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In our discussion of clause 3, the hon. Member for Fareham (Mr. Hoban) talked about the Chancellor giving with one hand and taking away with the other. The amendments that we have tabled on the income tax clause reiterate that theme. They seek to pursue two different lines of inquiry, and pose questions that I hope will tease out the Governments line of thinking in relation to the announcements that the Chancellor made in his final Budget.
First, we are trying to tease out the Governments arguments behind the Chancellors proposal to abolish the starting rate of income tax and to cut the basic rate by 2p in the pound. That is dealt with by amendment No. 11 and by amendment No. 12, which has not been selected for debate. It will be interesting to hear the Ministers justification of the abolition of the 10p starting rate, which will result in millions of people
who currently pay 10p in the pound seeing their tax rate increase to 20p in the pound.
Secondly, we want to highlight the alternatives that the Government could have considered, given that the Chancellor talked about tax changes that would be fairer. This is dealt with in amendment No. 10, which, rather than increasing the 10p starting rate to 20p, would get rid of it altogether, thereby lifting people on very low incomes out of tax altogether. It would replace the 10 per cent. rate with a zero rate, which would have the opposite effect to that announced by the Chancellor. Two million people would thereby be lifted out of tax altogether. This was a proposal that our tax commission looked at, in addition to cutting the basic rate of tax by 2p, as the Chancellor has announced. Amendment No. 11 proposes to introduce the basic rate changes that the Chancellor announced with great fanfare in the Budget but which, according to the Governments timetable, will not be introduced until the next financial year.
I shall briefly discuss the context of the proposals. The changes in income tax were announced in the final few words of the Chancellors final Budget. His explanation of the reasons behind the cut to the basic rate was clear. He said that
to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p.
That was very clear. My hon. Friend the Member for Twickenham (Dr. Cable) said in the debate on the Budget resolutions that that announcement had given him a frisson of excitement, because he thought that the proposals put forward by our tax commission were being imitated.
With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax.[ Official Report, 21 March 2007; Vol. 458, c. 828.]
That is as close as he came to explaining that he was going to get rid of the 10p rate. He did not give any details of the decision to abolish the starting rate at any other point. Instead, we have to look at table 1.2 in the overview on page 13 of the Red Book. Line 15 refers to:
Removing the starting rate of Income Tax on non-savings income.
Let us not forget, therefore, that the Government have chosen not to put these proposals in the Finance Bill. They are designed to be introduced next year. Perhaps the Chancellor is keen to leave these issues to his successor. Amendments Nos. 11 and 12 propose to introduce the changes immediately. As they would enable the Government to implement their own policy early, I would be interested to hear whether the Minister is considering supporting them. If not, perhaps he will explain why the Government are so keen to delay the changes for a year. Why does introducing them later make them any fairer?
I shall remind the House again of the Chancellors words: he talked about making working families
better off. How much better off will the Governments changes make the average family? At bestas we have seen in relation to the small business rate changespeople will be no better off. At worst, individuals will be significantly worse off, especially households on low incomes with no children, and single individuals. Ministers have talked about how tax credits will offset that, but let us not forget that large numbers of people do not claim the tax credits to which they are entitled. Many people under 25 on low incomes are not entitled to apply for tax credits in the first place. It is interesting to note that the Chancellors speech contained no explicit mention of young individuals or childless couples on low incomesexactly the groups who will be worse off, and for whom the proposals will not be fairer. I would be interested to hear from the Chief Secretary exactly how the proposals make the system fairer.
The amendments are particularly pertinent given the coverage over the weekend of how the wealth of the richest in our society has grown exponentially over the past 10 yearsyet the Government proposals will hit those on the lowest incomes. Would it not have been fairer to fund a basic rate tax cut, reducing that growing inequality, by raising taxes for those on very high incomes, instead of raising taxes for those on very low incomes? As the Rich List published in The Times at the weekend showed, the only tax that many of those very rich people pay is council tax. Why did the Government not take the opportunity provided by the Bill to introduce measures that would have made the tax system fairer, perhaps by implementing some of the Lyons reviews recommendations in the short term?
The 10p rate, which will be abolished in the next Finance Bill, was highlighted in Labours manifesto, and the Liberal Democrats have proposed reducing the rate to zero rather than increasing it to 20p. The Labour manifesto in 1997 stated:
Our long-term objective is a lower starting rate of income tax of ten pence in the pound. Reducing the high marginal rates at the bottom end of the earning scaleoften 70 or 80 per centis not only fair but desirable to encourage employment.
