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I urge the Government to think again about schedule 20, just as I urge them to think again about the whole Bill. Much of the measure increases complexity and instability in the tax system, discouraging business investment and damaging productivity growth, both of which have slumped under the Chancellor's stewardship of the economy. Much of it undermines attempts to improve Britain's IT skills, which are vital in competing for high value jobs with India and China and the world's emerging economic giants. It leaves Britain with its highest tax burden ever, excluding North sea oil revenues, damages our competitiveness and fails to prepare our country for the challenges and opportunities of the 21st century globalised world economy.
Mr. John McFall (West Dunbartonshire) (Lab/Co-op): It is a privilege for the Select Committee on the Treasury to publish our report on the same day as Second Reading. The report was prepared under a restricted timetable and, as Chairman, I thank the Committee staff for their tremendous work in the past few weeks. I also thank those who appeared before the CommitteeTreasury officials, outside experts, including Professor David Heald, who has been a constant source of advice during our inquiries, and, not least, the Chancellor.
Stephen Hesford (Wirral, West) (Lab): Does my right hon. Friend regret, as I do, that all the hard work that the Select Committee put in and all the evidence that it heard were trashed yesterday in a Tory leak to The Times, which misrepresented the evidence that the Committee had heard and what it said about the Chancellor's golden rule?
One of the issues that the Committee considered was energy prices. The rise in energy prices appears so far to be having muted second-round effectsin terms of increased demand for wages, for examplebut we greatly welcome the Government's proposals to encourage an independent investigation into European gas markets and into energy markets in general. We would like the Government to provide an update of the outcome given in the 2006 pre-Budget report.
In regard to the energy market, we took evidence from the Governor of the Bank of England, which published its inflation report during our hearings. We asked the Governor about the lack of competition in European gas markets, and it is worth quoting his response:
"It is true that there is the inter-connector with Belgium through which it had been hoped that gas would flow into the United Kingdom when prices were higher here than on the Continent, but I am not sure whether it was entirely reasonable to expect that, given that the gas market on the other side of the Channel is not exactly reminiscent of the group of atomistic competitors of textbook theory".
I endorse that lucid academic comment, and urge the Government to seek the liberalisation of those energy markets, because the present situation is having a detrimental effect on United Kingdom business and UK consumers.
"While the forecasts of the Budget do not suggest that consumer spending growth will reach the previously high levels seen in the recent past, several outside observers note significant downside risks to these forecasts. We recommend that the Treasury provide all necessary assistance to the Office for National Statistics in its task of understanding and measuring consumer spending, such as on services rather than retail sales, to help improve the quality of consumer spending forecasts."
There is an abundance of information on our manufacturing industry but very little on the retail and services sectors. Given that those sectors now account for 70 per cent. of gross domestic product, it is important that the collection of the relevant figures for those sectors improves.
The Committee also considered the labour market and migration, and noted the Home Secretary's statement about a points-based immigration system. It is important to underline the fact that this country needs skilled immigration. Among the successes of London that have been noted recently, particularly since the tragic events of 7 July last year, are the effect of its cosmopolitan nature and the way in which people come into the city and use it to work in. It is therefore important to consider immigration in that context. Economically, we need immigration. No expert commentator, including the Governor of the Bank of England, would appear before our Committee and say that we did not need immigration. We need appropriate immigration, however, and it is important that the system to be implemented by the Home Secretary should work well.
In the Budget the Government have recognised the need to encourage a higher rate of female labour participation. The Women in Work Commission has made more than 40 recommendations on this matter,
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and I hope that the Government will take them up. The economies in Europe that are doing well are those with labour market flexibility and a high participation rate of women in labour markets. The female employment rate in this country is nearly 70 per cent., but the Women in Work Commission's report suggests that, by increasing female labour mobility and participation, the economy could benefit by up to £23 billion, which is roughly 2 per cent. of GDP. Therefore, the provision of more funds to train women who have lower skills to get higher skills is important.
We also considered the golden rule, on which my hon. Friend the Member for Wirral, West (Stephen Hesford) intervened. I saw a biased report about that rule in the newspaper this morning. I hope that there has not been a leak from the Committee, but that newspaper report indicates that a vote had been taken about it in Committee. That account is very much to be regretted, because the Treasury Committee, which I have had the privilege to chair in both this and the previous Parliament, has largely produced unanimous reports. We investigate subjects deeply and spend a lot of time debating issues when compiling reports. I do not think that I am speaking out of turn when I say that we spent about three hours debating our Budget 2006 report to ensure that all members were as happy with it as they could be. I will bring that issue to the attention of fellow members.
