New Clause.—(Payment of Interest.)
(1) Interest at the rate of 4 per cent. per annum shall be payable on any sums in excess of £10 which fall to be paid by the Minister concerned under sections 1, 2, 4, 5 and 6 of this Act and shall become due from the date when the employer paid the Selective Employment Tax or if the amount of the tax paid by an employer in respect of which he has had no refund under this Act does not exceed £10, then from the date when such amount exceeds that sum.
(2) Interest due under this section shall be recoverable as a debt due from the Crown.—[Mrs. Thatcher.]
Brought up, and read the First time.
Mrs. Margaret Thatcher (Finchley)
I beg to move, that the Clause be read a Second time.
During the last debate Niall Macdermotthe Financial Secretary pointed out that at any rate Treasury Ministers have had a high rate of productivity. By way of reply to that comment I would point out that during the progress of this Bill we have had a particularly low rate of productivity over concessions, even though there has been ample justification for concessions. I am now giving J. Diamondthe Chief Secretary the chance, during the debate on this new Clause, to add to his productivity rate of concessions the one embodied in this new Clause.
During the Budget debate, when this proposal was first put up, the objects of the tax were announced. The first was to raise revenue and the second to secure deployment of labour. At no time was it mentioned that one of the objects was to deprive various organisations, from manufacturing industry to charities, of cash essential for carrying their day-to-day business. Yet this is exactly what will be happening under the new arrangements. On a previous occasion we moved an Amendment designed to make the payments in and out virtually coincident so that there was no measure of an enforced loan about it.
We were not successful in getting the Government to accept that Amendment, although it would have been a great deal better if they had done so. We are now obliged to move this Clause in mitigation of the present circumstances. If we cannot persuade the Government not to take [column 766]the money in until they are prepared to pay it out by way of refunds and premiums, we think that any enforced loan should carry a moderate rate of interest. During his Budget speech James Callaghanthe Chancellor made great play about what his borrowing requirement would be. He said that it would be very small indeed this year, only about £287 million. It should now be considerably less because of Harold Wilsonthe Prime Minister's “Budget” , although that particular “Budget” contained so much juggling with figures that it is difficult to assess its precise effect.
The Chancellor will have to pay interest to secure that borrowing requirement. We got a clue through his speech as to the kind of rate of interest which he expected to have to pay. He noted that the new issue of National Savings Certificates was going well. That was because the rate of interest was considerably increased. When it was lower the certificates were going very badly. When it was put up to a rate of 5½ per cent., that is to say, 7¾ per cent. gross to the person paying the standard rate of tax, they began to go very well.
Clearly, for borrowed money the Chancellor expects that National Savings Certificates, to meet his borrowing requirements, would have to pay something akin to 7 per cent. interest. On National Development Bonds, announced during the Budget speech, the rate is 5 per cent. plus a £2 bonus, tax free, if the bonds are held five years to maturity.
The Chancellor of the Exchequer knows that he has to pay the ruling rate of interest on money for which he has to go to the market, which happens to be high, normally now between 5½ and 8 per cent. I note from this morning's Financial Times that three-month local authority money is costing 7⅝ per cent. Looked at against that background, the rate of interest proposed in the Clause, 4 per cent., is extremely modest. Having gone quickly through some of the rates of interest which Governments both expect to pay and which they do pay for money, we realise that 4 per cent. is a midway rate. [column 767]
Let us consider certain other rates of interest. Income Tax, if it is not paid within three months of the due date, is charged at 3 per cent. from the date on which it should have been paid. That is a comparatively modest rate. The rate on Estate Duty is 2 per cent. from the date of death. On tax reserve certificates it is 3½ per cent. tax free, although the Chancellor of the Exchequer announced a new issue during his Budget speech. He believes that 3½ per cent. tax free is inadequate, but I am not sure what the new rate will be.
Certain other Departments of the Treasury are much more realistic in their interest payments. If land is compulsorily acquired, and the Government agency enters on to that land before compensation has been paid, interest is paid on the compensation at 7 per cent. This is a very apt analogy with what the Government are doing in connection with the Selective Employment Tax. They are entering on to the taxpayer's money and using it, but are not proposing to pay a brass farthing for the privilege. A creditor who has established his debt in the county court is entitled to 4 per cent. from the date of the judgment summons. If a legacy is due, that is charged at 4 per cent., from the end of the executor's year.
I hope that it will be clear from what I have said that we are asking for a very modest rate of interest. I hope that I shall not have to argue the matter very strenuously, because it goes without saying that a person should not be compelled to lend money without receiving interest. The Government are enforcing this loan which cuts down their borrowing requirements very considerably. They should pay a reasonable rate of interest for the money.
