Economy: 1979 Budget (Howe 1)

Document type: Declassified documents
Source: Hansard HC [968/235-264]
Editorial comments: 1532-
Importance ranking: Key
Word count: 10,943 words
Themes: Economic policy - theory and process, Employment, Industry, Monetary policy, Privatized & state industries, Pay, Public spending & borrowing, Taxation, Trade
[column 235]


3.32 p.m.

The Chancellor of the Exchequer (Sir Geoffrey Howe): It is a little over five years since my predecessor, the right hon. Member for Leeds, East (Mr Healey) rose at this Dispatch Box to present his first Budget. The House will have seen today the honour recently conferred upon him by Her Majesty. I am sure that the House will wish to join me in congratulating the right hon. Gentleman on the great honour that has been conferred upon him.

Like me, the right hon. Gentleman approached this task within a very few weeks of his party's success at a general election. In compressing the huge and complex process of Budget-making into so short a time, he faced – as I have done – a formidable task.

It is right for me to say that I have received unstinting support, not just from my fellow Treasury Ministers but from many people, of every rank, within the Treasury and the two Revenue Departments. But for their willingness to work far beyond the call of duty it would scarcely have been possible for me to present this Budget at all. So I gladly echo my predecessor in acknowledging this assistance with a very real sense of gratitude.

I echo the right hon. Gentleman, too, in saying that I approach my task – and I assure the House that I quote his very words –

“in a mood of humility and trepidation” – [Official Report, 26 March 1974; Vol. 871, c. 277.]

I say that not just because of the novelty of the experience for me – although that is daunting enough – but [column 236]much more because of my sense of dismay at the disturbing familiarity of the occasion from the point of view of almost everybody else.

As the House will recall, this is the fourth Budget in the last 15 years to be introduced by a new Chancellor in a new Government. The late Iain Macleod, alas, did not live long enough to be included in this series. Before me there was, in 1964, the present Leader of the Opposition; in 1970, my noble Friend Lord Barber; and, in 1974, the right hon. Member for Leeds, East.

The depressingly familiar feature of the first Budget speech of each of those three predecessors is that every one of them found cause to complain, with more or less justice, about the disagreeable nature of the estate that had come his way.

The House will understand, in the light of the most recent evidence about inflationary trends, monetary growth, Government borrowing and the deteriorating trade balance – not to mention the postdated cheques for public sector pay that I found on arrival at the Treasury – that I am certainly in no position to discontinue the tradition of my predecessors.


So many other facts tell the same story. Consumer spending rose last year, in percentage terms, by seven times as much as manufacturing output. We actually manufactured 4 per cent. less goods in 1978 than in 1973. But the volume of manufactured imports went up by 13½ per cent. Though demand was rising strongly, and unemployment remained high, the economy was almost unable to increase supply. The current account of the balance of payments was barely in surplus last year, despite a massive contribution of £3½ billion from North Sea oil and gas. And well before the last Administration left office inflation was back on a rising trend. Although many price increases had been held back behind the general election dam, the rate of inflation in the six months to April – excluding seasonal foods – was running at no less than 12·3 per cent. at an annual rate.

On that form and on the policies which brought it about, there is little reason to expect any improvement in the future. [column 237]Productivity is rising less than half as fast as in the early 1970s. There is no sign of any change for the better there. Last year's growth in demand could never have been sustained, because, as the trade figures make clear, it was largely met from imports. That was the main reason why the recent fall in unemployment was, in any event, likely to be reversed.

It would be easy to conclude that these difficulties are all the fault of the last Administration. Certainly the Labour Party bears a heavy responsibility. Labour Governments have, after all, been in office for 11 of the last 15 years. Even so, I want to consider our problems in an even longer perspective.

Only a quarter of a century ago – within the memory of almost every Member of this House – the people of the United Kingdom enjoyed higher living standards than the citizens of any of the larger countries of Europe. Amongst the free nations of the world, Britain was then second only to the United States in economic strength.

It is not so today. For example, France and Germany's combined share of world trade in manufactured goods, which in 1954 was almost the same as Britain's alone, is now more than three times as large as ours. The French people now produce half as much again as we do. The Germans produce more than twice as much, and they are moving further ahead all the time.

There has, of course, been plenty to say in mitigation of all this. At least until recently, we have been able to claim a good record in most of those things that can be summed up in the phrase “the quality of life”. But in the last few years the hard facts of our relative decline have become increasingly plain, and the threat of absolute decline has gradually become very real. That is not a prospect that I am prepared to accept. Nor, I believe, are the British people. They realise that we cannot for ever go on avoiding difficult choices in the fatal, and increasingly futile, quest for easy solutions.


Of course, as inhabitaints of a country that has always been deeply involved in the international economy, we pay a great deal of attention to events outside [column 238]our own country. But it would be very dangerous if preoccupation with this or that world crisis – the oil crisis, the dollar crisis or whatever – led us to believe that our economic troubles could be blamed mainly on the outside world. The truth is that our troubles are very largely home-made. If we tackle them ourselves, we can pull our own economy round, even in a world of slow growth. If we do nothing to change course, nothing that happens beyond these shores can help us.

As it happens, the international environment is unlikely to give us any comfort in the years immediately ahead. Oil prices are now, on average, about 30 per cent. higher than six months ago. That is one reason why growth in most countries is likely to be significantly lower than in 1978. So we clearly now need to do more about both conservation and supply of energy.

For that reason, it will be an important subject for discussion at the next meeting of the European Council and at the economic summit in Tokyo at the end of this month.

In this disturbed situation, the European Community can, and should, be a source of stability and strength for its members. In one important area, however, present EEC policies are seriously hindering our efforts to help ourselves. The United Kingdom and Italy, which are among the poorer members of the Community, are transferring substantial resources to richer member States – [Hon. Members: “Oh.”] – chiefly through the Community budget. We have already made it very clear to our partners that this cannot be allowed to continue. [Hon. Members: “Oh.”] It is plainly unfair, and it is against the interests of the Community itself. We shall continue to press for an agreement which meets our case.

