Employment: Tax Policy

Lord Livermore Excerpts

Thursday 31st October 2024 Grand Committee

[Baroness Vere of Norbiton (Con)]

My Lords, it is a great pleasure to follow the noble Lord, Lord Razzall. I agreed with some of what he had to say, which is a bonus for me today, so I am enormously grateful for his contribution. I am also grateful to my friend Lord Leigh for tabling this debate. Who knew that it was going to be so well timed? Like many others, I too will fall into the trap of focusing on the Budget because it is top of mind at the moment, and not in a good way.

I have to say, from listening to my noble friend Lord Leigh’s opening remarks, that he brings extraordinary expertise of commerce and the private sector, as of course do many other speakers in this short debate today, notably my noble friend Lord Petitgas and of course the noble Lord, Lord Bilimoria. Unfortunately, that is more than can be said of the current Chancellor and indeed the wider Cabinet—I think some analysis has been done, and private sector experience is somewhat lacking—so I hope that the suggestion made by the noble Lord, Lord Davies of Brixton, that some of the Labour Peers are promoted to positions of greatness such that they can share their private sector expertise, is taken up. It is definitely the case that there is private sector expertise on the Labour Benches; it just does not seem to have got up to the top levels.

Yesterday the new Labour Government raised the tax burden to the highest level in our country’s history. Despite making an outright promise not to raise taxes on people, they raised taxes on working people. In hiking the employers’ national insurance contributions—NICs for short—to raise a headline figure of £25 billion, the Government have committed a straightforward breach, according to the IFS, of their manifesto. Furthermore, there are numerous examples of the now Prime Minister and Chancellor promising before the election not to hike taxes. Can the Minister give the Committee any insight into how the discussions went when drafting the section of the manifesto about no increase in taxes on working people? Was it a cunning sleight of hand that left the words “national insurance contributions” unencumbered by the “employees’” qualifier, or was it just incompetence?

The noble Lord, Lord Bilimoria, made an excellent contribution. I appreciate his comments about the last Government. As a Conservative, I can say that no one wants to see taxes go up—it is just not in our DNA.

I remember many debates when I was a Treasury Minister and the noble Lord, Lord Livermore, in opposition, would slam me for tax rises. I was going to come up with various quotes today about the number of times he has previously slammed me for tax rises, but I thought that would be really cruel.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

Could the noble Baroness not be bothered to do so?

[Baroness Vere of Norbiton (Con)]

No; my speech is already six minutes long, but I will do it next time.

Of course, at that time, we were dealing with the pandemic and its fallout, and the fallout from the energy price support we had given. Therefore, we had a very firm footing on which to raise taxes.

The Minister will try to bring out his fictitious black hole; I sincerely hope that he will not, given what the OBR has now said about it—I am starting to feel a bit embarrassed for him. Plainly and simply, promises have been broken, and we need to now think about what we can do to ensure growth in the private sector. The views of the private sector on this are now well known. Can the Minister share with me whether anyone in the private sector thinks the rise in employer NI is a good idea?

I want also to look at what the OBR has to say in its economic and fiscal outlook. My noble friend Lord Elliott is right. It is like beer, which is going down by 1p in a pint—that is huge, is it not?—and wine: the more you tax it, the less you get. The noble Lord, Lord Razzall, was very helpful in this regard. If you tax the film and creative industries less, they grow more. Unfortunately, we have seen taxes go up, so—surprise, surprise—the labour supply is forecast to come down by 0.2%. I do not know whether the Minister is happy with this, but I wonder what the Government will do to mitigate for those people who would otherwise have been in a good job.

But it is worse than that. Real earnings will then stall in 2026 and 2027, as firms rebuild their margins and pass on the costs of higher employer NICs. Real wages are not expected to resume growing in line with productivity until beyond the forecast horizon. What interventions will the Minister set out in terms of increasing productivity such that we can get some sort of real wage growth going?

It is not just the OBR that has an issue here; it is also HMRC, which reflects that 940,000 employers will lose an average of £800 per employee. This is not good news for employment, and it is not good news for growth. Labour’s No. 1 mission is to secure the highest sustained growth in the G7. I am an optimist, but this Budget literally has the forecasts for growth coming down. I cannot see how that is compatible with Labour’s No. 1 mission.

The noble Lord, Lord Razzall, asked for alternatives. I will give him two that are still on the table. First, if we increased productivity to pre-pandemic levels, we would get £20 billion a year. Secondly, reforms to adult welfare would save £34 billion a year. That was our plan; we did have a plan but, unfortunately, we were not able to put it in place.

