Finance (No. 2) Bill

Lord Desai Excerpts

Thursday 26th March 2015 Lords Chamber

[Lord Desai (Lab)]

My Lords, this is the fifth and last time that we are going to discuss a Finance Bill and all that one can say is that, so far at least, the macroeconomic strategy that the Labour Party had laid down before it went out of office has been achieved by the Conservative Party. We are grateful for that. We said that the deficit should be halved. Given the greater ambition of the Chancellor, at least he has managed to achieve half of the job.

I want to concentrate in this debate on lots of things which have not been done. I do so not from a partisan basis but from the point of view of economics. We continue to tax income rather than consumption, and when we tax income we make far too many small distinctions—between married people and this and that—so that the whole thing becomes very complicated. Again and again, we have tried to simplify the tax system. While the raising of the threshold has been very welcome, it really needs thinking out whether we should not just try to find a suitable definition of consumption. I think that would be easier to define than income, which at the higher levels gets to be a very tricky concept. Lots and lots of tax advisers make a fortune out of trying to game the system, so we should think of doing a consumption tax.

To that extent, I am disappointed that the Chancellor, who is a very innovative person, has not put his mind to this sort of thing. Whoever the Chancellor is next time, they may do that. The same argument extends to corporation tax. Again and again, we tax profits, not resource consumption. The important thing is to tax not achievements but expenditure and the consumption of resources, if we could find a way of taxing resource consumption.

My noble friend Lord Haskel talked about productivity. Another aspect of productivity is asking, “Are you achieving an efficient input/output combination? Are you achieving productivity in terms of the non-labour input as well as the labour input in the way that you conduct business?”. We ought to give incentives in such a way that companies economise on resource use rather than just taxing profits. Again, that is an open question for the future; I do not know whether we will be able to achieve it.

Going further along the line, if we can decide early on that whatever we do should encourage work and employment, we ought then to go on to look at the national insurance contribution. I have never understood why we still have that tax. Again and again, promises have been made to merge it with income tax or do something drastic, but we have not had that. In a sense we are stuck in a rut, because it is easier to make marginal changes to the existing tax structure than to review the tax structure itself. I wanted to make that general comment.

One of the things that we are about to face is that the developed economies, which have had the good fortune to grow well and easily over the past 50 years, are about to enter a low-growth economy. Good times are no longer going to be around as they were before. In that sort of situation, we ought to be much more vigilant about achieving growth-enhancing things to the extent that we can. Ultimately, it will be the human resource, the productivity of labour and the way in which we use our resources that will determine the marginal difference between having, as it were, 2% growth or 3% growth.

We need to rejig our thinking. Growth is no longer going to be automatic and natural. We are going to face severe headwinds unless we rethink our economic system. To that extent, while much may have been achieved in the last five years, we have not had time to rethink our economic system. It is about time that we did that, in which case we would not tax income but tax consumption, not tax profits but tax resource use, not tax labour but reward work and, further along, try to find as many other things as possible that could be growth enhancing. We need Budgets that are genuinely growth enhancing and not just tax concessions to businesses. We need better than this.

[Lord Marlesford (Con)]

Before the noble Lord sits down, he raised the interesting question of the expenditure tax. He will remember much better than I do Lord Kaldor’s famous book on the expenditure tax, probably in the 1960s or even earlier. The big problem with the expenditure tax, and I just wonder whether he has taken this into account, was the taxation of the benefit of the ownership of capital. Nicholas Kaldor said that it was necessary to attribute a value to capital as part of the formula under which expenditure could be determined. In other words, the return on capital was part of the income, and then at the end of the year it would be more expenditure that would be counted in. This of course raised the whole problem of the taxation of capital and having a wealth tax, and it foundered on that basis. Does the noble Lord have any view on how he would tackle that problem?

[Lord Desai]

Basically, I would be much more radical than even Lord Kaldor. It is because you are trying to tax income, capital or income from capital that a variety of complications arise in our tax system and our tax code gets ever more elaborate. Beyond the small range of PAYE-type incomes, income is not definable conceptually in economics. Therefore, when you try to tax something called income, you get into complications because people can find ways of redefining whatever it is as not income. The whole approach is really to go down the expenditure tax route—purely expenditure—and not to worry about income of other kinds. If people are deriving income from capital, that is fine. What we would want to know is what expenses they incur in trying to do that, and tax that.

Especially now when we are in a very different dispensation than we have been used to for the past 50 years, we will have to be radical about rethinking our taxation. I would even go further and not worry about considerations like that.