I repeat, however, that progress internationally, whether on energy policy or within the Community, will not cure the deep-seated weaknesses of our own domestic economy. Nor will North Sea oil. Growing production will certainly put us in a better position than other countries, without oil of their own, but it must not be allowed to conceal the grim truth about what has been happening to the balance of our own trade, particularly in manufactured goods.

[column 239]

North Sea oil will itself do nothing to solve the problems on the supply side of our economy. Nor will it check inflation. Indeed, in some respects it may actually make matters worse, unless we correct some other aspects of policy which are at present working in the wrong direction.


So we find ourselves, yet again, asking the question: how are we to check, and then reverse, the long decline? In particular, what can we, here in this House of Commons, do about it?

We do well to begin, I suggest, by acknowledging that there is a definite limit to our capacity, as politicians, to influence these things for the better. I suspect that that view is much more widely accepted outside this place than it is within.

I do not mean to be unkind to my predecessor when I invite the House for a moment to consider his experience. The Government of whom he was a prominent member consistently behaved as if it were possible for the Government to manage, indeed to plan, the economy, so as to promote efficiency and growth. The right hon. Member for Leeds, East did this with notable enthusiasm. In five years of office he introduced no fewer than 15 Budgets and economic “packages”, and financed a wide range of policies in the name of “the regeneration of industry”

But at the end of five years the right hon. Gentleman must ask himself, to what avail? Has the industrial strategy, as he conceived it, really transformed the outlook for British industry? Are we not driven to the conclusion that the notions of demand management, expanding public spending and “fine tuning” of the economy have now been tested almost to destruction?

Certainly the Leader of the Opposition has come round to that view. He said in a memorable speech on 28 September 1976 to his own party conference at Blackpool:

“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting Government spending. I tell you, in all candour” –

said the right hon. Gentleman –

“that that option no longer exists …”.

The right hon. Member for Leeds, East has, in the event, been proclaiming [column 240]the same conclusion. He has, throughout, asserted the importance of monetary policy. He rightly began the practice of setting money supply targets, and he claimed to make his public spending plans accordingly. This means that I am able to approach my task this afternoon on this one, crucially important piece of common ground: that the poor performance of the British economy in recent years has not been due to a shortage of demand. We are suffering from a growing series of failures on the supply side of the economy.


It is our belief that many of these failures are themselves the result of actions and interventions by the Government themselves – laws that stand in the way of change and stifle enterprise; and, as important as anything, a structure of taxation that might have been designed to discourage innovation and punish success.

Of course there are many other causes of our decline. That is not in dispute. But we believe that it is more sensible for the Government to make those beneficent changes that are undoubtedly within their power than to preach the need for changes that lie well beyond their authority. Certainly, improvement remains unlikely unless we are prepared to change the laws and taxes to which I have referred.

That is why the British people are convinced – as we believe – that it is time for a new beginning. Our strategy to check Britain's long-term economic decline, which has gathered pace in the last five years, is based on four principles.

We need to strengthen incentives, by allowing people to keep more of what they earn, so that hard work, talent and ability are properly rewarded. We need to enlarge freedom of choice for the individual by reducing the role of the State. We need to reduce the burden of financing the public sector, so as to leave room for commerce and industry to prosper. We need to ensure, so far as possible, that those who take part in collective bargaining understand the consequences of their actions – for that is the way to promote a proper sense of responsibility.

Those principles require substantial change in the way in which our economy is allowed to work. The tax changes that I shall propose today will be only the [column 241]first step. They will take us a long way in the right direction.


But those changes will not themselves be enough unless we also squeeze inflation out of the system. It is crucially important to re-establish sound money. We intend to achieve this through firm monetary discipline and fiscal policies consistent with that, including strict control over public expenditure.

Financial responsibility on the part of Government must be supported by responsibility elsewhere. People must understand and accept that the only basis for real increases in wages and salaries is an increase in national production. Higher pay without higher productivity can lead only to higher inflation and unemployment. It is important for that to be fully understood by all those concerned with wage negotiation. We shall be more than willing to consider better methods of ensuring that it is.

Given the monetary and fiscal policies to which we are firmly committed, irresponsibility is bound, as I have said, to threaten jobs. This indeed is the clear evidence of recent history, most plainly in the private sector.

Responsible bargaining necessarily means different things to different people and in different kinds of firms and industry. But on both sides of the table, and on both sides of the House, certain limitations must be recognised: in the public sector, what the ratepayer and taxpayer can afford; in industry, what the customer is prepared to pay, what the firm needs to invest, and what the pressure of competition demands; and, throughout the economy, the limits imposed by the need to control the money supply.


As I have already observed, my predecessor was undoubtedly right to adopt a system of monetary targets. But his other policies were seldom consistent with his own monetary objectives. Thus, although monetary growth in 1978–79 as a whole was just within the target range of 8 per cent. to 12 per cent., it was growing in the second half of the year at an annual rate of almost 13 per cent. Moreover, the May figures, now becoming [column 242]available, indicate that the underlying growth is still above the top of the range and, if anything, accelerating. One cause of this has been the alarming rate of central Government borrowing – £2½ billion in April and May alone.

It is now clear that the public expenditure policies which we inherited would have made it quite impossible to meet the right hon. Gentleman's 8 per cent. to 12 per cent. target without a further savage squeeze on the private sector, involving not just higher interest rates but also a sharp increase in the total tax burden. Not for the first time, the levels of public spending and borrowing which he permitted were far too high to be compatible with his own monetary targets. Reluctantly, I shall myself be obliged to take painful action to correct that mistake.

