Mr. John Pardoe (Cornwall, North)
I beg to move Amendment No. 65, in page 25, line 36, at end insert:
‘such rate or rates as may be determined annually by Parliament and shall for the period from 26th March 1974 to 5th April 1975 be charged at’.
This amendment, though it may not be immediately realised, is about the crucial issue of indexation. I hope that the Committee will never again enact a tax without having a discussion on the whole question of indexation of the tax system. There are some later amendments dealing with this subject, Nos. 57 and 86. I congratulate the right hon. Member for Finchley (Mrs. Thatcher) on some remarkable mathematical ingenuity, to say nothing of the algebra, in her spendid amendment No. 57.
My amendment is somewhat simpler and, I believe, more in keeping with the nature of Britain's constitution. The right hon. Lady will readily accept that there is a difficulty in indexing the tax system without a written constitution. Amendment No. 57 says, almost at the beginning
“and from every subsequent 6th April” .
That cannot be, because any Parliament can change what any previous Parliament has done. I proposed an amendment similar to that in the Standing Committee [column 1578]which considered last year's Finance Bill. It is possible, by dint of such an amendment, to make things a little more difficult for the Government, because instead of doing nothing they would have to introduce a clause into a future Finance Bill to change something that had already been provided for by Parliament. That is not a very severe brake on the Government's freedom of action.
If we are to have indexation of the taxation system or of any individual tax we shall have to have an entrenched clause. It should become part of a Bill of Rights. It is not my intention this evening to debate indexation or monetary correction generally. We are debating it in the context of this tax, and inevitably of taxation generally, partly because of what the Chancellor said in his speech yesterday.
Sir John Hall (Wycombe)
I am interested in the hon. Gentleman's comments on Amendment No. 57, but does not he agree that Amendment No. 65 asks a future Government to do what they are theoretically supposed to do anyway?
The hon. Gentleman is correct. I am well aware of the difficulties of trying to write indexation into our tax law. It is virtually impossible to do so without an entrenched clause. I agree that the amendment leaves it [column 1579]entirely open and calls upon the Government to do little more than they are supposed to do but do not. We have only to look at the history of estate duty to recognise that Governments all too often leave rates of tax lying idle year after year and do not correct them for inflation.
I hold strongly that we have reached such a level of inflation, and are likely in the foreseeable future to maintain such a level of inflation, that we should accept the principle of monetary correction. To make a contract or a financial arrangement in money terms at present rates of inflation is a futile action. A contract, whether for wages, borrowing, lending, rents or taxes should be made in real terms rather than in money terms. Only by doing that can we reintroduce some stability into the whole gamut of financial contracts. That mean that the wage, the debt, the interest, the rent, the tax or the tax allowance is adjusted in line with the change in the cost of living.
We have already done that in an ad hoc way. In stage 3 of the Conservative Government's prices and incomes policy thresholds were introduced and have been with us since. Wage thresholds are a way of indexing wages.
Does not the hon. Gentleman agree that thresholds index the only item of economic statistics which does not need to be indexed, because wages are a powerful group which go up faster even than the cost of living?
Events in the last 12 months have shown that to be true. I think even the hon. Gentleman would doubt whether it will always be true, although I agree that it is more likely to be true than otherwise. I agree that the very last thing that should be indexed is wages, because indexing wages without indexing savings undermines the whole basis of our economy and has contributed to the high rate of inflation over the past year or two.
We have to a limited extent indexed pensions because we review them every few months in the light of the cost of living and other social security and national insurance benefits. The Government have now accepted, to a limited extent, the principle enshrined in the [column 1580]recommendations of the Page report on national savings. However, they must go much further. I shall never again lend money to a British Government who do not guarantee my capital against the ruinous rate of inflation which their own policies go a long way to create.
It is in the context of taxation that parliamentarians and those who care for the authority and control of Parliament over the executive should most welcome indexation. By pretending that indexation does not exist Governments are able to increase taxes without parliamentary approval. They call this marvellous effect of inflation on the revenue by the splendid euphemism “buoyancy of revenue” . That means no more or less than the effect of inflation. By doing nothing and letting the rate of inflation erode tax allowances any Government are able to gather a large number of poor people into the tax collector's net, which Parliament never intended when it voted the taxes. The same process makes middle-income earners into supertax payers up the scale.
