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Column 839of pounds of hidden costs will be involved in setting up the system needed to administer the new levy. Norwich Union, which has about 2 million household and motor insurance policyholders, says that it will cost several millions pounds just to set up the new system to collect the tax, and a further £1 million to administer it. The premium tax could be the final straw for individuals and companies, forcing them to cut their outgoings and to insure themselves inadequately or not at all. In the long run, that will cost us more as a nation.
This bureaucratic and unfair tax will bring in to Government coffers less than £300 million in 1994-95, £775 million in 1995-96 and up to £840 million in 1996-97. Will that really make a big inroad into the £50 billion deficit?
That brings me to the Liberal Democrats' fourth objection to the proposed insurance tax : it is devious. It is simply a back-handed attempt to raise revenue in any way possible, so long as it is not through income tax-- although tax thresholds have already been frozen, and that will bring 400,000 more people into tax. National insurance contributions have been raised, sick pay has been hived off from the state to the private sector, and now there is a new tax that the Chancellor tries to pretend is nothing. It is yet another tax that the Government will increase so as to avoid visibly increasing income tax rates.
That does not wash with the electorate any more. I believe that the Government have been found out. If not the opinion polls, election results show that people will not be so easily fooled again. One of my constituents, who did not vote for me in the by-election--there were some of those--but who had watched the Government's behaviour since I was elected, declared, "It will be a cold day in hell before I ever vote Conservative again."
Liberal Democrats wanted a Budget to give us an investment-led recovery. That should have been started long ago, and we have advocated it for some time. We wanted to see fair taxation, based above all on people's ability to pay, not another tax that falls most heavily on those in need and on the most vulnerable, those who have been so badly let down by the Government. Anyone who has been talking to people outside the House will know that the last thing they want is another new tax.
My hon. Friends and I reject the tax. We support the amendment, because it would at least ensure that the measure was not enacted until it had been properly scrutinised. The proposed new tax is unjustifiable, inefficient and devious--but, above all, it is unfair.
Mr. John Hutton (Barrow and Furness) : In the time left for the debate I shall make several general observations about the insurance premium tax. Like the hon. Member for Ryedale (Mr. Greenway), I want to comment on some of the complexities that might flow if we passed the measure.
I shall start with the speech of the Paymaster General. I was mildly encouraged by the fact that he described the new tax as progressive. That is the first time since I entered the House that I have heard a Conservative Treasury Minister express support for the notion of progressive taxation. I hope that we can look forward to hearing Treasury Ministers espouse the virtues of progressive taxation on future occasions-- but I am afraid that I expect to be disappointed.
The hon. Member for Christchurch (Mrs. Maddock) talked about the sum that the proposed tax would raise, and
Column 840we must consider it specifically in those terms. The Government's clear aim in introducing an insurance premium tax is to broaden the tax base. It is simply a money-raising device, with no other merit whatever, and in 1996-97 it will be expected to raise nearly £1 billion--almost the entire budget of the Department of National Heritage. Unlike the hon. Lady, I look upon that as a considerable sum.
Why do the Government propose to tax insurance? As my hon. Friend the Member for Edinburgh, Central (Mr. Darling) said, insurance is an inherently good thing, and I believe that it is the role of Government to encourage people to take out proper insurance, to insure themselves against the risk of illness and other eventualities, and especially to take out home contents insurance, to which my hon. Friend the Member for Hornsey and Wood Green (Mrs. Roche) referred. There is an ideological problem associated with the tax, because it is targeted at something that is positive and life enhancing. The Minister did not address that problem.
We have been told, as we have been in a number of Budget statements and economic debates, about the Government's policy on indirect taxes. We have been told repeatedly that the Government favour indirect taxes. Indeed, they are such an advocate of indirect taxes that they have invented two totally new taxes. We have the insurance premium tax, which we are debating tonight, and the airport duty tax, which we debated last night. It is worth bearing in mind that these are the first two new indirect taxes in more than 20 years. Given the attendance certainly on the Tory Benches for most of this debate, it is not surprising that the introduction of this new tax has promoted rampant indifference on the part of the Conservative party. For example, there is no reference to the insurance premium tax in the Government's manifesto. Indeed, it could be argued that this tax goes against the grain of Tory tax policy since 1979. Insurance is not an optional item of expenditure in many households, so insurance premium tax will not work in the same way as value added tax. It cannot be argued that insurance premiums are an optional extra--that taxpayers can choose whether to spend money on insurance premiums in the same way as they do when they consume normal household goods. The issue is fundamentally different. The insurance premium tax will directly hit basic and essential items in household budgets. It is estimated--accurately, I believe--that 16.5 million households will pay insurance premium tax.
