Finance (No. 4) Bill

Debate between Owen Smith and Harriett Baldwin

Wednesday 18th April 2012 Commons Chamber

[Owen Smith]

I do not know how many times I need to keep telling the hon. Gentleman this, but the simple answer is no. He should turn to page 2 of the document, which clearly says that this rate raised £1 billion; he should turn to page 39, which says that it raised £1.1 billion; he should turn to page 51, which says that it will rise to £3.1 billion next year. These would be the static costs. It goes on to say—[Interruption.] No, £1.1 billion is the actual amount lost to the national accounts as a result of this change. That is a fact. It is not uncertain; it is a fact. The Treasury thinks that the money would have gone up to £3 billion, rising to £4 billion subsequently.

[Harriett Baldwin (West Worcestershire) (Con)]

Will the hon. Gentleman give way?

[Owen Smith]

Yes, for the last time.

[Harriett Baldwin]

Can the hon. Gentleman confirm that his party’s next manifesto will contain a pledge to restore the 50p rate?

[Owen Smith]

When we get close enough to the next election to write our manifesto, we will write it, and the hon. Lady will be able to see it then. That is the simple answer to her question. Can she tell us exactly what will be in her party’s manifesto at this stage? I do not think so, and I do not intend to tell her what will be in ours. We will decide.

I wonder what the Tory manifesto will say about the NHS and VAT at the next election. I suspect that it will not say that the Tories will look after the former or fail to increase the latter, because no one would believe them any longer, would they?

Let us be clear. The document says that £3 billion would be the static cost of a cut in the rate to 45p. It also says that the behavioural change based on the magic of Arthur Laffer’s cocktail napkin calculus would generate £2.9 billion. Unfortunately, as I have said, HMRC is not terribly certain about that, which is why it has covered its rear so often.

I promised to give the Committee a few examples of the use of the words “uncertain” and “uncertainty”, which occur more than 30 times in the document, and I cannot resist doing so, because they are so juicy. The document states that

“the yield estimates were highly uncertain.”

It states:

“There is considerable uncertainty over the true level of the elasticity.”

It states:

“The incompleteness of returns at this stage gives the results and conclusions a margin of uncertainty.”

In fact, there is so much uncertainty in it that there is a separate section entitled “Areas of uncertainty”. My personal favourite appears on page 38, where uncertainty is expressed about the uncertainty. In an attempt to estimate the behavioural effects, the document states:

“The level of uncertainty associated with this estimate is therefore driven by the uncertainty of all the other stages described above.”

Why is the document so uncertain? The reason, in short, is taxable income elasticity or TIE. The Treasury decided that the appropriate TIE for the calculation of a £100 million loss was 0.45; not the standard number that the previous Treasury had used, 0.35, and not—I look forward to an intervention on this point—the standard numbers used in the vast welter of academic research which puts a delta at between 0.12 and 0.4. The figure of 0.46, which is used in this Treasury document, is at the very top end of the possible delta. Even if it were true that 0.45 is appropriate, however, the uncertainty would still be enormous. All we need do is shift the figure slightly to 0.35, and what do we find? Not a £100 million loss, but a loss of £700 million. If we shift it nearer to the 0.12 that has been used in many United States studies, we see a loss to the tune of between £3 billion and £4 billion.

Paul Johnson, director of the Institute for Fiscal Studies, told the Treasury Committee, whose report was published only today, that the Treasury’s

“central estimate… is incredibly uncertain, to the extent that we think that its estimate suggests there is only a two-thirds probability that a revenue-maximising rate lies between 30 per cent and 75 per cent.”

That is what the IFS had to say about what the optimal rate might be on the basis of the Treasury’s calculus. Mr Johnson continued:

“Those numbers are absurd in some sense, but that gives you a sense of the level of numbers of assumption and uncertainty that underlie what”

the Treasury

“has done.”