During the debate on the last new Clause, we heard that the merit of the claim has, in one way, been recognised by the concessions made to local authorities. If it is right that local authorities should get their money back in one month, surely it is right that other people who are not basically liable to pay it in the sense that the Government do not intend to keep it indefinitely should either have their money back quickly or receive a reasonable rate of interest. [column 768]
The Clause would affect a number of organisations. It would affect industries. J. DiamondThe Chief Secretary may say that later they will get a premium. Long before that—and there is no date fixed in the Bill—they will be desperately worried about how they will raise money to pay 25s. per man per week or 12s. 6d. per woman per week, particularly as bank advances will not be raised for this purpose, although the Chancellor of the Exchequer said in his Budget speech that some arrangement would be made. He said:
“I shall be considering what steps may be needed to enable the banks to respond to temporary needs for credit in such cases.” —[Official Report, 3rd May, 1966; Vol. 728, c. 1457.]
Therefore, the right hon. Gentleman accepted that the banks should be able to respond to temporary needs. The only thing he was considering was what steps should be taken to that end. He agreed that banks should be able to make arrangements to meet this need. He has gone back on that statement, and, therefore, manufacturers as well as other people are worried about how they will raise the money. I will not go into that matter in detail now, but it would be some token to them if by depositing the money with the Treasury they were to get a certain rate of interest. 7.15 p.m.
The Clause would affect some of those entitled to refunds, such as the fishing industry, mining and quarrying and research activities. All these are not basically liable to pay the tax. It is only because of an administrative arrangement that the money has to go in first before it is paid out. It is rather ironic that as a result of an administrative arrangement people will be forced to make an interest-free loan unless the Government accept the Clause.
The Clause was originally drafted to include local authorities. We heard for the first time today a little more about the arrangements concerning local authorities. It would have been better if we had heard about them before. The reason that we have not heard about them is that they were never made or thought out before the introduction of the Bill.
The other two groups which the new Clause would affect are charities and [column 769]qualified households. It is particularly hard on charities, which the Chief Secretary has conceded would not be deprived of their money that they should have to make a tax free loan to the Treasury. This is at a time when the call on charitable organisations is particularly heavy. From 5th September to past Christmas the Government will be taking in money from the charities at a time when they would normally be hoping to pay extra sums.
I think of those in Dr. Barnardo 's Homes, the disabled and the old folk to whom the charities try to give extra treats over Christmas. Yet the money cannot be used for that purpose. It will have to go to the Treasury. It would be some token to them if the Treasury said, “We cannot pay you back on the arrangements we have made, but we will give you a moderate rate of interest on that money, so that when it is returned you will receive something for having lent it to us” .
I turn to the next group, qualified households. Under the Clause, interest would not be due if the refund did not exceed £10. That would cut out some, although not all, of the qualified households. Here one sees exactly from whom the Government are compelling this loan. These are people who often live in households of comparatively slender means. They are being asked to deposit with the Treasury a very considerable part of their weekly income, interest free.
It is interesting to look at the family expenditure survey for 1965 which has recently been published in the Ministry of Labour Gazette. The average family of three which is usually rather better off than those in qualified households, spends 26s. 11d. a week on fuel, light and power. This means that a qualified household is compelled to deposit every week with the Treasury the equivalent of three days' coal and light, interest free. These are the people on whom the Government are imposing an enforced loan. The average family of three spends £5 18s. 8d. a week on food, approximately £2 per head per week. Qualified households are being asked to deposit with the Treasury, interest-free, the equivalent of two days' food for one person.
We cannot use a logical argument against this, because there is no logic which can justify it, but the Chief Secretary and, through him, the Chancellor of [column 770]the Exchequer, should recognise the merits of these claims by agreeing to pay a reasonable amount of interest on the money deposited. I have some idea of what the Chief Secretary will say in reply. He will say that there are administrative difficulties. There always are, particularly under this Government. They are one of the first Governments to permit administrative difficulties to take pride of place over equitable reasoning.
I know that there will be administrative difficulties, because I am reasonably aware of the National Insurance system. But, in a manufacturing industry, the large employer has to keep up to date with National Insurance stamps, because he has people leaving all the time and cards must be stamped. Moreover, the Ministry has inspectors who can easily call on the large organisations.
Some of the large employers pay by cheque, and it would be comparatively easy to see when they had paid in the money. Others pay by high value stamps, and it would be easy to see when they were purchased. Others pay by stamp impressing machines. As the Chief Secretary knows, one has to pay in advance for the number of impressions that a machine contains, and it will be quite easy to see when the money has been paid in that instance. It will be more difficult for anyone who relies on stamping an ordinary card.
The Chief Secretary could say that a stamp might not have been bought at the due date, but three months in arrear. That might have happened, because some people get behind in stamping cards. However, they do not usually get five months' behind. As the right hon. Gentleman knows, there are four staggers, one stagger going in each quarter. For anyone who employs a comparatively small number of people, the chances are that some cards will have to be going in every three months.
I am aware that there would be administrative difficulties, but the equitable case is so great that the administrative difficulties should be overcome. What we are asking for is very modest. The Chief Secretary will be the first to admit that I have been modest in my requirements throughout the Finance Bill and the present Bill, not that we have been any more successful as a result. [column 771]It might be said that sweet reasonableness has got us nowhere, and we shall have to bear that in mind for next year, because we might have to change our approach considerably.
