Surplus Target and Corporation Tax

John McDonnell Excerpts

Monday 4th July 2016 Commons Chamber

[John McDonnell (Hayes and Harlington) (Lab)]

(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on proposals regarding the Government’s surplus target and plans to further cut corporation tax.

[The First Secretary of State and Chancellor of the Exchequer (Mr George Osborne)]

In the past week, I have sought to be realistic with the British people about the economic challenges we now face but to mix that realism with reassurance that we can rise to those challenges. The financial contingency plans that the Governor of the Bank of England and I put in place have proved effective to date. Financial markets have adjusted, but I can report today that, although we remain vigilant, they have shown no signs of disorder. We must now respond to developments in the real economy, which will require a supreme national effort.

First, we must look to support demand and ensure that credit flows freely in our economy. The Governor of the Bank of England said on Friday that

“some monetary policy easing will likely be required over the summer”.

Thanks to the reforms that I introduced, the independent Bank of England has the tools that it needs to act against the cycle and support lending in the economy. The Financial Policy Committee will publish its decisions tomorrow, and we stand ready in the Treasury to act in concert with the Bank of England should more need to be done to support funding for lending.

The second part of our national effort must be to maintain Britain’s fiscal credibility. Eight years ago, people questioned Britain’s ability to pay its way in the world; eight years later, British gilts are seen as a safe haven and funding costs have fallen to record lows. We should maintain the fiscal consolidation measures that we have announced. However, our rules were always explicit that, in the face of what the fiscal charter calls a “significant negative shock”, we should allow the automatic stabilisers to operate, and with the consensus of economic forecasters now lowering the forecast growth for the UK next year—from close to 2% before the referendum to 0.4% now—that is what we will do. We must be realistic that the target for a surplus is unlikely to be achieved in 2019-20. The Office for Budget Responsibility will conduct a formal assessment when it produces a new independent forecast in the autumn, and then we will have a clear idea of what additional measures are required to maintain fiscal credibility.

Thirdly, we need to broadcast loud and clear the message that Britain remains the best place in the world to do business. In the past six years, we have reduced Britain’s corporation tax rate from 28% to 20% today, and 17% in the future. I did that at the same time as taking difficult decisions elsewhere to balance the books. In my view, the strongest signal we could send to the world that Britain, after the referendum, is open to the world and ready to do business would be to cut corporation tax still further. We should aim for a rate of 15% and preferably lower, because if we are pro-business, we are pro-jobs, pro-living standards and pro-working people.

Fourthly, the referendum result revealed a deep-seated feeling of disfranchisement in too many of our communities, especially in the midlands and the north of England. As I said in Manchester on Friday, the northern powerhouse is the right response and we need to redouble our efforts with elected mayors and new transport infrastructure. In my view, once both parties have determined who their leader should be, we should then get on and build a new runway in the south-east of England, because we cannot be open to the world if we cannot fly there.

Fifthly and finally, while we must seek with our European neighbours the best possible terms of trade in goods and services, including financial services, now is the time also to redouble our efforts to promote trade with the rest of the world. I have spoken to my US counterparts. Later this month, I will be travelling to China to build on that important new partnership.

To conclude, this is a blueprint to meet our economic challenge. Nothing positive will come from looking back in anger. We must lift our eyes to the horizon ahead and make the best of what is to come.

[John McDonnell]

I would like to thank the Chancellor for his response. I think it is important that, as in the Opposition day debate last week, we set the tone of our response at the level of the national interest and take care to avoid making any statements that would adversely impact on fragile markets.

I have to say, however, that a lack of planning for a leave vote is becoming evident across all policy areas. Instead of a clear plan of action, we have so far had a series of ad hoc statements and announcements, including the grateful abandonment of the “Brexit Budget”, which was to increase the sharply the level of austerity being applied. The fiscal surplus target has been abandoned and today the Chancellor has announced planned reductions in the headline rate of corporation tax.

