HC Deb 21 July 1977 vol 935 cc1909-2001
The Chief Secretary to the Treasury (Mr. Joel Barnett)

I beg to move Amendment No. 95, in page 12, line 33, leave out 35 per cent.' and insert 34 per cent'.

Mr. Deputy Speaker

With this we are to take the following:

Amendment (a) to the proposed amendment, leave out 34 'and insert 33'.

Amendment No. 10, in page 12, line 33, leave out '35' and insert 34'.

New Clause 83—Capital gains:unit trusts, etc. '(1) In relation to gains accruing on disposals after 5th April 1977 section 112 of the Finance Act 1972 (reduction of tax liability on certain disposals of shares in unit trusts, investment trusts and funds in court) shall have effect as if for the references in paragraphs (b) and (c) of subsection (3) to 17½ per cent. there were substituted references to 17 per cent. (2) Section 113 of that Act (reduced rate of capital gains tax for certain unit trusts and funds in court) shall have effect for the year 1977–78 and subsequent years of assessment as if the rate specified in it were 17 per cent. instead of 17½per cent.'. Amendment (a) to the proposed new clause, in subsection (1), leave out 17 per cent.' and insert 16½ per cent.'.

Amendment (b) to the proposed new clause, in subsection (2), leave out 17 per cent.' and insert 16½per cent '.

New Clause 38—Decrease in deductions to be made from payments to subcontractors in the construction industry Subsection (4) of section 69 of the Finance (No. 2) Act 1975 (which requires deductions to be made from payments to certain sub-contractors in the construction industry) shall have effect in relation to payments made on or after 1st September 1977 with the substitution of "35 per cent." of '33 per cent."'. Government Amendments (a) and (b) to the proposed new clause.

Government Amendment No. 96, in Clause 19, page 13, line 20, leave out thirty-five sixty-fifths 'and insert thirty-four sixty-sixths'.

Amendment (a) to the proposed Amendment No. 96, leave out thirty-four sixty-sixths 'and insert thirty-three sixty-sevenths '.

6.15 p.m.

Mr. Barnett

Amendment No. 95, as will be clear to the House, seeks to reduce the basic rate of tax from 35p to 34p. There are a number of consequential new clauses and amendments taken with it on which it might be helpful if I say a few words at the outset.

New Clause 83 deals with the credit to capital gains tax in the case of unit trusts and investment trusts. It is exactly consequential on the reduction in the basic rate. New Clause 38 is again consequential on the reduction in the basic rate and relates to sub-contractors. On this I note that there is some concern, because the Opposition's amendment sought to have the date in September whereas we are suggesting that the date should be 6th November. I shall explain the reasoning behind this so that the House can understand why it was not possible to accept the date in September. The reason is that there are very serious operational problems, which I shall explain.

A new ready reckoner and guidance notes will need to be prepared for the purposes of all those involved in the industry to save great difficulty in the half million businesses involved. If we tried to do it in September, before such guidance notes were distributed, it would be extremely difficult, not least for the smaller firms, although the larger firms might be able to cope with the reduction. It could not be prepared and distributed in time for September. Without that kind of certainty, I think it would be helpful to start at the earliest conceivable date when we can start sending notices to all concerned. That would be the beginning of the income tax pay-as-you-earn month, which would be 6th November.

The House will appreciate that it does not affect the tax liability of the businesses concerned, which will be decided in the normal way when the accounts are submitted and assessed. I hope the House will recognise that, for these reasons, starting on 6th November is a sensible way of dealing with the matter.

Those are the two main consequential amendments. Amendment No. 96 is also directly consequential and relates to advance corporation tax.

We would, of course, have liked to reduce the basic rate of tax to 33 per cent. and we would have liked to do a great deal more about the threshold and also to introduce a reduced rate of tax.

I have said on many occasions in the House and in Committee that the starting point for tax is far too high. We should have liked to make a start this year on a reduced rate band. We had a straight choice within the constraints of the borrowing requirement. Given the money available, we had to choose how much we could do on the threshold, how much we could do on the basic rate and how much, if anything we could do, on a reduced rate band. I make no bones about it. I preferred the original proposition to do something on the threshold plus 2p on the basic rate, which I believe would be a rather better balance than the additional amount on the threshold and only 1 p on the basic rate.

As I explained in Committee, there has been a narrowing of differentials in terms of net take-home pay which we need to widen somewhat. Much as I want to raise the threshold as rapidly as possible, if we took all the sum available on the threshold and nothing, as some of my hon. Friends would have liked, on the basic rate of tax, that would give precisely the same sum in terms of net take-home pay and tax relief to the man or woman earning £30 a week as to the man or woman earning £100 a week. It would have narrowed differentials in terms of net take-home pay yet further to a small extent. That is why we chose as our preference to raise the threshold as much as we could and also to reduce the basic rate of tax by 2p.

However, the Committee—and, it seems, the House—wants to raise the threshold rather more. Given the constraint on the borrowing requirement, it is not possible to do both. We have therefore decided to stay with the additional raising of the threshold plus 1 p, which is not as much as we would have liked but is still of some help to those in skilled employment and those with earnings at the top end of the basic rate band. I believe that it will be helpful in that respect, and I hope that the House agrees.

I recognise that there are those, such as the right hon. Lady the Leader of the Opposition in her speech yesterday, who seem to be asking my right hon. Friend the Chancellor of the Exchequer to do much more out of the sums available for the higher paid, whereas some of my hon. Friends prefer to devote virtually all the sums available to the threshold. There is no simple answer to these questions. The threshold is too low, and we need to raise it as fast as we can. But, given all the constraints, I believe that the 1p, plus the additional raising of the threshold that we are now proposing, plus what was done in Committee, will be of considerable benefit.

I know from speaking to people in my constituency and elsewhere that there is still misunderstanding about when the relief will take effect. Some people think that it takes effect only from the date when we pass the proposal in this House. I should make it clear, however, that both the new basic rate and the increase in personal allowances will be effective from 5th April last. That means that most taxpayers will get a refund of tax. Indeed, in August the taxpayer on average earnings and liable to the basic rate of tax will have a total refund in respect of personal allowances and the reduction in the basic rate of £17.50 for a single man and –19.50 for a married man.

I hope that this proposal, together with the other measures announced by the Chancellor on Friday, will create the kind of climate that will enable us to obtain moderation in pay settlements during the next year. I should have preferred a more formal understanding on pay over the next 12 months, but I do not think we should under-estimate what the TUC has been able to do. The 12-months rule, as the TUC clearly spelt out in its document, should go a long way towards ensuring that there will not be a pay explosion in the next round. But that by itself will not be enough. Clearly we want settlements in the next round to ensure that the growth in earnings over the next 12 months will be within 10 per cent. overall. That does not mean that we can specify any particular figure in a period of free collective bargaining. But, as a Government, we shall be working to achieve that end.

The TUC was particularly helpful in its statement last week, which is worth quoting: In the context of the restoration of voluntary collective bargaining, the emphasis should be on looking forward to what can be genuinely gained in terms of real living standards, not on looking backward to a situation where it was the vain attempt to counter the effects of inflation by escalating wage claims that exacerbated the very ill this was hoped to cure. I am sure that the TUC meant what it said in that statement and that all members of the TUC and the constituent trade unions will note what it said. But one is bound to recognise that in a period of free collective bargaining the real test is yet to come. The real test will come during the next 12 months of the pay round. The Government for their part, both as employer and as being responsible for the management of the economy, intend to do all they can to ensure that kind of restraint in pay settlements.

The raising of the tax threshold and the other measures that we have already announced, together with what we hope it will be possible to achieve in future, will show the trade union movement, and, indeed, all people who have to settle pay claims during the next 12 months, that we intend to try to create the kind of climate that will enable this country to move forward, with moderate pay claims and settlements in the next year, to the kind of economic situation that we can see within our grasp, with inflation of single figures and staying there and with living standards being maintained and thereafter moving on and up. I hope that the House will accept the amendment.

Sir Geoffrey Howe (Surrey, East)

The Chief Secretary helpfully explained New Clause 38 and the amendments being proposed by the Government as being the changes necessary to accommodate those in the construction industry for the change in the tax rate now proposed. Lt is difficult to believe that it is necessary to defer the date from 1st September to 6th November. No doubt the ready reckoners are documents and objects of enormous complexity in this industry, but it is hard to believe that such a long delay is necessary.

The right hon. Gentleman was right when he said that there would be no change in the tax liability of those concerned. There is a change of some significance in the cash flow position of those who benefit from the 714 certificates and who are entitled to benefit from the withholding of a lower amount of tax. I hope that the Chief Secretary will regard this as another example of uncertainty produced in the prospective rate of income tax as a result of the conditionality about the main tax change proposed in the Budget.

There are two aspects to the debate. The first is conditionality—the concept of the House of Commons being invited to consider changes in the standard rate of income tax, but not to decide them for some months. The second concerns what is or should be the proper level of income tax as a standard rate.

It is interesting to reflect, as the idea of conditionality sinks below the waves for the last time, how important it was to the Chancellor's Budget strategy, not only this year but last year. The House will recollect the way in which the reduction in income tax was made the centrepiece of the Chancellor's Budget Statement last year and was made explicitly dependent upon the achievement of a further formal agreement with the TUC. The House was presented with afait accompli.It was regarded as a new instrument of modern Socialist man, making our tax position subject to the determination of bodies outside the House.

Therefore, this year the Chancellor, so proud was he of this device, not only presented it to his bank managers in the International Monetary Fund and said that he would again make his Budget conditional in this way, but made it clear in his Budget Statement. Conditionality was still at the heart of his Budget when we debated this matter in Committee as late as 9th May when the hapless Minister of State, in answer to a similar debate, said: The Chancellor made the position quite clear in his Budget Statement, and it has been repeated here tonight. My hon. Friend feels that it would be quite imprudent to determine these matters until we have seen the course of the negotiations and the outlook for a pay agreement is more settled and clear. That is where the Government sstand."—[Official Report, 9th May 1977; Vol. 931, c. 1058.] That was a robust declaration by the Minister of State. We say that this approach to the settlement of tax rates for the country is wrong in principle and inconvenient in practice. It is inconvenient in the way in which we have been discussing 714 certificates for con- tractors, and it is wrong in principle, as we have said many times, to subject the decision of the proper standard rate of tax to a body outside the House.

6.30 p.m.

Incidentally, it has another unattractive aspect, although the Chancellor may find it attractive. The right hon. Gentleman appears to get an almost endless series of headlines telling the nation that he has made tax cuts that he has not made. When he makes his Budget Statement the headlines scream "Tuppence off" and everybody goes home euphoric and delighted. Then we are told that it is not really tuppence off and that the reduction is to be kept on ice till the TUC has considered it. The Chancellor told us last Friday that in fact it would be a penny off. Again the headlines screamed "Another penny tax cut". That may be the only justification left for the Chancellor to continue using the technique—namely, being praised in the headlines more than once for an ever-diminishing tax cut.

When these matters were debated in Committee in May my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) and the hon. Member for Tottenhain (Mr. Atkinson) said that conditionality would not survive. They both said that whatever happened in respect of the pay deal the tax cut would be made in one form or another. And so it has proved. In fact, the pay deal has not been arrived at. The social contract has melted away. Conditionality is also melting away. It was the last residual feature of the social contract technique. It gives us the opportunity for taking another affectionate look at the posture of the Liberal Party in these affairs.

Mr. John Pardoe (Cornwall, North)

I wondered when the right hon. and learned Gentleman would turn to the Liberal Party. I was becoming rather lonely.

Sir G. Howe

I did not want to disappoint the hon. Gentleman, who is sitting on the Liberal Bench in not so splendid isolation.

The Government were standing firm on 9th May. The Chief Secretary had as his loyal henchman, his follower of fashion, the hon. Member for Cornwall, North (Mr. Pardoe). The hon. Gentleman said: I accept the conditionality …What 1 do not believe is that, with the negotiations as they are now, the Government should simply hold up their hands and say to the trade unions 'We surrender. You can have anything you like. You can do any kind of deal you like, and it will not make any difference to taxation'."—[0fficial Report, 9th May 1977; Vol. 931, c. 1041.] It seems that the Liberal Party was standing firmly and squarely alongside the Chief Secretary on the principle of conditionality. It was one of the elements of the pact. It was one of the planks of the joint edifice that sustains the right hon. Gentleman and the hon. Gentleman alongside each other. However, like so much else it has disappeared, and the hon. Gentleman is left contemplating the wreckage. Conditionality is as dead as the social contract that gave it birth.

Mr. Lawson

Perhaps my right hon. and learned Friend is being a little unfair. The hon. Member for Cornwall, North (Mr. Pardoe) and his fellow Liberals still have an opportunity to show their consistency and redeem their integrity by voting against the Government on the amendment.

Sir G. Howe

Yes. I accept that position as being logically consistent with the solemn declarations made by the hon. Member for Cornwall, North. However, we do not know what further bargaining has been taking place between the Chief Secretary and the hon. Gentleman to maintain the improper embrace that they lock around each other to sustain this curious alliance. My hon. Friend the Member for Blaby (Mr. Lawson) is entirely right to draw attention to the opportunity that presents itself to the Liberal Party today. We shall see whether logic or some other relationship is dominant in the mind of the hon. Gentleman. I would seek to have no part in the sort of consultations that take place between the right hon. Gentleman and the hon. Gentleman. So much for conditionality.

The other aspect that is even more important is what should be the standard rate of income tax for the present year. The Chief Secretary has moved an amendment to reduce it to 34p in the pound. The Opposition are proposing an amendment to reduce it to the level originally suggested of 33p in the pound.

I remind the House of the way in which the Chancellor approached this issue when he gave the nation his compact and candid insight into the Budget in his Budget broadcast. There was no qualification in his description. He said: It is this new confidence in Britain which has made it possible for me to make really big cuts in income tax so that it is more worth while for everybody to work that bit harder. He continued: The cuts in income tax should make everyone feel that it is worth while putting more into their work and getting an agreement on another round of pay policy when this one runs out. At the end of the day the standard rate cut emerges as 1p. Of course, as the Chief Secretary has rightly said, the total package of tax cuts was originally meant to be conditional. However, an unconditional element has been brought into the mixture. There has also been a change in the level of allowances. That was imposed upon the Government in Committee. Although the threshold has been raised it still remains impossibly low.

In our view, the Government continue to approach the reductions that should be made in income tax from entirely the wrong point of view. Night after night in theatre after theatre the Chief Secretary goes forward, wrings his hands and says" Of course, we should like to raise the thresholds. We should love to cut the standard rate. We should love to contemplate the introduction of a reduced rate band. However, we are unable to do as much as we should like." The right hon. Gentleman always operates as a man constrained by fixed frontiers.

The right hon. Gentleman is rightly constrained by a responsible attitude to the public sector borrowing requirement. We wish to see that requirement being reduced steadily. However, he should not be constrained by feeling that all the expenditure to which he is committed is inevitable. He should not be constrained by a reluctance to contemplate what my hon. Friend the Member for Guildford (Mr. Howell) urged upon him in Committee and in the House previously—namely, a willingness to increase the yield of VAT by moving to a standard across-the-board simple rate of 10 per cent. with a yield of £600 million as a means of paying for a reduction in direct taxation. The right hon. Gentleman should not be constrained by a passionate determination to pour publicly raised money into oil exploitation and exploration in the North Sea through the British National Oil Corporation when oil companies around the world would love to relieve him and the public purse of that task.

The right hon. Gentleman should be committing himself to further substantial reductions in public borrowing. He should accept the logic of the argument that he was advancing so benignly in the pages of theFinancial Timeslast week—namely, that people wish to see a switch from tax on income to tax on expenditure.

It is remarkable the way in which the right hon. Gentleman addresses conference after conference of tax experts and accountants and acquires a growing reputation for his wisdom and skill in these matters. No doubt, that will stand him in good stead in the world shortly to come. He commends the change of policy that we have been urging upon them, but he always fails to come to the point of doing anything about it.

The right hon. Gentleman knows as well as we do that income tax was designed in the days of the Forsyte Saga. It has moved further and further down the income scale in the years that have passed since the war. In the early 1950s the threshold was above average earnings for a married man with two children but it is now well below half average earnings. The tax, which was designed for the Forsyte Saga, has now bitten deeply into Coronation Street. Families who should not be paying income tax are now paying it with a threshold that is too low and on a rate that is too high. It is the lowest threshold in the Western world and the highest starting rate.

We should see a determination to make a major change in the shape and nature of the burden. That is why we are pressing for the implementation of the proposed reduction that was put forward in the Budget Statement of 33p. The Government should be prepared to finance that by raising additional money, if necessary from value added tax, but preferably by reducing some of the expenditure that we regard as unnecessary. Nobody else in the Western world has a starting rate as high as 33p, 34p or 35p. Nobody else has a starting rate of more than 22p in the pound. They all have higher thresholds except for one or two countries that have starting rates of only 7 per cent. or 15 per cent. It must be right to make substantial reductions in the shape and burden of direct taxation.

The Chief Secretary, as did the Minister of State in our last debate on these issues, canvassed the possible alternative of a reduced rate band. I know that the hon. Member for Cornwall, North has spoken about this and that, like very other suggestion for lightening the burden of direct taxation, it deserves some consideration, but I do not find it an attractive direction in which to move, because the disincentive would remain high for those who began paying the standard rate above the reduced rate. In other words, the disincentive effect would be reduced only for those in the band covered by the reduced rate, and the standard rate would remain oppresively high for those above it. It could too easily be regarded as an excuse for maintaining too high a basic rate if one could point to a tranche of people who were exempted. From that point of view, reduction of the basic rate might be regarded as more preferable.

There are bound to be administrative complications as a result of the reintroduction of a reduced rate band. There would be complications in relation to dividend payments, mortgage interest payments, and so on. There would be complications also if one were contemplating any further movement in the direction of the tax credit scheme alongside the child credit scheme. The Chief Secretary will remember that that was one reason why a single basic rate was adopted earlier.

We prefer to see a switch from direct to indirect taxation given priority in itself, for its own sake, so that one can reduce the basic rate sufficiently to make the introduction of a reduced rate band unnecessary. The Chief Secretary will remember the answer given on 16th May about the proportion of direct to indirect taxation in this country. The Financial Secretary's answer, which is to be found in Hansardat Vol. 932, column 34, shows that in 1968–69 direct taxation as a percentage of indirect taxation was 81 per cent., whereas in 1975–76 the figure had risen to 123 per cent. The House is familiar with the huge switch of the burden in that direction. The tilt in the direction of direct taxation is so substantial that the main thrust of getting it back again should go in the reduction of the standard rate, and that should take precedence over the complications of introducing a reduced rate band.

Mr. E. Fernyhough (Jarrow)

I am interested in what the right hon. and learned Gentleman is saying. He will appreciate that the incomes of several million people are so low that they do not pay any tax. If indirect taxation is increased, the standard of living of those who do not now pay income tax is automatically reduced.

Sir G. Howe

That argument has frequently been advanced over the years, but, as the Chancellor of the Exchequer said—for the first time from his point of view—in a debate last autumn—and it has been mentioned frequently in subsequent debates—because VAT, one of the main engines of indirect taxation, exempts food, fuel, transport and housing it leaves out a great chunk of essential purchases by the families to whom the right hon. Gentleman referred. It is inaccurate to speak of indirect taxation as regressive and working to the disadvantage of poorer families. For the reason that I have given VAT, with the spread that it now has, is an advantage. The Chancellor of the Exchequer has said, and the Chief Secretary will no doubt confirm this, that a switch from direct to indirect taxation would not work to the disadvantage of poorer families. The Chancellor has, I agree, gone on to say that a switch in that direction would produce an increase in the average level across the board of the retail price index that has to be taken into account, but the argument advanced by the right hon. Member for Jarrow (Mr. Fernyhough) is no longer valid.

Mr. Julian Ridsdale (Harwich)

Does my right hon. and learned Friend agree that, to help the poorer families, we as a country have to create more wealth? How can we do that if we do not give people on the shop floor an incentive in the form of reduced taxation to produce that wealth?

6.45 p.m.

Sir G. Howe

My hon. Friend is right. That is the underlying thrust of my argument. It is the oppressive burden of direct taxation at every income level, and the imposition of tax at 39ip, including national insurance contributions, on every pound over £16 to £17 per week earned by a single man, that we must lift and lighten. It is a burden that we must be prepared to lighten at the expense of moving towards higher indirect taxes.

In his Budget speech the Chancellor of the Exchequer introduced into these debates a new argument that is a little difficult to follow and accept entirely, but it might have some value. The right hon. Gentleman argued that a reduction in the burden of direct taxation would have, or could be said to have, the effect of reducing the retail price index.

