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Mr. Henderson: I feel that I should apologise for repeating myself, Mr. Deputy Speaker, although I do not seem to be the only Member in the Chamber who is guilty of doing so. No small business wants regulation. Small businesses just want to get their products or services right, but regulation—whether environmental, labour or tax—is something they just have to put up with. In big companies, experts earning handsome salaries deal with all those things—I have sometimes been a beneficiary of those services in the past. There is a completely different environment for such companies, and that fact will not change. That is not the political argument about whether the Finance Bill is appropriate, because small businesses will always feel the same about regulation. The test is whether the regulations that are being prepared—for example, on freelance workers—are fair. It is legitimate to argue about that, but whether or not such regulations are fair or appropriate will not make much difference to the viability of those workers. A subcontractor in the software industry may have an easy time under a particular regulatory regime, and if it changes they just have to adapt, but keeping their skills up to date will very much determine whether they have a job—self-employed or working for an employer. That is the key issue for freelance workers, just as it is for small businesses.
Before I allow myself the luxury of intervening on other Members, I want to make a point about regional policy. We need to re-think regional policy, to consider what we need to do to bring about greater opportunity for regions, including mine—the north-east of England—which have not been as successful in the past in purely economic terms. That is not to say that the way of life in those regions is not desirable, which is a separate issue— [ Interruption. ] I see that the hon. Member for Dundee, East (Stewart Hosie) is nodding; the situation is the same in parts of Scotland.
Regional policy used to be about persuading people with money to invest to go to Scotland, the north-east or Northern Ireland rather than locating in the over-heated areas of the south of England. Then regional policy was about encouraging external investors to invest in the regions rather than in an overcrowded area. Both those policies were right at the time, but that is not what regional policy is now about.
Regional policy is now about getting small companies—on behalf of their industry, their skills and their regions—to upgrade themselves so that they can compete globally. For example, it is important that the management consultancy companies based in the north-east of England upgrade themselves in a way that allows them to compete internationally. The same is true of the finance industry in Edinburgh. Upgrading design, creative and management sciences and engineering and back-up skills is as crucial in regional policy as all the other things, such as making the right infrastructure available. Such upgrading can generate huge incomes that can lift regional economies.
Mr. Redwood: Over the past 10 years, the London economy has grown twice as quickly as those in Scotland and the north-east despite the fact that huge sums of public money have been poured into Scotland and the north-east. How does the hon. Gentleman account for that? What alterations should be made to Government policy to try to get the north-east and Scotland to grow as fast as London?
Mr. Henderson: If I knew the answer to that, I would have solved an awful lot of problems in my constituency and elsewhere. Part of the answer is cultural.
Mr. Henderson: As my hon. Friend says, part of the answer is skills, but another part is cultural. For example, firms in the software industry locate in the Thames valley because other software firms are there. People in the software industry know each other, they probably play tennis together and their kids go to the same schools. They create a community, so it is difficult for a small business in the software industry to locate anywhere else if it wants to be part of that cluster. That is an important factor.
The key is to create clusters that are competitive in other parts of the country. Edinburgh is pretty competitive in the financial industry and there is a cluster there, although they all play golf and not tennis. There is a community of people who know each other and who can link up to help their firms to grow. In the north-east, there are cultural links between design companies in the engineering and oil industries. Companies that have been located in the area for many generations have upskilled themselves and exported their services around the world, and that is good for the area.
The trick in regional policy is to create more of those clusters. Teesside believes that firms in the pharmaceutical industry could become a cluster that would be of advantage to the area, and each area has to consider how it can build such opportunities. In Newcastle, we have high hopes that, based on biosciences, we can develop a cluster of embryonic industries that can then employ the graduates who go to universities in Newcastle. By the way, we play football in Newcastle, but creating such a cluster would help to address many of our economic problems.
Development agencies in many parts of the country have to rethink how they approach these issues. I know that they have been thinking of how they can help to upgrade the skills that will give the regional economies a stronger base in the future.
Mrs. Villiers: I am very grateful to the hon. Gentleman for being so generous in giving way. As he considers how to improve the effectiveness of regional policy, I would be interested to hear his views on the idea that has been floated by a number of people, including, I believe, the Chancellor. That would involve devolving more of European Union regional policy to a national level. The closer we get the decision to the individual communities concerned, the more likely we are to get it right.
Mr. Henderson: The hon. Lady is right to raise that point, and I have no difficulty with it at all. The closer we can get to the activity, the better. I would support such a general move.
Our educational institutions have a vital role to play in creating regional clusters of skills and industries around the country. We must bring them in more. Some are desperate to get in. Newcastle university, for example, is keen to get some of its wonderful scientific
and technological breakthroughs translated into an applied state so that they can benefit the region. The regional development agencies ought to give universities more assistance in that respect.
