members have pressed and for which some of my hon. Friends pressed when I, as Secretary of State, was putting the Child Benefit Bill through the House. I should have adored to accept that proposition but the Government felt that it should not be accepted then.

If we are now in an era in which we are talking about giving away £1,800 million and perhaps another £900 million, do the Government say that we cannot include the child benefit in the November uprating? If that uprating were 16 per cent.—it was 15 per cent. last year—it would cost the Government £3 million. Cannot we show at least enough interest in the country's children to make that commitment of principle and that small gesture? Cannot we abandon the decision to increase the price of school meals? Cannot we take the family problem seriously?

I am sorry only that, owing to the structure of the Bill and the structure of the compromise that we have reached over child benefit, I am inhibited in moving an amendment to the Bill that would put my policies before the House. If I did that, I am sure that I would win.

5.38 p.m.

Mr. Reginald Maudling (Chipping Barnet)

I am glad that my right hon. and hon. Friends on the Front Bench have decided not to oppose the Bill on Second Reading because I agree that it represents a step in the right direction—slow, faltering and timid perhaps, but, nevertheless, a move in the right direction, particularly in its transfer of emphasis from direct to indirect taxation.

I was fascinated to hear the Chief Secretary talking this afternoon about the iniquities of direct taxation. What a conversion, and what an extraordinary repetition of the arguments that have been put by this party for many years and that have always been rejected by the party opposite! No doubt there is always room for people to repent. I am glad that the emphasis has rightly been moved and I hope that the process will continue, although I am disturbed about the particular form that it has taken.

There is some unwisdom about the imposition of tax on petrol, and I agree with my hon. Friend the Member for Guildford (Mr. Howell) that it would have been a better move to have put the rate of VAT at 10 per cent. The effect of that on the retail price index has been exaggerated at times in terms of wage negotiations. The increased price of petrol will have more effect during such negotiations than an increase in the retail price index.

There is another dangerous argument here. The Chief Secretary referred to what President Carter has said about conserving energy by putting up the price of petrol. That is all very well, but what will the producers and our Arab friends say about that? No doubt they will comment "All right, if you want to see the price of petrol higher, we shall do it for you, thank you very much." They will say that we have been pressing them hard to keep down the price of oil because of the inflationary effect of high oil prices on Western economies, yet now we are deliberately putting up prices ourselves. That is a difficult case for us to argue.

The Saudis produce far more oil for Western consumption than it is in their national interest to produce. It suits them better to keep the stuff in the ground because they cannot spend all the money they get for it. They have been trying hard to moderate the increase in petrol and oil prices for the benefit of Western democracies, yet now the West is putting up prices for the sake of its own economies. The Saudis will be bewildered about what Western democracies really want.

Dr. Bray

Does the right hon. Gentleman not agree that if the Arabs wanted to increase their income from oil they would not put up the price because that would reduce their incomes, which would be very silly?

Mr. Maudling

I do not think that is true. It is crystal clear that one of the reasons the price of oil has not gone up more is that the Saudis and the Gulf States have not wished further to embarass Western economies by further inflationary price increases. They have done that after considerable argument with their colleagues, but now they find the British and American Governments deliberately putting up prices and that leaves them in an awkward situation. This is an important factor in the long-term relationship between oil producers and consumers.

I return without apology to the problems of incomes policy because it is vital. The collapse of incomes restraint and a return to a free-for-all this year would be disastrous for this country and its people.

Our economy is making some progress. The balance of payments is becoming stronger, confidence in sterling is better than it was a few months ago, and the increase in unemployment seems to be stabilising, although the figures are hard to read. In addition, North Sea oil is approaching rapidly in amounts that will be significant for our balance of payments. However, this slow and faltering improvement could be jeopardised by a new explosion of wage increases, and the tender plant of confidence in sterling could wither in a very short time.

There are two widespread delusions in this country. The first is that there is such a thing as free collective bargaining to which we could return, and the second is that the effect on prices of a wage explosion could be contained by what is called strict control of the money supply. Both are dangerous illusions, because if we followed them we should find ourselves in a very difficult situation.

The Leader of the Liberal Party said recently that free collective bargaining should be called free collective chaos and I was rude enough to suggest that it should be called free collective blackmail, because that is what it could become. If unions used their monopoly power without restraint a new spiral of cost inflation would be inevitable. As has been mentioned already, there is dissatisfaction with the present state and phase of incomes policy and pay restraint. There is general resentment that living standards are being brought down, and unions and other people making wage claims want to preserve their own living standards, even if by doing so they depress the living standards of other people.

There is also a serious problem of erosion of differentials. My hon. Friend the Member for Guildford rightly referred to the difficulties of management in this country, and the figures he quoted, with other figures that have been published recently, underline dramatically the enormous change that has taken place. There is no doubt that the change in the real living standards of management in this country is bound to have a serious effect on the performance of British industry.

These are genuine and real criticisms of the present state of incomes restraint and the pay policy, but the answer is not a free-for-all. It is to have more flexibility within the policy. A free-for-all would not solve the problem of differentials because, in general, the people who have been losing their differentials are those with the least industrial muscle and they might suffer even more in a free-for-all.

There should be more scope for kitty bargaining, and particularly for local schemes to increase productivity, such as output bonuses and so on, but the basis will be nationally agreed rates. As long as there are national unions, we shall have national negotiations, and any attempt to fragment the trade union structure more than it is at present might be less than helpful. Of course, in many occupations, including teaching, for example, it is not possible to increase productivity, and often productivity is increased not because of increased effort by the labour force but because of increased investment.

While there is room for flexibility, wages will still generally be determined on a national basis and not pit by pit or school by school. As long as we have national negotiations, they cannot be free negotiations. There cannot be free collective bargaining in any true sense of freedom as long as unions have their monopoly powers. We cannot have free negotiations with people who can turn out the lights in a few hours' time.

In all major negotiations, a third party —the consumer—must be included. What freedom does the consumer have? What freedom would he have if the determination of wages were left entirely to employers and unions? For many years it has been the job of Governments to represent the broad interests of the consumer in the determination of the wage structure in this country.

I do not believe that this talk of returning to free collective bargaining has any reality in the modern world. Equally, I do not believe there is much substance in the argument that we can use strict control of the money supply to prevent a wage explosion passing into a price explosion.

The movements of M1 and M3 are capricious and unpredictable. The Treasury does not know from one month to the next whether the borrowing requirement will be £8 billion or £9 billion. It is impossible to predict the sale of giltedged at any given time, and no method is known to mortal man whereby one can maintain, in mathematical terms, strict control over the money supply, whether it be M1 or M3. The relationship between money supply and effective demand is still shrouded in mystery. Effective demand is what matters. It is not the amount of cash in banks or building societies that matters, but what people intend to do with it. On the whole, people spend what they earn, borrow or dissave. It is these decisions that matter, and not some strange mathematical formula about M1 or M3.

We still have lingering symptoms of the quantity theory. A letter in The Times recently recalled that Keynes said to the editor of a well-known newspaper that, by modern surgery, even an inflamed quantity theory could be removed without serious danger. I believe that this is an operation that should be carried out.

It is argued that even if wages increase and we maintain the total amount of money that can be spent, prices will not increase but unemployment will. That is a total fallacy. If unemployment rises, production will fall. There will be fewer goods on which the same amount of money is spent, so prices will still increase. The idea that we can maintain the general level of prices by containing the general quantum of purchasing power in conditions of high unemployment is, to my mind, rubbish. We are aware of the doctrine of the high priests of monetary theory that it takes two years to have any effect: that which happens at the end of this year was determined two years ago by the movement of the money supply. If anyone believes that whatever happens to wages in the next 12 months will have no influence on the level of prices because that was determined two years ago by the movement of the money supply, he can only be a professor.

I am not convinced that credit restraint or cash limits—I accept that they are both extremely important elements of Government policy—are answers to a wages explosion. All experience in recent years has demonstrated quite clearly that that is so. A tight money situation does not in practice compel employers to resist wage demands. In those circumstances it is a fact that cash flow becomes of the greatest importance. Employers are more liable to give way to wage demands so as to maintain cash flows. In that way investment is sacrificed. As a result, there is stagnation and no investment.

Mr. John Lee (Birmingham, Handsworth)

I have been listening to the right hon. Gentleman with a great deal of interest and sympathy. Judging by the expression of those who sit on the Opposition Benches above the Gangway, I think that there is more sympathy on the Government side of the Chamber than on the Opposition side. The right hon. Gentleman has demolished the monetarist argument. Does the right hon. Gentleman agree that, if we are to have effective investment in the situation he has described, we must have tough Government intervention and a siege economy? Is not that what is needed?

Mr. Maudling

I believe that the very opposite is the case. I was worried that the hon. Gentleman was nodding in apparent agreement when I was speaking. Experience has shown that investment takes place only when the man who makes the investment sees a market for his goods. Tax incentives do not work very well. Government direction is usually counter-productive. The only chance of getting the level of investment that we want is to make investment profitable and desirable for investors. That is not achieved, with great respect, by Government intervention.

I doubt whether cash limits on public services are effective in controlling prices. Of course, these are old arguments. Similar arguments took place when Lord Beeching was in charge of transport many years ago. If a cash limit is imposed upon a public service and it is then said that it wages increase services will have to be reduced, that is no answer to inflation. In those circumstances the public will be paying the same amount of money for a much reduced service. They will be paying the same amount of money for fewer goods or services. That is just as inflationary as paying more money for the same amount of goods and services.

I recognise the importance of cash limits and credit restraint in the right circumstances, but they are not the answer to a wage explosion. I can see no alternative, but continuing Government influence on the level of pay settlements at a national level. The form that that influence takes must change. There must be more flexibility. There must be changes in detail. The negotiations and the formulation of a change in policy will obviously be exceedingly difficult, but the effort will be profoundly worth while because any alternative will be disastrous.

5.54 p.m.

Mr. Jack Ashley (Stoke-on-Trent, South)

The speech of the right hon. Member for Chipping Barnet (Mr. Maudling) will have commended itself to many more hon. Members on the Government side of the House than on the Opposition side. The way in which the right hon. Gentleman dealt with the problems that face us and the theories offered to the House by the monetarists will have been taken very seriously by my right hon. and hon. Friends.

I was glad to hear the right hon. Gentleman refer to the dangerous delusions that we often hear expressed. His brand of common sense was a breath of fresh air to many of us as we hear so much hot air about these economic problems. The support that the right hon. Gentleman gave to the Government's efforts to try to negotiate phase 3 of the social contract will be echoed throughout the country. As the right hon. Gentleman said, there will have to be changes. There will have to be more flexibility and there will have to be regard to differentials. There is a great need for phase 3 to be carried out, and I am hopeful that the Government will be successful.

I have always been regarded by the Government as a loyalist, but I must warn the Treasury that it is tending to become presumptuous in its approach to Labour Back Benchers. It is tending to take them for granted. In this brief speech I hope to let the Treasury know that it is beginning to play with fire and that some of us are beginning to make up our minds that we are not prepared to be pushed around by Treasury Ministers when we put forward specific objectives and the interests of certain groups. We are not prepared to have the Treasury pooh-poohing those groups.

By all means let us acknowledge the difficulties confronting the Government. I recognise as well as anyone else that there must be constrains on public expenditure and I have great contempt for the political stunts that are sometimes offered, as well as some of the simple solutions and panaceas. That is why I stand behind the Government on the whole and support the Treasury's attempts to deal with these difficult and intractable economic problems.

Although this will be rather like a red rag to Conservative Members, I believe that only a Labour Government can negotiate phase 3 with the trade unions. It would be impossible for the Conservatives to do that. That is because history is against them. Their preoccupation with middle income groups, management and the self-employed makes trade unionists suspicious. I do not dispute that they are right to raise such matters and I accept that there are legitimate problems faced by the middle income group, middle management and the self-employed, but the fact is that because of these preoccupations, trade unionists distrust the Conservatives' approach to phase 3.

Curiously enough, the Government are now beginning to fall into a trap of their own making. Although they are right to have regard to the fears of trade unionists about differentials and flexibility, they are beginning to go too far. In the Budget specific help was given to married working men because their pay packets lost 70p a week although their wives received £1 extra. The Chancellor said that he was proposing a substantial increase of the married allowance to provide family men wtih special help during the transition to the child benefit scheme. My right hon. Friend is conscious of the need to see the effect of this change on the public's pay packet. Obviously the Chancellor is trying to get phase 3, and good luck to him. In that respect I support him. The danger is that the Government will go for differentials in so bullheaded a fashion that they will overlook the less privileged sections of the community, the low-paid and the disabled.

The Chief Secretary prides himself upon being tough and standing up for public expenditure restraint. But a picture is beginning to emerge of a brave Chief Secretary placating the most powerful and bravely fighting the disabled and underprivileged whom I and some of my colleagues seek to help. It is a picture of a Goliath knocking down the little Davids and apparently being very proud of it. I cannot say what Ministers say in private, but the word is going around that certain Ministers are refusing any advances for underprivileged groups, such as vaccine-damaged children and others of that kind. Those groups do not have the power of the trade unions. They do not have the support of shop stewards and they cannot call a strike.

I warn the Treasury that if it wants to play it rough with these groups—vaccine-damaged children, low-paid workers, widows and so on—that is fine. It will have to play it rough with those Back Benchers who try to represent such people. The Treasury is turning loyalists into rebels. We are prepared to organise and to fight. If the Government have to be defeated on specific issues of this kind, the Government will be defeated. It is as simple and as plain as that.

I recognise that there are grave economic problems facing the Government. I have loyally supported them throughout the years. I am now beginning to think again. A certain amount of sympathy has been expressed by the Department of Health and Social Security towards these groups. I want the Treasury to reconsider its attitude and not to pooh-pooh these groups. I, too, want to help trade unionists, but I am not prepared to see the little guys pushed around. They are now beginning to be pushed around by the Government, and it has got to stop.

I hope that the message will get home to the Chief Secretary and all his colleagues. I say that in a spirit of friendliness because I know that the Government are faced with massive monetary problems. They will have my support, as they have had it in the past, but I make an earnest plea to the Treasury and to the Government not to go for the weakest in their anxiety to correct the balance of payments, to get rid of deficits and to reduce inflation.

I know that Ministers can stand at the Dispatch Box and quote what has been done. I have done that on a party political platform. We have a far better record than the Tories on these issues. I have argued that, but I argue now for what can be done in the present situation, and a lot more can and should be done. I hope that the Government will take all those considerations into account when they are dealing with the Bill and with consequent amendments which I intend to table.

6.4 p.m.

Mr. Andrew MacKay (Birmingham, Stechford)

It gives me much pleasure to follow the hon. Member for Stoke-on-Trent, South (Mr. Ashley). I have a considerable regard for the hon. Member. I hope that in my service to the House I am able to do half as much for the underprivileged as he has done.

It is with a feeling of a great sense of occasion that I take a small part in this Second Reading debate on the Finance Bill, particularly bearing in mind that I am following on my right hon. Friend the Member for Chipping Barnet (Mr. Maudling), one of the most distinguished Chancellors during my lifetime. As Member of Parliament for Stechford, I am succeeding another distinguished Chancellor of the Exchequer.

It is a tradition of this House that a new Member's maiden speech includes complimentary references to his predecessor. In my case I mention Mr. Roy Jenkins not as a perfunctory courtesy to the House but out of a genuine regard for that considerable statesman. I know that it is a regard shared by all sections of the House for a man who has not only held the two great offices of Home Secretary and Chancellor but has shown a degree of integrity in public life which has enhanced people's views of politicians in an age of increasing cynicism. His work for European unity has been fittingly rewarded by his appointment as President of the European Commission. I know that all hon. Members will wish him well in this difficult but vital role. We feel a little more confident about life in the European Community now that he is at the helm.

During his 26 years as Member of Parliament for Birmingham, Stechford, Roy Jenkins built up an admiring public. We in Birmingham have a fine record of finding, supporting and promoting distinguished statesmen dating back to John Bright, through Joe Chamberlain and up to the present day. These are men of vision serving their country from that soundest of bases, the great city of Birmingham.

I am pleased to say that my constituency of Stechford forms an important part of the city of Birmingham. It stretches from the south-east boundary, which is made up of the M6 motorway, to the centre of the city and the main commercial areas. The village of Stechford dates back to Saxon times and has gradually, during the course of this century, been complemented by many residential suburbs, namely Hodge Hill, Ward End, Washwood Heath, Shard End, Glebe Farm and Kitts Green. As befits the workshop of Europe, we manufacture a wide variety of electrical goods as well as all other forms of manufactured goods.

For instance, at Metropolitan Cammell we build London buses. I suspect, Mr. Speaker, that we even build the buses which operate in the city of Cardiff. In a neighbouring factory we supply the railway carriages for the London Underground. We have just had an exceptionally good order for the Tyne and Wear Metro and, more important still from an export point of view, we have had a first-class order for the new Hong Kong Metro. That will be of considerable value for this country.

We also supply the country with domestic and other electrical appliances, such as cookers and refrigerators, from Parkinson Cowan. We export a large number of trucks all over the world from British Leyland's factory at Washwood Heath. Many residents travel across constituency borders to a wide variety of manufacturing and engineering companies. These are the companies upon which the prosperity of the city of Birmingham depends.

More complex still are the many small businesses and self-employed workers who make up the majority of the working elec- torate in Stechford. Very often they are the base upon which the bigger companies depend for skilled production of components and for efficient retailing.

As a member of a family which has lived in Birmingham for five generations, and having worked in such firms, I am naturally biased when discussing their attributes. Consequently, I ask the House to forgive me if I dwell on this subject for a just a little longer.

There is an air of despondency and a listless feeling in small businesses throughout the country. Their numbers are diminishing through bankruptcies and voluntary liquidations. Those that are surviving have no wish to expand, and there are few firms jumping up to take their place. This is a tragic state of affairs.

—Let us look at what a thriving, self-employed small business sector could do for our country. It generates competition, it serves the consumer much more ably than do many of the large multinationals, it is in closer touch with market trends, and it has a fine record of happy industrial relations. Even more important, it is an excellent outlet for the kind of entrepreneurial skills which made this country great.

