The Economy
The Third Salvo
By NICHOLAS DAVENPORT
This suggests another bankers' ramp, but— shades of 1931!—this was the last thing Mr. Wilson would have tolerated. We can draw on the International Monetary Fund as of right--up to a certain amount—and before Mr. Maudling had left the Treasury we had negotiated a stand- by credit for $1,000 million. But because the IMF is rather short of some European currencies, the French Director-General of the Fund, M. Schweitzer, decided to ask the gold bloc—the so- called 'Paris Club'—to provide supplementary resources up to about $400 million. This was a curious move. 'Lombard' of the Financial Times declares that it was unnecessary. The Fund, he said, had on paper usable resources of $3,250 million—to say nothing of its stock of dollars and gold—and even if this exaggerates the posi- tion because of the weakness of some of the currencies involved, it is hard to believe that a comparatively modest borrowing of . $1,000 million by the UK would force the Fund to call Upon its emergency $6,000 million 'Paris Club' agreement. But M. Schweitzer, I believe, felt as strongly as his European friends that the 15 per cent tariff surcharge should be short-lived and non-discriminatory. If the EFTA group were to accelerate their tariff cuts they would, in effect, be removing themselves from the 15 per cent surcharge. Mr. Wilson was able to assure M. Schweitzer that the surcharge would be non- discriminatory and that EFTA would not be julnping the gun. But it was a tricky moment. Naturally, the Europeans took the view that the British should be made to suffer as well as the foreigner for the huge trading deficit they had run up. So Mr. Wilson had good reason to rush the autumn Budget before the House of Com- mons to show them that this was part of his plan
but in strict accordance with his idea of social Priorities.
Having stated these prerequisites, it is almost an anti-climax to say that an autumn Budget was also necessary to raise more revenue to pay for the increased social services.
Incidentally, the social revolution also de- manded haste. Mr. Brown and Mr. Callaghan had seen the TUC and made it no secret that they wanted to have a wages policy in operation before the end of the year. (They added some- what superfluously that they did not ask for a wages freeze—as if that was ever practical Politics!) The autumn Budget had to implement their part of the bargain. It had to show that, for the first time, when sacrifices had to be made on the altar of the balance of payments, the knife would not fall exclusively on the wage-earner.
This Mr. Callaghan demonstrated by his prom- ise to increase the capital gains tax next April and by his unexpected decision to increase the standard rate of income tax for 1965-66 by 6d. to 8s. 3d. About 14+ million people will be unaffected by this change and for married couples with three children there will be no change up to an earned income of £1,000 a year. (Even with an income of £5,000 there would be an in- crease of less than £100 for such a family.) It is, therefore, rather a demonstration than a reality of suffering for the average well-to-do person, but Mr. Callaghan threatened something worse to come by his intention to legislate against taxation evasizm and to reform the whole taxation system for companies next April.
As he left it this week company profits are already very heavily taxed. With profits tax at 15 per cent and income tax raised to 41+ per cent, the total exacted from company profits is now 56+ per cent. It is the highest level for company taxation in the world. Mr. Callaghan did, however, say that it would not be necessary to introduce a corporation tax of 56+ per cent. The same revenue could obviously be raised with a lower corporation tax if dividends were 'double-taxed,' that is, subjected to a special dividend tax. This apparently is what Mr. Callaghan implied. 11. dividends were taxed at the full standard rate of 8s. 3d., the corporation tax could be no higher than 35 per cent. But even so, the effect of a corporation tax of 35 per cent would be to reduce dividends for any company whose existing dividends are less than twice covered.
The imposition of a petrol and diesel oil tax of 2s. against the existing Is. 6d. is, I confess, meaningless unless Mr. Callaghan wants to dis- courage motoring on our heavily congested roads. While it will increase the costs of pro- duction by only / per cent or so it will aggravate the transport costs of many industries set up in remote 'development' districts.
The well-directed bestowal of higher pensions and social benefits will certainly demonstrate to the people that Mr. Wilson's Government puts social justice in the forefront of its programme, but will the higher income tax and promise of a stiffer tax on capital gains and on company profits (and/or dividends) next April convince the trade unions that they can no longer object to an incomes or wages policy? I do not feel confident that Mr. Callaghan has succeeded in bringing off the main objective of his Budget— which is to get a wages policy in operation by the spring of next year.
The enforcement of greater social justice by way of taxation is an estimable thing, but if it is so 'put over' that it leaves the trade unions indifferent to the success of an incomes policy and if, at the same time, it leads to a lessening of the work incentives of enterprising business- men, on whose efforts in the export trade our balance of payments depends, then Mr. Callaghan will have failed.
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