Finance Bill

Debate between Chris Heaton-Harris and David Gauke

Monday 2nd July 2012 Commons Chamber

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

We have had an interesting debate that has addressed what are perhaps two of the most controversial issues in the Budget: the change to age-related allowances and the reduction in the 50p rate of income tax. The debate has lasted three hours, but at one stage I thought we might finish early, until we heard the tour de force from my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg). I hope that I will have time to respond to the various comments that have been made. We heard the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) quote Groucho Marx, which I suppose is an improvement on other Marxes who might have been quoted, although I was reminded of the other Groucho Marx line:

“I’ve had a perfectly wonderful evening, but this wasn’t it”,

at least until I heard the speech from my hon. Friend.

The changes the Government have made to the rates and thresholds of income tax will provide a competitive platform for our tax system while also ensuring fairness. The measures in the Bill will reduce the additional rate of income tax in 2013-14 to 45p, increase the personal allowance to £8,105 and simplify the working of age-related allowances. I will discuss each of the amendments in turn, but it is important first to set out why the Government have taken this approach.

The fact is that the 50p rate of income tax has not raised the revenue it was intended to raise. It is currently the highest statutory income tax rate in the G20. When we came to power we inherited an economy that the previous Government had driven into a parlous state, with regard to not only the state of the public finances but our overall competitiveness. The fact is that the 50p rate came in only at the fag end of the Labour Government, who for 13 years had kept the 40p rate, and when they brought in the 50p rate they declared that it was temporary. There was a reason for that: they recognised that the 50p rate would damage our competitiveness. The hard evidence backs up that claim. The report by HMRC sets out that the 50p rate is distortive, damaging to international competitiveness and an economically inefficient way of raising revenue.

In short, the 50p rate is a failed policy. We were told that it would raise over £2 billion and, given the crippling deficit we were left, that was not something we could just wave away as if it did not matter. However, higher taxes are worth while only if they raise more revenue, and the analysis by HMRC shows that at best the yield would be £1 billion, and at worst it may raise nothing at all. That is because the behavioural response has been substantially larger than expected.

[Chris Heaton-Harris]

One part of HMRC’s gaming for this actually did not look at how much extra money would come in as a result of the incentive to pay the lower level of tax. Surely it would have been worth while doing that so that we could prove to some of those who do not understand simple economics that it would be worth while.

[Mr Gauke]

HMRC’s analysis, which is a good piece of work, showed through two different mechanisms that the reality was that the amount being raised was somewhat less than had been predicted. The fact is that the behavioural response was much greater.

Let me say a word or two about that. To start with, HMRC estimates that as much as £18 billion worth of forestalling took place in 2009-10, of which about two thirds, up to £11.3 billion, has been estimated to unwind in 2010-11, but this forestalling was not factored into the original revenue calculations. Furthermore, HMRC estimates that between one third and one half of the behavioural effect comes from genuine reductions in income. We have heard this evening that this is all about tax avoidance, that tax avoidance increases when we increase the rate and that we can be sure we will get the benefit of it as we unwind, but the reality is that between one third and one half of this was simply the result of less economic activity, because people reduced their hours and participation in the UK labour market and moved elsewhere.

Budget Leak Inquiry

Debate between Chris Heaton-Harris and David Gauke

Thursday 22nd March 2012 Commons Chamber

[Mr Gauke]

I do not believe that the figure of 7% came from the Treasury, but we also ought to recognise that in last year’s Budget the Chancellor made it clear that we were looking at getting more money from those owning high-end properties, so it should not have come as a complete surprise that there was an announcement along those lines in the Budget yesterday.

[Chris Heaton-Harris (Daventry) (Con)]

It was widely reported in the press before the Budget, and in fact before Monday, that on Monday morning the quad would meet for a final sign-off of the Budget. Surely anything that was in the papers about the Budget before that point would have been complete speculation?

[Mr Gauke]

There is a lot of speculation, but one of the aspects of Budget policy making under this Government is that it is much more orderly and systematic and decisions are reached in a proper way, unlike the chaos that reigned under the previous Government.