Finance Bill
(8 years, 5 months ago)
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The Commercial Secretary to the Treasury (Lord O’Neill of Gatley) (Con)
My Lords, since 2010 the Government have laid the foundations for a stronger economy. We can now see that the recovery is well established. The UK had the fastest-growing economy in the G7 countries in 2014, and is reasonably well positioned for the same in 2015.The fiscal deficit has been halved as a share of GDP and national debt, as a share of GDP, is forecast to fall in 2015-16.
Working people are, generally, also feeling the benefits. Employment has increased and continues to increase reasonably rapidly, with full-time employment at record highs, as I heard my noble friend mention in the previous debate. Unemployment is lower and continues to fall. In addition to more people being in work than ever before, very importantly and encouragingly, wages continue to rise—a relatively new trend in the past 12 to 18 months or so. Therefore, it seems reasonably clear that the long-term economic plan is having some success. However, of course, the job is not done. The Finance Bill before us today is the first of this Parliament and it demonstrates this Government’s commitment to continue the work of the last five years. It implements key measures to eliminate the fiscal deficit in a way that is fair to taxpayers and supports the growth of business.
As the Chancellor set out in the summer Budget 2015, the Government want to ensure that people are able to keep more of the money that they have worked hard to earn. The Bill includes three manifesto pledges to achieve that aim. First, the Government committed to legislate within 100 days for the five-year tax lock, ruling out increases to income tax rates, VAT and national insurance contributions for the duration of this Parliament. Clauses 1 and 2 of the Finance Bill deliver the first two aspects of this commitment. The third aspect of the tax lock was debated in this House earlier today.
Secondly, the Government committed to ensuring that individuals working 30 hours a week on the national minimum wage do not pay income tax. The Government have a proud record of reducing tax bills for the lowest paid. In total, 3.8 million individuals have been removed from income tax altogether since 2010. Clause 5 continues this record by increasing the personal allowance from £10,600 in 2015-16 to £11,000 in 2016-17 and £11,200 in 2017-18. Compared to today, 570,000 individuals will be taken out of income tax altogether by 2016-17.
As I just said, the Government have made a commitment to ensure that individuals working 30 hours a week on the national minimum wage do not pay income tax. Clauses 3 and 4 will extend this commitment beyond this Parliament. Once the personal allowance has reached £12,500, it will automatically increase to stay in line with this threshold. This will be the first time in history that the personal allowance is not indexed to price inflation.
Finally, as I am sure many—if not most, or even all —noble Lords will agree, it is a natural desire to pass on a home to your children and grandchildren. Clause 9 will introduce a new inheritance tax main residence nil-rate band, so that around 93% of estates will be able to pass on all their assets without paying any inheritance tax. However, to ensure that the wealthiest continue to contribute their fair share to the public finances, the largest estates will not be able to benefit from the new nil-rate band.
These are three important manifesto commitments delivered to ensure that hard-working British people keep more of the money they earn. Of course, these commitments must be delivered in a way that is fair and sustainable. In 2013-14, the Government spent more than £34 billion on income tax relief for pensions, making it one of the most expensive reliefs. Two-thirds of this relief currently goes to higher and additional-rate payers. The Finance Bill will restrict pension tax relief for the highest earners, putting it on a more sustainable footing.
I turn briefly to productivity, a topic that I have discussed quite broadly in this place before, and will no doubt discuss again. It is well known that improving the productivity of the UK remains a historic and significant economic challenge, which this Government are eager to do something about. The summer Budget set out a number of measures to meet this challenge, including, for example, investment in infrastructure and the creation of 3 million new apprenticeships funded by a new levy on employers.
The Finance Bill implements further measures to address parts of the productivity issue. It includes several measures to back business. Clause 7 cuts the rate of corporation tax to 19% in 2017 and 18% in 2020. This will benefit more than a million businesses, saving them a total of £6.6 billion by 2021 and giving the UK the lowest rate of corporation tax in the G20. Clause 8 increases the permanent level of the annual investment allowance to £200,000 from 2016, to provide stable and long-term incentives for small and medium-sized businesses to invest in plant and machinery.
Improving productivity, however, also means prioritising central investment in infrastructure. That is why Clause 46 reforms vehicle excise duty, to support the creation of a new roads fund. From 2020, all revenue raised from vehicle excise duty in England will be invested directly back into the strategic road network. These reforms are also being implemented in a fair and sustainable way that strengthens incentives for the cleanest cars. Nobody will pay more than they do today for the cars they already own. For cars in the new system, the vast majority of motorists will pay less than the average they pay today. Zero-emission cars will continue to pay nothing, whereas cars worth more than £40,000 will pay a supplementary charge. As I said, productivity is a challenge but it is a challenge that the Finance Bill, as well as other measures beyond it, is designed to meet.
As I set out at the beginning of this speech, the Government have made significant progress in bringing down the fiscal deficit but the hard work is not yet complete. As set out in the summer Budget, around £37 billion of fiscal consolidation is required over the next five years, and £5 billion of this will be raised by measures announced at the summer Budget to tackle tax avoidance, evasion, non-compliance and imbalances in the tax system, many of which are being legislated for in this Bill.
As evidenced in the last Parliament, this Government are tough on corporate tax avoidance. The Finance Bill continues this trend. First, Clause 44 stops investment fund managers exploiting loopholes in the tax system to avoid paying the correct amount of capital gains tax on the profits of the fund payable to them. Secondly, Clause 37 stops multinationals off-setting losses against controlled foreign companies tax to ensure that they pay tax on profits diverted from the UK. Finally, Clauses 40 and 42 stop corporate groups reducing their taxable profit by transferring stock or intangible assets around the group.
Fixing the public finances also means ensuring that everyone pays their fair share of tax. Clause 51 introduces a new means for HMRC to recover tax and tax credits debt directly from the bank accounts of debtors. This levels the playing field between hard-working, honest taxpayers and those who persistently refuse to pay their debts, almost half of whom have more than £20,000 readily available in cash.
The Bill also ensures that landlords with the largest incomes are no longer unfairly helped by the tax system. Landlords are able to off-set their finance costs from property income when calculating their taxable income. At present, the relief they receive is at their marginal rate of tax. This means that landlords with the largest incomes receive either 40% or 45% relief, whereas landlords with lower incomes benefit only at the basic rate of income tax—20%. Clause 24 ensures that all individual residential landlords will get the same rate of tax relief on their property finance costs.
The Government believe that it is only fair for the contribution made by banks to reflect the risk they pose to the economy. However, the UK must also remain competitive as a major dominant global financial centre. The Finance Bill introduces a balanced approach to bank taxation by introducing a new supplementary tax of 8% on banking centre profit in Clause 17, while gradually reducing the full bank levy rate over the course of this Parliament in Clause 16. This will increase banks’ tax contribution by around £2 billion over the next six years, while at the same time providing a more sustainable long-term basis of taxation.
The Government are committed to supporting low-carbon energy, while at the same time ensuring value for money. The climate change levy exemption provided indirect support only to renewable generators, and the value UK renewable generators receive from the exemption was expected to be negligible by the early 2020s. That is why Clause 49 removes this exemption. Any loss that UK renewable generators face will be small compared with the other financial support they receive from the Government, which will total around £5.1 billion in 2015-16 alone. Taken together, this Bill is tough on tax avoidance by wealthy individuals and businesses and resolute in ensuring that the tax system is balanced and fair.
In conclusion, the Finance Bill before us demonstrates the clear direction set out by the Government at the start of the Parliament. It prioritises economic security for working people, businesses and the public finances. I commend the Bill to the House.
Lord Lennie (Lab)
My Lords, I will focus my brief remarks on two aspects of the Bill: one is an amendment to it and the other is an omission from it. Both would improve this legislation—they are intended to be constructive and helpful—and both are important to many millions of people, working or otherwise. First, I want to raise the issue of inheritance tax, which the Minister highlighted in his comments. Secondly, I want to raise the so-called tampon tax.