On 16th May my hon. Friend the Member for Horsham and Crawley asked the Chancellor of the Exchequer what would be the effect on the retail price index if the basic rate of income tax were reduced (a) to 30 per cent. and (b) to 25 per cent., using the same calculations as he gave in his Budget statement". The Financial Secretary replied: On the assumption that such reductions replaced increases in wages yielding the same net benefit, a reduction in the basic rate of income tax to 30 per cent. together with the other tax reliefs announced in the Budget would be worth 4¾ per cent. off the RPI by the end of 1978, and a reduction in the basic rate to 25 per cent. would be worth 8¼per cent. off the RPI. This is before any increases in indirect taxation which might be needed to offset such large direct tax reductions."—[Official Report,16th May 1977; Vol. 932, c. 33.4] The inflation concept that the Chancellor has introduced fortifies the argument that if one can make a substantial reduction in the standard or basic rate of direct taxation it can have a significant effect in persuading employees to accept more readily the case for restraint in pay bargaining. It can increase the incentive available to them by reductions in direct taxation, and it can, through the whole of that process, make more acceptable an increase in the burden of indirect taxation.

I am certain that that is the direction in which we have to move in our tax system. We have to continue to raise the threshold to let out of the burden of income tax as many as we possibly can. We have to get away from nonsensically high rates of direct taxation at the top of the scale, and we have also to achieve substantial reductions in the basic rate of income tax.

The Chancellor has raised the figure by 5p in the pound since he came to office. He held out the possibility of a reduction of 2p in the pound at the beginning of this year's Budget speech. He now leaves us with a reduction of 1p. We do not think that that goes anything like far enough. Even within the framework of this Budget, given proper resolution on their part, the Government could get at least the original 2p off the standard rate and I shall in due time invite my hon. Friends to vote for that course.

Mr. Ridsdale

I am glad to follow my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in the moderate way in which he has put forward our zeal to reduce direct taxation. The zeal that many of us have to reduce direct taxation stems from the fact that as a result of Socialist rule we see the economy of the country in a straitjacket.

The failure to get any growth in the economy is alarming and startling, and anyone who is not tied up in the bureaucratic everyday running of our country and can look back and see with clear vision what is happening realises that a succession of Budgets introduced by Socialist Governments have led to direct taxes being increased because of the inflation they have caused.

When I visit Japan, I am upset to see the difference between what is happening there and what is happening in this country. When I was there in April, I visited an exhibition at the British Export Trade Centre. 1 had crossed the Pole and I was tired. But next day I went to the exhibition. I thought that the furniture manufacturers would complain about import controls and the difficulty of getting into the market. Not a bit of it. They asked me to tell the Government when I returned home to get off their backs, because they could not compete with the present rates of direct taxation and wages.

Our direct taxation is almost double that of Japan. Our wage rates are half those of Japan. It is no wonder that the Japanese have more incentive and freedom to produce. For every 60p that our Government spend, the Japanese Government spend 20p. That is how our incentives are reduced. That is why I appeal to the Government to get our economy out of the present straitjacket. We have too much Government expenditure, which must be reduced.

Mr. Fernyhough

While the hon. Gentleman was in Japan, did he inquire about how much of their gross national product was spent on defence and how much of it has been spent on defence since the end of the war? If he compared it with ours, he would appreciate the burden that our people carry.

Mr. Ridsdale

That is a real argument. Nevertheless, before the war when we were spending 20p in the pound we were able to spend a large amount of it on defence and compete in the world as well. Japan's defence burden is smaller than ours but it does not account for the comparative success of Japan. Their success is partly as a result of low Government expenditure.

When I visit factories in my constituency, perhaps one that has been presented with the Queen's Award, I talk to the people on the shop floor. They tell me that it is nice to see the flag going up and for them to have a piece of the cake to share, but they do not know what is in it for them. They say that they have worked hard to increase exports but still have to pay a high proportion of tax.

We must help the people on the shop floor with their tax burdens, otherwise we shall continue with the present zero growth rate. It is no wonder that there is a feeling in the unions in favour of increased wages. The Government have been spending too much. There has been a 50 per cent. increase in Government expenditure. That has to be paid for. What a pity it is that a constraint has not been placed upon the Government and that that money is not available to reduce taxation on the shop floor. That would increase our growth rate.

In Japan a 15 per cent. settlement has been made in the public sector compared with 50 per cent. settlements in this country. The inflation rate will be 9 per cent. in Japan this year. The Government say that they want to bring down the rate of inflation to single figures. Even if we achieve that with a zero growth rate, we shall still be in difficulties.

This is the challenge. This is why I say to the Government that a reduction of 2p in the pound in the standard rate of tax is not bold enough. We must switch from direct to indirect taxation, because the money that the Government need to meet their obligations cannot be cut overnight. We must ensure that those who produce the wealth of the country have a share in that wealth and thereby increase output.

I am sorry to go on about Japan, but I have made a study of its industry. In Japan, wage negotiation is on a company basis. That means that both those on the shop floor and the management share in the creation of the wealth and in the wealth itself. Here, alas, because the wealth is shared across the board, the incentives are not there. That is why we want a reduction in direct taxation, not only for those on the shop floor but for management and for skilled people generally.

It is alarming to find that when one visits a factory in this country the managers want one to stay a little longer before going to the shop floor. That is because management is taxed too heavily. The skilled and the hard-working are constrained in a straitjacket. Until we get out of that situation, we shall not give people the incentive to go ahead.

High direct taxation causes many to leave the country to work abroad, where they find that they receive a better reward for their work. It is understandable that they should go abroad. The Government are in a straitjacket, not only because of their Socialism but because of their obligations to the IMF. I am glad that a new Conservative Government will not be long in taking over to give incentive to shop floor workers. We shall then see growth increasing and I am certain that we shall be out of many of the difficulties. Above all we must have a cut in direct taxation, but it must be a bold cut and not a petty cut.

7.0 p.m.

Mr. Pardoe

If the problems of the British economy were as easily solved as the hon. Member for Harwich (Mr. Ridsdale) indicated, there would be no difficulty in reversing the economic decline which began about 100 years ago in 1870. The fact is that in 1870 and in many of the years since then we had low taxation, and we did not solve our problems. By present standards, we had quite reasonably low taxation in the 1950s. In spite of the fact that the terms of trade then moved in our favour for a decade at least, we still did not solve our fundamental industrial problems. We were still not able to compete in the export markets of the world and in terms of productivity.

I do not share the fondness for Japan expressed by the hon. Member for Harwich. The Japanese have done miraculous things economically, but it is an excruciatingly paternalistic society and I do not find that paternalism the least bit attractive. The hon. Member is not the only person who does business in Japan. At present, the Japanese economy is a pretty dead duck. The Japanese are therefore being forced to cut export prices to less than the bone in order to sell their products in the world markets, because they really cannot sell them at home as the domestic economy is in such poor shape.

The right hon. and learned Member for Surrey, East (Sir G. Howe) tried hard to be beastly. For internal party purposes, he actually needs to be thought to be beastly. It is a well-known principle in the Conservative Party that the Chancellor has only one thing to commend him—namely, his beastliness. Anyone who is trying to compare himself with the Chancellor, or to be compared by Conservatives with the Chancellor, must therefore be beastly too. But, no matter how hard the right hon. and learned Gentleman tries, he remains resolutely and appallingly nice. That is his great difficulty.

The right hon. and learned Gentleman and I—he may remember this it is a pity that he is not now in the Chamber—and the Secretary of State for Education and Science took part in a late-night discussion programme during the last General Election campaign. The programme was written up in one of the popular prints—theDaily Expressor theDaily Telegraph,I remember not which. The television critic said "At last—three politicians who were able to discuss the problem reasonably and at least look as though they wanted to agree at the end and might, in fact, succeed."

Let us see whether there is not some area of agreement about some of the subjects that we are discussing as a result of the amendment. The right hon. and learned Gentleman mentioned the conditionality. There are three ways at least of looking at conditionality. One is that the offer of 2p off the standard rate of income tax was a bribe to the trade unions in order to deliver a pay policy. If one looks at it like that—if it is not a pleasant prospect for any parliamentarian —I would not call it a bribe, but I am not sure what word I would euphemistically put in its place.

Then one can say that it is a fiscal device to ensure that the balance of taxation takes account of what is happening in the rest of the economy. Here there is no doubt that pay is a very important part of what is happening in the rest of the economy. Pay is surely one of the most important factors in any Government's management of the economy. It is directly important because of the impact of pay increases on the Government's own labour costs and, therefore, on the Government's own total expenditure and on the borrowing requirement.

It is also enormously important that the Government have some idea about what is going to happen to pay, even in the private sector, because, again, the level of pay can affect the whole question of the management of the economy. As most Governments—I think even the Government in which the right hon. and learned Gentleman took part—would believe that the tax system was one of the weapons that the Government have to use for the management of the economy, it seems obvious that there has to be a link at some point between the calculations they make about taxation level and what is happening to pay in the economy, because that is so important an element in the whole question of management.

Then, perhaps, one can look at the question of conditionality as being a necessary delay, because it would be wrong to decide the final Budget judgment before knowing the level of pay. Of course, the trouble here is that, because our settlements are scattered out over the whole year, Governments never know what is likely to be the settlement on pay unless they have the kind of rigid pay policy that we have had in phase 1 and phase 2.

I understand that the right hon. Member for Lowestoft (Mr. Prior) has been pondering on these problems and is very near the point, if not quite at the point, at which he can say that he favours something which is somewhat grotesquely called "synchro pay day". If that simply means that it would be better if all pay settlements, or major pay settlements anyway, were decided in the first three months of the calendar year, I think we would all agree that that would make many things easier. That is Utopia. I doubt whether we shall get near it, so there is not much point in talking about it. However, I understand that the right hon. Member for Lowestoft believes that to be an important factor for the future management of the economy under a Conservative Government. I look forward to seeing how the Conservatives will get from here to there. It would be interesting to see how it could be done. I accept that it would be desirable to do it if it coud be done. I am not sure whether the right hon. and learned Member for Surrey, East agrees with his right hon. Friend.

Certainly, if we were in a position to know what the major pay settlements were for the year beginning, say, on 1st April, and if we knew that at some time in early March of each year the Budget judgment could obviously be taken with much greater confidence.

Then we move to the question of the balance in our tax. Here again the right hon. and learned Gentleman made the point that our tax, certainly our income tax, is too high. His hon. Friend the Member for Harwich seemed to think that all our taxes were too high. I do not think that it is really sensible for us to keep repeating what is a myth. We still feature in the first 10 OECD countries in terms of wealth. We are about eighth in relation to the proportion of our gross national product which is drawn by the Government in taxation. Therefore, in total terms, we are not actually a high tax country. Unfortunately, it just feels that way because we take so much out through the most unpopular tax of all. That is my answer to the right hon. Member for Jarrow (Mr. Fernyhough).

It is all very well to go on saying—as, indeed, I have said in the past; I accept that entirely—that income tax is somehow more fair and just in the teeth of what we all know—that is, that people would rather pay their tax on expenditure than on income. The problem with income tax is that it is so directly perceived a tax. If one is paid weekly, as the majority of the population are, there it appears, in black and white, on the pay slip. One seems what one could have got if only someone had not deducted that amount, and the gap between gross pay and net pay is so large that even people on a very modest level of income are now heartily sick and tired of income tax.

That is not the same thing as saying that we are a high-tax nation. Therefore, it is much more important that we should discuss the question of the balance between taxes than simply continuing to mouth the old nonsense "We are overtaxed. Dear, oh dear, we must get total tax down." The fact is that Governments do not get total tax down, and—guess what?—Governments will not get total tax down.

I do not believe any of the stuff about a Conservative Government being able to make the kind of cuts in public expenditures that will reduce the total burden of tax. When one considers all those other seven OECD industrial nations that are having to take a higher proportion of their GNP in taxation than we are—admittedly, they have higher GNPs, and it does not hurt so much when one takes it out of a higher total—I think it unlikely that we shall get ourselves into an economic situation in which we can become a low-tax country by their standards.

I think that it is now common ground in the House, with one or two exceptions, that we need to reduce income tax. We need to reduce it, as the right hon. and learned Member for Surrey, East said, at every level. We needs to reduce it as a proportion of our total tax burden. It is ruinously high at low levels of income, at middle management levels and at the top rates, where it is simply confiscation, and one might as well be honest and call it by its proper name. But if one is to bring down income tax, where is the money to come from?

The right hon. and learned Gentleman said that the Government might cut some expenditure. They might. To take another penny off income tax would cost about £450 million or 500 million, give or take a million—who cares? I do not expect the Chief Secretary to agree with my last comment. It is not his job to agree with such remarks. The necessary £450 million would have to be found from expenditure in this financial year because of all that we did in Committee.

How is the money to be obtained? Is it likely that £450 million can be cut from current expenditure this year? If so, let us be specific and say where it is to come from, because 1 fear that otherwise it will come from capital expenditure. It is quicker and easier, as the right hon. Member for Down, South (Mr. Powell) has often pointed out, to take it out of capital expenditure. But that would be more disruptive. The money can come out of the capital programme provided that it has not been spent. At this stage in the year it can certainly be obtained from that source. Let us have from the hon. Member for Guildford (Mr. Howell) a specific answer to a specific question. If the £450 million is to come from reduced public expenditure, we all want to know exactly what public expenditure is to be cut.

I remind the hon. Gentleman and his right hon. and learned Friend that it is not good enough for Conservatives to prate about how well they did the last time they were in power. I accept that income tax was lower when they left office than it is now, but that would not be very difficult. They did not do all that well, however. They only reduced the top rate of income tax to 75 per cent., and that is hardly Utopia. As the right hon. and learned Gentleman said this afternoon, the standard rate was only 5p less then at present. Is it the target of the next Conservative Government to knock 5p off the standard rate and knock the top rate of income tax down to 75 per cent.? I do not think that that can be so. If the Conservative Party goes on about cutting income tax, it must mean that it will do more than that. We should like to know exactly what it means. I ask how the hon. Member for Blaby (Mr. Lawson)—

Mr. Lawson rose——

Mr. Pardoe

I see that the hon. Member for Blaby, with the full authority of the Conservative Party, is to deliver theobiter dicta.

Mr. Lawson

It is to offer noobiter dicta,to put the historical record straight. The hon. Member referred to the last Government only reducing the top level of tax to 75 per cent. That was not much, he said. Is he aware that when the last Conservative Government entered office the top rate of tax was 91¼per cent? A reduction from that to 75 per cent.—I agree that 75 per cent. is too high—is not a trifling reduction.

Mr. Pardoe

We are talking about incredibly few people at that level.

Mr. Joel Barnett

We must get the comparison right. The 91½ per cent. rate should be compared with 75 per cent. plus 15 per cent. investment income surcharge, which makes 90 per cent.

Mr. Pardoe

I thought that the hon. Member for Blaby could not add up. That is because he is a monetarist.

Mr. Lawson

We are talking about earned income. The top rate of tax on earned income when the last Conservative Government took office was 91½per cent., and they reduced it to 75 per cent. The Chief Secretary is talking about investment income, which is a different issue altogether and not what the hon. Member for Cornwall, North (Mr. Pardoe) and I are talking about.

Mr. Pardoe

It is not a different issue. The hon. Gentleman is confusing the whole question. There was a complicated change of the tax system under Lord Barber, whereby the old standard rate on earned income and the earned income relief were dropped and an investment income surcharge was created. It is not fair to compare the two.

That, however, is not the main point that I am trying to make, and the hon. Gentleman knows it. My main point is that the Conservative Government only reduced the top rate to 75 per cent. What it came down from is neither here nor there. People who are paying 75p in the pound are not thrilled by the idea that at some date in the past under some Government or other, their forebears paid 91p in the pound. They want to know what the Conservative Party, if it gets into Government, will do about the top rate of income tax. What is their target? The hon. Member for Guildford said that the target is 60 per cent. How many years will that take to achieve? How would the Conservatives replace that revenue?

We then come to the standard rate of income tax. Is it 33 per cent., 34 per cent., or 35 per cent? One takes one's pick with this somewhat strange parliamentary arithmetic. Like my hon. Friends and the Chief Secretary, I would like to see it at 33 per cent., 32 per cent. or 31 per cent. Is there any advance on 31 per cent.? Does anybody want to go down the scale?

7.15 p.m.

We have to consider how the £450 million is to be replaced. I want a specific answer to the specific question. What do the next Conservative Government, if we ever get one, aim to do with the standard rate of income tax? Will it be 30p in the pound, or 28½? How long will it take a Conservative Government to reduce it? I would be much more impressed with Conservative policies it they were spelt out in this way.

The right hon. and learned Member for Surrey, East spoke for a whole half hour last night and set a record which ought to go into the Guinness Book of Records. It would if the place was not already taken by his right hon. Friend the Leader of the Opposition. The record is for making a long speech which never at any point states what the Conservatives are going to do about anything. Not one single, specific, constructive thing did he say. We can redress the balance now. The hon. Member for Guildford can put it right. There is plenty of time. All his hon. Friends are upstairs at a meeting and they will not want to be here to vote for a time. He can spell out the next Conservative Government's targets on personal taxation. I hope that he will take this opportunity to do so.

One of the difficulties to be faced by a Conservative Government is this extraordinary promise to scrap the domestic rate. How lovely, how popular. But what will replace it?

Mr. Peter Rees

Before the hon. Gentleman goes on to deal with the question of rating—I know that he is anxious to avenge what he would regard as the slight which his right hon. Friend the Member for Roxburgh, Selkirk and Peebles (Mr. Steel) suffered yesterday—I would remind the House and the hon. Gentleman that his party are at the moment supporting in power a Government who are prepared to reduce the top rate of income tax on unearned income from 98 per cent. to 97 per cent. and on earned income from 83 per cent. to 82 per cent.—

Mr. Ian Stewart

Not at all. That does not follow.

Mr. Peter Rees

That reinforces the point. I would not be so vulgar as to refer to the Lib-Lab pact, but we are dealing with actualities and not what might happen after the next General Election. Will the hon. Gentleman confide to the House whether he and his right hon. Friend have made it an essential article of the pact this summer that the Chancellor of the Exchequer should reduce the rate of tax on higher incomes by more than apparently has been proposed by the Government Front Bench? I think that the bona fides of the hon. Gentleman and his right hon. and hon. Friends are at stake. The House will not listen with great relish or patience to a speech of this kind unless he can demonstrate that he has pressed policies of a different nature on the Chancellor and his right hon. and hon. Friends.

Mr. Pardoe

I am sorry, but the hon. and learned Gentleman is not a fly on the wall. I will not take him wih me into meetings that the Chief Secretary and I have. He was almost asking for an invitation to those soirees, but he will not get one. They are very entertaining sessions, but he will not 'be around.

In Committee on the Floor of the House, I moved an amendment which would have had a substantial effect on the top rates of income tax. It would have introduced into our tax system what the hon. and learned Member for Dover and Deal (Mr. Rees) knows is already a vital part of the American tax system—that, whatever the top rates of income tax may be, no one should pay more than 50 per cent. of his earned income in tax. That would have had a substantial effect on the top rates of income tax.

The hon. and learned Gentleman, alas, did not join us in the Lobby. His right hon. and hon. Friends instructed him not to do so. I understand that: he has to obey when the whip is cracked. But it is a pity, because that amendment would have made a great deal of difference to the balance of our tax system.

Mr. Peter Rees

Let me put the record straight. There was no question of instruction as far as I was concerned. Although, of course, I share the hon. Gentleman's apparent objective of bringing down the higher rates of tax, his amendment was not a well-thought-out way of doing so. It would, of course, have benefited those on incomes of £40,000 or £50,000 and above, but for those in the £19,000 to £20,000 range it would have had the curious effect that their marginal rates would have been very high and that only as their incomes rose to a certain level would the rates have dropped again. It would have had an uneven effect.

Perhaps the hon. Gentleman did not study the debates on that amendment with care, or he would have realised that the practical reasons which led us to prefer a more sensible and logical approach, which will be adopted by a Conservative administration after the next General Election. No Whip, on whatever side, will deflect me from my intention to see the higher rates of tax fall, but I want them brought down in a more considered way than the hon. Gentleman's amendment would have achieved.

Mr. Pardoe

I had hoped that I was being fair to the hon. and learned Gentleman. I was trying to give him a way out. I thought that he had espoused foolishness because he had been told to do so. Now I find that he always espouses foolishness of his own free will, which is far worse. The hon. and learned Gentleman knows—one does not need to be a clever lawyer to know this—that if one places a ceiling at any point in the income tax scale there will eventually come a point when someone's marginal rate of tax will actually start to fall. That did not stop the American Senate from introducing such a measure in 1975. I suggest that the hon. and learned Gentleman does what I have done and studies the debates in the Senate. They make far more sense than those conducted in the correspondence columns ofThe Timesand theFinancial Times—apart from the contributions I write myself.

