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We should however be aware of two aspects of the Budget which will make us aware of how the Budget is changing things. One of them is the Chancellor’s
apparent conversion to simplification by merging the tax and national insurance bands, for which I praise him. I accept that complications are also introduced in respect of tax credits, but simplification is the aim; that is the headline that the Chancellor wants the public to remember. The other key aspect of the Budget is the Chancellor’s apparent conversion to cutting the base rate—and therefore to tax cuts.
That offers a challenge to Conservative Members. It will become increasingly difficult for the Government and the Chancellor now, in the next couple of years and up to the general election, to argue, as he has so successfully argued in the past, that tax cuts promised by an incoming Government will inevitably lead to worse public services. Such claims have been made to devastating effect in the past against my party. As a result of the Budget, they will be increasingly difficult to sustain.
Efficiency gains and growth can ensure better public services. We should be aware of that at all times. After all, as my right hon. and learned Friend the Member for Rushcliffe made clear in his speech, the Chancellor wants to increase spending by only 2 per cent. in real terms—by less than the inflation rate. Before I sit down, I want to make what might be considered a fairly radical suggestion—that we should limit increases in total public spending, once there is a new Conservative Government, to the rate of inflation. Even last year, that would have been considered a way- out, radical, right-wing suggestion, but it is one that the Chancellor himself has taken up. As well as limiting himself to only a 2 per cent. spending increase, he is promising at least 2 per cent. in efficiency gains.
So there is a challenge for us. There is a real possibility that the new Chancellor of the Exchequer, whoever it may be—whether it will be somebody sitting in the Chamber at the moment or someone else, we do not know; we can only speculate—will be able to deliver very substantial tax cuts before the next general election. It is therefore important that my party be aware of that, prepare the ground and not wait for the general election to make its own promises, when, as happened in the past, they can be immediately rubbished. We should have the moral and intellectual courage to make the case for the state’s taking a lower share of people’s valuable earnings.
As I said, public opinion is changing, and it is doing so because people are being taxed so much more. Because of the failure since 1997 to raise income tax thresholds in line with earnings, in excess of an additional 3 million people are paying income tax, and an additional 1 million are paying it at the higher rate. Whatever they might say to public opinion pollsters who stop them in the streets, and whatever focus groups might say about the apparent reluctance to trust politicians who offer tax cuts, those people are out there in very considerable numbers and paying more tax.
The rise in taxes in both relative and absolute terms, and the well documented increase in the system’s complexity, has had a damaging impact on families, incomes, jobs and businesses. Let us look at household discretionary income. The amount that families earn after paying unavoidable expenses such as taxes and household bills has fallen by 10 per cent. Beneath the surface, public opinion is changing faster than we
political cognoscenti sometimes acknowledge. As the Chancellor may have sensed, perhaps the public are more interested in political parties that promise to relieve their burden of extra taxes.
Members might dismiss my views as those of one Back Bencher—meaning that they have no influence and do not matter. Do not listen to me, even for a second; instead, look at what is happening in other parts of the world. Since 1996, the Conservative Government of John Howard has carried out a major reform of Australia’s tax system. Its four income tax rates have been reduced from 20, 34, 43 and 47 per cent. to 15, 30, 40 and 45 per cent. respectively. Income tax thresholds have been increased considerably; indeed, the top rate threshold has trebled: it now starts at 150,000 Australian dollars, which is more than £60,000. So the results have been dramatic and show that in one country, at least, it is possible over time to combine falling interest rates, falling unemployment and falling tax rates with increased tax revenue, increased growth, increased Government spending, budget surpluses and the elimination of Government debt. If it is possible in that country, is it so unbelievable that it is possible in others?
Kelvin Hopkins (Luton, North) (Lab): If I heard the hon. Gentleman correctly, he suggested that the Australians have a top rate tax of 45 per cent., starting at £60,000. Is he recommending that for Britain?
Mr. Leigh: It is impossible for me, sitting where I do, to give an absolute figure for what should be the starting point for paying top tax rates. Nobody can expect us Opposition Members to do that. I am saying that we should at least have an open mind on this issue, look at what is happening in other countries and realise that it is possible to make considerable progress on these fronts. If Members do not want to consider the example of Australia, which is a long way away, they should consider Ireland.
In 1987, Ireland’s economic position was precarious. It had stagnant growth, high unemployment, spiralling deficits and the International Monetary Fund threatening to intervene in the Irish economy. That sounds familiar: it happened a long time ago in our country before the reforms under Lady Thatcher and John Major. Ireland’s 1987 budget began a process of major economic reform, cutting spending drastically to bring the deficit under control. The next budget reduced current spending by 3 per cent. and capital spending by 16 per cent. Those spending reductions were accompanied and followed by major and continuing tax cuts. Among others, the standard rate of corporation tax was steadily reduced from 50 per cent. in 1987 to 12.5 per cent. in 2003—the lowest rate in the EU. Personal tax rates were steadily reduced from 35 per cent., 48 per cent. and 58 per cent. in 1987 to 20 per cent. and 42 per cent. in 2001.
