The Chancellor of the Exchequer (Sir Geoffrey Howe): The House will tomorrow have the opportunity of paying its full tribute to Lord Butler, of whose death it has just learnt with such deep regret, but it would not be fitting for me to embark on my Budget proposals this afternoon without saying a word about one of my most gifted and distinguished predecessors.
It is almost 30 years to the day since “Rab” introduced his first Budget, and there are now only a handful of hon. Members who were present on that occasion. They would, I am sure, agree that it was an historic occasion, as it marked both the end of the transition of the economy from war to peace and the beginning of the prosperity which was a feature of the 1950s and 1960s. He went on to present four more Budgets and, with the exception of the right hon. Member for Leeds, East (Mr Healey), was the longest-serving Chancellor of the Exchequer since the war. His achievements for the country and his humanity and breadth of vision will be long remembered.
A tradition has emerged, I think, since “Rab” Butler's time that the Budget speech should be composed in some sense almost as though it were a detective story with many [column 727]lengthy passages of exposition before the dénouement, the full picture being revealed only at the end. That was supposed to have something to do with waiting for the closure of the markets. Having listened to a good many of these annual rituals since first I entered the House, the thought has occurred to me, and no doubt to others, that perhaps there was an element of tantalising suspense that was thought desirable to retain the attention of hon. Members at fever pitch.
This afternoon, I propose to break with that tradition and to tell the House without more ado that in this Budget I shall be proposing substantial reductions in taxation while at the same time reducing the Government's borrowing requirement.
This will be a Budget for industry—and so a Budget for jobs. But it will be a Budget for people as well. It is a Budget that will strengthen the foundations of economic recovery.
To set my proposals in context, I must start with a word about the past. Within the memory of almost every Member of this House, almost everyone in this country took it for granted, for example, that our buses, cars, or motor cycles were made in Britain from British steel. Most of the world's finest ships were still being built in our yards.
It is, after all, only 11 years since the Erskine bridge was built over the Clyde—to a design which would allow to pass below it a steady line of Cunarders from John Brown's world-beating yards at Clydebank.
So, until quite recently, we took it for granted that we had one of the highest living standards in Europe, if not in the world.
By 1979, all that had changed. Already, we had seen inflation go above 25 per cent. and already we had seen unemployment close to 1½ million. Fewer than half the new cars bought in Britain were being made here. Instead of building three out of every 10 merchant ships supplied to the markets of the world, as we had done just 25 years ago, we were building only three out of every hundred. Our share of world trade had been halved, and living standards in several European countries were at least half as high again as ours.
We had been paying ourselves too much and producing, and selling, too little. During the 1970s, money incomes had gone up 20 times as much as real output. That was a sure recipe for inflation, for lost markets, and for lost jobs.
Through all this, of course, many companies, many individuals, continued to record outstanding successes. But all too often they were swimming against the tide, because our overall economic performance had become one of the weakest and most inflation-prone of all the major industrial countries.
At the last election we made all this very clear. We made it plain, too, that reversing this decline would require a major effort—an effort that would need to be sustained over the lifetime of more than one Parliament. And so it will be.
But this country's problems are not ours alone. In the summer of 1979, the whole world was hit by the fresh surge of inflation and renewed recession that followed the second huge increase in the price of oil. The average price of a barrel of oil last year was $34. That was 26 times as much as in 1970, when it cost only $1·30.[column 728]
The 1979 oil shock made the task of restoring our economy both more urgent and much more difficult. And it coincided with the surge in pay, and public spending, which the outgoing Government bequeathed to us.
So, in spite of North Sea oil, Britain entered the recession in poor shape, and rather earlier than other major countries.
Britain has, therefore, suffered worse than many. But we have not suffered alone. In the United States, in France, and in many smaller economies, unemployment has been rising sharply. In Germany last year, the number out of work rose by more than half a million, and there are now about 26 million people out of work in the industrial countries.
Even so, most Governments have reacted by continuing to give priority to the fight against inflation, and they have been making progress in that fight. But the battle is by no means won, so the outlook for the growth of world trade remains subdued.
It is in the light of this international environment that British policy has to be fashioned. All too often people still talk—and behave—as if British Government decisions alone were all that mattered for the British economy, and as if we could protect or subsidise ourselves against the impact of our competitors or the decisions of other Governments.
Yet the House knows how important for the United Kingdom are the policies of the OPEC countries in the world's oil markets, of the United States in relation to economic activity, inflation and interest rates throughout the world, and of Japan for the balance of world trade.
I shall have something to say later on about the impact of recent changes in the oil market. They are likely to have an encouraging effect on the international outlook for prices and output, and, in the medium term, on the stability of interest rates and exchange rates. But at present, it is interest rates and perhaps particularly interest rate volatility that are causing understandable concern, and I wish to say a word about that.
At a time of growing international tension, the United States is shouldering burdens for the defence of freedom for which all of those on this exposed flank of Europe should be grateful. The United States Government are also showing admirable commitment to the maintenance of monetary disciplines. For that, too, we should be grateful, for American inflation affects us all, because of the importance of the United States and of the dollar in the world economy.
We and our other friends have, therefore, a legitimate interest in the success of the United States Administration in reconciling their spending obligations with their own responsible pursuit of monetary discipline. If that success were only partial, there would be a risk of continuing high interest rates, which would be damaging to recovery—in the less developed world as well as in the industrial countries.
As I have told the House on a previous occasion, there is no reason to suppose that we in this country could insulate ourselves from such pressures by the simple single step of participation in the European exchange rate mechanism, because that has not been the experience of the existing participants.
Nor would concerted intervention in exchange markets be able, for any length of time, to contain the movement of funds that can be generated by the widening of interest rate differentials.[column 729]
There is, therefore, all the more reason for the closest possible understanding between those responsible for managing the major economies, for, as I have said, their policies can all have a direct, and often speedy, impact upon each other. We in this country must do our best to exercise our influence on the policies of our allies and associates, both directly and through the European Community, the Commonwealth, OECD and the International Monetary Fund. And we do just that. That is why I attach so much importance to the regular meetings of Community Finance Ministers, and of the World Bank and the fund, and why I look forward to welcoming to London this summer my counterparts from throughout the Commonwealth.
But let nobody pretend that we could expect to exert any influence at all if our own policies failed to command respect abroad. It is, however, widely recognised abroad—though not always by some at home—that in the last three years we have made substantial progress in tackling our long-term problems.
Thanks to last year's Budget, public borrowing has gone down as a percentage of gross domestic product, giving us interest rates lower than they would otherwise have been. In the six months following the Budget, our rates were on average four points below American and French levels, and on a par with German rates, in spite of the difference between German and British levels of inflation. And output started rising from the middle of the year.
Inflation has almost halved since the spring of 1980. It should be in single figures during this year, and lower still in 1983.
Productivity has been rising sharply. In manufacturing industry last year, output per man rose by about 10 per cent.
Lower pay increases, combined last year with fast productivity growth, meant that unit labour costs in manufacturing rose hardly at all. Our performance was comparable with that of Germany and Japan, and better than all our other major competitors.
Exports were rising again by the end of 1981. In the last four months, their value and volume was well up on a year earlier. Business surveys, and most economic forecasts, point to a further rise over the next year.
In the economy as a whole, we now expect output to grow in 1982 by 1½ per cent. and by rather more in 1983.
This gives the lie to all those who argued, not least at the time of last year's Budget, that our policies were foredoomed, because the recovery that we foresaw, and worked for, is now taking place. My aim in this Budget is to nurture and help sustain that recovery.
I shall discuss, first, the central issue of unemployment. Helping industry to become more competitieve competitive is the best way of creating future employment. But there is a clear case for direct action by Government as well, and I shall have a new proposal to bring before the House. I shall then have something to say about monetary policy, and the level of Government borrowing in the year ahead. Finally, I shall come to the tax and other measures which we intend to take, primarily for the benefit of industry and jobs.[column 730]
JOBS AND PAY
I begin with unemployment. To have millions of people at a time without work, many of them for long periods, is a tragic loss to any community. To be unable to find work is an affront to personal self-respect. This waste of human resources is today the misfortune of many societies besides our own. It is naturally a cause of deep concern to every Member of this House.
It is no service to the unemployed to suggest that there is some swift or simple remedy. For years, for example, it has been argued—it is still argued today—that we could get unemployment down if only we were less concerned to fight inflation. The right dose of reflation, more generous public spending, so the argument runs, would soon see unemployment tumbling down.
Would that it were so easy! But successive Governments for 20 years have been tempted to act on that advice. And with what result? All the time the tide of unemployment has been rising insistently from one business cycle to the next.
The truth is that “reflation” does not create jobs that last. In the longer run, it helps to destroy them. If more public spending was the proper engine for growth and jobs, Britain should now lead the world in both. Yet in fact unemployment today is almost eight times higher than it was 20 years ago.
The unemployed deserve a more considered response than that—one that is based on analysis of the root causes of the social blight of unemployment.
So this afternoon I want to remind the House once more of two figures that virtually tell it all. Since 1960 the real purchasing power of the average citizen in Britain has risen by over two-thirds, but the real rate of return on the capital employed in British industry has fallen by five-sixths. In other words, our present living standards have for years been plundered from the store of investment for the future.