As the Chief Secretary knows, we have supported the Budget strategy, which is a question of how much tax there is to give away. The 1p reduction brings us up to and slightly over what the Chancellor set out to give away. At this stage, it would be ridiculously irresponsible to adopt the Conservative Amendment (a). I say that in some pain, because I recognise that 2p off the standard rate of tax would be a considerable help to middle management. It is what the CBI desperately wants this House to do. But it is what the House would have done if the Conservative Party had not tabled and voted for an amendment to change the threshold.

Everybody wants to change the threshold. I want to bring in a reduced rate of tax: I find it strange that the Conservatives do not. We all want to reduce all taxes. But surely it would have been better this time round to keep the balance as it was in the Budget. It has somehow got around that what happened in Standing Committee was due to an amendment which is sometimes called the "Morecambe and Wise" amendment. I am sorry that the two Labour Members concerned are not here. I am not attacking them, because I supported the principles on which they were working.

That amendment was not a Labour Left-wing amendment at all. It came out of the full irresponsibility of the Conservative Party in all its glory. Middle management and the CBI had better begin to understand that the reason why they will not get a 2p cut in the standard rate today is that the Conservatives ditched them in Committee. That is the fact, and that is what we shall continue to tell the nation.

Mr. Tim Smith (Ashfield)

It is a great pleasure to follow someone as modest as the hon. Member for Cornwall, North (Mr. Pardoe).

Mr. Pardoe

They are not found very often.

Mr. Smith

It is good to know that the sessions with the Chief Secretary are entertaining, but I wonder what influence, if any, the hon. Gentleman has had on Government policy. It is hard to see how Liberal policy has affected the Government at all over the past few weeks, although I know that the hon. Gentleman regards himself as the Vice-Chancellor. It is only a few weeks since he was saying that we should have a rigid incomes policy.

I agree with the hon. Gentleman in one thing, that the majority of people would prefer to pay more of their tax indirectly rather than directly. I would also associate myself with the remarks of my hon. Friend the Member for Harwich (Mr. Ridsdale) who referred to the skill and hard work of people on the shop floor. It is working people and their taxes to which I want to address myself.

Amendment (a) seeks, very modestly, to reduce the basic rate by a further 1 per cent. Since 1974 a combination of two factors, the increase in the standard rate from 30 per cent. to 35 per cent. and the failure of the tax thresholds to keep pace with inflation, has meant that ordinary working people have been squeezed hard. It is they who are now paying the bulk of income tax. The further adjustments that the Government have now accepted to the thresholds, and which were proposed in the Chancellor's statement last Friday and the White Paper, account for inflation only since the last Finance Act. There is still a lot of ground to be made up for that period from February 1974 to April 1976.

The tax for everybody who has to work is ruinously high. Today, theDaily Expresshighlights what it calls "the real tax rip-off". It points out that, since 1970, tax has risen 40 per cent. more than prices, and that most of that has been plied on since 1974. A man on average earnings with a wife and two children now pays three and a half times as much tax in cash terms as he did in 1970, while prices have risen two and a half times. So in terms of actual tax paid, where he paid £215 a year in 1970, this year he will pay £750.

This amendment deals with the standard rate. Between 1970 and 1974, and disregarding the reforms of the Finance Act 1971, the basic rate was reduced by 2½per cent. In the three years since 1974 it has been increased by 5 per cent. The current marginal deduction rate is 40¾per cent.—taking into account 35 per cent. tax and 5¾per cent. social security contributions—and the Chancellor now proposes to reduce that figure to 39¾per cent., but from 6th April next year social security contributions will go up again by¾per cent. to pay for the additional earnings-related pension scheme under the Social Security Pensions Act, 1975, so the marginal rate will be back to 40½per cent.

That is an excessive marginal rate, which has a massive disincentive effect, especially on overtime working. For instance, a miner in my constituency working at the coalface has a basic pay at the moment of £70.35 a week. If he has a wife and two young children he will still be paying tax of £13 a week even after the Chancellor's revised proposals.

7.30 p.m.

We are talking about people who work hard, but where is the incentive to work hard? Where is the incentive for skilled people to make more effort when every pound that they earn in overtime will be reduced to 60p before it reaches the pay packet?

Such is the strength of feeling on this issue that I have been given a number of NCB pay slips and told to keep complaining about the deductions till something is done. In many cases the tax deduction is equal to all the other deductions put together, including national insurance, NCB pension contributions, NUM pension contributions, union dues and NCB rent.

The issue was highlighted by theDaily Mirrorwhich, in May, investigated the reasons for the Government's resounding defeat in the Ashfield by-election. Joe Haines reported on why some miners had voted Tory. One said that he was bitter about the tax stopped from his wages and bitter because after a pit accident I made more money stopping at home than I did when I was working". Another said that he had no confidence in the Government. Prices were going up all the time and the amount of tax that he paid on his overtime was ridiculous. A third said that he had voted Conservative for the first time. His pay slip showed a gross sum of £59.97 with a net payment of £38. He said: If things don't alter, I'll vote Tory again. When you go to the pay office on a Friday at least a third of your wages has gone in tax. The annual report of the NCB has been published today and Sir Derek Ezra has warned that Britain faces the possibility of a shortage of house coal this winter unless the miners increase their output. He has called on union leaders for a new productivity drive. Why should miners work harder? They have no incentive to do so. They have no local productivity scheme and they pay a marginal deduction rate of tax of 40 per cent. on every pound they earn in overtime.

No Labour hon. Member opposite who represents a mining district will say these things that so badly need to be said. Therefore it is left to me. The miners, like other hard-working, skilled people, pay far too much tax. Amendment (a) is extraordinarily modest, and should be supported.

Mr. Ian Stewart

It must be rare for an Opposition Back Bencher to table an amendment to the Finance Bill on basic rates of tax and to have it not only accepted, but moved by a Minister. Amendment No. 10, which I tabled two or three weeks ago, has exactly the same effect as the Government's Amendment No. 95, which was tabled subsequently and which is longer and less elegant than mine, though, perhaps because it stands in the name of the Chancellor of the Exchequer, it appears higher on the Order Paper.

I recognise that by the Report stage of the Finance Bill, the Government must make clear their intentions on those tax matters where they have not done so before, but the fact that a decision had not been made about the basic rate of tax until a few days before the Report stage started is a disgraceful reflection on the way in which the Government are pursuing their economic strategy and dealing with the fundamental tax problems of millions of citizens.

I felt it right to table Amendment No. 10 in case the subject had slipped the Government's mind. I could not table an amendment to reduce the rate to 33 per cent., because that proposition had been defeated in Committee and, according to tradition, there would have been no opportunity to reintroduce it. Perhaps it was still the Government's intention to reduce the rate to 33 per cent., but they voted against that proposal and helped to defeat it in Committee.

It is against that background that we have to consider the Committee's decision on the incidence of income tax. Weeks after the Budget Statement, the Government had still said nothing concrete about the basic rate of tax and the Committee was entitled to regard that part of the strategy relating to the reduction of the burden of income tax as open for debate and, if necessary, amendment. It was against that background that the Committee made its decision about the threshold.

At that time we were also considering the basic rate of tax. There is no difference between my Front Bench and myself on this matter. Perhaps I was just a little more modest than Amendment (a) in proposing a reduction of 1 per cent. rather than 2 per cent. It is not irresponsible for the Opposition to make such a proposal. I cannot be drawn into giving official reasons for our belief that it is possible, desirable and capable of being financed. I leave that to my hon. Friend the Member for Guildford (Mr. Howell).

Amendments to reduce the basic rate recognise, as do hon. Members on all sides of the House, that our rates of income tax are far too high at the top, in the middle and at the bottom, and that they start to bite at far too low a level of income. As my hon. Friend the Member for Ashfield (Mr. Smith) spelt out so cogently, the marginal rate of tax is far higher than 34 per cent. or 35 per cent., because we have to add national insurance payments. A marginal rate of about 40 per cent. on earned income is absurd. There is no other word for it. It is not surprising that it is having the social and economic consequences that we are now seeing.

We are determined to reduce the basic rate of income tax and the incidence of other rates at higher levels. There is a fundamental difference between the two sides of the House on this subject. I believe that the Liberal Party is with us. The hon. Member for Cornwall, North (Mr. Pardoe) seemed to be agreeing with our view.

We always get words of encouragement from the Treasury Bench, but we get very little action. The Government speak of the need to reduce the burden of personal taxes, but we must ask whether they mean what they say. It may be electorally embarrassing that so many of their erstwhile supporters are being taxed out of their loyalty to the Labour Party. That may suggest to the Government that something needs to be done, but the Government will do nothing on intellectual or social grounds or because of a sense of right, or because of their conscience. They will do it only if they are forced into doing it.

The Chief Secretary and his right hon. Friends have said many times that they do not believe in the disincentive effect of high taxation. They suggest that if rates of direct tax are increased people will work harder in order to compensate for that and to maintain their standard of living. I do not understand how anyone can believe that that is an option, given our starting levels and rates of taxation. It is not on.

This is nowhere better illustrated than in the sort of comments that many hon. Members must be getting when dealing with constituents' personal taxation problems in their weekly surgeries. When I was first elected to this House in 1974, I received a friendly letter from the inspector of taxes at Hitchin, offering to help with tax problems brought to me by constituents. For the first year or so they were mostly technical problems about whether assessments were correct, or whether there were arrears of this or credit for that, or perhaps some complicated arrangement over pension contribution deductions.

That is not the way it has been in the past year. People have been asking me to take up their tax problems, because they believe that the level they are expected to pay is incredible. They do not believe it possible for the Government to have fixed rates of tax starting at such a level that they have to pay such a high proportion of their income in tax before they see anything in their pay packets.

I dutifully go through the motions of checking whether there has been any mistake, and the inspector of taxes continues dutifully to reply with courtesy and promptness. But he confirms what we all know—that the impact of taxation, which is so worrying our constituents, is due not to calculations but to the rates of tax themselves It is widespread and it is fundamental, and it is urgent that the House should deal with the problem.

I do not want to bother with statistics —they have been ably deployed by others and the case is well known—but I hope that eventually it will sink into the minds of Treasury Ministers that this is not just a marginal issue, or one of getting tax down a percentage point, or of raising thresholds by £50 here or there. It is a massive problem, which, because of inflation has distorted the whole impact of direct taxation to a level at which only fundamental action can set it right.

The point at the heart of the proposals about the basic rate of tax and the fact that we are talking about it at this stage of the Bill lies in the Chancellor's Budget. When he made his Budget Statement he made the proposed reduction in the rate of income tax conditional on a successful negotiation of phase 3. In the last week or so, events have made that past history. The fact is that he regarded the inflationary position of pay settlements as fundamental to his decisions and judgment about the tax concessions which he could make in his Budget. No doubt his expectations today are different from those that he had in March. He would pretend that it was otherwise; that the course that he is following is the one that he intended to take all along. Many of us beg leave to doubt whether that is the case.

The reason why the Chancellor found it so important to obtain a phase 3 settlement that would permit the reduction of income tax in the way he originally proposed—2p in the pound—was clearly his anxiety about the continuing impact of inflation. Although the overall reductions of tax now proposed are broadly similar, we are to get only 1 p off income tax if the Government proposals are carried. Therefore, I want to ask the Government a question. If inflation is as important as all that in determining the rates and levels of taxation, what are the Government doing with the exchange rate?

7.45 p.m.

The Chancellor claims that phases 1 and 2 were very successful in moderating the rate of price increases. They did moderate in 1976, but have gone op again in 1977. Was that the failure of phase 1 or of phase 2? No—it was the collapse of sterling in 1976 that brought about the increase in the retail price index in the first half of this year. The Government are sitting on the sterling exchange rate and holding it pegged at 1.72 dollars, and if the dollar is falling in value they are forcing the value of sterling down too. The pound is being forced down against natural market forces, and that is certain to make the inflation rate in the coming months higher than it otherwise need be.

If the Government are serious about getting down the rate of inflation, why do they not address themselves to those parts of their policy that are in their power to do something about? Phase 3 does not appear to be very much in their control, but there are other methods. The Government are, however, taking measures with our currency that will force up inflation, and therefore the strategy originally proposed in the Budget is being contradicted by their own actions.

At this stage, we should tell the Government that it has been demonstated that they have not only lost control of their Budget strategy, on the income tax side, but they have lost direction in the whole of their budgetary posture, and the House should be free to take whatever decisions it feels proper on this subject.

Mr. Lawson

We are talking about a number of amendments and two new clauses, one of which is New Clause 83, which has various amendments to it. I want to say a brief word about one of them before coming to the major issues dealt with so ably by my hon. Friend the Member for Hitchen (Mr. Stewart) and, in a more wayward way, by the hon. Member for Cornwall, North (Mr. Pardoe).

New Clause 83 is designed to make a consequential change in the concessionary rate of capital gains tax for unit trusts, consequential on the reduction in the basic rate. This concession implies that unit trusts ought to be treated specially. I therefore ask the Chief Secretary why it is that despite this the Treasury has continued to insist that unit trusts are taxed at the corporation tax rate on unfranked income and not at the basic rate of tax. Unfranked income in particular, comes from gilt-edged securities. It seems very strange that there should not be this modest encouragement for unit holders, through unit trusts, to invest in Government bonds, in gilt-edged securities.

I ask the right hon. Gentleman to answer this point, because it seems strange that there should be this capital gains concession on the statute book—we are now amending it slightly through new Clause 83—when there is no concession on the unfranked income.

My hon. Friend the Member for Hitchen said that the whole framework to our discussion of the question of a reduction in the basic rate is the pay policy of the Government and the Chancellor's approach to it. I shall return to that matter, but before doing so I should address myself to the rather strange remarks of the hon. Member for Cornwall, North, if only because he is obviously very eager that I should do just that.

Towards the end of his speech, the hon. Gentleman launched into an attack on the Conservative Party. That I do not mind in the slightest. But his attack was a strange one. He said that he was going to go far and wide, broadcasting to everyone that the Conservative Party had not put as its first priority cutting the basic rate of income tax.

I have taken the trouble to see what the hon. Member said on this subject in Committee of the whole House on 9th May. Then, when the Chancellor had proposed that there should be a 2p reduction in the basic rate of income tax, the hon. Member for Cornwall, North thought that that was wholly the wrong way to go about things. He said: What I am trying to ask is whether we should not think in terms of a lower rate band as an alternative to a reduction in the standard rate of income tax whenever that takes place. He went on to ask if we have just under £1,000 million at this stage of the game to play with—whether it would not be better to do it this way —that is, by the reduced rate band— rather than by reducing the standard rate of tax". The hon. Gentleman went on to explain that although he preferred a reduced rate band to a reduction in the basic rate of tax, there was another possibility. He said: Of course, one answer would be to raise thresholds. He rejected that, reluctantly, on the ground that it might cost too much, saying that it is a hideously expensive thing to do". Finally, he concluded: Even at this stage I am, on balance, in favour of the reduced rate band rather than the 2p off the standard rate of income tax."—[Official Report. 9th May 1977; Vol. 931, c. 1037-8.] We are quite clear, then, as to the hon. Member's priorities on 9th May. His first priority was a reduced rate band of tax. If he could not have that, his alternative was an increase in the thresholds. The one thing that he thought least appropriate was a reduction in the basic rate of income tax. Yet here he is now, two months later, saying that he is the champion of the cut in the basic rate of income tax and that it is the Conservatives whom he will expose as having suggested that there may be a case for raising thresholds.

Mr. Pardoe

The two quotations from my speech which the hon. Gentleman has read out were both put in the form of questions—whether it would not be better, and so on. They hardly sound like categorical statements of belief. Certainly I believe that it would be worth paying a very substantial price to reintroduce the principle of the reduced rate band. I am now confident that the tax system will eventually see the reintroduction of the reduced rate band, and I believe that that is an important matter. But certainly the speech from which the hon. Gentleman has quoted was in no sense a categorical statement about anything. I was talking about the three possibilities before the House. It is certainly true that I argued the case for the reduced rate band, but not necessarily to the exclusion of the others.

Mr. Lawson

The hon. Gentleman is quite clearly wriggling. He is always confident about the future, as he showed a moment ago. If he had a better grasp of the past, we might have a little more reason to share some of his confidence about the future. What he said quite clearly was: Even at this stage I am, on balance, in favour of the reduced rate band rather than the 2p off the standard rate of income tax. That was not in the form of a question. The hon. Gentleman was quite clearly comparing the two possibilities and saying that one was better than the other. That disposes of that matter.

The hon. Gentleman then—[Interruption.] I know that the hon. Gentleman cannot take criticism, but he must learn to do so. He went on in that speech to talk about the top rates of tax. He said that he was very much in favour of a reduction in the top rates, but again it was the Conservatives who foiled him in his attempt to bring them down.

Let us study the record again, if we may, Mr. Deputy Speaker. There is always plenty of record to study. One of the few advantages that the hon. Gentleman has, being the only economic spokesman of a very small party, is that every time any kind of economic debate takes place he is called—quite rightly, Mr. Deputy Speaker. I am not criticising that —whereas my hon. Friends have to wait almost a year before their turn comes to speak—

Mr. Deputy Speaker (Sir Myer Galpern)

Order. It is obvious, then, that the hon. Member for Cornwall, North (Mr. Pardoe) will have economic policies for each debate.

Mr. Lawson

That is absolutely true. I absolutely agree with you, Mr. Deputy Speaker. The hon. Gentleman has a different economic policy for each debate, and it is somtimes a bewildering and baffling task to follow him through the maze. We in the Conservative Party put forward amendments to reduce the higher rates of tax, and this is what the hon. Gentleman had to say on that subject: Whatever economic and utilitarian arguments we advance for a reduction in the top rates of tax. regrettably we are politicians. The amendment… —that is, the Conservative amendment— calls for substantial increases this year in net take-home pay for a small, though important section of the community … Frankly, I do not believe that we could get away with that. We must take account of the feelings of the British people, who are not in a mood at the moment to accept that such increases should be made. The hon. Gentleman went on to say that he hoped that it would eventually be politically possible to reduce the upper rates of tax. However, as I shall argue later on investment tax, if I catch your eye, Sir Myer —you were always the lucky man, Mr. Deputy Speaker, to hear the hon. Gentleman, and we all envy you▀×

Mr. Deputy Speaker

Order. I assure the hon. Member for Blaby (Mr. Lawson) that I have benefited considerably from being in the Chair during the speeches of the hon. Member for Cornwall, North.

Mr. Lawson

That was exactly the point I was making, Mr. Deputy Speaker. As usual, we are at one. The hon. Gentleman said that he hoped it would be politically possible to reduce the upper rates of tax. However, as I shall argue later on investment tax, if I catch your eye, Sir Myer, I believe that the quid pro quo for that is a heavy wealth tax."—[Official Report, 10th May 1977; Vol. 931, c. 1178-9.] We then had a vote. The Conservative amendment was a relatively modest one, because we wanted to carry as many hon. Members as possible with us in reducing the top rate of income tax. We carried with us, indeed, the Members of the Scottish National Party and the Members of Plaid Cymru. But where were the Members of the Liberal Party? They were in the Government Lobby voting against a reduction in the higher rates of tax.

Then, very much later, the hon. Member for Cornwall, North surprised us all —although we really should not be surprised at these somersaults from him—by moving, very much later at night, a curious amendment—the most up-market amendment of them all—to have a top take of 50 per cent. of anybody's total income, which would benefit only the very richest. He moved that amendment formally, without making a speech.

We then had the task of trying to interpret what the hon. Gentleman meant by moving the amendment formally in that way. Clearly, he could not have meant that he was in favour of reducing the top rates of income tax, because we had had that debate and voted on it. We had voted for it, and he had voted with the Government against it. It could only have been a paving amendment for the heavy wealth tax of which he declared himself to be in favour and which he said was the necessary quid pro quo.

When the hon. Gentleman goes to his friends in the City, trying to gather some funds for his impoverished party, and says "Do not believe the Conservatives, it is we, the Liberals, who are trying to help you, because we put forward this amendment", perhaps his friends in the City ought to look at the pages of Hansard in order to see what really happened on 10th May 1977.

I think that that disposes of the charade of the hon. Member for Cornwall, North. Now I want to address myself, Mr. Deputy Speaker, to the proposal of the Chancellor of the Exchequer that is before us.

The whole context of the debate is really very strange. It takes place in the context of the Budget Statement, and we have to go back to that. The Chancellor of the Exchequer said that he hoped to reduce taxation by £21 billion. He said that he was not committing himself straight away—I shall read his exact words in a moment—and that is why we are having to discuss the matter now.

8.0 p.m.

The Chancellor said: I have explained why it would not be prudent to commit myself absolutely to this decision". —that is, the decision to cut tax by £21 billion— 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—". He continued: In fact, it is difficult to exaggerate the advantages of a satisfactory pay agreement which makes it possible for me to proceed with the full income tax package of £2¼ billion."—[Official Report, 29th March 1977: Vol. 929, c. 283-4.] But what has happened? There is no satisfactory pay agreement. That is accepted by the Prime Minister, but not by the Chancellor, to whom I shall return in a moment, yet he still goes ahead in cutting taxes by £2¼ billion.

