Below is the text of Mr Major's Commons Statement on the Finance Bill made on 25th April 1989.
The Chief Secretary to the Treasury (Mr. John Major) I beg to move, That the Bill be now read a Second time.
This Bill embodies the legislation that flows from my right hon. Friend's Budget. Over the past 10 years we have seen a transformation in economic policy and performance. Policies of demand management and state intervention that failed have been replaced by policies of free enterprise within a sound medium-
The evidence for this is overwhelming: output has expanded by over 20 per cent. since 1979, business investment has risen to its highest ever level as a proportion of GDP, the public finances are now in large surplus and not in large deficit and there has been a marked rise in productivity and employment and a drastic reduction in inflation. As a result, real living standards are now much higher than they were 10 years ago and have every prospect of improving further.
There are two measures that illustrate the improvements we have seen. First, the performance of our economy has been transformed compared with its own performance in earlier years; but, secondly, and equally importantly, it has also been transformed when compared with the current performance of our competitors. That is why in the 1980s output and investment have grown faster here than in any other major European Community country, a marked contrast to earlier decades, particularly the 1960s and 1970s; and manufacturing productivity has grown faster here than in any other major industrial country, including Japan. In all these measures the United Kingdom was bottom of the league of performance in the 1960s and 1970s. Our position has now dramatically improved.
Also, in the 1980s, small businesses are being created at an unprecedented rate. In the year to March 1989 the net increase in the number of firms registering for VAT was nearly 70,000, an increase of over 40 per cent. on the previous year, which was itself a record. This means that on average over 1,300 new firms are being established every week. I cannot imagine that this has ever happened before in this country. It is noticeably higher than the 1,000 new firms a week we previously claimed.
This is by any yardstick an outstanding record of success and this year's Budget seeks to build on it. But there are difficulties as well which we acknowledge. The Budget was framed against a background of an unwelcome increase in inflation at home and abroad. Inflation in all the major nations is currently at its highest level for three and a half years. In the United Kingdom, current inflationary pressures, although much exaggerated by the perverse effect of mortgage interest payments on the RPI, had their roots in the events of October 1987. At the time of the stock market crash commentators feared that is would precipitate a world wide slide into recession, as it had done in 1929. That fear was shared by many right hon. and hon. Members.
It was precisely to avoid that risk that we, along with the other major industrialised countries, deliberately made sure that monetary conditions at that time were not too tight. We were successful in that aim, in that the effects of the crash were not remotely as bad as we, or anyone else, including Opposition Members, feared. It is clear that the current strength of the world economy owes much to the prompt and co-
The Budget was also framed against the background of the current account deficit. This largely reflects an excess of private sector investment over private sector saving, and not the reckless public spending which was the hallmark of previous deficits. It is thus fundamentally different from those of the 1960s and 1970s. The investment boom we are now experiencing underlines the confidence which domestic and foreign investors have in the United Kingdom economy and will stand us in good stead for the future.
Against an international background of rising inflation, this had to be and was a prudent and cautious Budget. That was undoubtedly the right judgment, and it is generally shared. Our long-
Much of the economy's success is a direct response to the favourable tax structure created by my right hon. Friend and his predecessor in the past 10 years. Successive Budgets have broadened the tax base, lowered tax rates and made the tax system more coherent, more intelligible and a great deal simpler. The tax climate is undoubtedly a significant factor in attracting the stream of welcome inward investment recently and magnificently continued by Fujitsu, Bosch and Toyota. That inward investment, as a result of tax and other changes, should be welcomed by hon. Members in every part of the House -
The 1989 Budget made further progress. It contained a major reform of national insurance contributions and the abolition of the pensioners' earnings rule. Those two measures were considered during the Report stage of the Social Security Bill yesterday. Both have received widespread support. Both will remove significant distortions and disincentives. The reform of national insurance contributions will also increase take-
In his 1987 Budget, my right hon. Friend recognised the special needs of older pensioners by introducing a new and more generous age allowance for those aged 80 and over. Clause 29 extends this higher allowance to people aged between 75 and 79. This will take an additional 15,000 elderly single people and married couples out of tax altogether. In real terms, the age allowance for those aged 75 and over will be 19 per cent. higher than in 1978–79. Three quarters of all those aged 75 and over will not be liable to income tax at all.
The clause also reduces the rate at which the age allowance is withdrawn for those with incomes above the income limit. It is clearly right to concentrate the benefits of the age allowance on elderly people with relatively modest incomes, but we received a number of representations from hon. Members calling for a reduction in the marginal tax rate faced by those with incomes in the withdrawal band. I am pleased that the Budget met these concerns, which were expressed forcibly by hon. Members -
These changes ensure that pensioners keep more of their own money. They also build on what is already an impressive increase in pensioners' incomes. Between 1979 and 1986, the average net incomes of pensioners increased by 23 per cent. in real terms. By contrast, despite the concern I know exists among Opposition Members, pensioners had an increase of only 3 per cent. in the years of the Labour Government between 1974 and 1979.