Yesterday the Chancellor of the Exchequer took to task the right hon. Lady the Member for Finchley. I am glad to see that she is a convert to the principle of indexation. On the last Finance Bill I had it almost to myself, although there were some mavericks on the Conservative benches who supported it.
May I again express my gratitude to the hon. Member for Cornwall, North (Mr. Pardoe) for supporting my amendment which was carried with the whole force of the Opposition, with the hon. Gentleman's help, and which was included in that earlier legislation in Committee? It was the first indexation amendment that had ever been carried.
I am not sure whether the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) would regard it as a compliment, but I regard him as a maverick Conservative in the best sense of the word. My support for his amendment on that occasion was given in that light and in light of the interpretation I place on that word.
The Chancellor said yesterday that it would be totally irresponsible for any Government to index one tax and that it [column 1581]was irresponsible for the Opposition even to talk of such an idea. His view was that some kind of inquiry should be set up to investigate the indexation of the whole taxation system before we went one step further. Very well—let us take the right hon. Gentleman at his world. Let us examine the Government commitment to set up an inquiry into indexation. We have the Sandilands committee on inflation accounting, but we have no committee or Royal Commission investigating the indexation of the tax system. It is time we did. I hope that the Chief Secretary will say something on this point and will give some hope that the Government will set up such an inquiry. There is no need for such an inquiry to take too long for it is not a massively complicated matter. The Chancellor also made the point that it would be wrong to make a start with a capital tax. I do not see why it would be wrong.
Parliament should never again pass a tax which is not indexed. If the Government are to come forward with new taxes Parliament should not be put in the position of not pursuing a principle in which it believes because there are other taxes which are not indexed. Of course there are others. I should like to index them all. I believe that we should make a start with this one, and that we should do so tonight. Bearing in mind the old slogan of no taxation without representation, we should now adopt the attitude that we must never again approach a debate on a new tax without the cry “No taxation without indexation” .
I am no friend of indexation. I do not believe that indexation in any way assists in the measures which have to be taken if inflation is to be brought under control and eliminated. Nor do I believe that indexation can reduce, let alone banish, the penalties and the inconveniences which must attend upon any reduction of the rate of inflation. Nevertheless, my hon. Friends and I am disposed to support the amendment, but for a much more modest reason.
It seems quite wrong that Parliament should pass a Finance Bill inaugurating a whole new system of taxation such as that of the capital transfer tax—a system which, for what fairness it may have, for [column 1582]what leniency may be built into it, depends upon the specification of monetary limits—without having in that Bill some means whereby those limits can be readily altered without the necessity of full legislation, because experience teaches that where legislation is necessary for that purpose, it is often resorted to very belatedly, or not at all.
Mr. Norman Lamont (Kingston-upon-Thames)
I do not want to interrupt the flow of my right hon. Friend's argument, but I was interested in what he said about his reasons for being against indexation. I do not think that many hon. Members who have spoken in the debates have supported indexation amendments on the ground that they would help to reduce inflation. They have supported them on the ground simply of equity between one income bracket and another, and because they believe, given that inflation is here and there is no sign that it will desist, that it is a way of equitably adapting to that unfortunate fact.
I am familiar with that view of the merits of indexation also, but I do not share it, because I do not believe that we should live with inflation and devise means for making ourselves comfortable on the assumption that inflation will continue indefinitely at rates which call for this kind of adjustment.
To return to the point that I was making, the Bill embodies in the code of the capital transfer tax a number of crucial money figures. They apply to the treatment of agriculture and to the scale as a whole, and in many other ways. Certainly the Chief Secretary would not claim that his Bill would be as satisfactory or as fair if it did not include those limits in money terms. But, if so, he must accept the consequence. That is, that if, in the next 12 months, inflation alters by, let us say, 20 per cent. the real meaning of those limitations, the intention of this House, his intention, and the fairness to be claimed for that intention, are to that extent severely damaged. It seems quite wrong that he should propose to place on the statute book, in statutory permanent form, without the machinery for frequent modification, as necessary, money figures upon which the fairness of a whole system of tax depends. [column 1583]
The Amendment Paper contains several alternative methods of approaching this problem. One, to which glancing reference was made by the hon. Member for Cornwall, North (Mr. Pardoe), is the attempt of the official Opposition at a full-scale mechanism of indexing. The hon. Member has been much more modest, suggesting in his amendment that the rate should be fixed for one year and that therefore it should be necessary for subsequent Finance Bills, presumably, to fix the rate year by year.