I do not believe that it in any way reduces the strength of the argument that we have deployed against insurance premium tax to argue that the rate of IPT will be only 3 per cent. because we know what the Government have done to the rate of value added tax since 1979. It might start at 3 per cent., then it will be 5 per cent., then 10 per cent. and then 20 per cent. That is exactly the sort of policy approach that the Government have adopted over many years. The Chancellor estimates that the revenue to be raised by IPT will be equivalent to 35p a week. Given the accuracy of his predictons in other areas of the Government's fiscal policy, however, we are entitled to treat that prediction with some caution. The revenue raised is likely to be much higher.
One of the problems--the hon. Member for Ryedale (Mr. Greenway) did us all a service by drawing attention to this--is that IPT, and the way in which the tax has been constructed in the Bill, looks to be potentially a wide tax.
Column 841Clearly, it will cover insurance policies such as travel insurance, warranties on electrical goods, mortgage indemnities and certainly private medical insurance. The real figure that we can attach to IPT and its impact on household budgets is more likely to be £1 per week.
The hon. Member for Ryedale drew attention to the views of the insurance industry. The best that we can say is that the insurance industry has given the tax a muted response. The Association of British Insurers and other groups have expressed concern that the net effect of IPT will almost certainly be that people will take out inadequate insurance or no insurance cover at all, and that is to be regretted.
I have only one minute left. I prepared wider notes on IPT but clearly I shall not be able to make those remarks tonight. It might be reasonable, therefore, to conclude that IPT will be an unpopular tax. It has been conceived for the wrong reasons and it will impact most heavily on those who should not be asked to get the Government out of their deep financial mess. I am reminded, as I usually am on such occasions, of the comments of Sir Edmund Burke, who wrote in 1775 :
"To tax and to please is not given to men."
That is especially apposite in the context of the insurance premium tax.
Mr. Darling : This has been a short and not altogether satisfactory debate because there has not been nearly enough time to examine some of the general problems of the tax, let alone the specfic ones. I shall start by making a preliminary point about the speech of the hon. Member for Ryedale (Mr. Greenway). The reason why I raised the point of order about declaration of interest is important. It is not a personal matter in relation to the hon. Gentleman because I know that, in many debates, he has made speeches about the insurance industry, about which he knows. Indeed, he has made one or two comments that have been helpful to arguments that I have made. Perhaps he made them inadvertently, but he did so.
There is a point in principle here. It is our experience that, as the Bill goes into Committee, a large number of Tory Members raise matters because they are consultants to various people. It is a bad precedent, and it is bad for this Parliament, that industries should get into the habit of thinking that the way to raise matters in Parliament is by buying the services of a consultant. That is wholly inappropriate and it should be deplored. Having said that, the hon. Member for Ryedale raised a number of important matters. The technical matters in the Bill need to be discussed. There are about 28 clauses and there are regulations which we have not yet seen. I do not think that any hon. Member has said that, during the next few months, the Government will be coming up with hordes of regulations to make the tax work. We should not lose sight of the fact that the industry will have to change its accounting systems to make the tax work.
In addition to all of the regulatory burdens, the insurance industry will now have to set people in place to administer and to collect the tax. The cost of the new systems and the new employees will add to the premium
Column 842costs and the public will not just be paying the insurance tax but will be paying the cost of its administration. The cost will not be met by the Government and it will not be defrayed against other expenditure. It will be met by ordinary people.
The technical points made by the hon. Gentleman were important, as was his point concerning the United Kingdom and non-United Kingdom risks. The Government have done many things on which we have touched in other debates that may drive business away from the London market. They must have regard to the consequences of their actions. An insurance tax may be seen to be a light touch or an easy option, and the Government will pray in aid the fact that there are similar taxes on insurance in other parts of the European Union.
