Budget Resolutions and Economic Situation
Debate between Owen Smith and Matt Hancock(12 years, 8 months ago)
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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.
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.
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—
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.
Finance Bill
Debate between Owen Smith and Matt Hancock(14 years, 4 months ago)
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Matthew Hancock
What Policy Exchange has done is review the economic literature, which is what I am looking at. Perotti, in 1999, said:
“High debt levels are associated with higher probability for fiscal policy to have”
expansionary effects. The European Commission—not something that Labour Members tend to barrack—said: “Expenditure cuts may exhibit” expansionary features,
“even in the short and medium run.”
So the economic evidence is there. The best quotation from that review is this:
“Though now quite well established in economic literature”—
referring to the argument that fiscal consolidations promote growth—
“this work is still feeding its way into the wider public consciousness.”
No doubt part of the reason for the slow move of that argument into the public consciousness is the argument put forward by Opposition Members that it is not true.
There are two other important ways in which consolidation will get to higher growth. The first, of course, concerns expectations of future tax rates. If people around the country can see that spending is out of control, they will anticipate that taxes might have to rise in future, whereas setting out a clear path for taxes makes it clear that there will not have to be sharp and immediate tax rises in future, even if that path includes some tax measures. That forward-looking element of human nature, which is so important in understanding how the economy works, matters at a personal level—for some people far more than for others, as I entirely accept—but it especially matters in the corporate world. Businesses look to the future to see how much tax they will be paying, as well as how much it will cost them to pay it because of the complexity of that tax. That is why it is so important to have both the simplification of the tax system that my hon. Friend the Exchequer Secretary—soon to be right hon. Friend, no doubt—set out, and the ladder down in headline corporation tax rate, which will set out a 1% reduction year on year so that our businesses know that Britain is open for business.
Owen Smith
On that specific point of corporations looking to the future and thinking about how to plan their business, can the hon. Gentleman tell me of any industrial sector or any big British company that has responded to the austerity budget and said that they now anticipate significant growth and taking on new people? I have not seen any such report.
Mr Deputy Speaker (Mr Nigel Evans)
Order. Before the hon. Member for West Suffolk (Matthew Hancock) resumes his speech, let me say that we allow some latitude on Third Reading of the Finance Bill, but that it would be useful if Members made reference to the Bill from time to time.
Matthew Hancock
The reductions in corporation tax that are outlined in this Bill have been welcomed by the CBI, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses. Indeed, a multitude of business organisations have welcomed it. Even the Engineering Employers Federation said that this was a path in the right direction. That shows the support from business organisations.
Matthew Hancock
Let me make some progress; I have only a couple of minutes left.
The final argument is about productivity. Greater tax competitiveness not only helps productivity in the private sector, as consolidation can also help productivity in the public sector. We read only this morning that the police have said that they can take 12% out of their budget without affecting front-line services. I wonder what that 12% was spent on under the previous Administration.