Mrs. Thatcher (Finchley)
It is a pleasure to be opposite the right hon. Gentleman Harold Leverthe Chancellor of the Duchy of Lancaster once again. It happened first about seven years ago when we were both in similar positions. I remember his great enthusiasm then for international co-operation. It took the form of being one of the first to tap the Eurodollar market for financing the nationalised industries in Britain.
The right hon. Gentleman used to take me to corners in the House to give me a little financial homily—believe it, or not, on the wisdom of not borrowing short to lend long and on the great wisdom of borrowing longer from Europe to lend shorter on some of the IMF commitments.
[column 614]Mr. Lever
The right hon. Lady has benefited imperfectly from the instruction. What I said to her was that for overseas borrowing we ought to borrow long and not short because we would thereby shield ourselves from runs on the currency. I have never said that borrowing short and lending long is in itself undesirable within the domestic system. That would mean the end of the building societies. The FFI would never have started. I have never had any such view as the right hon. Lady attributes to me.
Mrs. Thatcher
Clearly I shall have to have another lesson. I was rather alarmed when the right hon. Gentleman compared the FFI to building societies, in view of my problem with building societies while in my last Shadow job.
One thing that I remember from my previous experience with the right hon. Gentleman is that he always had a borrowing answer to every single problem. I always felt that I could never rival him at the Treasury because there are four ways of acquiring money, to make it, to earn it, to marry it and to borrow it. He seems to have experience of all four.
The right hon. Gentleman spoke warmly about private enterprise. I only wish that some of his colleagues would speak as warmly about it as he does. I think the right hon. Gentleman probably has more battles with his back-bench colleagues than he does with hon. Members on the Front and back benches on this side of the House. He showed his great skill when discussing the Merrett and Sykes and Wood and Godley theories, in coming down on both sides of the argument. It is a skill which must stand him in very good stead at Cabinet meetings. Some of us feel that just as I have been a statutory woman in the Cabinet, he is perhaps a statutory moderate in the Cabinet now.
The right hon. Gentleman spoke in a clear way about the problems of taxation on stocks during times of inflation and said that we had not really got down to inflation accounting. When I first came into the tax business I considered the Report of the Royal Commission on the Taxation of Profits and Income in which Lord Radcliffe came down against having inflation accounting because the figure of inflation was comparatively small, although they [column 615]thought it comparatively large. The right hon. Gentleman is wrong to say that we did nothing about it. We appointed the Sandilands Committee from which we shall shortly receive a report, although I understand from the Press that the report will take longer in coming than we hoped.
The right hon. Gentleman will also know from his tax experience that companies are taxed on profits computed according to the current commercial method of accounting. That principle has recently been affirmed, but the problem is that there is no agreed method of commercial accounting in periods of inflation, and until we have that agreed method it is not easy to alter the basis of the tax otherwise than on an ad hoc principle. The right hon. Gentleman enlarged upon the ad hoc principle and wisely gave the example of a continuing business, unlike the Cambridge school which gave an example of one which was not likely to continue very long.
May I refer to the “bankable assurance” , about what will happen to taxation on stocks next year, and point out that a bankable assurance may be all right for a continuing business but that it is not all right for a liquidator if the business goes bust in the meantime. This is a detailed point that we might consider on the Finance Bill.
Before going on to what I wanted to say, may I say that I was a little concerned about one or two things which the right hon. Gentleman said about the FFI. Most of us agree that we would rather have this sort of facility in private hands, and it is a good idea to set it up, but I do not think there is a good parallel with building societies. One thing which concerns some of us, particularly those who have ever been connected with some of the institutions which are expected to put up some of the finance—for example, insurance—is that the duty of insurance companies is first to look after their beneficiaries. To do this they need to match their liabilities with their investments, and I hope that by investing in this kind of institution there will be no question whatsoever of their having to put the interests of their beneficiaries second. I think they would be in considerable difficulty if they had to do that.
[column 616]Mr. Atkinson
That is an important point. It slots into this debate very acutely indeed. If the right hon. Lady is philosophising on the basis that insurance companies and other financial institutions should put the interests of the beneficiaries first, would she not also say that that was a correct posture for the trade unions to take? The Conservative Party seemed to be accusing the trade unions of ignoring the national interest, and now the right hon. Lady says that the interest of the beneficiaries comes before the national interest.
