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House of Commons
Session 2007 - 08
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General Committee Debates

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, †Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Tuesday 6 May 2008


[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

10.30 am
The Chairman: May I welcome members on both sides of the Committee to the first sitting of the Finance Bill 2008. I am confident that it will be a well ordered and constructive Committee, with no wasting of time and maximum positive involvement so that all matters relating to the Bill that are of particular concern to the Opposition parties are debated.
I want to outline one or two domestic Committee arrangements. Members may, with the permission of the Chairman, remove their jackets if they so wish. Will they please all ensure that electronic devices, mobile phones and pagers are turned off or are switched to silent mode during sittings? I must confess that, if they go off and I identify the hon. Member, and that person seeks to be called, I shall be inclined to use a Nelson—and turn a blind eye. I remind hon. Members that adequate notice should be given of amendments. As a general rule, I and my fellow Chairmen do not intend to call starred amendments, including any that might be reached during an afternoon sitting.
The Financial Secretary to the Treasury (Jane Kennedy): I beg to move,
That the Committee shall meet—
(a) on Tuesdays at 10.30 a.m. and 4.30 p.m., and
(b) on Thursdays at 9.00 a.m. and 1.00 p.m.,
when the House is sitting.
Sir Nicholas, what a pleasure it is to be here under your chairmanship. I am also pleased that Mr. Cook and Mr. Hood will be sharing the duty of chairing the Committee. I know that your wealth of experience and skill will keep us in order and make sure that our debates are to the point. I look forward to the next few weeks during which the Bill will be scrutinised. I welcome Mr. Sandall to his role. I also extend a welcome to the hon. Member for Runnymede and Weybridge who will be leading for the official Opposition. I am sure that we shall have a number of lively and interesting debates. I welcome also the hon. Member for Taunton and his colleagues who represent the Liberal Democrats, and the hon. Member for Dundee, East.
The Chairman: What a happy way in which to proceed.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I join the right hon. Lady in her comments. I am delighted to have the opportunity once again to serve on a Committee under your chairmanship, Sir Nicholas, and that of Mr. Cook and Mr. Hood. Finance Bills do not always attract this degree of public interest, and it is not entirely clear to me that each clause and schedule of the Bill will be scrutinised with the same enthusiasm by the media and the electorate, but some of them certainly will be.
Our job as an Opposition, and that of the other Opposition parties represented on the Committee, is to scrutinise what the Government propose, explore the alternatives and establish whether they have properly looked at all of the alternatives and considered the representations that are made by experts outside the Committee and the House, in order to test the robustness of the Government’s thinking.
We shall no doubt hear during the Committee’s proceedings, in response to Opposition amendments, a lot of nonsense about how we and others are making spending or tax-cutting commitments. It was clear from the debate on the Floor of the House last week that not all Members understand the conventions and rules relating to Finance Bills, so it might be worth placing on the record the fact that, while Opposition Members and Government Back Benchers may table amendments proposing reductions in taxation, it is the prerogative of Ministers of the Crown to table amendments that would increase taxation.
Frankly, that leaves Opposition Members in some difficulty when trying to present balanced alternatives to Government proposals. Members of Opposition parties have no difficulty when presenting their ideas in the round during debate—perhaps I anticipate what the hon. Member for Taunton will say to us in a few moments in relation to amendment No. 1—but in response to the cry, “Why have you not tabled an amendment to do it?” the answer will often be that we simply are not able to get amendments selected that would present a balanced package response to some of the Government’s proposals.
This Finance Bill has attracted an unusual level of public interest—at least in relation to certain provisions—and I hope that we will have a genuine debate on the Government side on some of those provisions. In other words, I hope that the Government Whips have failed in their efforts to create an entirely sanitised Public Bill Committee, and that we will have some contributions from Labour Members. I have been looking at the majorities that some of them enjoy, and they will be extremely focused on the public debate about some elements of the Bill. I hope that we will hear from them and have an opportunity to debate with them as their minds are focused by events going on around us. I have no objection to the sittings motion that the right hon. Lady has proposed and look forward to the progress of the Committee’s business.
Question put and agreed to.
Motion made , and Question proposed,
That the order in which proceedings are taken shall be: Clauses 1 and 2; Schedule 1; Clause 4; Schedule 2; Clause 7; Schedule 3; Clause 8; Schedule 4; Clauses 9 to 12; Schedule 5; Clauses 13 and 14; Schedule 6; Clauses 16 to 20; Clause 24; Schedule 8; Clause 25; Schedule 9; Clause 26; Schedule 10; Clauses 27 to 29; Schedule 11; Clauses 30 and 31; Schedule 12; Clauses 32 and 33; Schedules 13 and 14; Clause 34; Schedule 15; Clause 35; Schedule 16; Clauses 36 to 40; Schedule 17; Clause 41; Schedule 18; Clauses 42 to 48 and 50; Schedule 19; Clauses 51 and 52; Schedule 20; Clauses 53 to 57; Schedule 21; Clauses 58 and 59; Schedule 22; Clause 60; Schedule 23; Clauses 61 to 71; Schedule 24; Clauses 72 to 76; Schedule 25; Clauses 77 to 79; Schedule 26; Clauses 80 and 81; Schedule 27; Clauses 82 to 88; Schedule 28; Clause 89; Schedule 29 Clause 91; Schedule 30; Clauses 92 to 94; Schedule 31; Clauses 95 and 96; Schedule 32; Clauses 97 to 102; Schedule 33; Clauses 103 and 104; Schedule 34; Clauses 105 and 106; Schedule 35; Clauses 107 and 108; Schedule 36; Clauses 109 and 110; Schedule 37; Clause 111; Schedule 38; Clauses 112 and 113; Schedule 39; Clauses 114 to 116; Schedule 40; Clause 118; Schedule 41; Clauses 119 and 120; Schedule 42; Clauses 121 to 124; Schedule 43; Clauses 125 to 132; Schedule 44; Clauses 133 to 139; Schedule 45; Clauses 140 to 151; Schedule 46; Clauses 152 to 158; Clauses 22 and 23; Schedule 7; new Clauses; new Schedules; and Clauses 159 and 160.—[Jane Kennedy.]
The Chairman: I call Mr. Philip Holland.
Mr. Hammond: It is all right, Sir. Nicholas—we have only known each other for 11 years.
The Chairman: I make the mistake every time.
Mr. Hammond: You do. [Laughter.]
I notice that the order of consideration is chronological, with the exception of clauses 22 and 23, so will the Financial Secretary take a moment to explain why the Government’s view is that clauses 22 and 23 should be considered at the very end of the Committee’s proceedings?
The Chairman: Before I call the Financial Secretary, I say to the hon. Member for Runnymede and Weybridge, who is leading for the Opposition, that my error was in no way intentional.
Jane Kennedy: Mr. Winterton—[Hon. Members: “Sir Nicholas.”] Sir Nicholas, we have also known each other a long time.
The slight deviation from chronological order means that clause 22 will be considered at the end of the Committee’s deliberations. That is because it concerns an extremely technical area that we have been working very hard to get right. There may be further amendments to those proposals, not on the detail of them, but to ensure that the detail of the Bill is right. It will take my advisers a little longer to be certain that those proposals are drafted exactly as we want them to appear in law. We did not schedule clause 22 for discussion at the end of the Committee’s deliberations so that there was not an opportunity to discuss it. We did so to ensure that it is absolutely right before we put it into law.
Mr. Hammond: I am grateful to the Financial Secretary for that clarification. I note that these proposals were first announced in the pre-Budget report. There has subsequently been somewhat of a U-turn on how they will be implemented. From what she has said, it appears that the Government are still thinking about the wisdom of some of the detailed measures in clauses 22 and 23. She has rightly identified the importance of those measures.
As you know, Sir Nicholas, the Opposition’s concern is that it is not unheard of for a Finance Bill to run into the mud and slow down so that new clauses have to be dealt with very quickly at the end. We are concerned that we must not get into a situation where we are left with a choice between debating clauses 22 and 23 and debating the new clauses that will be tabled during the consideration of the Bill. Will the Financial Secretary assure the Committee that if we are faced with such a choice, the Government Whip will be wheeled into action and the Government will give favourable consideration to an extension of the Committee’s sitting period?
I do not think that the Financial Secretary would regard it as appropriate if measures as important as those contained in clauses 22 and 23, which are likely to have a significant effect on the UK’s future economic performance and its status as an international business location, were considered under extreme pressure of time. We would certainly not regard that as appropriate. Everything that we do is under the pressure of time, but it would not be appropriate to consider such measures under unreasonable or extreme pressures of time.
I know that the Financial Secretary cannot give a specific answer today because we do not know how the progress of the Committee will go. However, I hope that she shares the sentiment that proper time must be made available for the discussion of clauses 22 and 23, and not at the expense of the proper consideration of new clauses, one of which has already been tabled. I can assure you that many more will be tabled during the course of the Committee, Sir Nicholas.
Jane Kennedy: I believe that we have agreed between us sufficient time to deal with all the issues that might arise during the Committee. In my experience, how much time is allocated to issues of importance is often in the hands of Opposition Members. We have arranged for those clauses to be discussed at the end for the reasons that I have explained, and not to avoid discussing them. I hear what the hon. Gentleman is saying, but on such matters, it is for him, his hon. Friends and the usual channels to ensure that we manage the time between us effectively and efficiently.
Mr. Mark Hoban (Fareham) (Con): Will the Financial Secretary give the Committee an assurance about the timing of the tabling of amendments to clauses 22 and 23? Those clauses have attracted considerable outside interest, and those representative bodies will want to comment on them and perhaps encourage members on both sides of the Committee to table alternative amendments to achieve different or the same sort of outcomes. Can the Financial Secretary tell us when she expects amendments on clauses 22 and 23 to be tabled, to give proper time for consideration?
10.45 am
Jane Kennedy: We will expose the new draft of those provisions as soon as possible. I would not wish the procedures of the Committee to stand in the way of important new clauses that Opposition Members wish to see. I cannot give a specific deadline, but I will do so as soon as it is available. Amendments and new clauses should be tabled as soon as possible. The detail of clause 22 and the related schedules on residence and non-domicile arrangements have been in the public domain for some time, and representations are being made. The hon. Gentleman is right that it is necessary to get the rules right so that people affected by them have certainty about their tax affairs. I am absolutely clear on that, and hope to assure him that we do not intend to use or manoeuvre the Committee to reduce that time; I simply do not have a date.
