Lord Sikka
Main Page: Lord Sikka (Labour - Life peer)Economy: Spring Statement
Lord Sikka Excerpts
Lord Sikka (Lab)
My Lords, it is pleasure to participate in this debate. If I had had more time, I would have liked to dissect every sentence in the Chancellor’s Statement. However, that opportunity is not available, so I will concentrate on just a few things.
First, the Statement is really bad news for a large section of our society. Due to the high rate of inflation and tax hikes, at the next general election the real income of average households will be lower than it was at the time of the 2019 general election. According to the Resolution Foundation,
“the typical working-age household faces an income fall of 4 per cent, or £1,100, in 2022-23.”
Public sector workers will fare even worse as they have faced more than a decade of wage freezes, with the announcement of another derisory pay rise today.
With the freezing of the personal allowance and income tax thresholds, as well as hikes in national insurance, 27 million workers will pay more in income tax and national insurance by 2024-25. No Government in British history have ever negatively affected so many people in one fell swoop. The Chancellor has neither given adequate immediate relief from the cost of living crisis nor addressed the structural factors that condemn millions to poverty and hardship.
The average household energy bill is expected to increase to around £3,000 by the end of this year. Consequently, the average energy company profit per household is expected to rise from £24 to £60—two and a half times more. Energy producers, including oil companies, gas companies and other companies, are expected to increase their profit per household from £43 to £1,717—that is a fortyfold increase in their profits—yet there is no windfall tax on the producers of energy to reduce household energy costs. So my first question is this: can the Minister tell the Committee why the Government are tolerating such a high rate of profiteering? I hope that she will not come back and say that they are investing, because I already have an answer ready for that; she will have to find some other answer for that question.
The word “pensioners” appeared just once in the Chancellor’s entire speech. There is no immediate restoration of the triple lock or increase in the winter fuel payment, which has remained unchanged since 2011. The median weekly state pension of between £150.25 and £178.52 per week will rise by 3.1% from April, while the rate of inflation—RPI—is 8.2%. Food prices are forecast to increase by 15% on average while energy prices—
Lord Sikka (Lab)
My Lords, just before the Bells rang, I was referring to the plight of our senior citizens, who are facing food price rises of 15% and energy price rises of 54%. Already, 2.1 million of them live in poverty; millions more will now face hardship. It is disappointing that the Chancellor did not really have anything additional to offer them. In case the Minister is inclined to defend that, would she volunteer to live on the median state pension and see what it is like?
Before the pandemic, some 14.5 million people, including 8.1 million working-age adults and 4.3 million children, were living in poverty. The Chancellor’s cruel policies will push another 1.3 million people into poverty, including 500,000 children. That is unacceptable. UK household debt at the end of January 2022 was nearly £1.8 trillion. Millions of people just do not have a buffer of savings to help them manage the crisis. Median household gross savings are £12,500 in the UK. Some 25% of households have less than £2,100. Millions of people are just one pay cheque away from destitution, yet the Government have not offered them any help at all.
Due to inflation, the Government have higher tax receipts, but they are retaining them to bribe the electorate before the next election with an income tax cut of 1p in the pound in 2024. This will do absolutely nothing for the 18.4 million individuals whose income is below the tax-free personal allowance. According to the Institute for Fiscal Studies, only 58% of UK adults pay income tax as the other 42% are too poor and their income is less than the personal allowance. Any cut in income tax will do absolutely nothing for them either. The Government have made the poor even poorer; it has already been said that they cut universal credit last October and are now increasing benefits by just 3.1%. How does the Minister expect the poor to survive?
The Government’s tax policies are loaded against work and workers. I will give your Lordships an illustration of how they work and how unfair they are; hopefully noble Lords have a pen and paper handy to note down the numbers I am going to call out. Let us look at a case with two individuals who each have an annual income of £30,000. One is a worker in a factory and the other speculates on shares and makes capital gains. The worker has £30,000 gross income and will receive a personal allowance of £12,570 from tomorrow; that leaves a taxable income of £17,430. This worker then pays income tax at a rate of 20%, which comes to £3,486, and will now also pay 13.25% of national insurance, which comes to £2,309. Their total deductions are £5,795 and their take-home pay is £24,205 out of £30,000 gross.
Now let us look at the speculator, who speculated on shares and made capital gains of £30,000. They will receive a capital gains allowance of £12,300. Chargeable gain—the phrase used—is then £17,700. This is not liable to 20%, as the worker pays in income tax, but to only 10%, so their capital gains tax is £1,770. The national insurance payable is zero because no national insurance is charged on capital gains. The total deductions paid by this speculator are £1,770 and their take-home pay is £28,230, compared with the worker’s £24,205. Why on earth are workers penalised with higher deductions?
