An interim Budget
Nicholas Davenport
With the economic pundits shouting contradictions at him — one lot crying for another £1,000 million to keep growth going at 5% and another lot telling him to put the brakes on and cut the borrowing requirement by £1,000 million—Mr Barber may be forgiven for deciding to present a " neutral " budget. But when he went on to say that the twin theme of his strategy was "expansion and the attack on inflation" it was clear at the end of his speech that his Budget helped neither, In the first place, there was nothing apart from the expected increase in investment and exports to offset the expected coming decline in the volume of consumer spending. In the second place it can hardly be argued that the imposition of VAT at 10%, which will inevitably be followed by more wage claims from the workers even with children's clothes exempted, does anything to further the attack on inflation.
It is almost impossible to devise a " neutral " budget. One social class or another is bound to say that the budget is unfair to them and too kind to another. In fairness to Mr Barber it must be said that he has never favoured the very rich who now pay more in tax than they did under Mr Jenkins (the top rate being 90% against 88i%). The new unified system of personal taxation comes into effect on April 6. For 1972-73 we shall be paying on the old rates for surtax but thereafter we shall all pay 30% in direct tax on earned incomes, the rate increasing as our earnings rise over £5,000 until 75% is taken, which is the maximum. On unearned income there will be a 15% surcharge on investment incomes over £2,000, the maximum rate being 90%. I agree with Mr Barber that most people will consider top rates of 75% for earned incomes and 907, for investment incomes high enough. West Germany, even after a recent 10% temporary surcharge, only exacts 60%. Of course Barbara Castle will point to the enormity of a chairman of a public board getting a large tax concession when the poor gas workers are only claiming a few pounds extra but the answer is to ask her why she and her party agreed to pay chairmen of the industries they nationalised such ridiculously high salaries. I have always argued that the top civil servants can do their job on their normal civil service pay just as well as the tycoons she and her colleagues recruited. After all, the nationalised industries are not there to make commercial profits but to avoid losses, which, of course, they cannot do if their political masters decree otherwise.
The changes in the tax system which the Tories have made since they came into office have reduced taxation by over £3,000 million. Of this nearly 25% represents reductions in purchase tax and SET and of the balance the greater part has gone in increased tax allowances, costing over £1,000 million. About 8% of these went to people with incomes of less than one and a half times the average adult manual wage. The tax threshold — the point at which people start paying tax — has been raised since 1970 by 8i°/, in real terms for a married man with two children whereas under Labour the tax threshold was actually lowered in real terms by 12%. The idea that Mr Barber has favoured the very rich is really nonsense. But he did give the well-off taxdodging concessions which he should not 'have done. And alas, the very poor still remain in the poverty trap.
Incidentally, Mr Barber was rightly conscious of the need to tax heavily the profits being made from land and North Sea oil. To increase the capital gains tax on land sales would only tend to withhold from the market land which would otherwise have been made available — and put up its price. So after consulting with the local authorities he is going to introduce a special land hoarding charge which will be levied for failure to complete the permitted development within a specified period. The charge will be levied on the full market value of the property as on the day immediately following the grant of the development permit. It seems a sensible thing for the State to share in land profits but I doubt if in itself it will bring down the price of land. Only more supply and less demand will do that.
We must at least be grateful to Mr Barber for helping us domestic ratepayers to pay the big increases in rates coming out of the new revaluation of property. He is meeting half the cost above 10% of any increase in domestic rate bills in 1973-74 which are attributable solely to the effects of revaluation. It will cost the Exchequer only £10 million.
How will the Stock Exchange react to this " neutral " Budget? It will, of course, be relieved that it was not worse but it will find precious little to halt the decline in equity shares. Mr Barber is relying on an accelerating growth in industrial investment and stock-building, of which there are signs already, to offset the decline in the volume of consumer spending which the rise in prices will bring about. He is almost certainly too optimistic about the rise in exports. But he claims that the UK has a more generous system of national incentives for industrial investment than in any EEC country or in the US. He reaffirmed the Government's intention that the new system of investment incentives will endure at least until the end of the EEC transitional period, which is January 1, 1978. This suggests that the regional employment premiums will go on until that date, which is all to the good. The new system of corporation tax will come into effect in April but as the tax is paid in arrear the rate will remain at the present 40%. The new rate next year has not been fixed. The new system is called the imputation system. The difference between this and the old is that under imputation income tax deducted from dividends will be offset by the company against its corporation tax. The receiver of the dividend will get a tax credit. So double taxation will end and with it the present tax discrimination against distributing profits. The effect on shareholders will vary with each company's set-up and the Chief Financial Secretary is to give details later in the debate.
Mr Barber is obviously hoping that the Stock Exchange will advise investors to switch from equity shares to the giltedged market. He announced the issues of two new Treasury stocks which caused a slump in the gilt-edged market. The first is designed to attract the surtax payer — and it will — and the second 'has the novel attraction of being convertible in 1980 into £110 9% Conversion stock 2000. These are ingenious moves to sell more gilt-edged stock in order to reduce the rate of in crease in the money supply. And by heavens it is needed! The deficit in the current Budget rises to £1,197 million — against last year's estimate of a surplus of £215 million — and this brings the total borrowing requirement for 1973-74 up to £4,431 million.
The Chancellor seemed to me wildly optimistic about the balance of payments. The esti mates of its deficit for 1973 range from £500 .to E1,000 million. Whatever it may be it is not going to be allowed to upset the Government's 5% growth target. Will our partners in the EEC stand for this? Mr Barber has given them his sterling conditions for a joint float of EEC currencies against the dollar which they cannot pos sibly accept. Clearly, if sterling gets into trouble and puts up the costs of our food and other imports yet more, this Budget gets lost and we shall have another one in the autumn.
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