Office for Budget Responsibility

Anneliese Dodds Excerpts

Tuesday 24th July 2018 Westminster Hall

[Lee Rowley (North East Derbyshire) (Con)]

It is a pleasure to serve under your chairmanship, Mr Gray. I congratulate my hon. Friend the Member for Ochil and South Perthshire (Luke Graham) on securing this important debate; the relatively small number of Members in the Chamber is disproportionate to its impact, and I know our colleagues are desperate to be here and talk about these things. This is one of the most interesting and important debates the House has had in the last few weeks, in either Chamber, because underneath its surface is a series of questions that we as politicians, on both the Opposition and the Government Benches, have about what we want the debate to be around finance, fiscal policy and monetary policy in the coming years, and how we ensure that that is underpinned with a series of structures that make those debates useful and helpful for those who seek to understand and, eventually, vote on them.

I welcome the main thrust of what my hon. Friend talked about in trying to ensure that the Office for Budget Responsibility—the structure that we have in place already—could be expanded, so that it gave an understanding and indication of the costings of the myriad Bills that are introduced, whoever puts them forward, in the white heat of an election campaign, however difficult that is. That would give the electorate an opportunity to stand back—if done correctly and appropriately—and understand what people and parties were suggesting, and how responsible and, in some cases, irresponsible, those parties were being about our future financial and economic health. We have seen, over several decades, across the world, an increasing move to independent structures, whether independent central banks or independent fiscal watchdogs. I think this is a natural extension of that trend, which I would welcome.

I have both non-partisan and partisan points to make, so I will get the non-partisan ones out of the way first, before the hon. Member for Oxford East (Anneliese Dodds) intervenes on me, as I am sure she probably will. These things are important for having an educated democracy. To understand where we are going as a country, how much we are spending and the opportunities that we are putting forward for our communities, the public have to have the information so as to understand the different choices being placed before them. It is an excellent idea to give people the tools to understand the implications of the policies that are being made—with the caveats, which I will come to and which my hon. Friend has explained.

We have myriad policies that sound brilliant in isolation, and it seems they should have been implemented decades ago. In isolation, that makes the Government look as if they have been mean or not cared about certain areas. There are often reasons, however, why policies are not implemented. There are reasons things are not necessarily a good idea, even though they look good on paper. There are opportunity costs to decisions that are made. If we can have a discussion about economics and implications, we will be stronger as a democracy.

That discussion must necessarily accept that the world is complicated. In politics, there is a tendency to simplify discussions, particularly about finance and fiscal policy, to a point where they become meaningless. We talk about billions, gaps and black holes in finances without understanding the economic implications and realities of the assumptions underneath them. Wherever we are on the ideological spectrum, it is important to improve the quality of debate about our finances and about where the Government—whoever is in government—seek to take them in future.

I welcome the proposal from that non-partisan perspective and from a partisan perspective, because if it had been in place in 2017, it would have blown apart the Labour manifesto, which was the biggest work of political fiction and fantasy I have seen in my lifetime. I say that not to annoy the hon. Member for Oxford East, but on the basis that on 12 May 2017 the Institute for Fiscal Studies said:

“This manifesto cannot be summed up in mere numbers.”

It also said that the tax measures were “highly uncertain”, that key elements of it were not explained, and that there was an inherent contradiction in borrowing more and seeking to reduce debt. I know that there is a way to do that, but the quantum of debt that the Labour party manifesto suggested was entirely unrealistic. If the Labour party had got in, and if I were not here today as one of the six Members of Parliament who gained a seat from it, we would be in a problematic economic and fiscal position.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I will do the large-scale demolition later, but I will ask the hon. Gentleman one question now: where were the costings in his party’s manifesto?

[Lee Rowley]

No one assumes that the 2017 election was perfect on both sides. I accept the principle of what the hon. Lady says to some extent: we did not have a good economic debate in the 2017 election, and I hope proposals such as this will improve the quality and standard of future debates.

My underlying point, which is partisan but not party political, is that I am extremely concerned about the level of debt that western democracies have taken on over several decades—that is one of the reasons I am in politics. That debt is storing up huge challenges for our children and grandchildren in the coming decades.

Speaking about debt has gone out of fashion in the last couple of years; it has not been a central part of our discourse, as it was when we had a large deficit several years ago. It is a credit to the Government that that deficit has been brought down, but it has not been eliminated. On a daily basis, we still add costs and create debt for our children and the people who will be here in 30 years’ time. Although debt is less than it was eight years ago, we should never forget that it is still significant. Between 2002 and 2014, debt as a proportion of GDP rose in every western democracy in the G7. In some cases, that rise was minimal, but in others it was extremely large. Western democracies have a debt addiction that will be problematic in the long term.

As a country, we have moved from paying £30 billion annually in interest payments to paying nearly £50 billion in recent years, and that will only increase. The problem with paying £50 billion is that some of the conversations that we have here every week—about how much money we should put into the health service, the education system or welfare—would be much easier if we were not spending 8% of our budget on debt repayments to financial institutions elsewhere in the world, just so we can hold money that we spent many years ago and that cannot have any benefit today.

That £50 billion is the equivalent of building a hospital every four days, of employing thousands of nurses, doctors and other people in the public sector, or of significant cuts to income tax. The problem is that if we, as a representative western democracy, do not arrest our continued debt addiction, in 20, 30 or 40 years’ time, the figure will be £75 billion or £80 billion in real terms.

Many people have suggested that extending the remit for independent fiscal watchdogs, as my hon. Friend the Member for Ochil and South Perthshire has proposed, does not work, because it is ultimately impossible to model some of the underlying implications as there is an inevitable political bias in the assumptions that will be utilised to assess the activities, and because they might not be truly independent.

My hon. Friend also talked about the situation in 2014-2015, when the former shadow Chancellor suggested that the Office for Budget Responsibility look at Labour’s manifesto costings, but it did not have the capacity to do that. Those are all interesting points, and probably worthy of debates in themselves, but we have to decide whether we want to improve the quality of debate on financial and economic policies—and I do. The extension of the OBR’s remit would be a positive step in that direction.

Those watchdogs work and are useful, as my hon. Friend showed by talking about the Congressional Budget Office in America and institutions in several other countries around the world. I will point to two examples from Australia, where I have family; I am particularly interested in the political machinations there.

In 2007, the Liberal party, which I would closely ascribe to if I were in Australia, was moving out of office and the centre-left party was coming in under Kevin Rudd. In the heat of that election campaign, there was a big debate between John Howard, the Prime Minister, and Kevin Rudd, who would become Prime Minister, about financial and economic costings. The centre-right Government were trying to splurge to win an unprecedented fifth term in office, so they proposed approximately double the increase in spending that the centre left proposed.

I would naturally support my Liberal friends in Australia, but they were not proposing the right policies at the right time, and in doing so, they were not recognising the challenges of an overheating economy. Australia’s independent watchdog came along and said that the proposals would cause problems, which gave the mantle of economic credibility to the Labor party—something that is rarely done across the world.

Kevin Rudd is not a natural fellow traveller for me, but his biography says that

“barely 10 days out from voting day…we had won the all-important battle for fiscal credibility…the political dividends were reaped not only from a slew of Australian financial and economic commentators but from the international credit rating agencies too. Fitch stated that Australia would retain its AAA credit rating if Labor was elected”.

That is an example of why this kind of policy, and this kind of proposal, is really important.

If we fast-forward to the 2013 Australian election, Kevin Rudd was at the end of his second term as Prime Minister and was seeking to splurge to stay in office. In the white heat of the election campaign, his party put out a number of scare stories about why the incoming coalition Government were going to cut loads of things, cause huge economic problems and really affect the economy—the kind of thing that we hear quite regularly. The Australian published a book called “Triumph and Demise” by Paul Kelly, an eminent journalist in Australia, in which he said:

“In the second-last week of the campaign, the heads of Treasury and Finance issued a statement repudiating Labor’s claims”

on the costings of the coalition—the opposition. He continued:

“It was an unprecedented event, the biggest story of the campaign and a humiliation for Rudd as prime minister. Rudd had over-reached and been repudiated by his own advisers. The symbolism of a dying, dysfunctional and dishonest government was irresistible.”

I would not particularly like to have been in John Howard’s or Kevin Rudd’s shoes, but that demonstrates that if we get structures right and have an independent watchdog that can look and say, “This doesn’t work. This is wrong. These numbers are obscured,” that can improve the quality of debate and focus people on the underlying questions that are being asked.

However, that will only ever be useful if we, as politicians, and the country at large, recognise that statistics are not necessarily the be all and end all, that there is a wider context to be gained from them, and that we need to treat them with caution, as my hon. Friend outlined. But in principle, the extension of the OBR’s remit is extremely important. Although I recognise that there are challenges, if we are looking to take steps to improve the quality of debate—both within this place and without, in the wider community—we should seriously consider ideas such as this, which I welcome strongly.

--- Later in debate ---

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve with you in the Chair, Mr Gray. I thank the hon. Member for Ochil and South Perthshire (Luke Graham) for securing the debate, as well as the Backbench Business Committee.