The Committee's report noted the Treasury's projections showing that the Government are on course to meet the golden rule after the end of this economic cycle. However, we remain concerned that fiscal policy towards the end of a cycle might be constrained unnecessarily by spending levels or data classification from, say, 12 years earlier, at the start of a cycle. In particular, revisions to data might be held to require sudden and undesirable changes to tax or spending in the final years of the cycle, for the sole purpose of meeting the mechanical calculation implicit in the golden rule. We have said previously in reports, and will repeat in this one, that we remain of the view that it would be appropriate to review the fiscal rules, so that any improved formulation of the rule could be introduced at the start of the next economic cycle. The Governor of the Bank of England and others have said to us that a forward-looking approach to the golden rule should be adopted, focused solely on the sustainability of public finances. In many ways, that would take away the mechanistic element whereby the golden rule is considered over a fixed economic cycle. I note, however, that the golden rule has worked on that basis to date.
"The Golden Rule at best was only ever a reasonable rule of thumb . . . The idea that over a period of seven or 12 years if you beat it by one billion that is terrific and if you miss it by one billion that is a disaster just is not sustainable on any analytical grounds."
On the other fiscal rule, the sustainable investment rule, we know that the whole of Government accounts procedure will be introduced shortly. The sustainable investment rule will need to be considered in the context of the Government's balance sheet, to be prepared
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under the Government WGA programme. I know that Sir John Bourn and others have been discussing that with the Government, as the Public Accounts Commission, of which I am a member, regularly receives evidence from Sir John and his colleagues on that issue.
Like the Government, the Committee is also focusing on the comprehensive spending review. We welcome specifically the Government's decision to initiate a national debate as part of that review. It is important, however, that that debate is set in a context that allows an opportunity for full consideration of options and priorities, rather than simply providing an opportunity for Departments to canvass public support for their bids for increased expenditure. It is therefore important that departmental Select Committees of the House of Commons ensure that they are fully engaged with the process. As a first step, the Treasury Committee expects to hold an initial inquiry on the CSR, following the publication of the report, which we expect to be in mid-2006. To assist with the timely parliamentary scrutiny of matters arising from that report, we urge the Government to ensure that that document is published no later than June 2006, so that the Committee can get its teeth into it in July, before the recess. The debate can then continue when Parliament returns in the autumn.
As the Chief Secretary knows, the Select Committee looked closely at the issue of efficiency savings and the public sector work force, and the Government's targets in that regard. We welcome the contribution made by the recent National Audit Office study to understanding of the efficiency programme, but we should like future documents to contain further analysis of the programme as a whole, including an indication of the proportions of the overall reported savings that are attributable to central and local government and that are cashable and non-cashable, as well as an analysis of savings in relation to the themes identified in the Gershon review. I am thinking particularly of back-office functions, transactional services, procurement policy, funding and regulation, and productive time.
As for poverty and the tax system, we welcome the Government's contribution to the ending of the highest marginal deduction rates of 70 per cent. or more. Those affected have been reduced from 740,000 before the 1998 Budget to 240,000 under the 2006 system of tax and benefits, which is very welcome. Many of us who have been in the House for years became used to being told by pensioners that they were losing 100 per cent. as a result of being a few pence over the Government's limit. The elimination of that 100 per cent. is extremely important, but, as always, it is work in progress.
The number of households facing marginal deduction rates in the region of 60 to 70 per cent. has increased since 1997, and now appears to have levelled off at about 1.5 million. We recommend that the Treasury analyse the characteristics and income distributions of households facing such high marginal tax rates, and the extentif anyto which they are discouraging people from entering the work force, working longer hours, or acquiring additional skills. We welcome the progress made so far, but there is more to be done.
The press and others have already taken up the Government's statements about environmental taxation. The Committee made clear its view that the Government's response was both incoherent and
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unconvincing. Why did we say that? Between 2000 and 2004, the annual number of chargeable passengers increased by 25 million, or 35 per cent. The emission of greenhouse gases has increased by 10 per cent., or 0.8 tonnes, and tax receipts for air passenger duty have decreased by 8 per cent. Theirs is an unconvincing environmental approach to taxation.