I hope that on this occasion sweet reasonableness and equity will win the day, and that we shall at last get one concession from the Chief Secretary.
Sir D. Glover
In rising to support the Clause, though my criticism of it is that the rate of interest is too low, I should like to re-emphasise to the Chief Secretary that if he does not accept it or one similar to it, he will be saying that it is a capital levy that the State is extracting from the people concerned. The way that the Government's proposal will work is that people will pay in the money for five months before they receive anything back. They will be almost permanently three months in arrear, and the State will take that money from them virtually permanently.
What will happen to the firms concerned? Almost all industrial and commercial concerns, if they are worthwhile in their activities, work on a bank overdraft. According to the Government's policy, they will not be allowed to increase overdrafts at the bank to pay the Selective Employment Tax. That will mean that they will have to reduce turnover because they will have fewer funds with which to operate and more people will be put out of work. But, as that is the Government's intention, perhaps we should not complain too much about that.
Once the situation has eased, and if the Selective Employment Tax is still operative in its present form, what will happen in the future? Firms will have to borrow the additional finance from the banks, if their credit worthiness is such that the banks will grant them that facility, and they will have to pay the banks at least 1 per cent. above Bank Rate. As the Government have a Bank Rate of 7 per cent., which will probably exist for a considerable time, it means that on every £100 which firms loan to the Government they will probably pay 8 per cent. to borrow it and will not get anything back in interest from the State. Quite apart from the impost which they are paying, they will be 8 per cent. down on the money which they have been forced to lend to the State. [column 772]
That cannot make sense. It cannot be something that the Government have thought out if they intend that situation to continue into the future. I can understand their saying that as part of their present policy they are deliberately not paying interest because they do not want people to borrow from the banks but, rather, to reduce their activities and turnover and therefore reduce the burden on the economy and put people out of work. I can understand that, for the next six months. The new Clause that we are debating would make a much more permanent, sensible and just system than the Government themselves have evolved. It is outrageous that the Government's proposals should affect not only firms but, if that is not bad enough, charities as well.
I do not know whether the Chief Secretary realises it, but the Dr. Barnardo 's organisation will now have to raise £25,000 to go into the State coffers as a forced loan without interest. Of any appeal that it puts out at the moment, the first £25,000 will not be used for any service of Dr. Barnardo 's at all. It will go straight into the Treasury's coffers, and Dr. Barnardo 's will not even get interest on it. That is a tremendous thing to put into an appeal. People will be asked to subscribe to Dr. Barnardo 's well knowing that the money which they subscribe will go to the Treasury and that Dr. Barnardo 's will get no benefit from it at all. Can this really be the Government who spent years in the wilderness saying that they cared for the under-privileged?—yet they are doing this to every single charity.
If I may take the example of the little charity of which I happen to be chairman, the amount of loss that will accrue to it will probably mean that it cannot even put out an appeal for more money, because it will represent the small amount of capital that it has over and above its yearly expenses. That is something that the Government are doing deliberately.
I do not know about the administrative difficulty which my hon. Friend the Member for Finchley (Mrs. Thatcher) mentioned. I cannot see the administrative difficulty. If the State is to pay back to people a sum of money, it is obvious when they pay it back that they know how many people are involved in the [column 773]pay-back. If they know that, automatically they must know how much money was involved in the pay-in, and therefore they will know how much interest to include in the cheques when they pay the money back to the people who originally paid it to them.
I ask the right hon. Gentleman, even at this late stage, to accept this Clause or a similar one. It may be that my right hon. and hon. Friends would not be wedded to the exact wording of their Clause. I think that the rate of 4 per cent. is too low, but it is at least some recompense, and it would provide an element of justice if the Government would accept it. If they refuse, firms will be asked to pay what is a capital levy, and subscribers to charities will be asked to pay a forced loan to the Government rather than to the service of the charities to which they are subscribing. I think that it is the most deplorable thing that any Government could do to the people concerned.
The Chief Secretary to The Treasury (Mr. John Diamond)
The hon. Lady the Member for Finchley (Mrs. Thatcher) prefacing her remarks with references to productivity, which I did not entirely follow, started by referring to the original purposes of the tax and to what my right hon. Friend the Chancellor said about it. In the column following the column from which the hon. Lady quoted, my right hon. Friend said:
“As I was saying, it will prove in future years to be a very valuable addition to the measures available, first, as a means of raising revenue, and also as an incentive for labour economies and manpower redeployment. The scheme will produce an easing in home demand this year …”
It was his intention that it should produce that, and this is part of the timetable of the phasing of the reduction of inflationary demand to which he referred on many occasions.
If we may go back to what the hon. Lady referred to at col. 1457, when my right hon. Friend was talking about the question of the refund and the delay, he said.