Stewart Hosie: I am enjoying the hon. Gentleman’s treatise on the commanding heights of the economy from a free market perspective. He mentions IT clusters and life science clusters. Dundee is very strong on both of those, particularly the latter, because of private money from the Wellcome Trust and £50 million from Wyeth. With reference to the Bill, does he agree that small companies in those sectors which are trying to grow will be affected by the new SME rules for research and development tax credits? He mentioned science education. Does he agree that the 0.9 per cent. of GDP which is to be maintained, and only maintained, for the next four or five years, and which is going into science education, is not good enough and that there must be a real-terms increase? In terms of the competitive advantage for the nations of the regions, why does he not consider full fiscal autonomy for Scotland and perhaps for Wales, so that we can lower corporation tax rates and really compete not just in the UK or in Europe, but in the world?
Mr. Henderson: The hon. Gentleman raises an awful lot of issues in that intervention. Scottish small companies are in the same position as small companies in other parts of the country. I come back to my point: if the economy is in a good state, they generally prosper. That is the case in Scotland as well. If, in this election period in Scotland, the hon. Gentleman proposes complete fiscal independence, he must accept the consequences of that for the revenue-raising powers and the revenues that would be available for Scottish public expenditure. If the Scottish people look at the figures, they will not be very keen on that. My constituents in Newcastle are not overwhelmed by the present division of the cake. The Scottish cake would be significantly smaller, were it not part of the United Kingdom.
One thing Governments can do on regional policy is spread public investment. Why, for example, is all the military located in the south-west? Why are all research institutes located in the Oxford-Cambridge area? One could continue with Government offices of all kinds. Government could do a lot in that regard. The present Government have done a great deal, but they need to do more.
I think that I have said enough. I commend the Bill to the House. It tackles the major issues of macro-economic policy and puts us in a position to take on the global challenge. It faces up to some of the major decisions that need to be made on climate change and other issues. All the detail of the arguments about fiscal regimes for freelancers and for small companies can be explored further in Committee. I do not say that every dot and comma of the Bill should remain unchanged after it has completed its parliamentary stages, but I endorse the general thrust. By opposing the Bill, hon. Members would threaten to undermine the success of our economy and the importance of that to the various enterprises, big and small, in their constituencies.
5.8 pm
Julia Goldsworthy (Falmouth and Camborne) (LD):
The hon. Member for Newcastle upon Tyne, North (Mr. Henderson) raised some interesting questions
about regional policy, which I agree needs to be re-examined. I represent a constituency that belongs to a region extending from the Scilly Isles to Bristol and Swindon. Clearly, we need to re-assess what the regions, as currently defined, have in common. There is a great difference between the local economies of Penzance and of Bristol.
The hon. Gentleman also raised some interesting issues about the purpose of the Finance Bill. He posed the question whether it should focus on macro or micro-economic issues. Perhaps the process that we go through each year in dealing with the Bill should be reviewed to try to encourage it to be more strategic.
The last few sentences of the Chancellor’s Budget included some pretty explosive fireworks, so initially I expected some pretty explosive stuff in this year’s Finance Bill. However, it turns out that it is a bit more of a damp squib. Much of the Chancellor’s wider legacy will be left to his successor to sort out—we have seen increases in unemployment recently, and we have rising interest rates, rising inflation and rising personal debt—and the same is true of the Finance Bill. The most uncomfortable bits for the Chancellor to justify and explain will be left to someone else to deal with next year. I am sure that the Paymaster General hopes that, after 11 Budgets of leading the Committee on the Finance Bill, it is not going to be her.
The clearest example is the changes that were announced to income tax in the Budget. The changes cut the basic rate by 2p and abolish the 10p starting rate, which for 2 million people will in effect mean that the rate of tax that they will pay will increase by 10 per cent. The Chancellor said those last few sentences just before he sat down and in the immediate aftermath the proposals were broadly welcomed, even on the Liberal Democrat Benches. They seemed to mirror proposals made by the Liberal Democrat party to try to make the tax system fairer. As my hon. Friend the Member for Twickenham (Dr. Cable) said, initially it gave him a frisson of flattery, but as ever, the devil is in the detail.
The Chancellor did not make it explicit in his Budget speech that the tax cut that he was trumpeting was going to be funded by raising taxes for those on the lowest incomes—mostly people who are lower paid and childless couples, who will pay more in tax. He is abolishing a rate of tax that he introduced. Perhaps that is why he is keen to leave the detailed debate to his successor. I would like the Minister to confirm that it would have been possible to include the income tax changes for next year in this year’s Finance Bill, even though they may not take effect till next year. If it was decided not to do that, on what basis was that decision made? I hope to return to that when the Bill enters a Committee of the whole House.
Other changes to the taxation system that were flagged up in the Budget have made their way into this year’s Finance Bill. As we have already heard in some of the lengthy discussions about taxes on business, on the surface the changes look like simplification measures. They look like they should be welcomed, but once one looks in the Red Book and sees the way in which the revenue is changing, it is clear that there are complicating fingerprints from the Chancellor all over them. The changes were intended only to grab the headlines, not to make the system simpler or fairer.