However, the tax does not end with the 3 per cent. levy which is currently being imposed. The costs of administration and collection and the regulatory costs must be added to the cost of the insurance industry. Those costs must be paid for either directly by those who pay premiums, or through more redundancies in the industry. Anyone who has been involved in the insurance industry will know that it has had many redundancies, and I fear that there are more to come. I suspect that the tax will add to those redundancies.
The second point of the hon. Member for Ryedale was on private health care. I agree with him that it is entirely to be encouraged that people take out insurance which provides cash cover in the event of illness. We have always sought to encourage that and the Government are right to exempt that type of long-term insurance. Where the distinction falls to be drawn is between that sort of insurance and private health care insurance, which is in effect providing private health care as an alternative to the NHS. That is a difficult distinction to draw in technical terms, but it is one which the Government must draw.
I do not think that the Paymaster General was particularly clear about the distinction and I hope that he will make it clear that private health care insurance will not be exempt from the tax. If it is exempt, the people who must pay increased premiums for insuring their houses or their cars will not understand it.
Let me turn to another important point. The Minister said--whether he likes it or not, I have a note of him saying this--that the costs of the tax are not important because other costs in the industry are going up. It beggars belief that a Treasury Minister would make such a statement, but the fact is that insurance costs are going up dramatically.
My hon. Friend the Member for Hornsey and Wood Green (Mrs. Roche) said that the crime rate in London and in our other major cities and towns is escalating. The cost of insurance is becoming prohibitive and many people cannot get insurance of any sort. For a person seeking car insurance, the criterion for having to meet a larger burden of insurance is not so much whether he has had his car damaged or stolen but that he lives in a particular area. That burden is becoming so prohibitive to some people that they will under-insure or not insure at all. It is not in society's interests to get into a situation in which people may be injured by somebody in a car and discover that that car is not insured. That sort of crime is prevalent enough as it is without encouraging it by adding to the costs--not just the insurance tax itself, but the added-on costs which are to be incurred by the industry in administering the tax. For the Minister to claim that the cost is not important is astounding. I hope that he will have reflected for the past
Column 84340 minutes or so on the ill-advised nature of that remark and perhaps he will withdraw it. The Minister also said that the tax is mildly progressive. Again, that is surprising. The Minister cited the example of poor people who are living in small houses. When we were discussing the abolition of domestic rates and the introduction of the poll tax--some Conservative Members may remember that fondly, some not so fondly--we were always being given the example of the poor widow who lived in the big house. Well, the poor widow who lives in a big house may have a larger insurance bill than someone living in a small house, yet the Paymaster General, who I do not remember being a rebel on the poll tax although I may be wrong and perhaps he will refresh our memory if he was-- [ Hon. Members :-- "He was a Whip".] Indeed. He probably whipped his right hon. and hon. Friends into the Lobby to vote for the poll tax when those ridiculous arguments were being deployed.
As my hon. Friend the Member for Coventry, North-East (Mr. Ainsworth) said, many people on low incomes are being hit by high insurance bills and there is nothing that they can do to avoid them. As my hon. Friend the Member for Barrow and Furness (Mr. Hutton) said, that is why it is important for us to return to the fundamental question--what is the Government's philosophy? They want people to be prudent and responsible, yet they are taxing people for that. I know that other Ministers on the Treasury Bench are much given to philosophy these days. The Chief Secretary to the Treasury, who is one of the most precious Ministers in this Government, tells us many things, including the fact that people have become cynical about our great institutions--whether the Conservative party, Parliament or anything else. The Financial Secretary to the Treasury, who is another candidate for the Cabinet, is also given to philosophical discussions, although he appears to be a more traditional, Disraeli Tory.
Let us hear where the Paymaster General stands in this great moral debate and especially what he has to say about taxing responsibility and prudence. I am sure that he must have had something to say about it in his manifesto.
I am sure that the House would like to hear what the Government's philosophy is. Many of us believe that they are not bothered about philosophy when it comes to a frantic scrabble to raise tax to make ends meet. At the last election the Government told us that they had a deficit of £28 billion and that the recovery would start the day after the election. No doubt Conservative Members remember that. Yet we now have a £50 billion deficit and people are being hit by income tax increases and value added tax on fuel and are finding that their mortgage tax relief is being steadily reduced. Depite the fact that the Government condemned us for allegedly intending to reduce mortgage tax relief to 25 per cent., they will reduce it to 15 per cent. during the next few years.
