Postal Packets (Miscellaneous Amendments) Regulations 2023

Baroness Penn Excerpts

Wednesday 19th July 2023 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Postal Packets (Miscellaneous Amendments) Regulations 2023.

Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee (special attention drawn to the instrument)

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, this statutory instrument will provide United Kingdom authorities with powers in relation to postal packets—parcels—moving from Great Britain to Northern Ireland. It does nothing more or less than that. It does not itself put in place the wider Windsor Framework arrangements.

These powers are part of delivering what we promised for consumers and businesses in Northern Ireland. They are necessary to ensure that we can implement the Windsor Framework and remove the burdensome regime that the old Northern Ireland protocol would ultimately have required. I am aware of some misunderstanding about what the Windsor Framework requires in respect of parcel movements, so I will attempt to address that also in my opening remarks.

Had it been fully implemented, the Northern Ireland protocol would have required international customs processes for all parcel movements from Great Britain to Northern Ireland. On the new arrangements, it is worth dealing up front with some of the issues where there has perhaps been a misunderstanding about what will be required in future under the Windsor Framework. In short, I would like to provide some reassurances to noble Lords in that regard.

First, someone in Great Britain sending a parcel to their friends and family in Northern Ireland will not need to engage with any customs processes under the Windsor Framework. Nothing will change for those movements, compared with today. Similarly, Northern Ireland recipients of parcels sent by their friends and family in Great Britain will not need to engage with any customs processes. For example, a grandson in Liverpool sending a package to his grandmother in Belfast will not need to do anything new to send the package and his grandmother will not need to do anything new to receive it.

British businesses in Great Britain selling to Northern Ireland consumers will not need to complete customs declarations, international or otherwise, and Northern Ireland consumers buying from sellers in Great Britain, including via online shopping, will not need to engage with any customs processes. They will buy from the seller in Great Britain and receive their goods without doing anything new.

I emphasise that this means the Windsor Framework explicitly removes one of the most onerous requirements on goods being sold to Northern Ireland consumers and, of course, on goods being sent to friends and families. There will be no routine checks or controls applied to parcels, with interventions only on the basis of a risk-based, intelligence-led approach. This means that the overwhelming majority of parcels will not be subject to checks.

I turn to parcels sent from a business in Great Britain to a Northern Ireland business. These will be treated the same as equivalent freight movements: they can be moved through the new green lane where eligible when it is introduced from October 2024. As with freight movements, the green lane will ensure that eligible goods will no longer require international customs processes. They will instead require only the provision of routine commercial information. Movements via the red lane, including goods destined for the EU, will be subject to the customs processes required by the EU, as noble Lords would expect.

The Prime Minister negotiated the Windsor Framework to ensure that consumers and businesses in Northern Ireland—and, indeed, British businesses selling into Northern Ireland—could benefit by protecting internal trade within the UK. The Government need to ensure that the powers of HMRC and Border Force are sufficient to allow them to monitor the rules for movements of parcels and that, where certain requirements are in place, they can be enforced.

The Secondary Legislation Scrutiny Committee’s report suggested that we clarify the rationale for bringing the instrument into force on 31 August. There is a limited range of prohibited or restricted goods that the UK Government accept are required to comply with EU customs rules today—for example, certain drug precursor chemicals or products derived from or associated with endangered species covered by CITES. HMRC and Border Force cannot currently enforce these requirements, which is why this statutory instrument is needed now rather than in a year. The same powers will be used in respect of the new parcels arrangements that will come into force through the Windsor Framework arrangements for parcels from 30 September 2024. This is so that we are able to determine that parcels destined for the EU can be detected and ensure that they follow the requirements of the red lane.

The committee’s report also noted that arguments had been submitted to it that these regulations would contravene the principle of unfettered access within the UK by introducing a customs border. A submission by the Democratic Unionist Party argues that they would be contrary to the Good Friday agreement.

The Government recognise that there are a range of views on the Windsor Framework. Our view as the Government—as the Prime Minister and the Secretary of State for Northern Ireland have made clear—is that the arrangements support and protect the Good Friday or Belfast agreement in all its parts. They protect the integrity of the European Union’s single market and Northern Ireland’s place in the United Kingdom’s internal market. These regulations are discrete and relate solely to powers available to HMRC and Border Force. That said, I hope I have provided some reassurance about what the Windsor Framework does and does not require, and therefore what the powers granted by the regulations will be used to monitor and enforce.

The report also notes the absence of a public consultation. It is the Government’s view that a public consultation on an SI of such limited scope is unnecessary. The instrument implements requirements under the Windsor Framework that have been discussed extensively. The Treasury and HMRC continue to engage with a wide range of businesses and sectors, and indeed with fast parcel operators, on both this SI and the wider Windsor Framework.

In summary, the parcel arrangements set out under the Windsor Framework are a significant improvement when compared with the requirements under the old Northern Ireland protocol. But as well as comparing them with what the protocol would have required, it is vital to understand how little will change compared with the status quo for the vast majority of Northern Ireland parcel recipients and those in Great Britain sending goods to them. This statutory instrument is not a barrier but an enabler to the agreement that we have negotiated. I therefore beg to move.

[Lord Dodds of Duncairn (DUP)]

My Lords, I thank the Minister for outlining the purposes of the regulations before us. As noble Lords probably know, just the other day this was a matter of some heated debate in a Delegated Legislation Committee in the other place, and was subject to a vote in that House yesterday evening. Some consternation was expressed in the other place about the manner in which the Government had removed Members from that committee and replaced them with those who would vote these regulations through, but that is a matter for another day and it can be followed by reading Hansard on those committee proceedings.

The Minister said probably the most significant thing at the very end of her speech: these regulations facilitate the Windsor Framework. A lot of the debate is about the benefits of the Windsor Framework compared with the protocol as originally agreed, but the regulations before us are not about implementing the Windsor Framework; they are purely about creating the border for parcels between Great Britain and Northern Ireland. After that, we come on to the Windsor Framework, which is all about the EU law in which it decided, after discussions, to reduce the requirements that would normally be in place to move parcels into the EU for Northern Ireland.

But that is not what is before this Committee. Before this Committee is purely the creation of the parcels border. Whatever the EU then decides to do, whether by agreement or unilaterally, is facilitated by that border. It is our job as parliamentarians to examine the actual regulations before us, not necessarily today, although we can comment on them. The Windsor Framework proposals, which are in EU legislation, are separate, but I will reference them and no doubt they will be referenced by other speakers in this Committee.

The regulations treat Northern Ireland as if it is a foreign country for the purposes of moving parcels. They put in place another piece of the jigsaw of the Irish Sea border. They do not ameliorate or remove it; this is a new creation that is not here at present. Their effect is to separate Northern Ireland from the rest of the United Kingdom in the sense of placing it outside the same single market as Great Britain for postal purposes.

They amend the Postal Services Act 2000 and the Postal Packets (Revenue and Customs) Regulations 2011, so that movements from Great Britain to Northern Ireland cease to be unfettered within the same single market and become fettered by a customs barrier that effectively divides them into two single markets. As a consequence of the legislation before the Committee, postal packages destined for Northern Ireland from Great Britain have to be placed in the same group as packages destined for foreign countries. The definition of “export” is changed to include movements from Great Britain to Northern Ireland. Reference to the United Kingdom has to be removed so that the only references in play are Great Britain and Northern Ireland, with the UK single postal market terminated.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I agree with the noble Baroness, Lady Chapman, on the approach that this Government should, and want to, take to implementing the provisions in the Windsor Framework. The noble Baroness described it as the least worst option for Northern Ireland; the Government describe it as the best option. In reality, there is not a gap between them, because it does restore the smooth flow of trade and protect Northern Ireland’s place in the union. It also delivers a robust framework for solving future issues, as we know they will come up.

The framework delivers by enabling smooth trade between Great Britain and Northern Ireland, resolving the problems that were undermining Northern Ireland’s place in our union and fixing the democratic deficit which has seen Northern Ireland have no say in its laws. It is worth responding at the outset that while we may disagree on the Windsor Framework in this Committee, it is important to be clear that with regard to the approach taken by the Government in the framework and the accusation that it reflects the fact that the Government do not care about Northern Ireland, the opposite is true. The effort put into negotiating for Northern Ireland by my right honourable friend the Prime Minister, and many others across government, is because we care deeply about Northern Ireland and its place in our union.

To provide an answer and reassurance to the noble Lord, Lord McCrea, Northern Ireland is a full part of the United Kingdom in every sense, and we negotiated the Windsor Framework to protect the UK’s internal market and trade between Great Britain and Northern Ireland. We are confident that the framework does this. We reject the claim that the Windsor Framework changes Northern Ireland’s status within the UK.

Nevertheless, while I acknowledge the range of views on the framework in this debate, I encourage noble Lords to recognise the nature of what this statutory instrument provides. It is solely about the powers available to HMRC and Border Force to ensure the improvements in respect of parcels that we have secured through the Windsor Framework are delivered. Focusing on what this SI does provides, in part, some of the answers to the questions put forward to the Committee today. Noble Lords are right that the provisions relating to parcels will come into force at the end of September 2024 and that there is more work to be done in implementing those provisions. That work will be taken forward by the Government, HMRC and the Treasury, working with businesses in Great Britain and Northern Ireland and having discussions with them.

[Baroness Ritchie of Downpatrick (Lab)]

The Minister was describing the work and who would actually be involved in it. Can she provide the Committee with a little more detail about the type of work? Maybe she could elucidate that.

[Baroness Penn (Con)]

I was going to come later to ongoing co-operation with businesses in Northern Ireland and Great Britain, in terms of implementing the provisions when it comes to parcels. For example, we are working through in detail with the couriers and the people who take a lot of this traffic on how we can make it as seamless as possible. If I have anything further to add in my speech, I will do so later.

In respect of the point from the noble Lord, Lord Dodds, on this statutory instrument being about creating a border between Great Britain and Northern Ireland, as I said just now and in my opening speech, this instrument does not put in place the Windsor Framework arrangements. The noble Lord is right that that has already happened, but we disagree that the Windsor Framework or these regulations separate Northern Ireland from Great Britain in the way that he describes. The regulations do not treat movements from Great Britain to Northern Ireland as exports or movements from one country to another; they make some powers that are available in respect of international movements available in respect of movements from GB to NI. However, it is not the case that they treat them the same as parcel movements that are international or exports.

As the noble Baroness, Lady Chapman, said, these arrangements are unique. The Windsor Framework is a bespoke set of arrangements. If you move a parcel internationally, such as to your grandmother in France rather than in Northern Ireland, you and she would need to make customs declarations and possibly pay tariffs; that is not the case for the arrangements for GB to NI. Similarly, if you buy from an international retailer, the package goes through customs when it enters the UK; as I set out, that is not the case for GB to NI orders from internet sellers to individuals.

[Lord Dodds of Duncairn (DUP)]

Does the Minister accept, however, that the reason for what she has set out is in EU law, and that nobody in Northern Ireland is elected and nobody in the EU is accountable to anyone in Northern Ireland—indeed, in the United Kingdom—for those laws? If those laws change—for example, if the EU changes, tweaks or modifies them—that is what will apply. So the Minister cannot give any guarantee or assurance that the position she is outlining will continue to pertain and apply because no Government, nor this Parliament, will have any power in that respect.

[Baroness Penn (Con)]

The Windsor Framework is a bilateral agreement. To the noble Lord’s point, there are detailed governance arrangements around the Windsor Framework. Either side can raise issues through those mechanisms. It is not the case that the EU could just impose new requirements without consultation. Of course, the Stormont brake will be available to the Northern Ireland Assembly, when it is sitting.

