The Economy
Andrew Love Excerpts(13 years, 5 months ago)
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Jackie Doyle-Price
I shall press on, if that is okay.
The Government’s measures will encourage more people to fill newly emerging jobs. I am delighted that in the last Budget, we began to move towards increasing the income level at which income tax is paid, which will make the most difference at the margin. With our welfare reforms, that will incentivise people to get back into work.
There has also been an improvement in investment. The biggest inward investment in the UK is for the London Gateway port, which is being constructed in the borough of Thurrock. That will add to the area’s existing port facilities at Tilbury, which this year celebrates its 125th anniversary—we all wish it many more years of success—and Purfleet, where the roll-on/roll-off container business is again booming. Even before DP World opens, the tonnage landed in Thurrock exceeds that of Dover and Felixstowe. That is a good sign that in my constituency at least, the economy is definitely moving in the right direction.
Having spoken of all that is going well, I would like to tell my colleagues on the Treasury Bench about matters on which the Government need to raise their game, so that we make the most of the economic opportunities that are available to us. First, we need to do more to encourage investment. We need to make investment easy and to ensure that there are no barriers in its way, particularly in the planning system. Some firms have had to pay absolute fortunes to protect species on brownfield sites, and section 106 agreements seem to be used by local authorities, and indeed on occasion by Government Departments, as cash cows to fund projects that go beyond the benefit needed. Our overall objective is to encourage economic growth and job creation, so we need to ensure that those measures do not act as barriers to investment, but encourage it.
On the banking sector, I thoroughly support the objectives behind Project Merlin and agree that there is a need to ensure that our banks lend to people who want to buy their own homes and to businesses. However, we need to bear in mind that businesses are much less risk averse, and that they are looking at other ways of financing investment where possible. We must avoid putting the taxpayer in the position of lender of last resort for projects that are riskier than projects that we should support.
Mr Andrew Love (Edmonton) (Lab/Co-op)
I thank the hon. Lady for giving way before she leaves the subject of Project Merlin. She will have seen the lending figures for the first quarter. To put it mildly, the figures for lending to small and medium-sized business are disappointing. Does she believe, as I do, that the Government need to take firmer action to ensure that the banking sector lives up to its Project Merlin commitments?
Jackie Doyle-Price
We should absolutely encourage more lending to sustainable businesses and business propositions, but we should not encourage banks to lend just to meet that target. Lending must be based on real demand, which, as I said, is falling, because firms are finding other ways to fund investment. It must also be based on an appropriate degree of risk, because it is inappropriate for the taxpayer to stand as guarantor of such loans.
In conclusion, there is more realism in the economy. We are building an economy on real wealth creation, not credit or an inflated public sector. There is much to celebrate, despite the best efforts of Opposition Members to talk our economy down. They must consider the impact of their words. Confidence is central to economic growth—confidence is all, and every negative message undermines it. When confidence is undermined, the recovery will slow. This is not about partisan games; it is too important. We all need to recognise the real progress that we are making.
James Morris
I will not give way. I will make progress.
The Government faced a considerable challenge when they came to power. With the growth plan that they have begun to implement, in addition to the important steps that they are taking on deficit reduction, we are moving in the right direction. In the west midlands and the broader black country economy, skills is the No. 1 issue that we need to tackle. It is holding business back. We are investing considerably more in high-quality apprenticeships, involving the voluntary sector and other parts of the economy in making sure that we build a proper skill base in the black country and the wider west midlands economy. We are beginning to build better relationships between small and medium-sized enterprises and institutions of further education, such as Halesowen college and Sandwell college. We are beginning the job that the previous Government did not address, and making sure that we match appropriate supply of skills with demand in the local economy.
As “The Plan for Growth” recognises, we also need a more local approach to stimulating economic development. That is why I have been a strong advocate for the black country local enterprise zone. I have been working with its representatives to define the best way to drive economic growth in the black country, and on how to maximise the potential of the Chancellor’s Budget announcement on enterprise zones to stimulate new investment and new jobs and ensure that the local enterprise partnership is able to drive economic development.
Mr Love
There is a lot of evidence from the 1980s about employment zones, and it shows that the cost of the jobs created was very high compared with alternative models, and that all that employment zones did was shift employment around the borders of the LEP. What leads the hon. Gentleman to believe we will be more successful this time?
James Morris
There is huge potential to stimulate growth in the black country. Especially now when public spending is limited, we need to find creative ways to stimulate economic growth in the various areas of the black country, and we might do so by starting with one enterprise zone, which then develops into more of them so that we seed the black country economy and drive real economic growth. That is what we need to achieve, and I believe that the LEPs have a better chance than many other possible methods of tackling some of the deep-seated economic problems we face in the west midlands.
As many Members have pointed out, bank lending is still an issue; getting credit to the right places in order to stimulate the economy is still a problem, and it may hold back the recovery. There are organisations in the broader black country, such as the Black Country Reinvestment Society, that are developing innovative models to get microfinance to small and medium-sized enterprises, but we need to do more to fill the credit gap. I welcome the Chancellor’s Project Merlin announcement, particularly its emphasis on encouraging the banks to invest in the regional economy, because they have a moral obligation to do so. As the Chancellor recognises, the banks have a critical role to play in developing the regional economy, but if there continue to be problems with the availability of credit we might need to consider measures such as counter-cyclical regulation, encouraging the banks not to hoard capital but to get it to the small and medium-sized enterprises in areas such as the black country.
The key decisions that the Government have taken over the past year to tackle the deficit, to restore confidence in Britain’s financial institutions and to build a platform for growth have been crucial in getting the country back on an even keel, but we need to build on what the Government have achieved so far. We must continue to drive innovation. That is particularly important in areas such as the black country. We must address how we can sustain innovation and build on the capabilities that are in place in advanced manufacturing. We also need to continue to support and develop our manufacturing base in the west midlands, so that technologies and vital jobs do not get shipped abroad. Labour market productivity in the black country is increasingly globally competitive, and we need to ensure that businesses continue to invest in domestic manufacturing. The Government must also identify emerging technologies that we can capitalise on and where we have the skills to exploit and commercialise them.
However, the most important signal this Government have sent to the world is that the country is open for business, and in particular that the black country is open for business.
Margot James
I thank the hon. Gentleman for his intervention. Clearly, I would not have wanted the hospital not to be built. However, I think that Labour took a good idea, PFI, which was started by a previous Conservative Government, and ran amok with it, accepting deals on far too generous terms so that our hospitals are stuck with being forced to pay absurd, non-competitive rates for all sorts of services from their PFI partners.
Margot James
I would like to make progress and bring my remarks to a conclusion.
Throughout the boom years, nearly 2 million people were living off benefits, at huge expense to the economy, while three quarters of the new jobs went to people from abroad. That was a scandal. It is ironic that the Opposition motion calls for the Government to spend all sorts of money that we do not have on 100,000 jobs for young people. I remind Labour Members that the unemployment figures for people between 16 and 24 started out at 650,000 in 1997 and ended up at 930,000 in 2010, at the end of their Government’s tenure. That is an unacceptable increase.
Regulatory and Banking Reform
Andrew Love Excerpts(13 years, 5 months ago)
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Mr Hoban
I am grateful to my hon. Friend for his support. I am not quite sure at times which is the more popular profession, MP or banker, but he has experience of both. He is absolutely right that we need to stick to our course on this. There are some important issues that we need to tackle to make sure that the banking system is safer, to improve the regulatory structure and to ensure that the style of regulation is much more interventionist and proactive than in the past. That will doubtless cause some institutions some difficulty, but we have to recognise that it is in the long-term interests of the stability and sustainability of our economy for there to be better regulation of the banking sector and the financial services sector more broadly.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The Government set up the Independent Commission on Banking last year. The commission produced its interim findings in June and its final recommendations will not come out until September, but the Chancellor yesterday in his Mansion house speech and the Financial Secretary today in this Chamber have pre-empted two of those decisions, although it was made clear by the commission that it had not reached its final conclusions. Do not the Government owe an apology to members of the commission of inquiry?
Mr Hoban
Is that it? I really did wonder. The hon. Gentleman has played an important role in the Treasury Committee in challenging both this Government and the previous Government and holding them to account on banking reform and I should have thought he would welcome the fact that we are taking action to strengthen regulation of the banking system and to make sure that our banks are more secure. It would have been great if he had supported those measures.
Finance (No. 3) Bill
Andrew Love Excerpts(13 years, 6 months ago)
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Mr Andrew Love (Edmonton) (Lab/Co-op)
When the Office for Budget Responsibility was informed late of the additional 1% reduction in corporation tax, it commented that the impact on growth would be minimal. How does the Minister explain that in the context of the claims he is making for that reduction?
Mr Gauke
Let me turn to the impact of this measure. When the OBR analysed the corporation tax package that was announced in 2010, it made it clear that that would help with the cost of new capital investment in the UK. It expected that the recovery would be supported by business investment, and the reductions in corporation tax underpinned its forecast for strong business investment growth over the next five years. In June, the OBR increased its estimate for expected investment and gross domestic product in response to the corporation tax package. Its analysis was that the resulting 3% reduction in the cost of capital would
“promote a higher level of business investment…than would otherwise have been the case.”
In total, that resulted in a forecast of an additional £13 billion of business investment by 2016.
The right hon. Member for Delyn asked about particular businesses and sectors. However, the best way to run an economy is not the Government dictating from the centre. Running an economy is about providing a competitive environment in which businesses from all sectors can grow. Making sectoral forecasts tends to be difficult, and there are severe accuracy questions.
Mr Gauke
I suspect that we will debate manufacturing at greater length in the next group of amendments. However, manufacturing will benefit from the package as a whole, including the changes to capital allowances. It will benefit considerably. Indeed, it is one of the sectors that pays a great deal in corporation tax. We also believe that the changes will benefit all regions. It is perfectly right for the right hon. Member for Delyn to highlight the different requirements in different regions, and as the hon. Member for Strangford (Jim Shannon) will know, the Government are exploring the case for greater flexibility for corporation tax in Northern Ireland. We continue to explore that matter.
On the subject of jobs, the OBR, in its 2011 Budget publication, forecast that 2010-15 total employment would increase by about 900,000. That will not all flow directly from the corporation tax cut, but that reduction will play a part in it. We also have to recognise that most of the recent academic analysis—certainly a recent report published by the OECD—makes the case that taxes on corporation income are the most growth-inhibiting ways of raising revenue. They are inefficient, so it is right that we seek to have a lower rate of corporation tax to help the economy.
Mr Love
May I press the Exchequer Secretary on the benefits for growth and potential employment arising from these measures? According to the Red Book, the corporation tax decrease in the Budget will cost £1 billion by 2015. That is on top of £4 billion from the previous Budget. However, the changes in allowances and other aspects of the corporation tax bring in only £2.7 billion. That leaves a significant gap. The Opposition would not be doing their duty properly if they did not ask what benefits will be delivered by that significant cut in corporation tax.
Mr Gauke
I am grateful to the hon. Gentleman for acknowledging that it is a significant gap. It is a considerable tax cut for businesses in order to get them to grow. Reducing corporation tax will reduce the revenue we take from an inefficient tax, thereby increasing the rate of return on investment and resulting in greater business investment, greater productivity, higher wages and salaries and more jobs. It is important that we have a dynamic private sector, and that is exactly what we are about.
We have to be internationally competitive. Our tax system is not as competitive as it once was. Over the past decade, our competitors have seized the opportunity to cut their corporation tax rates faster than we have. In 1997, the UK had the 10th-lowest main rate of corporation tax among the 27 EU countries, but by 2010 we were 20th. As a result of the reforms announced in the Budget by my right hon. Friend the Chancellor, the UK will have the fifth-lowest corporation tax rate in the G20, and by the end of this Parliament, it will be the lowest of any major western economy and the lowest rate this country has ever known. By taking our corporate tax rate right down to 23%, we are going further in restoring Britain’s international competitiveness with a corporation tax rate 16 percentage points lower than America’s, 11 percentage points lower than France’s and seven percentage points lower than Germany’s. It will be the lowest corporation tax rate in the G7. We are pleased that we have been able to make progress in this area.
