Economic Environment: Growth and Jobs

Baroness Neville-Rolfe Excerpts

Thursday 11th July 2019 Lords Chamber

Moved by

[Baroness Neville-Rolfe]

That this House takes note of the case for creating an environment which encourages (1) business growth, and (2) job creation, especially in relation to the tax system.

[Baroness Neville-Rolfe (Con)]

My Lords, I am honoured and delighted to be leading this debate at such an important time for our country. Of course, most of our thoughts are on the next 100 days, which will make a huge difference to our future and the 66 million people and 5.7 million businesses on these islands, but whatever happens to Brexit the success of business is important to everyone whether, say, they sit in the NHS in Salisbury or in a retirement home in Scarborough. This is because business produces the wealth on which we all depend.

I would like to reflect more deeply on this point. There are many excellent things about being appointed to the House of Lords, especially the chance to scrutinise legislation in a way that is not practicable in the House of Commons. However, I have to say that I have been disappointed by our failure to understand commercial interests and their importance to wealth creation and to the UK’s position in the world. However, I am comforted by the fact that, although no one is guiltless on this matter, attitudes in the Conservative Party are somewhat better than they are elsewhere. We should not underestimate the significance of a culture where enterprise is valued.

The same attitude seems to permeate society at large where too much attention is given to dividing up the cake and to regulating in ways that reduce it than to ensuring it increases. Growth was only 0.3% in the three months to May, despite annual population growth of 0.6%, and output per hour, the key measure of productivity, is now at best flatlining. Against this challenging background, I will explore some of the drivers of growth and what is getting in the way. A key question is whether our tax system helps the economy to grow in both absolute and relative terms. Does it help with our international competitiveness at a time when we will need to trade more broadly? Are we encouraging the magic of digital growth and taxing it fairly?

Before starting my main themes, I should like to thank the Library staff, who, as always, have been unfailingly helpful in assisting me to prepare for this debate.

I turn, first, to certainty. Businesses need to know where the country is going, and at present capital is being held on balance sheets rather than invested. Ask almost any CEO and they will say that US and other firms are holding back from investment. In March, many sought a delayed Brexit as they did not want a no-deal scenario, but I fear that we are now reaching a stage where delay in reaching a conclusion on Brexit is itself possibly the greatest negative factor affecting the economy. Businesses also fear the chaos and extreme socialism of the present Labour leadership. For all those reasons, the economy, hitherto resilient, particularly on employment, is now slowing.

On fiscal responsibility, there is an arms race of new ideas for taxation among both Conservative leaders and the Labour Party. Unfortunately, the necessary lodestone of fiscal responsibility is missing. We must not now put at risk all the good work that we have done in reducing the deficit created by the financial crisis. The national debt is still far too high, at £1.8 trillion, and it costs us £37.5 billion a year—money that could be put to better use.

The tax system is also creaking under the weight of its own complexity. Because I believe in taxing broadly and thinly, I think that we should keep VAT. However, there are hundreds of complications that have taken the entire tax code up to 10 million words—an estimate from the Institute of Chartered Accountants of Scotland, where I am off to after this debate. That is double what it was in 2009, according to the Telegraph. With a simpler approach, we could have avoided some embarrassments. I refer, for example, to Making Tax Digital, to those trading with the EU finding it so difficult to get the tax codes they need to export post Brexit and to the wretched loan charge fiasco.

On regulatory burdens, the complexity of the tax system, when allied with a confusing and growing regulatory system in sector after sector, leads to the dampening of business growth, whatever the underlying strength of the economy. It is no coincidence that labour productivity has been so poor since the crash in areas such as financial services and energy, where there has been so much new regulation. Noble Lords should beware of new uncosted, complex regulation in new areas if we are to retain international competitiveness.

I turn to education and digital education. Having studied what drives growth for so long, both at Tesco and as a Minister—like my noble friend Lord Henley—at the business department, and later at the Treasury, I am convinced that the most important driver of long-term efficiency and productivity is education. I welcome many of the Government’s reforms, including Teach First, and the improvement in standards, especially, for example, in London primaries. However, the schools are too full because the impact of immigration was not provided for under our short-term accounting system.