Politics is about choices, and showing who we care about and how we connect with them are central to any party’s political strategy. The choices reveal much about the values that inform our politics and our policies, and the Tory Government have recently laid bare their current values. At this time, at this defining moment, when all the analysis and forecasts of the UK economy are best described as fragile—rather than the rather robust description given by the Minister—and the public realm is about to be subjected to 40% austerity cuts, the Government have decided that the time is right, never better, to increase the inheritance tax threshold to £1 million, so that those with the most, the wealthiest 10%, get a fighting chance at keeping the wolf away from their doors. The cost to the Exchequer is close to £1 billion.
Compounding this particular choice at this time is the fact that it is being put forward while the Chancellor is seeking to cut £1,300 on average from the income of the lowest-paid 3 million working people in the country. It is a somewhat hideous juxtaposition that the Government are putting forward. The richest 10% get a £1 billion give-away; the poorest working people lose £1,300 on average a year. It is compassionate conservativism laid bare. The rhetoric may be compassionate, but the reality is conservatism.
Instead of the somewhat false fury that emanates from Downing Street about some sort of constitutional crisis in this House because of the decisions your Lordships’ House took on the issue of tax credits, they should be thanking your Lordships for getting them out of a deep hole. It was getting deeper and deeper by the minute as Conservative Member after Conservative Member was in rebellious mood about the matter. We will seek a delay on this issue, deletion of this clause, and a delay at least until the Chancellor has achieved a current budget surplus before any further consideration of changes to the inheritance tax threshold.
On the tampon tax, until the recent exchanges in the other place, I have to admit that I was unaware that VAT was payable on tampons and sanitary towels. If I had to guess the odd one out or play spot the luxury item from among the following list—Jaffa Cakes, a game of bingo, a ticket to the zoo, or tampons—I do not think I would have picked tampons as being the specific luxury item. However, apparently that is the case. Jaffa Cakes are a necessity; tampons a luxury. As we have heard, the Prime Minister this morning set out his priorities for achieving reforms in the EU in advance of the forthcoming referendum. I had hoped that, when the letter to President Tusk was written, it would have contained a line seeking support across Europe to allow tampons and sanitary towels to be zero-rated in each member state. Had he done so, his legacy would be assured. We have had some words of support from government representatives, but nothing concrete is proposed. Incidentally, the cost of this change to this country would be no more than £15 million to the Exchequer. Labour will seek to add a clause to the Finance Bill to give effect to this.
I look forward to hearing the Minister’s response to these two items in his closing summary.
Baroness Kramer (LD)
My Lords, in 2010 the coalition Government came into being in the face of a financial crisis and succeeded over the next five years in stabilising the economy and the country’s finances—significantly reducing the structural deficit—but they did so on the basis that we were all in it together and that the greatest burden should fall on the broadest shoulders. In his opening speech a few moments ago, the noble Lord, Lord O’Neill, gave the impression that that continues but that is the wrong word to use in this case, because the policy that we are all in it together and that the broadest shoulders should continue to carry the greatest burden is one that the Conservatives in their Budget and in this Finance Bill and various other related Bills have made a point of moving away from in an extremely distinctive manner.
It is absolutely true that we need to continue to eliminate the structural deficit. That is a responsible action to take so that we do not pass those burdens on to the next generation. But this Government are seeking to cut in the region of £50 billion more than necessary from public spending over the next five years in their goal to move from eliminating a structural deficit to building a significant surplus—a surplus that is not required by the financial conditions that we live in today. They have departed from the principle that we are all in it together.
I looked at the distributional analysis, which finally came out rather late—in June, I believe. It is a document that should have come with the Budget. It is interesting because the principles under which it is put together have changed. Indeed, I hope that the Treasury might engage with us at some point to explain further those changes and their implications. But what is absolutely fascinating about the distributional analysis is that it focuses almost exclusively on the benefits delivered by the coalition and gives virtually no sense to the change that was introduced, marked and signalled by the first Budget and embedded, in part, in this Finance Bill.
It is clear from looking at the distributional analysis that by 2017-18 those in the wealthiest quintiles will have had no proportionate loss in the welfare benefits that they receive. Presumably that is because harsh reductions in welfare are being introduced for the lowest quintiles in the Budget and the related legislation that has been presented to us, but it is difficult to tease that out because of the way in which the distributional analysis glosses over the difference created in this past year. I have noticed that in his various responses to Questions in this House, the noble Lord, Lord O’Neill, also talks as if the coalition period was the marked umbrella, and barely pays attention to the change of direction which his Government have so proudly heralded in shifting away from placing the burden on those broadest shoulders and beginning the process of pushing it back on to the weakest shoulders.
To be honest, when we were in coalition, Conservatives did argue that we should not be putting so much on the wealthy, and that the burden ought to be falling on those at the bottom of the scale because they were benefit recipients. I would very much appreciate at some point hearing from the Treasury how it has made those changes from its perspective. Until then, we are dependent on the Institute for Fiscal Studies, which, as the noble Lord, Lord Lennie, reported, has identified so clearly the huge burden of tax credit cuts that fall on the working poor and are not offset by the changes in the living wage or childcare. So we have moved away from “We are all in it together” and it is particularly the working poor, young people and those with disabilities who suffer the most.
Of course, I welcome some of the key pillars of this Finance Bill. The increase in the personal allowance—a long-standing Liberal Democrat policy—is captured in the Bill and obviously we are very pleased to see that there. We are supporters of the new living wage, although it is inappropriate to call it a living wage because it is not a wage on which anyone could live; it is a new minimum wage. An increase in the minimum wage is welcome, although I hope at some point we will hear from the Government how they intend to cope with the consequences for, for example, local authorities or the care home sector or others which will struggle to pay that minimum wage; that is not an argument for discarding it but we need to understand how on earth those costs are going to be properly absorbed in the current climate. We are also pleased, obviously, with the restrictions on pension tax relief, which is an important measure in the Bill. It is beyond us, however—and I echo the noble Lord, Lord Lennie, in this—why the inheritance tax cut is being introduced at this time, when such a burden is being placed on the working poor. Surely that timing almost adds insult to injury.
We do not accept that reductions in the bank levy have been necessary: the banks are brilliant lobbyists, and this is good evidence that they have been successful. I am spending two other days this week working on the Bank of England and Financial Services Bill, which has further roll-backs of the various measures that were imposed on the banks in response to their behaviour that generated the financial crisis—not just the original crisis, but consequential crises such as LIBOR, various money-laundering and PPI. The bank levy, therefore, has to be looked on in the light of effective lobbying by the banking industry and not as a necessary measure to sustain the financial services industry in this country. Moreover, I do not understand why it is the right time to raise the higher-rate tax threshold, when we are placing so many burdens on those at the bottom of the scale, the young, and the disabled.
The Minister talked about productivity, which is obviously his area of special interest. Productivity is going to be absolutely key to our future, so I fully recognise the importance of the comments that he made. However, this Finance Bill, and the other actions of the Treasury, once again fail to recognise the difference between capital and revenue: they are rolled together again. I know that it is a conviction of the Chancellor that one should not make distinctions between capital and revenue, but I completely fail to understand the arguments that are meant to support it. There is such an infrastructure deficit after generations of neglect in this country—I think everyone in this House would agree that that was true, in area after area, whether rail, road, broadband, energy generation or, in particular, housing—that we are generations behind where we should be on both infrastructure renewal and infrastructure building. Under such a circumstance, when the British Government can borrow at the lowest rates they have seen for generations, this should be the opportunity to accelerate investment into that sector. It should be distinguished from revenue in the management of the fiscal framework, and this Bill does not succeed in doing that. I hope that the Minister will be able to give us some argument as to why that has not happened, because I fail to see one. It is a lost opportunity and passes on to the next generation the burden of making that infrastructure catch up.