Mr Hanson
To be honest, I do not know. I was not a Treasury Minister in the last Labour Government. I spent my time in Northern Ireland, in prisons, in probation and in the Home Office—[Interruption.] Perhaps that is not an area into which we should progress this afternoon, however. In the spirit of cross-party discussion of these matters, I acknowledge that the hon. Member for Amber Valley (Nigel Mills) has made a valid point, but, whatever the previous Government did or did not do, the economy was stronger than it is now when those cuts were made to the capital allowances. We can debate the reasons for that for a long time, and we can disagree or agree on the issues, but we now have growing levels of unemployment, slowing growth and public spending cuts that have not yet hit the public and private sectors. There are estimates that up to 500,000 people in the public sector will lose their jobs, which will have a knock-on effect on the private sector. We are seeing the squeezing of the middle in relation to child benefit and working families tax credits, and poverty and wage freezes are hitting hard.
All those factors are going to hit the economy hard in the next 18 months to two years. The Minister is proposing to cut the capital allowances from April next year, and all we are asking in this modest amendment is that the Government review where we are in October 2012, given the tortuous procedures that we are going to go through in the next 18 months as the squeeze has its effect. The Minister will undoubtedly accept that that is going to happen, because it is part of the Government’s policy to make it happen, and we are keen to ensure that, at the end of that period, we do not lose valuable manufacturing capacity and jobs.
Mr Love
Is not the key point here the Minister’s inability to give us hard figures on the improvement in growth and employment? Our request, through the amendment, is that we look carefully at that, because the Government are making major claims about growth in the economy as a result of these measures, as well as rebalancing the economy away from financial services towards manufacturing. Surely the amendment will give us the opportunity to test those claims.
Mr Hanson
Indeed. We are dealing specifically with clause 10, but it overlaps, as will be discussed further, with clauses 11 and 12. Manufacturing is a key part of our economy, but it needs support in order to fuel future jobs growth. The Government thus need to explain today and later in Committee upstairs why they are cutting investment allowances for manufacturers by about £75,000 and using that money to give a corporation tax cut that will go predominantly not to manufacturing, but to financial services industries.
I have made a claim, and I am happy for the Minister to challenge it and to explain why the corporation tax cut we considered and agreed in clause 4 will be skewed towards the financial services industries which are not creating manufacturing jobs. I originally hoped to have clauses 4 and 10 considered in tandem as they are inextricably linked. The key issue is that the corporation tax cut is going predominantly to a certain sector, while the manufacturing capital allowance cut will predominantly hit manufacturing industry. We need to reflect on that.
I will refer briefly back to clause 4, but it is relevant, Ms Primarolo. The Chancellor’s “Budget for growth”, which he trumpeted in March, included an additional 1% corporation tax cut at the final moment. We know that, because the Office for Budget Responsibility said in paragraph B13 of the Budget 2011 policy costings:
“The OBR was notified of the change to corporation tax and the 1p cut in fuel duty from 1 April 2011 too late to incorporate any indirect effect of these measures in the economy forecast.”
If so, the capital allowances under clause 10 will come into effect with that reduction next year, but there is no assessment of whether the additional corporation tax cut, along with the fuel duty rise and other issues I have mentioned, will impact positively or negatively next year. Given the lack of thought and consultation on those issues, we need to reflect on them at an early stage, which is what the amendment says.
Nigel Mills
It is with a small amount of pleasure that I rise to speak about tax issues, having spent 13 years advising companies on them, mostly under a Labour Government. It was kind of the right hon. Member for Delyn (Mr Hanson) to mention my two former employers and the various comments that they have made, which I happily endorse.
I want to comment on the request for a review of the proposed reduction in capital allowances partly because I think that we are in a strange position overall. The purpose of capital allowances is to give businesses tax relief on their capital investment in order to encourage them to invest in plant and machinery. We used to try to encourage them to invest in industrial buildings and factories, but we have stopped doing that now.
The attraction of the capital allowance system used to be the ability to incentivise people by accelerating tax relief. Forty years ago someone who invested in a piece of equipment with a 10 or 15-year useful life could accelerate the tax relief on it quite far in advance of the overall spread of its useful life, but I am not sure that that is where we are now. How many businesses in our constituencies will invest in equipment when they are not certain that its useful life will be even 10 years? If they expect it to be five or six years, the present mechanism will not work at all.
A simple calculation will show that, given an 18% writing down rate, an investor will still not have received tax relief on 30% of his investment in a piece of equipment. After eight years, he will still have not have received 20%. He may anticipate a fairly large residual scrap value if he can sell the equipment on, but that is on the assumption that a good deal of its useful life remains, and I am not sure how realistic that assumption is.
If we are to have a review, let us review the whole capital allowance system to establish whether it is really giving businesses an incentive to invest. Perhaps we should have a look at what they are actually doing in their accounts. The right hon. Member for Delyn mentioned that. What is the useful life over which they are writing off assets? I think that we may be adding a huge amount of complexity to the system by preventing all the businesses in the country from employing actual accounts depreciation for this purpose, and requiring the creation of a capital allowance pool requiring all the assets to be tracked separately. In the past it was said that businesses were receiving a tax incentive, but this huge and unnecessarily complex system may have an adverse impact on them. Our review should ask whether the capital allowance regime is the right one.
Later—not today—we will come to clause 12. The Government have responded to some lobbying, and have recognised that it will cause huge problems for manufacturing business in particular. The clause proposes that the lives of short-life assets should end after eight years. Someone who invests in equipment whose life he expects to be less than eight years will have to make a separate election to treat it as a short-life asset rather than putting it in his main capital allowance pool. He can try to obtain the tax relief over the eight years; otherwise, as I have said, he will still have 20% unrelieved. We are building additional complexity into the system, and I am not sure that that is necessary.
The Bill contains various responses to businesses that are trying to find ways around the capital allowance rules. Clause 33, for instance, proposes anti-avoidance rules for long-funding finance leases. Year in year out, we see new and complex rules intended to prevent businesses from getting around the rules. Sometimes they are trying to obtain extra deductions to which they are not entitled, and sometimes they are trying to find ways of receiving a deduction over the period for which they think they should receive it.
If we are to be a tax-simplifying, tax-reforming Government, perhaps the Office of Tax Simplification could conduct a review of whether the capital allowance is still fit for purpose, and whether it is the right way to attract business investment over the next 10 or 15 years. Should we, in fact, try to find a way out of it, and adopt a system that allows businesses simply to look at their accounts to be eligible for some kind of tax relief, rather than having to adjust the depreciation for those assets? I know that that too will be complex, because there will be a huge hangover from the existing system, and there will be problems when people try to accelerate relief over far too short a period. However, I think that all those problems can be addressed, and that we shall be able to stop increasing the complexity of the system.
I cannot vote for the amendment, because I think that it is merely an excuse for a debate. If we are to have a review, let us have a proper one.
Nigel Mills
If we want a competitive corporate tax system, the tax rate is key. However, we probably need to examine four things, which include the tax base, as the hon. Gentleman said, and the complexity, stability and predictability of the system. We are in danger of just ticking the first box; I am not sure we are ticking the tax-base box well with this approach, and we are adding extra complexity. Many regimes around the world do not have capital allowances but do let businesses take the depreciation that they see in their accounts. That is a far more attractive, simple and predictable system, because businesses would not think, “I might invest in this piece of equipment, but they might reduce this to 15% in three years’ time and my relief suddenly starts to look different.” As the hon. Gentleman was trying to say, this involves a combination of things. We need to get not only the rate right, but the base and the underlying system right; we will not get all the advantages from simply reducing the rate.
However, for most businesses the first headline comparison is about the overall tax rate, so that is the main thing to focus on. I am not going to vote against this rate reduction. Paying for the reduced rate partly by reduced capital allowances is the right way to go in this financial situation, but we need to go in the direction of simplifying our incredibly complex corporate tax system. We can all work out the statistics by saying, “When I started work 13 years ago, my tax legislation was so big and when I left a year ago it was much bigger, and I have not even got the VAT and inheritance tax book.” We can look at how many schedules on income—actual capital—we have and consider how many of them we actually need. The capital allowance regime is part of that problem, because it was written 50 or 100 years ago, when it actually worked. A lot of these things are out of date, so we must look to simplify things if we want to ask businesses to invest. I am not sure that they are going to worry about whether something is at 18% or 20%, but they do want tax relief for their investment over the useful life of their asset provided in a way that is simple for them to manage. I am not sure that we are anywhere near providing that at the moment.
A lot of my clients use the capital allowances regime to add flexibility to how they get tax relief in the years when they have profits and in the right entities in which they have profits. They will not entirely welcome my idea of simplifying this system and taking all that away from them. However, if we are to get a modern, competitive corporate tax system, it must be simple and easy to understand. It must also do what we want it to do: incentivise the investment that we desperately need to have a growing economy.
John McDonnell
Let me put it this way, as mildly as I possibly can: we hardly have a description of evidence-based policy making before us. Let us go back to the example of the additional 1p cut given by my right hon. Friend. When the Treasury Committee considered the matter, it invited evidence and Paul Johnson, the director of the Institute for Fiscal Studies, was questioned about the impact it would have. He said that we did not know about that with any precision. We do not know with any precision what the impact of the overall cut in corporation tax will be and we certainly do not know with any precision, globally or sectorally, what the impact of the capital allowances cuts will be. We are stepping into the dark and going down the wrong path and that is why we should have the review.
I fear that a number of companies might have planned their development in advance based on the capital allowances that they thought were secure and would be forthcoming because of the statements of the previous Government as well of the Chancellor of the Exchequer over the past 12 months. They will now not proceed with that investment and as a result, the companies might not be put at risk but they will certainly not expand in the way that they planned and that will have consequences for jobs. In certain areas—my right hon. Friend has mentioned at great length the higher unemployment rates in certain regions—the effects on individual communities will be fairly catastrophic if this job growth does not go ahead.
I oppose the reduction in corporation tax, as I think it is misguided. I would prefer it if, instead of cutting taxes to companies and forgoing that income, we could use the income from the top companies and corporations to invest in public infrastructure projects that will get people back to work and stimulate the economy overall. The last thing I would suggest the Government should do, even if they are cutting corporation tax, is pay for that cut with cuts in capital allowances. In my view, that flies in the face of everything that the Government have said about rebalancing the economy, stimulating the manufacturing base and shaping behaviour so that there is a longer-term view of investment in the capital and manufacturing infrastructure of this country based on security and the knowledge of the income that a company will have to invest in the future.
Even if the Government cannot withdraw these provisions on the cuts in capital allowances and reconsider those on the corporation tax, I urge them at least to allow us to reconsider the matter within 18 months, as the amendment says, to see the implications overall. I honestly do not understand the fear within Government of having an open examination of this matter within that time scale. If I were a Minister, I would welcome it. If I were an advocate for this policy, I would welcome the opportunity to come back in 18 months or so and, if necessary, to gloat at its success. I certainly would not want to feel that I was on the run and hiding from the consequences of the decisions that I had proposed in a Finance Bill of this nature.
Mr Love
I echo the final comments of my hon. Friend the Member for Hayes and Harlington (John McDonnell) about the amendment. It mentions capital allowances—that is what we are discussing—and the impact they will have on the UK economy is of particular concern at the moment.
We must comment on the backdrop to this debate, as the economy has stalled over the past six months. We had a very bad final quarter of 2010 and although things improved in the first quarter of this year, the reality is that everyone was expecting much larger growth in the first quarter to compensate to some extent for the lack of growth in the final quarter of last year. If one reads what the commentators and forecasters have said, one sees that there is genuine concern, which is reflected in the figures provided by the Office for Budget Responsibility. The predicted growth rate has gone from 2.6% to 1.7%, but that figure might already be out of date, so there could be further reductions in the rate.
Andrew Gwynne
My hon. Friend is making a good start to his speech by setting out the background. Not long ago, when the Chancellor was promoting his Budget and introducing the measures that my hon. Friend is talking about, he did so on the basis that it was a Budget for growth. However, do not the OBR’s forecasts show that even with the measures in the Budget, growth is predicted to be lower than it would have been had Labour’s plans remained in place?
Mr Love
Absolutely. One has to question, as I am doing, the Government’s whole strategy, which they call a growth strategy but which does not appear to be delivering what we would expect from a proper growth strategy. Indeed, the previous Government’s growth strategy produced a far better result, as I shall discuss in a moment.