With regards to the lack of an impact assessment, that point takes me back to what this statutory instrument itself does. It does not impose any requirements on businesses; it is solely about the powers for HMRC and Border Force. The Government are dealing with the resources available to those agencies in the normal way. I cannot remember who asked about this—it was the noble Baroness, Lady Ritchie of Downpatrick, I think—but we will of course ensure that resources are available, in particular to HMRC, to ensure that these agencies can engage with businesses in order to ensure that the process is as smooth as possible.

[Lord Purvis of Tweed (LD)]

I understand the Minister’s point with regards to the powers for HMRC under these regulations, but it assumes that HMRC will not then use those powers to ask businesses to carry out certain procedures. If that is the case, there will be an impact on businesses. Secondly, my reading of Regulation 3 is that, for the first time, a postal packet going from GB to Northern Ireland will now be categorised alongside a foreign postal packet. That is what the regulation says.

[Baroness Penn (Con)]

Again, that takes me back to what these regulations do versus the wider process around how parcels will move under the Windsor Framework. These powers do not and cannot do anything to impose anything on businesses.

I come to a few of the points made by the noble Lord, Lord Purvis, about understanding and beginning to quantify how the new process will work. It is not possible to give precise numbers on volumes of parcels and how they will fall into the different lanes, because volumes are not consistent year on year. However, based on estimates and commercial information provided by the parcel industry, we understand that about 5% of parcels are sent from business to business, with 90% moving from businesses to consumers and 5% from individuals to individuals. Based on those figures, for 95% of movements no difference will be felt in how customs operate now, under the easement that we have to the protocol. Compared to the protocol itself, they will face significantly fewer burdens.

There will be no routine checks or controls applied to consignments, with interventions made only on a risk-based, intelligence-led approach. This is decided by HMRC and Border Force. We expect a very small proportion of parcels to be checked or opened, only when there is reason to suspect circumvention of the rules.

The 5% of business-to-business goods will be treated the same, as if they were moving in freight. They can access the UK internal market scheme and the green lane, and they will benefit from radically reduced checks and data requirements compared to those under the protocol. Businesses can apply to HMRC to become a trusted trader and access the green lane. It is a simple process. Tens of thousands of traders are already in the scheme, and the Windsor Framework extends eligibility to it further. New arrangements under the framework are being phased in over nearly two and a half years. We will continue to use that time to undertake extensive engagement with stakeholders, including businesses in Northern Ireland and Great Britain, trader support services and parcel operators, to provide support and ensure that everyone is ready.

[Baroness Hoey (Non-Afl)]

As part of that work, will the Government look at the extra cost to business? There will definitely be an extra cost to businesses in GB that want to send to Northern Ireland, whether they go through the green or the red lane. Those costs will eventually end up with consumers in Northern Ireland. Do the Government agree?

[Baroness Penn (Con)]

The whole purpose of the Windsor Framework is to reduce any extra costs and burdens from moving from business to business in Northern Ireland. We need to put this in the context of the figures that I gave earlier about personal packages and business-to-consumer packages which, on some estimates, account for around 95% of parcel movements from GB to NI. The aim of our ongoing engagement with parcel operators, in both GB and NI, is to make sure that this process is as easy and seamless as possible for those that rely on existing information and data, where that is possible.

Several noble Lords also raised the question of timing. As I said, provisions under the Windsor Framework are being brought in over two and a half years and will come into effect on 30 September 2024. As I said in opening, although the majority of Northern Ireland protocol requirements on parcels were not implemented as the Government sought to renegotiate arrangements, we accepted that certain categories of goods moved in parcels, as in freight, should require customs declarations to ensure that both their entry to Northern Ireland and possible onward movement to the EU were notified to HMRC.

These requirements related only to a specific list of prohibited and restricted goods that includes, for example, certain drug precursor chemicals, endangered animals, et cetera, covered under CITES. The powers we are taking now will allow those requirements to be monitored and enforced from now, and those same powers will be used in respect of the new parcels arrangements that come into effect on 30 September 2024.

Bank of England: Interest Rate Policy

Baroness Penn Excerpts

Wednesday 12th July 2023 Lords Chamber

[Lord Forsyth of Drumlean (Con)]

My Lords, I declare my interest, as in the register, as chairman of a bank.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, we constantly monitor the UK economy’s performance and outlook, and we acknowledge the pain that rising interest rates are causing for many households. However, setting interest rates is the responsibility of the independent Monetary Policy Committee of the Bank of England. The Government do not comment on the conduct or effectiveness of monetary policy. We will continue to support the MPC as it takes action and focuses on making the tough decisions necessary to tackle inflation.

[Lord Forsyth of Drumlean (Con)]

My Lords, I fully understand the need to respect the independence of the Bank of England, but that it is not the same as denying it being subject to proper accountability. The Bank of England was responsible for a huge increase in the money supply through quantitative easing—which resulted in part in the inflation that we are now experiencing—despite warnings from Andy Haldane, its chief economist at that time, that that would result in inflation. Andy Haldane is now suggesting that there may be an overreaction and overcorrection in putting interest rates up to the extent that they are being. This will cause misery to millions of people. The Bank of England should surely be accountable for this.

[Baroness Penn (Con)]

My Lords, I agree with my noble friend that the Bank of England should be and, indeed, is accountable for the decisions that it makes, but it is not for government to comment on the conduct or effectiveness of monetary policy. He is right that high levels of inflation and, therefore, high interest rates, are causing pain. That is why the Government are taking action to support people at this difficult time, including the mortgage charter, agreed by my right honourable friend the Chancellor, that covers around 90% of the market and gives people options when they are facing higher mortgage rates to make sure that their payments continue to be affordable.

[Baroness Kramer (LD)]

My Lords, I have great sympathy with the Question from the noble Lord, Lord Forsyth. I would like to hear from the Minister that there will be no attempt to compromise the independence of the Bank of England, but that that does not mean that improvements cannot be made; for example, to counter what many of us think is an underlying flaw of groupthink and lack of diversity that leads the Bank to decisions that could be made more optimal with a different set of parameters.

Does the Minister also recognise that the Government themselves could influence inflation far more effectively if they focused on doing so? For example—to name just three actions—they could have dealt with the staff shortages that have so driven inflation; they could have done a great deal more, much earlier, to deal with price gouging by many of our major supermarkets; and they could have kept in place the energy price support scheme, which helped SMEs hold down their prices. Will the Government then take responsibility for their share in not taking those steps to stem inflation?

[Baroness Penn (Con)]

On the noble Baroness’s first point, my initial Answer set out that the Government continue to be committed to the independence of the Bank of England. She is right that government policy can also affect inflation. The OBR said that the energy price guarantee brought inflation down by around two points. Our labour market supply measures, including expanding access to childcare, were the biggest supply side impact in a Budget that the OBR has ever measured. If we were to provide direct subsidies to mortgages, as the Liberal Democrats propose, that would have an inflationary effect, meaning that interest rates would be higher for longer.

[Baroness Meacher (CB)]

My Lords, if the Government feel unable to comment on Bank of England policy, to whom is the Bank of England accountable?

[Baroness Penn (Con)]

The Bank of England is accountable to both the Government and Parliament. The noble Baroness referred to a report being done by the Economic Affairs Committee in this House. I am sure we will pay close attention to the outcomes of that.

[Lord Howell of Guildford (Con)]

Has it occurred to my noble friend’s Treasury colleagues that the stream of increases in Bank of England interest rates is both deflationary, obviously, and inflationary, in that every 1% increase in the interest rate adds between £15 billion and £20 billion to government debt servicing? Also, since the Government have up to £30 billion or £50 billion per increase in the RPI level, any impact of these interest rate increases on RPI further increases government spending. We really are looking at a double-edged sword. Other, more direct measures are obviously needed to reduce RPI, the pressure for pay demands and all sorts of other inflationary effects.

[Baroness Penn (Con)]

While I will not be tempted by my noble friend to comment on the conduct of monetary policy, I agree that, in the context of high inflation, fiscal responsibility and keeping government borrowing under control are absolutely essential. That is why the Government are committed to that.

[Baroness Chapman of Darlington (Lab)]

My Lords, what is it about the Government’s handling of the economy that means that, with near 0% growth, inflation is still high, despite the Prime Minister promising to halve it, and higher for longer in the UK than in many similar economies? How does the Minister think that 1 million households facing a £500 a month increase to their mortgage payments by the end of 2026 will cope? How concerned should we be at the Government’s voluntary agreement with the banks, which means that over 1 million households will miss out on the support that Labour’s mandatory scheme would have brought?

[Baroness Penn (Con)]

My Lords, growth is better this year than predicted and expected by some. The UK is not alone in facing high inflation. Core inflation in the UK is lower than in more than half of Europe, but we face particular underlying factors that interact with the global challenges causing inflation. The energy shock has been felt more keenly in the UK because of our historical dependence on gas, and we have labour market tightness, due in part to a rise in activity during the pandemic. That is why we are focused on measures to tackle these problems. I talked about the energy price guarantee, which brought down inflation by around two points, and our measures to address childcare. I say to the noble Baroness, reflecting the point from my noble friend, that fiscal responsibility and government borrowing have a part to play in this. That is why Labour’s plans to spend £28 billion a year of additional borrowing would be inflationary and make the problem worse.

[Lord Desai (CB)]

My Lords, would the Minister not agree that, although independence of the Bank of England is all right, what we need is competence? The Bank of England was more competent when it was not independent than it is now when it is.

[Baroness Penn (Con)]

Much as noble Lords continue to ask me to comment on the conduct of monetary policy by the Bank of England, as I said, the Government do not comment on the conduct or effectiveness of monetary policy. We continue to support the MPC as it takes action, and we focus on making the tough decisions necessary to tackle inflation.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, does the Minister not realise that this mortgage rate misery comes on top of the huge increase in the cost of energy and the continued increase in food prices and other costs? How do the multi-millionaires who run this Government find out how ordinary people are affected?

[Baroness Penn (Con)]

The noble Lord does not reflect on the action that has been taken by this Government that has supported those who struggle most to meet the rising cost of living, with more than £90 billion of support last year and this year focused on those who need it the most, including the energy price guarantee, direct support with energy bills and cost of living payments worth hundreds of pounds to millions of families across the country.

[Lord Rooker (Lab)]

Is the Minister aware that the Select Committee has received abundant evidence that central bankers talk too much?

[Baroness Penn (Con)]

I am not aware of all the evidence that the Select Committee that the noble Lord refers to has received, but I am sure that once the Select Committee produces its report the Government will read it with interest.

[Lord Kamall (Con)]

My Lords, many people recognise that we have an independent Bank of England, but we also have a Bank of England that is supposed to meet a target of 2% inflation. Given that the Bank has continuously failed to meet that target—I understand also that government can contribute to this—one would expect the Bank either to comment on government policy which it saw as inflationary or, at the same time, to be accountable for not holding to its target. Given what the Minister says about tempting her or otherwise to talk about the Bank of England and its policy, it is important that people understand that when the Bank fails to meet its target it has to be held accountable to someone, and many noble Lords have not seen that accountability.

[Baroness Penn (Con)]

My Lords, when the steps were taken to make the Bank of England independent, measures were also put in place to ensure that it is accountable to the Government and to Parliament for its decisions.

[Baroness Bennett of Manor Castle (GP)]

My Lords, the Minister has referred to the drivers of inflation, but she did not mention greedflation—the fact that, as the OECD figures which came out this week show, British company profits were boosted by almost one-quarter between the end of 2019 and early 2023, faster than nearly any other state’s. In the last Question, we referred to the fact that we have a huge lack of competition across our economy. Four, five or six big companies dominate all the sectors, often cross-owned by hedge funds. Are the Government going to do something about greedflation?

