Denis Healey – 1978 Budget Statement

Below is the text of the budget speech made by Denis Healey, the then Chancellor of the Exchequer, on 11 April 1978.

Since the Financial Statement and Budget Report gives a full account of events in our economy over the last twelve months, I do not propose to begin my speech this afternoon with the usual historical preamble. And I shall follow the precedent I set last October by wherever possible putting detailed material about my proposals into supplementary documents which are being published this afternoon. I shall therefore confine my speech to the central features of our economic situation as we enter a new financial year and to the budgetary measures which I am asking the House to adopt in consequence.

The whole of the industrial world has found the last four years by far the most difficult since the war. The enormous increase in oil prices and the reaction to it of the industrial countries have plunged the world into the deepest and most prolonged recession since the 1930s combined with an unprecedented inflation. The period has been particularly difficult for us in Britain because we entered it in 1974 with our economy already badly out of balance, a growing deficit on our current account and severe inflationary pressures.

Four years of painful and difficult decisions have now got the economy into much better balance. Our current account has moved into surplus. Our financial position has been transformed. The year-on-year rate of inflation is well into single figures and still falling. Interest rates are far below the level of four years ago. The money supply is under firm ​ control and we have exceptionally high reserves. All this is reflected in the fact that the fourth quarter of last year saw a rise of nearly 5 per cent. in real personal income after tax and national insurance—the biggest quarterly rise in living standards for nearly six years.

But this transformation in our financial situation has not yet been reflected in an adequate growth of output. In consequence, unemployment remains intolerably high, though it has been falling slowly since September. It is the first purpose of this Budget to encourage a level of economic activity sufficient to get unemployment moving significantly down. But like all other countries—and more than most—we cannot isolate ourselves from the rest of the world. And here the outlook still leaves much to be desired.

Two years ago it looked as if the industrialised world was emerging from the severe recession which followed the increase in oil prices. But that recovery proved more sluggish than expected. 1977 was a disappointing year for nearly all the world. Economic growth in the OECD area was well below the average rate obtained in the 1960s. World trade in manufactures increased only 3½ per cent. compared with 9½ per cent. in 1976. Although with an increase of 8 per cent. in the volume of our manufactured exports we increased our share of world trade, in general as well as in manufactures, there was very little growth in our economy during 1977.

The problems created by the slow growth of the world economy have been made worse by the big payments imbalances between the oil-consuming countries. Some oil-producing countries cannot in the short run eliminate their surpluses through trade, so the oil consumers as a group must face a corresponding deficit. The total current account deficit of the OECD countries rose to around 30 billion dollars in 1977. But this total includes a large increase in the deficit of the United States and a large increase in the surplus of Japan.

One reason for these disparities is that other strong countries have been slow to follow the expansionary lead of the United States. These payments imbalances are at the root of the currency instability of the last few months which is itself a further threat to world growth.

If we are to solve this country’s problems we need to take action on a world scale, because no single country can lead the world out of its difficulties. Indeed, no single country can by itself solve even its own problems. My right hon. Friend the Prime Minister and the President of the United States recognised this fact together when they met at Easter to discuss a programme for concerted action designed to attack simultaneously all the five major problems which are now damaging the world economy—low growth, currency instability, the trend towards protectionism, over-dependence on imported energy and inadequate flows of stable long-term capital and aid from the surplus countries to countries in deficit, including many in the developing world.

Yesterday the Heads of Government of the seven leading world economies agreed to develop their policies so as to promote a concerted approach to this group of problems in the months leading up to the Bonn Summit meeting in July.

The European Council agreed on Saturday to work with determination for the higher economic growth that this approach requires.

This Budget represents a first British contribution towards that common effort as well as meeting our national needs.

I shall now say something about our balance of payments and overseas debt.

Between 1973 and the middle of last year we borrowed large sums overseas to meet the consequences of the oil price increase and the deterioration in our terms of trade. Most of these loans have to be repaid in the six years from 1979 to 1984, but as we moved into balance of payments surplus and rebuilt our reserves last autumn, the Government were able to start tackling this hump of debt. It then stood at over $20 billion.