That is one way of doing it. My hon. Friend the Member for Londonderry (Mr. Ross) will, later in the proceedings elsewhere, I hope, move an amendment which seeks the same result by what I believe may be the most convenient and simple method, namely, giving to the Treasury a power of raising limits and exemptions. This is not a power to tax. This is a power to relieve from taxation and one that therefore may properly be exercised by statutory instrument.
Whatever may be the method by which the end is attained, I believe that the Committee ought at an early stage to show its sense that it is not right for us to rest in so important a manner upon money figures of which the real meaning we well know will be substantially different within six months, let alone a year.
I therefore hope that there will be general support for the amendment—support which need not commit any of us to the method which the hon. Gentleman has adopted. I hope that we shall have from the Treasury Bench some indication, at any rate, of sympathy with the object of the amendment.
I am in substantial agreement with all that the hon. Member for Cornwall, North (Mr. Pardoe) said, except that I would like to hear him one day expound on the difference between a maverick in the best sense of the word and a maverick in the worst sense of the word. The difference was not immediately clear to me from his kind remarks.
I do not intend to make a speech about indexation. I remind the Chief Secretary of that jolly little episode in Committee on the Finance Bill last summer when, to the horror of the Treasury officials and, I suspect, of himself, an indexation [column 1584]amendment was carried to the figure of £25,000 as the limit for mortgage interest relief.
The Government were much more amenable and flexible in the days when they did not have much of a majority. I remember how far along the slippery pole the right hon. Gentleman crept out in order to placate the Opposition and to persuade them, if he could, not to put it into the Bill. He went so far as to promise that there would be a very close review of the £25,000 figure and that on every possible occasion the Government would come forward with proposals to upgrade it. His protestations of sincerity, honesty and good intentions so affected the House of Commons when the Bill returned on Report that hon. Members—silly mugs—believed him and did not press for the amendment to stay.
So I look at the figure of £25,000 of mortgage relief which came in last March, 10 months ago. I looked through the Bill with interest and eagerness when it was published to see whether the figure of £25,000 mortgage relief was to be increased to the £30,000 which is should now be. To my astonishment it is not there. There is no clause about it. It is not even possible to put it within the Long Title.
Therefore, we cannot rely upon the Treasury's good intentions. Not even the right hon. Gentleman, whom I hold in high esteem, can be trusted. Are we going to be able to succeed in the next Finance Bill, by which time much more than a year will have passed before we see the Bill and know what the new rate can be? So we cannot rely on the Government's good intentions in this matter.
There must be some device by which the House of Commons can insist upon these figures being reviewed by whatever means is most appropriate. We look to the Chief Secretary tonight to make a statement about what the Government will do about the very serious problem of the value of capital figures dwindling year by year and greatly eroding the fast dwindling reserves of the citizenry.
But there is a special reason in relation to this tax why we should have a firm reply from the Government tonight. It is not a tax which applies for one year only. It is not a tax on transactions of [column 1585]short duration. It is a tax which accumulates and affects a taxpayer for the whole of his life, and if he is to make sensible disposition of his resources, either by gift or by keeping them until he dies, he must know the rates of tax which he will have to pay at any stage.
No taxpayer knows what rate of tax on capital transfer will apply beyond this year because by next year the value of money may have changed to such an extent that the tax will bear very much more hard, and 50 years ahead, by which time he may be dead, the value of these slices will be so different that no calculation will be possible.
Curiously enough, failure by the Government to accept this amendment will lead to an earlier transfer of property than would otherwise have been the case. Plainly, if we are not to have the tax indexed, it will be slightly more advantageous to give early than to give late, because when we come to the point when the £15,000, the exempt slice, is the price of a packet of cigarettes, which may be only 10 years ahead—or 10 months ahead, or perhaps even only 10 days ahead, to judge by the way the Government are conducting their economic policy—the tax will bear much harder. It will bear much harder with each year that goes by, so there is some incentive to make early gifts.
