Lord Sassoon
Main Page: Lord Sassoon (Conservative - Life peer)
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I beg to move that the Bill be now read a second time.
This Bill follows the emergency Budget and puts in place many of the measures necessary to gain control of the public finances and strengthen the economy. Despite its brevity, this Bill makes significant and necessary changes to our tax system—changes that will secure fiscal credibility, changes that will promote free enterprise and changes that will promote fairness, especially for the most vulnerable in society.
Our Budget was necessarily a tough Budget, but it was also a fair Budget. It set out the decisive and credible plan that is necessary to deal with the record deficit that this Government inherited. We currently have the largest budget deficit in Europe, with the single exception of Ireland, and we are borrowing one pound for every four we spend. Our deficit reduction plan will pave the way for sustainable, private-sector led growth, keep interest rates lower for longer and help to support jobs in the private sector. I cannot put it better than the noble Lord, Lord Myners, put it in this House on 8 June, when he said:
“There is nothing progressive about a Government who consistently spend more than they can raise in taxation, and certainly nothing progressive that endows generations to come with the liabilities incurred by the current generation. There will need to be significant cuts in public expenditure”.
The noble Lord went on to say:
“The Government cannot create jobs. The Government can create an environment that is conducive to the creation of jobs, but they cannot create jobs and we mislead ourselves if we believe they can”.—[Official Report, 8/6/10; col. 625.]
Earlier this month, in its report on the UK, the OECD said:
“The comprehensive budget announced by the government on 22 June was courageous and appropriate. It was an essential starting point. It signals the commitment to provide the necessary degree of fiscal consolidation over the coming years to bring public finances to a sustainable path, while still supporting the recovery”.
Despite containing only nine substantive clauses, the Bill represents a clear change from the past and a new direction of travel. As my honourable friend the Exchequer Secretary said to the other place, it is underpinned by the three principles of responsibility, freedom and fairness. First, the Bill is based on the principle of responsibility. We are taking responsible action to restore our nation’s finances because failure to address the deficit is the greatest economic threat that we face. We have been honest about the scale of the challenge and we have been honest about the actions needed to address it. If we are to bring down the deficit without cutting vital public services, raising valued added tax is an unavoidable choice.
For the first time, we have published within the Budget an analysis of the distributional impacts its measures will have. This shows that fairness underpins the tough choices that the Government have taken to tackle the deficit. It shows that this is a progressive Budget that deals with the deficit fairly: all sections of society will contribute, but the richest pay more than the poorest. We cannot, as some have done, look at the VAT increase in isolation. It is part of a wider package that ensures that the most vulnerable in society are protected. Without tough action on the deficit we risk losing the freedom to protect the services that the most vulnerable rely on.
Our long-term objective remains to increase the income tax personal allowance to £10,000, as set out in the coalition agreement, and we will take steps towards achieving that objective through the rest of this Parliament. Additionally, we have taken steps to increase child tax credit by £150 next year and £60 the following year. As a result of that, the level of child poverty will not increase.
Secondly, the Bill is based on the principle of freedom of enterprise in Britain, the freedom that our private sector so urgently needs in order to thrive and to spearhead a strong and stable recovery. A genuine and long-lasting economic recovery must have its foundations in the private sector. By cutting the corporation tax rate to 27 per cent, the Bill takes the first step towards reversing the decline in the UK’s competitiveness that we have seen over the past decade. As the Budget announced, we will continue to cut the rate of corporation tax by one percentage point every year until it reaches 24 per cent—the lowest rate of any major western economy and the lowest rate that this country has ever known.
The concern has been raised that cutting the main rate of corporation tax would mean that banks do not pay their fair share of taxes. However, I would point to the wider reforms outlined in the Budget, in particular the announcement of a banking levy, which will, in fact, ensure that the banking sector makes a greater contribution, one that outweighs the benefit that it receives from lower corporation tax rates. Banks will pay at least £2 billion more in tax as a consequence of these proposals.
Concerns were also raised in another place that the banks will not be deterred from pursuing risky behaviour. This is not the case: we have taken a targeted approach that preserves competitiveness, while ensuring that those who indulge in risky behaviour pay an appropriate premium for it. Tax competitiveness is good for employment and society as a whole and the bank levy allows us to be competitive while ensuring appropriate tax treatment for those activities that pose the greatest threat.
The reduction in the main rate of corporation tax is just one part of a wider package to build a private sector led recovery. Instead of increasing the small profits rate by 1 per cent, as planned by the previous Government, in next year’s Bill we will cut it to 20 per cent, benefiting some 850,000 companies from April 2011. We are also increasing the threshold at which employers start to pay national insurance contributions, and the Budget included a wider package of support for small businesses.