I am delighted that we are talking about the remit of the Office for Budget Responsibility. I strongly agree with the hon. Member for North East Derbyshire (Lee Rowley) that it is an important issue. I regret that we do not have many Members thronging the Chamber; the last time but one I was here was for the debate about safe standing for football grounds, and it is a shame that we do not have the huge numbers we had then. It is incredibly important to talk about the robustness of figures when it comes to budgeting. I have to say, if you will permit me, Mr Gray, that it is also a delight for me to be able to talk about Labour’s manifesto and spending plans. It feels like summer has come slightly early for the Labour party—perhaps not quite as early as the Prime Minister had hoped. Still, I am pleased to be able to cover those subjects, but I will do so briefly, Chair, so as not to strain the patience of those in the Chamber.

Labour, of course, supports the OBR. We have had a good summary and discussion here of its origins and its work, and Members have usefully referred to how it follows on from similar independent fiscal institutions in other countries, not least those in the Netherlands and the US. The hon. Member for Strangford (Jim Shannon), who is no longer in his place, rightly mentioned the significant expertise we have in our OBR, how it compares favourably with other parts of Government and how we need to ensure that we support the people who work there. I very much want to pay tribute to all their hard work.

The OBR’s analysis, particularly in recently years, has been enormously helpful, especially in performing the task—referred to briefly by some Members—of having a long-term perspective on Government spending and its potential impact on economic sustainability. Of course, it was the OBR that pointed out, at the time of the last spring statement, how projections for both GDP and productivity and investment growth are set to be lower than anticipated, thus counteracting, perhaps, some of the media coverage that has suggested that as a country we are out of the woods in some way. On the long-range issues, the OBR has suggested that much work needs to be done if we are to get our economy on to a more sustainable basis. I very much agree with the hon. Member for Ochil and South Perthshire’s praise for the OBR’s accuracy in that regard, even though the office sometimes has negative, or at least concerning, lessons to impart about the long-term economic sustainability of our country.

The OBR has been unafraid to speak some perhaps uncomfortable truths when necessary. There was much discussion of its role around the time of the last Budget, when the new stamp duty holiday policy was being introduced. The OBR was concerned to look at its potential impact on house prices. It was criticised for doing so, but it was absolutely right that it did.

The hon. Member for North East Derbyshire helpfully mentioned some of the trade-offs involved in policy making and suggested that we need more of a focus on those, particularly when assessing the economic impact of Government policies. I strongly agree that that issue needs to be much more explicit. We need a far better quality of debate in that regard, and the hon. Member for Aberdeen North (Kirsty Blackman) gave us some very good examples of where short-term savings appear to have been made in Government budgets but have long-term impacts, often not for central Government but for local government. In practice, debt has been transferred over recent central Governments to local governments, foundation trusts and other bodies. In many cases, the debt has not gone away; it is just in a different place, and we need a greater focus on that.

Above all, we need a far greater focus on our long-term productivity problems and the OBR has played an important part in encouraging evidence-based debate on the topic. In the long run, if we do not deal with our investment gap, which in Britain is far larger than in many comparable countries—our investment has not gone back to pre-crisis levels at the same speed as elsewhere—we will not have the capacity to raise sufficient Government revenue in the future. We have to deal with those issues quickly, and bodies such as the OBR help us to do that and perhaps to move beyond some of the sterile debates about making short-term savings that do not promote long-term sustainability.

Labour is such a strong supporter of the OBR that we agree with the hon. Member for Ochil and South Perthshire about an extended remit. The OBR has helpfully raised the salience of long-term challenges for the UK’s public finances due to demographic change—something the hon. Member for Henley (John Howell) usefully mentioned—but Labour Members feel that it could have a more expansive role when it comes to a long-term threat that is not sufficiently considered by the Government, that of climate change and environmental degradation, to which many experts, not least Lord Stern, have drawn attention. We ask the OBR to report in particular on the fiscal risks of climate change, which could include the impact of raised food costs, the costs of flooding, and lost productivity caused by extreme weather events.

The current Government may be sanguine about lost revenue; we saw just last week another Treasury Minister talking about the potential trade-offs between being able to move goods across borders in the event of a no-deal Brexit and potentially losing revenue by not being able to collect VAT. No study has been done on the potential impact of that. We have had nothing from the Government that spells that out, but we should have. We need transparency on such issues and on the short and long-term risks to the public finances, particularly in relation to, as I said, environmental damage.

Widening the OBR’s remit would go with the grain of developments in many other countries. The hon. Member for Aberdeen North rightly referred to the fact that we always need to look at international examples. She helpfully referred to some of the thinking that was done about the Scottish Fiscal Commission; other Members referred to that as well. I agree with her that negative lessons can often be particularly important—learning from what has not worked as well as what has. Certainly we can learn from the EU’s fiscal forecast and the countries that look more expansively at environmental matters.

Adding more of a focus on environmental matters to the OBR’s remit would go with the grain of what the Bank of England has been doing by incorporating a consideration of banks’ exposure to climate change-related risks and stranded assets as it regulates banks. It would echo the approach of many long-term investors who are increasingly considering environmental matters when it comes to assessing the promise of different investment opportunities. The OBR would probably be willing and happy to do something that would usefully build on its existing activity.

We also want to strengthen the independence of the OBR, requiring it to report to Parliament rather than merely to the Executive, as was helpfully mentioned by the hon. Member for Ochil and South Perthshire. That is the approach of the CBO in the US, and it could be usefully adopted here. It is not unusual for an independent fiscal institution to report to the legislature rather than the Executive, and it would aid the OBR to show that it is a truly independent evidence-based body that can have a real impact on policy making. It might also then lead to a greater salience of its reports at a political level and at the level of public discourse and debate as well, which would be a good thing.

There are many other areas where we need more data and analysis to truly assess the impact of economic decision making. One area that has come up frequently in recent Budgets concerns the lack of distributional analysis of Government economic decisions. I am pleased to see support for that from the hon. Members for Ochil and South Perthshire and for North East Derbyshire, who are nodding. The Department for Work and Pensions carries out such analyses frequently. The Treasury appears to do such analyses, but it does not report them publicly very often, which is a problem. The Government have a duty under the public sector equality duty to consider how their decisions affect people with protected characteristics, but at the time of a Budget, for example, we do not have that analysis in front of us, so we cannot examine the impact of policies on different groups, and it is very difficult for members of the public to assess the impact on them.

Recent policies have had very different impacts on different groups of people. If we look at changes to social security, the incomes of lone parents, particularly black and minority ethnic lone parents, have dropped substantially by up to around £9,000 in some cases, and that has not been made clear from Treasury analyses before Budgets. It is important to have a clearer handle on such impacts at the time when we actually vote on such measures.

On the point about greater evidence and analysis before economic decision making, the hon. Member for Aberdeen North rightly referred to the need for greater post hoc evaluation of economic decisions. She referred to the case of tax reliefs, which is something that I have worked on for some time. We rarely have post hoc evaluation of the impact of tax reliefs in the UK, which contrasts with the situation in many other countries. India has an annex to the Government Budget that covers tax reliefs, but we do not have that in the UK. There is a real contrast with how we assess spending decisions in terms of direct spending programmes as against foregone income in the form of tax expenditure. There is a huge gulf there and we need to deal with that. The OBR could play a part in that, and we should think about that for the future.

The Labour party’s position remains that the core role of the OBR should be to scrutinise the Government’s fiscal and economic plans, but it should do so in a more expansive and open manner than previously, as I have explained. An extension of its remit to cover party manifesto pledges might be warranted, but if it occurs it must be in concert with an extended remit to examine governmental spending commitments and it must be adequately resourced to enable it to fulfil that task. I am aware of the Dutch example that the hon. Member for Ochil and South Perthshire referred to. I was pleased to see him inter alia praising the role of trade unions in decision making, which was slightly unexpected but good to hear. We can usefully learn from the Dutch example and the extended remit to look at Government spending plans. We had an interesting discussion about the Australian situation that the hon. Member for North East Derbyshire mentioned.

The hon. Member for Ochil and South Perthshire referred to the CBO and its more extensive role in ongoing policy making—not just at Budget time; it looks at discrete policies on an ongoing basis. Before we talk about potentially extending the OBR’s remit in that manner, it is important to focus on the activities of the Treasury first. In many cases the Treasury should carry out analyses, anyway. There is the question of independence; I do not take that for granted. But in many policy areas we do not even get to the level of understanding what the Treasury analysis is, let alone then having that independent analysis as a guarantor.

I do not agree with the hon. Member for Aberdeen North on everything, but I did agree with her on Brexit. Internal analysis has been conducted within the Treasury, but it has been like trying to get blood out of a stone to allow Members, let alone the public, to see that analysis. If the Treasury were a little more open about its processes, we would be in a different situation and we could then consider whether there should be additional independent analysis, but let us have more open analysis from the Treasury first.

