Finance Bill

Lord Kerr of Kinlochard Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

I agree with the noble Lord, Lord Davies, about uncertainty, just as I agree with the Minister that this Finance Bill comes to us from a different world, the pre-referendum world. We now know that we face a decade of uncertainty, with growth consequently lower and recession, if there is one, deeper than it would otherwise have been.

I say a decade, as did the noble Lord, Lord Davies, because there are several stages to go through. Unlike the noble Lords, Lord Darling and Lord Davies, I think there will be an Article 50 deal. I think there will also be a framework deal—that is a precondition of the Article 50 deal—and a trade agreement deal. I think all three baskets are perfectly doable; it may take longer than two years, but I do not think anybody would want the default option of the noble Lord, Lord Darling. That is not in the interest of our continental partners any more than it is in ours, so I think a deal will be struck, but it will take two or three years. There will then be another year of uncertainty while it is ratified in the other 27 capitals and here. We need to remember that the trade deal with Ukraine came unstuck in Holland in a referendum, which was fought not over the merits of trade relations with Ukraine but to do with Dutch domestic politics, so there are many hazards on the way.

It is only when the content of our trade agreement with the EU and its status becomes clear that our position in the WTO can be established. We cannot be members in our own right until we have proposed our own MFN schedule of commitments, and that must be accepted by 164 members of the WTO, with plenty of room for mischief-making. Only when we have put forward our baseline MFN offer and it has been accepted can we realistically expect to strike trade deals with third countries. Why should they envisage a concession to us in trade negotiations when they do not know whether it is something we will offer anyway in our schedule for the world? Trade negotiation is a mercantilist arm-wrestling business, where people are looking for national advantage and concessions are hard to win.

So I do not know why Dr Fox is currently out recruiting negotiators, because I think they will have nothing to do for at least five years. We need to go through the extraction process with the EU. That trade deal we can strike, because it is a comprehensive agreement. We then need to become WTO members and have our membership terms approved by 164 members before we will find that even our Antipodean friends are willing and able to negotiate a trade agreement.

So a long period stretches ahead and, in the interim, inward investors will, in my view, tend to look elsewhere. The attractions of the gateway into the market of 550 million will be seen to be going, possibly gone. If Dr Fox is right—and I am sure he is—that we shall be leaving the customs union, British manufacturers, when their goods cross the Irish border or the channel, will be subjected to the rules-of-origin tests, the paperwork, bureaucracy, checks and transaction costs which Mrs Thatcher’s Government rightly took such pride in getting rid of in the 1980s, thanks to the single market programme and Lord Cockfield. All this points to a decade of uncertainty and growth lower than it would otherwise have been. I do not predict a recession; I simply say that that uncertainty must, as the noble Lord, Lord Davies, said, have an effect on the economy as a whole.

So this Finance Bill is pretty irrelevant to the real problems we face, and I agree with those who say that the Autumn Statement is likely to be rather more relevant. Speaking as a member of the committee chaired by the noble Lord, Lord Hollick, I support all that he said about what we would hope for in the Autumn Statement. In particular, I hope that the Chancellor means it when he talks about the importance of investment in infrastructure and encouraging investment in housing—particularly, as the committee emphasised to him, assisting local authorities to invest more in housing than they have been able to do.

That seems to me to be much more important than tax. I noted the Minister taking great credit for the fact that the plan is to have the lowest corporation tax rate in the G20 by 2020. I am much more encouraged by the fact that the current Chancellor has decided that he does not want to implement the faster and deeper cut that his predecessor was proposing after the referendum.

I think that Mrs May’s thinking will probably be slightly different from that of Dr Fox and Mr Davis, and what we read from the noble Lord, Lord Lawson of Blaby. Dr Fox does not want to protect any bits of our industry:

“We must be unreconstructed, unapologetic free traders”.

His schedule of MFN commitments might be quite easy to draft, but it seems to me that, politically, it would be quite difficult to sell in this country: difficult to sell to manufacturers; difficult to sell to farmers; difficult to sell all round. I suspect that Mrs May will prove rather more like Mrs Thatcher, who used to enjoy teasing her Chancellors by talking the Minford talk or the Alan Walters talk, but when it came to the walk she was much more pragmatic and shrewd in her judgment of what the country needed and what the country would take. I suspect that something similar will be seen with Mrs May.

