The Chancellor of the Exchequer (Sir Geoffrey Howe): The longest Budget speech that I have been able to trace was given by Mr Gladstone on 18 April 1953 – [Interruption.]
Mr Deputy Speaker: Order. Perhaps the Chancellor would like to start again.
Sir Geoffrey Howe: I am content, Mr Deputy Speaker, to recognise that, although Liberals have long lives, they do not live that long. The date to which I refer, of course, was 1853. The speech lasted for about 4¾ hours. The then Leader of the Opposition said of the speech:
“… it was so extensive that it is impossible, without consideration, to weigh its disadvantages and advantages”.
That could have its merits in certain circumstances. But I can assure the House that I shall not try to rival Mr Gladstone. Instead, I shall try to follow Disraeli, who delivered a Budget speech in 1867 lasting only 45 minutes. I am afraid that I cannot quite match that; but at least this will be one of the shortest – perhaps the shortest – of my Budget speeches, or at any rate the shortest so far. And that will not be its only attractive feature.
I begin, as last year, by making it clear that I shall today be proposing further significant cuts in the taxes paid both by businesses and by individuals. These proposals will be consistent with our medium-term strategy for effective control of the money supply, for lower public borrowing, and for further progress on inflation.
The requirement we saw, and the country accepted, in 1979, was for resolve, for purpose and for continuity. My proposals in this Budget are rooted in that same resolve, and will maintain that purpose, and that continuity. They are designed to further the living standards and employment opportunities of all our people and to sustain and advance the recovery for which we have laid the foundations.
In 1979 it was clear that the long-term decline of Britain's relative position in the world economy called for a fresh start, for a radical new beginning. And it soon became apparent, as the effects of the second oil price shock hit home, that that fresh start would have to be made in an international setting that was increasingly difficult.
Last year world output and trade were lower than generally expected. In the major industrial economies output fell; and more than 30 million of their people were unemployed.
Developing countries have faced similar difficulties. Weak markets for their products, high oil import costs and [column 135]high interest rates have led to a sharp rise in their short-term debt. They have had to cut their imports; and that has added to the fall in world trade.
It is worth recalling that in 1979–80 the world price of oil rose by about 2½ times, and that it was this sharp rise, coming in the aftermath of the 1973 surge, that triggered off the deepest economic recession the world has experienced since the war.
Now, however, there are signs that the worst of the problems of the world economy are beginning to abate.
Oil prices have now weakened. For the world as a whole this means lower inflation, and hence an encouragement to increased activity.
More important still, there are clear signs that the world is breaking the inflationary habits of the 1970s. In many countries the rate of increase in prices has fallen more steeply than expected.
At the same time, interest rates have declined substantially almost everywhere, including, of course, here. In the United States, though real interest rates remain high, three-month rates have almost halved from last summer's peaks.
Looking ahead, 1983 should see recovery in the major economies gathering pace as the year goes on. This should be accompanied by a recovery of world trade.
Even so, we cannot expect a year of trouble-free progress. Transition from a period of high inflation is bound to be uncomfortable, internationally as well as nationally. The process of adjustment by major debtor countries has to be encouraged, and world recovery nurtured and sustained.
There is a major task here for the international financial institutions, which deserve – indeed require – our full support. The need is not for blue-prints for new institutions but for increased commitment – political and financial – to the existing ones. That is why, as chairman of the Interim Committee of the International Monetary Fund, I worked this winter for an early increase in the resources available to the fund for lending to countries in difficulty, and why I pressed for a major increase. The decisions reached in the Interim Committee in February require ratification by national Parliaments, including this House. But their effect should be substantially to increase the usable resources at the fund's disposal – and I hope that the House will share my view that this is a wholly welcome development.
The agenda for international discussion remains a full one. Differences in performance by individual industrial countries remain wide and create tensions which are reflected in the foreign exchange markets. The threat of protectionism, which in the long run benefits nobody, continues to grow. The efforts of the United States Administration to cut back their daunting structural deficit are crucial to the prospects for interest rates and future inflation, and hence recovery prospects, for us all.
It is sometimes suggested that countries which have made most progress against inflation should speed the recovery process by a resort to reflation. But nothing could be more dangerous for recovery.
Lower inflation and lower interest rates are themselves the right foundations for economic recovery, a recovery which can be sustained. The days when Governments by spending more could guarantee to boost activity are far [column 136]behind us – as the right hon. Member for Cardiff, South-East (Mr Callaghan) pointed out almost seven years ago. But lower interest rates, and lower inflation, reduce costs and provide the opportunity for greater real growth of activity.
The prospect now is for just such a recovery. It will be gradual, but it should be steady, provided anti-inflationary gains are not thrown away; and the international consensus is that they must not be thrown away.
This is the heart of the strategy agreed at last year's Versailles summit and recently reaffirmed by the Interim Committee. Carrying it through will need persistence and political will, but it is backed by a broad measure of international commitment, on which we hope to build in the series of international meetings leading up to the Williamsburg summit.
THE DOMESTIC ECONOMY
At home as abroad, the need is for steadiness and resolve.
Government spending is being restrained. The public sector deficit, as a percentage of our domestic product, is now one of the smallest in the industrialised world. Monetary growth is towards the middle of the eight to 12 per cent. target range; and inflation, at 5 per cent., is lower than at any time since 1970.
Last year saw a surplus on our balance of payments current account of some £4 billion. In 1983, too, we now expect a significant surplus. Total official external debt now stands at around $12 billion compared with $22 billion when we took office. This overseas debt burden is now smaller in relation to our trade than at any time since the second world war.
In our own economy domestic demand has been growing – at almost 3 per cent. a year in real terms – since the spring of 1981. This is a stronger growth of demand than in most other industrial countries. Indeed, in the industrial world as a whole demand has tended to fall. With this weakness in overseas demand and a rise in our imports, total output in this country increased last year by only 0·5 per cent. This year we expect domestic demand to grow by over 3 per cent. and output to rise by some 2 per cent. This is likely to be in line with, or a little faster than, the projected growth in world output.
In the last quarter of 1982, output in the construction industry was 6 per cent. higher than a year before. In the three months to January housing starts were more than 13 per cent. up on the previous quarter. And for manufacturing industry too the prospects look better. After a slight fall last year, the current evidence suggests a rise in 1983. Figures published today show a 2½ per cent. rise in manufacturing production in January, which follows a 1 per cent. rise in December. All these are clear indicators of recovery, and should be welcomed in all parts of this House.[column 137]
Unemployment, however, remains intractably high, even although it has been rising more slowly than in 1980 or 1981. In many countries it has recently been rising faster than here. Over the past year, for example, it went up by 1·6 percentage points in the United States, by 2·3 percentage points in Germany, and by nearly 4 percentage points in the Netherlands, as against only 1·4 percentage points here.
Because unemployment throughout the Western world is likely to remain high for some time, we have established a wide range of programmes, designed to help particularly those without jobs who are bearing the sharpest pains of the long recession. These special employment and training measures will next year bring direct help to almost 750,000 people. We now propose to extend this help in four further ways.
First, some 90,000 men between the ages of 60 and 65 now have to register at an unemployment benefit office if they wish to secure contribution credits to protect their pension rights when they reach 65. From April, they will no longer have to do this. Even if those concerned subsequently take up part-time or low-paid work on earnings which fall below the lower earnings limit for contributions, their pension entitlement will be fully safeguarded.