Despite those tax increases the Government are coming back for more and more. People who cannot afford it are being hit by tax bills that they cannot avoid. That is why insurance is being taxed and why we debated the air tax yesterday. The Government are going for all the soft options, regardless of the consequences.
Perhaps the Paymaster General will be honest and tell us that the Government are not going for those taxes because of any philosophical problems but because they are engaged in a frantic and desperate search for further tax.
Column 844Will the Government tell us whether they intend to extend the scope or rate of the insurance tax? The Prime Minister got into difficulty when he said that he would not extend the scope or rate of value added tax. He was absolutely categorical about it. "Oh no, we are not going to increase it", he said. What is the Paymaster General going to say about the insurance tax? Will the scope or rate be altered in the life of this Parliament? Perhaps we could hear his answer in clear and unambiguous terms.
Sir John Cope : I must start by pointing out that the reason for the tax is that it will raise revenue from a sector which has relatively low indirect tax at the moment. As my right hon. and learned Friend the Chancellor concluded at the time and as other hon. Members have said since, such a tax was and is a sensible means of raising revenue--in the context of the Budget as a whole--by broadening the scope of indirect taxation. That is a direct remark of the sort that my right hon. and learned Friend is given to make. It was an honest remark and it explained the origin of the tax extremely clearly--it could not be clearer than that.
The hon. Member for Barrow and Furness (Mr. Hutton) quoted one of my most distinguished predecessors as Paymaster General, although admittedly he held the post at a time when the job was rather different and much more profitable than it is now. My predecessor said something that was extremely true :
"To tax and to please is not given to men."
It was right and fair that the hon. Gentleman should quote that. The insurance sector is currently subject to little indirect tax. This tax represents a further contribution to the Government's long-term strategy of shifting the burden of taxation from direct to indirect taxation. It generates what the hon. Member for Christchurch (Mrs. Maddock) called "very little revenue". I do not see it that way. It generates a significant amount of revenue--approximately £775 million in a full year--and, in doing so, makes a valuable contribution to tackling the Budget deficit.
The hon. Member for Edinburgh, Central (Mr. Darling) asked about the future rate and scope of the tax. The current rate has been chosen after careful consideration of all the factors involved : the impact on taxpayers ; the effect on the industry ; the other matters that arise out of the amendment ; and the yield to which I referred. We believe, and the Chancellor believes, that it is the right rate for this tax. I am not forecasting future Budgets. No Treasury Minister can do so at any stage, and I shall not do so this evening, but that is how we chose the right rate.
At one point in the debate I was complimented on recommending the tax on the ground that it was mildly progressive. At other times I have been attacked for making remarks on a similar basis, as I was even in this short debate. The point that I was making was that, as the family expenditure survey shows, the poorest 20 per cent. of households will pay only about 7p a week. I recognise that that is an average. Hon. Members, including the hon. Member for Hornsey and Wood Green (Mrs. Roche), described individual cases where expenditure varied from that. That is true of every form of expenditure. However, the 7p a week for the poorest 20 per cent. of households contrasts with about 47p a week for the richest 20 per cent. of households. It seemed to come as a great insight to some hon. Members that high-income households pay more on insurance than low-income households. But that seems obvious. Indeed, high-income
Column 845households pay more on everything than low- income households, which is why taxes on expenditure tend to be progressive, as this tax is. That is an obvious fact of life.
Sir John Cope : Yes, but that is the case now, as the hon. Lady rightly says. In introducing the insurance premium tax, we had to take account of average figures. That is not a novel factor that is somehow being introduced as a result of the insurance premium tax, but is the current position.
