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Mr. Nicholas Soames (Mid-Sussex): Will my right hon. Friend speculate on why the Government should have done such a stupid thing? Although it is easy for Opposition Members to understand why the Government abolished tax relief on health insurance--it was out of pure spite and malice--it seems inexplicable that they could have done such a stupid thing with savings.

Mr. Heathcoat-Amory: I am genuinely at a loss to give my hon. Friend an answer to his question. We have racked our brains to try to determine why the Government should have done something that was not only wrong in macro-economic terms, as I explained, but contradicted their express desire to get people off welfare and on to private provision and self-reliance. I can only speculate that their action was due to ignorance and, perhaps, the instinctive reaction of a Labour Government to tax, which is to try to tax their way out of any difficulty.

Mr. Hammond: Does my right hon. Friend agree that the Government may have hoped that those who were bearing the tax might not notice that they were bearing it? It was a back-door tax which many pensioners did not appreciate they were paying until Conservative Members drew their attention to it.

Mr. Heathcoat-Amory: I think that my hon. Friend has part of the answer--that the Government hoped that no one would notice. They thought that instead of taxing people directly, they could tax corporations and pension funds, which do not themselves have votes. However, millions of people who rely on those pension funds now know perfectly well that the Government effectively conducted a £5 billion-a-year-raid on pensioners and contributors to pension funds. Last year's Budget, therefore, will always be known as the Robert Maxwell memorial Budget. That is entirely appropriate as at least two of the Ministers conducting that raid had first-hand experience of how the late Robert Maxwell handled his business affairs. So the Government did not get away with it, but the damage created by that Budget will be with us for many more years. It was compounded this year when the Government returned to

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the subject and used the change in the system of corporation tax to smuggle in a back-door tax increase, borne this time by corporations and the larger business sector in particular.

5.30 pm

When we debated the economy yesterday, the Chief Secretary to the Treasury again asserted that the Government had cut the rate of corporation tax. That may be true in nominal terms, although the Government have a long way to go before they match our record. In 1979, we inherited a corporation tax rate of 52 per cent. and by gradual degrees, year upon year, we reduced it. All the Labour Government have done is to signal that there will be a further 1 per cent. reduction, which will not take effect until next April.

Companies and the Confederation of British Industry are concerned that, despite a nominal reduction, there has been an actual increase in the burden of corporation tax. I am not making an allegation or giving the House an opinion; I invite hon. Members to consult page 18 of the Budget statement, which shows that the abolition of advance corporation tax and the introduction of quarterly payments will increase tax by £100 million in the current financial year, by £1,600 million next year and by a full £2 billion in the year 2000-01.

Mr. Hammond: Are not the Government engaged in utterly cynical manipulation? They are bringing forward in a one-off shift tax revenues that would have been enjoyed later so that they can spend them during the period of this Government and, hopefully from their point of view, buy their way back into power at the next general election?

Mr. Heathcoat-Amory: Yes. My hon. Friend is entirely right. It is particularly short-sighted because the Government are relying on those same larger companies to provide the extra jobs that they need for their so-called welfare-to-work programme. If they persist in taxing those companies, it will rapidly turn into a work-to-welfare programme. There is already evidence that the labour market is turning, and investment is also affected. The same Red Book published in March shows a steady and continuing reduction in investment, particularly by the business sector. That can only be a consequence of the increased tax burden that businesses are expected to bear.

Mr. Quentin Davies: Could not the position get even worse? Not only will companies be less inclined to invest because of the extent to which the tax burden on them is increased, but if the economy continues to turn down as a direct result of Government action and inaction--manufacturing is already in recession--will not that additional £2 billion a year of cash-flow burden on British industry make all the difference to the survival or the collapse and bankruptcy of British businesses? Therefore, there may be an escalating effect. The Government may be launching a vicious circle which will be damaging to output and to employment for a long time.

Mr. Heathcoat-Amory: Yes. My hon. Friend makes a good point. The measures are pro-cyclical; they are reinforcing what is already an emerging recession. The

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effective increases in corporation tax will hit companies precisely when they are already experiencing a recession. The damage has not yet become entirely apparent.

Another issue concerns our general competitiveness and our position in the European Union and in the wider world. One of the great--and, we hope, lasting--achievements of the previous Conservative Government is that we established a low-taxation structure. We are the envy of Europe. Indeed, the Chancellor of the Exchequer in one of his disguises goes round the European Union lecturing other countries about the problems of high taxes, particularly on labour, and the need for them to introduce flexible labour markets. At the same time he is undermining precisely those achievements at home, so it is little wonder that he is now excluded from Euro X and the other committees on which such matters are discussed. They have spotted a degree of hypocrisy. The Chancellor is telling them to do what he is failing to do at home.

We hope that tomorrow we shall be debating the increase in indirect taxation on transport fuel, for example, which is eroding the competitiveness of our haulage industry, but at least we thought that we had entrenched a competitive advantage for Britain in terms of business taxes which makes us a beneficiary of inward investment from the European Union and the rest of the world.

Mr. Soames: Is my right hon. Friend aware that the competitive advantage which, indeed, was well entrenched, has become eroded in such a way--even within the past year--that in my constituency and neighbouring constituencies, quite substantial numbers of jobs are already beginning to flow out of manufacturing industry? What does my right hon. Friend have to say for the future when the impact of the ill-thought-out and ill-conceived changes to corporation tax will further hit manufacturing industry?

Mr. Heathcoat-Amory: My hon. Friend is entirely right. The damage is already apparent, and we have not yet had the full impact of the changes in corporation tax. The figures that I quoted from the Red Book show that what is a problem today is in danger of becoming a catastrophe tomorrow unless avoiding action is taken. New clause 5 goes some way towards at least drawing the teeth of the change in corporation tax and bringing relief to some sectors of British industry that are faced with effective tax increases.

The Government have abolished advance corporation tax, but replaced it with a system of interim payments whereby larger companies will have to make payments on account, which represent an effective tax increase.

Mr. Andrew Love (Edmonton): I have listened to my right hon. Friend for the past five or seven minutes, and have yet to hear any recognition from the Opposition that, when corporation tax is reduced by 1 per cent. next year, it will be at its lowest rate ever.

Mr. Heathcoat-Amory: Yes, but the hon. Gentleman has not understood my point. Businesses are not concerned about the nominal headline rate of corporation tax if the actual tax that they pay goes up. Labour's world is all about theory. When Labour Members see a cut of 1 per cent., they assume that all the companies in their

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constituencies will pay less corporation tax. The hon. Gentleman may have been nodding off when I quoted from the Red Book. Even the Chancellor's own arithmetic shows that there is an effective increase in the tax burden on companies in Britain of £2 billion a year. Does the hon. Gentleman not understand that simple point? If he will not accept it from me, will he do the House the honour of spending the next few minutes reading the Chancellor's Budget statement, which sets that point out with commendable clarity?

Mr. Oliver Letwin (West Dorset): Does my right hon. Friend agree that the position is even worse than he has described? He has been describing the stagnation part of inflation, but by directing their attentions to corporate taxation and interest rates, which have been shown increasingly to have a greater effect on the corporate sector than on the personal sector, the Government are not addressing inflation.

Mr. Heathcoat-Amory: My hon. Friend is right. I hope that he will catch your eye later, Mr. Deputy Speaker, to elaborate on that point.

I should like to establish the fact--this is not a contestable opinion--that the Government are smuggling in a real increase in the burden of corporation tax suffered by corporate Britain. When investment falls, as it is due to do, and unemployment increases, the Government will have only themselves to blame.


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