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9.42 pm
Mr. Edward Davey (Kingston and Surbiton): When the Finance Bill was published before the recess, I must confess to feeling slightly elated. Having rushed to the Vote Office and eagerly demanded my copy of the Bill, I was pleased to see that it was rather shorter than usual. The right hon. Member for Fylde (Mr. Jack) and the hon. Member for Dudley, South (Mr. Pearson) also commented on the brevity of the Bill, and I congratulate the Government on that achievement. My elation was due partly to surprise because, on Budget day, the Chancellor of the Exchequer stood at the Dispatch Box and pulled out rabbits, gizmos and fizz bangs as if there were no tomorrow. I remember commenting to my hon. Friend the Member for Richmond Park (Dr. Tonge) that, with all those gimmicks, the Bill was bound to be very long.
The brevity of this Finance Bill is explained partly by the fact that some of the Chancellor's gizmos are to do with national insurance, which will be covered in other
legislation, and some--such as the cut in the basic rate of income tax--will be introduced next year. The Bill is also quite short because the Budget is far less substantial than it first appeared. The Chancellor has no philosophy for managing the tax system, and he has no strategy or direction regarding its development. He is getting a reputation for being a Chancellor of the big picture. He has sorted out the macro-economy by borrowing the Liberal Democrats' idea for an independent Bank of England--we welcome that move--and by laying fiscal foundations and introducing a code of fiscal stability. On smaller-scale economic policy, however, he is found wanting.
The Chancellor may eventually be starting to have some success, having made mistakes in macro-economic policy in his first two years--he had an awful lot of luck in the process--but he will make a severe mistake if he does not pay attention to the micro-foundations of economic policy. If he gets the micro-economics wrong, he will get the macro-economics wrong later, as sure as eggs are eggs.
What is the reason for the Chancellor's failure on micro-economics? He seems to be complicating the tax system. It is ironic that even a short Finance Bill contributes to the ever-growing complexity in the tax system, and that is the Bill's key shortcoming. I am sorry that the right hon. Member for Fylde is not in his place, because he made a telling speech earlier in the debate which elucidated many of the extra complications in the Bill. He referred to the extra tax rates, including the 10p rate, and the retention of the 20p rate on savings. A third corporate tax rate has also been introduced. The new children's tax credit, with its rather complicated withdrawal system, will produce a marginal tax rate of 46.7 per cent. on a range of incomes around £30,000. There will therefore be much more complexity in the tax system.
Much of my speech was delivered by the right hon. Member for Fylde, so I shall ask a question that he did not ask. Why is the Chancellor creating more complexity in the tax system? Many commentators in specialist tax journals and the quality press are asking that question, and three theses have been put forward. The first is that the Chancellor has no interest in that policy area; he is leaving it to others and they are making a mess of it. Secondly, it is a ruse to hide and obfuscate the Chancellor's underlying strategies. Perhaps he has a redistribution strategy, but he does not want to tell anyone about it. The third theory is that tax complexity is a policy that is driven by presentational demands rather than an understanding of the demands of the users of the tax system.
Of those three theses to explain the Chancellor's tax strategy--or lack of strategy--the first two can be refuted. The Chancellor is hyperactive and he is involved in all aspects of economic and social policy in every Department. He seems to be a workaholic. He has a hand in almost every domestic policy announcement that the Government make, whether it relates to child care, employment or housing policy. The theory that he is not interested in the detail of tax policy does not stand up. He told us before the election and in his pre-Budget report that Labour's policy was pro-tax simplification, which demonstrates that he wants to be involved in tax policy.
The second theory is that tax complication is a ruse to hide alternative strategies. There have been many tax rises, as we have heard in this debate. I do not want to engage in what my hon. Friend the Member for Gordon (Mr. Bruce) called the debate about angels on pinheads--the mediaeval debate. Liberal Democrat Members do not want to have a statistical debate about whether the tax burden, as a percentage of gross domestic product, has increased. However, the Chancellor did not need to complicate the tax system to camouflage an increase in the tax burden because he can conceal that increase using statistics, as he has demonstrated in his description of the tax burden for this year, not including tax rises from previous Budgets that feed into the overall tax burden.