[Lord Livermore (Lab)]

My Lords, I congratulate the noble Lord, Lord Leigh of Hurley, on securing this debate and on his opening speech. I thank all noble Lords for their contributions.

The manifesto this Government were elected on promised to invest in our public services and prioritise working people. Keeping those promises was at the core of yesterday’s Budget. Many noble Lords focused today on specific tax decisions made in the Budget, and the impact and analysis of those decisions as set out by the independent Office for Budget Responsibility. It may be helpful to noble Lords if I begin by explaining the background to the decisions we made.

First, in July, as the noble Lord, Lord Leigh of Hurley, kindly mentioned, the Chancellor exposed a £22 billion black hole at the heart of the previous Government’s plans—a series of promises they made but had no money to deliver. This Government yesterday published a line-by-line breakdown of that £22 billion black hole, and the OBR published its own review of the circumstances surrounding the Spring Budget forecast.

For the benefit of the noble Baroness, Lady Vere, the OBR’s report says that the previous Government “did not provide” them “with all the information” that was available and that, had the OBR known about these

“undisclosed … pressures that have since come to light”,

its spring forecast would have been “materially different”.

Secondly, the country inherited not just broken public finances but broken public services too, with NHS waiting lists at record levels, schools literally crumbling, and rivers filled with waste. Yet, since 2021, there had been no spending review—no detailed plans for departmental spending set out beyond this year.

Thirdly, the previous Government had failed to budget for costs which they knew would materialise, including funding for compensation schemes for the infected blood scandal and the Post Office Horizon scandal.

Put together, these three things—the black hole in our public finances, the compensation payments which they did not fund and their failure to assess the scale of the challenges facing our public services—meant that, in order to meet our first fiscal rule, yesterday’s Budget needed to raise taxes by £40 billion.

So, we had in yesterday’s Budget some very difficult decisions to take in order to rebuild our public finances and our public services. In doing so, we made an important choice: to keep every single commitment we made on tax in our manifesto. We did not raise taxes on working people—their income tax, their national insurance or VAT—and we were able to go further, by not increasing fuel duty and by not extending the last Government’s freeze of income tax thresholds, which hit working people so hard, as the noble Lord, Lord Bilimoria, mentioned.

Of course, in the circumstances I describe, any responsible Chancellor would need to take difficult decisions to raise the revenue required to fund our public services and to repair our public finances. So, in yesterday’s Budget, the Chancellor announced an increase in employers’ national insurance contributions by 1.2 percentage points to 15% from April, and that the secondary threshold would be reduced from £9,100 per year to £5,000.

We know that it is particularly important to protect our smallest companies, so we also increased the employment allowance from £5,000 to £10,500, meaning that 865,000 employers will not pay any national insurance at all next year, and over 1 million will pay the same or less than they did previously. In the Budget, we also increased the lower rate of capital gains tax from 10% to 18%, and the higher rate from 20% to 24%, which means that the UK will continue to have the lowest capital gains tax rate of any European G7 country.

Alongside these changes to the headline rates of capital gains tax, we are also maintaining the lifetime limit for business asset disposal relief at £1 million, to encourage entrepreneurs to invest in their businesses. Business asset disposal relief will remain at 10% this year before rising to 14% in April and 18% from 2026-27, maintaining a significant gap compared with the higher rate of capital gains tax.

We also published a Corporate Tax Roadmap, which confirms our commitment to cap the rate of corporation tax at 25%—the lowest in the G7—for the duration of this Parliament, while maintaining full expensing and the £1 million annual investment allowance and keeping the current rates for research and development reliefs to drive innovation.

The Budget also set out additional tax measures, including reforming inheritance tax and measures on tobacco duty, vehicle excise duty, air passenger duty and alcohol duty.

We also delivered on our other commitments, which some noble Lords addressed during this debate: to abolish the non-dom tax regime and replace it with a new residence-based scheme; a new approach to the way carried interest is taxed; reforms to the stamp duty land surcharge tax for second homes, and to the energy profits levy; and we introduced VAT on private school fees. In total, these changes—alongside our measures to tackle tax avoidance—will raise over £9 billion to support our public services and restore our public finances.

We are asking businesses to contribute more, and the Chancellor acknowledged in her speech that the impacts of this measure will be felt beyond businesses, too, as the OBR has set out and as noble Lords raised in today’s debate. In addition, as my noble friend Lord Davies of Brixton observed, the employment rate will increase by 1.2 million over the forecast. These are, however, very difficult choices, and not ones that the Chancellor took lightly. But, in the circumstances we inherited, we believe they are the right choices to make.

