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—

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[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.

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.

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.

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.

Financial Services and Markets Bill

Baroness Penn Excerpts

Consideration of Commons amendments
Tuesday 27th June 2023 Lords Chamber

Moved by

[Baroness Penn]

That this House do not insist on its Amendment 7 and do agree with the Commons in their Amendments 7A, 7B and 7C in lieu.

7A: Page 39, leave out lines 11 to 13 and insert—
“(c) the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section 5 of the Environment Act 2021 (environmental targets) where each regulator considers the exercise of its functions to be relevant to the making of such a contribution;”

7C: Page 148, leave out from “compliance” in line 14 to end of line 15 and insert “by the Secretary of State with section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section 5 of the Environment Act 2021 (environmental targets) where the Payment Systems Regulator considers the exercise of its functions to be relevant to the making of such a contribution;”.

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

My Lords, I beg to move Motion A and, with the leave of the House, will also speak to Motions B and C. I am grateful to all noble Lords for their considered scrutiny of the remaining issues in front of us today and throughout the Bill’s passage.

I will speak first to Lords Amendments 7 and 36, and I thank the noble Baronesses, Lady Hayman and Lady Boycott, in particular, for their leadership on these issues during the passage of the Bill.

The UK is a global leader in sustainable finance. The Government’s ambition to support the growth of this important area is demonstrated by the amendment relating to sustainability disclosure requirements made on Report, and the amendments in lieu of Amendments 7 and 36 introduced during Commons consideration.

I turn first to Lords Amendment 7. The regulators have an important part to play in supporting the Government’s ambitions, which was demonstrated by the inclusion of the net-zero regulatory principle at introduction. The Government have reflected carefully on the calls to ensure that the regulatory framework also reflects the Government’s nature targets.

While I welcome the intention behind Amendment 7, the Government cannot accept this amendment because it is too broad and therefore too open to interpretation. We have therefore brought forward Amendments 7A, 7B and 7C in lieu of Amendment 7, which add the relevant and well-defined targets made under the Environment Act 2021 to the new regulatory principle. It is important to recognise that addressing climate change and nature issues is not the regulators’ primary function, which is, broadly, to advance their objectives, including to protect the integrity of the financial markets and the safety and soundness of firms within the financial system and to deliver appropriate protection for consumers. Most of the levers for reaching our net- zero and environmental targets sit outside the regulators’ remit and control.

The amendments in lieu will ensure that, when acting to advance their objectives, the regulators will be required to consider the Government’s commitments to achieve the net-zero emissions target and the environment targets. I assure noble Lords that the amendments do not weaken the requirement for the regulators to consider the Government’s net-zero target. FSMA requires the regulators to act in a way that advances their statutory objectives when carrying out their general functions. When advancing their objectives, the regulators must also have regard to the regulatory principles, which aim to promote good regulatory practice.

It is for the independent regulators to decide how best to meet the requirements placed on them in legislation when discharging their general functions. The drafting of the amendments in lieu makes this clear: the regulators are required to have regard to the regulatory principle only in so far as it is relevant to advancing their objectives. This does not change the effect of the net-zero requirement, but the Government considered that this additional language was needed, alongside expanding the principle, to make this point clear and to ensure consistency. I am confident that the Government’s approach meets the intended effect of Amendment 7, and I hope noble Lords will acknowledge it as a significant step to further support the growth of sustainable finance in the UK.

I turn to Lords Amendment 36 on deforestation-linked financing. As I set out on Report, the Government again support the intention behind this amendment. The policy considerations for tackling the financing of deforestation risk commodities are complex. We are grateful for the work of the Global Resource Initiative and in particular its report on this issue from May 2022. This emphasised the need to take a staged approach and that further exploratory work would be needed to investigate the implementation of a prohibition on the financing of the use of prohibited forest risk commodities.

The Government have therefore brought forward Amendment 36A in lieu of Amendment 36, which commits the Treasury to undertake a review to assess whether the financial regulatory framework is adequate for the purpose of eliminating the financing of illegal deforestation and to consider what changes to the regulatory framework may be appropriate. This will ensure that any intervention is scoped appropriately and that the UK moves in lockstep with our international partners to ensure the effectiveness of any regime in tackling the financing of illegal deforestation.

The Treasury will be required to undertake this review within nine months of the first relevant regulations under Schedule 17 to the Environment Act being made. This will enable the Government to reflect those regulations in the review, which is essential if we are to have a joined-up and effective approach.