[Baroness Penn (Con)]

While the Government do not recognise the picture that the noble Baroness has painted, we are looking carefully at the data and ensuring that competition is working properly. That is why my right honourable friend the Chancellor met the major regulators last week or the week before, I believe, and agreed a plan of action in each of those areas to ensure that consumers are getting a fair deal.

[Lord Londesborough (CB)]

My Lords, on the subject of talking too much, as the noble Lord, Lord Rooker, has just raised, how helpful was it when the Prime Minister at the beginning of this year set a personal pledge to halve inflation from 10% to 5% when the Bank of England was forecasting 3.9% and holding a target of 2%? What does that do for the credibility and independence of the central bank?

[Baroness Penn (Con)]

My Lords, the Government have always been clear that we want to halve inflation by the end of this year on the path to delivering the 2% target to which the noble Lord referred. The primary driver for that is action by the MPC, which the Government support, but it is also important that the Government make sure that fiscal policy acts in support of monetary policy and that we take action in the short term to bring down inflation; for example, through the energy price guarantee. It is important too that we take action on some of the longer-term drivers of inflation; for example, through improving energy security and supply and tackling things, such as labour supply, which are part of the drivers of where we are today.

Consumer Rights Act 2015 (Enforcement) (Amendment) Order 2023

Baroness Penn Excerpts

Wednesday 12th July 2023 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Consumer Rights Act 2015 (Enforcement) (Amendment) Order 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the order will enable trading standards to fully exercise its investigative powers to check compliance with the Tobacco Products (Traceability and Security Features) Regulations 2019. Smoking is the single leading cause of preventable death and disease in the UK, accounting for approximately 76,000 deaths a year. The Government are committed to addressing the harms of tobacco and have announced an ambition for England to become smoke-free by 2030, supported by a package of measures to cut smoking rates.

Alongside that approach, HMRC has a role to play in charging duty on tobacco products to deter smoking, as well as raising revenue to cover the cost to the NHS. HMRC has another key role in tackling the illicit market. One of the main challenges in tackling smoking prevalence, aside from the addictive nature of nicotine, is the illegal trade in tobacco products. That increases both the affordability and health risks for smokers.

The UK’s tobacco track and trace system, introduced in 2019, helps to prevent the illegal trade in tobacco products by making it more difficult for smugglers and counterfeiters to operate. The system provides a way to verify the authenticity of tobacco products and ensures that they have been legally procured and distributed. Tobacco products are tracked from point of manufacture through to point of retail, and at all stages in between.

To supply tobacco for sale in the UK, an entity must be registered for tobacco track and trace and must obtain an economic operator ID. Over 50,000 businesses are already registered, but there are inevitably those who deliberately choose to operate within the illicit supply chain, and we need to tackle such activity.

At Budget 2020, the Government announced plans for tougher, more effective sanctions to tackle the sale of illicit tobacco. An HMRC consultation which ran from December 2020 to February 2021 proposed that the sanctions be linked to the tobacco track and trace system and available for use by both HMRC and trading standards. HMRC and trading standards already work closely together to tackle the illicit tobacco market—for example, through their joint initiative of Operation CeCe. Under that initiative, illegal tobacco products are seized from retail and residential premises, disrupting the market, and preventing fraud.

Respondents to HMRC’s consultation supported the introduction of tougher penalties for illegal products found in retail and residential premises. They also supported extending powers to trading standards to better tackle non-compliance.

Primary legislation providing the powers to make regulations to introduce the new sanctions was introduced in the Finance Act 2022. Its provisions include powers to make regulations to issue penalties of up to £10,000, seize product involved in a contravention, and exclude retailers from the tobacco track and trace system, thereby restricting their ability to buy duty-paid tobacco for retail purposes.

The consequent regulations required for these sanctions to take effect will be achieved by the making and laying of two statutory instruments. The first is the Tobacco Products (Traceability and Security Features) (Amendment) Regulations, which was laid on 12 June. It sets out the detail of the new sanctions and how they will be implemented. It confers investigation functions on trading standards specifically related to track and trace. The second SI is the Consumer Rights Act 2015 (Enforcement) (Amendment) Order 2023, which we are debating. This will make a small amendment to the Consumer Rights Act 2015 to allow trading standards to exercise its existing powers under the Act in relation to the investigative function conferred under the Tobacco Products (Traceability and Security Features) (Amendment) Regulations 2023.

That function will see trading standards investigating breaches of tobacco track and trace and referring them to HMRC, which will administer the sanctions. This approach will play to both organisations’ strengths. Trading standards will have an additional tool to deal with what it finds during its compliance visits. It will then be able to refer information to HMRC, which will administer the penalties and ensure that the most appropriate sanction is applied and enforced. These sanctions will serve as a strong deterrent against businesses involved in street-level distribution of illicit tobacco, helping to protect the public and our economy. I therefore beg to move.

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[Lord Livermore (Lab)]

My Lords, we support this measure. I shall reiterate a couple of facts mentioned by the Minister. Smoking is the biggest cause of preventable death in the UK. It accounts for some 76,000 deaths each year, with half of all smokers dying of a smoking-related illness. It is estimated that smoking costs NHS England over £2.5 billion every year. Alongside high-level policy, such as the smoking ban introduced by the last Labour Government in the Health Act 2006, evidence suggests that high duty rates have had a positive impact by reducing the number of people who start smoking and increasing the numbers seeking to cut down and quit.

With 21% of cigarettes sold in the UK currently illicit, clearly the illegal trade in tobacco products undermines these important contributions to public health. It deprives the Exchequer of vital revenue and reduces the deterrent effect of high duty rates. We therefore support harsher penalties for those who seek to avoid paying such duties and commensurate powers for trading standards to tackle those who procure, supply and distribute illegal tobacco and profit from the illegal trade.

I would like to ask the Minister three questions. First, she mentioned that the combined application of fines, powers to seize illicit products and the new sanctions is designed to have a deterrent effect on retail outlets and street-level distributors. This point was also made by the noble Baroness, Lady Kramer. Are there any plans to communicate these powers to potential offenders so that the deterrent effect might be enhanced? Secondly, where illicit product is sold through retail outlets, what data exists on whether the owner of a retail outlet is aware of such sales versus illicit sales carried out surreptitiously by an employee, and therefore whether enforcement measures are always correctly targeted? Finally, what communication, co-operation and co-ordination exists between HMRC and the Border Force to tackle the supply of illicit product at source?

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their contribution to this short debate. I am afraid that the speed of our debate might mean that I will need to write to them regarding some of their questions. I will address the ones I can.

The noble Baroness, Lady Kramer, asked whether the cost of living pressures have caused an increase in the illicit market. My understanding is that there has been a negligible increase in it. Some smokers are switching, for example, to hand-rolling tobacco from ready-made cigarettes to save money. That is the kind of behaviour shift we are seeing.

As for when we will be implementing the provisions provided for in the two statutory instruments, trading standards will start work on 20 July when the tobacco tracking and security SI commences.

Regarding the types of tobacco that will be covered, I can say that the tobacco track and trace system applies to only cigarettes and hand-rolling tobacco, but this makes up approximately 97% of the tobacco market. The system and the penalties are intended to be extended to other tobacco products, such as cigars, cigarillos and shisha, but that will be from May 2024. There is a plan to extend over the remaining market.

Both the noble Baroness, Lady Kramer, and the noble Lord, Lord Livermore, asked about the deterrent effect. We should see a decrease in the current tax gap for tobacco duty. We anticipate that we will see an increase in compliance activities undertaken by trading standards. The visibility of businesses selling illicit products being penalised will have the deterrent effect that both noble Lords asked about.

Tackling this issue at the smaller scale, where trading standards visits premises—the noble Baroness, Lady Kramer, also talked about links to more organised crime—will continue to be a focus. Activity in that area is driven by HMRC, which is the delivery partner, rather than trading standards.

The noble Baroness asked whether outlets engaged in underage sales will be targeted under this measure. My understanding is that, in each local area, trading standards looks at the priorities for targeting enforcement activity. It has powers when it comes to underage sales. The effect of this SI is to ensure that trading standards can make use of the enforcement mechanisms under track and trace, in addition to its powers on underage sales, plain packaging and other consumer issues. The priorities for trading standards visits are set locally, rather than nationally.

The noble Baroness, Lady Kramer, asked about e-cigarettes and vapes. Track and trace does not apply to them but, as she may be aware, we have a call for evidence open at the moment that focuses particularly on the use of vapes among underage consumers or children, which will look at that issue more closely.

On the question of the public health benefits of this measure versus revenue protection, they are mutually reinforcing. Illicit tobacco can have health implications, because it is not subject to the same health and safety regulations as legitimate products. It has been found to contain arsenic, mould and rat droppings, for example, so that issue is at play. The availability and affordability of tobacco products also impacts on smoking rates, which is why the duty that we have in place helps to reinforce our strategy to stop smoking. Making sure that people do not engage in the illicit market also reinforces that strategy.

I will not pretend that protecting the duty owed to the UK Government is not an important objective for HMRC; it is one that we continue to support. However, it mutually reinforces the wider ambition for England to become smoke-free by 2030. As I said, the Department of Health and Social Care announced a package of measures to cut smoking rates, acknowledging that we need to go further in this space. They include expanding access to new treatments, rolling out a national incentive scheme to help pregnant women quit, and using a new approach to health warnings.

I am conscious that I have not answered all noble Lords’ questions, but I undertake to follow up in writing. There is broad support for the SI, but I am sure that the answers to those additional points will help your Lordships to understand how it will have the impact that we all hope it will have. I therefore commend this instrument to the Committee.

Motion agreed.

Supply and Appropriation (Main Estimates) (No.2) Bill

Baroness Penn Excerpts

Committee stage & 2nd reading & Committee negatived & 3rd reading
Monday 10th July 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

Bill read a second time. Committee negatived. Standing Order 44 having been dispensed with, the Bill was read a third time and passed.

Gross Domestic Product: Wales and the UK

Baroness Penn Excerpts

Thursday 6th July 2023 Lords Chamber

[Lord Wigley]

To ask His Majesty’s Government what are their latest figures for the gross domestic product per head of population for (1) Wales, and (2) the United Kingdom.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the latest Office for National Statistics data show that in 2021 gross domestic product—GDP—per head, at current prices, was £25,665 for Wales and £33,745 for the UK. The UK Government have made significant interventions aimed at boosting GDP in Wales and across the UK, including the £4.8 billion levelling-up fund, the £2.6 billion UK shared prosperity fund and delivering on investment zones and freeports.

[Lord Wigley (PC)]

My Lords, do these figures not speak volumes? They underline the failure of successive Governments to close the gap between Wales and England. With the relevant economic levers being shared between Whitehall and Senedd Cymru, is it not essential that the two co-operate on these economic matters? Does the Minister appreciate how much this is undermined by the refusal of the Chief Secretary of the Treasury to attend the Senedd’s finance committee? Is she aware that her colleague, the noble Lord, Lord Bourne, told that committee in Cardiff last week that a duty should be placed on the Chief Secretary to attend such committees when required? He said that

“if it needs putting on a statutory basis … that needs to happen”.

Does she agree?