“I have not overlooked this, and, against the background of the general credit restraint which it is necessary to maintain, I shall be considering what steps may be needed to enable the banks to respond to temporary needs for credit in such cases.” —[Official Report, 3rd May, 1966; Vol. 728, c. 1457–58.][column 774]My right hon. Friend subsequently made it clear that, having regard to the background of general credit restraint—which everybody recognises has increased, not reduced, since he made that statement—he was not proposing to take any steps to respond to temporary needs for credit in such cases.
My right hon. Friend was making it perfectly clear that one of the purposes of the tax this year was to bring about a deflationary effect in the autumn. Thus, with regard to what the hon. Lady said about the original purposes of the tax, it is clear that it has never been the intention of my right hon. Friend that the position should be other than it now appears to me to be, and therefore all the arguments——
Mr. Patrick Jenkin
It has changed.
I have read the original speech in which my right hon. Friend made the point clear. It has not changed since then, except to accentuate the need—this is the point which everybody is making—for further public restraint. This is what the popular phrase “freeze” means, further credit restraint, and it was on the basis of the credit restraint thought to be necessary on 3rd May that my right hon. Friend said what he did.
The hon. Lady's argument is that, as we have to put up with a forced loan, cannot we have some interest on it so as to soften the blow? I am afraid that the blow is not felt to be hard or unexpected, but let us examine the extent of it, because I do not think that hon. Members who have spoken have fully appreciated it.
The hon. Member for Ormskirk (Sir D. Glover) referred to all firms working on a bank overdraft and said that this would add to their difficulties. Perhaps I might give the House the recent figures of the liquid assets of British firms. At the end of March 1966, liquid assets amounted to approximately £3,500 million. The maximum amount of the forced loan, which will reach its peak at about the end of December, is slightly less than £160 million. Thus, I do not think that there will be any undue difficulty in meeting those demands.
The question also arises whether there is any justification—what the hon. Lady [column 775]referred to as the equity of the case—in making these repayments. The figure which I have given of £160 million is the combination of the premium which will be repaid and the refund which will be made. Of that £160 million, £140 million is premium. We do not accept that there is any case for treating the premium with special care, having regard to the fact that within six months, by about the middle of 1967, those companies which are in the premium-receiving categories, broadly the manufacturers, will be in balance, and from May, 1967, onwards will be in surplus. I am just making the simple point that there is no reason to be particularly sensitive about the premium aspect of it.
Mr. Patrick Jenkin
The right hon. Gentleman has left me behind. He said that £160 million was the amount of the forced loan, which is what it is. How, in those circumstances, can that contain any element of premium? Premium is not in any sense part of the loan, it is something which comes back in addition to the refund of the tax.
I called it a forced loan because that was the phrase used by the hon. Lady, and because it is a forced loan. This is the method by which the tax is proposed to be collected. It will be collected in this way, and deliberately so. The hon. Gentleman will appreciate that there is no refund of the Selective Employment Tax paid by service industries. There is no question of a forced loan from them. What they have paid, they have paid for good.
The only question of a forced loan is the money received from the other two categories, those getting a refund which they would have had had it been repaid more promptly by the end of December, and those getting a premium, that is to say refund plus 7s. 6d., or whatever it is, who would also have received it had it been paid more promptly by the end of December. The longest period of the forced loan will be from the commencement of the payment of the tax until the end of December, and it will reach its peak on that date when the figure will be about £140 million for the categories entitled to receive refund plus premium. [column 776]
I am sorry if I did not explain it sufficiently clearly, but the £20 million is for this category in the refund area alone, and by far the larger group—all the manufacturing categories—are those who are receiving the complete refund of what they have paid, plus what we call the refund of the premium.
Sir D. Glover
I do not know why the right hon. Gentleman says that the peak figure will come in December. I understood that the first repayment would be in February.
The first repayment will be in January. It will be as early in January as we can arrange it. It may be that the figure at 2nd or 3rd January will be even higher than that at 31st December, but for all practical purposes it will be 31st December, and we want to arrange the repayment as early as possible in January.
Although the hon. Lady is talking about interest, basically what she is saying about it is a recognition of the difficulty, and if I can demonstrate that there is no major difficulty, there is no reason to have regard to interest. The difficulty, therefore, is one which I say relates only to £20 million worth of enforced loan from the refund categories, which will start to be repaid in January, and then be repaid in stages from that time onwards. On average the loan will run for about six weeks. It will be three months payment, repaid during the course of the following months, which I think we can call about six weeks as the average period of the loan. That will be the extent of it. Bearing in mind that the liquid condition of British firms is about £3,500 million, and the enforced loan, the only category which one could regard as being difficult, will represent £20 million, the burden is not likely to be especially heavy.
As to the purpose of the loan, it was not the intention that there should be any other than a marked reduction in inflationary demand in the autumn. But that does not deal with the special categories which the hon. Lady mentioned and to which we want to have regard. One is the charities and the other the qualified households. There could be real hardship in certain cases of qualified households, and we propose therefore to make special arrangements, which my [column 777]right hon. Friend the Minister of Pensions will be announcing in due course, for much faster repayment. That is the best way of meeting that case.
