Examination of Witnesses (Questions 280-299)
22 MARCH 2005
RT HON
GORDON BROWN
MP, MR JON
CUNLIFFE, MR
MIKE ELLAM,
MR DAVE
RAMSDEN, MS
SARAH MULLEN
AND MR
JOHN KINGMAN
Q280 Mr Cousins: Chancellor, this issue
of tax avoidance has already been referred to earlier by Mr Heathcoat-Amory.
Do you think that fairness is put at risk when so much of our
national energies are put into financial engineering, the introduction
of tax avoidance schemes and the use of offshoring and tax havens
to dodge tax?
Mr Brown: Clearly it is a problem,
or we would not have to act against it. We introduced new disclosure
rules which have been successful. Where a scheme has been planned
by accountants, they have a duty to inform us of that process.
The reason we did that, we did not want clients being advised
that a scheme was legitimate and would continue in existence and
that the Inland Revenue would never take any action against it.
We thought it was right for the customer to be advised quickly
as to whether a scheme being promoted would have a chance of continuing.
This has been relatively successful. It enables early targeted
action to be taken. It reveals those using avoidance schemes,
so that they can be challenged. It informs risk assessment of
avoidance activity. So it achieves a number of different objectives.
We have now extended the disclosure regime in the Budget to Stamp
Duty Land Tax on commercial property (which has been an area we
have been worried about), and to two more listed VAT schemes and
an additional VAT hallmark. The Stamp Duty Land Tax rules will
take effect from 1 July; and the new rules for VAT disclosure
will take effect after Royal Assent. The disclosure requirements
have become a very important part of how we deal with continued
tax avoidance.
Q281 Mr Cousins: That suggests, Chancellor,
that you are operating with the idea not necessarily of trying
to draw a hard and fast permanent line between what is to be regarded
as avoidance and what is not to be regarded as avoidance, but
rather more responding to the ingenuity of contemporary financial
engineering?
Mr Brown: I think financial institutions
will always be ingenious. I think people will devise new schemes
to benefit their clients. Why we have a disclosure rule is because
we think it is a more responsible way of acting, to disclose that
that scheme is in existence so that the Revenue is in a position
to say whether they believe it is a legitimate scheme, or a scheme
that they wish to act on immediately. Certainly this requirement
to disclose, which is not popular but I think has now been accepted
as the right way forward, means that we can act quickly where
there is an avoidance scheme that may in the end mislead their
clients as to whether they will be able to get tax relief on a
particular item, or a particular activity.
Q282 Mr Cousins: Continuing with the
issue of fairness—the Government has been successful in
reducing the tax burdens on the least well off, particularly those
that earn, and of course many low income earners now are on negative
tax rates. Do you think this can be sustained without major reforms
to Housing Benefit, and possibly the introduction of some kind
of housing allowance to support low income earner occupation?
Mr Brown: These are big issues.
We published on the day of the Budget our document on tax credits
which suggests that the Housing Benefit may be one of the areas
where further reform could be made. Basically the tax system has
moved from being (as we inherited it) a 20p rate to a 40p rate;
from 40p at the top to potentially -200% at the lower end. That
means that the tax authorities, instead of receiving money from
certain people, are actually paying money out to people. It also
means, because of our generous system of Child Tax Credits, that
someone with an income of around £22,000, if they are a family
with two children, will have all their Income Tax liabilities
wiped out by the payments of Child Tax Credits and Child Benefit
to them. We have effectively created a system of taxation which
is fairer to people who work, fairer to families with children
and, because of what we have done in ISAs, fairer to people who
save. That is what tax credits enable you to do.
Q283 Mr Cousins: Do you not agree—and
this issue is flagged up very clearly in the document to which
you have referred—30% of housing tenure is renting; and
in addition to that there are a number of low income owner/occupiers,
and it is going to be very difficult to continue the Government's
strive to fairness without extending major reforms and assistance
through the Housing Benefit system?
Mr Brown: I think there are questions
here. First of all, I think we have got to do more to help people
afford to buy their first home, as well as help people who are
tenants.
Q284 Mr Cousins: But you may have to
support them after they have bought it?