If it was fair to introduce the 10p rate to try to counteract high marginal rates of taxation, why is it now fair to increase that marginal rate of taxation back to 20 per cent.? After being introduced with such a fanfarepreannounced in the manifesto, in the first Budget, and again before being finally introducedwhy does the Chancellor now seem keen to dump the 10p rate on the quiet once he has left the Treasury building?
Mr. Timms: I know that the hon. Ladys party has been favouring the abolition of the 10p rate, its replacement with a zero rate, and the extension of personal allowances as set out by her partys policy document. The document indicated, however, that the change would be offset by £8 billion of environmental tax rises and other changes. Will she table amendments to the Bill setting out the detail of those changes?
As the Chief Secretary knows, there are constraints on what can be tabled and
debated in relation to this years Finance Bill, and we must respond to the measures before us today. The amendments are about whether the system will be fairer. The Chief Secretary is absolutely right that our tax commissions proposals were fairer, simpler and greener. We will seek to make the case for those measures as best we can, given the constraints in relation to the Finance Bill.
Mr. Paul Goodman (Wycombe) (Con): The hon. Lady said that there were restrictions on what can be tabled. I presume that she was referring to the tabling of any amendment that would raise a tax. Will she confirm that last year her party tabled tax-raising amendments in relation to vehicle excise duty?
Julia Goldsworthy: The hon. Gentleman will know that such amendments can be tabled but not debated, which obviously causes difficulties in relation to the selection of amendments and the package that can be put forward. In addition, we are debating clause 1 rather than the whole Finance Bill, so, unfortunately, we have to consider the measure in isolation.
Will the Chief Secretary explain why, and on what basis, he would feel unable to support now amendment No. 11, tabled by the Liberal Democrats, which reduces the basic rate of tax to 20 per cent.? If the Government want to get rid of the 10p rate, why would that be fairer? It was clearly presented as fairer in the Budget, but in the aftermath of the Budget, Ministers were keener to present it as a simplification measure, which is certainly more logical.
The amendments provide an opportunity for the Treasury to set the record straight and follow through on its announcements in the Budget. I am not clear why it was not able to do that in this years Finance Bill. If the Government really consider the measure to be fairer, it makes sense to introduce it straight away. Alternatively, is the Treasury keen to postpone certain arguments until after the present Chancellor moves next door to No. 10?
Mrs. Villiers: I want to consider the amendments first, and then the wider background to clause 1, especially the 10p income tax band. The official Opposition will not vote in favour of the amendments if they are pressed to a Division. Our primary concern about them is that they have not been properly costed, so it would not be fiscally responsible to vote in favour of them.
We are also concerned by the claim in the Liberal Democrats tax policy paper that their package amounts to a green tax switch; it amounts to nothing of the sort. Well over half the tax rises that the Liberal Democrats say that they would use to fund the reductions have nothing whatever to do with the environment. They plan to fund £4.3 billion of their tax reductions from scrapping higher rate relief on pensions. That is an astounding proposal to put forward at a time when our pension system is in crisis, and to do so without proposing any alternative incentives to save or to tackle the pensions crisis seems wholly irresponsible.
Mrs. Villiers: If that is the case, the Department for Work and Pensions does not know what it is talking about. John Lawson, of Standard Life, described the Liberal Democrat tax proposals as extremely flawed. He continued:
The Lib Dems need to have a serious rethink of this proposal...Pensions under these proposals would become almost pointless.
catastrophic effect on pension funding.
Julia Goldsworthy: Does the hon. Lady agree that it is people contributing at the lower rate of pension tax relief who should be encouraged to save for their pensions? Those contributing larger amounts currently qualify for greater relief, so the people who are already saving more benefit more, while those who are saving less, benefit less.
Mrs. Villiers: How does the hon. Lady get round the problem that if one removes a significant tax incentive to save for a pension, fewer people will save for pensions, and the pensions crisis will become even more serious?
Mr. Frank Field (Birkenhead) (Lab): May I probe the hon. Lady further, as I am interested in the image that the Opposition are presenting of being most concerned about the poorest? Is not it true that half of all tax relief for pensions goes to those paying the higher rate of tax? Those are the people with the largest pensions, who will be well provided for in old age. Would not a new Conservative party be more interested in redistributing that revenue to those at the bottom who find it most difficult to save, even if it disagrees with the Liberal Democrat proposals for more sweeping tax reform?
