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14 Apr 2003 : Column 672—continued

Mr. Alex Salmond (Banff and Buchan): I will resist the temptation to cite Aberdeenshire to the hon. Gentleman, but are we not reaching a position where the council tax, because it is being asked to bear a burden that it was never designed to bear, is becoming almost as regressive as the poll tax that it replaced?

Matthew Taylor: The hon. Gentleman is right. The criticism that I make is not restricted to this Government. The problem is particularly bad this year because the Government were particularly short of money, so they had to hit councils, but both Conservative and Labour Governments have performed the trick since the council tax was introduced. Council tax replaced the poll tax. As we all remember, VAT went up in order to increase the grant and keep council tax down to a level that would not lead to public protest but, ever since, year by year, Governments have been unburdening themselves of the costs of those services, pushing them on to the councils and pushing up the council tax.

There is a fundamental problem with the council tax: it is not related to ability to pay. It may be easy for a Chancellor on £140,000 a year to pay his council tax bill but it is very hard for people in areas such as the one that I represent—average income is £15,000 or £16,000 a year for a full-time male employee in my constituency—to find about £1,000 to pay the council tax bill, and it gets worse year by year. We know just how hefty the burden is, because the new figures that the Government released on Friday show us the result of this process. On average, after benefits the poorest fifth of households pay 7.1 per cent. of income in local taxes, compared with the richest fifth, who pay just 1.8 per cent.

That is why Liberal Democrats have argued that something has to be done nationally. We argued that we should have a 50 per cent. rate of tax on those lucky enough to earn more than £100,000 a year, which is in line with European levels, and even with New York

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levels, for top-rate taxpayers. That would provide sufficient funding to cut the council tax immediately by £100, and to get rid of the iniquitous tuition and top-up fees that are hitting the many ordinary families supporting students through university. Moreover, at a stroke it would to some degree rebalance the tax system, making it a little less regressive for the poor by asking the rich to pay just a little more.

Mr. Tom Harris: Will the hon. Gentleman clarify the effects of this policy? In addition to higher earners paying 50 per cent. tax, would not everyone else pay extra income tax, given that the Liberal Democrat policy is to get rid of the council tax and replace it with a local income tax? Would not the burden be increased, therefore, far beyond just 50 per cent.?

Matthew Taylor: In the first instance, we would ask not current top-rate earners but only those on more than £100,000 a year to make that contribution. That measure could be introduced very quickly; indeed, the Chancellor could have introduced it this week. In the longer run, what the hon. Gentleman says is right. We believe that the council tax is not a sustainable way to fund local government expenditure for the very reason that I have given. Yes, we would replace it with a system based on ability to pay: a local income tax that is collected through the existing Inland Revenue structure, involving less than 3 per cent. on income tax, in order to get rid of the council tax. I should remind the hon. Gentleman of the figures. The poorest 20 per cent. of the population currently pay 7.1 per cent. of income in local taxes—there would be a huge tax cut for them—yet the richest fifth pay 1.8 per cent.

Such rebalancing of the tax system would be right and fair. [Interruption.] I do not expect the Conservatives to believe me, because they do not believe in progressive taxation. I urge Labour Members to think hard about this issue. The alternative is further squeezes on council expenditure and services, and, worst of all, the probability of further yearly above-inflation increases in council tax. This Government have simply followed the previous one down this path. It is always easier for Governments to get councils to take the blame for council tax increases. People on low incomes—pensioners on fixed incomes and many others—are finding it impossible to pay these bills, at more than £1,000 per household, on average, for a band D property. This has gone from a protest of hurt to a real cry of pain, and the policy should not continue.

Mr. Jim Cunningham (Coventry, South): Some years ago, before the poll tax, the abolition of the old rating system—in Coventry, for example—resulted in the loss of some £600 million over a number of years. What are the hon. Gentleman's views on that, and would local government be funded solely through his proposed local taxation, or would he retain a measure of Government grant—he has not touched on that so far—for social services, education and so on? How would he compensate for that?

Matthew Taylor: The replacement system for the council tax would require only a fairly low level of

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income tax—on all income, incidentally, right across the bands—but the question of Government grant must be addressed in two respects. It is obviously necessary to maintain a system of Government grant to equalise differing income levels in different districts. The principle should be a similar level of income tax to pay for a similar level of service, so there is no getting away from generating fairness and equality across the country through Government grant. But the key difference between council tax and local income tax is that one could, if one wished, increase the proportion raised locally simply by reducing national income tax and increasing local income tax, penny for penny. However, there is no getting away from the fact that an equalisation system would be necessary, and no one in his right mind would argue otherwise.

Mr. Michael Howard (Folkestone and Hythe): Will the hon. Gentleman confirm that he would need 6p on income tax to compensate for the money that he would otherwise take through the council tax? On his short-term proposal, will he confirm that, since Liberal Democrat councils already charge, on average, £100 more in council tax than Conservative ones, the only effect of his introducing a 50 per cent. rate on income tax would be to bring Liberal Democrat councils' taxes to roughly the existing levels of Conservative ones?

