[column 757]

INTRODUCTION

3.31 pm

The Chancellor of the Exchequer (Sir Geoffrey Howe): The annual presentation of the Budget is rightly regarded as the principal economic act of Government. But every Chancellor – indeed, every Member of the House – very well understands that the economic well-being of the nation owes more, at the end of the day, to the spirit and vitality of its people than to any single act of Government. I do not seek, in saying that, in any sense to undervalue the proper role of Government, but simply to set it in perspective. What is the essential duty of Government is to provide responsible management of the financial framework within which the nation has to live. That duty must start from a sober and realistic assessment of the nation's economic condition. It is with that that I begin.

First, there is the fight against inflation. We have made real progress. Prices are now rising only about half as fast as they were last summer. In the last year we have had the most rapid fall in inflation of any major country. Living standards in the personal sector as a whole are estimated to have risen in 1980 by a further 2 per cent. There have been fewer industrial disputes than at any time in the last 40 years. In 1980 Britain's exports increased in value, and held up in volume, and we achieved a record current account surplus of £2¾ billion. Many British companies are clearly facing the challenge with much more success than might have been expected.

However, there are sharp contrasts. In 1980 total output in the United Kingdom fell by about 2½ per cent. and that of manufacturing industry by no less than 9 per cent. Interest rates have remained high. Many parts of industry have been extremely hard pressed. Although the latest figures suggest that the rise in unemployment may be slowing down, there are almost 1 million more people out of work than there were a year ago. For individuals, families, and sometimes for entire communities, this can mean real hardship. The Government share the nation's deep concern.

[column 758]

WORLD DEVELOPMENTS

But Britain is not alone in facing these problems. In the spring and summer of last year, output fell sharply in six out of seven of the major economies. Unemployment rose by about 3 million in the OECD countries during 1980. In the American motor industry alone, almost 200,000 workers lost their jobs. The average OECD inflation rate remains in double figures. This year the output of the European Community as a whole is not expected to show any improvement over 1980.

A major cause of this world-wide setback is the enormous rise in oil prices in the last two years. The oil-producing countries of OPEC last year collected about 150 billion dollars more in export receipts than they did in 1978. That huge increase, and the surpluses that it created, mean that the rest of the world has had less to spend on other goods and services. At the same time, Governments have had to act firmly to counter the inflationary spiral set in motion by higher oil prices.

Those are the main reasons why the OECD has estimated that the national product of the industrial countries this year will be at least 6 per cent. lower than it would have been without the latest oil price increases. That represents a very large enforced reduction in sales and output. It has inevitably meant a big jump in unemployment. Because we are a trading nation, the fact that we have our own oil cannot protect us from the slowdown in many of the markets to which we sell around the world.

THE UNITED KINGDOM ECONOMY

There are still many businesses in Britain that lead the world. But the obstacles to recovery are none the less greater here than in other countries. Many parts of our industry have long been less dynamic than theirs. Years of high inflation, low productivity and delayed change have made our economy especially vulnerable, and reduced its ability to compete in both home and overseas markets. And so we are suffering more than others.

Those firms which have lagged behind have often been encouraged to do so in the misguided belief that change can be postponed indefinitely. Eventually, the combined pressures of competition and recession have compelled long-overdue moves to tackle these deep-seated weaknesses. They have been essential to the creation or preservation of secure jobs for the longer term. But, of course, the immediate effect has been to add to unemployment. Thus, nearly 300,000 jobs have been lost in the motor industry, steel, textiles and shipbuilding over the past 18 months.

As a nation we have carried the process of weakening our own economy a long stage further in the three years before the recession started. In each of the last three pay rounds, earnings in manufacturing industry rose by over 14 per cent. while the underlying improvement in productivity has been little more than 1 per cent. British unit labour costs have risen more than twice as fast as those of our foreign competitors.

Industry has had to adapt to a second huge increase in the price of energy. The world oil price is now three times what it was three years ago. Because of that, the North Sea has had the consequence of contributing to the sharp rise in sterling since 1977. Various other factors have also influenced the position of sterling, including changes in the fortunes of other major economies. Although the [column 759]strong pound has conferred some benefit on British industry through cheaper imported materials, it has, of course, imposed real difficulty on businesses that sell against international competitors. That has been particularly true of those industries that were still seriously overmanned.

So, as consumers, we have benefited greatly from the strong pound and very often from large pay increases as well, while many companies have been hard pressed. Between 1977 and 1980, the real after-tax income of individuals rose by about one-sixth. But the real disposable income of industrial and commercial companies fell by one-quarter. And output rose by only 2 per cent. This contrast between the fortunes of individuals and businesses marks a striking imbalance. There is also a sharp difference – within the business sector itself – between the fortunes of the oil and banking sectors, on the one hand, and most manufacturing companies on the other.

In these circumstances, many manufacturing businesses have had to take drastic action in order to survive and they have sharply reduced the number of jobs that they were able to provide. Many factories had already gone a long way towards pricing themselves out of the market by earlier pay settlements. Many of those who secured big pay increases may have improved their own standard of living, but only at the cost of pushing their fellow workers out of a job.

Recently, however, there has been an increasingly constructive approach to these problems, at least in the private sector. The level of pay settlements has been falling significantly. Pay bargainers have begun to face up to the harsh truth that excessive pay is a major cause of unemployment. Most settlements in manufacturing since November have been below 10 per cent. That is in sharp contrast to the years that went before. Management and work force are at last joining together to tackle the problems of overmanning, restrictive practices, and out-of-date working methods. They understand that cutting unit labour costs is the way to become competitive again and to price themselves back into markets and jobs.

But the nationalised industries, many of them monopolies, are not subject to the same market disciplines as the private sector. They have often been slow to adapt. And when eventually they do adjust, the financial and social costs can be very heavy. But the cost of delaying change has often been even greater, in terms of markets lost and jobs destroyed. It is the need to make nationalised industries more responsive to market disciplines which lies behind the Government's vigorous programme to increase competition in, for example, transport and telecommunications, and wherever possible to return parts of the State-owned sector to private enterprise.

Nor have other parts of the public sector learnt these lessons at all quickly. Thus, the overall cost of the public sector has continued to grow in relation to the rest of the economy. Total spending programmes in 1980–81 are now expected to cost approaching £94 billion, compared with last year's Budget forecast of about £91½ billion. In addition, debt interest has cost £1 billion more than expected. The increase in the overall total would have been still greater had it not been for the notable success of my right hon. Friend the Prime Minister in negotiating refunds from the European Communities of some £600 million. The burden of public expenditure will be a recurrent theme in my speech.

[column 760]

BUDGET STRATEGY

It is against this background that I turn to the central objectives of my Budget.

Some have urged that I should abandon the battle against inflation as our top priority and look instead for ways of expanding the economy. If this were the way to sustained recovery for British Industry, and so to the creation of more long-term jobs, I should certainly be ready to consider a change of course, because the well-being of our people and the health of our economy are more important than any Government's commitment to a particular strategy.

But to change course now would be fatal to the whole counter-inflation strategy. Our problem in recent years has not been a lack of final demand. Since 1977, spending in the whole economy, in money terms, has risen by no less than 50 per cent. Most of the impact of that increase has been dissipated in higher prices. In so far as the volume of spending has increased, a large share of the extra has gone on imports. In the end, there has been very little effect on United Kingdom output.

Just boosting demand would do nothing to remedy that problem. Rather, it would risk throwing away the real achievements that we have secured, without winning any compensating gains. In the past, Governments have too often deprived themselves and the British people of the success that they deserved because they abandoned the policies when the going got rough – when the sacrifices, in fact, had largely been made, but before the long-term benefits had begun to arrive. It would, indeed be a tragedy to inflict on ourselves a further dose of crippling inflation just at the time when, with resolution, our industry can be helped to take advantage of the more stable conditions, which should follow the easing of the present recession.