Nor have we put to good use the investment that has been made. Too often we have tried to mitigate the inescapable consequences of poor productivity and shrinking international competitiveness by clinging to manning levels that could not be sustained.
We have only to recall, by way of example, the history of the British Steel Corporation. Had we not, throughout the middle 1970s, put off the painful choices, the corporation and those who work in it would have faced the current slump in world demand for steel in far better shape to weather it. Far fewer jobs would have been lost. Acquiescence in poor productive performance and overmanning may put off the evil day. But it only makes the inevitable adjustment all the harder when it comes, as come it must.
And so today we face the huge task of helping to create the conditions in which the unemployed can obtain work, in jobs that will l* and, as a vital step in this, encouraging wages to be at a level which will enable these more secure jobs to be created. My principal Budget measures will help in that direction.
Some of the obstacles to fuller employment have been created by successive Governments. Actions taken with exactly the opposite intention have often had the effect of keeping people out of jobs, actually adding to unemployment.
The Government have taken action to remove a number of these obstacles. We are seeking, by our employment [column 731]legislation, to create a more reasonable balance of bargaining power between the partners in industry. But in truth we need much wider change than can be brought about by Government or Parliament alone. We need a clear-sighted change in our national understanding of the problem, and then a more practical, more flexible approach.
The key point is this. Somewhere in the gap between the levels of income which we pay to those out of work and the earnings enjoyed by those who have a job are rates of pay which those now out of work would be glad to take if they had the chance. But convention and a narrowness of vision prevent those bargains being struck. When jobs are in abundance, any employer will make sure that he keeps up with the market, by offering high enough pay to recruit and retain the workers he needs. And trade unions will naturally encourage him. But when business is tight and jobs are scarce, the same employer owes it to the unemployed, as well as to his own employees, to react to the changed market, to pay at rates which leave room for him to earn enough for further business and further investment—and so for new jobs. In this situation too, trade unions have—or should have—exactly the same interest. That is the best service that any employer or union leader can offer to the unemployed.
Attitudes are changing in that direction. And so prospects for employment are improving. But it will take time. That is why we have already committed substantial sums for special employment and training measures to help those hardest hit. Our plans for 1982–83 provide nearly £1½ billion for special employment and training measures. By 1984–85, its first full year, we plan to spend over £1 billion a year on the new youth training scheme alone—a major advance for school leavers who cannot find jobs.
A number of these measures—for example, the young workers scheme—are intended to help the labour market work more flexibly, to help make wage levels more responsive to economic reality, and so lead to the creation of lasting jobs.
We should all wish to do more, within what the economy can afford, to reduce the continuing personal burdens of unemployment. It is clearly right to do all we can for those obliged to spend a long time without a proper job.
We can all see, in our local communities, tasks of environmental improvements, or of bringing help to those in need, that are crying out to be performed. Lord Scarman rightly drew attention to this in his recent report. He pointed out that there could be great advantage in schemes for socially useful activity, in place of current unemployment and social security arrangements. There are people needing work and work that needs to be done; the need is to match the two.
Many people believe—certainly this Government do—that it should be possible to take further constructive action along these lines. Let me give the House some indication of what we now have in mind.
The central idea would be to give those who have been on the unemployment register for some time the chance to work for the benefit of their own community, while still getting broadly the equivalent of their benefit entitlement plus an addition for expenses and the like. They would [column 732]remain free to take a regular job if it came along. And it would be for them to decide whether or not to participate in such a scheme.
This concept may be unorthodox. Certainly it is no substitute for long-term jobs. But in today's world it makes a great deal of practical sense. The Government would like to see it tried, to see it carried through successfully, on a wide, indeed on a nationwide, scale, with people working on non-profit-making projects brought forward by local sponsors of all kinds, including voluntary organisations and the churches, and indeed local authorities.
My right hon. Friend the Secretary of State for Employment is, therefore, asking the Manpower Services Commission to work up urgently a flexible and voluntary scheme on these lines, so that the Government can take firm decisions in the early summer on a new initiative for the commission to run alongside the present community enterprise programme.
We shall look for the commission's advice on what is possible; but, for illustration, net additional expenditure of some £150 million a year excluding supervision costs ought to be able to support around 100,000 places. That would be excellent value for the taxpayers' money—value for the community and a constructive opportunity for those who choose to take part. We should indeed be ready to back this kind of development on an even larger scale if the demand is there.
The Government therefore hope that all those in the community who could play a part in promoting this scheme will give it their early and careful consideration. And I hope that this new initiative will also be welcomed in all parts of the House.
I propose next to describe to the House how monetary policy will operate in the year ahead. I shall, nevertheless, do so as briefly as I can. The technically minded will find ample solace in the lapidary prose of the Red Book.
Ever since the collapse of the Bretton Woods system of fixed exchange rates in 1971, the need to control the money supply has been accepted world-wide. In this country, published targets for monetary growth were initiated by my predecessor in 1976, the year in which he had to seek help from the IMF. Then, as now, monetary control was supported by progressively lower public borrowing. I am sure that my predecessor was right to be persuaded of the need for monetary and financial restraint, to persuade individuals and companies alike that inflation would come down.
The medium term financial strategy which the Government launched two years ago is an extension of this approach. It has helped us to reduce inflation, and will continue to do so. We now have a real prospect of sustainable recovery. It is clearly right to maintain the strategy. Of course, it is right to adjust, in the light of experience, the way we pursue it. But maintain it we must. For it establishes the financial framework within which day-to-day policy decisions are taken.
In last year's Budget speech, I emphasised that no single measures of money can fully describe monetary conditions—they must be assessed in the light of all the available evidence. And that remains the basis of our policy.
As intended, the overall effect of policy in 1981–82 has been to maintain downward pressure on inflation. £M3 has [column 733]grown faster than the target set a year ago. This was due partly to the Civil Service strike. It has been affected, too, by structural changes in the market place—such as the rising market share of the banks—which could have long-term effects. The growth of the wider measures of money probably also reflects greater demand for liquid assets as a medium for saving. This, too, could last for some time. So, though the stock of broad money is higher than originally expected, our judgment is that this is consistent with maintaining the steady pressure needed to achieve a downward trend in inflation.
Certainly the evidence as a whole does not suggest tax monetary conditions. As in several other countries, the narrow aggregates have grown more slowly than the wider ones. The effective exchange rate has been relatively steady since the autumn. Interest rates have been high—both in nominal and in real terms. The price of some important assets—for example, houses—has been constant or falling.
I have taken account of these factors in setting somewhat higher ranges than were suggested for £M3 in last year's Red Book. The target range for 1982–83 will be 8 to 12 per cent. This adjustment in the monetary target does not imply any relaxation of purpose. On the contrary, it is a recognition of the pace of progress thus far, and, in the light of that, our judgment that the new ranges will be consistent with continued progress against inflation.
The new target represents a realistic restatement of our determination to maintain a responsible monetary policy. It should be consistent with growth of money GDP at 10 per cent. a year, with continued progress against inflation, and with a strengthening recovery of the real economy.
We shall continue to monitor a range of indicators. To make more explicit the way in which we do this, the ranges that I have just announced will apply to both the broad measures of money—£M3 together with PSL2—and the narrow measure, M1.
The exchange rate also normally gives useful information on monetary conditions. For while the Government have no target for the exchange rate, its effect on the economy, and, therefore, its behaviour, cannot be ignored.
Evidence on all these variables will continue to be taken into account. Policy dicisions will be aimed at maintaining a monetary environment conductive to the reduction of inflation.
Targets for the years after 1982–83 will be set nearer the time. Slower monetary growth is central to the medium-term financial strategy. The path for further reductions in the rate of money growth from year to year is illustrated in the Budget Red Book. The ranges have been constructed on the assumption that there are no major changes in the exchange rate from year to year.
What I have just described provides the framework for continuing the conquest of inflation. We are winning that battle and are determined to see it through.[column 734]
Monetary Control and Debt Sales
I ought also to mention changes which have been made over the past year in the techniques of monetary control. From last August, minimum lending rate ceased to be posted. The main purpose of this change was to allow market forces a greater influence on the structure of interest rates, and to allow rates to be adjusted more promptly in response to changing economic conditions. These objectives have been met. The new arrangements have coped successfully with some severe swings both in the international markets and in the money markets here at home.
We have also been working to even out the flow of revenue over the year in order to ease the problems for money market operations and monetary control generally. Let me give three examples. Over the past nine months, Customs and Excise has taken steps, with the agreement of the companies concerned, to secure a more even monthly flow of VAT into the Exchequer by adjusting the quarterly dates on which certain traders are required to account for VAT. Secondly, we are seeking a smoother payment of the building societies' composite rate tax. Finally, and most important, the proposals for oil taxation, which I shall describe later, will spread the payment of petroleum revenue tax more evenly over the year.
A central element in the Government's financial policy is that the gap between public sector spending and revenue should be financed in a way that is consistent with our monetary target. We have therefore greatly improved the balance of Government funding.
In 1979–80, when the PSBR was similar to this year's, sales of gilt-edged stock were more than eight times larger than the contribution from national savings. This year the ratio was down to about two to one. National savings have exceeded their target, which was raised to £3½ billion last autumn. I congratulate the department on achieving these higher inflows through increased efficiency, while making its contribution to Civil Service staff reductions.