One might think that that was dramatic, and if anyone suggested such cuts here they would be dismissed as out of touch with reality or as coming from a right-wing think-tank, or criticised by Matthew D’Ancona in The Sunday Telegraph. However, between 1987 and 2003, overall tax receipts in Ireland increased fourfold and corporation tax receipts increased 16-fold. That has allowed public expenditure to grow by 220 per
cent., compared with a rise in the UK of 120 per cent. in the same period. I know that other factors were involved and we cannot entirely replicate what the Irish managed to achieve. Ireland, for example, has benefited unduly from receipts from the EU, but the fact is that the simple case is very interesting, and we should be aware of it.
David Taylor (North-West Leicestershire) (Lab/Co-op): The hon. Gentleman paints an interesting picture of alternative tax scenarios drawn from countries across the globe and across the Irish sea. He is known and recognised as one of the free, radical and independent thinkers of the Conservative party and it seems only a few months since that group was flirting with and promoting the virtues of a flat-rate tax. What is the present thinking on that in his party?
Mr. Leigh: I am famously not in the loop, so I do not know. I was very heartened by what the shadow Chancellor said in his early days about the benefits of moving to a much simpler and flatter tax system. I agree with the shadow Chancellor that in a complex economy such as ours it is not feasible to do suddenly what the east Europeans did and move overnight to a flat rate of tax. It is a caricature of our position to suggest that that is what we advocated. The Chancellor presumably believes in a simpler tax system himself. Why otherwise would he have sought simplification in this Budget?
Why is it beyond the bounds of credibility to suggest that a Conservative Government, over the lifetime of a Parliament, could move to a much flatter, simpler tax system, as suggested by Lord Forsyth, in an excellent, well documented paper? It showed, incidentally, that £21 billion of tax cuts were entirely deliverable. Of course, there was an attempt to rubbish that paper, with the same old arguments. Ministers trotted out the tired arguments that Lord Forsyth’s tax cuts would scythe a horrible hole through our public services, when in fact £21 billion is within the margin of error.
The point that my friend, Michael Forsyth, made to me on the phone when I was discussing flat taxes with him today—and I put it to my right hon. Friends on the Front Bench—is that unless one reduces the overall burden of taxation, it is difficult, indeed impossible, to achieve flatter and simpler taxes without creating a considerable number of losers. Therefore, we have to have the courage as a political party to start arguing the case for a lower overall burden of taxation, because that is the only way in which we can make progress towards a much flatter rate of tax.
I think that there is now an overwhelming case for change, and that the intellectual consensus is starting to change as a result of this Budget. People in all political parties are beginning to recognise that higher taxes are causing real hardships to families, and most of all to the poorest.
That is where the moral case for lower taxes comes in. Too many caricature the argument as one that is posed by people who have no interest in compassion and who want simpler and lower taxes only to help the rich. The truth is that higher taxes affect the poorest and most vulnerable members of society to the greatest extent, and that is unfair and immoral.
According to well-audited national statistics, the poorest 20 per cent. of households pay 36.4 per cent. of their gross income in direct and indirect taxes. That compares with 35.6 per cent. for the richest fifth, and 35.3 per cent. on average. The poorest people pay the highest tax—what a ludicrous situation! That is where we find ourselves after 10 years of a Labour Government, who I accept are composed of people who are entirely honourable and personally committed to reducing the burden on the poorest. What is going on?
I have set out the moral case for lower taxation. The PAC and other Select Committees have compiled numerous reports on the matter, and in his speech my right hon. and learned Friend the Member for Rushcliffe talked about the desperation that the poorest in our society face as they try to cope with overpayments in the tax credits system.
According to tables A3 and A4 in the Budget statement, people have to start paying income tax and national insurance when they earn only £5,225 a year. That is scarcely believable. Do not people in this House agree that that is a most extraordinary state of affairs?
In addition to the moral case for lower taxes, there is also a strong economic case, as I have tried to show with examples from around the world. A recent paper from the Organisation for Economic Co-operation and Development, speaking about the period between 1965 and 1995, concluded:
“Up to one third of the growth deceleration in the OECD would be explained by higher taxes.”
Although the US is not very popular in this House, I shall mention it as another example, as a report from the American Shareholders Association says that
“the US tax cuts of 2003 have already paid for themselves by around 50 per cent.”
I have set out the economic and moral case for tax cuts, and now I turn to the political case—the most important one for us politicians. I am constantly told that the public do not believe promises of tax cuts, that they have no appetite for them and that they want better public services. However, a recent ICM poll found that 71 per cent. of people believe that
“taxes have risen, we aren’t getting value for money, and the people who suffer the most are the most vulnerable in society”.
In addition, 59 per cent. of people believe that
“if Britain reformed public services and cut waste it could lower taxes without having to cut spending on vital services”.
By contrast, the poll found that only 36 per cent. of people believe that
“lowering taxes would create damaging instability for the economy”.
I have shown that there is a moral and an economic case for tax cuts, and I have spoken of the importance of audit. Like the Chancellor, however, I want to make one final statement before I sit down. It is a bit of a parlour game, but why should I not play it?