It would not be sensible to aim to pay off the whole of this debt from current account surpluses earned over the next six or seven years. That would add to the problem of current account imbalances in the world and it would not be consistent with the need to expand our own economy. The Government’s aim is therefore to combine net repayment of debt year by year, with new borrowing to spread the maturities.

As part of this policy we are now repaying large amounts of debt ahead of time. In January I announced the prepayment of $1 billion of our drawings from the International Monetary Fund. Arrangements for this payment have recently been completed. I can now announce that I shall be arranging to prepay a further $1 billion to the Fund this year. This further step is made possible by our own improved position and we hope that it will assist the IMF to help other countries. This should be a useful contribution to the concerted approach to world problems to which we have committed ourselves.

In addition to these IMF prepayments, we have since October repaid or arranged to repay ahead of time $1 billion of private market debt. Thus our repayments ahead of time, made or already planned, now total $3 billion. We shall also repay a further $1 billion in 1978 on the due dates as other debt matures in the ordinary way.

The other part of our policy is to make progress with new borrowing. Since last October we have contracted new loans totalling about $630 million from the European Investment Bank and the European Coal and Steel Community. In addition, I can now tell the House that we propose to make a British Government bond issue in the New York market. The issue will be for a total of $350 million in two tranches of seven and 15 years respectively. So it will mature well after the hump of existing maturities. The United States rating agencies have said they will rate such an issue triple-A, the highest credit rating they can award.

I believe that by spreading the burden of debt repayment forwards and backwards in this way we can ensure that it does not unduly restrict our ability to expand our economy and to make an appropriate contribution to world growth.

Our main objective in the coming years, like that of other countries, must be to reduce the intolerable level of unemployment by stimulating demand in ways which create jobs at home without refuelling inflation. The temporary employment subsidy and other special employment measures which have now been in operation for three years are already providing 320,000 jobs or training places.

My right hon. Friend the Secretary of State for Employment announced a powerful reinforcement to these measures on 15th March which should increase this figure to 400,000 by March next year. I believe that in a period of world recession such measures bring immense human and social benefits. Their value is shown by the fact that although the number of men and women available for work has been increasing by 170,000 a year, unemployment has been falling slowly for the last six months and job vacancies have been rising.

But we cannot expect to see the rate of unemployment moving down at an acceptable speed unless we can create new jobs particularly in profitable firms in manufacturing industry and so strengthen the industrial base on which our whole economy depends.

A Budget stimulus by itself will not necessarily achieve this, because unless British industry can produce and sell the goods required to meet the demand created by any Budget stimulus, that increase in demand will be met by imports and set inflation going again. It will create jobs in other countries rather than our own. After some years in which the level of investment has been lower than normal it is not easy to judge the point at which a demand stimulus may prove self-defeating for this reason, both in terms of jobs and prices.

But two things are clear. The key to growth and high employment must lie in an improvement in our industrial performance. And we must design this Budget, like the measures last October, as part of a programme for steady and sustained growth which must cover a period of many years.

If the bulk of the additional demand created by this Budget is to be met by British goods then we must make sure that the products of our industry are more competitive in terms of design, delivery and price. An improvement in these fields is the prime objective of the tripartite industrial strategy to which the Government, the TUC and the CBI committed themselves afresh last month when they approved the programmes of the sector working parties for this year. Our main job now is to carry the industrial strategy down to the managers and workers in individual companies and plants throughout the country. I hope that the whole House will endorse these efforts because the future of our economy lies ultimately in the hands of those who work in British industry.

If industry is to become more competitive and unemployment is to fall, we need better product design, better marketing, more efficient use of plant and materials and more investment in new capacity. The main responsibility must fall on management and work force in the individual firms and plants. But the Government have a responsibility for providing an environment which encourages their work.

The Government will therefore continue to support the industrial strategy through industrial assistance, training schemes and the National Enterprise Board and by helping to provide a favourable economic climate. Moreover, we are now giving industry priority across the whole range of Government policies—for example, in education and local planning.