As the Government set out in the updated green finance strategy, we will convene a series of round tables this year. These will form the basis of a taskforce to drive forward the work of this important review and support the development of clear conclusions. This will complement the Government’s existing commitment to explore how best the final Taskforce on Nature-related Financial Disclosures—or TNFD—framework should be incorporated into the UK policy and legislative architecture. As the GRI report acknowledged, the developing work of the TNFD is increasingly important, especially as it has now included recommendations relating to deforestation in its draft standards.

Following the review, the Government will consider what further action is appropriate to progress the goal of eliminating the financing of illegal deforestation. The Bill and the existing provisions in FSMA provide the Treasury with extensive powers, including through the regulated activities order or the designated activities regime, to bring new activities into the scope of regulation if needed.

Finally, I turn to Lords Amendment 10. As the Economic Secretary set out yesterday, and as I set out on Report, the Government cannot accept this amendment. While I acknowledge the intention behind it, I reiterate the point that financial inclusion is a complex societal issue that cannot be solved through financial regulation alone. The Government are committed to the aim of ensuring that people, regardless of their background or income, have access to useful and affordable financial products and services. The Government’s view is that the FCA’s current and ongoing initiatives around financial inclusion demonstrate that it can already effectively support the Government’s leadership on this agenda through its existing operational objectives and regulatory principles.

Parliamentary scrutiny of the introduction of the new secondary growth and competitiveness objectives for the regulators comes after two consultations on the Future Regulatory Framework Review and extensive engagement with industry and other stakeholders. It is not appropriate to amend the regulators’ objectives, which are crucial to the effective regulation of financial services in the UK, at this late stage of the Bill’s passage without due consultation. Furthermore, the FCA’s new consumer duty, which comes into force on 31 July, seeks to set a higher and clearer standard of care that firms owe to their customers, and includes a new principle requiring firms to act to deliver good outcomes for consumers. It is important that the sector is given the opportunity to embed these important new requirements before considering further action of a similar nature.

I ask noble Lords not to insist on Amendments 7, 10 and 36 and to agree with the Commons in their Amendments 7A, 7B, 7C, and 36A in lieu. I beg to move.

[Baroness Hayman (CB)]

My Lords, I declare my interests as set out in the register, and will speak to Amendment 7A. I thank the Minister and her team for the considerable efforts that have been put in, since the Bill left this House, to find a way to respond positively to the issues raised in my original amendment, which was supported from all sides of the House. As the Minister knows, the central issue was that of providing a clear legislative basis for financial regulators to act, not only on our climate change duties, which the Government themselves recognised and included in the original Bill, but in relation to our duties relating to the natural environment.

This issue is seen as important in Parliament but also outside it. The inclusion of nature was supported both by Professor Sir Partha Dasgupta and, in a statement last week, by a group of eight leading financial firms. I am extremely pleased that the Government decided not to try to completely overturn the amendment but to introduce the amendment we have before us now, the basis of which the Minister has just explained. It recognises that the importance of climate should go alongside the importance of nature, which was not there originally.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, we on these Benches supported all three of the amendments that we are discussing today when we looked at them last time, including Amendment 7, which would expand the regulatory principle on net-zero emissions to include conservation and nature. We also voted for Amendment 36, imposing a duty on those conducting regulated activity to conduct due diligence with the aim of preventing illegal deforestation.

We have listened carefully to what the Minister has said and will be listening to what she says in response to this debate, particularly to the questions asked by the noble Baroness, Lady Boycott. However, I thank the Minister for her openness in engaging with these issues and for the amendments in lieu, which demonstrate an agreement with your Lordships that these are issues that the Government need to address urgently. They may not be doing so in a way that we would have preferred today, but it is right that we acknowledge the moves that the Government have made.

Amendment 10 in my name would require the FCA to take financial inclusion into account when advancing its consumer protection objective of securing an appropriate degree of protection for consumers. The Government disagree with that amendment, saying they consider that the FCA is already able to tackle issues of financial inclusion within its remit. We argue that the problem is that the Government have failed to address our key concern in tabling the amendment, which is about the poverty premium—that is, the extra costs that poorer people pay for essential services such as insurance, loans or credit cards.

We see this Bill as something of a missed opportunity to build a strong future for our financial services and rethink financial resilience, including how some of the wider well-being issues are tackled by the regulator in the future. Everybody should be able to access the financial services they need, regardless of their income or circumstances. Although we do not intend to push this to another vote today, I can assure noble Lords that we will be returning to this subject at every opportunity—especially if that opportunity arrives in the form of a Labour Government.