Second, there are some 42,000 men over 60 who are registered as unemployed and on supplementary benefit but who have to wait a year, or until they reach 65, before they qualify for the higher long-term rate of benefit. From 1 June they will qualify for the higher rate as soon as they come on to supplementary benefit. For this purpose they will in effect be treated as if they had already reached retirement age.
Third, the job release scheme. As the House knows, this scheme allows men over 62 and women over 59 who so choose to retire early, and so to make room for employing someone else who wants a job. I can now announce a new scheme for part-time job release. It will apply to the same categories of older people who are willing to give up at least half their standard working week, so that someone else who is without a job can be taken on for the remaining half. The allowances will be paid at half the full-time rate. The scheme will take effect from 1 October and should provide part-time job opportunities for up to 40,000 more people who are at present unemployed.
Fourth, enterprise allowances. These encourage unemployed people to set up in business by paying £40 a week for their first year to offset their loss of unemployment benefit. Pilot schemes were set up in five local areas in early 1982. The response has been very encouraging and there is already evidence that many of the 2,000 or so new businesses created under the scheme are generating extra jobs. I can now announce that from 1 August to the end of March 1984 enterprise allowances will be available throughout the country, within an overall cash limit of £25 million in 1983–84. Individual allowances will run on for a full year, so that the scheme will cost a further £29 million in the next financial year. The net public expenditure cost is about two thirds of this gross cost. It should help some 25,000 unemployed peole to set up in business. We shall be monitoring the scheme closely, and I hope it will show a continuing benefit to those concerned and to the whole economy.[column 138]
The gross cost of these four measures is estimated at £55 million in 1983–84 and £55 million in 1984–85. In 1983–84 we shall be spending over £2 billion in all on the full rang of special employment and training measures.
There is one other matter which has, I know, been a cause of concern to hon. Members on both sides of the House. As the House will recall, the November 1980 uprating of unemployment benefit was abated by 5 per cent. We said then that we would review the position once the benefit was brought into tax. That happened in July last year. As my right hon. Friend the Secretary of State for Social Services said when the House last considered the issue, the Government accepted in principle the case for restoration of the abatement. It is right now to redeem that pledge. In the uprating that takes place in November this year, the abatement of unemployment benefit will be restored in full.
But it is not enough simply to mitigate the effects of the unemployment. It is our purpose as well to secure a sustainable growth in job opportunities. So we must look for a larger share of rising demand to be translated into British output and British jobs.
Progress on inflation is crucial to the prospects of higher output and lower unemployment. High inflation destroys savings, impairs efficiency and undermines stability. So lower inflation is good in itself. But it also underpins a return to lasting growth and to new jobs.
Lower inflation will lead to higher real demand and output, provided we hold to the medium-term financial strategy. Lower inflation helps consumer spending, as savers no longer have to put aside so much simply to maintain the real value of their capital.
Lower inflation encourages higher spending by companies, both on stocks and on investment. For lower inflation contributes to lower interest rates, so improving cash flow; and lower inflation helps keep down other costs. This is one reason why industrial profitability, though still by historic standards very low, has begun to recover. This too should encourage new investment and the creation of new jobs.
Lower inflation and interest rates also ease the burden of mortgage interest, helping house buyers and in turn house building.
With lower inflation the cash programmes of the public sector go further: they buy more goods and services.
Lower inflation will provide the stability and confidence needed for further progress in securing the improvement in Britain's economic performance needed to reverse the long years of relative decline.
Finally, of course, inflation has long been the enemy of good sense in pay bargaining, and so too the enemy of jobs. The understanding that Government will not finance higher inflation has done much – though still not enought – to bring common sense back into wage bargaining. The way in which excessive pay increases destroy jobs is now much more widely understood.
More moderate pay settlements combined with improved productivity are two of the reasons why last year, in a shrinking world market, British manufacturers succeeded in enlarging their market share. Still lower pay settlements and still higher productivity remain vital to our competitive position. Provided they come through, British [column 139]business is now better placed than for many years to make inroads into markets at home and overseas – and provided we go on achieving success against inflation.
Inflation was on a rising trend when we came to office. It peaked at some 22 per cent. in 1980. The reduction since then has been dramatic, with retail price inflation now down to 5 per cent. The benefits of this transformation are felt throughout the country – it results from the firmness and consistency of the policies we have pursued in the pasts four years.
We shall not change course. Downward pressure on inflation will be maintained. With the lower exchange rate some check in our progress now is unavoidable. In the fourth quarter of this year inflation in retail prices may for a time be running at about 6 per cent., a little above what it is now, but still substantially below its level of a year ago. And it seems likely that the rate of increase of the GDP deflator – which is a measure of prices across the whole economy – will continue to fall, from 7 per cent. in 1982–83 to 5½ per cent. next year.
The trend of rising inflation that appeared irresistible has been decisively broken. We are now certain to be the first Government for a quarter of a century to achieve a lower average level of inflation than did their predecessor. In the next Parliament it will be our purpose to do even better.
One weapon we shall certainly continue to use is effective monetary policy. That nonetary policy has a key part to play in the fight against inflation is recognised by the markets and by Governments abroad. However much they nay deny it now, it was, of course, a pillar of the last Government's counter-inflation policy – and rightly so.
In judging manetary conditions we look at the measures of money supply and at other financial indicators such as the exchange rate, real interest rates, and of course at progress in reducing inflation itself. The Red Book includes a full discussion of these matters. Until now, Chancellors have published their thoughts rather like Chairman Mao, in a little Red Book. This year, however, the book is larger and very much easier reading. There are no more pages and much more information at almost the same price. I shall only try to summarise it at this stage.
Since the last Budget, financial conditions have developed much as I foreshadowed. In the year to February, the growth of all three target aggregates was within the target range of 8 to 12 per cent. Other financial indicators also pointed to moderately restrictive monetary conditions.
But with the satisfactory development of financial conditions and rapid progress in reducing inflation a significant fall in interest rates was possible. By mid-November, short-term rates had fallen to 9 per cent. They subsequently moved up to around 11 per cent., but they are still very substantially below the 16 per cent. of November 1981. The House will have seen that, following the recent easing in market rates, there has this morning been a further cut in bank base rates.
For most of the year the exchange rate was strong. The weakening in November and December seemed mainly to reflect external factors such as concern about oil prices and sharp movements in the world's other major currencies. Opposition statements and election uncertanties, here and abroad, may also have played a part in currency movements.[column 140]
But this winter's movements in sterling rates were certainly not due to any laxity in the Government's financial policy. On the contrary, our monetary and fiscal objectives were achieved. Provided we continue to meet them – and we are determined to do so – our policies give no reason to expect anything more than a temporary rise in inflation from the fall in the exchange rate that has taken place.
The lower exchange rate gives industry an opportunity to improve its competitiveness, but only if other costs are tightly restrained. I make no apology for repeating that this requires still greater moderation in pay bargaining. Without that there would be only a temporary improvement in our competitive position and no long-term help in providing a sustainable basis for the improvement in output and employment that is now within our grasp.