The Budget has been hailed as a Budget for the elderly -
This Bill contains one other measure to help the elderly. Clauses 51 to 54 will give tax relief for private medical insurance premiums for the over-
In recent years, employers' health insurance schemes have expanded rapidly, and I welcome that. It is attractive to see independence and choice increasing, and I regret that Opposition Members are hostile to that. It is largely due to such schemes that some 50 per cent. more people are covered by medical insurance schemes today than in 1980. But membership of these schemes usually ends on retirement. People are then faced with a double increase in costs: not only do their employers cease to pay their premiums, but the premiums tend to rise at precisely the moment when people's incomes fall.
We have had a large number of representations over the years from people caught in this trap who did not think it was fair that they should suffer this double penalty. I agree with them, and the relief is designed to deal with that specific problem. It also encourages the overall provision of health care and investment in it, and thus eases the demands in that fashion on the NHS.
Indeed, in a curious way, the greater the take-
The medical insurance industry has begun to introduce policies which are aimed at those who cannot afford, or do not want to take out, more expensive cover. Some of the policies are intended specifically for people in retirement, and I welcome that extension of choice for them.
Although this measure is important, it needs to be seen in perspective. Our public expenditure plans mean that, overall, the NHS will have an extra £2,500 million in 1989–90, and a further £2,500 million in 1990–91 -
Mr. John Battle (Leeds, West) Can the Chief Secretary tell the House why the Secretary of State for Health and the Minister of State for Health welcomed the measure in lukewarm fashion, saying that, at best, it was an interesting detail in the Bill, and, at worst, would damage attempts to sell the White Paper on health about which the Government are struggling to convince the country?
Mr. Major It is within my knowledge that both my right hon. and learned Friend and my hon. and learned Friend strongly support this measure. There is no doubt about that.
A dominant feature of the Bill is the improvement of the taxation of savings. It contains a series of measures to increase and deepen the ownership of shares, especially by employees and smaller investors. In the post-
In contrast to saving through large tax relieved institutions, such as occupational pension schemes, direct equity investment subjected the saver to a range of punitive taxes. A top rate of tax of 83 per cent., combined with an investment income surcharge of 15 per cent., meant that direct investors in equities could receive as little as 2p in the pound of dividend income. On top of that, they were taxed not only on real capital gains, which I am afraid were few and far between from 1974 to 1979, but also on inflationary gains, which were in considerably more plentiful supply. If the investor wanted to hand on his shares to his children, he was subject to yet another confiscatory tax in the form of capital transfer tax, where rates could be as high as 75 per cent. It is hardly surprising that direct share ownership went out of fashion in the 1970s; the only surprising thing is that it survived at all. Since 1979, my right hon. Friend and his predecessor have given share ownership a dramatic boost.
The trend has changed -
We believe that it is right to go further to promote private saving through equity investment. Direct share ownership must be allowed to compete with institutional saving. That is why my right hon. Friend introduced personal equity plans in 1986 and further improved them in the Budget. The increase in the overall investment limit from £3,000 to £4,800 and in the unit trust and investment trust limit from at best £750 to £2,400 will give PEPs an additional impetus. Unit and investment trusts allow investors to spread risk and are a good introduction to equity investment for the small saver. Along with the important PEP deregulation measures announced by my right hon. Friend, the changes have been widely welcomed. More plan managers are setting up plans and a number of new products are being marketed. As the chairman of the Unit Trust Association has said: PEPs should now be the major success that for investors they deserve to be. We all look forward to that.
Employee share schemes are specifically designed to encourage direct share ownership by workers in their own companies. As such, I know that such schemes have supporters in each and every part of the House. They have the particular advantage of giving employees a direct stake in the company that they work for, and have been an important factor in breaking down the "them and us" mentality which pervaded British industrial relations, resulting in great damage, in the 1960s and 1970s. That mentality is going, and good riddance to it. The sooner it is gone, the better. The House will know of the success of all-
Employee share ownership plans, known generically as ESOPs, provide an alternative means of encouraging employee ownership. Clauses 64 to 71 and schedule 5 provide a statutory basis for tax relief for company contributions to those plans. For some companies they offer more flexibility than normal all-
The most important of those conditions is that the shares must be distributed to employees within a maximum of seven years of their acquisition by the trust, and on an all-
The changes to the taxation of pension schemes set out in clauses 72 to 74 complement the wider share ownership measures. They will increase pensions choice and encourage greater personal responsibility for pension provision. They will also deregulate an area of savings which has become excessively and undesirably circumscribed by Inland Revenue rules.
