Baroness Penn
Main Page: Baroness Penn (Conservative - Life peer)Economy: Spring Statement
Baroness Penn Excerpts
Baroness Penn
That the Grand Committee takes note of the economy in the light of the Chancellor of the Exchequer’s Spring Statement.
Baroness Penn (Con)
My Lords, over the past month the bravery of the Ukrainian people has inspired the world. In contrast, Putin’s savage and unprovoked attack on a sovereign nation has shocked us all in equal measure. This country stands with Ukraine. That is why we continue to support that brave nation with defensive weapons and humanitarian aid, and it is why we are introducing the largest and most severe economic sanctions that Russia has ever faced. These sanctions will help to cripple Putin’s war machine and degrade the Russian economy for years to come. However, as my right honourable friend the Chancellor said in the other place last week,
“behind Putin’s invasion is a dangerous calculation that democracies are divided, politically weak … and incapable of making tough long-term decisions to strengthen our economies”.—[Official Report, Commons, 23/3/22; col. 337.]
This Government are determined to show that this cynical view of the world is wrong.
That is why, on the international stage, we will continue to support Ukraine, while domestically the Government are focused on strengthening our public finances. The measures contained in this Spring Statement will help to build a resilient, robust and fast-growing economy that will allow this country to respond to crises and help our friends in their times of need.
The economy is recovering well following the coronavirus pandemic. The Government’s successful vaccine rollout and Plan for Jobs have helped support a quicker than expected recovery and a buoyant labour market. Tax receipts have been stronger than expected, which has contributed to borrowing falling this year and over the forecast period. However, the steps that the Government are taking to sanction Russia are not cost-free for the UK and pose a risk to our recovery. Higher than expected global energy and goods prices have already led to an unavoidable increase in the cost of living in the UK. Statistics published last week show that in February inflation stood at 6.2%. This was still lower than in the US and broadly in line with the euro area. Disruption to global supply chains and energy markets, combined with the economic response to Putin’s aggression, means that the Office for Budget Responsibility expects the cost of living to rise further, averaging 7.4% this year.
As noble Lords will recall, the Government have already taken significant steps to help with the cost of living. These measures include a cut to the universal credit taper rate and increases to work allowances to make sure that work pays, a £9 billion package to help households with energy bills announced this year, and a freeze to fuel and alcohol duties to help keep costs down.
In this Spring Statement the Government are taking further action. At the heart of the Statement is a three-part plan to support families with the cost of living, support growth in the economy, and ensure that the proceeds of that growth are shared fairly. Let me stress that the Government’s approach to developing this plan and our ultimate goal of a lower-tax economy will be responsible and sustainable. However, as the Chancellor has said, cutting taxes sustainably is hard. It requires prioritisation and a commitment to fiscal discipline. We will take a principled approach, maintaining space against our fiscal rules, as we have this year, continuing to take a disciplined approach to spending, and carefully considering the broader macroeconomic outlook. Such a prudent approach is more important now than ever. Next year we are forecast to spend £83 billion on debt interest. This is the highest amount on record and almost four times higher than last year. These figures underline why the Government must not shy away from tough decisions. That is why the health and social care levy that the Government announced last year will remain in place, safeguarding a dedicated source of funding for the NHS and those who require care.
I turn to the specifics of our tax plan. Under the first part of the plan, which focuses on relieving the pressures facing families and individuals as a result of the rise in the cost of living, the Government are making a range of sweeping changes to the national insurance system. As noble Lords may recall, reforming and simplifying the tax system has been a long-time goal of this Government. Since 2010, millions of people have been lifted out of income tax through successive increases to the personal allowance, raising it over that time from £6,500 to its new level of £12,570. However, the equivalent thresholds in national insurance, which define how much people can earn NIC-free, are still about £3,000 less. The Prime Minister pledged in the 2019 election that the Government would increase those thresholds. We have already taken some steps forward on that front and last week fulfilled that promise.
From July, the national insurance primary threshold will rise from £9,880 to £12,570, bringing it in line with the income tax personal allowance. This means that people will be able to earn £12,570 a year without paying a single penny of income tax or national insurance. In fact around 70% of all workers will have their NICs cut by more than the amount they will pay through the new health and social care levy. This change will save the typical employee £330 while the typical self-employed worker will receive a benefit worth over £250. This measure represents the largest increase in the starting threshold ever.