Stewart Hosie (Dundee, East) (SNP): I am confident that the Financial Secretary will publish the amendments as soon as they are available. If the amendments appear very late, and they are impenetrable and complicated, would she and Treasury team provide an explanatory note to indicate what their intention is?
Jane Kennedy: I am sure that we can do that; I give that undertaking to the Committee.
The Chairman: Before I put the question, may I say from the Chair that it is important for proper consideration of such an important Bill that the usual channels ensure that the Opposition parties have an opportunity to raise issues. Otherwise, the purpose of the Committee stage of a Public Bill is, in my view, completely negated. I hope that the Government will take account of that, and provide adequate time for those clauses, schedules and new clauses that the Opposition parties wish to debate. If I see any bad practice in seeking to ensure that parts of the Bill are not discussed, I shall seek to use what little influence a Chairman has.
Question put and agreed to.

Clause 1

Charges and main rates for 2008-09
Mr. Jeremy Browne (Taunton) (LD): I beg to move amendment No. 1, in clause 1, page 1, line 7, leave out ‘20%’ and insert ‘16%’.
This is not quite the right moment to discuss the 10p rate—it has been discussed exhaustively, but I think we could still manage to get a bit more mileage out of it. The 10p rate, and the whole issue of income tax, has proved extremely controversial. It will continue to be controversial, because the compensation package that was outlined by the Chancellor to the Chairman of the Treasury Select Committee last week, failed lamentably to achieve the objectives shared by many Members in the House. We should compensate those groups who are net losers as a result of two policies happening simultaneously—a cut in the basic rate from 22p to 20p, and the doubling of the 10p rate. Many questions hang over us, and it is the Committee’s duty to examine and scrutinise them, including issues about who will be compensated, how that compensation will be backdated and matters of that sort.
As a party, we are trying to make a wider point with the amendment. It is not that the overall tax burden as a result of the change should be increased or decreased—this is a revenue-neutral proposal although, as the hon. Member for Runnymede and Weybridge said a moment ago, we can propose only reductions, not increases, so I must sketch in the remainder of the detail. The purpose of the proposal is not to decrease or increase the tax burden in the UK but to shift the emphasis of taxation, to a greater extent than at present, on to behaviour that is damaging to the environment, on to income groups who could bear a greater burden of taxation, and away from people who pay the basic rate of income tax, and thus away from income.
The effect is twofold. One effect is to discourage environmentally polluting activity, and the other is to reward work and enterprise. There is also a redistributive component to the proposal, which would not completely compensate those who have lost out as a result of the doubling of the 10p rate and the 2p reduction in the basic rate, but would leave far fewer than 5 million losers. The net losers are people whose saving from the reduction in the basic rate is not sufficient to offset the doubling of the 10p rate. If the saving were not 2p in the pound but 6p, as we propose, that would compensate far more people than the arrangements proposed by the Government.
Mr. Hammond: I acknowledge what the hon. Gentleman has said about being able to present only one part of the package in the amendment, but will he tell the Committee what the gross cost of a reduction from 20p to 16p is?
Mr. Browne: Our estimate is something in the region of £19 billion.
Stewart Hosie: I am looking at the Red Book, and the cost over three years of reducing it to 20p was £28.5 billion. It would be £85.5 billion in total to go from 22p to 16p, and to go from 20p to 16p would be £57.5 billion over three years. That is an extraordinary amount of money. The hon. Gentleman said that that would be offset by taxes elsewhere. Can he tell us what environmentally damaging things he would tax to find £57.5 billion over three years?
Mr. Browne: I can indeed. Let me give the Committee a few examples, Sir Nicholas, even though you may feel that that is not directly relevant to the matter before us. It struck me as bizarre that when I earned enough money to be a higher-rate taxpayer, I received a greater amount of marginal tax release on my pension contribution than I did when I paid the basic rate. Everybody in this Committee is a higher-rate taxpayer, so I suppose that we should all mutually declare an interest in retaining the status quo. None the less, if a member of the Committee puts an extra £1 into a pension pot, they will get more tax relief than one of our constituents who earns, for example, £20,000 a year. To the Liberal Democrat party, that is a strange state of affairs. To remove higher rate tax relief on pension contributions would, according to our estimates, which are based on Treasury figures, bring in something in the region of £7.5 billion per year.
Some members of the Committee may think that the current state of affairs is preferable—I imagine that everybody on the Government side thinks that, as it is Government policy. It means that, for the sake of argument, if someone who earns £120,000 per year puts an extra £1 in their pension pot, they will be rewarded out of taxpayers’ funds to a greater degree than somebody who earns £20,000. That is not my party’s position, and I shall I come on to the issue of environmental taxes.
Mr. Hammond: Will the hon. Gentleman clarify whether the £7.5 billion assumes that higher-rate taxpayers, deprived of 40 per cent. relief on pension contributions, will make no change to their pension-contributing behaviour? In other words, is it assumed that they will carry on contributing the same amount but with only 20 per cent. relief, or has the hon. Gentleman factored in—
Mr. Mark Todd (South Derbyshire) (Lab): Sixteen per cent.
Mr. Hammond: But with only 16 per cent. relief? Has he factored in a dynamic effect?
Mr. Browne: It is always difficult to predict behavioural changes, but the proposals have been examined by many people in positions of authority and by respected observers, and they share our confidence that the figures are robust. One could argue that we are excessively pessimistic. Many people in that position may want to spend money that they would otherwise have saved, with that short-term spending boosting the economy and economic growth; they may spend it in local shops, on local goods and services, and there may be a knock-on effect that means that we are being too pessimistic in our assumptions. As a party, we have a reputation for being cautious and wise in that regard, which is why the other parties are so quick to pinch our ideas, so I do not have any worries on that score.
On environmental tax, I remember our predecessor party—the Liberal party—being lampooned by both of the other parties for being environmental and having concerns about the future of the planet, which was considered to be whacko and off the scale. Serious parties talked about serious economic policies and trade union performance and so on; only peripheral parties such as the Liberals or the Liberal Democrats were concerned about such inconsequential matters as environmentalism. More recently, my party was the first to propose differential vehicle excise duty rates which, again, were considered pretty obscure and the sort of thing that only the third party would suggest. The big two parties congratulated each other on not going near those sorts of policies, of which no reputable and serious person would approve. Now, the Government have not only introduced that policy, but they champion it with vigour and are seeking further to extend the rates and differentials. We are often ahead of the thinking of the other two parties, and I make no apologies for that.
Mr. Hammond: The hon. Gentleman is clearly well ahead of the rest of the Committee in his thinking on pension tax relief. Will he confirm that his party proposes that the relief on pension contributions for higher-rate taxpayers be reduced from 40 per cent. to 16 per cent? For interest, will he tell the Committee whether he has market-tested that proposal in, let us say, Richmond Park?
Mr. Browne: The answer to the first question is yes, pension relief would be limited to the basic rate. On the question of whether our policies are driven by marketing assumptions in marginal seats, or whether that is the preserve of the hon. Gentleman’s party leader and his team of chums from that world, I defer to him since I know far less about the trendy polling mechanisms that he and his party spend so much money on. I realise that the Conservative party has recruited people from the private sector at huge expense, and that they do not give any guidance on policy or ideology, because those issues belong to yesterday’s politics; however, they are experts on marketing. If he wants to know about such procedures, he is better off talking to the leader of his party than to me.
Stewart Hosie: The hon. Gentleman has failed to answer the question. More importantly, the relief on pension savings for basic rate taxpayers would go down to 16 per cent. That is quite an extraordinary thing to do, is it not? It would penalise even further those struggling to save for their pensions.
11 am
Mr. Browne: I am sorry, that intervention was preposterous. If we followed the argument made by the Scottish National party, and 99 per cent. of the population were basic-rate taxpayers, everybody in the country would be in a state of euphoria because their relief would be so high that they would be extremely prosperous at 65—they would just be impoverished before then. My party’s policy is crystal clear and everyone needs to pay attention because it will be a policy embraced by their parties in a matter of years.
The Chairman: Order. May I tell the hon. Gentleman who leads for the Liberal Democrat party that this is not an election meeting? This is a Public Bill Committee debating the Finance Bill, and we are debating an amendment that he tabled. As long as he immediately connects the amendment to what he is saying, I am happy. When he goes rather too wide, I become irritated. I trust that he will take that into account.
Mr. Browne: I do not wish you to be irritated, Sir Nicholas. I have taken your warning into account, and I apologise for being diverted by those rather partisan interventions, which I was gracious enough to accept but which I shall be deterred from accepting in future.
The policy is clear-cut. Millions of people are struggling with their daily necessities—their food and fuel bills and so on. People at the lower end of the income scale are paying too much of their income in direct taxation, and some of them are paying up to a 70 per cent. marginal rate when we take into account the removal of allowances and tax relief. The driving inspiration behind the policy and the amendment is, as I said, twofold. First, we want to try and encourage more environmentally responsible behaviour, but the primary aim of the proposal for a 16p basic rate is to reward people on low to middle incomes for their work, enterprise and endeavour by enabling them to keep a larger proportion of their wages at the end of each week or month than they can keep under any proposals introduced by the Government or, for that matter, by other Opposition parties.
Emily Thornberry (Islington, South and Finsbury) (Lab): I would be grateful if the hon. Gentleman explained what sorts of green taxes he intends to introduce to make up for the £50 billion black hole. Is not part of the problem the fact that if green taxes change people’s behaviour, one simply do not raise that amount of money any more? How much carbon will be saved as a result of his new green taxes?
Mr. Browne: That is a difficult issue. This it is not Question Time, but I will try to skip through those questions. It depends on the elasticity of the trade-off between environmental taxes and behaviour. There is a well-accepted principle behind the amendment. For example, the Finance Bill raises taxes on cigarettes, and the Government tell us that the effect is twofold: one aim is revenue raising and the other is to discourage smoking. We are putting the same principle into effect. We anticipate environmental benefits, but the measure is revenue raising as well.
The hon. Lady may wish to argue on behalf of her constituents and others that Parliament and the British Government should not encourage environmentally responsible behaviour as vigorously as I suggest, and that the public should be penalised to a greater extent than I propose for working, but I do not want to argue either of those positions.
Mr. Peter Bone (Wellingborough) (Con): I am interested in what the hon. Member says, and he has made a beguiling argument for reducing the basic rate to 16p. However, can he tell me, for instance, by how much the price of petrol would have to go up to recoup the cost, and what happens to the demand curve? At what point does the measure go from being inelastic to elastic and achieve environmental benefits? What would the price of petrol be under the proposal?
