Lawson (Nigel)

Economy: 1985 Budget (Lawson 2) (Hansard)

Document type: Declassified documents
Source: Hansard HC [75/783-801]
Editorial comments: 1552 -
Importance ranking: Key
Word count: 10,112 words
Themes: Economy (general discussions), Employment, Industry, Monetary policy, Privatized & state industries, Pay, Public spending & borrowing, Taxation, Trade
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3.52 pm

The Chancellor of the Exchequer (Mr Nigel Lawson): In last year's Budget statement I charted the course for this Parliament. Today I reaffirm the Government's determination to hold to that course, the purpose of which is nothing less than the defeat of inflation. We have not wavered from that purpose. Nor will we, but the defeat of inflation, essential though it is, is not enough. We must also do what we can to combat the scourge of unemployment. Nor is there any conflict between these two objectives. So my Budget today has two themes: to continue the drive against inflation and to help create the conditions for more jobs.

I shall begin by reviewing the economic background to the Budget. I shall then deal with the medium-term financial strategy, with monetary policy, and with the fiscal prospect, both this year and next. I shall then turn to the Government's strategy for jobs, and the measures to implement that strategy. These will involve action on a number of fronts, including both tax reduction and tax reform.

As usual, a number of press releases filling out the details of my tax proposals will be available from the Vote Office as soon as I have sat down.


I start with the economic background.

Once again, we can look back on a year of steady growth and low inflation. During 1984 as a whole, inflation remained at around 5 per cent. Output grew by a further 2·5 per cent., with investment up by 6·5 per cent. and non-oil exports by 9 per cent., to reach all-time record levels in each case.

Manufacturing industry recovered particularly strongly, with output up by 3·5 per cent. – the biggest rise in any single year since 1973 – exports up by 10 per cent. and investment by 13 per cent. The current account of the balance of payments has remained in surplus, for the fifth successive year. By international standards, too, the economy has performed well. Our growth was above, and our inflation below, the European Community average.

Moreover, this progress has been achieved in the teeth of the coal strike, for which, in the short term, the nation has had to pay a heavy price. In the current financial year, the coal strike has reduced the level of national output by over 1·25 per cent. and worsened the balance of payments by some £4 billion. It has increased public expenditure by £2·5 billion and public sector borrowing by £2·75 billion. It has cost us confidence abroad and jobs at home.

But the costs, both economic and constitutional, of submitting to this strike would have been infinitely greater than the costs that have been incurred in successfully [column 784]resisting it, and it is a remarkable tribute to the underlying strength of the British economy that it has been able to withstand so long and damaging a strike in such good shape.

Looking ahead, we are now about to embark on what will be the fifth successive year of steady growth, with output in 1985 as a whole set to rise by a further 3½ per cent. Inflation may edge up for a time, perhaps to 6 per cent. by the middle of the year, but should then fall back to 5 per cent. by the end of the year and lower still in 1986.

While there can be no disputing the strength and durability of the economic upswing, there is equally no disputing the fact that it is married by an unacceptably high level of unemployment – and this despite the fact that the latest figures suggest that employment has risen by half a million over the past two years, with a further increase likely over the year ahead.

If at home the past year has been overshadowed by the coal strike, internationally it has been dominated by the relentless surge of the dollar, which rose by a further 30 per cent. against all the major European currencies. To finance its massive budget deficit, the United States is importing a large part of the rest of the world's savings and exporting some of its own inflation.

This is not a sustainable state of affairs. As Federal Reserve chairman Paul Volcker last month testified to Congress, the United States is living on borrowed money and borrowed time; but meanwhile, it is not only America that is paying the interest.

All this has led to one of the most turbulent years in the financial markets within living memory. It has been, and will continue to be, a time for strong nerves and sound policies.


We have already shown that we are not afraid to take action, however unpalatable, to keep the medium-term financial strategy on course in an unpredictable and uncertain world. That strategy was first launched five years ago next week. Our commitment to it remains as firm today as it was then. It was designed to bring down the rate of inflation and to ensure a reasonable growth of demand in money terms, and it has succeeded on both counts.

We are determined to maintain steady downward pressure on inflation. It is not in the gift of any Government to eliminate short-term fluctuations along the way, but the underlying direction has to be downwards. It is this objective which governs the desirable growth of total spending power in the economy, as measured by money GDP.

The Government's economic strategy has two key components: a monetary policy designed to bring down inflation and a supply side policy designed to improve the competitive performance of the economy.

The supply side policy is rooted in a profound conviction, born of practical experience both at home and overseas, that the way to improve economic performance and create more jobs is to encourage enterprise, efficiency and flexibility; to promote competition, deregulation and free markets; to press ahead with privatisation and to improve incentives.

The argument over which will have a bigger impact on demand – increased public expenditure or lower taxation – completely misses the point. The case for lower [column 785]taxation rests on supply side policy: lower taxes will help to enhance incentives, eliminate distortions, improve the use of resources and heighten the spirit of enterprise.

The great mistake of post-war demand management, which still has some devotees today, was to react to rising unemployment by injecting more money into the system, whether through the Budget or through the banks. So far from halting the upward trend of unemployment, this simply generated runaway inflation. That course we will not follow.

A policy for demand expressed unambiguously in terms of money provides a further important advantage, for it ensures that wage restraint will provide more jobs. I repeat today the undertaking I gave the National Economic Development Council last month: the medium-term financial strategy is as firm a guarantee against inadequate money demand as it is against excessive money demand.