The headline cut in corporation tax from 30p to 28p in the pound is welcome in itself and follows the lead of many other leading economies, but it is going to be paid for by changes to capital allowances that will disproportionately hit some sectors over others. Small businesses will, in effect, see their corporation tax rate rise and they will still be trying to work out how they qualify under the changes to the other allowances that are proposed in the Finance Bill. As I have mentioned in interventions, micro-businesses will be the least well placed to try to navigate the new geography.
I draw attention to clause 35 on industrial and agricultural buildings allowances. It seems that proper consideration has not been given to the kinds of businesses that will be adversely impacted. Two of the areas that have been highlighted are the hotel industry and poultry farmers. The clause withdraws after March 2007 the final allowance or charge that was previously taxable or tax deductible on disposal of these buildings. When implemented, the clause will change the impact of long-term investment decisions that might have been made many years ago. Hoteliers are concerned that that will increase room rents considerably. Hoteliers that have recently refurbished their hotels may find it difficult to raise room rates enough, compared with market rates.
Turning to the agricultural buildings allowance, I would like to refer briefly to an issue raised by a constituent of my hon. Friend the Member for North Devon (Nick Harvey). The constituent referred to the abolition of the agricultural buildings allowance over four years and cited what he called something of a killer fact. He wrote:
“Mr Brown describes in Budget Note no. 7...the reason for this abolition is that it removes ‘outdated and unjustified distortions’ implying that the ABA is some sort of tax break to encourage investment in the post war period. This is completely wrong. Poultry buildings”—
“in which I have a particular interest with my brother...will not last much longer than 25 years no matter how much you repair them, and so it would be quite proper to write them off against tax over 25 years at 4 per cent.”
The point is that even some sub-sectors of particular sectors will be disproportionately disadvantaged. I am worried that the matter was not properly investigated before the announcement was made, because the measure was proposed to grab headlines. No strategic context undermines the long-term stability of the taxation system more than investor confidence. Was any assessment made of the differential impact of the measure on sub-sectors of the economy, such as the agricultural sector?
Mr. Dunne: The hon. Lady refers to the poultry sector. Her constituency covers a remote agricultural area. Has she heard of similar examples involving other agricultural sectors, such as potato farming—I believe that potatoes are farmed in Cornwall? Other sub-sectors of the meat sector and fruit farmers require substantial capital investment, which involves long-term decision making.
Julia Goldsworthy:
The hon. Gentleman is right. The measure will affect many other sectors. The key point is that the buildings involved will have a relatively short
life span, yet require long-term investment, which is being undermined by the changes proposed in the Bill.
The Chancellor’s pet projects are flagged up even when there is limited evidence of their success. There has been increased investment in research and development tax credits, especially those for larger companies, even though companies often need to make the decision to invest before they examine whether they are eligible for tax credits. The same is true for smaller businesses. Indeed, many very small businesses will not be aware of some of the credits that are available.
A report last year by the Institute of Chartered Accountants in England and Wales made the point that R and D tax credits had not had a clear impact on the decision about whether to invest. It also pointed out that the largest companies benefited from them disproportionately. Recommendation 18 of the Treasury Committee report that has been published today states:
“It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies. We recommend that, prior to the 2009 Budget, the Treasury review the impact of these measures on business investment in order to ensure that the measures are having a positive impact on investment and business growth, including ... small businesses”.
Surely there should have been an investigation of the validity and usefulness of the credits before they were extended further. Does the Department intend to undertake a full review of the efficacy of the system, as recommended by the Treasury Committee?
While R and D tax credit is one of the pet projects, or touchstones, that the Chancellor likes to highlight, it is frustrating that we have again seen tokenism on the environment this year. Limited progress has been made, but that seems to have been only in response to a considerable increase in public pressure. Amendments on vehicle excise duty that the Liberal Democrats tabled to last year’s Finance Bill look remarkably similar to measures before us today. This year’s proposed increases represent a welcome improvement on last year’s measures. The increase for some of the most polluting cars in the higher band of VED for new cars that was introduced last year was equivalent to the cost of less than half a tank of petrol. This year, the difference between the bands has increased to about £95. However, last year’s Energy Saving Trust report indicated that the price differential required to have an impact on behaviour would need to be nearer £2,000. If the Government are serious about using such measures to bring about real changes in behaviour, there is still a long way to go.
Mr. Redwood: Is the hon. Lady saying that it is Liberal Democrat policy to put £2,000 a year in extra tax on certain types of car? Also, is she saying that because she does not want the 10p band abolished, she would not cut income tax by 2p?
Julia Goldsworthy: I am sure that the right hon. Gentleman will know that it is the recommendation of the all-party group on climate change that we look again at banding issues. On our wider taxation policy, the Liberal Democrat tax commission will report in September—I am sure that he will watch for that with great interest—and we will respond to the changes made in this year’s Budget in that report.
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