I have a small question on the road fund. It is unusual for the British Government to hypothecate taxes to a particular spending commitment. In this case, VED is being hypothecated to road infrastructure. Will the Minister tell us which areas are now going to lose investment as a consequence of that hypothecation? The cake is not expanding: it is just being given to one particular party, so it would be helpful to understand how all that is put together. That being said, I am glad to hear of his ongoing commitment to ultra-low-emission vehicles. It is an area in which the UK can be an absolute leader. We need it not just because of our own environment, but because it offers great potential for jobs in the future. We are becoming leaders in the R&D in this area, and there is a very significant opportunity to be snatched and taken—if the Government continue their commitment to it, which began under the coalition.
The Government referred to the training levy. It is absolutely apparent that we must increase skills within the UK. It is the major reason that any business would give for our failure to achieve productivity on a par with our competitors, whether in the European Union or looking further afield. I see the advantages of the training levy, but how are we going to tackle the need for training within SMEs? I can understand the reluctance not to put a levy on small and medium-sized businesses that may not be able to bear it, but they have to become significant providers of apprenticeships and training. The Government need to tell us why they have not used this Bill to enhance that potential. There is an increase in the national insurance employment allowance, but I do not think anybody believes that that alone is sufficient to generate the levels of training that we need in the SME sector.
I disagree with the Minister that removing the climate change levy exemption for renewable energy is a minor factor. This is about the green economy, which again is fundamental to our future. We moved, over a five-year period, from being laggards in the green economy to creating the basis for some of the leading green industries across the globe, generating significant numbers of jobs. The decision to remove that exemption seems to me to be part of a much broader anti-green strategy, as is the decision not to implement zero-carbon homes. We have had example after example where green measures have been watered down, apparently for ideological reasons, because the numbers we are talking about in terms of the overall government budget are absolutely minimal. The green industries are taking that to heart and understand very clearly that they are getting the message from this Government that, instead of this being a place where a green future is being encouraged and underpinned, it is going to be, at the very best, treated with indifference.
SMEs are absolutely crucial to our future. Many in this House can testify to the fact that small and medium-sized businesses provide something like 90% of the jobs in this country, are a leading provider of exports and are absolutely critical as the backbone of the UK. So why have the Government chosen to reduce corporation tax, which is paid by very few SMEs? To the extent that it is paid, it is a very small part of their expenditure. It is the large corporations that benefit from the cuts in corporation tax, and surely that is exactly the wrong decision. This would have been an opportunity to provide support to small businesses, particularly around training but also to enable them to achieve the kind of growth and scale-up which we need for our future. Frankly, when we are already one of the countries with the lowest corporation tax in the OECD, using this opportunity to bring it down so that we will be the country with the absolute lowest rate of corporation tax seems simply wrong as a priority. It does not bring a whole lot of benefit and is targeted on exactly the wrong part of business. Having that money flowing into small businesses and providing them with support would be far more beneficial. However, I recognise that the Government are helping small businesses by keeping the annual investment allowance at £200,000, which surely is good news.
The Minister talked about tackling tax evasion. Who could complain about that? However, I suspect there is much more work to be done as we try and get a grip on the new digital economy, and the Bill goes only a very small way in trying to grasp that nettle. I recognise that this is a complex issue and a great deal of work needs to be done in this area, but this new focus on tax evasion and enforcement of tax payment comes when we have just heard that HMRC has agreed to something like a 30% reduction in its spending over the remainder of this Parliament. We are already in a situation where again and again HMRC does not seem to have the manpower necessary to enforce tax law. It certainly does not have the manpower necessary to respond to the endless queries from the many individual and small business payers that need to speak with it to get their affairs in order. A further cut at this point just seems, again, entirely inappropriate. Is the Minister able to give us some assurance that the resources will be available for the extensive programme to deal with tax evasion that he has talked about today?
I finish by referring to the Charter for Fiscal Responsibility—the tax lock, as the Minister described it. As I said in discussion on the then National Insurance Contributions Bill, it seems extraordinary that a Government make a pledge that they will carry out a policy but then so distrust themselves that they decide that they have to capture it in legislation. That is a very dangerous precedent.
I have raised this issue before. One reason that we ended up with a financial crisis to which it was so difficult for the Government to respond was because of real arrogance in the Treasury. We had a Labour Government, a Gordon Brown Government, who had decided that boom and bust were over. I have always said that I do not think that Alistair Darling would for five minutes have agreed to the public spending that Labour committed to had he ever thought that an economic cycle could impact the country, never mind an external shock.
That same arrogance seems to be back here. The Government are once again deliberately tying their hands. I know that they say that if growth drops to 1%, they can step away from the constraints that they have put themselves in, but that is too late. The Minister will tell me if it is different, but I am certain, looking back, that nobody forecast the financial crisis. When a crisis comes, the need to be able to respond is immediate; it cannot be embedded in a forecast for a five-year period. Governments have to have that freedom and flexibility to act, and act quickly.
We must never get ourselves into a situation where we are in a car, we can see the crash coming but we cannot veer out of the way. That is exactly where this Government are putting themselves. It comes from that utter conviction that things will never go wrong. Well, they do go wrong. It is essential that Governments recognise that. Not to be able to use VAT, which is a tax that can be used very rapidly if necessary to remedy a problem, strikes me as significant.
There is a lot that is unsatisfactory in the Bill. There is nothing much that this House will be able to do about the exact clauses, as we take no votes on money Bills, but I am glad to say that many aspects are not part of a money Bill, and I hope that we will be able to tackle those when they come before this House.
Lord Cavendish of Furness (Con)
My Lords, I am grateful to my noble friend Lord O’Neill of Gatley for introducing this Second Reading debate. I was not quite sure how to approach it, as it is a strange one to be holding in your Lordships’ House, but I start by congratulating the Government on their continuing determination, as I see it, to do whatever is needed to restore good health to the nation’s finances. I realise that that is not always popular or easy, but it is urgent.
With every passing day, the perception grows that things are not quite so bad after all. “Why not water down the medicine?”, some are saying. Some commentators come close to saying that Ministers themselves share that delusion. We remain in a very dangerous place, and it is much to the credit of this Government that they hold to the course on which they were elected. I believe that we are heading for a strong economy, the chief beneficiaries of which are the working poor. It saddens me to think that the noble Baroness, Lady Kramer, and the noble Lord, Lord Lennie, cannot accept that.
This afternoon, I want to touch on the topical issue of infrastructure and how it can be financed. Especially, I want to focus on my local town of Barrow-in-Furness and its surrounding area. As I have told your Lordships before, we are expecting investment in the region of £40 billion over the next decade. It will come from shipbuilding, pharmaceuticals, civil nuclear, offshore gas and other things, and a very exciting prospect that is for an area whose economic future has not always been certain.
Here I should perhaps declare a personal interest. I make no secret of the fact that the group of family companies of which I used to be chairman—I have now handed over to my daughter—will want to take advantage of that investment. I refer noble Lords to the Register of Lords’ Interests.
I think I am right in saying that private or institutional investment in infrastructure projects is at an all-time low. In 2008-09 infrastructure spending reached £57 billion. Since then it has dropped, in 2013-14, to £42 billion. The Chancellor’s anticipated commitment to spend £100 billion on infrastructure will be greatly welcomed, but how to find the money?
Brooding on this, I was struck by a piece I found on the Centre for Political Studies online news service, CapX, written by George Trefgarne whose father, of course, has long adorned your Lordships’ House with great distinction. Mr Trefgarne’s piece is headed with the words: “An idea whose time has come: project bonds.” I strongly commend it and further reading on the subject to your Lordships.
There was a consensus that allowed my party’s programme of privatisation and the less than ideal PFI arrangements of the party opposite. For whatever reason, that consensus collapsed after the financial crisis. In consequence, there seems to be very little appetite among investors for participating in today’s projects or mechanisms to attract those investors. It is difficult to reconcile the Chancellor’s spending ambitions with his admirable goal of deficit reduction. It is not only the annual deficit that should concern us, but the many billions of pounds that are set to be added to the national debt. Worse, unless a solution is found the Treasury will be on course once again to be in charge of every road, hospital and railway system in the land.