Some Members referred to Labour’s spending plans. I regret that the hon. Member for North East Derbyshire tried to wriggle out of my question about where his party’s spending plans were set out in pounds and pence. He spoke elegantly and eloquently, but he managed to wriggle out of it because his party failed to include any costings anywhere in its manifesto at the general election. As my right hon. Friend the Member for Hayes and Harlington (John McDonnell) has commented, the only numbers in the Conservative manifesto that we have been able to see are the page numbers. We have seen nothing about how different approaches to spending would be carried out. We have seen a similar approach continuing in Government. The huge elephant in the room in this discussion concerns plans for NHS spending. A commitment has been made to a huge boost to NHS spending, but we have no idea where the additional funding will come from. Initially there was a suggestion that it would come from a so-called Brexit dividend, but it does not appear from the current approach to Brexit that there will be any such dividend. We heard whispers about where the funding will come from, but they are just whispers.

[James Gray (in the Chair)]

In the context of the OBR.

[Anneliese Dodds]

In the context of the OBR, the problem is that we have just heard from some Members that the OBR’s remit should be extended to cover party political manifestos, and we have the Government making a huge spending commitment during its period in office, and yet no details have been provided for how the spending will arise. Many public servants are reading the tea leaves, not least those in the police, and assuming that the spending will come from cuts elsewhere. They are probably not wrong to do so.

Some Members referred to the discussion of Labour’s spending plans at the general election. It was possible to have that discussion because Labour had set out its spending plans in our grey book. I can see the hon. Member for North East Derbyshire smiling. He will smile even more when I provide him with some summer reading: Labour’s grey book, “Funding Britain’s Future”. It is very simple to read. I am sure other Members who are former accountants will find its layout very simple because it sets out on one side where more revenue will be derived and on the other side where expenditure will go. It is enormously simple to understand.

[Luke Graham]

Will the hon. Lady give way?

[Anneliese Dodds]

I would be very happy to do so.

[James Gray (in the Chair)]

To intervene only about the OBR, I call Luke Graham.

[James Gray (in the Chair)]

To speak only about the OBR, I call Anneliese Dodds.

[Anneliese Dodds]

I absolutely will, Mr Gray. The hon. Gentleman suggested that the OBR’s remit could be extended to look at such figures. As I said, Labour is not against that. We might be interested in looking at that, but the figures have to be provided in the first place. Sadly that was not the case for his party at the last general election. I humbly suggest that as a first step towards that outcome, his party might follow mine and set out some of its spending. That would mean that we could have a discussion with other independent bodies in advance of an election, as occurred with Labour’s spending plans.

We had a useful, productive discussion with the Institute for Fiscal Studies, which looked into our assumptions. There were differences of view in relation to some areas of spending. For example, Labour suggested that it should not be assumed that removing the pay cap, which is something that we have committed to do for public sector workers, will be only a cost, because revenue would be positively affected by the additional national insurance that would arise from slightly higher wages. The IFS does not take that into account, so we had different assumptions on that. However, Labour wants to have that debate and discussion. To do that, we need to have the figures out there in the first place.

I thank the hon. Member for Ochil and South Perthshire again for securing the debate. I also thank all those in the Chamber and, particularly, those who work so hard for the OBR to ensure that we have an independent, unbiased assessment of our public finances. Finally, I wish everyone a very enjoyable summer.

--- Later in debate ---

[Anneliese Dodds]

May I briefly ask whether the British economy was growing when Labour left office?

[Robert Jenrick]

The British economy had just suffered a severe recession, and we inherited the largest peacetime deficit since the end of the second world war. Nothing exemplifies the situation with the public finances more than the note that was left on the desk in the Treasury office down the road saying that there was no money left.

The OBR produces the official economic and fiscal forecasts for the UK. It does not cost Government policies, but scrutinises and certifies costings initially prepared by the Treasury and other Departments to estimate their impact. That is an important point, to which I will return in a few moments. The OBR also provides detailed public reports, including the fiscal risk report every two years, which we have heard about, and the fiscal sustainability report, which was published last week and which keeps us at the frontier of fiscal management internationally and demonstrates our commitment to fiscal transparency and accountability. I am pleased that, as we heard in the debate, Scotland has followed suit and, since 2014, the role of the Scottish Fiscal Commission has been strengthening. That institution is in its relative infancy, but it appears to be building credibility and working to help keep Scottish finances in check.

The OBR has won international acclaim. Earlier this year, Kevin Page, in a paper for the Centre for Economic Policy Research, said:

“The OBR’s commitment to transparency is likely the gold standard in the IFI community.”

He added:

“The OBR deserves to be considered a leader among”

independent fiscal institutions

“for the transparency of its work and the credibility it derives”,

as we have heard from hon. Members. Protecting that credibility should be as much a priority for Parliament as it is for Government.

Since 2010, there have been a number of calls to expand the OBR’s remit, including proposals, as we have heard today, to report on distributional analysis, performance against child poverty targets, environmental matters and living standards. Each has merits, and deserves discussion and further thought. The OBR was deliberately set up to report on the sustainability of the public finances, and to date that is where we have let the matter settle. Asking the OBR to expand into areas beyond its core expertise and experience carries with it risks to its credibility. We need to consider that carefully before taking any such steps.

The OBR has also been called on to produce costings of policy proposals for Opposition parties. Again, we have heard about that today, and it has been raised by successive shadow Chancellors, including Ed Balls before the 2015 general election. Respected institutions such as the Institute for Fiscal Studies already perform that function well, and we should bear that in mind as we consider such proposals. As we heard from my hon. Friend the Member for Ochil and South Perthshire, the IFS recently exposed the folly of some of Labour’s proposed tax increases.

[Anneliese Dodds]

indicated dissent.

[Robert Jenrick]

The hon. Lady shakes her head, but the IFS said that those would lead to taxes being raised to their highest in peacetime history. The IFS also questioned whether they would raise as much as the shadow Chancellor claimed, and said that they would hit working families hardest. We do not always need to rely on the OBR to twist the knife, as the IFS has certainly done so repeatedly.

[Anneliese Dodds]

May I respectfully ask how exactly the IFS was able to analyse the Conservative party’s policies, when there was no indication in its manifesto of how any of them would be funded? It appears slightly peculiar to pick on the small number of criticisms made by the IFS of some elements of Labour’s assumptions when no information whatever was provided by the Minister’s party.

[Robert Jenrick]

I would not characterise the IFS’s criticisms of the Labour party’s manifesto as “small”. They were pretty fundamental; the remarks I have just described speak for themselves. The IFS did analyse the policies of the Conservative party in the lead-up to the last manifesto, but let us stick to the question before us today, and apologies to you, Mr Gray, for deviating from it.

A number of arguments have been made today for widening the remit of the OBR. Over previous years, such arguments have been looked at in some detail. Back in 2014, Robert Chote wrote in response to Andrew Tyrie, now Lord Tyrie, who at the time was Chair of the Treasury Committee, setting out his views on the matter. He said that, while some of those arguments undoubtedly had merit and deserved proper consideration by the Government and by Parliament, it was important that we consider

“the significant practical issues that would need to be addressed”.

Let me briefly set out some of those, which we would all need to consider.

My hon. Friend the Member for Ochil and South Perthshire referred to the US Congressional Budget Office. That is a good comparison, although the US system varies from our ours in a number of ways—in particular, Congressmen, Congresswomen and Senators have a much greater ability than Members of the House to initiate legislation that carries with it significant financial implications. However, it is worth considering the remit of the CBO, and its capacity.

The CBO undertakes analytical work in-house and has around 235 members of staff, with an annual budget of around $50 million. In comparison, the Office for Budget Responsibility has just 27 members of staff and costs us around £2.5 million. The OBR is clearly dwarfed in comparison. Although that is not in itself a reason not to proceed, we would have to consider the financial consequences of doing so.

The CBO is required by law to produce cost estimates for nearly every Bill approved by a full budget committee of either the House or the Senate, and produced 740 such formal costings last year, so a significant amount of work would be required. It is worth pointing out that the CBO does not—this is perhaps a more relevant comparison for some of the issues we have discussed this morning—evaluate the costings of candidates for Congress, or indeed of presidential candidates. Clearly, to increase the remit of the OBR would require it to have a significantly larger operation.

Undertaking Opposition costings as part of the parliamentary process would have important implications for the OBR and departmental resources in all Departments, including the Treasury, but the greatest impact would be felt were it to be involved in manifesto costings. The time that the OBR and Departments needed to produce costings would pose very particular difficulties during general elections, some of which are unplanned. It is difficult to see how parties could be afforded the customary flexibility in developing their manifestos until a relatively late stage in the election process, to reflect the public debate in the run-up to the election. Instead, they might have to submit detailed proposals two or three months ahead of a general election. Of course, we could consider that, but we would have to consider carefully the implications for the general election process and the way we have traditionally approached that.

The policies in scope for OBR costings also differ in type from the policies that have dominated the political debate. The detailed costing process at fiscal events covers only tax and welfare policies, which are clearly very important and a significant element of general elections, but are not all the issues reflected in a general election or all the policies in manifestos.