That is no way for a Government to show authority. No one will believe anything that this Government says in future. The Chancellor said that if there were a satisfactory pay agreement, and only if there were a satisfactory pay agreement, he would cut taxation by £2¼ billion, but when there is not one, he still does. That makes nonsense of what the Government says. It lowers the status of the Treasury in the eyes of the nation. The Chancellor really should have resigned.

In any case, it was complete nonsense to suggest that there was no link between taxation and public expenditure. The hon. Member for Cornwall, North was at least right to say that if we cut taxes by a further £450 million or £500 million we must balance it by other taxation or cuts in public expenditure. He rightly asked, Where will that money come from? It is absolute nonsense to suggest that the amount by which taxes can be put depends on whether there is a pay agreement.

For too long the people of this country have been used to thinking that taxation and public expenditure are completely divorced from each other. The fact is that any change in one has an inexorable consequence on the other. People must learn the lesson that more public expenditure means higher taxes and lower taxation means lower public expenditure. Until that lesson is learned, we are lost.

But the Chancellor says that the level of taxation has nothing to do with public expenditure; it depends on how good the pay agreement is. That is a lesson that no responsible Chancellor or Treasury should try to instil in the minds of the people.

I said that I would refer to how we would get the money. We have made this absolutely clear. The Government could still do it by introducing a new Ways and Means Resolution, even at this late stage, and having a recommittal stage immediately after this Report stage, to move a new clause on VAT.

We have said that we would recoup the money by having a 10 per cent. rate of VAT all round rather than two tiers of 8 per cent. and 12½ per cent. That is what we would do. That is why we shall be voting for the 33 per cent. tonight because we openly put forward the counterpart.

It is not that public expenditure cannot be cut; it is rather that it takes a little time. Transfer payments such as food subsidies can be cut more quickly, but some things take longer. [Interruption.] The hon. Member for Cornwall, North tempts me to prolong my speech, but I do not think that that would necessarily commend itself to all hon. Members.

The hon. Gentleman is wrong if he thinks that capital expenditure is something that we can switch off just like that. Capital expenditure is sometimes politically attractive to cut, because all the burden goes on the private sector and the construction industry, whereas public sector manpower is not touched. But if we cut capital expenditure just like that, there is tremendous waste. As a result too, the burden is concentrated on one industry—the construction industry—apart from the disastrous long-term consequences of a sharp fall in public sector investment. That has happened under this Government. It is public sector investment that has been cut rather than public sector consumption.

Apart from all that, there is great waste. It is nonsense to stop a road in the middle when it has not been completed or to stop a building project halfway through. There are quicker ways of cutting public expenditure.

Mr. Pardoe

I entirely agree. I agree that it is politically attractive to do this and that that is why politicians always do it. Will the hon. Gentleman say something about cuts in public expenditure? Does he think that it would be possible for a Conservative Government to cut £5,000 million off public expenditure in real terms? Has he seen the reports of the interview with his right hon. Friend the Member for Sidcup (Mr. Heath), the ex-Leader of the Conservative Party, whom the hon. Gentleman supported for so many years, in which the right hon. Gentleman said that it would be quite impossible for a Conservative Government to make these cuts in public expenditure? Does he disagree with his right hon. Friend or not?

Mr. Lawson

One curious thing I have noticed about reaction to my right hon. Friend the Member for Sidcup (Mr. Heath) is that when he was Leader of the Conservative Party, Labour and Liberal Members did not have a good word to say for him, but now that he is no longer Leader of the Conservative Party they appear to consider him to be infallible. It would be interesting to see what they would say about my right hon. Friend if he were still Leader of the Conservative Party.

I think that those hon. Members are making cheap political points and are not interested in seeking after the truth. I was saying that we are not committed to any specific sum. The hon. Member for Cornwall, North has plucked a figure of £5,000 million out of the air.

Mr. Pardoe

The right hon. Member for Sidcup mentioned it.

Mr. Lawson

Then it has been plucked out of the air by two hon. Members. That does not mean that it is Conservative policy. We shall certainly cut public expenditure. In another debate I may go into details about the public expenditure cuts that could be made, although I cannot speak for the Conservative Party. Indeed, in debates in the past I have gone into this question. No doubt the hon. Member for Cornwall, North will look them up.

As my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said, we have now abandoned the whole business of conditionality in pay policy. We have abandoned the incomes policy and the social contract. As the Prime Minister said, we are now in a period of free collective bargaining. Incidentally, I doubt whether the Chancellor could ever get himself to talk the truth. I wish he would. The Chancellor has not been telling us that we are in a period of free collective bargaining. The Prime Minister said that yesterday, and the Chief Secretary said it today, but the Chancellor says that we are in a period of a return to normal collective bargaining.

The weasel words and uncouth manner of the Chancellor make him resemble nothing so much as a punk rock version of the right hon. Member for Huyton (Sir H. Wilson). It is something that this House could well do without.

What we are concerned with is not just language for its own sake but, as the Prime Minister said yesterday, the fact that people have to be persuaded. The language has to be right. It is no use the Chancellor thinking that he can persuade people to follow what is necessary to maintain the monetary guidelines if he makes speeches to the CBI, as he did, saying that monetarism is practised only in countries where the police have been trained in torture. When he kept on saying —vainly—that we must have a year of phase 3 before we have free collective bargaining I wondered whether he wanted another year in order to train our police in torture.

The Chancellor cannot preach against monetarism and then practice it and expect the people to be persuaded. He cannot follow an orthodox economic policy—as I am glad he is now, with free collective bargaining—and still speak the language of incomes policy. No one will believe him. No one will follow him.

The Chancellor of the Exchequer is as unconvincing now as a believer in free collective bargaining and monetarism in the attack on inflation as Mr. Chamberlain was unconvincing as a war leader. Both were forced by events into policies with which they disagreed. The Chancellor of the Exchequer, for the first time, is approaching a correct policy, but it is not a policy that he will be able to sell. He has lost credibility, and the persuasion is not there. The language in which to sell the policy is not there.

That is why, in voting for this amendment to bring the rate down to 33 per cent., I hope that we shall show once again our total lack of confidence in the Chancellor of the Exchequer.

Mr. John Moore (Croydon, Central)

It may be unwise for an innocent to intervene in this debate in the sense that I was not involved in the proceedings in Committee. However, I feel that something of an incestuous relationship may be developing between my hon. Friend the Member for Blaby (Mr. Lawson) and the hon. Member for Cornwall, North (Mr. Pardoe) and that there is now what might be described as a gap in the proceedings which may allow some of us to bring our attention back to the reality of simple tax matters.

Some of us believe that our idiotic system of taxing earned income is at the root of many of the problems that our country faces. I want to develop the theme a little, since we have the opportunity of the amendment to look at the specific proposals of the Government to amend fractionally our earned income rate of tax from 35 per cent. down to 34 per cent. This is merely tinkering with a system which is so idiotic as not to make any kind of rational sense for the sort of society which both sides of the House would like to see.

If I may say so to the hon. Member for Cornwall, North, there was not quite the degree of accuracy that there might have been in his references to the United States. In the United States, the federal system prevents an income tax level above 50 per cent. However, the combined impact of certain State taxes on income along with the Federal rate sometimes puts up the rate above 50 per cent. But hon. Members should not forget that the basic federal rate is 14 per cent. at the bottom, with a threshold which is somewhat more than twice our current threshold rates, even when we have adjusted them, up to a maximum of 50 per cent.

Mr. Eric S. Heffer (Liverpool, Walton)

The hon. Gentleman should take into consideration the lack of a national health service and matters of that kind which we have because we pay taxes of the kind that they do not pay in the United States. But if the hon. Gentleman believes in the so-called free enterprise system where the citizen pays for all his health, I can only say that, although the hon. Gentleman may be quite happy to have that sort of system, it is one which my hon. Friends and I would not accept.

Mr. Moore

One of the difficulties about expressing ignorance of that kind is that the hon. Gentleman does not realise that not only do we have to live with the reality of an impoverished system which we on this side of the House would like to see improved but that we make comparisons on the basis of totally fallacious information.

I happen to have spent many years in the United States. I have been a patient under both medical systems. The ignorant statements that we tend to get on the matter take away from a real understanding of the problems that we are now discussing.

Mr. Heffer

Will the hon. Gentleman give way?

Mr. Moore

No.

Mr. Heffer

The hon. Gentleman said that I made an ignorant statement. Will he not give way?

Mr. Moore

No, I shall not.

Mr. Heffer rose——

8.15 p.m.

Mr. Deputy Speaker

The hon. Member for Liverpool, Walton (Mr. Helfer) knows that if an hon. Member says that he is not giving way, he is not giving way, and that is the end of it.

Mr. Moore

I shall continue to develop my argument, which concerns the difficulty in which we are trapped so much in our choices as a society by the idiotic tax structure that we have.

The hon. Member for Cornwall, North made some valid suggestions when he said he thought that it would be wiser if Opposition Members made rather more specific comments on their own views. I do not speak with the authority of my party, of course, but the hon. Gentleman may be interested to hear my personal view and the suggestions that I have to make about the basic income tax structure.

I believe that 50 per cent. should be the maximum on earned income. I see no reason to play games with 55 per cent. or 60 per cent. In my view, 50 per cent. is simple, straightforward and easily understood. Whether we have 50 per cent. or 60 per cent. is a question of envy and not one of the revenue-raising. So 50 per cent. would be my maximum.

Clearly, we have to do a much more important job than simply dropping to 50 per cent. to take into account the opportunities to earn at the top. The bottom is much more important. I said earlier that the United States had a bottom level of 14 per cent. I should like to see us approaching that kind of threshold level. Perhaps 15 per cent. would be a more straightforward figure.

Obviously, it would be impossible to do that straight away. But if, tomorrow, we moved to a system on earned income where the base rate started at 25 per cent. and the maximum rates was 50 per cent., that would cost in lost revenue, assuming no revenue buoyancy, about £5.7 billion. That would have to be provided for. There is no way in which that kind of revenue can be disposed of overnight. But, clearly, there are dual ways of providing for it. One way is the need to identify public expenditure cuts. The other is the need to move into forms of indirect taxation.

We should be more specific on this. I represent a constituency where the clear majority of my constituents are council tenants. The ratio of council tenants to those in private housing is far higher than in any other Conservative-held constituency. In my constituency, 44 per cent. are council tenants and only 29 per cent. are private tenants.

With an average industrial wage of between £75 and £85 week, dropping the basic rate to 25 per cent. from the current 35 per cent. and the proposed 34 per cent. would result in the average married man with two children in my constituency saving about £5 a week. In those circumstances we could begin to make adjustments elsewhere. Certainly we could save money on direct council house subsidies.

I say that because these things have to be said. Hon. Members on both sides of the House recognise the fallacious way that we discuss housing finance. I am concerned with helping my constituents and seeking to bring about a more wealth-creating society. In my view, that sort of suggestion is rather more sound than simply talking airly about what we might like to do.

We must also concern ourselves with the real product of our levels of taxation. I dislike the way the hon. Member for Cornwall, North deprecated the so-called Rooker-Wise amendment in Committee which sought essentially to raise the threshold. For example, an elderly lady came to see me the other day. She was 70 and a pensioner. She had worked for most of her life as a nurse. She had accumulated very modest savings which had gone into buying a small apartment in a building which was then purchased compulsorily by the local authority. Needless to say, the building was knocked down to make way for a new development. But, of course, there is no development there. It is now an empty site.

The lady is now in a home. The proceeds from the compulsory purchase order provide her with a small sum of money, and she is paid a small annuity. The total income does not exceed £25 a week, but the lady is now paying tax at a marginal rate of 25 per cent., which is a total absurdity. Surely hon. Members do not come to this House to create situations of that kind.

I suggest that there is something very wrong with out system of earned income. It produces a society in which we are very much concerned with redistribution. One has to examine the degree to which we are all trapped into a sense of guilt about riches. Fortunately, since I come from a poor background, I have no such guilt, and I believe that people should be allowed to break out of their poor-income background. My party in the past has been suffering from these guilt feelings and we have sought to tinker with the rates of tax, but I believe that the top and bottom rates must be massively reduced.

The hon. Member for Islington, South and Finsbury (Mr. Cunningham) has made some intelligent speeches arguing that the effect of income tax is no longer to be seen as a major redistribution of wealth. We must do more than simply tinker with the system, which is what we are trying to do tonight. We have produced a society that is geared to wealth destruction to the detriment of the wealth creators. I am talking not of unearned income but of earned income. We build in and breed class rigidity and we make absurd decisions based on an idiotic tax structure. We have become a consumption society. The figures show—I am speaking from memory—that 1.58 per cent. of household expenditure goes into savings and investment, and "savings" in general terms includes all levels of insurance. Whatever one's political views this means that we are consuming the past, whereas we should be thinking in terms of capital construction or individual contributions to the future. This cannot be the right way to manage our affairs or to look to the future of our children and grandchildren.

I have made this brief intervention merely to emphasise that we must examine on a more fundamental basis the degree to which we are currently taxing ourselves into historical relics. That is what a society that is no longer concerned with wealth creation becomes—a society dominated by its past, disconnected from the future and concerning itself with a change of rate from 35 to 34 per cent. This is an idiotic suggestion to make in an amendment.

Mr. Kimball

At the end of this debate, for the first time since the Budget, we shall know the rate of tax we shall pay this year. In the last four months we have had a most extraordinary situation because nobody has known what his rate of tax for the year will be. Normally after a Budget one sees from the newspapers or learns from one's adviser what one's liability is likely to be. This year, however, we have drifted on because the Government have not been able to make up their mind what the standard rate of tax was to be.

Whether or not the amendment is accepted and the Government carry the day, we must have no illusions as to the range of tax we shall have to pay or the rate of direct tax, which is far too high. As my hon. Friend the Member for Croydon, Central (Mr. Moore) said, the level of taxation takes away all incentive, enthusiasm and desire to undertake any work.

On 7th May, the Economist published a table showing a typical production worker's wage. If we take the average income tax on the combined income of a husband receiving a typical week's wage and a wife earning two-thirds of that figure, we see from that table that this country—apart from smaller countries such as Sweden and Denmark—is the highest taxed country in the civilised world. Of course Japanese production is soaring ahead when we have a 33 per cent. rate of tax. Great Britain comes third in the league, with Italy, France and then Japan at the bottom of the league of the percentage of tax that is taken off a married couple. The trouble with this country today is our high level of taxation.

My hon. Friend the Member for Croydon, Central went on to cite the position of people working and earning in the United States. A Written Answer in another place only last week showed clearly the percentage of earnings retained after income tax. These are really important figures. In the United Kingdom today, on an average manual wage the percentage of earnings retained after income tax by a married man with two children is 76-8. In the United States, that dynamic country, it is 95.6 per cent. That is a terrific difference. In West Germany it is 89-5 per cent. France does even better than America with 97-9 per cent. of earnings retained after standard rate of income tax has been taken off. In Canada it is 95.8 per cent., and even in poor Italy it is 88.7 per cent. It is our position at the top of the league that causes the real trouble in this country today.

When I first came to the House, hon. Members used to complain in Budget debates that tax evasion was a matter for those who were fortunate enough to be able to get the best advice. Today, however, tax evasion or legitimate judicious mitigation of the amount of tax that anyone has to pay is the main subject of conversation at all levels of society. If one asks an employee to work overtime, one has to say "O.K. You can have it in cash." Of course it is not cash. Nobody breaks the law. One has to tell the employee that one will pay him £50 and then add on the balance of tax for the taxman.

There is no incentive to work. Overtime does not cost the employer what it says in the wages schedule. It costs a great deal more. The level of tax has killed all desire for anyone to do any work. One simply cannot ask employees to work on Saturdays and Sundays if one has to take off the large amounts of tax that one is supposed to take off their overtime payments. All that workers are interested in is the amount of cash they will get in their packets. They feel that the amount of tax is unfair and unacceptable.

I do not know what the official policy of my party is on the level of indirect taxation that we would be prepared to tolerate, but I would be happy to see a level of VAT at about 20 per cent. provided we could remove very large numbers of people from the pay-as-you-earn category altogether. I agree with my hon. Friend the Member for Croydon, Central and wish that we could see a top rate of tax on earned and unearned income of not more than 50 per cent. That is the only way we shall restore industrial prosperity in this country.

The way in which the percentage of direct taxation has risen in the last few years is extraordinary. In the financial year to 5th April 1964, income tax accounted for 44 per cent. of total tax revenue. Today it has risen to 54 per cent. I believe that 2p on value added tax brings in about £650 million to the Treasury in a year. The Chief Secretary will correct me if I am wrong.

We obviously cannot slash public expenditure just like that. We cannot stop all the public works programmes, new roads and schools in mid-stream. We must raise the money from somewhere. I should be happy to see it raised by a substantial increase in value added tax so that we could achieve a worthwhile reduction in income tax. By no stretch of the imagination can any one of the amendments before us be considered as seeking a worthwhile reduction in income tax.

8.30 p.m.

Mr. Kenneth Lewis (Rutland and Stamford)

My hon. Friend the Member for Gainsborough (Mr. Kimball) was entirely right when he said that the chief topic of conversation wherever one goes today is "How can I get some money without having to pay tax on it?"

This morning a small builder told me that 80 per cent. of his building force were self-employed. There has been an enormous increase in the numbers of self-employed in recent years. I was told by this builder that the self-employed in his work force were not earning much more than his ordinary employees. But the self-employed get the advantage of being able to count against tax such items as cars, telephones and so on.

My hon. Friend the Member for Croydon, Central (Mr. Moore) was also right in saying that the Chancellor, by deciding not to reduce the tax rate to 33 per cent., was making a meaningless cut, because the extra amount that people will get in tax cuts in their pay packets at the end of the week will not mean very much to them.

The country has lost confidence in the Government. Recent by-elections and polls show that. Indeed, the House of Commons shows it, because the Government have had to do all kinds of wheeling and dealing with the Liberal Party to make sure that they get their votes in the Lobbies, even on the Finance Bill. That is bad enough in all conscience. But when we come back in the autumn after the Summer Recess we shall still have a Government in which the country has no confidence and in which we have no confidence either.

The worst feature of this situation, however, is that the Government have lost confidence in themselves. We are now being controlled by a Treasury Bench that has no confidence in itself. I shall explain why I think I can prove that. The Government are dropping the incomes policy. Yet the Chancellor clearly said that he will try to hold the line on wage rises at 10 per cent. in the public sector. But if the Chancellor cut income tax, he would more easily be able to hold to his 10 per cent.

There are two ways in which people can get more money in their pockets. One is by getting a pay rise of 10 per cent., 15 per cent. or whatever it is. Naturally, the unions will press for their members to gain more than 10 per cent. if they can get it. The second way in which it is possible for people to get more money in their pockets is by the Government cutting taxes. If there were a meaningful reduction in income tax, neither the unions nor the ordinary man and woman on the factory floor would need to ask for rises of more than 10 per cent. The Government have lost confidence in themselves because, with all the opportunity in the world to give more tax money back to ordinary men and women on the shop floor so that they need not then ask for increases of more than 10 per cent. in wages, the Chancellor has failed to take advantage of those opportunities.

The Chancellor has failed because the Government have no real belief that by so doing production would be increased. If the Government were to reduce taxes by two points or three points instead of one point, they would be taking a deliberate risk. However, if they could increase productivity by even a minimum amount—always possible if incentive is provided our— unit costs would be reduced and the Government would get back their tax cut money. In that way the nation would be increasing its output and its exports and by the end of the fiscal year the Government would have even more revenue in the kitty. In addition, the balance of payments would be better.

The truth is that we have had a succession of Governments—I suppose that it started way back in 1964–70—who have produced Finance Bill after Finance Bill with tax increases and never any reductions. The people now believe that there is no possibility of getting any meaningful reduction of their taxation. That is why they follow union leaders who say that they must ask for the maximum pay increase in the hope that they will get rises somewhere in the middle, although that middle is usually beyond what any Treasury Bench wants them to have and is sometimes more than the country can afford to pay.

The only way in which we shall get out of the cycle is to have a Government who decide that they will take the risk and reduce taxes on income. Taxation has to be reduced right down the line. My hon. Friend the Member for Croydon, Central said that we should reduce the top rate of income tax to 50 per cent. I agree. However, if I were given the choice of bringing some people out of taxation and reducing the top rate to only 60 per cent. or 65 per cent., or reducing the top rate to 50 per cent., I should rather remove and reduce to 60 per cent. or 65 per cent. and take lower levels out of tax.