Mr Trefgarne’s article highlights a potential solution that is being canvassed both here and abroad. Instead of relying on the public sector to deliver our vital infrastructure needs, new companies would be created, perhaps jointly owned by a combination of devolved Administrations, local authorities and private sector investors. They would keep revenues and charges and in turn issue their own debt, underwritten at least in part by the taxpayer. Experience elsewhere suggests that project bonds offer long-term investors attractive yields and significant credit spreads. Typically, they are attractive to pension funds and life insurance companies. I understand that even in countries where public finance is not so constrained, project bonds are used to diversify funding, meet regulatory demands, improve efficiency or quite simply tap into private sector expertise.
The system is not so different from the one the Victorians presided over that led to the great boom in bridge, canal and railway building, but one does not have to hark back so far for a similar precedent. I believe London’s Crossrail is coming in on time and on budget, if I am permitted to sing the praises of the mayor in your Lordships’ House. It is funded by a coalition of private and public interests, and Transport for London has been licensed by the Treasury to issue its own debt to fund it. The EU and the European Investment Bank are running project bond pilot projects.
Of course, I am telling my noble friend nothing new, but I would like to ask him how closely he has followed the project bond debate and what conclusions he draws. Does he agree that such a mechanism will not occur without the Treasury willing it to happen? I think I may be right in saying that the Treasury has experience of and a track record with similar financial mechanisms. The proposal would in effect entail the Government launching and licensing an entirely new capital market. Can my noble friend say whether the Government stand ready to do such a thing? Combined with the incomparable existing skills in the City, that makes for a hugely exciting prospect—and a huge problem removed from the Government. If an increasing number of proponents are right about the potential of project bonds, then why wait? Above all, why wait until Wall Street or some other financial centre steals a march on us?
Returning to Barrow-in-Furness, my personal view is that the beautiful area in which I live is ill-prepared for the large investments I have talked about coming its way. By any measurement, our infrastructure is in a shocking state of disrepair. I have grounds for thinking that our local government representatives are in touch with Ministers and seek ways to remedy these problems. I wish them well. When I was in local government, I remember being tremendously impressed by the skill and ingenuity of our financial officers. I dare say it is a different skill set from the one my noble friend finds at the Treasury, but it is nevertheless completely appropriate to a rural county with a few dominant tier 1 companies and myriad SMEs, among which my family businesses are included. I look forward to a time when devolved government will once again allow this reservoir of skill to be deployed for the benefit of local people, jobs and services.
Finally, I repeat a plea I have made in other debates. It will not be lost on my noble friend that much of the investment I talked about stems from government procurement of one kind or another. Like the Government, tier 1 companies have cultural problems when it comes to engaging with SMEs. A more sinister problem is when tier 1 companies collude to keep SMEs out. There is often much comforting talk about benefits to the local supply chain, but again and again they fail to materialise. Is it possible to compel large companies to report on what proportion of their business benefits local companies? Also, could the Government be rather more forceful in changing this culture, especially given that they are ultimately the customer?
It is a pleasure to speak about the problems of success. My noble friend the Minister is an economist of great distinction and I have no doubt he will make a great contribution to Britain’s economic recovery. I live in a rather different world from him—among people who make things, grow things and do things, and market their wares at home and overseas. Our whole existence is about judging risk and living with the consequences. We seldom make a headline, nor do we seek to do so. However, I remind my noble friend that we represent 95% of this nation’s economy. I hope that, as he surveys his huge brief, he will keep in mind that the sector’s interests also need his concern and protection.
Lord Haskel (Lab)
My Lords, even though we cannot do much about it, I welcome this opportunity to debate the Finance Bill because it is a chance to expose a mismatch between what the Government promise and what is actually in the Bill. We are promised a fairer and more equal society, a more prosperous economy based on higher skills, higher-paid jobs and a greener and more pleasant land. The Finance Bill says otherwise.
The most glaring example of inequality is of course the mismatch between the rising minimum wage and reducing benefits, which leaves millions of poorer people worse off. The IFS distributional analysis says it all but there are other examples. I agree with my noble friend Lord Lennie that raising the inheritance tax threshold at a time of austerity must contribute towards inequality. Surely the time to raise inheritance tax thresholds is when our current account is in balance or even surplus. What the Chancellor is doing now is just giving the better-off a tax break, especially as the IFS tells us that the percentage of the population liable for inheritance tax is in single digits. As other noble Lords said, this comes at a time when 3 million working families are at risk of being worse off next year. We still do not know how the social care sector will manage. It really is a bit of a shambles.
The Minister spoke of anti-avoidance measures for corporations and individuals. Yes, those are welcome but how robust are these measures? According to the Institute of Chartered Accountants, corporation and income tax revenues are decreasing. Is this because they are not being collected by an efficient and motivated staff, as suggested by the noble Baroness, Lady Kramer? Is this yet another example of this Government alienating their public servants? Nurses and doctors, teachers and carers, police and firefighters: do we now add Revenue and Customs staff? The Public Accounts Committee in another place seems to think so. These measures will not be effective if the Government are not an effective employer.
We are also promised a more prosperous economy, hopefully through productivity and rising skills. However, skills are changing all the time in our digital economy and it is good practice for people in work to upskill through part-time study. In 2012 tuition fee loans were extended to part-time students, but they were hedged about with so many restrictions that few took them up. As a result, we have seen a sharp decline in the number of part-time students and the courses available to them. This is confirmed by this morning’s news about FE colleges. Despite much debate and frequent presentation of the facts, the Bill does not recognise this. Nor is there any mention of part-time education in the Green Paper published on 6 November. Consequently, we are losing a huge opportunity to raise the skills of our workforce, although that is industry’s most frequent complaint. This is despite the good intentions in the Minister’s recent productivity paper.
That paper also referred to the housing crisis. In spite of what the Minister said, the Bill does nothing to hold back ever higher rents, higher deposits, falling home ownership and the lowest rate of housebuilding that any of us can remember. All this is with a rising housing benefit bill and less secure tenancies. Despite what the Minister said, the Bill does nothing to encourage a culture of productivity; the kind of culture you immediately sense when you walk into a highly productive business or service. We have a financial strategy reflected in the Bill, but no industrial strategy. This is why our economy remains unbalanced, with growth still depending on low wages, rising house prices and rising consumer credit.
With the Paris meeting due soon, perhaps my greatest disappointment with the Bill is that it reduces our commitment to combating climate change. The Minister told us of the exemption of renewables from the climate change levy which is, incidentally, back-dated. The levy was designed both to promote energy efficiency and reduce CO2 emissions. Since then, subsidies for onshore wind have been virtually removed with a single cut. At least these changes could have been tapered.
Another example of diminishing commitment to climate change in the Bill is the vehicle excise duty for passenger cars, which the Minister spoke about. Levels of excise duty used to deter high-polluting cars and encourage low-polluting ones. The new, rather complicated, rules seem to have abandoned this. Instead, under the new proposals, cars in band A, which paid no road tax, will pay much the same tax in years two and beyond as cars in band M, the highest-polluting band. Setting aside the public scepticism about car emission figures, what is the purpose of penalising polluting cars only in the first year? Is it just to maintain revenue from cars, irrespective of emissions; is it just to invest in roads? There were three items of news this morning about climate change. The Bill really ought to recognise it.
These are just a few examples of the way this Bill does not reflect the rhetoric of the Government. It certainly does not move us towards the greener, more prosperous and more equal society that we have been promised.
Lord Flight (Con)
My Lords, it seems a long time since the second Budget was announced. This second Finance Bill has had rather limited media coverage. I agree wholeheartedly with the comments of my noble friend Lord Cavendish about the need for infrastructure investment and about the success, going back into our history, of financing models that have involved both public and private sector. Crossrail has been, in our time, a brilliant example of that, and is on time and on cost.