Mrs. Villiers: We are prepared to examine a range of options to try to encourage people across the income spectrum to save for their pensions, but we simply do not think that a £4.3 billion hit on pensions savings is what our pensions system needs at the moment, and that is what the Liberal Democrats are proposing. Given that the savings ratio has been halved during the 10 years of the Chancellors tenure at No. 11, we think that the last thing the country needs is the complete abolition of an important incentive to save for old age, particularly when it is not accompanied by any compensating incentives elsewhere in the system.
I am not convinced that the numbers in the Liberal Democrats tax package add up. When it was first announced, the Institute for Fiscal Studies identified a £500 million underestimate of the cost of their proposed income tax changes. And the problems do not end there. For a start, as we have heard from the Chief Secretary, the Liberal Democrats have not produced any convincing details of how they would raise £8.1 billion in green taxes. Nor am I convinced that they have got their numbers right in the capital gains tax part of their package. They claim that those changes would raise £6.2 billion, but, they seem to have underestimated
the impact on behaviour of changes in the system. After all, for many people capital gains tax is a postponable tax. When rates and reliefs are amended to become less favourable to the taxpayer, there is an incentive to sit on assets.
Mrs. Villiers: I am delighted to be guided by you, Mrs. Heal. I will, however, refer in passing to an observation by the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who reiterated the Liberal Democrats support for a local income tax. Far from supporting income tax reductions, her party wants a 4.5 per cent. increase via the local system. I suspect that that is something that her colleagues are not mentioning on the doorsteps this afternoon.
It is instructive to examine the changes in income tax rates proposed for 2008-09 by the Chancellor in his Budget speech. In particular, when we evaluate the 10p band and the 22 per cent. basic rate in clause 1which the amendments would alterit makes sense to consider the responses to the Chancellors announcements.
In reaching a conclusion on the merits of the 10p band, we should assess the Chancellors proposal to abolish it as from next year. It is striking that the Chancellors rabbit out of a hat announcement on the basic rate does not appear in clause 1. He began his Budget speech by saying that he did not want to follow Gladstones example and act as Chancellor as well as Prime Minister. However, he still seems very keen to bind the hands of his successor by pre-announcing tax changes for next year, and even later in some instances. Contrary to the spin that he tried so hard to place on the Budget, taxes on income will rise next year as a result of the changes that he announced. The Red Book shows taxes on income rising by £340 million in 2008-09, if we take into account the increases in national insurance and the scrapping of the 10p band.
Serious concern has been expressed about the impact of the loss of the 10p band on those with low incomes. The IFS calculated that 5.3 million families would be worse off as a result of the loss of that band, and other changes proposed in the Budget. That figure was confirmed as being broadly in the right ball park by Mark Neale, managing director of the Treasurys Budget, tax and welfare directorate, when he gave evidence to the Treasury Select Committee.
Abolishing the 10p band will result in a transfer of the burden of tax from those on middle incomes to those on low incomes. According to the IFS, the big losers will be people earning between £5,225 and £18,500 a year, particularly those without children, whose loss will not be compensated for by tax credits. Adults without dependent children will be among the hardest hit, because the blow will not be softened to a significant extent by those tax credits. According to the IFS, the poverty rate among that group is now 4 millionthe highest since records began in 1961. It is now the largest group of poor people, comprising up about one third of the total. Recent Government data show that child poverty is rising as wellit rose by 100,000 last yearand that the real incomes of the
poorest 20 per cent. of the population are falling. There are now more people in entrenched povertybelow 40 per cent. of median earningsthan there were when the Chancellor took over at No. 11.
Kerry McCarthy (Bristol, East) (Lab): Is the hon. Lady aware that when giving evidence to the Treasury Select Committee, the IFS said that it had never been clear that the 10p rate was a particularly effective tool, and that, taken with other measures in the Budget, the Chancellors proposed changes appeared to be sensible?
Mrs. Villiers: That does not detract from the real concern expressed by many Members throughout the House about the loss of the 10p band. Let me draw the hon. Ladys attention to what some of them have said.
I think we have to some extent neglected poorer people who have no children. I think thats a cause for concern. It is something that needs to be put right in the long term because there are people who are single who are struggling on low incomes.
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