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Rob Marris: I, too, oppose the amendments. They are uncosted and my hunch is that they would cost billions of pounds to implement. The Conservatives also oppose the amendments. However, I agree that it is strange that the hon. Member for Chipping Barnet (Mrs. Villiers) talked about higher rate tax relief and the capital gains tax regime, both of which principally benefit the rich in our society—although it is not as if the Conservatives have ever cared about the poor. She completely overlooks the minimum wage and the fact that child poverty and pensioner poverty rose massively when the Conservatives were last in office.
However, although the amendments are uncosted, I associate myself with the remarks of my right hon. Friend the Member for Birkenhead (Mr. Field) and my hon. Friend the Member for Newport, West (Paul Flynn) about the abolition of the 10 per cent. starting rate proposed for next year’s Finance Bill by the Chancellor in his Budget this year.
The measure will adversely affect a group that has not been mentioned—I have some in my constituency, some of whom have written to me: people who have taken early retirement, often on grounds of ill health, who will therefore not benefit from the rise in personal allowances for pensioners and are not eligible for tax credits because they are not working.
I urge my right hon. Friend the Chief Secretary and his team to look again at the proposals for next year. They should reject the proposals in the Liberal Democrat amendments before us, but they should look again at the abolition of the 10 per cent. starting rate, because it will have some unintended consequences which are beginning to be teased out.
Mr. Timms: The clause to which the amendments apply imposes income tax for 2007-08—each year’s Finance Bill has to plan for subsequent years—but keeps income tax rates unchanged for the current year at 10 per cent., 22 per cent. and 40 per cent. The combined effect of the amendments would be to replace the current starting rate band by a zero rate band and to cut the basic rate for this year from 22p to 20p. The hon. Member for Chipping Barnet (Mrs. Villiers) and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) said that that was not costed. I can tell the House that the total cost of implementing these two amendments this year would be £13.8 billion, which I would have thought is quite a tidy sum even for the Liberal Democrats. Therefore, I agree with the hon. Lady that the Liberal Democrats tax proposals are flawed. The hon. Member for Falmouth and Camborne (Julia Goldsworthy), who speaks for the Liberal Democrats on these matters, is wholly at liberty to table amendments to the Finance Bill setting out in detail how £8.1 billion in environmental taxes would be made up, along with other details of the package outlined in her party’s policy document. The great majority of Members would warmly welcome that information.
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Rob Marris: My right hon. Friend has enlightened us on the £13.8 billion figure. He might not have the information with him, but could he have a stab at saying what the higher rate referred to in clause 1(c), which is currently 40 per cent., would have to rise to in order to make up the £13.8 billion? Would it have to be 75 per cent., or 98 per cent., perchance?
Mr. Timms: It would certainly have to be a large figure. Unfortunately, I do not have that figure to hand, but—who knows?—during the course of my remarks I might be able to do the calculation that my hon. Friend asks for.
Mr. Mark Francois (Rayleigh) (Con): If the Chief Secretary does not have the figure, would it help if the right hon. Member for Birkenhead (Mr. Field) tabled a parliamentary question on the matter?
Mr. Timms: I hope that I can give some reassurance to my right hon. Friend the Member for Birkenhead (Mr. Field) on—
Mr. Frank Field: It is not necessary to table a parliamentary question. The Liberal Democrats’ programme would cost us 4p on the standard rate of tax. My constituents would not be very pleased with that.
Mr. Timms: I very much agree with my right hon. Friend on that point.
The amendments would introduce only some elements of the package of reforms to the tax and benefit system announced by my right hon. Friend the Chancellor in the Budget. The House will of course have the opportunity to debate those changes in full when they are legislated for, and I very much look forward to that debate.
Let me set out the background to the Budget announcements. There has been a major programme of reform to the tax and benefit system in the 10 years since 1997, with the aims of reducing, and over time eradicating, child poverty, which doubled during the 18 years of the previous Government; of supporting families; of promoting saving; and of ensuring security for all in old age. We have made very big changes to advance all those objectives. The Budget introduced the next stage in that programme by offering more support for work, families and pensioners. The package comprised eight separate reforms, including changes to income tax personal allowances, to national insurance thresholds and to tax credits. Between them, they amount to a total net reduction in personal taxation of £2.5 billion. Let me underline that point. It has been said in the debate, correctly, that the Budget as a whole is fiscally neutral, but the personal taxation elements constitute a net reduction of £2.5 billion.
Stewart Hosie: That is very interesting, because if my memory serves me right, according to the 2006 report on income-related benefits, uncollected working tax credits alone amounted to £2.4 billion—a figure almost equal to the £2.62 billion expected to be given away in the two subsequent years. Is this not just smoke and mirrors? Is not this “balanced” Budget based on not contributing £2.5 billion a year to those entitled to collect it?