Mrs. Thatcher
With respect, I was speaking on the basis of a legal contract, not a social contract. The two are quite different things as the hon. Gentleman knows.
Mr. Atkinson
If there is morality in law, then surely these things must equate one with the other, because this is what the argument is about.
Mrs. Thatcher
Perhaps the hon. Gentleman could equate them by making his contract legal as well.
In 15 years of listening to Budget speeches, and that is a lot more than 15 Budget speeches, I have never known Denis Healeya Chancellor take so long to communicate so little to the general public. Not even the price increase in petrol came from him. Instead it came from one of his colleagues. It was a very long speech to say not a great deal. I appreciate that he was in some difficulty. It was not the difficulty of steering a course between the objectives of curbing inflation and providing jobs. We all know about that difficulty.
It was not even the difficulty that he could not do exactly as he wished because of external constraints. We all know and appreciate those difficulties and how they might mature next year. The difficulty he was really in was of trying not to reveal that if he was right now he was wrong in his March Budget. It seems to us that part of the task of this Budget is to put right some of the wrong decisions in the March Budget which my right hon. and hon. Friends were continually pointing out at the time of that Budget and also during the passage of the second Budget, when they once again referred to the liquidity problems affecting companies. [column 617]
I want to follow the Chancellor of the Exchequer in some of the questions which he raised and left unanswered. Harold LeverThe Chancellor of the Duchy started with the private sector. I want to begin with the nationalised sector. The Chancellor of the Exchequer put a lot of his strategy on raising prices in the nationalised sector but did not begin to tell us by how much. Can we contrast his attitude in March with his attitude in November? On 26th March he called the deficit of £800 million
.“deficits on an appalling scale”
He said:
“We could not allow the existing state of affairs to go on … the situation had gone too far to be rectified completely by a single round of price increases.” —[Official Report, 26th March 1947; Vol. 871, c. 300.]
He then went on to announce the actual increases, electricity 30 per cent., rail 12½ per cent. to 15 per cent., and increases for the Post Office.
It was interesting that when the Chancellor had been in office for only three weeks he had grasped the problem and quantified the solution. Now contrast what happened in November. The deficit of the nationalised industries was now running at £1,000 million a year. Again it was the same story:
“it is impossible to achieve a realistic level all at once” .
I accept that. I know it is. I have been in Government trying to eliminate deficits. The objective was:
“to phase out these subsidies completely as fast as possible” .—[Official Report, 12th November 1974; Vol. 881, c. 268.]
The interesting thing was that although he had been in Government for eight months he could not then quantify the necessary increases. Either he could not or he would not. I do not know why. He knows that the deficit of the nationalised industries, the six main ones, according to a Written Answer of 5th November, was £650 million. He knows that to eliminate even that, let alone the deficits on some of the others, could involve a substantial increase in prices.
I do not understand why he has refused to give those increases when he made that the cornerstone of his strategy. We therefore have to rely upon the Press because it appears to have done some work on price increases. It says that gas will go up by about 15 per cent. and electricity by about 25 per cent. In the [column 618]Price Code the right hon. Gentleman not only wants the industry to break even, he wants it to make a modest surplus, again for obvious reasons. My right hon. and hon. Friends know of the years we spent, when previously in Opposition, trying to get yardsticks for the efficiency of nationalised industries. The normal yardstick is competition but it is not there with a nationalised industry.
It is difficult to substitute another except by fixing certain targets. The Chancellor has fixed certain targets—that prices should secure “a modest surplus” in 1975–76. But he knows that he will be in political difficulty and may not be able to achieve his objective. We saw that at Question Time this afternoon. Already the complaints are coming in that these deficits should not be eliminated. How does he propose to make his aims clear to those who are responsible for putting forward wage claims in the nationalised industries?