It is of advantage if we can allow those at the top rate of tax to keep something moving towards 30 per cent. of their income. It is also an advantage if we can take those at the lower end right out of the tax range. If that can be done, the administrative costs are reduced and we remove a situation in which people can say that it is best to be on social security or unemployed benefit. Unemployment pay and social security benefits do not attract tax, whereas many today pay tax although they are at the lower end of the scale of pay.

I believe that Nye Bevan once said "Why look into the crystal ball when you can read the book?" I have not always agreed with Conservative Governments in the past. They have sometimes increased taxes more than I would have liked. However, if we look back at the 15 years of Conservative Government before the Labour Party began taking office, excepting the years 1970–74, in every one of the 15 years tax levels were lower than their present levels by more than 50 per cent. If anyone does not believe that we shall cut taxes, they should look at that record. They can read the book. We did it before and I think that we shall do it again.

I am sure that we must do it again. We shall not get the country off the ground, increase productivity, restore enthusiasm and ensure that skill is rewarded until a Chancellor reduces the standard rate of tax right down the line.

Mr. Deputy Speaker

The debate has gone on for some time, and I think that it would be for the benefit of hon. Members who have only recently come into the Chamber—because they were engaged elsewhere—if I were to remind them of the amendments under consideration. We are debating Amendment No. 95 and those listed with it on the Amendment Paper.

Mr. John Cronin (Loughborough)

I am grateful to you for your guidance, Mr. Deputy Speaker.

I listened to the speeches of the hon. Members for Croydon, Central (Mr. Moore), Rutland and Stamford (Mr. Lewis), and Gainsborough (Mr. Kimball). I was astonished to hear the hon. Member for Rutland and Stamford say that the Government lacked confidence. We have the most confident Government that we have had for years, and my right hon. Friend the Chief Secretary is the most confident person in the House of Commons.

Mr. Kenneth Lewis

That is because the right hon. Gentleman is looking forward to his holidays and will not have us here for the next two or three months. Were that not so, he would not be confident.

Mr. Cronin

It is the confidence of a person who has for some time been running the financial affairs of this country with skill and distinction.

I sympathise with the three Conservative Members to whom I have referred. Paying income tax is extremely unattractive. I speak as one who received a large demand only this morning. One can always win political points by saying that taxation should be reduced, but what worries me is hearing Opposition Members talk about a top rate of income tax of 50 per cent. That would mean enormous gains for the richest members of the community, and such statements cannot help but reinforce the impression that Conservative Members are concerned chiefly with providing benefits for the rich members of our society. I have not heard any Conservative Member say what can be done to help those who are caught in the poverty trap.

Mr. John Moore

I made the point specifically that little revenue would be lost by lowering the figure to 50 per cent., but that the important thing to do was to reduce the figure at the bottom of the scale. The only example that I gave, which indicates this point, was of someone in receipt of £25-plus a week.

Mr. Cronin

It is clear that I was doing the hon. Gentleman an injustice. I arrived in the middle of his speech, and he must have said that before I entered the Chamber. I am glad that there are hon. Members on both sides of the House who realise that at the bottom end of the scale there are people who are paying much more tax than they should, and to that extent are caught in the poverty trap. But that does not mitigate the argument that there is no reason why people at the top end of the income group should have this enormous extra wealth given to them, as suggested by hon. Gentlemen on the Opposition Benches.

One has to face the fact that, come what may, income tax is, to a substantial extent, a deflationary financial measure. At a time of massive inflation it is helpful, in general economic terms, to cut purchasing power, although nobody likes that to be done, and it is unattractive. Any Government can obtain political support by cutting taxes. One of the things to be said for the present Government is that, realising the presentl economic situation, they have not been prepared to make any substantial reductions in income tax despite the obvious political advantages of doing so.

The hon. Members for Rutland and Stamford and for Gainsborough referred to the disincentive effect of income tax. I very much doubt whether it has a disincentive effect, because if a man receives his wages less 35 per cent. there is an incentive for him to earn still more rather than forgo the extra income that he can receive thereby. This was carefully discussed some years ago by the Royal Commission on the taxation of incomes, which came to the conclusion that there was no real evidence that income tax had a disincentive effect on the earning power of the mass of the population.

8.45 p.m.

There hon. Member for Croydon, Central referred to the desirability of achieving an economic situation similar to that of the United States. He should bear in mind that in the United States there is more poverty and fewer social services than in any other civilised Western country. If one is earning a low income and is seriously ill in the United States it is catastrophic. The hon. Member's argument is in favour of subjecting the lower income groups to a more disagreeable life.

There is an excellent case for maintaining taxation at its present level. Perhaps the Chancellor of the Exchequer will, next year, decide that a reduction would be helpful. However, I suggest that now—when we must combat inflation and meet the expense of essential social and other services that make this country a place where those on low incomes are well cared for—there is no case for a substantial change in taxation other than that which the Chancellor of the Exchequer has proposed.

Mr. John Cope (Gloucestershire, South)

The hon. Member for Loughborough (Mr. Cronin), made much play of the enormous gains that would result for the richest members of the community if there were a decrease in the top rate of income tax. That has been argued many times before by other members of the Labour Party. I heard the speech of my hon. Friend the Member for Croydon, Central (Mr. Moore), and I can confirm that that was not the nub of his case. The reason that this appears to be the effect is the enormous penalties now being paid by high income earners.

I am not sure that there is any more logic in saying that there would be enormous gains for the high income groups than there is in saying that there are tremendous penalties being paid by those on high incomes because of our high scale of taxation compared with other countries.

There is something in what the hon. Member for Loughborough said about the willingness of people to make sacrifices and to work hard if there were reductions only in the top rate. Clearly that would have a cosmetic effect. But we must distinguish between that and the real argument.

It is because of that effect and because of the morale effect that I should like to see not only reductions in the top rate but a more even arrangement of improvements in income tax rates. I think that the hon. Member for Loughborough did himself a disservice to discount as much as he did the disincentive effect of taxation. I remember the Radcliffe Report, but that was over 20 years ago, and things have changed a good deal since the last Royal Commission on taxation.

There is little evidence of which I am directly aware, of an academic sort, that proves conclusively the disincentive effect of high taxation. Nevertheless, one has only to talk to people in pubs, streets, or elsewhere—in Loughborough or anywhere else—to realise the reality of the disincentive effect of the sort of rates of taxation that we have at present. I am talking not only about the top rates but about the very high starting point, which is the subject of the amendment, because the standard rate of tax is also the starting point of tax in our system.

Mr. Cronin

I am trying to follow what the hon. Gentleman is saying, but the argument about whether taxation has a disincentive effect must depend on much closer reasoning than what people say in pubs. The hon. Gentleman must produce a better argument.

Mr. Cope

I do not think that whether one can prove something statistically makes it right or important, or that if one cannot prove it statistically, it makes it unimportant. What matters concerning incentive or disincentive effects is what people perceive to be the effect, and the way in which that is reflected is in their behaviour and so on, but also in what they say in pubs or anywhere else. The fact that there is no statistical evidence for either argument, for or against the proposition, does not necessarily mean that the proposition is not valid by itself.

We also have to bear in mind—this is a fundamental point that runs through the whole debate—the real reason why income tax has become so high and why it has risen to such a large proportion of the revenue as a whole. My hon. Friend the Member for Gainsborough (Mr. Kimball) referred to the percentage of revenue that income tax now raises and the amount by which it has increased. The primary reason for that is inflation.

I remind the House again that before any Budget changes were suggested, the yield of income tax was expected to rise from £15 billion to very nearly £18 billion. All the changes that are being proposed today or have been proposed in this Finance Bill, in Standing Committee, and on the Floor of the House for that matter, would not get income tax back to last year's yield or anything like it. Inflation has increased it, this year as in previous years, by a tremendous amount—so much so that income tax this year, although it will not rise to £18 billion, because of the changes that nave been made today and recently, will rise to £17 billion.

The next largest tax in the list is VAT. This contributes only f31,- billion. That is the measure of the tremendous weight of income tax by comparison with the other taxes in the list.

Some may think that talk of top rates of tax of 50 per cent., reducing the standard rate, and so on, is rather theoretical talk. However, I happen to have had the advantage of having just returned from a country that has a top rate of tax of 48 per cent. and a very high sales tax in order to balance it.

I have just returned from Rhodesia. There are many interesting things about Rhodesia and many ways in which it differs from this country. One of the ways in which it differs is that it has a siege economy, not by its own choice but by imposition from here and elsewhere. Rhodesia is in the middle of fighting a serious war. It has tremendous public expenditure problems as a result. But the Rhodesians have been able to keep their top rate of income tax down to 48 per cent. on all incomes, partly because they raise more money by indirect taxation.

One of the results of that is that their economy has remained much more dynamic, in spite of their problems, and this is a message for us. Incidentally, when they decimalised the Rhodesian pound it was divided into two dollars. The Rhodesian dollar is now worth almost £1 sterling. That is a measure of the success that Rhodesia has had in the last few years in spite of its special problems in the handling of its economy.

Mr. Cronin

The hon. Gentleman must be aware that Rhodesia's economy is based on something very close to a slave State. He ought not to use that as a serious argument in discussion of taxation.

Mr. Cope

It would not be appropriate at this stage to follow the hon. Gentleman's argument too widely. I disagree with his proposition.

All the amendments that we are discussing are concerned with very small changes in the rates of income tax. Over the next few years we need to talk not only about small changes such as those but about much larger changes.

Mr. David Howell

It is a good thing that the opportunity has been given to us by the Report stage of the Finance Bill to discuss at some length, the standard rate of income tax and the amendments that propose changes in it. I say that because I believe that the level of personal income tax, and particularly the way in which the standard rate bites into the weekly wage packet or the monthly salary slip, is one of the key issues in the country. I do not think that it is the prime issue, because I suspect that the main issue is still the appalling rises in prices in the shops. That is still the number one worry in most family budgets and around most breakfast tables.

I suspect, however, that very close behind comes the issue of the deductions from the weekly wage, and mainly the deduction of income tax. But, as hon. Members, including my hon. Friend the Member for Ashfield (Mr. Smith) in an excellent speech, have rightly pointed out that is not all. To that must be added the weekly national insurance contribution which, even if the amendment is carried, will put the marginal rate of deduction on the pound earned by those on far below average earnings at a rate unchallenged and unequalled anywhere else in the world.

The issue that we are discussing, which is raised by the proposed Government amendments, to which we have in turn put down amendments, is fundamental. It is therefore right that at the close of this Session Parliament should have an opportunity to discuss this major issue. The amendment which was moved by the Chief Secretary is, as my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said, the vestigial remnant of what has been called the "prudence deal". That was the statement by the Chancellor that prudence requred him to ensure a satisfactory pay deal before he could cut the standard rate from 35 per cent. to 33 per cent. Now, all that has gone, it is water over the dam and the language is meaning less in the new context into which the Chancellor and his colleagues have been washed by events.

9 p.m.

The Chief Secretary alluded to the proposition that a reduction in the standard rate might help moderation in pay. That was an archaeological remnant of a past way of thinking which is clearly still embedded in his mind. I do not blame the right hon. Gentleman. He has been trained to sing a different tune and to put forward different arguments for years, and it must be a trauma suddenly to have to change. So it was not surprising to hear in his speech the relics of the old order, when it was believed that a deal could be done with the unions to ensure pay moderation and that conditional tax cuts could secure it.

As we have made clear since the Budget, we reject the doctrine of conditionality. We do not believe that that is a proper way to conduct the tax affairs of this nation or for Parliament to secure the tax rates which the citizens should pay. Conditionality was never part of our creed and we are glad to see it go.

The hon. Member for Cornwall, North (Mr. Pardoe) said that there were three ways of loking at conditionality. It sometimes seems that the Liberals have three ways of looking at everything nowadays —last week's, this week's and next week's. Sometimes, on some issues it seems that they have 63 ways. [Interruption.] I am trying to be nice to the hon. Gentleman. I am very sorry to hear that he is in pain, but I am not surprised after all his contortions.

This is all the language of "social contract man", who is now as dead as the dodo; that is the end of that approach to policy. The sooner that the Chief Secretary and the hon. Member for Cornwall, North, who is for ever with him—perhaps not for ever, but for the moment at least—understands that that view of public policy is over, the better we shall be able to address ourselves to the issues of the proper levels of income tax.

I have spent some time on conditionality, as did my right hon. and learned Friend, because it is important to establish how the Chief Secretary will look at income tax and other taxes in future. The level of income tax and the question whether there is still some supposed deal to be done with the unions are directly connected with the issue of the wealth tax, which according to recent reports is again very much a starter.

We understand that the Chief Secretary is a member of a liaison committee with the TUC—not the one with the Liberals —which has been cooking up the wealth tax. [Interruption.] As the right hon. Gentleman says, he spends all his time now liaising with bodies outside the Government to make these arrangements. There appears to be some residual hankering after the idea that a wealth tax will induce the unions to come back into the deal game. I do not think that it will. This is a wrong approach, and the sooner we can all—including Treasury Ministers—get it out of our minds, the better for public policy.

One argument is that a wealth tax would be marvellous because it would enable Governments to ease the burden on income tax. It is that sort of argument that has led the Liberal Party to embrace the idea of a wealth tax. 1 understand that the Liberals are keen on it. Presumably the hon. Member for Cornwall, North and the Chief Secretary use the Lib-Lab liaison meetings to work out the details of a wealth tax. It is a good issue for the Chief Secretary because it is the one subject on which, until we see the small print, he can get agreement from the Liberal liaison committee and the TUC-Left-wing liaison committee. There is agreement from the Liberals right across to the Left wing on a wealth tax. Of course, Left-wing hon. Members want a wealth tax for different reasons and in a different form from that wanted by the hon. Member for Cornwall, North. I understand that the Labour Party Left wing, and some members of the various liaison committees in which the Chief Secretary spends all his time want a wealth tax as an addition to existing taxation. They do not concede that there is already a tax on wealth. The hon. Member for Cornwall, North wants a wealth tax instead of income tax, but only a party with the bottomless gullibility of the Liberal Party could fall for that arrangement. It is clear what sort of spider's web they are walking into.

The hon. Member for Cornwall, North knows that there will not be any substantial cut in income tax under a Labour Government.

Mr. Pardoe

Just wait and see.

Mr. Howell

There never has been and there never will be. The Chief Secretary comes virtuously to the Dispatch Box to put before us the delights of moving from 35 per cent. to 34 per cent. The hon. Member for Cornwall, North should remember that the Government started at 30 per cent. Now we are asked to clap hands because they have made a 1 per cent. reduction.

We have always argued that we look for major cuts in income tax. It is common sense that this will cost substantial sums, particularly if there are cuts in the standard rate. My hon. Friend the Member for Croydon, Central (Mr. Moore) pointed out in his excellent speech that cuts at the higher rates would not cost any money and would probably increase revenue. However, there would be a political price to pay. Substantial cuts in the basic rate would cost a substantial amount, and we have to look at the constraints in the way of achieving that goal and how to overcome them.

First, there is budgetary restraint. The public sector borrowing requirement is a critical and crucial restraint that must not be put aside. On the other side of the budget equation is the public expenditure restraint that we have already debated today. My hon. Friend the Member for Gainsborough (Mr. Kimball) pointed out that, contrary to the enormous slashes in public expenditure in the past year, a sensible approach to public expenditure policy must be gradual. Anyone who says that there should be thousands of millions of pounds worth of cuts in public expenditure just like that does not understand the right approach to public expenditure policy. What has happened in the past year is a good example of a Government who do not understand that. After a long delay, they were eventually forced into making violent and disruptive public expenditure cuts.

Another constraint is the other forms of revenue, the main one of which is VAT. We have argued that our wish immediately to reduce taxation could be responsibly covered by increasing VAT to 10 per cent. Even if that were done now through the regulator, it would generate enough revenue to finance our amendment without offence to the public sector borrowing requirement. It is fiscally and financially responsible and could be done now. It will not be done under this Government because they do not really believe in cutting the standard rate of income tax. That is their belief, and that is why they are not pursuing the kind of amendment that we have put down.

Mr. Cronin

The hon. Gentleman is puzzling me. For the last year or so we have heard impassioned pleas from the Opposition to cut public expenditure. Now we hear from them that it is being cut too much so that the whole economy is being disrupted.

Mr. Howell

I shall put it in the kindest way and say that the hon. Gentleman is mishearing me. There have been substantial cuts, and we look for further cuts. But I have said that common sense dictates that the further cuts have to he more gradual than the hiccups and slashings of the last year. The hon. Gentleman is distorting what I say.

The other question which is asked about cuts in income tax and a switch to a higher rate of value added tax is whether it would not hurt the poorest in our community. We believe that question to be perfectly sincere and a correct one to put but that it is based on a previous era in the pattern of taxation. Nowadays—incredibly, almost unblievably to visitors from abroad—the vast majority of our people, down to the most modest wage earners, and even the single man with only £26 a week or so, pay income tax. We have reached the stage as the Child Poverty Action Group has said, at which income tax has become the enemy of the poor. It has become a regressive and not a progressive tax. Attempts to reduce the rate and raise the thresholds are now as much help to people on modest wages and salaries as to anyone esle. That is why we go along this road with confidence, in the knowledge that our proposals would help the vast majority of working people, especially those on lower wage levels.

Secondly, the increase in VAT would be far less regressive than, traditionally, indirect taxes were supposed to be, because VAT does not apply to food and transport, food in particular being a major item in the household budget. Therefore, the transfer between the two taxes, while obviously there are some unfavourable effects— I would not assert that no one could be hurt, because that would be absurd—far from being an attack on those with lower incomes, would have the opposite effect because it is income tax that is biting into wages at all levels.

The third reason why we are confident that we are pursuing the right policy is that we must get back incentive. Unless we are prepared to put incentive back into the system again, we shall not get the business revival, particularly at the smaller end where the jobs will be. Only by incentive can we restart the business heart of the nation. We hear talk—it may be sincere or not—about the need to restructure this industry or that and about grand industrial strategy. But the reality is that in the great manufacturing industries in this country, just as in places like Japan and Germany, there will not be millions of new jobs. They will have to be found in services, in new businesses that people cannot even categorise and describe yet and in all sorts of commercial undertakings which will employ only a few people each but which will provide future employment, which is so desperately needed, particularly for our younger generation. These are the people who need lower levels of income tax.

Those are the three reasons why we have no hesitation in pushing for a lower standard rate of income tax and why we intend to work for lower levels still. In Committee the hon. Member for Birmingham, Perry Barr (Mr. Rooker), who played some part in our proceedings, supporting some of our amendments as we did some of his, turned to some of his colleagues and reminded them that they were allowing, through their blindness to the impact of income tax, the issue of income tax to become a major bitterness within the Labour Party and that many people who had previously voted Socialist were not going to do so again.

The hon. Gentleman recognised the point and the Government should recognise it too. Until they recognise it, they will not be at the heart of our economic problems—that is, that the level of personal income tax is too high on working people, business people, investors and those who have new ideas for the creation of new jobs and services. We must get it down, and if it means changing the level of VAT we are ready to do that.

That is why we are prepared to pursue our amendment, and that is why I advise my right hon. and hon. Friends to follow me into the Lobby on it.

9.15 p.m.

Mr. Joel Barnett

With the leave of the House, may I say that whenever I listen to the hon. Member for Guildford (Mr. Howell) describing me in the graphic words he chooses to use on these occasions I can never recognise myself. But one thing is absolutely clear. He is obviously very jealous of the many liaisons I have—with the TUC, with the Labour Party working party, and with the hon. Member for Cornwall, North (Mr. Pardoe).

I do not know whether the hon. Member for Guildford was inviting himself to our meetings, but I have to tell him that I am not prepared to invite him. I am enjoying the meetings and I do not seek to widen them. I note his envious looks at these liaisons. I assure him that they are going very well. Indeed, last night's vote and the increasing majorities that we enjoy in the House of Commons are clear indications why the hon. Gentleman is so envious of these liaisons.

On the general question of direct taxation, and the point made by the hon. Member for Croydon, Central (Mr. Moore) and many others, income tax levels in this country, at both the very lowest and very highest levels, are too high; I do not dispute that, and never have. I want to see them reduced. But we need to understand that 1 p off the basic rate of income tax costs about £500 million. When hon. Members talk about massive cuts in income tax they should be honest with this House and with people outside and say specifically where and how they propose to raise the sort of money of which they talk so glibly.

No one in this debate or in any debate on previous occasions has told us precisely in what way it is proposed to raise this sort of money. I shall come to some of the points made by the right hon. and learned Member for Surrey, East (Sir G. Howe) and by the hon. Member for Guildford about how they would seek to reduce direct taxation, but let me first take up the initial point made by the right hon. and learned Member concerning the problems of conditionality. It seemed from what he said that he is not the slightest bit interested in having any kind of understanding with the trade union movement. He is not interest in creating the sort of climate in which it is possible for the Government to talk to he trade union movement, and continue to talk to it.