Mr. Browne: I am grateful for the hon. Gentleman’s intervention, because that is a reasonable question. However, he makes the mistake of equating petrol taxes paid at the pump with environmental taxation when, of course, that is only one of many environmental taxes that could be introduced. I will be completely straightforward and honest. A higher-rate taxpayer, who leads a life that creates a large amount of pollution, takes a lot of international flights and drives many miles in a car that consumes a lot of petrol, will be a net loser as a result of what we are suggesting. A basic rate tax payer, who does not pollute to that extent, would be a net beneficiary. People could try to adjust their behaviour to make themselves less susceptible to higher levels of taxation. For example, they could choose to travel by train rather than by car, as I did when I travelled from Taunton this morning. People would be more incentivised to do such things if the price differential were greater. That is what we are proposing. The onus is on those who disapprove of such measures to argue for what they would do to encourage the progressive environmental policies that all parties profess to support, while at the same time encouraging work and enterprise, which is the purpose of the amendment.
Mr. Hammond: May I digress for a moment, Sir Nicholas? When speaking to the hon. Member for Taunton, you said that you might become irritated. That reminded me of my experiences serving under the chairmanship of the late Mrs. Dunwoody in Standing Committee. A number of Government Members and one of my hon. Friends will remember this experience. Mrs. Dunwoody had an excellent system for indicating her rising irritation with an hon. Member who was making a speech. She used to tap her pencil rhythmically on the desk and would increase the tempo of the tapping to indicate that the hon. Member was trying her patience. They then had an opportunity to change tack, and if they did so, the tempo of the tapping would gradually reduce.
I learned my trade in several Standing Committees under Mrs. Dunwoody’s chairmanship, and it has stood me in very good stead. I have often wished subsequently that other Chairmen had adopted the tapping pencil routine. Perhaps you might suggest to the Chairmen’s Panel, Sir Nicholas, that would-be Public Bill Committee Chairmen be apprised of Mrs. Dunwoody’s wonderful invention in the training session that I am sure is held for them.
The hon. Member for Taunton has tabled an amendment that, by his own admission, would cost £19 billion a year. It is true that in the context of a broader tax reform package it could be financed. He has given us a clue about the sort of things that would be necessary to make it financeable, such as slashing tax relief on pension contributions by people on middle incomes from 40 to 16 per cent.
The hon. Gentleman has correctly identified the problem that the marginal rates are too high at the bottom end of the income scale. I do not think a single person in this room would disagree that high marginal rates of tax and benefit withdrawal are a serious disincentive to people on low incomes to get into work, start earning income and to advance their earning potential once they are in work. His proposal to reduce the basic rate to 16 per cent. acknowledges that logic. The problem is that 16 per cent. is a great deal higher than 10 per cent. and he has already indicated the extreme cost of going to 16 per cent. His proposal would not solve the problem caused by the abolition of the 10p starting rate and, thus, the significant hike in the initial rate of marginal tax faced by people coming into the work force.
The hon. Gentleman’s proposal would mean significantly higher marginal rates on middle and higher incomes. His party has always maintained a resolutely outward-looking approach to the world. It seems that his taxation proposals and those of his colleague, the hon. Member for Twickenham, are often at odds with an understanding of what a globalising economy means. The hon. Member for Taunton does not acknowledge that labour markets as well as investment markets have globalised and that there are constraints on all Governments regarding the marginal rates of tax that they can apply to the most mobile people in the work force.
I do not know—as the hon. Gentleman has not told us—the current policy of the Liberal Democrats on taxing the rich or what he described as certain income groups that could afford to pay more. In the previous incarnation of such policy, I remember that certain income groups started at about £60,000, which includes many people, certainly in my constituency, who would not regard themselves by any stretch of the imagination as rich, but as hard-working, middle-income people and perhaps middle-ranking public servants.
Stephen Hesford (Wirral, West) (Lab): I just want to know the Opposition’s base position. Given that the hon. Member for Taunton tabled the amendment and the official Opposition did not do so, am I right in thinking that they agree with the Chancellor that the base rate should be 20p in the pound?
Mr. Hammond: The hon. Gentleman is right to characterise the Opposition’s position as one of assessing the public finances at the present time as being unable to sustain a larger decrease in the basic rate of income tax than that which has been proposed. Of course, we would all like to see lower taxes. The hon. Gentleman will correct me if he does not agree, but we all recognise the problems of the disincentive effects of high marginal rates of tax and benefit withdrawal. To be honest, the economic genius who has presided over Britain’s economy for the past 10 years or so has delivered our public finances to a position in which tax cuts are not immediately on the agenda.
The hon. Member for Taunton referred to environmental taxes. We have no argument with the idea that, if such taxes are properly constructed as alternative taxes and if the proceeds are ring-fenced for use in reducing the burden of direct taxes, they be a useful part of the package, as they have both a behaviour-changing effect which, as the hon. Member for Islington, South and Finsbury reminded us, must be factored in to the yield calculations, and a beneficial supply-side effect in shifting part of the burden from incomes to pollution.
11.15 am
Mr. Browne: We have reached agreement, which is that the precise point of my proposal is that environmental taxation becomes discredited in the minds of the public when they see it as a net revenue raiser to compensate for what they rightly regard as shortfalls in Government revenue raising. The public do not see it offset in tax cuts elsewhere, and that is precisely why the amendment, and my package of proposals, seeks to win a good reputation for environmental taxes by offsetting them entirely with reductions in personal taxation.
Mr. Hammond: The hon. Gentleman is right. Those who are concerned about the environment and believe that a shift in the balance of taxation is part of the solution for the environmental challenges that we face, will be concerned and alarmed at the evidence of opinion polling. That evidence is that as individuals and families find their economic circumstances worsening and their budgets squeezed, environmental matters go down in their list of priorities. That should be of concern to us, but of course he is right that the suspicion that environmental taxes are being used simply as stealth taxes is extremely damaging to the case for environmental taxes. That is why the Conservative party has pledged to create a ring-fenced family fund into which will go, on an independently audited basis, the proceeds of new environmental taxes, so that they can be used entirely for the purpose of reducing direct taxation on families. That will reinforce the message that environmental taxation is not about increasing the burden of taxation, but about shifting the pattern of that burden, away from earning and hard work and on to pollution.
I return to the second element of the hon. Gentleman’s package. He talked about environmental taxes, which is fair enough, and he also talked about removing pension tax relief for higher-rate taxpayers. What he did not talk about was the rate of tax that he would impose on higher-rate taxpayers, the threshold from which he would impose it, or whether his 16 per cent. basic rate of income tax would come with a change in the level of the threshold at which higher-rate taxes were paid. I am grateful that he indicates that he will clarify those issues in a moment, because the benefit of a reduction in the basic rate of tax accrues not only to those earning at low rates and paying only the basic rate of tax, but to those earning much higher incomes and paying higher rates of tax.
Mr. Browne: We do not propose to raise the top rate of tax, or to adjust the thresholds in ways that are disadvantageous to people. The hon. Gentleman is right that many of his constituents would be beneficiaries of the proposals, including some who paid higher rates of tax but were net beneficiaries because their basic rate had been reduced by 4p on that slice of their earnings. If he were trying to make a calculation about net beneficiaries, he would have to factor in other types of behaviour, including how much those people contributed to their pension and, for example, whether they drove a car.
Mr. Hammond: That is a fascinating insight. The last time I heard about the Liberal Democrats’ income tax policy, the policy was that they were going to have higher rates of tax for the super-rich, who I think at the time were people earning £60,000 or more. Obviously the hon. Gentleman has had second thoughts about that policy.
Mr. Browne: That is made up.
Mr. Hammond: It is not made up. I have the document in my filing drawer and will produce it for the hon. Gentleman this afternoon if he would like me to. However, he makes a fair point. Buried beneath the usual Liberal Democrat stuff is a serious point. The starting rate of 20p is still a high threshold for those going into work and earning for the first time, and I think that probably even the Prime Minister is now getting that message.
Stephen Hesford: Will the hon. Gentleman give way?
Mr. Hammond: I will in a moment. The hon. Gentleman was elected in 1997, and therefore owes his position to the 1997 Labour manifesto, which said:
“Our long-term objective is a lower starting rate of income tax of ten pence in the pound.”
That was what he was elected to Parliament with. It was advocated because:
“Reducing the high marginal rates at the bottom end of the earning scale—often 70 or 80 per cent.—is not only fair but desirable to encourage employment.”
The hon. Gentleman will also remember that in 1999 the Prime Minister succeeded in achieving his long-term objectives set out in the 1997 Labour manifesto—to his credit, it took him only two years to deliver on that promise. When he introduced the 10p rate, he said:
“The new 10p rate—the lowest starting rate of tax in Britain for more than 35 years—will make work pay and help people, especially those who are low-paid, to keep more of the money that they earn”.
As a result,
“1.8 million low-paid workers will see their tax bills halved”.
He concluded:
“When we make promises, we keep them.”
Apparently what he meant was, “When we make promises in 1997 and deliver on them in 1999, we will keep them until the 2007 Budget”—that was when he systematically unravelled the long-term objective that was set out in the 1997 Labour manifesto.
Stephen Hesford: Of course, the hon. Gentleman gives a partial answer, and I do not take issue with that. The point is this. When my right hon. Friend, then the Chancellor, now the Prime Minister, made those comments, there were no tax credits in place. They take up the slack for the vast majority of working people that this measure affects. The hon. Gentleman has just said that the marginal rate for low-paid workers was too high at 20p. When we came to office, under the previous Administration, it was 23p in the pound, with no prospect of reduction.
Mr. Hammond: I wonder whether the hon. Gentleman has been out and about over the last few weeks. I can envisage him knocking on doors in Wirral and, when confronted with an angry elector who says, “You’ve axed my 10p tax rate”, answering, “Ah, but when we promised you a 10p tax rate, we did not have tax credits. You are so much better off now, you shouldn’t mind at all that the Prime Minister is clawing back some of your new found wealth by scrapping your 10p tax rate.” Perhaps he has a perfectly coherent argument, but we live in a democracy and the voters have given their view on the argument that he has just advanced. If I were him, I would go away and think of a new argument.