That is why I cannot emphasise too strongly our view that devaluation brought about by monetary and fiscal laxity would be damaging and that to seek it as a deliberate act of policy would be a grave mistake. It would be a signal to the world of a willingness to accommodate rising inflation – inflation that would undoubtedly be fuelled by demands for higher wages to offset its effects. Confidence would collapse and jobs would be destroyed.
That is not the way we intend to go. That is why, by contrast, last year's medium-term financial strategy again set out a declining path for monetary growth in future years. After growth of 8 per cent. to 12 per cent. in 1982–83, a target of 7 per cent. to 11 per cent. was suggested for 1983–84. I confirm now that the 1983–84 target will indeed be 7 per cent. to 11 per cent. Once again it will apply to both broad and narrow measures of money, though, as I said last year, M1 may for a time grow rather faster than indicated by the range. Given the prospect for inflation, this range gives scope for a healthy rise in output.
The establishment of the medium-term financial strategy has been more than justified by its value as a framework of fiscal and monetary discipline. Another innovation has similarly proved its worth, namely, our decision to diversify our funding policy.
We have made available indexed as well as conventional assets; and we have secured a larger contribution from the personal sector in the form of national savings. I intend to continue this policy.
The Department for National Savings is close to achieving this year's target of £3 billion. For the coming year I am again setting a target of £3 billion. Nearly £2 billion worth of indexed gilts have been issued over the past year and it has been possible to dispense almost completely with long-term fixed interest stocks, which has helped to bring long rates down very nearly as much as short rates.
PUBLIC SECTOR BORROWING
Control of money needs to be supported by firm control of public sector borrowing, otherwise the result is to push up interest rates and create strains that sooner or later prove intolerable. Other countries understand this. All too many have had to learn the hard way.
A substantial reduction in the trend of public sector borrowing over the medium term is a necessary part of the process of reducing inflation. We have made good progress. During the latter half of the 1970s public borrowing represented on average about 6 per cent. of [column 141]gross domestic product. In 1975–76 the figure was nearly 10 per cent. By 1981–82 it had fallen to 3½ per cent. of GDP.
For the year now ending I budgeted for a public sector borrowing requirement of £9½ billion. The outturn is likely to be substantially lower, principally because oil revenues during the current year have been very much larger than could have been expected. The latest estimate of the outturn for this year's borrowing requirement is about £7½ billion – or 2¾ per cent. of GDP. However, the year is not yet over and there are large sums on the expenditure side yet to be brought to account and on the revenue side to be collected. So this year's outturn figure is still subject to a considerable margin of error.
For 1983–84 last year's Budget Statement suggested a PSBR of 2¾ per cent. of GDP as consistent with the desired trend to lower borrowing. That is equivalent to about £8 billion at the level of money GDP now forecast. In judging whether that figure is still appropriate I have taken account of developments over the past year and of the main uncertainties which now confront us. On interest rate grounds, there is a clear case for continued fiscal restraint. Interest rates, though lower than they were, are still undesirably high both in nominal and in real terms. The fact that the exchange rate has now moved to a lower level eases the financial pressures on companies, but we need to remember that holding to the medium term financial strategy as inflation falls is the best way of helping the recovery of output.
I have also had to consider the implications of the recent fall in North sea and other oil prices. Of course, lower oil prices reduce the value of our own oil production. But North sea oil accounts for only 5 per cent. of our national income and tax on it for only some 6 per cent. of Government revenues. Moreover, the health of a much larger part of our national economy depends on the state of the world economy. Though sharp swings in the oil price are in no one's interest, moderate reductions mean lower inflation abroad and lower prices here. The fall in the general level of world oil prices is therefore to be welcomed. A more prosperous world will in time mean more output and jobs in Britain.
It follows from this that it would be unnecessary, as well as impractical, to react to every deviation in the oil market by changing the general level of taxes. The forecast published in the Red Book reflects the prices currently offered by BNOC to North sea producers. Clearly there could be a change in oil prices sufficient to affect the balance of revenue and expenditure in the Budget, though not all the effects would be one way. There is no simple arithmetical guide for dealing with this, let alone allowing for it in advance. Much would depend on the extent of the change and the attendant circumstances. If any further reduction in oil prices seemed likely to compromise the success of our economic strategy, I would be ready to take appropriate corrective action; but the lesson for today is that it is prudent to keep planned borrowing down.
Taking these factors into account, I have decided to hold to the previous plan and provide for a PSBR in 1983–84 of 2¾ per cent. of GDP – that is, some £8 billion. Last autumn I announced measures with a revenue cost of some £1 billion in 1983–84. Most of this was directed to reducing the burden on private industry and commerce. It included a cut in the national insurance surcharge.
After allowing for that and for the other changes announced in November, the latest forecasts suggest that [column 142]a borrowing requirement of £8 billion in 1983–84 permits further real tax cuts with a net cost to the PSBR of some £1½ billion. The full year revenue costs of my proposals will be rather larger than that.
The Red Book gives revenue and expenditure projections for the period up to 1985–86. These allow for a further reduction in public sector borrowing as a percentage of GDP over the medium term. There is of course no certainty about the precise figures, but they show how lower borrowing can be combined with lower taxes within the framework of policies designed to reduce both inflation and interest rates. This was indeed illustrated by my last Budget.
Central to the restraint of borrowing is the restraint of public expenditure, and the key to effective control of public expenditure is that finance must determine expenditure, not expenditure finance.
The House debated last week the public expenditure White Paper which set out our plans for the years to 1985–86. Public expenditure is being held within the levels set in earlier plans. The ratio of public expenditure to GDP, which is the measure of the burden which public expenditure places on the rest of the economy, has been reduced from 44½ per cent. in 1981–82 to a planned 43½ per cent. in 1983–84.
In working to get and keep public spending down we have been helped by an important institutional innovation which we have introduced – cash planning. Improved control of expenditure has been an essential factor in making possible the tax reductions I am announcing today.
The additions to certain public spending programmes which I am announcing today will all be met from the contingency reserve and so will not add to the planned total of expenditure.
We have also maintained a strict control over the running costs of Government, in particular manpower. By the end of this month we shall have reduced the numbers of the Civil Service to 651,000 – a fall of 80,000 since 1979. The target of 630,000 by April 1984 which we set ourselves on taking office and which some thought unattainable is thus now within reach. Civil Service numbers will by next year be lower than at any time since the war.
SOCIAL SECURITY AND CHARITIES
I now turn to social security. This is much the biggest single element in public expenditure – more than one-quarter of the total.
About half of social security expenditure is on benefits for pensioners. The costs are borne mainly by contributors and we had in November to announce further increases in national insurance contribution payments, which take effect from next month.
The House will remember that, because prices have been falling faster than expected, the provision in last November's uprating for the rise in prices in fact exceeded it by 2·7 per cent.
The forecast method of uprating, which gave rise to this situation, has never worked well, for a forecast made at Budget time of what the rate of inflation will be at the time the uprating takes place in the following November is necessarily uncertain. Increases can therefore be larger or smaller than intended. There have been years when prices [column 143]have been under-estimated, as in 1981, when there was a 2 per cent. underprovision, which we made good in the following year, and other years such as 1980 and 1982, when the error has gone the other way. In each case there has necessarily been a year's delay before the error of the previous year could be corrected.