I believe that small businesses have a special role in improving our industrial performance. They have always been a prime source of innovation in British industry. The development of small businesses often produces more additional jobs more quickly than development in the larger firms. They can also play a vital role in regenerating our inner cities and our countryside. For this reason, this Budget will give a special importance to the needs of smaller businesses.

Now that our economy is in so much better balance and our financial situation ​ is transformed, an improvement in our industrial performance must be our overriding objective, since this is a precondition for restoring high employment. But this improvement is bound to take time. To the extent that our performance falls short in design, delivery and productivity of that of our competitors, we shall have to concentrate on making ourselves competitive in price.

It remains as true as ever that inflation is the main enemy of full employment. Monetary policy will be one decisive factor here. But our price competitiveness will also depend crucially on reducing industrial costs, of which wages are bound to remain much the most important element.

Over the last three years, the British people have given overwhelming support for pay policy, and this has played an indispensable role in keeping our industry competitive and in bringing the rate of inflation down. The country owes a lasting debt to our trade union movement for its invaluable contribution here.

I believe that the Government can help to support common sense and moderation in pay negotiations both by controlling prices and avoiding unnecessary increases in indirect taxation and by cutting income tax. But the main responsibility here again must continue to lie with the trade unions and employers who actually negotiate on pay.

In deciding how much stimulus I can afford to give the economy this year, I have to make a judgment about the rate at which our industry can increase its output to meet the consequent demand and about the competitiveness of the goods it produces. I must also consider the likely development of the economy over the next year or so if I take no further action at all in this Budget.

These are all difficult questions of judgment on which the margin for error is uncomfortably large. Economics, after all, is about the behaviour of human beings—the most unpredictable of all creatures. It is a useful tool of policy but still far from being an exact science—if it is a science at all. As I have warned the House on many occasions, economic ​ forecasts, like weather forecasts, become increasingly unreliable as they look further ahead, particularly if precise figures are attached to them—as must be the case, for example, with the forecasts which the House has instructed me to provide. But some trends are fairly clear.

Now that the inflation rate is stabilising at a level well below the increase in earnings, living standards and personal consumption should both rise substantially. Private investment in manufacturing industry rose about 14 per cent. in volume last year and is expected to show a similar increase this year. Public expenditure on goods and services is planned to rise significantly.

It is more difficult to forecast how our trade performance will develop since assumptions about our competitiveness are crucial here. But it is reasonable to expect that exports will continue to increase substantially, though higher domestic demand will probably lead to faster growth in our imports of manufactures.

This leads me to conclude that without any stimulus from the present Budget the economy might grow in the coming year by 2 per cent. to 2½ per cent., if, as is still the case, we make these calculations at the prices which ruled in 1970. If, on the other hand, we value the contribution of North Sea oil at the relative prices of 1975, after the oil price explosion, which we plan to do for all national income statistics later this year, then the increase in oil production would, of itself, add a further ¾ per cent. to our growth rate.

Against this broad estimate of the likely growth in the economy without a Budget stimulus, the increase in demand which I can afford to generate this year depends critically on the outlook for inflation. This, in turn, will depend primarily on two factors—our monetary policy over the next 12 months and the outlook for wage costs. So far as the immediate future is concerned the outlook is now firmly established and our success is evident in the figures already available.

Our year-on-year inflation rate reached single figures in January—months earlier than we predicted last November. Over the last 10 months, the month-to-month increase in inflation has been running at an annual level below 8 per cent. The yearon-year inflation rate is likely to reach 7 per cent. in spring or early summer. ​ Unless there is some quite unforeseeable catastrophe, it seems likely to remain fairly steady at around 7 per cent. for the rest of this year—at about the average rate for most industrial countries and lower than that of some of our competitors whose inflation rate has been rising rather than falling in recent months. But if we are to be sure of maintaining at least this level in 1979, then we must have appropriate policies for dealing both with the money supply and with pay and prices. I shall deal with each of these factors in turn.

