Economy: Spring Statement

Lord Turnbull Excerpts

Thursday 31st March 2022 Grand Committee

[Lord Turnbull (CB)]

My Lords, a number of what Jane Austen would have called “truths universally acknowledged” have slipped into public debate about economic policy, but many are fallacies. I start with the contention that it is pointless developing the UK’s oil and gas reserves because this will not reduce the price. It is true about not reducing the price, but that misses the point. We will need hydrocarbons for several decades to come even if we are approaching net zero. So long as we do, we are better off developing our own oil and gas resources, which will also enhance security of supply. Exploiting these reserves will add to national income and so boost our tax base, and providing investment in and inputs to the sector will add to our skills base.

The next fallacy we should address, which is often heard from the Conservative Benches, is that we should not tax people’s hard-earned savings—a euphemism for “hands off the value of my house”. For most people in this Room, the value of their house forms a large part of their wealth, and the capital gains on it form a large part of the increase in that wealth. Little of this has attracted income or capital gains tax. The claim that this is hard earned is entirely bogus. In my case, it is the effect of living in the same house in a nice neighbourhood for 34 years. I have not done anything to earn that. A recent analysis showed that, for many people in this country, the increase in the value of their house was bigger than the income they earned in the year.

We have a system for taxing housing wealth but it is seriously flawed. Through stamp duty we impose very large transactions costs on those who move but relatively little on the continued ownership of housing. We should flip this over, reducing stamp duty and increasing council tax, so that all householders pay a moderate amount extra every year instead of the small number who move, often for very good reasons, paying an enormous amount in that year. The added bonus is that these revenues could accrue to local authorities, which need more money to fund social care. Of course, all this needs a revaluation and a wholesale reconstruction of the council tax bands, which are stuck at 1992 levels. That requires political courage, which is not much in evidence.

There is a mystery about where we are going on the relative taxation of earned and unearned income—one of the points the noble Lord, Lord Sikka, just made. In 1971, in my second job in the Treasury, I worked on fiscal policy. In that year the tax on earned income was 83%, to which was added an investment surcharge of 15%, bringing the combined top rate to 98%. These rates were abolished by Chancellors Howe and Lawson—now the noble Lord, Lord Lawson—and the latter sought to establish a system in which we had a top rate of 40% on all forms of income, including capital gains. This regime did not last long, being progressively dismantled by several successive Chancellors.

The proposals now before us turn 1971 on its head. National insurance contributions have been raised while income tax rates are unchanged, so that there is no extra taxation on dividends, rents, interest and so on. The result is that tax on earned income has increased relative to other forms of income, and the growth of ISAs also favours investment income. What is the logic in all this?

It gets worse. The 1p cut in income tax in 2024, which was the coup de grace of the Spring Statement, applies to both earned and investment income. When rates are going up, investment income is protected, but when rates are going down, investment income shares in the benefit. For those with investment income it is heads I win, tails you lose, leaving younger working families shouldering the burden.

Let us face it: there is no logic in all this. It is just virtue signalling to assure the party faithful that their party still believes in lower taxes. It is also a knee-jerk response to the silly gibe that taxes will be the highest since Clement Attlee. I will explain in a moment why it is a silly gibe.

The Chancellor might still dream about lower taxes but do they work for society as a whole and can they be achieved? Economists used to describe as “luxuries” goods and services which people wanted to buy proportionately more of as incomes grew, but this is not true anymore. In today’s world, the things we want proportionately more of are not luxuries but essential services such as health, care, education, access to justice and resilience against sudden loss of income. These services can, mostly, be better provided collectively.

In Attlee’s time, those over 75 were 5% of the population but now they are approaching 15%, and this share will go on rising. So the outcome for any given level of borrowing is likely to be a high-tax/high-spending combination. The risk for the Conservatives is that they are locked into their low-tax mantra, even if they do not really believe in it, while the remorseless tide of demographics carries tax levels ever upward.

Two years ago, the Lords Economic Affairs Committee identified serious problems with universal credit in both the level of support it offers and the way it is administered. The two years of the pandemic have shown it in an even harsher light. Its finding then was that universal credit had

“left some claimants with an income that is substantially lower than their essential needs.”

That is even truer today. I believe we are heading for a new Poor Law, with local authorities and food banks supporting the destitute. Even in difficult times for this country, is a new Poor Law really the best we can offer?

In skating terms, the Spring Statement as a parliamentary occasion scored well for artistic impression, but for intellectual coherence and technical merit it was pretty dire.