The system of trying to forecast inflation, introduced in 1976, is a fragile basis for calculations of such importance to millions of our fellow citizens. Given the experience of the past seven years, the Government believe that it would now be right to restore the more certain system that prevailed before 1976. This is the system by which benefit upratings are calculated on what has actually happened to prices, rather than on what might happen in future – if the forecast proves right.
From this November, therefore, we shall return to the historic, or actual, method. The necessary legislation will be introduced immediately.
The uprating this November will be based on the rise in prices in the 12 months to May of this year. That figure will be announced by the Department of Employment in the usual way, and will be the basis for the uprating statement as soon as possible after that. We have chosen the May figure because it is the latest month we can use as the basis of the calculation and still make sure that all recipients get their increase in November.
The uprating will be based on whatever the May figure turns out to be. At this stage, of course, it is impossible to say exactly what it will be.
It seems likely, however, to be in the region of 4 per cent. Of course, in November, as I have already told the House, the annual rate of inflation may for a time be running at about 6 per cent., but if we had retained the old system, and taken full account of last year's 2·7 per cent. overpayment, the increase in benefits would have been significantly smaller than is now proposed.
There will be no question of asking pensioners to return any of the pension money they have already received, no question of any so-called clawback. Beneficiaries will retain the full benefit of the extra payment they are now receiving; and part of it is likely to continue into 1984.
Linked public service pensions will be raised in November by the same percentage as benefits. For unemployment benefit, the increase will be in addition to the restoration of the 5 per cent. abatement which I have already mentioned.
On the basis I have described, the position for pensioners over the lifetime of this Government is this. Between the November upratings of 1978 and 1983 prices are likely to have risen by some 70 per cent. and pensions by some 75 per cent. Our pledge to maintain the value of the pension over the lifetime of this Parliament will thus have been more than fulfilled.
There is one other social security benefit to which we attach no less significance. It plays a major part in easing the unemployment trap, and so in our strategy of improving incentives for everyone. It is important for families, and particularly for the low paid. Indeed, it is the benefit which provides the greatest help to many of the poorest families in the country. I refer, of course, to child benefit.
I am glad to be able to tell the House that from November 1983 the rate of child benefit will be increased from £5·85 to 6·50. One-parent benefit will be [column 144]correspondingly increased to £4·05. On the basis of our inflation forecast, both benefits will then be worth more than ever before. I know that the House, and the country, will welcome this news very warmly.
The Government also give special priority to help for the sick and disabled, and for widows, and I am proposing further measures to increase that help.
In my first Budget I exempted from tax war widows' pensions and widows' child dependency allowances. In 1980 I introduced a bereavement allowance to benefit widows in the tax year of their husband's death. However, because their income in that year is already covered by other allowances, many newly widowed women receive no financial benefit from that allowance. Accordingly, it will now be extended to cover the year after the husband's death as well, at a cost of some £30 million in a full year. This means that more than twice as many widows will benefit.
We also intend to provide significant new help for about 55,000 invalidity pensioners. Until now the so-called invalidity trap prevented them from receiving the long-term rate of supplementary benefit. I announced earlier that the unemployed over 60 will now be entitled to the long-term rate. We shall extend this concession to those over 60 who are sick and disabled, so that they, too, will qualify straight away for the long-term rate. In addition, I am glad to be able to tell the House that people under 60 who have been on incapacity benefits for a year will also qualify for the long-term rate. This will get rid of the invalidity trap – and quite right, too. There will also be an increase from £20 to £22·50 in the amount which disabled and chronically sick people can earn before their benefit is reduced.
While we need to ensure that social security benefits go to those most in need, I am concerned that we should not discourage people from saving. We shall therefore increase from £2,500 to £3,000 the limit above which savings disqualify people for supplementary benefit. There will be an additional disregard of £1,500 for the surrender value of life assurance policies. We shall also increase to £500 the corresponding limit for single payments of supplementary benefits to help with exceptional expenditure.
We will also help over 11,000 war pensioners by replacing the existing vehicle scheme by a more flexible and equitable cash allowance, set at a rate which will preserve the war pensioners' traditional preference over civilian benefits.
These measures, taken together with the increase in child benefit and one-parent benefit and the ending of the abatement of unemployment benefit, will cost over £140 million in 1983–84 and around £400 million in 1984–85. The increases over the existing provision in the social security programme will be charged to the contingency reserve. This is in addition to the cost of the extension of the long-term rate of supplementary benefit to the over-60s, to which I referred earlier.
But caring means more than cash. Many of the key needs, for example, of the elderly, are met by voluntary groups and charities. If they are to do all they can, we must help the helpers.
Once again we have been pressed to reimburse charities for VAT on their taxable purchases. But, however exhaustively and sympathetically we examine this proposal, the difficulties remain and cannot be swept aside. I have been able in previous years to extend VAT [column 145]reliefs for the disabled and charities serving them. But a VAT refund scheme would be expensive to operate and indiscriminate in its effects, benefiting not only those charities which do valuable work in the community but also – and sometimes disproportionately so – many other bodies with very limited or controversial aims which do not command public support. So, as before, I have been forced to conclude that we are right to channel our help in other ways.
But I intend to give some extra help. In 1980 I introduced substantial new tax reliefs for convenanted donations to charities, by allowing relief against higher rates of income tax up to a ceiling of £3,000 a year; and last year I increased the limit on exemption from capital transfer tax for gifts made within a year of death from £200,000 to £250,000. I propose now to carry these two measures further by raising to £5,000 the ceiling on higher rate relief for gifts made by deed of covenant and by abolishing the ceiling on exemption from capital transfer tax for charitable bequests. All outright gifts and bequests to charities will now be entirely free from CTT.
I have had representations about the position of companies which would like to second their staff, with pay, to charities. At present the employee's salary is not allowable for tax because it is not an expense incurred by the company wholly and exclusively for the purpose of its business. For normal business expenses we must continue to stick to that general principle. But I am satisfied that it is right to make an exception in this limited case. Companies which lend staff to work for charities and continue to pay their salaries will now be able to treat the cost as an allowable expense for tax purposes.
HOME OWNERSHIP, HOUSING AND CONSTRUCTION
I come now to housing and the construction industry. The whole House is anxious to see more activity in this sector. Within the public expenditure plans there is provision for capital expenditure on construction in 1983–84 of over £10 billion, a 10 per cent. increase on this year's expected outturn. We want this money used effectively for the purpose for which it is intended.
One of our highest priorities has always been the extension of home ownership. This Government have done more than any other to encourage this. Since we came to office almost half a million public sector tenants have bought their homes; and the fall in mortgage rates over the past year has made it easier for first-time buyers to meet the costs of a mortgage.
But it is now clear that the £25,000 limit on mortgage interest tax relief is beginning to hinder a growing number of families who want to buy their first home, or to move. I have therefore decided to increase the limit – this figure may reassure the right hon. Member for Norwich, North (Mr Ennals) – to £30,000. This will cost some £50 million in 1983–84. It will help potential home owners and the construction industry alike. At the same time, I intend to remove an anomaly whereby a borrower may get tax relief in excess of the ceiling for both an ordinary mortgage and an interest-free loan from his employer.