Last week, Professor David King spoke of a 3°C increase in temperature over 100 years, whose effect would be calamitous. He said that 400 million more people would face hunger as a result, while 3 billion more would risk flooding or no access to adequate water supplies. Cereal crops would be reduced by anything from 20 million to 400 million tonnes. This is the issue of today, as the Prime Minister said when he was in New Zealand. If I remember the transcript correctly, he said that the situation was worse than the Government expected it to be a year ago. Something must be done, but we should not kid ourselves: it is a hard decision for all politicians and all parties. It does not promote communion between us and our electorate, because people enjoy cheap flights, but we should bear it in mind that aviation is in many ways outwith the present scheme. It does not pay value-added tax or fuel duty, and is exempt from the climate change levy. So the situation has to change and the Government have to get a grip on this issue. The Treasury officials who came before the Committee said that they judge environmental taxes according to behavioural changes, but as we have said, the fact that there are now an extra 25 million passengers shows that the behavioural changes are going in the wrong direction. The officials seemed too clever to understand that point, but people realise that, as such changes show, the system is not working as well as it could.
The Government tell us that they want aviation emissions to be included in the EU emissions trading scheme. I agree entirely with that idea, but it is only a partial response to the problem. The current scheme applies from 2008 to 2012, and I am informed that any changes to it have to be in by 30 June and must be internationally agreed. So we are not going to get such agreement, and aviation will not be included from 2008 to 2012. I am told that there is a theoretical possibility that aviation could be included from 2010, but again, that is not going to happen; it will be kept out until 2012. The Government say that they are meeting their Kyoto targets, which is true, but Kyoto finishes in 2012 and the EU emissions trading scheme must be renegotiated from 2012 onward. So we may think that the current situation presents problems, but they will increase enormously from 2012.
So, be it at a domestic levelthe Government have fallen behind on their domestic carbon dioxide emissions targetsor internationally, the situation regarding climate change is bleak. Whether or not the report's recommendation that the Government consider increasing air passenger duty is taken seriously, it highlights a problem that we all have to tackle, but which, sadly, we so far have not. We cannot simply continue with our current lifestyle, without making sacrifices to reduce carbon emissions. We have to strike a balance, and I hope that the Committee has helped to focus public debate on this issue.
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The Committee also looked at changes to the tax treatment of trusts. The Committee and I have received quite a bit of correspondence from companies and individuals, mainly companies. The Committee said:
"We are concerned that a legitimate measure designed to reduce tax avoidance may penalise trusts established to protect family members and consider that the issue merits further consideration. We recommend that the Government provide detailed information about how it has arrived at its estimate that the new rules on the tax treatment of certain trusts will affect only a 'minority of a minority' of 100,000 discretionary trusts."
"In future, we suggest that the Treasury considers the benefit of undertaking appropriate consultation on measures such as those changing the tax treatment of certain trusts, where there is a strong argument that people have been quite properly planning their affairs on the basis of explicit exemptions in tax legislation."
"that the rise in council tax over 200506 and 200607 is forecast to be the lowest since 1997 . . . .We welcome the guarantee of the higher winter fuel payment of £200 and £300 for the over-80s for the rest of this Parliament, alongside the support for insulation and central heating for pensioner households. In the light of continued volatility in energy markets and announcements of future gas and electricity price rises, we recommend that the Government re-assess the situation at the time of the 2006 Pre-Budget Report and take further action if necessary."
As a Committee, we were aware that the context of the Budget was the long-term challenges, both domestic and global, that face this country. In the domestic area, we took evidence on the education and skills agenda, the child poverty targetson which the Government still have a bit to doand the comprehensive spending review. The CSR is a very important review and my right hon. Friend the Chief Secretary confirmed that it is from a zero base. We examined three departmental budgetsInternational Development, Education and Skills, and Health. The increase for DFID, year on year, is 10.6 per cent. The DFES and the Department of Health have been singled out for extra increased expenditure. That means that some other Departments will get as little as 1.7 per cent., so it is important that the process is transparent so that parliamentarians may be assured that the Government's approach is proper and that every Department will get its fair share. In the context of the Budget, the sustainability of public finances is important, and we considered that issue time and again in our report.
In the global context, we are aware of the economic imbalances. Professor David Miles of Morgan Stanley has pointed out that the longer the US runs an extraordinarily large current account deficit, the more likely a potentially sharp adjustment becomes. If that happens, it will affect this country, so it is important that we play our part in the reform of global institutions.
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I was therefore delighted by some of the comments that my right hon. Friend the Chancellor made at the weekend about the International Monetary Fund. We are privileged to hear evidence from the Governor of the Bank of England on the IMF next Thursday, and my right hon. Friend will follow him in a couple of weeks.
The Committee is considering globalisation, because it has advantagesthere is no doubt about thatbut it also has drawbacks. It is important that this country has the appropriate policy responses to the issues of globalisation. The Committee therefore looks forward to working with the Government and others to consider those issues and to ensure that the challenges that this country faces, at both domestic and international levels, can be met and overcome.
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