Baroness Penn (Con)
My Lords, this change to national insurance contributions is the largest single personal tax cut in a decade, reducing the tax burden by £6 billion for 30 million people across the UK. To mirror the increase in the primary threshold for employees, the national insurance lower profits limit will also rise from July to £11,908 and will increase to £12,570 from April next year.
The Government also recognise the impact of the rising cost of living on self-employed workers on low incomes. As a result, we are also reducing class 2 NIC liabilities to nil on profits between the small profits threshold and the lower profits limit. This will mean that, from April, those with profits between £6,725 and £11,908 will not pay class 2 NICs, with the upper limit rising to £12,570 from April next year. However, I assure noble Lords that these workers will still be able to build national insurance credits and will therefore remain eligible for the state pension and other contributory benefits.
Beyond the national insurance system, this Spring Statement uses the tax system to ease cost of living pressures in other ways. Fuel duty will be cut for only the second time in two decades by 5p per litre for the main rates, saving motorists around £2.4 billion over the next year. In addition, the Government are reforming VAT reliefs for households that want to install energy-saving materials in their homes, such as solar panels, heat pumps and insulation. Consumers in Britain will pay a 0% VAT rate for the installation of these items and the scope of who can access such VAT reliefs has been expanded.
Our tax plan also contains measures to help businesses cope with inflation. The employment allowance will rise from April, allowing eligible businesses to cut their employer NIC bills by up to £5,000 a year. This tax cut is worth up to £1,000 per employer and will mean that businesses will be able to employ four full-time employees on the national living wage without paying any employer NICs.
This brings me to the second part of our tax plan, which includes measures that seek to boost growth and productivity. The Government want to create a new culture of enterprise and help the private sector to invest, train and innovate more. The Government’s focus here will be on three key areas: capital, people and ideas. The plan sets out tax-cutting options on business investment and innovation, with the final decisions to be announced in the Autumn Budget.
First, on people, we are behind our international peers on adult technical skills so we will examine whether the current tax system, including the operation of the apprenticeship levy, is sufficient to incentivise businesses to invest in the right kinds of training.
Secondly, on ideas, this country is built on innovation. In recent decades, UK-born inventions such as the world wide web, carbon fibre and the ATM have changed the world. In fact, over the past 50 years, innovation has driven around half the UK’s productivity growth. However, since the financial crisis, the rate of increase in these new ideas has slowed more than it has in other countries. As the Chancellor set out last week, this country spends more on R&D tax reliefs than almost any other country yet, right now, the amount that businesses spend on R&D as a percentage of GDP is less than half the OECD average. So, the Government will reform R&D tax credits so that they are as effective as possible and provide better value for money while expanding their generosity to include data, cloud computing and pure maths. The Government will also consider what more can be done to tackle abuse—particularly in the SME scheme, where rising costs indicate that the relief is not being used as intended—and, in the autumn, will consider whether to make the R&D expenditure credit for large companies more generous.
Thirdly, on capital, we know that capital investment by our businesses is considerably lower than the OECD average. This is another cause of the UK’s productivity gap with its international peers. Once the super deduction ends next year, this country’s overall tax treatment for capital investment will be far less generous than in other advanced economies. That is why the Government have said that, at the Autumn Budget, they will cut and reform taxes on capital investment. The Government will engage with businesses on this matter in the months ahead.
Let me now turn to the final part of the Government’s tax plan, which focuses on ensuring that the proceeds of growth are shared fairly. This Government recognise that it is only right that hard-working people keep more of what they earn. As a result, the Spring Statement announced a cut to the basic rate of income tax from 20p to 19p. This will be worth an average of £175 for more than 30 million workers, pensioners and savers, and will be implemented in 2024 when it is forecast that inflation will be back under control, debt will be falling sustainably and the economy will be growing. Income tax rates have been reduced only twice in the past two decades; this is the first income tax basic rate cut in 16 years. I should point out that this cut will apply in England, Wales and Northern Ireland. The Scottish Government will receive additional funding each year through the agreed income tax block grant adjustment, which they can use to reduce taxes or increase spending.