I want to cover two other issues that have caused quite a lot of surprise and concern in relation to the Government’s policies. First, on construction, the first quarter growth figures for this year show one glaring and prominent inadequacy is in construction activity, which is going down rapidly. If we add to that the incoherent policies that the Government are pursuing on house building, planning consents and oiling the wheels of the construction industry’s infrastructure, one can only be very gloomy about the prospects for the next year or two.
Secondly, I will mention manufacturing because it would be part of the report that we are suggesting the Government should produce. Manufacturing did rather better than I had suspected it would in the first quarter. Internationally, it seems to be delivering some of the changes in net exports that all the economic forecasters suggested, but we need a much more growth-oriented manufacturing sector if we are to bring about the changes that will be necessary if the changes in capital allowances are to go forward.
Those considerations lead me to conclude that the Budget proposals before us—the reduction in the headline rate and the compensatory measures widening the tax base to pay for that—are the main thrust of the Government’s growth strategy in real terms. The Government suggest that those measures will help to rebalance the economy. I look at all issues as objectively as I can and I have to say that, given the measures being undertaken in the comprehensive spending review in relation to the public sector, we certainly need to do something to boost the private sector. We are told that the measures will do that, but will they? That is the question being addressed in the amendment.
The Minister and the Chancellor have told us that a lower rate of corporation tax should act as a signal that we are open for business. There is some evidence that that approach has worked previously to a limited extent, but the question is whether it will work in the current economy. I am not a sceptic but, like the shadow Minister, I would like to see some Government projections about the number of businesses they expect to come from other countries either to expand existing operations or to start new ones here as a result of that signal.
In his Budget statement, the Chancellor proclaimed from the Treasury Bench that we have
“the lowest corporation tax in the G7”—[Official Report, 23 March 2011; Vol. 525, c. 955.]
but we already had the lowest rate of corporation tax in the G7. If all we are trying to do is send a signal, surely we could have proclaimed that. There is also the wider Group of Twenty to consider. Looking at countries such as Ireland we must ask whether it is feasible and rational for our strategy to be to compete with that in Ireland. As we know, there is debate in Northern Ireland about whether corporation tax should come down to the level in the rest of the island. There is genuine debate about that, but I do not think it is being suggested that we want to compete with Ireland. We compete with the major G7 economies and our rate is already below theirs. The cut in corporation tax will re-emphasise that, but what we would like to know from the Minister is what benefit that will deliver to the British economy.
Andrew Gwynne
Is it not a fact that for the international companies seeking to invest inwardly in the United Kingdom, corporation tax is only one small part of the overall picture? They are looking at much more than just the headline tax rate.
Mr Love
Yes, absolutely. If we look at business investment, which in some senses reflects how optimistic employers, manufacturers and other parts of the economy are about the future, we will see that we have not had the increase in business investment that all the forecasters, economists and coalition politicians have been telling us we should have. That reflects the wider issues in the economy that should be of such major concern. We cannot expect a cut in corporation tax to solve all the problems, but the merit of the amendment is that it proposes that the Government try to indicate how much additional growth and employment will be created as a result. In the previous debate, the Minister suggested that a cut in corporation tax would boost investment.
The Second Deputy Chairman of Ways and Means (Dawn Primarolo)
Order. I appreciate that the Government themselves have said that corporation tax and capital allowances are part of a package, and I have therefore allowed a linked debate, even though we have finished debating corporation tax. However, the hon. Gentleman needs to focus a little more on capital allowances, which are the subject of the amendment.
Mr Love
Thank you for your guidance, Ms Primarolo. I will move swiftly on to capital allowances. The Government have discussed the need to widen the tax base and they have told us that reducing capital allowances is partly a method of paying for the cut in the headline rate. As I mentioned in an intervention, that phenomenon has been apparent in most western countries in recent years and, indeed, all the economists project that there will be much greater competition in business taxes. Corporation tax is likely to continue to come down, and the reduction will be partly made up by widening the tax base.
Like my right hon. Friend the Member for Delyn (Mr Hanson), I am prepared to consider the changes to capital allowances, although I am concerned about the cut in the annual investment allowance from £100,000 to £25,000. I am perfectly happy, however, to look at that if we are reassured that the proposal in the amendment will make a significant difference. As has been said—and I have said so myself—the Office for Budget Responsibility added a rather sceptical note to the debate by suggesting, even though it had been informed at a late stage of the 1% cut in corporation tax, that that would not have a great impact on growth.
Finally, I want to focus on the issue of who will benefit from the changes to capital allowances. As a number of Opposition Members have said, high-profit, low-investment companies will be the main beneficiaries of the package, which is unfair and, if I may say so, will not achieve the rebalancing of the economy that the Chancellor has promoted for a considerable period, away from financial services towards the manufacturing and production of export-oriented goods. The change militates against all that. In particular—and I refer to the cut from £100,000 to £25,000—it will penalise manufacturing, particularly businesses with high capital costs. My right hon. Friend the Member for Delyn mentioned the motor industry and others, but I am concerned, because I have a number of small, capital-intensive manufacturers in my constituency. Sadly, they are only a remnant of the manufacturing sector that we had 25 or 30 years ago, but we need them and we need to promote them. I am therefore worried about the Government’s proposals.
Andrew Gwynne
My hon. Friend has been incredibly generous in accepting interventions. I am not sure of the extent of the manufacturing base in his constituency, but I imagine that it is pretty similar to mine. Small manufacturing industries tend, as he said, to be a remnant of the larger-scale manufacturing that once operated in our constituencies. Does he not regard the capital allowances scheme as a mechanism for manufacturing industries, however small, to diversify into the new sector?
Mr Love
I agree. If we take the coalition at face value, it has suggested that we need a vibrant small business and manufacturing sector, much of it consisting of small businesses. I would think that it would want to promote that by incentivising it through the taxation system. One wonders whether the measure would achieve that. I do not want to suggest, without any concrete figures, that that will in fact happen. We urge the Government to produce those figures, so that we can all make a judgment. Indeed, they can make a judgment about whether their policy has achieved their objectives.
Jim Fitzpatrick
My hon. Friend, like most of the speakers in this debate, is generously supporting the modest amendment tabled by our right hon. Friend the Member for Delyn. It does not attack what the Government are trying to do; it is just asking for
“an assessment of the impact of the changes”.
We are therefore giving the Government the benefit of the doubt, as their proposal may well be beneficial and positive. As my right hon. Friend has said, the Treasury will examine, monitor and scrutinise the impact of the measure on businesses, so what is wrong about publishing an account as suggested by the amendment?
Mr Love
I agree, as other Members do, that that is not an unreasonable request. If the Government choose not to support the amendment, are they concerned about the impact of capital allowances and the prospects for the UK economy? One wonders whether they do not want the debate that would ensue in 2012 when, if we are to believe Government figures and the OBR, the economy should turn a corner. That would be an appropriate time at which to carry out that investigation.
There are 5 million small businesses in this country, and it is a symbol of the unity that we occasionally achieve in the Chamber that Members from all parts of the House recognise the role that they play now and, importantly, in future. If we add to the impact of capital allowances on small businesses the failure of the banking system in this country to provide the credit necessary to expand the sector, I wonder whether we can achieve all that the Government hope to achieve through the shift from public sector to private sector activity. I merely raise that as an additional issue, but I hope that the Government will address the credit needs of the small business sector a little more robustly. That is what underpins the amendment.
John McDonnell
I apologise, Ms Primarolo, for leaving the Chamber earlier. Should there not be some consultation of small businesses in particular so that they could describe the nature of the investments that they would forgo if they failed to secure the capital allowances that they normally secured under previous regimes? That would allow the Government to assess the overall impact of the loss of those investments to sectors of industry and on employment overall.
Mr Love
My hon. Friend makes my point. That is exactly why, once the changes have been introduced, we need to review and assess their impact, particularly on small businesses and more generally on the economy. We would like to be reassured that the headline rate cap with the changes to the allowances will make a material and positive difference to the economy.
I commend the amendment to the Committee and in particular to the Minister. I hope he will consider carefully what is asked for and agree that it is a constructive amendment that he can support. I hope that together we can make a real difference to the prospects for the UK economy.
Mr Gauke
Amendment 6 would require the Chancellor to publish by 31 October 2012 an assessment of the impact of the proposed changes to capital allowances on the UK economy, as we have heard. The amendment was tabled to clause 10, which reduces the rates of writing-down allowance on the main rate pool of plant and machinery expenditure to 18% and on the special rate pool to 8%. Before I deal with the amendment, I will explain the purpose of clause 10, which is key to the amendment.
Capital allowances allow businesses to write off their expenditure on capital assets, such as plant and machinery, against their taxable income. They act as a simple, statutory system in place of commercial depreciation. Capital allowances are given at different rates, depending on the year of investment and the type of asset acquired. The principal year-on-year allowance for plant or machinery expenditure is the writing-down allowance. The main rate is currently 20% per annum, and the special rate is 10%.
Both are calculated on the reducing-balance basis. We are making changes also to the annual investment allowance, in clause 11, reducing it to £25,000, as we have heard, and extending the short-life assets regime from four to eight years, in clause 12.
The changes announced last year, which are given effect by clauses 10 and 11, enable a reduction in the main rate of corporation tax, which will reaffirm Britain’s competitive tax system and support enterprise and growth. The right hon. Member for Delyn (Mr Hanson) was right to highlight the fact that this is part of a package. In his earlier remarks, the hon. Member for Edmonton (Mr Love) pointed out that this was a partial contribution. There is none the less a gap, and further funding has been found—from the bank levy, for example—which has enabled us to reduce the corporation tax rate.
We have already debated the benefits of reducing the corporation tax rate and we have returned to that topic to some extent in the present debate. I note that it does not have the support of all hon. Members, although it is supported by the Opposition Front-Bench team. It is helpful to repeat what was said by John Cridland, the director general of the CBI:
“The extra 1p cut in corporation tax will help firms increase investment.”
The objective is not just to reduce the amount of tax that companies pay, but to enable them to invest and grow businesses in the United Kingdom. I am pleased that that is welcomed throughout much of the Chamber.
Our initial assessment of the package as a whole suggested that that would lead to an additional £13 billion of business investment by 2016 by making the cost of capital investment cheaper. The additional reductions in corporation tax rate and the extension of the short-life assets regime will help to increase further the levels of investment by business. We estimate that the overall effect of these measures will be to reduce the tax liabilities of the manufacturing sector by around £700 million by 2015. The changes to the rates of writing-down allowances do not mean that businesses will not continue to receive full tax relief for their investments in plant and machinery. Rather, the relief will be over a slightly extended time frame.
Let me give an example. Where it would have taken 11 years under the current rate to write off more than 90% of the cost of a machine, it will now take 12 years. Meanwhile, the rates will continue to align broadly with average rates of depreciation across the economy. This does not mean that we intend to remove capital allowances in favour of pure accounting depreciation.
On the issue raised by my hon. Friend the Member for Amber Valley (Nigel Mills), the previous Government did consult in some detail on their reform of corporation tax between 2002 and 2004. I am sure you remember it well, Ms Primarolo. The business response to that consultation was strongly in favour of retaining capital allowances. It was argued that capital allowances provide certainty and a level playing field, with the same rates of allowances applying to all. The flexibility of the system allows the pooling of expenditure and the ability to claim less than full allowances, depending on the individual’s business circumstances. My hon. Friend set out the case for a different approach to capital allowances. He brings great expertise on the matter and there is ongoing debate, but we do not intend to reopen discussion of that point.
Finance (No. 3) Bill
Andrew Love Excerpts(13 years, 6 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Chris Leslie
We find ourselves in the Committee stage of the Finance Bill, a rather large two-volume measure that, over the coming two days on the Floor of the House, we will no doubt explore in some detail. The Bill will then progress upstairs to Committee, where more detailed scrutiny will take place.
It is a peculiarity of Ways and Means resolutions and of the way in which proposed finance legislation is scrutinised in the House of Commons that hon. Members who are not Ministers may not table amendments to Finance Bills that would have the effect of raising the level of taxation. That was news to me, perhaps because I was in government and did not think about tabling such amendments, but the rules of order are as they are, so the amendment does not propose—because we cannot—an increase in the rate of the bank levy. Instead, it calls for a review of the rate and the general approach to bank taxation adopted by the Treasury. It seeks to look into the rationale behind the rate that the Treasury has chosen for the bank levy and why a number of other choices were made.