The hon. Member for Hornsey and Wood Green spoke about the position in Greater London where, according to the family expenditure survey, people pay an average of some 18 per cent. more for vehicles, building and contents insurance than people elsewhere in the United Kingdom. When that is translated into the 35p a week which 44 per cent. of households pay, there is not a tremendous difference between the overall burden on people in Greater London and the burden on people who live elsewhere in the United Kingdom. I readily accept, and have made no attempt to disguise my acceptance, that those are averages and that some individuals will be in a different position. There has also been some discussion about the coverage of the tax, particularly in relation to medical health insurance and private health care. I made it clear that we consider it right to extend the tax to all general insurance. That includes private health care and credit insurance. By doing that, we can keep the rate to 3 per cent. and minimise the impact on everyone concerned.
I was asked also by my hon. Friend the Member for Ryedale (Mr. Greenway) and by the hon. Member for Edinburgh, Central about equalisation reserves. I understand that the Association of British Insurers is still in discussion with the DTI and Inland Revenue about a possible scheme for calculating equalisation reserves. Clearly, the outcome will be announced when those discussions have been completed, but I have noted the interest expressed in these matters by hon. Gentlemen during the debate.
It being Ten o'clock, The Chairman--, pursuant to the Order this day, put the Question already proposed from the Chair.
Question put, That the amendment be made :--
The Committee divided : Ayes 285, Noes 327.
Division No. 98] [10 pm
Abbott, Ms Diane
Adams, Mrs Irene
Ainsworth, Robert (Cov'try NE)
Anderson, Donald (Swansea E)
Anderson, Ms Janet (Ros'dale)
Banks, Tony (Newham NW)
Beckett, Rt Hon Margaret
Beith, Rt Hon A. J.
Benn, Rt Hon Tony
Bennett, Andrew F.
Berry, Dr. Roger
Column 846Bray, Dr Jeremy
Brown, Gordon (Dunfermline E)
Brown, N. (N'c'tle upon Tyne E)
Bruce, Malcolm (Gordon)
Campbell, Mrs Anne (C'bridge)
Campbell, Menzies (Fife NE)
Campbell, Ronnie (Blyth V)
Campbell-Savours, D. N.
Carlile, Alexander (Montgomry)
Clark, Dr David (South Shields)
Clarke, Eric (Midlothian)
Clarke, Tom (Monklands W)
Clwyd, Mrs Ann
Cook, Frank (Stockton N)
Cook, Robin (Livingston)
Cunningham, Jim (Covy SE)
Cunningham, Rt Hon Dr John
Davies, Bryan (Oldham C'tral)
Davies, Rt Hon Denzil (Llanelli)
Davies, Ron (Caerphilly)
Davis, Terry (B'ham, H'dge H'l)
Donohoe, Brian H.
Dunwoody, Mrs Gwyneth
Eagle, Ms Angela
Evans, John (St Helens N)
Ewing, Mrs Margaret
Field, Frank (Birkenhead)
Foster, Rt Hon Derek
Foster, Don (Bath)
Gilbert, Rt Hon Dr John
Godman, Dr Norman A.
Golding, Mrs Llin
Grant, Bernie (Tottenham)
Griffiths, Nigel (Edinburgh S)
Griffiths, Win (Bridgend)
Harman, Ms Harriet
Hattersley, Rt Hon Roy
Hill, Keith (Streatham)
Hogg, Norman (Cumbernauld)
Home Robertson, John
Howarth, George (Knowsley N)
Howells, Dr. Kim (Pontypridd)
Hughes, Kevin (Doncaster N)
Hughes, Robert (Aberdeen N)
Hughes, Roy (Newport E)
Hughes, Simon (Southwark)
Jackson, Glenda (H'stead)
Jackson, Helen (Shef'ld, H)
Johnston, Sir Russell
Jones, Barry (Alyn and D'side)
Jones, Ieuan Wyn (Ynys Mo n)
Jones, Jon Owen (Cardiff C)
Jones, Lynne (B'ham S O)
Jones, Martyn (Clwyd, SW)
Jones, Nigel (Cheltenham)
Kaufman, Rt Hon Gerald
Kennedy, Charles (Ross,C&S)
Kennedy, Jane (Lpool Brdgn)
Khabra, Piara S.
Kinnock, Rt Hon Neil (Islwyn)
Lestor, Joan (Eccles)
Lynne, Ms Liz
McCrea, Rev William
Maddock, Mrs Diana
Marek, Dr John
Marshall, David (Shettleston)
Marshall, Jim (Leicester, S)
Martin, Michael J. (Springburn)