Monetary policy will continue to play a central role in our attack on inflation. The money supply figures for banking March will not be published until Thursday, but I think it right on this occasion to tell the House in advance that sterling M3 grew in March by only ½ per cent. and M1 slightly less. This confirms that the trend of monetary growth has come back into the desired range, as I predicted it would after the exceptional but expected jump in January. The figure for 1977–78 as a whole will probably be just above the 9 per cent. to 13 per cent. range but under 14 per cent. But this was a year in which the money supply in Britain, as in Germany, was substantially increased by inflows of foreign currency—a factor which we took action to correct last October.

For the coming year, 1978–79, I intend to continue using monetary targets, with certain changes. Over the last year, as we have moved into surplus on our balance of payments, greater attention has rightly focussed on sterling M3, the wider measure of money supply, rather than DCE—domestic credit expansion. It is right to recognise this by making a target range for sterling M3 the focus of our monetary policy.

I also intend to adopt a system of rolling targets, in which the target is rolled forward once every six months. This will enable me regularly to reassess progress on the monetary front in relation to developments in the rest of the economy and either to continue with the existing target range or to modify it. For example, if events have moved as I would hope on ​ counter-inflation policy, it would be appropriate to consider in the autumn whether to lower the target range.

The target range for sterling M3 for 1978–79 will be 8 per cent. to 12 per cent. The corresponding level of DCE will be below the £6 billion which was set out in the Letter of Intent I wrote to the International Monetary Fund in 1976. This will provide both for a reduction in the rate of inflation and for an increase in economic growth. It should provide ample room for the likely increase in bank lending to industry.

In Britain, as elsewhere, the rate of growth of the money supply is bound to fluctuate significantly from month to month. As last year, it is likely to be significantly above or below the desired range from time to time. In so far as it is possible now to identify the sort of factors which may cause such fluctuations, I would expect the growth to be higher at some stages in the first half of the year than in the year as a whole. In particular, the timing of central Government receipts and payments may cause jumps in certain months such as banking May similar to that which we had in January this year.

I will, of course, use whatever instruments of monetary policy are appropriate as the year proceeds. I would hope that gilt-edged interest rates will fall later in the year as it becomes clear that we are making further progress in the fight against inflation. At the moment, however, sterling short-term interest rates are on the low side, both in relation to controlling the domestic money supply and by comparison with United States and Eurodollar rates, given recent developments in the exchange markets.

With my approval, therefore, the Bank of England is this afternoon raising its minimum lending rate from 6½ per cent. to 7½ per cent.—far below the level that I inherited four years ago.

Within the framework of this monetary policy, we must also do our best to ensure that rising prices and earnings do not make our industry uncompetitive. ​ This will require co-operation from employers and trade unions alike. We must start with a collective determination to ensure that we do not allow the rate of inflation to begin rising again from the levels we expect to reach this summer. On the contrary, we must aim at a further fall.

This will not be easy to achieve. Over the last 12 months we have been helped in getting the rate of inflation down by the appreciation of our currency and by the fall in world prices which accompanied the fall in world growth and trade. We cannot rely on similar assistance in the next 12 months. That is why the forecast in this year’s FSBR shows an increase of 1 per cent. in the inflation rate by the middle of 1979, even assuming that earnings increase only half as much in the next pay round as is likely in this round. Earnings in fact will be the key to the inflation rate next year. Although earnings have increased in the current round far less than most observers expected a few months ago, they are still growing faster in Britain than in most of the countries which compete with us, and our productivity is growing more slowly.

So we shall be unable to prevent our rate of inflation from rising significantly next year unless we can achieve much lower levels of increase in wage costs than we have achieved this year. If we fail to achieve this, then, whatever the size of the stimulus I give to the economy in this Budget, we cannot expect to keep control of prices or to see the faster fall in unemployment at which we aim.

I therefore propose early discussions with the representatives of both sides of industry to see, first, whether they agree with the Government that we must keep inflation moving down next year and, second, what policies are appropriate in the field both of prices and of earnings to ensure that we achieve this objective.

I believe that the success we have achieved in fighting inflation over the last few years both through our control of the monetary aggregates and through our policy for pay and prices provides reasonable grounds for confidence that we can continue to make progress in the fight against inflation in the next 12 months.