I am, therefore, determined to sustain the firm action that is necessary to maintain our success in the battle against inflation. It is also essential this year to respond to the two imbalances in our economy that I have described: the imbalance between consumers and industry and the imbalance between the public and the private sectors. Moving towards a better balance must be the central purpose of this Budget.

[column 761]

THE MEDIUM-TERM FINANCIAL STRATEGY AND 1981–82 MONETARY TARGET

There is now world-wide recognition that inflation is the enemy of growth and employment. And it is just as widely recognised that sustained monetary restraint is necessary if inflation is to be kept permanently under control. Of course, there is not a rigid relationship between money and prices. Of course, there are other influences on inflation, particularly in the short run. We always made that absolutely clear. But monetary policy is of fundamental importance. These principles apply to this country just as much as to any other.

The Medium-Term Financial Strategy

It is time for us to start thinking ahead to the advantages that can accompany a permanent reduction in inflation, for to live once again in a world that has banished the spectre of accelerating inflation must be our objective. We reaffirmed our commitment to that objective last year when we published the medium-term financial strategy. I am reaffirming it again today by taking the measures necessary to strengthen and carry forward that strategy.

I have no doubt that the House will expect me to spend a little time on monetary matters. As the recent report from the Treasury and Civil Service Select Committee has shown clearly, this is an absorbing area of policy.

Thanks to the tight financial conditions of the past 18 months, including the effects of the strong pound, we are well ahead in the battle against inflation. We have achieved that while reducing controls rather than by imposing them. But for a number of reasons related to the special circumstances of last year, the growth of sterling M3 – the measure of money used to express the strategy – has been well outside the first year target range of 7–11 per cent. I said in November that I expected it to slow down in the new year. Recent figures, including the preliminary figures for banking February, published today, are fully consistent with that.

Monetary Growth in 1980–81

The first reason for rapid monetary growth over the year is the abolition of the so-called corset. That was long overdue. All that the corset achieved was to make the published figures artificially low. Since its removal last summer those distortions have been reversed, and the figures have been artificially high. By their very nature, such distortions are impossible to measure accurately. They are likely to have been substantial. But purely statistical changes have no implications for future inflation. The distortions have now largely worked their way out of the system. In that respect, sterling M3 will from now on be a better measure.

Again, the growth of sterling M3 was increased last year by the special nature of the recession. Public borrowing increases in a recession, but that is normally offset by lower private sector borrowing. Over the past 12 months public borrowing has been exceptionally high. But on this occasion bank lending did not fall away as quickly as might have been expected.

Because of the exceptional imbalance between business and personal incomes, both sectors, for different reasons, have borrowed heavily. Faced with an unexpectedly severe recession and the consequences of previous pay increases, businesses borrowed to tide them over while they reduced costs. Many people, on the other hand, have [column 762]seen their living standards rise to an extent unusual in a recession, and have been willing and able to borrow as well. The combined effect of that borrowing has been an important expansionary influence on sterling M3.

At the same time, there has been a high level of private investment in financial assets. That can be seen as an attempt by the private sector to rebuild its holdings of such assets, whose purchasing power had been sharply eroded by inflation. It has included an increase in holdings of interest-bearing money. But to the extent that it merely involves returning towards a more normal level of financial assets it need not fuel inflation.

Other indicators also suggest that the underlying financial conditions have, as the Government intended, been tight. Our Green Paper on monetary control, published a year ago, stressed the need to watch a range of measures of monetary conditions. Over the past 18 months the narrower measures of money have not grown at all rapidly. The pound has certainly been higher than would be expected from the behaviour of the money supply. That external pressure has reinforced the monetary squeeze and contributed to the fall in inflation. And inflation has fallen so much relative to interest rates that the real cost of borrowing has risen significantly.

Financial behaviour should now revert to a more normal pattern. The private sector has been moderating its borrowing from the banks, and the exceptionally rapid build-up of personal sector liquidity should come to an end as the growth of prices and incomes continues to slow down.

The Medium-Term Strategy and the Target for 1981–82

It is important to express the medium-term strategy in terms of a wide measure of money, because it has close links with public spending and borrowing. So I am maintaining continuity by keeping sterling M3 as the yardstick for medium-term policy. The aim remains to reduce monetary growth to 4–8 per cent. by 1983–84. The new target range for next year, based on the actual figure for sterling M3 in banking February, will be an annual rate of 6–10 per cent. over the 14 months to April 1982.

The special factors at work last year are unlikely to be repeated. In any event, they should have no adverse implications for future inflation. But we cannot be certain that they were the only causes of the rapid growth in the money supply. So it may be desirable to recover some of the past year's high monetary growth in the form of lower growth over the medium term. But the most important requirement is a lower growth of the broad measures of money in the years ahead.

However, the short-term response of sterling M3 to interest rate changes is particularly uncertain and the full effect can be spread over many months. The narrower measures, which we also monitor, include fewer interest-bearing types of money and are more sensitive to changes in interest rates. But because they are so sensitive they can overstate the effect of interest rate changes on underlying monetary conditions. Moreover, their relationship to other aspects of policy is less clear.

I am taking steps, therefore, to improve the information available about the narrower measures. Publication of figures for monetary base will begin later this month. [column 763]Arrangements for a new statistical series for the retail deposits of the banking system, M2, are also well advanced. That will be published later this year.

We shall continue to monitor M1. In doing so, we shall take account of its normal tendency to grow quickly as nominal interest rates come down with inflation. For this reason we may now find M1 growing rather faster, for a time, than it did last year.

PUBLIC SECTOR BORROWING

I turn next to the public sector borrowing requirement, the PSBR. Some people, I know, are tempted to regard the PSBR as something mystical, of interest only to economists. How I wish that they were right. But, alas, that is not true. The size of public borrowing is, as it must be, a critically important constraint, for Governments are no different from individuals. The PSBR, in plain language, is broadly the difference between what the Government spend, or lend to others, and what they collect in revenue, mainly through taxation. It necessarily includes what the nationalised industries borrow. Most of that comes from the Government, and where they borrow from other sources the Government stand behind them. So the PSBR is the amount central and local government and the public corporations have to borrow. It is the experience of Governments around the world that if they try to borrow too much, either interest rates or inflation, or both, begin to soar.

Britain's experience tells the same story. If we are to stay on course for lower inflation and lower interest rates, we must borrow less. Public borrowing, as a proportion of national income, must be brought down. This is why the medium-term financial strategy envisages a downward path for borrowing, as well as for the growth of the money supply. These remain two essential prerequisites for a lasting grip on inflation.

Against that background, the House will understand my anxiety at the way in which borrowing has actually developed. For 1980–81, the year which is drawing to a close, the PSBR is now forecast to emerge at £13½ billion, or 6 per cent. of the gross domestic product. That compares with the 1980 Budget forecast of £8½ billion. The lion's share of the £5 billion excess in 1980–81 was accounted for by higher expenditure. There has also been a net shortfall of tax revenue of about £1 billion, with receipts from indirect taxes and North Sea oil below expectations – only partly offset by higher receipts from the other Inland Revenue taxes.

For the year now approaching, 1981–82, our published strategy suggested an illustrative PSBR of some 3 per cent. of the gross domestic product. Translated into today's prices that would be about £7½ billion. In 1981–82 output is expected to be lower, and unemployment higher, than envisaged a year ago. The effect of the recession on the PSBR is likely to be even greater this year. It is therefore clear that a £7½ billion PSBR for next year would be unduly restrictive.

Moreover, I must tell the House that this year's Budget-making exercise has started from the basis of a forecast for the PSBR in 1981–82 of no less than £14 billion. I am in no doubt that to begin the year with the intention of borrowing as much as £14 billion would be irresponsible in itself and unacceptable to the House.