Although I am trying desperately hard not to be controversial in my maiden speech, I must say that these small businesses genuinely feel that they have been abused by successive Governments, because by their very nature they are fragmented and they did not realise until too late the need for an effective parliamentary lobby. They require no special favours, no charity, and no commissions to advise them on how to act. They simply need an incentive to work, without being strangled by red tape.

I believe it is generally accepted in all parts of the House that we are somewhat over-legislated. But nowhere is the burden of such legislation felt more greatly than among small businesses and self-employed workers. They do not have the staff to cope with the unnecessary bureaucracy imposed by Governments who have entered areas which they know little about and in which, with respect, I consider they should not be. Perhaps I shall say more about this in another debate.

I appeal to the Government to give small business men and the self-employed a financial incentive by substantial cuts in direct taxation. Although they appreciate the small cuts that were made in the Budget, I do not think that the Chief Secretary would by any stretch of the imagination consider that they were substantial or anywhere near enough.

We must encourage the expansion of new enterprise by giving that incentive. By encouraging expansion we shall create real jobs for the future, which is what every hon. Member wants. We must make the risk worth while. To this end, it would surely be advantageous to give special tax concessions to small businesses and to companies that are ploughing back their profits into new plant or machinery or to those that are creating new jobs through expansion and opening up new factories, shops and firms.

Let us tap the considerable resources of ingenuity that we have in this country so that there is a feeling of optimism, with everyone working at full stretch and reaping ample rewards for his endeavours. This will help stamp out the cynicism that the Prime Minister last week so rightly suggested was pervading the country.

I hope that in my short contribution I have made some valid points that the Minister can take up at the end of the debate. I know that there are very many small business men and self-employed people not only in my constituency but throughout the country, who will be interested in his reply.

6.15 p.m.

Mr. John Cronin (Loughborough)

It is a long-standing and pleasant tradition of the House that when one follows an hon. Member who has made his maiden speech one should express more detailed appreciation than is generally accorded. I am happy to be able to comply with that tradition. I thought that the hon. Member for Birmingham, Stechford (Mr. MacKay) spoke with great lucidity, deployed his arguments skilfully and spoke with an attractive modesty. All of us from both sides would probably feel that we appreciate his courtesy in referring to his predecessor, a member of a different political party, in such complimentary terms.

All of us would probably agree that much should be done to encourage small businesses. I would carry this argument a little further and say that there is a good case for big businesses being divided into smaller divisions, instead of our having the somewhat monolithic situation that occurs in the hon. Gentleman's own constituency with British Leyland. Nevertheless, I thought that the hon. Gentleman made an attractive and pleasant speech and I am sure that we shall hear much more of him with great pleasure in the future.

I give the Finance Bill a warm welcome. I have certain objections to some minor points. My objections are largely about the things that are not in the Bill rather than those that are in it, but quite a few of them could not be put into a Finance Bill. I certainly welcome the income tax reductions. I am glad that the average married man will now be £2 better off in his pocket. It is certainly an attractive situation that 850,000 members of the lower income groups no longer have to pay any tax. I am also happy that retirement pensioners are having the threshold at which they pay tax raised by £140 to £1,695.

It is satisfying also that something has been done for middle management by raising the levels at which the higher rates of income tax apply and also, in respect of exports in Clauses 28 and 29, by giving certain relief to overseas employees. However, I must say that these clauses are hedged by provisos and stipulations which make their value rather more doubtful now than perhaps will emerge when we deal with them in Committee.

It must be clear to all that employment and the prosperity of our nation depend to a very large extent on the skill and energy of executives in middle management. They are the people who get the business, and they certainly deserve consideration from the Treasury, if only in order to bring employment to the highest level and improve our economic condition.

I turn now to the proposed cut from 35 per cent. to 33 per cent. in the basic rate of income tax. This is subject to agreement on a pay policy. I believe that all right hon. and hon. Members will agree that the pay policy so far has been full of injustices and anomalies, some of them very grave, and that the effects on differentials and on productivity have been far from satisfactory.

I imagine that all will agree with what was said by the right hon. Member for Chipping Barnet (Mr. Maudling) about the need to return to orderly collective bargaining. But it must be orderly. It is vital that there be no pay explosion. Plainly, phase 3 is essential if we are not to have a serious wage explosion.

Nevertheless, a pay policy does not stop inflation, and I think it important that the Government should make this clear to the general public. A pay policy does no more than reduce inflation to a level lower than it would be without the policy. It is no magic panacea. None the less it is essential, and I am sure that the Chancellor and other Treasury Ministers will withstand the strong pressures that will be put upon them to make the pay policy far more lax than they would wish it to be.

There is a built-in difficulty in all pay policies. If we make the norm or pay ceiling high enough to accommodate all cases of extreme anomaly and injustice, that norm will be regarded as a standard entitlement for everyone and there will be a rush by trade unionists to take advantage of it. On the other hand, if we make the norm too low the whole thing becomes unworkable and it is impossible to make the pay policy stick. I hope that the Government will have a moderate norm or ceiling, with case-by-case examination of anomalies, preferably with the active participation of the TUC. If we can bring in the TUC to take part in a more active way, this will be a great help to the Government, I am sure.

I turn now to a matter which is not covered in the Bill but which is closely relevant to it, namely, the whole problem of price control. The Chief Secretary to the Treasury pointed out that inflation was dependent on many factors outside the Government's control, saying that world terms of trade were a cause of inflation, that our poor export performance was a cause of inflation and that even the fall in the parity of sterling was a cause of inflation.

Those factors are outside the Government's control, except, perhaps, the parity of sterling. I should like the Minister to give some indication of the Government's policy regarding the parity of sterling. One gains the impression that there is a deliberate attempt to keep sterling down when it is, in fact, tending to rise, presumably on the assumption that that will make our exports more competitive. At the same time, however, it increases inflation through the cost of imports.

I am sure that both sides of the House will agree that fiscal measures such as we have in the Bill are not enough to reduce inflation substantially. Moreover, the effect of fiscal measures is inevitably delayed. I ask the Chief Secretary, therefore, to consider—and to talk to his colleagues about it—more direct price control, since that would have an immediate effect. I appreciate that this is principally the province of the Secretary of State for Prices and Consumer Protection, but I have no doubt that there is close co-operation between the Treasury and that Department.

Price control of a direct nature, even if only partially successful, would at least have a good psychological effect. I admit frankly that the disaster for the Government at Stechford—I say this with all respect to the hon. Member for Stechford—was largely due to the electorate's dissatisfaction about prices, and I fear that the Labour seat at Grimsby will be in severe jeopardy today for the same reason.

In my constituency I have a vociferous, energetic and intelligent Labour Party. I try to maintain frequent exchanges of view with my Labour Party members at meetings, and every speaker—I am talking here of active Labour Party members—seems to condemn the Government's policy on price control. I believe that they reflect the views of the electorate, and I ask my right hon. Friend the Chief Secretary to convey that fact to his colleagues, because this is one of the most serious issues. If the Government were to lose the next General Election—in that event, I should certainly adopt the old saying "Aprés moi, le déluge"—I think that that disaster would be almost entirely the result of dissatisfaction with what has up to now been the Government's unhappy record in controlling prices.

I turn now to some minor aspects of the Bill, and I refer first to Clause 4 on hydrocarbon duties. Several hon. Members have referred to this already. I take the Chief Secretary's point that energy conservation must be regarded as an important aspect of policy, even by the Treasury, but I am not sure that I accept his view that his policy of increasing the petrol duty is justified simply because it brings duties into line with inflation. If he were to use that argument on such matters as taxation he would find himself in very deep water.

I understand the point when my right hon. Friend says that for a person with an average-size car the extra cost is only about 30p a week, but I must remind him that for a good many people with small cars that is a quite substantial sum out of their weekly earnings, and especially so in rural areas where incomes are on the low side, to say the least.

In Leicestershire, part of which I represent, there is a good deal of hardship and a good deal of ill feeling. People in rural areas are looked after by bus services which, to put it mildly, do not give universal satisfaction, and as a consequence they tend to use cars much more than they would wish. I feel that they can rightly and properly object if they are penalised in this way.

An important adjunct of the Finance Bill is the Government's control of the money supply. I was very favourably impressed by the determination expressed by the Prime Minister and the Chancellor of the Exchequer, and again today by the Chief Secretary to the Treasury, showing that the Government firmly intend not to increase the money supply to an extent which would be incompatible with the interests of the economy. I cannot help saying that this is a big change from the situation which prevailed in the days of the Tory Government when the right hon. Member for Sidcup (Mr. Heath) was Prime Minister. When I heard the hon. Member for Guildford (Mr. Howell) congratulate my right hon. Friend the Prime Minister on his determination in this matter, I could not but think that if he had said the same thing four years ago his promotion would have been seriously delayed in those rather slap-happy times when money was printed without regard to the effect on the economy.

I hope that the Chancellor will not depart from his target—that is, not to increase the money supply by more than about 10 per cent. It is important that every industrialist and every trade unionist who takes a bigger reward out of the economy than is justified by what he produces should lose thereby, and that will be the effect of the Government's firm stand, which I hope they will maintain.

The Chancellor and his junior colleagues at the Treasury have had a good record. Last year, when there was the threat of an explosion in the money supply by raising interest rates and cutting the Budget deficit the Chancellor turned an important corner for the economy. I realise that my right hon. Friend has been Chancellor during a period of high unemployment and seriously rising inflation, but it should be remembered that this is merely a coincidence of time. He has followed a succession of Chancellors whose policies brought about that situation.

In my view, therefore, the Chancellor and his Treasury Ministers are doing a good job. They are certainly the best Treasury Ministers we can have. They have an unrivalled record of knowing what can go wrong and, therefore, being able to counteract it. In the course of their stormy journey I wish them all luck, particularly in coping with the vital phase 3 negotiations. I am sure that Treasury Ministers will weather this storm, and I am equally sure that all hon. Members on both sides of the House hope that they will be successful.

6.30 p.m.

Mr. John Pardoe (Cornwall, North)

I add my congratulations to the hon. Member for Birmingham, Stechford (Mr. MacKay) on an excellent maiden speech. I particularly welcomed his comments about his most distinguished predecessor. The hon. Gentleman told us a great deal about Stechford and how it was contributing or helping to solve some of the underground problems of others. I also welcomed his comments about small businesses. We shall be returning to that subject on many occasions during the Committee stage of the Bill. I hope that we shall hear the hon. Gentleman on this and other subjects in future.

The Government expected the Budget to be popular. Strange leaks were emanating from Treasury quarters before the Budget was announced which indicated that it would dish the Tories and out-Tory the Tories with regard to cuts in income tax. Indeed, I think that the Conservative Party itself half feared that this might be the case, and immediately following the Budget the reaction of the right hon. Lady the Leader of the Opposition was to talk about "a Budget of survival". In fact, as the Gallup Poll has indicated—if one can believe these things at all—it is the most unpopular Budget in 25 years.

The Government were taken very much by surprise. The reason, of course, is partly frustration with falling living standards that all of us have experienced. It affects not only middle management—the people whom the right hon. Lady was talking about—but also families, particularly those with the problem of raising a family, and pensioners.

Everyone has experienced the frustration of having to make ends meet with fewer resources over the last two or three years. But apart from that general sense of frustration about the failing of the British economy in recent years—I would say over a longer period—the Treasury got the petrol thing completely wrong. The massive outcry against the very sharp increase in the petrol tax took the Government entirely by surprise. I was not taken by surprise because, like many other hon. Members who have spoken today, I represent a rural constituency. Perhaps in Leeds, where the Chancellor comes from, they do not have rural buses and, therefore, do not quite understand the problem.

There will be plenty of time to discuss the Bill in detail during the Committee stage, some of it on the Floor of the House. Some of the comments of the hon. Member for Guildford (Mr. Howell) seemed to suggest that there might be some backstage deal or agreement about what amendments the Liberals would support. In answer to the hon. Gentleman, I would say that the Budget and the Finance Bill are without any agreement between the Labour Government and the Liberal Party. The Budget was clearly put together and announced before the agreement came into force. As I have indicated, we were not consulted.

Therefore, the Liberals will be tabling a specific amendment on petrol, as no doubt will other right hon. and hon. Members, to end the increase on a specific date. Of course, whether our amendment is carried does not depend entirely on us. It depends on getting enough hon. Members from all parties to support our amendment.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

Does the hon. Gentleman's announcement that the Budget and the Finance Bill were in no sense part of the agreement between his party and the Government mean that when we come to the July package, or the October or December package or whatever it is, he will expect to be consulted by the Government before that package is put together?

Mr. Pardoe

It does not indicate any such thing. The hon. Gentleman will not draw me that way. He will have to wait and see. He will, no doubt, be very good at doing that by the time this agreement has run its course.

Mr. Peter Rees (Dover and Deal)

Since this is a matter of general importance, not only to the House but outside, are we to understand that economic and fiscal affairs are without the agreement between the Labour Party and the Liberal Party?

Mr. Pardoe

The hon. and learned Gentleman is excessively good at making rather trivial points sound enormously and pompously important. It is sometimes entertaining and sometimes simply boring. On this occasion it is simply very very boring. It does not even bear any relation to what I was saying. I simply said that this Finance Bill and this Budget were without the agreement between the Liberal Party and the Government.

With regard to petrol tax, however, we shall be tabling an amendment and we shall certainly press it to a vote. It is perfectly legitimate for the House to debate alternative ways of raising tax revenue. There is no reason why Parliament should not get involved. The fact that it has not been able to get involved in the past is simply because we have had single-party majorities and, therefore, that argument has not been able to win the day.

I do not know where the hon. Member for Guildford got the figure of 20 per cent. as Liberal Party policy for VAT. I have never seen such a suggestion, and I certainly have never made such a suggestion myself. On many occasions I have asked for a flat-rate VAT of 10 per cent. One VAT rate would be infinitely preferable to the petrol tax increase. Indeed, even if one allowed the petrol tax increase, a single-rate VAT would still be preferable. I believe that 10 per cent. would be preferable because for a great many people it would be so much easier to administer. The compliance costs of VAT are more important than the actual Customs and Excise costs, yet Governments do not take them sufficiently into account.

We shall also have the opportunity on various amendments to debate the tax system generally during the various stages of the Bill. The Chief Secretary today argued—all of us thought very convincingly—in favour of switching the burden from taxes on income to taxes on expenditure. We would certainly agree with that. But one has to ask "How?" and "Which tax?". It is perfectly legitimate to choose between taxes on expenditure. Moreover, I remind the Government that there is a severe political difficulty about making the switch from taxes on incomes to taxes on expenditure if we do not index the whole tax system. The unpopularity of the increase in the petrol tax has indicated just that, because unless we index the whole tax system it is altogether too easy to raise revenue from income tax. It happens automatically because of the effect of inflation on the revenue from income tax. One merely needs to leave it alone and income comes pouring in.

It is much more difficult to raise very specific taxes on expenditure because people notice the increases so much more. Such an increase happens at one particular point. It is abrupt and sudden. That is what happened to petrol. I suggest that had the petrol increase been spread over the cost of living, or alternatively, over a period, the outcry would not have been as great. I do not say that that is what we should have done, because I would oppose the increase in the petrol tax for other reasons.

I do not accept the Chief Secretary's argument that we should simply increase taxes in line with the cost of living because we can then change the rate if we have a mind to do so. It remains for Parliament to do so, and that is an important advance.

The Finance Bill is sometimes used as a weapon or vehicle for making comments about the state of the economy generally. Frankly, on the Budget judgment I admit to being an agnostic. I do not think that it matters too much what the particular judgment is at any one time, provided one does not think that it is a judgment for all time or for the next 12 months.

I want to downgrade the importance of the Budget and its one day of the year. This can be changed, depending upon circumstances. In any case, it is notoriously difficult to forecast the public sector borrowing requirement, which is a fairly crucial statistic, let alone the money supply. That is even more difficult to forecast. As those things are taken into account in fixing the Budget judgment—certainly since the IMF agreement—one has to see how the trends develop.

I think that probably the Chancellor has brought in a cautious Budget and that it is about right at this time of the year. However, it will not do anything for unemployment, which will inevitably continue to rise, and I do not think that it will do anything to stop the fall in living standards either. Politicians ought to ask themselves whether it was not inevitable that living standards had to fall following two events. The first was the rise in the money supply during 1972–73. The money supply increased by 60 per cent. in three years, and that is to be found in Table 112. One can see what happened to the money supply in those years. I do not want to rake over that period, but that happened, and if one has to get the rate of inflation down it is inevitable that living standards have to fall. Secondly, following the large increase in oil prices in 1973 we had, in a sense, to export a part of our living standards for a period of time. There is no reason why we should not be able to catch up in time, but during a period of three or four years a fall in living standards was inevitable.

I turn next to the conditional element in the Burget—that is, the pay policy. I was dispirited when I heard the speech of the right hon. Lady the Leader of the Conservative Party the day before yesterday about her party's attitude to pay policy. I much prefer the constructive attitude of the right hon. Member for Lowestoft (Mr. Prior) and the speech this afternoon of the right hon. Member for Chipping Barnet (Mr. Maudling).

Having listened to the right hon. Lady and some of her colleagues on the Conservative Front Bench, I thought "We have been here before". I understand the desire of any Opposition to cut free from the encumbrance of pay policy. I understand particularly the desire of the present Opposition to cut free from the encumbrance of pay policy. I understand particularly the desire of the present Opposition to cut free from the encumbrance of pay policy, because the argument is advanced, and it must infuriate Conservatives, that the Conservative Party will not be able to get a pay policy anyway and, therefore, it is necessary for it to say that it can govern the country without it.

The right hon. Lady said that she does not want any national agreements, but only locally-negotiated ones. That is eminently desirable. I think that we should all prefer to have locally-negotiated agreements. The problem is how to get them. How does one enforce them, or how does one stop trade unions from negotiating national agreements and force them into negotiating only locally?