It is on this assumption that I have made my judgment about the size of the stimulus which I can deliver to the economy this year. The total size of the stimulus must, however, depend not only on the assumptions about inflation but also on the nature of the stimulus itself. It can be larger to the extent that it is clearly designed to improve our industrial performance and to strengthen our prospects of success in the fight against inflation.

The objective of the measures in my Budget today is to provide additional support for our industrial strategy partly in the form of direct help for business, particularly for small firms, and partly by strengthening the incentive to effort at all levels in industry through cuts in income tax. I also believe that by using tax cuts to increase the real value of the pay packet during the coming year I can encourage further moderation in pay settlements and a continuing fall in the rate of inflation.

I recognise, too, that if the Budget measures are to generate the support of working people for the nation’s economic objectives they must also contribute directly towards the relief of poverty, to the fight against unemployment, to the improvement of our social services and to the achievement of a more compassionate and fair society. The measures I am about to describe are designed specifically to achieve these objectives.

I have, therefore, concluded that it would be right to give a full year stimulus to the economy of some £2½ billion—or about £2 billion in 1978–79. The measures should raise output by another ¾per cent. in the next 12 months and, as a result, GDP should increase by about 3 per cent. at 1970 prices—the highest increase for five years. I am satisfied that this can be done without either prejudicinging our monetary objectives and refuelling inflation or overstraining our productive capacity.

As a result of this Budget stimulus the PSBR this year will be within the ceiling I set in my letter to the International Monetary Fund last December. The forecast shows a PSBR of £8½ billion or 5¼ per cent. of GDP, reflecting a general ​ Government financial deficit which at 4 per cent. of GDP would be no higher than that, for example, of Germany. In fact, the PSBR for 1977–78 as forecast in last year’s Budget was exactly the same as the current forecast for 1978–79—£8½ billion. The estimated outturn for last year, however, is now £5·7 billion—nearly £3 billion lower, despite additional cuts in taxation during the year.

Of all the elements in the forecast the PSBR is the most difficult to estimate correctly. But even if this year’s PSBR is as high as forecast, the higher level of government debt needed to finance it will be counter-balanced by the reduced need to sell gilts to offset the domestic effects of inflows across the exchanges, which were very substantial in the last financial year.

The funding of the PSBR outside the banking system will be helped by direct sales of certificates of tax deposits, mainly to companies, and of national savings to individuals. A new issue of savings certificate is announced today, with a yield of just under 6·8 per cent. per annum over its four-year life, and a maximum holding for any one saver of £2,000.

This will mean that the forecast requirement for gilt sales will probably be much the same in money terms as the sales achieved in the last two years and somewhat smaller in relation to the institutional funds which are likely to be available. Thus I foresee no difficulty in financing the PSBR for 1978–79 consistently with the new monetary guideline of 8 to 12 per cent.

I now come to the Budget measures themselves.

Last October I announced an increase in our plans for public expenditure in 1978–79 of £1,000 million at 1977 survey prices, including £400 million on construction and over £300 million on raising the rate of child benefit to £2·30 from this month. These increases were included in the Government’s expenditure plans as set out in the public expenditure White Paper last January. The White Paper also made provision for the statutory uprating of the main social security benefits in line with earnings or prices as appropriate.

​We have therefore decided to increase in November the rate of pension by £3·20 to £31·20 for a married couple, and by £2 to £19·50 for a single person. This is likely to represent an increase of over 4 per cent. in real terms. The real value of the pension will thus have risen by over 20 per cent. since this Government came to office when the married pension was £12·50 and the single £7·75. My right hon. Friend the Secretary of State for Social Services will shortly be announcing the full details of the uprating, including the increases in short-term benefits. Altogether, these improvements will be worth around £500 million in 1978–79 and £1,300 million in a full year. The revised national insurance contribution rates for 1978–79 now in payment were announced by my right hon. Friend the Minister for Social Security last December.

