Employment: Tax Policy

Lord Bilimoria Excerpts

Thursday 31st October 2024 Grand Committee

[Lord Bilimoria (CB)]

My Lords, the Government, the Chancellor and the Prime Minister keep talking about growth. The investment summit at the Guildhall had a huge sign saying “Growth”. But, to do that, the private sector has to be supported to grow. It is private sector growth that creates the jobs that pay for the taxes that pay for public services—no growth; no taxes. If you put up taxes, you get no growth. That is the paradox.

I thank the noble Lord, Lord Leigh, for his excellent opening speech. Taxes on employment generate £454.8 billion. That accounts for 45% of total public sector receipts. It is huge. Employment tax revenues represent almost 17% of UK GDP. For a married worker with two children earning an average salary, the UK has a tax wedge of 27%, above the OECD average of 25.7%. Higher employment taxes can discourage firms from hiring, reduce wages and affect workers’ decisions to enter the workforce or seek higher-paid jobs. Corporate and consumption taxes also influence that. Employment corporate taxes can deter investments in jobs. I am sorry but the previous Government have to be blamed for raising taxes to their highest level in 70 years and, in particular, putting up corporation tax from 19% to 25%. That was a huge mistake and should not have been done.

Consumption taxes create a wedge affecting labour, demand and supply. Higher taxation is associated with reduced labour supply, and studies show that a 1% rise in tax correlates to a 0.5% drop in hours worked. Of the 17 OECD studies, only five found no significant negative impact of taxes on unemployment. The remaining studies indicate that higher labour taxes increase unemployment levels. A 10% reduction in the tax wedge could lower equilibrium unemployment by 2.8% and raise the employment rate by 3.7%. That is what we are talking about. The fiscal drag that the previous Government put in place until 2028 is also hugely damaging, affecting 7 million tax payers.

The Labour Party has promised to maintain corporation tax at 25% and not raise income tax, employees’ NI or VAT. That is all great, but the noble Lord, Lord Leigh, mentioned the hugely damaging effect of the taxes on non-doms and the removal of the non-dom regime. Inheritance tax reforms will drive investment away from this country. I know many people who have already left. Some 75,000 non-doms pay £9 billion of tax; they spend and invest in this country. Those people are mobile and that money will fly.

The increase of capital gains tax from 20% to 24% was not as bad as we thought, but the elephant in the room is the £40 billion of tax increases. The OBR warned that this could weaken long-term growth in the UK economy. Sure enough, the forecasts for growth do not even reach 2% in the years ahead, at about 1.5% or 1.6%. Increasing national insurance by 1.2% to 15%, raising approximately £25 billion, is a tax on jobs. I agree with the noble Lord, Lord Davies, that if you spend more and increase infrastructure then that should help productivity, but our public spending will reach 44% of GDP by the end of the decade, funded by tax and borrowing. Businesses are bearing the brunt of this £40 billion tax increase. The threshold of NI going down from £9,100 to £5,000 will bring many more people in as well. The business rates discount put in place by the previous Government of 75%, which has really helped, is going down to 40%. How many pubs and restaurants and how much of the high street will be able to take that?

On top of that, we have a £5 billion cost on the impact of employment regulation, and we have flexible employment, which is a huge advantage over a country such as France. If you make our workforce less flexible, it has a cost to it, and it makes us less attractive for investment. Inflation is now predicted to go up to 2.5% or 2.6%.

To conclude, since 2008, over those 16 years of financial crisis, austerity, the Covid pandemic, the Ukraine war, with inflation up to 11%, energy inflation, the cost of living crisis, 7 October and the tragedy of that day and the tragedy since, and with the uncertainty in every direction you look in the world, how much more can business put up with? How much can business deal with? How resilient can our businesses be? As the noble Lord, Lord Leigh, said, 80% of the jobs are provided by it, and then there are the 5 million SMEs and the jobs that they provide. How can we carry on and deal with just one challenge after another? Then we get this Halloween Budget, burdening business with higher taxes. This is a tax, borrow and spend Budget, not a growth Budget. It is not a pro-business Budget or a pro-entrepreneurship Budget. The Government’s job is to be a catalyst and create the environment for businesses and entrepreneurship to flourish and grow. The Budget does exactly the opposite.