The consequences of not getting a pay policy were in no way over-estimated by the right hon. Member for Chipping Barnet, and I think that it was right for him to lay his cards on the table. In theory, at some time a reduction in the money supply will do the trick. If it does not, we shall have to bring Professor Milton Friedman before the Bar of the House to answer questions.

At some time it will happen, but if we rely only on the money supply—in the public sector that means relying on cash limits—and there is no pay policy, what will happen? There will be enormous pressure from some trade unions for large increases, and some trade unions, by reason of their bargaining power—which is related not necessarily to their contribution to the economy at any one time but simply to their nuisance value—will be able to get a substantial increase. If the money supply is kept constant and if cash limits are imposed, other people will not get anything like as much, and many will be without any incomes. They will become unemployed.

The inevitable consequence of relying on the money supply and cash limits alone, without a pay policy, will be a substantial increase in unemployment, and with it a substantial increase in industrial unrest by the public sector unions, which will come up against cash limits and be forced to strike. That is the problem. Therefore, I think that to duck the issue and run away from the need for a pay policy is not facing the responsibilities that one has in the present situation.

If one asks how much pay policy should give—and that is a fairly crucial question—one gets different answers depending upon whom one asks. If I ask myself how much I need, inevitably one answers that question by saying "I need enough to compensate for the rise in the cost of living, and that is probably 17 per cent" If I ask how much the economy can afford—that is, how much the economy produces to pay for this in real resources—the answer is "Nothing" or "Next to nothing".

To pay nothing is clearly politically impossible. To pay nothing at all as an overall increase across the board would not be politically feasible. There has, therefore, to be an across-the-board increase. We have to keep it as low as possible by negotiation, and not more than 5 per cent. seems to be the absolute limit for that part of the increase.

We then need a further amount for differentials. We come back to local plant bargaining, because that is the only place where the differential can be bargained over and negotiated in a sensible way. If there was no initial increase, any amount that we voted, or any amount that was decided on in the negotiations for this purpose, would be spread too thinly to deal with the problem of differentials. I guess that about another 5 per cent. will have to be allowed to deal with differentials at the plant bar gaining stage. That makes an increase of 10 per cent., but that does not give an average increase of 10 per cent. It is bound to be higher than that.

In addition, there must be some incentive for increased efficiency and extra production. However, productivity deals have a bad reputation because most of those on which we voted in the late 1960s were "phoney". There was no connection between promise and performance. People tended to get paid for the productivity that they had promised to deliver. They did not deliver it, but they were still paid. Productivity deals have a bad reputation, and no one will negotiate for that sort of thing again. That, however, is putting the cart before the horse. We need genuine productivity deals that are self-financing and in which the pay comes after the productivity is delivered. If we can get to that situation, the sky is the limit for the British economy.

We need incentives in some industries and in a range of organisations. They must be able to negotiate a pay deal that allows them to decide which pay bonuses to take. In coal and steel we shall have to go for direct production bonuses because it is possible to measure production, and a pay policy will have to allow for that. In other industries, particularly in the private sector, added value may be a better measure, and an increase in added value per employee might be a better measure of effectiveness. In yet other industries we shall have to go for profit-sharing schemes that are widely spread. The hon. Member for Guildford said that he was not sure whether the Liberals were still committed to profit-sharing. I assure him that we are.

The hon. Member for Guildford talked a lot of nonsense about our having joined the collectivist camp. The hon. Gentleman was a supporter of the previous Tory Government. One could not get more collectivist than that. I understand that it is Conservative Party policy to get back to free collective bargaining, and that, too, is pretty collectivist.

One must face up to the problem of enforcement. All that a voluntary pay policy has done is to shift the responsibility for enforcement on to the trade union leaders. Parliament should take that responsibility. The buck stops here. Eventually we shall have to take that responsibility. The right hon. Member for Chipping Barnet said that the public interest must be taken into account in negotiations. He asked who represented the public interest. Who represents the public interest if Members of Parliament do not do so? Parliament must do its job.

We cannot return to free collective bargaining. We should use these negotiations to find a new way of determining wages. That must be the main aim of British economic policy over the next three months.

6.51 p.m.

Dr. Jeremy Bray (Motherwell and Wishaw)

. The hon. Member for Cornwall, North (Mr. Pardoe) made a wide-ranging speech. Obviously the particular matter which is of importance to the House is his reaction to the proposed increase in petrol tax. I sympathise with his concern about rural transport. However, he will agree that a general reduction in petrol tax is an inefficient way of trying to help. That is because 80 per cent. of petrol must be consumed in towns by town dwellers.

Those in rural areas—in the constituency of the right hon. Member for Orkney and Shetland (Mr. Grimond) for instance—will be helped little by such a reduction. A number of hon. Members and I visited Orkney and Shetland during the Easter Recess. There was no doubt that transport costs were the biggest single issue there. It is the wish of the hon. Member for Cornwall, North to do something to alleviate that situation. I urge him to turn his mind to ways in which more effective support could be given to all country dwellers generally by using the large funds that are represented by the proposed increase in petrol tax.

Understandably the Chief Secretary had nothing new to offer in his analysis in the absence of the Chancellor of the Exchequer who is in Washington. The situation continues to develop regardless. In his Budget the Chancellor offered a 2 per cent. reduction in standard rate of income tax. Unions have been doubtful in their reaction to that. They are doubtful whether any stage 3 is negotiable at all. I wonder whether the Chancellor will make that 2 per cent. reduction in the standard rate, regardless. Perhaps he will suggest a larger figure.

Inflation dangers remain acute. Interest rates have been further reduced. The minimum lending rate has fallen more than equivalent rates in other countries. There is pressure on building societies to reduce their borrowers' rate. The exchange rate is being stabilised. Generally the situation is developing in a way which is not out of line with what the Chancellor of the Exchequer expected at the time of the Budget, but it gives cause to the House to wonder whether the reductions that he planned then are appropriate to the situation now.

The effect of high interest rates last year, the IMF loan, the safety net, supplementary special deposits and restrictions on financing Third World trade have stimulated a massive inflow of funds, the unwinding of leads and lags, a massive sale of gilts and a reduction in M3. Interest rates have fallen. The margin of interest rates over foreign interest rates has become much lower than the gap in inflation rates between this country and others. The rate of inflation, interest rates and exchange rates are so unstable that people wonder what will happen and what the Government will do. The economy is in the doldrums and pressures on the pound may go all over the place.

The Government want to hold the exchange rate to arrest inflation. They want to keep interest rates low to encourage investment. They fear that, if they pursue that course with inflation still high, negative interest rate may create a crisis of confidence. The possible outflow of funds, a fall in the sale of gilts, rises in DCE and money supply, a sharp rise in interest rates and a sharp fall in sterling, are all too familiar as elements in a July crisis. All that can happen before any of the machinery of the safety net comes into operation, because that is contingent only on the movement of official holdings of sterling. Inflationary wage settlements later could greatly exacerbate the dangers.

What advice are the Government receiving in this uncertain situation? The IMF wants its money back. Most banks do. It is not really interested in inflation. It wants its money back in SDRs. It is not concerned how many pounds one has to pay for SDRs.

The Financial Times reported from Washington yesterday: IMF staff have made it clear that they are concerned that Britain may not have let the pound fall far enough yet to reflect the continuing effect of inflation on its competitive position. That reflects the theoretical, not to say doctrinaire position of the IMF staff and Mr. Polak in particular, not only in the artificial invention of domestic credit expansion, but also in his address at the conference in Washington last month on United States-European relations. Here he stressed the reluctance of economies and Governments to "adjust" as opposed to "co-ordinate"—that is to say, to accept the devaluation implications of inflation. He says that one can pursue what domestic policies one likes provided one is realistic with the exchange rate policies that go with it. One should adjust exchange rates to match. That is successfully achieved in some South American countries.

According to the Financial Times report, the IMF is saying that the pound should be allowed to slide gently down and that it should not be over-defended. It is saying that we should defend it by DCE and public expenditure rather than by interest-rate policy. So much for the IMF. It is eccentric, but it has an influence on our affairs.

There are also the portfolio monetarists. Their broad doctrine is that holders of currencies have a view about how much of each currency they want to hold. If too much currency is supplied the price will fall. That means that short-term behaviour is dominated by capital flows. Current flows only affect rates as they alter the portfolio balance. These monetarists have many representatives. One such group exists at the London Business School—Terry Burns and Alan Budd in particular. They are arguing in their most recent forecast, reported in the Press today, that if Government combine tight money policy and seek a low exchange rate or an undervalued exchange rate they will get the worst of all worlds in combining a recession, as a result of the tight money policy, and inflation, as a result of the ever-increasing price of imports. Their advocacy is of a deliberate attempt to raise and maintain the exchange rate to let it float but with the expectation that it will float upwards.

Peter Jay, again writing in The Times today, wants a clean float, but a clean float aimed at a current non-oil balance of payments, thus building up vast surpluses to build up investment and capacity in an economy which he fears is going through the process of de-industrialisation. That is a powerful argument and, I think, one with which many of us would sympathise—that we cannot use the oil revenues as a bonanza and must use them to seek structural change in the economy. His implication for currency drawn from this—although I am not sure that the hon. Member for Guildford (Mr. Howell) would agree—is the expectation that the clean float would take the pound downwards. Quite how he expects holders of sterling to discriminate between an oil balance and a non-oil balance is not entirely clear, but, nevertheless, his prescription is that the Government should push the exchange rate down.

Sam Brittan—they have all had a go today—writing in the Financial Times, wants a clean float, and he also expects it to go downwards, but not yet; perhaps later on this year. He produces convincing graphs in the Financial Times today to show that at present the exchange rate is not over-valued. However, this is clearly a moving target, and as rates of inflation in this country continue at a higher level than rates of inflation overseas, sooner or later the question is bound to come: how will the pressures on the exchange rate move and what should be the Government's policy in relation to it?

All these differences of point of view—and they would all describe themselves as, I suppose, monetarists of one kind or another—are, as Terry Bums points out, crucially dependent upon the very obscure long-run properties of the individual equations, models actual or mental that these chaps have of how the economy works. Terry Burns goes to the trouble of formulating these numerically and quantitatively, and testing them. That is a degree of menial labour that neither Peter Jay nor Sam Brittan finds necessary. They are, perhaps, more fundamentalist in their pursuit of this background.

Coming more closely to the Chancellor, what about the Treasury? The Treasury listens to everyone, and it tries to test alternative theories on the evidence; and a great many theories it has had to test. Specifically, it seeks to link a flow of funds model to its national economy model, and it seeks to find relations linking the real and monetary variables in the ways described by the monetarists, be they primitive, insular or international monetarists, as Sam Brittan describes them. The Treasury is not very successful in testing the theories that are put forward, for two reasons. First, the data really are not very helpful; it is not at all clear from experience which of the theories are right; but also, I am afraid that the Treasury has difficulties because it has gone about its model building in a rather ham-fisted way. It convinces no one, least of all the Chancellor.

Skirting around the Chancellor for a moment, there is, of course, the Opposition, whom I describe as Billy Bunter monetarists. They complain that we give too much money to everyone else. They say "Just let me and my friends have the money in the till, cut our taxes, and we shall make gorgeous pigs of ourselves and you will see how the tuck-shop prospers". That is more or less how it comes across in all those dreary weeks in Committee on the Finance Bill, to which we on this side of the House look forward with such mixed feelings.

Mr. David Mitchell

Has the hon. Gentleman considered the enormous benefits to everyone if the tuck-shop booms and a lot of jobs are created?

Dr. Bray

That is a view. No doubt the hon. Gentleman would have the economy as one big tuck-shop. It is a marvellous idea, but not entirely convincing. Any morsel of half-understood economics that helps to fill the belly will do, with not a man in the Shadow Cabinet, I suspect, worried about whether the evangelically fundamentalist monetarism of the right hon. Member for Leeds, North-East (Sir K. Joseph) makes any sense or not.

If that be the attitude of the Opposition, which does not help the Chancellor much, what about the Chancellor himself? He is in an exceedingly dangerous position. He has made promises. All of us on the Government side of the House have made promises in the social contract. We have said "If you keep wages down, we shall keep prices down, and we shall then—and this is the only way in which we can do it—be able to reduce unemployment."

That has been the argument now for three years or longer. Unemployment has gone for a burton. Prices took off again due to the fall in the pound last autumn. People have simply stopped believing the arguments—people in the country: not only people below the Gangway on the Government side of the House but people above the Gangway; and the Chancellor had better take notice.

What, then, is he to do? The argument that Ministers are now putting is "We have to restrain wage increases because if we do not do so all hell will break loose, including a Tory Government" That is a formidably powerful argument, but it is not really an economic argument. The argument "Restrain, or else unnamed disasters will follow" is one in which people begin to question the logic, and they have good cause to do so. One may ask what alternatives there are.

I would want to look more deeply at the foundations. In the United States the monetarist debate went through in one wham, bang, fizz. Within a year of a paper being published by Friedman, a dozen empirical papers, qualifying or refuting what he has said, were published. The reason why the debate drags on so interminably and boringly in this country is, first, the very small number of prime researchers in the field using United Kingdom data and, secondly, the low productivity of applied econometrics in Great Britain. Thirdly, there is the very large bandwagon of camp followers in the City, the House and the Government who simply parrot the prime work, which is of such extremely limited content.

What is much more interesting for United Kingdom economists than reworking the theories in economics on United Kingdom data is, obviously, to work on the frontiers. This is very much more interesting professionally and much more stimulating intellectually. Let me give an example. I have with me three papers. They are highly monetarist papers, two being by Aoki, one to be published shortly in the "Journal of International Economics", and one, developing the field, by Buiter of the London School of Economics, "Optimal foreign exchange market intervention with rational expectations" All those are central to the main international monetary problems. They are at the frontiers of research in economics, and no one from the Treasury or the Bank of England has bothered to go anywhere near Buiter of the London School of Economics to find out what was going on, whereas in Washington there would be a parallel man in the Fed, working the data on a United States model and saying "This is tripe" or "This has implications", and the answer comes so much more decisively.

If the Chancellor wants to get that quick, brisk feedback in the testing of theories he must organise himself to make use of the very much more limited resources that we have in this country. I wrote to The Times on 16th March criticising the Treasury for simply not keeping up to date technically. Last week I am glad to say that there were a dozen or more Treasury economists at the conference in London on "Recent developments in national economic policy formulations." There was a group of Americans, including Professor Klein, economic adviser to President Carter; Gregory Chow, the first member of Friedman's workshop on monetary theory at the University of Chicago, who has latterly done more interesting work; Kendrick, who has done pioneering work on the effects of model uncertainty; and Helliwell, who has been advising the SSRC on the work of the National Institute. Yet there were no Press present, no Conservative Members, although the conference was developing arguments fundamental to the management of the economy. There was an encouraging number of applied economists, and perhaps they learned something of the way we have been lagging behind in technique in the United Kingdom.

How can the Chancellor stimulate better work in the United Kingdom? At the moment he is in an extremely uncertain and dangerous situation, with people trying to blow him in all directions on exchange rates, interest rates and so on. He has to stimulate the work most of all in the Treasury itself. I am afraid that he has come out instead with a whole series of gratuitous swipes at his advisers. It is all very well for me to take swipes at Treasury officials, but when the Chancellor himself does so it does not raise the morale or increase the confidence of the Treasury officials that they are getting across.

I tried to check with the Treasury on whether a report in the Financial Times yesterday had unfairly reported what the Chancellor said, and I was told that the Treasury had no reason to believe that it had. It said: The Chancellor, who is in Washington to attend a meeting of the interim committee of the IMF, paid the Fund a compliment for its réle in last year's negotiations with Britain which resulted in the $3.9 billion loan. He said that the approach suggested by the Fund, and eventually agreed by Britain, 'does appear to be right', even if it was not favoured by 'Treasury slide rules and blueprints'. What does the Chancellor mean about it being right? What evidence is there that the IMF conditions imposed on this country at that time are having any effect on restraining inflation, restoring the balance of payments or encouraging investment in manufacturing industry, or the growth of the economy which are the broad economic objectives of any Government? There are no conceivable reasons the Chancellor can have for saying that the IMF was right. Is he saying technically that the Polak model and the absurd primitive monetarism on which the IMF works is better than the efforts of the Treasury? That is an insult to his own staff in the Treasury. The Chancellor must either have been bootlicking, speaking out of ignorance or from informed belief. I would never accuse my right hon. Friend of bootlicking. I do not believe that he is informed on these matters because he does not read the literature. I sympathise with him on this. I would not rebuke any Chancellor for that, but he should encourage other people to read the literature to help in the advice that they give him. I believe that he is speaking out of ignorance on these matters. I hope that he will find ways to make amends to his own officials.

When I have criticised officials I have taken care to be constructive and make suggestions on how they should buck up their practice. I have made some suggestions, some have been taken up, even though they are always taken up too slowly. I ask Opposition Front Bench spokesman, too, to bear in mind the impact of the remarks that they make on the people who will have to advise them if they find themselves in Government. I hope that Treasury Ministers also will take into account the effects of their remarks and to give some encouragement and guidance about what is useful and helpful to Ministers.

We must be enabled, whether as Back Benchers or Ministers, properly to consider the very difficult problems that we face in the economy. I moved a schedule to the Industry Act 1975 requiring access to the Treasury model and the published forecasts. Last week there was a meeting of the econometric seminar of the Social Science and Research Council, attended by 70 econometricians, all British. They met to consider the best means of access and of using the Treasury model and the econometric programmes needed. It was a quality of effort that the Treasury could not conceivably organise in house and should not be excepted to organise in house under its direct control on work on the national eonomy, whether in the context of the Treasury model or more widely.

The usefulness of all that effort is gravely hampered by the reaction of the Treasury to that schedule. I am sure that the reaction was determined by Ministers, not officials. The forecast that the Treasury is required to publish, instead of providing the base lines from which people can make other forecasts, and test other theories, is so derisory in the scantiness of its coverage that it provides no guide to the real thinking and argument on which the model is based. What are needed are full data and full forecasts made from the model so that people can make alternative assumptions.