We are not preparing properly for the future. The apprenticeship levy was meant to herald the sort of vocational education that I have seen operate well in Germany and Austria. However, as was apparent when reading between the polite lines of last Thursday’s debate—which, sadly, I missed—it is a mess. It is not business led as it should be, and the levy in some cases has become simply yet another tax charge on the medium and large businesses that supply most of our quality jobs. Many fine businesses take the view that they are putting in much more than they gain. The apprenticeship levy needs to be turbocharged and simplified, and I await the Government’s review, which I welcome, with some trepidation.

Even more seriously, we are not preparing properly for the digital revolution, which will destroy some jobs as automation and AI take off. This must be balanced by a vast investment in digital skills in schools, alongside literacy and maths, and in higher education, apprenticeships and on-the-job training; otherwise, growth will bring jobs losses, not the job creation that we all seek.

Infrastructure is not for today’s debate but I support the Government’s infrastructure fund, which is another productivity driver. We just need to get on with building the roads, digital networks, housing and rail facilities in the Government’s plans. More competence is as important as more money.

I must refer to the Taylor review of working practices, to which my noble friend the Minister very helpfully drew my attention when we met earlier in the week. This analyses how to improve working practices to the advantage of all. I was particularly struck by section 4, on management-employee relations, where the objective is that workers are engaged and heard, which I know is so important. On the same theme—I refer to my business interests as listed on the register—I am a director of Capita plc, which has recently appointed two employee directors to the board; having met the individuals concerned, I am very hopeful that they will make a strong contribution to the success of the company.

I now turn explicitly to the tax system and must say how much I look forward to today’s contributions on the specifics. I have already criticised tax complexity—which is possibly top of my list, because it is a slow killer that people do not notice—but I would like to highlight some specific areas where the structure of tax, especially for business, needs to be looked at.

As a former retailer, as everybody knows, I know that retail, the heart of thousands of towns and villages across the country, is disproportionately affected by business rates. According to the British Retail Consortium, the industry constitutes 5% of the economy but pays 10% of business taxes and 25% of business rates. Moreover, the Treasury requires a fixed amount in business rates every year. This is no longer a sensible or viable policy; the take needs to be reduced. Also, the present system of transitional relief is unfair. Month after month, we see the bigger shops failing and taking with them many small shops. This week’s figures bring the problem home: in the three months to June, non-food instore sales fell by 4.1%, like for like, while online retail sales, excluding food, grew by 3.3%

I support the digital services tax in principle, but it should be higher and the proceeds should be used to offset business rates and help the desperate situation on the high street. Rates should be frozen with no upward adjustment until the vibrancy of our towns and cities is restored or the business taxation system reformed.

It is clear that the property market is slowing and that the recent increases in stamp duty have discouraged people from moving whenever it can be avoided—especially at the top end, where the level reaches 12%. This has had a deleterious effect on the movement of labour, which is vital to our growth. Stamp duty must be reformed, especially with a view to encouraging mobility and empty nesters trading down to release family homes. It is not just a matter of concern at the lower end, which leadership candidates have highlighted.

The Government should be congratulated on what they have done for small businesses on rates and their proposals to give the Small Business Commissioner more teeth. They have also established the British Business Bank, which is now five years old and the subject of an inquiry in the other place. My own view is that this bank needs to increase in scale and remit and that it can help smaller businesses enormously, not only in London but especially outside it.

However, the tax environment remains a struggle for millions of small businesses and, as your Lordships’ Economics Affairs Committee report Making Tax Digital for VAT: Treating Small Businesses Fairly highlighted, the change to digital returns has created great difficulties for some small businesses. The work I have done with business across the country also suggests that the complexity of the tax, national insurance and auto-enrolment pension systems—which I support—taken together are made much worse by the inadequacy of free advice from HMRC and others.