For now, I place on the record our sincere thanks, particularly to the noble Baronesses, Lady Hayman and Lady Boycott, who have been highly effective in raising nature and deforestation issues. I also thank my noble friends Lord Livermore and Lord Tunnicliffe for their work on this Bill. We are probably at the end of it now. I note what the noble Lord, Lord Leigh, said about the need to get this Bill through and on to the statute books for the benefit of this important sector.

[Baroness Penn (Con)]

My Lords, I am grateful to noble Lords for the debate today, and I would like to address some of the points raised.

On the addition of the obligations under the Environment Act to the principle on climate change, I intended in my opening speech to clarify some of the language in that amendment. I am very happy to emphasise again the Government’s intention that the legal effect of the new provisions will be the same as the original climate principle, with the addition of the targets under the Environment Act. The intention is that it will be at least as strong as the provisions in the Financial Services Act 2021. I explained in opening the reasons for amending the language. It is not about diluting the principles or commitments, but further clarifying them, given that these are new areas.

I accept the noble Baroness’s point that often, these issues can be two sides of the same coin. We had the debate on whether the issues were sufficiently covered by just mentioning climate. Adding the explicit reference to the Environment Act targets led to a desire to be even clearer about the effect of that principle, but it has not changed in the wording of our amendment.

On Lords Amendment 36, there were questions on the timing of the provisions under Schedule 17 to the Environment Act. I am afraid that, as hard as I have tried, I cannot provide a definitive date, but I reassure noble Lords that I have met the Minister leading on this at Defra. Work is under way to bring forward those regulations, and we are seeking to do it at the earliest opportunity.

The noble Baroness, Lady Boycott, and my noble friend Lord Randall of Uxbridge asked what commodities those provisions will cover, and the noble Baroness mentioned a consultation on two forest risk commodities. My understanding is that the consultation and impact assessment covered a variety of policy options across three different turnover thresholds and seven different commodities. While I cannot pre-judge the outcome of the regulations under Schedule 17, our approach to this review will mirror the approach taken forward under Schedule 17.

On the point about the outcomes of this review, I am sure that the noble Baroness will understand that I cannot prejudge that, but I can say that it is not intended to duplicate work already being done; it should build on it. I am happy to make sure that noble Lords and other parliamentarians are involved in the progress of that review as we take it forward, so that they can see that it is heading in the right direction.

I thank the noble Baroness, Lady Chapman of Darlington, for the constructive way she has approach the Bill in its latter stages. She raised the issue of the poverty premium that can be placed in financial services. We are progressing work in areas where the poverty premium can occur. For example, we are working with Fair4All Finance, the organisation set up to use funding from dormant assets for financial inclusion, to improve access to affordable and appropriate financial products, including a package of tailored support to scale affordable credit in order to help the sector develop a sustainable model for serving people in vulnerable circumstances. We also looked at issues in the insurance industry in a number of areas, in terms of outcomes and access. We will continue to look at the areas where the poverty premium occurs, the factors that are driving it and the right levers we should think about to address it. It is different for different sectors, services and products, but that work will continue, despite our not being able to accept the noble Baroness’s amendment.

I therefore ask noble Lords not to insist on Amendments 7, 10 and 36 and to agree with the Commons in their Amendments 7A, 7B, 7C and 36A in lieu.

Motion A agreed.

Moved by

[Baroness Penn]

That this House do not insist on its Amendment 10, to which the Commons have disagreed for their Reason 10A.

10A: Because financial inclusion is a broader social policy issue, the Financial Conduct Authority is already able to take action on issues related to financial inclusion within its remit and it would not be appropriate to amend the regulators’ objectives without due consultation as it would create uncertainty for FCA-regulated entities.

--- Later in debate ---

Moved by

[Baroness Penn]

That this House do not insist on its Amendment 36 and do agree with the Commons in their Amendment 36A in lieu.