I also propose to extend mortgage interest relief of the kind already enjoyed by many employees, whose duties prevent them from living in their own homes, to self-employed people, like tenant farmers and tenant licensees, who have a contractual requirement to live in [column 146]accommodation provided for them but who are also buying their own homes. This will be accompanied by a similar extension of the capital gains tax relief applying to a private residence.
We want to help people not only to own their own homes but also to keep them in good repair. Last year I announced a major attack on disrepair by increasing the rates of repairs grants. This has proved very successful. Expenditure in 1982–83 will be twice that in 1981–82 and a further increase is expected next year.
We have already announced that the higher rates are to continue until the end of 1983–84; and local authorities have been told they may spend without limit on all improvement grants next year. To ensure that we get the greatest impact from this initiative, the limits on expenditure eligible for grant will be increased by 20 per cent.
Our main aim, of course, is to help people to help themselves. But there are some areas, particularly in the inner cities, where decay in the private housing stock is so bad that concerted action is needed. We are encouraging local authorities to tackle such areas by the process known as enveloping – where the authority repairs the external fabric of whole terraces or streets of houses on behalf of the owners. This has proved a cost-effective way of improving an area, and we will be allowing local authorities to undertake additional expenditure in 1983–84 on any approved enveloping scheme.
These two measures are likely to lead to additional expenditure of some £60 million in 1983–84. In addition, my right hon. Friend the Secretary of State for the Environment is today announcing further measures to encourage local authorities to make full use of the resources available to them for capital investment.
Today I can announce three further steps to help the construction industry.
First, in 1981 I introduced a scheme to defer development land tax on developments for the owners' own use. The scheme, which is due to end in April 1984, has proved valuable, and I propose to extend it to April 1986, at a cost of £4 million in a full year.
Secondly, stock relief will from today be available for houses accepted by builders in part exchange on the sale of a new house for the personal use of an individual or his family. This will cost £5 million in a full year.
Thirdly, I propose to increase from 10 per cent. to 25 per cent. the proportion of office space in buildings qualifying for the industrial buildings allowance – an allowance which I increased in 1981. The cost will be about £25 million in a full year.
I come now to the indirect taxes.
I propose no change in the present rate of value added tax.
In successive Budgets I have sought to establish the sensible presumption that the excise duties should be adjusted broadly in line with the movement of prices from one year to the next. This is essential if we are to maintain the right balance between direct and indirect taxes.
This year, too, I intend to follow the same approach. But our success in reducing inflation means that the increases I shall be announcing will be much smaller than in recent years. The additional revenue I shall be seeking [column 147]from duty changes this year is about half of the comparable figure in 1980 and 1982 and about a quarter of that in 1981.
I start with the duties on alcoholic drinks. I propose to increase the duties from midnight tonight by amounts which represent, including VAT, about 25p on a bottle of spirits, 5p on a bottle of table wine, 7p on a bottle of sherry and 1p on the price of a typical pint of beer. On cider, which is increasingly competing with beer, I propose a similar increase of 1p a pint.
As for tobacco, I propose to increase the duty by the equivalent, including VAT, of 3p on the price of a packet of 20 cigarettes. There will be consequential increases for cigars and hand-rolling tobacco, but no increase for pipe tobacco. That is not just in deference either to my hon. Friend the Member for Birmingham, Selly Oak (Mr Beaumont-Dark) or to the right hon. Member for Huyton (Sir H. Wilson), but it gives me the opportunity to reassure the right hon. Member for Huyton that the pipe in his pocket has not been devalued. These changes will take effect from midnight on Thursday.
Next, the oil duties. I am conscious of the concern felt by a number of my hon. Friends about the effects of increases in duties on petrol and derv. But at a time when world oil prices are falling it would not be right to allow the real value of the duties to be eroded significantly. I propose therefore to increase the duty on petrol by about 4p a gallon, including VAT. In the case of derv I propose an increase, including VAT, of about 3p a gallon. These changes will take effect for oil delivered from refineries and warehouses from 6 pm tonight.
As in the last two years, I propose no change in the rate of duty on heavy fuel oil. The real burden of this duty will thus have been reduced since 1980 by some 20 per cent. This will be of considerable continuing assistance to industry, since it will help to hold down its energy costs.
I also propose a number of changes in the rates of vehicle excise duty. For cars and light vans the duty will be increased by £5, from £80 to £85. On goods vehicles, the new duty structure introduced last year allows me to spread the burden more fairly. In order to bring the rates of duty more nearly into line with the costs the various categories of lorry impose on the road system, I propose to increase the duty on some 190,000 heavy vehicles. This means that I shall, on the same lines, be able to reduce by approximately 10 per cent. the rates of duty on some 315,000 lighter commercial vehicles. These changes will take effect from tomorrow.
The total effect of all the changes in excise duties will be to raise additional revenue of some £600 million a year. But let me emphasise again that this implies virtually no change in the real burden of indirect taxes in 1983–84. The immediate effect will be to add about 0·4 per cent. to the overall level of prices. This has been taken fully into account in the price forecasts which I have given to the House.[column 148]
I come now to North sea tax. The development of the North sea is a notable achievement of private enterprise and the result of a huge co-operative effort involving hundreds of companies and thousands of people. We want this to continue into the future, despite changes in oilfield economics. Tax is not the only factor in sustaining North sea potential. Steps taken by the industry to cut costs and the future level of oil prices will be at least as important. But the tax structure must adapt as well.
I am therefore proposing a substantially more favourable regime to assist the companies as they move on to develop new fields, and, in order to help finance new activity, a package of relief on current fields. The industry will benefit from these changes by more than £800 million over the next four years, starting with £115 million in 1983–84.
To encourage further exploration and appraisal, I propose immediate relief against petroleum revenue tax for expenditure incurred after today in searching for oil and appraising discovered reserves.
For future fields I propose two important new incentives. First, the oil allowance, which is the quantity of oil production exempted from PRT, will be doubled for such fields. Secondly, my right hon. Friend the Secretary of State for Energy will be taking steps to abolish royalties for these fields. The changes will apply to future fields where development consent has been given on or after 1 April 1982, with the exception of the relatively more profitable southern basin and onshore fields. I am ready to discuss with the industry whether there is a need to extend these incentives to the southern basin fields. If I were to be persuaded of the need, any extension would be backdated to development consents issued after today.
Most existing fields make good profits, but to improve current cash flow I have decided progressively to phase out advance petroleum revenue tax. As a start, the 20 per cent. rate will be reduced to 15 per cent. from 1 July, and APRT will disappear completely by the end of 1986.
An Inland Revenue press release will give further details, and also describe other proposed changes in oil taxation. They include, following the consultative document published last May, proposals on PRT reliefs for expenditure on shared assets such as pipelines, and for charging related receipts. The proposals will give significant additional relief on expenditure and will exempt tariffs on 500,000 tonnes of oil a year from each field using a pipeline. This will encourage the shared use of these assets.