Beyond the tax plan, the Spring Statement sets out a range of other actions that will help families with the rising cost of living, including doubling the existing household support fund through an additional £500 million to support the most vulnerable households with essentials. This money is distributed through local authorities in England, which are best suited to know how to use it in their local areas. These measures build on the support that we have already put in place to help families to deal with inflation—a package worth £22 billion in 2022-23.
This is far from an exhaustive list of all that is included in the Spring Statement. However, these measures underline our commitment to building this country’s economic strength and resilience through supporting people with the cost of living, helping businesses to expand and grow, and creating a country where everyone who works hard will see the rewards of their labour. I commend the Statement to the Committee and beg to move.
Baroness Penn (Con)
My Lords, it is a real privilege to close this debate on behalf of the Government. It has benefited from a wide range of thoughtful contributions, so I shall focus my closing remarks on addressing as many of the points noble Lords made as I can.
The noble Lord, Lord Whitty, kicked off contributions by asking about climate change. His comments were echoed by many noble Lords, including the noble Baroness, Lady Boycott, and the noble Lord, Lord Oates. I am glad the noble Lord, Lord Whitty, acknowledged the dramatic and impressive statement made by the Government’s road to net zero policy, at the time of the Glasgow summit. I reassure him that that commitment remains. It is backed by £30 billion of government funding, which we hope by 2030 will leverage up to £90 billion of private sector investment in tackling climate change.
Noble Lords also acknowledged the measures in the Spring Statement to remove VAT on energy saving materials. This is expected to be worth £170 million over the next five years to support decarbonisation. The noble Lords, Lord Bourne and Lord Hain, asked how this would apply to Northern Ireland, given the protocol. We look forward to engaging constructively with the EU and Ireland on our proposals in this area, and we are committed to ensuring smooth implementation of the Northern Ireland protocol, while ensuring that Northern Ireland remains an integral part of the UK market. The Northern Ireland Executive will receive a Barnett share of the value of this relief, while the Government and the EU discuss the application of the reform to Northern Ireland.
Noble Lords asked more broadly about other measures to support energy efficiency, in particular how we can help low-income households to improve their energy efficiency and reduce their bills. The Government are providing £3 billion of funding over this Parliament through schemes such as the social housing decarbonisation programme and the home upgrade grant, which will support energy efficiency for those on some of the lowest incomes. We allocated £500 million of this to support households improve their energy efficiency in the last year.
The noble Lord, Lord Whitty, also referred to a climate change amendment in the Subsidy Control Bill. While I do not know the details of that, I can think back to Bills in which I have been involved—whether the Financial Services Bill, or the skills or health Bill—where amendments on climate change have been made, recommitting the Government to our net-zero targets. I hope he is reassured by that.
The noble Lord, Lord Sikka, and others asked about a windfall tax. As he knows, the Government already place additional taxes on the extraction of oil and gas. To date, the sector has paid more than £375 billion in production taxes.
Beyond the broader commitment to net zero, as regards what the Treasury is more directly doing, there has been a huge push on green finance from the Treasury. Our ambition is to align private sector financial flows with green environmentally sustainable and resilient growth and to strengthen the competitiveness of the UK. We are committed to becoming the world’s first net-zero-aligned financial sector, we became the first country to commit to mandatory reporting under the Task Force on Climate-related Financial Disclosures, and we are introducing economy-wide sustainability reporting requirements. I could go on but, I hope that in naming some of those measures, noble Lords will hear the Government’s continued commitment to this agenda.
Another strong theme that came through in this debate was the cost of living. The Government understand the pressures people are facing with the cost of living. These are global challenges but the Government are providing support worth over £22 billion in 2022-23 to help families with these pressures. Much of our support will help those who are vulnerable and on lower incomes. We have cut the universal credit taper rate, increased the work allowance, and maintained the increase to the local housing allowance. We are also providing an additional £500 million through the household support fund as well as increasing the national living wage to £9.50 an hour. Analysis published alongside the Spring Statement shows that decisions made since spending round 2019 have on average benefited those in the lowest income deciles the most.
Baroness Kramer (LD)
My Lords, thanks to the noble Lord, Lord Sikka, I have just seen a copy of a Written Statement that was just put down by the Government, I assume while this debate was under way, constraining public sector pay increases for civil servants to 2%, with a 1% flexibility to go above that under special circumstances where people are particularly needed. Does the Minister really consider that this meets people’s need for additional income to cope with the cost of living in this coming year? She will undoubtedly be aware of the Statement, and I am sure that the support she has behind her has provided her with a response to the question.