I have some questions for the Minister. First, why is no national insurance charged on capital gains, even though the recipients use the National Health Service and social care? I hope that the Minister will answer that; hopefully we will get some straight answers. Secondly, why are workers charged a higher rate of tax than speculators? How is that conducive to levelling up and building a better society? I hope that the Minister answers that question, too. As I have said in the House many times, by taxing capital gains at the same rate as earned income and charging national insurance on it, we could raise at least £25 billion. This could be redistributed and invested in public services and higher education, as was mentioned earlier, but that is simply not done.
It is not that the Government do not like just our senior citizens, workers and people on benefits—they do not seem to like graduates either. The Chancellor did not mention that fact in his speech but, when you look at the OBR analysis, you can see that grievous harm is being done to our graduates. Under the Government’s formula, graduates will pay interest at RPI plus 3%, which will hit 11% to 12% soon. The average graduate debt is £50,000. Where exactly are graduates going to find that £6,000 in the form of interest, in addition to higher food, energy and other costs? The OBR’s analysis is that graduates will be hit by £11 billion in 2022-23 alone, and by a total of £33 billion over the next five years. That is the OBR’s actual analysis—it is in the Statement. Can the Minister explain how she expects graduates to survive? Will the Government consider revisiting their treatment of graduate debt?
There is nothing in the Chancellor’s Statement to address the deeper causes of poverty. For example, 42% of all disposable household income goes to the top 20% of households, while 7% goes to the bottom 20%. The Government have no policies for addressing this and securing an equitable distribution of income. Workers’ share of GDP in the form of wages and salaries has declined from 65.1% in 1976 to 48.7%—a decline unmatched in any other industrialised country. Yet there is no government policy that I am aware of to increase workers’ share of GDP, without which a resilient economy cannot be built. I am afraid that the Chancellor’s Statement has probably increased the possibilities of social disorder this summer.
Baroness Penn (Con)
My Lords, on public sector pay, of course there is a process to be gone through. The Government set out the parameters that the pay remit bodies then go away and look at and make recommendations to the Government. We are at only the beginning of that process and we will see those recommendations in the summer.
I was just saying that the Government will continue to keep the situation under review, recognising the high level of current uncertainty, including monitoring the ongoing impact of the Russia-Ukraine conflict on the economy, and will be ready to take further steps if needed. That may be pertinent to the noble Baroness’s point.
The noble Lords, Lord Davies of Brixton and Lord Sikka, raised the issue of pensioners in particular. I can confirm to the noble Lord, Lord Davies, that when the Chancellor was asked at the Treasury Select Committee a very direct question about whether he would guarantee the triple lock for pensioners this year, he was crystal clear that he would. On the value of the state pension more broadly, since 2011, when the triple lock was put in place, the value of the basic state pension has increased by £2,050 and is now at the highest level relative to earnings in 34 years.
The noble Baroness, Lady Boycott, asked specifically about food insecurity for the poorest households.
Lord Sikka (Lab)
On the state pension, I referred to the median figures, which are half the national minimum wage. Does the noble Baroness consider that a state pension of half the median wage is adequate for millions of our senior citizens to live on?
Baroness Penn (Con)
My Lords, I make two points. One is that we have been increasing the value of the state pension, as I just said. Secondly, for those who rely solely on the state pension for their income, there is pension credit in addition. We are doing a lot of work to drive an increase in the take-up of pension credit so that people who are entitled to that extra support access it.
On food insecurity, the latest statistics from the DWP on households with below-average income, which came out today, show that the percentage of individuals in food-insecure households fell from 8% in 2019-20 to 6% in 2020-21. I completely acknowledge that that is still too many and that, of course, the nature of those statistics means that they lag behind by a year. I have already mentioned the household support fund that the Government have put in place but, beyond that, we have increased the value of Healthy Start food vouchers and are investing more than £200 million a year from 2022 to continue our holiday activities and food programme, which already provides enriching activities and healthy meals to children in all English local authorities.
The noble Baroness, Lady Boycott, asked about BOGOF promotions. We recognise that there will be costs to businesses associated with implementing this policy. However, the cost of obesity to individuals, society and the NHS is significant; the benefits of reducing calorie intake across the population are therefore substantial and outweigh the costs of that policy.
In the longer term, we can best support people to cope with the rising cost of living by helping them into work—not just into jobs but into better-paid jobs. The noble Lord, Lord Bird, talked about long-term investment in social programmes. In July 2020, the Government launched their plan for jobs, which is one of the most comprehensive and ambitious plans in the world, to protect, support and create jobs across our country. That plan is working, as demonstrated by unemployment falling for 12 consecutive months back to below pre-pandemic rates.
