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Britain is now benefiting from the longest period of sustained low inflation—certainly the longest in my lifetime. We have the second-highest GDP in the G7, instead of the lowest, as when we entered office, and growth that is not only strong—stronger this year than in the euro-area and in the United States—but sustained. As I said, we have experienced 59 quarters of uninterrupted growth—the longest period on record for any G7 country. Even if the UK’s economy were to stop growing tomorrow, which of course we do not expect it to, it would take at least nine years for any other major economy to overtake that record. That macro-economic performance, that stability and that strength in our economy have delivered rising standards of living and rising prosperity right across Britain, and it is important to say that this is not a zero sum game. We do not have to make some people poorer
to make others richer; we have shown that over the past 10 years. We want our good macro-economic performance to continue, and we want Britain’s economy to continue to succeed. We are confident about the position that we are in, but of course we must not be complacent. There are challenges that we need to face, including that of globalisation.
As technological advances and falling transport costs break down the barriers to trade and economic integration, we have to be watchful, and we must ensure that the increasingly interconnected world economy continues to work well for Britain and our national interests. Capital and labour are increasingly mobile; that is particularly true of highly skilled individuals, who are increasingly in demand as the world moves towards a more skills-based economy. That presents some challenges, but also huge opportunities, and the UK is making the most of them. With skills increasingly at a premium, we will benefit from our hugely talented work force. That is partly the result of our high-quality education provision and training, but it is also because of the openness and internationalism that characterises the City: one quarter of London’s senior managers in financial and business services come from abroad.
I will pause to reflect on the City for a moment, because its performance in recent years has been truly remarkable. London is now established as the world’s leading global financial centre, and Britain has a trade surplus in financial services that is twice as large as any to be found elsewhere in the world; it totalled £26 billion last year. The wealth that the City generates is critical to our economy, and we have worked hard to maintain its competitiveness. We will continue to work hard to build on the City’s leading position, and we will work with the City, including through the high-level group that the Prime Minister set up when he was Chancellor of the Exchequer. I encourage the hon. Member for Twickenham and his colleagues to reflect on the City’s strong position when they consider the changes that he proposed today.
The hon. Gentleman spent a good deal of his speech talking about the rules affecting non-domiciled individuals. That is a complex area, but we are talking about a relatively small group—it is made up of some 112,000 people, according to the latest estimates. That group declares some £9.8 billion through the self-assessment process, but it is important to note that it contributes £3 billion in tax, and it behoves the hon. Gentleman to recognise that. That is a significant contribution, and it is not correct to perpetuate the idea that there is serial avoidance by that group.
It is not right to suggest that it is easy to gain non-domiciled status. A person’s domicile is the country to which they are attached from birth to the age of 16. A person usually has the same domicile as their father, and at the age of 16, they may have a domicile of choice, often through the nationality of their father. It is not my understanding that someone could gain non-domiciled status on the back of a tenuous link—I think that that is the phrase that the hon. Gentleman used—with a country. If the hon. Gentleman writes to me with more details on that point, I will be interested to read what he says, but it is not easy to change status in the way that he suggests.
Julia Goldsworthy: I would be grateful if the Chief Secretary to the Treasury clarified a point for me. My understanding is that it is possible to inherit non-domiciled status. If someone’s parent was non-domiciled, they could claim non-domiciled status. That is what I inferred from his remarks. Is that the case?
Andy Burnham: I believe that it is the case, and if it is not, I will correct what I said. I was referring to a comment made by the hon. Member for Twickenham, in which he appeared to suggest that a person working in his office who had a Swiss grandfather could, on the back of that, achieve non-domiciled status for tax purposes. That is not my understanding, and it is not right to suggest that it is easy to gain that status. I hope that the hon. Gentleman will accept that we are talking about complex changes that would have an impact not only on the economic competitiveness of the country, but on other parts of the tax system.
It is important to avoid knee-jerk responses, to give careful consideration to any proposed changes, and to have consultation on any proposals. The tone of some of the hon. Gentleman’s remarks suggested that this was a relatively easy target. He made great play of the 4p cut in income tax and seemed to set great store by it, but how much money would he raise to pay for that £18 billion spending commitment?
Dr. Cable: If the hon. Gentleman has read the report, as he said that he had amused himself over the weekend by doing, he will have seen that the arithmetic is quite carefully set out and that it is balanced. We estimated that the cost of the 4p cut would be rather more than £18 billion—closer to £20 billion. Perhaps we were conservative, but it would be paid for partly by the capital gains tax taper relief, which is about £6 billion, partly by the environmental taxes, which he has fairly referred to and which we can debate, which are of roughly the same order of magnitude, with the balance to be paid for by restricting pension contribution tax relief to the standard rate. Those are the three components and if he has read the report, he will have seen that it balances.
Andy Burnham: I saw some press coverage of that arithmetic. As the hon. Gentleman knows, I have not been in the Treasury for long and he is well versed in these matters, but I suspect that in his heart of hearts he knows that these are optimistic policies, to say the least. That was the word that I heard civil servants use today to describe some of these plans. We all know what optimistic means in this context, and if the average family realised what burden would be loaded on to their petrol bill or their annual family holiday bill to make some of this tax burden even vaguely fundable, they would have some serious second thoughts about what the hon. Gentleman and his colleagues have in mind.
