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I turn to Britains position in the world and the way in which the Budget helps us to build on our achievements in Europe. I am glad that the Chief Secretary to the Treasury is in the Chamber, because he has performed many excellent ministerial roles in the past 10 years, including negotiating with our European partners. Tomorrow is the seventh anniversary of the adoption of the Lisbon agenda. I had the privilege of serving as Minister for Europe at the time, and I saw the way in which the Prime Minister negotiated a set of benchmarks for the European economy, if I may put it like that. For the first time ever at a European summit, we put in place a set of benchmarks against which the European economies would be measured, to see whether they were successful. It was not the usual warm words that are spoken European summits, where everything is wonderful and everyone is happy with everything that Europe has done.
Those benchmarks were revisited two years ago on the fifth anniversary of the Lisbon agendathe Kok report, too, looked at the success of European economies after Lisbonso we can determine how well we have done against the Lisbon criteria. There has been growth of 25 per cent. in the past eight years and, moreover, we are the fourth-best performing economy on criteria in the Lisbon agenda. We are the best of the big European economies, and that is because of the Governments policies. If we want to turn the European Union into the most dynamic and knowledge-based economy in the world, and if the competition is the United States, as it always is, we can see that the benchmarks set at Lisbon have made an extremely important contribution to what our Chancellor and the Treasury team have achieved in trying to move the agenda forward. That agenda has not only provided a strong economy, but has created jobs.
There was a great deal of concern among Opposition Members about the arrival of our fellow citizens from eastern Europe when the A8 joined a few years ago. They voiced criticism and, in fact, the then Leader of the Opposition, the right hon. and learned Member for Folkestone and Hythe (Mr. Howard), was going to go to Luton airport to judge how many EU citizens were coming to work in this country. Enlargement, however, has been an enormous success, and the Government, the Prime Minister and the Chancellor have led the process of enlargement. The combination of enlargement and the Lisbon agenda means that the citizens of the A8 who have come to the UK have produced huge benefits for our economy. Their taxes have benefited the economy, and their hard work and dedication have helped us to keep our place, which is why the Germans and the French must regret very much failing to do what we did two years ago, when we allowed the A8 citizens unfettered access to the UK.
I was disappointed that on 1 January this year we did not extend that unfettered access to the Romanians and Bulgarians, as I believed that allow such access would further help the economy and make it even stronger. However, a review has been promised by the Home Secretary, and I hope that my right hon. Friend the Chief Secretary to the Treasury, who knows those reports and the statistics, will tell him that the enlargement of the European Union and our success on the Lisbon agenda have provided a huge boost to our economy.
Mr. Lilley: Does the right hon. Gentleman accept that, even if there are the advantages in labour market terms that he suggests from the employment of the huge influx from the eastern European countries, it must also have had an effect on the housing market? Would he like to speculate how many houses are required to house 600,000 people?
Keith Vaz: I know that the right hon. Gentleman poses those questions sincerely. I have had no evidence at my surgeries or any anecdotal evidence at meetings that the A8 citizens are putting pressure on our housing market. He may have evidence, but I have none. If they contribute through their taxes to the British economy, they are entitled. The right hon. Gentleman is a former Secretary of State for Social Security. Very few of the A8 citizens have claimed benefits. The Minister, I know, will have the figures at his fingertips. A tiny proportion145 was the last figure that I heardof the hundreds of thousands who have come into the country have claimed benefits. If they come to the UK, pay their taxes, are not exploited and are paid the minimum wage, that is how they contribute to the economy, and it is up to local authorities to make up the difference. Any Member who represents an inner-city area knows that that is the case. That has been the magnet for people to come to this country.
I shall make two final points. The first concerns the GE factory in my constituency, which is about to close with the loss of 287 jobs, despite the booming economy. I have had meetings with the Minister for Industry and the Regions about that. The factory has been in existence for over 60 years, and was originally owned by Thorn. It used to make the majority of the light bulbs for the whole of Europethe lights in Europe started in Rushy Mead in Leicesterfirst for Thorn and then for General Electric, the second largest company in the world. GE has decided to close the factory, against my wishes, against the wishes of local people and against the wishes of the council.
