Civil Service Impartiality

Lord Macpherson of Earl's Court Excerpts

Tuesday 7th March 2023 Lords Chamber

[Baroness Neville-Rolfe (Con)]

That is a completely different scenario. Ms Gray will work for the leader of the Opposition, which is a political post that she is moving straight into from the very top of Whitehall. That is why we have rules and guidance. I am surprised by the response from the party opposite: I would have thought that it would want to get on and explain what she talked about with the leader of the Opposition and what else she was doing at the same time. This seems to me to be quite different from some of the other cases that have been mentioned.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, like my noble friend Lord Butler, I remember a number of examples of people moving from the Civil Service to political positions, in particular my old friend, the noble Lord, Lord Sassoon. He was a very successful director-general at the Treasury, who moved to become Gordon Brown’s ambassador to the City; he then resigned and turned up the next day as an adviser to George Osborne. Surely the issue is about the ACOBA rules, which are all too often not observed by members of the Government. Does the Minister agree that, so long as Ms Gray follows the recommendations for an adequate cooling-off period, which I would assume would be somewhere between three and six months, she is pursuing the right and honourable course?

[Baroness Neville-Rolfe (Con)]

Ms Gray does indeed need to apply to ACOBA, which she has not yet done. Her post is a very senior post of a political kind, and I am sure that ACOBA will look extremely carefully at the move and lay down appropriate rules and guidance for her departure from the Civil Service.

Economy: The Growth Plan 2022

Lord Macpherson of Earl's Court Excerpts

Monday 10th October 2022 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, there are some sensible policies in the Government’s growth plan. A better functioning supply side will enable higher growth of the economy—although I have a word of warning. Every Chancellor I served as Permanent Secretary announced reforms to the planning system—some announced them once a year. Announcing reforms is the easy part; making them stick is much harder.

I also congratulate the Chancellor on the senior team he announced today. I worked with James Bowler and Beth Russell over many years and under different Administrations. They are very able and represent all that is good in the Civil Service. Their appointment will be good for the Treasury’s credibility—and not before time, because credibility is hard won and easily lost, as the Chancellor has discovered in recent weeks.

Sacking a respected Permanent Secretary on day one can just about be dismissed as a little local difficulty, but choosing to announce the biggest giveaway since Anthony Barber’s in 1972 without involving the Office for Budget Responsibility was an elementary error. We now know that the OBR offered to produce a fiscal forecast, but the Chancellor declined. Investors want to understand the consequences for the public finances of major announcements and the OBR has provided considerable reassurance since George Osborne set it up in 2010. Perhaps if the Chancellor had engaged with the OBR he might have had second thoughts about the scale of his tax cuts, because injecting £45 billion into an economy facing chronic labour shortages and the highest inflation rate in 30 years is a risky strategy.

The Government are right to point out that the markets are fragile, but surely that is a time to move carefully. Bond yields had been rising since early summer but, as the markets began to digest the incoming Prime Minister’s programme, gilt yields rose faster in the UK than in the US and Europe. Again, that should have been a warning sign, but the Government chose to ignore it. The result is that the long-term cost of borrowing now stands at 4.7%—when I started writing these notes this morning, it stood at 4.3%. So the long-term yield is 210 basis points higher than at the beginning of August and, if sustained, will add over £40 billion to public spending in the long term.

Moreover, as the Bank of England Deputy Governor, Sir Jon Cunliffe, set out in a letter to the chairman of the Treasury Committee last week, yields rose considerably in the days following the Chancellor’s statement and, as we now know, the Bank of England had to intervene to calm the markets. When it comes to future meetings of the MPC, the Bank will have little choice but to raise interest rates more than it otherwise would, not least to protect the value of sterling. This is already putting pressure on mortgage rates and risks more than offsetting any growth effect of the mini-Budget.

It is not too late to put things right. I welcome the Chancellor’s announcement that he is bringing forward his Fiscal Statement to 31 October. This needs to include a credible plan to stabilise and then bring down debt as a share of the nation’s income. It needs to include credible public expenditure proposals. History suggests that writing in ever-bigger cuts to the benefits of poor people is simply not deliverable. If the Government cannot show how they will cut spending, they will need to revisit their tax proposals. This may be embarrassing but, unless the Government can restore economic credibility, the market response in the weeks ahead could be a whole lot worse than we have seen so far.