During the last few days there has been a significant debate on taxation as it affects families, particularly married couples. Not having a great deal to do at the weekend, I read through all the press cuttings, and it was interesting to see the different views beginning to emerge from the Conservative party following the publication of the document last week by the right hon. Member for Chingford and Woodford Green
(Mr. Duncan Smith). The key proposal for a marriage tax break would take billions of pounds out of public services and support for all families and help married couples at the expense of other children. It was interesting to see how quickly some began to back off. The right hon. Member for Wokingham (Mr. Redwood) characteristically had the courage to go on the record and he was quoted in The Times on Friday as saying:
“For the life of me, I cannot see why one should give a prize to people with no children, simply because they happen to be married.”
One can only speculate as to the identity of the “modernising Tory MP” quoted in The Times on Friday as saying:
“This is straight back to the ‘nasty party’. God knows why David has done it.”
It is interesting to follow the ups and downs of the debates in the Tory party that seem to be ebbing and flowing outside the public view. But even more staggering when one reads the document published last week is that not only was there the cost of the marriage tax break, but on a conservative estimate, some £10.9 billion of spending commitments. How on earth all that adds up when one considers the policy of sharing the proceeds of growth is beyond me. I hope that the hon. Member for Runnymede and Weybridge will enlighten us this evening when he makes his remarks. We agree with two conclusions of the Conservative social policy group, however. In December 2006, it concluded:
“For the past 10 years, inflation has been low, the stop-go cycle has given way to continued economic growth and there has been full employment.”
We certainly endorse those conclusions.
All the actions that the Government take will go to continuing to improve the competitiveness of our economy, coupled with reforms that will continue to increase fairness in the tax system. We will continue to make those changes because we need to recognise the realities of a modern, global economy, with the increasing mobility of labour. The Chancellor has made it clear that on many of the issues that the hon. Member for Twickenham has raised this evening, such as taper relief or the residence and domicile rules, we will not make changes without thinking them through. We will not have the knee-jerk reactions that some call for these days. Changes to the tax system must be properly considered and carefully thought through in the context of what is best for the economy overall, and that is what we will do.
This issue is about striking the right balance—a careful balance between competitiveness and fairness. It is about recognising that we do not have to penalise the rich or make them poorer to make everyone else better off, although we expect them to play by the rules. We have shown that we will take action to ensure that they pay their fair share of tax. This Labour Government have shown over the past decade that we can strike the right balance for Britain, and raise prosperity for everyone while providing the most support to those people who most need it. The incomes of the poorest households have grown faster than those of the richest, and we have increased fairness in our society by cutting child and pensioner poverty.
On the back of a tax announcement last week, the Liberal Democrats have moved this evening a motion that on any reading does not enhance the position of people earning the least in our society. On that specific point, I challenged the Liberal Democrats to come forward with measures that would, as the hon. Member for Twickenham said at the beginning of his remarks, close the gap in wealth and income and produce a fairer distribution of wealth. The loading of taxes on to petrol and aviation would have a major regressive effect and hit hardest those families on the lowest incomes. The 4p cut in income tax would benefit the highest earners in society, not those in the lowest decile. The local income tax would load taxation on to the working population, and move it away from people who do not work. One must consider the combination of all those factors when analysing the package that has been put forward.
By contrast, we have undertaken a comprehensive programme of tax system reform, which has increased fairness by closing tax loopholes. We have tackled tax avoidance and provided support for workers, families and pensioners, cut child and pensioner poverty and struck the right balance between fairness and competitiveness. By striking that balance and making tax changes only after thinking through their impact, rather than seeking short-term headlines to assuage fears about by-election performances, we have shown that by making the right decisions and thinking them through properly, we can deliver macro-economic stability, success and rising prosperity for the whole country. I urge the House to vote against the Liberal Democrat motion, and I commend the Government’s amendment to the House.
8.49 pm
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I thank the Chief Secretary for his kind words of welcome, which I reciprocate. I look forward to a constructive debate with him over the coming months and possibly even years.
I do not want to spoil the Liberals’ day, but perhaps I can deal with the Chief Secretary’s comments about marriage—he will be pleased to hear that the position of shadow Chief Secretary is no different from that of Chief Secretary. He knows that the excellent and exhaustive report produced by my right hon. Friend the Member for Chingford and Woodford Green (Mr. Duncan Smith) is just that—it is a report to the Conservative party with a series of sometimes expensive recommendations that we will consider very carefully. With the benefit of our “Stand up, Speak up” campaign to consult the people of Britain on those issues and many others, we will, in due course, introduce carefully costed proposals, which the Chief Secretary will be able to analyse and which we will be happy to debate with him.
Few areas are as politically charged as personal taxation, and there are few areas where the temptation to play to the gallery is stronger. There is a great scope for cruel deception in this area. Static models can be served up for popular consumption suggesting that there are easy wins for hard-pressed taxpayers by raising taxes on the undeserving rich. The hon. Member for Twickenham (Dr. Cable), by his background and his training, should understand better than most the pitfalls of pursuing
that route. In that area above all others, there is an overpowering need for mature debate and for ensuring that the economic head rules the political heart.
