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(b) a taxpayer with an income of £13,600 receives no such addition.
(4) Regulations under this section may make such transitional or incidental provision as the Treasury thinks fit.
(5) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of the House of Commons.’.
New clause 13— Independent review of income taxation —
‘(1) The Chancellor of the Exchequer must appoint a person to review the operation of the provisions of the ITA 2007 and sections 1 to 3 (income tax) of this Act.
(2) That person must, within 12 months of the coming into force of this Act, carry out and report on a review of those provisions and, where he does so, must send a report on the outcome of his review to the Chancellor of the Exchequer as soon as reasonably practicable after completing the review.
(3) That person must, upon the amendment by future legislation of any provision contained in ITA 2007, carry out and report on a review under this section within 12 months of that amendment coming into force.
(4) A report received by the Chancellor of the Exchequer under subsection (2) must be laid before the House of Commons.’.
New clause 20— Personal allowances (No. 2) —
‘(1) The Treasury must by regulations made by statutory instrument vary section 35 of ITA 2007 (personal allowances for those aged under 65) so as to achieve the outcome specified in subsections (2) and (3).
(2) For the tax year 2008-09 50 per cent. of income in excess of £6,400 (up to a maximum of £600) shall be added to the personal allowance, subject to subsection (3).
(3) That addition shall be withdrawn at the rate of £10 for every £100 of income in excess of £7,600, so that—
(a) a taxpayer with an income of £7,600 receives an addition to the personal allowance of £600, and
(b) a taxpayer with an income of £13,600 receives no such addition.
(4) Regulations under this section may make such transitional or incidental provision as the Treasury thinks fit.
(5) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of the House of Commons.’.
Amendment No. 102, in clause 1, page 1, line 8, at end add ‘, unless subsection (3) applies.
(3) If this subsection applies—
(b) the basic rate is 22%, and
(4) Subsection (3) applies in the case of any person who has notified the Commissioners for Her Majesty’s Revenue and Customs that he wishes his income to be charged at the rates specified in that subsection and not at the rates specified in subsection (2).’.
Amendment No. 103, in clause 3, page 2, line 18, leave out subsections (2) and (3).
Amendment No. 104, page 2, line 22, leave out subsection (5).
Amendment No. 105, page 2, line 26, leave out ‘the starting rate and’.
Amendment No. 6, page 2, line 27, at end insert—
‘(8) The Chancellor of the Exchequer shall, within six months of the coming into force of this section, lay before the House of Commons a report containing an assessment of the combined impact of—
(a) the increase in personal allowances, and
(b) the abolition of the starting rate of income tax,
on individuals with a gross income under £13,000 per annum.’.
Amendment No. 106, in schedule 1, page 101, line 15, after ‘(2)’, insert
‘Unless section 1(3) of FA 2008 applies,’.
Amendment No. 107, page 101, line 17, at end insert—
‘(3A) After subsection (2) insert—
“(2A) If section 1(3) of FA 2008 applies, income tax is charged—
(a) at the starting rate on an individual’s income up to the starting rate limit, and
(b) at the basic rate on an individual’s income above the starting rate and up to the basic rate limit.”’.
Amendment No. 108, page 101, line 24, at end insert—
‘(8) The starting rate limit is £2,150.’.
Amendment No. 109, page 101, line 25, leave out sub-paragraph (6).
Jane Kennedy: Government new clauses 11 and 12 and Government amendment No. 5 put into effect the Chancellor’s statement to the House on 13 May. Raising the personal allowance by £600 to £6,035 is worth £120 for a basic rate taxpayer, equivalent to the average household loss from the Budget 2007 reforms. Around 2 million basic rate taxpayers will benefit from the change. The number of households that lose from the Budget 2007 reforms will be reduced from 5.3 million to 1.1 million, and the amounts for those who still see a loss will be at least halved.
The Treasury Select Committee published its report on Saturday 28 June. We will respond in detail to that report in due course, but let me just quote from the Committee’s press release. The Committee welcomed the compensation for
“those who have lost out through the abolition of the starting rate of income tax through raising the personal allowance for basic rate taxpayers, but concludes that there remains a pressing need for the Government to seriously examine ways in which the 1.1 million households who will continue to lose can be fully compensated.”
As I have the opportunity of speaking twice on such occasions, it has been my practice in Committee to move the Government’s amendment or new clause briefly and then listen to the detail of the debate, so that I may address directly the points that colleagues raise.
Lembit Öpik (Montgomeryshire) (LD): Before the Minister concludes for now, may I ask her the question that my constituents in Montgomeryshire have asked me? Why have the Government abolished a tax arrangement that they introduced? Why was it their judgment to introduce it in the first place, only to abolish it now? I do not understand what changed.
Jane Kennedy: There are very sound reasons why the 10p rate was removed in the Budget 2007. Those have been debated on many occasions in the House. I will come to many of the benefits that flow from those changes later in this debate.