Mr. Timms:
No, this certainly is not smoke and mirrors; rather, it is an actual reduction. An examination of tax, national insurance and tax credits shows a reduction of take to the Treasury of £2.5 billion. The Budget also increased taxation on polluting activities, announced a major reform of empty property rate
relief, and addressed avoidance. Those three measures between them provided the resources to enable this £2.5 billion reduction in personal taxation, which I can assure the hon. Gentleman is a real reduction that will be enjoyed by his constituents.
Mr. Gauke: Does the right hon. Gentleman not accept, however, that the IFS is correct in stating that 5.3 million households are worse off as a consequence of the changes announced in the Budget?
Mr. Timms: I would agree with the IFS that there are many more gainers from this package than losers. I cannot confirm the figure that the hon. Gentleman gives, for some of the reasons that he set out earlier. He will doubtless be familiar with the IFS’s analysis immediately after the Budget, which is available in slide form in a PowerPoint presentation on its website. It shows that the Budget package raises household incomes in every decile, and that the biggest proportionate increases are in the lowest three income deciles. I underline for the Committee the extent to which this Budget is consistent with the pattern of changes that we have made in the past 10 years. In particular, it improves the position of those on low incomes.
Mrs. Villiers: I am very grateful to the Chief Secretary for giving way. Does he agree that table C6, on page 279 of the Red Book, reveals that tax will be up by £2 billion per year when all the Budget measures announced up to 2011 kick in, on top of £2.4 billion in tax increases trailed in the year leading up to the Budget, as set out in table A2, on page 210 of the Red Book? This is not a tax-cutting Budget.
Mr. Timms: No, it is a fiscally neutral Budget, as my right hon. Friend the Chancellor said at the time. That is the correct representation of what happened in this Budget.
The changes that I described are offsetting measures to enable this very substantial reduction in personal taxation. They also simplify the tax system, while protecting and boosting the incomes of vulnerable groups. We have had some discussion of what the IFS has said, so let me quote what its director said about the Budget package:
“To reform the system in a useful way, within tight financial constraints and with only modest gains and losses should be a cause for congratulation rather than criticism.”
I hope that the Committee shares that sentiment about my right hon. Friend’s Budget,
The hon. Member for Falmouth and Camborne asked on Second Reading and again today why the package of measures was being introduced next year and not this year. A number of elements of the package cannot be introduced without further primary legislation, such as changes to the upper earnings limit for national insurance and to empty property rate relief, which will clearly take some time. In addition, the package entails significant changes to payroll systems, and it would not be reasonable to expect them to be implemented in just a few weeks. That is why the package of measures that I have identified, and which permits us to make this dramatic reduction in personal taxation of £2.5 billion, needs to be introduced next year, rather than this.
Stewart Hosie: Will the Chief Secretary give way?
Mr. Timms: I will do so once more, and then I really need to make some headway.
Stewart Hosie: I am no supporter of the Liberals’ proposals and I certainly would not support these amendments, but the Chief Secretary is suggesting that he cannot do this year many of the things that he wants to do because they require primary legislation. Last year’s Finance Bill was twice as long—two full volumes—with three volumes of explanatory notes. This is not an argument that we can take seriously, surely.
Mr. Timms: I am interested to hear the hon. Gentleman calling for longer and more complex Finance Bills; that is rather contrary to the mood of the Committee. The changes that I am referring to would not be made in a Finance Bill; they need separate legislation.
We are of course also being careful to ensure that the benefits that this package will bring are not at the expense of the UK’s underlying economic and fiscal stability, which have made these reforms possible and have been the principal sources of Britain’s welcome economic transformation over the past decade.
As I said, the hon. Member for Falmouth and Camborne asked why these changes will be introduced from April 2008 and are not being included in this year’s Finance Bill. Income tax is an annual charge re-imposed each year in the Finance Bill, and the convention is that changes to the rates are legislated for in the year in which they come into effect. I have done a little research on that point and, as far as I have been able to establish, there have been no instances in recent decades of income tax changes being legislated for other than in the year in which they take effect, so in line with that convention, next year’s Finance Bill will legislate for the personal tax reforms for 2008-09 that were announced in this year’s Budget.
The amendment proposes removal of the starting rate and replacing it with a new zero-rate band, in effect increasing personal allowances. The total cost of those changes would, as I have said, be £13.8 billion, but it would be a very untargeted measure, which would be of most benefit to those on higher incomes.
Our policy is to target help where it is needed, so the Budget package included a major investment in tax credits. Tax credits benefit about 6 million families and 10 million children and reach far more low and moderate-income families than any previous system of income-related financial support. By using that mechanism we can continue to give extra help to low-income families, whereas simply increasing tax-free personal allowances would not have that effect, as the figures I shall give in a moment will show.
Julia Goldsworthy: I understand the Chief Secretary’s argument that lifting the threshold is not targeted, but does not the same argument apply to cutting the basic rate of tax? That is completely untargeted and will have the disadvantage of not benefiting people on the lowest incomes, whereas raising the starting rate threshold, as we suggest, would benefit them.
