Finance (No. 3) Bill

Debate between Lord Hanson of Flint and Jim Fitzpatrick

Wednesday 4th May 2011 Commons Chamber

[Mr Hanson]

My hon. Friend makes some valid points. I know that he defends his constituency and the whole of the north-west region strongly when it comes to the importance of manufacturing industries. One issue that I want to explore with the Minister is the very question of whether the capital allowance reductions proposed in clause 10—as well as other in clauses, which we will consider in due course upstairs in Committee—will have an impact on the job creation and investment proposals that we are considering today. Unemployment in my hon. Friend’s region in the north-west will be very high, at around 9%, which again indicates the importance of generating and regenerating manufacturing industries in those areas.

Capital allowances allow businesses to write off the cost of certain capital assets, including plant and machinery, to arrive at their business profits. Capital allowances take the place of commercial depreciation, which is not allowed for tax. There are certain first-year capital allowances that allow 100% of a business’s expenditure on specific, environmentally-beneficial plant or machinery to be written off in the year that the expenditure is incurred. There is also the annual investment allowance, which allows businesses to write off the whole of their expenditure on most plant and machinery, up to a limit in the year in which it is incurred. Expenditure on plant and machinery not covered by the allowances also attracts writing-down allowances, at either the main rate or a special rate.

The changes in clause 10 are part of the package of corporate tax reforms announced in the Government’s 2010 Budget, as the Minister will undoubtedly explain later. The amendment calls for a review of the impact of the Government’s abolition of capital allowances for smaller businesses in 15 to 16 months—that is, October next year—when these allowances will have been operational and we can see what the growth potential in the economy has been over that period thanks to the corporation tax measures in the Budget, as well as the impact of stringent public spending cuts and rising unemployment across the UK.

[Jim Fitzpatrick (Poplar and Limehouse) (Lab)]

In the debate yesterday evening and earlier today, there were many references from Opposition Members to the concerns raised by the British Chambers of Commerce and the Federation of Small Businesses, and my right hon. Friend has referred to the CBI. Can he say whether those organisations support the review that is being requested, and whether he has had a chance to discuss the Government’s plans with them?

[Mr Hanson]

I want to refer to a number of comments that have been made in this debate. Perhaps I could start by being helpful to my hon. Friend and referring him to what Lord Northbrook said. Lord Northbrook does not take the Labour Whip in another place or even the Liberal Whip; he takes the Conservative Whip. He considered a range of issues on Second Reading in another place, and said of this proposal:

“How does the reduction in capital allowances square with the Government’s wishes to encourage a more manufacturing-based economy?”—[Official Report, House of Lords, 26 July 2010; Vol. 720, c. 1172.]

That is a tempered criticism, but it raises the very question that I wish to raise with the Minister. On the one hand, to help growth we have corporation tax cuts—which the Committee has just supported, although we want to see an estimate of the outcomes—but on the other hand, we have massive reductions in capital allowances, which are specifically designed to encourage businesses to invest in plant and machinery, and environmentally efficient equipment, all of which will help to build jobs and growth for the future. However, I will return to my hon. Friend’s point in due course.

The key reason to consider the matter in depth is that, as the Office for Budget Responsibility—the Government’s own creation—has said, even after this year’s Budget, which the Chancellor has dubbed a “Budget for growth”, growth will be lower this year and next year than it was predicted to be around this time last year, when my right hon. Friend the Member for Edinburgh South West (Mr Darling) was Chancellor of the Exchequer. Slower growth and rising unemployment will make it harder to make the deficit fall. It is therefore even more important that we encourage as much growth, manufacturing and manufacturing investment as we can, to help counterbalance the massive effects of large spending cuts, which will put many people out of work and have a knock-on effect in the private sector.

Even after the measures in the Budget are taken into account, the OBR has said that growth will be much lower this year and next. In 2011, growth is now forecast to be just 1.7%, compared with a forecast of around 2.6% a year ago. The estimated rate of unemployment has been revised upwards to 8.2%, from 8%. Despite all the discussions and the measures that we have seen so far, there is still fragility out there. We are not sure how the economy will perform in the next 12 months, nor are we sure whether it will retain its strength and grow, or whether manufacturing investment in particular will grow. We are taking a potential risk by balancing the growth in corporation tax, which the Minister believes will occur because of the cuts that have been proposed, against the cut—admittedly of 2%, but still a cut—in capital allowances proposed by clause 10.

The amendment simply says that at some point in the future—October 2012—we should have a break point, when we review what has happened since the allowances came into effect, which will be next year, against the corporation tax cuts, which come into effect now, and the other issues in the economy, which, although they are not before the Committee, are still relevant to this debate. As I did last night, I wish to refer to the fact that unemployment is still high across the United Kingdom. We need to grow the economy and grow manufacturing jobs, yet the cut in clause 10 may well impact on our current fragile growth. As I mentioned last night, unemployment in the UK is highest in the north-east, at 10.2%. I notice that my hon. Friend the Member for Hayes and Harlington is here, as well as my hon. Friend the Member for Poplar and—

[Jim Fitzpatrick]

Limehouse.

[Mr Hanson]

I still think of my hon. Friend as the Member for Canning Town; it is a habit that is hard to break. Just as I was about to say “Canning Town”, I realised that I was wrong, which is why I paused for a moment. In London—including the constituency of my hon. Friend the Member for West Ham (Lyn Brown)—the unemployment rate is 9.4%. London is a centre of prosperity, and it has growth in many parts, but if we are to encourage manufacturing industry in London to soak up those unemployed people and get them back into jobs and spending, it will be necessary to have an assessment of whether, downstream, the capital allowance cuts have been good or bad for unemployment rates.

The unemployment rate in the west midlands is 9.9%. In Yorkshire and the Humber, it is 9.3%. In my own region, Wales, it is 8.7%, and in Scotland it is 8.1%. Those are high levels of unemployment, and I want the Government to make an assessment of whether the capital allowance cuts will particularly hurt manufacturing industry in the north, the north-west, Yorkshire and the Humber and in the north-east, where my hon. Friend the Member for Tynemouth (Mr Campbell) has his constituency, more than it might do in the south, the south-east and the south-west, where the unemployment level is only 6%. That level is still high—it is 100% for those people who are unemployed—but it is still only 6%, compared with the higher levels at the heart of challenging constituencies in London and in the north and north-east.

[Jim Fitzpatrick]

When I won the seat of Poplar and Canning Town in 1997, the level of unemployment there was almost 17%. When Labour left office last year, it was down to about 9%. That was still between two and three times the national average, but it was a lot less than it was when we won the election in 1997 because of the efforts that the Labour Government put into attacking unemployment as the scourge of our economy. My right hon. Friend is making a strong argument that unemployment is not now going to be attacked as aggressively as we would hope, because of the economic policies of the coalition Government. I would like him to continue in this vein and to outline how we think it ought to be attacked, because it is the scourge of our economy.

[Mr Hanson]

I am grateful to my hon. Friend for making that valid point. I know that he is committed to bringing jobs and investment to his part of east London, as indeed my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) is to the north-west and elsewhere.

I am not saying that we will not approve the cuts in capital allowances in due course. I am simply asking the Minister to monitor their impact, and if they are becoming detrimental, given the corporation tax cut to which they are inextricably linked, we shall need to look at how the process will continue.