Budget Statement

Debate between Lord Lupton and Lord Skidelsky

Wednesday 23rd March 2016 Grand Committee

[Lord Lupton (Con)]

My Lords, I want to talk about two matters in the Budget, one of which has had little publicity to date but to my mind signals a significant and welcome policy development. Before doing so, I want to make one general observation and remind the Committee of my declared interest as chairman in Europe of a global corporate advisory firm, some of whose clients may well be affected by the Budget.

In my first few months sitting in your Lordships’ distinguished company in the House, I have come to the conclusion that the opposition parties have learned little from the depressing tale of recent economic history. Reckless mismanagement of the economy in 13 short years, most of those years in the boom period before the crash, brought this country almost to its knees in 2010, requiring the Conservative-led coalition in that year, now a Conservative majority Government, to take decisive action to reduce a double-digit deficit.

It is apparently perfectly acceptable, when we have a deficit still running at more than 3%, to table amendments costing the country literally billions while criticising in a knee-jerk way any tax cut, even when there is good evidence that such a cut may produce more revenue. I am sorry to say that there is something sickening about listening to the sheer hypocrisy of Labour Peers criticising a so-called “black hole” of £4 billion opening up over the next five years on PIP when they dug a 10% deficit cavern in 2010—a Wookey Hole compared to a PIP pothole.

[Lord Skidelsky]

My Lords, can we just get some accuracy on the figures? The deficit when George Osborne took office was 8.3%. Let us not talk about double digits.

[Lord Lupton]

As the noble Lord well knows, the economy is a supertanker that does not turn around in six months, as indeed the evidence over many economic cycles shows. None the less, just to recall, all of that generated in 2010 the famous billet doux from the Treasury: “Good luck. There’s no more money”.

I want to talk about the proposal to cut capital gains tax from 28% to 20% from next month. In 2010, the Adam Smith Institute produced a compelling report on the effect of capital gains tax rises on revenues using data from the USA dating from 1955 to 2006. I apologise in advance for bombarding noble Lords with numbers, but when the tax rate was raised four times between 1968 and 1976 from 20% to 35%, total capital gains tax revenues fell by 21%. When the 35% CGT rate in 1978 was then progressively cut to 20% by 1984, the CGT take rose by 46% to $41 billion. When the rate was increased again in 1986 to 28% from 20%, revenues fell by 13%, and when the rate was cut from 20% to 15% in 2003, CGT revenues almost exactly doubled to $110 billion. Noble Lords will get the drift: there is a clear pattern of inverse correlation between the two. Professor Paul Evans of Ohio State University found in an important piece of research carried out in 2009 that a 1% reduction in the marginal tax rates on CGT in the US might trigger a 10% increase in revenues.

There have been fewer changes to CGT rates in the United Kingdom so it is more difficult to draw evidence-based conclusions, but I note that the rate cut in this Budget is possibly the only cause for my being in agreement with the former Chancellor of the Exchequer, Gordon Brown. He reformed CGT in his first Budget in July 1997, cutting CGT on long-term investments from 40% to 24%, and again in 2003 he cut CGT on business assets to a rate of 10% for assets held for more than two years. Thereafter—guess what?—CGT revenues in the UK increased by 35% to £3.2 billion. Since much of capital gains tax is a voluntary tax in that you can often choose when to realise a profit, this feels intuitively right.

I applaud the cut in the rate of CGT, not least for basic rate taxpayers who will now pay only 10%. With entrepreneurs’ relief at 10% now extended to all long-term investors in unlisted shares—quite often start-ups—there is already anecdotal evidence of a further surge in entrepreneurialism which will, based on strong historical evidence, particularly in the United States, increase revenues from this tax to the Exchequer—and hence my reason for applauding it.

I would also like to say a few words about the introduction of the interest deductability cap which, perhaps unsurprisingly given its name, has had little coverage in the press. The Budget imposes what to my mind is a sensible cap on the amount of interest which can be deducted from taxable profits at 30% of those earnings in the UK with a de minimis threshold of £2 million of net interest expense to avoid harming smaller companies. This represents a very important policy shift. While a key driver of this measure seems to be restraint of tax shifting by international companies away from the UK, sections of the investment community, some of whom I represent in the UK, will no longer have such a powerful personal motive to leverage the companies their firms buy.

This provision will force a change on the private equity business model in the UK, requiring, I believe, greater prudence and greater concentration on genuine business improvement rather than overreliance on pure financial engineering. That is a good thing and I am sure that the private equity industry will rise to the challenge.

The great financial crisis was littered with carcases of companies where the so-called “tax shield” of carefully constructed legal structures with double dipping and excessive debt went wrong when the profits of the company stumbled. From talking this week to some of the major players in the private equity world, my feeling is that this OECD-wide initiative, which our Government are now pioneering, is regarded by them as an inevitability, with the result that lesser personal rewards will be available from what, in aggregate—that is the point: in aggregate—became the taking of major systemic risk through excessive leverage. Excessive, and even abusive, use of interest rate deductions incentivises the use of debt over equity, overleverages corporations, thereby increasing their risk, and increases systemic risk in the UK banking sector as a direct result. Change is long overdue—a fact the Chancellor recognised with prescience when he called for such change in opposition. I applaud this move, with the cautionary note to the Minister that when interest rates eventually rise, the Government may need to be flexible on whether 30% is then the right threshold for the cap.

This is not only a pro-business Budget but one which is pro-market, pro-new entrant, pro-small business and pro-entrepreneur too. Under the bonnet of this Budget, small businesses and entrepreneurs are being helped the most and large companies are being held better to account to behave responsibly and pay their fair share. Growing, successful businesses create jobs. Higher employment improves the economy, reduces the deficit and enables us to take care of the most needy in our country. We should trumpet the success of UK business in recent years. I am confident that this Budget will build an even more vibrant business economy.