We are committed to the progressive reduction of the rate of growth of the money supply. I therefore intend, despite the discouraging backcloth, and as the first step in this process, to reduce the targe range for the remainder of this year, 1979–80. The new target range, to apply to the growth of sterling M3 in the 10 months to the banking make-up day in April 1980, will therefore be an annual rate of 7 per cent. to 11 per cent., but I will roll the target forward by six months in the autumn.

Equally important, I intend to improve the way in which the monetary target is achieved. We need to rely less on curbing the private sector, and put more emphasis on fiscal restraint and economy by the public sector. That requires, as a first step, a significant reduction in the public sector borrowing requirement from the figure of around £10 billion that it would otherwise have reached this year.

There are, however, limits to what can be done in this Budget, with two and a half months of the financial year already passed, to curtail the scale of public spending in the current year. This is indeed a severe handicap. Even so, I intend to reduce the public sector's financial needs enough to make it possible to achieve my monetary target with less restraint on the private sector.

But the fiscal measures which I am announcing today must inevitably take time to take effect. They cannot immediately reduce the seriously excessive monetary growth that we have inherited. [column 243]Particularly given the continuing surge in bank lending, I have concluded that there is no option but to act directly to reduce that growth. It is not enough to speak of the importance of monetary policy, unless one is prepared to carry one's words into practice.

The Bank of England is accordingly rolling forward the supplementary special deposit scheme, or “corset”, by three months on the existing basis. In addition, the Bank is announcing, this afternoon, an increase in its minimum lending rate by 2 per cent. to 14 per cent. [Hon. Members: “Oh”.] I must make it very plain to the House that the necessity for this action ranks alongside last week's trade figures as entirely characteristic of the legacy of the last Administration.

I return now to consider the right size of the public sector borrowing requirement in the current year. As my predecessor found to his cost, this is a fickle and elusive statistic, so I offer my judgment of the scale of Government borrowing in 1979–80 with a degree of caution. Having said that, my best estimate is that the changes in taxation and public expenditure which I am announcing today will be sufficient to reduce the PSBR to £8¼ billion in the current year, as compared with the outturn of £9¼ billion for 1978–79. As a percentage of GDP, that will represent a reduction from over 5½ per cent. last year to under 4½ per cent. in the current year. The public sector deficit will also fall from 4½ per cent. to 3¾ per cent. of GDP. These are important steps in the right direction. I intend to continue along that path in the years ahead.

It will no doubt be argued by some – although I do not think that it can be so argued by my predecessor – that fiscal action to bring down the PSBR to the figure I have mentioned is unduly severe. Indeed, the conventional forecasting arithmetic, which, in accordance with custom and stature, I am publishing in the Financial Statement, does suggest that the economy will show no growth in the period immediately ahead.

But this prospect, in so far as it can be viewed as a reliable prediction – which itself is open to doubt – cannot be taken to mean that the Budget is, in the traditional language of neo-Keynesian economists, perversely contractionary. To make that claim is to argue [column 244]that an alternative course of fiscal policy would produce more growth and more employment. I believe that argument to be profoundly wrong.

To aim at a significantly higher public sector borrowing requirement – in other words, to ease the stance of fiscal policy – would serve only to fuel the fire of inflation. In the end, we should have less growth, less employment, and even higher prices. Even the Leader of the Opposition must accept that, in the light of the words that I quoted from what he said at Blackpool nearly three years ago. It follows that any decline in economic activity which might, on a narrow view, be attributed to this Budget will be essentially the consequence of the economic situation which has made such measures inevitable, while inflation is being brought under firm control.


I come now to my proposals, and I deal first with the question of exchange control. Sterling is at present relatively strong, and I expect it to remain so. That strength flows partly from the realisation that, as a result of North Sea oil, the United Kingdom is better placed than most of our competitors to deal with present world oil problems. Moreover, our fiscal and monetary policies should maintain confidence in the currency. This is, therefore, an appropriate time to start dismantling our apparatus of controls on outward capital flows. Our present regime is more restrictive than that of any other major industrialised country. There is an overwhelming case, in this context as in others, for giving both companies and individuals wider freedom of choice. This should reduce the distortions and costs which controls are bound to impose on economic decisions. These costs bear particularly heavy on smaller companies.

We intend to move one step at a time. In the initial stage, the emphasis will be on direct investment overseas. Details are being made available in the Vote Office. The main relaxation will be to make official exchange, to the extent of £5 million per project per year, freely available for new outward direct investment. This should allow the majority of United Kingdom firms which invest overseas all the sterling finance they are likely to want. The two-thirds rule, which restricts the re-investment of profits earned overseas, [column 245]will be abolished. In response to Labour Members, I must say that this greater freedom in the financing of direct investment abroad does not, as is sometimes feared, and as they suggest, threaten jobs in the United Kingdom. The weight of evidence is that overseas investment generally strengthens our position in world export markets to the benefit of output and jobs in this country. Moreover, additional investment overseas today will yield an income that will stand us in good stead when the overseas earnings from North Sea oil begin to decline.

During the sterling crisis of 1976, the last Government stopped the use of sterling to finance third country trade. That restriction has placed British merchants at a disadvantage in international business, and I am taking the opportunity to restore the facility to them as soon as the details can be worked out.

I have also decided that there should be some immediate easement of the controls affecting individuals. I am, therefore, making significant relaxations in the rules concerning travel and emigration allowances, overseas property, and cash gifts and payments to dependants. In regard to portfolio investment, I am taking two modest steps at this stage. I am abolishing the requirement to maintain 115 per cent. cover for overseas portfolios financed by foreign currency borrowing, and official exchange will henceforth be available for meeting interest payments on such borrowing. The 1975 controls on gold coins will also be abolished. As the House knows, the liberalisation of exchange controls is one of our obligations under the EEC Treaty. I have accordingly discussed with the Commission the decisions that I am announcing today.

As time goes by, I intend to take further steps in the progressive dismantling of exchange control. The pace of relaxation will obviously be influenced by sterling's strength, as well as by the speed with which we can solve the economic problems that face us.