We must consider what should be the objective for next year's PSBR. I have already ruled out £7½ billion as [column 764]unduly restrictive. Taking everything into account, I have concluded that it would be right to provide for a PSBR in 1981–82 of some £10½ billion, which is a little more than 4 per cent. of the gross domestic product. This is still a high figure, but I believe it to be consistent with the monetary target that I have just announced. I also believe it to be a sum that can be financed without placing undue strains upon the capital markets.

But, as the House will understand, if the figure is to be brought down to £10½ billion from £14 billion, some harsh decisions are inescapable. The figure of £14 billion which I have just quoted incorporates the spending plans for next year that have already been announced – but it is otherwise based on unchanged tax rates and unchanged allowances. It allows for the increases in national insurance contributions that I announced last November – which the House has now approved. That leaves a net sum of around £3½ billion to be secured in this Budget: £1 billion of that will come from the new North Sea taxation that I foreshadowed last November. I shall be outlining other proposals later in my speech.

These tax changes should enable us to achieve our monetary objectives without having to face intolerably high interest rates. But we are determined to maintain the monetary and fiscal framework necessary for the reduction and defeat of inflation – even at the cost of departing, for the time being, from our commitment to lower personal taxes. The tax increases that I am announcing today are a measure of that determination. Equally, they reflect the bill that we as a nation must meet if we are to pay for the high level of public spending that we have chosen to support. I will return to the detailed proposals shortly.

METHOD OF BORROWING AND MONETARY CONTROL

Meanwhile, it is necessary not only to reduce Government borrowing but to finance it in a non-inflationary way. By drawing more efficiently on possible sources of savings it should be possible to control the growth of sterling M3 more effectively.

National Savings

Imaginative use of national savings can help to reduce pressure on the capital markets. Thanks to the initiative announced last autumn we have already achieved our national savings target of £2 billion for 1980–81.

For 1981–82 we have set the still more ambitious target of £3 billion. New measures are needed for that. We therefore propose two important changes to the second issue of index-linked certificates or “granny” bonds. From the beginning of next month the age of eligibility for these certificates will be reduced from 60 to 50 – [Hon. Members: “Maggie bonds”.] I am glad that the House is willing to join with me in recognising the declining age of grandmothers. From the beginning of next month the age of eligibility will be reduced from 60 to 50 and a minimum bonus of 4 per cent. will be provided for all holders, both new and existing.

A reduction in the interest rate on the national savings investment account from 1 May will be announced later this month. That will be compatible with keeping interest rates on national savings instruments competitive enough to achieve our target.

In October last year my right hon. Friend the Secretary of State for Energy announced plans for a bond which [column 765]would allow the public to share in the benefits of the nation's North Sea oil resources. The Government intend to issue such a bond later this year. It will be aimed at small savers and will be a non-marketable certificate, administered by the Department for National Savings. Its capital value will be fixed, but the return on the bond will be linked to the value of the British National Oil Corporation's North Sea oil.

Marketable Securities

We also propose an important extension of the structure of Government borrowing by introducing an indexed gilt-edged security. This will be sold to pension funds and to life insurance companies and friendly societies in respect of their United Kingdom pension business.

Restricting the right to buy this indexed gilt will help to avoid the risk of attracting unwanted inflows of foreign funds. It will give those institutions that are eligible a new choice between indexed and conventional securities. The Bank of England is announcing this afternoon details of an issue of long-dated indexed stock worth £1 billion.

This innovation demonstrates the confidence that we have in our strategy for bringing inflation down. It will also reduce uncertainty about future real rates of return, thus helping borrowers and lenders alike. Those are important advantages for monetary control. We will have more flexibility in the market place and thus greater assurance of meeting the Government's borrowing needs.

We are also considering the introduction, later in the year, of new short-term marketable Government securities.

Smoothing the Flow of Revenue

I am proposing some new measures which will help short-term monetary management by smoothing the uneven flow of tax revenue. The most important area is that of North Sea oil taxation, to which I shall come later. Other proposals will be described by my hon. and learned Friend the Minister of State later in this debate, if he is fortunate enough to catch your eye, Mr Speaker.

Monetary control

These initiatives will be accompanied by other improvements in monetary control. Following extensive consultations based on last year's Green Paper, I outlined last November some changes that were desirable in their own right and would be consistent with a gradual evolution to monetary base control. These will come into effect during the coming financial year.

The reserve asset ratio has complicated monetary control. The first step in phasing it out was made in January. In the next month or two, at the conclusion of talks now to be undertaken with the banks, the ratio will cease to be a minimum requirement. Thereafter it will be adapted to have a transitional role as a prudential norm round which there will be variation, until the detail of the new arrangements has been settled.

The Bank of England has already made some useful changes in its money market operations. In its dealings with the discount houses it now relies mainly on buying and selling bills. Direct lending to the market has been greatly reduced. The interest rate on this lending is also now generally somewhat above comparable market rates, [column 766]while the rates at which the Bank conducts its open market operations have become more flexible. In conducting its operations in bills the Bank no longer quotes rates for more than one month ahead. Instead, it responds to bids and offers. This has the great advantage of allowing the market a greater role in determining the structure of short-term interest rates.

Discussions are now to take place with the financial institutions about these and other changes, including the future of the cash ratio. When they are complete, the Bank will aim to keep very short-term interest rates within an unpublished band, and in due course suspend altogether the practice of having an announced MLR, which would by then have lost its operational significance.

Decisions about short-term interests rates will continue to take account of the whole range of monetary indicators referred to earlier and other factors that affect the significance of the numbers, especially the progress of inflation. Modest reductions in interest rates were made in the second half of last year. Progress in reducing inflation, strongly positive real interest rates, a noticeable slackening in the growth of sterling M3 in recent months, and a marked fall-off in bank lending point towards a further reduction in rates. The increases in taxation that I am proposing in the Budget will make it possible to have an immediate reduction. Accordingly, the Bank of England is today, with my approval, reducing its minimum lending rate by two percentage points.

PUBLIC EXPENDITURE

Further progress towards lower inflation and lower interest rates does not depend primarily on improvements in funding techniques or in managing the money markets, important though these are. The overriding need is for more effective restraint of public spending. In the last year public expenditure has put a severe strain on the budget. Much of the increased spending has been caused by the effects of the recession being worse than expected. There has been an increase of £¾ billion in spending on unemployment benefit and on special employment measures, notably the temporary short-time working scheme. On many central Government programmes the expected shortfall in expenditure has not happened, and so the total has been higher than expected.

The recession has also – inevitably – had an adverse effect on the financial situation of most nationalised industries. It has meant an increase in the total of these industries' external financing limits for 1980–81 of some £900 million, over half of which has been for the steel industry. Some of the nationalised industries are now taking steps to reduce the overmanning and inefficiency which have built up over the years. But that, too, can cost more money initially.

These, however, have not been the only sources of upward pressure. On defence there has been substantial overspending – to the tune of £260 million – over and above a cash limit that had already been increased by £200 million. Local authorities' total cash spending appears to have been a good deal higher than allowed in my last Budget – and the position would have been much worse without the firm action taken by my right hon. Friend the Secretary of State for the Environment.

Because of all these developments we have not been able, in the course of 1980–81, to secure the full 5 per cent. cut at which we were aiming in our predecessors' planned [column 767]volume of expenditure. We have nevertheless achieved a reduction of about 3½ per cent. – or £3½ billion. Moreover, since the Government came into office numbers employed in the Civil Service have fallen by 35,000, and by the equivalent of about 40,000 full-time staff in local government.

The Coming Year

In the coming year, some of the upward pressures on public sector spending are bound to remain with us. I have in mind, for example, last November's decision to spend more on industrial support and on special employment measures to ease the effects of recession. Next year the cost of special employment measures will be no less than £1 billion. This will make it possible to offer every unemployed school leaver a place on the youth opportunities programme by Christmas. And we hope to offer other 16 and 17-year-olds, unemployed for three months, places within a further three months. In all, 440,000 opportunities will be offered – twice as many as in 1979–80. In addition, the temporary short-time working compensation scheme is currently supporting nearly 700,000 people.