Baroness Penn (Con)
My Lords, on public sector pay, of course there is a process to be gone through. The Government set out the parameters that the pay remit bodies then go away and look at and make recommendations to the Government. We are at only the beginning of that process and we will see those recommendations in the summer.
I was just saying that the Government will continue to keep the situation under review, recognising the high level of current uncertainty, including monitoring the ongoing impact of the Russia-Ukraine conflict on the economy, and will be ready to take further steps if needed. That may be pertinent to the noble Baroness’s point.
The noble Lords, Lord Davies of Brixton and Lord Sikka, raised the issue of pensioners in particular. I can confirm to the noble Lord, Lord Davies, that when the Chancellor was asked at the Treasury Select Committee a very direct question about whether he would guarantee the triple lock for pensioners this year, he was crystal clear that he would. On the value of the state pension more broadly, since 2011, when the triple lock was put in place, the value of the basic state pension has increased by £2,050 and is now at the highest level relative to earnings in 34 years.
The noble Baroness, Lady Boycott, asked specifically about food insecurity for the poorest households.
Lord Sikka (Lab)
On the state pension, I referred to the median figures, which are half the national minimum wage. Does the noble Baroness consider that a state pension of half the median wage is adequate for millions of our senior citizens to live on?
Baroness Penn (Con)
My Lords, I make two points. One is that we have been increasing the value of the state pension, as I just said. Secondly, for those who rely solely on the state pension for their income, there is pension credit in addition. We are doing a lot of work to drive an increase in the take-up of pension credit so that people who are entitled to that extra support access it.
On food insecurity, the latest statistics from the DWP on households with below-average income, which came out today, show that the percentage of individuals in food-insecure households fell from 8% in 2019-20 to 6% in 2020-21. I completely acknowledge that that is still too many and that, of course, the nature of those statistics means that they lag behind by a year. I have already mentioned the household support fund that the Government have put in place but, beyond that, we have increased the value of Healthy Start food vouchers and are investing more than £200 million a year from 2022 to continue our holiday activities and food programme, which already provides enriching activities and healthy meals to children in all English local authorities.
The noble Baroness, Lady Boycott, asked about BOGOF promotions. We recognise that there will be costs to businesses associated with implementing this policy. However, the cost of obesity to individuals, society and the NHS is significant; the benefits of reducing calorie intake across the population are therefore substantial and outweigh the costs of that policy.
In the longer term, we can best support people to cope with the rising cost of living by helping them into work—not just into jobs but into better-paid jobs. The noble Lord, Lord Bird, talked about long-term investment in social programmes. In July 2020, the Government launched their plan for jobs, which is one of the most comprehensive and ambitious plans in the world, to protect, support and create jobs across our country. That plan is working, as demonstrated by unemployment falling for 12 consecutive months back to below pre-pandemic rates.
The Government have been building on the measures announced in the 2021 spending review to support people in finding work and increasing their earnings. We will spend more than £6 billion on labour market support over the next three years. That includes extending for a further 12 months the Department for Work and Pensions’ train and progress programme, whereby those on universal credit can spend up to 12 weeks in training, or up to 16 weeks in training in subjects with skills at boot camps, instead of eight weeks. That will allow those who have recently become unemployed or are at risk of unemployment to retrain into priority sectors.
Further, we have doubled the number of work coaches in the system to 27,000 and we have the KickStart scheme, which has supported 130,000 young people into KickStart jobs. We have also announced more than £1.1 billion of funding over the next three years for programmes that enable people with disabilities or long-term health conditions to find and sustain employment. This includes continuing the Access to Work scheme, which offers financial and practical assistance in making workplace adaptions, and the work and health programme, which provides tailored support for individuals to overcome their specific obstacles to employment.
Beyond this, in terms of support for wages, the Government have introduced the national living wage. As I said, this will increase in April by 6.6%. There is also a new in-work progression offer. This means that, for the first time, people who are on universal credit and are already in work can access individualised work coach support that focuses on helping them to increase their earnings and progress in their jobs. The other element to support that progression is investment in skills. We will invest £3.8 billion in skills in England by 2024-25.