The Government have been building on the measures announced in the 2021 spending review to support people in finding work and increasing their earnings. We will spend more than £6 billion on labour market support over the next three years. That includes extending for a further 12 months the Department for Work and Pensions’ train and progress programme, whereby those on universal credit can spend up to 12 weeks in training, or up to 16 weeks in training in subjects with skills at boot camps, instead of eight weeks. That will allow those who have recently become unemployed or are at risk of unemployment to retrain into priority sectors.
Further, we have doubled the number of work coaches in the system to 27,000 and we have the KickStart scheme, which has supported 130,000 young people into KickStart jobs. We have also announced more than £1.1 billion of funding over the next three years for programmes that enable people with disabilities or long-term health conditions to find and sustain employment. This includes continuing the Access to Work scheme, which offers financial and practical assistance in making workplace adaptions, and the work and health programme, which provides tailored support for individuals to overcome their specific obstacles to employment.
Beyond this, in terms of support for wages, the Government have introduced the national living wage. As I said, this will increase in April by 6.6%. There is also a new in-work progression offer. This means that, for the first time, people who are on universal credit and are already in work can access individualised work coach support that focuses on helping them to increase their earnings and progress in their jobs. The other element to support that progression is investment in skills. We will invest £3.8 billion in skills in England by 2024-25.
The point about investment in skills allows me to touch on another point made by the noble Lord, Lord Bird, about the importance of education. It is absolutely essential. In the House, we dealt with the skills Bill as part of the Government’s plans to ensure that technical and further education get the support in this country that they rightly deserve. This week, we published the schools White Paper and the SEND Green Paper, which focus on improving educational outcomes for children. We have narrowed the attainment gap for children in the poorest households but there is so much more to do. The noble Lord, Lord Macpherson, talked about the need for long-term action in this area, building cross-party alliances. I do not pretend that there is agreement on all aspects of our plans but, on skills and education, the policies we have designed and the Government’s approach are definitely in that spirit.
This brings me to the question of public sector spending and the comments of the noble Lord, Lord Hain, who talked about cuts to public spending. I have to disagree with the noble Lord. The spending review in 2021 set departmental budgets up to 2024-25 and, based on these plans, total departmental spending is set to grow in real terms by 3.7% a year on average over this Parliament; that is £150 billion in cash terms and an increase of £88 billion in real terms.
I will address the point made by the noble Lord, Lord Davies, about the GDP deflator. Of course, the GDP deflator is a broader measure of inflation than CPI, which just measures the inflation felt by consumers. Government operates across the whole of the economy and therefore it is appropriate to use the wider measure of inflation. This is the measure that is always used to look at these questions.
The noble Lord, Lord Hain, also questioned whether, as we meet our fiscal rules, we should use the additional headroom to allow people to keep more of the money they earn, and suggested that we might have set our priorities in the wrong place. I disagree with the noble Lord; I think his own Front Bench may disagree with the noble Lord also. It is partly for this reason: the size of the state is expected to grow to 41.3% of the economy in 2024-25—up from 39.9% in 2007-08. So, when we are in a position to do so, we should look at cutting taxes for ordinary working people to put more money back into their pockets.
On the subject of spending, the noble Lord, Lord Macpherson, raised defence spending. He will know that defence spending has been prioritised by this Government. In the spending review 2020, the MoD was awarded the largest sustained spending increase since the end of the Cold War. Underpinning that spending review decision was The Integrated Review of Security, Defence, Development and Foreign Policy, which recognised that Russia remained
“the most acute threat to our security”
and that:
“NATO will remain the foundation of collective security in … the Euro-Atlantic”.
I was previously accused of being complacent on this subject, and I reassure noble Lords that I and the Government are not. All I would say to the noble Lord, Lord Macpherson, is that we are only five weeks into the conflict in Ukraine. I think it is something that will develop and unfold over a longer time period, so I caution against changing long-term plans and decisions based on the length of experience so far.
I turn to a subject where I agree with many noble Lords: the question of growth. The noble Lords, Lord Desai, Lord Horam, Lord Macpherson, Lord Hain, and others all pointed to the fundamental need to get more growth into our economy. That is why the second part of our tax plan is focused on exactly that.
On infrastructure, we have launched the UK Infra- structure Bank and confirmed a total of £100 billion of investment in economic infrastructure over the spending review period. On skills, I have already referred to the important investment we have made, including things such as the lifelong learning entitlement and the development of skills bootcamps. On innovation, we are increasing public investment in R&D to £20 billion by 2024-25 and we are focused on boosting small and medium enterprise productivity through the help to grow scheme. I could go on, but I am conscious of time.