When I moved the schedule alarm was expressed that the variables were so sensitive—such as the retail price index—that it would gravely affect inflationary expectations, but all the most sensitive variables are published, and were published at the time of the IMF Letter of Intent. They have been used in debate but it cannot be argued that they have had a devastating effect.

I shall accordingly table an amendment that the Treasury should honour the intention of the original schedule and so enable these able and eager outside workers to assist the Government and the Opposition with the general process of economic debate in this country. They should come clean and make the full material for the use of the Treasury model available so that instead of wasting their time guessing or guesstimating the 3,000 numbers that are needed to run the Treasury model they should be able to stand on the shoulders of the work done in the Treausry and get on with the serious business of testing and developing the model. I hope that the Government and the Opposition, after they have considered this matter further, will see their way to accepting that amendment.

This is important because it underlines the reason why the Chancellor finds himself in such an unsatisfactory and dangerous position at the moment. As Burns points out, the arguments, whether monetarist or non-monetarist, are crucially dependent on the highly uncertain long-term properties of individual equations, particularly narrow features of the models. People can argue that they are not influenced by such absurd things as models and that they have their direct and primitive perceptions of what goes on.

Sam Brittan, having put forward all the different monetarist views of exchange rates, says: Of course in real life there are effects in all directions, and the three circuits of cause and effect are in simultaneous operation. But the type of economics that just says that everything depends on everything else is of little use or interest, and both experience and reason suggest that the third circuit (of money supply on exchange rates, on prices, on wages) is the main one into which the others feed. I say to Sam that that is just not good enough. How big are the effects? What are the lags? What are the uncertainties? What are the implications for policy? It is all very well for him to say that experience and reason give the conclusion. The fact is that those who have looked most closely at this from experience cannot find any such thing.

It follows from my argument that in any particular recommendations to the Chancellor I would want to see a great upgrading of the apparatus. I am a politician and realise that the effects of the analysis would be only to show the very severe limitations of the situation in which the Chancellor is placed. It would not solve his political or economic problems. It would give him a better indication of the constraints upon him. It would also give him a more realistic guide about what to do. Without having that apparatus, my judgment of the direction our policy should take is that it should be nudged towards reflation. Whatever other effects there might be there would be a major capacity effect.

Mr. David Mitchell

Has the hon. Member considered what would be the econometric model of the House of Commons in which all hon. Members took more than half an hour over their speeches?

Dr. Bray

Given the balance of the parties in the Chamber at the moment I believe that we shall see the indulgence of the Deputy Speaker in these exceptional circumstances in which very few Labour Members will be seeking to speak and Conservative Members will be able to speak in succession to one another.

Mr. Deputy Speaker (Sir Myer Galpern)

The hon. Member for Motherwell and Wishaw (Dr. Bray) is under a misapprehension. It could be that the Government Benches will be flooded with Members when it is realised that there is no one on them at the moment waiting to speak, and, therefore, the balance might not work out in the way in which the hon. Member suggests.

Dr. Bray

You are extremely know ledgeable about the behaviour of Scottish Members on Thursday nights, Mr. Deputy Speaker, and you will, therefore, know that it is unlikely that these Benches will be flooded in the way in which you so joyfully anticipate.

Mr. Deputy Speaker

Membership on the Government Benches is not restricted to Scottish Members.

Dr. Bray

Other hon. Members sometimes appear to think so, Mr. Deputy Speaker. However, I accept the wish of other hon. Members to speak and I shall give them every opportunity to do so.

I was attempting to draw conclusions about what the Chancellor could do in the present situation. There is undoubtedly a major deterrent to investment at the moment in that firms have so much idle capacity. What do they need to invest in? With exports, a major factor is that the poor level of investment for many decades past has led to non-competitiveness from other factors as well as the price factor. Also undoubtedly there has been a long-term deterioration in the balance of payments which has resulted from the general failure to modernise.

If we are to get both exports and investment right we have to look at the possibilities of reflation. I do not suggest that it is possible to do very much, but by shifting the emphasis back from inflation to full employment there would be a powerful impact on industry which would not have the effect on confidence that Conservative Members fear. There would be a powerful effect on the possibilities for wage bargaining during the coming year when it would become clear to the unions that there would be some prospect of raising real earnings and real output, and there would certainly be a powerful political effect on Labour Members and Labour supporters in the country.

The implication is quite clearly that the Chancellor would have to adjust to the prospect of continuing higher inflation and concentrate on being able to control it at a higher level rather than looking for a dramatic and quick reduction. This requires us to look at the possible necessity of introducing indexation more widely—for example into mortgage repayments for householders—and all the other issues which have been raised in connection with a high rate of inflation.

I am not saying that there will be a renewed and rapid rate of inflation, but if we prepared sensibly for a period of double-figure inflation rather than banking everything on a return within a year to single-figure inflation the changes are that we would get back to single-figure inflation more quickly and we should get into the economy a degree of growth which would help us to reduce the rate of inflation more rapidly.

The Chancellor and the Prime Minister certainly cannot afford to suggest that there is scope for any kind of wages free-for-all, but to say that there is scope for reflation is not to invite a return to a free-for-all. There will be a need gradually to allow the pound to slide, a need to expect interest rates to rise again, and a need to look for a larger reduction in the standard rate of income tax than 2 per cent. because of the effect of fiscal drag.

We shall break out of the tunnel we are in in some way. It seems to me sensible, therefore, for the Chancellor to consider breaking out in a reasonably planned and carefully engineered way rather than in the clumsy method chosen by Labour in 1969 and by the clumsy attempts of the Conservatives in 1972 and 1973.

7.25 p.m.

Sir John Hall (Wycombe)

I have listened with rapt attention, as I am sure the whole House has done, to the interesting, if rather over-long, address on economic theory by the hon. Member for Motherwell and Wishaw (Dr. Bray). What seemed to come out of it was support for the old saying that if all the economists in the world were laid end to end they would stretch in all directions. I am not sure what else came out of that interesting address. Perhaps I may bring the debate back to the Second Reading of the Finance Bill.

I have sat through the Committee stages of every Finance Bill introduced by the present Chancellor, and I start by expressing my grateful relief that the present Bill is the shortest of the five. It has 50 clauses and nine schedules. Furthermore, I would be the first to acknowledge that this is the first of the five Bills to take account of the need to reduce taxation and to acknowledge that direct taxation is too high. The reductions in direct tax are too small to have any real effect, but at least they provide the illusion of some relief to an aching back, even if that relief is illusory.

It has been estimated by the Chancellor on several occasions that the tax burden at both ends of the tax scale is too high, and it is true that there are a very large number of people on lower income levels who, even after the Bill is enacted, will still be taxed but should not be.

It is also true that a number of people in the upper ranges are bearing too heavy a burden of tax, and several hon. Members have referred to the impact of pre sent taxation on middle and senior management. I make no apology for returning to that now. It is largely on the leadership, energy and enterprise of middle and senior management that our industrial future lies. When middle management gets the sort of rewards already described this afternoon, it is hardly surprising that industry does not get the effort from it that it needs.

We constantly criticise industry and say that the standard of British management is low. In many cases that is true. Industry, however, will not get the kind of men it needs in an undertaking such as British Leyland if those men are paid the poor rewards that are given today, which are so poor that management finds itself falling far behind the rise in the cost of living.

Recently I was talking to constituents of mine who come within the middle management range and are on incomes of between £5,000 and £7,000 a year. Most of them are commuters. Let us consider the effects of the Bill on their standards of living. The relief given in the Bill is completely swallowed up by all the other imposts that these people have to bear.

Consider a man in my constituency who has had to face three or four swingeing increases in rail fares. He also has to meet a 15 per cent. increase in rates—a fairly low figure compared with the rest of the country. He will have to pay additional tax arising from the new assessment for the private use of his company car—that came into operation on 6th April. Taking all these imposts and others into account, not only is he worse off than he was a year ago but he is considerably worse off than he was three years ago when the present Government came into office.

The Finance Bill is regarded as the legislative means by which the Government act to strengthen the national economy. Hon. Members on both sides will agree that it is essential to encourage initiative, enterprise and effort of individual people. Decisions are taken by individuals, not soulless companies. It is people who decide whether they will export, invest or take risks, and it is people whom we should be encouraging. But there is nothing in the Bill to make people feel, whether they are working in industry or providing capital through savings, that they will get worthwhile rewards for the effort they put in.

In an excellent maiden speech, my hon. Friend the Member for Birmingham, Stechford (Mr. MacKay) said that the atmosphere today, resulting from a combination of pay restrictions and penal taxation was causing depression and increasing dismay. Even this Bill's greatest friends cannot claim that it does much to alter that situation.

The Chief Secretary in his opening speech referred at some length to the pay policy and the necessity for stage 3. This was taken up by various hon. Members on both sides. I have always been opposed to pay restrictions and, indeed, to any pay and prices policy, even when it was introduced in a much more modified form by the previous Con- servative Administration. Any attempt to restrict pay increases and any attempt by the Government, through the trade unions, to regulate the amount by which pay can increase produces distortions and anomalies and places increasing stress on industry. This has been the experience of the last two or three years. It becomes increasingly difficult to break out of that situation without stimulating an upsurge of pent-up demands.

In a country with as many trade unions as we have—we are suffering from being the pioneers of the trade union movement—it is impossible to maintain a policy of pay restriction for very long. There may be circumstances from time to time when a pay and prices freeze is essential for a very short period. If that arises, it should be a freeze across the board without exceptions and only for a short period. If it is continued over a long period it brings increasing trouble, and rather than restricting the growth of wages it tends to increase it.

When the Government give a target or a maximum pay rise, that maximum becomes the minimum for every wage earner. All too frequently many workers who would have been prepared to settle for a much lower figure than the Government's target will demand the maximum available. That is only human nature. The same thing happened with rationing in the war and shortly afterwards. Even those who did not want the commodities insisted on taking up their entitlement simply because they felt it was their entitlement. One sees the same reaction when a maximum figure is placed on pay demands and wage increases.

Successive policies restricting pay increases and rewards by all Governments have produced a low-wage, low-productivity economy in this country. We should go all out for increasing national wealth and not restricting the rewards that can be gained by those who contribute to the development of our national wealth.

I have some sympathy with the hon. Member for Cornwall, North (Mr. Pardoe) in his proposals to reward effort by sharing profits. He suggested, for example, that a productivity deal should be based on payments after the productivity had been obtained. Then there is a system by which profits could be distributed in one form or another among those who contribute to making them. There are various methods by which the work force at all levels could at the end of the trading period share in the profits they have helped to make.

In France there is legislation whereby firms set aside some part of their profits, and at the end of the trading period this goes to employees for improving their social conditions and amenities. Equally, it could be paid in the form of an additional wage or reward, in some cases without being subjected to taxation.

Profit-sharing schemes are in existence in this country whereby at the end of the period the profit due to the workers is calculated and translated into shareholdings which are issued in proportion to the wages earned. This share bonus is paid with the deduction of only limited tax or none at all. There is a case for introducing profit-sharing schemes of that kind. We should concentrate on giving reward for effort. This would produce results, as workers could share and could be seen to share in the successes of the enterprises with which they were personally concerned.

There is nothing in the Bill to encourage investment. Over the past 10 years, and particularly the past three years, investment income has risen far less than the cost of living. That trend has been aggravated by the present dividend restriction policy. One has to have almost all one's trading operations overseas before one is allowed by the Government to increase dividends, or one has to negotiate a merger that will persuade the Government to allow an increase. Apart from the adverse effect that the restrictions have on pension funds, which hits those who were hoping to get good pensions, it also penalises those who are living largely on invested savings. To that extent I welcome the increase of the investment income surcharge exemption by £500. If it were to rise to the real value of £2,000, which it was when it was originally established by Lord Barber, it would have to rise to about £4,000.

The investment surcharge is grossly unfair discrimination between one class of taxpayer and another. Arguments about this have been rehearsed many times before and have been rehearsed again today. I think that there is abso- lutely no justification whatever for charging 10 to 15 per cent. on incomes which are well below average industrial wages simply because they derive from savings. There is a savage contrast here between the treatment of those who save for their retirement out of their taxed income and who are then subjected to the surcharge on investment income, which is being outpaced all the time by the growth in the cost of living, and those who enjoy indexed pensions, who pay normal tax on them and whose pensions are growing at a much faster rate than the cost of living. There is grave discrimination between the treatment of these two classes of pensioners.

There is nothing in the Bill to encourage savings, and I very much regret that. The Chancellor has not raised the limits on holdings of index-linked savings, and particularly indexed retirement bonds, which is one of the few ways in which the modest saver can safeguard the value of his savings in that he can retain the value of his original savings. What equity is available where that can be done? An extremely high rate of interest is needed after tax if the saver is to maintain the capital value of his total savings. Therefore, I hope that even now the Chancellor may consider increasing the limit on the savings bonds that can be held by any one person.

I also regret the persistent refusal to index capital gains tax. It is undeniable that, with the rate of inflation of recent years, it is a tax on capital. It can be nothing else. It is more penal that the wealth tax because it hits everyone, from the smallest to the largest investor, whereas the proposal for the wealth tax was, I understand, that a large sum of capital would be exempted and would not come within the purview of the tax.

The effect of the capital gains tax and capital transfer tax combined will be devastating to individuals over the years and damaging to the national economy. I suppose that it is too much to expect a Socialist Chancellor to reform the capital gains tax, which is destroying capital by stealth, and that we shall have to look to the next Tory Chancellor to do it.

Talking about doing things by stealth, I was interested to see the way in which metric measurement is introduced in Clause 7. The history of the switch to metric measurement in this country has been one of doing it gradually, bit by bit, in a way which it is hoped would escape the notice of the people as a whole. The Government have been rather dishonest in the way in which they have tried to introduce metric measurement over recent years.

I shall not deal with the petrol tax, which has already been exhaustively discussed and will, no doubt, be exhaustively as well as exhaustingly discussed in Committee.

I want to refer to Clause 25 and the improvements in the benefits which can accrue to those who are self-employed. The trouble about the improvements granted by the clause is that they seem to me to benefit only the well-off. Those who are earning less than £20,000 will not benefit to the maximum extent possible. The Chancellor might have considered allowing everybody to put aside the same amount towards his or her annuity—£3,000 under the clause—instead of restricting it by imposing a limit of 15 per cent. of total income for the year. I hope that he will give some thought to that and even perhaps move an amendment in Committee.

To sum up the Bill, it can be said to show a glimmer of movement in the right direction in so far as it acknowledges for the first time since we have had the present Chancellor that there must be a switch from direct to indirect taxation. For that reason, I am not as opposed to the increased petrol tax as are some other hon. Members on both sides of the House. One cannot argue too much against the impact of direct taxation, say that we must switch to indirect taxation and then immediately protest if an indirect tax is raised. Therefore, I do not altogether oppose the increased petrol tax. I am glad to see the Chancellor moving in the direction of a switch from direct to indirect taxation. It is far better to tax people in such a way that at least they have a choice, so that they may decide whether to pay the tax when they buy something that they want or to save their money. The income tax system leaves one no choice.

Though I welcome the Bill for its movement in the direction of indirect rather than direct taxes, it will do nothing to stimulate industry and nothing to get it moving in the direction the Government wish, because it does little to stimulate the individual and make him feel that he will be properly rewarded for the effort he is asked to make.

7.44 p.m.

Mr. William Hamilton (Fife, Central)

I entirely agree with what the hon. Member for Wycombe (Sir J. Hall) said about the switch from direct to indirect taxation. It used to be a firmly-held dogma of my party that direct taxation was preferable to indirect taxation, but I think that the Labour movement is moving towards the idea that such a switch is desirable as long as the indirect taxes are kept from essentials. That is the political nub of the problem.

I want to make a speech largely concerned with a hobby-horse of mine. Hon. Members will not be surprised when I outline certain objections that I have to what the Government have done in the past. I hope that my hon. Friend the Member for Motherwell and Wishaw (Dr. Bray) will excuse me if I do not engage in discussion of the kind of theories of which he spoke. I am sure that his constituents will avidly read reports of his speech, but I guess that it will not cut much ice with the hardy and horny-handed men in the TUC with whom the Government must come to some agreement in the next few months.

In that context, I want to re-emphasise what my hon. Friend the Member for Stoke-on-Trent, South (Mr. Ashley) said. I have rarely seen my hon. Friend in such an angry mood, and I think that he had good cause to be angry. Whether or not it is the case, there is a commonly-held belief that, at a time when they should be bending over backwards to protect the weak and the helpless, the Government are not doing enough in that direction. Indeed, the reverse seems to be the case. There is a disturbing amount of evidence that we are not doing too well in that regard.

By that criterion, it is true that two years of strict incomes policy have tended to give the lower-paid a better deal than they would have got under free collective bargaining. It is significant that the unions basically representing the lower-paid are in favour of a third year and that the unions that are not in favour are those with muscle, generally representing higher-paid workers.

The very success of the policy in the first two years has created or accentuated the differentials problem. This makes a third year that much more difficult to obtain. Even so, there is no doubt that the direct tax burden today weighs proportionately far more heavily on the ordinary working man and woman than on the richer sections of the community. Many statistics can be obtained to prove that. One sees it when one goes round one's constituency every weekend. One meets people taking home £20 a week who have had tax of perhaps £10 a week taken from them, which is an enormous burden. When I was in a working-class home in Durham in the 1920s and 1930s, one thing that was never talked about was income tax. We did not know what it was. Now, however, it is the talk in every home, because it is an increasingly burdensome problem that ordinary working people should not be asked to bear.

In addition, it is the very same people who are suffering most from the cuts in public expenditure, whether in education, health or housing. It is in that context that I want to raise the point to which I referred earlier. My right hon. Friend the Chief Secretary and I served on the Select Committee dealing with the Civil List and Royal income and expenditure a few years ago. Then a Back Bench Member, my right hon. Friend adopted in the Committee a very breezy and abrasive approach to the claims put forward by the Royal Family. I am now bound to tell him and the Treasury Bench in general that he seems to reserve that abrasiveness and his rough-tongued Treasury posture for local councils, education authorities, health boards and rough diamonds such as Joe Gormley, Jack Jones and Len Murray.