Within the MTFS, the central role is played by monetary policy, for it is by controlling the growth of money in the economy that the Government are able to influence the growth of money demand. Last year I set target ranges of 4 to 8 per cent. for narrow money and 6 to 10 per cent. for broad money. Over the 12 months to mid-February, the targeted measure of narrow money grew at around the middle of its range, and that of broad money at just below the top of its range.

For next year, I shall be retaining the same two target aggregates. I attach equal importance to both. The target ranges for 1985–86 will be those indicated in last year's MTFS – that is to say, a reduction in monetary growth of 1 per cent. in each case.

There are those who argue that if we stick to sound internal policies, the exchange rate can be left to take care of itself. In the long run that may well be true, but significant movements in the exchange rate, whatever their cause, can have a short-term impact on the general price level and on inflationary expectations. This process can acquire a momentum of its own, making sound internal policies harder to implement. So benign neglect is not an option.

That is why I have repeatedly argued that it is necessary to take the exchange rate into account in judging monetary conditions. There is no mechanical formula which enables us to balance the appropriate combination of the exchange rate and domestic monetary growth needed to keep financial policy on track, but a balance still has to be struck, and struck in a way that takes no chances with inflation.

There can be no doubt about the Government's commitment to maintain monetary conditions that will continue to bring down inflation. Short-term interest rates will be held at the level needed to achieve this.


While monetary policy is at the heart of the medium-term financial strategy, it needs to be buttressed by an appropriate fiscal policy.

The outturn for the public sector borrowing requirement for 1983–84 was £9¾ billion, or 3¼ per cent. of GDP. In my Budget last year I planned to reduce it substantially in [column 786]1984–85 to £7¼ billion, or 2¼ per cent. of GDP. In the event, this year's PSBR looks like turning out at £10½ billion, or 3¼ per cent. of GDP – the same as last year.

All but half a million pounds of this substantial overrun is directly attributable to the cost of the coal strike. I believe it was right to meet the large but once-for-all cost of keeping the economy going throughout the coal strike by borrowing, thus in effect spreading the cost over a number of years, but it is now necessary to return to the path I outlined last year.

That means that the PSBR for the coming year, 1985–86, will be set at £7 billion, equivalent to 2 per cent. of GDP. As this year, some £3 billion will be financed through national savings.

I have been urged by some to provide for a still lower borrowing requirement in order to impress the financial markets. Others have argued that the present high level of interest rates would justify a more relaxed fiscal stance.

There is nothing sacrosanct about the precise mix of monetary and fiscal policies required to meet the objectives of the medium-term financial strategy, but this is not the year to make adjustments in either direction. The wisest course is to stick to our pre-announced path. This means that, for the coming year, a substantial reduction in the PSBR must take precedence over our objectives for reducing the burden of tax.


Given the need to ensure that the Budget deficit is of a size that can and will be soundly financed, lower taxes can be achieved only by maintaining the firmest possible control of public expenditure.

Controlling public expenditure is one of the most difficult tasks facing any democratic Government in the modern world. Public expenditure acquires its own momentum and creates its own vested interests. To control it requires constant vigilance, and a determination to succeed despite the inevitable setbacks. We have that determination, and have succeeded in bringing the growth of public spending below that of the economy as a whole. This achievement has required difficult decisions in successive public expenditure reviews, but there is no benefit to sound economic management or effective control from sticking to public expenditure figures which subsequent events have made unattainable.

As my right hon. and learned Friend the Chief Secretary made plain in the recent debate on the public expenditure White Paper, the normal pre-Budget review of the fiscal prospect has had to take account of changes in the economic scene since the public expenditure review in the autumn. Of these, the most important has been the coal strike, whose public expenditure cost in 1984–85 is estimated at some £2½ billion – about £1 billion more than allowed for in both the autumn statement and the public expenditure White Paper, which explicitly assumed that the strike would end at Christmas. There will also be some further cost in 1985–86.

It now looks as if this year's public expenditure planning total will be exceeded by nearly £3½ billion, of which over two thirds is attributable to the coal strike, but, quite apart from the coal strike, the upward pressures on public spending remain intense, not least from increased take-up of social security benefits and further local [column 787]authority overspending. In addition, since the White Paper was prepared, we have had to accommodate the effects of higher interest rates and a lower exchange rate.

I have therefore reassessed the adequacy of the reserves for 1985–86, 1986–87 and 1987–88 which were provided in the January White Paper. In order to provide a more realistic basis on which to plan and control the level of public spending, I have judged it prudent to add £2 billion to the reserve and thus to the White Paper planning totals for each of the three years. At the same time, I have further increased the estimate for debt interest in each year.

These increases in the size of the reserve will raise the planning totals for the next three years by about 1½ per cent., but let there be no misunderstanding: the new totals still represent a tough target. No extra cash has been allocated to individual programmes. Calls on the reserve will still be judged on the strictest criteria. There is no slackening in our determination to curb the size of the public sector.

Public expenditure will continue to fall as a proportion of GDP, as it has, the coal strike apart, since 1981–82. Expenditure is planned to stay broadly flat in real terms at about this year's level, excluding the costs of the coal strike. To achieve even these new figures, future public expenditure surveys will have to be at least as tough as their predecessors; and there can be no let-up in the tight control of individual spending programmes within the cash limits set for the coming year.

On the other side of the public accounts, tax receipts, too, are now expected to be higher over the next three years, partly for related reasons, but not by as much. The scope I have for tax cuts this year is therefore only half the amount I said might be available in my statement to the House in November. In other words, the net effect after indexation of the measures I shall shortly announce will be to contribute some three quarters of a billion pounds to the £7 billion borrowing requirement I have set for 1985–86.