36A: Page 87, line 34, at end insert the following new Clause—
“Forest risk commodities: review
(1) The Treasury must carry out a review to assess the extent to which regulation of the UK financial system is adequate for the purpose of eliminating the financing of the use of prohibited forest risk commodities.
(2) In subsection (1) the reference to “prohibited” forest risk commodities is a reference to forest risk commodities, or products derived from forest risk commodities, the use of which is prohibited by paragraph 2 of Schedule 17 to the Environment Act 2021.
(3) Having carried out a review the Treasury must lay before Parliament, and publish, a report stating—
(a) the conclusions of the review, and
(b) the steps the Treasury considers it appropriate to take to improve the effectiveness of the regulation of the UK financial system for the purpose stated in subsection (1).
(4) Subsection (3) must be complied with before the end of 9 months beginning with the day on which the first regulations under paragraph 1 of Schedule 17 to the Environment Act 2021 are made.
(5) In this section—
“forest risk commodities” has the same meaning as in Schedule 17 to the Environment Act 2021;
“UK financial system” has the same meaning as in FSMA 2000 (see section 1I of that Act).”

Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023

Baroness Penn Excerpts

Tuesday 20th June 2023 Lords Chamber

Moved by

[Baroness Penn]

That the draft Regulations laid before the House on 27 April be approved. Considered in Grand Committee on 15 June.

Motion agreed.

Inheritance Tax: Cohabiting Siblings

Baroness Penn Excerpts

Tuesday 20th June 2023 Lords Chamber

[Lord Lexden]

To ask His Majesty’s Government what plans they have, if any, to make transfers of property between long-term cohabiting siblings exempt from inheritance tax.

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

My Lords, the long-standing inheritance tax assumption for wealth transfers between spouses and civil partners reflects the formal legal obligations that marriages and civil partnerships necessarily entail. While the Government understand the issue, there are no plans to exempt transfers of property between long-term cohabiting siblings.

[Lord Lexden (Con)]

My Lords, the Government say that two people who have shared a jointly owned home for years must be in a legal relationship if inheritance tax is to be deferred when they are parted by death. I remind the Government that they blocked my Private Member’s Bill to open up civil partnerships to siblings after its Second Reading, where it gained wide support across the House. This would have enabled siblings to establish legal relationships and solve the problem. Why on earth should the postponement of tax on the death of the first of two people united in a loving association for years require sexual activity between them? Why should the survivor of a chaste relationship have to face the agony of selling the family home on the death of a loved partner to pay an inheritance tax bill? Have this Government no compassion?

[Baroness Penn (Con)]

My Lords, it is important to set this Question in context. Each individual has a nil rate band of £325,000. Two cohabiting siblings who jointly own a house may have an inheritance tax liability only when the value of the house exceeds £650,000—well in excess of both the average UK house price and the average London house price. There are also circumstances in which inheritance tax can be paid over a period of time, giving the beneficiaries time to adjust to changed circumstances. That facility would enable people in those circumstances to remain in their home, which I believe is the concern at the heart of my noble friend’s Question.

[Lord Pannick (CB)]

My Lords, I declare an interest in that I acted for the two Misses Burden, who unsuccessfully challenged this policy in the European court in 2008. This is not a question of law but a question of fairness. How can it be fair for two elderly sisters who have lived together for the whole of their lives, jointly own their property and have each made wills leaving the property to each other on the death of the first to be denied a tax benefit enjoyed by married couples and civil partners who may have a far less committed, developed and permanent relationship, or does fairness not count in the implementation of the tax system?

[Baroness Penn (Con)]

My Lords, the Government have attempted to draw up a system that is fair but recognises the unique status of marriage and civil partnerships. As I pointed out to your Lordships’ House, very few estates fall subject to inheritance tax, and we have put in place processes to ensure that those who live in the same house, for example, are able to meet their obligations over time, to lessen the impact of inheritance tax.

[Lord Palmer of Childs Hill (LD)]

My Lords, one can leave all above £325,000 to your spouse, your civil partner, a charity or a community amateur sports club. Can the Minister explain how siblings are less important than a community amateur sports club?

[Baroness Penn (Con)]

My Lords, I do not think that is the rationale behind the approach. The rationale in distinguishing between marriage and civil partnership and other relationships is the unique legal status and the unique legal and financial obligations that people enter into in that regard. As the noble Lord, Lord Pannick, referred to, this question was also referred to the courts, which found in the Government’s favour.

[Baroness Browning (Con)]

Does my noble friend accept that the Treasury seems to regard inheritance tax as locked into the Ovaltine family of the 1950s with 2.4 children? As my noble friend Lord Lexden’s Question indicates, it is about time that it took a long look at how inheritance tax works for families that do not have 2.4 children. Can I add to the sibling argument, and I declare a personal interest, the parents who take responsibility for disabled adult children for all of their lifetime, where the amount of money that can be passed on during an adult’s lifetime is severely limited on the assumption that lawyers—looking round the Chamber now, there are lots of grins around me—will be able to manage the trusts for that money after the parent has died? The parents want to do what is right for their children during their lifetime.