Interest rates have come down since the current national savings certificate was introduced. It will therefore be withdrawn from tomorrow and replaced as soon as possible by a new savings certificate offering a lower but still competitive rate of return.
New sales of gilts to the public in the past year have not needed to be more than about £7½ billion, with less emphasis on conventional long-dated high-coupon stocks. In our funding policy we have demonstrated our confidence in our policies for reducing inflation. Last year I announced, as one part of our policy of diversified funding, the introduction of indexed gilt-edged stock. Over the past year, sales of this indexed stock amounted to some £2½ billion.
The right to buy this indexed gilt was restricted to pension funds and certain other institutions in respect of their United Kingdom pension business. I have now decided to remove this restriction. The Bank of England is announcing this afternoon a new issue of indexed stock on an unrestricted basis.
The restrictions on the existing indexed gilts already in the market will also be removed today. The House may recall that the original prospectus for these stocks itself provided for the possibility of removing the restrictions. This broadening of the market should increase the usefulness of indexed gilts as a funding instrument.[column 735]
Our policy of diversified funding will continue next year, with contributions coming from indexed gilts, conventional gilts and national savings. In the case of national savings, the target for 1982–83 will be £3 billion, just a little below the figure for last year.
PUBLIC SECTOR BORROWING
As well as setting a proper framework for money supply growth, the medium-term financial strategy sets out the Government's views on the proper level of public borrowing in the years ahead. This cannot make excessive demands on the funds available without putting upward pressure on interest rates. That is what Governments in other countries have found out, to their cost. Recent experience throughout the world exposes the myth that big budget deficits are good for growth and employment. On the contrary, a responsible fiscal policy is essential for both.
Last year I budgeted for a PSBR of £10½ billion. Since then output has moved broadly as expected at the time of the last Budget, and the 1981–82 PSBR is still on track for the forecast outcome.
Some argue that our fiscal policy is excessively tight, once account is taken of the effects of the recession. I do not accept this. The acid test for the PSBR is the level of interest rates at which it can be financed. My Budget decisions last year took account of the recession, and in assessing the impact of fiscal policy on the economy it is actual spending and tax payments that matter—not hypothetical estimates of what they might have been if the world were somehow different.
I know that there are some who say that our interest rates are really determined in New York anyway, and hence that the amount that we decide to borrow is neither here nor there. Such reasoning is mistaken, and the conclusions drawn from it are dangerously wrong.
Of course, it is true that international interest rate movements affect the price that we must pay for money borrowed here. But that in no way diminishes the responsibility upon us to choose policies likely to hold our interest rates in the lower part of the international range.
Let us remember what happened last autumn. We could not resist the pressures of rates rising sharply all round the globe: we would not have been able to do so whatever the level of our own domestic borrowing. But, because of the firm line taken in my last Budget, our own interest rates, even after the increase in the autumn, did not soar to the levels reached in the financial markets of a number of our competitors.
Had I last March thrown caution to the winds, our rates of interest would not have come down last spring, and would have had to go up far higher last autumn. Indeed the £10½ billion PSBR set for the year now ending, and the determined measures that we have taken to achieve it, have again been helping us in recent weeks to bring down the cost of borrowed money.
The fact is that, while there are limits to the influence we can have on the world background, we can do something more directly about our own borrowing. The larger the PSBR we start with, the higher the interest rates we shall end up with, and the opposite is also true.[column 736]
In my coming to a judgment about what we can responsibly plan to borrow in the next financial year, there is one further international dimension which I cannot ignore the recent fall in oil prices around the world.
I cannot stress too strongly that a lower level of oil prices, if it is sustained, is basically good news for Britain and for the world. It reduces industrial costs. It helps to lower inflationary expectations. It makes room for a faster growth in output, consistent with the proper monetary discipline which is now so widely applied. And, as the balance of earnings power between the advanced industrial countries and the oil producers undergoes some correction, the weight of highly mobile financial surpluses, which have been such a destabilising influence on world capital markets in recent years, is likely to be diminished. For this reason, the prospects for international inflation, for interest rates, for growth, and for exchange rate stability have all improved in recent weeks.
But, for my Budget judgment, this does to some extent work both ways. In part, my task has already been done for me. A drop in oil prices affects our own economy in much the same way as a cut in indirect taxes, or Excise duties, or national insurance surcharge.
Lower oil prices reduce costs and prices all round. They leave people in this country with more money in their pockets to spend on other things. They lower the costs of production and distribution. And, in addition—which a cut in our own tax rates cannot do—a fall in the world oil prices promises to increase activity worldwide, and with it the purchasing power of many of our traditional customers in the non-oil developing countries.
But that is not the whole story. When the price of oil drops our tax take from the North Sea production is correspondingly reduced. Other things being equal, this would increase the borrowing requirement, though not by as much, since the beneficial effects of the oil price cut boost our revenues from other forms of activity.
The prospect is bound to be uncertain. But in determining the size of the PSBR for the year that starts in April I can assure the House that I have made allowance for these factors as we know them today. Obviously, if there was to be a prolonged fall in the oil price, below the level we currently expect, then both the beneficial effect on activity and domestic prices, and the revenue-loss effect on the PSBR, would be increased. It would be wholly irresponsible for me to rule out the possibility of having to take action to correct the fiscal balance if that were to happen.
The illustrative projections presented with last year's Budget envisaged a PSBR for 1982–83 equivalent to 3¼ per cent. of GDP. This would be around £9 billion at current prices. In the light of the latest assessment of the prospects, I have thought it right to provide for a PSBR of around £9½ billion in the coming year, equivalent to 3½ per cent. of GDP. This is about £1 billion below the expected outturn for the current year. But it is also about £1·3 billion above what the PSBR would have been next year on the conventional assumptions—that is to say, if the changes to income tax and specific duties which I am proposing today were only to take account of the past year's inflation. That £1·3 billion is the PSBR cost of my Budget proposals in 1982–83. Their net cost to the Exchequer in a full year is over £3 billion, compared with this year's tax and duty rates.
The new revenue and borrowing projections published in the Red Book envisage a further decline in the PSBR [column 737]over the following two years to 2 per cent. of GDP on the assumptions about growth and inflation which are there set out. So the size of the Government's borrowing in real terms will continue to decline from year to year. This will further ease the pressures it imposes on financial markets, and it will assist progress towards lower interest rates and lower inflation.
I turn now to expenditure.
On 2 December I announced the Government's public expenditure plans for 1982–83. Today we are publishing the annual public expenditure White Paper. This sets out the plans for next year in more detail and also contains our provisional proposals for the two following years. At the same time, the Supply Estimates for 1982–83 are being presented to the House. The House will note the new and greatly improved presentation in the White Paper which I certainly find much easier to follow.
In the last two years these documents have been published on Budget day, so that all the information would be available at the same time. In this way the Budget debate can cover both sides of the account. The Select Committee on the Treasury and Civil Service is, I know, considering the handling of these matters, and I await its recommendations with interest.
I explained to the House in December why we had decided to increase planned spending in 1982–83 by some £5 billion compared with the plans set out in last year's White Paper. The increases included some £1·3 billion of extra finance for the nationalised industries, £500 million more on defence, and another £800 million on special employment programmes. They were partly offset by a general reduction in most cash limited expenditure.
Although most of the measures which I shall announce today involve reductions in taxation, I am also proposing some additions to public expenditure, totalling some £350 million in 1982–83. This includes an increase of £150 million in the Contingency Reserve to accommodate some of the expenditure measures. This brings the reserve in 1982–83 to £2,400 million. The planning total for 1982–83 given in the White Paper is £115·15 billion, in cash, compared with £110·2 billion, which is the cash equivalent of last year's projections for 1982–83. But the increase that I now propose will be more than offset by other changes in costs, and the total will therefore be £114·9 billion.
Total public sector capital spending is next year planned to be about the same—£11½ billion—as expected this year. The plans allow for new investment by nationalised industries—including that financed from their own resources—of over £7½ billion in 1982–83, some 26 per cent. higher than the outturn now expected in 1981–82, and 40 per cent. higher than in 1980–81.
Taking account of measures which I shall be announcing a little later, spending on construction is expected to rise by 14 per cent. to £10¼ billion in 1982–83. In particular, housing investment, and work done on water and sewerage projects, should be higher in real terms next year than this. In all these ways the Government are planning for the continued improvement of public sector services.
For the first time we have published figures for the whole survey period in cash. Following the Budget changes, the planning totals for later years are £120 billion for 1983–84, and £128 billion for 1984–85, in cash. The [column 738]Contingency Reserve, of £4 billion and £6 billion respectively, which is included in the figures for each of these years, has been set to give realistic totals in a cash planning regime.
The programme figures are provisional and will be reviewed in future surveys. The starting point will be the cash programmes resulting from this afternoon's announcements. The figures will not be automatically increased if inflation turns out to be higher than expected. Any alteration will be a matter of deliberate political decision. That is the essence of cash planning.
I foreshadowed these developments in my Budget speech last year. I am confident that they will help us to keep expenditure under control.
SOCIAL SECURITY AND CHARITIES
By far the largest single element in public spending is social security. In 1982–83 it will account for £32 billion, over a quarter of the total. About half of this goes to the elderly, who deserve our special consideration. The Government have been determined to preserve the full purchasing power of the social security retirement pension. We shall accordingly raise the pension rates, to cover the expected increase in prices for the 12 months to next November.