Mr. Gardiner:
The hon. Gentleman has been on his feet for six minutes and he has talked about the complexity that the Chancellor has introduced to the tax structure, but he has not yet managed to make a substantive criticism of what the Chancellor has achieved through that process. To talk about complexity and transparency, as Conservative Members have done, is not to deal with the benefits of the Budget that are being delivered to people.
Mr. Davey:
My immediate response to that is,"Oh, dear." Labour Members clearly have no understanding of the tax system if they do not realise that complexity is a very real problem. Compliance costs to business are a serious issue, as is the effect on individual taxpayers. Does the hon. Gentleman realise that more than 9 million people now fill in their tax returns every year? Self-assessment is now widespread. If we complicate the tax system, we make it difficult for people to understand; if we make it difficult to understand, we reduce its transparency and undermine the Government's accountability to the people. Complexity is a major criticism, and I make no apology for its being the main theme of my speech, for however long I end up speaking.
I was trying to find a reason for the direction of the Chancellor's tax policy. I was considering whether it was a ruse to hide something else. Some people have suggested--I think that The Economist did so in an editorial on the Budget--that perhaps he was trying to hide the fact that there was some redistribution going on in the tax system. If that is the case, he is using a very large fig leaf to cover up that strategy, because the element of redistribution is very small.
The incomes of the bottom fifth are going up by 2.5 per cent. as a result of tax changes, whereas those of the top two fifths go up by 1 per cent. That is a redistribution, which we welcome, but it hardly requires the degree of camouflage provided by the overgrown complexity of the tax system. The real reason for the complexity is that the Government are driven in their tax policy by presentational requirements, not by the requirement to improve the tax system for the good of business and individuals.
We are entering an age in which the tax system is driven by soundbite economics and soundbite Budget statements. That is the new Treasury orthodoxy. In days gone by, although we might not have agreed with them, Chancellors of the Exchequer used to go into detail as to whether monetarism or joining the exchange rate mechanism were sensible policies. Those were the sorts of issues that Chancellors used to discuss on Budget day. Now, the Chancellor comes up with a few fizz bangs and soundbites,
and that passes as debate on economic policy. Frankly, it is not good enough. It seems that a Treasury mandarin is required to master the media, not macro-economics. That downgrades the economic debate.
We saw that very failure in the presentation of the Budget. A great deal of time was spent on tiny matters. At the beginning of his speech, the Chancellor spent much time talking about the 10p tax rate for small businesses, as if it were a huge change to the tax system. It certainly introduces an extra complexity, but it will make very little difference to entrepreneurial activity in this country. It costs a small amount and relates only to a small band of profits.
The Chancellor failed, however, to announce the very large tax changes that he was making. He did not let words to the effect that he was abolishing the 20p tax rate cross his lips. We were all left in some confusion until we read the Budget book and the press releases. As I said, the economic analysis that he provided to the House was devoid of content. The press releases revealed the complexity. We got it not from the presentation, but from the press releases.
I mention only one press release, on clause 19--the clause that introduces the new 10p starting rate of income tax. One would have thought that that was the simple soundbite tax policy of the Budget statement--the one that would grab voters and hit tabloid headlines. But the press release shows that the Government are introducing that policy into the tax system in a way that is far from simple. Paragraph 18 of the press release explains:
The tax system is becoming incredibly complex, and Liberal Democrats are concerned for our constituents, who are asked every year to try to understand it when they complete their tax return. As my hon. Friend the Member for Gordon said, the current series of Budgets from the Chancellor, including this year's Budget, is a gift to tax accountants.
"The starting rate will not apply to income from savings. The rates of tax on savings income remain at the lower rate of 20 per cent. for income up to the basic rate limit and at 40 per cent. above that, except for dividends which, from 6 April 1999, will be taxed at 10 per cent. up to the basic rate limit and at 32.5 per cent. above that limit."
That is simple, is it not?
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