Mr Brown: The issue is whether
the payments they have to make for their mortgages are payments
they can, in the end, afford to make. That can be done in a number
of different ways. It is a possibility that we can move further
and faster on, what I suggested in the Budget last week, shared
equity schemes. Instead of the home owner owning 100% of the equity
of the house, they share that with the government and the mortgage
lender themselves. There are some pilot schemes being looked at
for 70% ownership and shared equity with the government and Council
of Mortgage Lenders of up to 30%. That is another way of helping
people afford to buy their homes. At various stages over the first
few years either they can re-purchase the rest of the equity,
or wait until they then buy their next home. There are a number
of different ways. I accept that the reforms we are making in
Housing Benefit already are designed to help people get into work.
There is structural reform of Housing Benefit with the flat rate
Pathfinders for tenants in the private rented sector. There are
administrative improvements to help calculate better the Housing
Benefit requirements people have. Obviously we want to move towards
a greater simplification of Housing Benefit—not least to
encourage labour mobility, as well as for fairness.
Q285 Mr Cousins: I am sorry to press
you on that, but you referred to shared equity, does not the idea
of shared equity clearly point to the fact that we are going to
have to have a system of housing cost support that may be tenure-neutral;
that is not limited simply to those who rent but is also capable
of being extended to low income owner/occupiers?
Mr Brown: This is obviously an
issue. There is help for people in work through the work credit
whether they have got children or not; so tax credits already
help people who are single people or couples who do not have children;
they are not simply a means of helping people with children. The
future of Housing Benefit is obviously affected by this as well.
That is why in our tax credit document we say we want to look
further at the future of Housing Benefit. In principle what you
suggest, equity between renting and owning in some form of Housing
Benefit, is something that could be discussed; but I was suggesting
to you there are other ways by which we can help people buy their
first home.
Q286 Mr Cousins: I wonder if I could
also ask you about the additional support for Council Tax payments.
Half of the people over 65 pay tax, and there are clearly enormous
attractions in offering support for Council Tax that is tax-free,
through the Council Tax Support System and through the Winter
Heating Allowance because they are tax-free and means test-free.
The decision not to pay the £200 to people receiving 100%
Council Tax Benefit as I understand it, and please correct me
if I may wrong—but my understanding is that people on 100%
Council Tax Benefit will not get the £200, they may get the
£50 when they are over 70—would it not have greatly
assisted the Government's drive to help pensioners on low incomes
if the £200 could have been extended to people who are in
receipt of 100% Council Tax Benefit?
Mr Brown: I think what you are
suggesting is that we should give a Council Tax refund to people
who are not paying Council Tax, and I think that is a difficult
proposition. What we are saying is, where a household in which
there is a pensioner over 65 is paying Council Tax we will help;
but where no Council Tax is being paid it is difficult to justify
a Council Tax refund.
Q287 Mr Cousins: Yet as I understand
it, and please correct me if I am wrong, if somebody were to be
on almost 100% Council Tax Benefit and was perhaps paying the
very minimum Council Tax contribution, which is a matter of pence
a week, they would still be entitled to the £200 support.
I think in terms of equity the difference between these two groups
of people is so small in terms of income it might have been fairer
to extend the support to everyone?
Mr Brown: I think what you are
suggesting is that there be another £200 payment to every
pensioner household.
Q288 Mr Cousins: Quite a promising idea.
Mr Brown: There is actually already
a £200 payment to every pensioner household in the Winter
Allowance, and it is £300 for the over-80s; and in fact for
the over-70s it is an additional £50 this year as well. You
have £200, £250 and £300. I think that is the better
way of dealing with the problem which, as you rightly say, may
exist as an issue. I do say that if you have a Council Tax refund
it should be for people paying Council Tax.
Q289 John Mann: When Langold School was
first built the pupils celebrated by banging dustbin lids and
singing praises of a parliamentary candidate, and it was sufficiently
long ago that the candidate's father's name was Ramsay MacDonald.
An eight or nine year-old child in that village today goes to
the same school. Next to them is a brand new Sure Start and their
older brothers and sisters will be going next year to a brand
new secondary school. In terms of allocating money for new primary
schools, is it your intention that areas that have disproportionately
well benefited in the last seven years, such as mine, should now
continue to disproportionately benefit well or should there be
a reverse? In other words, should we be looking at the investment
pattern over the last seven years or over the last 70 years in
determining where the priorities are?