Mr Andrew Love (Edmonton) (Lab/Co-op)
Does my hon. Friend agree that in setting the rate the Government missed an opportunity? The bank levy could have raised significant sums to help with the other policies that we hoped they might pursue.
Chris Leslie
Indeed. Were it possible under the rules of order for the Opposition to table an amendment to increase the bank levy rate, we probably would have done so. However, we were unable to do so because of the slightly arcane rules of order. We need to examine the rationale behind the rate chosen by the Minister and understand why the Government moved from a threshold approach to triggering the bank levy, to a tax-free allowance of a certain amount before which banks would pay against the chargeable liabilities of the bank levy.
We also need to understand whether the bank levy is, as my hon. Friend suggests, an adequate step when considered in the context of the wider economy and public finances. Ultimately, we need to understand whether the Treasury is being straight with the public and honest about the taxes that the banks will pay over the years ahead. We have debated the Government’s approach to the banking sector before, and we look forward to the final report of the Vickers commission on the state of competition and regulation of the banks so that never again can these institutions take such extreme risks and gambles that land in the lap of the taxpayer when the going gets tough, as they did before the credit crunch.
Chris Leslie
My hon. Friend makes an extremely prescient intervention, because the Chancellor, under pressure from the Opposition, had to cave in to a concession on corporation tax in the March Budget. The Government announced the bank levy last June, so we knew that they would be introducing this tax, yet the corporation tax cuts will clearly benefit the banks significantly. The Treasury claims that in the March Budget it offset the benefit that the banks will apparently get as a result of the reduction in corporation tax rates, but we will have to wait to see whether the slight increase in the bank levy—around £100 million—introduced in the Budget will be sufficient to offset the full corporation tax cuts that the banks will enjoy over the lifetime of this Parliament. I recall that the written answer to a question I tabled on the predicted benefits to the banks of the corporation tax reductions suggested that that would be about £100 million in year one, £200 million in year two, £300 million in year three, and so on, but that largely reflects the reductions in corporation tax rates. That is something of a moot point, because we contend that the design of the bank levy is insufficient. Today’s debate should provide an opportunity to seek proper redress for the crisis and ensure that we put the banks on a fair tax basis, but that is not what the Government are seeking with this pathetically small bank levy proposal.
Chris Leslie
Even the Swedish advocate a bank levy, and we must acknowledge that the alternative financial changes are being made in a number of jurisdictions across the world. Obviously, the more jurisdictions in which such measures are pursued, the better, because that will remove the argument on regulatory arbitrage.
However, it is worth looking at the pathology and history of the bank levy, and at how the Chancellor has tweaked the rate. The Government pull back from a higher rate when they think it is too much, but sometimes the Chancellor gets into hot water and feels the need to change that approach. On the fateful morning of 8 February, at 7.30, the Chancellor went on the “Today” programme and announced a mini-Budget. It just so happened, by pure coincidence, that that was on the day of Treasury questions, when he was struggling with the banks in the negotiations on the damp squib that was Project Merlin. While we are on Project Merlin, we should not let go the opportunity to note that borrowing is increasingly expensive for small and medium-sized enterprises, and that according to the most recent data, there is less and not more availability.
The Chancellor changed the rate again in the March Budget, when, as I said, the Government were forced into a U-turn in the face of criticism of the reductions in corporation tax. That would have been a massive cash-back bonanza for the banks—it could still turn out that way, but we must wait for the final figures. At no point during the design of the bank levy have the Government said why they are capping revenues at just £2.6 billion. What is their fixation with that yield?
Mr Love
Before my hon. Friend moves off the subject of Project Merlin, does he agree that it was more than pathetic that, after telling the banks that they would increase the banking levy unless the banks came up with the goods, the Government made a pipsqueak change which did not rise to the occasion?
Chris Leslie
Absolutely. I cannot figure out why the Government refused to go beyond that £2.5 billion or £2.6 billion. That is a strange way to design a tax. Normally, a Government would think about whether the rate set was fair and just, and about the requirement for revenue yield, and they might even analyse the effect of the levy in a regulatory impact assessment or whatever. However, at no point have the Government said why they are reluctant to go beyond that £2.6 billion. Perhaps there has been a deal behind the scenes between the Chancellor and the banks, but if there has been such a deal, it is probably the only one that he has been able to reach.
Chris Leslie
The Minister needs to answer that question. Hon. Members might care to turn to page 297 of the Bill. The steps might at first appear quite straightforward, but then we get to this odd provision in paragraph 7, with its proportions X, Y and Z of various different amounts and so on. I understand that that provision is triggered because the Treasury has to recoup retrospectively some of the money taken, since the Chancellor tweaked the levels of tax on 8 February and again in March. It therefore becomes incredibly complex and difficult to hold to account. The design of the bank levy has not been made easy by the Chancellor’s decisions.
Mr Love
On the intervention from my hon. Friend the Member for Rhondda (Chris Bryant), is it not rather strange, given that the Chancellor has set up an Office of Tax Simplification and announced as his first measure in the Budget that he wanted to put the principle of simplification at the forefront of tax consideration, that here we have something that is almost as complex as it gets?
Chris Leslie
As I said, the reason for the complexity is that all the variables in the design of the bank levy have to be amended because the Treasury wants to squash it around that figure of £2.5 billion or £2.6 billion of revenue. In other words, the whole of the bank levy is being driven by that particular sum, which is a very odd way of designing a tax.
Chris Leslie
Staffing at HM Revenue and Customs is under incredible pressures. Indeed, there have been a number of redundancies and posts lost. It has not been explained where the extra resources will come from to ensure that the bank levy, in all its complexity, can be enforced adequately. Again, the Minister needs to say what extra capacity HMRC will have to implement this increasingly complex bank levy.
Chris Leslie
In a moment, but I need to make some progress.
I understand that there is a difference between short-term and long-term liabilities. However, what will be the impact on businesses in the real economy if short-term liabilities are less attractive to major banks? For example, if a small firm has a bank deposit of over £100,000—to protect its cash flow or whatever—that happens to be above the level of the deposit guarantee scheme, what is to stop the banks raising their bank charges on SME deposit accounts to try to divest themselves of such short-term liabilities? That is an important point, because there will be consequences from the design of the bank levy. I would like the Minister to explain to the Committee why short-term liabilities and long-term liabilities have been divided in that way.
Can the Minister explain the position on the reported legal challenge under European Union law, which I understand many in the banking community are watching carefully? The Hungarian Government have introduced a levy on their energy and telecoms sectors. I understand that a case has been taken—or is due to be taken—to the European Court to claim that a levy on a specific sector of the economy is somehow unfair or not possible. To what extent is the Minister confident that the case will not have a bearing on the implementation of a banking levy here in the UK?
I would also be grateful if the Minister could answer the question about complexity and opacity in the bank levy accounting systems. As I understand it, overseas banks can sometimes not use IFRS—international financial reporting standards. If those banks do not use them, they will need to re-compute their chargeable equity and liabilities with reference to the UK’s GAAP—generally accepted accounting principles—or IFRS, in other words, by preparing a notional consolidation under those systems, including for branches. Is that anticipated to create a problem? What do the Government foresee as a solution to that level? Obviously we have banks that cross jurisdictions and use a series of different accounting platforms, so I would be grateful if the Minister could clarify some of the comments that have been made about that.
However, it is the Government’s general approach to banks and banking taxation that concerns many hon. Members—a general approach that, as we know, is quite woeful. Hon. Members have already raised their concerns about some of the bonuses that we have seen and the breathtaking behaviour that the banks have engaged in, even though they were the root cause of the credit crunch.
That makes the Government’s tax giveaway to the banks even more staggering. The post-Budget reaction last June, when the bank levy was announced, was indeed positive from the bankers themselves. They enjoyed the Government’s decisions on the bank levy. One commentator said:
“We’d expect most domestically-orientated banks…to be better off after four years than they were pre-Budget”,
and a City insider said that
“some banks will have a feeling of glee at the way this has worked out”.
Clearly, we need to advocate a bank bonus tax to raise £3.5 billion, as it did before. That deserves to be repeated this year. Even if it were to raise just £2 billion, that would make a massive difference to our society and our economy. For example, we have calculated that such an amount could be used to establish a youth jobs fund—using a similar model to the future jobs fund, which this Government have abolished—creating 90,000 new youth jobs at a time when youth unemployment is close to 1 million, with one in five young people on the dole.
That money could also help to construct 25,000 new homes for low-cost home ownership and affordable social renting. That would create tens of thousands of jobs in the construction industry and new apprenticeships alongside them. The money could also provide £200 million of funding for the regional growth fund, the Government’s rather lamentable replacement for the regional development agency funding. That could help to provide for regional projects and promote growth. The Government’s changes represent a two-thirds cut on the previous funding, and the first wave of £450 million in grants was several times oversubscribed with bids. We therefore need to revisit the regional growth fund, and a repeat of the bank bonus tax could support that.
The bonuses being paid are still vast; they remain at eye-watering levels. Despite the smoke and mirrors of Project Merlin, in which Ministers broke their promises to take action despite the warm words in the coalition agreement, the bonuses remain high. Let us just remind ourselves of what the coalition agreement promised. The Conservatives and the Liberal Democrats said:
“We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.”
That is on page 9 of the agreement, right up front among the promises that the coalition made.
The Government could not even bring themselves to promote the basic transparency that we expect when it comes to bonuses and remuneration. The most that they could extract voluntarily from the banks in Project Merlin was an agreement to report anonymously on the total remuneration of the five highest paid senior executives of the bank, excluding board members. That is a weak and shameful compromise. The Government are not even forcing the banks to disclose all bonuses above £1 million, even though Labour’s legislation allows them to do so. That provision is already on the statute book.
Chris Leslie
“But surely that is a complete coincidence”, he said ironically! I do not know whether my hon. Friend was making the point that this is payback time, but the level of these bonuses is incredible.
Let me finish my point about Barclays. I was saying that £38 million in bonuses and salaries went to just the top five earners. That is enough money to pay the wages of more than 1,000 qualified nurses in our NHS. That gives some meaning to the scale—enough money to pay for 1,000 qualified nurses.
Chris Leslie
Absolutely; but, quite apart from the obscenity of the scale of some of those bonuses, there is a hard-headed economic rationale for more transparency. If shareholders cannot see what senior executives in the banking sector are being paid, that indicates a dysfunction in the corporate governance of the banks, and if the bonus pots of certain executives are being swelled by their behaviour—by the choices that they make and the risks that they are taking—perhaps those were some of the antecedents of the credit crunch. We need transparency to prevent us from repeating the problems that occurred in 2008.
Nic Dakin
I thank my hon. Friend for his intervention about intervention. More intervention is needed from the Government, who have a stake in the banks. In fact, it is taxpayers and the public we serve who have that stake in the banks. He is quite right that the Government should be exercised about how they get the benefit back to the British people.
Mr Love
Have the Government not failed lamentably? If we look at Project Merlin, where they intervened with the banks on bonuses and on lending to small businesses, we can see the bonuses that are likely to be given this year and the fact that the Government have failed lamentably to deliver finance for small businesses in this country. They simply are not working.
Nic Dakin
I thank my hon. Friend for that observation. Project Merlin’s record is a sorry tale so far. We see a failure to deliver on bankers’ bonuses and a failure to reinvest the taxation from them in the economy. He is right that the record on lending to small and medium-sized enterprises is woeful. Small and medium-sized enterprises, as I think all Members recognise, are the lifeblood and the engine of our economy, and he is completely right to underline that point.
Mr Love
Is it not also the case that the taxpayer has given the banking system an unlimited guarantee, and that according to the Bank of England, we are subsidising the banks to the tune of about £100 billion a year? Yet even with all that support, they still demand that they should be able to pay massive bonuses.
Barry Gardiner
Indeed. The support that the country has given the banks is perfectly right, in my view. I disagree with the right hon. Member for Wokingham on the matter. He said that he would not have bailed out the banks at all. His position was very clear—he takes a very hard monetarist line and says that if the banks fail, they fail. Labour Members believe that the consequences of that failure cannot simply be ignored.