Emily Thornberry: Would the hon. Gentleman enlighten us as to whether or not the Conservative party is in favour of the 10p tax rate? Does he agree that it is a fantastic idea for the taxman to put money into the wage packets of people who are on low incomes and raise them from poverty, which is what this Government have done?
Mr. Hammond: I am curious about the notion of putting money into people’s wage packets. The last time I checked the tax credit system, the thing that it does not do is put money into wage packets. It requires people to make a complicated claim to Her Majesty’s Revenue and Customs in order to receive a benefit payment which, in 1 million cases a year, is over-calculated, and then has to be clawed back.
Mr. David Gauke (South-West Hertfordshire) (Con): It is 2 million.
Mr. Hammond: My hon. Friend corrects me; 2 million cases are over-calculated and the money has to be clawed back.
Stephen Hesford rose—
Mr. Hammond: I have committed myself to giving way to the hon. Member for Islington, South and Finsbury.
Emily Thornberry: Is the hon. Gentleman in favour of tax credits or not? Would he unravel the whole system, and is he in favour of the 10p band? I still do not quite understand what he is saying.
Mr. Hammond: No, we have made it very clear that we accept that tax credits are a part of the furniture and are here to stay. They play a useful role. The hon. Lady will remember that the genesis of the tax credit project lies in the Conservative Government of Sir Edward Heath. He explored the possibility of a negative income tax, a solution that would have put money into the pay packets of the lowest paid, not created a complicated means-tested benefit claim system. The hon. Lady seeks to exaggerate the difference.
David Wright (Telford) (Lab): What about 10p?
Mr. Hammond: The hon. Gentleman says, “What about 10p?”
Emily Thornberry: Will the hon. Gentleman give way?
Mr. Hammond: Let me finish the point. We have made it clear in the interminable debates over the past few weeks that we do not have a problem of principle with a simplification of the tax system into a two-band system. It was not us who proposed in 1997, or in 1999, the introduction of an additional tax band. However, we cannot countenance, and I do not think that many people in the country support—even those who are net beneficiaries of the package presented at the 2007 Budget—a cut in the basic rate of tax that is financed on the back of 5 million low-income households.
It does not answer the point for the hon. Member for Wirral, West to say that five or seven years ago those households did okay out of this or that change; they may well have done so, but all he is doing is displaying a fantastic failure to grasp how the lives of those on low incomes work. They do not sit there thinking, “I am very grateful that I am a little bit better off from something that was done a few years ago and therefore I will keep quiet when the Government come along and mug me for £150 or £240 out of my pay packet this coming year.”
Mr. Siôn Simon (Birmingham, Erdington) (Lab): It is still not clear. Please will the hon. Gentleman tell us whether it is the policy of the Opposition to restore the 10p band, which he has told us is the verdict of the voters?
Mr. Hammond: We have said quite clearly that we do not have a policy of necessarily restoring the 10p band of income tax. What we will do is ensure that those taxpayers who have been disadvantaged by the abolition of the 10p band must be compensated. The Government have told us that that is what they will do. The right hon. Member for Birkenhead (Mr. Field), following extensive discussions with the Prime Minister—if I had just one opportunity to be a fly on the wall in a meeting, that is the one I would have gone for—assured us, in an e-mail to Members who signed his amendments, that the Government gave him a commitment that they would compensate all those who had lost out, compensate them in full and backdate that compensation to 6 April 2008. It now becomes apparent that the Government are backtracking on each one of those commitments. Perhaps the hon. Member for Birmingham, Erdington should be thinking about that.
11.30 am
Mr. Browne: Did the hon. Gentleman hear the reports over the bank holiday weekend that the right hon. Member for Birkenhead is considering re-tabling his amendment because he is so disappointed that the Government, according to the reports that I have read, are not compensating many of the 5 million people who will be net losers as a result of the doubling of the 10p rate? Even those whose compensation is backdated will have a short-term cash flow problem, because they have to pay their increased household bills today.
Mr. Hammond rose—
The Chairman: Order. Before the hon. Gentleman replies, may I say that the debate is going rather wider than the amendment? We are debating a Liberal Democrat amendment to a Government Bill that addresses the levels of taxation. We are not debating what a future Government might do, in the name of Her Majesty’s Opposition. Would colleagues on the Committee please direct their remarks to the amendment and not to a much wider debate?
Mr. Hammond: To be fair to the hon. Member for Taunton, I think that he was addressing his intervention not so much to the policy of a future Government, but to the possibility of amendments being tabled on Report. My understanding, like his, is that that is on the cards. That is relevant, because the amendment proposes a modification of the initial rate of tax from 20 per cent. to 16 per cent. Inevitably, that debate has to be set in the context of the Government’s measure to remove the 10p rate. However, I bow to your strictures, Sir Nicholas, and hope that we will have an opportunity on clause stand part to debate one or two other issues that relate to clause 1.
Stewart Hosie: May I say to the hon. Member for Taunton that there is no shame in proposing a tax cut? If the economy can sustain it, a cut in personal taxation is a good thing, and if the economy would grow, a cut in business taxation is essential. The difficulty that I have with his amendment and the way he argued for it is that he failed to justify why he would take £7 billion out the pension savings pot every year. He failed to recognise that those paying the basic rate of tax would see the tax rate on their pension savings reduced, which would be a foolish thing to do now. He failed to explain fully where he would find £57.5 billion over three years to fill the gap he has identified, other than through a description of rather nebulous environmental taxation. In that, he did what the Liberal party always does—it did it in the document to which the hon. Member for Runnymede and Weybridge referred. It failed to recognise any behavioural change associated with a massive hike in environmental taxation. With those criticisms of the argument made by the hon. Member for Taunton in favour of his amendment—and sticking narrowly to the amendment, Sir Nicholas—I have only to say that I am sure that he will not push it to a vote, given the Committee’s arithmetic. Should he do so, I fear that I might not be able to support it.
Jane Kennedy: As we know, clause 1 imposes the income tax charge for this year and sets the basic and higher rates of income tax at 20 per cent. and 40 per cent. respectively. Together with clause 3—we have strayed into that debate again this morning, despite having already debated it, and I am sure that we will return to it— clause 1 will simplify the tax system by reducing the number of income tax rates from three to two, as has been described. Income tax is an annual tax that is re-imposed each year by Parliament, even if the proposed rates are the same as in the previous year.
The amendment would set the basic rate of income tax at 16 per cent., but the Government have already reduced the basic rate from 22 per cent. to 20 per cent, which is the lowest main rate of income tax for 75 years, as Members will know. That was part of a package of reforms to the tax and benefits system that allowed the Government to reduce the basic rate by an affordable amount while continuing to provide high- quality public services. The hon. Gentleman did not explain how he would continue to do that. That package also allowed the Government to continue targeting support through tax credits, despite the criticisms that have been made about that, and through age-related thresholds.
I compliment the hon. Member for Taunton on his courage. He is here on his own and has defended his policy with some vigour. When I first read it, I believed that this must be a probing amendment, which we often deal with in Committee. However, after listening to him, I realised that it was a serious proposal. Well, it is a proposal whether it is taken seriously or not. A reduction in the basic rate to 16 per cent. would be very expensive and I agree with the figure that he has given. We estimate that it would cost about £18.9 billion, which is just a shade lower than his estimate. That is a very large amount. It would be exceedingly difficult to continue financing public services to the same degree with such a loss of funds.
The hon. Gentleman described his party’s intention to raise resources through taxing bad behaviour, but he began by describing how he would reduce the rate of relief for pensioners. In my view, that would create a huge administrative burden for employers, pension providers and HMRC. From an administrative point of view, the proposal would therefore be extraordinarily difficult to implement. It would also go against the Government’s policy of encouraging everyone to provide for their futures.
Mr. Hammond: I hesitate to spring to the defence of the hon. Member for Taunton, but while I see many arguments against reducing the rate of tax relief on pension contributions from 40 per cent. to 16 per cent., administrative difficulty is not one of them. It would surely not be difficult administratively to give the relief at basic rate. While I am on my feet, will the Financial Secretary tell us whether the Government have made an estimate of the likely impact on pensions saving of such a reduction in pension tax relief?
Jane Kennedy: I take the hon. Gentleman’s point about the administrative burden. If this measure was the right thing to do, it would be worth finding the administrative means to do it. However, that does not reduce the difficulty of doing so. On his second point, I do not have that sort of estimate because I did not believe that this was more than a probing amendment, to be perfectly honest.
Mr. Browne: I cannot see how giving pensions relief at one rate, regardless of the income of the individual, would be administratively more complicated than giving it at two rates, as is currently the case.
Jane Kennedy: I take the debating points that are being made. I should have put that reason last on my list as to why the amendment should not be accepted.
Mr. Hammond: The Financial Secretary says that the Government do not have an estimate of the impact of a reduction in the tax relief on pension contributions because she thought that this was just a probing amendment. Does she have an estimate of the impact on pension contributions that the reduction in basic rate relief from 22p to 20p is likely to have? That is not a probing amendment, but a Government proposal.
Jane Kennedy: I do not have an immediate answer to that question. I will look to see where those figures are available and provide them to the hon. Gentleman if it will help the Committee’s deliberations.
Changing pension relief in the way that the hon. Member for Taunton suggested would fundamentally go against our policy of encouraging people to save for their futures. The Government have an excellent track record of supporting pensioners through pension credits, the winter fuel payment, increased tax allowances for over-65s and the pension reforms of last year.
I will turn in a moment to the green proposals and the suggestion that we might recoup £18 billion through green taxation.
Mr. Browne: The beneficiaries of the types of measures that the Financial Secretary just outlined, and often the sole recipients of that Government largesse, are not people who are currently paying top-rate tax and therefore able to get greater pensions relief on their income tax in any case. The reduction of the basic rate to 16p is paid for in part by limiting pensions relief to the basic rate. The rate would go from 20p down to 16p, but the primary impact would be felt by those who are currently able to have much higher pensions relief because they claim at the top rate—higher earners.
Jane Kennedy: The hon. Gentleman, in answering questions around his proposal, indicated that even if it were implemented in the way that he suggests, it would raise about £7 billion—I think that that is the figure he quotes. That still leaves a very large gap in the resources that he says need to be raised to finance a reduction in the basic rate of income tax to 16 per cent.
If I, as a higher-rate taxpayer, put £2,000, for example, into my pension fund, the Government, effectively, tops that up by about £800, recognising that I make contributions from taxed income. Pension itself is then taxed when it is drawn. The hon. Member for Taunton and his party have not really thought through what—it is becoming clear—is a serious proposal.
