 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, James Davies, Committee
Clerks
† attended the
Committee
Public Bill CommitteeTuesday 6 May 2008(Morning)[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.
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.
I welcome my
colleagues on the Labour Benches, as I do the Exchequer Secretary and,
in particular, the Economic Secretary. It is good to see her back after
her
short leave from us. We are delighted that she has been able to bring
forward little George. We welcome him. I am sure that we will have a
good Committee. I know that we shall have cause to be grateful to the
organisations that have made representations to us during our
deliberations. They always help to shed light on areas that would
perhaps otherwise be obscure to members of the Committee, and I look
forward to our debates being informed by the information that has been
put
forward.
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.]
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?
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 1Charges
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%’.
As
this is my first contribution, and the first by my party, may I start
by saying what a pleasure it is to serve under your chairmanship, Sir
Nicholas, and how much I look forward to doing so in the many weeks
ahead? The purpose of amendment No. 1 is to cut the basic
rate of income tax in the United Kingdom from the 20p that the
Government propose to 16p, which would be the lowest basic rate of
income tax in the country since 1916. Without going too far off the
beaten track and incurring your wrath Sir Nicholas, it would perhaps be
helpful for the Committee if I set out the context for the amendment.
The Government propose to reduce the basic rate from 22p to 20p in
the pound, largely—although not exclusively—paid
for by doubling the 10p rate. Of course, that has caused considerable
controversy and financial difficulty for many millions of people across
the United Kingdom.
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?
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.
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.
We have a huge
public finance problem to resolve in this country, with an acknowledged
borrowing figure for this year of £43 billion. Most independent
experts
looking at the challenges facing the economy, particularly the slowdown
in the housing market, the continuing credit crunch and oil at $120 a
barrel, believe that the Government’s estimations of revenue may
prove optimistic and thus that borrowing this year may be significantly
more than the £43 billion projected. As every household knows,
we cannot go on borrowing ever larger sums for ever without eventually
having to address the problem that we are creating for
ourselves.
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.
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.
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.
Hammond:
My hon. Friend corrects me; 2 million cases are
over-calculated and the money has to be clawed back.
We can exaggerate our
differences. We all share similar objectives, and we are all faced with
one big constraint—the dreadful mess of the public finances. We
all share the desire to see lower rates of taxation and the perception
that marginal rates of tax facing those on the lowest incomes are
shockingly high. None
of us, I think, feels comfortable that as a long-term equilibrium
solution, we live in an environment where people earning just over
£100 a week are paying income tax at 20p in the pound, then
having to claim their money back through tax credits. I am sure that we
all share those concerns, but because of the state of the public
finances there is no ready or immediate solution. The Government have
to bear responsibility for the state of the public finances because
they have not just come through a difficult economic period or had to
weather an economic storm; they have been gliding across a mill pond of
perfect economic weather worldwide for the past 15 years and they have
still failed to sort out the public
finances.
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.
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.
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?
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.
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.
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.
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—
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.
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.
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.
Mr.
Browne:
I am putting forward precisely the same case as
the Treasury, but in more ambitious terms. The basic
principle has been accepted by the Government.
Why does the hon. Gentleman think there are differential rates in
vehicle excise duty depending on the size of a vehicle’s engine?
In part, that is a revenue-raising measure. If one looks in the Red
Book, one can see that the Government raise more revenue that way than
if vehicle excise duty were kept at the rate of the lowest or average
polluting car. However, at the same time it changes
behaviour.—[
Interruption.
] The hon. Member
for Eltham, in his sedentary intervention, is arguing against himself.
I will use the example of cigarettes again to show how that discourages
people from smoking. The estimates show that taxes on cigarettes raise
large amounts of revenue because the price is high, so there are both
revenue-raising and health benefits from having high levels of
cigarette taxation. There are environmental benefits as well as
revenue-raising benefits in taxing
pollution.
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:
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.
12.15
pm
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.
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.
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.
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.
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: 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.
12.30
pm
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 2p cut in
the basic rate is primarily funded by the doubling of the 10p rate,
which will have the most profound impact on low earners. About 5.3
million people will be net losers because the 2p reduction in the basic
rate is insufficient to compensate them for the
doubling of the 10p rate. The change is extremely controversial. Some
people have speculated that the Prime Minister’s motivation for
reducing the basic rate by 2p in the pound was to outflank the
Conservative party, by proposing a lower basic rate from that envisaged
by the Conservatives. If that was the case, it did not work out as
well—in terms of the impact on public perceptions—as he
would have wished.
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.
The hon. Member
for Runnymede and Weybridge raises an important point, which I shall
look at again in detail, about the how the tax changes might impact on
personal savings and the pensions provision. I reassure him that
individuals will still have the full amount of tax that they have paid
on earned income put into their pension pot. None of the advice that I
have received indicates that there will be a significant impact on the
amount of pensions saving. Given the questions that he has raised, I
will revisit this issue. If there is information that will reassure
him, I will be happy to share it with the Committee. We must also bear
in mind that pension income itself will now be taxed at 20 per cent.,
not 22 per cent.
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.
12.45
pm
The overall
take-up of working tax credits is 61 per cent., with 82 per cent. of
the money being claimed. Although we have seen a modest rise in the
percentage for those without children from 19 to 22 per cent., I am
not satisfied that that is as high as it should or could be. Her
Majesty’s Revenue and Customs also recognises that more needs to
be done, which is why, during our last oral questions, I spelled out in
some detail what HMRC is doing—and had already planned to
do—to address that point. It is something that we should do as a
matter of principle, and I am happy to work to achieve that with
employers and trade unions and to raise awareness of the availability
of tax
credits.
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—
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:
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 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:
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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