John McDonnell
That is exactly my point. It might be that the levy is being set in relation to other banking reforms, particularly those on bonuses and remuneration, but not only have we seen the complete disregard of the Chancellor’s and Prime Minister’s exhortations, with bonuses continuing at a very high level, but we have seen, as another Member said, a diversion into other forms of remuneration and salary increases. That is almost an abuse of the system as set out in the Government’s proposals.
If the debate is about the adequacy of the levy, and in view of the fact that in spite of the Government having set down a marker in the proposals, bonuses have continued and remuneration has increased, can the Government not support the amendment? If the review reported at least by December—I would prefer the autumn—we could consider increasing the levy to ensure adherence to the wider banking reform proposals the Government want implemented. It is clear from the evidence produced today that the banks need a continuing threat—a sword of Damocles—hanging over their heads, if we are to get any change in the bonuses and remuneration that are so offensive to all our constituents suffering in the recession.
It might be that the levy was set so that the Merlin agreement could become fully operable and lending might start in earnest again. As my hon. Friend the Member for Nottingham East noted, however, so far all the indications are that the revival of lending has not taken place. The Government’s proposals therefore warrant a review at the earliest stage, because even now, while they are still being implemented, they are not working. The evidence for that is all around us. It is clear now—this is why the review is so important—that the levy has become almost irrelevant to the real issues of capitalisation and regulation.
Mr Love
I agree with my hon. Friend about the review’s importance. On the one side, bankers are telling us that they are lending money and that money is available to lend; on the other side, we have small business organisations united in saying not only that money is not available, but that the terms on which it would be made available are so onerous as to make it impossible for them to take out a loan. The review could resolve who is right and who is wrong.
John McDonnell
The review would certainly test the adequacy of the levy as an instrument for influencing banks’ behaviour, which I believe is its purpose. However, the problem is not just the lack of lending; it is the continuing profiteering in the mainstream banking system—let alone the shadow banking system that my hon. Friend the Member for Walthamstow (Stella Creasy) has been so assiduous in exposing. In the main Budget debate, I highlighted some of the interest charges being made. A report by Moneyfacts last August showed that the profit margins enjoyed by the banks on fixed-rate deals are the highest since 1988, and that the average interest rate on personal loans was 12.6%, which at 12.1% over the base rate is an all-time high. So far, the threat of the levy has done absolutely nothing to change banks’ behaviour in any aspect, whether remuneration, bonuses or lending. We are in danger of allowing the banks not merely to return to business as normal, but to get even worse. Even those in public ownership are out of public control. I find that extraordinary.
The review must take place in the context of other attempts, such as the Basel discussions, to restrain or control banks’ behaviour. Basel II seems to let the banks off the hook on a range of issues, from remuneration to capital ratios. The levy is meant to come in the context of the reforms the Government are engaging in nationally and internationally, but the Financial Times reported today that discussions about global standards on bank lending risks are not moving towards an agreement, so now we are not even moving forward in capital ratio discussions.
We need to consider the levy in the context of the banks’ role overall and the anger in our wider communities. Many believe—rightly—that the banks played the key role in creating the recession, and now, if we are not careful, by not lending or engaging in economic growth, they will play a role if not in tipping the economy into a double-dip recession, at least in leaving the economy to scrape along the bottom of economic activity. I have referred before to the words of Graham Turner, from the Left Economics Advisory Panel. He works in the City and is an expert on what happened in Japan. We face the prospect of a long, low-level, depressed, deflationary spiral if we do not use the levy to stimulate the banks into playing a responsible role within our economy.
We will come out of recession only through an astute mix of fiscal and monetary policy. In the 1930s—this is the whole point about Keynes—it was about not just deficit funding and quantitative easing, but more importantly banking reform. Banking reform is one element of the strategy that any Government must adopt to take us out of recession, and the banking levy is one of the few tools and weapons at our disposal that can force through banking reform. So far, the threat of the banking levy has failed to engage even those banks that are in public ownership in a proper discussion about banking reform and the role that they will have to play in tackling the recession and encouraging economic activity.
Mr Love
I congratulate my next-door neighbour and right hon. Friend the Member for Tottenham (Mr Lammy) on a very competent speech.
It will not come as a surprise to those in the Chamber that I support the amendment. I support it primarily because there is so much public interest in and concern about bankers’ bonuses and the contribution being made by bankers when we are all supposed to be pulling our weight. I also support it for the reason given by the shadow Minister: a peculiarity of our system is that we cannot amend upwards any proposal in the Finance Bill, and the amendment offers an alternative way to look critically at the levy by proposing a review, which is not unreasonable. By December, we should have some idea of how it is working.
The most important feature of the amendment, as discussed earlier, is that it asks for a report to be published that can be debated by this House. Because of the importance of the issues involved, that is critical. The report will include an account of how the rate and the threshold were decided. As we have watched the measure’s development over the past few months, we have started to have a sneaking suspicion that Ministers decided what amount of tax should be paid by the banks and then worked back to what the threshold and the rate should be. I will come back to that point later.
Much has been said by Opposition Members about the measure’s adequacy. It is right to say that it will not raise as much as the bank bonus tax did and it is felt widely, within the House and outside, that the levy does not reflect the contribution that bankers ought to make. That relates to new subsection (2)(c) in the amendment. I will come back to bankers’ bonuses, because they have an important implication for the contribution that bankers should make.
In what the Government propose, we are being asked to agree to a levy on UK banks and building societies and on the UK operations of foreign banks. It is estimated that it will affect between 30 and 40 institutions, covering all the largest financial services institutions in the City of London and throughout the country. That proposal seems reasonable, but it is important that it is reviewed to see whether it is appropriate.
The tax will be levied on what the Chancellor termed the wholesale funding of banks, which is the liabilities and equity minus a number of items that are considered safe, such as tier 1 capital and insured retail deposits. I think that we are being asked to agree that that will incentivise the use of prudent balance sheets, rather than risky balance sheets. Of course, the wholesale funding that the Chancellor talked about was a major cause of the difficulties in the credit crunch. We all remember the collateralised debt obligations and the exotic funding regimes, although I do not think that any of the major institutions are into any of that now. The proposal, which mirrors the proposal that was discussed internationally, is intended to incentivise our banks to hold safer liabilities than they held before.
Many Opposition Members have commented on the threshold of the tax, which has been set at £20 billion. I hope that the Minister will respond to the concern that that figure is far too high. The rate has been a moveable feast, and there have been many different rates and proposals. As was mentioned earlier, the Chancellor got up one morning—it just happened to be the day of Treasury questions—and announced another change. Changes have also been announced presumably because of corporation tax, and there has been concern that the rate may have been raised as a result of the failures of Project Merlin, which I will talk about later. We have had many different threshold rates, and I ask the Minister to clarify how we reached all those rates, where we are now and how much money the levy will raise. It is suggested that it will raise between £2.5 billion and £2.8 billion, which, as other Opposition Members have said, seems a very low figure in the present situation. I hope that he will respond to that concern.
What is the levy meant to achieve? Supposedly, it deals with a number of matters. First, numerous speakers have mentioned the implicit public subsidy that we provide to banks. The Bank of England has done some work and suggests that there is a £100 billion subsidy; others have suggested lower figures, but there is consensus that the figure is very substantial. If the bank levy will raise only one twentieth or one fortieth of that sum, that puts the matter in context.
To pick up on a point that the right hon. Member for Wokingham (Mr Redwood) made, the bank subsidies make life for new entrants to the marketplace—they are called challenger banks—very much more difficult, as they do not have any of those subsidies, reflecting the idea of banks being too important to fail. That notion should be the crux of our discussion about the financial services sector, because it raises the question of moral hazard: will banks that are too important to fail take riskier decisions, as happened in the lead-up to the credit crunch? I would like the Minister to explain how those issues relate to the levy. We understand that it will provide only part of the contribution that has to be made, but what contribution will that be?
I mentioned banks being incentivised to hold less risky liabilities. The reason for that is clear: if things go wrong, it is not just the financial services sector that is affected. Unlike other industries, in which problems affect other companies in the same industry, if the financial services sector hits difficulties, the whole economy is hit, as we found out to our great cost in 2007. It is critical that we reduce the possibility of that contagion happening in future.
We must deal with a number of issues peculiar to our financial services sector. Many believe that too much is concentrated in four or five very large banks and that as a result there is not sufficient competition. I will not go into the details of the Banking Commission’s report or the most recent Treasury Committee report, but those who have read them will know that both have strongly suggested that consumers do not have a great deal of choice in our banking system, that the banks are too concentrated and that it is very difficult for new banking companies to come into being. There is not sufficient competition and, by common consent, the cost is that banks make excessive profits. The levy should tax those profits. I would like the Minister to say whether he believes it will do that sufficiently.
To return to a point that I made a few moments ago, in the light of the subsidy given to the banks—£50 billion is one suggestion, £60 billion is another and the Bank of England says it is £100 billion—a levy of £2.5 billion, which is between a twentieth and a fortieth of that subsidy, does not seem to address the problem that we face. Why does the Minister believe that the measure answers the concern about the financial services sector?
I could be more generous and suggest that the Government are moving in the right direction. After all, all the changes in the rate of the banking levy have been increases—from 0.07%, to 0.075%, and for longer held assets, from 0.04% to 0.05%. I think I got those right, but I would be unsurprised if someone stood up and said, “You’re wrong. It’s changed,” or if I woke up tomorrow to find that the Chancellor had re-announced the rate. Those changes have raised the take from the levy by £200 million or £300 million, so that £2.5 billion will be raised in the first year. However, as I said at the start of my speech, given how the £20 billion threshold was constructed and the rate changes, we cannot escape the conclusion that the Government have set the overall amount that they wish to take and then gone back to work out the threshold and the rate. I should like the Minister to explain why that is not the case.
Of course, critically, at £2.5 billion or £2.8 billion, the levy does not raise as much as the bank bonus tax, so the suggestion—I put it no stronger than that—is that the banks are getting off lightly. The corporation tax reduction—corporation tax seems to have been constructed because the banks do not invest a great deal but have high turnover—and other changes could have been ideally designed for the banks. There is therefore a suspicion that banks are doing really rather well out of this year’s Budget. If that is not so, I should like the Minister to tell us why not.
There are many good reasons why the Minister should have been more draconian in introducing the levy. After all, as has been said by many hon. Members, when the coalition parties were in opposition, they told us that negotiations between the Government and the banking industry on proposals such as Project Merlin would produce certain results; on bonuses, however, the Government got absolutely nowhere. Statements were made about constructive negotiations, so it was embarrassing to find bankers telling us that there was no change.
Of course, still more critically, we were told that small businesses are the lifeblood of our economy—that mainly small businesses in the private sector would make a reality of the Government’s so-called strategy of getting the private sector to take up the slack created in the public sector. If they are to achieve that, they need to grow.
Roberta Blackman-Woods (City of Durham) (Lab)
May I draw my hon. Friend back to the use of the bank bonus tax to promote growth? We heard last week that the construction industry was struggling to come out of the recession. Of course, applying the bonus tax and giving it to the construction sector to, for example, build affordable homes, which are very much needed in my constituency and many others, would have helped to stimulate the economy.
Mr Love
I agree with my hon. Friend. Clearly, the sector of the economy that has lost out the most is construction. If the Government intend to contribute only the homes bonus and changes to the planning regulations to the construction industry—they are creating uncertainty up and down the country—I foresee a bleak future for the construction sector in the next two to three years. I urge the Government to consider that carefully. They say they have a growth strategy but they do not, and we are now suggesting one. It would repay them to listen to what people are saying and to address the inadequacies of their response, particularly in the construction sector.
Mike Gapes
My hon. Friend mentions the national insurance holiday for new businesses, but it discriminates against London and Londoners. Some of the poorest people in the poorest communities in the poorest boroughs in this country are in London, as are some of the areas with the highest unemployment, yet the national insurance holiday does not cover London, which he, as a London Member, knows as well as I do.