It is a fundamental defect of the tax as the Government have drawn it that although the rates of tax applicable to any transfer taking place in the near future are determined, the rates of tax to apply to any transfer some time ahead, or when the man dies, are totally unknown because the value of money will affect people to such an extent as to make nonsense of the whole thing, especially among those in the lower brackets who do not have great wealth.
It is, therefore, incumbent upon the Government to tell us their intentions for uprating the values of the slices in this clause. If they say that they intend to keep them in line with changes in the value of money, that they do not intend to do so, that they intend to have an annual review or a biannual review, or that they intend to pursue some other policy on the matter, at least taxpayers will have some idea of what is likely to happen in the future. For this reason, we want both [column 1586]a general statement from the Government of their policy in this matter and a particular statement in relation to this tax and what they intend to do about the severe erosive effects which inflation will have upon the value of the relief.
The Chief Secretary to the Treasury (Mr. Joel Barnett)
We have had an interesting debate on several indexation questions. The right hon. Member for Down, South (Mr. Powell) told us, not altogether surprisingly, that he did not agree with the idea of indexation but agreed with the amendment, for the perfectly sound reasons which he gave. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley), on the other hand, agreed with the amendment but wanted me to give an assurance that the Treasury would constantly keep the rates in line with inflation, whether yearly, half-yearly or in some other way.
One accepts that, with the present level of inflation, the thresholds or rates in this tax and in other taxes will need constant review. I give the absolute assurance that we shall keep these thresholds under constant review. The right hon. Gentleman referred specifically to agricultural relief. There I entirely agree with him. It is absolutely crucial that the threshold should be kept under review because it could very much diminish in value depending on what happened to the price of land. I can give him the assurance that we intend to keep it under review. My right hon. Friend has said as much. 9.15 p.m.
The hon. Member for Cirencester and Tewkesbury referred to one of the many little incidents which took place in Standing Committee last summer on the question of the £25,000 mortgage interest relief. He seemed to imply, in spite of the high esteem in which he holds me, that I might go back on the undertaking that we would keep these matters under review——
The Chief Secretary has already gone back on it.
That is not the case. We have had an autumn Finance Bill and we have yet to come to the spring Finance Bill, which will occur one year after the previous spring Finance Bill. If house prices have declined in the period it may [column 1587]be necessary, as I am sure the hon. Member has recognised, to reduce the relief from £25,000. We may find that it would have to be reduced to £23,000 or £24,000, but out of pure beneficence we might not want to change it. Hon. Members might therefore conclude that we had not reviewed the matter, but that would not be true.
The Chief Secretary has got hold of the wrong end of the stick on this matter. We are not here concerned with what happens to house prices. The important thing is what happens to the value of money. If the value of money has fallen, as it has, the indexation or adjustment should push the rate up, not down. The rate has nothing to do with the level of house prices.
I am obliged to the hon. Member for Blaby (Mr. Lawson) for his brief lecture, and I am sure that he will give us longer lectures upstairs in Committee. I look forward to them. I appreciate the hon. Member's position over indexation. The hon. Member for Cornwall, North (Mr. Pardoe), in the absence of the hon. Member for Blaby, claimed credit for having first introduced the whole question of indexation. Another Conservative Member, however, disclaimed the fact that it was the hon. Member for Cornwall, North or his hon. Friends who first raised the matter. The hon. Member for Cornwall, North said that a few mavericks on the Tory benches had raised the matter. I would not call the hon. Member for Blaby a maverick. I might call him many other things, but not that.
It is, of course, always open to Parliament to review not only the thresholds of capital transfer tax but the rates and thresholds for all taxes every year. We review these rates regularly, and we are doing so at the moment. The amendment of the hon. Member for Cornwall, North is therefore unnecessary. Even if he had accepted that fact I am sure that that would not have prevented his tabling the amendment, because he wanted a brief debate on indexation. I am happy to oblige him briefly, even though I know that other hon. Members may prefer to get on.