[Baroness Penn (Con)]

My Lords, perhaps I can provide a little reassurance to the noble Lord. Yes, the gap between GDP per head in Wales and the rest of the UK is too large, but Wales has had the highest growth in GDP per head since 2010 of all regions and nations across the UK, increasing by 15.7% compared with 6.9% across the UK. He talked about the Welsh Government and the UK Government working together. That is something that we have done successfully on city and growth deals across Wales that were developed jointly by the UK Government and the Welsh Government. This included £500 million for the Cardiff capital region and over £100 million in north Wales and Swansea. On his point about the Chief Secretary to the Treasury, he works hard and closely with the devolved Administrations—I know that is something he is very committed to—but I will take the noble Lord’s specific point away.

[Lord Anderson of Swansea (Lab)]

My Lords—

--- Later in debate ---

[Lord Anderson of Swansea (Lab)]

May I invite the Minister to examine all the relevant indices of poverty and deprivation? She will find that Wales is mostly at the bottom, with 75% of the average, whereas the Government in levelling up concentrates simply on north-south. Should not the Government by contrast look also at the east-west divide?

[Baroness Penn (Con)]

I reassure the noble Lord that levelling up is not viewed through the prism that he says it is. When it comes to the looking at the needs in Wales and the funding to be matched to them, that is what we do through the Welsh fiscal framework. In the 2021 spending review, the largest annual block grant in real terms was assigned to Wales since the devolution Acts were passed.

[Baroness Humphreys (LD)]

My Lords, for around 20 years, west Wales and the valleys qualified for EU Objective 1 funding, precisely because our GDP was among the lowest in the EU. With the figures for Wales published in May showing a decrease of 2.1% in GDP over the longer term in Wales, compared with the figures for the rest of the UK showing an increase of 2%, are we in Wales, in the Minister’s opinion, facing a short-term blip, or are we heading for a gradual return to our pre-Objective 1 status, as a result of the loss of EU funding?

[Baroness Penn (Con)]

The statistics that the noble Baroness refers to are more experimental than the ones that I used in my Answer, but they are being refined all the time and they can be subject to greater volatility due to the smaller size that they represent. However, the Government are delivering on their commitment to replace European funding in Wales. As I set out in my earlier Answer, that is just one of the UK Government’s investments in Wales that recognise its great potential to grow even further.

[Lord Browne of Ladyton (Lab)]

My Lords, talking of figures speaking volumes, the Minister will be aware that last month the annual fraud indicator for the United Kingdom, which of course includes Scotland and Wales as well as England and Northern Ireland, assessed it at £219 billion. Are those fraudulent transactions, the muling of that money and the transfer of it from shell company to shell company, and the export of it in crypto assets, counted as economic activity and therefore aggregated into GDP? When the money comes back into the country to buy houses and land, works of art and other things, is it counted as inward investment?

[Baroness Penn (Con)]

The classification of these matters is for the ONS, and I shall get the ONS to write to the noble Lord.

[Lord Livermore (Lab)]

My Lords, the Government’s approach to levelling-up funding has forced local authorities throughout the UK to compete in a process that lacks any published criteria. In the second round of allocations earlier this year, local communities across each of the four nations of the UK, including Wrexham, Moray, Bolsover and Belfast, each had bids rejected without any public explanation. Ahead of the third round of levelling-up funding, will the Minister work with ministerial colleagues, the devolved Governments and local authorities to improve the transparency of the bidding process so that cities, towns and villages across the UK can have access to funding that is both fair and seen to be fair?

[Baroness Penn (Con)]

Just to reassure the noble Lord with regard to Wales, in the first two rounds of the levelling-up fund, £330 million has been invested so far. That exceeds the commitment that 5% of those funds would be invested in Wales, but we always seek to improve our processes around those issues, and I shall happily commit to working with colleagues in the Department for Levelling Up to make sure that we build on the success that we have had so far with this fund.

[Lord Berkeley (Lab)]

My Lords, will the Minister take forward with much more vigour the idea of Celtic Sea offshore wind, which can only really be built in places such as Port Talbot, where there is deep water and lots of land? That might help redress some of the economic disasters that other noble Lords have spoken about.

[Baroness Penn (Con)]

My Lords, the UK has an excellent track record in delivering offshore wind, and I am sure that that will continue. As I have said, we are investing across Wales, and that includes two freeports in Wales—the Celtic Freeport and the Anglesey Freeport, which will both be backed by policy and planning permissions, as well as up to £26 million in funding in each area.

[Lord Bird (CB)]

My Lords, as long as there is a situation in government where most of the money spent is on emergency situations and coping with poverty and very little is spent on prevention of poverty and skilling people away from poverty, we will continue arguing about GDP and whether it is high or low in Wales or England. We do not spend money on dismantling poverty—we spend it on making the poor as comfortable as possible.

[Baroness Penn (Con)]

My Lords, I agree with the noble Lord about the importance of investing in prevention. That is why we have invested in our education system, and we have seen our educational outputs improve under this Government. It is why we are investing in prevention in our NHS. We also need to capture the importance of other aspects that contribute to our country when we look at these matters. That is why we are looking at incorporating measures when it comes to well-being, for example, and not just looking at the narrow measures of GDP.

[Lord Hain (Lab)]

My Lords, if the positive economic figures that the Minister cited for Wales are correct, is that because we have a Welsh Labour Government?

[Baroness Penn (Con)]

It is hard to tell from the other side whether there is a success story or not when it comes to Wales. I think that the best success comes when the UK and Welsh Governments work together in the interests of the people of Wales, and the record that we can see is testament to that.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, can I ask a question where I think, for once, the noble Baroness, who is an excellent Minister, might be able to give me a positive answer? The Advocate-General for Scotland has agreed, at my request, to instruct his officials to investigate ultra vires expenditure by the Scottish Government. That is a great step forward. Can the Minister give an assurance that her officials in the Treasury will work co-operatively with the Advocate-General’s officials?

[Baroness Penn (Con)]

I can give the noble Lord that assurance.

Income Tax Threshold

Baroness Penn Excerpts

Tuesday 4th July 2023 Lords Chamber

[Lord Balfe]

To ask His Majesty’s Government what plans they have, if any, to adjust the threshold for the higher rate income tax of 40 per cent to account for inflation.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

The income tax higher rate threshold is still high enough to protect the vast majority of people from paying the higher rate of income tax. Around 80% of all income tax payers pay at the basic rate. The Government must ensure that the tax system supports strong public finances, and it is right that those who earn more contribute more.

[Lord Balfe (Con)]

I thank the Minister for her reply, but I remind her that paying tax at 40% used to be a sign of achievement in this world and the middle classes—the middle earners on whom the prosperity of this country depends—are getting gradually poorer, with 1 million more of them paying higher rate tax in the last two years. With the withdrawal of child benefit, the effective rate of tax between £50,000 and £60,000 is around 61%. I know the Labour Party is not standing for lower taxes either, but does the Minister really believe that the country is going to be incentivised to perform well if it is crippled by this level of taxation?

[Baroness Penn (Con)]

My Lords, of course, the Government want to bring taxes down. It is worth reminding noble Lords that since 2010 we have nearly doubled the personal allowance and, this year, around 30% of those with income are projected to pay no income tax at all. In our current circumstances, we need to be fiscally responsible, and the best tax cut we can give people is to cut inflation.

[Lord Sikka (Lab)]

My Lords, the income tax threshold and personal allowances are frozen at the April 2021 level until 2027-28. At that time, the real value of the personal allowance—to which the Minister just referred—will be less than it was in 2013. As a result of government policies, an additional 4.2 million people are expected to pay the basic rate of income tax this year; that is, 20% plus national insurance of 12%. Can the Minister explain the rationale for extra taxes on the poorest, already hit hard with negative wage rises and rising bills? How does the Government’s hiking of the taxes of the poorest reconcile with their levelling-up, or is it squashing-down, agenda?

[Baroness Penn (Con)]

My Lords, I could not disagree more with the noble Lord. On the personal allowance, the increases we have seen under this Government since 2010, even with the freeze in thresholds, will be more than if it had been raised in line with inflation. We have put in place unprecedented support for people after the two major shocks of Covid and Russia’s invasion of Ukraine. We need to consolidate our public finances in the face of that and it is right that everyone contributes. We have looked to change corporation tax rates while protecting the smallest businesses, and we have frozen tax thresholds. We brought down the additional rate threshold at the Autumn Statement 2022, which is a sign of those with the broadest shoulders bearing the biggest burden.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, does the Minister agree that the impact of inflation on taxpayers is corrosive, and therefore the sooner the Bank of England gets inflation back to target, the better? Does she further agree that the amendment introduced by the noble Lord, Lord Rooker, along with Audrey Wise back in 1977 is perhaps the most important principle informing our tax system?

[Baroness Penn (Con)]

On the first point, I absolutely agree with the noble Lord. As I said in answer to my noble friend, bringing inflation under control is the most effective tax cut we can give to families across the country. On the second point, I will have to check the record; it was at least a decade before I was born.

[Baroness Kramer (LD)]

My Lords, I do not suggest cuts in the tax take in our current financial condition, but I question the distribution of the tax burden. Can the Government explain why they have chosen to use the threshold rather than the tax rate? By using the tax rate, they could certainly target the higher level of tax against those with the broadest shoulders most able to carry it. By using and freezing the threshold, they have dragged into the higher tax rate many people on very middling incomes, who are now experiencing the highest increase in taxes, according to the IFS, since 1979. Those are the people who, as the noble Lord, Lord Balfe, said, drive our economy, but they are also the group suffering severely from the cost of living increases.

[Baroness Penn (Con)]

I reassure the noble Baroness that the income tax system is still highly progressive: the top 5% are projected to pay nearly half of all income tax in 2023-24 and the top 1% are projected to pay more than 28% of all income tax. The noble Baroness is right that those on middle incomes are feeling the squeeze; that is why we are absolutely focused on supporting the Bank of England in its mandate to get inflation down.

[Lord Leigh of Hurley (Con)]

Does my noble friend agree that the one tax that goes up because of inflation is receipts from inheritance tax? The latest figures show that inheritance tax receipts grew by 14% last year. As the noble Baroness, Lady Kramer, has pointed out, people are dragged into the fiscal net who were never intended to pay inheritance tax on their estates—which are essentially quite modest family homes. Is there not an urgent need to address the threshold rates for inheritance tax?

[Baroness Penn (Con)]

Since 2010, we have introduced additional allowances for people in certain circumstances to pass on up to £1 million to their direct descendants. Inheritance tax makes an important contribution to our public finances, so any changes in that area would need to be properly funded.

[Baroness Chapman of Darlington (Lab)]

My Lords, the former Chancellor and current Prime Minister says that he wants to cut people’s taxes, yet under his watch the tax burden has reached a 70-year high. As other noble Lords have observed, more people are paying more income tax, wiping out the benefits of previous changes to the personal allowance. Can the Minister understand the frustration of those who work hard and pay their taxes only to see non-doms and those with £2 million pension pots given preferential treatment by this Government?

[Baroness Penn (Con)]

My Lords, we have worked hard to put tax cuts in place for working people, which is why we have raised the personal allowance. The increase to the starting threshold for paying national insurance was raised last year by the largest single amount, helping people who are currently facing challenges with the cost of living. The noble Baroness mentioned the changes we have made to pensions tax. That is to try to keep experienced professionals in our public sector workforce, from doctors to head teachers and members of the military. Those changes were made for the right reasons and will have the right effect.

[Lord Kirkhope of Harrogate (Con)]

My noble friend is quite right about the need to tackle inflation above all else. In the same way as the Government are discouraging excessive wage demands because they are inflationary, is it not correct that any attempt to change the tax system to chase inflation would be equally dangerous for the economy?