In our external policy we have also to take account of our official external debts. These at present amount to $22 billion – a massive increase on the $8 billion which the previous Government inherited in 1974. It is our intention to reduce that burden of external debt substantially during the life of this Parliament.

[column 246]


In order to reduce the borrowing requirement and the burden of direct taxation, we must make savings in public spending and roll back the boundaries of the public sector. We are totally committed to improving standards in the public services. But that can be achieved only if the economy is strong in the first place. So that will be our first priority. Finance must determine expenditure, not expenditure finance. Substantial reductions in expenditure can, and will, be made in the remainder of this financial year.

First, as I made clear three weeks ago, we shall not raise the cash limits to cover prices higher than those provided for in the cash limits originally published for this year. On pay in the public services, while we will honour the commitments to the universities and the health authorities entered upon by our predecessors, in general we shall limit the adjustment of the cash limits so that substantial offsetting economies will have to be found.

The need for substantial economies applies equally to local authority expenditure, where the Government's contribution is made through the rate support grant. As I said three weeks ago, we shall take account of pay settlements in calculating the increase orders for the rate support grant, but we shall make a significant across-the-board reduction from the total so calculated.

I can now tell the House that the reduction will be £300 million for England and Wales and £35 million for Scotland. That is, of course, to be set against total rate support grant expenditure of about £9 billion. These figures may have to be increased when we know the cost of further pay increases and will be finally determined in November, before the increase orders are made. In coming to this decision, a major factor has been how much in present circumstances it is reasonable for the taxpayer to contribute.

The cash limits on Departments and fringe bodies are being set to ensure that economies of 3 per cent. are achieved on manpower costs this year, as announced by my hon. Friend the Minister of State, Civil Service Department. I estimate that this cash limits policy will reduce the volume of planned expenditure by about £1 billion at 1979 survey prices.

[column 247]

On top of these reductions resulting from the policy on cash limits, my right hon. and hon. Friends have reviewed the plans for their Departments and the nationalised industries and have identified further specific reductions which are being made this year. The changes are listed in a notice to be issued by the Treasury and available in the Vote Office. Further details will be given by the Ministers concerned. But the House will want to know where the main reductions will be made. All figures that I quote are at 1979 survey prices.

We are making an immediate start in reducing expenditure on industrial and employment subsidies. My right hon. Friend the Secretary of State for Industry is cutting expenditure on industrial support this year by £210 million. This will come mainly out of the provision for new projects by the Department of Industry and by the National Enterprise Board, and by imposition of a delay of four months in payment of approved claims for regional development grant. Support from the employment programmes is to be concentrated on the areas where unemployment is highest. Savings of over £170 million will be made in those programmes this year.

In the area for which my right hon. Friend the Secretary of State for Energy is responsible, savings of over £320 million are being made this year in the finance for BNOC and the electricity, gas and coal industries. The industries have been asked to avoid so far as possible increases in fuel charges beyond those required to meet the cash limits announced by the previous Government.

My right hon. Friend the Secretary of State for the Environment is making savings of about £440 million from his programmes this year, mainly by scrapping the Community Land Act, deferring water authority investment and reducing existing allocations to housing authorities.

As we have repeatedly made clear, it is not our intention to reduce spending on the Health Service. But we cannot ignore the fact that the contribution made by some health charges has greatly diminished in recent years. This applies especially to prescription charges, which have stood at their present level for eight years, during which prices have risen [column 248]over two and a half times. It is therefore proposed to increase prescription charges to 45p. This will still leave them cheaper in real terms than they were in 1971, and the present wide range of exemptions covering children and the elderly amongst others will, of course, be maintained. Certain dental charges will also be increased. Those changes will yield £34 million in 1979–80 for Great Britain as a whole.

My right hon. and learned Friend the Secretary of State for Education and Science is reducing expenditure in those areas of the education and science programmes within the Government's direct control by about £55 million. We shall not add to the increase of 5p in the school meal charge which was planned by our predecessors for the autumn term.

The aid programme this year is being reduced by £50 million. Savings are also being made on the transport, trade and arts programmes.

My right hon. Friends the Secretaries of State for Scotland, Wales and Northern Ireland are making comparable reductions in their own programmes.

In total, these reductions amount to almost £1½ billion this year.

In addition, we do not intend to use as large a Contingency Reserve as provided for 1979–80 in the previous Government's public expenditure White Paper. We have decided to cut the reserve by £250 million. Any further decision to add to the volume of programmes in the remainder of this year will be met from the balance of just over £250 million which will remain in the reserve after today.

In two areas we are providing for increased spending – defence and pensions. An extra £100 million is being provided for the defence budget this year. This will enable essential projects in the equipment programme to go ahead. I shall return to pensions improvements shortly.

As I have already indicated, we are only just embarking on our review of the plans we have inherited and of the scope for reducing the size of the public sector. But it is already clear that the scope for sale of assets is substantial.

Sales of State-owned assets to the private sector serve the immediate purpose of helping to reduce the excessive public sector borrowing requirement with which [column 249]I was faced. This is all the more necessary this year, given the difficulty of cutting back public sector spending programmes once a year has already begun.

But such sales are not justified simply by the help they give to the short-term reduction of the PSBR. They are an essential part of our long-term programme for promoting the widest possible participation by the people in the ownership of British industry. This objective – wider public ownership in the true meaning of the term – has implications not merely for the scale of our programme but also for the methods of sale we shall adopt.

So far as this year's disposals are concerned, we must obviously retain flexibility on timing and on the precise mix of assets in order to ensure a fair price. I do not, therefore, propose to announce the details today. But I intend to ensure that the proceeds of sales in the current financial year will amount to some £1 billion and I have taken account of this in the Budget arithmetic. The biggest contribution to this total will come from the sale of a further part of the Government's shareholding in British Petroleum, where we shall be following the example set by the previous Administration.