Health and Social Care Levy Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading & Order of Commitment discharged & 3rd reading
Monday 11th October 2021 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I draw attention to my declaration of interests in the register, including the ownership of a flat that I rent out.

I have long been in favour of a health and social care levy and, unlike most former Treasury officials, I am in favour of the hypothecation set out in the Bill. It was clear long before we knew about Covid-19 that the country would need to spend more on the national health service and social care. Demographic pressures have been building for some time and are set to increase further over the next three decades. The events of the last year have confirmed that care home provision is simply not good enough. It is a mark of a civilised society how a country treats those in need of the greatest care.

It has also been clear for some time that the Government have lost the will to find offsetting spending savings to pay for demands on our health and social care system, so taxes have to rise. I have no great problem with that. With gilt yields rising, debt interest promises to be the fastest-growing programme in the spending review. Better to finance current spending out of revenue than through borrowing. So I congratulate the Treasury and the Minister on achieving something all too rare: persuading an oversensitive No. 10 to accept a tax rise that breaks a manifesto commitment. This is not a forced tax rise of the sort that followed crises in 1976, 1992 and 2009 but a discretionary one. The Government are choosing to spend more, so they are taxing more.

I am tempted to leave it at that, but I feel duty-bound to take issue with three aspects of the tax. First, there is the issue of fairness. It is a principle of sound taxation that the tax base should be as wide as possible to keep rates as low as possible. Here I fear the Treasury has missed a trick. The health and social care levy should be paid by everyone, old as well as young, and should be payable on all income.

I welcome the Chancellor bringing dividend income into the levy’s coverage, but I am puzzled that rental income is exempt. The fact is that rental income has its own income tax schedule, Schedule A, so it would be easy enough to ensure that such income bore a higher rate of income tax. Indeed, for much of income tax’s 220-year existence, unearned income incurred a higher tax rate than earned income. That has been turned on its head over the past 40 years as Governments have chosen to channel tax increases through national insurance and tax cuts through income tax. However, the issue of rental income is a matter not just of fairness but of economic efficiency. Housing already receives substantial privileges, which further entrenches the bias in favour of property investment over equity investment. Rentiers generally do not need additional privileges—they have enough already.

I am also concerned that the levy further increases the differential in tax between employees and the self-employed. However, having spent 30 years of my life trying to persuade politicians to close this gap, only to see the noble Lord, Lord Hammond of Runnymede, try and fail the year after I left the Treasury, I am sufficiently realistic to accept that there is a zero chance of correcting this anomaly.

My second concern is that Government have decided to apply the levy to employers by increasing the rate of national insurance that they pay. This is sleight of hand, as the incidence of the tax and its economic effect is the same whether it is borne by employees or employers. It would have been much more transparent to introduce a levy of 2.5% payable only by individuals. I fully understand that taxing employers is easier politically—they do not have many votes—but, as always with tax, there is no free lunch. Employers’ national insurance is a tax on jobs. Tax more employment and you get less of it. That is why Margaret Thatcher abolished the national insurance surcharge in the 1980s.

I recognise that this Government have a rather different attitude towards business. The Chancellor has announced over £40 billion of tax increases this year. Nearly two-thirds of these will be borne by business in the form of high corporation tax and national insurance. That may be good politics, but at a time when Brexit has made it more important than ever that the UK is business-friendly, it is almost certainly bad economics. That, in turn, makes me wonder whether the Government will succeed in making the tax increase stick. Over the past 50 years, there has been many a radical tax change. Tax rates have swung wildly, new taxes have been created and old taxes abolished, but throughout this period, the tax take has remained stubbornly stable. No Chancellor has managed to get tax receipts above 34.1% of national income. Many Chancellors have forecast a rising tax take, only to be disappointed. This Bill envisages a tax take not seen since the days of Sir Stafford Cripps. I am sceptical it will deliver it.

My final point relates to where the money will be spent. I can see the case for capping the care costs individuals pay, but I agree with the noble Lord, Lord Forsyth, that it likely to have many unintended consequences. The social care cap is a simple income transfer from those who pay the levy to those who benefit from the cap. Of itself, it does nothing to increase the capacity of the social care sector. Given the travails of the past 18 months, that should surely be the priority at the current time. It would be tempting to rely on increased funding for local authorities, but, again like the noble Lord, Lord Forsyth, I fear that will not be forthcoming. It is not a protected programme, and recent Governments, since 2010, have chosen to squeeze local authorities over and over again. So, as well as looking forward to the increase in the social care levy, we will be looking forward to many an increase in council tax.