If the right hon. Gentleman's objective is to eliminate the deficit then surely what he is saying is that any wage claim that is granted in the nationalised industries will automatically be passed on to the consumer. It is not a confrontation between those who work in the industries and Government. If there is a confrontation it is between those who work in such industries and those who will ultimately pay consumer prices. Will he attempt, in any way through the directive mechanism or other mechanisms, to make that clear to those responsible for putting forward wage claims in the nationalised industries?
In his broadcast the Chancellor of the Exchequer said:
“If you're on the shop floor you can force your company into bankruptcy by asking for wages you know it can't afford.”
There is no such limit on the nationalised industries. We noted yesterday that it was suggested, for the first time to the knowledge of most of us, that there should be a penalty on companies which went beyond the social contract. But there could be no similar penalty on the nationalised industries. How does the Chancellor propose to deal with this?
I point out in passing that it seems odd to some of us that employers are not parties to the social contract yet they are the people who suffer the penalty if the social contract fails. Those who are [column 619]parties to the social contract seem to suffer no penalties at all, if it fails. I hope that the Chancellor will deal with this later.
I turn to the corporate sector with which the Chancellor of the Duchy dealt. It always seems rather interesting that with incomes policy the cry is that co-operation is the only way but when it comes to the other side of the equation, prices, somehow control is the only way, and pretty detailed control too.
Mr. Lever
The Conservatives had controls on prices, too.
Mrs. Thatcher
We had controls on both sides, as the Chancellor of the Duchy knows. There were the two sides of the equation. The right hon. Gentleman's party has taken away one side of the equation and left the other. On Tuesday another layer of detailed control was added, a whole new set of complicated rules about allowable labour cost increases and investment increases.
The danger of taking any control policy too far, and this was always inherent in incomes and prices control, is that we create a paradise for bureaucrats. We also build into the system a great deal of delay at both ends. A firm I visited the other day told me—I got it to check the numbers—that it had to fill in 750 forms for Government Departments annually. Over 500 were statutory and 250 were voluntary. However the firm felt that it had to comply. It also had great difficulty in getting answers, sometimes, out of the Prices Commission. It would find that there would be a refusal after 27 days so that it had to start all over again. Every new built-in detail makes the job of private enterprise in responding to the immediate situation that much more difficult. We should be extremely wary of this.
I know that the CBI and traders wanted the Government ultimately either to abandon price control or to substitute a general control of profits which would have been much easier for everyone to operate. But the answer was, “No, we are not going to do this” , without a reason being given. I hope that the Chancellor will not keep detailed control for too long, because this is a serious problem. [column 620]
On the prices side, the Denis HealeyChancellor says that he believes that the relief on prices will bring in about £800 million extra to the corporate sector. He gave no breakdown of that estimate. Some people think that it is on the high side for two reasons. First, a number of companies will not be able to take advantage of the maximum relief because competition will keep prices down, and, secondly, in some spheres there is a good deal of consumer resistance to increased prices.
The other problem that will arise is how far and how quickly will the price increases be passed on in wage increases, bearing in mind the structure of the social contract. One can foresee what will happen. The Chancellor's intention is to transfer money from the personal sector to the corporate sector. That can be the only meaning behind his strategy. When price increases are allowed automatically, the cost-of-living clause in the social contract will come into effect, so the price increase will not go into profits for long but will once again go into wage increases. That will mean that the price increase will give little relief to profits, and there will be a spiral.
The only two ways of relieving that, are either by inflation, which ultimately reduces the standard of living, or by unemployment, and that is exactly what the Chancellor of the Exchequer has been warning us about. I hope that he will give us a breakdown of the £800 million, and tell us how he proposes to prevent the relief from spilling over into wage increases under the social contract, thereby defeating his Budget strategy, which is to take money from one sector and put it into another.
I turn to stock relief for tax purposes and make a plea that the Chancellor will reconsider the position of small traders. At present the relief is not available for individual traders, partnerships and companies whose closing stock is less than £25,000. Administrative reasons are pleaded. I do not fully understand that. Every person who is liable to tax has to fill in a tax return. He has to show his opening and closing stock and his trading income on that return. All the figures will be there on the return, and the return will qualify the person for a number of reliefs. Why in the world cannot the return be used to qualify [column 621]that person for this extra relief? The Government did not shy away from providing extra bureaucrats for the detailed control of prices. Why do they shy away from providing extra people, if necessary, for allowing detailed reliefs. I hope that the Chancellor will reconsider that.