The other point to note is that the OBR does not produce the work in-house. It relies on detailed data produced for it by Departments, including the Treasury, which are then submitted to the OBR for scrutiny and analysis. As the hon. Member for Aberdeen North (Kirsty Blackman) said, the quality of the information is extremely important. Civil servants in Departments would be required to work through political parties’ manifestos and then provide high-quality approved data to the OBR, with which it could do its usual costings.

Air Passenger Duty

Anneliese Dodds Excerpts

Tuesday 10th July 2018 Westminster Hall

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to speak in this debate with you in the Chair, Sir David. I congratulate the hon. Member for Belfast East (Gavin Robinson) on securing the debate, which has been very inclusive and interesting, and on his illuminating speech.

Many of these issues have been discussed before, as the hon. Gentleman mentioned. They were foreshadowed in our debates about recent Finance Bills, in which I spoke on behalf of the Opposition. Labour argued in those debates that the Government need to be clearer about their long-term plan for APD. There have been a number of reviews of APD’s efficacy, proportionality and impact on competitiveness since its introduction in 1994, and we need to situate this debate in that context. However, despite those reviews, a number of questions still have not been answered, so I hope the Minister provides some indication of the Government’s thinking.

As has been indicated in previous debates on this topic, the Government estimate that APD contributes about £3.1 billion to general taxation. I am well aware that the hon. Gentleman and others suggest that, if one takes a holistic view of its fiscal impact, APD may be fiscally positive on the ledger. It would be helpful to hear from the Minister whether the Treasury is conducting a 360° review of APD’s fiscal impact. I understand that PwC has carried out research, but it would help if the Treasury were focused on this issue, too.

In response to the comments by the hon. Member for Shannon, I cannot resist—

[Jim Shannon]

For Strangford—that’s a step too far!

[Anneliese Dodds]

I beg the hon. Gentleman’s pardon. I am very sorry about that. He will perhaps be even more perplexed when I mention that, rather than pound pinching, my family talked about looking after the pennies and the pounds looking after themselves. Perhaps that reveals a psychological difference between lowland and Ulster Scots. Of course, we need to look after the pennies and the pounds—that is the whole point. We need to trace exactly the impact of APD.

Studies suggest that the evidence about APD’s impact on passenger numbers is mixed. As many Members said, such a duty is unusual in the international context, but the number of passengers using UK airports has increased by 15%—a substantial increase—in the past five years. Of course, APD needs to be considered in the context of there being no tax on aviation fuel and no VAT on domestic or international flights. There are also different levels of APD for different kinds of flights, and exemptions for children were introduced in 2015 and extended in March 2016.

I will focus on four issues: the long-term viability of APD, regional competitiveness, the unequal impact of APD on different groups of Britons, and environmental issues. From a revenue point of view, there are clearly significant concerns about APD’s long-term viability. The Government have moved to provide industry with earlier notice of APD changes. The rates for next year were announced last autumn. That is surely positive for industry but, as I mentioned, we have had no indication of the Government’s view of the long-term trajectory of the tax, particularly in the context of the race to the bottom occasioned by internal competition in the UK. The tenor of this debate demonstrates that the starting gun has been fired on that race—it has begun, and we need to know the Government’s response.

We must view increases or reductions in APD in the context of taxation generally across income levels. It is notable that, given the increasing popularity and accessibility of air travel, many more people pay APD. As my hon. Friend the Member for North Tyneside (Mary Glindon) said, many more people enjoy hard-earned holidays abroad, and there are also people who need to travel abroad for family or work reasons.

Equally, APD is far less significant for household incomes than VAT, another transaction-based tax, which Members touched on. We would be in a different situation if the potentially regressive impacts of consumption taxes as a whole were cancelled out by progressive income taxes, for example, but of course the Government reduced the top rate of income tax. The latest Office for National Statistics figures suggest that overall, unusually in Britain’s history—at least in recent times—people in the least well-off decile pay a greater proportion of their income in tax than those in the most well-off decile. That is a peculiar situation.

Another concern we must note is about APD’s impact on regional competitiveness, which has been a focus of the debate and was perhaps its motivation. As we have discussed, APD levels were devolved to the Scottish Government in the Scotland Act 2016 and initial suggestions were that it would be halved and then potentially removed altogether.

We have discussed at length changes mooted in Northern Ireland, where there has been a call for evidence. We got useful detail about the operation of that from the hon. Member for Belfast East. As I understand it, the Government stated in February 2015 that they would also consider the case for devolving APD to the Welsh Assembly. We have therefore seen much change in relation to this duty.

All those changes naturally raise questions for airports contiguous to other airports not subject to the same APD levels, whether they are contiguous to Scotland or to the Republic of Ireland. We heard interesting thoughts on that from the right hon. Member for Belfast North (Nigel Dodds) and the hon. Members for Upper Bann (David Simpson) and for East Londonderry (Mr Campbell). Of course, the hon. Member for Strangford (Jim Shannon) —I have got it right this time—gave us a typically passionate and inclusive speech and a glimmer of his holiday plans. I hope they are more sedate and relaxing than those of the hon. Member for Henley (John Howell), whose itinerary of recent movements sent my head into a bit of a spin.

We also heard from my hon. Friend the Member for North Tyneside, who pointed out research suggesting that the duty has a significant impact on people living in her area. She is always a doughty supporter of their interests.

The Treasury published a discussion paper on options to support English regional airports in July 2015, but it is difficult to find out what concrete steps have occurred since then. Furthermore, the Government have said they will look at the matter once legislation concerning state aid changes is produced. An indication from the Minister of the Government’s thinking on that would be helpful; it is particularly important, given the points made by the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) about the situation for the highlands and islands.

There is often confusion in this place, though certainly not on the hon. Gentleman’s part, about the impact of EU state aid provisions in general. Of course, they prevent the provision of arbitrary support, but, as he suggested, low levels of population could be a feasible basis for such an exemption.

[Drew Hendry]

The hon. Lady makes the point well. This is an exemption based on population density and the regional difficulties in the highlands and islands. Indeed, it should be possible—I hope it is—for the Scottish and UK Governments to work together to solve that problem.

[The Exchequer Secretary to the Treasury (Robert Jenrick)]

We are.

[Anneliese Dodds]

I was pleased to hear the Minister say from a sedentary position that they are working on that. I hope the UK Government will do so with rather more application than they did on support for the steel sector, of which I had an inside view as a Member of the European Parliament: they made no attempt to secure clearance for the kind of support we saw applied in countries such as Romania, which had been okayed by the European Commission; they asked the Competition Commissioner for exemption only from environmental measures. There was not much application around steel, so I hope we will see a different approach to these matters.

Another concern is the impact of APD on Britons who have family living outside the British Isles. The previous four-banding system meant that such individuals could end up paying more APD than those travelling to the US, for example. None the less, the division in the calculation between short and long-haul travel continues to be criticised by some who feel that that disadvantages Brits with families in, for example, the Caribbean, India, Pakistan or Bangladesh, who need to fly long haul to visit them. One could argue that other, lower carbon alternatives are available to flying for short-haul journeys, which do not apply for travelling long distances. An indication of the Government’s thinking on that would be helpful.

Our final concern is about APD’s impact, or otherwise, on environmental outcomes. In response to a question posed by the hon. Member for Henley, the hon. Member for Belfast East maintained that APD does not have a positive environmental impact. However, we must look at it in the context of enormous public concern around climate change and the increasing significance of emissions from aviation. At APD’s introduction in 1994 and, following that, the Labour Government’s focus on it, there was an attempt to ensure that its design would have a green impact. For example, during the 2007 Budget process it was stated that APD

“plays a valuable role in ensuring that passengers understand and acknowledge the environmental costs of their actions. The resultant behaviour change can deliver significant climate change benefits”.

Those believed benefits were then detailed.

[Gavin Robinson]

I hope that the hon. Lady does not misconstrue what I said as a suggestion that we are not interested in climate change. The Library briefing is helpful, talking about the Labour Government in 2006 and a Department for Transport recalibration of emissions, which were to increase and not decrease until 2030. I do not think consumers realise that the contribution is made for environmental benefit or that it is having any tangible impact. The growth of aviation technology will have a much bigger impact on environmental benefits than an APD charge.

[Anneliese Dodds]

I am grateful to the hon. Gentleman for those comments. I acknowledge that there is not necessarily the awareness to ensure that it does have such an impact. Some of the matters he just raised have led to calls for a redesign of the duty, which some believe could lead to a greater environmental impact. One suggestion, which was examined in 1998, was whether it would be better to levy the duty on planes rather than passengers to reduce under-occupancy and lessen emissions. However, the then Government suggested that a restructuring of APD would be more appropriate and the four bands were introduced. Of course, since then we have gone down to two bands.

It is interesting to note that the highly interventionist right hon. Member for Wokingham (John Redwood)—he is not often described as that—argued that, on reducing under-occupancy through such a measure,

“there is a green case to be made there.”—[Official Report, 23 April 2007; Vol. 459, c. 729.]