The Government’s plans provided a contingency reserve of £750 million at 1977 survey prices to cover additional public expenditure measures in 1978–79. We have decided to allocate now a substantial part of the contingency reserve to such measures.

The first call on this sum is for the employment measures which my right hon. Friend the Secretary of Stale for Employment announced last month. The extra cost of these additional measures to United Kingdom employment programmes in 1978–79 is estimated at about £156 million and in 1979–80 at about £144 million. As I said earlier, these additional measures, combined with the others previously announced, will protect or provide about 400,000 jobs or training places by March 1979.

The Government are also making available further sums in 1978–79 to expand other programmes which are of particular social and economic importance at this time. Within the social services we are giving on this occasion the highest priority to health and education. There will be an allocation of £50 million in 1978–79 for the Health Service in the United Kingdom for specific improvements in services for patients. These will vary from place to place but there will be, for example, extra resources for the full opening of newly completed hospitals, facilities to cut waiting lists, more staff to help care for the elderly ​ and handicapped, and over 400 extra kidney machines, Education will receive £40 million to cover a higher rate of capital expenditure by local education authorities on schools and colleges and there will be additional funds for retraining teachers in subjects like mathematics, science and crafts where there is a shortage.

There will also be £20 million for environmental services, including building small factories in rural areas by the Development Commission, and for preserving the coastline. There will be provision for higher expenditure on law and order—such as police and prisons and the probation services; special assistance for certain areas affected by early steel closures; and a small extra sum for sea defences in addition to the help announced for farmers affected by storm and flood damage earlier this year. Finally, funds will be made available to promote insulation of private houses and to launch a further scheme to promote energy saving in industry and commerce. I think that this will make a helpful contribution to the energy objectives of the concerted international programme I have mentioned.

These decisions will provide useful additions to a wide range of public expenditure programmes and will also bring some further help to the construction industry. Further details will be announced by the Ministers responsible in each case.

The other increases in expenditure are designed to help the family budget. The Government have decided that the autumn increase in the charge for school meals will not take place. We have also decided to take advantage of the Common Market subsidy for school milk by enabling local education authorities to provide free milk for 7-to-11-year-olds. The net cost of these two measures is about £68 million in 1978–79.

Finally, we are raising child benefit again. As I announced last summer, child benefit was raised this month to £2·30 a week for all children, and the premium for the first child of one-parent families doubled to £1. The Government have now decided that the child benefit rate will be increased in April 1979 to £4 for all children. Meanwhile, as a first instalment of this increase, the Government ​ have decided to increase child benefit by 70p to £3 for all children this November. In addition, the premium for children of one-parent families will be doubled from £1 to £2 in November.

The cost of these increases in 1978–79 will be around £165 million. They will give a further major boost to child support for working families. Those dependent on social security benefits will, of course, gain from the general social security uprating which I have just announced.

In deciding on these measures of additional expenditure this year, the Government have regarded it as an essential principle that their cost should be met within the public expenditure plans published in January. Accordingly, the cost will be met from the contingency reserve for this year.

It has been argued from many quarters, including by many of my right hon. and hon. Friends, that the Government should take major expenditure decisions on measures affecting people’s incomes, such as child benefit, at the same time as their main decisions on taxation. The two can then be seen in relation to each other. I believe it is right that the Government should have taken now their principal remaining decisions affecting 1978–79. Just under £200 million at 1977 survey prices remains available in the contingency reserve. Any contingencies requiring additional expenditure in the remainder of the year will be met within this figure.

The Government will consider the programmes for 1979–80 and subsequent years in the public expenditure survey. It remains the Government’s firm intention to contain the growth of expenditure planned for those years within the growth which we can expect in the economy as a whole.

I now come to my proposals for those taxes which most concern the individual man and woman.

I think it is now generally recognised that, while the total burden of taxation in Britain is well within the international average, the proportion of total revenue derived from income tax is still too high although I have already reduced it significantly in the last three years. So cuts in income tax will account for almost all the £2½ billion stimulus which I have announced.