However, this need to spend more on some programmes cannot justify accepting the wrong fiscal balance. That is why we took the decisions that I announced last November to reduce most of the Government's other programmes by £1,400 million cash. Those substantial cuts will go a good deal of the way to offset the other increases that I have described. But they have not gone far enough to avoid the need for substantial increases in taxation.

It is worth recalling that this Government have not been alone in having to cut planned and actual public expenditure. Our predecessors had repeatedly to do the same. Such reductions are necessary if the burdens on the rest of the economy are not to become intolerable. They are essential to the fight against inflation. That has been the recent experience of almost every other industrial democracy. The economic conditions that call for lower public spending are a world-wide phenomenon.

Today's new public expenditure White Paper shows a planned volume of public expenditure next year that would be much the same as this year's expected outturn. Various developments since the White Paper went to print, including the withdrawal of the plans for accelerated pit closures, have made it prudent to increase the size of the contingency reserve. I shall also be announcing later in my speech additional expenditure to help with industrial fuel costs. Altogether, these will add about one-third of 1 per cent. to the volume of expenditure next year, 1981–82. The resultant planning total is more than 3 per cent. higher than we had intended. But despite the much larger claims of employment support and of social security it will still be nearly 5 per cent. less than our predecessors had planned.

Our decisions for the future are designed to ensure that the volume of spending falls after 1981–82. The public expenditure White Paper shows a planned fall of 4 per cent. by 1983–84. Whether we can spend even on that scale must depend on how far we can afford to do so. During the annual review later this year we shall be looking hard at the possibility of further reductions in those plans.

[column 768]

The House will find that the sheer size of public spending becomes much easier to grasp if one thinks not just in terms of the so-called volume of spending but in terms of actual cash paid out. The difficulty of controlling it also becomes clearer.

Last year – 1979–80 – we spent on programmes £77 billion in cash. This year – 1980–81 – the corresponding figure will be nearly £94 billion. Next year – 1981–82 – we will spend about £104 billion, cash. If debt interest is included, the rise is even greater.

An important part of the rise in total expenditure between last year and this has been due to the increase in the public services pay bill resulting from the Clegg commission and similar catching-up exercises, many involving staged settlements. The Clegg awards and staged settlements alone accounted for an increase of £2½ billion between the two years.

We have had to make provision for those consequences of the previous Government's incomes policies. But the significance of those consequences and the extent of the problem that they present have still not been widely recognised or understood. The pay bill for the public services in 1980–81 of about £30 billion is about 25 per cent. higher than in the previous year. This is twice as fast an increase as in the pay bill of the private sector. Much of the overall cost of pay settlements in the private sector has been offset by a reduction in numbers of people employed, or in hours worked. So the cash cost of Government has been growing much faster than the cash income of the rest of the economy that has to support it.

The immediate lesson is simple, but vital. After the recent large increases it is now both fair and essential that public service pay should grow more slowly. Pay, after all, accounts for as much as 60 per cent. of the major public expenditure programmes, such as education and health. This is why it is so important to work out improved ways of settling public service pay. Any new system must take proper account of all the relevant factors; the balance of supply and demand for particular skills as well as comparisons with terms and conditions in outside employment and – inescapably – the limits of finance available. Due weight will also need to be given to the expectation and intention of a continuing decline in the rate of inflation.

Experience over a number of years shows clearly the need for a system for the control of public expenditure generally which displays the consequences of spending decisions as plainly as possible. The present system certainly does not do that. This year, as for many years past, the figures in our White Paper are expressed mainly in volume terms at “constant” prices. But there is something inherently unreal in trying to plan and measure things in terms of what is rightly described as “funny money”. Goods are not bought and people are not paid in the money of last year or the year before. They are paid in cash.

When the community, acting through the Government, decides to buy goods and services, it has to pay in money of the day, just like any private individual. There is, of course, a case for planning in volume terms as well. There is a clear need to plan the number of hospitals or roads or frigates that we are aiming to have in future years. But there is great danger in planning in volume alone. For there is then an inevitable tendency to assume that a given quantity of goods or services will definitely be available, [column 769]however much their costs may have risen. For this reason, it is essential that the control and planning systems should focus much more closely on the money actually spent.

I am accordingly making some important changes in the control and planning of public expenditure. These changes cannot be a substitute for the hard political decisions that have always to be taken. But they will enable those decisions to be taken with a much clearer appreciation of what is involved. They will help to displace the automatic assumption that what was once planned can always be afforded.

We have decided to make a major shift in the planning and control of spending from volume to cash. The introduction of cash limits by the last Government paved the way for this change. We now need to go a great deal further down that road.

In the first instance we shall, from the coming year onwards, change the way in which we operate the contingency reserve. This will now be a cash control. Previously, only decisions that increased the volume of spending during the year were charged to the reserve. Next year the control will be extended so that decisions to increase cash limits – in respect of pay or prices as well as in respect of volume – will be treated as a charge on the reserve. The reserve will be set at £2½ billion cash – about 2½ per cent. of the total of programmes. This allows both for the wider coverage resulting from the switch to a cash basis and for the increased provision, which I have already mentioned, to allow for developments since the White Paper.

Even more fundamental is the change that we shall be making in the way we go about future annual reviews of public spending. In planning public spending for 1982–83 we shall, from the outset, conduct our examination and discussions in terms of the cash that will be available for that year. This will change the whole framework and spirit within which decisions are taken. In some ways, it will make things more difficult for those who have to manage spending programmes – harder, indeed, for the Government as a whole. Departments will be obliged from the outset to form a view as to what their money will buy. That is bound to be less easy than just deciding what they want and then simply looking forward to receiving all the money needed to pay for it.

This is precisely the same problem as that which every family in the land has to face in planning their own spending. They may have to adjust plans, according to the way costs move and according to the availability of finance. For them, the focus must always be on how much cash is actually going to be available. It is high time for public spending to be subjected to similar discipline. This change to taking decisions in terms of cash will make a major contribution to improving financial management and will do much to support our other efforts to increase cost consciousness and accountability throughout the public sector.

[column 770]

SOCIAL SECURITY

I turn now to my specific tax and spending proposals. Even in a lengthy speech they cannot all be covered in detail, and more information about a number of them will be found in a series of press notices issued by the Departments concerned, copies of which are available in the Vote Office.

I have stressed already the huge total of public expenditure. Far and away the biggest element within it is the social security programme. It accounts for more than one-quarter of the total. In the last decade it has grown very fast. Partly, this is because of the increasing number of beneficiaries and the replacement of child tax allowances by child benefit. But it also reflects real increases in rates of benefit. Thus, over the decade the retirement pension has gone up by about 30 per cent. in real terms. That is about twice as much as the increase in the national income as a whole.

The cash cost of the social security programme in 1981–82 comes to a staggering £27 billion. This is about £1,000 per year for every worker in the country. We cannot, therefore, avoid considering this programme as closely as any other.

I estimate that prices will rise by 10 per cent. in the year to next November. The increase in pensions and other benefits made in last year's uprating proved to be 1 per cent. more than required to keep pace with last years' inflation. This is because prices rose more slowly than expected between November 1979 and November 1980. State retirement pensions, public service pensions, and most other benefits, including supplementary, unemployment and sickness benefits will, therefore, be increased next November by about 9 per cent. This reflects the expected rise in prices and at the same time adjusts for the over-provision made last year. The increase in the benefits will be substantial. The retirement pension for a married couple will go up by £3·90, to £47·35 per week, and for a single person by £2·45, to £29·60 per week. Unemployment and sickness benefits will be increased to £36·40 and £22·50 per week respectively.

Full details of the November increases will be announced tomorrow by my right hon. Friend the Secretary of State for Social Services. We shall be giving further consideration to policy towards public service pensions in the light of the report of the Scott committee. I shall myself have something more to say about child benefit in a few moments.