I believe that my proposals will provide the industry with the right fiscal incentives for the further successful development of the country's North sea resources.[column 149]
NATIONAL INSURANCE SURCHARGE AND COMPANY TAXATION
From one key industry I turn now to business and industry as a whole. Our living standards and jobs depend on our ability to sell and compete, producing the right goods and services at the right time and the right price. The main responsibility for achieving this lies with industry and commerce. But the Government can help by reducing the burdens they place on business. These can be twofold. High inflation and excessive public borrowing have in the past kept interest rates and business costs higher than they need have been. We have made progress in putting that right. But Government also impose direct burdens on business, and here too we have acted to help cut costs. I have given high priority to reducing the national insurance surcharge, the tax on jobs first introduced and then increased by our Labour predecessors.
In last year's Budget, I cut NIS from 3·5 per cent. to 2·5 per cent. In November I announced that, for 1983–84, the rate would be further cut to 1·5 per cent. On top of this I made special arrangements to enable half of that further cut of 1 per cent. to be brought forward into 1982–83.
I now propose that the rate be reduced from 1·5 per cent. to 1 per cent. from August 1983. As before, the benefits will be confined to the private sector. This cut is worth another £215 million in 1983–84 and nearly £400 million in a full year.
The surcharge was 3·5 per cent. when this Government took office. We are now well on the way to abolishing it. The reduction from 3·5 per cent. to 1 per cent. will be worth nearly £2 billion to private business in a full year.
On corporation tax, we issued a Green Paper over a year ago. I am grateful for the many thoughtful responses, which we have examined carefully. There is one impression that stands out, and that is the overwhelming desire on the part of industry for stability in the corporation tax regime. I recognise the force in this. Change is not costless. I have therefore concluded that there should be no change in the broad structure of the present arrangements. As regards the taxation of inflationary profits, I await the outcome of the accountancy profession's further considerations.
There are, however, some useful changes on which I can make a start today.
At present, advance corporation tax can be carried back two years to be set against corporation tax. I propose to extend this over a period to six years. I also propose that the incidental business costs of issuing acceptance credits and of issuing certain convertible loan stocks should be allowable expenses for corporation tax purposes. There are other areas where we need to make progress, including the tax treatment of groups and capital allowances for the mineral extraction industries. I am authorising the Inland Revenue to look further at these issues, and to consult on them where necessary.
On the taxation of international business, I have considered carefully the responses to the latest round of consultation. I have decided not to proceed this year with measures concerning company residence and upstream loans. Both need further consideration.
On tax havens, however, I propose to move clauses which take account of the recent consultations. These will not come into effect until April 1984.
This change should be considered alongside one other proposal that flows from the corporation tax Green Paper. [column 150]At present, credit for foreign tax on overseas income is only allowed against such part of a company's corporation tax liability as remains after deduction of ACT. As a result of representations received in response to the Green Paper, I propose that from April 1984 this double tax relief should be allowed against the full corporation tax liability before ACT is deducted.
As I have said, my proposals on tax havens and on ACT and double tax relief have to be seen together. Between them they will not involve any increase in the total burden of tax on international business, but they do mean a switch in the tax burden away from those who remit profits home and on to those who accumulate surplus cash balances in tax havens overseas. I am sure that the House will agree that this is right.
To turn to a different area, I announce each year the future scale rates for measuring the benefits from company cars. Recent increases have been at a rate of 20 per cent., but the levels still fall short of any objective measure of the true benefit. This year I am proposing further increases with effect from April 1984; but they will be held to about 15 per cent. These increases will also apply from the same date to the new car fuel scales which come into operation next month.
I have also decided to legislate to bring back into tax the benefit from scholarships provided by employers for the children of their higher paid employees. There will be a transitional exemption for awards made before today so that scholarship income in respect of an existing award will continue to be exempt until the child leaves his present school or college.
I propose, too, to remove an anomaly by which some people have their tax bills artificially reduced because their employers do not account for PAYE at the right time and then pay over too little. I also propose with effect from April 1984 to increase substantially the tax measure of the benefit gained by an employee who occupies rent free, or at a very low rent, expensive accommodation owned by his employer.
The House will be aware of instances of tax avoidance through the exploitation of group relief, and through the exploitation of so-called second hand bonds. I propose legislation to deal with these abuses and also to improve the arrangements for collecting DLT on disposals by non-residents.
Now I wish to say a word about banks. I said last year that we would be giving further thought to the problem of how best to ensure a sufficient contribution to tax revenues by the banking sector. I have examined the position with great care in the light of current circumstances, and have concluded that it would not this year be sensible to tighten the tax regime for banks.
Finally, for the company sector, I propose some changes that are designed specifically to help small and medium-sized companies. At present the so-called small companies rate of corporation tax is 40 per cent. and applies to taxable profits up to £90,000. The 52 per cent. rate is payable at £225,000. I propose to reduce the 40 per cent. rate to 38 per cent., to raise the lower limit of £90,000 to £100,000, and to raise the upper limit from £225,000 to £500,000.
Between these two limits profits are subject to a marginal rate which stood at just over 66 per cent. when this Government came into office. I have already reduced [column 151]it to 60 per cent. The changes that I am proposing today will bring it down to 55·5 per cent. – only a little above the main 52 per cent. rate.
These changes will concentrate the help that I can give on the many small and medium-sized companies with taxable profits of up to £500,000. The cost will be £40 million in 1983–84 and £70 million in a full year.
Small and medium-sized enterprises are a major source of new wealth for the nation and, above all, of new jobs. I shall, therefore, propose today a further series of measures which will foster their growth, greatly extending those which I have already introduced, and whose results are already evident. I am told that Britain now offers a more attractive tax environment than Germany for venture capital and for the microelectronics revolution. That was not so five years ago.
I now propose further action in a number of areas.
I want more people to share in the ownership of the companies for which they work. It is both a good incentive and a good way for people to build up a capital stake. The measures so far introduced have already brought us to the position where about 250,000 employees receive shares each year.
But I want to make these employee profit-sharing schemes more attractive and more flexible, while still open to all employees. Already companies can give tax-free shares to employees each year up to the value of £1,250. I propose to add an alternative limit of 10 per cent. of the employee's earnings, up to a maximum of £5,000. This new freedom will provide still further encouragement to management, upon whom so much depends.
Share options for senior managers also provide an important incentive. Last year I introduced arrangements to spread the income tax burden that can arise when an option is exercised. I propose this year to increase the instalment period from three years to five years.
Save-as-you-earn linked share option schemes already cover over 100,000 employees. The monthly limit on contributions with tax relief now stands at £50. In order to encourage further growth I propose increasing it to £75. The total cost of all these share incentive measures will be £20 million in 1983–84 and some £35 million in a full year.
I also want to ease the path for employees of a company who seek to buy the business for which they work. The transformation that followed the employee buy-out of the National Freight Company shows how valuable this can be. In order to help those who borrowed to take part in this buy-out, and to encourage similar success, I propose that where an employee-controlled company is being set up the employees should benefit from interest relief on loans they take out to buy shares in it.
Capital taxes can suffocate enterprise. Last year we took the major step of indexing capital gains. It is clearly appropriate to provide a period of stability to let the new structure settle in. We have already announced that administrative measures will be introduced to help large institutional investors. I now propose that, as the legislation provides, the annual exempt amounts for individuals and for trustees should be increased in line with inflation; and I propose to increase to £20,000 the limits on the relief for small part disposals of land and for residential letting.[column 152]
I propose to double the present retirement relief, raising it to £100,000. This will further encourage entrepreneurs to keep money in their business where it can work to best effect. I have received a number of representations that other features of the present relief cause difficulty, and we shall therefore be conducting further consultations later this year.