In total, I estimate that the economies I have announced will amount this year to about £3½ billion at 1979 survey prices and £4 billion at current prices. Yet, given the scale of the problem we have inherited, I must look for a further contribution from indirect taxes to finance the first stage of our plans for the reduction of income tax.

Before turning to the first of my tax proposals, I must make it clear that today's Budget will be able to deal with only a small part of the Government's tax agenda. Coming, as we do, to a Finance Bill at this late stage in the year, there is a physical limit to the amount of legislation that can be proposed and enacted. We have been unable to deal with many important matters. There will be other opportunities to consider those. At this stage, we have concentrated on tax changes of strategic importance. I turn now to the first of these.


We made it clear in our manifesto that we intended to switch some of the tax burden from taxes on earnings to taxes [column 250]on spending. This is the only way that we can restore incentives and make it more worth while to work and, at the same time, increase the freedom of choice of the individual. We must make a start now.

I have reviewed the whole field of indirect taxation to decide where the increased revenue could best come from. There are many cogent arguments at this stage in favour of value added tax.

First, large areas of consumer spending, in fact about half the total, are not chargeable to VAT. Food, children's clothes, heating and light, public transport, house prices and rents are all zero rated.

Second, poorer households tend to spend proportionately more of their income on such zero-rated goods. This means that, unlike most indirect taxes, VAT is not regressive.

Third, by comparison with taxes such as those on alcohol and tobacco, VAT is much more broadly based.

Fourth, there is a real opportunity for simplifying the operation of the tax by having one rate instead of two.

In his speech in the House on 22 May, the right hon. Member for Leeds, East seemed to favour increases in the surcharge on national insurance contributions or in advance corporation tax. The national insurance surcharge falls on the whole of British industry, including production for export, but not on imports. It is inferior in that respect to VAT, which falls on imports but not on exports. That is clearly significant in the light of the latest trade figures. An increase in advance corporation tax, which he also seemed to suggest, would damage the overall liquidity of industry at a particularly difficult time: by contrast, an increase in VAT actually increases liquidity.

For all these reasons, my choice must fall on VAT. Moreover, the increase I make must be sufficient to provide for substantial and worthwhile reductions in income tax. I propose, therefore, that as from next Monday VAT should be charged at a new unified rate of 15 per cent.

Allowing for the wide range of goods and services that are zero rated, and will stay zero rated, the new rate that I propose is equivalent to 8 per cent. averaged [column 251]over the whole of consumer expenditure. That is significantly less than the average in the European Community.

The yield from the increase to 15 per cent. is estimated at £2,035 million in 1979–80 and £4,175 million in a full year. Thus, it will provide scope for further direct tax reductions in later years. The relatively small size of the yield this year reflects the loss of over two months' revenue between April and the present and the time lag allowed to traders before they pay over VAT receipts to the authorities – an average of over three months. I have referred to the helpful contribution that that gap provides towards improving liquidity. As these funds build up in traders' hands, they provide a substantial boost to the liquidity of the firms and companies concerned. Concern has been expressed that an increase in VAT could lead to some particular difficulties, for example in relation to telephone bills for calls made before the date of change. I am proposing transitional provisions to deal with that and some other problems of that kind.

The increase in VAT will of course add significantly to the point of sale prices of drink and tobacco. For example, the VAT increase will mean about an extra 28p on a bottle of whisky, approximately 2p on a pint of beer and 6p on a typical packet of 20 cigarettes. In these circumstances, I do not think that it would be justifiable to make a separate increase in the excise duty on drink and tobacco this year.

I fully realise that this increase in value added tax will result in a rise in prices – in fact, a rise of about 3½ per cent. in the retail price index. This is, of course, a once-for-all effect. But there never will be a time when it is easy to effect the switch from direct to indirect taxes, and the present moment is clearly no exception. That much-needed reform has been postponed too long already.

The House should bear in mind that, as I have already indicated, VAT does not fall on a wide range of necessities. That means that the increase will fall less heavily on people in the lower income groups. As will be apparent when I come to my income tax proposals, I shall be leaving people with more money in their pockets with which to pay the increased VAT. I appreciate, however, that those [column 252]who are not liable to income tax – and I have in mind particularly many of those living on retirement pensions – will not benefit directly from my income tax proposals. That brings me to our proposals in the field of social security.


The Government have decided to increase the standard rate of retirement pensions in November by £6·10 to £37·30 for a married couple and by £3·80 to £23·30 for a single person. These increases take full account of the underestimate which the last Government made of the actual rise in earnings between November 1977 and November 1978, and are well above the figures of £4 and £2·50 announced by the previous Government. Other social security benefits will also be increased, and my right hon. Friend the Secretary of State for Social Services will announce full details tomorrow.

This means that social security pensioners will be fully protected against the increase in prices. That is what is really important. But the extent to which we can afford to go further than that – to add improvements in real terms – must depend on the productive capacity of those in work.

Under the present rules, pensions are uprated on the basis of the movement in prices or earnings, whichever is the greater. The Government have decided, however, that for the future the requirement for the statutory uprating of pensions should be based on price movements, and we shall be introducing legislation to that end. That will be a minimum requirement and will fully protect the value of these pensions against price increases at all times, including those arising from indirect tax changes, such as I have just announced.

Mr J. W. Rooker (Birmingham, Perry Barr): That is treasonable.

Sir G. Howe: Of course we want, as much as the hon. Member for Birmingham, Perry Barr (Mr Rooker), to be able to do more, but we realise that that depends on the strength of our economy. I am confident that in time, as our economy improves, it will be possible to do more and ensure that pensioners share in the increase in national prosperity. That is one more reason why my other [column 253]proposals today are so important. They are intended to strengthen the productive capacity of the economy as a whole, for the benefit of pensioners as well as every other citizen in the community.