THE DISABLED

There is one group to whom we should pay special attention this year, despite the economic constraints that we face. I refer to the disabled, for this is the International Year of Disabled People. My right hon. Friend the Secretary of State will be announcing tomorrow an increase in the mobility allowance. I shall mention some other measures now.

The special income tax allowance for the blind has stood at its present level since 1975. I propose to double it to £360. I hope that this will be of some help to blind people in tackling the very real problems they have to face.

Many representations have been made to me for relief from value added tax on all purchases made by charities. I have regretfully concluded that such relief would be impossible to administer fairly or economically and would, in any case, cost too much. However, I do propose [column 771]to extend existing value added tax reliefs for the disabled and the charities serving them. For example, the present zero rating for articles given to hospitals will, in future, cover ambulances and wheelchairs. The benefit of this zero rating will also be extended to institutions caring for the handicapped. Car adaptations for disabled drivers will also be relieved from VAT. The necessary Treasury order is being laid today.

I am also proposing changes that will widen the scope of the reliefs from capital taxation for trusts for the disabled. To encourage unemployed people to work for voluntary bodies, the amount that a person can earn without affecting unemployment benefit will be increased from 75p per day to £2 per day.

The total cost of these measures is relatively modest. But, if put alongside the tax reliefs that I announced last year in respect of covenanted gifts to charities, the overall amount is substantial. The House may like to be reminded that tax relief on covenants at the higher rates of tax becomes effective from 6 April this year at a revenue cost of £20 million. These reliefs should greatly improve the fund-raising ability of charities. I shall be arranging to publicise these reliefs, and the opportunities that they offer, much more widely.

There is one other matter to which I should refer. I announced last year that we planned to bring into tax the invalidity, sickness and other incapacity benefits. We had expected that this might be from April 1982. In part because of pressures on civil service staff numbers, we propose to postpone this. I confirm however, that when invalidity benefit comes into tax the 5 per cent. deduction made from the November 1980 uprating will be restored.

RAISING THE REVENUE: BUSINESSES

Oil Companies

I come now to the range of measures that are necessary to raise the extra revenue for this year. First, the North Sea. In deciding on particular measures I have had to take into account recent developments and future prospects for North Sea oil and the implications that these have for Government revenues. In 1980 production in the North Sea, at 80 million tonnes of oil, was less than predicted – only four-fifths what had been expected two years before. The production difficulties experienced in the past year have led to a major revision of output levels over the next few years. My right hon. Friend the Secretary of State for Energy has just published reduced forecast ranges for North Sea production in the years to 1984.

While oil production is likely to be lower than once expected, oil prices are much higher. Increases since 1978 in the real price of oil have brought substantial benefits to the oil companies, which face a very different prospect from that when the present tax regime was introduced. Such has been the rise in the oil price in recent years that I believe that the Exchequer should properly look to this area for additional revenue beyond what will accrue from existing taxes. However, even after the measures that I am about to announce, the increase over the medium term in Government revenues from the North Sea will be smaller than was once expected.

In my statement last November I foreshadowed the measures that I had in mind for increasing the Government's share of these revenues while maintaining [column 772]incentives for further exploration and development. Consultations with the oil industry have taken place and I can now announce detailed proposals.

I intend to introduce a new tax – the supplementary petroleum duty – broadly as outlined last November. The new tax will be at a rate of 20 per cent. on the total value of oil and gas produced, after deduction of an allowance of 1 million tonnes a year for each field. It will be deductible in computing liability to petroleum revenue tax and corporation tax. In response to representations by the industry, gas supplied to the British Gas Corporation from earlier North Sea fields will be exempted, and there will be provision for the new tax to be refunded where fields do not fully recover their initial development expenditure.

The new tax will be payable in monthly instalments. This will make a useful contribution to achieving a smoother public sector cash flow through the year. I shall also invite the industry to consider with the Inland Revenue how a broadly similar pattern of payments may be introduced for PRT.

I also announced in November last year that the special reliefs devised for PRT were under review. I now have proposals to make involving some restriction of these reliefs. I hope that my hon. and learned Friend the Minister of State, Treasury will have the opportunity of covering them in more detail in the debate.

There are a number of other minor changes to improve the oil taxation regime – partly made in response to the industry's own views.

The new tax, together with changes to the PRT reliefs, will raise an extra £1 billion in 1981–82. There will be a substantial continuing yield in later years.

The oil companies have urged that my objectives of more revenue and a more efficient and economical pattern of tax relief could be better secured by a thoroughgoing reform of PRT, which would make it unnecessary to introduce a permanent new tax. Officials have over several months given exhaustive consideration to that possibility, but without success, and no other proposals that I could regard as satisfactory have been put forward from any other source. But I do not close my mind to the possibility that modified proposals producing a broadly similar yield might be forthcoming. I propose, therefore, that the new tax, SPD, should in the first instance have legislative effect only for the 18 months ending on 30 June 1982. That will allow ample time for further study and consultation before permanent arrangements are introduced in next year's Finance Bill.

Banks

Apart from oil, one other business sector has largely been protected from the effects of the recession, and that is banking. Indeed, bank profits in recent years have increased sharply, both absolutely and by contrast with the experience of most other businesses. A substantial part of these profits is the direct consequence of high interest rates in recent years: this applies in particular to the so-called “endowment profit” on current accounts on which no interest is paid.

Recent levels of bank profits are partly, of course, a cyclical recovery from the low level to which they fell in the mid-1970s. Also, the banks have needed to make provision against the effects of inflation and to rebuild the [column 773]reserves needed to underpin the valuable support that they give to businesses in difficult times. That is why I took no action last year.

However, I undertook to keep developments under review. The past year has seen further high banking profits, probably at a level not very different from the record profits of 1979. Certainly the contrast with the sharply reduced profits of industrial companies is, if anything, more striking. In present difficult circumstances, I cannot avoid the conclusion that I should require the banks to make a special fiscal contribution.

This will take the form of a special once-for-all tax on deposits of banking businesses that are in operation today. The tax will be charged by reference to non-interest bearing sterling deposits in excess of £10 million, averaged over the final three months of 1980. The rate of tax will be 2½ per cent. It will not be deductible against corporation tax. I estimate that the clearing banks will be the source of about 90 per cent. of the revenue, but the tax will apply to banking businesses generally. Altogether, an estimated £400 million will be raised in three instalments over the second half of 1981–82. This revenue will make it possible for me to give some help to the rest of industry this year which otherwise I could not afford.

RAISING THE REVENUE: INDIRECT TAXES

Even so, for the reasons that I have already explained, it is necessary to look principally to the personal sector for the additional revenue needed. People in employment have in general had more money to spend. Extra tax will have to be levied on that expenditure.

I do not propose any increase in the 15 per cent. rate of VAT. As last year, most of the extra revenue needed must come from the Excise duties. Increases would be necessary again this year simply to keep the rates of duty in line with the general movement of prices. Even when that had been done, however, many of the duties would be lower in real terms than they used to be. For example, since April 1975 the beer duty has risen by only about half as much as prices generally. I am proposing to increase the Excise duties to produce, in total, about twice as much additional revenue as would be required to compensate for one year's inflation.

Alcoholic drinks, tobacco, etc.

First, the duties on alcoholic drinks and tobacco. From midnight tonight I propose to increase the duties on drinks by amounts which, including VAT, represent about 4p on the price of a typical pint of beer, 12p on a bottle of table wine, 25p on a bottle of sherry, and 60p on a bottle of spirits.

On tobacco, I propose from midnight on Friday to increase the duty by an amount which, including VAT, will represent 14p on a typical packet of 20 cigarettes.

There will be consequential increases for other alcoholic drinks and tobacco products but a little less for pipe tobacco, which is used particularly by pensioners. I estimate that the increase on alcoholic drinks will yield £500 million in 1981–82 and £515 million in a full year. The increases on tobacco will raise almost exactly the same.