Treasury Ministers say to such people that they want them to curb their demands for another year and that the golden decade will then begin to dawn. Ministers warn that if this is not done all will be lost. That may well be sound advice, and I hope that it may eventually be accepted. It is simply a pity that the same advice was evidently not given when the shop stewards from Buckingham Palace knocked on the Treasury doors in 1976.

During the last few weeks and months I have co-operated, loyal party supporter that I am, in tabling inspired Questions for Treasury Ministers. However, my Question of 3rd February was inspired not by the Treasury but by my own suspicious curiosity in these matters. I asked and sought to elicit information about what had happened to the Royal annuities since the Civil List Act was passed in 1972. I elicited information which might otherwise have been suppressed and which might not have been known until it was elicited in the form of a Written Answer.

I want to put some of the facts on record. The Queen Mother's income was increased from £95,000 a year in 1975 to £140,000 in 1976—an increase of about 50 per cent. in one year, and most of that is tax-free. We talk about the burden of taxation, but does it not apply to the people to whom I now refer? Prince Philip's annuity was increased from £65,000 to £85,000 in one year—a one-third increase. Princess Anne's annuity was increased from £35,000 to £45,000, from £700 a week to £900 a week, while Princess Margaret's went up from £35,000 to £50,000. The Duke of Gloucester was receiving £5,000 a year in 1974, £15,000 in 1975 and £28,000 in 1976—all this under a Labour Government. The Duke of Kent was receiving £35,000 a year in 1975, and that was raised to £45,000 in 1976. Princess Alexandra was receiving £22,000 in 1974 and £30,000 in 1975, while in 1976 it was £40,000. As I have said, all these annuities are tax-free.

I tried tirelessly, week after week, to secure an Adjournment debate on these matters but I was eventually worn down by those in charge and, therefore, had to seek other means of raising the issue. Meanwhile I asked certain Questions of Ministers. On 24th February I asked the Secretary of State for Employment whether he was: satisfied that all pay settlements made in the last 12 months conform with the terms of official incomes policy. The answer was: My Department maintains comprehensive monitoring only of major settlements. In the last 12 months, all of these have been entirely in conformity with incomes policy and I have every reason to think that the TUC guidelines have been generally observed"—[Official Report, 24th February, 1976; Vol. 926, c. 672–3.] On 1st March I asked a more specific Question of the Chancellor of the Exchequer: whether the increase in the Royal annuities made in 1976 conformed with present incomes policy. His answer was "Yes". Apparently, all the figures that I have produced and made public satisfied the Chancellor that they set an example to the Transport and General Workers Union, to the shop stewards at Heathrow and at British Leyland, and to those up and down the country in coal mines and factories.

I now wish to ask the Treasury some specific questions, and I hope that they will not be treated lightly. From where did the initiative for those increases come? Did the Buckingham Palace bargainers knock at the Treasury's door first or did the Chancellor, in a fit of compassion for the new poor, himself take the plunge in pleading that these crumbs from the Treasury should be accepted? While the Government behave in such a sycophantic and insentitive way in these matters and in the taxation of Royal wealth, secrecy about their shareholdings and so on, they cannot expect too much enthusiastic support from hon. Members such as myself in obtaining a further stage of the incomes policy.

As I have said, it is probably desirable that the further stage should be obtained, but it is going to be hard to achieve any firm and specific commitments from the TUC and, more vitally, from the shop floor. Anything that falls short of being specific and firm will probably be the worst of all possible outcomes of the current talks. The Prime Minister was right in his speech at the USDAW conference when he said that if we do not obtain something firm and specific we shall have failed.

I must enter this caveat. It is a highly dangerous and undesirable constitutional innovation for the Chancellor to appear to be dancing the tune called by some outside body or bodies, whether the CBI, the TUC, the Labour Party National Executive or the Liberal Party. The sovereignty of Parliament is limited in the sense that the Government must be sensitive and responsive to representations made by outside bodies, otherwise the Government will lapse into some kind of dictatorship.

I fear that the process may have been allowed to go too far the other way when it seems that Parliament and the Government are being swept along by outside forces and by sectional interests that may not be as powerful or as representative of the people as they sometimes claim to be. It is highly undesirable for a Chancellor to use his Budget as a carrot or bargaining counter and to be influenced more by forces outside the House than by those inside it. The Chancellor must use his own judgment and make his own Budget decisions on the merits of the case and the facts as he sees them and then take the consequences.

In conclusion, I wish to refer to one or two specific matters in the Finance Bill. The Bill has not been referred to as much as it might have been in the debate. That is understandable, because we use this occasion for a broad debate on the economic prospects of the nation, but there are one or two specific questions that are likely to cause some controversy, and possibly some defeats for the Government, during the passage of the Bill. I refer specifically to petrol tax.

It is undeniable that we must take additional measures to conserve energy, but I do not accept the case that has been put forward tonight. It is easy to be against any tax, but those who oppose it must put forward alternative ways of finding revenue or of cutting public expenditure by the same amount. If a choice has to be made between 5½p on a gallon of petrol and 3p on a pint of beer, I guess that my constituents would probably opt for the tax on petrol. I may be wrong, but I mention that to demonstrate that the alternatives are not as easy as some people may suggest.

In general, the Government may be getting on to the right road, but there is much that they could do to satisfy hon. Members such as my hon. Friend the Member for Stoke-on-Trent, South and me and to give us more evidence than we have had in the past two or three years that they are doing everything practicable to help those who cannot help themselves while penalising those at the other end of the scale who can easily bear much greater burdens than they have borne hitherto.

8.1 p.m.

Mr. David Mitchell (Basingstoke)

I resent the carping of the hon. Member for Fife, Central (Mr. Hamilton) at the Royal Family and the cost of the Civil List. The Royal Family give employment to many more people than the hon. Gentleman will ever employ, and the foreign exchange earnings from the attraction of tourism to this country arising from the Royal Family's activities are greater in one year than will be the hon. Gentleman's contribution to our economy during his whole life.

Mr. William Hamilton

That should get the hon. Gentleman an honour.

Mr. Mitchell

In his Budget speech last year the Chancellor of the Exchequer promised that inflation would fall, that output and investment would rise, that unemployment would fall and that we were on our way to an economic miracle. This year he opened the cupboard and found the same speech again. He blew off the dust and we heard all the same promises, with the exception of the economic miracle. I am not quite sure where that has got to. As so often happens with Labour Governments, the sad and unhappy reality is that living standards have fallen and unemployment has continued to rise. The judgment on this year's Budget is that it is a Budget of lost opportunities—one might almost say, the Budget that never was.

I should like to look at the Budget from the point of view of smaller businesses. It is beginning to be recognised what a great importance these businesses have for the future of our economy, particularly in job creation.

Unemployment is now structurally different from what it has been for a very long time. We can see that in the fact that British industry is now turning out no more than it was producing during the three-day week. There is vast under-utilised capacity throughout our manufacturing and commercial life. Demand can rise considerably before extra labour has to be taken on.

The one sector of the economy in which this is not true is the small business sector, because that has never been able to afford to carry any surplus fat. In the growth of small businesses and the starting of new businesses we have real prospects for dealing with the problem of unemployment in a far larger proportion than hon. Members have yet realised. I was delighted that my hon. Friend the Member for Birmingham, Stechford (Mr. MacKay) chose to make this the theme of his maiden speech and put it so well.

There are three things from which the small business sector suffers—an excess of Government, a lack of finance to enable it to keep pace with inflation, and a lack of incentive. Taken together, they have resulted in the highest level of bankruptcies ever recorded in this sector, not only since the war but including the depths of the depression, and this has played its part throughout industry with a resultant falling off of jobs, and a doubling of unemployment.

I should like to spend some time looking at the lost opportunities in the Budget. The first concerns the excess of Government. The Bill gives the Government an opportunity to do something helpful and effective, namely, to simplify VAT. I shall recommend four simplifications, and I hope that the Treasury will introduce amendments in Committee to give effect to them.

First, the threshold has remained at £5,000 since 1972. In real terms, this sum was £8,540 last year and must be about £10,000 this year. If the Government raise the threshold to £10,000 about 250,000 small businesses, traders and self-employed people would be taken out of the VAT net. This would result in a substantial reduction not only of the time of the Customs and Excise staff but, more important, of the time of these businessmen in dealing with VAT returns and all the other paraphernalia that goes with them when they could be getting on with running their businesses.

Secondly, we should return to a single rate of VAT. It may be that the conflict the Government face in connection with petrol tax and its effect on rural areas may result in their accepting my view.

Thirdly, the Government should also take action over bad debts, because there is a legal loophole being used by many firms. That should be brought into operation for all companies. The firms are simply issuing credit notes cancelling sales in cases of bad debts. In that way they escape having to pay VAT on the bad debts. That system should be introduced formally by the Treasury and made subject to proper investigation.

Fourth, I ask why the Treasury does not accept that it could move to a system under which VAT payments were made on an estimated basis every quarter with accountants providing a full and proper reconciliation of the amount due to the Treasury at the end of the year when the companies' accounts are made up. One way of doing this would be to convert the 8 per cent. rate of VAT into a percentage of each company's turnover. It may be 1.95 per cent. or 2 per cent. The Treasury ought to allow companies to pay that percentage each quarter. That is the one figure that every company knows, and such a scheme would be simple and straightforward. Little work would be involved and it would enable the burden on the small business sector to be dramatically reduced.

Another lost opportunity in the Budget was the failure to cut corporation tax. With inflation, businesses are cash hungry; they need more cash to do the same volume of business. The Government's answer is stock relief, but that is only part of the solution. It is no relief for the other requirements for working capital—for example, debtors, the increased cost of national insurance and the cost of complying with endless regulations.

In any case, stock relief applies only to the companies that can afford to lay out the money to buy extra stock. If a company finds itself in difficulty it has to pay back the relief, as it is only a deferred liability. In these circumstances stock relief is not as effective in dealing with the problems of inflation as a reduction in corporation tax.

Stock relief helps investment in stock, but we need quality of investment. With great respect to the Chancellor, increasing stock is not the best form of investment, and is not the best quality of investment advice. At present the Chancellor is giving a great incentive to the least desirable form of investment.

If we compare the United Kingdom's economy with other economies we find that we carry more stock per volume of turnover than most other countries. That is not good. I am sure that the Treasury would accept that it is a bad thing in many ways, and that we should seek another way of dealing with the problem. I believe that the right approach is to reduce corporation tax so as not to reduce the distortion that comes from stock relief.

If the Chancellor is to continue stock relief I hope that he will do something to correct the unfairness for the self-employed and the partnership, where the profits taken as salary have to be added back before arriving at a 15 per cent. reduction in relation to the stock relief.

Like all my hon. Friends, I welcome the increase in the small business corporation tax definition for companies below £40,000. I draw the attention of the House to the fact that, generous though it may sound, it has not kept pace with inflation. Since 1974 the relief has increased by 60 per cent. but inflation has increased by 77 per cent.

The logic of the situation is that the Government should recognise that the small-firm rate of corporation tax was introduced because such companies are much more reliant than others on retained profits for the financing or expansion of the business. The logic is to go to the point at which companies are large enough to be able to obtain significant outside help and are not reliant upon retained profits. At present that is a level of £100,000 or more. A business of that size can talk on equal terms with merchant banks or move towards a flotation. Bearing in mind the need of small firms to retain their profits, logic demands that the figure is taken from £40,000 to a much higher level.

By way of light relief, I welcome the self-employment retirement annuity contribution being increased to £3,000. I am grateful for this movement because it is the effect of an amendment that I introduced last year. Inflation has already made this movement out of date. In politics gratitude has been described as the anticipation of further favours to come. Further favours are very much needed by the self-employed, and I hope that we shall see a move in that direction.

There is to be provision of £100 million for inner cities over two years. The Chancellor spoke of the Government consulting local authorities about the allocation and programming of this expenditure. Will the Minister give an assurance that it will be used not for local authority direct labour organisations but to help the construction industry, especially the smaller firms within the industry? If that is not the position, it will have been almost a deception for the Chancellor to have spoken about aid being given to the construction industry.

I turn to the tragedy of unemployment. There is nothing that destroys a man's self respect more than enforced idleness. This is not merely a case of lost opportunity on the part of the Chancellor. No opportunity has been missed by the Government to strangle the creation of new businesses and the expansion of small firms. Such undertakings need less overheads of Government. Above all, they need incentives. The economy needs the harnessing of their motivation.

As each month goes by, and the Government make business more difficult and create greater disincentives, the level of incentives needed to revive the economy in the small business sector becomes greater and greater. The employment protection legislation, which makes people wary of taking on extra labour, additional redundancy payments liability, price controls, the promise of a wealth tax, capital gains tax and capital transfer tax are all adding to the disincentives to start a business or to take on more staff.

As the disincentive effects of the Government's other activities mount, so it is necessary for the Treasury to give a greater financial incentive to overcome them so that we may see the real revival of the economy that we need. The growing effect of the present dismotivation is disastrous.

The Government want employment—I believe that—but they do not want employers. The Government want investment—I believe that—but they do not want investors. The Government want a dynamic economy, but they have destroyed incentives. That is a circle that cannot be squared.

8.17 p.m.

Mr. Michael Spicer (Worcestershire, South)

I begin by referring to the speech or address by the hon. Member for Motherwell and Wishaw (Dr. Bray). In many ways I have a great deal of respect and admiration for the hon. Gentleman. I hope that he will not take it amiss when I say that when listening to his addresses I always feel that I should be paying a heavy fee for doing so or should not do so at all.

I was horrified when the hon. Gentleman promised that in Committee he would introduce an amendment to put further bureaucratic burdens on the Treasury in addition to those he has already put upon it in the schedules to the Industry Act 1975, which he was extremely effective in introducing and forcing the Government to accept. Those schedules force the Treasury to produce their economic models and to discuss the workings of those models. Many of us felt that the facts, figures and calculations would be useless by themselves. That has been proved to be the case. They are useless unless we can get an insight into the assumptions being made behind them. That is now the hon. Gentleman's complaint.

If we are to place further burdens on the Treasury and employ further officials to carry out the burdens, we are treading into a quagmire. In order to know what assumptions are being made, it will be necessary to allow everyone, including one's clients, to sit in on all the Treasury debates. There is no other way of knowing the nature of the assumptions that are being made. It may be that one day we will come round to the Carter Cabinet by television, but until we reach that stage the most that we can expect from the Government is for them to give us a clear view of their basic assumptions about the future in general terms. Will those terms be acceptable to those who attended the seminar of 70 econometricians? A number of us felt that the present position would arise when the hon Gentleman introduced the schedules. The penalties that we are paying for the Schedules are now coming to light.

Dr. Bray

Before the hon. Gentleman embarked on this path, he should have declared his financial interest as a proprietor of a firm called Economic Models Limited, which is a direct competitor of the surveys available from the Treasury. Although this lends authority of a sort to what the hon. Gentleman has to say, it also imparts a definite interest of which hon. Members on both sides of the House should be aware.

Mr. Spicer

I apologise for not declaring that interest. I do not declare it every time because it is clearly written in the appropriate annals and there is nothing to discuss on the matter. In my judgment it is not instrumental—at least, not significantly so. I do not see the Treasury model to be any kind of competitor to another sort of service. There was nothing behind what I said that was significant in that respect. The hon. Gentleman is doing himself less than justice by raising that point. All I was doing was taking his argument on its merits—which I think are few—and saying that to impose yet further, totally superficial burdens upon the Treasury would not achieve anything. I do not see the jump from that to the solution of our economic problems.

Dr. Bray

I did not wish in any way to be offensive, but if the hon. Member looks in the Register of Members' Interests he will see that registration there does not exempt a Member from declaring his interest in the course of debate. Secondly, the hon. Member will recall that we have discussed the impact of the publication of full Treasury forecasts on private forecasting services. I have personally assured him that in my view it would have a stimulating effect on business. Furthermore, in terms of the added bureaucracy involved, I have shown that if my suggestions were taken up there would be less work involved than is at present carried out in the Treasury. All that I want is the Simple, bald computer print-out from the Treasury, made available at as exorbitant a fee as is required. That would involve no further work and would bring extra revenue for the Treasury.

Mr. Spicer

I totally disagree that that would not impose extra burdens. The competitive point has nothing to do with this at all. That was not the purpose of my raising this issue. I do not see it as competition. I was simply concerned that the hon. Member, who knows a lot about these things, should be leading the House and perhaps the Government down a totally false path. We shall never be able to establish anything as theoretically perfect as the hon. Member wishes or pretends can be established.

I agreed with one thing that the hon. Member said—namely, that in order to form a view about the Bill it is necessary to form a view about how the economy is going. On a medium-term view of the economy, in my view it is getting progressively worse. On a short-term view, the dilemmas which the Government find facing them—to a large extent they are of their own making are considerable.

On the one hand—this seems to have escaped the attention of a number of Labour Members—inflation is still running at 16 per cent. There is talk of its coming down, but no one is saying that it will come down below 10 per cent. in the foreseeable future. At the same time, unemployment seems to be rising. There are a number of fears that the economy is running into at least a temporary recession. The hon. Member for Motherwell and Wishaw said that this might be the case. There is certainly a great deal of over-capacity and a high level of unemployment.

Against all this, it is said that oil is coming along. It is true that there will be no balance of payments problem in the next five years beginning from next year. It is possible, contrary to general belief, that sterling, far from sliding if it is left to itself, will begin to rise. Against that and the Government's immediate hopes in terms of electoral prospects, there is one fundamental trend in the world today. This can be seen if one looks particularly at Japan. It is also occurring in the United States and to a lesser extent in Germany. I refer to something which can be classified only as a totally new Industrial Revolution. I do not think it has yet been recognised as such.

We are talking now of countries whose industries are contemplating productivity increases which are measured not in terms of machines using three people instead of five but in terms of the total abolition of people in factories. If we take the example of Hitachi outside Tokyo, or certain parts of the Japanese shipbuilding industry, we can see this trend, involving the replacement of production lines by computer processes.