The point about investment in skills allows me to touch on another point made by the noble Lord, Lord Bird, about the importance of education. It is absolutely essential. In the House, we dealt with the skills Bill as part of the Government’s plans to ensure that technical and further education get the support in this country that they rightly deserve. This week, we published the schools White Paper and the SEND Green Paper, which focus on improving educational outcomes for children. We have narrowed the attainment gap for children in the poorest households but there is so much more to do. The noble Lord, Lord Macpherson, talked about the need for long-term action in this area, building cross-party alliances. I do not pretend that there is agreement on all aspects of our plans but, on skills and education, the policies we have designed and the Government’s approach are definitely in that spirit.
This brings me to the question of public sector spending and the comments of the noble Lord, Lord Hain, who talked about cuts to public spending. I have to disagree with the noble Lord. The spending review in 2021 set departmental budgets up to 2024-25 and, based on these plans, total departmental spending is set to grow in real terms by 3.7% a year on average over this Parliament; that is £150 billion in cash terms and an increase of £88 billion in real terms.
I will address the point made by the noble Lord, Lord Davies, about the GDP deflator. Of course, the GDP deflator is a broader measure of inflation than CPI, which just measures the inflation felt by consumers. Government operates across the whole of the economy and therefore it is appropriate to use the wider measure of inflation. This is the measure that is always used to look at these questions.
The noble Lord, Lord Hain, also questioned whether, as we meet our fiscal rules, we should use the additional headroom to allow people to keep more of the money they earn, and suggested that we might have set our priorities in the wrong place. I disagree with the noble Lord; I think his own Front Bench may disagree with the noble Lord also. It is partly for this reason: the size of the state is expected to grow to 41.3% of the economy in 2024-25—up from 39.9% in 2007-08. So, when we are in a position to do so, we should look at cutting taxes for ordinary working people to put more money back into their pockets.
On the subject of spending, the noble Lord, Lord Macpherson, raised defence spending. He will know that defence spending has been prioritised by this Government. In the spending review 2020, the MoD was awarded the largest sustained spending increase since the end of the Cold War. Underpinning that spending review decision was The Integrated Review of Security, Defence, Development and Foreign Policy, which recognised that Russia remained
“the most acute threat to our security”
and that:
“NATO will remain the foundation of collective security in … the Euro-Atlantic”.
I was previously accused of being complacent on this subject, and I reassure noble Lords that I and the Government are not. All I would say to the noble Lord, Lord Macpherson, is that we are only five weeks into the conflict in Ukraine. I think it is something that will develop and unfold over a longer time period, so I caution against changing long-term plans and decisions based on the length of experience so far.
I turn to a subject where I agree with many noble Lords: the question of growth. The noble Lords, Lord Desai, Lord Horam, Lord Macpherson, Lord Hain, and others all pointed to the fundamental need to get more growth into our economy. That is why the second part of our tax plan is focused on exactly that.
On infrastructure, we have launched the UK Infra- structure Bank and confirmed a total of £100 billion of investment in economic infrastructure over the spending review period. On skills, I have already referred to the important investment we have made, including things such as the lifelong learning entitlement and the development of skills bootcamps. On innovation, we are increasing public investment in R&D to £20 billion by 2024-25 and we are focused on boosting small and medium enterprise productivity through the help to grow scheme. I could go on, but I am conscious of time.
Many noble Lords asked about the 1p cut to income tax in 2024. We have had a wider debate in this Committee about the merits of taxing earned versus unearned income. As the Government’s tax plan made clear, we want to spread the proceeds of growth. That is why the tax cut applies to a broad set of taxpayers. I am very aware of the concerns about how we are treating earned versus unearned growth. As I assured noble Lords yesterday, the tax cut does not apply to dividend income. Dividend tax rates will rise as planned this April and not reduce in 2024.
The Government have also taken significant steps to ensure that rental income is taxed fairly, including restricting the finance cost relief so that landlords can no longer get relief at the marginal rate if they are a higher or additional taxpayer. Purchases of additional properties are also subject to higher additional rates of stamp duty.