To conclude: I support this Bill, but the design of the levy has flaws. I hope that once the levy is in place, the Government will seek to address some of its faults.

Budget Statement

Lord Macpherson of Earl's Court Excerpts

Friday 12th March 2021 Lords Chamber

[Lord Macpherson of Earl’s Court (CB) [V]]

My Lords, I add my congratulations to the noble Lord, Lord Khan of Burnley, on his eloquent maiden speech.

There is much in this Budget which is sensible. It is right to support the economy at the current time. It is right to support people who cannot work and businesses that cannot open. Some of the measures are ingenious; I regret not having advised the then Chancellor Alistair Darling to implement a super-deduction. The Chancellor is also right to focus on repairing the public finances once this crisis is over. Unlike the noble Lord, Lord Eatwell, I do not think that we can rely on the Bank of England indefinitely buying the huge amounts of debt that the Government are issuing.

As they repair the public finances, I encourage the Government to be mindful of two issues. First, the proposed rise in corporation tax is very steep, and here I agree with the noble Lord, Lord Lamont. The deductions available against the tax are small. Britain risks becoming uncompetitive as a result, with activity moving to lower-tax jurisdictions. I am sceptical that the tax will raise as much revenue as the OBR suggests.

Secondly, the Government have further tightened their spending projections in the medium term. But, apart from cutting overseas aid and announcing a pay policy which may or may not be deliverable, they have shown little inclination to take the tough decisions to live within those plans. All the pressures in the coming period are going to be upwards—whether improving NHS capacity or the quality of social care. Meanwhile, demographic pressures are accelerating.

Controlling spending is hard work. The so-called unprotected programmes are now so small they cannot yield the savings that the Chancellor needs. He will have to take difficult decisions, and soon—for example, revisiting the triple lock on the state pension. But, in the end, I fear further tax rises will be necessary, so I continue to recommend a temporary social solidarity charge.

Finance Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading & Committee negatived & 3rd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords & 3rd reading (Hansard) & 3rd reading (Hansard): House of Lords & Committee negatived (Hansard) & Committee negatived (Hansard): House of Lords
Friday 17th July 2020 Lords Chamber

[Lord Macpherson of Earl’s Court (CB) [V]]

My Lords, I want belatedly to congratulate the Minister on his appointment to the Treasury. I had the good fortune of supporting from the official Box one of his distinguished predecessors, the noble Earl, Lord Caithness, in a Finance Bill debate back in the 1980s. I wish the Minister well in responding to so many speakers today.

The Chancellor set out a sensible Budget in March, and this is a sensible Bill. He has announced further measures since, all of which should support demand through a very difficult time, but we should be in no doubt that the best way to support the economy is to get on top of the virus and enable people to return to work.

When it comes to a temporary stamp duty cut, timing is everything. In the early 1990s, the re-imposition of the duty after a temporary cut may have added to the housing market slump which had then taken root, but I am happy to defer to the noble Lord, Lord Lamont, on that. In current circumstances, the cut could lift animal spirits and hence demand. In any event, I hope that the Chancellor will take the opportunity to look again at the stamp duty regime. Rates of duty are too high; they discourage people from moving. In a rational world, we would follow Ireland’s example, cut stamp duty rates and introduce a self-assessed property tax, but I am a realist and I do not expect this to happen any time soon.

Of course, dispensing largesse, whether through tax cuts or higher spending, is the easy part of the Treasury’s job. The Fiscal sustainability report, published by the independent OBR earlier this week is a reminder of the difficult part. On its central projection, the country will still be a running a deficit of over £100 billion in four years’ time, which is some 4.5% of national income. That suggests to me that we will need tax rises or public spending cuts of at least £50 billion to restore the public finances to a sustainable footing.