In determining the nature of those measures, within the overall framework of the medium-term financial strategy, my overriding objective has been to improve the prospect for jobs. It is important to be clear what this means. Jobs are created by firms that are competitive, efficient, profitable and well managed. This in turn requires a work force with the right skills, one that is adaptable, reliable, motivated and prepared to work at wages that employers can afford to pay.

The extent to which Government – let alone a single Budget – can bring this about is clearly limited. We cannot instantly inculcate the spirit of enterprise by Act of Parliament, or abolish latter-day Luddism overnight simply by adding a few more pages to the statute book.

We cannot even prevent trade unions from pricing their members out of a job. Last year, despite a further encouraging growth in productivity, wage costs per unit of manufacturing output rose by some 4 per cent. In the United States, Germany and Japan, unit wage costs actually fell. This is bad for our competitiveness and bad for jobs. Too much of the benefit of economic growth is currently being enjoyed in higher living standards for those in work, too little in the form of better job prospects for [column 788]those out of work. In a free society, the remedy lies in the hands of those responsible for collective bargaining throughout the economy.

However, limited though the role of Government is, it remains an important one: to prepare the ground in which enterprise can best flourish; to remove obstacles to the effective working of markets in general and the labour market in particular; to correct the deficiencies in our education and training that make it hard for industry – and individuals – to adapt to change; to construct a pattern of taxation that does least damage to incentives, and in particular does least to deter people from taking jobs at wages that businesses can afford.

We have made progress on all these fronts. Inevitably, it takes time for the effects to come through. That is not surprising – attitudes and behaviour acquired over decades cannot be changed overnight – and there is much still to be done; but there is no short cut. If it were possible to create jobs simply by boosting Government borrowing and Government spending, there would be no unemployment in the world today, for nothing is easier for a Government than to borrow and spend. Impatience is a bad counsellor.

In setting financial policy for the year ahead I have had one object in mind: the continuing reduction of inflation. Equally, in deciding my individual Budget proposals within that overall framework, I have sought throughout to make those changes that will do most to promote enterprise and employment.

Our attack on the evil of unemployment is clear, coherent and strong. My Budget today represents a further step along the road we have been taking since 1979. It will help us to ensure that more new jobs are created and that they will be new jobs that last.


I begin with some measures directly related to employment and training.

One of the most long-standing problems in this country is our failure to prepare our school-leavers adequately for work. Since it was first launched in 1983, the youth training scheme has proved to be a very successful bridge between school and work. I has also helped to make young people's pay expectations more realistic. But too many trainees are still reluctant to accept rates of pay which reflect their inexperience, and too many employers still fail to recognise that training is an investment in their own commercial interest. This is in marked contrast to our major competitors overseas.

The Government have therefore decided to promote a substantial expansion of the youth training scheme. Provided employers contribute a major share of the cost, the Government are prepared to provide further funds to launch this new initiative, over and above the existing £800 million a year of public expenditure on the YTS. The expanded scheme would offer places lasting two years for 16-year-old and one year for 17-year-old school-leavers, leading to a recognised qualification.

The main aim of all this is a better qualified work force. It would also be a major step towards our objective of ensuring that every youngster under the age of 18 will either be in full-time education, or in a job, or receiving training, with unemployment no longer an option. But first we have to get the expanded scheme in place. It will [column 789]require the active co-operation of employers, trade unions and school-leavers, which I am confident will be forthcoming.

The existing YTS provides foundation training and preparation for work. The expanded scheme will also involve occupational training for both the employed and the unemployed, geared to the needs of business and industry. In the long run, we would expect employers to meet the full cost, as those in other countries do, but I recognise that such a major change in attitudes may take time. I am therefore prepared to set aside a fixed sum in public funds to launch this new initiative and get it moving in the right direction.

My right hon. Friend the Secretary of State for Employment will be arranging consultations through the Manpower Services Commission about the quality of the training, the share of the cost to be borne by employers, and the level of trainee allowances. We aim to complete these consultations by the end of June so that a second year will be available for as many as possible of the 16-year-olds leaving school this year. Provided the outcome is satisfactory, I have undertaken to increase the Department of Employment's programme by £125 million in 1986–87 and £300 million in 1987–88. This expenditure will be partly offset by savings in social security payments and the ending of the young workers scheme, which will close for applications at the end of March 1986.

I am also providing the MSC with an additional £20 million in 1986–87 to finance a programme of appropriate in-service teacher training courses.

It has become increasingly evident that our output of graduates in high technology disciplines is not keeping pace with the expanding needs of industry. My right hon. Friend the Secretary of State for Education and Science will therefore be announcing later today a special programme, costing around £40 million over the next three years, to provide additional places in engineering and technology at selected higher education institutions. In this case the cost will be met from within existing public expenditure programmes.

While school-leavers are catered for by the youth training scheme, there remains the problem of the long-term unemployed genuinely seeking work. Under the community programme, local authorities and voluntary bodies provide temporary work for the long-term unemployed on projects of community benefit. This scheme, which at present provides 130,000 places has proved its worth, with a significant proportion of those who leave it going on to other jobs.

I have therefore agreed to make funds available to provide an additional 100,000 community programme places by June 1986. These places will be for 18 to 24-year-olds who have been unemployed for six months or more, and other adults who have been unemployed for over a year. To accommodate this, the Department of Employment's programme will be further increased by £140 million in 1985–86 and £460 million in 1986–87.