Credit must go to the Chancellor for having got things dramatically right and having got this economy recovering better than any other in the world. All those clever left-wing economists told him he had got it wrong, and the IMF rapped his knuckles and so forth. He in essence followed a sensible, balanced path. He was substantially Keynesian and did not overdo trying to cut the deficit. However, he also took measures that helped the real economy to expand.
As I have said before, there has been a wonderful entrepreneurial explosion in the past five years. We have 5 million new companies, we are leading the world in a lot of tech areas, and it has been an age of greater entrepreneurial activity than I can remember ever in my lifetime. As we all know, it is producing more than 13 million jobs in the economy.
I also think that, although things are not all resolved, the balance of putting the public finances right is about right over the next five years. I was rereading a book on Disraeli the other day, noting that, as late as 1868, debt service on the borrowings that had financed the Peninsular Wars at the beginning of the 19th century were still the biggest item of public expenditure. If you overborrow, you end up burdening future generations with too much debt to service.
If people stand back and look at the whole area of welfare spending, they will see that something is very clearly wrong. Alistair Darling has been the most honest politician to point out what is wrong. Total welfare spending now is running at close to £300 billion a year because you have the basic of £231 billion, to which you have to add personal social spending of £30 billion. Housing claims benefit is now approximately another £30 billion. I am not even clear whether working tax credits, now up from their original £2 billion to £30 billion per annum, are still treated as a net-off from income tax revenues, which was the accounting fix that Gordon Brown put in, or whether they are within the total.
At least a third of public expenditure now goes on different forms of welfare spending. The point Alistair Darling had the honesty to make was that, with income tax credits, what was intended to boost incomes was simply serving to drive down and hold down wages. We have a system similar to that which we had in the early 19th century, when what was called outdoor relief was paid. It led to overemployment, poor productivity and underinvestment. When it ended, there was a great burst in wages, the new industries came up and people moved to the new areas.
Now we have a ridiculous system in which someone is better off working 16 hours a week on low pay, with the top-up tax credits, than working 40 hours a week on average pay. The whole formula in these areas needs addressing radically. I would go even further: the German model of dealing with welfare, which is assessed individually, ends up being much more sensible than our arrangements, which often help those who would be much better off if they worked a full, normal working week, and often do not help those who do need more help.
I repeat: it is well overdue for politicians of all parties to realise that income tax credits have been an economic disaster for this country, with exactly the same unsatisfactory effects as the system had 200 years ago. Of course, you must have a relatively high minimum wage if you are to have income tax credits, or employers tend to exploit it by not paying people sufficiently. Now, it is all well and good; £7.20 will go up to £9 by 2020, but that is particularly damaging in parts of the country where the cost of living is much lower, especially the housing costs. Those parts are landed with too high a minimum wage, so losing the economic advantage that they would otherwise have in getting businesses to move towards them. Then you say that perhaps you should have different minimum wages for different parts of the country, but imagine the complexity of trying to administer that. We have yet to see how measures will be worked out. I am certain that the Conservative Government wish to be fair to people, but it is a mistake for people not to perceive that income tax credits have caused a lot of the problems of our times.
I have some criticisms of this Bill. To me, there is too much stealth tax in it, and I feel that Gordon Brown would have been rather proud of it. Indeed, it rather smacks of quite a lot of the type of thing that he used to get up to. Hidden within it, the middle classes, whom I still stand up for, are having their tax bills increased by something approaching £20 billion, but in a way that the Government hope they will not realise, such as in the change on dividend income. No one really knows how dividends are taxed anyway—but that tax will add about £8 billion or £9 billion a year to the bills of ordinary people’s pension funds. I support corporation tax being reduced to 18% by 2020; I accept that to some extent it is a headline tax, but at least that attracts businesses to being based here. But the extra 8% tax on banks makes little sense, to my mind. Banks need another £355 billion of capital over the next few years to be safe against financial risk in future. They have been subject to fines of something like $300 billion, and now there are higher taxes. All that means, again, is that pension fund shareholders will end up having to put up more money; they are the people the Government are really taxing by the 8% profits tax.
The increase in insurance premiums from 6% to 9.5% will hit about 20 million home owners and car owners on their various insurance policies, with a cost in the order of another £2 billion per annum. I wonder why the Chancellor did not stick to the pledge that he gave—which was so popular and led Gordon Brown to put off having an election—when he said that he would simply raise the IHT threshold to £1 million. But no, we have some extremely complicated arrangement, whereby it works for some but, if your estate is worth above a certain level, you do not qualify. Would it have been easier for him to have stuck to his promise, which was extremely popular?
On pensions, I think the lifetime limit is foolish. This country needs a higher level of saving and investment, which is a function of that; we need to stop having to sell the family silver the whole time because our current account deficit is so large, yet we are discouraging the better-off from saving. It is fair that people should all have the same 20% tax credit, but we are getting a pension law loaded to discourage those earning higher incomes from saving more in their pensions.
Then there is something that is not the fault of the Government but, I am afraid, that of the EU Trade Commissioner. I have spoken of the EIS system and the VCT arrangements before—and I declare my interests as chair of the EIS Association. EIS has raised more than £12 billion of high-risk equity investment for small companies, and in 2010 the Government agreed arrangements with Europe that led to big increases in the amount of money that it raised. For reasons I cannot understand, complicated rules have now been forced on the UK by the EU Competition Commissioner that will limit the amount of money available, especially to SMEs that have cut their teeth, been going two or three years, and then need some more money to expand. I cannot see how the EU concept of state aid relates in any way to what the Government of this country choose to do in offering incentives to people to invest in local SMEs. Why does the EU have the right to stick its finger into this and—perhaps not make a mess of it, because there is still good scope—but—damage what has worked extremely well?
Even on buy to let there is a misunderstanding. Before pensions, people used to buy one or two houses, if they could, and let them out. That was their source of income in old age. Those were the people who owned and financed a lot of the Victorian terraces all over south Wales, as well as London. The generation now in their 40s has often gone down the route of buying houses to let rather than using pension schemes—for rather good reasons, because as an asset, houses have performed better. The only tax incentive for that has been the ability to off-set interest. I am not sure how wise these measures will be. Without buy to let, lots of people would have had nowhere to live in the past few years. I certainly do not agree with retrospective taxation. We can change the tax laws for new purchases, but it is unwise to change tax arrangements retrospectively. I can just see what will happen: a time will come when inflation and interest rates rise, and the housing market goes down. Then there will be problems.
That touches on something I mentioned earlier. While the economy is expanding, it is crucial to get our savings rate up so that our investment rate can rise and our external finances come into balance. If anything, what is in the Finance Bill is not at all conducive to saving; in fact it is negative towards saving.
I congratulate the noble Lord, Lord O’Neill, on the discreet way in which he described this measure, but I think it is disgraceful to give HMRC the power to raid people’s bank accounts for sums of more than £1,000. Why should not the Government, like any citizen, have to rely on the power of the courts to go after money owing to them? To me, that is a totalitarian measure of the kind that we have fought against for almost 1,000 years. It shows the Government in a very poor light if they put that sort of thing on the statute book.
I am critical of a lot of the Finance Bill, speaking as a capitalist and as representing, in a sense, the middle classes of this country. But I am full of praise for the Chancellor for the way he has so successfully managed the economy.
Lord Palmer of Childs Hill (LD)
My Lords, much has been said and debated in the past few days as to whether your Lordships’ House can amend a statutory instrument that relates to money. As the instrument was not a money Bill, such amendments, fatal or otherwise, were allowable. However there is no doubt that the Finance Bill before us today both is a Bill and relates to money. Therefore, as other noble Lords have said, we cannot amend it.
I would like to take this opportunity to raise what happens when the other place gets it wrong on a money Bill. That can be because too little time is spent in the other place, or because of hasty government amendments. The noble Lord, Lord Flight, took us back a couple of hundred years, but I only want to take us back to March this year. The March 2015 Finance Bill—not the Bill before us today—had a clause added to it without consultation, and was enacted two days after that addition was made. The Government did not notify the umbrella company sector that it would be making those changes at that late stage. In speaking today, I am seeking that the Government should think again with the current Bill and repeal the section in question.