Mr. Hammond: The hon. Member for Taunton said that his proposal would raise £7.5 billion a year by eliminating the higher-rate pension tax relief. Would the proposals of the hon. Member for Taunton not be an even bigger raid on pension funds than the Prime Minister’s raid in 1997 when he hit our pension funds with a £5 billion a year annual tax?
Jane Kennedy: I am not going to agree with the terms of what the hon. Gentleman has suggested.
To come back to the point that the hon. Member for Taunton made, the main source of revenue that he would use to finance such a reduction in income tax is bad behaviour—polluting behaviour. He described his proposals as being somewhat elastic.
Mr. Browne: That is not true.
Jane Kennedy: I heard the word elasticity, and the concept of Liberal Democrats bungee jumping policy is quite entertaining. The hon. Member for Taunton suggests that travelling by train is the way forward; he must know that travelling by train requires a degree of public subsidy. He has no serious proposals for how he would promote and encourage that kind of transport. He is suggesting that it will be possible to do so with a wave of the hand.
Mr. Browne: I do not wish to keep intervening but the Minister keeps saying things that misrepresent my position and I feel obliged to. I did not say that the proposals were elastic. The point that a Labour Back Bencher made is that every pound of revenue would be wholly offset—that is not the case. One can have beneficial environmental changes while at the same time raising additional revenue. I drew a parallel with cigarette consumption and Government taxes, which have the dual purpose of trying to reduce cigarette consumption while being an important revenue raiser for the Treasury. That could be applied equally well to environmental taxes; indeed, the principle is already accepted by the Government. We are just more ambitious with the scope of the proposals than the Government.
Jane Kennedy: I hear what the hon. Gentleman has to say, as colleagues in the Committee will have done. I remain completely unconvinced of his case. As I have said, such a loss of funds would make it exceedingly difficult to continue to finance public services to the same degree as currently. Tax cuts in themselves do not target specific sectors; they give the most benefit to high earners and little or no benefit to those paying little or no tax. It follows, therefore, that a greater cut in the rate of tax would provide even greater benefit to higher earners.
11.45 am
The hon. Member for Runnymede and Weybridge asked a number of serious questions, which I do not propose to repeat. He made a number of assertions, one or two of which I would like to refer to. He argued that his party proposed to ring-fence tax revenues and place them in a family fund—I believe he was describing the revenues that would be raised from the removal of the 10p rate of income tax, or have I misunderstood?
Mr. Hammond: On a point of correction, the proposal from the Leader of the Opposition is that a family fund would be created and externally audited to account for the revenues raised from new green taxes, to assure the public and taxpayers that those are substitute taxes and not additional taxes. The proceeds will be used entirely to reduce direct taxation on families.
Jane Kennedy: I am grateful for that clarification, Sir Nicholas. I was going to say that ring-fencing is often proposed by groups outside government as a way of financing different projects. It is also a favourite proposal of parties in opposition. When putting together a Budget, ring-fencing is not necessarily the best way forward for managing the revenues. However, I appreciate the argument made by the hon. Member for Runnymede and Weybridge that it is a transparent way of demonstrating to the public how taxes raised through green measures would be spent in return.
The hon. Gentleman’s point about the marginal withdrawal rate probably agrees with the proposal introduced by my right hon. Friend the Member for Birkenhead (Mr. Field). However, half a million fewer families face the highest margin of withdrawal rate of over 70 per cent. as a result of our reforms since 1997—those are our latest figures.
Mr. Hammond: The Minister is absolutely correct, but she would be disappointed if I did not come back and ask how many additional families faced withdrawal rates of over 60 per cent. She is right that the highest rates have been reduced, but they have been shifted down, to an increase in those facing withdrawal rates at 60 per cent. plus, which she will agree is a pretty serious disincentive. The Committee members should imagine how they would feel about being taxed at 60 per cent. on their marginal income.
Jane Kennedy: The hon. Gentleman is right. That figure is in the public domain. However, the shifting overall has been to the benefit of those on the lowest incomes, which was the point that I wished to make, coming back to the sweeping criticism he made about marginal tax rates.
The hon. Gentleman talked about our stress on the use of tax credits as a way of assisting low-income families, and I know that there are criticisms of a complex system. One of my priorities when I assumed my role was to examine the tax credit system, to see what could be done to reduce complexity and bureaucracy and to ensure that as many people as possible who were entitled to tax credits received them. We are examining a full range of options on what to do and how to help low-paid workers, particularly those without children, as well as pensioners who, we acknowledge will pay more tax as a result of the removal of the 10p tax rate. Tax credits, however, are successful and benefit nearly 6 million families, with a higher rate of tax take-up for families with children than any previous system of support. They are not a benefit in the sense of a welfare benefit, but an entitlement. The overpayments to which the hon. Gentleman referred are an outcome of the system we adopted: it is flexible, and can respond to changes in income, particularly drops in family income, during the year. The system allows a quick response.
Mr. Bone: Is the Financial Secretary suggesting that the tax credit system allows for responses during the year, but does not result in many people facing clawbacks? Other hon. Members and I face that situation every week in our surgeries.
Jane Kennedy: There are occasions when someone’s income changes during the year, but if a family’s income goes up by up to £25,000 there is a disregard in place. That means that no account is taken of that amount in the tax credits to which they are entitled. The credits are not regarded as an overpayment, but if a family’s income goes down dramatically, the flexibility of the system enables it to respond—in some cases within days, if the information is received quickly enough—to boost that family’s income. There are many families throughout Britain who will testify to the support that they receive from tax credits.
Mr. Hammond: The right hon. Lady talks about the disregard, which was increased in a panic to £25,000 simply to reduce the number of people from whom credits have to be clawed back. Just for the record—this has always struck me as bizarre—will she confirm that someone could be earning £93,000 a year for 11 months of the tax year, and still be in receipt of tax credits? They would receive the £68,000 maximum rate at which some tax credit could still be paid, increased by £25,000 of disregard. Is it right to create a system in which people earning £93,000 a year receive benefits from the state?
The Chairman: Order. The debate has been diverted into tax credits, but that is not what it is about. Committee members should concentrate on the clause and the amendment. While I am happy for the Financial Secretary, if she wishes, to give a one-sentence response to the Opposition spokesman, I trust that that is all it will be.
Jane Kennedy: Thank you, Sir Nicholas. My quick response is that while that would be the effect of the disregard, people earning at that level would be in receipt of very small amounts of tax credit. Tempted as I am, I will not go into that further.
The Government are committed to helping those who need the help the most. All the reforms that we have introduced to the tax system since 1997 are aimed at that target. We believe that people should be enabled to help themselves, first and foremost by moving into work, and then by moving in work. We believe that it is important to help work pay, and that is what the 10p tax rate was designed for: it did what it said on the tin. It made a huge difference and was of benefit. However, things have changed. Ten years on, it was appropriate to review the system, and that review resulted in the proposal in last year’s Budget. We continue, as a result of the representations that we have received from Members on both sides of the House and outside in the country, to look at the impact of that change. We are working hard to consider what proposals might be brought forward to help those paying more as a result. I cannot say more at this stage.
Mr. Hammond: I think that this point was alluded to earlier in a reference to the right hon. Member for Birkenhead. Can the right hon. Lady give the Committee any hope that amendments or new clauses that address that issue will be tabled, so that the House will know on Report how the Government will make good on the commitments that were apparently made by the Prime Minister to the right hon. Gentleman?
Jane Kennedy: Nobody is more seized than us of the need to be coherent in what we introduce and make sure that it is affordable and achievable, and to introduce proposals that meet people’s expectations that those who have been badly affected will be assisted. We are working on the detail of those proposals. It would be quite wrong to make commitments that I may regret. We need to work through the detail and, as I have said, our proposals must be affordable. Representations will continue to be made, and I am sure that we will debate this matter again, but it would be wrong of me to go further than I have done. While the hon. Member for Taunton argued his case with passion, he did not convince me. I do not think that he convinced many Opposition Members and I am confident that he did not convince any of my hon. Friends.
The Chairman: I call Mr. Browne.
Mr. Browne: Am I allowed to make a concluding speech, Sir Nicholas?
The Chairman: I am calling you to speak.
Mr. Browne: I will make my speech extremely brief. This is my first Committee, Sir Nicholas, although I have served on other Committees of this type.
The Chairman: I will guide you.
Mr. Browne: Thank you, Sir Nicholas.
I will make only a few points in conclusion. I simply did not understand some of the arguments made by the Financial Secretary. One such argument was that it would be simpler and cheaper to administer two levels of tax relief than a single rate. She could have argued that I was too cautious in my estimates as a result of not factoring in the administrative savings that would be brought about by having a single rate, but I did not receive that compliment.
I will dwell briefly on the right hon. Lady’s final point that, in her estimation, none of her colleagues would be convinced by my arguments. I do not doubt for a moment that, if I pressed the amendment to a vote, none of her colleagues would support me. However, I am suggesting a package of proposals that, if Labour Members stopped and reflected on it, as well as their fortunes last Thursday in the local government poll, they might regard as being well worthy of their support.
I proposed three measures, the most important of which was to substantially reduce the marginal rate of taxation for people on low and low-to-middle incomes. Those are the people who are struggling the most with the abolition of the 10p rate. There are people in my constituency and elsewhere who are not wealthy by the standards of many in the London commentating classes, and who might be regarded as quite poor. This measure is designed to assist individuals who are earning £15,000, £16,000, £17,000 or up to £20,000 a year, as they are the people who have the most difficulty making ends meet. The hon. Member for Runnymede and Weybridge was somewhat dismissive of the concerns of such people. He said that the impact would be keenly felt by people who were earning four times the amount earned by those who are struggling most with their bills at the moment. People on those levels of income and who pay basic rate tax are the people whom my party would like to help, and I make no apologies for that.
The Financial Secretary was also rather misleading about the other two measures that would pay for the change, as she said that they would lead to reductions in public services. The proposals are revenue neutral. Obviously, if income tax is reduced it must be paid for somehow. I am surprised that Labour Members are automatically dismissive of the two proposals. The first would reduce some of the benefit that accrues to higher-rate tax payers so that that money can be made available to those who pay the basic rate. I would expect Labour party members to see much to recommend that as a basic policy. The argument is that people on top-rate tax should not receive more beneficial pension relief than those earning a basic-rate tax type of salary.