[Baroness Penn (Con)]

My noble friend is absolutely right. That is why, when we have looked at what support we can put in place for people, our number one aim is not to make the problem of inflation worse. We were able to do that through announcing the mortgage charter, which will provide important relief to people struggling with higher interest rates while not making the problem worse.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, is the Minister aware that the noble Lord, Lord Balfe, and others are lucky that they do not live in Scotland, where middle-income taxpayers pay even more tax, which the Scottish Government then use in areas where they have no responsibility—such as a Minister for Independence, serviced by 20 UK civil servants and paid for by our taxes? It is about time the Treasury did something about that. When will the Government do it?

[Baroness Penn (Con)]

I absolutely agree with the noble Lord that the UK income tax system is more competitive than the Scottish system and that we deliver better value for money.

[Lord Brownlow of Shurlock Row (Con)]

My Lords, yesterday the Competition and Markets Authority showed that consumers were charged 6p a litre more than wholesale prices justified. Obviously, those excess profits will be taxed. Do the Government think they should be taxed at more than the current rate?

[Baroness Penn (Con)]

My Lords, we have been clear that we will take the findings of the CMA very seriously and put in place a system to ensure that we do not see future excess profits in a similar way.

Finance (No. 2) Bill

Baroness Penn Excerpts

Committee negatived & 3rd reading
Tuesday 4th July 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, we are here to debate the annual finance Bill, introduced in the House of Commons following the Budget on 15 March. At the Budget, my right honourable friend the Chancellor was clear-sighted about the global headwinds we are facing. We are all familiar with the challenge on inflation as we work through the impacts of the pandemic and of the energy crisis triggered by Putin’s invasion of Ukraine.

In the face of these challenges, the Prime Minister has set out his key economic priorities: to halve inflation, get our national debt falling and secure economic growth. The finance Bill we are debating today is an essential plank in our plan to deliver this. It takes forward measures to support enterprise and grow the economy by encouraging business investment and helping to increase the number of people in work. It legislates for announcements made at previous fiscal events which take advantage of our opportunities outside of the EU and which reinforce our commitment to financial stability and sound money, and it implements the tax measures needed to continue improving and simplifying our tax system to ensure it is fit for purpose.

I turn to the substance of the Bill in those areas, starting with measures to support growth. This Government recognise how important private sector investment is to growth. That is why the Chancellor has set out his long-term vision to make the UK an attractive location for innovators and entrepreneurs, with a particular focus on key growth sectors of digital technology, green industries, life sciences, advanced manufacturing and the creative industries.

That is also why this Bill lowers business taxes to incentivise investment and tackle the productivity gap. Following the end of the super-deduction, the Bill introduces full expensing for the next three years. This means that for every single pound a company invests in qualifying plant or machinery, its taxes are cut by up to 25p. This will result in a corporation tax cut worth £9 billion that the OBR has said will increase investment by 3% for every year it is in place. It will also make us the only major European country with full expensing and give us the joint most generous capital allowance regime of any advanced economy—securing the UK’s position as a global leader.

The Government are committed not only to supporting the growth of established businesses but to providing a boost to start-ups and young companies. The Bill therefore legislates for an increase in the amount of seed enterprise investment scheme funding that companies can raise over their lifetime from £150,000 to £250,000, an increase in the company gross asset limit from £200,000 to £350,000, an increase in the company age limit from two to three years and an increase in the annual investor limit from £100,000 to £200,000. It also introduces changes to the enterprise management incentives, or EMI, scheme to simplify the process to grant options and reduce the administrative burden on participating companies, as well as changes to the company share option plan, or CSOP, rules and limits. Since 6 April 2023, qualifying companies have been able to issue up to £60,000 of CSOP options to employees, which is double the current £30,000 limit. These changes provide a boost to young companies by widening access to the schemes and increasing the limits, encouraging additional investment and helping to attract talent.

To encourage research and development, the Bill legislates for previously announced reforms to R&D tax reliefs, such as changes to support modern research methods by expanding the scope of qualifying expenditure for R&D reliefs to include data and cloud computing costs, and a range of measures to reduce error and fraud to ensure that our tax reliefs are well targeted and offer value for money. By encouraging more businesses to invest in R&D, this Government are helping them to create the technologies, products and services which advance living standards.

The finance Bill will also extend for another two years the current 45% and 50% rates of tax relief for theatres, orchestras and museums. This builds on wider support for the sector through the cultural recovery fund and the public bodies infrastructure fund, and will continue to offset ongoing pressures and boost investment in our cultural sectors.

The Bill will also support the Government’s ambitions for employment. To achieve the dynamic economy we all want and to support action to halve inflation, we need to get more people back into work. This means removing the barriers that stop people who want to work from doing so.

The Government recognised that senior clinicians felt they had to leave the workforce just when the NHS needs them most because of unexpected tax charges on their pension. To make sure that they and those in other professions are not deterred from working, this Bill increases the pensions annual allowance to £60,000. The Bill also removes the lifetime allowance charge altogether. This will incentivise our most experienced and productive workers across our economy to stay in work for longer, easing pressures in the economy while increasing the knowledge and experience of the UK’s labour force.

It is vital that the growth this Bill will support is felt across all corners of the United Kingdom and not concentrated in London and the south-east. The Spring Budget set out the creation of 12 new investment zones, helping to spread the benefits of economic growth around the UK, with at least one zone in each of Scotland, Wales and Northern Ireland. The Government continue to work with stakeholders to establish how investment zones will be best delivered in these areas. This Bill will deliver important aspects of that ambition. It will ensure that investment zones have access to a single optional five-year tax offer in specific sites, matching that in freeports. This will consist of enhanced rates of capital allowances, a structures and buildings allowance, full relief from stamp duty land tax and business rates, and a reduced rate of employer national insurance contributions.

This finance Bill will also deliver on previous commitments, including delivering on the UK’s freedom to set its own course outside the EU. Among these opportunities was a major review of the alcohol duty system on which the Government have worked closely with industry over the past two years. The UK can now implement a system that aligns with public health goals and is fairer for hard-working producers. The Bill simplifies the alcohol duty regime and moves to a progressive tax structure in which products are taxed according to their strength. It also legislates for two reliefs, draught relief and a new small producer relief, which will support a wider range of small businesses to grow and provides a recognition of the vital role that pubs and other on-trade venues play in our communities.

We are also able to take action to better connect our country. As announced in the Autumn Budget 2021, this Bill delivers a package of air passenger duty reforms that will bolster air connectivity across the UK through a 50% cut in domestic APD. The new domestic rate applies to flights between airports in England, Scotland, Wales and Northern Ireland, benefiting more than 10 million passengers this year. These reforms will also further align with the UK’s environmental objectives by adding a new ultra-long-haul distance band, ensuring that those who fly the furthest and have the greatest impact on emissions incur the greatest duty.

This finance Bill takes forward measures that support sustainable public finances, helping to provide the stability and confidence that underpin the economy and supporting businesses and households across the country. The Bill legislates for a tax on the extraordinary electricity generator returns resulting from the spike in gas prices driven by Russia’s war. This will raise billions of pounds over the next five years to help fund public services and the interventions to support households and businesses with increased energy bills. We are also taking steps to decouple electricity and gas prices permanently by reforming the energy market and using technologies such as energy storage to balance the system and reduce our reliance on imported fossil fuels.

To further ensure that businesses pay their fair share of tax, the Bill contains significant measures to protect the UK tax base against aggressive tax planning and reinforce the UK’s competitiveness. This Bill implements the G20-OECD pillar 2 rules in the UK, building on the historic agreement reached with more than 135 countries and jurisdictions and brokered by the current Prime Minister during the UK’s 2021 G7 presidency. This is a two-pillar solution to the tax challenges of a globalised digital economy. Pillar 2 will ensure that multinational enterprises pay a minimum tax rate of 15% in each jurisdiction in which they operate, meaning that those companies operating in the UK will contribute their fair share. The UK is implementing the global minimum tax in unison with many of our international peers, such as Germany, France and Ireland—indeed, all EU member states—as well as Japan, Australia, South Korea and Canada. Acting alongside others is crucial in meeting the aims of this global reform while ensuring that the top-up taxation on UK operations is not imposed by other countries.

Finally, the Government want to deliver a tax system that is simple, fair and fit for purpose. As announced last year, this Bill legislates for the abolition of the Office of Tax Simplification. Rather than an arm’s-length body to oversee simplification, this Government set a clear mandate for officials in the Treasury and HMRC to put tax simplification at the heart of policy-making. A great example of this introduced by the Bill is the previously announced permanent £1 million limit on the annual investment allowance. This measure allows businesses to write off the cost of qualifying plant and machinery investment in the first year up to £1 million, simplifying the tax treatment of capital expenditure for 99% of businesses. As is usual for a finance Bill, this Bill also legislates for a range of administrative changes to deal with technical issues, improving and modernising the tax system and making it easier for businesses to interact with it.

To conclude, this finance Bill takes forward important measures that are needed to support enterprise and growth, including incentivising investment and supporting employment, including in the NHS. It seizes freedoms that are available now that we are outside the EU. It deals with threats to the sustainability of our public finances posed by the energy crisis and international tax avoidance. It supports our long-standing goals to modernise and simplify the tax system. This delivers on an important part of the Government’s commitments made in the Spring Budget to long-term economic growth. For these reasons, I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to the short debate that we have had on the finance Bill today. Noble Lords reflected on the economic circumstances in which we find ourselves. We recognise that high inflation increases costs for households and businesses and that, as my right honourable friend the Chancellor has said, low inflation is necessary for growth. The energy shock from Russia’s unlawful invasion has been felt more in the UK, partly due to our historic dependence on gas, and domestic factors such as record tightness in the labour market and high inactivity rates have put pressure on UK inflation, but that does not remove the fact that we are not alone in facing the global challenge of high inflation rates. Despite this, the IMF has said that the UK has taken decisive and responsible steps to tackle inflation, and all major forecasters expect inflation to fall this year.

Turning to noble Lords’ comments around the level of taxation in our economy and the suggestion—I am not sure whether it was from the Labour Front Bench—that we should change the decisions that we made on tax thresholds to consolidate our public finances and that this should be the route that we take to help people with the cost of living, as my right honourable friend the Chancellor has made clear, the Government’s number one priority is reducing inflation. Not only will this be the most effective tax cut for people and businesses across the UK, but we must not to do anything to prolong inflation, which unfunded tax cuts would only fuel.

It is important to reflect on the action taken since 2010. We have increased the personal allowance and the national insurance contribution threshold above inflation, taking millions of people out of paying tax altogether. Consequently, we have some of the most generous starting allowances for income tax and social security contributions in the OECD and the most generous in the G7.

Outside the tax system, to support household we have focused our help on those who are most vulnerable to the impact of rising prices. Our cost of living support includes the energy price guarantee, cost of living payments and the household support fund, as well as uprating benefits in line with inflation. I say to the noble Baroness, Lady Kramer, that the Government recognise the impact that rising inflation and increases in the cost of living are having on households across the country. That is why cost of living support for households totals £94 billion, or around £3,300 per household, on average, this year and next, which represents one of the most generous packages of support in all of Europe. I say to the noble Lord, Lord Sikka, that looking at the impact of the decisions made from the Autumn Statement 2022 onwards, government support for households in 2023-24 provides low-income households with the largest benefit in cash terms and as a percentage of income. On average, households in the bottom half of the income distribution will see twice as much benefit as households in the top half of the income distribution in cash terms.