To an even greater extent than with the youth training scheme, the net public expenditure cost will be substantially less than the gross cost because of savings on social security benefits. The net addition to public expenditure as a result of all the proposals I have just announced will be £75 million in 1985–86, £300 million in 1986–87, and £400 million in 1987–88.

We also need to do more to remove legislative impediments to the effective working of the labour market. [column 790]However well intentioned, these can only lead to fewer jobs. Accordingly, my right hon. Friend the Secretary of State for Employment will be extending to all employers the provisions on unfair dismissal which currently apply to small firms. The qualifying period for unfair dismissal claims will thus become two years for all new employees. This is a reasonable period of time and should lessen the reluctance of some employers to take on new people.

In addition, my right hon. Friend will be issuing a consultative document about the future of the wages councils later this week. Wages councils destroy jobs by making it illegal for employers to offer work at wages they can afford and the unemployed are prepared to accept. This applies in particular to small employers and to youngsters looking for their first job.

Mr John Evans (St. Helens, North): The right hon. Gentleman should be ashamed of himself.

Mr Lawson: The document will cover a number of proposals for radical change, including complete abolition.

My right hon. Friends the Secretaries of State for Employment and for Education and Science will be issuing press notices later today giving further details of these measures.

Mr Evans: Bring back sweatshops.


Mr Lawson: I now turn to taxation.

This Budget carries forward the theme of tax reform I set out last year; reform designed to make life a little simpler for the taxpayer; and above all reform designed to improve our economic performance over the longer term, on which the jobs of the future will depend.

In my Budget last year I announced a radical reform of the corporation tax system. This had been preceded by the Green Paper on corporation tax issued by my predecessor in 1982.

I am satisfied that the right way to proceed with major tax reform is to issue a Green Paper first, as a basis for full and informed discussion, followed by legislation when the results of that discussion have been fully digested.

I therefore propose to issue a Green Paper later this year on the reform of personal income tax.

The computerisation of PAYE makes this the right time to review the system of personal taxation. Most of the work will be complete by the end of 1987 and the full range of facilities will be available by 1989. The Green Paper will therefore discuss a range of options opened up by computerisation, from non-cumulation to closer integration between the tax and benefit systems, and including in particular a reform of the present system of personal allowances.

It is the Government's firm policy to reduce the burden of income tax, but we need to make sure that the reliefs we can afford are concentrated where they will do most good.

The present structure of personal income tax is far from satisfactory. Too many young people start paying tax at too low a level, and too many families find themselves in the poverty and unemployment traps. The system discriminates against the family in which the wife stays at home to look after the children. It denies to the partners in a marriage the independence and privacy in their tax affairs which they have a right to expect.

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There is therefore a strong case for changing to a new system of personal allowances more suited to today's economic and social needs. Under this, everyone, man or woman, married or single, would have the same standard allowance; but if either a wife or a husband were unable to make full use of their allowance, the unused portion could be transferred, if they so wished, to their partner.

This reform would produce a more logical and straightforward system. Far more people could be taken out of the poverty and unemployment traps, and indeed taken out of tax altogether, for a given sum of overall tax relief than is possible under the present system. It would end the present discrimination against the family where the wife feels it right to stay at home, which increasingly nowadays means discrimination against the family with young children.

Husbands and wives would each be taxed separately on their own income irrespective of the income of the other. The aggregation for tax purposes of a wife's earned income and investment income with her husband's would end, thus removing what has become an increasing source of resentment among women.

The Green Paper will set out full details of the proposals I have just outlined, as a basis for public discussion. After an appropriate period for consultation, it would be possible to legislate in 1987 and have a system on these lines in place by the end of the decade.

There is also a case for changing the tax treatment of pension funds, as part of a thorough-going reform of the tax treatment of personal savings generally. Any fundamental reform of this kind would, in the same way, need to be preceded by the publication of a Green Paper.

The House will, I am sure, be interested to learn that I have no such Green Paper in mind.

Nor, indeed, despite the unparalleled pre-Budget agitation, do any of the detailed proposals in my Budget affect the tax-deductibility of pension fund contributions, the tax-free nature of pension fund income and capital gains, or the anomalous but much-loved tax-free lump sum.

Meanwhile, I have a number of other important proposals for tax reform to announce today, which will both simplify the system and encourage enterprise.

First, on Capital gains tax, last year I was unable to do anything about the acknowledged defects of this tax, notably its combination of unfairness and complexity, and undertook to come back to it this year. This I now do.

I have decided that the right way to reform capital gains tax is to build on the important change made by my predecessor three years ago when he introduced the 1982 indexation relief. That relief, valuable though it is, and increasingly valuable as it will become, suffers from three serious limitations.

First, indexation does not cover the first 12 months of the ownership of an asset. This provision was introduced to discourage the short-term conversion of income into capital, but it has made the tax very much more complicated for the taxpayer. I am now in a position to remedy this defect. Hon. Members will recall that I announced last month measures to put an end to the practice known as bond washing, the principal device for converting income into less heavily taxed capital gains. Having done that, I now propose to abolish the 12-month rule. So far as most disposals are concerned, this will take [column 792]effect from 6 April. In the case of certain fixed interest securities, however, the rule will need to remain in being until the anti-bond-washing provisions take effect on 28 February 1986.

Second, the indexation does not at present extend to losses. I propose to remove this restriction.

Thirdly, the present indexation provision unfairly discriminates against those who acquired their assets prior to 1982. For them, the allowance is based not on the 1982 value of the asset but on its original cost. I now propose to remedy that injustice. The indexation allowance will henceforth be based on March 1982 values. Capital gains made prior to 1982 will still not be indexed, of course, but at least all purely inflationary gains made since that date will now be free of tax, irrespective of when the asset was acquired.