The second proposal, which may give the Government the vision or narrative that they lack, would tackle the urgent environmental situation facing the country and the world, which requires measures that are slightly more dramatic in scale than those that the Government have hitherto introduced. Labour Members, including the Minister, were extremely dismissive—
Several hon. Members rose
Mr. Browne: I will accept interventions in a moment. The Minister was dismissive of the notion that behaviour could be changed at the same time that revenue could be raised through environmental taxes. However, that is precisely what the Government propose to do with, for example, vehicle excise duty differentials. One assumes—and the Government have predicted—that that will increase Government revenue while, at the same time, providing a disincentive for people to buy and maintain the most fuel-inefficient cars. The principle is one that the Government have accepted slowly and reluctantly. As for environmental taxation, I am not putting forward principles that Labour MPs are not asked to vote on every week; I am putting forward a more ambitious set of programmes that would go some way towards helping lower earners with their household bills.
12 noon
Mr. Greg Hands (Hammersmith and Fulham) (Con): The hon. Gentleman’s proposal almost seems to be a centrepiece of any future Liberal Democrat Budget proposal. There are supposed to be four Liberal Democrat members of the Committee, but he is the only one present. Is he presenting this as party policy, or in a personal capacity?
Mr. Browne: I am presenting it as both party policy and as something in which I profoundly believe. I assume that my three colleagues are already persuaded of its merits. It is a regrettable state of affairs that, for example, the hon. Member for Weston-super-Mare, the only member of the Committee from Somerset—the same county as myself—has not taken the trouble to turn up either.
Mr. Brooks Newmark (Braintree) (Con) rose—
The Chairman: Is the hon. Member for Taunton giving way?
Mr. Browne: I will not do so just yet. There are many people in Weston-super-Mare and Somerset—
Mr. Newmark rose—
The Chairman: Order. Is this a point of order?
Mr. Newmark: I hope that it is.
The Chairman: I must say to the hon. Gentleman that that is not a promising start.
Mr. Newmark: On a point of order, Sir Nicholas. My hon. Friend the Member for Weston-super-Mare is stuck on a train that has broken down between Weston-super-Mare and London. That is the only point of order that I wish to make.
The Chairman: It is not a point of order; it may be a point of fact.
Mr. Browne: I was seeking to make the point that many hon. Members have many reasons to be detained by many activities. However, they can still share my profound belief in the need to reduce marginal tax rates on low, and low-to-middle, income earners in Weston-super-Mare and across the United Kingdom.
Clive Efford (Eltham) (Lab): The hon. Gentleman seems to put his party in the same position as that of the Conservative party. He accepts the principle that green taxes are aimed at changing behaviour and therefore, by their very nature, they must reduce the amount of income generated in the long term. If they are to be successful, that must be what they do. He makes fiscal policy based on long-term income from taxes that he already accepts must go down, just as the Conservative party has done. How will he fill that gap in public finances in future?
Mr. Browne: It is a fair point and I will try to explain it as clearly as I can. For the sake of argument, let us suppose that the Government doubled the tax payable on the most polluting model of car in the country. Most people would assume that the amount of revenue raised would not double and that there would be a behavioural change. However, would that behavioural change be so dramatic that the revenue did not go up at all, or indeed fell? It most cases it would not. That is the point about elasticity of demand that I sought to make to the Minister. I suspect that there would be a fall-off in the number of people who buy the most polluting vehicles, but that number would not fall off by half, which is what would have to happen before additional revenue ceased to be raised. In other words—and I use the example of cigarette consumption—the proposal would result in a behavioural change, with fewer people driving the most polluting vehicles, and it would raise revenue at the same time.
This is a straightforward economic principle. It is not contentious—it is what any student would learn in a GCSE economics lesson. People can modify their behaviour. If someone gave up being a heavy smoker and bought children’s clothes instead, they would pay a lower proportion of their overall income in taxes. People can modify their behaviour to avoid environmental taxation, but my party also calculates that the measure is revenue raising as well, and the Red Book shows that the Government, too, have made that calculation.
Clive Efford: I will take the example that the hon. Member for Taunton has given one stage further, because fiscal decisions and policy of the kind that he is advocating also create changes in the marketplace. For instance, the demand for changes in technology will increase, and it will become more lucrative to develop other forms such as hydrogen cell technology. That will also have an impact on people’s behaviour and on the income that can be generated from the proposals that he has introduced. Therefore, there is a huge black hole, and he has taken a huge gamble with future public finances and taxes for families on fiscal policies that would not hold water in the long term.
Peter Viggers (Gosport) (Con): We owe it to the hon. Gentleman to take his argument seriously. How many vehicles did he have in mind and what would the taxation level need to go to? How many smokers does he have in mind and what level would tobacco tax need to go to?
Mr. Browne: I do not want to incur your wrath again, Sir Nicholas, so perhaps I should not go too far down the path of smoking elasticity, but I think that the point is generally accepted. I am not aware of any party that suggests that levels of tobacco taxation should be dramatically lower, because there are health benefits from having higher taxes. What the Government propose in the Budget and what my party is proposing to a greater scale, is that the bigger a vehicle’s engine size, the higher the vehicle excise duty should be. We do not focus specifically just on cars, but also have proposals on flights. That will give consumers an incentive to buy a lower polluting model of vehicle, although some will choose not to. Interestingly, I recently talked to a person from Land Rover who said that demand seemed to be fairly strong in his sector, so it could be argued that the Government’s policies on differential vehicle excise duty are not sufficiently great to have the desired effect on people who choose to purchase higher emission models.
Some people on low incomes and many households in this country do not have a car at all. In debates such as this, the assumption is that everyone has a car, but many people in this country do not, and they tend either to live in large cities with good public transport or to be in very low-income households. On average, they are quite a lot poorer than the population as a whole. On the argument made by the hon. Member for Runnymede and Weybridge, under these proposals someone paying higher-rate tax could choose not to have a car if they lived, for example, in central London. Indeed, under the Government’s proposals, they would reduce their tax liability as a consequence.
Emily Thornberry: May I assist the hon. Gentleman and ask him to consider that surely the purpose of green taxation ought first and foremost to be to change people’s behaviour? Therefore, if he is to raise taxation on the highest polluting cars, he should cut taxation on the lowest polluting cars and allow green taxation to be effectively revenue-neutral. That way, people’s behaviour can be changed. The focus should be on how much carbon would be saved. It is contradictory for the Liberal Democrats to have a policy whereby they consider that they can raise income from green taxes, yet somehow or other seem to ignore that the purpose of green taxes ought to be to change behaviour. In exchange for my assistance, can the hon. Gentleman help us and explain what sort of green taxation he is really talking about?
Mr. Browne: I am obviously struggling to make myself clear. The purpose is both to change behaviour and to raise revenue. By changing behaviour, we hope that there will be an impact on carbon emissions, from which benefit to the environment will follow. What we are proposing is more fundamental than what the Government are offering. Perhaps I have not made matters clear, but our proposals represent a bigger picture and are more visionary than those the Government are putting forward. There should be more incentive to work and for enterprise. The total amount of the Government’s revenue raised through work should be reduced. People should be able to keep more of the money that they earn.
However, because of the revenue-neutral proposal, the shortfall must be made up somewhere and the Minister was wrong to say that it would mean that public services would not be funded. Public services could be funded to exactly the same level. The proposal is revenue neutral, so the shortfall could be made up by putting extra taxation on pollution and reducing taxation on work. In other words, we want to penalise people who wish to do something of which my party disapproves, which is to ruin the planet’s natural resources, and to give people greater incentive to do something of which we do approve, particularly those on low and low-to-middle incomes who are struggling. We want to make work pay.
Jane Kennedy: The hon. Gentleman cannot get away with the broad, sweeping statement that he would raise £12 billion through taxes on pollution. He must be more specific. I almost think that a by-election campaign is being run somewhere on the back of the proposal.
Mr. Browne: Do you want me to comment on by-elections, Sir Nicholas?
The Chairman: Do not be tempted.
Mr. Browne: The Minister has been obsessed in all our exchanges by the fortunes of people on Liverpool council, and I shall not talk about that.
We have put forward a mix of proposals. Environmental taxation is not the only policy that has been taken up. As I have said, some of the measures are for people on high earnings who my party believes should be paying tax on capital at the same rate as people pay tax on their incomes. At the moment, those who mainly pay themselves through capital gains pay a lower amount of tax overall as a proportion of their income than the people who clean their offices. My party does not consider that to be an attractive state of affairs. No doubt, Labour MPs disagree. At present, those on higher salaries have greater tax relief on their pensions than those earning typical salaries of the sort that most of my constituents earn. My party does not think that that is a good idea. Moreover, my party thinks that we should do more to help the environment. All the proposals could fund reductions in the basic rate of income tax for people on low and low-to-middle incomes.
Stewart Hosie: At least, we are putting some flesh on the bone. The hon. Gentleman has again missed the point about behavioural change. If he wants to tax capital gains higher, people who hold assets will not dispose of them because they will not want to give him their money. They will keep hold of the assets and change them or sell them off in smaller chunks as time goes on. What cognisance has he taken of behavioural change in respect of capital gains yield?
Mr. Browne: I shall bring my comments to a close soon. Of course, there is behavioural change in any taxes. There would be behavioural change if the Government were to cut the basic rate from 20p to 16p in the pound because more people would be incentivised to do an extra hour’s overtime. I am absolutely amazed that Opposition Members do not consider that reducing marginal tax rates causes behavioural changes. It does. It makes people more likely to work because they can keep a higher proportion of their earning, which is important.
I gave an example about whether doubling VED on the most polluting car would disincentivise people to buy the car. Yes, it would. Would it disincentivise them enough that it was revenue losing? My suspicion is that it would not. Models suggest that it would not, unless other factors were being taken into account. Of course, all taxes can result in behavioural change.
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Mr. Simon: Several times, the hon. Gentleman has let us know what he thinks Labour Members think. Before he sits down, I want to assure him—at the risk of disappearing down a counter-factual plughole—that even though he probably will not call a vote, were there one I would vote not with him, but with the Financial Secretary, not solely because of my admiration for her, nor because of my tribal loyalty to the people’s party, but because I am genuinely and profoundly unconvinced by his arguments and somewhat alarmed by the £57 billion black hole in the eco-caper revenue-neutral thing.
Mr. Browne: The hon. Gentleman will vote with the Government because he has not yet given up his forlorn hope of being rewarded with ministerial office before the Labour party finds itself out of government for a generation and his chance is long gone and The Daily Telegraph will not have him back to write a column that very few people read in the first place.