Several noble Lords mentioned growth, and it was of course welcome that the OBR was so clear: this Budget will permanently increase the supply capacity of the economy, boosting long-term growth. However, there is of course much more to do.

It is important that we also consider in this debate the purpose of the difficult decisions we have taken on tax, which enable us not just to repair the public finances but to begin to rebuild our public services. It is worth noting that, in this debate, some noble Lords spoke in favour of some of this investment, but without supporting the taxation necessary to fund it. Because of the difficult decisions the Chancellor has taken on tax, day-to-day spending from 2024-25 onwards will grow by 1.5% in real terms, while total departmental spending, including capital spending, will grow by 1.7% in real terms.

In this, the first phase of the spending review, the Chancellor has prioritised day-to-day funding to deliver on our manifesto commitments. We will increase the core schools budget by £2.3 billion next year to support our pledge to hire thousands more teachers into key subjects; to triple investment in breakfast clubs to put them into thousands of schools; and to provide an additional £300 million to our further education colleges, while taking steps to transform the apprenticeship levy into a more flexible growth and skills levy.

We will deliver a real-terms funding increase for local government next year, including £1.3 billion of additional grant funding to deliver essential services and £200 million to tackle homelessness and rough sleeping. We are also providing funding to support public services and drive growth across Scotland, Wales and Northern Ireland, with the largest real-terms funding settlement since devolution delivering an additional £3.4 billion to the Scottish Government, £1.7 billion to the Welsh Government and £1.5 billion to the Northern Ireland Executive in 2025-26.

Finally, we are fixing the NHS after years of neglect. Because of the difficult decisions the Chancellor has taken on tax, which we are debating today, and because of our commitment to a new investment rule, yesterday’s Budget announced that we are now able to provide a £22.6 billion increase in the NHS budget over two years. That is the largest real-terms growth in NHS spending outside of Covid years since 2010. Many NHS buildings were left by the previous Government in a state of disrepair, so we will provide £1 billion of health capital investment next year to address the backlog of repairs and upgrades across the NHS estate. To increase capacity for tens of thousands more procedures next year, we are providing a further £1.5 billion for new beds in hospitals across the country and more than 1 million additional diagnostic tests, as well as new surgical hubs and diagnostic centres, so that the people waiting for treatment can get it as quickly as possible. Because of this record injection of funding, the thousands of additional beds that we will secure and the reforms that we are delivering in our NHS, we can now begin to bring waiting lists down more quickly and move towards our target of an 18-week waiting time by delivering our manifesto commitment for 40,000 extra elective appointments a week.

The difficult decisions on tax that we made in yesterday’s Budget, which have been debated here today, were made for a purpose. We made choices to rebuild the public finances and our public services, to invest in the national interest and to keep our manifesto commitment to prioritising working people. It is perfectly possible to make different choices, of course, but noble Lords should keep in mind that, at the last election, the country voted for change. They did not reject the previous Government so overwhelmingly because they thought the choices they had made were the right ones; they gave this Government a mandate to fix the foundations of our economy and to deliver the change they voted for.

As the noble Lord, Lord Razzall, observed, we did not hear very much about any credible alternative during this debate. We believe that any responsible Chancellor would have had to take action in the circumstances we faced, but, of course, it was possible to choose not to act. Some noble Lords may think that it would have been better to choose the path of irresponsibility and ignore the problems in the public finances altogether. If that is their choice, they should say so. I believe that the choices the Chancellor set out at the Budget are the right choices for our country, to repair our public finances, to protect working people, to fix our NHS and to rebuild Britain.

Other choices could have been made, of course, but let me be clear: not making the choices that we have made would make it impossible to protect working people; not funding public services in the way that we have would mean cuts to schools and hospitals; not supporting our investment rule would mean delaying or cancelling thousands of projects that drive growth across our country. We have made our choices—the only responsible choices—to protect working people, to fix the foundations of our economy and to invest in Britain’s future.

[Baroness Vere of Norbiton (Con)]

Before the Minister sits down, if I may say so—he has a minute left—I am concerned that he is answering the wrong exam question, as he did not seem to mention employment. However, he did mention the NHS and the £22 billion for it. How much of that sum is the RDEL compensation for the public sector, which will not have to pay employers NI?

Also, I would like the Minister to write, if possible, to cover the question from my noble friend Lord Petitgas about any sector-by-sector analysis of the impact of this tax policy on employment.

[Lord Livermore (Lab)]

I am very happy to write. I did mention employment: I set out that there would be an increase of 1.2 million over the course of the forecast. That is the question I was asked.

Committee adjourned at 4.55 pm.