When I published the Industry Act forecast last December, I expected that increase to be 10 per cent. That was an appropriately cautious central forecast. But the outlook for inflation has clearly improved since December. My similar forecast now is that prices will go up by only 9 per cent. in the same 12-month period.
But I do not propose to raise the pension rates by only 9 per cent. We intend also to compensate pensioners for the fact that last year's increase was based on a forecast of the rise in prices that was 2 per cent. below the actual rise. Retirement pensions will thus go up next November by a total of 11 per cent. The standard rate will be increased by £3·25 to £32·85 a week for a single person, and by £5·20 to £52·55 for a married couple.
There is, of course, no Government commitment to full price protection except for the retirement pension and associated benefits. During the debate on the Government's public expenditure plans we said that a decision about the 2 per cent. shortfall in the value of other benefits would be announced at Budget time.
The main ones are unemployment benefit and supplementary allowance, sickness and injury benefit, and maternity allowance. I have received many representations that the 2 per cent. shortfall should be restored on these benefits also. We have decided that it should be.
This means that the rate of unemployment benefit will rise from £22·50 a week to £25 for a single person, and from £36·40 to £40·45 for a married couple. Details of the other benefits will be announced tomorrow by my right hon. Friend the Secretary of State for Social Services. We have also decided on some changes in the rules governing payment of benefits. These are in response to representations we have received, and will be widely welcomed. My right hon. Friend will give details in his announcement tomorrow.
There are, however, some further changes which I should announce today. First, child benefit, which is an important source of income for many—especially the lower paid with large families. From next November it [column 739]will go up by 60p a week, from £5·25 to £5·85. It will thus have been increased by 23 per cent. over two years, and so fully protected against inflation.
The additional one-parent benefit will be increased by 35p to £3·65. In the case of the family income supplement, the prescribed amount for a one-child family will go up from £74 to £82·50.
I shall have something to say a little later about the mobility allowance.
The full year public expenditure cost of all the changes in the social security field which I have mentioned will be some £3,000 million. The extra cost in 1982–83 will all be accommodated within the public expenditure totals I have just announced.
I turn now to help for charities.
The Government are deeply conscious of the contribution to our national life that is made by many of our charitable organisations. Two years ago I introduced substantial new tax relief for covenanted donations to charities. I also doubled the exemption from capital transfer tax for charitable bequests or gifts made within one year of death.
We have been urged to relieve charities from VAT on their purchases. The attractions of this are obvious, but it raises substantial difficulties. The more one studies how it might be done—we have looked into it exhaustively—the more insuperable appear the problems of definition, of administration, and of equity that stand in its way. So, reluctantly, I have had to be satisfied with other ways of helping charities instead.
First, I propose to take the capital transfer tax exemption for qualifying gifts to charities a stage further, by increasing it, for gifts made within a year of death from £200,000 to £250,000.
Secondly, I intend to abolish stamp duty completely on transfers of assets to charities.
Thirdly, as the National Council for Voluntary Organisations has suggested, I propose to remove beyond all doubt any liability to development land tax where a charity disposes of property which has been subject to roll-over relief.
Taken together, these measures constitute worthwhile new assistance to charities and voluntary organisations. They build still further upon the significant benefits which charities have derived from earlier action by this Government. Our record continues to be one in which we can justifiably take pride.
I now come to the particular problem of the disabled, which we have always had very much in mind. Last year, the International Year of the Disabled, I introduced a range of value added tax reliefs for charities concerned with the disabled. I am now able to announce three further measures of help.
First, there will be some extension of the existing VAT reliefs for disabled people and the charities serving them.
Secondly, the rate of mobility allowance will be increased—by more than the expected rise in prices—from £16·50 to £18·30 a week. This will mean that mobility allowance has risen by over 80 per cent. since the Government took office. This represents a considerable increase in real terms.
In addition, I propose this year to respond to a particularly important request made on behalf of the disabled to successive Governments in recent years. I [column 740]propose that from 6 April the mobility allowance should be wholly exempt from income tax. This is a major step: it means an increase in net income of up to £5 a week for the working disabled. They deserve every encouragement, and the change will, I know, be widely welcomed.
MANAGING THE PUBLIC SECTOR
The provision and organisation of welfare benefits is only one of the many tasks of the Government.
The whole cost of Government administration does indeed impose a formidable burden upon the taxpayer. Out of total spending of £105 billion in the current year, the Government's running costs amount to over £12 billion. The importance of keeping tight control of these costs is, therefore, manifest.
This is why we set ourselves the task of reducing the size of the Civil Service, from 732,000 in 1979 to 630,000 by April 1984. We are on target. Numbers are down already by 57,000. We now have the smallest Civil Service for 15 years.
Local authority manpower, on the other hand, has come down by only 3 per cent. since 1979, less than half as much as in the Civil Service. The importance of further progress there needs no underlining.
Efficient cost control means getting pay rates right, as well as controlling staff numbers. Later in the year the committee of inquiry under Sir John Megaw will be making recommendations about Civil Service pay arrangements for the future. In considering its report we shall aim to be fair to public servants, and to the taxpayer.
The Nationalised Industries
But the Government are also responsible for the nationalised industries. In deciding how much public finance to make available to them, the Government must be influenced by their performance in controlling their own costs. Every 1 per cent. they save on labour costs is worth another £140 million that they could use for investment, or to reduce prices.
Yet even now this lesson has not been fully learnt. Seven out of every 10 days lost because of strikes in the last two years were within the public sector. The continuing rail dispute, about productivity improvements and up-to-date labour practices that should have been introduced years ago, demonstrates how far there is still to go. In the absence of increased productivity, willingly accepted, it is not easy to justify increased investment.
This is why we intend to widen the exposure of the public sector to the discipline of the market place. One way of doing this which has been commended on both sides of the House is by the introduction, under the right conditions, of private capital. Those conditions must ensure fair competition with the private sector for capital, they must also ensure that the consequent higher cost of borrowing is offset by greater efficiency.
The Government have now decided to accept, in principle, the proposal for British Telecom to issue a bond to raise market capital in this way. The return to the investor would be based on the profits earned by the corporation.
British Telecom will be expected, as a condition of access to market finance, to keep tariff increases at least two percentage points below the annual movement in the [column 741]RPI, and to reduce real unit costs in 1982–83, by a minimum of 5 per cent., with further reductions to be agreed for later years.
We shall have to satisfy ourselves, in the light of market conditions nearer the time, that the bond represents good value to the Government and British Telecom, as well as to the investor. Subject to that condition, the aim will be to go ahead with an initial sale in the autumn, of up to £150 million. This will be an important experiment in exposing the performance of a nationalised industry to the judgment of the market place.
But above all it remains our purpose, wherever possible, to transfer to the private sector assets which can be better managed there. In the private sector, businesses have to respond to consumer needs. The pressure on enterprises formerly in the public sector to do the same at once becomes much greater if they are transferred.
We have made considerable progress. There has been some controversy about the method of selling shares in Amersham International, but for those inclined to be wise after the event it is worth pointing out just how much greater public interest in the sale proved to be than commentators expected when the terms were first announced. It is, in any event, a cause for satisfaction that the great majority of Amersham employees are now shareholders in the enterprise for which they work. For the great majority of people, that is the right kind of public ownership.
Legislation is on the statute book enabling us to transfer to the private sector the British Transport Docks Board, and British Airways, and to permit the sale of subsidiaries in British Telecom and British Rail. Within the last few weeks we have transferred the National Freight Company to a consortium led by its own management. And British Aerospace and Cable and Wireless are now firmly established in the private sector.
Our plans assumed that asset sales of this kind would total about £500 million this year. We expect to achieve that target. The Government look forward to further disposals in the next two years. We are seeking powers to sell the offshore assets of British Gas and to permit the introduction of private capital into the National Bus Company. The most important transfer will be the sale of 51 per cent. of the BNOC's oil-producing business, for which a Bill is now before the House.
I now turn to what can be done in this Budget directly to benefit business, industry, and so jobs.
NATIONAL INSURANCE SURCHARGE
Our prime purpose is to help private commerce and industry to help itself, by cutting its costs. And I have no doubt, from the representations I have received, that the single measure business would most welcome is a reduction in the national insurance surcharge.
This surcharge was imposed and then increased by the previous Government. Indeed, in their last two and a half years in office the last Government increased the combined charge on employment, the employers' national insurance contribution and the national insurance surcharge, from 8½ to 13½ per cent.
The surcharge is, of course, a tax on employment. It raises production costs. It is not rebatable on exports and it either puts up prices or cuts into profits. But it is an [column 742]extremely cost-effective tax. It raises large amounts of revenue at little administrative cost. It is much easier to put on a tax of this kind than to take it off.
The Government have already protected businesses, and so employment, from any increase in employers' national insurance contribution rates for two consecutive years. Had we not done so, employers would have had to find nearly £1 billion more in the coming year than will actually be the case.
It is now time to offer more positive relief. I accordingly propose to cut the rate of the national insurance surcharge from 3½ to 2½ per cent. This will help to reduce costs throughout the economy and will be of value to all businesses, whatever their tax position. The cut will operate from 2 August, which is the earliest practicable date.