I do not know if the hon. Lady has been the honorary treasurer of as many charities as I have. Her experience may be different, but if there is any date when charities' receipts come in a rush—I know that they never have enough income—it is 1st January, when by far the most bankers' orders for covenanted subscriptions come in. There is a tremendous peak of income on 1st January and then receipts come in quarterly. Far from this Government having taken a harsh tax view of charities, we have done quite the opposite. We have, for the first time, established, in the Corporation Tax, a new firm attitude to charities.
The relationship between the Revenue and charities until that time was always ambivalent. Nobody knew where he stood and to what extent it was proper to engineer deeds of covenant, to what extent a charitable payment by a firm was a proper deduction. The question had to be answered firmly when Corporation Tax was introduced. We could have justified treating this as a special expense and not a deduction. We took the other view and put the charities on a firm foundation in their relations with the Revenue by making charitable payments a deduction for Corporation Tax purposes.
I am sure that the hon. Lady would not allege that we are unsympathetic to the needs of charities. Far from it. I hope that she will realise that, if the money had not been raised by this tax, it would have had to be raised in some other way. If we had adopted orthodox methods, Purchase Tax would have had to be carefully considered——
Mr. Iain Macleod
The right hon. Gentleman has said, rightly, that there are two special cases which are worrying us—the qualified household and the charity. What he said about the former is certainly welcomed on this side. He recognises that there may be hardship and he will do what he can under arrangements to be announced by the Ministry of Pensions to meet that. Could he not do exactly the same for charities? Suppose a charity could make the case that the interest-free loan would bring hard[column 778]ship, would he consider special arrangements for that?
I was going on to say something approaching that. But I wanted first to make it clear that the charities must have no anxiety about their relationship for tax purposes. This is their main anxiety. One of the main reasons that they reacted as they did to the Selective Employment Tax was not so much the taxing position itself but because they felt that this was a challenge to their tax standing. I am glad to say that what we did in Corporation Tax is a major step, from which any future Government would have difficulty in departing.
Had we introduced a tax more easily and obviously accepted as an indirect tax, such as Purchase Tax—the S.E.T. is often referred to as an indirect tax—there would not have been the slightest question but that, so far as it affected charities, by taxing their stationery or anything else, they would have expected to bear that additional impost.
The arrangements for charities are rather special. I am now responding to the right hon. Gentleman's question. Discussions on their administrative arrangements have reached a first stage which is not unsatisfactory to the charities. But it is a first stage and we naturally want to see how it progresses. I do not want to go as far as the right hon. Gentleman asked me to go. I will not say that, in any case where a charity can demonstrate hardship, we will immediately make a repayment, but we will keep this machinery under review, and where we find that it is not working satisfactorily and could be improved without unnecessary and disproportionate labour for the Civil Service and the Departments concerned, we will gladly do our best to expedite repayment.
We do not want charities to be unnecessarily kept from their money. Having regard to the debate just ended, it is very much our desire that we should avoid that kind of addition to the Civil Service and the administrative machine which is disproportionately expensive to the benefit incurred.
I am sure that we can discuss charities objectively. All charities are worth every kind of effort and support. I am sure that every hon. Member does his best and [column 779]has his pet charity on several. However, those who look at the Register of Charities would find some odd titles.
A charity is often hard up and was hard up before Selective Employment Tax was thought of, so I could not go so far as to make promises whatever the charity and whatever its objects and however it carried out its business. There is nothing to prevent a charity spending a disproportionate amount of its money on collecting and distributing the charitable benefit—some spend more than others and some spend too much—and still retain their charitable status. They could incur a disproportionate amount in overhead expenses. What we were saying on the previous Amendment was that we want to do everything we can to discourage unnecessary overhead expenses and use of labour.
I would not go beyond what I have said, but I hope that it is sufficient to indicate that we are only too happy to look at the matter sympathetically and see how it develops. This is why we should not accept the new Clause. The cost would not be enormous—about £400,000—and it is not on that basis that I rest my case. It would be difficult administratively because the interest on every repayment would have to be calculated for a curious period. A substantial number of qualified households would not be taken into account anyway with this speeding-up of repayment, because of the reduction in the Clause.
I hope that it will therefore be felt that there is no change of plan in this respect. It is an essential part of keeping down inflationary pressure. It is not part of our procedure to pay interest on taxes. When there is a refund of tax, we do not pay interest in the ordinary way. We never have done, nor did the Government of the party opposite. I hope that the Opposition will not press the new Clause.
Mr. Patrick Jenkin
The Chief Secretary exuded sympathy with his characteristic suavity, but gave us virtually nothing else. His answer can only be regarded not only by my hon. Friends, but by people generally, as highly unsatisfactory.
The right hon. Gentleman argued that the Chancellor of the Exchequer intended [column 780]to use this forced loan, which is what it is, as an instrument of credit control. His quotations from the Chancellor's speech were wholly unconvincing. It is obvious that this whole idea was miles from the Chancellor's thoughts at that time. If it was regarded as part of the pattern of control of credit and demand, it should have been relevant only in so far as taxpayers would be bearing the tax. S.E.T. will hit a large number of firms, organisations and activities in respect of which there will be no question of repayment or premium.