Public spending cuts can play a part—in my view, the abolition of the so-called triple lock for uprating the state pension is long overdue—but given the Government’s promise of no return to austerity, tax increases will have to deliver the bulk of the consolidation. For my part, I would recommend a social solidarity charge, payable on all income and with no reliefs. As the economy comes off life support, I encourage Treasury Ministers to lead a national debate about how the country will live within its means in the medium term.

Inflation

Lord Macpherson of Earl's Court Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest: in two weeks’ time, I begin to receive a Civil Service pension that will be uprated by the consumer prices index.

I congratulate the noble Lord, Lord Forsyth, and his committee on a rigorous and high-quality report, and on securing this timely debate. Public confidence in statistics is essential in a liberal democracy. I recall the words of Sir Michael Scholar, the first chairman of the independent UK Statistics Authority, who, incidentally, was appointed by the noble Lord, Lord Darling. He said:

“For me, good statistics is like sound money or clean water, it is an absolute necessity and if you do not have it things go seriously wrong”.


When it comes to economic statistics, measuring the rate of inflation is perhaps the most important statistic of all. Maintaining the value of a benefit, tax or charge has been hardwired into our social system since the Rooker-Wise-Lawson amendment of 1977.

I fully recognise that estimating the overall price level at any time is not easy, and I have considerable sympathy with the statisticians at the Office for National Statistics who must wrestle with this problem. Nobody has the same spending pattern. Expenditure tends to vary with age and income. Consumer habits and technological innovation mean that spending patterns are continually evolving. There is also a regional dimension, in that a lettuce will inevitably cost more on Uist than in Kent.

I was Permanent Secretary to the Treasury when the UK Statistics Authority, on the advice of the National Statistician, withdrew the retail prices index’s status as a national statistic in January 2013. At that time, it seemed that the RPI’s days were numbered. I knew that there would be a transition before the ONS and the Government alighted on a new arrangement, but six and a half years on I am surprised at how little progress has been made. I can understand the Treasury dragging its feet. At a time of fiscal consolidation, index shopping was helpful if, as the noble Lord, Lord Forsyth, pointed out, opportunistic, but there comes a point where such an approach damages the wider credibility of government policy, and we are now past that point.

I thought the UKSA handled the issue in textbook fashion in 2013, but since then it has been less sure-footed. It is no longer credible for the UK Statistics Authority to hide behind the Government. It needs to be clear about what is the best measure of inflation, and it needs to move the retail prices index into line with that measure.

Personally, I think the committee has been rather too kind to the RPI as currently constituted. It is not just the clothing formula which is the problem; it is the use of the Carli formula more generally. No other country uses it. Canada dropped it for sound reasons in 1978. Everybody else, with the exception of Slovenia, uses the Jevons formula. As Paul Johnson said in his 2015 review,

“Carli should not be used in any index aiming to achieve a good estimate of changes in consumer prices”,


and further it,

“is not suitable for use”.

Dr Ben Broadbent in his evidence to the committee reinforced the case against Carli saying that its failings,

“have been evident for a century”

I know this country welcomes exceptionalism, but we really ought to adopt international best practice. I would therefore advise against keeping the Carli index on life support. It is better to put it out of its misery once and for all.

Dropping Carli will have big implications for people who use the RPI. Having criticised the UK Statistics Authority for slowness, I should give it credit for its approach to consultation hitherto, and I hope it will consult further as and when—I hope it is soon—it reaches a definitive view on the way forward. I recognise that the UKSA is independent of government, but I would be grateful if the Minister could confirm that consultation lies at the heart of the UKSA’s and the Government’s strategy when it comes to change.

A reformed index would mean a transfer of resources to rail travellers and graduates with outstanding loans. The Government, understandably, have not recognised these groups as priorities hitherto, given competing calls on taxpayers’ money, but it is always open to the Government to change the relevant uprating formulae, just as they introduced the triple lock to underpin the state pension.

This brings me to the vexed issue of index-linked gilts. My recollection is that this was the swing factor when the Carli problem first emerged in 2013. I can see why the Treasury and the Debt Management Office do not want to disrupt the gilt market—it is to their credit that it is one of the most efficient markets in the world—but here the committee’s report is persuasive. First, whether or not the ONS changes the basis of the RPI, the market is sufficiently big—and it is likely to get bigger with current spending proposals—to be able to bear CPI-based issues existing alongside gilts indexed to the RPI. As the committee’s report makes clear, there are only three index-linked gilts left with a requirement that the Treasury buys them in at par if there is an index change. All will have expired by 2030, and even if the Government had to buy them in, I do not believe that would prove too disruptive, not least because at current prices few, if any, holders would want to exercise the option.