But I am anxious that industry should not suffer from this unavoidable delay. I shall, therefore, propose an extra ½ per cent. reduction between August 1982 and April 1983. The effect of this will be to ensure that business as a whole will enjoy in the last two-thirds of 1982–83 the equivalent of a whole year's reduction of 1 per cent. in the surcharge.
This proposal is intended to reduce business costs in the private sector. However, public sector employers also pay the surcharge, and in order to leave them exactly where they would have been without the change appropriate reductions will be made in the relevant cash limits and the Votes of central Government and the NHS, in the rate support grant to local authorities, and in the external financing limits of the nationalised industries. The necessary changes will be announced as soon as possible. This will reduce the cost to a net figure of £640 million in 1982–83.
The aim of the relief I have just announced is to help business costs and employment. If it were to find its way into higher pay, that would totally defeat the object of the exercise, and would obviously have to be taken into account in future.
It is crucial that this should not happen. In proposing this reduction, we are offering business and industry, management and work force, an exceptional opportunity to improve their own performance and prospects. I believe that they will take it.
I come now to the indirect taxes. I propose no change in the rate of VAT.
For the Excise duties there has grown up in recent years a sensible presumption that they should be adjusted in line with the movement in prices from one year to the next. That, after all, is what happens automatically with VAT and the ad valorem duties; and also to the personal tax allowances, unless Parliament decides otherwise. And that is the basis of my approach to Excise duty changes this year.
I start with the duty on tobacco. Last year the duty was increased twice—in March as part of the Budget measures and in July to help recoup the loss of revenue from the derv duty reduction. I have taken account of that in proposing this year an increase that is the equivalent of 5p, including VAT, on the price of a typical packet of 20 cigarettes. There will be consequential increases for other tobacco products. These changes will take effect from midnight on Thursday.[column 743]
Next, alcoholic drinks. I propose to increase the duties from midnight tonight by amounts which represent about 2p on the price of a typical pint of beer, 10p on a bottle of table wine, and 13p on a bottle of sherry—all including VAT. The full increase in the price of a bottle of spirits necessary to take account of inflation would have been over 50p. However, in the light of the representations about the state of the Scotch whisky industry which I have received from hon. Friends representing Scottish constituencies and others, I have decided that it would be appropriate to limit the increase on spirits to 30p a bottle, again including VAT.
In proposing a rather larger percentage increase in the duty on claret than on whisky, I have at no stage had in mind adding to the problems of the candidate for the Social Democratic Party in Glasgow, Hillhead—Mr Roy Jenkins. I fancy that he may have enough troubles of his own already.
Next, the oil duties. Last year, as the House will recall, I felt it right to go some way to meet the representations made to me by hon. Members in favour of a lower increase in the case of derv than of petrol, in view of the impact of derv duty on industrial and distribution costs. I have decided this year slightly to widen that differential.
There is a strong case for a larger increase in the petrol duty than in the other duties, for our average pump prices are currently among the lowest in the European Community. They have, moreover, been favourably affected by recent changes in the price of oil. Pump prices have been falling rapidly.
Against this it has been impressed upon me by a number of my hon. Friends from rural constituencies, in all parts of the kingdom, again including Scotland, that pump prices in remote areas are very much higher than those in more heavily populated areas. Yet dependence on cars for transport is greatest in the more scattered communities.
On balance, I think it would be right, at least at this stage, not to impose any real increase in the oil duties. I propose, therefore, to limit the increases in the duties on both petrol and derv to amounts which no more than compensate for one year's inflation. The duty on petrol will accordingly increase by the equivalent, including VAT, of about 9p a gallon or 2p a litre. This will still leave most pump prices lower than they were at the end of last year. The duty on derv will increase by the equivalent including VAT, of about 7p a gallon or 1·5p a litre. As almost all derv is used by businesses, this smaller increase will help to hold down business costs.
As last year, I propose no change in the rate of duty on heavy fuel oil. I am not able, as some would wish, to cut the duty rate; but leaving it unchanged will help industry as the duty burden continues to fall in real terms.
Last year I undertook to review the rate of duty applied to aviation gasoline, or avgas. I have given very careful consideration to the representations which I have received on behalf of air taxis, flying schools, crop-spraying and other specialist services, and from those concerned with air travel in the Highlands and islands of Scotland. I cannot accept in full the arguments which have been put to me, but I have decided that it would be right to reduce the avgas duty rate to one-half of that on petrol. Including VAT, this amounts to a reduction of about 32p a gallon, or 7p a litre. All these changes take effect for oil delivered from refineries and warehouses from 6 pm tonight.[column 744]
I also propose to increase most rates of vehicle excise duty. For the motorist, the increase will be £10, from £70 to £80. Duty levels on most other groups of vehicles will be increased by about 12 per cent.
I propose to make two important changes in the VED on commercial vehicles. I hav, e decided that it would offer a substantial, and justifiable, help to small and medium-sized businesses at this time to bring the duties on about half a million light commercial vans more closely into line with those on cars. On the other hand, it would be appropriate, in the light of the conclusions of the Armitage report, to impose on the heavier lorries—the 80,000 or so of more than 9 tons unladen weight—a licence duty which more closely reflects the actual cost which they impose on the road network. So the duty on this category will be increased by about a quarter. These changes have effect for licences taken out after today.
The changes I propose for commercial vehicles reflect the Government's intention to get a fairer balance between the taxation burden on different groups of lorries and their road costs. I propose to take a further step in this direction by including in the Finance Bill provisions for restructuring the basis of VED on heavy lorries, to a gross weight method of assessment, and for taxing all light commercial vehicles in due course at the same rate as cars. The House will recall that the framework for this major reform of the VED system was set out in the Transport Act 1981. It will involve substantial changes in the pattern of commercial vehicle taxation and I think it right that the road transport industry should have time to adjust. I therefore propose that the rates of duty on the new gross-weight basis should take effect from 1 October.
And, last of the Excise duties, taxes on betting and gaming. Many of my hon. Friends pressed last year for substantial increases here; and I made some changes in July. I now propose no further increase in the rates of duty on general betting and bingo, both of which were increased then. But I have decided that pool betting duty, which has been unchanged since 1974, should go up from 40 to 42½ per cent. from 1 April. I also propose increases from the same date in the rates of duty on casinos, where I believe the existing rates are too low. Full details of the new rates, and other changes which I shall be announcing today, will be given in press notices this afternoon.
My right hon. and learned Friend the Chief Secretary announced last summer that Customs and Excise would undertake a comprehensive review of gaming machine taxation. A very large number of representations were received during the course of this review, from and on behalf of clubs, public houses, amusement arcades, and others. In the light of these representations I have decided that it would not be appropriate to introduce an ad valorem duty on gaming machines, or to impose an excise duty on amusement machines, such as “space invaders”. I have also decided that duty should no longer be charged on 2p gaming machines, which are mostly to be found in the seaside arcades. However, I have decided that there should be significant increases from 1 October in most rates of the existing licence duty on 5p and 10p gaming machines.
The total effect of all these changes in Excise duties will be to raise an additional £1,150 million in 1982–83, and £1,165 million in a full year. The impact effect on the RPI will be about three-quarters of 1 per cent. This has been fully taken into account in my forecast of falling inflation in the year ahead.[column 745]
I have spoken of the oil duties: I now turn to the oilfields. The development of the North Sea has been a story of success, which is almost entirely due to the skill and enterprise displayed, and risks accepted, by the private sector. As a nation, we must never forget the great debt that we owe to those on the oil rigs and elsewhere, who have been responsible for exploration and development. It is important for them as well as for the British people that the rewards should be fairly shared.
Last year, in the light of the massive increase in oil prices which had occurred in earlier years, we changed the structure of North Sea tax, to make it more responsive to changes in price. At the same time tax revenue from the North Sea was brought forward, with an increase in the total level of taxation. I also invited the industry to suggest better ways of raising the revenue that we needed. I am grateful to it and others who have commented for their careful and considered response.
As I have mentioned, the current fall in oil prices reduces the revenue that the Exchequer receives. I recognise that it reduces the revenues of the oil companies as well—but it also reduces the tax that they have to pay.
Detailed study has convinced me that, subject to some marginal adjustment, the total tax burden is not such as to discourage exploration or development. Nor is it so high as to deprive the oil industry of a reasonable, and often attractive, yield. In these circumstances, I cannot reduce the overall tax burden to the extent that the industry would have wished. But I do agree with it on the need for some change of structure. I see, in particular, the advantage of profit-related taxes in relation to additional investment in existing fields. The supplementary petroleum duty will therefore be abolished with effect from the end of this calendar year.
I propose at the same time that the rate of petroleum revenue tax should be increased from 70 to 75 per cent. and that arrangements should be introduced for advancing PRT payments. Advance payments of PRT, although computed in the same way as SPD, will not be a separate tax, but simply an acceleration of the existing tax. They will thus differ fundamentally from SPD in being fully set off without limit against ordinary PRT liabilities when these arise. This structural change is one which representatives of the industry have proposed. As from mid-1983 there will also be a monthly instalment system of payment of PRT in order to secure a smoother public sector cash flow.
These changes will not affect the revenue yield of rather over £6 billion in the coming year. But in 1983–84 there will be a net cost, after allowing for the saving in interest due to the new system of instalment payments, of some £70 million.