My noble friend Lord Leigh welcomed the implementation of the G20/OECD pillar 2 rules. We take our international obligations very seriously. We were instrumental in negotiating this agreement and these rules and as such do not see them as at odds with our sovereignty. We retain sovereignty to set our corporation tax rate as one of the lowest in the G7 and to use important tax levers to boost investment in the UK, including our world-leading full expensing regime and our generous R&D tax reliefs. In fact, pillar 2 will boost the international competitiveness of the UK because it places a floor on low and no tax rates that have been available in some countries. It is designed to protect against the risks of harmful tax planning by multinational groups. As my noble friend said, it is important that the UK legislates for these rules now but, to repeat the assurance that the Financial Secretary to the Treasury gave in the Commons, we will provide an update on pillar 2 implementation as part of the forthcoming fiscal event in the autumn and, if necessary, in the spring, too. This will include the latest revenue forecast from the OBR and an update on the status of international implementation.

I turn to my noble friend’s comments on research and development relief. He asked whether I would have regard to the Chartered Institute of Taxation’s detailed comments, in particular in respect of the new powers HMRC has to remove a claim. While it is correct to assert that customers do not have a right of appeal, they do have a new statutory right of representation to provide HMRC with evidence within 90 days if they think the claim has been removed in error. They also retain the right to apply for judicial review if they do not think HMRC has applied the process correctly.

My noble friend also raised concerns about the R&D compliance check. The Government acknowledge that there is currently a high level of non-compliant claims in R&D tax reliefs and that it is right that HMRC takes action, as I think my noble friend also recognised. HMRC has increased the action it is taking, which means addressing more of the non-compliance. As part of this, it has been rapidly upscaling its numbers of people, and this can sometimes come with teething problems. HMRC ensures that less experienced caseworkers can call on technical support or specialist advice from more senior colleagues. HMRC will continue to work with stakeholders to ensure that the department is managing checks professionally and in line with the HMRC charter, and I would happily hear any further representations by my noble friend or others on how we can ensure that we are delivering in this area.

On company tax rates, the noble Lord, Lord Sikka, asked how many companies will pay the full 25% rate, which is an increase in the headline rate of corporation tax. The noble Lord is absolutely right that the small profits rate will keep the rate at 19% for companies with profits of £500,000 or under, and marginal relief is available for companies with profits from £50,000 to £250,000, meaning that companies will pay somewhere between 19% and 25%. That means that 70% of actively trading companies will not see an increase in the rate of corporation tax they pay, and only 10% will pay the full rate.

I am grateful to the noble Lord for giving me the opportunity to make those points. Sometimes, there is concern among those in business that our corporation tax rate is either uncompetitive or targeting smaller businesses. What we have done in changing the rate is to ensure that businesses pay their fair share of returning our public finances to a sustainable footing after the shocks of Covid and the invasion of Ukraine. We have reinstated some of those exemptions to ensure that the smallest businesses do not face those burdens. That is entirely how we have designed our approach.

[Baroness Kramer (LD)]

Can the Minister tell us—this is not to make a point but just for clarification and to understand the numbers better—is it 70% by number of companies or 70% by a value number of some sort, such as an asset value, a market value or a revenue generation value? How is that number calculated?

[Baroness Penn (Con)]

What I have before me is that 70% of actively trading companies will not see an increase, so I would take it as the former. If it is calculated in a different way, I will write to the noble Baroness to clarify that.

[Baroness Kramer (LD)]

To strengthen the Minister’s own point, it might be helpful if we had a calculation that gave us a better feel. One multinational could easily produce revenues many times those of dozens and dozens of small companies, so she might be getting a bigger tax take than the number that she is using implies.

[Baroness Penn (Con)]

The noble Baroness is exactly right. The increase in the headline rate of corporation tax makes a significant contribution to our public finances and to the consolidation of our public finances after Covid. All I meant to say is that, for some of the reasons set out by the noble Baroness, we have been able to exempt smaller businesses from that increase while also ensuring that bigger businesses—which often benefited a large amount from government support put in place during the pandemic—contributed their share to returning our public finances to a sustainable footing.

The noble Lord, Lord Sikka, also asked why HMRC’s budget had been cut. HMRC will receive a £0.9 billion cash increase over the Parliament, from £4.3 billion in 2019-20 to £5.2 billion in 2024-25, so I do not quite recognise the picture that the noble Lord has put forward. HMRC’s budget includes funding to tackle avoidance, evasion and other forms of non-compliance, to deliver a modern tax system and to support a resilient customs border.

I turn to another area of tax, the energy profits levy, which, I remind noble Lords, has helped to pay a significant proportion of households’ and businesses’ energy costs through the support that we have been able to provide. I want to be clear to noble Lords that the allowances in place are not a loophole. The OBR’s latest forecast is that the EPL will raise just under £26 billion between 2022-23 and 2027-28, inclusive of the EPL’s investment allowances. That is on top of £25 billion over the same period from the permanent regime for oil and gas taxations, totalling around £50 billion.

Abolishing the investment allowance would be counterproductive. The UK is still reliant on oil and gas for its energy supply and will be for several years; reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower tax revenue in future.

My noble friend Lord Leigh asked about the impact of the price floor and the Government’s long-term plans for energy security. By introducing the energy security investment mechanism, the Government are providing certainty about the future of the energy profits levy. This allows companies to invest confidently in the UK and supports our economy, jobs and energy security.

On the long-term fiscal regime for oil and gas, the Government are also conducting a review to ensure that the regime delivers predictability and certainty, supporting investment, jobs and the country’s energy security. I wonder whether that predictability and certainty would be covered in Labour’s review of business taxes. I do not think the oil and gas sector sees predictability and certainty in its policy approach in recent weeks.

I turn to the electricity generator levy. Unlike the EPL, this not a tax on total profits that is calculated after the recognition of total revenues and costs. Instead, the EGL is payable only on the portion of revenues that exceeds the long-run average for electricity prices. The Government took into account the potential impact on investment when setting the benchmark price.

The Government are supporting renewables deployment through a range of policy levers, including the contracts for difference scheme, through which generators have received almost £6 billion net in price support to date. The electricity generator levy will not be payable on renewable generation produced under contracts for difference, which is the Government’s main form of support for green energy and will account for most new large renewable generation.

I turn to the point raised by the noble Lord, Lord Livermore, on non-doms. The Government recognise that issues of taxation come down to fairness. We need to have a fair but internationally competitive tax system which brings in talented individuals and investment that contribute to growth. Reforming the non-dom regime could potentially damage the UK’s international competitiveness, leading to a loss of international investment and talent. There is a great deal of uncertainty over the wider economic impacts of complete abolition.

Non-doms play an important role in funding our public services through their tax contributions. They pay tax on their UK income and gains in the same way as everyone else, and they pay tax on foreign income and gains when those amounts are brought into the UK. The latest information shows that that non-UK domiciled taxpayers are estimated to have been liable to pay almost £7.9 billion in UK income tax, capital gains tax and national insurance contributions in 2020-21 and have invested over £6 billion in the UK using the business investment relief scheme introduced in 2012.

[Lord Leigh of Hurley (Con)]

On another point of clarification, is my noble friend saying that HM Treasury’s calculations are that, if the reliefs that apparently exist for non-doms were withdrawn, as has been suggested elsewhere, there would be a net loss to Treasury revenue, given the mobile nature of such non-domiciled persons?

[Baroness Penn (Con)]

I am saying that that is most certainly a risk. There is a high amount of uncertainty about the impact of any changes in that area, and it would not necessarily lead to an increase in revenue, as is being relied upon by the Labour Party.

[Lord Eatwell (Lab)]

My Lords, surely there is not that degree of uncertainty, since the Government did raise a base levy on non-doms. Surely, then, we have evidence from the mobility of non-doms reacting to that base levy. What is the evidence? I suggest it is evidence of no mobility at all.

[Baroness Penn (Con)]

My Lords, I was speaking about the difference between changes to any scheme and abolition of the status altogether, but I would say that there is a high degree of uncertainty about the impact of changes made in this area.

Finally, I turn to the pension tax changes made through this Bill and the Budget, which many noble Lords have spoken about. To respond to the noble Lord, Lord Eatwell, I was not implying that only the most highly skilled and productive workers benefit from these changes, but many of them will. They have been designed in response to feedback from the NHS in particular that there was an impact on retention of the most skilled staff.

Regarding the suggestion that a doctors-only change could have been implemented instead, unlike more targeted policies, the Government have considered a range of options to address this issue over a number of years. One of the elements which means that a more targeted approach would not be appropriate in these circumstances is the time it would take to implement. These changes could be implemented quickly, from April 2023, minimising the risk of early retirements in the NHS before any changes take effect.

In the Statement taken before this debate, we heard about the pressures on our NHS workforce and the pressing need to address those immediately. If we were to take a targeted approach to one profession—NHS doctors—we may well come back to the same issue, as the same issues are faced by employees in other sectors, such as air traffic controllers, the police, the Armed Forces and senior teachers. To introduce targeted measures for each profession would not be an effective way to deal with challenges across those different workforces.

The Government are aware of the concern raised by the noble Lord, Lord Eatwell—

[Lord Sikka (Lab)]

I am grateful to the Minister for giving way. Will she take up my challenge and tell me which of the big four accounting firms, with strong court judgments against them in the cases brought by HMRC, has been investigated, fined, disciplined or denied government contracts because they are peddling tax abuses? If the Minister cannot name such a firm, can she tell me why the Government are soft on tax abuses by big accounting firms?

[Baroness Penn (Con)]

I think one of the reasons why I frustrate the noble Lord in this area is that the Government do not normally comment on individual taxpayers. On his more general point, the Government have taken action to tackle tax avoidance and evasion over many years and to reduce its incidence in our economy.

Finally, I turn to the impact of the change to the annual allowance and its potential inheritance tax impacts. Noble Lords are right that the annual allowance has meant that there has been a limit on how much individuals can put into their pensions and therefore pass on. The Government are aware of concerns that some may be using their pension pots to reduce future inheritance tax liabilities, rather than for their purpose: to fund their retirement. As with all taxes, the Government keep the rules under review.

[Lord Eatwell (Lab)]

My Lords, before the noble Baroness moves away from the lifetime allowance, I asked her if it was true that this £1 billion was funded by increased borrowing. In her summing up just now, she said very clearly that unfunded tax cuts increase inflation; those were her exact words. Is this not an unfunded tax cut?

[Baroness Penn (Con)]

The OBR has been clear about its forecast for the public finances, which has shown that they are more resilient than previously expected. Debt is lower in every year of the forecast compared with the November forecast. Borrowing falls year on year and the current Budget is in a surplus from 2026-27. All these decisions are taken in the round and assessed against the Government’s fiscal rules and the independent OBR’s forecasts for government borrowing and debt.

We have had a wide-ranging debate today, but if we return to the measures in the Bill, they form an essential part of our plan for the economy. They support enterprise, business investment and employment, including in the NHS. The Bill seizes the freedoms now available to the UK outside of the EU, addresses international tax avoidance and the problem it causes for the sustainability of our public finances, and will help simplify our tax system. For these reasons, I beg to move.

Bill read a second time. Committee negatived. Standing Order 44 having been dispensed with, the Bill was read a third time and passed.

UK Economy: Growth, Inflation and Productivity

Baroness Penn Excerpts

Thursday 29th June 2023 Lords Chamber

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank all noble Lords for their contributions to this timely debate, in particular the noble Lord, Lord Eatwell, who has brought us here today. In the face of rising inflation, we continue to take the action necessary to shelter the most vulnerable, get inflation under control and set our country up for long-term, sustainable economic growth.

Before I turn to some of those matters, I shall address some of the gaps in the review of the noble Lord, Lord Eatwell, of this Government’s record. He noted that the previous Labour Government left government debt too high as a result of intervention in the banking sector and their response to the accompanying recession. He neglected to say that Labour inherited a surplus of £66 million in its first full financial year in government and that, when it left office, the deficit was almost £160 billion, the largest since the war.

