The Economy
Second Thoughts on the Budget
By NICHOLAS DAVENPORT The first idea does not depend simply on mak- ing a show of social justice. Everyone welcomes the higher pensions and national insurance bene- fits, but this will mean an extra 2s. on the stamp from the employee (3s. 3d. from employers) as from March 29 next. Now if the workers are to be induced to accept a 'guiding light' for wages they must be convinced that the Government can be relied upon to stop any further rise in prices. But the first thing this Budget does is to raise prices. As if the 15 per cent surcharge on im- ported manufactures were not enough to put up the cost of living, Mr. Callaghan clapped 6d. on the gallon of petrol (now bearing 3s. 3d. tax), giving every businessman an excuse to make an upward adjustment in his prices. The Price Re- view Commission will be powerless to stop him.
Mr. Callaghan may say that he is only raising the cost of living fractionally, but he is raising tempers by very much more. Millions of workers now motor to their work and their rage at this impost has to be heard to be believed. They feel that the Government is treating them exactly as the Tories did. Don't upset the cost of living, the Tory Chancellors used to say, and in their next Budget they would put up purchase tax on a Whole range of household necessities. It made the Workers mad. And the end result of that sort of deflation was to put wages up as well as Prices. Has the new Labour Chancellor not learned this lesson? Has he not been told that Petrol for a mass of workers is a household necessity? The Government is already having misgivings, for it has undertaken to subsidise local transport to prevent a rise in bus fares. But Mr. George Brown, who has the primary responsibility for getting an incomes policy agreed, must be feeling like the pregnant maiden - something worse than a misgiving.
As for the second idea, I do not regard the criticism of Mr. Rees-Mogg and others as fair that the Chancellor is doing nothing to help in- dustry to modernise and increase output. Various measures are on their way, to say nothing of Severance pay for displaced workers, which will improve the mobility of labour. But it is surely destructive of good management morale to frighten the businessman with a new system of Company taxation and leave him in utter uncer- tainty as to what rate the future corporation tax Will be. All that Mr. Callaghan would say was that with 'double' taxation of dividends he could raise the same revenue from companies with a lower rate of corporation tax than the present combined rate of income tax and profits tax, Which is now 56+ per cent—the highest rate in the western world. Why could he not have said that the new corporation rate would be between 40 per cent and 45 per cent? He put income tax up from 381 per cent to 41* per cent, which is a bad enough blow for the up-and-coming young managers, technicians and highly skilled workers, but he left profits tax at 15 per cent. Did it not occur to him that if he had made it 171 per cent he would probably have secured enough revenue to square his anti-inflation equation—without rais- ing the petrol tax? That gesture—taxing the profit boom—would surely have impressed the trade unions and made them more willing to accept a wages policy. And it would not have greatly angered the business managements, who are presently enjoying a bigger upsurge in profits than they had expected. In fact, if he had said that next year they could look forward to a single corporation tax of, say, 40 per cent and no income tax on top he would have secured their good will and co-operation in the produc- tion and export drive we alLneed.
The Budget has the mark of the mathematician who has been asked to work out a taxation sum —regardless of its psychological effects—to offset the potential inflationary effects of the 15 per cent surcharge. For reasons which it does not divulge, the Inland Revenue estimate that the surcharge will keep out some £300 million. of imports, and produce only £200 million of tax 'revenue. The extra petrol tax, they say, will yield £93 million in a full year, so that this will effec- tively plug the inflationary gap of £100 million. But these estimates are no more than guesses. The Inland Revenue have no means of finding out (a) the extent to which the business world anticipated the advent of a Labour government and the imposition of import restrictions by stocking-up and (b) the extent to which home out- put can be increased by taking up the slack in production and by the better use of labour. (The latest FBI inquiry revealed that only 58 per cent of the firms reporting were working to capacity.) It would surely have been better to wait until April to see exactly how imports were being affected. The pension and national insurance benefits do not start until April—like the extra income tax—so that the immediate 6d, on petrol was thrown in as a pure deflationary gamble. I am sure it was a bad mistake.
To finance the new social welfare payments £345 million are needed next year and the Treasury is gathering in £415 million from the 15 per cent surcharge and the extra petrol tax and income tax combined. (This is on top of the extra stamp money.) Deducting the miserly £75 million of tax rebates for exporters, we arrive at £340 million net. It looks again as if the narrow-minded tax accountants have been at work with their clever little sums, their feverish ball-pointed pens and their ignorance of human nature. The April Budget should have been the instrument by which a major_ reform of the system of taxing profits and dividends could be called upon to pay for the improved social wel- fare of the new Labour regime.
I cannot help feeling that the old deflationists of the Treasury are still alive and getting at the Chancellor. When a balance of payments crisis blew up in the old days they only thought in terms of deflating business, putting up prices against the consumers and making everyone mad. This is really what the autumn Budget has done. What Mr. Callaghan should have done—apart from the surcharge and the export rebates—is to put a freeze on the export of capital. Even the Economist was moved to observe: 'The out- standing omission in these autumn measures is of any action whatever to deal with the huge outflow of capital which accounts for fully half the expected £700-800 million basic deficit.' Is Mr. Callaghan afraid of the word 'controls'?
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