Mr Brown: It is where there is
need, and where there is a need for either rebuilding or renewal
of a primary school that should be done. The whole point of this
programme is to upgrade every primary school and every secondary
school in the country to make them 21st century centres of excellence
for learning. There are thousands of primary schools that will
come inside this programme. I think I said there will be an average
of about 17 primary schools per constituency—that is how
big this programme is over time. Where there is a primary school
that is in need of that renovation as you are suggesting (there
is one in your constituency) I would have thought the Department
of Education would make it part of that programme. There are many
primary schools 100 years old; many schools are in buildings that
are very old; some of them have been completely modernised and
are good buildings themselves, and the equipment and infrastructure
inside is good enough for the future; some of the buildings are
so old they perhaps need to be rebuilt in their entirety; but
that is the point of setting aside so much money in this programme.
We could only do this because we have a commitment to invest more
in future years. It could not be done by any government that wished
to cut public expenditure or cut public investment. It is only
possible, therefore, because the investment plans are set down,
in this case, until 2010 for primary schools.
Q290 John Mann: There is a pressure from
the suburbs where schools were built in the 1960s and 70s that
they again should be top of the priority list rather than historic
Victorian and Edwardian age schools. Do you foresee that there
should be performance indicators for LEAs to ensure that they
do not unduly bow to that pressure from the suburbs?
Mr Brown: I know you are speaking
for the whole country here! I think what is important is that
schools that are in need of renovation get that renovation quicker
than they would otherwise have done but for the Budget announcement
last week. I am told that the upgrading will cover at least 50%
of primary schools in England. That means a very large proportion
of schools both in the suburbs, as you describe them, and in traditional
industrial areas will benefit from this programme. You are talking
about thousands of schools being part of this. I think the Secretary
for Education rightly described this—and I said education
was a priority of this Budget, education investment for the future.
This is the biggest renewal programme since Victorian times for
the schools of our country.
Q291 John Mann: Those nine year-olds
at Langold School have got parents in my constituency who are
in work. We have only 970 not in work but we have 3,000 new jobs
being created. In terms of addressing this new problem of labour
shortage, do you think that the JobCentre Plus rollout is going
to go fast enough to meet the demands for New Labour of returning
more people in more ways to the labour market?
Mr Brown: I think there is a skills
shortage in the country, and I think we have got to address this
by helping unemployed people get skills, helping people in work
getting better skills and helping young people be better qualified
for the work that becomes available. In each of these three areas
there are programmes of action. They are not all being done through
the JobCentres; they are being done through Adult Education; Further
Education; and, in some cases, through the Trades Union Learning
Programme that they have adopted themselves. There are a lot of
different centres of initiative for giving people the skills which
are needed, but I think skills are the issue for the future.
Q292 John Mann: Who benefits most from
this Budget: (a) a coalminer who has contributed to the Mineworkers'
Pension Scheme for 40 years or (b) one who opted out and spent
his money on gambling and alcohol?
Mr Brown: I think pensioners benefit
from this Budget, and people who have worked hard all their lives
and had lower pensions than some others benefit from the pension
credit—which is the first time we have been able to reward
the savings and the hard work of people who have built up a small
occupational pension but not a large one, and have some savings
but not huge amounts of savings. The pension credit is a benefit
to those people who have worked hard. As far as the beneficiaries
of this Budget are concerned, hard-working families generally
benefit from this Budget, as well as pensioners, and I think the
investment we are making in education and science for the future
is to the benefit of everybody in the economy.
Q293 John Mann: Finally, someone suggests
(and in my view rightly) that we have got an historical legacy
of debt owing to Commonwealth countries. When do you anticipate
on current trends, with the current Budget and the trends built
in it in terms of debt write-off, that we will have written-off
the debt as a country of all Commonwealth countries?
Mr Brown: Bilateral debts—the
debts that are owed by these countries to us, that is the highly
indebted poor countries—they are already taken care of as
a result of our 100% bilateral debt relief. The question that
is most worrying at the moment is, even if you have 100% bilateral
debt write-off, there are still two areas where debt is still
incurred by these poor countries and yet they are unable to pay
it: the first is a small group of countries that did not do the
100% write-off—and that includes Libya and Eastern European
countries, and I think that can now be dealt with over the next
few months; and the second is the debts owed to the IMF, the World
Bank and the African Development Bank themselves. That means,
unless something is done about that, the write-off of debt or
the reduction of debt in the poorest countries, we are only taking
care of half the debt; because of bilateral debt write-off we
have still got half the debt that remains because of what they
owe to the World Bank and the IMF. That is why we put forward
these ambitious proposals that, first of all, unilaterally Britain
will pay its share of the World Bank debts. Therefore we have
signed agreements and are signing agreements with about 20 countries
which are eligible for this debt relief that we will pay our share
of the international debts as well as the bilateral debts. Then
we want the rest of the international community to follow and
we want a scheme for dealing with IMF debts (and there are about
$8-10 million of IMF debts) which need to be dealt with by some
revaluation or use of IMF gold. Then the second area is debts
owed to the World Bank and African Development Bank, and we want
the world community, the richest countries, to share responsibility
for either writing off these debts or, as we propose, servicing
these debts so the debts are no longer debts paid by the poorest
countries—they are paid by the richest countries on behalf
of the poorest countries over a period of years. I think we are
making progress with the international community but we have to
persuade a number of countries that this is the right thing to
do now. I would like to see this year as being the year in which
we brought to an end the historic embarrassment and deep tragedy
of unpayable debts owed by poor countries that weigh them down
and make it impossible for them to invest properly in their health
and education systems for the future.