If we are to flourish in a world that is growing faster than us, we need to have more regard to international competitiveness. Some of this Government’s reforms to corporation and other taxes have been good and have reduced the incentive for offshoring. The reduction in corporation tax from 28% to 19% was George Osborne’s best move and has even increased revenues thanks to the magic of the Laffer curve. It will fall to 17% in 2020, which is a further boost to responsible, tax-paying businesses. Likewise, there is a good case for increasing thresholds for the higher marginal income tax rates, because it will encourage enterprise.

I am also a fan of a taxation and accounting system which supports our huge service sector, our invisible exports and intellectual property; these are all areas in which Britain is strong. I know how much BEIS has done to increase R&D funding in this country, but the tax system has also been supportive. UK-registered firms have claimed R&D tax credits worth £3.5 billion and 1,025 companies have saved £943 million in corporation tax from the patent box.

With such a myriad of taxes and so much complexity, I have barely scraped the surface of this important subject. However, I hope I have helped to make the case for a more informed and supportive attitude to business. While I know it is not my noble friend’s direct responsibility, I hope he agrees that the structure of business taxes needs to be looked at by the new leadership and that there is a case for change.

The Chancellor has already announced a welcome digital services tax on the larger digital players to help redress the unfairness of the current system, but it needs to increase quickly and be used to ease the burden of rates on the high street. It cannot be right that Amazon paid £4.6 million in UK tax in 2017 and the beloved Marks & Spencer paid £98.3 million.

Finally, we must support a culture of enterprise. If we do this, we are not only taking the right moral stance but we are bound to boost the economy further. The choice is not between lower taxes for business and more wealth for the public. Lower taxes, carefully crafted, will encourage growth to the benefit of all.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I begin by picking up the issues raised by the noble Viscount, Lord Chandos, who made it clear that we cannot talk about anything to do with the economy without a real awareness of Brexit. It sets the framework; I know we do not want to focus on it today, but it is worth a comment or two here. Many people are acting as though uncertainty is something that exists until we decide to leave, and at that point uncertainty ends. As the noble Viscount said, we are then locked into five to seven years of future uncertainty. It becomes the fundamental of the British economy, and all we can be sure of in leaving is that British businesses will have less access to EU markets; the complex supply networks that are the foundation of the British economy will gradually erode, because that is the logic of the disengagement and separation; and British businesses will have to build their future from economies of scale in a domestic market of 65 million people, not 500 million. I could go on, but that is the context.

The noble Lord, Lord Popat, the noble Baroness, Lady O’Cathain, and others said that we are looking at a robust and healthy economy. Public services in this country are desperately underfunded. Many, particularly at local government level, are in crisis. This is repeated in almost every sector, including the police, prisons, schools, the health service and social care.

There are more than 14 million people still in poverty, with inequality at its widest since the 1980s. We talk about full employment, but real wages are still 3% below those in 2008. We have now normalised in-work poverty, a serious feature that we have to tackle. For many people, their employment feels precarious as they know that their employers are trying to work out what the future of their business will be.

Growth is geographically unbalanced. In recent years, foreign direct investment in the UK has plummeted. In 2018 it was one-third of what it was in 2016. When people talk about us receiving more foreign investment than any other area, I wonder whether they have looked at the value of the pound. Assets in the UK are at fire-sale value and, even with that, there is a decline in foreign investment.

I share the concerns of the noble Baroness, Lady Neville-Rolfe, about productivity. Our recent growth numbers are, frankly, awful. It is a not a situation in which we can be complacent because we risk being ineffective in driving the economy forward.

The issue raised by the noble Lord, Lord Haskel, goes to the heart of economic growth for the future. Times have changed. Big businesses, good businesses and the smaller entrepreneurial businesses no longer take a traditional view of their role in society. Many recognise that it is now time for a new social contract between business and society; that social justice matters; that their relationship with their customers, workforce and communities must be a positive and different one; and the necessity of tackling climate change. We are entering a different and new world, which has to be redefined and can no longer be classified in terms of profitability. This will lead to a different notion of what is a successful business and how it grows. Fairness becomes a fundamental and underlying principle. I use the word “fairness” because I am shall move on to address some of the issues raised.