Mr. Frank Field (Birkenhead) (Lab): I am sure that those of us on the Government Benches much appreciate the approach that my right hon. Friend will adopt of listening to the debate and then replying. I hope that when she replies, she will be able to say something about how she thinks the Government will probably respond to the Treasury Committee’s recommendation on how that smaller group who benefit only partially from new clause 11—many have benefited, most totally, but some only partially—may be fully compensated before the year is out.
Jane Kennedy: I have listened very carefully and had conversations with my right hon. Friend and many others who have spoken to me about this issue, and I am sure that they will wish to participate in today’s debate. I want to reassure him that we will return to this issue in the pre-Budget report, as the Chancellor has said, not only in front of the Select Committee but elsewhere. He will bring forward concrete proposals, and they will be implementable as soon as possible. I want to give my right hon. Friend that reassurance right up front at the beginning of this debate.
Rob Marris (Wolverhampton, South-West) (Lab): Will my right hon. Friend say a little more about this while she is setting the scene? She quoted from the Treasury Select Committee’s press release and mentioned a figure of 1.1 million households. I believe that that represents 20 per cent. of the figure of 5.3 million households that was put forward last year by the Institute for Fiscal Studies. Treasury officials appearing before the Treasury Select Committee last year said that they broadly accepted that figure. Will the Minister tell the House whether the Treasury has looked again at that figure? Many hon. Members, especially on this side of the House, are rather suspicious because, while we wish to see no losers at all, we think that the figure of 1.1 million households is awfully high.
Jane Kennedy: I stand by the figures that we have discussed. I have no reason to believe that the 1.1 million figure is not accurate. It is certainly the figure that we continue to work to.
Julia Goldsworthy (Falmouth and Camborne) (LD): The Minister has just said that the Chancellor will return to this issue in the pre-Budget report. Will he also take into consideration the other issues, besides the changes to the 10p rate, that are affecting the losers? I was contacted today by a constituent who feels that she has been hit by a double whammy, because she will also lose out as a result of the switch from housing benefit to housing allowance. Can the Minister give me an assurance that all these cross-cutting issues will be looked into when the Chancellor returns to this matter in the pre-Budget report?
Jane Kennedy: At the beginning of the debate, I said that my making a short introduction would enable Back-Bench colleagues to make a longer contribution, to which I could respond in more detail at the end of the debate. I would hope to give the hon. Lady the reassurances that she is asking for, and I can assure the House that this work is ongoing. It is not a matter that Ministers have set aside. It is a serious matter, and I acknowledge the way in which amendments on the issue—many of which will be debated today—have been put forward.
Mr. John Redwood (Wokingham) (Con): It might speed the debate up if the Minister could clarify this point. Is she now saying that the Chancellor will come forward with proposals in due course to ensure that there will be no losers, or is she saying that a lesser number of losers than 1.1 million would be acceptable?
Jane Kennedy: What I have said is that we intend to consider this matter very seriously. We have made it very clear that we will return to the issue in the pre-Budget report, which is the proper time for such a matter to be discussed in further detail in the House. That is our intention. At this point, I would like to hear the detail of the debate, and to respond in detail in due course.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I have been in this House for 11 years, but I do not think that I have ever seen a Minister so anxious to sit down and hear what her colleagues had to say. She seems remarkably reluctant to pin her colours to the mast at this stage. The hon. Member for Wolverhampton, South-West (Rob Marris) suggested that the Minister was in listening mode, and I am delighted to hear that. Let us see whether we can make some progress on that basis.
The first group of amendments that we are debating today addresses what has become the central issue in the fiasco of the 2008 Budget and Finance Bill, as it has unravelled on what I think it is fair to call a scale that is unprecedented in modern parliamentary history. No one inside or outside the Chamber really believes that the changes introduced by the Government in new clauses 11 and 12 are some kind of well thought through, counter-cyclical response to the economic slow-down. They were announced on 13 May as an attempt—to use the language of the Treasury Committee—to pull a rabbit out of the hat ahead of the Crewe and Nantwich by-election and to undo the damage that the Prime Minister did in the 2007 Budget by putting short-term political calculation ahead of long-term political principle. Behind the spin, this is simply the final act—at least, it is for this year’s performance—of what, depending on one’s point of view, is either a tragedy or a farce of epic proportions, which has been delivered at epic cost, both financial and political.
The Financial Secretary did not provide any context, so let me remind the House of the history of the 10p tax rate, its birth and its death, on which these new clauses are intended to buy the silence of Labour Back Benchers. The 10p tax band first reared its head in the 1997 Labour party manifesto as a long-term objective towards lowering the starting rate of income tax to 10p in the pound. When it was introduced in 1999, the then Chancellor, our current Prime Minister, described it as something that will
“make work pay and help people, especially those who are low-paid, to keep more of the money that they earn”
As I have reminded the House before, the Prime Minister’s final flourish on delivering that 1997 manifesto pledge for the 1999 Budget was this:
“When we make promises, we keep them”.
That is grand and principled stuff, but by May this year, the current Chancellor was not describing the 10p tax rate as some long-term objective and deeply held principle of taxation, or as a manifesto commitment the delivering
of which was a moral obligation for the Labour party. No, by spring this year, the promise to be kept had been downgraded to something
“introduced in 1999 as a transitional measure”.