I have spoken earlier about current uncertainties in relation to oil prices and the future yield of tax from the North Sea. But I am aware of the concern felt by the industry about the number of changes in the regime there have been in recent years. For this reason, my hope is that the new tax structure that I have proposed will provide a more secure and stable regime for the future, permitting development to go ahead uninhibited by major fiscal uncertainties.
I propose a number of other minor changes, partly in response to the views put forward by the industry. And I propose that regional development grants paid in respect [column 746]of expenditure incurred after Budget day should be taken into account for the purposes of PRT and ring fence corporation tax. We shall also need to legislate next year to deal with certain special problems affecting PRT expenditure reliefs, pipeline tariffs, and other non-oil receipts. These will be the subject of a consultation document which will be issued shortly.
These fiscal measures, combined with the decisions that we have already announced on the abolition of the State's sole right to buy gas, and on the creation of the new private sector oil company, will provide a sound basis for another decade of successful enterprise in the North Sea.
I turn now from the energy industry to its industrial customers, to whose problems we have given a great deal of attention in recent years.
INDUSTRIAL ENERGY COSTS
Last year I announced substantial help for industry on energy prices. The NEDC task force, which has made a valuable contribution to a wider understanding of these matters, reported in November that these changes had significantly improved the position of large energy users here compared with their Continental competitors. But we are very conscious of the problems which remain, at least for some industries.
The Government have accordingly discussed with the electricity supply industry their pricing proposals for 1982–83, I am glad to be able to announce that these will include new special arrangements to benefit larger users—those heavy industrial users which face the greatest difficulties. A scheme will be introduced under which customers can gain significant reductions in their charges in return for a commitment to accept load reductions. The industry estimates that over 100 major companies should benefit.
This will be in addition to the arrangements for electricity prices which I announced last year and which will continue this year. But both the number of customers able to benefit from the new scheme, and the extent of the benefits, on average, will be greater.
To pay for these measures we are increasing the external financing limits for the electricity industry, including Scotland, by some £100 million in 1982–83. These costs are additional to the EFLs shown in the public expenditure White Paper.
Some large industrial users of gas face similar problems, and here, too, we propose significant relief. For contract customers the price of gas taken after the first 25,000 therms in the contract year will be frozen at the level charged on 1 April 1982. This freeze will apply until the end of 1982. The cost of this measure is forecast to be some £60 million.
In addition, we have asked the National Coal Board to renew the measures first announced last year, so as to avoid further increases in the list prices for foundry coke until the winter. The board's deficit grant and EFL will be adjusted accordingly and the cost will be met from the Contingency Reserve.
Last year I announced the introduction of grants towards the costs of converting from oil-fired boilers to coal. We have now decided to extend the scope of these grants to cover conversions of other industrial oil-fired equipment and conversions of gas-fired equipment to coal. The scheme will also now cover conversions in service industries as well as in manufacturing. At the same time [column 747]we are reducing the qualifying threshold for the total project cost from £25,000 to £15,000. This will help a large number of smaller firms, particularly in the horticulture industry. The cost of these changes will be met from within the £50 million already allocated for this scheme.
Taken together with the measures announced in my last Budget, these three measures—special arrangements for large electricity users, the freeze on gas contract renewal prices and on list prices for foundry coke—should reduce the energy costs of British industry, compared with what they otherwise would have been, by over £250 million over the two years concerned. They represent a serious and significant response to industry's representations on energy prices.
I turn now to the continuing effort to encourage innovation in industry. If we are to win still more worthwhile orders both at home and abroad British industry must continue to improve its design and production techniques.
There is no more important area to which this applies than microelectronics and information technology. The Government have already given a lead by designating 1982 as Information Technology Year. We have already authorised investment of well over £2 billion in the British Telecommunications network in the coming year—more in real terms than at any time since 1974–75. That investment will breed new services, new firms and new jobs. So, too, will the development of alternative and competing services for electronic communication, such as the new Mercury network for business.
Because new technology is important on a wider front, I propose to make a further allocation for this purpose. My right hon. Friend the Secretary of State for Industry will shortly be announcing a series of new and expanded schemes. These will include additional assistance towards space technology, and production engineering—including the introduction of a special scheme of assistance to small engineering firms. And the 100 per cent. first year allowances for leased television sets, which were due to be phased out this June, will be extended for a further year for sets incorporating a teletext facility. This will encourage the wider use of a leading product of British information technology.
These measures will be worth £130 million over three years.
I have now almost completed my review of proposals involving spending, and spending forgone. I have described my decisions on Excise duties, and the major cut in national insurance surcharge which we propose. In the remainder of my speech I shall be dealing primarily with fiscal issues.
I wish to deal first, and briefly, with the key issue of fiscal justice. All Chancellors of the Exchequer come under pressure every year to remedy hardships and anomalies in the tax system. This year has been no exception; and by the end of this afternoon I shall have been able to meet a large number of such points.[column 748]
But there is another side to that medal. Justice is indivisible. Justice to the taxpayer must be matched by justice to the Exchequer. The revenue must be protected if the burden is not to fall more heavily on the general body of taxpayers.
We must all be glad to see the courts adopting a new approach towards artificial avoidance schemes. As a direct result, we expect to collect a very large sum of tax, possibly as much as £400 million, which might otherwise have been avoided. The proper vigilance of the Revenue departments in these matters needs to be matched by the determination of Parliament to legislate where this is needed. Last year I asked Parliament to do so on a number of important matters. This year I propose further action.
We must, however, tread a very careful path between safeguarding the interests of the taxpaying community on the one hand and avoiding economic damage on the other. This need for caution applies, for example, to the proposals affecting the tax liability of companies engaged in international business, on which the Inland Revenue put out consultative papers last year.
Tax Havens and Company Residence
These papers and the draft clauses dealing with these matters have caused considerable anxiety. In the case of company residence the primary objective was simply to replace the present ill-defined rules with ones which were clearer and more certain. This was not an attempt to extend the coverage of the tax. But I accept that some people might be adversely affected. The matter therefore needs to be looked at again.
The problem of tax havens was a different one. If one has an open world in which there is free movement of capital and of persons—something which in itself is a good thing—this offers increased opportunities for tax avoidance. We must be very careful not to prejudice legitimate business, particularly because of the importance of London as a financial centre. We need to find the right middle road, and one which is accepted as right. It is to this end we shall be directing our efforts. Clearly this precludes legislation this year on any of these topics.
I now turn to the areas in which I propose to take action in this Finance Bill.
First, international leasing. At present, assets leased abroad attract capital allowances at what is, in many cases, a favourable rate of 25 per cent. per annum. Leasing of this kind has grown sharply. Moreover, there is evidence of United Kingdom tax incentives being used to subsidise deals between other countries—deals by foreign businesses in foreign-made goods, competing with our own home producers. I therefore propose, for new commitments after today, to reduce from 25 to 10 per cent. the rate of writing down allowance for all assets leased abroad.
Secondly, films. Investment in films qualifies for 100 per cent. first-year allowances. As with other capital allowance provisions, these investment incentives are available without regard to whether the film is made in this country or overseas. There is evidence that schemes for investment of this kind—primarily in foreign-produced films—are currently being marketed actively in this country. The potential loss to the revenue is very great.
I propose, therefore, to withdraw the 100 per cent. first-year allowance for films and to introduce in its place a [column 749]provision which will, in broad terms, allow companies to write off expenditure over the income-producing life of the film.
A change of this kind could have serious implications for the British film industry, if introduced immediately, at a time when there are signs that it is just beginning to establish a new and more competitive position. I intend therefore to introduce transitional relief for British-made films—broadly speaking, films registered for the purposes of the Eady levy arrangements—for a two-year period. I shall be consulting the industry about the form which this assistance might take.
Thirdly, shipping. Here again arrangements are being made to exploit United Kingdom investment incentives for the benefit of foreign businesses. In this case a typical arrangement may involve a foreign shipping company chartering a vessel built abroad from a company specially set up in the United Kingdom to attract 100 per cent. capital allowances. I propose to reduce the rate of capital allowance in these cases to the 10 per cent. rate for international leasing generally. I am concerned to safeguard the position of British companies chartering their vessels abroad in the course of a genuine shipping business, and I shall be discussing with the shipping industry how best to do this.
On each of these three subjects—international leasing, films and shipping—the changes will take effect from today. I shall bring forward the necessary detailed legislation in Committee.
Fourthly, so-called section 233 loans. These are contrived arrangements under which interest paid on certain bank loans escapes liability to corporation tax in the hands of the banks. In future these payments will be taxed like any other interest payments. The new rules will apply from today. In the case of contracts entered into before today, the new rules will apply to payments due on or after 1 April 1983.
Fifthly, by taking advantage of double tax relief banks can lend overseas at abnormally low interest rates at the expense of the United Kingdom taxpayer. I propose to include in the coming Finance Bill measures to stop this exploitation of our tax system. They will take effect from 1 April 1982 but in the case of existing loans will apply only to interest arising from 1 April 1983.
While the measures I have announced will help, we shall need to give much further thought in the coming year to the problem of how best to ensure a sufficient contribution to tax revenues from the banking sector. The problem is not an easy one, as the benefit of some of the devices I have just described is shared between the banks and their domestic customers. There is a danger that measures directed to ensuring that the banks pay a more equitable amount of tax are all too simply bypassed by the banks shifting the burden on to their customers. For these reasons I have forborne from taking action earlier, but, as Burke said,
“There is, however, a limit at which forebearance ceases to be a virtue.”