The right hon. and learned Gentleman talked about the procedures that we have, and the fact that only tonight, at this part of the Report stage of the Bill, are we settling the basic rate of tax. He said, I think, that it was inconvenient to settle it at this late stage. I am bound to tell him that the House of Commons has always had the opportunity of deciding the basic rate of tax and changing it on Report. That was always the prerogative of the House of Commons, and it will remain so whether we have conditionality or not. That is the situation, and I hope that we shall continue to live with it, because that is the way in which this House of Commons works.

The question then arises: what should be the basic rate of income tax, and how can we reduce it at this stage? The right hon. and learned Gentleman did not dispute the fact that the borrowing requirement could not be increased. He said—and his hon. Friends supported him—that what we should do is to increase the rate of value added tax. That was a constant theme.

I am bound to tell the House that we have had suggestions to increase value added tax on so many different occasions and on so many different amendments, in Committee upstairs and on the Floor of the House that it would take an increase of VAT to 20 per cent. to raise the sort of money that he and his hon. Friends have wanted to spend during the passage of the Finance Bill—and, indeed, to cover the areas in which he wishes to increase public expenditure. It really is nonsense for the right hon. and learned Member for Surrey, East to talk about this as some kind of simple way of reducing the basic rate of tax. He knows that that simply is not true.

But there is a problem about the balance between direct and indirect taxation. I do not dispute that. I have never disputed it. I said during my speeches on the Finance Bill and on the Budget that we have to switch from direct to indirect taxation as fast as we can. However, at a time when prices are of crucial importance in order to ensure that in the next pay round we have moderate pay claims, and when we want to moderate the rate of price inflation, it is absurd to suggest that the Government or House of Commons should want to see that moderation while at the same time deliberately increasing the level of prices. It must be nonsense to suggest that this should be done at this stage.

Several arguments have been deployed during this debate, and in the past, that by reducing the level of income tax all our problems will be answered. I wish it were as simple as that. We have had periods in our history in this century when the level of income tax has been considerably lower than at present. But our comparative industrial performance with America, Japan and elsewhere has been bad when our levels of direct taxation were much lower than they are today.

To suggest that somehow or other a simple panacea exists whereby we can transform the whole of our industrial performance is nonsense, which should not enter into our debates.

We want to see reductions in direct taxation, but let us make a sensible case for them and not suggest that it will solve all our problems. If it were that simple it would have been done a long time ago. The comparison with the United States and Japan is, of course, a bad one. Net take-home pay and living standards in both those countries are very much better than in this country.

As my hon. Friend the Member for Loughborough (Mr. Cronin) and several other of my hon. Friends said, there are two basic problems. One can, of course, reduce the level of direct taxation if one is prepared to cut public expenditure by a very substantial figure. It is possible to do that. It is possible to give a man on £40 or £50 a week—this applies in my own part of the world where average earnings of £70 or £80 a week are difficult to comprehend—an extra £2 or £3 a week in his take-home pay. But if we charge him £10 a week when a member of his family stays in hospital, that is not much help.

I was interested to note that the right hon. Member for Sidcup (Mr. Heath), with his traumatic experience, recognised this problem in a recent television programme. He said, and it is worth quoting: If efforts were made to cut it"— that is the level of direct taxation— by £5,000 million now there would be major problems. It would undoubtedly mean seriously cutting social service benefits. We all know that is the case, yet that is what the right hon. and learned Member for Surrey, East is saying. [Interruption.] Perhaps I should spell it out for the House and for the country. [Interruption.] What exactly is the right hon. and learned Gentleman saying?

The hon. Member for Guildford said that there have been substantial cuts in public expenditure. I have been responsible for presiding over many of those. I do not apologise for that, because I believe that it was necessary.

But to suggest that at this moment we can—

Mr. David Howell

Too late.

Mr. Barnett

The hon. Gentleman should stop muttering. Perhaps he will tell us where he will raise the thousands of millions of pounds. I shall spell it out. What he proposes to do is cut social service benefits and transfer payments.

The hon. Member for Blaby (Mr. Lawson) has a lot of influence on the Front Bench, perhaps more than he

Division No. 205] AYES [9.25 p.m.
Adley, Robert Corrle, John Hamilton, Michael (Salisbury)
Aitken, Jonathan Costain, A. P. Hannam, John
Alison, Michael Critchley, Julian Harrison, Col Sir Harwood (Eye)
Amery, Rt Hon Julian Crowder, F. P. Harvie Anderson, Rt Hon Miss
Arnold, Tom Dean, Paul (N Somerset) Haselhurst, Alan
Atkins, Rt Hon H. (Spelthorne) Dodsworth, Geoffrey Hastings, Stephen
Awdry, Daniel Douglas-Hamilton, Lord James Hawkins, Paul
Bain, Mrs Margaret Drayson, Burnaby Hayhoe, Barney
Banks, Robert du Cann, Rt Hon Edward Henderson, Douglas
Bell, Ronald Durant, Tony Heseltine, Michael
Bennett, Sir Frederic (Torbay) Dykes, Hugh Hicks, Robert
Bennett, Dr Reginald (Fareham) Eden, Rt Hon Sir John Higgins, Terence L.
Berry, Hon Anthony Edwards, Nicholas (Pembroke) Hodgson, Robin
Biflen, John Elliott, Sir William Holland, Philip
Biggs-Davlson, John Emery, Peter Hordern, Peter
Blaker, Peter Eyre, Reginald Howe, Rt Hon Sir Geoffrey
Body, Richard Fairbairn, Nicholas Howell, David (Guildford)
Boscawen, Hon Robert Farr, John Howell Ralph (North Norfolk)
Bottomley, Peter Fell, Anthony Hunt, David (Wlrral)
Bowden, A. (Brighton, Kemptown) Flnsberg, Geoffrey Hunt, John (Bromley)
Boyson, Dr Rhodes (Brent) Fisher, Sir Nigel Hurd, Douglas
Bralne, Sir Bernard Fletcher, Alex (Edinburgh N) Hutchison, Michael Clark
Brittan, Leon Fletchef-Cooke, Charles Irving, Charles (Cheltenham)
Brocklebank-Fowler, C. Fookes, Miss Janet Jenkin, Rt Hon P. (Wanst'tt&W'dfd)
Brooke, Peter Forman, Nigel Johnson Smith, G. (E Grinslead)
Brotherton, Michael Fowler, Norman (Sutton C'f'd) Jones, Arthur (Daventry)
Brown, Sir Edward (Bath) Fox, Marcus Jopling, Michael
Bryan, Sir Paul Fry, Peter Joseph, Rt Hon Sir Keith
Buck, Antony Galbraith, Hon T. G. D. Kaberry, Sir Donald
Budgen, Nick Gardiner, George (Reigate) Kellelt-Bowman, Mrs Elaine
Bulmer, Esmond Gardner, Edward (S Fylde) Kershaw, Anthony
Burden, F. A. Gilmour, Rt Hon Sir Ian (Chesham) Klmball, Marcus
Butler, Adam (Bosworth) Gilmour, Sir John (East Fife) King, Evelyn (South Dorset)
Carlisle, Mark Glyn, Or Alan King, Tom (Brldgwater)
Chalker, Mrs Lynda Goodhart, Philip Kitson, Sir Timothy
Channon, Paul Goodhew, Victor Knox, David
Churchill, W. S. Goodilad, Alastair Lamonl, Norman
Clark, Alan (Plymouth, Sutton) Gorst, John Latham, Michael (Melton)
Clark, William (Croydon S) Gow, Ian (Eastbourne) Lawson, Nigel
Clarke, Kenneth (Rushcliffe) Gower, Sir Raymond (Barry) Le Marchant, Spencer
Clegg, Walter Grant, Anthony (Harrow C) Lewis, Kenneth (Rutland)
Cockcrolt, John Griffiths, Eldon Lloyd, Ian
Cooke, Robert (Bristol W) Grist, Ian Loveridge, John
Cope, John Grylls, Michael Luce, Richard

should have. But one matter is certain. The hon. Gentleman knows that the only way that he could make cuts in direct taxation is, as his right hon. Friend the Member for Sidcup said, by cutting social service benefits and transfer payments. The hon. Gentleman knows that and, unless he is prepared to deny it, we must accept that that is what he wants to do.

The Opposition do a great disservice to themselves and to people outside when they pretend that there is a simple way, apart from improving our industrial performance, of cutting income tax by massive amounts. It is not possible. We have made a start in this Budget. We are making a further extension of it now. I recommend my right hon. and hon. Friends to vote for the Government amendment cutting the basic rate by I p and to vote against the Opposition's amendment.

Question put, That the amendment to the proposed amendment be made:—

The House divided: Ayes 238, Noes 268.

McAdden,Sir Stephe Oppenheim,Mrs Sally Smith, Timothy John(Ashfield)
McCrindle, Robert Osbom, John Speed, Keith
Macfarlane, Neil Page, John (Harrow West) Spence, John
MacGregor, John Page, Rt Hon R. Graham (Crosby) Spicer, Jim (W Dorset)
MacKay, Andrew James Page, Richard (Workington) Spicer, Michael (S Worcester)
Macmillan, Rt Hon M. (Farnham) Paitie, Geoffrey Sproat, lain
McNair-Wilson, M. (Newbury) Price, David (Eastleigh) Stalnton, Keith
McNair-WIIson, P. (Now Forest) Prior, Rt Hon James Stanley, John
Madel, David Pym, Rt Hon Francis Stewart, Rt Hon Donald
Mates, Michael Rees, Peter (Dover & Deal) Stradling Thomas, J.
Mather, Carol Rees-Davies, W. R. Taylor, R. (Croydon NW)
Maude, Angus Reid, George Tebbit, Norman
Mayhew, Patrick Renton, Rt Hon Sir D. (Hunts) Temple-Morris, Peter
Meyer, Sir Anthony Rhodes James, R. Thatcher, Rt Hon Margaret
Miller, Hal (Bromsgrove) Rhys Williams, Sir Brandon Thomas, Dafydd (Merioneth)
Mills, Peter Ridley, Hon Nicholas Thomas, Rt Hon P. (Hendon S)
Miscampbell, Norman Ridsdale, Julian Thompson, George
Mitchell, David (Basingstoke) Rifkind, Malcolm van Straubenzee, W. R.
Moate, Roger Roberts, Michael (Cardiff NW) Vaughan, Dr Gerard
Monro, Hector Roberts, Wyn (Conway) Viggers, Peter
Montgomery, Fergus Rossi, Hugh (Hornsey) Wakeham, John
Moore, John (Croydon C) Rosl, Peter (SE Derbyshire) Walder, David (CliJheroe)
More, Jasper (Ludlow) Royle, Sir Anthony Walkef-Smilh, Rt Hon Sir Derek
Morgan, Geraint Sainsbury, Tim Wall, Patrick
Morgan-Giles, Rear-Admfrai Scott, Nicholas Warren, Kenneth
Morris, Michael (Northampton S) Scott-Hopkins, James Weather!!!, Bernard
Morrison, Charles (Devizes) Shaw, Giles (Pudsey) Wlgley, Dafydd
Mudd, David Shelton, William (Streatham) Wilson, Gordon (Dundee E)
Neave, Alrey Shepherd, Colin Wood, Rt Hon Richard
Nelson, Anthony Shersby, Michael Young, Sir G. (Eating, Acton)
Neubert, Michael Silvester, Fred
Newton, Tony Sims, Roger TELLERS FOR THE AYES:
Normanton, Tom Sinclair, Sir George Mr. Jim Lester and
Nott, John Skeet, T. H. H. Mr. Peter Morrison,
On&Iow, Cranley Smith, Dudley (Warwick)
NOES
Abse, Leo Cox, Thomas (Tooting) Gould, Bryan
Anderson, Donald Crawshaw, Richard Gourlay, Harry
Archer, Rt Kon Peter Cronln, John Graham, Ted
Armstrong, Ernest Crowther, Stan (Rothertiam) Grant, George (Morpeth)
Ashton, Joe Cryer, Bob Grant, John (Islington C)
Atkins, Ronald (Preston N) Cunningham, G. (Islington S) Grocott, Bruce
Atkinson, Norman Cunningham, Dr J. (Whiteh) Hamilton, W. W. (Central Fife)
Bagler, Gordon A. T. Davidson, Arthur Hardy, Peter
Barnett, Guy (Greenwich) Davies, Bryan (Enfleld N) Harper, Joseph
Barnett, Rt Hon Joel (Heywood) Davles, Denzll (Llanelll) Harrison, Rt Hon Walter
Bates, Alt Davies, Rt Hon J. (Knutsford) Hart, Rt Hon Judith
Bean, R. E. Davis, Clinton (Hackney C) Hattersley, Rt Hon Roy
Beith, A. J. Deaklns, Eric Hatton, Frank
Benn, Rt Hon Anthony Wedgwood Dean, Joseph (Leeds West) Hay man, Mrs. Helene
Bennett, Andrew (Stockport N) Dell, Rt Hon Edmund Healey, Rt Hon Denis
Bidwell, Sydney Dormand, J. D. Heffer, Eric S.
Bishop, Rt Hon Edward Douglas-Mann, Bruce Hooley, Frank
Blenklnsop, Arthur Duffy, A. E. P. Horam, John
Boardman, H. Dunnett, Jack Howells, Geraint (Cardigan)
Booth, Rt Hon Albert Dunwoody, Mrs Gwynelh Hoyle, Doug (Nelson)
Boothroyd, Miss Betty Eadie, Alex Hughes, Rt Hon C. (Anglesey)
Bottomley, Rt Hon Arthur Edge, Geoff Hughes, Robert (Aberdeen N)
Boyden, James (Blsh Auck) Edwards, Robert (Wolv SE) Hughes, Roy (Newport)
Bray, Dr Jeremy Ellis, John (Brlgg & Scun) Hunter, Adam
Brown, Hugh D. (Provan) Ellis, Tom (Wrexham) Irving, Rt Hon S. (Dartford)
Brown, Robert C. (Newcastle W) English, Michael Jackson, Colin (Brighousc)
Brown, Ronald (Hackney S) Ennals, David Janner, Greville
Buchan, Norman Evans, Fred (Caerphllly) Jay, Rt Hon Douglas
Callaghan, Rt Hon J. (Cardiff SE) Evans, loan (Aberdafe) Jenkins, Hugh (Putney)
Callaghan, Jim (Mlddleton & P) Evans, John (Newton) John, Brynmor
Campbell, Ian Ewing, Harry (Stirling) Johnson, James (Hull West)
Canavan, Dennis Faulds, Andrew Johnson, Walter (Derby S)
Cant, R. B. Fernyhough, Rt Hon E. Johnston, Russell (Inverness)
Carmichael, Nell Fitch, Alan (Wigan) Jones, Alec (Rhondda)
Carter-Jones, Lewis Flanrvery, Martin Jones, Dan (Burnley)
Cartwright, John Fletcher, Ted (Darlington) Kaufman, Gerald
Castle, Rt Hon Barbara Foot, Rt Hon Michael Kelley, Richard
Clemllson, Ivor Forrester, John Kllroy-SHk, Robert
Cocks, Rt Hon Michael Fowler, Gerald (The Wrekln) Klnnock, NeH
Cohen, Stanley Fraser, John (Lambeth, N'w'd) Lamble, David
Coleman, Donald Ffeeson, Reginald Lamborn, Harry
Concannon, J. D. Freud, Clement Lamond, James
Conlan, Bernard Garrett, John (Norwich S) Latham, Arthur (Paddlngton)
Cook, Robin F. (Edin C) George, Bruce Leadbitter, Ted
Corbett, Robin Gilbert, Dr John Lee, John
Cowans, Harry Glnsburg, David Lestor, Miss Joan (Eton & Slough)
McAdden,Sir Stephe Oppenheim,Mrs Sally Smith, Timothy John(Ashfield)
McCrindle, Robert Osbom, John Speed, Keith
Macfarlane, Neil Page, John (Harrow West) Spence, John
MacGregor, John Page, Rt Hon R. Graham (Crosby) Spicer, Jim (W Dorset)
MacKay, Andrew James Page, Richard (Workington) Spicer, Michael (S Worcester)
Macmillan, Rt Hon M. (Farnham) Paitie, Geoffrey Sproat, lain
McNair-Wilson, M. (Newbury) Price, David (Eastleigh) Stalnton, Keith
McNair-WIIson, P. (Now Forest) Prior, Rt Hon James Stanley, John
Madel, David Pym, Rt Hon Francis Stewart, Rt Hon Donald
Mates, Michael Rees, Peter (Dover & Deal) Stradling Thomas, J.
Mather, Carol Rees-Davies, W. R. Taylor, R. (Croydon NW)
Maude, Angus Reid, George Tebbit, Norman
Mayhew, Patrick Renton, Rt Hon Sir D. (Hunts) Temple-Morris, Peter
Meyer, Sir Anthony Rhodes James, R. Thatcher, Rt Hon Margaret
Miller, Hal (Bromsgrove) Rhys Williams, Sir Brandon Thomas, Dafydd (Merioneth)
Mills, Peter Ridley, Hon Nicholas Thomas, Rt Hon P. (Hendon S)
Miscampbell, Norman Ridsdale, Julian Thompson, George
Mitchell, David (Basingstoke) Rifkind, Malcolm van Straubenzee, W. R.
Moate, Roger Roberts, Michael (Cardiff NW) Vaughan, Dr Gerard
Monro, Hector Roberts, Wyn (Conway) Viggers, Peter
Montgomery, Fergus Rossi, Hugh (Hornsey) Wakeham, John
Moore, John (Croydon C) Rosl, Peter (SE Derbyshire) Walder, David (CliJheroe)
More, Jasper (Ludlow) Royle, Sir Anthony Walkef-Smilh, Rt Hon Sir Derek
Morgan, Geraint Sainsbury, Tim Wall, Patrick
Morgan-Giles, Rear-Admfrai Scott, Nicholas Warren, Kenneth
Morris, Michael (Northampton S) Scott-Hopkins, James Weather!!!, Bernard
Morrison, Charles (Devizes) Shaw, Giles (Pudsey) Wlgley, Dafydd
Mudd, David Shelton, William (Streatham) Wilson, Gordon (Dundee E)
Neave, Alrey Shepherd, Colin Wood, Rt Hon Richard
Nelson, Anthony Shersby, Michael Young, Sir G. (Eating, Acton)
Neubert, Michael Silvester, Fred
Newton, Tony Sims, Roger TELLERS FOR THE AYES:
Normanton, Tom Sinclair, Sir George Mr. Jim Lester and
Nott, John Skeet, T. H. H. Mr. Peter Morrison,
On&Iow, Cranley Smith, Dudley (Warwick)
NOES
Abse, Leo Cox, Thomas (Tooting) Gould, Bryan
Anderson, Donald Crawshaw, Richard Gourlay, Harry
Archer, Rt Kon Peter Cronln, John Graham, Ted
Armstrong, Ernest Crowther, Stan (Rothertiam) Grant, George (Morpeth)
Ashton, Joe Cryer, Bob Grant, John (Islington C)
Atkins, Ronald (Preston N) Cunningham, G. (Islington S) Grocott, Bruce
Atkinson, Norman Cunningham, Dr J. (Whiteh) Hamilton, W. W. (Central Fife)
Bagler, Gordon A. T. Davidson, Arthur Hardy, Peter
Barnett, Guy (Greenwich) Davies, Bryan (Enfleld N) Harper, Joseph
Barnett, Rt Hon Joel (Heywood) Davles, Denzll (Llanelll) Harrison, Rt Hon Walter
Bates, Alt Davies, Rt Hon J. (Knutsford) Hart, Rt Hon Judith
Bean, R. E. Davis, Clinton (Hackney C) Hattersley, Rt Hon Roy
Beith, A. J. Deaklns, Eric Hatton, Frank
Benn, Rt Hon Anthony Wedgwood Dean, Joseph (Leeds West) Hay man, Mrs. Helene
Bennett, Andrew (Stockport N) Dell, Rt Hon Edmund Healey, Rt Hon Denis
Bidwell, Sydney Dormand, J. D. Heffer, Eric S.
Bishop, Rt Hon Edward Douglas-Mann, Bruce Hooley, Frank
Blenklnsop, Arthur Duffy, A. E. P. Horam, John
Boardman, H. Dunnett, Jack Howells, Geraint (Cardigan)
Booth, Rt Hon Albert Dunwoody, Mrs Gwynelh Hoyle, Doug (Nelson)
Boothroyd, Miss Betty Eadie, Alex Hughes, Rt Hon C. (Anglesey)
Bottomley, Rt Hon Arthur Edge, Geoff Hughes, Robert (Aberdeen N)
Boyden, James (Blsh Auck) Edwards, Robert (Wolv SE) Hughes, Roy (Newport)
Bray, Dr Jeremy Ellis, John (Brlgg & Scun) Hunter, Adam
Brown, Hugh D. (Provan) Ellis, Tom (Wrexham) Irving, Rt Hon S. (Dartford)
Brown, Robert C. (Newcastle W) English, Michael Jackson, Colin (Brighousc)
Brown, Ronald (Hackney S) Ennals, David Janner, Greville
Buchan, Norman Evans, Fred (Caerphllly) Jay, Rt Hon Douglas
Callaghan, Rt Hon J. (Cardiff SE) Evans, loan (Aberdafe) Jenkins, Hugh (Putney)
Callaghan, Jim (Mlddleton & P) Evans, John (Newton) John, Brynmor
Campbell, Ian Ewing, Harry (Stirling) Johnson, James (Hull West)
Canavan, Dennis Faulds, Andrew Johnson, Walter (Derby S)
Cant, R. B. Fernyhough, Rt Hon E. Johnston, Russell (Inverness)
Carmichael, Nell Fitch, Alan (Wigan) Jones, Alec (Rhondda)
Carter-Jones, Lewis Flanrvery, Martin Jones, Dan (Burnley)
Cartwright, John Fletcher, Ted (Darlington) Kaufman, Gerald
Castle, Rt Hon Barbara Foot, Rt Hon Michael Kelley, Richard
Clemllson, Ivor Forrester, John Kllroy-SHk, Robert
Cocks, Rt Hon Michael Fowler, Gerald (The Wrekln) Klnnock, NeH
Cohen, Stanley Fraser, John (Lambeth, N'w'd) Lamble, David
Coleman, Donald Ffeeson, Reginald Lamborn, Harry
Concannon, J. D. Freud, Clement Lamond, James
Conlan, Bernard Garrett, John (Norwich S) Latham, Arthur (Paddlngton)
Cook, Robin F. (Edin C) George, Bruce Leadbitter, Ted
Corbett, Robin Gilbert, Dr John Lee, John
Cowans, Harry Glnsburg, David Lestor, Miss Joan (Eton & Slough)
Lewis, Ron (Carlisle) Padley, Walter Strauss, Rt Hon G. R.
Llpton, Marcus Palmer, Arthur Summersklll, Hon Dr Shirley
Lomas, Kenneth Pardoe, John Swain, Thomas
Loyden, Eddie Park, George Taylor, Mrs Ann (Bolton W)
Luard, Evan Parker, John Thomas, Jeffrey (Abertlllecy)
Lyon, Alexander (York) Parry, Robert Thomas, Mike (Newcastle E)
Lyons, Edward (Bradford W) Pavitt, Laurie Thomas, Ron (Bristol NW)
Mabon, Rt Hon Dr J. Dlckson Pendry, Tom Thome, Stan (Preston South)
McDonald, Dr Oonagh Perry, Ernest Tlerney, Sydney
McElltone, Frank Prescott, John Tinn, James
MacFarquhar, Roderick Price, C. (Lewisham W) TomHnson, John
McGuire, Michael (Ince) Raoice, Giles Torney, Tom
MacKenzle, Rt Hon Gregor Rees, Rt Hon Merlyn (Leeds S) Tuck, Raphael
Maclerman, Robert Richardson, Miss Jo Urwln, T. W.
McMillan, Tom (Glasgow C) Roberts, Albert (Normanton) Walnwright, Edwin (Dearne V)
McNamara, Kevin Roberts, Gwllym (Canneck) Wainwrio.nl, Richard (Colne V)
Madden, Max Robinson, Geoffrey Walker, Harold (Doncaster)
Magee, Bryan Roderick, Caerwyn Walker, Terry (Klngswood)
Mahon, Simon Rodgers, George (Chorley) Ward, Michael
Mallalieu, J. P. W. Rodgers, Rt Hon William (Stockton) Watklns, David
Marks, Kenneth Rooker, J. W. Watkinson, John
Marshall, Jim (Leicester S) Rose, Paul 8. Weetch, Ken
Maynard, Miss Joan Ron, Stephen (Isle of Wight) Weitzman, David
Mendeison, John Ross, Rt Hon W. (Kllmarnock) Wellbeloved, James
Mikardo, Ian Rowlands, Ted White, Frank R. (Bury)
Millan, Rt Hon Bruce Ryman, John White, James (Pollock)
Miller, Dr M. S. (E Kilbrlde) Sedgemore, Brian Whitehead, Phillip
Mitchell, R. C. (Soton, Itchen) Salby, Harry Whitlock, William
Molloy, William Shaw, Arnold (llford South) Willey, Rt Hon Frederick
Moonman, Eric Sheldon, Rt Hon Robert Williams, Rt Hon Alan (Swansea Wf
Morris, Alfred (Wyihenshawe) Shore, Rt Hon Peter Williams, Alan Lee (Hornch'ch)
Morris, Charles R. (Openshaw) SUkln, Rt Hon John (Deptford) Williams, Rt Hon Shirley (Hertford)
Morris, Rt Hon J. (Aberavon) Sllkln, Rt Hon S. C. (Dulwich) Wilson, Alexander (Hamilton)
Moyle, Roland Sillars, James Wilson, Rt Hon Sir Harold (Huyton)
Mulley, Rt Hon Frederick Stlverman, Julius Wilson, William (Coventry SE)
Murray, Rt Hon Ronald King Skinner, Dennis Wise, Mrs Audrey
Newens, Stanley Small, William Woodall, Alec
Noble, Mike Smith, John (N Lanarkshire) Woof, Robert
Oakes, Gordon Spearing, Nigel Wrlgglesworth, Ian
Ogden, Eric Sprlggs, Leslie Young, David (Bolton E)
O'Halloran, Michael Stallard, A. W.
Orbach, Maurice Stewart, Rt Hon M. (Fulham) TELLERS FOR THE NOES:
Orme, Rt Hon Stanley Stoddart, David Mr. James Hamilton and
Ovender, John Stott, Roger Mr. Peter Snape.
Owen, Rt Hon Dr David Strang, Gavin