Q294 Angela Eagle: Chancellor, has seeing
the American nominee for the job at the World Bank made you more
pessimistic or more optimistic that you will be able to achieve
your goals for this year's G8 and EU chairmanship with respect
to international development?
Mr Brown: I think the decision
about what happens on debt and development is a matter for the
countries ourselves. It is a matter for us and the G7, then for
the members of the IMF and the World Bank; but it is essentially
a matter for the individual shareholders and for us, Britain,
and members of the G7. I think that is where the burden lies for
making the changes. It is our responsibility to make these changes.
Q295 Angela Eagle: One of the puzzles
about the Budget figures for some commentators has been what they
perceive to be happening in the labour market. There are various
views as to how tight the labour market is at the moment and surprise
in some quarters that there is no obvious sign of wage inflation.
What is your interpretation of what is happening in the labour
market? How confident are you that you can reach the goal you
set in the Red Book of increasing the number of people of working
age in employment by another 5%?
Mr Brown: I think this is very
important. Obviously there is a skills issue in the labour market
we have got to address, because if we do not have the skills that
are necessary for the future there will be inflationary pressures
arising from that. I believe we are starting to address in a long-term
way the need for skills. I think what has been fascinating about
the independence of the Bank of England is that whereas, before
the Bank of England was independent, wage bargainers and people
looking at what their wage levels should be in future years always
assumed that inflation would be far higher the next year than
it was in the previous year and built their assumptions in wage
bargaining around the idea that if inflation was 2% this year
it would be 4% next year and, therefore, we should bargain on
the basis of 5% or 6% as opposed to 4%, that has changed. I think
people now know, and it did take some time, that the inflation
target will be met and, therefore, if you are looking at what
your real terms rise in your standard of living is likely to be
it is based on a 2% inflation target and not on an expectation
that, even though the target is 2%, the actual level of inflation
next year will be 4%, 5% or 6%. That is quite a big change in
the way people approach the issue of wages. Even in 1997, with
the inflation target of 2½%, or less under the previous government—and
you might argue that when we made it a symmetrical target of 2½%
we did not have the further (less than) -2½% being an objective—people's
inflation expectations were 4% for the next year and people thought
that the inflation target would not be met. It is because of the
independence of the Bank of England and the new monetary regime
that people think the inflation target will be met and therefore
wage bargainers I think understand that you are bargaining on
the basis of a 2% inflation rate and not a likely inflation rate
of 4%. I think that is what has made the difference. Could it
therefore be possible that within a low inflation environment
we can get more people into work and meet our objectives? In the
Budget there are a number of measures agreed with the Department
of Work and Pensions, some of them initiated by Alan Johnson,
the Secretary of State, in recent weeks: one to help single parents
get into work. There has been a 40% increase in the numbers of
single parents who are working since 1997; so the percentage of
single parents in work has risen from 45% to about 55%, and that
is a big change. The next changes ought to bring it from 55% to
60% and then to 70%, to the same level of some of our competitor
countries. We have introduced a Back to Work Allowance that happens
in a number of areas in this country. We have got a special programme
for helping single parents back to work in cities where big companies
who want to recruit people are helping them back into work. Of
course we have tried to make the childcare arrangements better
for them. Gradually we will see this increase in the single parent
employment rate becoming pronounced. I think that is a big change
since 1997. Equally, the arrangements for Incapacity Benefit claimants
to get back into work: we want to avoid any discouragement for
them going back into work by saying that if it does not work out
if they get a job we will help them back onto Incapacity Benefit.