However, the practicalities of doing so are highly complex, which may be why that did not develop at that time. In particular, it is difficult to exempt transit and transfer passengers from the calculation, which led Alistair Darling away from initial moves in that direction.

The taxation of aircraft fuel has been mentioned as an alternative, but that is prevented by the network of bilateral air service agreements under the principles of the Chicago convention. It would be helpful to hear whether the Minister has been involved in attempts afoot internationally to alter that agreement to provide more flexibility.

[Drew Hendry]

I am grateful to the hon. Lady for giving way yet again. She is talking about alternatives for taxation. Does she agree that had APD been used directly for environmental measures, it would have had a huge impact? For example, it could have been involved in the creation of alternative biofuels and other incentives and operations to reduce dramatically the environmental impact, yet it has not been spent in that way at all.

[Anneliese Dodds]

I am grateful to the hon. Gentleman for that interesting point. Hypothecation of tax is relatively unusual in the UK. My party believes—he will expect me to say this—that there needs to be much more investment in those technologies. That would be positive for our country, whether funds are hypothecated from a particular area or found through other mechanisms.

One other aspect of the international context—this was mentioned to me by a Minister—is the ICAOs agreement on the carbon offsetting and reduction scheme for international aviation, which was introduced in October 2016. Members have referred to the EU’s emissions trading scheme in that context, but we have not yet heard from the Government about whether we will remain part of the ETS beyond 2020. If we follow existing patterns for APD, Parliament will set the rate for 2021 next autumn. It would be helpful to get a clearer idea about how the Government view international schemes such as that of the ICAO interacting with multilateral mechanisms such as the ETS. The general lack of clarity on environmental matters amplifies the fact that the UK Government seem to lack any long-term vision about what constitutes green taxation in the first place, let alone how it should develop in future. This is a bit of a cheesy point, but I contrast that with the shadow Treasury team, which includes a shadow Minister who is focused exactly on such matters, and on the link between environmental and Treasury issues.

In conclusion, I am afraid that I lack the poetic sensibilities and contacts of the hon. Member for Belfast East, but I congratulate him again on securing this debate. I look forward to hearing from the Minister about the five issues I raised: whether there will be a 360° review of APD; whether there is a long-term plan for it; what the Government’s view is about the substitutability of short-term flights, and whether that should be taken into account; whether the Government are participating in international attempts to reform the Chicago convention; and what their view is of the interaction between the ICAO scheme and the ETS, and what the future will hold for carbon trading for the UK beyond 2020—that point is very germane to this debate.

Oral Answers to Questions

Anneliese Dodds Excerpts

Tuesday 3rd July 2018 Commons Chamber

[Mel Stride]

I slightly detected from the hon. Gentleman’s question the suggestion that that meeting between HMRC and the EBT did not take place, and it most certainly did. He and I have discussed this matter, both formally in a meeting and informally, and we have debated it in the House. I have always stressed that there is a dividing line between HMRC and Treasury Ministers: we cannot intervene in the tax affairs of individuals or organisations. I am confident that HMRC is progressing in an appropriate manner.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Eight years of economic failure from this Government have been exacerbated—[Interruption.] I suggest that it is economic failure, with productivity growth down, GDP growth down and investment growth down, and in comparison with our comparators. Economic failure: if it smells like it and looks like it, that is what it is. Let me finish my question. That failure has been exacerbated by the Government’s reorganisation of HMRC, with cuts in our country deeper than in any other, outside Greece. Will they abandon this failing reorganisation, which also means that there will not be a single customs hub anywhere along the south coast or north of the central belt?

[Mel Stride]

The simple fact is that we need an HMRC that is fit for the 21st century, for the new digital ways in which we are working, and for our targeted approach on clamping down on avoidance, evasion and non-compliance, for example. That requires these sophisticated hubs that have the right skills to do that job, so I defend our reorganisation entirely.

On the portrayal of the economy that the hon. Lady has just given, we have the highest level of employment in our history, more women in work than at almost any time in our history and unemployment lower than at any time in the past 45 years. We are bearing down on the deficit and have debt falling as a percentage of GDP.

Draft Double Taxation Relief (Mauritius) Order 2018 Draft Doubt Taxation Relief and International Tax Enforcement (Cyprus) Order 2018

Anneliese Dodds Excerpts

Monday 18th June 2018 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve with you in the Chair, Mr Robertson, and to hear again from the Minister, with his explanation of the two double taxation agreements. It is of course not so long ago that we were talking about other agreements, particularly those covering Belarus and Ukraine. I am grateful to the Minister for writing to me on 13 June, after that exchange, to cover some issues that are relevant to these treaties as well. With your permission, Mr Robertson, I might delve into some of those briefly.

I am pleased to hear that Her Majesty’s Revenue and Customs is considering the case for further reviews of the treaty network. That would be very helpful because we, as parliamentarians, currently do not have a clear idea of which treaties are being negotiated with which countries, when, with which actors and according to which principles. It would be enormously useful to have that timetable in front of us. Surely it is also necessary to conduct a review, given that we recently debated and agreed in this place that the UK will follow the OECD’s multilateral instrument for the reform of double taxation agreements. It seems to be a useful time to review the agreements.

I was grateful to the Minister for stating in his letter that it would be helpful to know what kinds of additional information it would be useful for Committee members to have before debating such treaties. The first kind—this was revealed a bit in the exchange that we just had—is a clear indication of why new treaties or agreements might shift away from previous ones. Currently, the way that we parliamentarians normally notice that is through the explanatory note that comes with the agreement, which sometimes flags up particular issues. For example, it usefully flagged up the treatment of property investment vehicles for Cyprus. However, explanatory notes do not go through systematically and say, “Here’s every difference compared with the existing agreement.” We have to do that ourselves and look at them in parallel to work out what the differences are. Of course, some of them might not be important, but we cannot really judge that, so it is quite time consuming.

Secondly, we do not have an indication of why certain choices have been made. The potential impact of the new regime on British servicemen and women, and others who might be living in Cyprus, was a useful example. It would be helpful to know whether there had been consultation with people who might be affected by the new agreement. Above all, it would be useful to know why both the UK Government and the Governments of the countries with which we are negotiating treaties have taken certain decisions to move away from an existing regime. The OECD’s approach—I know the Minister is very much on top of the detail of this—gives us many choices about how we can contract with other countries through such agreements. It does not often specify an exact way forward. In fact, one particularly contentious matter, which I think we have debated in this room before, is the use of different forms of arbitration. Countries might have very different views on that, and very different interests.

Finally, the other area where it would be helpful for us, as parliamentarians, to have information about such treaties, when we are talking about developing countries or countries in the global south—a category that Mauritius would probably fall into—is whether any formal assessment, or even informal discussion, had been undertaken by the Government about whether the agreements cohere with the principle of policy coherence for development.

We would all support the tightening-up of the regime, which the Minister mentioned, although it is not something that will particularly benefit Mauritius financially. Such schemes do not tend to have much of a trickle-down impact—quite the opposite—and often create problems for the countries in which they are based, so when we are talking about developing countries, it would be helpful to have a systematic analysis of whether policy coherence for development has been considered in decision making.

Draft Double Taxation Relief (Mauritius) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Cyprus) Order 2018

Anneliese Dodds Excerpts

Monday 18th June 2018 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve with you in the Chair, Mr Robertson, and to hear again from the Minister, with his explanation of the two double taxation agreements. It is of course not so long ago that we were talking about other agreements, particularly those covering Belarus and Ukraine. I am grateful to the Minister for writing to me on 13 June, after that exchange, to cover some issues that are relevant to these treaties as well. With your permission, Mr Robertson, I might delve into some of those briefly.

I am pleased to hear that Her Majesty’s Revenue and Customs is considering the case for further reviews of the treaty network. That would be very helpful because we, as parliamentarians, currently do not have a clear idea of which treaties are being negotiated with which countries, when, with which actors and according to which principles. It would be enormously useful to have that timetable in front of us. Surely it is also necessary to conduct a review, given that we recently debated and agreed in this place that the UK will follow the OECD’s multilateral instrument for the reform of double taxation agreements. It seems to be a useful time to review the agreements.

I was grateful to the Minister for stating in his letter that it would be helpful to know what kinds of additional information it would be useful for Committee members to have before debating such treaties. The first kind—this was revealed a bit in the exchange that we just had—is a clear indication of why new treaties or agreements might shift away from previous ones. Currently, the way that we parliamentarians normally notice that is through the explanatory note that comes with the agreement, which sometimes flags up particular issues. For example, it usefully flagged up the treatment of property investment vehicles for Cyprus. However, explanatory notes do not go through systematically and say, “Here’s every difference compared with the existing agreement.” We have to do that ourselves and look at them in parallel to work out what the differences are. Of course, some of them might not be important, but we cannot really judge that, so it is quite time consuming.