[column 774]

The duties on matches and mechanical lighters, which have not been raised since 1949, will be increased substantially – to raise an extra £15 million a year.

Road fuel duties

Road fuel must also make a substantial contribution. The duties on petrol and derv will be increased from 6 pm tonight by the equivalent, including VAT, of 20p a gallon. These increases should yield an additional £910 million from petrol and £270 million from derv in 1981–82 and the same in a full year.

Vehicle Excise Duty

I propose to increase the vehicle excise duty on all vehicles by about 15 per cent. The annual duty on cars will thus increase by £10, to £70. As the duty on derv is being increased in line with that on petrol I do not propose any differential increase on heavy lorries. The VED increase should yield £225 million in 1981–82 and the same in a full year.

Car Tax

Finally, I propose extending the car tax to motor cycles, scooters and mopeds. This tax is charged at 10 per cent. on the wholesale value and is in addition to VAT. There is no longer any reason why these machines should be treated any differently from motor cars. The change is estimated to raise about £10 million in 1981–82 and £15 million in a full year.

Summary

In all, these changes to the indirect taxes should raise about £2,400 million in 1981–82 and about the same in a full year.

With the partial exception of the road fuel and vehicle excise duties, the increases fall on those products which are bought by private consumers. Had all these excise duties simply been increased in line with inflation this would have added one percentage point to the RPI. The increases that I propose could add up to a further point. This is the maximum impact effect on prices. But in the longer run, by reducing public borrowing they will help to bring inflation down and ensure that it stays down.

RAISING THE REVENUE – DIRECT PERSONAL TAXATION

I come now to income tax. Once again I must have the main priority in mind – the need to contain public borrowing so as to make it possible to secure lower interests rates and ease the conditions in which the trading sector of the economy has to operate.

Inflation raises the real burden of income tax. This is because allowances and rate bands are fixed in money terms. As the value of money falls so, too, does the value of these allowances and bands.

It was in order to counteract this effect that the House in 1977 carried a measure that required Governments to raise the tax allowances by each year's inflation unless Parliament explicitly decided to the contrary.

To implement this formula now would mean increasing allowances by about 15 per cent. In the circumstances of this year that simply is not possible. The incomes of most people have been rising in both money and real terms, but many companies have seen their profits virtually [column 775]disappear, with serious implications for jobs and investment. In these circumstances it will not be possible this year to make any increase in the income tax allowances or rate bands. As hon. Members will realise, the House will be asked to approve a resolution to this effect.

A Treasury order is also being made today, following the procedure laid down in the 1980 Finance Act, setting out what the increases would have been in the thresholds and allowances if indexation had been possible. The House will wish to know that full indexation of the allowances and bands would have reduced the full year yield of income tax by £2½ billion.

This decision has not been lightly taken, and I share the disappointment that everyone will feel. It enables us to avoid, as I am sure is right, the need for any change in the basic or other rates of income tax. And it enables me to tell the House, as I am glad to be able to do, that we propose that child benefit and one-parent family benefit will both be fully price-protected, in line with the forecast of inflation. Next November child benefit will, therefore, go up by 50p a week per child, to £5·25. The one-parent family benefit will go up by 30p, to £3·30 per week.

Fringe Benefits

At a time when the real burden of income tax has to be increased it is all the more important that it should be fairly shared.

The benefit of a company car is already subject to tax but the tax scales fall well short of the true value. The amounts assessed to tax are less than half the AA's estimate of the annual costs of running a car. Last year we prescribed an increase of 20 per cent. in the scales from this April – just about enough to keep them rising in line with the costs of motoring. I now propose that they should be increased by a further 20 per cent. in April 1982. For company cars that have little or no business use there is a higher schedule of taxation. I propose to raise the business mileage below which this charge applies from 1,000 to 2,500 miles a year, with effect from this April.

Last year I referred to the growing practice of employers providing free petrol and said that I should be bound to contemplate action if it continued to spread. This warning has largely been ignored. I propose, therefore, to take action that will ensure that tax is chargeable in all cases where petrol is provided for the private use of a higher-paid employee or director. The Inland Revenue will consult employers' organisations over the administrative implications of the various possible methods of achieving this.

Most people have to pay for their own travel to work, whether by rail or by road. Some people have their travel costs met by their employers. Most of these pay tax on that benefit. There is, however, one small but growing group – not more than one commuter in 10 – who get their travel costs tax-free. When an employer contracts with a transport authority for the provision of a season ticket to his employee the benefit is not, under the present law, within the general liability to tax. This is a clear anomaly. And it is plainly right to bring this group into line with everyone else.

Similarly, a minority of employees are provided with credit cards, which they use to obtain a wide range of goods and services that are charged to the employer. The [column 776]employee may thus avoid paying tax on part of what is truly his income. This, too, is quite wrong. I shall ensure that all employees pay tax on benefits of this kind.

Following consultations that took place last year, I have decided for now to leave in place the earnings threshold below which the taxation of fringe benefits does not, in the main, apply. Company cars and other such benefits will therefore continue not to be taxed in the hands of those earning less than £8,500 a year. Consistently with this approach, I propose to remove the charge to tax on medical insurance premiums paid by employers for the benefit of their employees earning less than this amount.

One pre-war anti-avoidance measure needs to be brought up to date following the decision in the Vestey case. This has shown that, among other imperfections, the rules dealing with avoidance of tax by way of transfers of assets abroad do not affect an individual who benefits from such a transfer but did not make or procure it. I propose changes in these complex and technical rules, to take effect from today, which will ensure that the individual pays tax on any benefit he receives. I propose also to amend the rules governing the taxation of capital sums paid by trusts.

Mr J. Grimond (Orkney and Shetland) rose – –

Sir Geoffrey Howe: Not even for the right hon. Gentleman do I wish to break the tradition of an uninterrupted Budget Statement.

HELPING BUSINESSES

So far I have been dealing almost entirely with a group of meas, ures that will have the disagreeable but necessary effect of increasing the revenue.

In order to secure the reduction in interest rates most of that revenue must go to reducing the PSBR. But some can go, as it should, to lightening directly the tax burden on business and enterprise.

There is not enough for across-the-board measures. It is important to concentrate relief where it will be most effective. I cannot, for example, find room for a reduction in the national insurance surcharge, at a full year cost to the PSBR of £700 million for, each percentage point. Nor would a general reduction in corporation tax be appropriate, since it would not help companies that are so hard pressed that they are making no profit. I therefore propose to bring help to business and to encourage enterprise in the following ways.

The first measure is one announced, subject to further consultation on the details,, last November: the reform of the stock relief scheme.

This reform wil, l tackle certain abuses of the old scheme that have attracted legitimate concern. It will also lift the threat of clawback – the withdrawal of tax relief when businesses reduce their stocks. This was jeopardising the financial position of industry in the current recession. It was, above all, this problem of clawback that made it essential for the details of a new scheme to be announced, as they were in our consultative document last November.

I have considered very carefully the representations that have since been made in response to my original proposals. As a result, I propose to make certain detailed changes, including improvements in the transitional arrangements.

In particular, I have considered very carefully the concern that has been expressed to me by many businesses [column 777]about how they would be affected by the proposed credit restriction – that is, the arrangement under which relief should be restricted to the extent that a business may finance its stocks by trade credit or other borrowings. I have sought to balance the case in principle for the credit restriction against the fact that the other changes that I am making will in themselves reduce the scope for abuse under the old stock relief scheme. In the light of the severe difficulties which many businesses are now facing. I have decided not to legislate for the credit restriction. This will be reviewed in the context of other possible changes in the promised corporation tax Green Paper.