That three-pronged reform of capital gains tax will produce a fairer tax, make life simpler for the taxpayer, help the efficient working of the capital markets, relieve the burden on family businesses and encourage risk-taking and enterprise. Combined with the statutory indexation of the exempt amount, which will rise in 1985–86 to £5,900, these changes will remove some 15,000 taxpayers from liability altogether. Increasingly, the tax will be levied on real and not inflationary gains. With these reforms, I believe that the tax is now on a broadly acceptable and sustainable basis. The combined cost of the threefold reform I have announced is £155 million in a full year; but none of it falls in 1985–86.

I turn next to the stamp duties. Following widespread consultation, I have decided that the time has come to simplify and modernise these ancient duties. I propose in this Budget to sweep away 15 separate duties, including the contract note duty and the 1 per cent. duty on gifts. Altogether, the changes I am proposing should reduce by over 40 per cent. the number of documents which require to be stamped.

My final proposal for reform concerns development land tax. This is a particularly complex tax, which was introduced in response to the problem of soaring land values at a time of high inflation. Its chief practical effect is to discourage the bringing forward of land for development. This disincentive effect will grow as the gap widens between the 60 per cent. rate of development land tax and a corporation tax rate which is on the way down to 35 per cent.

I have therefore decided to abolish development land tax altogether, with immediate effect. At the same time, I propose to cancel all deferred charges under the tax. The net cost will be some £20 million in 1985–86 and £50 million in a full year. That compares, incidentally, with a collection cost of some £5 million a year. Development gains will, of course, continue to be subject to income tax, corporation tax and capital gains tax, in the same way as any other income or capital gains.

The abolition of development land tax will, I am sure, be especially welcomed by the building and construction industry. It will also remove no fewer than 200 pages of highly complex legislation from the statute book. This follows the abolition of the national insurance surcharge and the investment income surcharge in last year's Budget – three unwanted taxes swept away in two years.

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I now turn to other aspects of business taxation. It cannot be repeated too often that it is businesses and not Governments that create jobs. The Government's responsibility is to foster the conditions which will encourage businesses to grow and to create more jobs. The measures I have to announce are designed with that end in view.

First, on corporation tax, the reforms I announced last year set out a new and improved framework of business taxation for the remainder of this Parliament and beyond, so this year I have only limited changes to make. A full list is, of course, contained in the Red Book.

As I promised last year, I have reviewed the scientific research allowance. Given the particular importance of expenditure on research and development if British industry is to hold its own in a competitive world, I have decided, exceptionally, not to reduce that allowance in line with the changes in the other capital allowances. A few minor changes apart, the scientific research allowance will remain at 100 per cent.

I have also decided to modify the new capital allowance system as it applies to short-life assets. While the new structure of capital allowances enables most plant and machinery to be written off over a period that more than fairly reflects its useful life, I accept that there is a problem with those assets which enjoy only a short life, in particular high technology assets.

Accordingly, from next year, a business will be able to exclude from its general pool of capital expenditure any asset which it believes will have only a short life, so that, if the asset is subsequently scrapped after, say, four years, it will be fully written off for tax over that period. I believe that this change will be widely welcomed. The benefit to business could rise to about £300 million in the early 1990s.

I now turn to a number of other detailed measures affecting business.

The number of employee share schemes has increased from 30 when we first took office in 1979 to some 850 today. The whole-hearted commitment of employees to the success of the companies in which they work is vital to our country's economic future. To maintain and build on this progress, I propose to reduce the retention period for profit-sharing schemes from seven years to five.

I propose to take action to deal with tax avoidance by partnerships, following the consultative document issued last year.

In my last Budget, I removed a competitive disadvantage to British manufacturers by levying VAT on imports. I have decided to modify the new regime in two respects.

First, I propose to relieve from VAT certain goods which are imported into this country solely for repair, or for processing which does not change their identity, and are then re-exported to their owners overseas. Secondly, goods which are temporarily exported from the United Kingdom and then reimported after repair or processing abroad, will bear VAT only on the value of the repair or processing. These reliefs will take effect on 1 June and have a once-for-all cost in 1985–86 of £30 million.

I propose to introduce secondary legislation to remove the constraint imposed by the Banking Act, which at [column 794]present prevents companies from financing themselves by a series of issues of short-term securities. That should provide a useful alternative to bank borrowing.

I have no major new proposals this year on the taxation of North sea oil. I have reviewed the economics of incremental investment in existing fields, but I have not been persuaded that there is a case for introducing new fiscal reliefs at this stage. My only proposal for change, apart for some minor technical measures, is to remove immediate petroleum revenue tax relief for onshore exploration and appraisal expenditure. Onshore activities are sufficiently low-cost not to need that special incentive.

In last year's Budget statement, I mentioned the Government's concern at the spread of unitary taxation within the United States, and the threat that this posed to the US subsidiaries of British companies. Since then, I am glad to note that several American states have abolished unitary taxation; but in others, notably California, no change has yet been made. We shall continue to press for action to be taken this year, and fully support the campaign being waged by the CBI and others on this issue.

Finally, I turn to a group of measures of particular importance to smaller businesses and the self-employed, a sector of the economy where an increasing proportion of the jobs of the future is likely to be found.