I want to make a suggestion about what we could do if the Conservative party were about to take on the ship of state and the shadow Chancellor were giving the Budget. It is so radical that the House will probably dismiss it instantly, but it does add up. I think that we should consider using the proceeds of growth to almost treble the tax-free allowance to £15,000, in today’s prices, by the end of our first Parliament or over the
next four years. In the process, we should abolish the starting rate of income tax.
That higher personal allowance would apply to all taxpayers, including pensioners, and it would benefit senior citizens as well as people of working age. Currently, people of working age can earn just over £5,000 a year before they pay tax, and for pensioners the figure is just over £7,5000. However, if those people were able to earn £15,000 before paying tax, that would constitute a major improvement in the quality of life for all taxpayers. It is difficult for non-experts—for MPs even—to cope with long Budget statements, but if the personal allowance was raised to £15,000, more than 13.5 million people would no longer have to pay any income tax at all. That is more than the number of people who voted for Labour in the 2005 or 2001 general elections. [ Interruption. ] I agree—I am not the Chancellor, I do not have all the books, and I am not suggesting that we should do all of that now. I am just saying that hon. Members can use the Treasury model and work it out for themselves—it is doable. If the personal allowance was raised, it would automatically raise the threshold at which people start to pay top-rate income tax. People start to pay the 40 per cent. rate when they earn just under £40,000, but raising the personal allowance to £15,000 in today’s prices and abolishing the starting rate of income tax would mean that people could earn more than £47,000 in today’s prices.
That is just one example, but it is realistically achievable over a Government’s lifetime if we take into account economic growth and efficiency gains. However, important choices have to be made, and that is where the pain—the slight pain—comes into my Budget statement. In recent years, the government sector has enjoyed record spending increases, which were mentioned by my right hon. and learned Friend the Member for Rushcliffe. Since 2000, the share of the economy taken up by the state has increased by 7.8 percentage points of GDP, which is faster than for any other country in the Organisation for Economic Co-operation and Development. The Government are literally awash with money—and borrowed money, to be paid for by taxpayers now and in future.
The expansion of government has gone far enough. We are suffering too much as taxpayers, and we should therefore consider limiting the annual growth of overall Government spending to inflation over the lifetime of the next Conservative Government. That is affordable and doable, and I commend it to the House. I do not think that it is going to happen, but I believe it very strongly. Before I conclude, I can only say that I stand by the words of Martin Luther:
“Here I stand. I can do no other. God help me.”
Royal assent
Mr. Deputy Speaker (Sir Michael Lord): Before I call the next hon. Member to speak, I have to notify the House, in accordance with the Royal Assent Act 1967, that Her Majesty has signified her Royal Assent to the following Act:
Northern Ireland (St. Andrews Agreement) (No.2) Act 2007
Budget Resolutions and Economic Situation
9.22 pm
Dr. Roberta Blackman-Woods (City of Durham) (Lab): It is always an interesting and challenging experience to follow the hon. Member for Gainsborough (Mr. Leigh). May I begin by congratulating my hon. Friend the Member for Blaydon (Mr. Anderson), who is not in the Chamber at the moment, on a truly excellent speech? I wish that I had carried out a similar audit in my constituency of what has been gained under the Government, because I am sure that the gains would be as extensive, if not more so, than those in his constituency.
I pay tribute to the Chancellor for the longest unbroken expansion on record, with GDP growing in 58 consecutive quarters, for stability in GDP growth, and for low inflation rates. All those things have put us in a strong position to respond to the global economic challenges that undoubtedly face us.
There are a few points in the Budget that I want to emphasise. First, raising the higher personal allowance for pensioners is extremely important. Pensioners have come to my surgery—and I am sure that this is the case for many hon. Members—as they are concerned about their level of taxation. The measure to take 600,000 pensioners out of taxation is a very good one, as are the measures to increase child tax credit, to increase the threshold for working tax credit and to reduce corporation tax as well as the basic rate of tax. It is important, too, that vehicle excise duty has been increased, although personally I think that the Chancellor could have gone much higher in taxing gas-guzzlers, which have a negative impact on the environment. I am not sure that the current level of excise duty will deter sufficient people from driving them. Lastly, the rise in investment in education by 2.5 per cent. in real terms is an important measure to which I shall return.
I want to stress the importance of science funding. We shall not be able to compete internationally unless we remain at the leading edge of scientific innovation and application, so I very much welcome the investment in knowledge-based and high added value sectors. I am particularly pleased that the 2007 Budget announced early the comprehensive spending review settlement for the ring-fenced science budget for the Department of Trade and Industry and for the Department for Education and Skills. Together, they will deliver annual average growth of 2.5 per cent. in real terms over the CSR period.
Mr. Graham Stuart: My understanding is that there will be a 2.5 per cent. increase, not 2.5 per cent. in real terms.
Dr. Blackman-Woods: My understanding was that it was a real-terms increase, which will, we hope, deliver excellent research.
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