Question accordingly negatived.

Amendment No. 95 agreed to.

Mr. Tony Newton (Braintree)

I beg to move Amendment No. 114, in page 12, line 39, after '£1,500', insert 'in the case of an individual qualifying for a personal relief under section 8(1)(b) of the Taxes Act or £2,300 in the case of an individual qualifying for a personal relief under section 8(1)(a) of the Taxes Act'.

Mr. Deputy Speaker (Mr. Oscar Murton)

With this it is proposed to group the following amendments: No. 108, in page 12, line 40, leave out '£500' and insert '£1,000'.

No. 115, in page 13, line 5, at end insert 'and for the reference to £2,300 of a reference to £3,060'.

Mr. Newton

Although these amendments have been grouped together and all concern—[Interruption.]

Mr. Deputy Speaker

Order. Will hon. Members who do not desire to hear the hon. Member for Braintree (Mr. Newton) move his amendment kindly withdraw quietly?

Mr. Newton

Although these amendments have been grouped together and all concern investment income surcharge, they raise two distinct issues, and I propose to deal with them separately.

We hope to have Amendment No. 108 distinguished separately if it comes to a vote. I shall deal first with that amendment, it being an official Opposition amendment in the names of my right hon and hon. Friends and myself. It concerns what might be called the secondary threshold for the investment income surcharge. Under the Bill, the first £1,500 of investment income is free of investment income surcharge. The next £500 is chargeable at the 10 per cent. surcharge rate, and thereafter the rate is the full 15 per cent. There is a slight variation for the over 65s, but that is the basic situation.

9.45 p.m.

In our view, the basic £1,500 threshold should be raised. At an earlier stage we tabled an amendment to increase it to £4,000. That battle, for this year at least, has been fought and lost, to the discredit of Liberal Members who have consistently spoken in favour of such a change but who failed to support it when it came to the point this year. No doubt it is something to which we shall return. Meanwhile we feel it right to press the Government again by urging this more limited change. Indeed, it might almost be said to be an excessively limited and modest amendment. We ask for relief of no more than 5 per cent. on £500 of investment income in the secondary tranche, the £500 that is above the £1,500 basic threshold.

All that we are proposing in Amendment No. 108 for a basic rate taxpayer is to reduce from 49 per cent. to 44 per cent. the marginal tax rate on his investment income between £2,000 and £2,500. The arguments were well put by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) and others when we discussed investment income surcharge in Committee of the whole House a month or two ago.

This evening 1 need only summarise the main points rather than attempt to detain the House by rehearsing them at length. First and foremost, anything that we can do in this area will primarily bring benefit to retired people. I understand from figures that have been given in the House that something approaching half of all taxpayers who are subject to the investment income surcharge are in the retirement group, over the age of 65. Even with this modest amendment we should be doing something to give additional help to a group of the population who have suffered especially from inflation.

The claim is made that those on a basic national insurance pension have been protected in some sense from inflation. It remains to be seen whether that is true this year. Many of us doubt whether the pension increase in November will prove to have protected them against inflation, but events will show. At any rate, some measure of protection has been extended to them. The same is true of those who have a private pension or public service pension that is inflation-proofed. They, too, have had some degree of protection, but the group that we have not been able to protect, and which has been a great problem to successive Governments, is composed of those who are dependent for their income, or a significant part of it, in retirement on the income from their savings during their working life, which are not inflation-proofed. Those savings have not kept pace with the rise in prices. It is to that group that I am addressing my argument.

This has been an intractable problem for every Government. No Government have found an answer to it. We cannot find an answer this evening, but we can at least give some measure of additional relief to those who would otherwise suffer the grinding effect of taxation eroding real incomes still further. At the same time we would reduce the unfairness between those whose retirement income comes from pension taxed income as earned income and those who happen to have saved for their retirement in a different way— by building up investment— and whose income is taxed at the surcharge rate if the investment is significant.

The next argument goes rather wider. In an earlier debate, my hon. Friend the Member for Horsham and Crawley referred to the effect of the surcharge on small savers and its significant effect on the stock market and the flow of funds to smaller and growing businesses especially. There is real force in that argument irrespective of whether Ministers accept it. Whatever Ministers think of that argument, what surely is common ground between us is that we need to do everything possible to encourage saving.

It is common ground that in using the resources that will flow to us from North Sea oil we need to invest as much as possible and consume as little as possible. That means that, taken as a whole, our community must save a greater proportion of its income than at present to meet the objectives that are agreed in using North Sea oil resources.

What is also common ground is that it is no longer open to a society with tax rates as high as ours to achieve such a saving by the forced saving of additional taxation. We on this side of the House have long believed that, but it is now the view to which Ministers and Labour Members are converted. If we need savings, and if we cannot have the tax rates to force that saving, we must have voluntary saving, but at the moment we have a situation in which almost everything militates against it.

The rate of inflation encourages people to try to put their money into goods rather than into monetary forms of saving. The personal savings ratio turned down in the early part of this year. At the same time, the operation of the social security system is leading a growing number of people who have retired to wonder whether it made sense to save at all because they find that they are no better off than those who did not save. This is another form of disincentive that we have built into our system. Finally, there is the tax disincentive of the surcharge on incomes for which people have saved during their working lives.

The amendment would do little to help, but it would be an additional sign that the Government meant business and genuinely wanted to encourage people to save and provide the flow of funds for industrial investment which everybody is agreed we need.

I turn now to the Amendments Nos. 114 and 115, which are not, I hasten to emphasise, Official Opposition amendments but are in my name only. They would ease the burden of investment income surcharge but in a much more specific way. The main amendment is No. 114, and Amendment No. 115 follows it through consequentially to the position for people over 65.

Essentially, what I am getting at is the present position in which, whether for married or for single people, the threshold for investment income is the same. We have a tax system which recognises that the need of a married couple is less than that of a single person, or perhaps I should say it recognises that the taxable capacity of a married couple is less than that of a single person. We recognise that by having a higher threshold against total income.

We also have a tax system which acknowledges that there is a need for a separate and distinct kind of threshold against the investment income surcharge — that is, the existing £ 1,500 threshold. What we do not recognise— there is a case for looking at this— is that the surchargeable capacity of a married couple is also less than the surchargeable capacity of a single person, giving rise to a logic which suggests that we ought to consider a higher investment income surcharge threshold for a married couple.

Whether the present situation would be seen as unjust would vary somewhat according to the exact circumstances of a particular married couple. In the case of a married couple where both had exactly £ 1,500 of investment income genuinely related to savings of their own and not some sharing out that had occurred in relation to the marriage, they would suffer a significant extra burden of investment income surcharge compared with what they would suffer if they were single.

I recognise that that is probably not a frequent case but it certainly can happen. I have a constituent who has prompted me to raise this matter. He says that he is in that situation. He and his wife have genuine investment incomes of £ 1,500 each. He goes on to say that as two single people they would pay no surcharge at all but that because they are married they pay a surcharge of £ 200. He adds that the absurdity of the situation— and this, too, is a valid point is highlighted by the fact that the richer the couple the less the discrimination, because the larger is the proportion of investment income which would in any event be taxed at the 15 per cent. rate. That is clearly an unfair situation.

Against that, in reality in many cases the capital is more likely to be in the hands of the husband. One can therefore argue that one would be creating a route down which, by splitting the capital of the married couple, one significantly reduced their tax liability, and it could be said that that argument was strengthened by the change in CTT enabling tax-free transfers of capital to take place.

I suspect that that is an argument on which the Minister will rely, but the prospect of a married couple splitting their capital to minimise their tax is not one which I find particularly objectionable, for three reasons. First, most of us would like to see capital more widely spread. Secondly, most of us increasingly recognise that the input of a wife into a marriage is more considerable than was previously recognised by both our tax and our legal systems. There is much to be said for treating a wife—if only for the work that she does as housekeeper and mother—as if she was entitled to a personal share of the assets built up by the partnership. Thirdly— and one must not underrate this when there is a high rate of marriage breakdown— there are considerable merits in increasing the financial security of the wife who still suffers most financially from a breakdown of the marriage. That can be done by encouraging the sharing and splitting of capital within and between the family.

I accept that to follow that logic through would be further than Ministers and others would wish to go. The amendments attempt to do something which is limited and reasonable. The figures are calculated in precise ratio to the existing thresholds on total income. Under the latest proposals, the single man's threshold is £ 845 and the married couple's £ 1,295. I have taken the £ 1,500 investment income surcharge threshold and come up with a figure of £ 2,300 investment income threshold for a married couple. It is a modest amendment. It is one that it is worth examining as a possibility.

I have made the proposals in Amendments Nos. 114 and 115 tentatively. They raised broad issues about the way in which we tax married couples. We have not heard the last of that. There is still much to be argued from all sides, and we shall not solve the problem by these amendments this evening. However, it is an aspect that the Government should consider.

Amendment No. 108 is not tentative. We believe that much more should be done to encourage savings and to provide additional help, especially to retired people living on incomes from their savings. The proposals in the amendment would at least do a little more to help in that direction. I hope that my right hon. and hon. Friends are with me in wishing to vote tonight if Ministers are not prepared to accept this moderate and reasonable proposal.

Mr. Ridsdale

Many people in my constituency are affected by the unfair tax imposition on retired people and those who are near retirement and finding it difficult to get employment. At a time of 17½ per cent. inflation this surcharge on their savings is inhuman. I cannot understand why the Government have not gone further to help.

The Liberal Party says that it wishes to help small savers. It appears that Liberal Members will either abstain or vote against the amendment. I can understand why the Liberals suffered such humiliation at Saffron Walden.

Mr. Pardoe

We did not. Has not the hon. Gentleman noticed?

Mr. Ridsdale

I read the letter in The Times from theVice-President of the Liberal Party, who called it a humiliation.

Be that as it may, this system of double taxation, almost triple taxation, for people who have spent all their lives working and people on very limited means, at a time of inflation, is very inhuman. I ask the Government to think seriously about it. If we are to encourage investment and saving, this is not the way to go about it. I am sure that the common sense of the people of this country will hold this, as well as many other things that the Government have done against them, as a reason for returning a Conservative Government at the next General Election.

I congratulate my hon. Friend the Member for Braintree (Mr. Newton) on having proposed the amendment.

10.0 p.m.

Mr. Kenneth Warren (Hastings)

I rise also to support my hon. Friend the Member for Braintree (Mr. Newton) in the amendment, which was very ably moved. I want briefly to contribute some thoughts on the whole question of the attitude of this House and the Government to investment income. When one takes a decision on a Finance Bill, one thinks that one is taking it only for a year, but in fact one is affecting people's decisions, probably for their lifetime ahead, on the question whether or not they should save. It is not just those who are spending their savings today who experience this taxation but younger people who will have to consider how they will combat the possibilities of inflation in their retirement.

I am sure that hon. Members on both sides of the House would subscribe to the idea that investment income ought to be available for people to enjoy in their retirement. One could advance a nice economic argument that it is part of the whole restraint, to stop people spending what they earn, and that it is a good idea to have that investment cycled through the economy to create new business enterprises and to sustain current enterprises, but I am extremely concerned that even the terms of these amendments show how shallow budgetary considerations frequently are. They are questions for today rather than problems that people face in a lifetime.

If one looks at the experience of my hon. Friends the Members for Harwich (Mr. Ridsdale), Eastbourne (Mr. Gow) and Folkestone and Hythe (Mr. Costain), which they share with me as being representatives of constituencies on the coast in which a large proportion of the population are retired, one can appreciate that these clauses and amendments are of vital importance.

After the years of their saving, they who served us in the front line and have now retired to these places find that not only are they in the front line in the inflation battle but they are also on the poverty line, with the increased erosion of their savings, increased fares, and so on. Not only are they on the poverty line; they have become isolated on islands on the perimeter of the British economy, where they are being shut away, neglected and left, until people speak out on their behalf.

In the House we hear of the need to moderate pay claims, and that people such as coalface workers may claim £ 135 a week. Perhaps they deserve it, but they can deserve it only if they produce against that pay. If they do not do that, it is the pensioners who will pay for such a pay increase. That means that the consideration of their savings must be much more strongly in our minds.

Lastly, I am delighted to hear investment income being talked about. It is usually called unearned income, but nothing could be further from the truth. We have been getting into Treasury folklore. I am sorry that the Financial Secretary is no longer present. I hope that he will not mind my criticising him in his absence for one phrase that he used in the debate on a previous amendment. He said that 1p off income tax costs £ 500 million. It does not cost £ 500 million. It means that a penny in someone's pocket is not in the Treasury's pouch. That is the way in which we ought to approach these problems—considering not how much it will cost the Government but how much it will save people.

This is a serious amendment about the quality of life of people who can no longer save, and whose savings are being eroded in front of their eyes.

Mr. Giles Shaw (Pudsey)

I support what my hon. Friends have said about the amendment. I want to stress the problems of the age-retired in this regard. Many of us know full well that those who are now aged 70, 75 and more were not enabled, during their working life, to save for some kind of contributory pension or to take part in an orthodox pension scheme. To them the importance of what we are discussing is related not to investment income, but to survival income. From that point of view there should be a review of these rates.

I know that there are age allowances, and so on, for retired persons. There should be a review of the whole system, whereby consideration should be given to the question of surcharge taxation. Quite apart from the equity of this case, a review is long overdue, bearing in mind the appalling effect of inflation on older persons.

Sir G. Howe

I should like to underline very strongly the importance of the point made in a comprehensive speech by my hon. Friend the Member for Braintree (Mr. Newton), supported by my hon. Friends the Members for Harwich (Mr. Ridsdale), Hastings (Mr. Warren) and Pudsey (Mr. Shaw), and supported silently but vigorously by my hon. Friends the Members for Eastbourne (Mr. Gow) and Folkestone and Hythe (Mr. Costain), who have frequently spoken on this subject in the past.

The central point of the case is that investment income surcharge is a tax which falls to a great extent on the elderly and the retired. It falls at a level of income which is much too low and at a rate which is much too high. It is unjust to them, it is damaging to the cause of savings and investment, and it should be abated and relieved as quickly and as far as possible.

My hon. Friend the Member for Braintree in his Amendments Nos. 114 and 115 raised the curtain on a more sophisticated and interesting aspect of this argument —the extent to which it is right or wrong for the investment income of husband and wife, married and living together, to be added together so that they enjoy the benefit of only one allowance. I hope that he will forgive me if I do not follow him down that road.

His argument raises a question which will be increasingly important in many aspects of our tax law. The income tax system was designed in an age when it bore only on high incomes at low rates, when married women spent a great part of their lives bearing children or looking after young children, when only a few of them went to work, and if they did they did not come within the bands which were subject to income tax.

We are now living in the world of the working wife, the world of couples both of whom are at work, both of whom have savings and both of whom are accumulating investment income. We are only beginning to analyse the changes which may be necessary to adapt our structure of income tax to the changing world.

The central point, as my hon. Friend the Member for Braintree said, under Amendment No. 108 is at the very least to increase the amount on which investment income surcharge is payable at a rate of 10 per cent. rather than 15 per cent., from £500 to £1,000, so that that surcharge falls on the band of income between £1,500 and £2,500 instead of on the narrower band.