The Government's record on improving private pension provision has been substantial over recent years. We have introduced personal pensions and free-
Those clauses build on that record. The rules for additional voluntary contributions, or AVCs, will be greatly simplified, reducing the administrative burden on employers' schemes; and the anomaly whereby successful investment performance of the AVC led to a reduction in the employee's occupational pension will be ended. In future, excess AVC funds will be returned to the employee subject only to a special tax charge.
Ending the link between Inland Revenue limits and the maximum pension payable by employers also makes the pensions regime more flexible. Employees and employers will now be free to negotiate whatever pension package they jointly think is appropriate. Inland Revenue rules will no longer constrain the size of the pension, only the extent of the tax relief.
The cap on tax privileged pension benefits completes the changes begun by my right hon. Friend the Chancellor in 1987. Based on earnings of £60,000, the cap has been pitched at a generous level. It will still be possible to receive a privileged pension of £40,000 a year, or, where benefits are commuted, a maximum tax-
I believe that a cap is necessary. Although we are committed to widening private pension provision, that should not he at an ever-
These changes have also provided an opportunity to redress the balance between occupational and personal pension schemes. Many members of personal pension schemes start contributing late in life, for reasons well understood in the House. They have no access to the accelerated accrual available in the best final salary schemes, and often have lower pensions in retirement as a result. Although tax-
To take the example of someone aged 56, under the old rules he received relief on contributions up to 22.5 per cent. of his earnings; under the new rules he will receive relief up to 35 per cent. of his earnings. This change will give a further boost to personal pensions and will be of special value to those who, in their earlier working life, need to plough back every penny available into building up their business. On Budget day, my right hon. Friend the Chancellor reported that more than 1 million people had taken out personal pensions by the end of 1988. I am pleased to tell the House that that number has risen to 1.5 million.
The Bill also contains important measures for business. In his first Budget my right hon. Friend introduced a major reform and simplification of corporation tax which enabled the main corporation tax rate to be reduced to 35 per cent., one of the lowest in the industrial world. That low rate, together with the removal of the old bias against employment inherent in the old system, has made a significant contribution to rapid economic growth, employment growth and the high investment that we have seen in recent years.
Of no less importance was the reduction in the small company corporation tax rate from 42 per cent. in 1978–79 to 25 per cent. today. It is now right to extend the benefits of that rate to more companies. Clause 33 therefore raises the profit limit by 50 per cent., far more than was required to keep pace with inflation. That measure will enable firms to make profits of up to £750,000 a year before paying the average rate of 35 per cent.
Mr. Dennis Skinner (Bolsover) In this and in other Budgets in recent years, many in the Government would argue that they have given large sums of money through taxation relief to the top salaried people. The last set of figures shows that the salaries of company directors have increased by 26 per cent. Does the right hon. Gentleman take the view that those company directors who have been fed pretty well by the Government in the past few years are perhaps biting the hand that feeds them? What has the right hon. Gentleman to say about the 26 per cent. increase when low-
Mr. Major We have made significant changes in taxation affecting people at all levels of income and not just those on high incomes. The basic rate of taxation, which affects all the 20-
Mr. Gordon Brown (Dunfermline, East) Will the Chief Secretary confirm that the very people who have been calling for wage restraint from the workers have seen their standard of living rise, after tax, by 26 per cent. in the last year? Is he aware that, according to the British Institute of Management, the standard of living of senior directors has risen by 47 per cent. in a year and that, according to another study, the standard of living of those on unearned income has risen by 87 per cent. in one year alone? Will he condemn those rises?
Mr. Major The hon. Gentleman should bear in mind that payments to directors of companies are not a matter specifically for the Government. Taxation rates are legitimately a matter for the Government to determine. Incomes are not directly under the control of the Government. I have no intention of responding in detail and directly at the Dispatch Box on each of those points.
Mr. Neil Hamilton (Tatton) Does my right hon. Friend agree that that little exchange shows with the greatest possible clarity the difference between the Opposition and we on this side of the House on taxation? Opposition Members see taxation as a fine on success regardless of whether it brings more money to the Treasury. The decrease in taxation rates on higher levels of income has increased the amount of money brought into the Treasury, which is then available for redistribution to those on lower incomes.
Mr. Major My hon. Friend is entirely correct in what he says about the tax yield. It is equally true to say that under the management and guidance of the people criticised by the hon. Member for Bolsover (Mr. Skinner) there has been a dramatic increase in investment, employment, the profitability of companies and the general well-
Mr. James Lamond (Oldham, Central and Royton) What my constituents in Oldham cannot understand is that, in the midst of this success story which the Minister has just told us about, last year, when they went on holiday to Spain, they got 202 pesetas for their pound, while this year they are getting only 192.5 pesetas. Does that reflect a strengthening of our economy?
