Budget Resolutions and Economic Situation

Owen Smith Excerpts

Friday 23rd March 2012 Commons Chamber

[Matthew Hancock]

Lord Drayson was an unusually good Labour Minister—I would favourably compare him with almost all the others. The defence strategy does, indeed, recognise the need to take into account the interests of our defence industries. That is an important part of the strategy, but not necessarily always the decisive factor.

Returning to the issue of tax, the Government should give a receipt to taxpayers. My hon. Friend the Member for Ipswich (Ben Gummer)—another great Suffolk man—has pioneered that approach. We as individuals would not spend much money without asking for a receipt in return. For most people, their tax bill is the biggest item of expenditure, so such a receipt would be very important. It would also educate the public on the impact of their taxes.

We also need to know the impact of our taxes for policy making. It is extraordinary that the Labour party ignores the behavioural impact of high taxes. It is hardly surprising that it managed to mess up the public finances so comprehensively if it denies, as the shadow Chancellor does, the impact of high taxes on incentives and the amount of future tax money the Exchequer receives.

Secondly, we need a simple and attractive tax system, especially on corporation tax. All taxes are, eventually, paid by individuals, but it is companies that make so many decisions about where to locate jobs. So although a high corporation tax still falls on individuals, it puts companies off expanding or coming to Britain. By having an attractive corporation tax rate, we can attract companies to this country. Ultimately, the corporation tax would still be paid by UK residents, whether it was paid indirectly involving the companies or in any other way the tax is raised.

[Owen Smith]

If the corporation tax rate has been so effective, will the hon. Gentleman explain why, according to the OBR, the volume of business investment in Britain is set to decrease by 0.7% this year and is down 7% over the past year?

[Matthew Hancock]

I shall give a direct answer to that. When GlaxoSmithKline announced 1,000 jobs and half a billion pounds of investment the day after the Budget, it cited the lower corporation tax rates as a reason for doing so.

[Owen Smith]

rose—

[Matthew Hancock]

I cannot give way, as I have only a minute left. This denial of the impact of the 45p rate is surprising, given that the Labour party is not pledged to implement the old rate again.

The third point I shall make is the importance of an industrial policy. Whether we like it or not, the Government have a stamp in this area, so I am very supportive of the following: the announcement on help for our creative industries, which was warmly welcomed, as Britain’s creative industries are the biggest in the world; the enterprise zones; the research and development tax credits; the moves on transport infrastructure, which has been talked about many times, where the start date for the work on the A11 has been announced and brought forward, and there is to be more road infrastructure, paid for both by the taxpayer and through innovative other means; and more for university research facilities. Let us contrast all that with what was called a “backwater”—the previous Government’s business Department. It all shows that the results of this Budget will be growth in the future, business confidence and a great deal of support in the months and years to come.

--- Later in debate ---

[Owen Smith (Pontypridd) (Lab)]

This has been an interesting debate, although we have not heard too much about transport, despite that being the theme for today. I suppose that that is a feature of Budget debates, but I suspect that it is also down to the fact that the Budget did not contain that much about transport. I am therefore not going to delay the House too much by talking about transport but will talk about the broader measures and about the Chancellor in the broader context.

People say that the Chancellor is a man who already worries a lot about his legacy, despite it being very early in his Chancellorship. I suspect that explains the volume of leaks, which reported that he wanted this to be remembered very much as a watershed Budget. The word used in the press quite a bit was “Lawsonian”, which I understand is a compliment where he comes from. Well, it was a watershed Budget and it will be remembered—there is no doubt about that—but perhaps not for the reasons he wanted and not in the manner he anticipated.

It was a watershed Budget for two key reasons. First, it shattered, once and for all, the illusion that this Chancellor is a master of political tactics or economic strategy. The only masters are the masters of the universe, down the road in the City, who will be thanking him for this Budget. They might be the people who think he is still smart about economic theory. I hate to tell him, but the only vanity that is burning right now is his own, on the front pages of the Daily Mail, The Daily Telegraph and all the other newspapers in which I read this morning that one Tory Back Bencher, who remained nameless—I cannot think why he wanted to remain anonymous—said:

“Everybody was saying George is a great economic strategist and political strategist and how unique he is to have both skills: that is going to be questioned. In fact, colleagues already are.”

More important, this Budget was a watershed because it gave the lie, once and for all—[Laughter.] The laughter indicates that Government Members are not worried about this in any way, shape or form. However, the Budget gave the lie to the notion that we are all in it together in this country in a period of austerity, because after this Budget we clearly are not. Clearly after this Budget, the old Tory order is restored and some people in our society are, in their view, more equal than others.

The themes the Chancellor sought to pursue in his speech were that his Budget would be simple, predictable and fair—that was how he described it just a couple of days ago. This morning, the Institute for Fiscal Studies described it as a “hotch-potch” of reforms that

“may turn out to be less fiscally neutral than intended”.

It is hard to disagree with that conclusion from the independent IFS, because everywhere one looks in the Budget one finds measures that are mis-described, such as the tax increase on pensioners that is described as a simplification, and outcomes that are overstated. We have heard a lot today about this being a Budget for business, but according to the OBR, it is resulting in a 0.7% reduction in business investment this year, which is down 7% on the anticipated volume of business investment over the past year.

Crucially, numbers have been massaged throughout the Budget or just plain made up—guessed at—on the basis of Arthur Laffer’s famous cocktail napkin curve. I am afraid that the hon. Member for West Suffolk (Matthew Hancock) will find that numbers in the Budget will fall apart.