On a different note, a number of building societies have recently issued a new form of negotiable bond. I have no reason to believe that any improper use has been made of these new bonds. But, as an obvious precaution, I propose to extend to these bonds, from today, the existing provisions dealing with the “manufacture of dividends”.[column 750]
I also propose some tightening up of the law relating to very large golden handshakes. The tax relief will be withdrawn on a sliding scale with the effect that the excess of sums over £75,000 will be fully charged to tax.
We owe it to the ordinary taxpayer to take action in these fields. It is on him that the cost would fall if we did not do so.
THE CONSTRUCTION INDUSTRY
I now revert to my principal theme: help for business and industry, and hence for jobs and people. Last year's Budget contained a number of measures to help the construction industry, an industry which can make a particularly significant contribution to the creation of new jobs. It is, accordingly, right to give it further help this year.
As I have already mentioned, our new public spending plans provide work for the construction industry in 1982–83 worth about £10¼ billion—an increase of 14 per cent.
This year local authorities have greatly underestimated the success of our policy of selling council houses and land. The extra revenue which this is bringing in has not been spent. For 1982–83 they have been assured that they can spend up to a total of some £3 billion on housing. This will include about £1 billion of funds which they can expect to receive mainly as a result of the success of the right-to-buy legislation. This should allow an increase of nearly one-third in the scale of their capital spending, compared with what they seem likely to spend in 1981–82.
In addition, I now propose a change for 1982–83, designed to help private home owners whose houses fall well short of today's standards.
The value of grants given for major repairs, and for the provision of basic amenities in the home, under the home improvement grant system, will be increased for a limited period, to a maximum 90 per cent. of the eligible cost, instead of the 75 per cent. currently available.
This increased rate of grant will apply only to applications received before the end of 1982. The purpose is not to add to longer term demands on the industry but to encourage the early take-up of immediate spare capacity. We also intend both to enable more people to get grants for home insulation and to increase the value of those grants.
To pay for these changes and to encourage local authorities to make more general improvement grants available, their capital allocations in 1982–83 will be increased by £100 million over and above the expenditure provided for in the White Paper.
My right hon. Friend the Secretary of State for the Environment has already announced measures for 1982–83 to give priority to inner city projects that offer the greatest degree of participation by the private sector. Building on this, up to £70 million of the provision for the urban programme and for derelict land reclamation in 1983–84 will be earmarked for projects that encourage participation by the private sector.
We have also decided to offer further encouragement to the private sector and nationalised industries to bring derelict land into productive use; we shall increase the grants payable, from 50 per cent. of the cost of reclamation to 80 per cent. in assisted areas and derelict land clearance areas when legislation can be brought forward. The cost will be contained within the existing programme.[column 751]
In addition, we shall give further encouragement to new private investment in housing for rent. I now propose to introduce capital allowances, at the rate of 75 per cent. for the first year only, for expenditure on the construction of properties wholly for letting as assured tenancies by bodies approved by the Secretary of State. The scheme will run for an experimental period of five years. Allowances may be claimed for expenditure incurred as from today.
In my Budget two years ago I introduced the small industrial workshop scheme, under which industrial building allowance can be claimed on the construction of small workshops at the rate of 100 per cent. The scheme has been a resounding success. Over 5,000 new workshops have been constructed for letting to small businesses, at an estimated Exchequer cost, spread over several years, of £125 million to £150 million.
The scheme has succeeded in increasing the stock of industrial workshops at or near the upper size limit. But there has been relatively little investment at the very small end of the range. I therefore propose to extend the scheme for very small workshops, of not more than 1,250 sq ft for a further two years, until March 1985.
I also propose to bring within the scope of the industrial building allowance certain kinds of servicing, repairing and warehousing activities. This, too, will improve the small workshop scheme.
I wish to deal also with the liability to VAT of certain kinds of building alterations, where there has in the past been serious doubt about what was liable to charge. A recent judgment of the House of Lords would have led, if applied in its entirety, to VAT being charged at the standard rate on a range of non-structural building alterations which had previously been free of charge. Though clarifying the law, this judgment would have imposed an extra £80 million of tax on the industry, which it can ill afford at present.
So I intend to re-establish the clarity needed, but in a way which will relieve the industry of all but £10 million of the extra tax burden. I shall, in due course, lay before the House an order, which will have the effect of continuing to zero-rate three important kinds of alteration which might otherwise be adversely affected by the House of Lords judgment. These are the most commonly recognised forms of double glazing, loft and cavity wall insulation and damp-proof coursing. This useful simplification of the law will cost the Revenue about £70 million a year. The other kinds of non-structural alteration covered by the judgment will become subject to VAT, but, pending the completion of discussions with the industry, no steps will be taken to apply the tax before about the beginning of September.
My final proposal in this area concerns stamp duty on house purchase. I propose to raise the exemption by £5,000, to £25,000, and the other thresholds also by 5,000, at a total cost of £70 million in 1982–83.
This change should be widely welcomed. It will help to improve job mobility and give some encouragement to house construction. Most of all it will help those who have been saving to buy their first homes. By the end of this Parliament nearly three out of every five families will own their own homes. This will represent a significant extension of the property-owning democracy. Taken [column 752]together, these proposals will mean more work for the construction industry, and more jobs for those who work in it.
BUSINESS, ENTERPRISE AND SMALL FIRMS
Evident in the measures I have announced so far is the Government's consistent determination to help create the right conditions for the new investment needed to create new jobs. But this Budget, like its two predecessors, is designed also to provide a special tonic for small businesses.
There can be no doubt that higher rates of interest and the consequent reluctance of companies to borrow long-term at high fixed rates have caused a distortion of balance sheets. Too much reliance is now placed on short-term bank finance. As a result there is additional pressure on monetary growth.
A number of suggestions have been made for reducing the burden of interest rates on companies. We are all indebted to my hon. Friend the Member for Surrey, North-West (Mr Grylls) and others for the way in which they have focused public attention on this problem. In many cases, the selectivity in the remedies proposed would favour lending by the banks, and lending to “tax-exhausted” companies. We have considered these ideas very carefully. But they raise difficult questions of principle, and we are not persuaded that they offer the best solutions to the problems they are designed to solve. Moreover consultations are still not complete on the corporation tax Green Paper, which raises major questions about incentives to investment, and we are still considering how best to ensure a proper contribution to tax revenue by the banking sector.
However, we can all agree that the basic problem of financing profitable expansion and investment demands urgent and continuing attention. A particularly important aspect of this is the provision of equity capital, about which I have some new proposals to make.
The business start-up scheme, which provides income tax relief for investments of up to £10,000 in the equity of companies starting new trades, has been widely welcomed. I propose for 1982–83 and 1983–84 to increase the annual limit from £10,000 to £20,000. As less than a full year has elapsed since it became law, some potential investors may have been unable to use up the full £10,000 limit in 1981–82. I propose, in addition, that any unused balance of this year's limit should be added to next year's entitlement. This means that, in some cases, the effective limit for 1982–83 will be as much as £30,000. These improvements should provide a further stimulus to investment in new enterprises.
Where capital for small businesses generally is concerned, many people have emphasised the importance of the new provisions in the Companies Act 1981 for companies purchasing their own shares. Clearly it would be wrong to change the tax law in such a way that these provisions could be used to pay out what would amount to tax-free dividends. But there is scope for tax changes which will significantly increase the attractions of equity capital, both to the investor and to the entrepreneur.
I now propose that certain purchases of their own shares by unquoted trading companies, mainly small and family businesses, should not be subject to ACT and income tax. They will be treated instead as sales of shares by the shareholder, and therefore, subject in most cases to capital [column 753]gains tax only. This measure will be of special benefit to small companies which have a limited market for their shares.
Two years ago, I relaxed the conditions governing profit-sharing schemes and reintroduced legislation enabling employees to take up options to buy shares in their companies without incurring income tax liability. I did this because I have no doubt that employees who own shares in the company for which they work develop a greater sense of commitment to the success of the business. Since I made my first changes two years ago, the increase in the numbers of employee share schemes has been extremely encouraging. In 1979 there were only 30 such schemes. Now there are over 400. This is exactly as we should wish. Wider share ownership is good for the business, good for the worker and good for Britain.
It is important to maintain and extend this progress. Accordingly, I now propose to increase the value of shares that can be allocated each year to any one employee from £1,000 to £1,250. I also propose to amend the detailed rules to simplify the administrative problems arising on rights issues. We should also give some help and incentive to those who acquire share options outside the ambit of approved schemes. I therefore propose to make it easier for them to pay the income tax chargeable on the exercise of such an option, by providing that it should be collected over three years rather than in a single sum.
In the last two years we have substantially relaxed the rules for tax relief for interest on money borrowed to invest in small companies. This year I propose to move a stage further. If a shareholder works full-time in the management of a business he will in future be able to qualify for tax relief to invest in that business even though he does not have more than 5 per cent. of the shares.