Sadly, the Budgetthe reduction in corporation tax, which I welcome, and the reduction in personal income tax, which I mentionedcomes too late for the factory and the work force. As I was pressed by the hon. Member for Wycombe (Mr. Goodman), I am happy to clarify that that will be the lowest level of tax for 75 years. I am happy to put that on the record, before he jumps up at the end of the debate and starts accusing me of a lack of knowledge of economics. Although I did economics at A-level, I plead guilty to the error and I am happy to put the record straight.
I wish the factory could have remained open. My constituents have worked in Rushy Mead all their lives and now they have no jobs to go to. That is the problem with globalisation, which the Chancellor is good at talking about because of his visits to China and India. He has spoken about globalisation and the need to make our economy competitive. The GE jobs are going initially go Hungary and eventually to China, so we need to find a way of retraining our people so that they get they skills that they need.
Finally, I am glad the right hon. Member for Hitchin and Harpenden (Mr. Lilley) is present, as I have some nice things to say about him. Sixteen years ago the Bank of Credit and Commerce International closed,
on 5 July 1991. I have raised with the Treasury, and it may well be in the Red Book, which I have not yet seen, the issue of BCCI and how helpful the right hon. Gentleman was to me and to those who lost their deposits, their homes and their jobs 16 years ago. He was the best Secretary of State to have dealt with the matter over the past 16 years.
How sad it is that after 16 years BCCI is still in liquidation, with the liquidators still bleeding the bank, or what is left of it, with their huge fees. How sad it is that a Labour Government, after 10 years, have not put sufficient pressure, through the Treasury and the Department of Trade and Industry, on the Insolvency Service, which is part of Government, to put pressure on the liquidators to close the liquidation. If my right hon. Friend the Chief Secretary or the Financial Secretary gives the Governor of the Bank of England a ring about BCCI, he will hear how sad and how angry the Governor is about the fact that the Treasury still has not sorted the matter out. He and former Governors have had to go to court because the liquidators sued the Bank of England and have had to settle out of court.
I should like to hear in the winding-up speech whether the liquidators have paid the costs of the case over to the Bank of England. I want to ask the Chief SecretaryI know he is not the Minister with responsibility for bankingto say to the Minister with responsibility for banking, Yet another Budget where we should have made provision for BCCI, yet no solution. Why is it that all the senior partners of Touche Ross over 16 years have dealt with the matter and have all become multimillionaires, and still there is money in the bank that has not been paid out?
I was very nice to the former Secretary of State, the right hon. Member for Hitchin and Harpenden, but it was a Conservative Government who closed BCCI with the words of the then Prime Minister and the then Chancellor of the Exchequer, Lord Lamont, that there was no money in the bank. That was what he said when he was Chancellor. Only 80 per cent. of the money has now been paid back. Please, under this Government, let us do the decent thing and close the liquidation. The Treasury must talk to the DTI to try to resolve the matter.
Those final points were my only mild criticism, not of the Budget, which is a splendid Budget, but of the way in which we are progressing these matters. The Budget will be warmly welcomed in Leicester, East and the people of my constituency want to thank the Chancellor for what he has done.
Mr. Michael Jack (Fylde) (Con): I am grateful to be called to speak in the debate. I remind the House of my declaration in the Register of Members Interests. I shall comment on the Budget and the Governments record of stewardship of Treasury matters. I shall say something about tax simplification, inflation and monetary policy, and I shall conclude with some observations on inheritance tax and the environmental element in the Budget.
The Budget was difficult to judge because part of the picture was missingthat is, the now receding outcome of the comprehensive spending review, originally scheduled for this summer, and now forecast in detail for the autumn. Until we can put the tax raising and spending parts of the economy together, it is difficult to know how good are the claims made by the Chancellor were yesterday. We know that effectively there will be a squeeze on public expenditure, and if the Government will not pay for certain services, individuals may have to provide those themselves. That, from their standpoint, would be the equivalent of a further tax.
The Chancellor was also silent on one tax rise that we know is definitely coming and that will arrive from 1 Aprilthe likely 5 per cent. increase in council tax across the United Kingdom. Many hard-working families will see a real departure of money from their balance before any of the changes announced by the Chancellor can affect their personal budgets. This has been the silent tax throughout the time the Labour Government have been in power, in that above-inflation increases in council tax have happened year in, year out. Not just hard pressed families, but many pensioners are struggling to pay their council tax. And they will have had little relief from the telephone directory-size-Lyons report.