Matthew Taylor: The right hon. and learned Gentleman is wrong, and he should check the Government figures. First, in fact, on average Liberal Democrat councils charge less than Conservative ones—[Interruption.] Oh, yes. The general public can rely on the official figures; they do not have to rely on the Conservatives' figures. His second point is also wrong. I am aware that the Conservatives have been peddling this figure. They assume that it applies only to the basic rate, which is wrong; worst of all, they forgot to take off the council tax benefit. So the proposal would cost nothing like the figure that he mentions. Perhaps he needs to get a new economic researcher, as this is a fairly basic matter to check on.

Of course, we know two things about the right hon. and learned Gentleman and tax for councils. He and I participated in a Committee some time ago, in which I argued for exactly the proposition that I have just advanced; however, he argued for the poll tax. He was representing the then Government and proposing the poll tax, so we know that he is not in favour of a fair system of local tax. He thinks that, regardless of how much people earn, they should pay exactly the same. He wants a big cut in his bill to pay for the council—a cut paid for by all of those on low incomes. An apology might be the right thing for him to intervene with now; perhaps he would like to apologise for introducing the poll tax, having arguing for it in Committee.

If the right hon. and learned Gentleman does not feel like doing that, perhaps he could tell us what he would do about the council tax. When asked last week by The Daily Telegraph what he would do about rising council tax bills, what did he have to say? Did he speak of a programme of change, of a new policy, of an initiative? No. All that he could say was, "I don't know." The full and thought-through Conservative party policy on the council tax, as expressed by the shadow Chancellor in the paper of that party, was, "I don't know." Well,

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Liberal Democrats do know. We have had a thought-through policy for some time, and the right hon. and learned Gentleman should surely have been able to catch up with us by now.

The final point that I want to touch on—

Mr. Soames: Bloody hell!

Matthew Taylor: Thank you. The Budget contained one unpredictable element that I was really surprised by: the Chancellor's decision, having thrown out prudence and dallied with lady bountiful, to hit the casinos—the gambler Chancellor. Underlying all of these policies are two assumptions that simply cannot be justified, but which underpin his spending programme for future years. He had a choice. His Budget need not have frozen some of the allowances, and he could have brought in a little extra in the way of finances. Most of all, he could have been honest and said not only that borrowing will be higher than he predicted for next year, but that it is likely to continue to rise for some time. We could then have argued about that.

Had the Chancellor taken that approach, his growth forecasts could have matched those of independent forecasters; instead, he chose to take a flyer. He chose to base his entire economic plan for the next few years on the assumption that growth in 2004 will bounce back way beyond the consensus of independent forecasters. He forecasts not the average 2.4 per cent. growth for 2004 predicted by independent forecasters; nor is he just a little on the high side of that figure at 2.5 to 3 per cent. He forecasts growth of a full 3 to 3.5 per cent. in just a year's time, despite the fact that forecasters predict that business investment will drop again next year.

We are talking about a bounce back coming from nowhere, funded by nothing, with no investment to pay for it. The Chancellor believes in that, and he may be right: perhaps the response to the war in Iraq will be a huge runaway success in the American economy, driving worldwide success and driving up the British economy, despite the fall in business investment in the United Kingdom. To describe that as prudent, however—well, not even the Chancellor could bring himself to do it.

The fact is that the Chancellor has taken a flyer. He has taken a gamble, and I do not think it was predictable. I think it was extraordinary. The chances are that he will have to come back in the autumn, or at the time of next year's Budget, and admit that he has got it wrong again and must downgrade his figures yet another time. Why did he do this? It is almost impossible to understand.

I am not talking only about the growth figures. In a couple of years, corporation tax receipts will be at record levels. They will not be at their present 2.3 per cent. level, or at the 2.9 per cent. historic average. A rate of 3.3 per cent. from the economy as a whole will be paid in corporation tax. How often has that been achieved? It happened in only one year, in the late 1990s, at the top of the stock market boom. For some reason, however, the Chancellor believes in low business investment along with record corporation tax levels.

If the Chancellor does not achieve his aim, he will have to cut spending or else—more likely—come back in a year or two and ask for more tax. This time it will

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not be to fund investment in education and health, but to fund a gap caused by his mistakes, which have led to low investment in business. That has meant an economy that has not earned the money to pay for the Chancellor's plans for health and education.

We welcomed those plans. We stood by them, and argued for the necessary increases. Next time, however, it will be not a tax for health and education, but a tax for Brown's error. Why did he do that unpredictable thing? Why did he take a gamble? I do not know. Perhaps we shall never find out; or perhaps the Chancellor has no intention of being in office when the time comes to pay his bills.

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