The section will prevent contractors and freelancers claiming their legitimate tax relief at source as they have always been able to do. Instead, because of the hastily added section in the March Finance Act 2015, they will now only be able to claim via self-assessment, which at best will result in a significant delay during which time the individual will be out of pocket. I refer of course to Section 289A of the March 2015 Act relating to exemption for paid or reimbursed expenses. The addition of subsection (5)(b), which contains an innocuous, convoluted phrase, will affect about 400,000 contractors by delaying receipt of their properly incurred tax relief. Whereas at present the tax relief is given at source, it will now have to be claimed after the end of the tax year. Many contractors will fail to do so; many will need to employ an accountant to sort it out; and—just imagine—the overworked and understaffed HMRC will need to process an additional 400,000 tax returns.
I have had recent experience of trying to phone my inspector of taxes. On three occasions, I was told I was in the queue and should be answered in 35 minutes. On the first two occasions I gave up; on the third occasion I hung on for 45 minutes, when a charming, helpful but overworked inspector dealt with my query. My noble friend Lady Kramer and the noble Lord, Lord Haskel, referred to the pressures on HMRC, and the effect of this section in the March 2015 Act will exacerbate that no end.
I have knowledge of this sector of the industry through having served in this House on the Select Committee on Personal Service Companies and as a now retired chartered accountant. Many companies do not employ contractors directly as employees: many use an umbrella company. This is not a brolly manufacturer but a company that acts as an employer to agency contractors who work under a fixed-term contract assignment, usually through a recruitment employment agency in the United Kingdom. The umbrella company receives the fee and pays it to the agency contractor after deducting full PAYE. However, the umbrella company can deduct at source relevant and valid expenses before calculating the PAYE. The expenses will be valid in calculating the tax but by this mysterious section, which suddenly appeared in the March Finance Act 2015 with two days’ notice, the tax relief on expenses would have to wait until the end of the tax year and beyond and use up the valuable HMRC staff time—to which other noble Lords have referred—to achieve no material tax gain to the Exchequer.
This is not only a technical point. Umbrella companies are a critical element in supporting the UK’s flexible workforce. They offer workers the platform to work without the worry of running their own companies while offering employers, directly or through an agency, the flexible workforce they require. Umbrella employees will see significant drops in their monthly income because of the delays they will face when claiming for tax relief that they are legitimately entitled to. Many of those affected will also have the added administrative burden of filing a self-assessment tax return which they had previously not needed to complete.
However, the significant number of umbrella employees in the UK—estimated to be at least 300,000 and probably 400,000—means that this will have a significant impact on the economy, particularly in restricting the flexibility of the workforce. The opportunity to provide contractors with their entitled tax relief at source is a key benefit for individuals choosing an umbrella firm—a perfectly acceptable tax use—and the new law would effectively remove this key commercial advantage, putting the whole industry at risk. The Freelancer and Contractor Services Association calculates the impact of the section is financially greater for many families than the loss of tax credits. That demonstrates how important this is.
I ask the Government to consider in the current Finance Bill repealing Section 289A(5)(b) of the March 2015 Finance Act—I am sure the Minister has it close to his chest and remembers every word of it—or, at the very least, to insert a new clause to delay the implementation of Section 289A(5)(b) for 12 months to enable a full consultation to take place so that an impact assessment can be made. I hope that the Minister will take this suggestion—that is all we can do in a Finance Bill debate—back to the Government so as to remedy in this Bill what may have been the unintended consequences of a section added to the previous Finance Bill and enacted two days later.
Turning back briefly to today’s debate, given that the noble Lord, Lord Lennie, referred to the fact that the reduction in tax credits was a dreadful thing, I ought to put on record that the Liberal Democrat amendment failed. I then went home and on the television I heard the Chancellor of the Exchequer saying that the Labour Party was fully against any reduction in tax credits, which was not what happened in the vote. What we voted for in the end was a deferment of tax credits.
The noble Lord, Lord Cavendish, talked about the tribute to the mayor for Crossrail. I pay tribute to him for giving the credit to the Labour mayor who introduced Crossrail, and for bringing this to this House in that manner.
I hope that the noble Lord will take into account the difficulties of this House giving advice on a Finance Bill—a money Bill—which will be listened to by the other place.
Lord Howard of Rising (Con)
My Lords, I shall comment briefly on just one aspect of the Finance Bill. Before doing so, I must say that it must have been a relief to the Chancellor not to have had to negotiate with the Liberal Democrats.
It is fundamental in this country that all are equal under the law; “all” includes the Government, in whatever guise—the Government, the state, the Administration. No one should be above the law. Schedule 8 to the Bill, briefly referred to by my noble friend Lord Flight, allows HMRC to take money directly from a person’s bank account without first seeking approval from a court of law. Yes, there are safeguards, but the principle behind Schedule 8 is wrong and it should not have been put forward. I imagine that is why the same idea was withdrawn after it was proposed in 2007. There is also some doubt about the security of the safeguards, as Clause 47(2) allows the Treasury to use secondary legislation to amend or alter at will.
It is right that HMRC should be able to collect taxes, but not that it should be above the law. It must be subject to the law in the same way as everybody else. One of the justifications given for enforcement by direct deduction from bank accounts is that more revenue will be raised than would be if HMRC first had to apply to the courts. This raises the question of whether some direct deductions might not have been approved in a court of law. If that were not the case, how could more money be collected?
If Schedule 8 is enacted, there are instances in the Bill where a decision is left to the discretion of HMRC, even if only by default, because of the lack of a time limit for a response or action by HMRC. This could create unreasonable delays, effectively freezing bank accounts. In particular, there is a time limit of 30 days for a response by HMRC in paragraph 11(1) of Schedule 8. Can the Minister clarify that the same time limit applies to paragraph 11(3)? It would appear that it does but that may not be the case.
The Explanatory Notes emphasise that there will be face-to-face interviews with taxpayers before these powers are used. It is too late for this to be in the Bill. We are all familiar with the need to make economies, forcing reductions in public services, but I would argue that ensuring every debtor receives a face-to-face meeting with HMRC officers is not something that should be put at risk when HMRC is looking at ways to reduce costs. I would be grateful if the Minister could clarify that face-to-face meetings will not be abandoned. After all it was a major selling point of getting Schedule 8 to the Bill through the House of Commons.
Lord Davies of Oldham (Lab)
My Lords, this has been a most interesting debate and the Minister will enjoy summing up these varied contributions. I hear what the noble Lord, Lord Howard of Rising, has just said, and what the noble Lord, Lord Flight, said earlier about tax inspectors. I cannot remember them raising the issue on how the bedroom tax would be enforced and whether people would in any shape or form suffer any derogation of liberty when investigations were done on that front. Of course, we accept that the Inland Revenue has to work within the framework of the law and we are glad that that has been emphasised, so the two contributions were of some value.
I will begin by commenting on those parts of the Bill which my party finds acceptable, and on which we congratulate the Government. On the annual allowance on pensions, Clause 23 restricts tax relief on pensions for high-income individuals by introducing a tapered annual allowance with effect from 6 April. It restricts tax relief for pensions contributions for those who earn more than £150,000 a year. So there is a gesture of some recognition of fairness as far as pensions are concerned.
We also recognise the relief for finance costs related to residential property businesses in Clause 24. That will ensure that relief will be at only 20% for those landlords claiming on mortgage interest payments. Some of them in the past have claimed 45%, which approaches a level of being scandalous. We are glad that that loophole has been plugged.
We are also interested in the anti-avoidance provisions and congratulate the Government on making progress in that area. Clauses 40 and 41 ensure that investment fund managers who receive carried interest are taxed within capital gains rules. We would have liked to see those interest earnings treated as income rather than as a capital gain. The manager does not contribute a meaningful amount to buy the investment, so why he should be taxed at the lower rate in those circumstance is not clear. The OECD has produced a report calling for carried interest to be taxed as income, and I hope that we will subscribe to that position in due course.
