Economy: Budget Statement

Lord Davies of Stamford Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, I endorse the remarks of the noble Lord, Lord Higgins, about the extraordinary leaks of this Budget, which was more or less published verbatim before the Budget Statement. I do not need to repeat those remarks because everyone heard them, but I thoroughly agree with them. If the Minister would be so kind, would he tell the House clearly whether the leaks by the official referred to by the Financial Times and other papers were authorised by Ministers or, if not, whether the Treasury is undertaking an inquiry into them with a view to stopping such scandalous behaviour in future?

I was shocked, as I think was the whole country, by the extraordinary decision of this Government, when for the first time they had an opportunity to give away some tax breaks, to make the major priority those people earning over £150,000 a year and paying tax at 50 per cent. It is widely regarded as extraordinary, at a time when people on modest incomes and on working families tax credit are finding that that tax credit and people’s benefits are being reduced and people are being made redundant wholesale by the public sector—I think of so many sailors, soldiers and airmen whom I knew in the MoD and whom the Government are now making redundant—that the Government should want to give a present of roughly £40,000 to someone who is earning £1 million a year. That is quite obscene and extraordinarily insensitive.

It was almost as obnoxious that the Government should abolish the higher personal tax allowances for older people, which apply only to those whose total income is less than about £25,000—I cannot remember the exact cut-off figure. Surely they are some of the most deserving people in this country; they are retired and have incomes at a modest level that can have been accumulated only through quite brave and self-sacrificial efforts at saving during their careers or small occupational pensions, and now they are being denied their benefit. Again, that is an extraordinary decision, reflecting an extraordinary set of priorities and values.

The Government have got themselves into the most frightful mess about child benefit. They have introduced a taper, which admittedly is slightly better than the previous system where the benefit was simply removed at the point of earning a £40,000 income. Nevertheless, what they have done introduces serious anomalies. Between incomes of £50,000 and £60,000 there will be a high rate of withdrawal of child benefit. I do not know what that rate will be—perhaps the Government can tell me—but it will be a very high effective marginal tax rate. I remind the Government, as they appear to have forgotten, that marginal tax rates are essential in determining incentives to save, to work, to take risks, to start businesses, to work harder, to get promoted or whatever. It is most undesirable for the Government suddenly to introduce a high effective marginal tax rate for this category of earnings.

What is more, the measure leaves the distortion and the great unfairness that if two parents are both working, they can enjoy an income much greater than in the case of a single parent who is working and continue to have the full child benefit. That runs quite counter to all the rhetoric that we heard from the Government about supporting the family and so forth. Perhaps that rhetoric was nothing more than rather insincere PR, which I think is rather a sad position.

I am concerned about the consequence of putting a ceiling on all reliefs. I support the principle quite strongly but I am concerned about the impact on charities. I would be grateful if the Minister could make clear whether in some way this would limit people’s ability to offset their charitable giving against tax; it would be a very unfortunate development if that were the case. There is a complete distinction between individuals who give away their money—they no longer have it and therefore should not be taxed on it—and those taxpayers who invest their money in tax-efficient savings schemes such as SIPPs and EISs. They still continue to own those assets and have the benefit of them, so the position is completely different and in that case it is quite right to impose a ceiling. It is quite wrong to do so if it affects the income of charities and the propensity of people in this country to contribute to them.

On the detailed tax measures, I support in principle the introduction of a general anti-avoidance rule but with an important condition, and I would be greatly reassured if the Minister could assure me that that condition will be applied: that there will be a right for taxpayers to receive timely pre-transaction rulings from HMRC when it wishes to remove the uncertainty that will otherwise be created by this GAAR. The point is that, under present arrangements, if you want to know what your tax liability is, it is sufficient to read the taxes Acts and look at the jurisprudence, or pay someone else a large amount of money to do that for you. Then you know exactly where you stand. Under a general anti-avoidance rule, that will no longer be the case. You might be completely in line with the texts available, which might tell you quite correctly that a certain rate of tax should be applied, but it is then open to HMRC to challenge you and say that actually you should pay a vast increase on that, a penal rate, because the only or substantial reason that you have arranged your affairs in that way was to avoid tax.

In many cases, there may be respectable reasons for a particular structure being adopted. The structure may happen to be tax efficient as well, but there may be other reasons, market reasons, strategic reasons or risk-management reasons—foreign exchange exposure management, for example—which lead you to adopt that course. Complete uncertainty is created as to whether those reasons will prevail and be accepted by HMRC. The disincentive to invest in this country which will be introduced if that uncertainty is allowed to exist will be much greater than the value of several points off corporation tax, desirable as that is in itself.

That uncertainty must be removed. The only way to remove it is to give people a guarantee that they can get a pre-transaction ruling from HMRC, that they can clear with HMRC a particular structure or arrangement in advance in a timely fashion. There should be a limit of 30 days within which HMRC must respond. I do not know whether the Government have in mind such a provision. If they do not, they should look at that urgently. If they do, I hope that they will reassure me that they are already working along those lines. It is not easy, because I am sure that HMRC will find all sorts of arguments why it cannot or should not be done: it does not want the risk or the responsibility; it is afraid of being taken to court; it does not have the people or the time; all the usual bureaucratic reasons. I am convinced that it will have to be forced to do that, but it is important that it is if the GAAR is to come into effect.