The hon. Gentleman said that without a similar clause in the past estate [column 1588]duty thresholds had not been regularly reviewed and increased in line with inflation. That is not strictly true. Over the past 20 years the initial thresholds on estate duty have not been ungenerous. They have increased at twice the rate of the retail price index, although I concede that that does not apply to the higher thresholds. Certainly, thresholds have been reviewed throughout the period.
Not every year.
It was not necessary every year. I am sure that even the hon. Gentleman, with his desire to index everything, agrees that it would not always be necessary to change the thresholds every year. I am sure that his right hon. Friend the Member for Finchley (Mrs. Thatcher), with her newfound love of indexation, would not want to do it every year.
I know that many hon. Members think that indexation is one of the answers to our problems. It is possible to accept indexation or, as the hon. Gentleman says in the amendment, compulsory redetermination from time to time, in certain areas, such as the inflation stock relief that we have given in Clause 16 and one or two other areas, and any review of rates or the threshold for which the right hon. Member for Down, South has asked might be effectively indexed with inflation. But that is a far cry from general indexation.
The hon. Gentleman said that we should index not only capital transfer tax but all taxes. One cannot stop there. One must carry it much further, into a general indexation of virtually all the remaining areas.
I was pleased to note that the last time we debated the matter the former right hon. Member for Wolverhampton, South-West, now the right hon. Member for Down, South, and the present hon. Member for Wolverhampton, South-West (Mr. Budgen) were of the same mind in this matter. It must be something to do with Wolverhampton.
If it is true that if we index one thing we must index everything, why does Clause 11 introduce one element of indexation for one particular savings bond?
I said precisely—the hon. Gentleman can read it in Hansard [column 1589]tomorrow—that it is perfectly possible to index certain items, as we have done in Clause 16 with stock relief. But what the hon. Gentleman and many others are seeking is general indexation. They are in danger of somewhat lightly coming to the view that indexation is the answer to all our problems. I do not agree with the arguments adduced by the right hon. Member for Down, South against general indexation. In due time there may prove to be a case for it, but the case has not yet been proved.
I hope that most hon. Members, other than those who are obsessed with the idea of across-the-board indexation, will recognise that it is at least possible that it could lead to an acceleration rather than a deceleration of inflation. It could stop. I am not saying that it will stop.
Mr. Norman Lamont
I thought that the hon. Gentleman would ask me that. Many of those who in the past have benefited from wage indexation would be able to secure further wage increases on top of the indexed threshold increases. We have a free society and we intend to have a non-statutory incomes policy. In that sense at least further increases would be possible. Indeed, that is precisely what the right hon. Gentleman the Leader of the Opposition said recently in the House.
What is being suggested is the indexation of tax thresholds and not of wages, as such. It may be argued that indexation relieves some of the pressures on wages.
I wish the hon. Gentleman would do me the courtesy of listening to me. I am sure that it will be found in Hansard that I have said that if we go so far as to index all tax reliefs and all tax thresholds we shall be going very much along the road towards general indexation. Matters become difficult once that stage is reached. I am sure that I carry at least one member of the Liberal Party with me, namely the hon. Member for Cornwall, North (Mr. Pardoe).
Mr. Cyril Smith (Rochdale)
The right hon. Gentleman carries me with him.[column 1590]
I see that I also carry the hon. Member for Rochdale (Mr. Smith) with me—an hon. Member whom I surround, in a constituency sense. It has not yet been proved that there should be generalised indexation. Nor do I believe it would be right to single our one form of indexation in the form suggested by the amendment. In any event, the amendment is not strictly necessary for the capital transfer tax. I gladly give the assurance that we shall review these matters regularly, particularly in terms of the agricultural reliefs that the Bill provides.
I asked the right hon. Gentleman a specific question. Is it the Government's intention, by whatever means they think best, to keep the values of the slices, or whatever they are called, of this tax broadly in line with the changes in the value of money? He has said that he will review the position from time to time. Does that mean that he will review it and decide whether he thinks the pips can be made to squeak a bit harder, or will he review it with a view to bringing up the rate to the value that Parliament is now being asked to validate?
Either the hon. Gentleman is naïve or he is expecting me to be naïve. He is asking me to say that I shall agree to index the rates although I do not want to put that into the Bill. The answer is that we shall review the rates regularly. I am not prepared to give the hon. Gentleman a firm commitment as to how we shall review them. Previous Governments have never been able to do so. That was the position before our predecessors had the idea of indexation. I repeat that the amendment is strictly unnecessary and I hope that it will be withdrawn.