I have already announced a substantial reform of the capital gains tax. In addition, I propose to implement many of the proposals contained in last year's consultative document on capital gains tax retirement relief, notably to reduce the age for full relief to 60 and to extend relief to those who are obliged by ill health to retire before that age. This relief is particularly important to the proprietors of small businesses concerned at the capital gains tax they might have to pay when they come to sell their business on retirement.

Although the business expansion scheme has been in existence only two years, it has already made an impressive contribution to the promotion and growth of new businesses. Last year, almost 20,000 people took advantage of the tax reliefs offered by the business expansion scheme to invest some £100 million in more than 500 companies. Over half of this went to provide equity capital for new businesses.

I have two changes to propose. The scheme was designed to encourage investment by individuals in new and expanding businesses in risk areas. Accordingly, I propose to include within the scheme companies formed to carry out research and development. By the same token I propose to exclude from the scheme certain ventures which primarily involve property development. Building and construction will, of course, continue to be a qualifying trade.

Last year I undertook to review the scope of VAT relief for bad debts, a matter of considerable concern to small businesses. In the light of legislation now proceeding in another place on the reform of the insolvency law, I propose to widen the scope of the existing relief. The new rules will take effect as soon as the provisions of the Insolvency Bill are implemented, and will cost some £25 million in a full year.

I propose to increase the VAT threshold to £19,500 from midnight tonight.

Over the past five years, the ranks of the self-employed have risen by well over half a million, or some 30 per cent., and the growth in self-employment has been a [column 795]particularly marked feature of the encouraging growth in overall employment that has occured since the spring of 1983.

However, the self-employed suffer from one long-standing grievance so far as tax is concerned. While the national insurance contribution paid by an employee cannot be set against tax, the national insurance contribution paid by the employer on the employee's behalf can. Yet none of the national insurance contribution paid by the self-employed can be set against tax at all.

Today I propose to remedy this grievance. As from 6 April, tax relief will be allowed for half the graduated class 4 national insurance contribution paid by the self-employed. In addition, I have agreed with my right hon. Friend the Secretary of State for Social Services that, as from the beginning of October, the flat rate class 2 national insurance contribution payable by the self-employed will be reduced from £4·75 to £3·50 a week. The benefit of these reliefs to the self-employed will be £55 million in 1985–86 and £155 million in a full year.

All this adds up to a substantial package of measures to help small business and the self-employed, which I am sure the whole House will welcome.


I turn now to the taxation of personal income and spending. My Budget last year shifted some of the burden of personal taxation from earnings to spending. Today I propose to make a further move in this direction. Accordingly, I propose to increase the revenue from the excise duties by rather more than is required simply to keep pace with inflation – a less painful task now that inflation is relatively low.

I propose to increase the duty on cigarettes and hand-rolling tobacco by the equivalent, including VAT, of 6p on a packet of 20 cigarettes. This will take effect from midnight on Thursday. I do not, however, propose any increase at all in the duties on cigars and pipe tobacco.

I propose increases which, including VAT, will put between 1p and 2p a pint on most beer, depending on its strength, 1p a pint on cider, 6p on a bottle of table wine and about 10p a bottle on sparkling or fortified wine. In recognition of the current difficulties of the Scotch whisky industry, however, I propose to increase the duty on spirits by only 10p a bottle, well below the amount needed to keep pace with inflation. [Hon. Members: “Hear, hear.”] All these changes take effect from midnight tonight.

I propose to increase the duty on petrol and derv by amounts which, including VAT, will raise the price at the pumps by approximately 4p and 3½p a gallon respectively. This does no more than keep pace with inflation. These increases will take effect from 6 o'clock this evening. As last year, I do not propose any change in the duty on heavy fuel oil.

I propose this year, however, to raise more revenue from the vehicle excise duty. For cars and light vans the duty will go up by £10 to £100. On the advice of my right hon. Friend the Secretary of State for Transport, the pattern of duty on lorries will be changed to correspond more closely to the amount of wear and tear that they cause to the roads. While there will be substantial increases in duty for some of the heaviest rigid lorries, for most lorries the rates will remain unchanged.

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These changes in the excise duty will, all told, raise an extra £820 million in 1985–86, some £235 million more than is required to keep pace with inflation. The overall impact effect on the retail price index of these changes will be 0·5 per cent. This has already been taken into account in the forecast that I have given the House of 5 per cent. inflation by the end of the year.

I now turn to VAT. I have followed with interest the speculation that has built up over recent months about my alleged intentions for VAT. Most of it – such as the so-called proposal to levy VAT on books – has concerned matters which have not even been under consideration. But to have revealed this prematurely would not have stilled speculation; it would merely have concentrated it on those matters that were under consideration – a practice that no Chancellor, rightly, has sought to encourage.

I can now inform the House that, apart from one change I shall be proposing today, I do not intend to make any further extensions of the VAT base during the lifetime of this Parliament. This is, of course, a field in which European Community law has to be reckoned with and where we are bound by our treaty obligations, but as the House will be aware, where we are currently under challenge, we are vigorously fighting our case.

The one extension I propose to make concerns newspapers and magazines. At present, while all other advertising is taxed, newspapers and magazine advertising is not. There is no justification for this anomaly. It is one thing to maintain that newspapers and magazines should not be liable to VAT: quite another to argue that those who advertise in them should enjoy a similar immunity. Accordingly, I propose that, from 1 May, newspaper and magazine advertising should be subject to VAT. This will raise £30 million in 1985–86 and £50 million in a full year.

I also propose to change the VAT treatment of credit cards and similar payment cards – a part of the financial sector which has enjoyed exceptional growth over the past few years. I propose that, from 1 May, transactions between the companies providing the cards and outlets which accept them should be classified as exempt. This means that the companies will not be able to recover VAT in respect of such transactions. This will raise £15 million in 1985–86 and £20 million in a full year. It should not directly affect the charges made to card holders.