I know that some hon. and right hon. Members think it would be right to cut income tax this year by a much larger sum and offset the additional costs by increases in indirect taxation. In principle I have some sympathy with this view. But I believe that this year we must consolidate and reinforce our success in the fight against inflation so that we can for good and all bring down the inflationary expectations which have damaged our economy in recent years in so many ways. In this situation I cannot believe it would make sense for the Government themselves deliberately to raise the inflation rate and increase the cost of living. I will, therefore, leave the indirect taxes generally unchanged on this occasion—with one small exception.

To discourage the smoking of cigarettes which have a higher tar yield, I intend to introduce from 4th September a supplementary duty on cigarettes with a tar yield of 20 milligrammes or more. If the manufacturers fully passed on this increased duty in prices they would raise the price of 20 of these cigarettes by about 7p. About 15 per cent. of cigarettes will be affected.

The House will recognise that this supplementary duty is not designed primarily to raise revenue—it could bring in only £25 million in a full year at most—and if it results in leading smokers abandoning these high tar cigarettes, no one will be more pleased than I. In any case, the effect on the RPI will be negligible.

I have also been asked to consider an increase in the national insurance surcharge. The share of employer social ​ security contributions and payroll taxes in total revenue is a good deal lower in Britain than in most other countries of the European Community. But I do not believe it would be right to increase it so soon after it has been introduced, and at a time when unemployment is our major problem. It would increase industrial costs at a time when it is essential to improve our competitiveness and it would ultimately be largely passed on in higher prices at a time when the fight against inflation is at a crucial stage.

The proposals I have announced so far leave £2,400 million for reductions in income tax. I have considered carefully how they should be distributed so as to further the objectives I have set myself, to increase the incentive for greater effort and to promote social justice.

I believe it right to regard this Budget as the second phase in a process which I began last autumn. I told the House in October that, as well as increasing the plans for public expenditure in 1978–79, I was raising the level of the personal allowances fixed in last year’s Finance Act by 12 per cent. so as to ensure that their real value was maintained and that I was bringing forward this increase in tax thresholds by 12 months compared with the date provided for in the Act. In practice, this increase of 12 per cent. has turned out to be slightly higher than the increase in the retail price index over the calendar year 1977.

The question I have had to decide for this Budget is whether I should devote the hulk of the tax relief now available to raising the tax thresholds still further or whether I should introduce a lower initial rate of tax. Since I have already more than fulfilled my obligation to index tax thresholds. I have been particularly impressed by the argument that the rate at which people become liable to enter income tax is too high. It is, indeed, the highest in the world. It means that many of the low paid are little better off in work than on the dole. I cannot believe that this makes sense in either economic or social terms.

I propose, therefore, to introduce a lower rate of tax, at 25 per cent., on the first £750 of taxable income. This new lower rate will be the marginal rate of tax for some 4 million of the low paid. Most taxpayers now caught in the poverty trap will find its impact that much less ​ severe because their tax will be nine percentage points lower than now. Other taxpayers will be £1·30 a week better off as a result of this change alone. I hope it may be possible to extend this lower rate band in future years.

I still believe, however, that it is necessary to raise the tax threshold as far as possible above the main social security benefit levels and to take as many people as I can out of tax altogether. I therefore propose this year to raise the single person’s allowance and the wife’s earnings allowance by a further £40 to £985 and the married allowance by £80 to £1,535.

This increase in tax thresholds will help widows and also provide the family man with special help during the second stage of the transition to the child benefit scheme. The additional child benefit which mothers are now receiving will in general more than offset the effect on family income of the reduction in the child tax allowance which we have already announced.

But I believe it also important to ensure that this change does not reduce the father’s pay packet, and for this reason I am increasing the married allowance by twice as much as the increase in the single allowance. I propose, as last year, to ensure that the allowance for one-parent families is kept in line with that for two-parent families by increasing the additional allowance by £40 to £550.

Pensioners with a modest additional income have a special problem, which I expect all hon. Members will have come across in their constituencies. I therefore propose to increase the age allowance a little more than personal allowances generally—by £50 for the single person and £100 for the married—and to raise the age allowance income limit to £4,000.