Finally, I make some remarks on the macroeconomic management of the Government. It seems to me that their fiscal policy has been far too tight. The fact that they have successively had to revise down their growth rates proves that. The excuse of the sovereign debt crisis in the eurozone is of no use, because that did not begin to affect the markets and confidence until last autumn. It is clear that they got their judgment wrong. It would have been much better to have continued on the general curve of reduction of public expenditure and the deficit which they inherited from the previous Labour Government.

That said, clearly the Monetary Policy Committee takes the same view and thought that it was necessary to do something by way of a monetary boost. Because, at the present rates of interest, it cannot use the traditional interest rate instrument, it has gone for the quantitative easing instrument. I have nothing against that in principle, but it raises two problems: a short-term and a longer-term problem. The short-term problem is that it is not very efficient. You need an awful lot of quantitative easing to get a given amount of credit creation—£200 billion or £300 billion each time. Part of the reason for that is that we are in a deleveraging recession or near recession in which there is not a great propensity on the part of households to take on more debt; they are trying to get rid of their existing debt. Part of the problem is the confidence in the economy at the present time, and part of the problem is that the Government are in contradiction with themselves, because they are trying to impose on banks the new Basel rules for high capital ratios, and that runs against the idea of the banks using that money to leverage a large amount of lending. That is the short-term problem.

Then there is the longer-term problem of what the Government do with all the instruments that they are buying—or the Bank of England, on their behalf, is buying. If they are cancelled, that represents a substantial increase in the money supply, which could be extremely dangerous once the output gap is reduced, narrowed. On the other hand, if the intention is to reverse the transaction, there will be great pressure on the markets, which will of course compete with the gilt issue and the need to renew the considerable amount of government debt in future. It will mean that interest rates are likely to be higher at that stage in the cycle than they otherwise would be, because of the need to reverse the transaction.

I agree with the noble Lord, Lord Higgins, on that. There has been nothing like enough discussion in this House or among the public about the monetary easing by means of quantitative easing. There is all too great a temptation to see this as a free lunch, a cost-free exercise with only benefits attached to it. I should be grateful if the Minister would address those problems in his summing up.

--- Later in debate ---

[Lord Sassoon]

That issue has been the subject of an Urgent Question in another place this afternoon, and the Government have explained their position in an answer there.

I have said that we will stick to our fiscal position. That means that there continue to be tough choices to be made. Some of those tough choices have been highlighted this afternoon. I start with my noble friend Lord Newby, who gave a fair and good analysis of the issues about pensioners and the fair deal that they are getting. However, because the noble Lords, Lord McFall, Lord Myners and Lord Davies of Oldham, and others raised the issue, let me underline it again. The Government are committed to supporting pensioners. The IFS confirmed today that that is indeed the case. Pensioners will get the largest ever rise in the basic state pension this April to £107.45 a week. The Government are protecting pension benefits, including winter fuel payments, free prescriptions and eye tests, free bus travel, free TV licences and, of course, the triple lock on the basic state pension is being introduced. The single-tier state pension will be introduced and has been estimated to be likely to be £140 in current terms. I refute the suggestions that pensioners have been poorly treated. We are all in this together.

My noble friends Lord Fink and Lord Sheikh have quite properly raised the issue of tax transparency. I agree with them on the importance of the new annual statements, which will show everyone who pays tax what they are paying and where the money will be spent across the different categories of expenditure. I am sure that will raise a healthy debate.

On tax reform, I am very confused about where the Opposition stand on the 50p tax rate. Are they really still saying that the Chancellor of the Exchequer should justify the continuation of a tax that is shown to produce next to no revenue for the country and which materially affects our global competitiveness? The noble Lord, Lord Eatwell, quotes approvingly the Institute of Directors, but the main part of the institute’s statement after the Budget called for the tax rate to be reduced to 40p. Is that what the noble Lord, Lord Eatwell, wants? The noble Lord, Lord Wood of Anfield, who is not in his place at the moment, questioned whether the Government had been fully transparent on this. The forestalling number that he was looking for is set out in bold type on page 51 of the Red Book, a complete contrast to what the previous Government did in not even recognising that there was a forestalling problem. The tax raised less than a third of the estimates that they put out. I believe that they are in no position to question the basis on which we have looked at the evidence in coming forward with a 45p rate.

[Lord Davies of Stamford]

How can a 50p tax rate possibly be devastating to our competiveness and at the same time raise no money? If people do not pay it, it will not have any effect on their behaviour.

[Lord Sassoon]

My Lords, the simple fact is that if you talk to businesses around the world about why they are not moving business into this country and are not moving high-earning individuals back to this country, you will find that it is simply because of the disincentive effect of the 50p tax rate. It is entirely consistent that there is a disincentive effect on business decisions, even though the net take is nothing. I listened to what the real businesspeople in this House—the noble Lord, Lord Bilimoria, and my noble friend Lord Fink—said about the damaging effect of high rates of tax. Their voices present the true position.