I also have a modest VAT concession to make. I have decided to extend the existing VAT relief for medical or scientific equipment bought with donated funds for use in hospitals and the like to cover computer equipment for certain medical uses. Customs and Excise will be announcing the precise details of the relief, which will take effect from 1 May.

Following extensive consultations, I propose to include in this year's Finance Bill legislation to implement most of the recommendations of the first two volumes of the Keith report on the enforcement powers of the revenue departments, including measures to deal with the problem of the late payment of VAT. This is expected to bring in extra revenue of about £50 million in 1985–86. By 1988–89, there will have been a cumulative once-for-all revenue gain of about £600 million. Proposals on the Inland Revenue aspects of the Keith report will follow in next year's Finance Bill.

The VAT changes I have just proposed will bring in £90 million in 1985–86, rising eventually to £215 million in a full year. They will have no impact on the RPI. The [column 797]additional revenue raised from the excise duties and VAT taken together will help me to lighten the burden of income tax.


Before turning to income tax, I should briefly mention capital transfer tax. Since 1979, the burden of this tax has been very significantly reduced, and I propose to maintain that position this year by raising the threshold and rate bands set last year in line with statutory indexation. In addition, I propose to widen the scope of the existing exemption for amenity land surrounding a house of outstanding heritage quality. I am sure that this will be welcomed by all those concerned with the preservation of our national heritage.

I now turn to income tax. On 6 April, the banks will move over to the composite rate system for the payment of tax on bank interest. I now need to legislate to put the corresponding composite rate payments by building societies on a similar footing, starting next year. This will not produce any additional revenue. As an administrative saving, I also propose to legislate this year to bring new loans above the mortgage interest relief ceiling into the MIRAS system by April 1987. The ceiling itself will remain at £30,000 for 1985–86.

I need to set the 1986–87 car benefit scales for those whose employers provide them with the use of a car. As last year, I propose to increase both the car and fuel scales by 10 per cent. with effect from April 1986. This will still leave the scale levels well short of the true value of the benefit.

To give further help to charities, I propose to increase from £5,000 to £10,000 the limit to which relief at the higher rates of tax is allowed for covenants.

I now turn to my main income tax proposals. I propose to make no change this year in the rates of income tax. Once again, I believe that it is right to concentrate most of the limited resources at my disposal on raising the starting point for tax. Increases in the basic tax thresholds benefit all taxpayers, but they give proportionately more help to those on low incomes. This year, a Budget for jobs and for enterprise has to give high priority to raising the tax thresholds.

The statutory indexation formula means that I should increase all the principal income tax allowances and bands by 4·6 per cent., which is the increase in the RPI over the year to last December, and then rounded up. For the higher rate thresholds and bands I propose this year to do just that. The first higher rate of 40 per cent. will be reached at a taxable income of £16,200 and the top rate of 60 per cent. will apply to taxable income above £40,200.

For the basic thresholds I can do more. Statutory indexation would imply an increase in the single person's allowance of £100. I propose to increase it by precisely twice as much – £200 – from £2,005 to £2,205. Statutory indexation would imply an increase in the married man's allowance of £150. Again, I propose to raise it by precisely twice as much – £300 – from £3,155 to £3,455.

I propose to increase the age allowances this year by the same cash amount as the corresponding basic allowances. Thus the single age allowance will rise by £200 from £2,490 to £2,690 and the married age allowance will go up by £300 from £3,955 to £4,255.

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These increases mean that most single people will enjoy an income tax cut of at least £1·15 a week and most married couples an income tax cut of at least £1·73 a week. Some 800,000 people on low incomes – 100,000 of them widows – who would have paid tax if thresholds had not been increased, will pay no tax at all in 1985–86. That is almost twice as many as would have been taken out of tax had the allowances merely been indexed.

The income tax changes I have announced today will take effect under PAYE on the first pay day after 17 May. Their cost is considerable: £1·6 billion in 1985–86, of which roughly half represents the cost of indexation.

The increase in the basic allowances of almost 10 per cent., or some 5 per cent. in real terms, means that for 1985–86 they will be more than 20 per cent. higher in real terms than they were in 1978–79, Labour's last year.


I have one last proposal to make. I have already set out the broad lines of the Government's strategy to improve the prospects for jobs. I have described a number of measures to improve training, remove legislative barriers to employment, and stimulate enterprise; and I have also raised tax thresholds substantially for the second year running; but I want to do more to improve job prospects for young people and the unskilled, among whom the problem of unemployment is most severe.

I have concluded that an effective response to this problem must include direct action in two related areas – to cut the costs of employing the young and unskilled, and to sharpen their own incentive to work at wages which employers can afford to pay.

I am therefore proposing, in collaboration with my right hon. Friend the Secretary of State for Social Services, a radical reform of the structure of national insurance contributions. The essential features of the contributory principle will be preserved. The changes will affect both employers' and employees' contributions.

Given the limited resources at my disposal, I cannot afford this year to make a further substantial reduction in the overall burden of employment costs, following the abolition of the national insurance surcharge in last year's Budget. I therefore propose to abolish the upper earnings limit for the employer's national insurance contribution, which for 1985–86 has been set at £265 a week.

