Income Distribution and Taxation

Baroness Morgan of Cotes Excerpts

Wednesday 9th April 2014 Westminster Hall

[The Financial Secretary to the Treasury (Nicky Morgan)]

It is an honour to serve under your chairmanship, Mr Weir. May I congratulate my hon. Friend the Member for Forest of Dean (Mr Harper) both on securing the debate and on presenting his case so eloquently? I was also in the House when he spoke in the Budget debate, which I think was his first debate as a Back Bencher for a while. He spoke incredibly eloquently then and it is a pleasure to hear him again today on the same subject. I am delighted to be answering the debate, regardless of the title that I happen to hold in the Treasury. I have to get used to a new one as of this afternoon, and it is a pleasure to be here speaking on this important topic.

As my hon. Friend said, the message that the Government wanted to go out from the Budget was that we are on the side of hard-working people and that work should always pay. As I shall come on to show, the other message is that this Government very firmly believe that people should keep as much of their own money as possible, so that they spend it in the best way for themselves and for their families in order to provide security for their families—rather than the Government telling them how they should spend it.

In the time available to me this afternoon, I would like to speak about the impact that the Government have made on getting more people into work, and then about the impact of the personal allowance and the other steps we have taken and how they help those at the bottom of the income scale. Finally, I want to speak about the percentage of the tax burden taken on by those at the top of the income scale, which I think my hon. Friend also mentioned.

Before I do so, it is worth making hon. Members aware that the latest available statistics show that in 2011-12, UK income inequality was the lowest since 1986. As the Office for National Statistics noted, that was partly due to earnings falling more for those at the top of the income distribution than for those at the bottom, but it was also magnified by the changes that this Government have overseen, particularly in the tax and benefit system.

Of course, one of the best ways in which a Government can reduce inequality is by tackling unemployment, which will increase incomes for those at the bottom end of the scale. We have seen clear evidence that the labour market has continued to strengthen this year. Record numbers of people are in work. Employment increased by 396,000 over 2013 and was 574,000 above its pre-recession peak in the final quarter of last year.

Wage inequality for all employees is also reducing. In 2013, the 90:10 ratio, a common measure of inequality, showed that wages at the top were 3.9 times higher than wages at the bottom, a smaller difference than in any year of the previous Government.

This Government are by no means complacent and we continue to introduce reforms that will support employment and wages. From last Sunday, both businesses and charities have been able to claim the employment allowance to reduce employer national insurance contributions by up to £2,000 a year. From next April, national insurance contributions will be abolished for all under 21-year-olds who earn up to £813 a week. Those measures will make it easier to take on new employees, particularly young employees, and will therefore help get even more people into work. When we have got people into work, it is important that they keep as much of their money as possible, and the Government believe that raising the personal allowance is the most effective way to support those on low and middle incomes and to reduce inequality.

As all hon. Members will be aware, last month’s Budget announced that the personal allowance will increase to £10,500 in 12 months. This month, it increased to £10,000. That means that by next April, a person on median earnings will pay more than £800 less income tax per year than in 2010-11, and will be more than £570 better off than under the previous Government’s plans. It will also lift another 288,000 low earners out of income tax altogether, increasing the total number taken out of tax by our personal allowance increases to over 3.2 million.

It is worth noting that in addition to the personal allowance, those earning the October 2014 national minimum wage and working full time will have seen their income tax bill fall by more than two thirds since 2010-11, and someone working 31 hours a week on the national minimum wage will not pay income tax at all.

The Budget also helped people to save. As well as getting more people into work and allowing them to keep more of their income, we want to provide further support for the lowest earners by abolishing the 10% starting rate of tax on savings and extending the 0% rate to the first £5,000 above the personal allowance. That measure is expected to help 1.5 million people with low earnings and some savings, meaning that everyone with a total income of less than £15,500 will not have to pay any tax at all on their savings income.

I turn to the share of taxes and benefits within income distribution. As well as lowering the tax contribution of the poorest, it is worth noting that the Government have increased the percentage of tax paid by the wealthy. My hon. Friend mentioned that in his speech. This year, the top 1% of income tax payers will pay more than 28% of income tax revenue, so overall the wealthiest will pay more in tax in this Parliament than under the previous Government’s plans. If any hon. Members dispute that, I point them to the Treasury’s distributional analysis, which is published alongside the Budget, and was praised by no less than the Treasury Committee as an outstanding document, which clearly shows that the richest 20% of households continue to make the greatest contribution towards reducing the deficit. Before this Government took action to reduce the deficit, the richest 20% contributed around three and a half times as much in tax as they received from public spending. That has now increased to around four times as much.

I am conscious of time, and the following debate, which has been delayed because of Divisions, so I will conclude by saying that while repairing the broken economy we inherited, this Government have managed to oversee the development of a fairer tax and benefits system in which everyone contributes to reducing the deficit, and those with the most make the largest contribution.

In 2015-16, the net contribution from the richest 20% of households towards reducing the deficit will be larger than the contribution of the remaining 80% of households. Employment is increasing, taxes for the lowest-paid are decreasing and, as the International Monetary Fund forecasts confirmed yesterday, our economy is recovering. That is good news on all fronts, and I am sure it will be welcomed by all hon. Members present.

I thank my hon. Friend for organising such an important debate and for allowing me to make these points this afternoon.