Mr Love
I thank my hon. Friend for that intervention. He is correct. When that legislation was passed, we argued that many parts of London had suffered tremendously from the credit crunch and were as deserving as—if not more deserving than—other parts of the country. However, that argument was not listened to. Perhaps the policy would be a little more successful if the Government had included London, along with all the other parts of the country.
The policy has clearly not been a success. The Government’s growth strategy is not producing growth. I would therefore like to suggest an alternative growth strategy, the merit of which is that it was beginning to bear fruit at the time of the general election.
I will pick out just a few areas at which the Government need to look carefully, while searching their conscience and trying to construct a positive growth strategy and address these concerns. First, youth unemployment is just about topping 1 million. One in five of our young people aged 16 to 24 are unemployed, and to focus on getting young people back into work, as we were trying to do before the general election, would pay dividends. We shall lose a whole generation if we do not address the youth unemployment problem, and that should be a priority for the Government.
Mr Robinson
The whole House will agree with my hon. Friend that youth unemployment is the single biggest threat on the unemployment front at the moment, at 20% and rising. Was not the cancellation of the future jobs fund a short-sighted, perverse reaction by the Government that could well result in a repeat of what happened in the 1980s—a whole generation being lost to the working population because of the rise in youth unemployment?
Mr Love
Yes, the future jobs fund was the very vehicle to provide a job, training or relevant work experience so that our kids did not have to sit on the sidelines without a future, getting demoralised and not being in a position to take up the job opportunities that will be available when the economy turns round. It is a dereliction of duty on the part of the Government not to address that issue.
Nic Dakin
My hon. Friend is giving a cogent and coherent analysis of the amendment before us. Does he not agree that the review suggested in the amendment represents a real opportunity to find the money needed to invest in young people and their job opportunities? It is not too late for the Government to address this error.
Mr Love
Absolutely. The merit of the amendment is that it would give Parliament, and particularly the Government, the opportunity to review the operation of the levy, as well as providing the banking sector with other opportunities to make a contribution to sorting out some of the deep-seated economic problems in our country. I hope that the Liberal Democrat part of the coalition will be sympathetic to our arguments and speak up where it matters, to try to get the Government to recognise that there is an alternative that would be good for the economy and good for our society.
A second issue is house construction. In my local authority area we have the fourth worst housing stress in the country. Things are difficult, and they are going to get significantly worse. I mentioned earlier the Government’s incoherent construction policy, with its homes bonus that is not a bonus, and its planning system that is so riddled with inconsistency and lack of certainty that major construction is now off the agenda. It is a system that allows local considerations to dominate and outweigh much-needed construction in different parts of the country. I can see only a bleak future for public and private housing construction—but our proposal provides one small, modest way in which the Government could improve the situation.
Mrs Chapman
Does my hon. Friend agree that it is not only the house builders who have a hard time when the construction industry suffers? In Darlington last week, we heard the announcement of the loss of almost 200 manufacturing jobs in a company that builds conservatories. Obviously, that is a difficult business to be in with the construction sector in its present state.
Mr Love
I agree entirely with my hon. Friend, and I hope that someone on the Government Front Bench is listening. These are urgent problems.
Let me mention two other brief points about a growth strategy. We do not have a Sheffield Forgemasters contributing to growth. I remind Government Members of that because a viable, well-thought-through and supportable project was put forward, yet it has still not received any funding—
The Chairman of Ways and Means (Mr Lindsay Hoyle)
Order. As we know, we are debating the bank levy. There has been some stretching of the debate already, and we are in danger of stretching it even further. We have had a good debate so far, and I am sure that the hon. Gentleman will want to keep to the amendment.
Mr Love
I bow to your advice, Mr Hoyle. I will conclude my remarks about the lack of a growth strategy by saying that as an optimist, I believe that it is never too late. I hope the Government will think carefully and recognise that the growth strategy they produced on paper simply does not respond to the real needs of the economy.
I finish where I started, by commending the amendment to the Government. It poses no threat to them; it simply seeks to review the bank levy system that they are introducing. They will know, because they have spent a great deal of time on this, just how important the public think the role of the banks in getting our economy sorted out is. After all, it is widely perceived that the banks were the main cause of the problem in the first place, so people are looking to them to help our economy in a meaningful way. For the reasons that I have stated, the amendment will address some of those issues and provide an opportunity to examine how the levy is working in December. I hope that it will provide us with an opportunity to straighten out and ensure that the levy really addresses the needs of our country.
Mr Hoban
Amendment 9 seeks to require a report into the effectiveness of the new bank levy, which is introduced in clause 72. I will come to the components of the amendment shortly, but I think it would help hon. Members if I first explained the role and features of the levy.
The levy is a new tax that will ensure that the banks fairly contribute to the Exchequer, while encouraging them to move to less risky forms of funding. This levy forms part of the Government’s far-reaching plans for banking reform. We have already announced an overhaul of financial regulation, marking a break from the light-touch regime championed by the shadow Chancellor when he was the City Minister. We have created an Independent Commission on Banking, which published its interim report last month and is due to publish its final report in September.
When Labour Members were in government, they refused to debate the structure of the banking sector. They were afraid of banking reform and they were afraid to understand and tackle the lessons from the financial crisis. This debate would have been better if one of them had had the courage to accept the failures of the previous Government on the regulation of the banking sector. Not one of them did so. I think this whole debate is a cover for their bluster. When we proposed in March last year to introduce a bank levy, on a unilateral basis if necessary, Labour Members were against it. The then Chancellor was against it and the present leader of the Labour party, who wrote the Labour manifesto, was against it, too. What we have heard today is a whole load of bluster, rhetoric and empty words about how we must tax the banking sector properly when Labour Members lacked the courage to champion these moves when they were in government. We have taken the lead on the issue, when they would have hung back and waited for international consensus and agreement. We have taken the lead, as I say, and France and Germany have joined us in announcing levies. Others have since followed, including Hungary, Austria and Portugal.
The hon. Member for Nottingham East (Chris Leslie) made great play of the various rates that other countries were introducing. Let me point out to him, then, that in France the levy is expected to raise only €500 million. In Germany, the levy is expected to raise €1 billion annually. The hon. Gentleman prayed in aid the US on two occasions, but the US has not yet introduced legislation, so his comments are empty—
Finance (No. 3) Bill
Andrew Love Excerpts(13 years, 7 months ago)
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The Chief Secretary to the Treasury (Danny Alexander)
I beg to move, That the Bill be now read a Second time.
The clauses that we are here to debate are another important step on the long road to economic recovery. They will promote growth and provide support for households and small businesses under pressure. They will encourage investment as well as enterprise, and they will help us to clean up the mess that the previous Government left behind.
As we start this debate, it is worth recalling the state of the economy that this Government inherited nearly a year ago. Britain had endured the longest and deepest recession in living memory. We were borrowing one pound for every four we were spending. We had the largest budget deficit in our peacetime history, one of the largest in Europe and the largest in the G20, yet no detailed plan was in place to deal with it—and that was not the end of the story. In the preceding decade Britain had slipped down the international league of competitiveness from fourth to 12th. We had seen our share of world exports decline, and we were considered to be a worse place to start a business than many of our European neighbours.
That was the coalition Government’s inheritance, which is why we have set about restoring confidence and stability to our economy, with a clear strategy for growth. At its heart is a credible plan to tackle the enormous deficit—a plan we are already implementing—so that the current structural deficit will fall in each and every year of this Parliament, and is forecast to be eliminated by 2015. National debt is forecast to fall as a proportion of gross domestic product in the same year, so that we can finally start to reduce the huge interest payments with which this country has been saddled—the lasting legacy of Labour’s failure.
The action we have taken on the deficit has shown that Britain’s economic future is now in safe hands, that this is a Government who know how to manage the country’s finances and that we have a credible plan to deliver the strong, sustainable and rebalanced growth that this country needs.
Mr Andrew Love (Edmonton) (Lab/Co-op)
If things are so rosy, why has the Office for Budget Responsibility forecast for growth gone down from 2.6% to 1.7%? Why has it projected that unemployment will increase by 200,000 as a result of this and previous Budgets? Why is it that we are doing so badly under this Government?
Danny Alexander
I do not think I said that the position was rosy. I was going out of my way to describe the calamitous state of the public finances that the Labour party left.
I would like to touch on growth first. In the Budget we set out four economic ambitions: that Britain should have the most competitive tax system in the G20; that Britain should be the best place in Europe to start, finance and grow a business; that we should be a more balanced economy by encouraging exports and investment; and that we should have a more educated work force who should be the most flexible in Europe. The clauses in the Bill set us on the road to meet those objectives.
For the past decade Britain has been losing ground in the world economy. While other nations have reduced their business tax rates, ours have lost competitiveness. While other countries have removed barriers to enterprise, ours have grown higher still. We cannot afford this to continue. Instead, our plan for growth is based on private sector enterprise, not public sector borrowing—growing businesses, not growing debts—and on securing sustainable long-term investment.
Essential to that is creating a competitive tax system—one that enables our businesses to compete on a global stage. That is why clause 4 will see our corporation tax rate fall by 2% this year. As the House already knows, we will implement further cuts of 1% in each of the next three years, so that by 2015 we will have the lowest corporate tax rate in the G7, allowing businesses to invest more of the money that they earn, hire more workers, export more goods and support the recovery.
Ms Eagle
My hon. Friend makes an extremely good point about confidence and sentiment in the economy transmitting their way into the real figures through their effect on demand.
Even those who gave their personal stamp of approval to the Chancellor’s aggressive cuts agenda last year in a letter to The Daily Telegraph are now voicing their doubts about weak growth. Ex-Tory MP Archie Norman is worried that the Government’s growth predictions are too optimistic and former Asda boss Luke Bond is predicting a two-year retail recession, which picks up on the point that my hon. Friend the Member for Luton North (Kelvin Hopkins) has just made.
The Government are going too far too fast, and we are paying the price in lost jobs and slower growth. Their phobia about the deficit means they are cutting public expenditure much further and faster than any other major economy. They have made deficit reduction the only thing that matters, regardless of how terrible its social or economic effects will be; they appear to be blind to the lessons of history; they refuse to listen to public concern; and they fail to recognise the absolute necessity of re-establishing growth to get the deficit down. Without growth, austerity measures simply make the deficit worse and impoverish the society they are inflicted on. The Chancellor should, as he so notoriously lectured us in February 2006, “Look and learn from across the Irish sea”. Ireland is on its fourth austerity budget with no end in sight. The evidence shows that all the countries that implemented drastic austerity measures saw their economies go into reverse in the fourth quarter of 2010. Those economies shrank in Greece by 1.4%, in Iceland by 1.5%, in Ireland by 1.6%, in Portugal by 1.5% and in the UK by 0.5%. In contrast, both the German and the American economies grew.
The Chancellor is not solving the problem; he is in danger of making it worse. The day after the Budget, the ratings agency Moody’s embarrassed the Government by suggesting that the UK’s triple A rating might be at risk not because of the deficit but because of slower growth. I would take any pronouncement from the rating agencies with a very large pinch of salt, as they are hugely compromised by the part they played in making the banking crisis worse and they need to be reformed, but, unlike the Chancellor, we have neither made their flawed and partial judgments the central justification for our economic policies nor installed them as the most important judges of our success by giving a dangerous credence to the fiction that the UK’s ability to finance its debts is at risk for reasons of petty party politicking. Their influence makes the inconvenient point for the Government’s political cuts narrative that growth is equally important to successful deficit reduction. Without growth, the deficit will not be sustainably reduced.
Ms Eagle
With a 25% devaluation in the value of our currency, we certainly ought to be seeing strong increases in economic performance, but my hon. Friend makes an important point about demand in other areas of the economy, especially in the European Union, which is our largest export partner—60% of our exports go there.
The Chief Secretary will already have seen the growth figures for the first quarter of 2011, and I am looking at his face for any scrutable or inscrutable reaction. The figures are due to be released tomorrow, so he has an advantage over the rest of us. I do not know whether he is going to give us any facial hints as to what is in them, but if the OBR’s three-times downgraded forecast of 0.8% is right, the economy will have grown a tiny 0.3% over the past six months against the 1.8% it achieved in the previous six months under the influence of the previous Government’s policies for recovery. As the Financial Times says today,
“it will be difficult to claim that the recovery is self-sustaining unless Wednesday’s number is at least 1.2 per cent and possibly as high as 1.7 per cent.”