Many noble Lords asked about the 1p cut to income tax in 2024. We have had a wider debate in this Committee about the merits of taxing earned versus unearned income. As the Government’s tax plan made clear, we want to spread the proceeds of growth. That is why the tax cut applies to a broad set of taxpayers. I am very aware of the concerns about how we are treating earned versus unearned growth. As I assured noble Lords yesterday, the tax cut does not apply to dividend income. Dividend tax rates will rise as planned this April and not reduce in 2024.
The Government have also taken significant steps to ensure that rental income is taxed fairly, including restricting the finance cost relief so that landlords can no longer get relief at the marginal rate if they are a higher or additional taxpayer. Purchases of additional properties are also subject to higher additional rates of stamp duty.
The noble Lord, Lord Sikka, raised the question of charging national insurance on capital gains. He will be well aware of the history of national insurance contributions as part of the UK’s social security system. That system is based on a long-standing contributory principle around paid employment and self-employment, with employers, employees and the self-employed paying towards the protection of those who have been in the labour market. That is why NICs focus on the tax base that they do.
The noble Lord, Lord Turnbull, talked about housing wealth funding social care, while the noble Lord, Lord Davies of Brixton, asked me yesterday whether there are any plans to change NICs treatment for the self-employed. I was clear to him then that the Government do not have any plans in this area. The proposal to use housing wealth to fund social care was included in the Conservative Party manifesto but was not welcomed by any party—perhaps including the Conservative Party—in that election. I do not make that point flippantly; it is important that policies put forward to be delivered, particularly as we discuss them in the unelected House, have the consent of the public. If we want to enact change, ultimately, we need people’s support for those changes. Some of the debates that we have today ultimately translate into broader debates across the country.
I heard the points that the noble Baroness, Lady Kramer, made. I hope she will forgive me for pointing to the fact that it was a Lib Dem policy to raise the income tax threshold to £10,000 while adding a penny to national insurance to pay for the NHS. I might be out of date on their approach now but that is worth bearing in mind.
Underlying a lot of this debate are the choices that the Government have made.
Baroness Penn (Con)
I absolutely agree with the noble Lord. That is why I tried in my speech to point to all the investment that the Government are making in helping people to move out of poverty and have a better life than they otherwise would.
In fact, the noble Lord’s point about the choices we have made in this Spring Statement and overall as a Government is a good one. I pointed to the distributional analysis published with the 2022 Spring Statement. Our modelling shows that the poorest 66% of houses receive more in public spending than they contribute in tax and, on average, households in the lowest income decile will receive more than £4 in public spending for every £1 that they pay in tax. The impact of government policy since the 2019 spending round on the bottom four deciles is expected to be worth more than £1,000 a year, while there has been a net benefit on average for the poorest 80% of households.
Lord Sikka (Lab)
I am grateful to the noble Baroness for giving way. It has been a long day and she has great powers of perseverance, which are all on display. She referred to capital gains. The point is that capital gains are not subject to any kind of national insurance, so zero is paid. The second point I made was when I compared a worker with £30,000 of gross income and a speculator with £30,000 of gross income, and the worker was paying £4,000 more in income tax and national insurance deductions than the speculator. What is the logic in taxing workers more and then having them queue up for universal credit and other benefits, or at food banks, in order to survive? What is the economic and social logic? I would be grateful for some discussion or explanation of that. Why are workers penalised with higher rates of taxes and deductions?
Baroness Penn (Con)
My Lords, I understood the noble Lord’s points and attempted to describe why we have evolved a system of national insurance contributions that is separate from our income tax system. I am sure this will not be the last time we debate this subject, particularly with the noble Lord.
I was just talking about the choices we have made with this Spring Statement and since then. If you look at them in the round, they benefit the poorest households most. This Spring Statement recognises the impact of growing pressures on the cost of living. We continued with the health and social care levy because it will provide additional funding for the public’s priority of the NHS and, in time, as those reforms come on stream, for social care. I believe it was the right choice to do that and raise the thresholds for national insurance rather than to scrap or cut the health and social care levy altogether. If we were to do that, as advocated in the policy of the shadow Chancellor, because half the revenues from the health and social care levy come from the highest 15% of earners, a reversal would not be targeted at the lowest and middle earners.
The same goes for support to tackle energy bills. The shadow Chancellor has talked about scrapping VAT on domestic energy, which would also benefit high-income households most. There are choices to be made and they are really difficult—I do not shy away from that. But this Spring Statement provides a tax cut to support millions of people with the cost of living. We have set out how we plan to use taxes to support higher growth in this country in years to come and how, when we are on the path to that and to meeting our fiscal rules, we will share the proceeds of that growth.
I thank noble Lords for their patience with the length of my—