Before I do so, however, I must step back and say that businesses also recognise both the opportunities and dangers of the fourth industrial revolution. The noble Lord, Lord St John of Bletso, referred to this. If we are to continue with research and development and science, and if we are to develop the skilled workforce we need, it will mean a revolution in how our businesses operate.

We have in place many of the right things to drive the economy forward, but we have them in miniature. I join others in praising the British Business Bank—it is perfect, but so small when compared with the challenge it is trying to deal with that it cannot make material change. It will take a change in thinking in this country to put into the British Business Bank the scale of resource and finance it will need for the future, especially as it will have to replace both the European Investment Bank and the European Investment Fund if we decide to leave.

Again, the industrial strategy has good policies, but in limited areas and on a limited scale. We are not undertaking the infrastructure challenge; we are not delivering the broadband we need; and we are not making the necessary changes in the rail and transport infrastructures. These are massive projects and will need substantial amounts of money behind them and a real drive to make them effective. It is the same with skills. Surely we all recognise now that life-long learning will be essential but comes with a heavy bill attached.

When I hear people talking about tax cutting as the key mechanism for driving the economy forward, I realise that we have to put a cross through virtually all the measures that we need to sustain and take forward our economy. I can think of nothing worse than tax cutting at this point in time. I ask those who think that cutting taxes will lead to a huge increase in the tax yield to go back and look in detail at the past few years. The rise in the tax yield has come because business has rebounded from a severe financial crash in 2007-08, not because taxes have been cut.

Unfortunately, part of the money has come in because business has been holding back on investment, as we have discussed. The work done by the IFS in looking at Jeremy Hunt’s proposal that we should cut corporation tax to 12.5% makes a nonsense of any suggestion that that kind of tax cut repays itself. If we are to repair public services and drive the economy forward, we certainly cannot afford to do any of that.

I have listened to many noble Lords who talk regularly to businesses. I do not find businesses asking for tax cuts. They ask for all kinds of long-term support, but I have never heard a request for tax cuts from any major business.

[Baroness Neville-Rolfe]

What about business rates?

[Baroness Kramer]

The noble Baroness, Lady Neville-Rolfe, is being kind to me in raising the issue of business rates because, as she knows, my party supports a policy of abolishing them—they are part of a Victorian past—and replacing them with a commercial landowner levy. I do not want to try the patience of the House in the time allocated by taking noble Lords through the details, but it is one of the crucial ways forward. It gives businesses every incentive to grow because the tax is on the underlying land value, not on the additional value that they create by future investment. It also helps the regional distribution of businesses. I suspect we have found another supporter for that policy in the noble Baroness, Lady Neville-Rolfe, and I appreciate that.

I agree with the noble Baroness that we have to tackle the issue of digital taxes. I am not sure whether I support the French proposal, announced today, of a 3% tax on digital revenues but it would be interesting to look at that issue because something has to be done, rather than just talking about it. I am concerned that the US is now considering that this would be an opportunity to retaliate against any European country that sought to tax digital companies more seriously. I hope any future Administration here would have the backbone to stand up to the Trumpian “America first”, which would make fair taxes impossible.

I believe in fiscal responsibility and investment. The old notion that you either support business or the ordinary people in the workforce is nonsensical. We are in a modern era where everyone must pull together. That is accentuated further by the fourth industrial revolution, and I hope we will begin to think about that new era rather than lock ourselves into the past.

--- Later in debate ---

[Baroness Neville-Rolfe]

My Lords, this has been an excellent and good-humoured debate, which is frankly long overdue. I thank all noble Lords from across the House for their thoughtful contributions at this critical time. I will send them, elegantly edited by our friends in Hansard, to the two aspirant Prime Ministers, with one of my beautiful blue ribbons. As my noble friend the Minister said, business pays the taxes that pay for the public services we all value—a key insight for the next 100 days.

Motion agreed.