Covid-19: Economic Recovery

Lord Carrington of Fulham Excerpts

Tuesday 20th April 2021 Grand Committee

[Lord Carrington of Fulham (Con) [V]]

My Lords, I start by bringing to your Lordships’ attention my interests as in the register.

Some businesses have undoubtedly done very well in the past 18 months, but many have seen their markets disappear and have struggled to pay their bills, even after all the support quite rightly provided by the taxpayer. Some companies will bounce back quickly, allowing them to protect jobs and invest for the future. However, most will find the next few years very tough indeed. They will be forced to retrench to survive while building back their capital base and, in particular, their working capital. As in the old cliché, cash will be king, and preserving cash will be the only way to survive.

These companies will need all the help they can get. Otherwise, jobs and investment will go, then productivity will crash. It will not be just small businesses that struggle; it will be firms of all sizes, with some industries hit worse than others. Help will have to come from banks and capital markets—even from lawyers, accountants and, improbably, consultants. The Government also have a big role to play: as they have during the pandemic, so they will during the recovery. The Treasury will have to continue pretty much what it has been doing already, by reducing the tax take from such struggling businesses through both tax holidays and tax delays. Of course, getting the country’s borrowing down is also vital. Timing is everything: if we get businesses growing and productivity rising, public sector borrowing will come down as night follows day.

The key is to get business cash flow growing fast. This is the time to stabilise or reduce taxes, not raise them. Frankly, it is pretty strange to plan to raise corporation tax ahead of the recovery. In terms of company planning, a proposed tax increase is the same as a present tax take. I hope that the Government will review the proposal to raise corporation tax and postpone or cancel it if it looks as though it will be damaging to corporate recovery.

However, as the pandemic has caused challenges, it gifts opportunities as well. If we want to reduce tax on business—as I think we should—now is the time for some much-needed reforms of our tax system. Let us start with business rates, an outdated tax unrelated to profit or turnover and a fixed, unavoidable cost for profitable and unprofitable businesses alike. It should be replaced with a tax related to a company’s cash flow.

Then there is national insurance and income tax. Let us combine them. I fully understand the cosmetic reasons for not doing so, but the objection is just cosmetic. Both are taxes on wages so combining them will raise the same amount of tax but allow for simplification of the tax system. This will be hugely beneficial to both employees and employers. While we are at it, we should get rid of employers’ national insurance contributions. They are a pernicious tax on employment at a time when we need to give employers every encouragement to take on and retain more staff.

Finally, I want to say something about clever financing schemes. Factoring invoices or, as it now seems to be branded, supply-chain financing, has a long and successful history, but it was never without risk. Indeed, it is always riskier than bank lending, which is why it has always been more expensive, but it is a banking risk that needs to be regulated by the bank regulator. To then combine factoring with the statistical manipulations that led to the subprime crash of 2008 was always going to end in tears. I suggest that if Her Majesty’s Government want to make their buying processes more efficient, they do that by reforming their procurement and bill-paying procedures. If this still, bizarrely, need to be financed externally rather than through the Debt Management Office, it can safely be done only through the regulated banking system.

The next few years will be very challenging for businesses of all sizes. Raising taxes and continuing with an unreformed tax system will add to industry’s problems in exporting and providing employment and will delay our recovery from this pandemic.