Queen’s Speech

Debate between Lord Forsyth of Drumlean and Baroness Noakes

Thursday 5th June 2014 Lords Chamber

[Baroness Noakes (Con)]

My Lords, four years ago, the Government inherited an economy on its knees. We had emerged from the most severe recession in post-war history. We had a big structural deficit. Government debt was more than 60% of GDP and rising. The previous Government had no plans to deal with this. They left an uncompetitive economy and tax system with a corporation tax rate of 28% and a top personal rate of 50%. It has been a long haul over the past four years to restore the economy to something that resembles health. The job is far from over, but there is a lot to rejoice about. The economy really is growing again—and at the fastest rate in the developed world. Unemployment is falling rapidly and real disposable incomes are starting to rise again. I am sure that the Benches opposite will join me in rejoicing that manufacturing industry, which suffered so much under the previous Government, is now firmly on an upward trajectory. My right honourable friend the Chancellor was wise to reduce the deficit largely through expenditure reductions rather than taxation, and he was wise to ignore the Keynesian sirens calling for more spending and more borrowing.

On the downside, the deficit remains stubbornly high and it is not a cause of celebration that the debt to GDP ratio will peak at nearly 80%. There is still an absolute necessity to continue to bear down on government spending. The Government have played a difficult hand very well, but there are of course some things that they could have done better. Our energy policy is still a mess. We have the self-inflicted wounds of environmental policies that load costs onto British businesses and on to vulnerable consumers. We need some common sense on how much this country is prepared to pay for green luxuries. I endorse everything that my noble friend Lord MacGregor of Pulham Market said about the potential for shale to transform our economy, but dealing with underground access to shale resources in the Infrastructure Bill is but a small part of what the Government need to do to get this moving. Like my noble friend, I look forward to the government response to the report of the House of Lords Economic Affairs Committee on this.

There is also much work still to do on reducing regulatory burdens. There is only so much that we can do in the UK, so we will have to take the fight to Europe—and the sooner we get into serious negotiations over our membership of the EU and its terms the better.

However, my main topic today is taxation. It was wonderful to hear in the gracious Speech that the Government would continue to cut taxes. My right honourable friend the Chancellor has done much good work already. I will single out two things in particular: the path to the lowest rate of corporation tax in the developed world and the reduction in the top rate of income tax. However, the Government get few points for tax simplification. The Office of Tax Simplification was a great idea and has done excellent work, but its recommendations have not all been heeded, and more than 2,000 pages of complex tax legislation will have been added to our tax code by the end of this Parliament.

The Chancellor has shown his capacity for radical thinking with his excellent pension reforms, announced in this year’s Budget. I look forward to the pensions tax Bill delivering those reforms. What the country now needs is a similar reforming mindset applied to the tax system. I draw noble Lords’ attention to a substantial report on a single income tax, produced two years ago by the 2020 Tax Commission, which was sponsored by the TaxPayers’ Alliance and the Institute of Directors. It echoes the conclusions of work done by my noble friend Lord Forsyth of Drumlean’s Tax Reform Commission over eight years ago. The report recommended that most taxes should be abolished and replaced with a new single tax on income. This major simplification would replace the existing income tax, national insurance, corporation tax and various capital taxes including inheritance tax. For good measure, it would get rid of the detested air passenger duty.

The commission recommended a single 30% tax rate on income plus a total restraint on taxes as a percentage of national income of around one-third. The essential argument for a low-tax regime is that high taxes act as a drag on the potential of the economy. The 2020 Tax Commission estimates that its proposals would add over 9% to GDP over 15 years. Importantly, the annual growth rate would permanently be increased by around 0.4%. These potential prizes are too great to ignore.

The Tax Commission’s analysis included dynamic modelling carried out for it by the Centre for Economics and Business Research. This is the key. Many of us were delighted that the Chancellor used dynamic modelling to underpin the reductions in corporation tax last year and the recent cut in fuel duty—so far, so good. What we really need the Treasury to do is move towards using dynamic modelling as a way of life. It is good to use dynamic modelling for specific taxes but the Treasury should be using it to understand how to drive the tax system to support the whole economy. Traditional modelling methods will inevitably produce incremental rather than radical approaches to policy. If the analysis of the 2020 Tax Commission of a single low rate of tax is even half-true, the Treasury simply has to embrace it.

Of course, analysing the impact of a radical tax change is one thing and implementing it is another. It is not easy in an advanced economy such as ours to re-engineer the tax system in a short period of time. There have to be transitions to avoid destabilising the economy and harming individuals. There is the underlying paradox that if you take a long time over transition and overprotect the status quo, you will not see the benefits of higher growth, which is the aim. So there is a case for boldness.

I can see why the Government might shy away from wholesale restructuring, as proposed by the 2020 Tax Commission. It does seem pretty scary. But I do not understand why the Government are not pressing ahead with one key element of the tax commission changes: namely, merging national insurance with income tax. This has a growing body of support. The Office of Tax Simplification proposed it in its review of small business taxation; the Institute for Fiscal Studies supports it; and surveys of businesses show strong support.

Informed commentators know that national insurance is a tax in all but name, but the one thing that has managed to keep it alive is that it is the ultimate stealth tax. Gordon Brown knew that when he raised the extra 1%, allegedly for the NHS—and it seems that Mr Miliband is thinking about trying the same wheeze if he gets a shot at running the country. I find it extraordinary that the Exchequer Secretary has used the Beveridge notion of the contributing principle as the rationale for keeping them separate. Expecting citizens to contribute in return for qualifying for benefits is fine, but you do not need the fiction of a separate national insurance fund to achieve that. The time has come to be honest about national insurance. No one pretends that merging the two systems is a walk in the park. There are many legal and administrative hurdles to overcome. But the prize is great if we want a simpler tax system.

[Lord Forsyth of Drumlean (Con)]

What would my noble friend do about the problem of pension income, which is not subject to national insurance?

[Baroness Noakes]

I was about to say that the TaxPayers’ Alliance produced a very thoughtful report, which showed how a transition could be made within five years and could also protect the expectations of pensioners at the same time. There is a way of doing it. All I would say to my noble friend and to noble Lords generally is that it can be done—it just needs a Government with the will to do it.