Sir John Hall
The Chief Secretary referred to the problem of applying indexation to wages. Is it not a fact that the social contract is in itself a form of indexation? Does it not apply rises in wages to the rise in the cost of living? Does he think that the social contract will fail?
I have been at the Government Dispatch Box in another capacity and I have replied to various debates and Questions. I know full well [column 1591]that when a Minister has not a clue what to say he will say that he will keep the matter under constant review. It does not mean very much. A Minister will often use that phrase when matters are put before him for the first time which he has not considered. It is a standard, stock reply. “Constant review” often means no review at all.
This is a modest amendment. It does not seek full indexation. If we do not have indexation and if we continue with the present rate of inflation, or even a lower rate of inflation, we shall find that the effect on property is even more devastating than was envisaged when the tax rate was introduced. The rate at which property will pass into the hands of the State will be more rapid than Denis Healeythe Chancellor envisaged, and that is saying something.
The figures in the Bill are the figures which were envisaged last March. In real terms they already mean that the tax will grip at a lower figure. I do not think that when we are introducing a new tax, in the circumstances which at present prevail, we can leave that tax without making positive provision for Parliament to look at the rate annually. It is not sufficient to leave the Treasury or Inland Revenue to look at the rates annually. We must look at them. I hope that the hon. Member for Cornwall, North (Mr. Pardoe) will press the amendment. If he does, we shall support him. [Mr. Bryant Godman Irvine in the Chair]
I agree with the right hon. Member for Finchley (Mrs. Thatcher) that this is a modest amendment, and it was phrased with that intention. I happen to be in favour of overall indexation, as the Chief Secretary correctly said. When one starts on the road, one probably has to proceed down it. Certainly one has to proceed down it when one has started on the road of taxation.
The right hon. Member for Down, South (Mr. Powell) said that he supported the amendment but for rather more modest reasons. I am glad to have his support for any reason whatever. He said that he was not a friend to indexation and that we could not tackle inflation that way. All I will say to him is this. [column 1592]Fairness is important, as he said, and equity is important. I happen to believe that indexation would be part of the weaponry with which we could successfully tackle inflation.
The right hon. Gentleman and I have a unique distinction in the House of Commons. We are the only two Members who claim absolutely and utterly that we know how to solve the problem of inflation. We would not do it in the same way. Nevertheless we each have our totally effective methods. The only thing is that we are not getting any nearer to being able or allowed to put them into practice. That is unfortunate, but there it is.
However, if we are to conquer inflation—I say this to the right hon. Member for Down, South and to the Chief Secretary—we must make it politically possible to do so. We must, therefore, reduce the painful side effects of ending it, and this can best be done by making financial contracts in real terms rather than in money terms. Indexation, through the tax system or anything else, is not a soft option. It does not seek to take the sting out of inflation but seeks to take the sting out of defeating inflation.
I say to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley)—as he asked me, he had better know—that the answer to his question “When is a maverick not a maverick?” is that he is a maverick in the best sense when he agrees with me and a maverick in the worst sense when he does not agree with me. He is now a maverick in the best sense, and long may he remain so.
The Chief Secretary promised us that he would review the tax rates in line with the cost of living. He promised us that this might even happen in the spring Finance Bill. He introduces these Bills like other people eat oysters—when there is an “R” in the month. His promises about reviewing tax thresholds or the rates of tax on capital transfers are not worth very much. He said that the amendment was not strictly necessary. I suppose that in his terms it is not strictly necessary. But in the way in which death duty has been applied over the years—we must go right back to the time of Sir Stafford Cripps, who was no mean Chancellor in extracting every last penny from the wealthy—it has not kept pace with the cost of living. It has not [column 1593]been reviewed in line with the rise in the cost of living.
Therefore I believe that the Government, without an amendment of this sort applying to every tax, have a vested interest in the perpetuation of inflation. It is that interest which we seek to remove from the Government and we seek to give [column 1594]back to Parliament the control which our forefathers fought so hard to establish.
Question put, That the amendment be made:—
The Committee divided: Ayes 244, Noes 256.