The fact that the tax becomes payable by them in October is surely the matter to which the Chancellor was referring in, for example, his remarks on 3rd May, when he said:
“The scheme will produce an easing in home demand this year …” —[Official Report, 3rd May, 1966; Vol. 727, c. 1458.]
A great many taxpayers will pay this tax and will not get anything back. Any reasonable person listening to the Chancellor making his statement must surely have believed that to be the position—that the extent to which home demand would be eased this year would be the extent of those who would bear the tax.
Is the Chief Secretary still trying to convince the House that the Chancellor solemnly sat down and drew a diagram of the extent to which he was going to take demand out of the economy? Whatever he did, we know that he was wrong. He has admitted it, and the measures of 20th July proved that to be so. But even at the end of April, when the Chancellor was drafting his Budget strategy, did he sit down, draw a diagram and then say, “At the beginning of October we will have to take £X million out of the economy and then, at the end of February, we will pay £160 million of it back and this will just about match the pattern of demand” ?
Does the Chief Secretary still maintain that that is what the Chancellor did, for that is the logic of the right hon. Gentleman's argument? If that is what the Chancellor was doing, why was it suddenly decided later, on 20th July, that the pattern of demand would be different and that he would be able to make these refunds and premiums eight weeks earlier than he had originally thought would be possible? It passes comprehension that the [column 781]Chancellor was consciously and deliberately using this crazy pattern of taking millions of pounds in and then paying millions of pounds out again as an instrument of credit control.
Not only was that so, but my right hon. Friend the Chancellor and I have said it on many occasions. I said it in my speech in the Budget debate. I made it clear that one of the justifications for this tax was that it was not thought at that time that there would be need to reduce demand in the early part of the fiscal year but that the need would arise in the Autumn. That has been said many times.
The quotation I made from my right hon. Friend's speech of 3rd May is specific. He said:
“The scheme will produce an easing in home demand this year. …” —[Official Report, 3rd May, 1966; Vol. 727, c. 1458.]
What the hon. Gentleman is saying would have been satisfied if my right hon. Friend had simply said, “The scheme will produce an easing in home demand.” However, he added the words, “this year” .
I appreciate that the Chancellor was saying that one advantage of this form of tax was that it would be levied quickly and raise revenue quickly, whereas other forms of taxation—Income Tax and certainly Surtax; as we know, the surcharge on Surtax which the Prime Minister announced on 20th July will mean that it will have no effect until September of next year—would be slow to take effect, and the Chancellor claimed that it would, therefore, have a deflationary effect this year.
I do not believe that the Chief Secretary hopes to gain credibility for his statement that this was a deliberate and consciously thought out pattern of control of credit from the very beginning, because that argument is not credible. I draw the right hon. Gentleman's attention to an article by Lombard in yesterday's Financial Times. It stated:
“… it reflects nothing but discredit on the Government that it hadn't the wit to devise a scheme for preventing manufacturing industry being exposed to embarrassment on this account and has since sought to turn that failure to account for tightening up the credit squeeze, knowing that this must be a highly unsatisfactory method of achieving that result.”
[column 782]Later, the article stated:
“… the afterthought decision to turn it to account for this purpose is far less clever than the authorities have evidently seen it.”
That is what that responsible financial newspaper thinks of the right hon. Gentleman's argument. As I said, it is beyond the bounds of credibility that anybody could seriously believe that that is the reason why we face this situation. In fact, we all know the reason. It is that S.E.T. was a last-minute thought, scraped up out of desperation and introduced by the Chancellor before any of its ramifications and administration had been fully thought out, with the result that we are having to deal with it in two separate Bills, one to raise the tax and the other to pay it back.
The reason for the forced loan is simply because its repayments administration could not be put into operation in time. I cannot believe that anybody seriously thinks that if that administration could have been done in time, it would not have been put into effect—that, is supposing, miraculously, that the Ministry of Labour would have been ready in October.
I quote from a letter which I have received from a constituent. Speaking of charities, the writer, a lady, states:
“… it is an immense relief now that the charities are to be excluded from the effect of the tax … but, my hat, of all the ingenious methods of raising an interest-free loan! I've been hoping all my life for just such a brilliant idea. Perhaps, after all, the Chancellor has some of the qualifications for his office?”
This tax is intended to have an impact on some service industries and others in similar categories, yet not on other industries. We regard this as a futile and damaging discrimination which will penalise those very people whom the Chancellor was hoping and intending to exempt.
My hon. Friend the Member for Finchley (Mrs. Thatcher) dealt with the two broad categories, industry and what one might call the hardship cases—qualified households and charities. The figures given by the Chief Secretary—£3,500 million of liquid assets—were misleading. This forced loan is bound to be an attack on a company's liquidity. It is bound to result—if firms are able to raise money in this way—in companies having to increase their overdrafts, if they are lucky [column 783]to have them, or run their bank credit right down. The only alternative way for a company to pay this forced loan is by reducing its stocks or work in progress.