This process gives rise to horrific questions for this country in the medium term. First there is the worrying, even terrifying, question of whether we shall be able to compete at all with countries such as Japan which are about to register not simply the sort of productivity increases we have seen and have come to respect and fear in the past 10 years but massive new increases in productivity. There is, first, the trade threat which is posed to this country by such a development. The second question is, what can we do about this? If we engaged, as we might, in a productivity race, we should be faced with massive redundancy and unemployment problems. The dilemma is facing this country in the medium term because we have acted so late and other countries have got so far ahead in the race. We have grave problems.

It is in that context that we must look at the Bill and ask to what extent it offers any hope in the medium term. If we look at it in any kind of long-term context, it can be seen to offer little hope. It is true that it is a holding operation. Some have even called it a feeble move in the right direction. Most Opposition Members would accept that we should move from a system of excessive direct taxation to one more inclined towards indirect taxation. Even so, a number of hon. Members have pointed out that any move towards more indirect taxation should have been fairer than that which is proposed.

The move that we propose, increasing VAT from 8 per cent. to 10 per cent., would have been much fairer. The arguments which the Government have raised for the petrol tax in terms of indexation—that seemed to be the main argument of the Chief Secretary—would ring more true if they applied the same indexation arguments to allowances and the other side of the tax coin.

The question goes deeper than that. It seems that the country is faced with a choice. One option is to go the Socialist way. There is now a clearly-defined Socialist way which would involve import controls in particular and certainly internal controls.

Returning for a moment to the speech of my right hon. Friend the Member for Chipping Barnet (Mr. Maudling), it seemed highly significant that when he was extolling the virtues, as I understood it, of a prices and incomes policy, the hon. Member for Birmingham, Hands-worth (Mr. Lee) should intervene and quite legitimately point out that if we were to go that far we might as well go the whole hog and control everything. That seems to be one alternative for this country. But we have to point out that if we start along the lines of an incomes control policy it starts voluntarily but it cannot exist that way. Eventually, it has to be compelled in some form or another. We have to have a prices policy, a rents policy and control of labour policy, because it does not work without those either. As was pointed out, quite rightly, to my right hon. Friend the Member for Chipping Barnet, we have to go the whole hog to controls right the way across the board.

The only other alternative is to do what was suggested so eloquently by my hon. Friends the Members for Wycombe (Sir J. Hall) and for Basingstoke (Mr. Mitchell) and others—to start to make the free enterprise system work. That, above all in the present context, means providing the right kind of circumstances in which it is worth investing, so that small and large businesses invest and increase productivity.

I accept that there are areas of overcapacity at present. That makes it even more absurd to have a control policy by which, in many cases we pump resources artificially, compulsorily or without any reference to the market place into areas where there is no demand for the goods produced, or at least a less than adequate demand. The market place has to be the means by which these matters are sorted out. The alternative is to go the whole hog towards controls. What we cannot do is have a kind of half-way attempt at both. This is one course which the country will no longer bear. We have tried it for 25 years. It will not work.

If we are to have a Bill which is to be motivated by Conservative principles, let us have a Conservative Government to put it into practice. The hon. Member for Stoke-on-Trent, South (Mr. Ashley) made the point that only a Socialist Government would introduce an incomes policy. Perhaps that is true. I do not know. But only a Conservative Government can introduce a Conservative Budget, which this Bill is on the lines of tentatively doing. We must have a Conservative Budget with credibility. What the country needs is not this Bill but a change of Government and a total change of direction.

8.31 p.m.

Mr. Robert Cooke (Bristol, West)

The preservation of an ever more accessible British national heritage of fine architecture, works of art, gardens and landscape has the interest and support of hon. Members of all parties. Throughout the long debates on capital transfer tax and wealth tax a growing understanding of the problems and possibilities of this heritage has emerged.

The Government have accepted that historic houses of outstanding national importance, their historically related contents and their amenity lands, can be exempted from CTT, conditional upon public access. A number of cases have already been processed and agreed. Every case requires detailed Treasury approval. The most stringent conditions have been laid down and will be enforced on pain of loss of exemption in the event of a breach of the conditions. This has all been designed to enable a growing number of owners to hold on to their houses and open them for the public benefit.

How then, the House may ask, can a disaster like Mentmore happen? The answer is not simply that Mentmore was caught by the old estate duty. Even if it had been caught under CTT, the owner of that house would have been faced with a massive capital tax demand upon the whole of his estate. Although he would have been able to have claimed exemption in exchange for considerable public access to Mentmore and its collections, he would still have had to meet the heavy charge on the rest of his estates. How could he have paid the tax? He could have sold much of the estate, leaving Mentmore unsupported and a chronic personal liability. On economic grounds, he would have been more likely to have sold some or all of the valuable contents, thus dispersing a valuable national asset regarded by many as a priceless part of our heritage.

This is the choice that will face the owner of every historic house of national importance under CTT. Unless we protect the private capital resources needed to produce income to achieve the public purpose of keeping an accessible heritage intact, we shall have to our shame an ever-quickening succession of Mentmore situations involving places of far greater national significance.

Those of us who saw this coming implored the Government to act in time. Last year, they introduced a new clause on maintenance funds for historic houses, but what emerged was a sinking fund. An irrevocable gift to a trust had to be made. The whole capital had to be burned up within 80 years because of the rule against perpetuities, and the income was to be taxed at the donor's top rate.

The Government themselves admitted—the Chief Secretary came to a great conference at the Festival Hall and admitted it—that few can take advantage of that proposal. The right hon. Gentleman said that we must wait and see what happens.

We have got to do better than that. How can we persuade those who still have them to designate capital resources to produce income to support an accessible heritage? Surely, we can do it by telling them that, so long as the designated assets are set aside to produce income for this public purpose, they will not be attacked by capital taxes. If, at the end of the day, they cannot continue with their obligations under the exemption the assets would then attract such capital taxes as Parliament decreed.

Treasury supervision of such a scheme for designated maintenance funds follows quite naturally from the work already being done for buildings, their contents and their settings. The Historic Buildings Council, perhaps amplified into a heritage commission, could supply all the expert advice which any Government could possibly wish for.

This is the key to the whole problem. It is the only way to avoid either the continuing sack of our remaining houses, leaving lifeless empty shells, or massive public expenditure on acquisition and upkeep.

I do not need to explain to the House why the National Trust is not the answer, just as even a rejuvenated, reinvigorated, reconstructed—or whatever—Land Fund is not the answer. Nor can the answer come from some new, publicly subscribed heritage fund, which would simply debilitate all other publicly subscribed funds.

I am supported here by the Revenue's paper on the wealth tax. The official view was: The Government recognise that private owners can look after the architectural heritage more cheaply and more efficiently than the State or institutions such as the National Trust. There is a massive volume of evidence, which poured from a whole procession of distinguished witnesses as I sat in the Chair for the heritage sessions of the Select Committee on the Wealth Tax, all supporting that view. All the national amenity societies, which have approached so many Members of Parliament and for which I speak on this occasion, support that view. It is a cause widely supported both across the House and nationwide, and all support the view which I have now expressed.

We in the Opposition are committed to a practical and lasting solution to the problem. My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), who is to wind up for our side, will endorse that view. The Government, too, I believe, share our aim. They have it in their power to act now. If they cannot table a new clause, perhaps they will support one if we table it in Committee.

To sum up, we seek to preserve and enhance an ever more accessible living and lively heritage of landscape, buildings and works of art. We intend to halt the decay, destruction and dispersal caused by the threat of capital taxation. We aim to restore confidence and to pro vide a safe and settled future for our heritage.

8.38 p.m.

Mr. Ronald Atkins (Preston, North)

I noted that the hon. Member for Worcestershire, South (Mr. Spicer) referred to import controls as a Socialist measure. I think that they might be regarded as measures of common sense. They are not particularly Socialist. Their advocacy can be found in the Lombard column of the Financial Times, occasionally even from the CBI, and from the Institute of Applied Economics in Cambridge. In fact, import controls are applied by almost every country in the world, most of them with what can be described as conservative Governments. It is merely a measure which we might need in order to survive.

One of our problems has been the large volume of manufactured goods still coming into this country. There have already been references to Japan. Japan, among other countries, has been using controls of one kind or another for years. Although doing it covertly, the Japanese are none the less doing it. I do not mind if we use the same sort of controls; we certainly should not be the odd man out in the world, and I feel that such controls may be necessary in future, especially if we try some spending to tackle the problem of unemployment.

Let it be remembered that unemployment itself is a factor in inflation nowadays, because there is a large body of consumers who are not producers. That is a point which has been referred to by the Institute of Applied Economics in Cambridge University.

I briefly want to refer to taxation on road users. The outcry over the 5p per gallon on petrol was remarkable in view of the fact that the oil companies have been making similar increases from time to time without any outcry at all. It was also remarkable since, before the Budget, everyone was saying "Let us increase indirect taxation so long as we reduce direct taxation". Yet as soon as indirect taxation measures are introduced there is an outcry. Of course, all taxation is unpopular, and it is easy enough, when in Opposition, to criticise a particular tax, but I cannot understand the venom about this form of taxation.

In the first place, the proportion of taxation on petrol has not risen in line with the price. Petrol in this counrty is still the cheapest in Europe and one of the cheapest in the world. It is still related to the amount that one makes use of the roads and that seems to be fair enough. It is also a conservation measure—much more than any grading of vehicle tax would be.

It is unfortunate that so little revenue is being raised from the heavy lorry which the Chancellor admits does not pay its resource costs by any more than a minor amount. There is a big gap in this area which needs to be made up. The heavy lorry is the most damaging vehicle and is environmentally and congestion-wise the most troublesome. It is most unfortunate that the gap which exists is not being filled more rapidly.

I find the 25 per cent. increase in the vehicle excise duty a step in the wrong direction. It is a retrograde step. This country is not unique with regard to this duty, but it is one of the few countries that relies on it to any great extent. It is inequitable because it hurts the poorest motorists. Motorists who do less than 8,000 miles a year would benefit if all the taxation were put on petrol instead of on the vehicle duty. It is the poorest motorist who finds the greatest difficulty in finding £50 when taxing his car while at the same time having to pay for insurance, MOT and the rest. It is a form of taxation that I would like to see phased out because it is inequitable. It is inequitable that a Rolls-Royce, which does 100,000 miles a year, should be taxed the same as a Mini which does only 500. It is also a tax which encourages the use of petrol in the sense that a man does not realise the cost of his journey when only part of the tax that he pays is on petrol. It is, therefore, unfortunate that this tax has not been abolished.

I want to refer briefly to the construction industry. It is true that an additional £100 million has been made available for inner city areas—for a very limited number of inner city areas. I am sure that my city will not benefit from it. It is a paltry amount in terms of what the construction industry requires. This is one area where the Chancellor could safely have released more funds in order to get the economy moving again. Since the Budget it has generally been acknowledged that the economy is growing much too slowly and needs an extra boost. It seems to me that the construction industry is the safest of all industries in this regard. It has the greatest unemployment. It uses British labour, and since wages would be paid instead of social security benefits in some cases it would not be inflationary. It is an industry that uses largely British materials.

It is significant that Britain got out of the depression of the 1930s largely because of housebuilding. Many experts acknowledge that it was the building industry that led Britain out of the depression in 1935, 1936 and 1937. I believe that this is one industry in which the Chancellor could have released funds, not only for the sake of the industry, not only to meet the urgent needs of people for houses, not only to clear up dereliction in our cities, but to lead the country back to prosperity.

8.45 p.m.

Mr. Jasper More (Ludlow)

I want to say a few words with reference to Clause 42, which relates to forestry. Recently, an inter-departmental committee under Treasury auspices went into various matters concerning private forestry. I hope that it took into account the critical position in which forestry in this colintry finds itself. The situation could not be better summarised than it was during the debate on the Queen's Speech by, oddly enough, the hon. Member for Ludlow who said: The position regarding forestry in this country is, on the one hand, very simple and, on the other hand, potentially very serious. We produce about 8 per cent. of our timber requirements. Next to oil fuel and food, timber and timber products are our largest imports. It is estimated that in the present year the value of these imports will be able £2,000 million. Attention should be drawn to four alarming features. First, the cost, as with the cost of all imports, has risen alarmingly as a result of inflation, which is estimated to be axle 25 per cent. this year. Secondly, a considerable proportion of the potential supply of our timber imports is under Communist control. Thirdly, year by year an increasingly larger proportion of our timber imports comes in the form of timber products. That is damaging to our own timber processing industry and means increased import costs. Fourthly…timber is a very bulky crop and is a dangerous commodity on which to have to depend for imports in an age when more and more submarines seem to be ranging the oceans of the world."—[Official Report, 24th November 1976; Vol. 921, c. 122.] Timber grown in this country depends in almost equal shares on the public sector represented by the Forestry Commission and on the private sector represented by private planters. Not much notice has been taken of this, but it is a fact that, in the present year, as part of the cuts in finance, the Forestry Commission has had its budget reduced by 12 per cent. I think it should be said publicly that there ought to be a protest about that, on the ground that the Forestry Commission enterprise—and I invite Ministers to listen to this—cannot really be classified as expenditure. From the time that the Forestry Commission was founded in 1919 the money spent has been, in a very real sense, capital investment.

The Commission has to take a cut of £3 million in its budget, and the main concern is over the decision to forgo to the tune of £1,800,000 the purchase of land that might be offered to it during the coming year. The Commission's stock of plantable land is already far short of the requirement to maintain planting within the level approved by forestry Ministers for the current three-year programme, and the effect of the present cut will reduce that even more. That has rightly been protested against by the staff of the Forestry Commission, and I hope that the Government will take notice of it.

I now come to the question of the private sector, and I want straight away to express the gratitude of private planters in the forestry industry for the recommendations and decisions of the recent inter-departmental committee. It has done a lot by way of concessions in connection with such things as grants, and one important concession in connection with capital expenditure tax is embodied in Clause 42, to which I have referred. I am sorry that it has not solved the whole problem. The problem that must be solved is that of confidence. Lack of confidence has produced an alarming fall in private planting in recent years.

One more important modification in our capital transfer tax must be made to restore confidence. Although it sounds ungrateful, the decisions of the interdepartmental committee spoiled the ship for a ha'porth of tar. This further concession would not cost the Treasury a large sum immediately, because it is dependent upon the chances of life and death, but it would make all the difference to an industry which looks to the distant future. I hope the Government will take notice of that because it was pressed on the Committee by almost everyone who gave evidence. I hope that this matter can be pursued in the Standing Committee on the Finance Bill.

8.51 p.m.

Mr. Malcolm Rifkind (Edinburgh, Pentlands)

The hon. Member for Preston, North (Mr. Atkins) referred to the unpopularity of the Budget. One cannot help but remember Edmund Burke's remark To tax and to please, no more than to love and to be wise, is a power not given to man. When he coined that phrase he must have had a premonition about the present Chancellor of the Exchequer. What other Chancellor could return to the taxpayer £1,300 million and promise a further sum of £1,000 million only to find that largesse thrown back in his face?

The Budget has been described as one of the most unsatisfactory Budgets for a generation. Only two days after the Budget, the electors of Stechford returned a Conservative Member for the first time. It is perhaps appropriate that my hon. Friend the Member for Birmingham. Stechford (Mr. MacKay) made his first speech today and more appropriate that the electors of Grimsby and Ashfield are passing today their judgment on the performance of this Government.

Is it that the British people are being ungrateful in not recognising what the Government have done for them? I do not think so. In part, the electorate's reaction is a verdict on the catastrophic way in which the Government are running the country. People have recognised certain aspects of the Bill which the Chancellor and his colleagues would have preferred them not to notice.

The British public will still be slightly worse off than they were a year ago because of the Government's disastrous handling of the economy. For that reason the public are not prepared to accept this Budget as an advance, as the Chancellor hopes them to do. They know that he is not some bushy-eyed Santa Claus but that he believes, as do all Socialists, that taxation is a virtue in itself. They know that the Chancellor is the person who looks to the British public with his hands in their pocket and sees them, much as Robert Browning saw his last duchess—I paraphrase: He likes what e'er he looks upon and his looks go everywhere. I shall concentrate my few remarks on a matter of more general import which relates to the Budget and previous Finance Acts. One of the most alarming tendencies in recent years has been the increasing inflexibility, complexity and incomprehensibility of our tax law. That problem is increasing enormously.

There was a fascinating report by the Board of the Inland Revenue last year. I refer in particular to page 3, where the Board pointed out that in 1918 an intelligent citizen wishing to know the tax law on income had merely to read 180 pages to be fully versed in the whole tax law relating to income. It is astonishing that not many years later that same citizen, instead of having to read 180 pages, has to read 3,600 pages in four volumes of tax law. He would still not have read last year's Finance Act or the Development Land Tax Act. We know, for example, that since 1970 alone 11 new Acts concerning tax have been brought on to the statute book. In the last 20 years, a whole host of new legislation—corporation tax, capital transfer tax, capital gains tax, development land tax, petroleum revenue tax and many more—has added to the problem.

This is a problem that is not simply one of irritation to the public. I refer again to the report of the Board of Inland Revenue, which says on page 3: The bulk and complexity of existing legislation poses formidable problems for the Revenue no less than for taxpayers and their advisers The view of the Board of Inland Revenue is echoed by the Institute of Taxation in its submissions to the Chancellor. Referring to the increase in the volume of legislation, it states, this sort of increase in the volume of legislation cannot continue indefinitely. Indeed, we would go further in saying that the time has come to stop all taxation legislation except that needed to cure serious anomalies If that is the view shared not only by the public but by the Board of Inland Revenue, the Institute of Taxation and many other sections of opinion, how do we then judge the Bill? In some ways it is an improvement on its predecessors. After all it has a mere 78 pages, as compared with the 110 and 144 pages of its two spring Budget predecessors. Flow-ever, in terms of obscurity it is no improvement whatsoever.

I give one example. I refer the House to Schedule 7, which is concerned with earnings from work done abroad. If hon. Members look at paragraph 1(3), they will see this excellent example of obscurity. Where…a period consisting entirely of days of absence from the United Kingdom ('the relevant period') comes to an end and there have previously been one or more qualifying periods, the relevant period and the (or, if more than one, the last) qualifying period together with the intervening days between those periods shall be treated as a single qualifying period". One should say "period" at this stage.