We also propose to improve certain other social security benefits. Child benefit went up by £1 per week only two months ago, and we do not propose a further increse this year. But single-parent families face particular problems, and we propose that the one-parent premium should go up from £2 to £2·50 next November. We also want to help the disabled. Mobility allowance will accordingly be increased from £10 to £12 in the autumn, and we shall, of course, honour our commitment to pay a Christmas bonus this year of £10.

These measures overall are worth about £1,100 million in 1979–80 and £2,700 million in a full year. They are largely covered by the existing social security programme, and the balance has been charged to the Contingency Reserve. As the House knows, our general policy is to make substantial reductions in public expenditure, but that must not be done in a way that bears unfairly on the more vulnerable members of society.

Our social security system has become far too complicated and it sometimes acts to reduce the incentive to work. The problem is widely recognised on both sides of this House. We are therefore studying a number of aspects of the social security system to see what can be done to simplify it. My right hon. Friend the Secretary of State is also putting in hand urgent measures to tighten up on abuse and fraud.


Hydrocarbon Oil Duties

I dealt earlier with the excise duties on tobacco and drink. The oil duties, however, raise wider issues. I have already mentioned the general case for measures that will help us to meet the growing and undoubted need to conserve oil. At a time when there is a worldwide shortage of crude oil, it is essential that we should play our full part in achieving the 5 per cent. reduction in consumption to which the previous Government rightly committed us.

[column 254]

I therefore propose to increase all the main oil duties this year. In the particular case of petrol, the VAT increase from 12½ per cent. to 15 per cent. will be smaller than for many other items. With that in mind I propose to increase the petrol duty by 7p a gallon, which will result in a total price change of about 10p a gallon. I also propose to increase the duty on derv by the same sum, 7p a gallon, and the duty on heavy oil other than derv by ½p. I am not, however, increasing the duty for burning oil and for domestic paraffin, which is the oil used most commonly in the home, particularly by pensioners. The yield from these excise duty changes is estimated at an additional £525 million in a full year and £400 million in 1979–80. The immediate increase in the RPI will be about a quarter of 1 per cent.

Vehicle Excise Duty

In view of the increase that I am proposing in the road fuel duties, I have decided to make no change in the rate of vehicle excise duty. Our predecessors announced their intention of abolishing the duty on petrol driven vehicles. As my right hon. Friend the Minister of Transport has already said, we are reviewing the future of this duty and we shall announce our conclusions in due course. For heavier goods vehicles, my right hon. Friend will be announcing plans for restructuring the form of this tax.

Car Leasing

Before I leave the subject of motor cars, there is a particular issue that I need to deal with. There is a weakness in the present legislation on capital allowances which enables leased cars to avoid the special rules restricting allowances for business cars. This has resulted in a loss of tax which is currently running at about £175 million a year, and which could well rise to £200 million next year if I take no action. I propose to put this right with effect from today.

Petroleum Revenue Tax

I turn next to petroleum revenue tax. The previous Government announced last August that they proposed to increase this tax from 1 January this year. These proposals were discussed very fully by the last Government with the industry and we ourselves have had representations about [column 255]them, which we have carefully considered.

I have judged them now against the background of recent rises in the price of oil. On that basis, the original package of PRT proposals for giving the Government more revenue from the North Sea is now fully justified. Accordingly, there will be provisions in the Finance Bill to implement it. I also propose, however, to introduce some changes in the PRT expenditure rules for which the industry has been pressing for some time. The British National Oil Corporation will no longer be exempted from PRT.

These proposals will increase the Government's revenue from the North Sea – at 1978 prices – by about £110 million this year and by about £1,800 million over the period to 1985.


Before I deal with the taxation of business profits I propose to refer to the taxation of capital, a matter of vital interest to business as well as to individuals.

We made it clear in our manifesto that we were determined to make the taxation of capital simpler and less oppressive. The objection to capital gains tax in its present form is that most of the yield comes from paper gains arising from inflation. The tax is, therefore, a capricious and sometimes savage levy on the capital itself. The capital transfer tax, despite the improvements secured in the last Parliament by constant pressure from the Conservative Benches, is oppressive, harmful to business and a real deterrent to initiative and enterprise. It is perfectly natural that people should want to build up capital of their own and pass it on to their children, and this is particularly true of the small business proprietor.

The issues involved in both of these taxes are difficult and complex. I have, therefore, decided that we should not attempt to deal with them in the coming Finance Bill – abbreviated as it is bound to be – but should press ahead with a thorough study, with a view to legislation on all these matters at an early date. There is, however, one specific issue on [column 256]which legislation is required in order to hold the present position. I propose to extend for a further two years the period for CTT transitional relief for capital distributions from discretionary trusts and to defer for two years the introduction of the periodic charge.

The development land tax, however, is a very different matter, which calls for immediate action. This tax has combined with the Community Land Act to prevent much worthwhile development and to increase unemployment in the construction industries. We have already said that we will repeal the Community Land Act. I propose now to deal with the development land tax. In place of the present rates of 66⅔ per cent. and 80 per cent., which the previous Government intended should rise to 100 per cent., I propose that development land tax will in future be charged at a single rate of 60 per cent. The amount of development value which can be realised in a financial year without liability to development land tax will be raised from £10,000 to £50,000. Both these changes take effect for disposals made on or after today.

I do not propose to make any further reductions in rate, and the generous increase in the exempt slice should mean that it will not need early revision. Owners of development land will, therefore, have no reason for holding back in the hope of further tax reductions. What I have said today should remove the major uncertainties which have been hanging over the market.

I now turn to the taxation of profits. A vigorous, profitable and expanding company sector is essential if we are to rebuild this country's prosperity. Profitability has dropped sharply in recent years and the rate of return on capital employed is now far too low, especially in manufacturing industry.

Without higher profits we shall not see the new investment and jobs which are so urgently needed. Achieving those profits is very largely the task of management and workpeople. The Government can help or hinder them, and this is no time to add to the difficulties that they face by raising taxes on profits still further. Against that background I propose no change this year in the general system or in the rates of corporation tax. Nor would it be right to make any major [column 257]changes in the system of company taxation without careful consultation in advance.