Another element was missing from the Red Book and I hope that the Financial Secretary will give some thought to remedying that in future. Over the Chancellors period in office, there have been many, many changes to the tax system, but no evaluation is ever provided as to whether they have produced any net benefit to the economy. For example, the Government have spent over £1.5 billion on reliefs to the British film industry. When I tabled parliamentary questions asking for some kind of evaluation, I was referred to the film industrys own reports on its overall progress. We have no indication from the Treasury of how many starts on new British films have occurred as a result of the umpteen tax changes that have affected the film industry. With £1.5 billion of taxpayers money put into one industry alone, I should have thought that some kind of assessment should be available.
I remember a small tax change some years ago whereby the rate of VAT on childrens car seats was reduced, with the claim that that would somehow improve childrens safety. I applaud that aim, but where was the evaluation of whether the expenditure of £5 million of the publics money ever gave us anything by way of improved safety?
A more controversial area is the ending of the payable tax credit as regards pension provisiona major change during this Chancellors stewardship of Treasury matters that was initially a £5 billion reduction in the amount of money going into pension funds. There has been much debate and argument about it. I, for one, would be interested to see a Treasury appraisal of that major change in the way in which pensions are funded, but nothing has appeared. If I had time, I could go through nearly every tax change that the Chancellor has made, for which there has been no impact study or evaluation to find out whether it worked.
Yesterday, the Chancellor patted himself on the back in relation to his own perception of his economic stewardship. Before we consider his latest Budget, we
should reflect for a moment on his track record. Personal tax allowancesmuch has been said about the personal tax content in this Budgethave, by and large, been increased by the rate of price increases, not earnings. As a result, the Chancellor has accumulated the equivalent of another 7p in the pound in tax takean increase in revenue equivalent to £29 billion during his lifetime as Chancellor. That fiscal drift has also meant that another 1.5 million people are now in a higher-rate tax bracket. I acknowledge that economic growth and increasing earnings account for part of that, but an awful lot of it has to do with fiscal drag. As for the tax bill for households, in 1997 the average household spend was 33.6 per cent. of income; now, it is 38.3 per cent.
One can go on looking at other areas. For example, while house prices have doubled, stamp duty thresholds, with the exception of the lower band, have not changed. The revenue from that area has increased by a staggering 582 per cent. In terms of investment in the economy, the percentage of gross domestic product invested in pensions when this Government came to power was 6 per cent.; now, it is significantly lower. The savings ratio has fallen from 10 to 5.3 per cent. Total debt in the economy is up by 160 per cent., at £1.3 trillion. Public spending as a share of GDP has, over the lifetime of the Government, increased from 34.7 to 44.9 per cent.an increase of 7.5 per cent. In the United States, our economic rival, public expenditure has increased by 2.4 per cent.; in Germany, the figure is 1.7 per cent. The cost to business of compliance with the multiplicity of the Chancellors tax changes since 1997 is estimated by the British Chambers of Commerce at an additional £40 billion.
In 2001 the Chancellor announced that Government debt over the next five-year period was to be £28 billion; by 2006, that had risen by an additional £129 billiona £101 billion overspend. Now this Budget, by contrast with the situation that was announced in the pre-Budget report for borrowing, contains a further £8 billion. I would say to the Financial Secretary that Treasury forecasting is very much in need of a review as regards its accuracy. If we go back through the Red Books, we see an increasing difference between what was promised and what was delivered, particularly on the key measure of Government borrowing.
Having given a different perspective on the Chancellors tax record, I turn to some specific issues. Let me first acknowledge the activities of one person who was not mentioned in the Chancellors plaudits yesterdaythe Paymaster General, who is continuing to provide support for the tax law rewrite exercise. That started during my time in the Treasury, and I am pleased that the Government have continued it over the past 10 years. The Treasury has also introduced some important anti-avoidance measures whereby those who wish to avoid tax must get Treasury approval in the first instance.
Against that more open and transparent operation of the tax system, may I say to the Paymaster General, through the Financial Secretary, that perhaps the time has come to start learning some of the lessons that have come out of the tax law rewrite exercise? I have been involved in its steering committee for the past 10 years. Many good ideas about sensible reforms in the operation
of the tax system have come out of that exercise, but sadly its remit does not allow those measures to be implemented because they would require a change in tax law.