Secondly, we do not have an indication of why certain choices have been made. The potential impact of the new regime on British servicemen and women, and others who might be living in Cyprus, was a useful example. It would be helpful to know whether there had been consultation with people who might be affected by the new agreement. Above all, it would be useful to know why both the UK Government and the Governments of the countries with which we are negotiating treaties have taken certain decisions to move away from an existing regime. The OECD’s approach—I know the Minister is very much on top of the detail of this—gives us many choices about how we can contract with other countries through such agreements. It does not often specify an exact way forward. In fact, one particularly contentious matter, which I think we have debated in this room before, is the use of different forms of arbitration. Countries might have very different views on that, and very different interests.

Finally, the other area where it would be helpful for us, as parliamentarians, to have information about such treaties, when we are talking about developing countries or countries in the global south—a category that Mauritius would probably fall into—is whether any formal assessment, or even informal discussion, had been undertaken by the Government about whether the agreements cohere with the principle of policy coherence for development.

We would all support the tightening-up of the regime, which the Minister mentioned, although it is not something that will particularly benefit Mauritius financially. Such schemes do not tend to have much of a trickle-down impact—quite the opposite—and often create problems for the countries in which they are based, so when we are talking about developing countries, it would be helpful to have a systematic analysis of whether policy coherence for development has been considered in decision making.

Draft Double Taxation Relief and International Tax Enforcement (Belarus) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Ukraine) Order 2018

Anneliese Dodds Excerpts

Monday 4th June 2018 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve with you in the Chair, Mr Robertson. It was very helpful to have the Minister’s explanation of the two orders. It would also be helpful if we could have some of this information in advance—in the notes that are produced alongside orders—because the Minister just answered some of the questions that came to my mind when I looked at the orders. It would be useful if the Government were a little fuller in their introductions to these kinds of order when they are presented to the House.

My first question relates to the overall structure for these kinds of protocol. I expect a number of other protocols will come now that we have agreement on the model tax convention—the OECD instrument that we discussed at length in the House. In November 2015, Her Majesty’s Revenue and Customs published its programme for future negotiations on double tax agreements. That mentioned some of the tax agreements that we have had the pleasure of discussing, but not all of them. It would be helpful to know when HMRC will produce its forward plan, so that the whole House, or at least the Members interested in this area, can scrutinise it.

It was helpful to have the Minister’s explanation on some aspects of the Belarusian agreement. The Belarus economy is quite different from that of neighbouring countries, because of the larger extent of state ownership than in many other nations, and that is reflected in the character of the agreement. However, I have a question about the rules on permanent establishment—a topic that comes up frequently in double tax agreements. Different nations and their companies have often attempted to ensure that profit is taxed in their jurisdiction or not taxed at all, rather than in the area where it is generated. In the Belarus agreement there is a temporal threshold of 12 months to determine the permanent establishment for construction sites. Why was that inserted? I cannot remember that exact threshold from previous discussions, but perhaps the Minister will enlighten us.

Again, I am grateful for the Minister’s explanatory remarks on the Ukraine agreement. The amending protocol was signed by both nations on 9 October. It has been quite a long time between it being signed and it coming in front of the House. It would be helpful to know why it has taken more than six months for it to come to Parliament. There may be legitimate reasons for that, but the process of making these agreements is something of a black box for many parliamentarians. Perhaps that issue is not for this moment, but in future the Government could be open about what the process is between an amending protocol being signed and it coming in front of us. It would be useful to have that information.

The Minister stated that most of the changes in the amending protocol are consistent with the OECD’s model approach. They seem to simplify a situation where, from what I could see, many transactions were exempted from withholding tax. Instead, a reduced rate of tax is now applied more generically across different activities—royalties, for example—which seems sensible.

The Minister answered my question about why withholding tax rates have gone up to 15%, having previously been 10% for dividends where there is not a very large beneficial holding in the paying entity. However, again, it would be useful if, with these agreements, we could have a little more information about these topics so that, as a House, we are not scrabbling around before we come to these Committees, trying to work out why certain decisions have been taken.

Oral Answers to Questions

Anneliese Dodds Excerpts

Tuesday 22nd May 2018 Commons Chamber

[Robert Jenrick]

My hon. Friend is absolutely right. The initial intention of PFI was to transfer risk, when appropriate, to the private sector, and to drive up innovation and quality in a very small number of selective cases. That was perverted under the last Labour Government by Gordon Brown.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

We have learned from the experience of PFI; this Government—[Interruption.]

[Mr Speaker]

Order.

[Anneliese Dodds]

Thank you, Mr Speaker.

This Government have not. In the light of last week’s report on Carillion, we want to know whether the Minister can indicate which PFI contracts are being delivered by contractors that are deemed to be actually or potentially high risk. Following last week’s reports that failed bidders for PFI contracts will be compensated, can he rule out bailing out firms that fail even to win contracts? We need answers on these questions now, not a history lesson.

[Robert Jenrick]

As I have indicated, this Government’s approach to PFI is entirely different from that of the last Labour Government. The hon. Lady says that she has learnt the lessons. Well, it is a pity for the taxpayer, and for our children and grandchildren, that they were learnt so late.

Draft Cash Ratio Deposits (Value Bands and Ratios) Order 2018

Anneliese Dodds Excerpts

Tuesday 15th May 2018 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Robertson. I am grateful to the Minister for those helpful explanatory remarks.

It is clearly essential that the Bank’s monetary policy and financial stability functions are adequately funded, and I therefore understand why some reform is necessary, given the shortfall arising under current arrangements. None the less, it is important that we properly interrogate this matter, given that we are talking about very large sums needing to be raised—£845 million over the five years to 2023—and extremely large sums of the Bank’s capital being held in order to raise that sum. I therefore have some questions for the Minister.

First, has a proper cost-benefit analysis been conducted on this approach to raising funds, as against other possible options? According to the summary of consultation responses for the scheme review, one respondent

“considered that a fee-based mechanism would be the fairest, most efficient and most transparent means of funding the Bank’s critical monetary policy and financial stability policy work. The respondent noted that, whilst the consultation paper explained that a fee-based model would require more in-depth analysis, no indication had been given to if, or when, such in-depth analysis will take place. The respondent understood that the current legislative agenda makes changing the basis of funding the CRD scheme difficult, but nonetheless considered that discussions on this proposal should begin.”

It will be interesting to discover from the Minister when and where those discussions about a fee-based model will take place.

I tried to do my own back-of-an-envelope calculation yesterday to work out whether the current approach is a relatively expensive or cheap way of raising the funds that the Bank needs for the overall economy, given that returns from gilts are generally low compared with other forms of investment. We could say that this is a rather banal calculation, in some ways. Banks are returning to substantial levels of profitability, in many cases, and something that costs a bank a lot may only cost its shareholders; that would not, therefore, necessarily constitute a major public policy concern.

I thought it was helpful to think this through from the neutral point of view of overall economic efficiency. In theory, the freed-up balances from banks could be invested in riskier but more profitable forms of investment. The five-year yield on UK gilts currently appears to be 1.15%. Traditionally, banks’ return on equity has been substantially higher than that, outside crisis periods. However, the return on equity has been reduced substantially by the financial crisis and subsequent regulatory requirements, and Brexit is also predicted to challenge returns on equity. I think it is interesting, and important, to compare the two levels of returns.

The respondent who suggested a fee-based approach may not have been concerned with efficiency—although the protection of banks’ profits may have been involved, given that, as I understand it, the respondents to the consultation were the banks that already contribute to the scheme. None the less, the respondent also referred to greater transparency arising from a fee-based system. I think there is some argument for that, given that it is, as I understand it, the method used to cover the cost of financial regulation via the Prudential Regulation Authority.

It was maintained in some of the documentation that I read that it would not be possible to adopt a fee-based system because the Bank’s monetary policy and financial stability functions affect all market actors. However, one could surely say the same thing about the PRA’s functions, to an extent. Furthermore, the threshold applied to this scheme means that, as the Minister rightly mentioned, the lion’s share of the contribution is made by the 20 largest institutions, with 146 making some kind of contribution and many other institutions that have eligible liabilities of less than £600 million making no contribution. Not each and every institution that benefits from financial stability currently makes a contribution, so I do not really understand that argument.

To conclude this point, it may indeed be sensible to stick with the current approach, albeit with the changes that the Minister has just adumbrated. However, given that at least one respondent suggested a fundamentally different methodology, it would be helpful to hear the Minister’s thoughts.

Secondly, how sensible was it to retain the current five-year cycle for determining the method and level of funding for the Bank on these operations? I say that because many of its financial stability functions, in particular, could be impacted significantly by Brexit, as of course could its monetary policy functions. As colleagues may well know, the PRA has introduced an EU withdrawal fee to its regime for financial institutions. However, there seems not to be even a single mention of Brexit in the explanatory memo for this change or the document “Review of the cash ratio deposit scheme: consultation on proposed changes”, which was released in February this year. Indeed, the latter suggests that the Bank’s policy costs will remain static over the four years following 2018-19. Does the Minister genuinely feel that the proposed method of contribution is likely to prove sufficient if we see the kind of no deal, highly disruptive scenario for which some Government Members have been pushing?