The cost of the CGT measures I have announced will be £15 million in a full year. There will be no cost in 1983–84.
On capital transfer tax, I propose to increase the threshold and rate bands broadly in line with indexation. As a result the threshold will rise from £55,000 to £60,000.
I am concerned that the prospect of capital transfer tax may still discourage those who are contemplating investing capital in small businesses. It may also be one of the factors reducing the number of farms available for letting. I therefore propose to increase relief for minority shareholders in unquoted companies and for let agricultural land from 20 per cent. to 30 per cent.
The cost of these changes in capital transfer tax will be £20 million in 1983–84 and £55 million in a full year. Other minor changes to CTT and CGT are set out in Inland Revenue press notices.
I propose two other measures to help small firms. The VAT registration threshold will be increased with effect from midnight tonight from £17,000 to £18,000, at a cost of £5 million in a full year.
I propose to increase from £200 to £1,000 the de minimis limit for assessment of investment income apportioned to the members of a close company.
I come to the question of innovation and technology. I have already announced an increase in the proportion of office space in buildings qualifying for the industrial buildings allowance. This additional flexibility will be of particular value in the high technology industries, which often need relatively large amounts of space for design and computer-based activities. It will cost about £25 million in a full year. On the tax side I also propose to extend the 100 per cent. first year allowance for rented teletext receivers until May 1984, and for British films until March 1987. The full year cost of these two measures will be £10 million and £30 million respectively.
On the public expenditure side, I propose a range of measures for the encouragement of industry and enterprise worth £185 million over the next three years.
The west midlands has been particularly hard hit by the current recession. Small engineering firms are even more important in that region than in other parts of the economy. They need help to modernise and rebuild their strength. I propose, therefore, to make available an extra £100 million over the next three years to enable my right hon. Friend the Secretary of State for Industry to reopen the small engineering firms investment scheme.
The scheme is already a proven success: 1,750 applications were received last year and more than 1,400 offers of assistance have been made. It is open to qualifying firms in any area, but, as one would expect, a high proportion of the first allocation went to firms in the west midlands. This new, and much larger, allocation should bring substantial further help to the region, as well as to small engineering firms generally.
In information technology, further assis, tance will be available to enable firms to evaluate the benefits of computer aids for production management, and for the development of innovative software products.[column 153]
At the moment grants are available for research and development, but there is no special facility for encouraging the marketing and investment stages of the innovation process. To fill this gap a new scheme will be introduced, which will be of special value to small and medium-sized companies.
There will also be an increase in expenditure on the Department of Industry's manufacturing and design advisory services. These provide small firms with a free introduction to private sector consultancy services, and have proved highly successful.
My right hon. Friend the Secretary of State for Industry may have an opportunity, later in this debate, to describe these measures in more detail. Taken together with measures previously announced, they will mean that Government assistance on new technology and innovation will have doubled since this Government took office.
Last year I extended the small workshop scheme by two years for very small industrial units. The scheme is proving very effective in promoting the provision of premises for new businesses. This year I want to encourage the conversion of more old buildings into productive workshops. I propose to allow all such units in a single converted building to qualify for 100 per cent. first year allowances if on average they meet the size requirements.
Now I come to the important matter of finance for business, on which I have major improvements to propose.
Companies and monetary policy alike would both benefit from a revival of the corporate bond market. Lower long-term interest rates are the key to this. But there are also a number of ways of giving companies greater flexibility in the nature and timing of the bonds they issue.
A consultative document on deep discount stock was issued on 12 January. It set out a range of options, and I am grateful to those who responded.
I now propose to introduce attractive tax arrangements for this stock. The borrower will get relief on an appropriate accruals basis, but the investor will pay tax only at redemption or on sale. There was considerable support for such tax treatment.
Companies will still be able to issue conventional or indexed bonds. My proposal extends their range of options.
I also propose certain reliefs to enable companies to issue Eurobonds in this country and to ensure that full tax relief is available for discounts paid on acceptance credits.
We shall be issuing on 21 March a consultative document on the possibilities for the simplification of stamp duty.
The loan guarantee scheme is another important innovation that we have introduced. My hon. Friend the Under-Secretary of State for Industry has conducted a thorough review of the scheme with the help of outside consultants. He will be making a full statement tomorrow. It is clear that the scheme has usefully encouraged lending to the small firms sector. Nearly £300 million has been lent to some 9,000 companies, about half of them new businesses. As a result, the scheme is now close to its present ceiling of £300 million. This ceiling will therefore be raised to £600 million to enable the scheme to run its full three-year course to May 1984, and we may need to seek the House's approval for an increase in the statutory limit for this purpose.
On 3 March I informed the House about the publication of the report of the working party on free ports, under the [column 154]chairmanship of my hon. Friend the Economic Secretary to the Treasury. I can now tell the House that the Government accepts the report and will implement its recommendations. Legislation will therefore be introduced in the Finance Bill to enable selected free port sites to be designated.
Free ports are a new trading concept for the United Kingdom and I regard it as essential to make a careful test of the facilities they offer. As the report recommended, the first step is to establish free ports on an experimental basis in a limited number of locations. Widespread consultation will be needed before the sites are chosen.
Last, but far from least, the business start-up scheme. This scheme, announced in my 1981 Budget statement, offers uniquely generous tax incentives to outside investors in small companies. It is not bettered anywhere in the world. But I now intend to better it.
When I introduced the scheme I thought it right to give priority to investment in business start-ups, where there is often the greatest difficulty in raising outside equity finance.
I now propose a major extension of the scheme. It was due to end in April 1984. The life of the new, extended scheme will run to April 1987. From 6 April the coverage will be greatly widened to include not only new companies but qualifying established unquoted trading companies as well. I propose also to double the allowable maximum investment in any year from £20,000 to £40,000. A number of other changes will be made to improve the scheme. In particular, the 50 per cent. limit on qualifying shares will be dropped. The cost of these changes is difficult to estimate, but could be £75 million in a full year.
Those proposals will transform the position of unquoted trading companies seeking outside equity. It is a further move towards removing the bias in the tax system against the personal shareholder, and a further measure to encourage wider share ownership. By concentrating help on those companies which do not have ready access to outside capital the scheme will assist many more small and medium companies to realise their undoubted potential for growth. The new, extended scheme will be known as the business expansion scheme.
Our constant concern as a Government has been to improve the competitive environment for businesses and people who work in them. These proposals mark a further major step in that direction.
In judging the right balance to strike in this Budget I have taken into account the measures I announced in the autumn which will directly reduce business costs. I have also taken account of the lower level of the exchange rate. As I said in my Budget speech two years ago, exchange rate changes alter the distribution of incomes between companies and persons. A higher exchange rate boosts personal spending power, but it squeezes the profits of companies exposed to international competition. Consequently, in my 1981 Budget, personal income tax thresholds remained unchanged in order in part to be able to offer some help to companies.
The same considerations led me to direct over two thirds of the real tax reductions in my 1982 Budget towards business and industry in order to help cash flow and rebuild profits. In this Budget, too, the measures I have announced so far go largely in the same direction. Taken [column 155]together with the net effect of the changes that I announced last autumn, they will provide help for business and industry that is worth around £1¼ billion in a full year.