Under existing arrangements, an employer pays in national insurance the same cash sum, which for the coming year would be roughly £28 a week, for all employees above the upper earnings limit, regardless of whether the employee is paid £15,000 a year or £50,000 a year. Under the new and arguably fairer scheme I am now proposing, the employer's liability will be the same flat 10·45 per cent. of earnings as at present applies below the upper earnings limit.

The £800 million raised by this change in a full year enables me to make a substantial reduction in the cost of employing people at the lower end of the earnings scale. There, instead of the uniform 10·45 per cent., I propose to introduce a system of graduated rates.

As now, there will be no national insurance payable for those earning below the lower earnings limit, which for 1985–86 has been set at £35·50 a week, broadly in line with the single person's pension, but for employees earning between this and £55 a week, the employer will in future have to pay only 5 per cent. instead of 10·45 per cent.; for [column 799]employees earning between £55 a week and £90 a week the new rate for employers will be 7 per cent.; and for those earning between £90 and £130 a week, the employer will pay 9 per cent. The full employers' rate of 10·45 per cent. will apply only for those earning over £130 a week.

These changes represent substantial reductions in the cost of employing the lower paid. They will significantly improve the flexibility of the labour market and the prospects for jobs. I recognise that employers cannot be expected to welcome the increased cost of employing higher paid workers, but for business and industry as a whole the increase in the cost of the higher paid will be fully offset – indeed it will be more than offset – by the reduced cost of employing lower paid workers.

Moreover, I propose to introduce a similar system of graduated national insurance contribution rates for the employees themselves at the lower end of the earnings scale. At present, those earning more than the lower earnings limit pay a flat rate of 9 per cent. on total earnings up to the upper earnings limit, and nothing on any amount they may earn above that limit.

This system makes national insurance contributions a particularly heavy burden for the low paid. I propose that, in future, those earning between £35·50 and £55 a week pay at the rate of 5 per cent. and those earning between £55 and £90 a week 7 per cent. Only those who earn above £90 a week will be liable to the full 9 per cent. on their earnings. However, I do not propose to abolish the upper earnings limit for employees' contributions. It is an integral part of the contributory system on which their benefit entitlement is based. Moreover, if it were abolished, those on the higher rates of income tax would face unacceptably high combined marginal rates, taking into account liability to both tax and national insurance contributions.

The changes I have proposed represent a substantial reduction in the burden of national insurance contributions on lower paid employees. In addition, as I have already indicated, I propose a corresponding reduction in the contributions paid by the self-employed. The flate rate class 2 contributions, as I have already said, will be reduced from £4·75 to £3·50 a week.

My right hon. Friend the Secretary of State for Social Services will include legislation to give effect to this restructuring of national insurance contributions in the Social Security Bill now before Parliament, and I expect the new rates to take effect from the beginning of October. I should make it clear that these changes are not intended to affect benefit rights, and new rules will be introduced to protect those rights. Nor will the changes affect arrangements for the contracted-out rebate.

The overall cost of these changes will be £450 million in a full year, made up of £80 million less in employers' contributions, £270 million less in employees' contributions, and £100 million less in contributions from the self-employed. In 1985–86 the total cost will be £160 million.

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The effect on job prospects will, over time, be substantial. The radical restructuring I have announced will encourage employers to take on the young and unskilled and give them, in turn, an incentive to seek work at wages that employers can afford. The cost of employing some 8½ million people on earnings of less than £130 a week will be reduced by almost £900 million in a full year. It will cost an employer £3 a week less to employ a young person or unskilled worker at just below £90 a week, and the take-home pay of some 3½ million people with earnings up to this level will be further increased, on top of the significant real increases in income tax thresholds I have already announced. Thus, a single youngster on just under £90 a week will pay about £1·80 a week less in national insurance on top of the reduction in his income tax bill of £1·15 a week – an overall increase in take-home pay of almost £3 a week.

The reduction in the total burden on the low paid – income tax plus employers' and employees' national insurance contributions combined – is even more dramatic. For someone on £80 a week it is cut by up to 30 per cent., and at £50 a week it is cut in half.

These are changes of a major order. They amount to a direct and powerful attack on disincentives to employment. They tackle the problem of unemployment where it is most acute. They complete my Budget for jobs.


In this Budget, Mr Deputy Speaker, I have reaffirmed the Government's commitment to the defeat of inflation through the maintenance of sound money. I have made further radical proposals for taxation and national insurance, and abolished outright a third tax. In collaboration with my right hon. Friends the Secretaries of State for Employment, for Education and for Social Services, I have proposed a coherent and wide-ranging set of measures to promote new jobs. I commend this Budget to the House.

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. Spirits (Motion No. 2)

  2. Beer (Motion No. 3)

  3. Wine and made-wine (Motion No. 4)

  4. Cider (Motion No. 6)

  5. Tobacco products (Motion No. 7)

  6. Hydrocarbon Oil (Motion No. 8)

  7. Vehicles excise duty (Motion No. 10) – [Mr Lawson.]

put forthwith, pursuant to Standing Order No. 114 (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.

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Budget Resolutions and Economic Situation


Motion made, and Question proposed.

That it is expedient to amend the law with respect to the National Debt and 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 –

  1. for zero-rating or exempting any supply;

  2. for refunding any amount of tax, otherwise than by a provision relating to the insolvency of a person to whom goods or services have been supplied;

  3. for varying the rate of that tax otherwise than in relation to all supplies and importations; or

  4. for any relief other than relief applying to goods of whatever description or services of whatever description. – [Mr Lawson.]

Relevant documents: European Community Document No. 10277/84, Annual Economic Report 1984–85 and the Unnumbered document Annual Economic Report 1984–85 (final version as adopted by the Council).