The Government’s growth strategy is a hotch-potch of reheated Thatcherite fiddling on the supply side. At its centre is the dubious belief that the most important driver of economic growth is creating a low corporate tax jurisdiction for multinationals, but the economic literature shows that growth tends to be higher in countries that have a higher investment in social and intellectual assets, as well as good capital infrastructures. The Government have a simplistic view that cutting corporate taxes will automatically lead to more investment, but we believe that an investment strategy is needed and that it sends the wrong signal to cut investment allowances. The £200 million one-off extra investment in science and apprenticeships, although welcome, is dwarfed by the £5 billion-a-year cost of reducing corporate taxes, which will help growth only if that money is reinvested in business activities in the UK. The Government’s decision to abolish the regional development agencies and cut regional growth funding by two thirds has set back many viable plans for development that could even now have been building an economic recovery in every region of the UK.
Despite the biggest squeeze in living standards since the 1920s, the OBR is forecasting that one quarter of economic growth this year and a third next year will come from UK households and will be financed by a sharp increase in household debt. Close study has revealed something that the Chancellor chose not to mention in his Budget speech: the OBR expects families to go deeper into debt each year between now and 2015 and expects household debt to rise to a record high of 175% of disposable income, or £77,000 per family, by the end of this Parliament. The Chancellor claims that the only thing that matters is getting Government borrowing down, but he does not say that his plan is to pass that debt directly on to already hard-pressed families. Although they did not cause this crisis, ordinary hard-working people and families are being made to pay for it. People are suffering under the pressure of the Chancellor’s hike in VAT, sky-high petrol prices and inflation, and we know that his real economic strategy is to force people to take on even more debt just to make ends meet.
What then of the sector that caused the crisis? Instead of making the banks pay more this year, the Government are giving them a tax cut. Project Merlin, the Government’s so-called final settlement with the banking sector, is a damp squib. As the majority shareholder, the Government have just approved, for the chief executive of the nationalised Royal Bank of Scotland, £7.7 million in pay and bonuses for last year despite the bank’s having lost £1 billion. It has also emerged that bank lending to small businesses fell again in the first quarter of the year. Lending to small businesses is vital to recovery and despite all the promises from the banks it is going down, not up. The Government should not be giving the banks a tax cut, but should follow Labour’s suggestion and repeat the bank bonus tax this year. That extra money could be used to build 25,000 extra affordable homes, to create more than 100,000 jobs to help tackle youth unemployment and to boost enterprise in the regions.
The Government are hellbent on taking us back in time to the divided Britain of the 1980s. The Tory leaders in the coalition are trying to re-enact the failed Thatcherite policies of the past, which resulted in one part of our society being divided against another. Not only are they making life tougher for people, but they are kicking away the ladders to a better future. They are teaching people to blame the weak and despise the poor. It is happening all over again, just like in the 1980s, but this time the Liberal Democrats are helping them to do it. At the weekend, the Deputy Prime Minister accused the Prime Minister of “defending the indefensible”, but I think that the Deputy Prime Minister and his Government colleagues are doing a pretty good job of that themselves. In public they complain, but in private they roll over and agree to every damaging Tory plan.
The Government fail to recognise the pain that their economic strategy is inflicting on people up and down the country. They want Britain to have a smaller state; they want to create a nastier, meaner, shabbier society that leaves people to fend for themselves; and they are trying to fool the country into believing the myth that the economic storm was all Labour’s fault and that this extreme and dangerous fiscal consolidation programme is the only option to deal with it. The Government need not have cut this far or this fast, because there is a better, fairer and safer way. They need to wake up and accept that their economic polices are not working and are just hurting, and they need to change course before it is too late.
Amendment of the Law
Andrew Love Excerpts(13 years, 8 months ago)
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Mr Gyimah
I agree with my hon. Friend entirely. One of the great things about “The Plan for Growth” is that the Chancellor did not try to say that there is a silver bullet for creating growth in the economy, or that we can pick winners. No bureaucracy or Government can really pick winners to generate economic growth. I am reminded of a story—perhaps apocryphal, but certainly instructive—about McKinsey, the strategy consultancy firm, which produced an economic outlook for the 2000s that completely omitted the internet when identifying the key drivers of economic growth. Today the internet is a massive sector worth, I think, £100 billion and employing thousands of people. It is right that we have not tried to pick winners.
Looking at what the Chancellor has done, I note that it is we, rather than Opposition Members, who recognise that growth will come from the private sector, not from a state-led programme. That is why I agree with the four objectives that he laid out: to be competitive on taxes; to be one of the best places to start, finance and grow a business; to encourage investment in exports as a route to a more balanced economy; and to create a more educated work force.
I will focus on just one of those areas—starting, financing and growing small businesses—partly because I have an interest in it because my constituency is full of small businesses. Nationally, however, there are 4.8 million small and medium-sized enterprises, and they are responsible for 50% of private sector output and 60% of jobs. If we really want to create the growth that drives jobs, we should surely look to do so from the private sector.
Research by the National Endowment for Science, Technology and the Arts points out that 6% of the fastest-growing companies create 50% of the jobs, not just in the south-east, but throughout all regions and sectors. In other words, the start-up, survival and eventual success of small companies is vital for public policy and for creating growth.
The hon. Member for Coventry North West (Mr Robinson) mentioned bank lending, but fast-growing companies’ revenues are often volatile and their cash flows can be unpredictable. Banks do not want to lend to them, so we need to be able to create an environment for equity lending. One thing we know in the UK is that, if people want to raise amounts below £2 million, they find it incredibly difficult to do so. Such risk capital, however, encourages businesses to take a risk—to take on the new plant, to hire new staff—so it is great that there are so many changes to the enterprise investment scheme in “The Plan for Growth”.
Increasing relief to 30% means that someone who is going to invest in a business knows that they can offset 30% of their investment against tax. It will encourage people to take sensible risks and invest in those companies that will drive growth. Raising the relevant annual limit to £1 million and to £10 million per company means that companies can seek capital from high net-worth and private individuals, not just from institutions. Anybody who is involved in small businesses knows that people often rely on friends and family to support their business in its early stages, so it is good to see the Government backing those who are ready and willing to take such risks.
Raising the limit on qualifying companies to 250 employees means that the measure will apply not just to start-up companies, where the failure rate can be quite high, but to well-established companies that need capital to grow. I would like to see what more the Government can do to allow connected persons to enjoy such tax reliefs, because connected persons—directors—cannot enjoy them at the moment, and that is where businesses get much of the expertise that they need. By making investment in small businesses easier, the Budget recognises and encourages people who are willing to take risks.
Mr Andrew Love (Edmonton) (Lab/Co-op)
I am listening very carefully to the hon. Gentleman. Does he agree that the real problem for small businesses is not in formation, as a number of them will inevitably die after a few years, but in taking a small business and making it into a larger business? I take his point about venture capital trusts, business angels and all the other mechanisms, but the only way in which we can achieve such growth is through bank lending. That is the real source of capital for small businesses, so how do we improve bank lending?
Mr Gyimah
I take the hon. Gentleman’s point and thank him very much for it. Anybody who has ever tried to start a business knows that banks do not lend to businesses with unpredictable revenues or cash flows. One has to raise equity to support small businesses, and the Budget includes a raft of measures to encourage individuals and institutions to invest in them. Entrepreneurs do not always mind whether it is a bank or an individual who is willing to invest in their business either in the early stages or when they need new plant; what they want is the money to grow their business and to hire new staff. That is how they look at it, and there are many appropriate measures in the Budget to address that.
The Budget also seeks, through the entrepreneurs’ relief and raising the cap on capital gains from £5 million to £10 million, to reward people who mortgage their home, take a low salary and start a business. That will not make the newspaper headlines, but in competitive terms it makes the UK a centre for investment. I have spoken to several people in the venture capital industry who say that they will now be thinking of coming to the UK to look for small business assets to invest in. It also means that an entrepreneur who lives in another country will come to the UK to set up a business such as Skype because he is more likely to attract investment—and yes, they might be from abroad, but they will employ UK residents. That is what is great about this Budget. Unless we understand that the engine of growth is enterprise—that it is individuals and their efforts who will drive growth—we will be barking up the wrong tree as we discuss this Budget.
In addition, we have measures such as the research and development tax credits; I cannot go through them all in the short time that I have available. It is good that small businesses that invest a lot in R and D can get some of that back in the form of a tax break. I am reminded of a husband and wife who came to my surgery. They had set up a business, having developed equipment to treat club foot, and needed R and D tax credits, but they had to move to Cornwall to do so. I hope that the tax relief that we are providing will not only be regionally based but that people will be able to access it wherever they are in the country.
Last week, Opposition Members came up with their growth plan—the right hon. Member for Morley and Outwood reiterated it today—which would levy the bank tax again and spend it on a series of Government programmes. What I like about this Budget is that it does not seek a Keynesian stimulus—we cannot have that because we have maxed out the credit card—but backs enterprise. It relies on the endeavour, the ingenuity and the efforts of the British people to get our country back on its feet again, in contrast to what the Opposition did, which was to get the country into a mess.
Amendment of the Law
Andrew Love Excerpts(13 years, 8 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mr Tyrie
What I am trying to do is not answer the questions, but pose them for Select Committees and others to try to answer. I am trying to point out that in order to generate a coherent growth strategy, a large number of policies need to be looked at in the round to ensure that we are not wasting public resources.
Mr Love
Does it not concern the hon. Gentleman that nothing has been said in today’s Budget about the centrepiece of the Government’s growth strategy—the national insurance holiday for small companies outside London and the south-east? Should we not know more about how that is going and whether it is, in any way, a success?
Mr Tyrie
That is an interesting point. As the hon. Gentleman knows, the Committee will be holding hearings next week and we will have an opportunity to take evidence on exactly that point.
I wish to draw my remarks to a close by observing that growth and the deficit reduction strategy—the two issues I have been discussing—will be one and the same thing if a reduction in the size of government allows room for the private sector to grow. I know that this is not something on which agreement will be reached across the House and that it is the very stuff of party politics, but I hope that Members sitting on the other side of the House will permit me to end with a personal view. Even if there were no deficit, we should still reduce public spending because at close to 50% of gross domestic product it is too high. It reduces choice and freedom for millions of individuals, and it burdens enterprises with unacceptable levels of taxation. During the 13 years of the previous Government, public spending averaged about 40% of GDP. I support this Government’s plans to reduce it to that level again.
Mr Redwood
My hon. Friend is quite right, but the Labour party could point to one or two examples under Conservative Governments, so I do not want to be drawn too far down that historical path. We can see what we need to see by looking at the modern reality. As my right hon. Friend the Chancellor said, fortunately, British bond rates—the rate that we have to pay to borrow money for public purposes—are much closer to those in Germany than those in many other countries in Europe. They are under half the level of those in troubled Portugal. The Portuguese 10-year rates went above 8% today. I stress to beleaguered Portuguese parliamentarians, who are battling over whether a general election is the answer to their problems, that if they do not take dire and immediate action, their country simply will not be able to borrow at an affordable rate of interest. They cannot go on spending the extra 10% of national income that we are spending, which is borrowed, to tide us through and get us to better-managed times.
My right hon. Friend the Chancellor, having set out a pathway for tackling the deficit, was right to turn to the question of how he can accelerate growth. The truth of the five-year deficit programme is simple: we need well-above-average growth in the last three or four years of the programme to deliver the numbers in the Red Book, which are similar to those in the Chancellor’s first edition of the Red Book last summer.
To remind the House of the scale of the task, the Government plan to spend £70 billion a year more, in cash terms, in the fifth year of the plan—2014-15—than in the last Labour year; that is not a big increase, but there will be pressures because of it. They plan to get the deficit down by increasing the tax revenue collected in the last year of the plan to an eye-watering £175 billion more than in the last Labour year. We believe that we have seen all the important tax rate rises that the Chancellor thinks are needed to do that; the rest depends on the above-average growth that is still in the official forecasts of the Office for Budget Responsibility.
Mr Love
As I understand it, the right hon. Gentleman is laying out why we need a credible reduction in our deficit in the light of the likely market reaction, but is he not concerned about the impact that any austerity programme might have? Although there has been only a limited impact so far in the United Kingdom, as in Greece and as is likely in Ireland, it may be too much, too soon.