And that makes it to me tragic that Mrs May is not going to Bratislava for the European Council this week. I simply do not understand that. We are members of this club until we leave it, and the empty chair is always a very bad policy. Mrs May should be there. I am told that the decision was taken in the last days of Mr Cameron. If so, that is another example of the disastrous consequences of the casual approach to diplomacy. If Mrs May were in Bratislava and were able—perhaps she is not—to explain how she envisages the Brexit process working, I think that our chances of getting a decent trade deal with our partners would be enhanced. They read the British press and believe that Dr Fox and Mr Davis, and the noble Lord, Lord Lawson of Blaby, are speaking for Britain. They believe we are heading for another big round of deregulation, for much less social protection, for a low-tax, low-wage economy—an offshore Singapore. If that is the kind of competition that they will face, that will colour their approach to trade negotiations with us.

As I say, I do not believe that that is where Mrs May is. If one believes Mrs May on the steps of Downing Street talking about reducing inequality, you do not reduce inequality by reducing wages and jobs. I should think they would find her presentation rather reassuring, and I am sorry that they will have to wait. Once she has decided how she will play this Brexit thing, it is very important that she should at an early stage give us a full explanation not just in this Parliament but in the European Parliament and to the European Council.

I ought to speak to the report of the noble Lord, Lord Hollick. I commend it. It is excellent and he has drawn our attention to all its merits, including the merits of our special advisers who are wonderful. I should add just one footnote to it. He did not mention what we said about the Office of Tax Simplification, which the Finance Bill puts on a statutory footing. Some might think it is a major change; I believe that it is a nugatory change.

My approach to tax simplification is coloured by working as private secretary for the noble Lord, Lord Lawson of Blaby, who shocked the Treasury on arrival by announcing that he wished to abolish one tax in every Budget—and he did. It was not a gimmick; the salutary effect on the Treasury of making it go through the exercise of looking at candidates for abolition was extremely good, and I commend the idea to Chancellor Hammond.

I also remember the Treasury’s great shock when, as he prepared his first Budget, Chancellor Lawson said that he intended to abolish all corporation tax reliefs, to make an instant reduction in the corporation tax rate and—this was the bit that really shocked the Treasury—pledged himself to five successive annual future reductions in the rate. He did so, and it was extraordinarily successful; the effect on certainty and confidence was considerable. That is the challenge for Chancellor Hammond. Can he emulate Chancellor Lawson as a simplifier?

On the need for him to do so, I quote three paragraphs from the excellent report of the committee led by the noble Lord, Lord Hollick. First, I quote from paragraph 228, which says that the first report from the Office of Tax Simplification,

“in November 2010 identified 1,042 tax reliefs in the UK tax system”.

By 2015, 53 had been abolished, but new reliefs had been introduced, making a total of,

“1,156 tax reliefs in statute as at March 2015 … a net increase of 114”.

Secondly, I quote from paragraph 229, which highlights that the Institute of Chartered Accountants pointed out that, in the same period, 2010 to 2015,

“the fact is we have had almost 3,000 pages added to the UK tax code, and that was on top of, I think, 9,000 when we started. It is very difficult to simplify a tax system meaningfully when you are faced with that level of extra legislation”.

Finally, I quote from paragraph 230, which highlights the evidence from the Federation of Small Businesses:

“Despite the laudable efforts of the OTS … We see neither the flow of new legislation abating, nor are we convinced that the administrative impact of tax measures undergo the same level of scrutiny as regulation more generally”.

Noble Lords will, I am sure, agree that one reason why there is inadequate scrutiny of tax regulation is that we do not get our hands on it here—we are made to keep off that grass.

There is a major job to be done in trying to reduce the size of the tax code, and I think that putting the Office of Tax Simplification on a statutory basis will not achieve anything. There are two routes you could go down: you could either follow the OBR route and make it genuinely independent and a power in the land, or you could keep it as it is now, or as it will be, on a statutory footing, inside the Treasury and dependent on the Treasury for pay and rations, but allow it—as it is not allowed now—to see tax measures in advance, and allowed in on the Budget process. As it is, it will remain neither one thing nor the other, as Churchill is said to have said of Alfred Bossom. It is neither going to be genuinely independent nor will it be up-stream. I would have gone for it staying in-house but being up-stream, which is something that the Chancellor could achieve by a flick of the pen, without any further legislation—and I very much hope that he will, as he rises to the dual challenge of reducing the size of the tax code during his time in office and abolishing one tax per Budget.