The noble Lord, Lord Sikka, raised the question of charging national insurance on capital gains. He will be well aware of the history of national insurance contributions as part of the UK’s social security system. That system is based on a long-standing contributory principle around paid employment and self-employment, with employers, employees and the self-employed paying towards the protection of those who have been in the labour market. That is why NICs focus on the tax base that they do.
The noble Lord, Lord Turnbull, talked about housing wealth funding social care, while the noble Lord, Lord Davies of Brixton, asked me yesterday whether there are any plans to change NICs treatment for the self-employed. I was clear to him then that the Government do not have any plans in this area. The proposal to use housing wealth to fund social care was included in the Conservative Party manifesto but was not welcomed by any party—perhaps including the Conservative Party—in that election. I do not make that point flippantly; it is important that policies put forward to be delivered, particularly as we discuss them in the unelected House, have the consent of the public. If we want to enact change, ultimately, we need people’s support for those changes. Some of the debates that we have today ultimately translate into broader debates across the country.
I heard the points that the noble Baroness, Lady Kramer, made. I hope she will forgive me for pointing to the fact that it was a Lib Dem policy to raise the income tax threshold to £10,000 while adding a penny to national insurance to pay for the NHS. I might be out of date on their approach now but that is worth bearing in mind.
Underlying a lot of this debate are the choices that the Government have made.
Lord Bird (CB)
Would it not be true to say that what we are experiencing here is that it is very expensive to keep people poor?
Baroness Penn (Con)
I absolutely agree with the noble Lord. That is why I tried in my speech to point to all the investment that the Government are making in helping people to move out of poverty and have a better life than they otherwise would.
In fact, the noble Lord’s point about the choices we have made in this Spring Statement and overall as a Government is a good one. I pointed to the distributional analysis published with the 2022 Spring Statement. Our modelling shows that the poorest 66% of houses receive more in public spending than they contribute in tax and, on average, households in the lowest income decile will receive more than £4 in public spending for every £1 that they pay in tax. The impact of government policy since the 2019 spending round on the bottom four deciles is expected to be worth more than £1,000 a year, while there has been a net benefit on average for the poorest 80% of households.
Lord Sikka (Lab)
I am grateful to the noble Baroness for giving way. It has been a long day and she has great powers of perseverance, which are all on display. She referred to capital gains. The point is that capital gains are not subject to any kind of national insurance, so zero is paid. The second point I made was when I compared a worker with £30,000 of gross income and a speculator with £30,000 of gross income, and the worker was paying £4,000 more in income tax and national insurance deductions than the speculator. What is the logic in taxing workers more and then having them queue up for universal credit and other benefits, or at food banks, in order to survive? What is the economic and social logic? I would be grateful for some discussion or explanation of that. Why are workers penalised with higher rates of taxes and deductions?
Baroness Penn (Con)
My Lords, I understood the noble Lord’s points and attempted to describe why we have evolved a system of national insurance contributions that is separate from our income tax system. I am sure this will not be the last time we debate this subject, particularly with the noble Lord.
I was just talking about the choices we have made with this Spring Statement and since then. If you look at them in the round, they benefit the poorest households most. This Spring Statement recognises the impact of growing pressures on the cost of living. We continued with the health and social care levy because it will provide additional funding for the public’s priority of the NHS and, in time, as those reforms come on stream, for social care. I believe it was the right choice to do that and raise the thresholds for national insurance rather than to scrap or cut the health and social care levy altogether. If we were to do that, as advocated in the policy of the shadow Chancellor, because half the revenues from the health and social care levy come from the highest 15% of earners, a reversal would not be targeted at the lowest and middle earners.
The same goes for support to tackle energy bills. The shadow Chancellor has talked about scrapping VAT on domestic energy, which would also benefit high-income households most. There are choices to be made and they are really difficult—I do not shy away from that. But this Spring Statement provides a tax cut to support millions of people with the cost of living. We have set out how we plan to use taxes to support higher growth in this country in years to come and how, when we are on the path to that and to meeting our fiscal rules, we will share the proceeds of that growth.
I thank noble Lords for their patience with the length of my—
Lord Northbrook (Con)
Before the Minister sits down, can I kindly ask whether, in the interests of time, she would kindly write to me? I had some queries.
Baroness Penn (Con)
I will be happy to write to the noble Lord on his specific points. I apologise for not being able to cover them in my response. With that, I commend this Motion to the Committee.