The noble Lord, Lord Eatwell, also neglected to mention employment. I do not know whether that is because all Labour Governments have left office with unemployment higher than when they entered it or because this Government’s record on employment and jobs does not accord with his narrative on our economic decision-making.

Two of the biggest gaps in the noble Lord’s assessment of this Government’s record were our responses to the crises of Covid and Russia’s war on Ukraine. The response to Covid was, in fact, a massive public effort to protect lives and livelihoods. The noble Lord did not mention the provision of more than £400 billion of support during the pandemic, including paying 11 million people’s wages, and that we had one of the fastest and most successful vaccine rollouts in the world.

Our response to Ukraine has not just been to be their most steadfast ally, providing equipment, training and financial support; we have also taken action to protect people at home from the price shocks that we have experienced in the invasion’s aftermath. We have put in place the energy price guarantee to protect people from the worst of the energy cost increases, we have increased benefits by over 10% this year and we have put in place extensive cost of living support payments for those least able to cope. In total, this year and last, our support has been worth £94 billion. This support will help the most vulnerable weather the current storm, but the real answer to the current economic challenge must be to bring down inflation.

The UK is not alone in facing high inflation. UK inflation was lower than in nine EU countries in May, and over half of the EU had higher core inflation in the same month. The primary drivers of high inflation are international: the supply chain shocks in the wake of Covid, followed by food and energy price shocks as a result of Russia’s invasion of Ukraine.

However, it is right to say that domestic inflationary pressures have also risen in recent months. To address one of the questions from the noble Baroness, Lady O’Grady, the UK is in a position of having a very tight labour market—as they face in the US, but with less pressure on the energy bills—with pressure on energy bills that is more akin to that which we see in our European partners. That means that we need to be even more determined than ever to get inflation down.

Let me reassure my noble friend Lord Griffiths of Fforestfach that, to do this, first and foremost, the Government remain steadfast in our support for the independent Monetary Policy Committee at the Bank of England and its target to return inflation to 2%. I agree with the noble Lord, Lord Whitty, that it is vital that monetary and fiscal policy work together in this respect. That is why we are making difficult but responsible decisions on tax and spending, to manage our borrowing and get debt falling. Increasing borrowing at this time would simply be adding fuel to the fire. Thirdly, we are taking long-term action to address some of the underlying drivers of inflation, investing in our long-term energy security and energy efficiency, and working to boost labour supply, with interventions to support people back into the workforce and remove barriers to returning to work, such as through the extension of free childcare to parents with children from nine months and upwards.

We know that, as the Bank of England increases interest rates to bear down on inflation, this puts upwards pressure on mortgages. While mortgage arrears and defaults remain at historically low levels, with just under 1% of residential mortgages in arrears in 2023, and at a lower level just before the pandemic, we want to support those who find themselves in a challenging position—but, again, as my right honourable friend the Chancellor has made clear, without adding further fuel to the inflation fire. That is why my noble friend Lord Lamont is right that we cannot take action such as providing tax relief on mortgage interest payments, or other support of that nature. We can work with lenders, as we have, to provide more support for people through flexibility in how they manage these costs. That is what the mortgage charter, negotiated last week, will do: it will help give people peace of mind about extending an existing mortgage or moving to an interest-only mortgage for six months.

Let me reassure the noble Baroness, Lady Thornhill, that there will now be a minimum 12-month period from the first missed payment before there is repossession without consent. The noble Baroness also touched on renters, and we recognise the need for more support there. The recently introduced Renters (Reform) Bill includes a ban on Section 21 no-fault evictions. There is an extensive package of measures there to improve security and quality in the private rented sector.

I agree entirely with my noble friend Lord Lamont that tackling inflation must be the immediate priority. It is also the essential precondition for sustainable economic growth. High growth needs businesses, investors and consumers to all have confidence, which is not possible with high levels of inflation. In January, the IMF said that the UK was taking “the right approach” and, in its recent visit to the UK, said that the UK authorities had taken “decisive and responsible steps” which have had a “favourable impact” on the economy. The measures announced in the Spring Budget deliver the largest permanent increase in potential GDP that the OBR has ever scored in a medium-term forecast.

I must disagree with some noble Lords on this Government’s record on growth. The UK had the fastest growing economy in the G7 last year, growing by 4.1%, following a 7.6% increase in 2021. Since 2010, we have grown more than major countries such as France, Italy and Japan, and about the same as Germany. Where we find more common ground—as we have in past debates on similar subjects—is that, in our economy, we have a need for greater productivity and investment. My right honourable friend the Chancellor at the start of the year set out his approach to the four pillars that we need to support to increase productivity in our economy.

The first focuses on enterprise, which means supporting innovation and investment. That is why direct funding for R&D will reach £20 billion a year. Indeed, OECD data shows that, as a percentage of GDP, the UK provides more support for business research and development through tax and spend than any other OECD country. Part of the challenge now is to match that investment from the public sector with investment from the private sector. To support that, we are refocusing R&D tax credits and have introduced full expensing. To the noble Lord, Lord Woods, and the noble Baroness, Lady Bowles, I say that we are looking at how we can further unlock pension fund capital to invest in our future businesses, while of course ensuring that pension funds continue to act in the best interests of their members.

On education, the Government are implementing a significant skills programme, including an expansion of apprenticeships and T-levels and crucially delivering a commitment to lifelong loan entitlements that will allow people to access support for their continued education throughout their lives and careers, not just as a young person leaving school and going on to university. This builds on the sustained success that we have had in improving educational outcomes in our schools since 2010.

On employment, as I have already said, the Spring Budget included a comprehensive plan to address labour shortages, including cutting the cost of childcare by up to 60% and abolishing the lifetime allowance on pensions. The OBR expects that these measures will result by 2027-28 in the labour market directly increasing employment by 0.3% and GDP by 0.2%.

Finally, as the noble Lord, Lord Monks, noted, this growth needs to be felt everywhere across the UK, not concentrated in London and the south-east. I assure the noble Lord, Lord Leong, that we will continue to devolve powers to local areas and to invest in places through our levelling up fund. My right honourable friend the Chancellor has also announced 12 investment zones which will catalyse high-potential, knowledge-intensive growth clusters across the UK, including four across Scotland, Wales and Northern Ireland, bringing investment into areas that have traditionally underperformed economically.

We have also heard from noble Lords about the importance of backing strategic sectors where the UK has a competitive or comparative advantage, and the Government absolutely agree on that. Over the past 13 years, we have become the world’s third trillion-dollar tech economy after the US and China. We have built the largest life sciences sector in Europe, producing a Covid vaccine that saved 6 million lives and a treatment that saved 1 million more.

Our film and tv industry has become Europe’s largest, and our creative industries have grown at twice the rate of our economy. Our advanced manufacturing industries produce half the world’s large aircraft wings. Our green industries mean not only that we are a world-leader in offshore wind but that we have managed to decarbonise our economy further and faster than other major economies.

We are committed to backing these sectors, creating forward-facing policy and regulatory initiatives and providing strategic public investment to ensure that they continue to build on the strengths I have just outlined. To take one example cited by the noble Lord, Lord Eatwell, when it comes to clinical trials, to maximise opportunities in this area, we have commissioned a review by my noble friend Lord O’Shaughnessy into the current clinical trials environment. As a first step after that review, we have made five headline commitments, backed by £121 million, to, among other things, substantially reduce the time taken for approvals of commercial clinical trials, deliver a national approach to contracting commercial clinical trials and deliver real-time data on commercial clinical trials activity in the UK. Our commitment in these areas continues.

The noble Lord, Lord Eatwell, and the noble Baroness, Lady Chapman, touched on the importance of our supply chains and our broader economic security in a changing global environment. That is a picture that the Government absolutely recognise. As announced in the integrated review refresh, the Government will publish a new supply chains and import strategy to support specific government and business action to strengthen our resilience in critical sectors.

That takes me nicely on to the question from my noble friend Lord Howell. I know that economic security and supply chains were a subject of great interest at the G7 recently hosted by Japan. He is absolutely right that Japan is a like-minded partner, and we value our relationship deeply. That is why the Prime Minister Rishi Sunak and Japan’s Prime Minister Fumio Kishida recently signed the Hiroshima accord on 18 May, which includes new agreements on defence, trade and investment and science and technology collaboration. We continue to want to work with our close partners.

My noble friend Lord Effingham is absolutely right that well-being is essential to supporting economic growth and productivity, and we are committed to supporting individuals to live healthier lives. At the heart of this is improving access to and levelling up healthcare across the country. In January, we announced that we will be publishing a major conditions strategy, and an interim report will be published this summer. Interventions set out in that strategy will aim to alleviate pressure on the health system as well as support the Government’s objective to increase healthy life expectancy and reduce ill health-related labour market activity.

To the noble Baroness, Lady Bowles, we had this debate on the Financial Services and Markets Bill, as she noted today. Can I suggest to her that perhaps the best way forward is that we sit down together in the Treasury and go through in detail the points that she has made in this debate?

Today’s debate has been wide-ranging, and it has been impossible to address all the points noble Lords have so thoughtfully made. The noble Lord, Lord Desai, recalled that we have had similar debates before, and I very much hope that we will have more in the future so that I am able to explore further areas that were beyond my reach today.

I think it is right, in closing, to return to the greatest economic challenge before us—inflation—and the Government’s steadfast commitment to bringing inflation down. Without inflation under control, we will not see the growth and productivity improvements that I think all noble Lords in this debate have agreed are needed.

Corporate Profits: Inflation

Baroness Penn Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Sikka]

To ask His Majesty’s Government what assessment they have made of the extent to which increases in corporate profits have contributed to inflation.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, UK inflation has been affected by global factors, including Russia’s invasion of Ukraine which has affected energy and food prices. The UK is not alone in facing these challenges: advanced economies across the world are feeling the impact of inflation. That is why halving inflation is one of the Prime Minister’s top five priorities, as a staging post to returning inflation to the 2% target. Evidence that corporate profits play a role is inconclusive.

[Lord Sikka (Lab)]

My Lords, the Minister is in total denial of reality here. The pandemic of profiteering is driving inflation. The IMF and the ECB have said so, but the Government are in denial. Look at the accounts of banks, oil and gas companies, supermarkets, food, internet and mobile phone companies, and others, and you will see that their profits have doubled within the last couple of years. The Government have a whole array of policy options, including price controls, windfall taxes, prosecution of profiteers, and breaking up oligopolies to encourage more competition to curb profiteering, but they choose to do absolutely nothing. Can the Minister explain what assessment the Government have made of the corrosive impact of profiteering on people’s standard of living and what they will do about it?

[Baroness Penn (Con)]

My Lords, I note that the noble Lord referred to the recent IMF analysis, which looked at the euro area. The Governor of the Bank of England recently said that it does not see a higher trend in non-North Sea corporate profits. Of course, we have the energy price levy in place with respect to North Sea corporate profits, but we keep it under close scrutiny. I am sure the noble Lord will be pleased to know that, yesterday, the Chancellor of the Exchequer met with the main regulators and agreed a new action plan to ensure that consumers are being treated fairly and to help those struggling to meet their bills.

[Lord Moylan (Con)]

My Lords, does my noble friend accept that, contrary to what the noble Lord suggests, inflation is entirely a monetary phenomenon; that since 1997 the Bank of England has been responsible for the control of inflation; and that the cause of our present difficulties is the reckless creation of money in recent years?