Mr. Tom King(Bridgwater)
Does my right hon. Friend agree that if the relief were at a lower level it could give tremendous help in agriculture? Tax bills will be coming in for the farmers, and stock is one of their problems.
Mrs. Thatcher
Yes, and it will also help many shop keepers who would otherwise be adversely affected. It will have two very good immediate effects.
Mr. Geoffrey Finsberg(Hampstead)
Would not that also be achieved by the Inland Revenue doing what it frequently does and making a provisional assessment, and in the following year putting it right by tax overpaid or tax underpaid?
Mrs. Thatcher
Clearly, my hon. Friends are not short of ideas. I am concerned that some relief should be given because, as both Chancellors—of varying hierarchical levels—realise, small businesses have suffered for various reasons, particularly on rates, for which both parties are guilty, so let us both agree to give them some relief.
Mr. Leslie Huckfield(Nuneaton)
That is an interesting admission.
Mrs. Thatcher
I never flinch from accepting responsibility for my part in any situation. The hon. Member for Nuneaton (Mr. Huckfield) should come to some of our debates on rates.
Mr. Huckfield
I am sure that I should find far more interesting some of the debates in the 1922 Committee.
Mrs. Thatcher
I am sorry that I gave way. The hon. Gentleman did not do himself justice.
The White Paper, “Capital Transfer Tax” , suggested that there would be relief both for farmers and small businesses. Relief from capital transfer tax has been provided to a limited extent for farmers, but there is no relief forthcoming for the small business. If none is forthcoming the life of the small family business will end. No family business will be [column 622]passed on to a son or daughter of the next generation. They would become one-generation family businesses. We think that that would be a great pity and would rob the nation of one of the most creative sources of new wealth provided by people who have one of the main incentives in life—to see that their children do better than they have done and to direct their efforts to benefiting their children. I hope that the Chancellor will look at this again.
Denis HealeyThe Chancellor said something about corporation tax which disturbed my hon. Friend the Member for Croydon, South (Mr. Clark). He said that one reason why he would not give relief on advance corporation tax was that it would benefit companies who had paid out most dividends, and he thought that they were not the companies with the greatest need. The Chancellor ignored completely that some companies have to finance their operations through preference shares. Those companies are already in some difficulty because dividends on preference shares are not allowed for tax, whereas if they had a higher gearing the interest would be allowed for tax. Those companies have no option but to pay the dividends, and they deserve some relief on advance corporation tax.
The Chancellor's reaction shows how shallow is his conversion to profitability and a vigorous private sector. I have previously heard him say that he likes profits, but only if they go to social purposes of which he approves. He cannot bear them going out in dividends. How he expects to get investment if people do not get a reasonable return for their investment is a mystery. We cannot and will not get investment in industry unless those who invest, whether they be trade unions, insurance companies, pension funds or individual people, get a reasonable return. I know that the Chancellor put up the dividend limit from 5 per cent. to 12 per cent., but that is not enough in today's circumstances.
The Chancellor's attitude to private savings is in general not very favourable. He never hesitates to penalise those who save. He had to have one vindictive bit in the Budget—the surcharge on savings income. Some of the people with savings income have already suffered a capital loss on the investment. They are having to take a return which does not even compensate for the fall in the value of the [column 623]investment in capital terms. This time he chooses to put an extra tax on those people. He gave us a nice little sermon:
“The senseless accumulation of material goods … can no longer be regarded as the only guarantee of human happiness or the only measure of economic success.” —[Official Report, 12th November 1974; Vol. 881, c. 255.]
That perhaps ties up with the fact that after the previous election he said:
“I never save. If I get any money I go out and buy something for the house.”
The Chancellor of the Exchequer (Mr. Denis Healey)
I wonder if the right hon. Lady would quote the origin of that canard. I cannot recall having ever said that in my life.
Mrs. Thatcher
The Sunday Telegraph for 24th March 1974.
Mr. Healey
I read that report, but it was attributed to a conversation that I was said to have held with somebody who did not write the piece in question. I ask the right hon. Lady again to give some evidence that I ever made such a preposterous remark.
