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Mr. Brooke: I am extremely appreciative of my hon. Friend for giving way again. Does he recall that, when the matter was raised with the Prime Minister on the Floor of the House, he absolutely deflected the question, and said that the problem would be solved by the behaviour of the stock market?
Mr. Davies: Evasiveness is clearly the hallmark of this Administration, and the Prime Minister's colleagues have followed his example. Perhaps we should allow them some moral mitigation--after all, their leader should bear primary responsibility for the tone he establishes in running the Government. On this and other subjects, that tone has been complete evasiveness, as my right hon. Friend has said. That is an extremely worrying state of affairs.
The fifth consequence of abolishing dividend tax credits also affects public expenditure--but, again, we have absolutely no estimate of its impact. Clearly, all investment decisions are taken at the margin, and the return from potential investment in personal pensions has been reduced significantly.
Therefore, it follows that many people who, on the basis of the previous equation, would have opted out of SERPS and into a personal pension scheme, will now not do so. There is much evidence that responsible advisers are warning people not to do that. That will impose a greater burden on SERPS as fewer people will opt out,
and therefore future public expenditure projections must be revised upwards. However, we do not know by how much.
Several judgmental assumptions must necessarily be made in this case. When the Paymaster General was the manager of Jaguar, I am sure that he did not allow his finance director, the treasury department or accountants to bring forward budgets without stating their assumptions and calculating the consequences of a particular line of expenditure on a net basis. I am convinced that he did not allow that. Will he intervene now and say that he did? I am sure that he demanded to see the net position. If the net position then had to be calculated on the basis of judgmental assumptions, I presume that he would have demanded to know what they were.
I think that the Paymaster General was a more successful business man than he is a politician, so he would have queried those assumptions. I am sure that he looked hard at the methodology, and insisted that the job be done properly. He may have said, "I won't employ in Jaguar people who do not do that." However, the hon. Gentleman apparently employs in the Treasury many people who have not even begun to do that work--or perhaps they have done the work and we have not been told the results.
There is no third, fourth or fifth possibility; it is one of two: either they have not done the job properly--they have not done their basic homework--or they are being less than frank with the public. That fundamental issue runs through the Bill, but nowhere does it pose itself more acutely and more pertinently than in this clause.
Mr. Damian Green (Ashford):
I cannot aspire to the comprehensive, indeed heroic, coverage of the landscape of the clause that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) has just achieved, but it is important for the House to consider a few more points as to the inadequacies of the clause and the necessity for the amendment tabled by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory).
The discussion of the behavioural effects of the proposed change to dividend tax credits has been particularly interesting. Behind much of the Government's argument and, in some cases, behind some of the points made by my right hon. and hon. Friends, is the assumption that the Government, through the clause, may be able to change the way in which companies distribute their profits. The point was made most starkly and most instructively by the hon. Member for Pontefract and Castleford (Yvette Cooper), who said, more or less, that all dividend payments were bad, that if shareholders demanded extra dividend payments they were likely to fritter them away and that it was therefore extremely important for the Government to try to direct dividend payments in socially responsible ways, such as towards investment.
That was instructive in two ways. First, it showed a catastrophically fundamental lack of knowledge of and sympathy with any free-market system, in which the interflow of the needs of investors, companies and different classes of shareholder means that investment goes into the most productive sectors. If history, particularly the UK's history in the past 30 years, teaches us anything, it is that attempts by government to micro-manage the economy to the extent of, for instance, managing flows of dividends always end in disaster.
Secondly, even beyond that misunderstanding, there was a more important misunderstanding: that by cutting companies' incentive to distribute dividends--by changing the ACT rules in this case--we will produce greater investment and greater research and development.
Mr. Gibb:
Would the Government have bothered to deal with this so-called distortion so early in their term if it were not for the fact that it just happened to raise £5 billion a year as a helpful by-product?
Mr. Green:
My hon. Friend makes an extremely pertinent point. The answer to his question is no, of course not. If the Government's proposal directed investment--which they clearly wish to do--but did not raise any money, they would not have introduced it in this emergency Budget. Clearly the fact that dare not speak its name about this tax increase is that the Government were desperate for revenue and took this route because they thought that it was so technical and directly affected so few people that they would get away with it.
During the debates both upstairs in Committee and on the Floor of the House, the Government have not got away with it. Those involved--the industries, the pension funds and, perhaps most important, the many millions of pensioners who will be affected by the proposal--are beginning to realise what kind of raid this is on their pension funds. When they extract the £5 billion from those pension funds, the Government will notice that pensioners rebel and condemn the clause as much as we do.
To return to the direct point about whether this tax grab will have any beneficial effect on the flow of funds in British industry, upstairs, we discussed various academic studies that show that what might be regarded as the populist, intuitive line--that, if we make dividends less attractive, companies will put more of their money into productive, long-term investment--is simply not borne out by any evidence.
All the evidence shows that the companies that devote most effort to research and development are in particular sectors--pharmaceuticals, health care, engineering and electronics--that those companies do not have any particular dividend policy, and that, if there is any link between dividend distribution and investment in research and development, it is that they go together, which is intuitively plausible as well as being true. Companies that invest for the long term are, over the long term, more profitable. They require capital to continue the flow of investment and the flow of profits. Therefore, they need to keep their shareholders happy, so they have generous dividend payments.
The basic rationale behind the Government's stated desire--the fig leaf that they use to try to disguise the fact that this is simply a tax grab--is itself wrong. There is no rationale that says that, if we reduce the desirability of paying out profits in dividends, we increase the amount
of money that goes into research and development; so, even on the Government's own rationale, the clause has no merit.
If the Government were genuinely interested in the rationale that they state for the clause, they would no doubt give tax credits for research and development. A general principle of Conservative Members--and of the previous Government--is that we want a simpler tax system that reduces corporation tax levels and does not have distortions such as tax credits. In other parts of the Budget, the Government have already shown that, where it suits them, they do not follow that regime. They say that various parts of Bill reduce taxes such as corporation tax and try to simplify the tax system, but when it suits them--as with the film industry--they are happy to introduce tax distortions that they regard as beneficial, so if they were really concerned about research and development they could introduce tax credits.
Mr. Quentin Davies:
While my hon. Friend is on the matter of distortions and pay-out ratios, does he agree that it is damaging for an economy to force companies to retain an excessive rate of profit? If an excessive amount were retained in companies that happened to be generating a lot of cash, not only would it disadvantage their shareholders for reasons that I explained in my speech, but the mobility of capital in the economy as a whole would be reduced and less capital would be available for other parts of the company where growth and investment prospects might be better. It would be an extremely ineffective and unproductive economic mechanism.
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