Looking further ahead, however, it is important that the tax system should take account of the effects of inflation on businesses, and do so in a way that is reasonably objective, equitable and simple to administer. The Government will therefore be reviewing this matter along with the accountancy profession's latest proposals for current cost accounting. I am arranging for the Inland Revenue to consult the accountancy profession and business later in the year.

I need, however, to deal now with the question of stock relief. The Finance Bill will include legislation to honour the undertaking which my predecessor gave last year, and which we supported, to write off the deferred tax liabilities arising from stock relief given for the first two years of the scheme – 1973–74 and 1974–75 – and thereafter to write off these liabilities in respect of each subsequent year, after they have been outstanding for six years.

In addition, following consultations which the Inland Revenue has had with industry, I am proposing two further changes in the stock relief scheme. I intend to reduce the profit restriction for unincorporated businesses from 15 per cent. to 10 per cent.; and all businesses will be given greater flexibility in the amount of relief that they can claim. Both these changes will be of particular benefit to small businesses.

Details of the stock relief and car leasing proposals will be given in Inland Revenue notices which I am making available in the Vote Office.

I come now to dividend control. If industry is to flourish, it needs not only adequate profits, but a vigorous capital market to provide funds for investment and expansion. The control of dividends has now outlived its purpose, and will accordingly come to an end when the existing legislation expires on 31 July.

We on the Conservative Benches have consistently championed the cause of smaller businesses. So I also propose to raise this year the qualifying profit limits for the small companies rate of corporation tax to the figures of £60,000 at the lower end and of £100,000 at the upper [column 258]end. This will go some way further than is necessary to maintain their real value.

In the tax field, however, there is one measure that will do more than anything else to encourage smaller businesses – indeed, businesses of every size. That is a major reduction in the burden of income tax.


That brings me to the keystone of our policy. Excessive rates of income tax bear a heavy responsibility for the lack-lustre performance of the British economy. We need, therefore, to cut income tax at all levels. For the reasons I have already explained, I cannot do as much this year as I should have liked, and I cannot do as much as is needed. But, although it is only a first instalment, there should be no doubt in anyone's mind that this Budget marks a turning point.

I begin with the higher rates of tax. The upper rates no longer affect only those on very high incomes. They apply – and Labour Members may find this surprising – not only to senior executives and middle managers in industry but increasingly to skilled workers, as well as to professional people and the proprietors of small businesses. These are the people upon whom so many of our hopes for initiative, greater enterprise and national prosperity must depend.

It is universally recognised, or almost universally recognised, that the present top rate of 83 per cent. on earned income is an absurdity. The rate of 98 per cent. on investment income is even worse. Such rates bring in very little revenue. But they kill incentive and are patently unjust. Some members of the previous Government recognised this, but they did nothing about it. I now propose an overdue measure of reform. The top rate on earned income will be cut from the present 83 per cent. to 60 per cent. This now top rate will apply to taxable income over £25,000. [Hon. Members: “Oh.”] If hon. Members will wait, I shall come to the other end. At the other end of the higher rate scale, the present threshold of £8,000 – and many skilled workers cross that threshold – is too low. I propose raising it to £10,000. Even at this figure, the starting point for taxation [column 259]at higher rates will be no higher in real terms than it was in 1973. Between £10,000 and £25,000, I propose a new scale of rates less steeply progressive than the old scale.

The top rate of 60 per cent. on earned income I now propose fulfils our commitment to reduce the top rate to the European average. For example, the top rate in France is 60 per cent., in Germany it is 56 per cent., and in the United States it is only 50 per cent. The new top rate will still be reached at an income level which is lower, and in some instances significantly lower, than is common elsewhere. This is a matter to which we may need to return on a future occasion.

So, while the reductions I propose are substantial, they are no more than the circumstances require. They will still in general leave people in the top income groups more highly taxed than people in corresponding positions in other industrialised countries. We have to compete with such countries, not only in the sale of goods and services but in attracting and retaining the talent required to run our industry efficiently and profitably and thereby provide the employment opportunities that our people so desperately need.

We have over the years spent far too much time and effort trying to “level down”. This is no good to anybody. It is much more important to have a successful and prosperous society, and we cannot have a successful and prosperous society without successful and prosperous individuals.

But it is not only at the top of the income range that the burden of income tax is particularly oppressive. The same is true for those on the lowest taxable incomes, where the tax system can help to ensure that some people are actually better off out of work. That is the importance of the tax thresholds, to which I turn next. The increases proposed in the April Finance Act, which were not of course implemented, were plainly inadequate. I propose to double those increases. This means that the amount a single person can earn tax-free will go up not by £90 but by £180. The married allowance will go up not by £140 but by £280. A single person's tax-free earnings will [column 260]thus go up by nearly £3·50 a week. The amount that a married man can earn tax-free will go up by £5·38 a week. These increases in personal allowances are quite apart from the change that I have in mind for the basic rate of tax.

I have in fact three other changes to propose before I come to that. First, to help the elderly, the age allowance will be raised by £240 for the single person and £380 for the married person. These again are double the figures proposed in the April Finance Act. Last year the income limit for the full age allowance was £4,000. This year I propose raising it to £5,000, more than twice the increase proposed in the April Finance Act.

Secondly, I propose raising the threshold for the investment income surcharge. The justification for retaining the surcharge is itself debatable. Certainly there can be no argument but that it bites at far too low a level of income. Almost half the surcharge is paid by people over the age of 65. This is, moreover, a tax which falls with particular severity on those who have had to make provision for their retirement out of their savings and have no occupational pensions to fall back on. The undue severity of the tax was recognised by the previous Government, but they introduced no more than palliatives, in the form of a reduced rate applied to the first slice of income liable to the surcharge and a slightly higher threshold for those over 65. I propose instead to raise the threshold to £5,000 for everyone; the rate above that level will remain at 15 per cent. This approach goes further than is necessary to take the matter back to where it stood in 1972, and it combines a considerable simplification of the tax with a measure of justice that is long overdue.