And that is less than half the story. For, if revenues from taxes paid by business – apart from the North sea industries – were the same share of total taxes in 1983–84 as they were in 1978–79, then these businesses would have to pay some £3 billion more than is forecast for the coming year. But profits have fallen, and over the years I have acted deliberately to lighten that load in recognition of the case for helping business which has been strongly, and rightly, argued in debate after debate, and from all quarters of this House. I do not believe any hon. Member would suggest that business and industry should pay more tax.
But I have had to recoup the £3 billion, alongside the need both to hold down borrowing – not least to secure lower interest rates, and hence reduce business costs – and to finance public expenditure. Although spending is now being restrained, it is worth noting again that there are few hon. Members who have not called for increases rather than cuts.
It is considerations of this kind which have led to the burden of tax on people, under successive Governments, becoming so unacceptably high. The House and the country must face this reality: spending at current levels, which some still regard as too low, together with current levels of tax on business, which many regard as too high, have brought successive Governments to a position where there has been no alternative to high levels of tax on people.
But the fact is that reductions in personal taxation themselves help business and employment. Indeed, it is the individuals who work in business who largely determine business success. Yet for years in Britain the tax system and the tax burden have discouraged individual effort, commitment and enterprise. By strengthening incentives through lower personal taxes, Government can help increase the commitment to business success at every level. And when the state takes less of what people earn there is less justification for excessive pay demands and settlements. Cuts in personal tax provide a vital stimulus for lasting growth and jobs.
Happily, because we are reining back public spending – though not yet far enough – the choice is less stark now than in the past. I am able to combine the significant measure of direct tax relief to industry and enterprise which I have just announced with a substantial measure of direct tax relief to people.
Acknowledged unfairnesses and anomalies produced by the overlap between the tax and social security systems give further compelling reasons for moving in that direction. It makes no sense that people on low incomes should be paying tax at all. And low tax thresholds are of course an important part of the poverty and unemployment traps. These traps mean that some of those out of work who could find a job, and some of those in work who could find a better one, do not do so because they would end up no better off, with all or more of their increase in income taken in tax and national insurance contributions, or lost in benefits forgone.
That is the situation that demands reform. But those who claim to have found a quick, cheap way to dispose of the poverty and unemployment traps deceive themselves. The problem has grown up almost entirely [column 156]because Governments for 30 years or more have increased benefits in line with earnings, but raised personal tax thresholds only in line with prices, which have grown much more slowly over the years. In 1950 the tax threshold for a married man was about two thirds of average earnings. Today it is barely more than one third.
A situation that has built up over 30 years cannot be put right in one Budget or even in one Parliament. These problems have arisen, and the point cannot be emphasised too strongly, not because Government spend too little, but because successive Governments have spent and taxed too much. The substantial increase which I have proposed in child benefit will improve work incentives for the low paid; and several of the measures we have taken since 1979 have reduced the unemployment trap. But it is only by limiting public spending, as we have done, that we can begin to get to grips with the problem along the lines I now propose.
In 1979 I reduced the basic rate of income tax from 33 per cent to 30 per cent. and cut the top rates. That was one of the first, and most radical, of the many changes that found a place in my first four Budgets. This year we can cut personal taxation again. But I do not propose any further reductions in rates. For the reasons I have just given it is thresholds and allowances that must take priority.
Two years ago, in order to curb inflation and allow lower interest rates, income tax allowances were not raised at all. That was a difficult decision, but necessary in the circumstances, and it has since brought great benefits. It was the firmness of that 1981 Budget which paved the way towards the lower inflation and lower interest rates which today offer the prospect of lasting economic recovery.
It is right that the benefit of the sacrifices of 1981 should be enjoyed now by those who made them then.
Last year I increased tax thresholds and bands by 14 per cent. This year I also propose an increase of 14 per cent. But because inflation is today so much lower, that now represents a real increase of not 2 per cent. as last year, but 8·5 per cent.
Income tax thresholds will be increased for the single person from £1,565 to £1,785 and, for the married man, from £2,445 to £2,795. The additional personal allowance paid to single parents, and the widow's bereavement allowance, will be increased in consequence from £880 to £1,010 The age allowance for a single person will go up from £2,070 to £2,360, and for a married person from £3,295 to £3,755.
Corresponding increases will be made in the higher rate thresholds and bands and the threshold for the investment income surcharge.
Effect will be given to these changes under PAYE as from the first pay day after 10 May. For a married man on the basic rate they will be worth £2 a week. The cost to the PSBR, above indexation, will be £1 billion next year. Including indexation, the total revenue forgone will amount to some £2 billion in 1983–84 and £2·5 billion in a full year. Some 1,250,000 fewer people will pay tax in 1983–84 than if thresholds had remained at their present levels.[column 157]
At the start of my speech I referred to the objectives this Government adopted in 1979, objectives to which we have held and still hold. From my first Budget we have pursued those objectives with consistency and firmness of purpose and so laid the foundations for sustainable recovery.
This is a Budget for that recovery: a Budget for the family, a Budget for enterprise – and, most of all, a Budget for Britain's continuing recovery. I commend it to the House.
Mr Deputy Speaker: Under Standing Order No. 94, the first motion, entitled “Provisional Collection of Taxes”, must 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 –
Spirits (Motion No. 2).
Beer (Motion No. 3).
Wine (Motion No. 4).
Made-wine (Motion No. 5).
Cider (Motion No. 6).
Tobacco products (Motion No. 7).
Hydrocarbon oil (Motion No. 9).
Vehicles excise duty (Motion No. 10). – [Sir Geoffrey Howe.]
put forthwith, pursuant to Standing Order No. 94 (Ways and Means Motions), and agreed to.
Mr Deputy Speaker: I shall now call on the Chancellor of the Exchequer to move the motion entitled “Amendment of the Law”. It is on that motion that the Budget debate will take place today and on succeeding days. The remaining motions will not be put until the end of the Budget debate next week and they will then be decided without debate.[column 158]
Budget Resolutions and Economic Situation
AMENDMENT OF THE LAW
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 this Resolution does not extend to the making of –
any amendment with respect to value added tax so as to provide –
for zero-rating or exempting any supply;
for refunding any amount of tax, otherwise than by a provision relating to supplies to, and importation by, a government department, within the meaning of section 19 of the Finance Act 1972;
for varying the rate of that tax otherwise than in relation to all supplies and importations; or
for any relief other than relief applying to goods of whatever description or services of whatever description; or
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, other than –
an amendment providing for a different rate of surcharge to be paid by the bodies specified in section 143(4) of the Finance Act 1982; and
an amendment relating to the Commission to be established under the Act resulting from the National Heritage Bill [Lords]. – [Sir Geoffrey Howe.]
[Relevant documents: European Community Documents Nos. 10337/82, Annual Economic Report 1982–83, together with the final version as adopted by the Council, and 10480/82, Annual Economic Review 1982–83, together with paragraph 7 of the Fourth Report from the Select Committee on European Legislation, House of Commons Paper No. 34-iv of Session 1982–83, and paragraph 4 of the Eleventh Report from the Committee, House of Commons Paper No. 34-xi of Session 1982–83.]