Sadly, despite the measured tone of his remarks, the hon. Member for Twickenham appears to have succumbed to the temptation to cash in on a popular media feeding frenzy. As the Chief Secretary has noted, the Liberal Democrat motion focuses on the taxation of the wealthy. It follows suspiciously closely the publication last week of a Liberal Democrat document, which proposes a cut in the basic rate of tax. That risks the accusation of shamelessly playing the politics-of-envy card.
Julia Goldsworthy: While we are on the theme of shifting the policy perspective allegedly in response to potential publicity, which of the following comments by the shadow Chancellor does the hon. Gentleman agree with? At a dinner at Claridges on 12 March, the shadow Chancellor told the British Venture Capital Association:
“The importance of your contribution to our economy is, I believe, rightly reflected in the tax treatment that you receive”.
In the middle of June, however, he said that his party would support plans to raise taxes for private equity amid growing criticism that many millionaires are paying a far lower rate of tax than other workers.
Mr. Hammond: If the hon. Lady will contain herself, I will specifically address the private equity question in due course in responding to the remarks of the hon. Member for Twickenham.
I sympathise with some of the underlying concerns set out by the hon. Member for Twickenham. He expressed his position in language that was rather more moderate than the wording of the motion, but a vendetta against wealth creators is completely the wrong approach to solving the problems of income inequality. Strikingly, the motion displays a lack of vision or ambition to boost the life chances of those who are being left behind, just as the Government amendment manifests a disturbing complacency about the state of Britain.
Tackling income inequality by attacking wealth creators risks reducing inequality at the price of general impoverishment. The Chief Secretary stated that this is not a zero sum game, and Abraham Lincoln made the same point in less modern language 150 years ago: “You do not make the poor richer by making the rich poorer.” The signal that we need to send is that we will encourage those who have the skills that Britain needs to move our economy up the value curve in a globalising market, and we should not send them the signal that they are unwelcome here.
Steve Webb: The hon. Gentleman condemns the Liberal Democrat motion and the Government amendment, but he has not tabled one himself. Does he have no views on the fair taxation of the wealthy that he wants to share with the House?
Mr. Hammond: If the hon. Gentleman listens carefully, he will hear my views over the coming 10 or 15 minutes.
The original title of the Lib Dem motion was “Taxation of the Super-Rich”, which has now been changed to “Taxation of the Wealthy”. That leads one to speculate on whether, if the debate had been delayed by another week or so, it would have become “Taxation of the Moderately Well-Off”. Evidently even the Lib Dems have recoiled at the absurdity of describing as “super-rich” people whose incomes leave them still eligible for tax credits. One of the Sunday newspapers pointed out that while £46,000 a year for a single earner household may be a very comfortable income in many parts of the country, it is hardly David Beckham territory.
I note, too, that there is no proposal in the Liberal Democrats’ tax document to reintroduce the 10p income tax band, despite their attack on its removal in the Budget. They seem keen to leave out of their calculations their long-term aspiration to increase the income tax threshold to £10,000, at a cost of £30 billion. The truth is that someone on a very low income, just falling into income tax, will still be worse off under the Liberal Democrats’ income tax proposals than they would have been before the Prime Minister’s Budget stealth taxes abolished the 10p rate.
The question that we need to ask ourselves, first in response to the Liberal Democrats’ paper last week, and then to their motion today, is whether their plans add up. They cost them at £22.2 billion, or £52.2 billion if we include the £10,000 threshold. Leaving aside for a moment the question of whether the replacement of council tax with a local income tax would be fiscally neutral, as they claim, how do they plan to pay for their cuts, and do those plans add up? The Chief Secretary focused on the broader picture. I want to look more specifically at three areas where the Liberal Democrats propose to raise taxes in order to pay for their proposed cut in the basic rate of income tax by addressing what they call the tax treatment of the rich, with new taxes on capital gains, a clampdown on non-domiciled residence, and a new tax on pension contributions. The latter has not been mentioned in any detail so far, and I would like to talk about it first.
The Lib Dems propose to scrap higher rate relief on contributions to pensions. In many ways, that epitomises their whole document—ill advised, ill timed and technically flawed. It would be hugely damaging to pension savings, it would not work, and it would not deliver the increase in tax revenue that they suggest. That means that there is already a great hole in their numbers. I think that they are saying that the proposal will contribute £7.5 billion to their funding challenge, but they do not seem to be quite sure what the number is. The document that they published last August, which also proposed abolishing the higher rate pension contribution relief, said that that would produce £4.3 billion, but the document they published last week says that exactly the same policy would produce £7.5 billion. That is a piece of Lib Dem economics for us to analyse. Whichever way, the savings ratio has slumped to an almost 50-year low—just 2.1 per cent. compared with 10 per cent. in 1997. Against that backdrop, and against that of a cross-party consensus that long-term saving for retirement needs to be encouraged, it seems deeply irresponsible to propose anything that would reduce pension saving still further.
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