So it is not so much a case of making promises and keeping them; it is more a case of ducking and weaving, twisting and spinning rather than of admitting that the promises were being broken.
Mr. Andrew Love (Edmonton) (Lab/Co-op): The hon. Gentleman is speaking very warmly about the 10p tax rate, so will his party give a commitment to reintroduce the 10p rate, should it ever become the Government?
Mr. Hammond: I note the tone in the hon. Gentleman’s final phrase, but I do not know where he has been over the past couple of months. He knows very well that the answer to that question is no. We have said that we accept the abolition of the 10p rate and the simplification of the tax system. That is supportable, but the Government have to ensure that it is delivered in a way that is not carried on the backs of the poorest taxpayers in our society. I would have thought that the hon. Gentleman would have been keen to promote that principle. What I am speaking warmly of is the principle that when parties make manifesto commitments—we could all think of a few of them—it is generally good for the health of the body politic if they deliver on them.
To be fair to the Prime Minister—I like to be fair to him—he could scarcely have paid a higher political price than he has for his cynical calculation over the income tax changes, creating 5.3 million losers among some of the lowest paid in our society. The Financial Secretary told us that there were very sound reasons for abolishing the 10p rate. The very sound reason that I can determine is that it was in order to fund the 2p cut in the basic rate of income tax that was announced with a flourish at the end of the 2007 Budget speech—a speech that was constructed and intended to be the launch pad for the then Chancellor’s bid for the Labour leadership and thus the office of Prime Minister. He thought that, by giving a demonstration of Blair-like ability to appeal to middle English voters, he would appeal to his party as an election winner in the mode of his predecessor. The price that was to be paid by the poorest in our society in the form of a deferred increase was buried in the small print. The plan was to hold the election in the autumn and worry about the mess that fell into place the following spring after the election was safely out of the way. The rest, as they say, is history.
4 pm
The fly in the ointment, of course, was the Prime Minister’s now notorious inability to make a decision, and the obviously completely irrelevant drop in his opinion poll rating at the beginning of last October—he would give his eye teeth for such a rating now. There we have it: a bungled and deceitful plan foiled by its author’s weakness and indecision.
There is a case for fiscal loosening—tax reductions—when the economy is slowing dramatically. A prudent Government who had put something by during the good years would have made that case in the Budget speech in March this year. But our Government did not put anything by. They did not fix the roof while the sun was shining. Unlike most of our competitors, who put
their public finances in order—some of them paid off the entirety of their net public debt—the UK enters the downturn ill-prepared as a result of what the OECD called “excessively loose fiscal policy” during the good years, and even more exposed to financial instability than the US, according to Alan Greenspan.
Therefore, the Chancellor did not announce a fiscal giveaway in the Budget in March because he had nothing left to give away. In fact, he said in his Budget speech that the best way to help families is not through a further rise in personal tax allowances. Of course, that was before; now he claims that he meant to say that the best way to help families is through a further rise in personal tax allowances. As the temperature started to increase on the Labour Back Benches, the Chancellor pleaded that he had no money, and said that he could not rewrite the Budget. As the temperature reached boiling point when the Bill was before a Committee of the whole House, however, his resolve snapped once again, and a perfect 180° U-turn was executed by the Treasury’s now rather accomplished U-turns team—veterans of the non-dom tax, the entrepreneurs’ relief, the foreign profits tax, and now the banking reforms. The Budget that could not be reopened was reopened; the money that the Chancellor did not have was found; and the barbarians at the gate—I am sorry to refer to the right hon. Member for Birkenhead (Mr. Field) in those terms—were bought off. Or were they?
The emergency Budget on 13 May plucked another £2.7 billion of borrowing out of the air, and at a stroke reduced the number of losers from the 10p tax debacle from 5.3 million families to just 1.1 million families. But two questions remain to be answered. The first is the one that the Financial Secretary identified from the Treasury Committee’s report: what about the other 1.1 million families? On the day of the great climbdown, when the right hon. Member for Birkenhead went to see the Prime Minister, the words being used were “compensation in full backdated for everyone”. To date, we have still not heard how the remaining 1.1 million losers will be compensated.
Secondly, we have not heard from the Government what will happen next year. Will the personal allowances stay at the level of new clause 11, and be indexed in accordance with existing law? Will the additional winter fuel allowance be repeated in future years? Speculation is rife. The Institute for Fiscal Studies calculates that, in the absence of action to extend the effect of new clause 11 into 2009-10 and 2010-11, by 2010—which, as hon. Members will have noted, could be a general election year—some 18 million families would be worse off than they are in 2008-09.
However, 13 million families who were not losers from the Budget 2007 reforms have none the less gained from the increases in the personal allowance. Do the Government plan to claw back from them in future years, perhaps by adopting proposals along the lines of those of the hon. Member for North-West Leicestershire (David Taylor) in new clause 10, or will they just continue to borrow an additional £2.7 billion a year to fund the tax giveaway and the £600 million-odd required to extend the additional winter fuel payments?
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