We welcome certain other areas of the Bill which, as indicated by the noble Baroness, Lady Kramer, are also welcome to the Liberal Democrats. I see merit in the vehicle excise duty changes, which she praised highly, but not to the extent that she does. We all recognise that VED needed reform. Green or more carbon-efficient vehicles are becoming more common, which will undoubtedly have implications for vehicle excise duty as a future source of government revenue. The fact that zero-emission vehicles will continue to be exempt from road tax is, of course, welcome, but we are concerned that a flat rate of VED, as outlined in the Bill, will mean that low-emission vehicles will pay £800 or £1,000 more over a seven-year period while many high-emission vehicles are expected to pay up to £440 less. We have, therefore, some anxieties about the way in which that new system is being introduced. We also have concerns about the potential impact of the new VAT system on car manufacturing in this country. There certainly need to be changes, but we do not believe that what is included in relation to vehicle excise duty is the right change for the environment, the consumer or manufacturing industry. It is a good shot by the Government but they have not hit the target as we would have wished.
Furthermore, as my noble friend Lord Haskel emphasised—he was very critical of the Government and I endorse his criticism—the position of the Government on green issues in this Bill is lamentable. The Bill removes a climate change levy exemption for renewable source electricity generated after August 2015. Can the Minister say whether there was any consultation with the industry about this issue, or any impact assessment produced? Or is it just another example of the Government undermining investment confidence in the renewable energy sector?
We sought to bring amendments to improve Clause 27 on Report in the other place, but were unsuccessful. Last week, more than 100 green energy groups wrote to the Chancellor asking him to think again and warning that the proposal to deny community energy investors access to both enterprise investment schemes and social investment tax relief is seen by many in the sector as a final nail in the coffin for future projects. This comes in a week when the wider world is emphasising the actions that need to be taken, particularly by the advanced world, to reduce the impact on the environment of global warming. The Government are stepping back from their commitments in these areas. The Government are hollowing out the renewable energy market from producer to consumer. Whether you are a large company looking to invest in a growing global market or a local community energy project seeking to inform and educate the local public, this Government are clearly not on your side.
Members on both sides of the House referred to the fact that the Bill provides for an inheritance tax threshold of £1 million for married couples and civil partners by the end of this Parliament. This was commended by the noble Lord, Lord Flight, and others on his side and criticised by my noble friends Lord Haskel and Lord Lennie. How can the Government continually emphasise that it is about encouraging those of the working population who deserve support but then happily say that it is also entirely right that people should inherit more than they can possibly earn in one year, in fact over 10 years, when property is transferred to them?
Surely there has to be some recognition by the Government, apart from pandering to the electorate in the search for votes, of equity in this area. We have sought, in the other place, to amend the inheritance tax scheme contained in Clause 9, but without success. We had a little more success when subsequently we tackled the tax credit cuts that the Chancellor sought to bring forward. Is it not extraordinary that the Government should think that the poorest in society, those on very modest incomes, should be hit at the rate of £1,300 a year while the better-off should gain from enhanced inheritance tax opportunities? The Government, and the Minister, have a lot to do to justify themselves on this issue.
Another issue has cropped up in the context of whether taxation in our society is fair. More than 30 years ago, when I first entered the House of Commons in 1974, we were just beginning to debate with some force whether levying VAT on sanitary products was biased against women and not fair to the consumer. Over that long period, we still have not levied the same taxation on sanitary products as is levied on chocolate-chip biscuits, Jaffa cakes and toffee apples, which are all exempt from the relevant taxation.
The Government could have done a great deal in the Budget but what was the overall position adopted in it? The Minister introduced the Bill with his usual calm assurance and insight and took us through the clauses very effectively. He prefaced his remarks with a statement about the enormous success of the Chancellor’s management of the economy. However, he is best placed to recognise that aspects of the current economic scene are extremely worrying. Our productivity and investment record are still poor and our productivity rate is below that of our G7 competitors to a greater extent than at any point since 1991. Today, we heard the news that FE colleges are to be blitzed by this Government, thus impacting on those aged 16 to 19 and those who engage in part-time work and study who seek to increase their productivity through improving their skills. There is even the suggestion that 40% of them should close. How on earth can the Government justify that? In the last debate we had on productivity, the Minister made an extremely acceptable defence of the progress of his plans for improving productivity but referred to the role of the education system in improving productivity simply in terms of the universities. Now I know why he did that as he, or certainly his Government, intended to blitz the opportunities for those who do not go to university but who need the skills which our society now largely tends to import from abroad. The Government are doing devastating damage to a sector of the economy which is necessary to increase productivity.
We jolly well need to increase productivity because our balance of payments deficit is at its highest level since modern records began. If this Government were analysed on the basis of the big debates on the viability of the economy that took place in the 1970s, when even importing a few aircraft could cause a Government great balance of payments difficulties, the situation this Government are in at present would be deemed absolutely chronic and one that far outweighs the anxieties that obtained at that time.
The Chancellor told us that his 2010 Budget would ensure that borrowing would reach only £37 billion by 2014-15. Last year, it was more than £87 billion. He said that public sector net debt would be 69% in 2014-15. It was in fact 80.2%. He also promised that the deficit would be eliminated. He has failed on all those counts. Therefore, while I accept the points made in the Minister’s opening remarks, I hope that he will also address the other side of the picture, which is all too bleak.
Lord O'Neill of Gatley
My Lords, yet again we have had an extremely interesting debate, and I thank all noble Lords for their excellent contributions. As has become my wont in previous debates, especially when not too many noble Lords have spoken, I will attempt to respond to most of what my modest brain could understand about what everybody said. I apologise in advance if I forget some of you, or if I misunderstood some parts.
Let me start with two overall points, especially concerning the comments of the noble Lord, Lord Davies, about the economy in general, because they link to a number of things that noble Lords touched on. Also—I will come back to this issue when I respond to the comments about welfare—it is very important when we debate government policy that we do not forget that it is presented in this Bill in the context of the mandate the Government sought and, importantly, secured in the election that they won with a majority. In the election campaign, the Government made it pretty clear that they were committed to deficit reduction, debt reduction, as low tax as possible and a low welfare spending environment. By and large, that is the framework that has shaped this Budget.
On the economy, I will address the three points that the noble Lord, Lord Davies, touched on in his interesting closing comments. First, I said in my opening comments that we have had considerable discussions about productivity and, given its importance, I am sure we will have many more in this place in the future. I welcome many of the insightful comments that a number of noble Lords made about aspects of productivity. I hope we can learn as we go along, because this is a complex and huge challenge.
As I have pointed out, it is not only the UK economy that has experienced challenges in the past few years. If we can believe the reported data, even some of the supposedly highly productive economies seem to have struggled recently. In addition to the caveat that we will soon get early indications from the independent review which the Government authorised Charlie Bean to undertake—I hope it will include some indications of how productivity is measured—in the most recent quarter, we have some evidence that productivity has started to improve. It is far too dangerous to presume that that is the beginning of a sizeable and permanent improvement, but the latest data show the best improvement since 2011.
On an important and closely related aspect—in my experience, the two go hand in hand—over the past two quarters there have been more encouraging signs about the performance of investment spending. According to our GDP accounts, at least, investment spending has become a more important, positive contributor to GDP. However, I quickly add that, according to some recent business surveys, there has been some softening in the confidence of apparent business investment intentions, which is probably related to global events.
On the balance of payments issue, as I have touched on in previous debates but would like to re-emphasise, it is quite intriguing that our trade deficit, which is usually the subject of most people’s focus on our seemingly never-ending poor performance, has not deteriorated. In fact, it has actually shown some signs of improvement, especially in recent months. But in the main identifiable parts of the accounts, it is the so-called invisibles surplus that has deteriorated. That could be due to something substantial, but it could be something to do with valuation and accounting treatment that is not necessarily going to be permanent, and there may be some questions about the validity of some of the statistics. At the risk of my sounding like a bit of a nerd, the newly appointed governor of the Central Bank of Ireland is a known expert on international balance of payments issues, and it was very interesting to read his suggestion that some of the apparent deterioration in our invisibles account may relate to the behaviour and book-keeping of international companies, which is among the reasons why it is very important that we embolden HMRC to do the work it is tasked with doing. I will come back to this in a few minutes.