Mr. Newmark: I certainly read the articles of the hon. Member for Birmingham, Erdington and enjoyed them very much, although I never agreed with them.
The Chairman: I call Jeremy Browne. Do not reply.
Mr. Browne: I will not reply.
My concluding point is that all changes to taxation have the potential to change behaviour unless other factors are taken into account. Under all of my proposals, there would be behavioural change. The type of behaviour that my party wants to encourage is for people to pollute less and work more and for them to be rewarded more for the work that they do. That is the big picture that underlines the amendment and that is why I have tabled it for the Committee’s consideration. I will not press it to a vote, but I recommend that all of those who show scorn for the principles of reducing pollution and incentivising work go away and think about whether that is a wise position for them to take in the future. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chairman: I believe that I have allowed a pretty wide-ranging debate.
Mr. Hammond: I seek your leave to make one or two further points on clause stand part, Sir Nicholas. Although we have had an exhaustive discussion, it has not covered every area.
The Chairman: I will use my discretion and be kind at this stage of the Committee’s deliberations.
Question proposed, That the clause stand part of the Bill.
Mr. Hammond: Thank you, Sir Nicholas. I will be brief and I will not anticipate such leniency on your part later on in proceedings.
I want to speak briefly on clause stand part because it is important to say, in case any Labour Members have missed it, that the clause, which is four lines long, is the cause of all the trouble. This was the prize. It was all about a line that says that the basic rate of income tax is 20 per cent. That is what caused the whole fiasco around the abolition of the 10p rate. Of course it is superficially attractive to reduce the basic rate of income tax from 22 per cent. to 20 per cent., but the Prime Minister has learned the fundamental flaw in his plan.
It could have all worked out quite differently. If things had gone according to plan, those who were going to benefit from the reduction of the rate from 22 per cent. to 20 per cent., as announced in the 2007 Budget, would have rallied to the Prime Minister’s flag in the election that he planned to hold last October or November. Those who were going to lose out from the loss of the 10p band would not notice their loss—we have evidence of this because in practice they did not—until they got their pay packets in April this year. This was designed to allow the clunking fist to reach out to middle England with a 2p basic rate income tax cut, while concealing until after the planned election the fact that it would be paid for by those on the lowest incomes. That is the most disgraceful political cynicism and it has now been laid bare. That exposÃ(c) of the Prime Minister’s character, in my humble opinion, is what is causing him and his party many of the problems that they face today.
Clive Efford: Will the hon. Gentleman give way?
Mr. Hammond: I am delighted to give way to the hon. Gentleman for what I anticipate will be a helpful intervention.
Clive Efford: While we are on the subject of cynicism, perhaps we might look at how the Conservative party responded to the change in the 10p rate when it was proposed. Does the hon. Gentleman accept that the situation that has been forced on the Government—there is no other way to describe it—to address those people who have missed out as a result of changing the 10p rate, is due to Labour Back Benchers speaking to Ministers and the Prime Minister about their concerns? I expect that next he will be telling us that Norman Tebbit was misquoted and was actually suggesting free bikes for the unemployed. When was it exactly that the Conservatives discovered a concern for the poverty stricken and the low paid?
Mr. Hammond: I am delighted for confirmation that the hon. Gentleman still regards the right hon. Member for Birkenhead as being on his side. If he thinks about it for a moment, on one level he is right. What forced the Government to change course was the prospect of a parliamentary defeat, and given the arithmetic of the present Parliament, such a defeat can delivered only through the united efforts of all Opposition parties and a sizeable contingent of Labour Back Benchers. Had the Opposition not adopted their position, the Prime Minister would have ridden roughshod over the right hon. Member for Birkenhead, as he has ridden roughshod over Labour rebellions when he could count on the Opposition’s support for the Government’s policy, for example on their education Bill last year. We have seen the effect of a combination of the discovery of courage by a significant group of Labour Back Benchers—incidentally, we have the greatest respect for them because I am sure that they came under intense pressure—and the position of the Opposition.
I hope you will not mind two anecdotes, Sir Nicholas, as it is our first morning in Committee. I have already mentioned Mrs. Dunwoody’s pencil tapping, but I also remember a story about Queen Anne. Apparently, she asked one of her Ministers what it would cost her to close Hyde park, and the answer came back straight away, “It would cost you but three crowns, ma’am: those of England, Scotland and Ireland.” Perhaps the Prime Minister has had a similar experience. He has discovered that the cost of this cynical manoeuvre—cutting the basic rate of income tax and paying for it by reducing the starting rate, thus making 5 million families worse off—will be measured in more than money.
I shall make one more specific point about the clause’s general effect. I think that the hon. Member for Taunton made the point—
Mr. Newmark rose—
Mr. Hammond: I must give way to my hon. Friend, if the matter is still pressing.
Mr. Newmark: I have a concern that I hope my hon. Friend shares. My worry is that the right hon. Member for Birkenhead seems to have been bought off temporarily and led down the garden path. The devil is in the detail, and I am extremely sceptical, looking at the Government’s finances, about how the Chancellor or the Prime Minister are going to get it together to deliver on what they promised him.
Mr. Hammond: My hon. Friend is right. That was why I invited the Financial Secretary to indicate to the Committee whether a concrete incarnation of the Government’s proposals would be put before the Committee, or perhaps before the House on Report. The conduct of the right hon. Member for Birkenhead speaks for itself. In the Committee of the whole House, he declined to vote with the Government because the Chief Secretary to the Treasury failed to answer an inquiry from my hon. Friend the Member for Tatton (Mr. Osborne) about whether there was a commitment to backdate whatever compensation was made available, for all recipients, to 6 April. She declined to make that commitment and the right hon. Member for Birkenhead drew the conclusion that the Government were rowing back and reneging on the commitment made to him.
Stewart Hosie: The hon. Gentleman’s party tabled an amendment for consideration on the Floor of the House to walk in the guarantees that the right hon. Member for Birkenhead thought he had received. The issue is unlikely to go away and the Prime Minister appears to be rowing back. Therefore, should the Treasury team be unable to bring forward detail in Committee, is it the hon. Gentleman’s intention to work with others—from all parties, including the Labour party—to draft another amendment around which we can all coalesce to ensure that the guarantees received by the right hon. Member for Birkenhead are indeed locked in for the future?
Mr. Hammond: Yes, that is absolutely our intention. I concede to the hon. Member for Eltham that the initiative will probably be more effective if it comes from those Labour Members who have found the courage of their convictions. I suspect that next time around they might be joined by a rather more of their colleagues, who are busily sharpening their pencils and getting their calculators out following last Thursday. We will certainly either support an amendment tabled by others, or table one ourselves, if the Government do not come forward with concrete proposals on Report. The public, who have a considerable interest in the matter, would expect just that of Her Majesty’s Opposition.
Peter Viggers: Does my hon. Friend share my concern that an increase in taxation cannot fairly and completely be compensated by an opportunity to take advantage of tax credits?
Mr. Hammond: My hon. Friend makes a good point. Some of those who are most disadvantaged by the removal of the 10p income tax rate are families without children. Perhaps they are eligible for working tax credit, but we all know that the uptake of working tax credit among those without children is low. The Government have not come forward with any concrete proposals to address that problem. We will want to look in great detail, as will the right hon. Member for Birkenhead, at how the Government propose to address the issue for each of the identifiable groups negatively affected.
I said that I had one specific point that I wanted to address to the Minister. The hon. Member for Taunton quite rightly drew attention to the absurdity of saying that if we had a 99 per cent. tax rate, that would be a great incentive to save for pensions. Of course we recognise that part of the inevitable price of lowering tax rates is the reduction of the incentive effect of tax relief to encourage the kinds of behaviour that we generally accept as desirable. I speak with some authority about the Government’s position, having spent many happy months engaged in discussions with Ministers about the personal accounts proposals. The Government’s position is that a significant increase in pensions saving is essential, particularly among people on lower incomes. In practice, that means people who are paying basic rate income tax, because people on very low incomes find it very difficult to save. A significant increase in pensions saving is absolutely essential if we are to avert a pensions crisis in this country in 30 or 40 years’ time.
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I know that lowering the basic rate will reduce the relief available—that is an inevitable consequence—but I asked the Financial Secretary earlier whether the Government had assessed what the resultant reduction in pension saving would be. I, and virtually everybody in the room, I am sure, have received letters from my pension provider telling me that I will have to increase my contribution—indeed, saying that it will increase the direct debit unless I intervene to prevent it from doing so—because of the reduction in tax relief. It is likely that most people on lower incomes will opt simply to allow the gross contribution to their pension fund to decline by the equivalent of 2 per cent. That might not sound an awful lot, but this is a serious issue at a time when the thrust of Government policy is rightly to encourage the take-up of pensions, and when the Government have legislation going through the House to deliver personal accounts, which would be made available to all those in the workplace.
I am not suggesting that that is a reason not to proceed with the basic rate cut, but the Committee would be greatly reassured if there were some evidence that the Government were aware of the issue and had quantified the likely effect. What discussions have the Government had with the shadow Personal Accounts Delivery Authority about the likely impact on personal accounts? I have doubts about the likely success of that vehicle. I would be grateful if the Financial Secretary were able to throw some light on that.
Mr. Browne: I have already spoken at length, but I deliberately did not talk at length about the doubling of the 10p rate and how that contributed to the clause because it was not directly relevant to the amendment that I tabled. If I may, I will speak about that briefly at this juncture.
The 10p rate has, perhaps more than any other tax change since the introduction of the community charge in the late 1980s, filtered through into popular imagination. Any Member who engaged in the recent local elections, or who has spoken to members of the public as a matter of course, would have been struck by how many people spontaneously raised the issue as a matter of concern, not solely those who were directly losing as a result of the changes. The Prime Minister, when he was Chancellor of the Exchequer, introduced the 10p rate in 1999. He said:
“Nearly 2 million people will see their income tax bills cut in half, and take home 90p of every pound they earn...The tax cuts I have made today are tax cuts to encourage work and make work pay, tax cuts for a purpose. They help all middle and lower-income families.”—[Official Report, 9 March 1999; Vol. 327, c. 189-90.]
That was a noble objective, but he could hardly be surprised that, when he reversed the change, all those people whom he imagined would be very grateful in 1999 were much less grateful when that was announced in 2007, and even less grateful in 2008 when it took effect.