Finally, I note that the consultation suggests that we are talking about relatively small beer. The consultation document notes:

“In the wider context of the total tax burden on banks and building societies the review notes that in 2016-17, £3.0 billion was raised from the government bank levy, and over £1.6 billion from the bank corporation tax surcharge. Corporation tax receipts from the banking sector over the same period totalled £4.8 billion. By comparison the CRD scheme is looking to recover £169 million per annum.”

That tax burden is reducing in incidence because of decisions made by the current Government. I accept that the absolute value of tax collected has not diminished, given the return of many banks to profitability, as I have already mentioned.

Of course, many learned commentators suggest that that is one of the main reasons why corporation tax receipts appear to have increased despite a lowering of the rate. Those commentators suggest that the receipts would have not reduced, but risen if the rate had not been cut. In addition, I gently draw colleagues’ attention to the fact that the reduction in the bank levy is not compensated for by the corporation tax surcharge, and it leads, over time, to a £1.4 billion gap, as evidenced by the Government’s Red Book at the last Budget. We should therefore take decisions in this area informed by the fact that, overall, this Government have substantially reduced the taxation that falls on our banking sector. That is not, I suspect, an approach with which many of our constituents would agree.

--- Later in debate ---

[John Glen]

For the deficit over the last five-year period on its expenditure on these two functions, the Bank will have been obliged to find the funds from other sources within its organisation. We want to ensure that these particular functions—the monetary policy and financial stability functions—are properly funded and that there is flexibility over the amounts based on the prevailing gilts; they will be transparently and publicly available, because they are quoted all the time.

On the risk of the expansion of costs in the light of Brexit, the Government are working toward a solution that involves a long-term economic partnership. The enduring functions of the Bank of England to satisfy monetary policy and financial stability will continue. If, at some future point, the Bank of England realises further costs, it will be for the Bank to have conversations with the Treasury about the matter, but that is not anticipated. The Bank has been able to make projections over the next five years and commit to a budget that it is happy with under this model.

I have just received some advice on carried-forward costs. There are no fixed costs over five years, and there will be no carry-forward of the deficit. That will be dealt with, and we will start on the basis of the budget over the coming five years.

The hon. Lady made some wider observations about corporation tax. I think that they are out of the scope of this discussion, which is simply about the provision for this function of the Bank of England.

[Anneliese Dodds]

I mentioned corporation tax only because the consultation for the order set the requirement to place deposits with the Bank in the context of overall tax burdens on banks. It was mentioned in the consultation first; I did not come up with it initially.

[John Glen]

That was mentioned in passing, but the order is designed to give better assurance about the realising of the return required for the Bank of England to carry out these functions. I do not have anything more to add, so I hope that the Committee will agree to this draft order for the benefit of the Bank, our banking sector and the users of those services across the country.

Question put and agreed to.

Draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018 Draft Double Taxation Relief (Switzerland) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018

Anneliese Dodds Excerpts

Wednesday 9th May 2018 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I am grateful to you, Mr Hosie, for chairing today’s proceedings. I will focus my remarks on the MLI—I am grateful to the Minister for that shortening, for all our sakes—but I will also refer to the Swiss agreement in passing.

As the Minister rightly explained, the MLI is an innovative new way of effectively spreading, or leading to a convergence of, tax policy, developed by the OECD. Essentially, it is a set of different amendments to double tax agreements. All countries that have signed up to the MLI will implement all the amendments in all their double tax agreements, if the other country is also a signatory to the MLI.

As the Minister also explained, the OECD has promoted that approach to try to make all double tax treaties better at stopping base erosion and profit shifting. Given that Britain has a comparatively large number of double tax agreements—which are very varied in terms of how they prevent double taxation and, I would say, often facilitate double non-taxation—it appears sensible for the UK to adopt the MLI. As I noted in the discussion of the MLI in the Finance Bill Committee in January, it was encouraging to see the UK taking a leading role in defining and agreeing the MLI, marking—I would say—quite a contrast with its attempts to block international co-operation when it comes to improved transparency for trusts, for example.

None the less, three areas of the legislation raise significant concerns, all of which arise from a point I made on 16 January in the debate on the Finance Bill, when the UK’s adoption of the MLI was first mentioned in law. I expressed concern that we lacked sufficient information to understand why the Government had taken certain decisions, and not others, in relation to their implementation of the MLI. As the Minister explained very ably in his introductory remarks, countries that are adopting the MLI have a series of choices to make about how exactly they do so and which of its provisions they take on board.

Back in January, the Government did not provide much information about why certain choices had been made. We did not get a lot more information, to be honest, in the Minister’s otherwise illuminating introductory remarks. That is quite a big problem, because traditionally double tax treaties have often led to source countries in particular, which tend to be developing countries, being denied tax revenues, which then accrue to already profitable firms in richer countries—not necessarily even to the revenue of richer countries.

We need more information on three areas, and I hope that the Minister will be able to provide some. That is essential if we are properly to show that the Government are holding to the principle of policy coherence for development in more than just a rhetorical form.

My first question is, why did Britain decide to exclude some of its double tax agreements from the list of countries mentioned in its adoption document? As colleagues may know, when a country signs up to the MLI, it has to indicate the double tax agreements to which it will apply the MLI. The UK excluded double tax agreements with Austria, the Falklands, the Faroe Islands, Guernsey, the Isle of Man, Jersey, Switzerland and the United Arab Emirates.

The Minister explained why Switzerland is not included. Are there any other countries where DTAs are put into primary legislation or passed through national legislation? I would have thought there are quite a few, so that seems like a slightly peculiar explanation of why we have taken a different approach to Switzerland. Does the Swiss system have a unique approach to tax legislation? I did not know that it did. Perhaps the Minister could explain that, because otherwise we would expect to see a similar approach being adopted to lots of other countries. That does not seem to be the case.

Given that a number of the jurisdictions that I have mentioned have been referred to in investigations into tax avoidance and evasion, it seems rather peculiar that they are not included here. It would be interesting to hear what the Government’s reasoning was and whether the requirements of the MLI are likely to lead to amendments to the double tax agreements for those jurisdictions too. If they are, what is the timetable to do that?

There are a number of targeted anti-avoidance rules in the MLI that countries can choose to adopt, but our Government decided not to. In the explanation of the MLI that we had previously, it was stated that that was essentially because they were too stringent. The Government stated that

“the mechanical test introduced by those provisions”—

the excluded ones—

“could deny treaty benefits in circumstances that are not abusive and would not target any genuine avoidance structures more effectively than the PPT”,

which is the principal purpose test.

The Minister said that the provisions were excluded because it was believed that they would have a disproportionate effect on corporate transactions, or they would be otherwise unnecessary. I find that a rather peculiar assessment, as do a number of experts. The principal purpose test is a very wide test—it includes a lot of discretion. Often, it is quite difficult for tax authorities to use it without being challenged, and most authorities and experts agree that strict and tight rules are better, because they avoid such ambiguities.

It would be helpful to hear from the Minister why we did not adopt articles 8, 9, 10 and 14. They apply a minimum ownership threshold for reduced tax on dividends, which makes rules about capital gains from shares and entities owning immovable property more precise. Those articles apply an anti-abuse rule for permanent establishments situated in third jurisdictions, and prevent the splitting up of contracts where companies game the system and pretend, for example, that one building site is delivered through a whole bunch of different contracts, when really it is delivered by just one firm.

All those measures were designed to prevent the kind of abusive behaviour that is frequently adopted by firms trying to avoid tax, especially in developing countries, yet the British Government have decided not to adopt them. Incidentally, the other country that has done that is the Netherlands, which I do not think has a model that we should aspire to when it comes to policy coherence for development in tax practice.

We need illumination from the Government on the rules on permanent establishment. Indeed, the Minister referred to those in his introductory remarks. I am very confused about precisely where Government are when it comes to the taxation of digital companies and assessing where their permanent establishment is. In relation to this MLI, the Government decided they would not adopt article 12 on the artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies. That contrasts with two other policy positions from the Government, which themselves are contradictory.

We have a new position paper from the Government on corporate tax and the digital economy, which says that they want much more ambitious measures, which could be agreed as part of the overall EU package of change. But in April, at the informal ECOFIN meeting, the Chancellor seemed to suggest through a spokesperson that the UK would instead only aim in the long run for internationally agreed measures—in particular, only those that the United States would agree to. That could take a very long time because, as we know, the US is directly against any development in this area from the OECD and the EU.

It would be good for the Government to tell us what we will do. Will we take proactive action on permanent establishments, as with the Google tax? Will we co-ordinate that with the EU? Will we try to do that with the OECD? Will we wait for the US? Surely, we should be an example in this regard. It will be interesting to hear the Government’s assessment.

Finally, in contrast to previous areas that I just mentioned, where the UK Government should have opted in to certain measures but decided not to, it is very strange that the Government have opted in to so-called mandatory binding arbitration in their adoption of the MLI. That will mean that if a multinational taxpayer triggers a dispute with the UK’s interpretation of a treaty and the dispute is not resolved within two years, the ultimate decision about whether the UK or the multinational’s home country has the right to tax the income under dispute will be taken by a panel of tax professionals—not through ordinary routes.