I think that will be an incentive for people to try work. Equally,
there is a disability and tax credit that makes it more advantageous
for people to have a job. Then, dealing with the long-term unemployed,
there are a number of measures in the Budget particularly for
ethnic minority areas, which I think are quite significant; and
in those areas where unemployment has not come down as fast as
in other areas we are trying our best to try to move that process
forward and there are more incentives available for people as
well as, in some cases, more responsibilities.
Q296 Angela Eagle: How important do you
think the New Deal is in achieving some of the supply-side changes
in the labour market?
Mr Brown: I think the New Deal
will be recognised in history as being the most successful employment
programme that this country has had, partly because we have put
upfront money through the Windfall Tax to create the New Deal
and, therefore, it was properly financed from the beginning; but
partly because people have responded to the mixture of rights
and obligations that were linked in the New Deal itself. Youth
unemployment has gone down 75%; long-term unemployment has gone
down by about 75% as well; and I have just given you the figures
for single parent employment, which is very encouraging and ought
to be built upon in the future years. What in my view would be
the worst possible decision in employment policy would be to abolish
the New Deal at this stage. Here you have new challenges ahead
to get the population skilled for the future, as well as to get
people who have fallen through the net into work, particularly
those unemployed, young people without qualifications, and adults
without qualifications, to get them both the skills and the employment
opportunities that are needed. Guidance in these cases through
advice, counselling and training and, in some cases, through Child
Tax Credits is important as well. That is why a programme which
has helped 1.2 million people into work, including half a million
young people and 200,000 unemployed adults ought to be continued.
I do caution the political parties that wish to abolish it against
doing that. What that would mean is that there would be more unemployment,
more social security costs and, in the end, instead of it saving
money it would cost money to abolish the New Deal.
Q297 Angela Eagle: On another area where
there is some disagreement amongst political parties about whether
it should survive, could you say something about what you believe
the significance of the second state pension will be to challenging
pensioner poverty?
Mr Brown: It does help challenge
pensioner poverty, and I could provide you with a note on the
effects of it which the Committee might benefit from. The important
thing to recognise is that in this debate about the future of
pensions that the Turner Commission is reporting on very, very
soon, the position particularly of women with interrupted earnings
in the labour market, and yet a need for themselves to have some
satisfactory arrangements in retirement, is something we have
got to take very seriously indeed.[1]
Q298 Mr Walter: Chancellor, if I can
deal with your section of the Budget document "Meeting the
Productivity Challenge", the main thrust of your Budget initiatives
to meet the productivity challenge is tackling the burden of regulation
on business. Section 3.19 "Leading regulatory reform"
says, "The Government believes that inefficient regulation
can impose significant burden on business and has pursued a programme
of reforms". If I can just pick out some of that, there are
three subsections on that. "Ensuring that regulation is used
only where necessary and that it is not gold plated if it originates
in EU law"; and, "Pursuing an agenda of regulatory reform
in Europe because around half of all significant new regulations
affecting UK businesses originate in the EU". The House of
Commons' Library has just done some analysis of EU-derived regulations
and in the five years to April 2004 shows that the proportion
of these regulations flowing from Brussels averaged only 9% a
year. By a simple deduction 91% must have come from your Government
and the 50% figure is wildly erroneous?
Mr Brown: I think I said "major
new regulations" or regulations that had an impact on companies.
I think my Budget speech said "major new regulations".
Q299 Mr Walter: Your colleague, Mr Denis
MacShane, the Minister for Europe said that of these 9%, which
the House of Commons identified, many of these EU dictated rules
were agricultural or quite technical. I do not think that is quite
the same definition as "major new regulations". In fact
he debunked the 50% figure, or the "around a half" which
you have got in your document in this morning's Financial Times,
by saying, "It's typical of the tendency of anti-European
politicians to tell more myths and fantasy about Europe than you
can find in Harry Potter or The Da Vinci Code".
Do I sense a major split here between the Foreign Office and the
Treasury?
Mr Brown: Not at all. In fact
the measures on the gold plating of regulations are ones that
are introduced in a document by the Foreign Secretary on Budget
Day showing the cooperation between the Foreign Office and the
Treasury in dealing with these issues. What I said was, about
half of all significant regulations affecting UK businesses originate
in EU law. I think it is rather strange that you are putting this
point to me in this way, given that it is your party that has
done most to identify some of the regulations that have been causing
problems for British business: for example, your pressure on the
Working Time Directive and on the Agency Workers' Directive. I
find it quite difficult to understand where your questioning actually
takes you. Are you telling me there is no significant EU legislation
that has affected British employers' costs?
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