Mr Redwood
That is absolutely right. The policies that Ireland, Greece and Portugal are being driven to may well not work because they are excessive, but that is the result of going into the euro and following the market pressures that that inevitably produces. I see some Labour Members trying to pretend that that is nothing to do with them, or looking the other way. I remember being a pretty lonely figure in the ’90s when I said that we should never join the euro. I am pleased that my party now seems to be very broadly of that view, and I believe that the other two principal parties in the House have come round to the view that we certainly should not join the euro any time yet, but we have still to receive apologies from them. Surely they must now accept that if Britain had been driven into the euro, as they wanted, we would have broken the euro and broken ourselves. The euro could scarcely contain small economies the size of Greece, Portugal and Ireland, with their amount of debt; it certainly could not have contained Britain comfortably with the level of debt that the previous Government started to incur. It would have found the British banks over-mighty subjects, just as it is finding the Spanish banks rather difficult to tackle.
Oral Answers to Questions
Andrew Love Excerpts(13 years, 8 months ago)
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Mr Osborne
My hon. Friend is right. The share of manufacturing in our economy halved during the years of the Labour Government. However, there is good news today: the CBI industrial trends survey shows that total order books are growing for the first time in three years. We are determined to move from an unbalanced economy that placed all the bets on the City of London to an economy that grows across the regions and in all sectors.
Mr Andrew Love (Edmonton) (Lab/Co-op)
The trade-weighted exchange rate has fallen by 20% in the last few years. Manufacturing has not increased as much as we expected, and there are even worse figures for the investment industry. What is the Chancellor doing to ensure that we gain the advantages of that exchange rate depreciation?
Mr Osborne
I do not know why Opposition Members want to talk down the British economy. What the chief economist at the CBI said contrasts with the hon. Gentleman’s remarks about manufacturing. The chief economist said:
“The outlook for UK manufacturing output growth is very encouraging.”
We are going to support manufacturing. We have the corporation tax cut that I announced in last June’s Budget, and we have the new centres for innovation and manufacturing. We are going to help manufacturing, whereas Labour shrank manufacturing.
HM Revenue and Customs
Andrew Love Excerpts(13 years, 8 months ago)
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Gregg McClymont
I thank the hon. Gentleman for that observation. Clearly, this is a complex issue and there will be reasonable arguments on both sides, but it seems to me that it is a job in which morale is particularly important. I intend to refer later to the psychology of being a tax officer, which pertains to his point about raising more revenue.
Mr Andrew Love (Edmonton) (Lab/Co-op)
I want to make an observation based on a recent conversation I had with a tax expert. When the Government looked at the overall staffing reductions in HMRC as a consequence of the spending review, it became absolutely clear to all that the gaps in their ability to raise taxes were such that they would need to put something back, and that is the explanation for the £900 million.
Gregg McClymont
I thank my hon. Friend for that information. As a member of the Treasury Committee, he is well known for his interest and expertise in this area. What he said sounds not only plausible, but likely.
I am suggesting that short-term savings in HMRC could reduce the Government’s ability to maximise tax revenue in the long run. They reduce the likelihood that HMRC will be able to attract and retain the talent necessary to administer complex systems and crack down on fraud, and the hon. Member for Chichester and my hon. Friend the Member for Leeds East alluded to that aspect of the argument. It seems to me that there is a danger not only that revenue will be lost to the Government, as has been made clear in previous contributions, but that reducing services to the public means that the costs will be passed on to the public and to businesses, particularly small businesses. If HMRC is harder to contact or slower to rectify errors, costs for the public and business will increase. The hon. Member for Chichester eloquently set out the dangers for small businesses of this process of HMRC reform or cutbacks, or whatever we call it. It is clear to me that those costs will disproportionately harm those with the least resources.
Gregg McClymont
I thank the hon. Gentleman for his observations. I was very interested in what the hon. Member for Chichester said about the merger. I come to that subject with little background knowledge, and I intend to do some reading on it, because at face value it seems to be a plausible reason for some of the problems that HMRC now faces.
Mr Love
Taking on board the point just made by the hon. Member for Hertfordshire, should that not be a further argument that now is not the time to be asking for further reductions in manpower? Because of the difficulties of the merger and the problems that it created, we should be trying to retain the expertise that already exists in HMRC.
Gregg McClymont
My hon. Friend makes a powerful point. If we do indeed have an organisation that is dysfunctional, to use the hon. Gentleman’s term, there is clearly a question about whether the way to approach managing such an organisation is to engage in severe cutbacks.
Priti Patel (Witham) (Con)
I welcome the opportunity to discuss the work of Her Majesty’s Revenue and Customs. I pay tribute to the Treasury Committee for its work in scrutinising that organisation and for the many helpful inquiries it undertakes.
I have a particular interest in the administration and effectiveness of HMRC, because it is clear to me and to many residents and businesses in my constituency that it is a failing organisation that all too often treats people and businesses in the most appalling fashion. I have endeavoured to raise these points before in the House, but have had the misfortune to be unsuccessful in the ballot for Adjournment debates. I am pleased that I can now put these matters on the record in the House. I should add that I am immensely grateful to the Exchequer Secretary, who has faced a deluge of correspondence from me regarding the numerous cases in which my constituents have felt harshly treated by HMRC. I thank him for meeting me earlier this year to discuss the numerous complaints and concerns about the administration and processes of HMRC.
We are all aware of the highly publicised issues associated with HMRC, which range from problems with PAYE and tax credits to lost child benefit discs. Many hon. Members have touched on those areas. As constituency MPs, we see at first hand in our surgeries and in the letters we receive the distress and sheer misery that these mistakes and errors cause. I am exasperated by the extent and seriousness of the cases, and by the level of distress among the constituents who have come to me. Such constituents usually come to us in desperation, after experiencing tremendous difficulties in communicating with HMRC and in getting answers from it. They are the human victims of HMRC. I will draw to the House’s attention some of the cases that I have come across in my 10-month tenure as a Member of Parliament.
First, my constituent Mr Philip Wright has an ongoing dispute with HMRC that dates back to 1999, in the days of the Inland Revenue. It relates to employment and tax status in the construction industry—a notoriously complex matter. Six years later, in 2005, the case was heard before Colchester general commissioners, who ruled in Mr Wright’s favour. Despite that, HMRC refused to let the matter rest and appealed on the grounds that the general commissioners had misdirected themselves. The case has since gone from one tribunal to another, including a sitting two years ago at which neither Mr Wright nor his representative could be present. There have been suggestions of irregularity in the process, and HMRC appears to be making it as difficult as possible for Mr Wright.
It is now 2011 and the case is still ongoing. The cost to HMRC of pursuing the case his spiralled out of control and has gone well above the claim that it has against my constituent. I saw Mr Wright on Saturday in my surgery and the stress of the case has clearly had a devastating impact on his health and emotional well-being. I urge senior HMRC officials who are paying attention to this debate to reflect on this case.
Another distressing case in which HMRC has gone after a local business in a thoroughly disproportionate way came to my attention just this week. A firm in Witham sent its VAT payments to HMRC two weeks late because there was a delay in it receiving a payment from a customer. Instead of exercising a dose of common sense, HMRC is pursuing the firm for a surcharge of almost £5,500 on a VAT bill of about £36,000. Of course there are rules about paying taxes, but at a time when so many businesses are struggling, it seems thoroughly inflexible of HMRC to target such small businesses, especially when they have paid their taxes in full. I get the impression that officials are waiting like vultures to target their prey when they are at their weakest. The effect on businesses of that approach, as many hon. Members have said, is to put jobs and prosperity at risk. A £5,500 surcharge might seem like small pickings for HMRC, but for most businesses in my constituency, where 80% of the local jobs are in SMEs, such a sum could enable somebody to be employed or a financial investment made in the business. The instruments of government should be helping business and the private sector, not causing such unnecessary burdens and distress. I have written to HMRC this week about these cases, and I hope that, among the 70,000 people it employs, there are enough who will have enough common sense to do the right thing.
I have come across other cases in which businesses have suffered at the hands of HMRC. One business that was applying for VAT exemption encountered nothing but excessive delays. Another case, which landed on my desk in June last year, alarms me no end. A local business received what I would describe as a generic letter from HMRC on 1 June, stating that the business was £64,000 in arrears. The letter stated that that sum had to be repaid by 14 June, even though it arrived only on 1 June. That is a significant sum of money. During that 14-day window, my constituent made a number of attempts to contact HMRC about the issue, but no one would return any calls. It was not until I intervened that HMRC finally replied. Its inability to return calls, its automated actions and its generic letters cannot be justified. It would be a shock to anyone’s system to receive a notification of that nature.
Mr Love
I want to take up the point made by the hon. Member for Chichester (Mr Tyrie) about the shift in compliance costs from HMRC not only to small businesses but to individuals and large businesses. As that shift is already catalogued as having happened in recent years, does the hon. Lady think that the implications of the comprehensive spending review are that small businesses will have to meet even greater compliance costs in future?
Priti Patel
I do not, actually. Many other measures came out of the comprehensive spending review and last year’s Budget that will help small businesses to further their interests and, we hope, grow their businesses as well.
I come from a small business background—my parents have a small business—and I am stunned by the attitude and the bureaucracy associated with HMRC. Its lack of accountability is also deeply disturbing for all our constituents. I have had constituents in my surgery who have been reduced to tears when describing their own personal experiences and the distress that HMRC has caused them. In one case, a couple who had separated were having endless complications with their tax credit awards, and the wife was receiving demands from HMRC for the repayment of overpaid credits. In another, problems were caused by HMRC’s delay in processing the correct levels of tax credit for a constituent because—surprise, surprise!—HMRC had made mistakes with the information that it held on her, and my constituent subsequently had to supply it with a great deal of additional paperwork and ID. That involved a lengthy and inconvenient process.
I should like to draw the House’s attention to another tax credit case. It concerns a couple who received overpayments as a result of HMRC’s mistakes. HMRC even gave my constituents a reward of £35 in recognition of that. However, the errors mean that that family are now being pursued for a range of repayments and are undergoing another lengthy and bureaucratic process, even though they have done nothing wrong. Make no mistake, HMRC is effectively still persecuting them and treating them like criminals.
In all those cases, and many others, my constituents have endeavoured to do the right thing, and there has been no evidence of any attempt to avoid paying taxes or to mislead HMRC. However, due to an overly complicated tax system and what seems to be endemic incompetence at HMRC, my constituents, and, as we have heard today, many others, have suffered. My constituents feel that HMRC, with the full force of the state behind it, is effectively bullying them and persecuting the disadvantaged, the weak and the powerless, and that it fails to realise the worry, stress, anxiety and misery that its errors cause the businesses and individuals who are threatened. Those unreasonable actions defy common sense and undermine how HMRC operates and the tax system.
Banking
Andrew Love Excerpts(13 years, 9 months ago)
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Mr Osborne
I am not only disappointed by it; it has been a constraint in what we have been dealing with. It is very explicit—[Interruption.] The shadow Chancellor says this is rubbish, but that was the agreement that he and his colleagues signed up to. That is the problem on this issue, and I think that that is beginning to dawn on them. They have a past—they have a record. It is a record of letting the City get away with murder, and of the rest of us having to pick up the pieces.
Mr Andrew Love (Edmonton) (Lab/Co-op)
Following the statement on bankers’ bonuses, how would the Chancellor respond to the one in ten of my constituents who are unemployed and looking for work; the many low-paid workers who face real reductions in their living standards over the next few years; and the many public sector workers who face the possibility of redundancy? Please do not respond by saying, “We’re all in this together.”
Mr Osborne
To repeat what I said in my statement, I completely understand the anger and resentment felt by the many people who have lost their job or faced their income being squeezed because of the mess that was created in the British economy by the banking system and those who were regulating it. That is the situation we are dealing with. My priority today has been to put the economic recovery first and to ensure that we get banks to lend to small and medium-sized businesses, so that they can take on the people the hon. Gentleman is talking about. Small and medium-sized businesses are the engine of job creation in the British economy and they are crucial to our revival. It is also crucial that we rebalance the economy so that we are not as dependent as we were on the success of the financial services sector.