Mrs. Thatcher
It is taken from the Sunday Telegraph, but if he did not say it I am delighted. The right hon. Gentleman had better take lessons on how to invest from the Chancellor of the Duchy of Lancaster.
We seem to have got that nicely out of the way. I am delighted that we have got on record the fact that the Chancellor is a jolly good saver. I know that he believes in buying houses in good Tory areas.
I turn to another aspect affecting——
Mr. William Clark
With regard to the investment surcharge, does my right hon. Friend agree that there are many cases in which disabled people will be hit because of the surcharge? A person who suffers an industrial injury and is paid damages receives those damages for loss of earning capacity, and they must be invested. Now a disabled person getting more than £20 a week investment income will be hammered.
Mrs. Thatcher
I have heard my hon. Friend make that point cogently in the past and I hope that we can deal with it in the Finance Bill. [column 624]
An interesting point which is buried in the Chancellor's Budget speech was the following:
“Wage increases and other cost increases have increased public expenditure as outlined in the March Budget in current price terms … . by over £1,000 million more than the additional yield from taxation which results from inflation.” —[Official Report, 12th November 1974; Vol. 881, c. 250.]
I noticed that point because we have always thought that fiscal drag was positive and that the effect of inflation was to raise the revenue more than was needed to meet the extra expenditure. But that appears to be no longer true.
I saw an analysis on this by an economist some time ago, and he came to the conclusion that fiscal drag was negative. I was therefore interested to see this £1,000 million referred to. At current levels of public expenditure and current levels of inflation on income it will be necessary progressively to tax more to satisfy the demands of public expenditure.
Two points arise from this. First, we have to turn our minds to inflation accounting on Government accounts, which does not appear to have been done, although there were some thoughts about it when we were in office. Secondly, we have to turn attention to getting not only income taxes buoyant but getting more of the expenditure taxes buoyant as well. I gather that one of the reasons for this comparatively new phenomenon is that less than half of the tax revenue is buoyant and the other half is made up of specific taxes. The only increase from specific taxes is in the volume sold.
The Chancellor did something about buoyancy on indirect taxes by adding 25 per cent. VAT on petrol, so that becomes a buoyant tax. But it would be most alarming if it became necessary steadily to impose more taxation to finance existing current Government expenditure. It would be far better to build some buoyancy into indirect taxes. What would be even better would be to reduce the volume of public expenditure.
If this relationship goes on it means that Governments will taken an increasing proportion of the national income into the public sector, not to finance expenditure on new projects, but to service existing projects. I hope that I have made this point clear. It was buried [column 625]deeply in the Chancellor's speech and I wanted to discuss it.
The Chancellor's other strategy was that he hoped we would make a determined effort towards cuts in public expenditure. But again he did not say where those cuts should be made. I believe that the cuts he is suggesting are not reflected in his target. I am sorry if that is a bit Irish, but the right hon. Gentleman will see what I mean in a moment. He gave us his target that public sector programmes as a whole should not increase in demand terms by more than 2¾ per cent. a year on average over the next four years. But I look back to what we provided in our last Public Expenditure White Paper. I have tried to take the same figure, which is not always easy. On page 7, paragraph 6 of the White Paper it was stated that we hoped to put the increase in real terms at less than 2¾ per cent. We put it at 2½ per cent.
So the Chancellor is apparently increasing his target at a time when the growth of the economy is running at a much smaller rate than during our period in office. The right hon. Gentleman knows full well that with his forecasts growth will not be moving at all, or at least very little, in the future. If he takes an increasing proportion into the public sector very little will be left for the personal sector. That would not suit us.
I hope that the Chancellor will tell us more about the cuts he is proposing. He pointed out that defence expenditure was under consideration, but he knows that cuts in defence expenditure would be of a long-term nature and would not have any effect next year. He said that local authority expenditure accounts for 30 per cent. of public expenditure as a whole. But I have reason to know that what it is possible to do in, for instance, education, in terms of cuts in local authority expenditure which would bite quickly, amounts to very little. What could be done on both the capital side and the procurement side was done. The only scope that the Chancellor has left is to increase charges if he wants anything to bite quickly under this heading.