Whichever way one looks at it, the £160 million will represent a reduction in the margin of stocks or work in progress and will cause considerable difficulties. The Financial Times made this point when it stated:
“… the displacement of liquidity the industrial system will be experiencing in the months ahead could impose an intolerable strain on the finances of the more vulnerable companies …”
It is important for the Chief Secretary to bear those words, “intolerable strain” , in mind.
This is nothing less than the truth. Smaller companies, which have not the resources and are already working to the bone with their stocks, overdrafts and work in progress, are the firms that will find it extremely hard to meet the tax. What are they to do? If they have investment plans, they can postpone them—and the Chief Secretary may say that although this is a bad thing, it might not be as bad as some other things. Another way will be to postpone the payment of any other tax that is due, such as Corporation Tax or Schedule F Income Tax. They will just hang on to the money and wait for the second, third and final demands, and the result will be that the Revenue will get no extra money at all. Ways should have been found round this situation.
One thing that the Government can do, and what the Clause asks them to do, is to recognise that there is this hardship. Small companies will have to borrow at 8 per cent. to meet some of the extra costs incurred. They will not only have interest payments, but will incur costs in meeting the tax either by running down stocks and then replenishing them, or reducing the rate at which they are liquidating their overdrafts. All these methods will incur extra cost, and the interest rate of 4 per cent. proposed in the new Clause is not unreasonable.
Companies may find that the only way in which they can pay this tax is by taking part in the shake-out and reducing the number of their employees. Many people will qualify for redundancy pay[column 784]ment. Most of that—three-quarters—will come from the Redundancy Payments Fund, but companies still have to meet a substantial slice of the payment, and this will be an extra cost incurred at exactly the time when the S.E.T. comes on them. This will impose an intolerable strain on many companies, and it is outrageous that the Government should have imposed it on them on top of everything else.
On the charities aspect, Dr. Barnardo 's will have to pay £110,000. In the first three months, that will be about £30,000. The interest on that amount of overdraft will be £2,400 for the three months, and Dr. Barnardo 's will lose that very substantial sum for ever. It will eventually get back the tax, but the cost of the interest on its borrowing meantime is lost for ever.
The Chief Secretary argues that charities are really flush on 1st January, but the period really starts in October, and builds up during November and December. It is in December, the pre-Christmas period, that charities usually make their maximum payments to many beneficiaries, but that is just when they will be hit hardest.
I had hoped that the Chief Secretary would have been much more forthcoming. When I see the crocodile tears that the Government shed over charities my mind always goes back to the 1947 Finance Act, and Dr. Dalton 's anti-charity legislation, which struck charities the hardest blow they had ever known by ceasing to make charitable subscriptions a deduction for Surtax payments.
The right hon. Gentleman gave some hope of sheltering the shorn lamb from the wind with regard to qualifying households. The sums are not large. If one has an elderly housekeeper, the amount to be raised is probably not much over the £10 figure appearing in the Clause but, even so, the interest on that sum will amount to about £1 which, in some households, could represent a hardship which it would be quite unreasonable to impose on them, having regard to the fact that these people are not intended to be hit by the tax at all. The arguments in favour of the Treasury meeting some part of the costs incurred by making this forced loan to the Government are quite overwhelming, but the Chief Secretary has gone [column 785]practically no way at all towards meeting it.
Mr. J. Bruce-Gardyne (South Augus)
I had not intended to intervene in this debate, but the Chief Secretary has provoked me into doing so. I found his argument remarkable. It was the lame argument that the purpose of the tax, as had always been emphasised from the time of the Budget Statement, was to achieve an easing in home demand this year and that, as a result, he did not feel able to accept the new Clause.
We are asked to believe that when the Chancellor of the Exchequer made his Budget Statement at the beginning of May he had a sort of wall graph in his mind which said, “May, June, July, August—demand down. September, October, November, December—demand up. January, February, March—demand down.” We know that the right hon. Gentleman's economic forecast was nonsense, as we all said at the time, but it is stretching our belief in the Chancellor's strategy a little far to expect us to accept that he had this pattern of fluctuating demand in his mind then, that that was why he devised the forced loan, that it was not an unexpected blow, and that, as a result, the Chief Secretary could not accept the new Clause.
That is not true, and the right hon. Gentleman knows perfectly well that it is not true——
The hon. Gentleman is as courteous as ever in saying that it is not true, and that I know that it is not true. I do not want to bandy words, but the hon. Gentleman is probably still capable of reading and perhaps he would read my right hon. Friend's Budget speech, my own Budget speech, my right hon. Friend's repeated statements about pre-Budget buying and the expectation, therefore, that demand would be considerably lessened after that. [Interruption.] The challenge is whether, in May, when my right hon. Friend introduced his Budget, he was introducing it on the assumption that there would be need for a reduction in demand of the kind and over the period that this tax would supply.