It is no wonder that the public are not only confused but alarmed about the consequences of this type of legislation. It has profound consequences for two separate areas. It has profound consequences for Parliament, because when we have tax and fiscal legislation of the most incredible complexity it becomes in practice extremely difficult for the vast majority of Members of Parliament to put forward useful contributions to representing their constituents on tax and fiscal matters. It is not surprising that the deep interest in fiscal matters in the House has become increasingly reserved to a very small number of hon. Members—among whom I do not include myself—who have the competence to venture into these matters and understand entirely what they are doing when they so do.

It may be that there are many aspects of business before the House in which only a handful of hon. Members participate. One could point to defence, social security matters, overseas aid or energy. However, the fact that so few hon. Members participate in deliberations on the Finance Bill, the main Bill before the House in any one year, is much more alarming, because tax and fiscal matters are not a sectional interest. They affect all the 635 constituencies in the United Kingdom and every member of the public in every constituency. If there is such a minute interest in terms of involvement in fiscal matters in the House, the complexity of the legislation is partly to blame.

An even more worrying factor is the inability of even intelligent, educated members of the public to understand the tax law that they are obliged and expected to obey. One of the basic maxims of our law is ignorantia iuris neminem excusat—ignorance of the law excuses no one. That is a perfectly sound and reasonable motif and expectation in a country or a society in which the law can be learned by anyone sufficiently interested to take the trouble to do so. It was a perfectly desirable and ethical requirement in the nineteenth century when any educated member of the public could acquaint himself, without too much difficulty, with the law under which he was obliged to live. Today, however, when this one small section of our law—fiscal law—runs to 3,600 pages in four volumes, clearly that has a very worrying effect. The public, being unable to understand the tax law under which they are obliged to live, become increasingly alienated and hostile to it.

I shall give one more example in relation to the Finance Bill, that of VAT. A number of my hon. Friends have argued strongly for single rate of 10 per cent. in terms of fairness and to provide an alternative if the Government wish to drop the increased charge on petrol. I support this proposal, but for different reasons, namely, on the ground of simplicity.

The VAT system is already sufficiently complicated and burdensome and enough of a nuisance to all businesses, especially small businesses, that anything that could lighten the burden would be welcome. If the Government returned to a single-rate system, as was devised for VAT when it was first introduced by a Conservative Government, with one single act the Government could convince small businesses and people throughout the country of their good intentions.

I accept that in the modern world it is inevitable that legislation, particularly fiscal legislation, will be complex, but much of the problem and the complexity that we are dealing with in this obscure legislation, with its curious wording, has occurred because Governments of both parties, and particularly those of a Leftwing disposition, have considered as their main objective the pursuit of equity. In order to achieve equity, however, they have produced all sorts of foolish legislation created to try to close every loophole and to fill every gap and make allowances for every possible circumstance.

Important though the pursuit of equity may be, the pursuit of simplicity is an equally important criterion of public life. It is of major importance in any democracy that an ordinary citizen who takes the trouble should be able to understand the law under which he lives. If that applies to other aspects of the law, it applies particularly to fiscal matters. While I hope that the Government do not abandon equity, they should pursue simplicity as of equal importance and establish that as the criterion for the future.

9.2 p.m.

Mr. Paul Dean (Somerset, North)

In commenting on the Budget The Times wrote on 30th March: The Budget limps in the right direction". I suppose that we should be thankful for small tax mercies, especially from a Government whose natural instinct is to be a big spender and big borrower, and, therefore, advocates of high taxation. Against their instincts, the Government are moving in the right direction. The pressure of events is forcing them to change course and to reduce some of the enormous tax burden that they have imposed in the past three years.

The howls of anguish that the Chancellor set out to create have gone sour on him. He is now getting the anguish of voters in by-elections, and, no doubt, in a few hours from now there will be more anguish for him when we hear the results of the by-elections at Grimsby and Ashfield.

The Chancellor is now being forced to recognise that disincentive to work, to earn, to accept responsibility, which is built into the tax system. As my hon. Friend the Member for Guildford (Mr. Howell) said earlier, no wonder managers in industry and commerce are embittered and demoralised. It is no wonder that people with professional qualifications or skilled trades are discontented. It is no wonder either that the widow who goes out to work is unhappy when she complains about the tax threshold which is now so low that it catches every penny she earns. High marginal rates of tax at one end and low tax threshold at the other are creating an unhealthy situation in which hard work seems to be a mug's game, and there is a similarly unhealthy situation in saving for retirement.

It used to be possible at one time to talk about the rewards of thrift. Alas, all too often today the appropriate phrase should be the penalties of thrift. There are too many examples of retired people with modest savings who would have been better off if they had spent the lot during their working lives and relied in retirement on social security.

I am thinking in particular of the retired person who worked abroad, and because he did that has no National Insurance pension and no occupational pension. He is relying on investment income, and he is being clobbered by the investment income surcharge, which is still an enormous burden on a modest income even with the improvements that are provided in the Bill. I am thinking, too, of the retired person with the national insurance pension and the small occupational pension in addition. All too often these people, close to the supplementary benefit margin, are caught in the tax trap because tax allowances have not kept pace with inflation.

Mr. George Cunningham (Islington, South and Finsbury)

Surely the hon. Member will agree that anyone who in his working life wanted to save for retirement and knew that he was not even partially covered by the State scheme could have put his money into a scheme under the Finance Act 1956? The pension he drew would be regarded as earned income and would not be caught as investment income. Is that not right?

Mr. Dean

Not in every case. There are some cases where that is true, but there are a number of cases, particularly of people who have worked abroad and who retired some time before the more modern provisions came into effect, whose only recourse was through the type of savings now caught by the investment income surcharge.

I mention these as just two examples of where, as a result of prudence and thrift in earlier years, people are reaping the penalties rather than the rewards of their savings in retirement.

I hope that the Financial Secretary will deal with the points which have been made from both sides of the House, but particularly that from the right hon. Member for Blackburn (Mrs. Castle), concerning the increase in the retirement pension and other benefits. The Chief Secretary made a wholly unsatisfactory speech today. I agree completely with the right hon. Lady. It is clear to me as a former Minister in the DHSS that the Government are running things very close indeed. If they do not very soon announce the increase to be made in November there simply will not be sufficient time to put in hand the necessary substantial and complicated administrative changes. Not only are the Govern- ment running dangerously close on the administrative arrangements. How can we effectively judge the Bill and the allowances which are changed by it when we have only half the picture, when we do not know what increases will be made in cash benefits?

Those are two reasons why we must know very soon what the figures will be. It is highly unusual, as the Government know, for this not to be announced in outline in the Budget and fully detailed in a speech the following day. That is normal procedure under this Government and the previous Conservative Government. It is very important, if the House is to judge these matters fairly, and pensioners are to receive an assurance that they will get their increase at the normal time of the year, that these figures should be announced without delay. I hope that the Financial Secretary, in his reply, will tell us more about that.

Finally, I refer to retirement annuities for the self-employed. I declare an interest in pensions, and a personal interest in retirement annuities. I welcome, as the whole House does, the increase to £3,000 in the maximum contribution that can be made annually and which will qualify for tax relief as laid down in Clause 25, but this increase is not adequate in itself, for two reasons. The first is that it does not enable the self-employed to cope adequately with the levels of inflation that we have suffered in recent years. Secondly, the self-employed will be disadvantaged when compared with employees under the new pension arrangements due to start in April next year.

It is important for the Government to bear in mind that this is the last Finance Bill before the new pension arrangements for employees come into operation in April next year. Therefore, this is their last chance to put the self-employed on a broadly comparable basis. The Government have decided to exclude the self-employed from the new earnings-related scheme starting next year. I do not argue the merits of that decision now, but having decided to exclude the self-employed, the Government are under a particular obligation to enable them to provide for themselves broadly the equivalent benefits, and to get tax relief on the required contributions. That obligation has not been fulfilled in this Bill.

There are in the new State pension scheme for employees, two essential features which must be fulfilled either through the State scheme or through conditions which occupational schemes must fulfil in order to contract out. Contributions must be revalued annually in line with the increase in earnings—in other words they must be on an escalator; and the pensions must be inflation proof up to a guaranteed minimum level whether they are provided by the State scheme or by an occupational scheme. Very few self-employed people will be able to match the conditions that the Government are laying down as the acceptable minimum for employees.

Surely it is right that, if such conditions are laid down for employees, the self-employed should be enabled to provide similar standards for themselves. The limiting factor here is the 15 per cent. earnings limit, which is quite inadequate to cope with inflation at its present levels, or to provide the sort of level of pension that is accepted as decent in present conditions.

The older a person is when he starts his retirement annuity the more inadequate the 15 per cent. limit. In this area it is usual to start saving for retirement comparatively late in life. In the early years a self-employed person is very often ploughing his profits back into his business. The provision for retirement inevitably is secondary, and is concentrated in the later years of the working life. Therefore, there should be a substantial increase in the 15 per cent. limit, particularly for older self-employed people, or—in my view, better still—the Government should allow the self-employed to make, in a specified number of years before retirement, whatever contributions are required to secure a two-thirds pension.

Modest amendments on those lines are the only way in which we can give the self-employed an opportunity to provide for themselves an adequate level of pension and in which we can provide them with an opportunity to gain for themselves a level of pension broadly equivalent to that which is being laid down in the new State scheme for employees.

I appeal to the Government to recognise the force of those arguments, which can be backed with detailed figures, with which I shall not trouble the House now, and to recognise that this is the last opportunity to do this in a Finance Bill before the new State arrangements for employees come into operation next April.

9.16 p.m.

Mr. Peter Rees (Dover and Deal)

My hon. Friend the Member for Somerset, North (Mr. Dean) has deployed an impressive, not to say overwhelming, case for a further improvement of the rules for retirement annuities for the self-employed. I must here declare a special and personal interest in that I am self-employed. I hope that we shall be able to return to the matter and have the benefit of my hon. Friend's statistical evidence when we debate Clause 25 in Committee.

It is not often that I have occasion to congratulate the Government Front Bench, but on this occasion I congratulate them on producing what I believe to be the shortest Finance Bill since 1970. Perhaps there is an omen in that. The reason is not hard to seek. The Government are As idle as a painted ship Upon a painted ocean Whether the Prime Minister is the Ancient Mariner and the Leader of the Liberal Party the albatross, or vice versa, I leave the House to speculate. At any rate, the Government's comparative immobility gives the House and perhaps the Government a pause to reflect and chart the fiscal and economic course of this Labour Government.

The tax system is always used by any Labour Government in the initial stages—it was true of 1965 and was certainly true of 1974 and 1975—as an instrument for paying off old scores, for avenging imagined slights to people such as Mr. Jack Jones and his colleagues. Reality eventually breaks in. The first sign is when the Government try to stimulate the country's economy with infusions of public money into ailing industries. Then comes the final realisation that it is the human spirit, the entrepreneurial drive, that is important in business, farming and the professions. The Chief Secretary by implication conceded as much in his memorable words on the impact of direct taxation. I am sure we shall have occasion to remember them and cite them time and again in our debates, whatever Government are in power.

There is joy in heaven over one sinner that repenteth. That was the theme of the impressive maiden speech of my hon. Friend the hon. Member for Birmingham, Stechford (Mr. MacKay). [HON. MEMBERS "Where is he?"]. He could not have conceived that the debate would go on so long and find me soliloquising to an empty Chamber at 20 minutes past nine, but he will perhaps learn about the torpidity of debates on Finance Bills when there is a Labour Government. Certainly they lack support from their Back Benches.

Mr. William Hamilton

Get on with it.

Mr. Rees

The hon. Member for Fife, Central (Mr. Hamilton) took his time and, with the benevolent connivance of the Chair—not you, Mr. Speaker—diverged into such irrelevant matters as the Civil List. I hope that I shall be allowed at least a comment on speeches from the Conservative Benches, including a maiden at that.

I should like to remind the House of the rather impressive and wise words of someone who took up farming. I am not certain whether it would be called hobby farming. Alas, he is with us no longer. He said: This year we find we pay 40 per cent. corporation tax"— the House will judge that this was written some time ago— and with income tax and surtax as well on what is distributed we have to pay 80 to 90 per cent. and so we have to give the whole profit to Pritchitt"— his farm manager— because there is no other way of doing it…From this farm responsibility I have learned about growth. about investment and about tax. It is a business with a £30,000 turnover and I have learned a tremendous lot about business management The House may be curious to know from what work I have culled this. It is from the Crossman Diaries. There is also some good stuff about his colleagues. There is nothing like a candid right hon. Friend for describing the quality of Labour Administration, but I shall not touch on that now nor on what he said about the Prime Minister and the Chancellor of the Exchequer. I shall reserve that for another occasion.

We now have the fascinating spectacle of the Chancellor of the Exchequer retracing his steps, perhaps hesitantly, over ground covered during the last three years—his sticky hand clasped in that of the hon. Member for Cornwall, North (Mr. Pardoe). I wish that the hon. Member had stayed to lend moral support to the Financial Secretary in his wind-up speech, because the right hon. Gentleman will need it and he will not get it from the Benches behind him so he needs it from the Liberal Bench. Perhaps that is why the right hon. Member for Orkney and Shetland (Mr. Grimond) has now come into the Chamber—to give the benefit of his wisdom and experience and to support the Labour Party in the financial field. We were unable to discover from the hon. Member for Cornwall, North whether the Lib-Lab. pact covers economic and fiscal matters although the country will be anxious to discover that and to know what Liberal Party advice is channelling to the Chancellor of the Exchequer.

As we retrace our steps we come to capital transfer tax. We have heard great words of wisdom from my hon. Friend the Member for Ludlow (Mr. More), who knows so much about these matters. I do not wish to gild his lily but to emphasise to the Financial Secretary that although the forestry interests—and here I declare an interest—are grateful for the minuscule relief that has been given in the Bill—and that does not affect me—if the Treasury wishes planting to be resumed on a considerable scale two things must be done. Capital transfer tax imposed on woodlands at death must be computed by reference to the value at death and not to the value of those woodlands when cut. Secondly, those woodlands must be valued as an estate by itself. That is the minimum that is required if private forestry is to be resuscitated. We shall have occasion to come back to these matters, but rates and grossing up must be gone into because, at the level of inflation that we have endured during the last two or three years, capital transfer tax is no more than confiscation.

I now come to Schedule E as treated in the Bill, and I particularly wish to refer to overseas earnings. Here we have a classic instance of Labour legislation enacted in the white heat of puritanical indignation, stimulated perhaps by Lonrho memories. What advice Ministers have received on this is a matter for conjecture, whether it was good advice from the Board of Inland Revenue which was rejected or whether it was bad advice which was accepted. We must assume that this policy was hatched out by the Chief Secretary and his colleagues.

Whatever small measure of avoidance there may have been under the old rule, by and large those rules were understood and worked reasonably satisfactorily. We warned the Government on this matter during 1974. This is a classic instance of legislating first and repenting at leisure.

The measures have proved so restrictive that there have been two consequences. First, the haemorrhage of talent and enterprise to such probable and improbable parts of the world as the Persian Gulf, South America and the United States has continued and increased. The Chief Secretary is laughing. I am flattered that he finds my modest contribution so witty, but I am not sure that those outside this House will be entirely reassured by his response to what are intended to be serious points.

The other consequence is that various companies which entered into considerable commitments in rather insalubrious parts of the world and found themselves almost unable to fulfil them because, they could not induce their employees to go to those parts. There has been a measure of repentance by the Government, but it is not sufficient.

I wish to put some specific points to the Financial Secretary, and if he does not answer them, I shall take them up again in Committee.

Why are the ameliorative measures limited to employees only? Why are they not extended to the self-employed, those in partnership or trading on their own, and those in the professions? If there is a case in principle and logic for relief for employees there must be the same case for extending relief to all those who benefit this country, and, may be, themselves too, by working overseas.

Why have not the Government chosen to give relief to those who incur expenditure when occupying positions abroad, albeit, perhaps, concurrently with positions at home? The 25 per cent. relief that a person may get when taking up a directorship of a subsidiary company in Buenos Aires may not even cover the cost of subsistence there.

The Government have been singularly short sighted and we shall have to return to these matters in Committee if we do not get satisfactory answers from the Financial Secretary when he winds up the debate.

I turn to benefits in kind. In an ideal world such benefits should be taxable in the same way as monetary income, but we do not live in an ideal world, particularly after three years of Labour Government. Benefits in kind will be found at almost every level in most businesses, and include the person working in the biscuit factory who is allowed to take home a packet of biscuits a day, the coal miner who gets free coal, and the employee who has use of a firm's car. These benefits are not concentrated—except in Labour Party mythology—in the higher echelons of business.

A tender concern has been expressed on both sides of the House for middle management. I am not sure why the concern is limited to middle management, because industry depends on all levels of management, but I recognise that middle managers have suffered more than most from inflation, the erosion of their standard of living, and the structure of our tax system. They will not be pleased with what the Chancellor of the Exchequer has done about motor cars.

We shall have to return to that and to the question of free accommodation, which is dealt with more specifically in this year's Bill. The Government have realised that their ill-thought-out pledges to the Labour Party, and perhaps to the TUC, have led them into a hornets' nest in which they are likely to suffer as much as those at whom they aimed their shafts. We shall have to scrutinise carefully who is to be caught by the provisions relating to accommodation and, perhaps more important, who will escape.

The Chancellor of the Exchequer, with a rare blend of political adroitness, has managed to offend practically every section of the taxpaying public—those who pay tax on incomes barely above the subsistence level, those who pay tax on incomes at 98 per cent., management at all levels, the self-employed and the retired.

I think it was the late Mr. Richard Crossman who said: I do not suppose that there is any man who is more disliked and out of touch with the Parliamentary Labour Party than Denis Healey I leave that judgment to the House. If the Chancellor is out of touch with the Labour Party, with which, presumably, intellectually, temperamentally and philosophically he should be in tune, why should we be surprised that he is out of touch with the country as a whole?

