THE BUDGET
The Denial of Incentives
By REGINALD MAUDLING, - MP
IT‘HERE is no doubt that Mr Callaghan's Selec-
tive Employment Tax was a surprise and an ingenious surprise at that. Its novelty enabled him, initially at any rate, to obscure two most important _ facts. He contrived to announce additional taxation to the tune of no less than £386 million in the current financial year, while giving the impression that the ordinary taxpayer would hardly notice it: and he diverted attention from the undoubted fact that the budget_ as a whole is as stale as it is Socialist.
Apart from the Selective Employment Tax there is no new thinking at all about our problems or their solution. It is the old Socialist story of restriction, discrimination and denial of the need for fresh incentives. New restrictions are placed on investment in the sterling area. The SET discriminates on the basis of the age- old Socialist prejudice in favour of manufacture and against services. In place of the need for more incentives to greater savings, greater efficiency and greater enterprise, we laafe heavy additional taxation of industry with a few Socialist side-blows at particular attempts to find new encouragement to the saver or to senior management.
Certainly, Mr Callaghan was facing a difficult situation. He had not much room for manoeuvre. The picture was dominated by the continuing problem of the balance of payments and by the complete failure of the incomes policy. It can now clearly be seen that, in fact, the Labour government inherited from their predecessors a balance of payments situation that was rapidly improving, just as we had always predicted. But the greater part of that improvement took place in the early months of their administration. The steam is now going out of it. The position in the first quarter of this year was little better than it was in the first quarter of 1965. On top of that Mr Callaghan was faced with the clear necessity to remove the surcharge before the end of this year. Our trading partners had come-=to the end of their patience. At home the simple fact is that fast year's rise in incomes of over 8 per cent has completely overshadowed any of the deflationary efforts in Mr Callaghan's various 1965 budgets. Home demand was contained last year only by sharp tax increases and a substantial increase in prices. For all his brave words, it is unlikely that the Chancellor was placing much faith in the Government's ability to stem the flood of addi- tional wage demands this year.
This, then, was his problem: to strengthen the balance of payments and to cope with the threat of domestic inflation. The pity is that he tackled both difficulties by the old Socialist measures of restriction and higher taxation rather than seeking new means to increase efficiency and to expand exports. His new restrictions on investment in those parts of the sterling area where investment is most profitable and, there- fore, of most value to this country,- are an out- standing example of this narrow-minded approach. Mr Callaghan has shown himself as biased against external investment as he now appears to be against the service industries. This seems to me to be extremely short-sighted. It is very dangerous indeed to under-estimate the con- tinuing importance to our economy and, indeed, to the flow of our exports, of vigorous overseas investment and his aim should have been not so much to cut it down as to find new resources to sustain it.
His measures to deal with the threat of inflation once again take the traditional Socialist form of , increasing taxation rather than reducing expendi- ture. Apart from some vague talk of a review of overseas defence expenditure, the Chancellor was singularly reticent about the whole question of economy in public spending. Yet, at a time when his major objective was to reduce the pressure on the economy, while maintaining incentives to efficiency and expansion, surely his thoughts should have turned first to reducing expenditure rather than increasing taxes.
Now for the tax changes themselves. They are dominated both in scale and importance by the SET. They will, of course, fall on the consumer. The profit margins of industry have already been squeezed to a point when the incentive to expan- sion and greater efficiency is dangerously low. The main difference about this particular form of taxation is that it will fall, for the first time, on the price of essentials as well as amenities. Food, clothing, medicines, insurance policies, mort- gages, houses; alt will be affected. For a Chan- cellor determined to make another vast increase in taxation in order to mop up purchasing power, perhaps this is orthodox economics. But it is singularly in contrast to the assurances about no need for severe tax increases given us blithely at the recent election.
The SET itself is a half-baked idea, based mainly on the old Socialist prejudice against distribution and services. There are those who support the idea of a payroll tax, although I have never, myself, been convinced by their arguments. But I doubt if anyone will support a payroll tax of this kind. The indiscriminate penalisation of the so-called service industries is quite unjusti- fiable. In terms of the Chancellor's own problems, to impose these new burdens upon the tourist industry and upon the financial institutions of the country is to handicap two of the main con- tributors to Britain's export earnings.
Nor, de I believe, will his - theory work. I doubt very much whether the tax will have any effect in achieving a more efficient use of labour in the service industries. Mr Callaghan is a strange man; only recently he was refusing in- vestment incentives to the service industries, which would have been the best way of en- „couraging them to greater economy in the use of man-power. And now when he stresses the need for this efficiency throughout the whole of our economy, he is actually giving a reward to mann. facturing industry for employing more rather than fewer people. The logic of this escapes me completely. The SET is a thoroughly bad device. It will be difficult to administer; it is riddled with anomalies; it will not achieve any economic pur- pose; I doubt if it will long succeed in its political purpose of concealing the real weight of new taxation on the consumer.
Any budget should be judged by two tests: does it set about raising the right amount of revenue, and are the methods proposed the best ones for the economy? It is very hard to say whether the Chancellor is right in trying to raise so much additional revenue this year. It depends, of course, on how far you think the Govern. ment's incomes policy will continue to fail, for in truth, the new taxes are the price the taxpayer is asked to pay for the failure of the Govern. ment's own policy. But £386 million is a for- midable amount of money and the fact that its collection is delayed for some months may well mean that it reaches its peak at a time when the economy is already slackening.
As for the methods adopted, his sins of omission are more serious even than those com- mitted in the SET. What the economy needs above all is fresh incentives to efficiency, to ex- ports, to savings and the stimulus of more com- petition. Mr Callaghan provided none of these things. There is no new fiscal encouragement to exports. Such improvement as he 'has made in National Savings-media will have little edc t. Far from giving incentives to industry and to management, he has imposed a corporation tax of 40 per cent and a great deal of additional taxation as well in the current financial year. and in his destruction of stock options he has removed one of the remaining incentives to greater effort in senior management. The investment grants are still far less effective than the investment allow- ances which the Conservatives introduced and he has abolished. As for competition, well, at least he has allowed greengrocers to sell postage stamps; but this is hardly enough.
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