[Baroness Penn (Con)]

My noble friend is right that, when we think about tackling inflation, the number one area is remaining steadfast in our support of the independent Bank of England as it takes action to return inflation to the target of 2% through monetary policy. However, government does have a role to play. We must make difficult but responsible decisions on tax and spending so that we are not adding fuel to the fire. We also need to take longer-term action to bring down prices, whether that is investing in our future energy security or looking at the tightness of our labour market and taking action to get people back to work—for example, through our ground-breaking reforms to childcare.

[Lord Palmer of Childs Hill (LD)]

My Lords, I hear what the Minister says, but a new word has appeared: “greedflation”. Everyone knows that the idea of a business is to make a profit; no one is saying that they should not make a profit. However, there is now greedflation, which is the padding of profits. We see people struggling while companies are making surplus profits above what is reasonable. Have the Government any real answer to this?

[Baroness Penn (Con)]

My Lords, the answer is twofold. We are looking closely at the data and will continue to do so, but we do not see the pattern that the noble Lord refers to so far. We will also work with the regulators in the main areas—the FCA when it comes to the banking sector and the passing on of higher interest rates to savers, as well as mortgage holders—and look at the work of the supermarkets to ensure that their profits are fair and reasonable and driven by fair competition in the sector. We will keep all of that under review. We have agreed a series of steps with the regulators to make sure that action is taken if competition is not working as it should.

[Lord Berkeley (Lab)]

My Lords, does the Minister agree with the IMF that the main cause of inflation is excessive corporate profits, and the fat cat salaries that go with them, rather than the wage claims such as those from people in the National Health Service?

[Baroness Penn (Con)]

As I have explained to noble Lords, the IMF analysis applied to the euro area.

[Lord Trees (CB)]

My Lords, there has been a large increase in the price of food for our consumers. What measures have His Majesty’s Government taken to ensure that the primary producers—in many cases our farmers, whose input costs have risen dramatically—are receiving an appropriate uplift in the prices they receive from wholesalers and retailers?

[Baroness Penn (Con)]

I believe that Defra has regular discussions with both food retailers and food producers to ensure that the market is functioning fairly for all those involved. At the moment, the higher food prices we are seeing in supermarkets appear to be down to the passing on of higher costs, but of course we keep that closely under review.

[Lord Robathan (Con)]

My Lords, does my noble friend the Minister not agree that the problem has been caused by the money supply increase, quantitative easing over the years and, in particular, most recently, the coronavirus nonsense, when lockdowns cost this country billions and contributed to the parlous state of the economy and inflation? Noble Lords on the other side are complaining now, yet in the past they wanted even further restrictions which would have cost this country money and, indeed, contributed to inflation.

[Baroness Penn (Con)]

My noble friend is right that we are still feeling the effects of the Covid pandemic in a number of ways. This Government put in place unprecedented economic support to get people and families through that pandemic, and we have had to take difficult decisions about the public finances since. Another way in which we are still feeling the effects of the pandemic is in the unwinding of the measures put in place to control it. We have seen heightened pressure on global supply chains; that has been part of the driver of the increased inflation and higher prices that we are seeing.

[Lord Brooke of Alverthorpe (Lab)]

Does the Minister agree that many of those factors affect the rest of the world, including other countries in Europe, yet this country is performing poorly in relative terms compared with them? Our inflation is higher and our productivity is lower—why is that so? Is this not to do with some of the points pressed about Brexit by people on the Tory Back Benches opposite and the 4% loss to our economy as a result of us coming out of Europe?

[Baroness Penn (Con)]

My Lords, I have to disagree with the noble Lord. The higher rates of inflation that we see are seen in countries across the world. I believe there are nine EU countries with higher headline rates of inflation than the UK, and more than half of EU countries have higher rates of core inflation than the UK. The noble Lord talked about the importance of productivity to our future economic well-being; I could not agree more. We need greater investment to drive greater productivity, and we would not see that with the kind of policies advocated by the noble Lord, Lord Sikka, such as windfall taxes and other measures that would deter investment from our country.

[Lord Livermore (Lab)]

My Lords, to follow up on the Minister’s answer to my noble friend, as she said the IMF has described so-called greedflation as a Europe-wide phenomenon, yet despite the Prime Minister promising to halve inflation, Britain continues to be an outlier. The UK has the highest inflation in the G7. Last month, core inflation increased to 7.1% in the UK—a 31-year high—while in other advanced economies, including in the eurozone and the US, it has started to fall. The Government often argue, as the Minister has this morning, that responsibility for the UK’s persistently high inflation lies in global factors, but do these figures not tell us that it actually lies much closer to home?

[Baroness Penn (Con)]

I am afraid I am going to have to disagree with the noble Lord. I will not cite again the figures I gave to the House a moment ago. We have heard about the IMF in this Question today. Despite the challenges we face after the pandemic and Russia’s invasion of Ukraine, the IMF has noted that the UK has taken decisive and responsible steps to tackle inflation, and all major forecasters expect inflation to fall this year. We cannot be complacent about that, and that is why this Government’s number one priority is to bring down inflation.

[Baroness Jones of Moulsecoomb (GP)]

My Lords, the fact is that the majority of people in Britain are suffering from the cost of living crisis and this Government are doing nothing to make it better. The noble Lord, Lord Sikka, has come up with some things that would generate income for us that would help the majority of people. Why are the Government not at least thinking about some of these ideas?

[Baroness Penn (Con)]

I would say three things to the noble Baroness. First, this Government are not doing nothing to support people with the cost of living crisis; that could not be further from the truth. Over last year and this year, we are providing £94 billion of support to people to cope with the crisis, which is targeted at those on the lowest incomes who are least able to afford the increase in their bills. Secondly, the noble Baroness talks about revenue raising. Where we see windfall profits, we have taken action. The energy profits levy is going to raise billions of pounds in additional revenue in tax to support that action. Thirdly, at the end of last week, on Friday, the Chancellor announced new action to help people who are struggling with higher interest rates to afford their mortgage payments or to go on to new terms to cope with those payments—but, crucially, without adding fuel to the fire of inflation. I could not disagree with the noble Baroness more.

Mortgage Charter

Baroness Penn Excerpts

Wednesday 28th June 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I rarely speak to such a thronged House. The number that we should focus on is core inflation, which removes the volatile issues over which we have little control and which has shockingly risen to 7.1%—a 31-year high, as the noble Lord, Lord Livermore, said. This number is key to interest rate rises and captures the sheer economic incompetence of the Government, as well as their wholly inadequate trade relationship with Europe post Brexit—the sharp drop in exports, British firms removed from supply chains, a collapse in business investment, the fall in sterling, customs friction driving up the cost of imports, labour shortages and incredibly low productivity.

Three groups of people will be particularly hard hit by the sharp and continuing rise in interest rates: mortgage holders with variable-rate or expiring fixed-rate mortgages, renters whose landlords face significantly higher mortgage costs and small businesses with short-term loan exposure. The mortgage charter will help some to push the pain into the future, but at a price. The hardest hit who face repossessions will feel the full force only after the next general election; I understand the Conservative strategy there.

Unlike this Government, I do not think it acceptable for the hardest hit, who face the destruction of their family finances, to take the bullet for the economy as a whole. Will the Government now put in place the emergency proposals that these Benches have made to assist those in the toughest position, who will get no help from the banks because they are regarded as unattractive customers? This is a voluntary system and the banks will use their standard approach of favouring customers with whom they want long-term relationships and denying opportunity to those with whom they do not.

Reversing cuts in the bank levy and the surcharge would do more than cover the cost of this, and I am with the noble Lord, Lord Livermore, in saying that the banks are really in a position of profiteering at this point because of their rejection of any pressure to share higher interest rates with their savers.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank both noble Lords for their contributions and their questions. The reason we are having this Statement today is the action the Government took on the back of the announcement by the Bank of England last week to raise interest rates to 5% as the UK, like other countries, grapples with high inflation.

There are many different international comparators that can be used in this debate, but the primary drivers of the inflation we are seeing in the UK and across the world are the global shock to energy prices, the impact on supply chains still coming out of the Covid pandemic and, in the UK and countries such as the US, tight labour markets. Interest rates are higher in the United States, Canada and New Zealand, and that will all be impacting mortgage payments. When it comes to inflation—and noble Lords have talked about the measure of core inflation—the UK is not alone here either, with 14 EU countries having core inflation higher than the UK’s.

First and foremost, the Government’s aim is to tackle inflation; our number one priority is to halve inflation by the end of the year to ease the cost of living pressures for everyone. That means that we back the Bank of England in its work to drive down inflation and we will not take measures that would potentially make this worse. We have looked at what we can do to help families who are struggling with the higher interest rates that we now see. We already have a big package of support in place to support families with the higher cost of living that we are seeing—one of the largest support packages in Europe, worth £94 billion, or £3,300 per household on average.

On Friday, my right honourable friend the Chancellor went further, with the mortgage charter for families up and down the country. The noble Lord, Lord Livermore, asked whether we would make the mortgage charter mandatory. I say to him that, when the mortgage charter was announced on Friday, it covered 75% of lenders but by Monday that had extended to 85%. We encourage all lenders to sign up to the charter.

There is the question of how one might make the charter mandatory. The Bill that we have just completed could potentially have had a power of direction within it towards the regulators, but I do not believe that is something that the Labour Party supported; in fact, it welcomed that such a power was not in the Bill. Thinking about the powers by which we can implement policies is perhaps something that we have to consider more carefully in government than in opposition.

The noble Lord asked what we are doing for renters. He mentioned the Opposition’s commitment to end no-fault evictions. I am sure that he was pleased to see the Renters (Reform) Bill that has just come before Parliament, which will do just that—the result of a commitment by this Government, long-standing for a number of years, to take action there. As has been noted, the action through the mortgage charter where landlords are mortgage holders may also provide some help and support to renters along with our wider cost of living support.

The noble Lord rightly said we should not do anything to inject money into the economy right now. It is for the Labour Party to explain how that squares with their own plans to borrow £28 billion a year until 2030. For the Government’s part, we will continue to focus on getting inflation down, supporting the Bank of England in its work and showing responsible fiscal policy.

The noble Lord asked about action to ensure that rising interest rates are not just passed on to mortgage holders but that savers would also see the benefit of those changes. My right honourable friend the Chancellor met the FCA again today along with other regulators, including the CMA, Ofcom and Ofwat. Among the measures agreed at that meeting, the FCA agreed to deliver a better deal for savers by driving competition, including reporting by the end of July on how the savings market is supporting savers to benefit from higher interest rates. The Government fully support the FCA’s review and the new consumer duty, which gives it stronger powers to take action if necessary.

We stand by families who are facing higher costs at this time, with both direct help to support the cost of living and specific help to support mortgage holders, all the while remaining committed to tackling high inflation. That is the core of the challenge that we face today and is the Government’s number one priority.

[Baroness Kramer (LD)]

My Lords, could I ask the Minister, when she goes back, if she could look a little more closely at the numbers she provided us with for core inflation? I just took a quick look to make sure that I had not got this wrong. The European Union as a whole has core inflation at 6.13%. In the eurozone it is significantly lower at 5.3%. There are some outlier countries, such as those which have particularly taken Ukrainian refugees. Hungary has a distorted number, as have a couple of the other countries which are very close, such as Estonia and Latvia. For the kind of economies against which we compare ourselves, we are definitely on the high-water mark and by some measure.

[Baroness Penn (Con)]

My Lords, I am always happy to go back and double-check my figures. The two averages quoted for the euro area and the eurozone are not what I was referring to. I simply said that 14 countries in the EU have core inflation that is higher than the UK’s. That would not just indicate a few outliers, but of course I am happy to go back and double-check and write if I need to.