These changes will increase the cost of the new scheme to the Exchequer. The fall in the rate of inflation would by itself have reduced that cost. But as a result of the changes I now propose, the cost in respect of profits earned in the present calendar year, 1981 – tax on which will mostly be paid in 1982–83 – will be £450 million. This includes the cost of dropping the credit restriction, of about £75 million in the first full year. Only a part year cost – about £180 million – will fall in 1981–82. There will be a continuing revenue cost for some time to come and equally a substantial benefit to industry.

I also propose a limited extension of consortium relief to enable consortium members to pass relief downwards to a consortium company.

Energy prices

Another area of concern to industry has been energy prices.

I recognise the strength of the representations put to me to bring the level of fuel oil duty in this country more closely into line with that of our major European competitors. I have carefully considered the case for doing so.

The direct benefits to industrial costs are obvious. But there are also other consequences, arising particularly from arrangements entered into some years ago for gas purchases. I understand that the overall effect of those arrangements would be to put up the cost of gas purchased by the British Gas Corporation and, with it, the United Kingdom's gas import bill.

We shall keep the position under review. But in present circumstances I had to conclude that the wider national interest would be best served by not reducing that duty, but keeping it at its present level.

I am, however, able to announce measures which will assist industry on energy prices. The National Economic Development Council last Wednesday discussed the report of its task force on energy prices. The report showed that, while prices for the vast majority of industrial customers in this country remain in line with Europe, a limited but important number of large users of electricity and gas pay more for supplies than competitors in Europe.

In these circumstances, the electricity supply industry in England and Wales will, in addition to the action it has already taken, introduce new flexibility into its pricing arrangements, providing further scope for large high load factor industrial consumers to reduce their electricity coats.

The British Gas Corporation has already relaxed its industrial pricing policy to help its industrial customers. In addition, the corporation will now hold renewal prices [column 778]for gas sold under contract to the present renewal levels until 1 December 1981. Furthermore, the normal quarterly price escalation arrangements for gas provided on a continuous basis will not be applied during this period. The action which is to be taken in this area by the Scottish electricity boards will be announced by the Scottish Office later today.

These moves will give direct benefit to British industry. Accordingly, I am increasing the external financing limits for the gas and electricity industries by some £120 million in 1981–82. That cost will add to the public expenditure total.

The NEDC task force also drew attention to industry's difficulties in the recession of finding the capital to convert equipment from oil to coal use. To help here we shall commit £50 million over the next two years for grants towards the cost incurred in converting from oil-fired boilers to coal. The expenditure will be offset, at least in part, by greater coal sales. Any net cost will be met from the contingency reserve.

CONSTRUCTION

Development Land Tax

The construction industry is particularly hard pressed and it is in any case sensible to remove unnecessary obstacles to development. We have identified three helpful changes to development land tax which will stimulate activity, and so employment, particularly this year and next.

First, under the present law, if industrial development is undertaken by the owner for his own use, tax is deferred until the property is sold or put to other use. I propose that for two years this relief should be extended to other types of development for the owner's use, including commercial and hotel development. If a development is begun by 1 April 1983 there will be no DLT for an owner to pay on any part intended for his own use until the property is sold or otherwise disposed of.

Secondly, where property is extended there will in future be no charge if the extension does not increase the size of the building by more than one-third. The current limit is one-tenth.

My third proposal will reduce the burden of DLT on builders who acquire land for residential development and will be of particular benefit where land is released by local authorities and others for building homes. The cost of these measures is put at up to £5 million in a full year but the benefit to the economy could be much greater.

Industrial Buildings Allowance

As I have said, I am concerned that businesses should continue to invest for the future. Our tax system already provides generous incentives for investment in new machinery. But modern machines will seldom yield their full potential if they are housed in obsolete and inefficient factories. I therefore propose to increase the initial allowance for expenditure incurred after today on the construction of new industrial buildings, from 50 per cent. to 75 per cent. The cost will rise to £25 million by 1984–85. This will benefit not only manufacturing but also employment in the construction industry.

[column 779]

CAPITAL TAXES

The measures I have just announced will in total be worth about £300 million next year. And the tax measures alone will be worth over £400 million in 1982–83.

But if we are to build a strong and vigorous economy, we must do more to encourage and reward the creation of new enterprises, new wealth and new jobs. I turn, therefore, to the subject of capital taxation, which bears especially heavily on the owners of small businesses.

Capital Transfer Tax and Capital Gains Tax

In a year in which we can give no income tax relief, I cannot make major changes in capital taxation. I do, however, propose to continue the process of making more sense of the structure of capital taxes.

First, there is capital transfer tax. One new concept introduced as a feature of that tax was the idea of cumulating gifts made at any time in a person's life. Some allowance was made for the earlier payment of tax on transfers during life than on death, but only at the bottom of the scales. As a result, people are deterred from transferring their property during their lifetime. This is undesirable. Business property, in particular, should be permitted to pass more freely from one generation to another.

I propose therefore to recast the lifetime scale. At the bottom the charge on gifts will remain half that on death; at the top it will become two-thirds. I also propose limiting cumulation to 10 years and extending the capital gains tax roll-over relief to gifts into trust, to avoid a double charge. I hope that, by encouraging gifts, the Exchequer will benefit as well as the taxpayer. I also propose to increase the annual exemption to £3,000.

Capital transfer tax is also holding back the supply of land for new entrants to the farming industry. Tax is not the only factor, of course. But it is important to maintain a proper balance between owner-occupied and let land, allowing for their different value. I have in mind the unequal treatment of let land. At present, no relief is normally given on let land. In future relief will be available at 20 per cent. Agricultural land not subject to a lease will continue to receive relief at 50 per cent. The difference in the rate of relief recognises the lower value that let land commands and the lower tax burden it attracts as a result. The facility to pay CTT by interest free instalments will be extended to let agricultural land and the limit of £25,000 will be removed.

Next, I turn to trusts. I am grateful to all who responded to our consultative paper. I propose to tackle some matters this year, but on discretionary trusts draft clauses will be prepared for further discussion and we shall legislate next year. Meanwhile, there will be a final extension of the transitional period to 31 March 1983, or 31 March 1984 where an application has to be made to a court.

I also propose dealing with certain avoidance devices which centre on the market value rule for capital gains tax purposes, and aligning the capital gains tax rules with the new income tax rules developed following the Vestey case.

The net affect of all these proposals in the capital tax field will be a cost of £5 million this coming year but a gain of £15 million in a full year – the saving from the anti-avoidance measures exceeding the cost of the reliefs I have proposed.

[column 780]

Stamp Duties

I intend to include one stamp duty provision in the Finance Bill which will help those buying council houses. This will ensure that stamp duty will be payable only on the discounted price that the buyer actually pays and not on some higher figure.

ENTERPRISE

Last year, I introduced a number of measures to help small firms. In addition to the major new initiative to establish enterprise zones, these included a venture capital scheme, improved tax relief for small workshops, and a reduction in the rate of corporation tax for small companies.

All these measures have been widely welcomed. The 11 proposed enterprise zones have stimulated intense interest among investors and the private sector has begun to respond even before the zones are formally established.

Meanwhile, provision of private finance for small factory units has grown rapidly. The continuing strong demand for small workshops shows the strength of the small business sector.

But we can and must do more to help existing small businesses to grow, and to encourage new businesses to start up. This remains an essential key to new jobs.

VALUE ADDED TAX

First, VAT. I propose that, as last year, the registration threshold should be increased in line with prices – on this occasion from £13,500 to £15,000. This change will take effect from midnight tonight.

Small Companies Corporation Tax

Secondly, I propose to increase from £70,000 to £80,000 the limit up to which the lower 40 per cent. rate of corporation tax is payable by small companies. I also intend to respond to one of the long-standing complaints from small companies, which is the relatively high marginal rate of tax which they have to pay when profits exceed that limit. The limit at which the full corporation tax rate of 52 per cent. becomes payable will be raised from £130,000 to £200,000. This will make for a gentler progression from the small companies' rate to the full corporation tax rate. The cost of these changes will be £12 million in 1981–82 and £21 million in a full year.