Stephen Williams (Bristol, West) (LD): I, too, have taken an interest over many years, from a professional point of view, in the tax law rewrite. Does the right hon. Gentleman agree that we also need a tax law commission so that new proposals to reform our ever-burgeoning burden of tax legislation could be discussed by the profession and then enacted by Parliament with an informed viewpoint?
Mr. Jack: I am grateful for the hon. Gentlemans observations. We do not necessarily need another commission, but the rewrite exercises remit needs to be expanded to take account of his thought process by allowing for the expertise of the tax industry, which has been devoted selflessly and tirelessly to the rewriting of our tax law in plain English. The lessons that have come out of that should be developed, in partnership with the Treasury and Her Majestys Revenue and Customs, into an exercise to improve and simplify the operation of our tax system without putting revenue raising at risk.
For 70 or 80 per cent. of the population, what they pay every month in their mortgage has a more profound effect on their financial well-being than a penny or two off the basic rate of tax. On the basis of the average mortgage£123,000, according to the Council of Mortgage Lendersa quarter of a point change in the Bank of Englands base rate would cost people £25 a month or £300 a year extra. That has a far more profound importance as regards their personal budgets than the relatively small changes in the tax system that were discussed yesterday. That puts particular emphasis on the continuing importance of monetary policy.
I have been worried for some time that the United Kingdom may be running unnecessarily high interest rates because of structural problems in our economy. I asked the Library to provide me with a comparison between average prices, GDP growth rates and interest rates in the UK and the United States over the period 1998 to 2006. In the UK, interest rates were 5 per cent., price changes based on the consumer prices index were 2.9 per cent., and growth was 3.1 per cent. In the United States, interest rates were 3.64 per cent., price changes were slightly below, at 2.9 per cent., and growth was 3.5 per cent. I conclude from that that this other open, free market economy has some advantage allowing it to run lower interest rates than we can, and we should explore why. A recent International Monetary Fund report clearly identified the difference between the inflation rate in the manufacturing and service sectors:
While goods price inflation has generally been below service price inflation in all three
in the United Kingdom, this has been significantly more pronounced with goods price deflation offsetting strong and fairly stable inflation in services prices.
There is a case for examining whether further structural reform is needed in the economy, particularly in the
service sector, to ensure that it is efficient and not unnecessarily driving inflation. That was borne out in the same IMF report in relation to labour productivity growth in tradeablesas it calls the manufacturing sectorin the United Kingdom between 1995 and 2004. A 2.93 per cent. change is quoted, with a 1.4 per cent. increase in productivity for non-tradeables. In the United States, however, the figures are 3.5 per cent. versus 1.99 per cent. That difference needs to be looked at, and I hope that the Financial Secretary will agree that a consideration of the structural side of the economy has some merits.
In previous speeches on the Budget, I have commented on the subject of inheritance tax. Originally, I advocated its abolition, but I recognise that anyone who says that a tax should be abolished must tell the Government, or the Opposition, of the day where the money will come from. Given that more estates are now being drawn into inheritance tax, I decided that an alternative approach was merited. Older people who want to pass on the fruits of their labour have a considerable worry that house price inflation will draw them into the complex web of inheritance tax, with its 40 per cent. marginal rate. There is now a case to re-examine that tax.
I posed to the Library of the House the following question. If the inheritance tax threshold remained where it is now, and if all inheritance tax exemptions were removed, what rate of inheritance tax would be necessary to maintain the current yield? The answer that came back was a marginal rate of 10 per cent. If we modified that proposition by continuing the exemption from inheritance tax for the surviving spouse, a rate of 12.5 per cent. would result. With a simpler, more straightforward inheritance tax with low marginal rates, we might not have the situation in which avoidance was the privilege of the rich and sophisticated. That analysis shows that there is a case for re-examining the way in which inheritance tax operates.
From the same analysis, I also discovered that if we removed ways of avoiding inheritance tax, and had a threshold of £750,000, we would still be left with a 40 per cent. marginal rate. We can play tunes with the inheritance tax system, and the time is now right for a thorough review to remove complexity and try to introduce a lower marginal rate.
I want to conclude my remarks on the environmental element of the Budget. As the Minister will know, I chair the Environment, Food and Rural Affairs Committee, which has been doing considerable work on the citizens involvement in climate change and on bioenergy.
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