[Mr Stewart Jackson]

Will the hon. Gentleman give way?

[Owen Smith]

In a moment.

Those numbers are absolutely crucial to the debate because they are crucial to the claims of fairness and fiscal neutrality. The key number is that relating to the 50p rate costing only £100 million, because the OBR endorses HMRC’s findings. That is what the Government estimate will be the long-run annual cost to the Treasury of cutting the 50p rate. The Chancellor swept the number aside the other day as though it were nothing, just as he swept aside with an imperious flourish of his hand the £1 billion that we actually saw going into the Exchequer in the first year of the 50p rate.

[Matthew Hancock]

Is it any wonder that Labour left everything in such a mess given that it does not accept that higher taxes have behavioural consequences? Is the hon. Gentleman saying that Labour will never again look at the impact of tax rises on people’s behaviour?

[Owen Smith]

We absolutely agree that taxes and changes in the income tax rate have an impact on “behavioural yield”, to use the Treasury’s phrase. That is why, when we calculated in March 2010 the revenues that would be realised—

[Matthew Hancock]

Wrong.

[Owen Smith]

It is interesting that the hon. Gentleman says that; I am going to explain why it is not wrong and why we are right. At first glance, it looks very simple. Page 51 of the HMRC report shows the cost of cutting the 50p rate—the money that will be forgone by the Exchequer—as £3 billion, not £100 million. The next line covers the behavioural impact to which the hon. Gentleman has referred—the one based on the Laffer curve and a bit of undergraduate economic text in the previous 50 pages—and says that the Exchequer will get back £2.9 billion rising to £3.9 billion over the spending period. The key point is that all that is entirely based on a taxable income elasticity measure of 0.45. If we plug that into the equation we get this £100 million gap. Of course, the previous Treasury figures were predicated on a 0.35 number—a more conservative estimate— and that would have given £2.7 billion in revenues each year.

[Justine Greening]

That was wrong.

[Owen Smith]

I would be intrigued to get the Secretary of State to explain why it was wrong. If she looks at page 50 of the document she will see that it says simply that the Government decided that 0.45 was a better estimate. That was predicated on a single academic study produced in the Mirrlees report and there is no other evidence for drawing that conclusion. That is why the Government are guessing at the £100 million. Sensible economists would think a different sort of sensitivity range would have given them a far better estimate.

[Justine Greening]

The OBR is very clear that the £100 million represents a reasonable and central estimate. In fact, I would suggest that the previous Government’s assessment of elasticity in one of their final Budgets was designed entirely to manufacture tax receipts that were never going to materialise. If it was such a good idea, why did it take them 13 years to think of it?

[Owen Smith]

The principal reason why we did not introduce it was because the economy was growing through most of our period in government, unlike the economy under her Government.

Let us return to the taxable income elasticity measure. The OBR says that it might be reasonable, but it also says on no fewer than seven occasions throughout the document that there is “huge uncertainty” around the assumptions—not small uncertainty, but huge uncertainty. The Treasury itself, in its document—albeit buried on page 68 of 69—says:

“The results of this evaluation are highly uncertain.”

The reality is that, based on the Laffer curve, the Government have made up that £100 million number, but over the last year we got £1 billion from the 50p rate.

[Charlie Elphicke]

There is more evidence that reducing the rate ups the take. Each time there was a reduction, from 80% to 60% in the ’80s, and then to 40%, revenues went up hugely. We know that it works, from the evidence.

[Owen Smith]

What we know is that last year we got £1 billion from the rate—not £100 million, but £1 billion. What we also know is that the OBR thinks the estimate of £100 million is highly dubious. That is the reality. If we had waited two or three years—a reasonable period—to make the estimate, when people would not be able to pull the money into an earlier year, which is increasingly difficult as the years go by, we should have seen a reasonable number.

The real issue is not the estimate, but what will actually happen as a result of the Government’s cooking the books in that fashion. Ordinary people will pay the price. In this country, 4.77 million pensioners will pay between £80 and £280 extra as a result of the changes to the personal allowance. That is the reality of the Budget, not what the hon. Gentleman describes.

What about the 1.3 million ordinary working people earning about £41,000 who have been sucked into the 40p rate? We have not heard a lot about them in the Budget. We have not heard about the teachers, policemen and middle managers who will be paying more, or indeed about the 1.3 million who will be affected by the big cut in their child benefit—£1,300 for most of them. That is the reality of the Budget for ordinary working people.

Many Members talked about business and growth. We heard a fascinating contribution from the hon. Member for West Suffolk about the need for an interventionist business and industrial strategy. I completely agree. There were two measures in the Budget along those lines: one was for video games and the other was the patent box that is said to be benefiting GSK. I know a bit about the patent box, because I was one of the industry side negotiators with the Labour Government back in 2009 when we struck the deal on the patent box. It was not a Tory policy—an industrial strategy made not by the Tories, but by Labour, and we are now reaping the benefits.

What about the video games measure? The hon. Gentleman thinks of himself as a bit of a historian of economic facts, so he should look back to the first Budget of his great friend the Chancellor, when the right hon. Gentleman got rid of tax relief for video games. Two years later, with the video games industry pointing out that it was a really duff move, the Government have reinstated the relief: not a policy made on the Tory side, but on the Labour side.

What is the reality? It is 0.1% extra growth, 4.77 million pensioners paying the price, inflation still at 3.2% and wages only up 1.4%. The reality is that the Government are ill serving our economy and ill serving Britain. They do not know what they are doing. They are making a mess and the time has come for us to think again.