I urge the UK Statistics Authority and the Treasury to act. Maintaining the status quo is increasingly untenable.

National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading (Hansard): House of Lords
Wednesday 26th June 2019 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I will speak briefly in support of the Bill. It would be poor form not to, since the Bill has its origins in George Osborne’s last Budget, when I was his Permanent Secretary.

In many ways, it is a textbook piece of tax legislation. It originated from a proposal from the Office of Tax Simplification and reflects extensive consultation. I recognise that increasing tax on redundancy payments will not satisfy all, but if they are subject to income tax, it follows logically that they should be subject to national insurance. Who knows? A higher tax charge might deter unnecessary redundancies.

Nearly every Government I worked for at the Treasury looked at bringing income tax and national insurance closer together. I remember a review in the mid-1990s, encouraged by the noble Lord, Lord Heseltine, which I suspect was led by the noble Lord, Lord Young, as Financial Secretary to the Treasury. However radical their initial intentions though, Governments tend to shy away from wholesale reform, understandably scared off by the number of winners and, more importantly, losers. The difference in assessment periods and tax base of national insurance and income tax is problematic. National insurance is assessed weekly; income tax is assessed annually. National insurance is payable only on earnings; income tax is payable on savings and rental income too. Income tax includes a number of reliefs, not least on pension contributions; national insurance does not. National insurance provides pension entitlement; income tax does not. National insurance is not payable by employees over the pension age; sadly, income tax is payable until you die. The income tax system is progressive, marginal rates increasing with income; national insurance is not. Indeed, once earnings go above the upper earnings limit, the employee’s marginal rate falls from 12% to 2%.

Therefore, although there would be substantial administrative gains if income tax and national insurance were brought together, and the tax system would become altogether simpler and more intelligible for citizens, Governments generally conclude that full alignment is altogether too difficult. Indeed, I wonder how much Governments really want it. National insurance rates have almost doubled during my working life, while successive Governments have taken credit for reducing the basic rate of income tax from 33% to 20%.

All that said, it is still possible to create greater alignment. The Bill represents a small step in that direction. I would be grateful if the Minister would confirm that the Government remain committed to finding further ways of bringing income tax and national insurance closer together. It is right in principle that sporting testimonials and large redundancy payments are subject to income tax. If that is the case, they should also be subject to national insurance.

It is a pity that only employers’ national insurance contributions—class 1A—are being applied. There is a strong case for applying employee national insurance contributions as well. No doubt the Government will argue that there are precedents for exempting certain types of employment income from class 1. For example, benefits in kind, such as a company cars, are subject to class 1A but not class 1. I encourage the Government to look at this again at some point in the future. The national insurance system should not discriminate between different forms of remuneration. Potentially, it would bring in some useful additional revenue, which, to judge by the spending commitments of the candidates to be the next leader of the Conservative Party, will be needed.

In seeking greater alignment between national insurance and income tax, I encourage the Government to keep two areas in their sights. The first is self-employed earnings, where the Office of Tax Simplification recommended abolishing class 2 and raising class 4. Sensibly, the Chancellor came forward with a proposal on this in 2017, but he was forced by a strange coalition of Brexiteers and the official opposition to withdraw it. At some point, maybe many years hence, a Government will be elected with a rather more compliant majority than exists today. At that point, I hope Treasury Ministers will have another go at simplifying the system and creating greater alignment between employee and self-employed national insurance.

Secondly, by bringing the starting point for income tax and national insurance closer together, Gordon Brown achieved broad alignment in the early 2000s. For the rest of that decade, the annualised lower earnings threshold was maintained in line with the income tax personal allowance. The coalition Government chose to prioritise increases in the income tax allowance. The national insurance threshold has been left behind. At some point, I hope the Government will seek to close the gap. I am encouraged that both candidates in the Conservative Party leadership election have advocated a rise, although they have not yet said how they propose to fund it. I know closing the gap fully would be very expensive, but if in future the Government have the resources to cut taxes, I hope they will make this a priority. Meanwhile, I strongly support the Bill and wish it safe passage.