Rather than ad hoc announcements, we need a framework for economic decision making. Previously, the Government sought to do that with the fiscal charter, which was passed into law last autumn despite Labour opposition. May I ask the Chancellor now, since he is no longer pursuing the fiscal surplus target, if the charter is also to be abandoned? Will he be putting a motion to repeal the law before this House? Will he be seeking to place a new fiscal rule on a similar basis in legislation?

The Chancellor has announced today that he will redouble his efforts to invest in the northern powerhouse. Of course the details of that are to be decided, but will he tell the House when he expects to have a detailed programme of investment? What scale of investment should we expect? What areas, and how focused will that investment be? Does he now agree with Labour Members, and the Secretary of State for Work and Pensions, that a major programme of Government investment is urgently needed? Does he agree with the Home Secretary’s decision not to give a guarantee to existing EU nationals living and working in this country? What will be the economic effects of that? Will he therefore give a more detailed statement to the House on the economic consequences of this decision?

The Chancellor has promised that, while seeking to boost investment, he will be maintaining

“the consolidation that we put in place last year.”

May I ask him for some clarification on this point? Is he now ruling out any further or additional consolidation in light of the leave vote? Regarding the planned cuts to the headline rate of corporation tax, the news has not been well-received by our international partners. Pascal Lamy of the World Trade Organisation has accused the Chancellor of “tax dumping”. He also highlights the risk to future negotiations with the EU.

I want to raise three critical questions on this issue. The Chancellor’s Budget this year suggested that his one percentage point reduction in the headline corporation tax rate will reduce expected revenues by about £1 billion. Does the Chancellor still hold to that estimate? How will the Chancellor pay for any losses in tax revenues from the proposed corporation tax cuts? Who will pay? The evidence from existing cuts to corporation tax is not favourable. Despite year-on-year reductions in the headline rate to the lowest rate in the G7, business investment remains low by G7 standards and has now fallen for two consecutive quarters.

Businesses are sitting on a cash pile of at least £500 billion yet are failing to invest. What assessment has the Chancellor made that a dramatic reduction in the corporation tax rate will have the desired effect on business investment, given the absence of evidence so far?

Finally, we know that the circumstances after the leave vote will be trying and that major forecasters now anticipate the UK possibly entering a recession over the next year. The Chancellor’s fiscal approach has failed and has been steadily abandoned. In the interests of the country, will he now commit to adopting a fiscal approach that allows the flexibility to invest while maintaining fiscal discipline, as the Opposition and now some on his own side are urging?

[Mr Osborne]

When I became Chancellor, there was a question mark over Britain’s ability to pay its way in the world, and that was reflected in our bond yields, but because of our determined effort over the last six years, when we have hit an economic shock, as we have done in the last two weeks, the response has been a fall in bond yields—because people have confidence in the UK.

First on planning, extensive contingency plans were in place to deal with financial market disorder as a result of a leave vote, and the fact that we are not debating that today shows that those plans have been effective—we remain vigilant, but those plans were in place. Secondly, we must now decide on the new model of our relationship with the EU. That was not on the ballot paper and has to be a decision for Parliament. We set out the options for the country in advance of the referendum debate, and now we must have that discussion.

Thirdly on planning, the fiscal charter specifically provides for the impact of a negative shock, which is what we have had, and as a result the rules of the charter apply. As I say, it is unlikely that the surplus will be achieved in 2019-20—although that will be for the OBR formally to assess—and it will then be up to the Chancellor to produce new plans to restore the public finances to surplus and for Parliament to vote on them. We thought about that in advance: it is in the charter that the House voted on.

The hon. Gentleman talked about investment. On Friday, I met the Labour leader of Manchester City Council, Richard Leese. We talked about how we could redouble our efforts to invest in transport across the Pennines and about devolved powers for mayors and the like. That will be part of our response to the disfranchisement that too many of our citizens in the midlands and the north of England have clearly felt.

Finally, the hon. Gentleman also asked about business confidence and the corporation tax cuts. Not only have our corporation tax cuts given us the lowest corporation tax rate of all the advanced economies of the world, but we have seen a 20% increase in receipts from corporation tax—because businesses are coming to this country, growing their businesses in this country and employing 2 million people. The best response we can send to the world to show that we are open for business is to go on reducing business tax.