I give the Chancellor one tiny word of advice. If he is privileged to introduce another Finance Bill, perhaps he will consider whether he cannot, without any great expenditure of public money, ease the pressure of the tax system on the taxpaying public.

There is a great deal in the 119th Report of the Board of the Inland Revenue that repays close study. On page 3, when referring to the corpus of legislation in the past year, it states: Nevertheless its bulk and its complexity pose formidable problems for the Revenue no less than for taxpayers and their advisers It goes on to record the number of people who have been recruited. This is a sinister aspect. Some 500 or 600 cadet valuers have been recruited. No doubt they are well intentioned and worthy people. It will take years for them to catch up with the arrears imposed by the capital transfer tax. No doubt they will cease to be cadets and become hoary veterans in that process.

I am not so much concerned with Inland Revenue officials. After all, they are remunerated by the public purse. As I look through the list I find them rewarded with CBs and CMGs. Undoubtedly they are devoted servants and I do not begrudge them the honours that have been so liberally bestowed. After these years of Labour Government I am sure that they all merit KGs or KCBs for service in the face of the enemy. I am more concerned with the taxpaying public and their compliance costs.

I believe that the Chief Secretary was once in professional practice. I refer to the days when he used to rub shoulders with Manchester United. Has the right hon. Gentleman ever thought of his former clients groaning under the imposi- tions that he and his right hon. and hon. Friends have imposed upon them? Has he thought of the professional fees that his former firm is now having to charge for the most minuscule services? Like my hon. Friend the Member for Edinburgh, Pentlands (Mr. Rifkind), who had some shrewd things to say, I believe that the Chancellor should consider how the tax system might be simplified and eased.

Having a slight professional acquaintance with these matters I do not pretend that any simplification will be a simple task. Probably the best solution is to bring down the rates. If we bring down the rates the taxpayer will accept living with a certain amount of rough edges, but with taxation at its present level the Government are bound to introduce a mass of complex measures to prevent injustice and counter avoidance. We shall have four or five such measures to debate in Standing Committee.

I ask Ministers to pause to reflect whether it would be necessary to have complex anti-avoidance measures if the top rate of income tax were 60 per cent. and corporation tax were reduced, say, to 25 per cent. I ask them to consider our position if we became a tax haven, as we nearly became under Lord Barber, whose fiscal perspicacity has rarely been appreciated in this place. I suggest to the Treasury Bench that in the next Finance Bill, if it survives to introduce another one, it explores that possibility. I know that it would require an effort of imagination and sympathy of which the Chancellor and—dare I say?—the Chief Secretary are no longer capable.

The Chancellor is tiring visibly, like a bull that has lumbered around the bullring for too long awaiting the coup de grace. When he is finally dragged out by his hind legs I hope that an appreciative electorate will award his ears—such, I believe, is the custom—to my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe). But, the House will ask in this perhaps slightly laboured simile, "Where stands the hon. Member for Cornwall, North?" The hon. Gentleman is the rather frolicsome bullock that escapes into the bullring by accident and is driven out with shouts of derision.

9.35 p.m.

Mr. Tony Newton (Braintree)

There can be few less enviable tasks than being a "tail-ender" in a debate of this type and having to follow my hon. and learned Friend the Member for Dover and Deal (Mr. Rees). I wonder how any judge finds him resistible. I am sure that in the court cases in which he takes part the public ought to pay an entrance fee to hear the proceedings.

Sir Geoffrey Howe (Surrey, East)

They do.

Mr. Newton

In which case they certainly get good value.

At this time of night, when we are operating with the benefit of the exempted business rule, I shall speak briefly. Apart from the fact that most of what I wanted to say has been said, it seems that anyone would be in difficulty in saying anything substantial about the contents of the Bill taken as a whole.

We are in the oddest position that I can remember in discussing a Finance Bill and making a judgment about the broad strategy. We do not know what the standard rate of tax will be. We do not know what the rate of pensions and social security benefits will be. We do not know what the Government's target for pay increases is to be, and there is even some doubt about the rate of one of the major indirect taxes—that is, the tax on hydrocarbon oil. When one attempts to piece together the figuring of the Budget, the Finance Bill and the Government's incomes policy for the rest of the year, one can only conclude that it is virtually impossible to make a judgment.

It is certainly good that the Budget makes tax cuts, and I think that the Opposition welcome that. I welcome very much the fact that the Government have at last got away from the belief that it is somehow wrong to exclude middle and upper income groups from the benefits of any tax cuts that can be made. One of the best things about the Budget has been the lack of enthusiasm shown towards it by Labour Members below the Gangway. I do not believe that we can tackle the country's problems so long as we do not have those Labour Members almost permanently unhappy about what is being done. The Budget and the tax reduction proposals do not, taken together, go far enough. In fairness to the Chief Secretary and the Chancellor, however, it must be acknowledged that they are a great deal better than nothing.

I very much doubt whether many of my constituents will be that much better off when they take into account other Government policies which ought to be considered along with the Budget—the extent to which rates have been forced up by Government policy, the consequences of the petrol and oil duties, the new gas tax and its effect on gas prices and the extent to which Government policy has forced up transport fares for people living in a constituency like mine. All those things would have happened to them irrespective of the Budget and in that sense the fact that there is a tax bonus for most people goes some way to soften what would otherwise have been a worse blow.

I do not want to follow the hon. Member for Motherwell and Wishaw (Dr. Bray) in his, at times, long and interesting dissertation about the more academic problems of economic policy. No doubt it would be good if the Treasury and Treasury Ministers were up to date with all the latest econometric research. What would be quite wrong would be for the hon. Gentleman, and still more the Ministers whom he was advising to get to grips with this mass of paper, to run away with the idea that there is some magic theory still less some magic set of statistics as yet undiscovered, which holds the answer to our economic problems. Of course there are improvements to be made in the technical management of the economy in the Treasury's calculations and in the advice it gives to Ministers. Fundamentally, however, both Front Benches would agree—certainly all my hon. Friends would agree—that the solution to our economic problems rests on political decisions and judgments as to how far people will respond to Government policy aimed at getting the economy on the move.

I shall not attempt to rehearse the stock Tory argument on that aspect tonight. My hon. Friends have made their views clear, and I agree with what they have said. All I say—I wish that the hon. Member for Motherwell and Wishaw were here—is that it is a grave error to believe that there is some academic device or theory which will suddenly solve Britain's economic problems.

The ingredients which, above all others has been missing over the past few years has nothing to do with statistical errors. It has been the absence of confidence—confidence among people abroad in our currency and confidence among people at home which would lead them to invest and provide new jobs. That is far more a political factor than anything economic in the narrow academic sense.

In all that has been said about incomes policy and taxation policy in this and other debates, I have sensed that right hon. and hon. Members on the Government side, whether on the Front Bench or on the Back Benches above or below the Gangway, still have not fully recognised how what they are doing is seen in the country.

Although they have been forced, with some reluctance, to acknowledge the error of their past ways, I cannot understand how the Chancellor and the Chief Secretary, who have made speeches both on the Budget and on the Bill defending their tax changes, could conceivably have made the speeches which they made on earlier Bills when they were creating so many of the problems which they are now trying to correct. However, it is a gain that they are now saying somewhat different things, and it is a gain that the Conservative Opposition have in that sense won the argument all down the line over the past two or three years. Ministers are now being forced to say what we have been saying for many years.

However, as I say, I sense that Ministers and hon. Members opposite still have not fully recognised the extent to which what they are now saying and doing, although it may be unpopular with the left wing below the Gangway, is far from unpopular in the country. The country knows far better than Labour Ministers have until very recently seemed to acknowledge that fairness and equality are not the same. Both in their fiscal policy and in their incomes policy, the Government have pretended that fairness and equality are in some sense identified in the public mind. If they still thought that, they need only contemplate the stirkes over pay policy which have taken place in the past two months. In a word, most of those strikes have been strikes against Socialism. They have certainly been strikes against a pay policy which was attempting to force everyone into the same mould at the same level, regardless of different skills, different effort or different capacity.

That is not seen in the country as fairness, and I believe that Ministers would be well advised in the country's interest to recognise that there is strong popular support for moving much further than they have yet been prepared to go towards rewarding effort and recognising differentials, not only in pay policy but also in fiscal policy—that is, in continuing the approach which they have very tentatively started in some parts of the present Budget.

I come now to one or two detailed points on the Bill. Obviously I welcome a great deal of it, and I shall not list the proposals which I welcome. I wish, first, to comment on the petrol duty proposals and the effect on rural areas. It seemed from what was said by the Chief Secretary and one or two of his hon. Friends that they still do not properly understand why the petrol tax increase has caused such a storm in the rural areas.

The Chief Secretary says—one can appreciate the point in a statistical sense—that 5½p a gallon on petrol is not a great deal. He works out that for a motorist with a modest car doing a modest mileage it is 30p a week, and in that sense he virtually brushes the problem aside. He asks what all the fuss is about.

The fuss has three genuine worries behind it. First, the Government are deliberately adding to what has already been a vast increase in petrol prices. People have reluctantly had to accept that increase, being aware that it has been imposed on us by outside forces. They do not like it, but they accept it. Nevertheless, they do not see why any Government should deliberately go out of their way to make it worse.

People in rural areas feel, and I agree, that this increase comes on top of what has already been a disproportionate burden on those who do not happen to live in one of the great metropolitan areas. They have already suffered far larger increases in costs—for example, in rates—than others have done over the past few years, and at the same time they have suffered a great reduction in their public transport services, which is another source of worry. I do not think they would accept the Chief Secretary's argument. They would, no doubt, accept that energy saving is desirable.

But, of course, if the Chief Secretary were to press his argument very far, he would no doubt seek to stop people from living in villages. Villages are inherently rather inefficient places from the point of view of energy use because they involve people in more travelling. They involve them in a larger use of energy than if everyone were concentrated close together in towns.

I do not believe that the energy-saving programme can be pressed as far as the Chief Secretary appears to want to press it. If he wants to save energy, he ought to be looking at other ways. The point I should like to emphasise most strongly, however, because it is perhaps the root of much of the objection in villages and more rural areas, is the absence of any positive side to this package.

The Chief Secretary predictably referred to President Carter and to what he had done with regard to energy. He referred to the fact that President Carter was raising petrol prices and the rest. But the key thing about the Carter package, which is totally lacking from what this Government are doing and have been doing over several years, is that it has a positive side. This Government's package is all stick and no carrot. President Carter has included tax incentives for people who will buy smaller cars, and he claims that some people will be better-off despite the petrol tax increases.

What is more, the Chief Secretary rather vaguely referred to the hope that the transport White Paper might provide some relief for the people we are concerned about. The rest of us must simply be sceptical. There has been no sign whatever of a serious attempt by the present Administration to provide a new rural transport policy. It is, of course, a difficult problem and one which has been perplexing Governments for a long while. But after three years in office the Labour Government have come forward with a Bill which will simply provide for a few experiments in rural transport. There is no positive programme at all to prevent the decline in rural public transport.

If the Chief Secretary is not careful, the result of his policy and the arguments he has used this afternoon will be a further decline in village and rural life. It will make it increasingly difficult for anyone who is not well off to live in the villages. The real point that the Chief Secretary has missed is that the people who are now being squeezed out of villages, because of transport costs, inadequate transport and the rest, are the elderly and those on low incomes. Villages are increasingly being forced into a mould where only relatively well-off middle and upper income groups can afford the cost of living in them. That may be what the Government want, but it will drastically change the character of English life, in my view for the worse. That is my fundamental objection to what the Chief Secretary has done and to his argument this afternoon.

But what about the alternatives? There seems to be some suggestion from the Government that a 10 per cent. rate of VAT, as suggested by some of my right hon. and hon. Friends, is the least desirable alternative to the petrol tax increase. I do not see why. The effect on the retail price index would be substantially the same. There would certainly not be very much difference, according to the figures that we have been given. In the light of the Chief Secretary's own argument, VAT could well be fairer than the petrol tax increase.

In a debate on public expenditure not long ago, the Chief Secretary spent a large part of his speech arguing that indirect taxes in general and VAT in particular were not regressive taxes because they left out essentials such as food, fuel and transport. But, of course, petrol falls on those items. The petrol tax increase will to some extent raise the price of food, and the hydrocarbon oil duty, also covered by the Chief Secretary's argument, will raise the costs of heating.

The Government have already imposed—one can well see this partly as an alternative to being courageous over VAT—a substantial additional tax on the price of gas, which again is a basic essential. It is fair for us to argue that, far from being less regressive, what the Chancellor has proposed with the petrol tax and in refusing to take the obvious alternative of a 10 per cent. VAT rate is less progressive and more regressive and will hit hardest the poorer sections of the community.

I propose now to deal with three points about the social justice aspect of the Budget. It was striking how strongly the hon. Member for Stoke-on-Trent, South (Mr. Ashley) felt that his right hon. and hon. Friends were ignoring their commitment to the less-well-off members of our society. There might be matters on which the hon. Gentleman and I do not agree, but I feel that much of his criticism of the Government was well merited, and I want to pick up two points in the Budget which seem to reinforce what he said.

There is, first, the treatment of retired people. My hon. Friend the Member for Somerset, North (Mr. Dean) spoke with some eloquence about this. For the second year running, the Government are to make the tax position of many retired people considerably worse. We had a substantial argument last year about the way in which the age allowance had been raised by less than the amount of the pensions increase, with the result that any retired person with income over and above his national insurance pension had to bear an extra tax burden.

By any possible calculation, albeit that we still have not had the social security uprating, the same thing will happen again this year, because the increase in the single age allowance is only about 7 per cent. and the increase in the married age allowance is only 9 per cent. Unless something far more dramatic and controversial is being contemplated for the social security uprating, pensions are bound to rise by more than 9 per cent.

If that does not happen, there can be no doubt that pensions will not compensate for the rise in inflation, and if they go up by more than 15 per cent. as a result of this inadequate increase in age allowance retired people who have some savings income, additional pension, or whatever it may be will find that the tax bite on them has been increased. To allow that to happen for the second year running would be deplorable. It is a pity that the Government have not reviewed the £3,250 upper limit on incomes that can benefit from the age allowance. That was fixed some time ago, and it ought to have been reconsidered in the light of inflation.

Earlier in the day I had an opportunity to question the Minister about the situation with regard to widows, and I think that I made my main point then. There is great disappointment that nothing has been done to deal with the disincentive effect on widows with earnings over and above their pensions. This remains a cause of great bitterness, and the situation will get worse rather than better as a result of the Budget.

There remains also—I am particularly disappointed about this—the unfair situation whereby women between the ages of 60 and 65 who are on retired incomes under the national insurance system do not get the tax allowance that is available to retired people under the tax system. Following a reply that the Minister of State gave some weeks ago, I had hoped that Ministers were about to change their minds. It is a great pity that they have not done so, and I hope that they will reconsider this during the passage of the Bill.

The next matter to which I wish to refer is one that I had an opportunity to raise in the House recently, and I shall therefore not elaborate it now. I am referring to rail fares paid by the commuting population. It is a difficult argument whether tax relief is justified in some great argument about principle. What is not open to question is that people in this group—I accept that they are not necessarily poor, but some are not well off, and some are better off—have borne a wholly disproportionate part of the burden of adjustment to our difficult economic circumstances over the past two years. In many cases the real standard of living of some commuters has fallen between 20 per cent. and 25 per cent. over the past two years, and that is more than we should have asked of any section of the community.

It would be possible to devise a justifiable and workable form of tax relief which would help to offset some of those difficulties. It would create a fairer situation and probably make it possible to pursue a rational railways policy. I am sorry that we have not heard anything about that yet. I hope that we shall get a chance to discuss it in Committee.

The Finance Bill is moving in the right direction in its broad proposals for tax reductions, but we need more of them. In some respects the Government have not been as fair or as generous to some groups which should have demanded their attention.

9.55 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

My first, extremely pleasant duty is to congratulate my hon. Friend the Member for Birmingham, Stechford (Mr. MacKay) on his most distinguished maiden speech. All who heard him will agree that he spoke with great clarity and confidence. He impressed all who were privileged to be here.

In my political career I have been fortunate and privileged to congratulate the maiden speeches of two Benjamins—two of the youngest Members of the House. I suspect that the stay in this House of my hon. Friend the Member for Stechford will be longer than that of the hon. Member for Nuneaton (Mr. Huckfield). I am also sure that he will progress more in the esteem of the House than the hon. Member for Nuneaton. He is the better of the two Benjamins.

I shall mention some of the lesser points to which we shall return during the Committee stage. In particular I shall touch upon forestry, which was raised by my hon. Friend the Member for Ludlow (Mr. More), and the question of historic houses, which was raised by my hon. Friend the Member for Bristol, West (Mr. Cooke).

In both those cases the value upon which capital transfer is now to be calculated is not the value at the time of deferment of the tax. It is the value either at the time of a breach or at the time of felling the woodlands. That is extremely unfair and confusing. It makes it impossible for people to calculate their tax liability. We should come back to that in Committee.

I also want to press a matter that was raised by my hon. Friend the Member for Guildford (Mr. Howell), was asked about the present threshold for VAT registration. Has anything come out of Brussels which will tell us that we may raise the threshold? We shall seek to raise the threshold in debates upstairs. We must also do something about the investment income surcharge on maintenance payments to divorced wives.

Small businesses will be discussed on many occasions upstairs. I was delighted to hear my hon. Friend the Member for Basingstoke (Mr. Mitchell) urge that further assistance be given to small businesses. I was even more delighted that my hon. Friend the Member for Stechford made that the theme of his speech. I assure him that we shall support him in all that he seeks to achieve. I was also pleased that he spoke so generously about his predecessor, Roy Jenkins. I remember the days when the former Prime Minister, the right hon. Member for Huyton (Sir H. Wilson), used to boast about the enormous talent of the occupants of the Treasury Bench. Where has it all gone now? I shall not dignify them, as Disraeli dignified his predecessors, by saying that they are a range of exhausted volcanos. They are a range of eroded foothills. The Chancellor himself might well be described as a foothill—

It being Ten o'clock, the debate stood adjourned.