Industrial co-operatives and partnerships

Thirdly, new businesses depend on ready access to fresh capital. Last year I relaxed the conditions governing tax relief for interest on money borrowed to invest in close companies. That was good for small companies. I intend this year to relax the conditions for industrial co-operatives and partnerships.

Purchase of own shares

Fourthly, as the House knows, the Government will shortly introduce new clauses in Committee on the Companies Bill, to enable companies to purchase their own shares. Corresponding changes are needed in the present tax structure to help with a number of problems arising in small and family businesses. I am, therefore, asking the Inland Revenue to issue a consultative document on this subject this summer, with a view to legislation in next year's Finance Bill.

[column 781]

Venture capital scheme

Fifthly, I intend to extend the venture capital scheme introduced last year. This scheme encourages investment in small businesses by allowing capital losses on shares in unquoted trading companies to be set off against income. At present, it is confined to investment by individuals. I propose to extend the scheme now to investment by companies, some of which may be able to provide funds for expanding small firms.

Positive use of redundancy money

Sixthly, we have looked at ways of encouraging people who are unemployed, particularly those who have just become redundant, to help themselves, and the economy, by setting up in business. Redundancy payments and other payments made on termination of employment are at present taxable if they exceed £10,000. I am raising that threshold to £25,000 with effect from 6 April. In addition, the rules for the taxation of these payments will be simplified.

Furthermore, we are looking at the suggestion that the existing social security rules act as a deterrent to initiative. We are considering whether they could be altered, or other arrangements made, so as to encourage people who have been declared redundant, or who have been unemployed for some time, to start their own new small business.

All these measures will be of significant help to small businesses. But I intend to go further and have two new measures to announce.

Loan guarantee scheme

First, as the House knows, I have been considering the introduction of a loan guarantee scheme. There are some people who, for one reason or another, have difficulty borrowing money to start or develop a business. They may, for example, not have the necessary collateral security. I am pleased to be able to tell the House that agreement in principle has been reached with the major clearing banks and the ICFC on the introduction of a pilot loan guarantee scheme.

The scheme will run for three years initially, subject to an overall maximum limit of £50 million to be lent in each year. Individual term loans of up to £75,000 will be available for periods of between two and seven years. Government guarantees will be available for 80 per cent. of each loan. The scheme will be administered by the Department of Industry. Further information will be given by my right hon. Friend the Secretary of State for Industry.

The scheme is intended to be self-financing. Lenders will make a full commercial charge for their loans, part as an interest payment to the lender, part as a guarantee premium payment to the Department of Industry. Receipts from premium payments will be designed to cover the cost of claims made under the guarantee provisions.

Business start-up scheme

My second new proposal breaks entirely fresh ground.

One of the biggest problems faced by people thinking of starting their own business is the difficulty of attracting sufficient risk capital to finance it during its critical early years. The amounts of additional money needed can be modest – at least as compared with the sums in which the big financial institutions commonly deal. But in individual cases they can be crucial.

[column 782]

The individual private investor has for many years had little encouragement to help fill that gap in the capital market. I propose to change that. The private investor can often contribute not only risk capital but direct personal business experience. The opportunities are certainly there. What is needed is to make it more attractive and more rewarding for private investors to take advantage of them.

I am, therefore, introducing an entirely new tax incentive to attract individual investors to back new enterprises. It is designed for the outside or minority investor in certain new small trading companies, as distinct from the owner of the business, his close family and associates. I am calling it the business start-up scheme. Under the scheme an investor will be able to obtain relief against income tax on up to £10,000 invested in any one year. The relief will be given in addition to the range of tax reliefs already available to the company itself, provided the investment is maintained for at least five years.

The scheme will relate only to genuine new business enterprises of the kind I have in mind. There will be strict rules to ensure that it is not used for investment in financial or passive operations, or for tax avoidance.

I am introducing the new scheme in the first instance for a three-year period, beginning with the coming financial year 1981–82.

This business start-up scheme will be unique in not only this country but among our main trading competitors. It will be a striking new incentive to channel investment into small businesses.

Business Opportunities Programme

These measures to encourage enterprise and risk-taking are essential if we are to replace the jobs that are disappearing elsewhere in the economy. There must be a healthy flow of new enterprises. We must be ready to set aside the resources to encourage them. They are the real future hope for absorbing and redirecting the people and resources at present squeezed out of employment by economic adjustment.

As I have said, this is the second Budget in which I have included measures to help and encourage small businesses. The measures I have just announced, together with those last year, constitute a formidable range of incentives. The tax system is now geared significantly in favour of enterprise, risk-taking and investment.

Much has also been done by this Government to ease the problems of small businesses in other ways – for example, by relaxing employment and planning rules. All this represents a complete change in the climate within which the small business operates. It is vital that these measures be widely known and that people be encouraged to take advantage of them.

The Government recognise the need to give a lead in that. We shall, therefore, be launching a business opportunities programme to publicise the help, advice and incentives available to small business. We shall be improving the advisory service available to small businesses in urban areas in England and to co-ordinate the advisory services provided by the Council for Small Industries in Rural Areas and the small firms service of the Department of Industry. The opportunities have been provided by this and earlier legislation and we must now do all that we can to see that they are taken advantage of.

[column 783]

CONCLUSION

This Budget has been designed to sustain the fight against inflation, and to help redress the balance of the economy in favour of business and industry. It is only by giving priority to those objectives that we can strengthen the basis for sustained economic advance.

We shall continue to pursue our strategy for the defeat of inflation with determination. – [Interruption.]

Mr Deputy Speaker: Order. The Chancellor of the Exchequer must be allowed to complete his statement.

Sir Geoffrey Howe: That strategy will be fortified by the changes that I am proposing today. These changes will reinforce the progress that has already been made and for which the nation can take credit.

In the year ahead the burden of income tax and Excise duties has to rise in order to secure lower interest rates and thus improve the prospects for industry and employment.

The downturn in the present economic cycle has been unusually severe. But it should now be coming close to its end. When recovery does start, the country will be better fitted than for many years to take advantage of the new opportunities, for important lessons have been painfully learnt. A greater sense of realism has been restored.

So, as we look further ahead, we can reasonably expect lower inflation and, in due course, lower unemployment and a reversal of the upward trend in the burden of taxation.

My present proposals are designed to secure our steady progress in that direction, and I commend them to the House.

Mr Deputy Speaker: Order. Under Standing Order No. 94, the first motion, entitled “Provisional Collection of Taxes”, must be decided without debate.

Provisional Collection of Taxes

Motion made, and Question,

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

1. Spirits (Motion No. 2).

2. Beer (Motion No. 3).

3. Wine (Motion No. 4).

4. Made-wine (Motion No. 5).

5. Cider (Motion No. 6).

6. Tobacco products (Motion No. 7).

7. Matches and mechanical lighters (Motion No. 8).

8. Hydrocarbon oil etc. (Motion No. 10).

9. Vehicles excise duty (Motion No. 11).

10. Value added tax: registration (Motion No. 13). – [Sir Geoffrey Howe.]

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

Mr Deputy Speaker: I shall now call the Chancellor of the Exchequer to move the motion entitled “Amendment of the Law”. It is on that motion that the Budget debate will take place today and on succeeding days. The remaining motions will not be put until the end of the Budget debate next week and they will be then decided without debate.

[column 784]

Budget Resolutions and Economic Situation

Amendment of the Law

Motion made, and Question proposed,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but this Resolution does not extend to the making of –

(a) any amendment with respect to value added tax so as to provide –

1. for zero-rating or exempting any supply;

2. for refunding any amount of tax;

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

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

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

[Relevant European Community documents: No. 10444/80 and the annual report on the economic situation in the Community (1980) and the economic policy guidelines for 1981.]

5.3 pm