I move amendment No.42 (a):
In page 35, line 15, after "money" to insert "in excess of the rate of change in the consumer price index in the relevant year".
This amendment seeks to make a change in the definition of interest in order to confine the charge to real interest rather than to nominal interest. In this respect, I am reflecting the views of the Commission on Taxation which felt that for tax purpose what should be regarded as taxable interest should be real interest rather than nominal interest. This would have the effect of putting that into effect and confining tax to the difference between the rate of interest and the rate of inflation. This does not make a major difference this year because the rate of inflation, happily, is low and it is estimated that for this year as a whole it will probably come out at about 3 to 3½ per cent. Therefore, interest rates which are payable now are more significant in real terms than was the case in the past.
We do not have to cast our minds back very far to remember a time when banks and other similar institutions were paying 6 per cent or 7 per cent to depositors and inflation was running at 18 per cent to 20 per cent. Therefore, by simply having money in a bank one was actually losing out very seriously in real terms. We could see those days again. We may see them either because there will be a substantial and sustained reduction in interest rates, which I would dearly love to see, or because we may go back to times of higher inflation for reasons which are no more under our control than the reasons we have low inflation today are under our control. They are the result of fortuitous external factors. They are fortuitous at present but the same external factors were not fortuitous in the past. We could well go back to that situation again.
There is very little reality — and clearly this view is shared by the Commission on Taxation — in someone receiving 6 per cent interest on money at a time when inflation is running at 18 per cent and then being taxed on the 6 per cent as if it were an actual gain to them. The purpose of this amendment, therefore, is to try to overcome that situation and bring a sense of reality into what the meaning of interest is. In real terms, it is simply the excess of the amount of interest over the rate of inflation at the time at which the interest is paid. If you are going to tax the interest, at least tax it on its real value rather than on its nominal or national value.
I regret very much many aspects of the proposal, even with the various amendments the Minister has made to the Bill. The failure to exempt people who should be exempted is very serious inasmuch as it is an imposition of tax on a large number of people who would not be liable otherwise for it and who were not liable for it in the past. Insult is added to injury by the failure of the Government to impose the tax on real interest rather than on nominal interest. The injury is very considerable indeed. It is amazing that when the Minister was giving a press conference on 4 April last on the introduction of this Bill and on its circulation he made a statement in which he gave an estimate of the likely yield from this DIRT tax. He said that if all those who were not liable for tax were exempted 60 per cent of the prospective yield would be lost. That is a most shattering statement because it makes it perfectly clear that only 40 per cent of the liability that is now being created is on people who are liable for income tax and that the other 60 per cent is in respect of people who are not liable. They were not liable for tax up to now for a variety of reasons but the main one was that their incomes were so low. These huge amounts are to be taken from them now. The prospective yield of tax in a full year is £130 million.