I saw a headline in the Daily Telegraph saying that the price of school meals would have to go up. This was attributed to something said by R. Prenticethe Secretary of State for Education and Science [column 626]at an education conference in Birmingham.
As the Chancellor has made public expenditure cuts another part of his strategy, we should have more details on this. We cannot judge the Budget as a whole without having more of the figures which are involved in it.
I realise that a number of my right hon. and hon. Friends wish to speak, but I could not sit down without saying at least a few words about the borrowing requirement. The Chancellor now realises, having listened to many speeches on this topic, what a great shock it was to everyone that the borrowing requirement has gone up to over £6,000 million, particularly in view of the attitude that he took about it in March, when his every effort was to get it down, for two reasons. He wanted to have an effect on the money supply—and, secondly, he said:
“Our aim will be to bring about a reduction in interest rates. … It will depend on our ability to restrict public sector borrowing requirement here at home. …—[Official Report, 26th March 1974; Vol. 871, c. 284.]
If getting interest rates down depends on our ability to restrict the public sector borrowing requirement, that has now gone through the roof and we hope that interest rates will not go up accordingly.
Mr. F. A. Burden (Gillingham)
Is my right hon. Friend aware that, during the period when we had no parliamentary papers, a Written Answer was given to me by the Paymaster-General in which he admitted that there was an in-built offset against inflation in the loan from Iran, that it would have to be repaid in five years, that he could not give me that exact interest rates, but that it would be repaid in American dollars? It will be interesting to know the basis of Government borrowing, how much has to be repaid in foreign currency and what in-built provisions there are against inflation.
Mrs. Thatcher
As my hon. Friend knows, the financing of the public sector borrowing requirement is very difficult. He is asking for information about it, as I would be.
There were one or two woolly bits in the Chancellor's Budget speech on this point—[Hon Members: “Oh.” ] They were not specific enough to give full [column 627]details. I know that the right hon. Gentleman has done the financing already to the tune of £5,500 million. What worries some of us that the need for the loan will outlast the willingness of some of the present lenders to leave their money here. In these circumstances, the right hon. Gentleman might have to resort to inflationary borrowing to cover the debt. I hope, therefore, that he will tell us a little more about how he proposes to finance the borrowing requirement, especially the part between the £4,000 million and the £6,000 million to which he referred in the closing passages of his speech.
Mr. Atkinson
In terms of the right hon. Lady's own statistics, if the private sector finds it very difficult to raise £3,500 million, taking the CBI's analysis of the situation, how can she say that it is inflationary to have a borrowing requirement of this kind in the public sector? Surely it must be looked at as a whole. If there is a deficit on one side, it follows that there is a surplus on the other—if the basis of the Government's policy is full employment and not excessive imports.
Mrs. Thatcher
Whether it is inflationary depends not only on its amount but on how it is financed and whether it can continue to be financed in a non-inflationary way. Apparently at the moment it is being financed in a non-inflationary way. Many of us wonder what long-term or medium-term commitments to that effect the right hon. Gentleman has.
We believe that the Chancellor of the Exchequer will be in difficulty with some of his current forecasts. He places great hopes on exports at a time when world trade is falling and, unfortunately, our own exports are falling, I hope temporarily. We feel that, instead of warning the people in clear terms of what lies ahead, he has chosen to try to blind the journalists—and hon. Members—with complications and statistics. He has opted for sacrifice by instalments. The first instalment is the petrol increases. The next instalment will be the nationalised industry price increases. The third instalment will be the increases or deductions arising from public expenditure cuts, and then we shall get increases in taxa[column 628]tion and rates in April arising from the increased public sector expenditure. It will be sacrifice by instalments.
The right hon. Gentleman did nothing to prepare the nation for that on Tuesday. He had a highly technical Budget. Press man after Press man appeared to take the Press releases. We got what sometimes happens in Budget speeches. There was a reaction the first day which was quite different from the reactions on the following days as people began to understand the Budget. It would have been better if he had prepared the people for what lay ahead. The people were ready. The Chancellor was not. He and they will regret it.