The cost of these measures will be £2,150 million, of which nearly £1,600 million is attributable to the lower band and just over £550 million to the increases in the personal allowances. As a result of these increases 360,000 people who would otherwise have been paying income tax in the coming year will not now do so.

Although last October I increased the thresholds for the basic rate of tax by 12 per cent., I did not at that time similarly index the threshold for the higher ​ rates of tax. If I did not raise this now, people with no more than one and a half times average earnings would move into higher rate liability this year. I propose, therefore, to raise the upper limit of the basic rate from £6,000 to £7,000. This will mean that a married man with earnings of £8,500 will not be liable to tax at the higher rate, even if he is entitled to no allowances other than his married allowance. As a result, 450,000 people who would otherwise be paying tax at the higher rate will not have to do so. This will be of particular advantage to highly skilled engineers, foremen and middle managers.

I propose also to increase the thresholds to the successive higher rate bands. The 40 per cent. band will, as now, be £1,000 in length. This will be followed by two bands of £1,000, two of £1,500, one of £2,000, one of £2,500 and one of £5,500. The 83 per cent. rate will thus be reached at a taxable income of £23,000 as compared with the present £21,000.

There is a similar case for raising the thresholds for the surcharge on investment income. I propose, therefore, to raise the general threshold to the 10 per cent. rate of surcharge from £1,500 to £1,700 and the threshold to the 15 per cent. rate from £2,000 to £2,250, in line with the rise in prices.

However, it is significant that nearly half of those liable to the surcharge are over 65, and two-thirds of these have incomes below the higher rate threshold. I therefore intend, in addition to the increase I have already announced, to help those elderly people living on relatively modest income from savings by increasing the real value of the surcharge thresholds for them. I propose that for those over 65, the thresholds for the 10 per cent. rate should go up from £2,000 to £2,500, and for the 15 per cent. rate from £2,500 to £3,000. Finally, I propose that maintenance payments should be wholly exempted from the surcharge with effect from this year.

The changes in the personal allowances will take effect under PAYE on the first pay day after 10th May. Single people and earning wives earning over £19 a week will in general then get a refund of £1·30, and they will thereafter pay 26p a week less in tax. The refund for married men earning over £30 a week will ​ in general be £2·60 and the weekly reduction for them will be 52p. The new tax tables giving effect to the changes in rates of tax, including the lower rate band, will operate from mid-July. There will then be a further refund of about £18 and a further reduction in tax of £1·30 a week.

Let me now explain the effect of this Budget on living standards.

With the usual Budget tables, I am arranging to have published this year, as in the last two years, tables which show the effect of my tax changes on individuals at different levels of earnings. In order to illustrate this, let me take first the example of a man earning £75 a week who has a wife and two children under eleven. The tax reliefs in today’s Budget will give him an extra £1·82 a week in his pay packet.

As I have said, however, these tax reliefs are only the second phase of the process which I began last October, when he got an extra £1·05 a week. From the beginning of this April, the new provisions for child benefit and child tax allowances have come into force, as well as the increased national insurance contributions. Taking all these into account, the £75 a week family is better off by £3·32 and, when the child benefit rises in November by a further 70p for each child, the family will be better off by a total of £4·72 a week.

But these calculations do not, of course, take into account the effects on living standards of wage increases over the current pay round. Taking again the man on £75 a week, if his earnings rise by 10 per cent. in accordance with the Government’s guideline, his standard of living will rise by nearly 6 per cent. in real terms between August 1977 and August 1978 as a result of last October’s measures and those I have just described.

The man earning £50 a week will do even better. His living standards will rise by nearly 7½ per cent. On the same basis, a single man on £75 a week will be about 4¾ per cent. better off, and on £50 a week will be just over 6 per cent. better off.

Thus I do not in this Budget make any call for sacrifice. With the rate of inflation remaining low, and with these substantial tax reliefs, modest increases in earnings should ensure that real living standards can continue to rise over the year ahead without unduly increasing our industrial costs. This is the best possible recipe for commercial and industrial success. It is the only recipe for curing unemployment.