MONEY The shape of the Budget
NICHOLAS DAVENPORT
That bold convert to Keynesianism, Presi- dent Nixon, has just presented Congress with a budget having an estimated deficit of $11,600 million. He called it an 'expan- sionary but not inflationary' budget. If only Mr Barber could follow his example! But the Treasury mandarins are so terrified of our wage-cost-push inflation becoming a demand-pull inflation that they are certain to advise him not to reflate. Yet unless the Chancellor does pursue an expansionary policy he will see his revenue losing its buoyancy—and the unemployed topping one million—which will land him in serious budgetary as well as political trouble before his term is out.
In a little over two months the Budget will be upon us—and God help us all! As the new White Paper on public expendi- ture has been issued, purporting to show that the Government is keeping the increase in real terms down to 2.6 per cent for the five years to 1974-75 against 3.5 per cent under Labour, the Budget must now be taking its final shape. Last week the CBI handed to Mr Barber a budget of their own making, which was not all that bad. Indeed, Mr Barber might be well advised to steal some of its thunder. Briefly, the cm wants to reduce the tax bill by £720 million and calculates that only £270 million would go back into consumption because of increased savings and investment. Actually much less than £270 million would go back into con- sumption seeing that the Treasury takes. a big cut of indirect taxation from con-
sumer goods, which the cm does not pro- pose to change. I doubt whether this would be enough reflation.
On income tax the CBI makes the sensible proposal that the earned-income allowances should be scrapped and income tax should be levied on earned and investment income alike at 6s in the £ (ie, 30 per cent). This would make for much-needed simplification and reduce work enormously in the revenue offices. The discrimination between earned and unearned income has long since ceased to be meaningful or equitable; it merely acts as an impost on the widows and elderly who have to live on savings. The cm would also cut surtax rates by 5 per cent but this I take to be a compromise. Surtax should be abolished altogether and new graduated rates of income tax worked out for the larger incomes. To leave the very rich with only 6d or 9d in the £ of their total incomes merely drives them out of the country or into the most elaborate forms of legal tax avoidance.
It is absurd of the egalitarians to protest that income tax reductions give more to the rich than to the poor. Obviously with a 10 per cent cut for all, those who pay the most tax will save the most tax. One cannot ask the Inland Revenue to abolish in- equality in a capitalist society. But a wise government would see to it that while in- equality exists two rules must be observed: first, the very poor must receive an income supplement (or negative income tax); second, the very rich must invest their say- ings in productive investment to increase employment. These rules, I am happy to say, have been. honoured by the cm. They propose to remove another million from income tax at the bottom end and extend the family income supplements by giving back more than £100 million to the poorer families suffering from the inflation caused by their greedier and richer work-mates. And they have various schemes for the en- couragement of savings and investment.
The Stock Exchange will be intrigued to see how the cat proposes to encourage sav- ings. Capital gains tax is to be reduced and the short-term tax made equivalent to the long-term, which is at present 30 per cent. (The American is 25 per cent.) Gains from the exercise of stock options are to be taxed as capital gains (at the reduced rate). And to make the Save-As-You-Earn scheme more attractive, the limit is to be doubled from £120 to £240 a year, half the monthly contribution is to rank for in- come tax relief, and investment in equities as well as National Savings and building societies is to be allowed. When a delega- tion from the. Wider Share Ownership cause went to see Mr Maurice Macmillan, the Financial Secretary of the Treasury, the rumour spread that investment in equi- ties had been approved, Mr Macmillan having been chairman of that cause in private life. The Treasury put out an im- mediate denial to save Mr Macmillan's blushes. The idea of putting National Sav- ings into equities—as if the Treasury were condoning the inflation—can be laughed out of court. Besides, the performance of the unit trusts is proof enough that equities are no reliable hedge against inflation.
As for the encouragement of investment the cat asks for modification of the invest- ment allowances and, if this is impossible, for a further 2/ per cent cut in corporation tax to 40 per cent. It is also demanding the abolition of the double taxation of corn- panics (tax now being taken from profits and from dividends), not to mention a 25 per cent cut in the rates of estate duties. It is certainly opening its mouth wide. I imagine that if the Chancellor concedes half what the cm is asking for, the stock markets will become much more cheerful. If he gives the CBI a snub the FT index of industrial equities—now 340—is likely to fall sharply and test the stability of its previous low level which was 315 last June.
Basically the CBI is absolutely right in demanding a lifting of the fiscal burdens and a start upon reflation. 'On present pol- icies', it says, 'an over-all budgetary surplus is forecast for 1970-71 of no less than £2,600 million of which £1,550 million is for loans to nationalised industries, other public corporations and local government authorities.' With unused resources mount- ing with the rise in unemployment to over 600,000, the revenue must now be losing its buoyancy and the potential surplus for 1971-72 fast diminishing. But I note in the White Paper on public expenditure that the Treasury is budgeting for a cut of £123 million in the service of the national debt. This point was overlooked by the cm. They should have seized upon this hopeful sign and implored the Chancellor not to wait until his Budget, as he may be doing, to cut Bank rate but do it now. As a stimulus to industrial investment and as a move towards reducing the cost of living a re- duction in the cost of money and the cost of borrowing is the clamant need of this dark hour.
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