Thirdly, I propose to implement immediately our election pledge to war widows. Provision will be made in the Finance Bill to exempt their pensions entirely from tax.

I come, finally, to the basic rate. For the great majority of taxpayers – some 21 million in all – it is the basic rate which determines their tax liability. It is the basic rate – plus, of course, the national insurance contributions – which represents the deterrent effect of tax on additional earnings, whether those extra earnings come from overtime or greater productivity or reflect greater skill or the [column 261]rewards of promotion. Everywhere one meets complaint and criticism that income tax erodes differentials, reduces the rewards of skilled workers and discourages effort, initiative and responsibility. This year I propose taking a first and significant step to deal with these complaints by reducing the rate from 33 per cent. to 30 per cent. Our long-term aim should surely be to reduce the basic rate of income tax to no more than 25 per cent.

The total cost of these income tax reductions, including the cost of increases in personal allowances proposed in April but not then implemented, will be £4,540 million in a full year. The lion's share, no less than £3,460 million or over three-quarters of the total, represents the cost of increasing the personal allowances and reducing the basic rate. The cost this year of all the income tax changes will be £3,500 million.

As a result of the increase in the tax thresholds, 1·3 million people who would otherwise have paid tax this year will not be required to do so. The number of people paying tax at the higher rates would have been 1·2 million. This will be virtually halved, to 650,000. The number liable to the investment income surcharge will be reduced to about a third of what it would have been – from 850,000 to 300,000. All these changes will simplify administration and reduce the work load on the Inland Revenue.

The changes in allowances will be implemented for most taxpayers on the first pay day after 12 July. The reduction in the rates of tax will be given effect as soon as new tax tables are ready in October.

A full year's income tax reductions will be received, even though my Budget is being presented two months or more after the start of the year. On this basis the income tax changes mean that for the married couple where the husband earns £100 a week, which is close to average earnings, there will be an increase in take-home pay averaged over the remainder of the financial year of over £4 a week. The increases in VAT and petrol duty will increase average family expenditure by about £2·75. So that, taking both the direct and indirect tax changes into account, the average family will be about £1·30 per week better off. Similarly, [column 262]where the husband earns £60 per week there will be a real gain of over 75p a week, while the position of the couple on £150 per week will improve by nearly £2 a week.

These reductions in the burden of income tax, which are as substantial as they are unprecedented, mean that wage and salary earners will have more money in their pockets to buy the goods and services they help to produce. True, the prices of a good many of these goods and services will be increased by my tax proposals. But we have done everything we can to ensure that every family in the land will have more money coming in to pay the increased bills. What is more, the choice of the way they spend their income will rest increasingly with people, and not with the Government.

These changes represent only the first stage in the major reduction in the burden of direct taxation that we are determined to make. I emphasise this point particularly for those who will be involved in pay bargaining in the year ahead. Take-home pay will be substantially increased by these unprecedented cuts in income tax. This will more than make good the price effects of higher spending taxes. Any further attempts to cover those price effects by higher pay claims will be utterly self-defeating. The money will simply not be there to finance higher pay as well as lower income tax. Any attempt to have it both ways will simply end up by threatening jobs and putting firms – on which jobs depend – out of business. That is why it is so important for this Budget to be considered as a whole.

I have stressed the urgent need for new policies to reverse the decline of the British economy. These policies start with our conviction that it is people and not Governments who create prosperity. This Budget seeks to reduce the role of Government. Government will spend less, Government will borrow less. This will lay the foundations for controlling inflation.

In today's world, higher prices for oil and petrol are inescapable. So, too, in the short run, are the consequences of the inflation that has afflicted us for so long. Until that is controlled, some check to the growth of output and employment is unavoidable.

[column 263]

That underlines the other half of the Budget strategy. It is not a give-away Budget. Indeed, it is not in the power of the Government to give anything away. However, it is an opportunity Budget. The shift from taxes on income to taxes on spending will widen choice and improve incentives. Above all, it will enlarge opportunities.

The Budget is designed to give the British people a greater opportunity than they have had for years to win a higher standard of living – for their country and for their families as well as for themselves. I dare to believe they will respond to the opportunity that I have offered them today.

Mr. Deputy Speaker: Under Standing Order No. 94, the first motion, entitled “Provisional Collection, of Taxes”, must be decided without debate. When that matter has been disposed of, I shall call on the Chancellor to move the motion entitled “Amendment of the Law”. It is on that motion that the Budget debate will take place today and on the succeeding days. The remaining motions will not be put until the end of the debate on Monday, and they will then be decided without debate.

Provisional Collection of Taxes

Motion made, and Question,

That pursuant to section 5 of the Provisional Collection of Taxes Act 1968 provisional statutory effect shall be given to the following Motions –

  1. Value added tax (Motion No. 2).

  2. Hydrocarbon oil etc. (Motion No. 3). – [Sir Geoffrey Howe.]

put forthwith, pursuant to Standing Order No. 94 (Ways and Means Motions), and agree, d to.


Amendment of the L, aw

Motion made, and Question proposed,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but, without prejudice to any authorisation by virtue of any other Resolution, this Resolution does not extend to the making of –

[column 264]
  1. any amendment with respect to value added tax so as to provide –

    1. for zero-rating or exempting any supply;

    2. for refunding any amount of tax;

    3. for reducing the rate at which tax is for the time being chargeable on any supply or importation otherwise than by reducing that rate in relation to all supplies and importations on which tax is for the time being chargeable at that rate; or

    4. for any relief other than relief applicable to goods of whatever description or services of whatever description; or

  2. any amendment relating to the surcharge imposed by the National Insurance Surcharge Act 1976 and applying to some only of the persons by or in respect of whom the surcharge is payable. – [Sir Geoffrey Howe.]