Mr. Major What the hon. Gentleman misses out of that interesting illustration is how many more of his constituents have been able over the past 10 years to afford to go abroad as a result of the policies of this Government.
Returning to the necessary, if perhaps esoteric, area of small companies corporation tax from which I was unruly ripped, I was about -
Mr. Nigel Griffiths (Edinburgh, South) Untimely.
Mr. Major I am grateful for that Shakespearian memory. "Untimely ripped" is the correct quotation from "Macbeth", appropriately coming to me from a Scottish Member.
The measure in clause 33 will enable firms to make profits, as I reminded the House a few moments ago, of up to £750,000 before paying an average rate of 35 per cent. What is relevant about this is that it strengthens once again Britain's claim to have the most favourable tax regime in Europe for small companies and it has been very widely welcomed by business men and managers, who, as the director general of the British Institute of Management wisely said -
A substantial chunk of the Bill will complete the reform of the administrative framework for the main taxes, which began with the setting up of the Keith committee in 1980. Clauses 138 to 165 simplify and update the system of interest and penalties for tax offences and revise the information powers of the Revenue. They will help to ensure that the operation of the tax system is effective and efficient, while at the same time remaining fair and just. They are the product of an almost unprecedented degree of consultation on tax matters and have been widely welcomed in responses as achieving a proper balance between the rights and obligations of the taxpayer and between the powers of the Revenue and safeguards for the citizen.
Clauses 17 to 21 implement last June's judgment of the European Court on VAT zero rating. As my right hon. Friend said in his Budget statement, we have made every effort to minimise the unwelcome burden of tax that we have been obliged to impose on businesses and, more especially, charities. Again, we have consulted widely with those who will be affected; indeed, consultation began on a contingency basis even before the judgment was given. I am glad to say that my right hon. Friend was able to meet their main proposals for minimising the judgment's impact. We have delayed implementation for as long as is possible and the transitional arrangements are said to be and are generous.
One of our main concerns has been the effect of the judgment on charities. We have managed to ensure that for their basic non-
Mr. Robert Sheldon (Ashton-
Mr. Major The right hon. Gentleman is entirely correct in saying that I have been speaking for half an hour, but a considerable part of that time has been taken up by interventions. He says that I am dealing in detail with the Finance Bill. That is what we are discussing, and it is a courtesy to the House to deal with what we are discussing.
There are a number of other provisions in the Bill which will benefit charities. Clause 25 exempts from car tax vehicles leased to the disabled. This will reduce the cost of each car by £400 and it has been widely welcomed. I quote from the deputy chairman of Motability: Without doubt this measure will help to enhance mobility for disabled people, especially those with very limited resources. As a former Minister of State for the disabled, this gives me particular pleasure.
The best way to help charities is to encourage people to contribute to them. In recent years in budgetary measures we have improved relief for charitable covenants, introduced relief for companies making one-
The response has been encouraging. Between 1978–79 and 1987–88 covenanted giving to charities grew by 140 per cent. in real terms. Payroll giving has also grown steadily since its introduction in 1987. There are now over 3,600 schemes in operation covering 100,000 participants. Clause 55 gives a further encouragement to this form of charitable giving by doubling the limit for relief. I am delighted that this measure has met with considerable approval among charities. It also shows that tax reductions and growing net incomes have increased charitable giving and that we are by no means the selfish and materialistic society that the Opposition sometimes claim.
Finally, and perversely, I would like to draw Members' attention to clause 1. This contains the measures designed to promote unleaded petrol, which have met with universal approval.
Despite the growing availability of unleaded petrol, its lower price and clear environmental benefits, at the time of the Budget it still accounted for only around 5 per cent. of petrol sales. That was, frankly, extremely disappointing and it prompted my right hon. Friend to try a new approach. He made it clear that he expected the full tax reduction of 3.6p a gallon on unleaded to be passed on to consumers. This has happened. The price differential at the pumps between four-
All the signs are that those changes are having the desired effect. The proportion of garages now selling unleaded petrol is close to 40 per cent. and is expected to top 50 per cent. by mid year. I hope and expect that that will increase still further. The onus is now firmly on individual motorists -
The Bill contains a series of measures to improve the taxation of savings, to widen share ownership, and to help small businesses. It will simplify and modernise the administration of the tax system. It underpins the continued strength of our public finances, takes forward our programme of tax reform, and improves the supply performance of the economy. It is a Bill well worthy of support, and I commend it to the House.