We recognise that the Chancellor of the Exchequer thought that there would be this dip in demand in May, June, July and August. We know that he was wrong—we said so at [column 786]the time—but we accept that that is what he thought. The Chief Secretary shakes his head, but we told the Chancellor of the Exchequer at the time that he was wrong. But our credulity is stretched too far when we are asked to believe that, having forecast this imaginary dip in demand, the Chancellor of the Exchequer foresaw a further rise in demand in the autumn, and another dip in demand in the spring of 1967. That would be the only logic to justify the Chief Secretary's argument, but it is stretching our credulity too far.
The Chief Secretary said that the position would be quite splendid for charities because their peak income moment was immediately after the New Year. That is true, but is the right hon. Gentleman suggesting that charities should delay payment from the autumn until the beginning of January? He himself has said that that would be breaking the law, but that is the only logic of his suggestion that charities will be all right because they get their peak income at the beginning of the new year.
I agree entirely with my hon. Friend the Member for Ormskirk (Sir D. Glover) that this Clause is too modest in scale; 4 per cent. is too modest an interest to expect the Government to pay for the forced loan they are extracting from manufacturing and construction industry and also from farming and the fishing industry. The Chief Secretary gave us some glorious and, as my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) pointed out, largely meaningless figures about company liquidity. I draw the right hon. Gentleman's attention to a couple of specific examples which were explained to some of my hon. Friends and me by two big manufacturing firms in Glasgow, not long ago.
One was a large engineering firm which calculated that over the period the forced loan would cost it approximately £100,000. This discussion took place before the Chancellor announced the reversal of his policy and when we discussed how the firm would finance the forced loan it was said that it would have to borrow from the bank. It was not up against its overdraft limits. It may still be fortunate enough to be able to borrow, but under the new dispensation it may not be fortunate enough. The loan [column 787]it will have to pay over to the Government will cost something in the nature of £2,600 during the period.
A firm such as this will not shake out employment, in the Prime Minister's eloquent phrase, in order to reduce its liability to the forced loan because it will not get the money back afterwards. This was not what the Chancellor and the Government wanted. Therefore, the firm will be faced with this financial burden. It does not seem unreasonable that in compensation the firm should get 4 per cent. in interest on the money it is lending to the Government.
The other firm we visited on the same occasion was a shipbuilding firm. In that case, the forced loan would come to about £150,000. That firm was up against the overdraft limit and had no way of finding how to meet the charge. It seemed to take the attitude that clearly it could not meet the charge and, therefore, presumably, the Chancellor, the Almighty, someone would dispense with it, but if that were not done the firm would be forced into liquidation.
I am not making any suggestions about credibility, but following the figures carefully, I see that this tax works out at about one week's wages. The hon. Member gave the first example of £100,000. Interest on that is one week's wages. In the other case, he spoke of £2,500, which is 2½ per cent. If the same figures apply in the second case the hon. Member is saying that the firm would go into liquidation because it is short of 2½ per cent. on one week's wages.
That is not what I said. The Chief Secretary clearly did not understand the case I was making. I was saying that in the case of the second firm it had to find a forced loan of £150,000. It was already at the overdraft limit and could not see from where it could borrow the £150,000.
I would not deny that it may have been exaggerating in saying that it would be forced into liquidation, but that is what was said. I would not say that this would necessarily be the case, but it cer[column 788]tainly would be forced into a very substantial shake-out of employment of a type which I do not believe the Government want. I do not suggest that the payment of a small interest charge by the Government would save the company from this dilemma, but at least it would be a small contribution of assistance.
Sir D. Glover
Perhaps the payment of interest would not stop the firm from going into liquidation because probably it could not get the £150,000 from the bank and would have to borrow privately at a much higher rate of interest, which would not ease the strain.
My hon. Friend is quite right. If the firm could borrow privately that would not ease the strain.
There is a further argument which has not been made and one which perhaps the Chief Secretary may not like. After our experience in previous weeks it seems that we are entitled to wonder whether the rebates will be paid when the Government say that they will be. We have been told a great many things in recent weeks and months by hon. Members opposite and practically always they have done the opposite. Suppose that in the spring next year we face—heaven forbid, but it would not come as a surprise to me—a continuing situation of intense strain on the balance of payments. Are we then suddenly to find that it is not opportune for the Government to pay the premiums or the rebates, that there will be a delaying proposal put before us and perhaps rushed through in Committee upstairs?
This Clause would at least give manufacturing and construction industry, farming and the fishing industry some assurance of compensation if this position developed. I trust that it will not. The Chief Secretary looks shocked that I should suggest it, but when he thinks of the actions of the Government over the last few weeks he should not be surprised. For all these reasons my only regret is that in proposing the Clause my hon. Friend did not push the interest rate which should be charged to the Government higher. I have the greatest enthusiasm in supporting the Clause. [column 789]
Question put, That the Clause be read the Second time:—— [column 790]
The House divided: Ayes 172, Noes 253.