Now I turn to loan finance. In my last Budget I announced the establishment of a pilot loan guarantee scheme. The scheme started in June 1981. Since then the demand for loans has far exceeded expectations. Last October, in response to that demand, we increased the allocation for the first year from £50 million to £100 million, but with 2,700 loans worth almost £100 million already approved after only nine months, some further increase is desirable. Accordingly, I propose to increase the amount which the participating institutions may lend to £150 million for the first year. In addition, a further £150 million will be available for loans under the scheme during its second year, to June 1983.
I also propose that the limits for the “small companies” rate of corporation tax should go up again from £80,000 to £90,000 and from £200,000 to £225,000. This will mean that this Government have increased the lower limit by 80 per cent. and the upper limit by more than 150 per cent. As a further help for new businesses, the period for income and corporation tax relief for pre-trading expenditure will be extended from one to three years.
Many hon. Members, I know, have been impressed by the value of the work done by local enterprise agencies. These agencies depend in the main on businesses already established in the local community. They clearly play a valuable part in helping small local firms to start and to prosper. I therefore propose to allow businesses to deduct for tax purposes the contributions they make to certain enterprise agencies, which concentrate on helping small firms. I hope this measure will encourage more widespread support for such agencies. The relief will be available from 31 March and will run for 10 years.[column 754]
On value added tax, I have two principal changes to propose. The registration threshold will be increased from £15,000 to £17,000. And I propose to introduce VAT relief for services supplied before registration. This measure, and the extension of relief for pre-trading expenditure, will reduce the costs of starting a new business. The total revenue cost of these measures to help small firms is about £80 million in a full year.
I also want to make it easier for those who have recently left school or college to start a business. Hitherto—[Interruption.] Hon. Members may laugh, but I shall propose a change in relation to a very practical obstacle to those young people securing employment opportunities. As the whole House should know and appreciate, hitherto people who have just left school or college have not been able to qualify for the so-called 714 certificates under the construction industry tax deduction scheme. The present system, designed to prevent tax evasion, may actually keep young people out of work as sub-contractors in the industry. The certificates are widely used in the industry but the existing rules require an individual to show that he already has years good record as a taxpayer before he can secure a certificate. By definition, someone who has just left school or college cannot qualify under this three year rule. I therefore propose—I hope the whole House will welcome it—to change it, so as to enable school and college leavers to obtain special certificates. I also propose a guarantee scheme which may help others to obtain these special certificates.
I have one other measure to help the self-employed. A decade of inflation has eaten into the value of money which the self-employed had put aside to provide for their retirement. I therefore propose to increase the limits on retirement annuity relief for contributors who are now in their fifties and sixties to 20 per cent. for those born between 1916 and 1933; to 21 per cent. for those born in 1914 or 1915; and to 24 per cent. for those born in 1912 or 1913. I also propose to alter the present restrictions on the relief to allow more self-employed people to benefit from these higher levels. These changes will cost £12 million in 1982–83 and £25 million in a full year. They will provide a significant improvement in the position of the older contributor whose lifetime savings have suffered particularly from high rates of inflation in the 1970s.
The self-employed play a key role in the economy. Their contribution to its vitality, its adaptability, is apparent to all. Along with small business men, they fully merit this special encouragement.
I turn now to a part of our tax system which is impeding the efficient working of capital markets and doing injustice to individuals and businesses alike: the capital taxes. There is room for wide differences of view about the principle of taxing capital. But there is no case whatever for maintaining a system of capital taxes which, by holding back business success and penalising personal endeavour, does serious economic and social damage.
In each of the last two Budgets we have taken significant steps to reduce such damage. I propose carrying this process a stage further today. The threshold for capital transfer tax will now be increased to £55,000. The rate bands which apply above the thresholds have remained virtually unaltered since the tax was introduced in 1975. It is time they were extended. Under the new [column 755]scale, details of which will appear in the Red Book, the top rate of tax will be reached at £2·5 million. In real terms, this is still not as high as the figure set by my predecessor when he introduced the tax in 1975. The lifetime scale will be improved to a similar extent. The cost this year will be £35 million and in a full year £85 million. I also propose that the indexation principles, already applied to income tax allowances, should in future apply as well to the CTT threshold and bands.
I should add that it is my intention that the Finance Bill should deal with the new regime for settled property. Draft clauses were published in December. The comments we have received will help us to clarify and improve the provisions. They have more than justified this exercise in open Government. I am grateful to all those who have contributed. There will also be a number of technical provisions related to the heritage. I have decided, in the light particularly of the reductions in the lifetime rates of charge that I made last year, not to alter the rate at which the periodic charge is payable.
I also propose that foreign currency accounts belonging to individuals who have no connection with the United Kingdom should not be caught by the CTT. It is important for London's position as the world's leading financial centre that this matter should be cleared up.
I now come to the incidence of capital gains tax on inflationary gains. This is a matter which has rightly given rise to a great deal of discontent. No one has yet succeeded in finding a solution to this problem. Innumerable proposals for full indexation, for tapering and other ingenious devices have been put forward. None, unfortunately, overcame all the practical difficulties. I cannot, however, allow this injustice to continue. It is intolerable for people to be permanently condemned to pay tax on gains that are apparent but not real—gains that exist only on paper.
I propose, therefore, that, as from this April, gains, including those of companies, will, in principle, be calculated after taking account of inflation which occurs after that date. No relief will, however, be given in respect of the first year of ownership. The problem that we seek to solve is one which relates essentially to assets held for a period of years and it would not be appropriate to extend relief to assets bought and sold within a comparatively short period of time.
Because we have not found it possible to extend the new scheme to cover past gains, I propose also that the exempt slice should be increased to £5,000. That is the best solution to the problem of the past and will simplify administration both for the taxpayer and the Revenue. For the future, I intend that this threshold too should be statutorily indexed.
There will be no revenue cost in the coming year. In 1983–84 the cost of these two measures will be £55 million. But this should not be looked at as a measure of the cost to the Exchequer. It is rather a measure of the tax which ought never to have been levied in the first place. This change is no more than simple justice, which should be welcomed on both sides of the House.
The benefit of these measures will be of substantial help to business as well as to the individual. They will significantly increase the attraction of equities to United Kingdom taxpayers. One result should be that companies can raise more equity at lower cost than would previously [column 756]have been possible. An increase in the scale of equity issues by companies will help to reduce their dependence on bank borrowing.
I also propose a number of other specific changes. In future, roll-over relief will be available on compulsory purchase and, completing our policy of avoiding a double charge to CGT and CTT on the one event, roll-over relief will also be available on assets coming out of trust. These proposals involve no cost this coming year and a cost of £11 million in 1983–84.
I believe that these changes, taken together, will be widely welcomed as a further major reform of the capital tax system.
But for the vast majority of individuals what really matters is income tax. And income tax is far and away the biggest source of Government revenue. This year about 26 million income taxpayers will contribute, in round figures, about £30 billion to the Exchequer.
Quite rightly people look for some reduction in their own tax burden. As I have explained at the outset, and demonstrated by my proposals, the paramount aim of this Budget is to help industry, to encourage business, and to create jobs. But I want also to help people directly. The one helps the other. People need industry; but industry also needs people—as workers, as customers, as investors. We remain firmly committed as ever, over the years, to reduce the burden of direct taxation. It is essential to do so to improve incentives, to remove disincentives and to reduce the poverty trap.
There are always, of course, competing arguments as to whether one should reduce the rates of income tax or raise the thresholds at which people pay tax. Any Chancellor would like to be able to do both. But this year, given my principal aim, I have had to make a choice.
We have already reduced the basic rate of tax from 33 per cent. to 30 per cent. and reduced the higher rates of tax as well. I propose, therefore, to concentrate the relief that is available this year on raising the tax thresholds.
The single personal allowance will accordingly be increased by £190 to £1,565 and the married allowance by £300 to £2,445. The additional allowance for single parents will, as a consequence, rise by £110 to £880. So too will the widow's bereavement allowance. And there will be corresponding increases in the age allowances, the higher rate threshold and bands, and the threshold for the investment income surcharge. Effect will be given to changes under PAYE as from the first pay day after 26 April.
These increases are up to two percentage points more than the 12 per cent. required to take account of inflation in 1981. They are worth £1·8 billion this year and almost £2½ billion in a full year. As a result some 1·2 million people who would have paid tax next year will not now have to do so. This news will be very welcome both to the House and to the country at large.[column 757]
In framing this year's Budget, it has been my purpose to give as much encouragement as I believe we can afford to an economy which is now moving in the right direction. To hearken to the voices that urge us only to “borrow, borrow, borrow” would perform no service to British industry or to the unemployed. On the contrary, it would lead only to the dead end of a plummeting exchange rate or a rocketing rate of interest—more probably to both.
Better by far to secure, as I have done, a prospective level of borrowing that is below that of the year now ending, and so to maintain our progress towards stable prices. And at the same time, as in each of my three earlier Budgets, to achieve substantial tax reforms, to promote the wider ownership of wealth, and to encourage the productive private sector, which in these past three years has made giant strides towards the restoration of our reputation as a trading nation.
This is a Budget that will give confidence at home, that growing markets will be there, for those prepared to go out and win them, and, so, a better prospect of employment opportunities for those who look only for the chance to work.
And confidence abroad, that Britain stays on course, to put a dismal record of performance behind us, once and for all.
This Budget is designed to give that double boost to confidence. I commend it to the House and to the nation.