That is an excessively modest proposal. It effects those with modest investment incomes— between £ 40 and £ 50 a week. The tax is unjust in bearing upon people who for the most part are elderly and retired. Forty-two per cent. of the tax is extracted from pensioners, generally from those who have no other significant income. These people are living on the savings which they have accumulated during a lifetime and which they thought were adequate for the non-inflationary future in which they were going to retire. Those savings are hopelessly inadequate for the inflationary world in which they find themselves. Such pensioners are not by any means frequently blessed with inflation-proofed pensions. To tax them at a differentially high rate on incomes as modest as these is to do great injustice. It is not easy to defend this action in any kind of society.

It is also more serious to sustain a tax at this level when one thinks of its impact upon savings and the whole attitude of society towards savings. When one reflects that the total yield of investment income surcharge is about £ 275 million and that the cost of the additional milk subsidy granted by the Chancellor last week is £ 110 million, it is surely worth asking whether that money would not be far more fruitfully spent in relieving the burden of taxation on savings and savings income than in spreading a subsidy thinly on one commodity.

How crazy are we becoming when we regard it as creating a proper atmosphere for whatever the Government have in mind to introduce a subsidy on milk while cancelling subsidies on bread and cheese? Conjuring tricks of that kind have no impact. The same amount of money would go further towards relieving hardship if spent under our amendment. That would be a signal of a different approach to the kind of society we want.

We have no use for a subsidy society. We have a great deal of use for a saving society. That is the direction in which the Government should disburse money if they can do it at all. I therefore invite my hon. Friends to support Amendment No. 108, which represents a modest step towards sanity and justice. If we went the whole way and restored the position established by the last Conservative Government, we should have to raise the threshold for investment income surcharge to £ 4,000 before it even started to be paid — and that would be merely tinkering with the most urgent problem, which should never have arisen and which the present Government have tolerated for too long, to their great discredit and shame.

The Minister of State, Treasury (Mr. Denzil Davies)

The hon. Member for Braintree (Mr. Newton), although he moved Amendment No. 114, spoke in the main to Amendment No. 108, which is the official Opposition amendment. Perhaps I may deal first with that amendment.

The hon. Member based his case to some extent on the need to encourage savings. We would all agree on the importance of that. In fact, the ratio of savings over the last few years has been very high, for various reasons which no one really understands, but despite the high rate of tax, including the investment income surcharge, for which hon. Members constantly criticise us, and a high rate of inflation. For some odd reason, people have not converted their money into goods because of inflation; in fact, they have saved it. That might be perverse, but it has happened. Therefore, to link the amendment with the need to create savings and to say that because the surcharge is too high it has inhibited savings, is not true of the last few years.

To listen to Conservative Members one would have thought that it was this Government who introduced that surcharge. I accept that they disagree about the levels, but they should remember that it was introduced in 1971 by Lord Barber. Previously, it was called the unearned income surcharge, but it was introduced by a Conservative Government.

Sir G. Howe

The Minister cannot get away with that literal presentation of the matter. The last time that we discussed this matter in Committee we established clearly that the distinction between earned and unearned income was introduced by a Liberal Chancellor, McKenna, when income tax was at a standard rate of 10 per cent. When that system was replaced by Lord Barber in 1972, the name of the game was changed, but he produced a substantial reduction in the burden of taxation on unearned income, at a level which could be reproduced today only by raising the starting point to £4,000.

10.15 p.m.

Mr. Davies

The right hon. and learned Gentleman should not get excited. [HON. MEMBERS: "Withdraw."] They are all getting excited now. I was merely reciting a fact; there is nothing to withdraw. The investment income surcharge was introduced by Lord Barber. I remember pointing out from the Opposition Benches that it did not apply to discretionary trusts, and they changed the law quickly to make it apply to them. As the right hon. and learned Gentleman admitted, what Lord Barber did was to change the name of the process for taxing unearned income. That goes back to McKenna, Lloyd George and the Liberal Party at the beginning of this century, but the Conservative Party decided, when changing our tax system, to make a tax on unearned income, with some exemptions, and to call it the investment income surcharge.

Inflation has affected savings and especially the income of those who do not have inflation-proofed pensions, or who have to live on what is correctly described as investment income. However, we have given these people certain relief in the Budget—though Opposition Members may dispute the level of the relief. We have increased the threshold to £1,500 for those under 65 and to £2,000 for those over 65. Opposition Members may say that that is not enough, but at least we have done that much.

The hon. Member for Croydon, South (Mr. Clark) keeps muttering. If he has something to say, let him get up and say it.

Mr. William Clark (Croydon, South)

The Minister of State claims to have increased the starting point for the tax, but when the Government came to office the level was higher than he is proposing.

Mr. Davies

I accept that. All that I am saying is that we have increased the levels in the Budget to £1,500 and £2,000.

In addition, the increased personal allowances benefit those who have to live on investment income in the same way as everyone else. Hon. Members on the Opposition Benches should not look only at the investment income surcharge. Those who are now shaking their heads do not understand how the tax system works. An increase in allowances naturally benefits people who receive income, whether it is investment income or so-called earned income.

The reduction in the basic rate of income tax also benefits those with investment income. They pay the same basic rate as everyone else. All these measures have benefited those living on investment income. The cost, or, in deference to the hon. Member for Hastings (Mr. Warren), the reduction in the receipts of the central Government, involved in the amendment would be £ 11 million to £ 12 million. 1 expect that, in their present mood, that does not mean much to the Opposition and that they could easily vote it away, but the £ 11 million has to be balanced against other calls upon our expenditure and, bearing in mind the increase in the threshold and other tax changes, we felt that this was as far as we could go this year. That does not mean that we think that those on investment income do not suffer from inflation, and the level of the surcharge is kept under review.

In Amendment No. 114, the hon. Member for Braintree seeks to equate an exemption with an allowance. Because there is a single person's and a married person's allowance, he wants allowances for both groups in respect of investment income. This is not the right way to deal with the matter. The married person's allowance benefits couples receiving investment income and recognises that married couples have greater expenses than single people. However, extending allowances in the way proposed in the amendment would not be the best way to proceed.

There is also the question of disaggregation of investment income. It may be that we shall go down this road because of changes in our society. Who knows how society will develop? If we go along this road, however, we also have to consider the effect on capital transfer tax and capital gains tax. If there is to be disaggregation of investment income,

Division No. 206] AYES [10.24 p.m.
Adley, Robert Clark, Alan (Plymouth, Sutton) Gllmour, Rt Hon Sir Ian (Chesham)
Aitken, Jonathan Clark, William (Croydon S) Gllmour, Sir John (East Fife)
Alison, Michael Clarke, Kenneth (Rushclitle) Glyn, Dr Alan
Arnold, Tom Clegg, Walter Goodhart, Philip
Atkins, Rt Hon H. (Spelthorne) Cockcrott, John Goodhew, Victor
Awdry, Daniel Cooke, Robert (Bristol W) Goodlad, Alastair
Banks, Robert Cope,John Gorst, John
Bennett, Sir Frederic (Torbey) Costaln, A. P. Gow, Ian (Eastbourne)
Bennett, Dr Reginald (Fareham) Critchley, Julian Gower, Sir Raymond (Barry)
Berry, Hon Anthony Crowder, F. P. Grant, Anthony (Harrow C)
Bitten, John Dodsworth, Geoffrey Grist, Ian
Biggs-Davison, John Drayson, Burnaby Grylls, Michael
Blaker, Peter du Cann, Rt Hon Edward Hamilton, Michael (Salisbury)
Body, Richard Durant, Tony Hampson, Dr Keith
Boscawen, Hon Robert Dykes, Hugh Hannam, John
Bottomley, Peter Eden, Rt Hon Sir John Harrison, Col Sir Norwood (Eye)
Bowden, A. (Brighton, Kernptown) Edwards, Nicholas (Pembroke) Haselhurst, Alan
Boy son, Dr Rhodes (Brent) Elliott, Sir William Hawkins, Paul
Bralne, Sir Bernard Emery, Peter Hayhoe, Barney
Brittan, Leon Eyre, Reginald Heseltine, Michael
Brocklebank-Fowler, C. Fairbairn, Nicholas Hicks, Robert
Brooke, Peter Farr, John Higgins, Terence L.
Brotherton, Michael Fell, Anthony Hodgson, Robin
Brown, Sir Edward (Bath) Flnsberg, Geoffrey Holland, Philip
Bryan, Sir Paul Fisher, Sir Nigel Hordern, Peter
Buck, Antony Fletcher, Alex (Edinburgh N) Howe, Rt Hon Sir Geoffrey
Budgen, Nick Fletcher-Cooke, Charles Howell, David (Gufldford)
Bulmer, Esmond Forman, Nigel Howe-H Ralph (North Norfolk)
Burden, F. A. Fowler, Norman (Sutton C'f'd) Hunt, David (WIrral)
Butler, Adam (Bosworth) Fox, Marcus Hunt, John (Bromley)
Carlisle, Mark Fry, Peter Hurd, Douglas
Chalker, Mrs Lynda Galbralth, Hon T. G. D. Hutchison, Michael Clark
Channon, Paul Gardiner, George (Relgate) James, David
Churchill, W. S. Gardner, Edward (S Fylde) Jenkin, Rt Hon P. (Wanst'd&W'df'd)

there is no reason why capital transfer tax or capital gains tax should be exempt. If the amendment were approved, it would have considerable repercussions and consequences on our tax system. Amendment No. 114 was put forward tentatively. I do not think that we are ready to move along that road, if, indeed, we ever are.

Nor can I recommend Amendment No. 108 to the House. I know that the Opposition feel strongly about it, but this year we have gone as far as we can in trying to help people in receipt of investment income and we cannot go further at the cost, in this case, of £11 million.

Question put, That the amendment be made:—

The House proceeded to a Division; but no Member being willing to act as Teller for the Ayes, Mr. DEPUTY SPEAKER declared that the Noes had it.

Question accordingly negatived.

Amendment proposed: No. 108, in page 12, line 40, leave out £500 'and insert £1,000'.—[Mr. David Howell.]

Question put, That the amendment be made:—

The House divided: Ayes 213, Noes 250.

Johnson Smith, G. (E Grinstead) Montgomery, Fergus Shersby, Michael
Jones, Arthur (Daventry) Moore, John (Croydon C) Silvester, Fred
Jopllng, Michael More, Jasper (Ludlow) Sims, Roger
Joseph, Rt Hon Sir Keith Morgan, Geraint Sinclair, Sir George
Kaberry, Sir Donald Morgan-Giles, Rear-Admiral Smllh, Dudley (Warwick)
Kellett-Bowman, Mrs Elaine Morris, Michael (Northampton S) Smith, Timothy John (Ashfleld)
Kershaw, Anthony Morrison, Charles (Devizes) Speed, Keith
Klmball, Marcus Mudd, David Spence, John
King, Evelyn (South Dorset) Neave, Airey Splcer, Jim (W Dorset)
Kitson, Sir Timothy Nelson, Anthony Spicer, Michael (S Worcester)
Knox, David Neubert, Michael Sproat, lain
Lamont, Norman Newton, Tony Stainton, Keith
Latham, Michael (Melton) Normanton, Tom Stanley, John
Lawson, Nigel Nott,John Stewart, Ian (Hltchln)
Le Marchant, Spencer Onslow, Cranley Stokes, John
Lester, Jim (Beeslon) Oppenhelm, Mrs Sally Stradling Thomas, J.
Lewis, Kenneth (Rutland) Page, John (Harrow West) Taylor, R. (Croydon NW)
Lloyd, Ian Page, Rt Hon R. Graham (Crosby) Tebblt, Norman
Loveridge, John Page, Richard (Worklngton) Temple-Morris, Peter
Luce, Richard Pattie, Geoffrey Thatcher, Rt Hon Margaret
MacCormick, lain Price, David (Eastleigh) Thomas, Rt Hon P. (Hendon S)
McCrlndle, Robert Prior, Rt Hon James van Straubenzee, W. R.
Macfarlane, Neil Pym, Rt Hon Francis Vaughan, Dr Gerard
MacGregor, John Ralhbone, Tim Viggers, Peter
MacKay, Andrew James Rawlinson, Rt Hon Sir Peter Wakeham, John
Macmlllan, Rt Hon M. (Famham) Rees, Peler (Dover & Deal) Walder, David (CIHtieroe)
McNarr-Wllson, M. (Newbury) Rhodes James, R. Walker-Smith, Rt Hon Sir Derek
McNair-Wilson, P. (New Forest) Rhys Williams, Sir Brandon Wall, Patrick
Madel, David Ridley, Hon Nicholas Warren, Kenneth
Marshall, Michael (Arundel) Ridsdale, Julian Weatherlll, Bernard
Marten, Neil R if kind, Malcolm Wells, John
Mates, Michael Roberts, Michael (Cardiff NW) Wood, Rt Hon Richard
Malher, Carol Roberts, Wyn (Conway) Young, Sir G. (Ealing, Acton)
Mayhew, Patrick Salnsbury, Tim
Meyer, Sir Anthony Scott, Nicholas TELLERS FOR THE AYES:
Miller, Hal (Bromsgrove) Scott-Hopkins, James Lord James Douglas-Hamilton and
Miscampbeil, Norman Shaw, Giles (Pudsey) Mr. Peter Morrison.
Mitchell, David (Basingstoke) Shelton, William (Streatham)
Moate, Roger Shepherd, Colin
NOES
Abse, Leo Cryer, Bob Grant, John (Islington C)
Anderson, Donald Cunningham, G. (Islington S) Grimond, Rt Hon J.
Archer, Rt Hon Peter Cunningham, Dr J. (Whiten) Grocott, Bruce
Armstrong, Ernest Davidson, Arthur Hardy, Peter
Ashton, Joe Davies, Bryan (Enfleld N) Harper, Joseph
Atkins, Ronald (Preston N) Davles, Denzil (Llanelll) Harrison, Rt Hon Walter
Atkinson, Norman Davies, llor (Gower) Hart, Rt Hon Judith
Bagier, Gordon A. T. Davis, Clinton (Hackney C) Hattersley, Rt Hon Roy
Barnett, Guy (Greenwich) Deakins, Eric Hatton, Frank
Barnett, Rt Hon Joel (Heywood) Dean, Joseph (Leeds West) Hayman, Mrs. Helene
Bean, R. E. Dell, Rt Hon Edmund Healey, Rt Hon Denis
Beith, A. J. Dormand, J. D. Heifer, Eric S.
Benn, Rt Hon Anthony Wedgwood Douglas-Mann, Bruce Hooley, Frank
Bennett, Andrew (Stockport N) Duffy, A. E. P. Hooson, Emlyn
Bidwell, Sydney Dunwoody, Mrs Gwyneth Moram, John
Bishop, Rt Hon Edward Eadie, Alex Howells, Geraint (Cardigan)
Blenklnsop, Arthur Edge, Geoff Hoyle, Doug (Nelson)
Boardman, H. Edwards, Robert (Wolv SE) Hughes, Rt Hon C. (Anglesey)
Booth, Rt Hon Albert Ellis, John (Brigg & Scun) Hughes, Robert (Aberdeen N)
Boothroyd, Miss Betty Ellis, Tom (Wrexham) Hughes, Roy (Newport)
Bottomley, Rt Hon Arthur English, Michael Hunter, Adam
Brown, Hugh D. (Provan) Ennals, David Irving, Rt Hon S. (Dartford)
Brown, Robert C. (Newcastle W) Evans, Fred (Caerphllly) Jackson, Colin (Brighouse)
Brown, Ronald (Hackney S) Evans, loan (Aberdare) Jackson, Miss Margaret (Lincoln)
Callaghan, Rt Hon J. (Cardiff SE) Evans, John (Newton) Janner, Greville
Callaghan, Jim (Mlddleton & P) Faulds, Andrew Jay, Rt Hon Douglas
Campbell, Ian Fernyhough, Rt Hon E. Jenkins, Hugh (Putney)
Canavan, Dennis Fitch, Alan (Wlgan) John, Brynmor
Cant, R. B. Flannery, Martin Johnson, James (Hull West)
Carter-Jones, Lewis Fletcher, Ted (Darlington) Johnson, Walter (Derby S)
Cartwrlght, John Foot, Rt Hon Michael Johnston, Russell (Inverness)
Clemitson, Ivor Forrester, John Jones, Alec (Rhondda)
Cocks, Rt Hon Michael Fowler, Gerald (The Wrekin) Jones, Dan (Burnley)
Cohen, Stanley Fraser, John (Lambeth, N'w'd) Kaufman, Gerald
Coleman, Donald Freeson, Reginald Kelley, Richard
Concannon, J. D. Freud, Clement Kllroy-Sllk, Robert
Conlan, Bernard Garret!, John (Norwich S) Klnnock, Nell
Cook, Robin F. (Edln C) George, Bruce Lamborn, Harry
Corbett, Robin Gilbert, Dr John Lamond, James
Cowans, Harry Ginsburg, David Latham, Arlhur (Paddington)
Cox, Thomas (Tooting) Gould, Bryan Leadbltter, Ted
Crawshaw, Richard Gourlay, Harry Lestor, Miss Joan (Eton & Slough)
Cronln, John Graham, Ted Lewis, Ron (Carlisle)
Crowther, Stan (Rotherham) Grant, George (Morpeth) Lipton, Marcus
Lamas, Kenneth Pardoe, John Strauss, Rt Hon G. R.
Loyden, Eddie Park, George Summefskill, Hon Dr Shirley
Luard, Evan Parker, John Taylor, Mrs Ann (Bolton W)
Lyon, Alexander (York) Paviti, Laurie Thomas, Jeffrey (Abertillery)
Lyons, Edward (Bradford W) Perry, Ernest Thomas, Mike (Newcastle E)
McDonald, Or Oonagh Prescott, John Thomas, Ron (Bristol NW)
McElhone, Frank Price, C. (Lewisham W) Ttvorne, Stan (Preston South)
MacFarquhar, Roderick Radice, Giles Tiemey, Sydney
McQuire, Michael (Ince) Rees, Rt Hon Merlyn (Leeds S) Tinn, James
MacKenzie, R! Hon Gregor Richardson, Miss Jo Tomlinson, John
Maclennan, Robert Roberts, Albert (Normanton) Torney, Tom
McMillan, Tom (Glasgow C) Roberts, Gwilym (Cannock) Urwin, T. W.
McNamara, Kevin Robinson, Geoffrey Varley, Rt Hon Eric G.
Madden. Max Roderick, Caerwyn Wainwright, Edwin (Dearne V)
Magee, Bryan Rodgers, George (Chorley) Wainwright, Richard (Colne V)
Mahon, Simon Rodgers, Rt Hon William (Stockton) Ward, Michael
Mallalieu, J. p. W. Rooker, J. W. Watkins, David
Marks, Kenneth Rose, Paul B. Watkinson, John
Marshall, Jim (Leicester S) Ross, Stephen (Isle of Wight) Weetch, Ken
Maynard, Miss Joan Rowlands, Ted WeUzman, David
Mendelson, John Ryman, John Wellbeloved, James
Mikardo, Ian Sedgemore, Brian White, Frank R. (Bury)
Miller, Dr M. S. (E Kilbride) Selby, Harry White, James (Pollock)
Mitchell, R. C. (Solon, lichen) Shaw, Arnold (llford South) Whitehead, Phillip
Molloy, William Sheldon, Rt Hon Robert Whitlock, William
Moonman, Eric Shore, Rt Hon Peter Wigley, Dafydd
Morris, Alfred (Wythenshawe) Silkin, Rt Hon John (Deptford) Williams, Rt Hon Alan (Swansea W)
Morris, Charles R. (Openshaw) Silkin, Rt Hon S. C. (Dulwich) Williams, Alan Lee (Hornch'ch)
Moyle, Roland Slllars, James Williams, Rt Hon Shirley (Hertford)
Mulley, Rt Hon Frederick Stlverman, Julius Wilson, Rt Hon Sir Harold (Huyton)
Murray, Rt Hon Ronald King Skinner, Dennis Wilson, William (Coventry SE)
Newens, Stanley Smith, John (N Lanarkshire) Wise, Mrs Audrey
Noble, Mike Snape, Peter Woodall, Alec
Oakes, Gordon Spearing, Nigel Woof, Robert
Ogden, Eric Sprlggs, Leslie Wrigglesworth, Ian
O'Halloran, Michael Orbach, Maurice Stallard, A. W. Young, David (Bolton E)
Orbach, Maurice Steel, Rt Hon David
Orme, Rt Hon Stanley Stewart, Rt Hon M. (Fulham) TELLERS FOR THE NOES:
Ovenden, John Stoddart, David Mr. James Hamilton and
Owen, Rt Hon Dr David Stotl, Roger Mr. Alf Bates.
Palmer, Arthur Strang, Gavin

Question accordingly negatived.

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