It is extraordinary that Labour Members took so long to awaken themselves to the overall changes and the impact that they would have on their constituents. The hon. Member for Eltham made an intervention to that effect. He is right that the Opposition parties need to align themselves behind any amendment to give it a chance of succeeding. For example, in the past Parliament, it did not matter how big the Labour rebellion was on the Iraq war because the Conservative party was committed, like the Labour party, to going to war in Iraq.
On this proposal, the Opposition parties have all lined up to pressurise the Government into realising the error of their ways. Of course the arithmetic in the House of Commons means that Labour MPs will need to vote with the Opposition parties to pressure the Government. My assessment is that the Prime Minister and those around him have bought themselves some space by seeing off the rebellion led by the right hon. Member for Birkenhead on the doubling of the 10p rate, but I suspect that it will be at the price of a lot of angst that will last for many months. I say that because the compensation package outlined in the Chancellor’s letter is shot through with holes and Treasury Ministers seem unable now to give even mild reassurances.
This policy has not come out of the blue in the past week. Had they been minded, Treasury Ministers could have spent the past 13.5 months working out how people who were going to be net losers as a result of doubling the 10p rate could be compensated, so this has not just been sprung upon them. The Financial Secretary will need to touch on a few issues during the course of our deliberations, and perhaps when she speaks in a moment. One is the impact on people without children who are eligible for tax credits but do not take them up. I understand that the current take-up rate is just 22 per cent., so even if that mechanism was used, almost four out of five people who would potentially be beneficiaries would not, in practice, benefit.
It is extremely unclear whether the compensation will be backdated, as is whether it will be backdated only for people in the 60 to 64 age bracket, or backdated for everybody, which is the assurance that the right hon. Member for Birkenhead seems to think that he received. Cash flow is an immediate issue. I touched on this earlier, but even if the money were backdated in November for six months, that would not mean that someone who had a household bill to pay today could say to the utility company, “I can’t afford it now, but I will pay for my electricity of gas bill in November instead when I have the backdated money from the Government.”
As I understand it, average levels of compensation are being proposed for each category. Some people will be over-compensated, which is a legitimate concern for the taxpayers who will have to fund that, but others will be under-compensated. They will have been led to believe by the right hon. Member for Birkenhead, through the media and elsewhere, that they will be fully compensated, yet that will not be the case. Some of the compensation mechanisms proposed are not fully in the gift of the Government.
The Low Pay Commission might have views about the level of the minimum wage. If people are compensated by using the minimum wage as a mechanism, it will be employers rather than the Government, through the taxpayer, who will shoulder the burden. People in part-time work who are on the minimum wage or just above it, or the self-employed, would not benefit from such proposals. As was said in the Chamber last week, such proposals would disproportionately have an unbeneficial impact on people in London because overall wages tend to be higher in the capital city, so fewer people are on the minimum wage than in other parts of the country.
The Government need to answer all kinds of questions. In part, one reason why the public are yet to be convinced that the tax changes are wise is because the answers have not come from Treasury Ministers. Until we get clear answers on those proposals, it is right that Opposition parties continue to probe the Government and that the public continue to be sceptical about the proposals before us.
Jane Kennedy: In supporting the clause, I should reiterate that it imposes the income tax charge for 2008-09 and sets the basic and higher rates of income tax at 20 per cent. and 40 per cent. respectively. The rates and limits set for 2008-09 mean that no tax is payable for income below the personal allowance of £5,435. All income over the personal allowance and up to the basic rate limit of £36,000 is taxable at the rate of 20 per cent., and tax is payable at the higher rate of 40 per cent. for all income over that limit.
I accept what the hon. Member for Taunton is saying about the 10p rate. Representations were made at the time of the 2007 Budget. A number of hon. Members who participated in last week’s debate drew my attention to those representations and I had read many of them when preparing for the debate. However, he will also recall that at that time the overall package of reforms was welcomed by, among others, the Institute for Fiscal Studies, which described the simplification as broadly very welcome and broadly fiscally neutral.
I do not wish to dismiss the concerns that have been raised about the 5 million-plus households that will be paying slightly more each week, according to the figures that I produced last October for my right hon. Friend the Member for Birkenhead, in some cases totalling £200 a year more in tax.
Mr. Hammond: It is important to be accurate when talking about these sums. The Financial Secretary says that people may be paying an additional £200 a year. Will she confirm that the maximum loss that has been calculated is £254 per year?
Jane Kennedy: The hon. Gentleman is right. There are households that might pay more because of a cumulative effect. I do not wish to talk down the impact on those families.
Peter Viggers: The Financial Secretary said that the figure was up to £200 a year. Her parliamentary answer of 18 October 2007 says that 400,000 families will be worse off by between £5 and £10 a week.
Jane Kennedy: Absolutely, but the maximum that an individual should find themselves paying per year is about £232. My point is that none of these figures is welcome to the families that are paying extra tax as a result of the changes.
I agree with the hon. Member for Taunton that reliance on working tax credits is not enough. That is why that is not the only solution that we are introducing. Even if we were not engaged in a debate about the removal of the lowest rate of income tax, I would still want to tackle the take-up of working tax credits among those who are entitled to them. I am not satisfied that that is at the right level. I will not go too far into this, but it is important that I respond to the criticism.
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Mr. Hammond: Do the right hon. Lady and the Government accept that not only ignorance about the availability of tax credits or the fear of the complexity of the application but the fear of the consequences of overpayment deters take-up? In practice, the system has created a positive deterrent for people on low incomes; they are simply too afraid of the possible consequences of getting it wrong to take up their tax credit entitlements.
Jane Kennedy: I accept what the hon. Gentleman says—there is the potential for that damage to happen. However, I am sufficiently concerned about the issue to raise it regularly in discussions with HMRC. It advised me that it sees no indication of any falling away in the rates of take-up, particularly among those families with children, where the proportion of take-up is largest. Nevertheless, it may well be a factor for those households without children, and that is why I am examining the structure around tax credits to see what can be done within the constraints in which we work and to ensure that those who are entitled to tax credits claim them.
The hon. Member for Taunton referred to the situation in London. A very good report, recently published by the London Low Pay Commission, draws attention to the impact in London of the minimum wage. It goes into great detail about what could be done to encourage more people in London to work and how the state can support people going into work in London in a way that tackles poverty. As London colleagues will know, we have been working very hard, but we must do more to make an impact here in London, which has special circumstances that we need to address.
Mr. Browne: I accept that I have rather lacked clarity on this point. I was seeking to make the point that the going rate in some parts of the country for a job may be the minimum wage, or just above, whereas the going rate in London for that job may be £1 an hour higher. If the national minimum wage was increased by 50p, it would impact on those parts of the country where people are paid the minimum wage, but not on people in areas where the labour market is such that they typically get paid more than the minimum wage for the same task.
Jane Kennedy: I am grateful to the hon. Gentleman for clarifying that point. We transgress slightly beyond the scope of the clause, but the two issues that appear to impact most in London are how housing benefit is administered and how child care is supported and provided. While they are not exclusively the only two areas that we look at when dealing with poverty and low-income households, we are aware of the concerns, and it is right for them to be raised.
On the general approach that the hon. Member for Runnymede and Weybridge made in opening the clause stand part debate, I reject the description and the reasoning that he gave about why these changes were made, but I understand why he did so—it is a party political point. In response, I say that while one of the factors influencing concern in the minds of the public is the uncertainty in the global economic market, it is wrong to say that we sailed along on, I think that he said, a looking glass—
Mr. Hammond: Mill pond.
Jane Kennedy: Yes, a mill pond of growing economic prosperity across the world. Over the past 10 years, the UK economy has proved resilient to at least two major shocks to the global economy, during which the changes that we have made to the structures within the economy—in particular, those to promote open and flexible product, labour and capital markets—have enabled the British economy to withstand the storms. Although there are signs that we will do the same on this occasion, everything that we do needs to be considered in the context within which we are working. We are committed to ensuring the continuing stability of the British economy. Our record on that bears comparison to any of the Conservative party’s records in government.
Mr. Hammond rose—
Jane Kennedy: I am happy to give way on that point.
Mr. Hammond: I am delighted that the right hon. Lady has given way. Some of my hon. Friends may detect a hint of little green shoots in what she is saying. I just hope that she is not being premature.
The right hon. Lady rejected in its totality, for reasons that I understand entirely, my analysis of the Prime Minister’s cynical behaviour in cutting the 22p rate of income tax and paying for it by abolishing the 10p rate. If my analysis is wrong, will she tell the Committee what his calculation was when he decided the scrap the 10p rate of income tax? Are we being asked to believe that the Prime Minister, who, for all his faults, is neither innumerate nor stupid, did not realise that 5.3 million families would be worse off? Or did he realise that they would be worse off and simply think that they would not notice; or did he realise that they would notice, but did not think that it mattered because, by the time that they did, he would have held the election?
Jane Kennedy: The hon. Gentleman’s suggestions—
The Exchequer Secretary to the Treasury (Angela Eagle): Are not worthy of him.
Jane Kennedy: The truth is that the proposals introduced last year were part of a worked-out package of measures that would clearly benefit four out of every five households in the UK, whereby they would be neither worse off nor better off. For the 5 million households, we acknowledge that more has to be done, and as we speak, we are working to that effect.
Stephen Hesford: On the green shoots, I do not imagine that the hon. Member for Runnymede and Weybridge meant to be facile, but does my right hon. Friend agree that it is not the Government who are making the case about the robustness of the economy, but the Governor of the Bank of England, who recently suggested that the credit crunch might be coming to an end?
Jane Kennedy: It would be wrong for me to speculate on such serious matters. It is clear that global economic uncertainties continue. We have a long way to go yet before we can say that the world has seen the back of the uncertainties that we are engaged in managing.
Mr. Hammond rose—
Jane Kennedy: I was about to sit down, but I shall give way.
Mr. Hammond: Although I accept that we are partisan in our approach to such discussions in the House, there is a global economic issue. If the hon. Member for Wirral, West wants to look at how independent and objective analysts view the UK’s position relative to that of other parts of the world’s economy, would the right hon. Lady advise him to look at the international currency markets to see how they have been marking the UK’s economy over the past few months?
Jane Kennedy: My hon. Friend the Member for Wirral, West will have heard the hon. Gentleman’s comments and will or will not take such advice.
To return to the clause, I believe that it is fundamental to the Budget package, and I hope that the Committee will agree to its standing part.
Question put and agreed to.
Clause 1 ordered to stand part of the Bill.
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