There are many problems with adopting that procedure, and they are analogous to some of the concerns raised around the inclusion of investor-state dispute settlements in trade deals, which occasioned a lot of public debate. I am sure that all members of the Committee will have received a lot of correspondence from constituents on that matter. Why did the Government not provide an assessment of the impact of adopting mandatory binding arbitration on the extent to which our tax policy will be coherent with our development goals? I raised this issue in the Finance Bill Committee, and was grateful to the Minister for listening to me there, but we did not get that information before this statutory instrument came before the House, and we need it.

I am well aware that, as the Minister said during the Finance Bill Committee, countries have to agree to arbitration in their adoption of the MLI before it can be applied to them, but that does not detract from the fact that the resources available to developing countries, particularly very low-income countries, to devote to their case and to amassing the information that would need to be provided to those tax professionals are minuscule in comparison with those available to the sort of multinational companies that we might be talking about. It would be a David and Goliath-style contest, and I am very concerned that that would not comply with policy coherence for development.

Finally, it is unclear why the Government have failed to provide an indication of how Parliament will be able to scrutinise the operation of this mandatory binding arbitration. We have gone in the wrong direction on this—the Government have expressly adopted paragraph 23.5 of the MLI. That paragraph requires written agreement from companies and their advisers not to disclose any information they receive in the course of their proceedings, which goes further than the default, to try to prevent that information being publicised. It is not clear to me how that is consistent with ensuring appropriate scrutiny of tax policy by Parliament, which the Government have repeatedly told us they are committed to. It would be helpful if the Minister could explain why that decision was taken.

--- Later in debate ---

[Anneliese Dodds]

I am grateful to the Minister for seeking clarification. The reason I mentioned it was that, with the adoption of the MLI, we have what many would view as quite a lax approach to defining permanent establishments, compared with article 12, if we had adopted that. However, in that consultation, the Government seemed to suggest a stricter approach. There seems to be a contradiction, which in itself is contradicted by what the Chancellor said at the informal ECOFIN—he seemed to say that we need to have US agreement before we can have stricter rules.

[Mel Stride]

I thank the hon. Lady for that clarification. I take this in two parts. These are different situations. When it comes to taxation of profits derived from digital platforms, be they social media, search engines or online marketplaces, the critical thing is to ensure that we tax the value that accrues to the interaction of consumers with those marketplaces. We are working with the OECD and the European Union, as the hon. Lady pointed out, to come up with an appropriate way to address that particular challenge of the current international taxation regime. As to the Chancellor’s remarks about whether we might go it alone or have to wait for America, I am not entirely sure that he said what was reported. That is the information I received, although I did notice those comments in the press, as did the hon. Lady.

We have debated mandatory arbitration before. The essential point is that, in order to enter into a DTA, both sides have to agree that it is an appropriate treaty to enter. Both sides have to be comfortable in the round with it. There is no circumstance in which the United Kingdom could therefore force a country against its will to enter into agreement with mandatory binding arbitration.

[Anneliese Dodds]

Surely it would be helpful, given the differences in resource that could none the less be provided between developing and developed nations, for the Government to carry out that analysis into the use of mandatory binding arbitration, and whether it exemplifies policy clearance for development. It would be wonderful to hear a Treasury Minister say that the Government might consider adopting this and doing so explicitly.

[Mel Stride]

The Government’s view is that mandatory binding arbitration is a very useful element of these agreements. In the absence of that, the process undertaken might be ultimately inconclusive. In order to ensure that these agreements work efficiently, we believe there is great merit to that approach.

I lastly turn to parliamentary scrutiny. Matters reserved against will be for the Government to determine in time although, as I have indicated, we have already put out preliminary suggestions of what we will do. As time goes forward, this or any other Government may decide to remove some of those reserved powers. It is down to this Committee and this moment to take a decision on whether in the round all those possible changes are agreed to or not. On that basis, I urge that we move forward with the recommendations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018.

DRAFT DOUBLE TAXATION RELIEF (SWITZERLAND) ORDER 2018

Resolved,

That the Committee has considered the draft Double Taxation (Switzerland) Order 2018.—(Mel Stride.)

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (UZBEKISTAN) ORDER 2018

Resolved,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018.—(Mel Stride.)

Stamp Duty Land Tax

Anneliese Dodds Excerpts

Thursday 26th April 2018 Commons Chamber

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

The Government appear to have arranged to give this statement so that they can pat themselves on the back, while reducing the amount of time spent on customs union with the EU. I appreciate that that issue may be controversial—albeit only for the Government; every other actor seems to feel that some kind of customs union is a good idea—but that should not prevent democracy from running its course on the matter. The Government’s cunning plan to introduce the statement today has spectacularly backfired, because rather than offering an opportunity for congratulation and digression, it has merely provided a chance to indicate the Government’s failure to deal with the housing crisis.

The Government have said—we heard it again just now—that their stamp duty cut is intended to back home ownership, but home ownership has fallen to a 30-year low under this Government. They say that the cut was intended to help first-time buyers, but there are now a million fewer under-45s who own their own home than there were in 2010. Home ownership was up by some 1 million under Labour, but it has fallen since 2010 under Conservative Ministers as part of this Government’s eight years of failure on housing.

At the root of that failure is an inability to increase the supply of genuinely affordable housing. I do not need to set out how the stamp duty cut has failed to deal with that issue; I will use the words of the Office for Budget Responsibility, which stated that

“the main gainers from the policy are people who already own property,”

not first-time buyers. In contrast, measures from the Government to increase supply are woefully inadequate. To take just one example, local authorities will only be able to bid into a pot in order to borrow to build—a farcical situation when demand is so pressing. The number of genuinely affordable homes is declining, not increasing, under this Government.

We parliamentarians see all around us the worst impact of the Government’s failure on housing, whether it is on the people we walk past who are rough sleeping in the city of London—rough sleeping is now at record levels here, as it is in many other cities—or the 120,000 children who are living in temporary accommodation, and whose families come to see us in our constituency surgeries. I am keen to hear the Minister’s response to the question of whether he has commissioned research into the impact of this flagship measure on prices, in the absence of decisive measures to increase affordable supply.

It would be helpful to hear from the Minister how Her Majesty’s Revenue and Customs is dealing with what appears to be a quadrupling of money-back claims related to a malfunctioning online calculator. What HMRC rather amusingly—it is not amusing for the people affected—calls a “ready reckoner” appears to be anything but, in view of its failure to take into account relevant stamp duty discounts. I would be grateful to hear from the Minister when it will be amended so that it properly reflects mixed-use properties.

On the subject of confusion over what stamp duty should be paid, it would be good to hear from the Minister about what the Government are doing to deal with those who make bulk purchases of individual flats, thus avoiding the buy-to-let surcharge. Let us imagine, as a hypothetical example, someone purchasing seven flats, worth between £450,000 and £1 million each, in a seaside town. They might try to do so using their own company, rather than as an individual. If so, I would hope that they registered the beneficial ownership of that company with Companies House—a matter that I look forward to debating with the Minister next week in our consideration of the Sanctions and Anti-Money Laundering Bill. Aside from beneficial ownership, however, by undertaking such a bulk purchase, our imaginary, hypothetical person would avoid a significant amount of stamp duty—say, around £100,000—which could have gone into our cash-strapped NHS. Can the Minister please inform the House what he is doing to deal with that loophole?

Above all, can we please have genuine action from the Government to deal with our appalling housing crisis— we parliamentarians cannot fail to notice that it is causing much misery to our constituents and blighting the lives of many children—rather than misplaced self-congratulation?

[Mel Stride]

I thank the hon. Lady for her contribution and her questions. She opened by asking what was the motivation for giving this statement today. I reassure her that it is that we believe that housing policy is one of the great issues of our age and we are determined to get on top of it, as the Chancellor set out in the autumn Budget. That is why—to move on to her question about how we will drive up the level of home ownership—the Chancellor made it clear at Budget that a further £15 billion would be made available, taking us up to £44 billion over the next five years, to drive up the supply of new homes. That is alongside planning changes and the review that my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) is undertaking to ensure that where planning permission is granted, houses are actually built. I suggest that we look at our record. Last year there were 217,000 new properties in this country, which is the largest figure since 2005-06. That indicates that our move towards having 300,000 more properties on the market by the middle of the next decade is realistic.

The hon. Lady asked specific questions about the effect of stamp duty relief on house prices, and she will know that the OBR forecast a small impact of 0.3%. She will also know that that projection did not take into account the various supply-side measures that I have mentioned, and other measures that we have undertaken. She asked about the specific case of properties bought within a corporate wrapper, and I hope she will be familiar with the annual tax on enveloped dwellings, which stands at 15% if the property is put into the wrapper. Indeed, on the basis she outlined where a property is then rented out, ongoing charges recruit tax in that way.