[Baroness Penn (Con)]

My Lords, I am happy to look at the specific circumstance that my noble friend raises. I do not think the Government have an old-fashioned view of how families are formed in modern times; that is why the benefits of being able to pass on inheritance, if you are married, is also extended to those who are civilly partnered.

[Lord Livermore (Lab)]

At the last Budget, the Government abolished the lifetime limit on tax-free pension savings. In the middle of a cost of living crisis, this giveaway for the very wealthiest cost £1.2 billion and increased the value of a £2 million pension pot by some £250,000. It also opened up an inheritance tax loophole whereby it is now possible to accumulate unlimited sums within a pension fund and pass them on entirely free of inheritance tax. What assessment has the Treasury made of the number of very wealthy individuals who will now use pension funds as a vehicle for inheritance tax planning, and at what additional cost?

[Baroness Penn (Con)]

My Lords, I was disappointed that the party opposite did not support our changes to pensions, which were key for many public sector workers in respect of recruitment and retention for their posts. The primary purpose of a pension is to provide income or funds that individuals can draw on in retirement. If an individual dies before they get to use it for that purpose, we believe their beneficiaries should be able to have those funds, and that is why unspent pension pots do not normally form part of an individual’s estate. As the Chancellor said to the TSC after the Budget 2023, we will keep any changes to the lifetime and annual allowances under consideration and look at the impact.

[Baroness Deech (CB)]

My Lords, I think the Minister is avoiding the issue of principle. Ever since I took an interest some 15 years ago in the case of the Burden sisters, referred to by the noble Lord, Lord Pannick, I have wondered why the financial inheritance benefits of coupling up are confined to sexual relationships, whether it is husband and wife, civil partners or even a deceased person and the person they lived with. What is so special about the sexual relationship, when you might have two sisters who have been committed for much longer, are unable to marry and have undertaken freely to take care of each other? The Government would not even lose in the end, because the inheritance tax is rolled over. Will the Minister please address the issue of principle?

[Baroness Penn (Con)]

My Lords, I do not think that I am not addressing the issue of principle; I am just disagreeing with some noble Lords on the conclusions of that question. The Government’s view is that marriage and civil partnership relationships necessarily entail particular legal and financial obligations to one another for the parties concerned. We think it is right that those obligations are reflected in our inheritance tax system. When it comes to the impact of inheritance tax, however, on people in the circumstances to which the noble Baroness referred, there are several measures in place to ensure that those impacts are minimised. Those include the existence of the nil-rate band, which means that the vast majority of people in this country—fewer than 6% of estates this year are due to fall subject to inheritance tax—do not pay inheritance tax. For those who are affected, there are measures in place to ensure the smoothing of those obligations when they find themselves in circumstances that we have heard about today.

[Lord Forsyth of Drumlean (Con)]

My Lords, following up on that last point, is not the problem that the only people who pay inheritance tax are the middle classes, or people whose only asset is the roof above their heads, whereas very rich people are able to buy farmland and make all kinds of arrangements to avoid inheritance tax? If the Treasury is keen on raising extra revenue, why not abolish inheritance tax and introduce capital gains tax on death, which would provide far more revenue and be far fairer to all concerned?

--- Later in debate ---

[Baroness Penn (Con)]

I have to disagree with my noble friend that the wealthiest do not pay inheritance tax. Statistics from 2019-20 show that tax paid on estates valued at £1 million or more accounted for 82% of total inheritance tax liability for that year. When it comes to reforming inheritance tax and looking at areas such as agricultural property relief and business property relief, we would need to be really careful about considering the impacts of changing that approach on family farms and family businesses before taking forward such changes.

[Lord Watts (Lab)]

My Lords, the Minister said that the Government introduced the pension changes to help GPs to be retained in the National Health Service. However, is it not the case that the majority of the savings will go to rich people rather than GPs?

[Baroness Penn (Con)]

I have to disagree with the noble Lord. The feedback we have had comes not just from the medical profession but from people in many other public service jobs who benefit from defined benefit contribution pension schemes and who have found their annual allowance and the lifetime allowance to be a real barrier to staying on in their work. It was in response to campaigns such as those from the BMA that the Government took action.