I turn now to the individual, very useful comments that noble Lords made. First, the noble Lord, Lord Lennie, spent some time talking about the environment for our tax policy with reference to the fragile economy. In addition to what I have just said, it is quite interesting that the very latest high-frequency indicators, specifically the purchasing managers’ indices for the most recent finishing month, showed in both the manufacturing and services sectors a notable—and to some degree, even for someone like me, surprisingly strong—acceleration. I am not so sure, other than being cognisant of the never-ending uncertainties that go hand in hand with life and the state of the world, quite where the fragilities that he referred to are. I would add in that regard that the tax policy path and the spending path this Government have chosen to pursue do not appear to be slowing the economic recovery, although of course the evidence varies from month to month, depending on the individual economic data.
On the second general point raised by the noble Lord, Lord Lennie, the so-called tampon tax—I apologise for reading the brief; I do not like to do that in my closing comments, as I am sure noble Lords appreciate—the UK does apply a 5% VAT rate to sanitary products, which is the lowest rate currently allowable under EU rules. During the debate in the other House on this issue on 26 October, my fellow Treasury Minister David Gauke said that he would raise the issue with the European Commission and other member states, setting out the Government’s view. I can advise the House that David has now written to the Commission and other member states setting out our strong position that member states should have full discretion over what rate of VAT they can apply to those products.
Turning to the considerable number of lengthy but, as always, very interesting comments made by the noble Baroness, Lady Kramer, again, I apologise that I will not be able to go through them all in the remaining time, but I want to touch on a number of points that relate to both the big picture and the specifics. On the overall nature of fiscal policy, the spending cuts and the figures to which she referred, let me repeat—even though everyone in this place, the other place and the country are aware of this—that one of the reasons why certain areas are being cut to the levels proposed is that the Government, in addition to emphasising their commitment to the lowest tax possible and to deficit and debt reduction, have consciously and deliberately, as part of the election campaign and since, promised to protect key areas which, in my own judgment, are vital to the long-term performance of our country. These are health, education, foreign aid and investment spending and, of course, spending linked to security challenges—following the latest Budget— and defence. It follows by definition that, if you are protecting those areas and are committed, as we are, to deficit and debt reduction, the other unprotected areas have to take the lion’s share of the work.
It is in that context that the interesting comments made by the noble Baroness, Lady Kramer, about welfare payments, and those of many others, should be considered. I am sure—following the rather emotive and intriguing debates we have had about that topic in this House, and what noble Lords have heard from the Chancellor, when he said that he would listen and set out in the Autumn Statement what he would do to address the concerns raised about the transition from a high-welfare, low-wage economy to a lower-welfare, higher-wage economy—that we will have some of these debates again in the future.
However, I will highlight, of the many statistics that are often quoted in debates in the other place and in here, one that I think that we cannot forget. We are about 4% of global GDP and about 1% of the world’s population. It is the case that today, we are spending about 7% of the world’s welfare payments. If we do not believe that we can do something about that, it is a pretty worrying state of affairs, particularly when our economy has improved as much as it has done; and, let me emphasise—in contrast to the tone that was adopted by a number of comments—when we have record levels of full-time employment that are showing continued signs of improving further. If we cannot tackle some of the welfare payment challenges during an economic environment like that, then it is a pretty concerning sign, even though the complexity of our welfare payment system in itself makes it pretty challenging to ensure that none of the policies being pursued has some unforeseen consequences that we did not wish to introduce.
The noble Baroness, Lady Kramer, and others made quite a few comments about skills. I cannot spend too much time on that other than to reiterate, as I said during both the last productivity debate and a previous one, that in my own personal judgment the challenge of skills, within all the factors relevant to the future performance of productivity, will perhaps be the highest one that we face.
It was very interesting and slightly distressing to hear the comments of the noble Lord, Lord Davies, towards the end of his speech, when he suggested that in my previous reference to this I gave the impression that the only thing that mattered was higher education. Let me emphasise right here that that is far from the case, which is why, in the productivity plan, and linked to it, we are very proud of the fact that we have introduced the apprenticeship levy to put more responsibility on the corporate sector, as is the case in some of our fellow developed economies, Germany being a particularly model example in this area. We are also proud that the corporate sector itself essentially picks up a lot bigger share of the indirect, and perhaps even direct, cost of education spending, certainly as it relates to skills. In highlighting further education in the productivity plan, we focused on improving the quality of the further educational attainments of our young adults rather than just their number—both of course are important. I cannot emphasise enough—on my own behalf and, I believe, that of the Government—that there is great awareness of the importance of this challenge and the importance of not just focusing on it in higher education.
The noble Baroness, Lady Kramer, and other noble Lords touched on the Government’s so-called lack of commitment to green policy. The Government remain committed to trying to improve the carbon performance of our economy but they are also trying to be even more focused on the value for money that goes along with a number of these individual policies from the past, especially in the circumstances of our desire to commit to a lower deficit and lower debt.
The noble Baroness, Lady Kramer, and a number of other noble Lords also touched on corporation tax, asking why we are continuing to lower it and, in some cases, why we were favouring large corporations relative to SMEs. I could spend a lot of time on this topic but will just highlight that in the past few weeks, the UK has been recognised positively by independent and globally recognised experts on such measures. I will name just two. In the World Bank’s review of the cost and ease of doing business, we have just overtaken the United States and are now ahead of them on that. Our stance on transparency and tax policy was also mentioned in that review, as it was by the Legatum Institute, which said that the UK’s leadership in Europe is accelerating relative to our European neighbours.
My noble friend Lord Cavendish made some very interesting comments about infrastructure. We are having discussions with many parts of the country about devolution and giving regions more responsibility for some big issues for their future. He touched on a couple of them, and may be aware that Barrow, in Cumbria, is one of the many we are having discussions with. I hope that at some stage those discussions will result in a fruitful outcome for Barrow.
More broadly, I emphasise to the House that I spend considerable time on the fascinating challenge of infrastructure. Whether it be project bonds or any other form of bonds, I am trying to challenge my own mind and my own past of many decades in finance, and the finance industry. At a time when we have such remarkably low bond yields all over the world, rising equity valuations and considerable amounts of cash, along with a massive infrastructure challenge here and elsewhere in the world, somebody in the future weeks, months or years will help us come up with a smart way of doing this that is not just some artificial way of putting it back on the Government’s balance sheets. Many of the suggestions that have been put to me typically end up doing that.
In that regard, I also highlight the very successful role played by the UK government guarantee scheme, which so far is showing signs of helping us boost the scale of our national infrastructure ambition. I cannot finish on that topic without highlighting the fact that since I last spoke in this House, we have announced an independent National Infrastructure Commission, which will pressurise this Government and future Governments over how we rise to these very complex and ambitious infrastructure challenges with our beautiful and complex democracy. Part of the purpose and why I believe that that is such an important thing for us to do is to put us under more pressure to meet those challenges.
I realise that I have taken up 20 minutes of your Lordships’ valuable time, and I now apologise to several noble Lords that I have not had the chance to speak to their individual comments. At the risk of going beyond 20 minutes, I would like to touch quickly on the issue of HMRC, which several noble Lords mentioned.
To meet our fiscal and debt reduction commitments, the Government are committed to trying to tackle tax avoidance. Although it will remain a challenge, given the ambitions that we have set, we are committing the right resources to enable HMRC to ask the right questions and pursue those who are not meeting their obligations. Perhaps I may write to the noble Lords, Lord Flight and Lord Howard, but I can say with some confidence on their specific question that we think there is plenty of protection for people’s individual rights.
I draw to a close. I thank all noble Lords again for their valuable comments, and commend the Bill to the House.