Mr. Timms: That is why there is a package of measures, which includes national insurance, income tax and tax credits. The overall effect of the package will particularly benefit households on the lowest incomes, as the IFS analysis rightly shows. After all, personal allowances can only cut a family’s tax bill to zero, whereas tax credits can go further and make a payment to the family. Personal allowances cannot provide support tailored to a family’s circumstances, such as the number of children in the family or whether a disabled child is a family member. Tax credits, by contrast, can do that and are doing it.
If the Government invested £1 billion in raising personal allowances, a low-income worker would be only 68p a week better off. Using the same money to extend the working tax credit means that workers on low incomes could see an increase in their incomes of more than 10 times as much—£7.10 a week. That is why the Budget proposals are so much better than those being made by the hon. Lady and her hon. Friends.
The hon. Lady asked for specific figures. As a result of the Budget package, by April 2009, households will be £100 a year better off on average; households with children will be £200 a year better off on average; and in the least well-off fifth of the population, households with children will, on average, be £350 better off. The changes to make those figures possible will be in next year’s Finance Bill. The House will have the opportunity to debate them then and I look forward to that debate.
I shall gladly look further into the point made by my right hon. Friend the Member for Birkenhead, but I do not think that the package redistributes away from women to men, once the impact of tax credits is taken into account. Child tax credit is paid to the main carer, who is usually the mother, and the child element will rise by £150 a year above earnings indexation, so taken with the other effects of the package, there will not be the redistributive effect that my right hon. Friend suggested.
Mr. Frank Field: As my right hon. Friend is so confident, does it mean that I shall soon receive a reply to my question, so that his confidence can be set out in the Official Report? Three groups of people have been highlighted in the debate. Low-paid workers, who are largely women, may not qualify or might not claim. There will be redistribution in families, from the lower-paid who will pay higher tax—largely women—to the men in the household who will receive tax cuts. The third group is equally important: those who have had to take early retirement and will thus not qualify for the higher personal allowances.
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Mr. Timms: I am confident that my right hon. Friend will receive an answer to his question shortly; as I fear I told him that in a previous debate, I had better make sure that it actually happens this time.
I hope that I have answered his point about redistribution from women to men. If my right hon. Friend looks at the package as a whole, including the increase in the child tax credit, he will see that it will not have that redistributive effect. He is right in the sense that some
people who might otherwise be regarded as losers will, if one looks at the impact on the household as a whole, not be losers. That point occurred to me when the hon. Member for South-West Hertfordshire (Mr. Gauke) was talking about the impact of the increase in the minimum wage; some people who are not among the 170,000 to whom he referred will be in households that might otherwise be regarded as losers from the package, but the increase in the minimum wage means that in fact they may not be losers.
Mrs. Villiers: I think the Chief Secretary is acknowledging that were it not for the impact of tax credits a significant number of people would lose out under the Budget—5.3 million people are losing out, but the impact would be even harsher without the operation of tax credits. What is he doing to get women who are not claiming tax credit to claim it?
Mr. Timms: The hon. Lady asks me to comment on the position before 1997, before there were tax credits. It is true that the system we inherited was extremely unfair, so we changed it. She is right: tax credits are an indispensable element in the far fairer system that we have now, which improves incentives for work and, in particular, strengthens the position of families on low incomes. The take-up of tax credits among families and households with the lowest incomes is high—far higher than for family income supplement and other mechanisms that were used in the past. In that sense, tax credits have been particularly successful, but we are working to increase take-up further. Over the past few weeks, a series of pilots have been set up in three parts of the country to try out a number of mechanisms for increasing take-up and we are analysing the results. No doubt we shall be able to do more to increase take-up of tax credits, which are an indispensable element of the personal tax and benefit system.
I remind the House that all that the clause does is to keep income tax rates unchanged for the current year, at 10 per cent., 22 per cent. and 40 per cent., so I hope that the House will reject the amendments.
Julia Goldsworthy: Despite the almost universal scorn poured on the amendments, I am pleased that we have been able to have this constructive and important debate. As the hon. Member for South-West Hertfordshire (Mr. Gauke) said, the reason why it has been so difficult to table amendments is that Opposition parties cannot cover all the aspects of the proposals announced in the Budget.
It is clear, however, where the costs will come from and where they will go. Table 1.2 shows that removal of the starting rate of income tax will raise revenue of £7.3 billion for the Treasury in the first year. The cost of reducing the basic rate will be £8 billion, which will partly be offset by aligning income tax and national insurance contributions. The Chief Secretary is right to say that changes to national insurance contributions require primary legislation, but the Finance Bill is primary legislation, so it could be used to adjust primary legislation on national insurance. He may say that in recent decades there has been no announcement of such changes to take effect in the same year, but over the past 10 years there have been no income tax changes at all.
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