As we cut the rate of corporation tax we will also reduce allowances. The Budget announced a reduction in the writing-down value of plant and machinery allowances to 18 per cent and a reduction in the annual investment allowance to £25,000. However, allowances will remain broadly in line with depreciation and the annual investment allowance will still cover the annual qualifying expenditure of 95 per cent of businesses. Furthermore, by reducing the main rate of corporation tax in 2011 and changing allowances only in 2012, we are giving companies a timing benefit, which will form part of the £13 billion additional investment that we expect as a result of these changes.
Thirdly, I come to the principle of fairness in the Bill. Clause 2 increases the rate of capital gains tax for higher-rate taxpayers to 28 per cent. This progressive change will substantially reduce the incentive for individuals to disguise their income as a return on capital and will ensure that the appropriate rate of taxation is paid. This is fair in itself, but we have also ensured protection for those on more modest incomes. Consequently, those who pay only the basic rate of income tax will carry on paying capital gains tax at 18 per cent. In addition, this increase in the rate will help to fund the increases in income tax personal allowances that I mentioned. Those who have the most will help to lift more of those who earn the least out of income tax altogether. The optimum rate of capital gains tax has been debated at length in another place. Treasury analysis has shown that 28 per cent is the revenue-maximising level and is therefore the appropriate rate. A different value would reduce revenues, either by increasing the incentive to shift from income to capital or by reducing the incentive to invest in the economy.
Tax avoidance has also been a significant issue during the passage of the Bill. It was raised in reference to corporation tax and capital gains tax and is the target of Clauses 8 and 9, which together protect around £200 million of revenue per annum. The Government are absolutely committed to tackling robustly avoidance and evasion. We must continue to take the necessary steps to protect the Exchequer and to maintain fairness in the tax system. In the future, we want to take a more strategic approach to tax avoidance by protecting against such opportunities when reforming policy and by seeking to reduce complexity within the tax system. Against this background, we are considering whether a general anti-avoidance rule should form one element of those defences and we will seek the views of interested parties on whether there is a case for this approach.
The Government have inherited plans to limit tax relief on pension saving for the wealthiest. Under the approach of the Finance Act 2010, individuals on the highest incomes who are able to make very large pension contributions could have continued to receive pensions tax relief worth up to £51,000 every year. We have concerns about both the complexity and the fairness of the previous Government’s approach but, given the state of the public finances, we cannot ignore the £4 billion of revenue that this policy was set to raise. We are committed to protecting the public finances and we will put forward an alternative measure that will raise no less revenue than the existing plans. We are looking at an approach where annual tax relief available will be restricted to less than half that available under the previous Government’s plan, which will significantly curtail the ability of the super-rich to benefit from pensions tax relief. We want to ensure that this is a fair and effective approach and will be talking to employers, pension schemes and other interested parties to determine the design of an alternative scheme. It was requested in another place that the Government publish an analysis of the impacts of the alternative measure that we establish. I can confirm that the Government, as a part of our commitment to transparency, will publish a range of assessments alongside the legislation, including the impact on the economy and the impacts of the policy, as suggested.
This is a progressive Budget. It ensures that every part of society makes a contribution to deficit reduction, while protecting the most vulnerable, including pensioners. In fact, the Budget included a number of measures to support pensioners, not least our triple lock guaranteeing an annual increase in the state pension in line with earnings, prices or a 2.5 per cent increase, whichever is highest, to the benefit of 11 million pensioners across the country.
Lord Lea of Crondall
Is the noble Lord suggesting that inequality in Britain will be reduced by this Budget?
Lord Sassoon
My Lords, as I have already said, the Budget document sets out transparently for the first time tables which have never been published before and indicate the effect on different decile income bands of the population. These show that the Budget is progressive in its effect.
Continuing on the theme of pensions, the Government will enable people in retirement to make more flexible use of their pension savings. We intend to end from April 2011 the obligation to annuitise by the age of 75. Last week we launched a consultation on the detail of this change. The Bill therefore provides interim measures which delay this requirement until an individual has reached the age of 77, so that people turning 75 on or after the day of the Budget will not be required to annuitise before the new system is introduced in next year’s Finance Bill.
To conclude, the Finance Bill is founded on the principles of responsibility, freedom of enterprise and fairness, and is a vital part of implementing the changes to the tax system set out in the Budget. I look forward to hearing this afternoon’s speeches. In particular, I will listen intently to the maiden speeches of my noble friends Lady Browning and Lord Spicer, who bring many years’ experience of scrutinising Finance Bills in the other place. I commend the Bill to the House.