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6 May 2009 : Column 192

We truly have moved through the looking glass if halving a budget can now be described as protecting it. This is a dishonest Budget that is all about protecting the jobs of the few on the Treasury Bench rather than the many in the British economy—a crowd-pleasing, economy-damaging tax on the rich this side of an election, with a hidden tax bombshell targeted at the many timed to go off after an election.

Yvette Cooper: The hon. Gentleman refers to public sector investment. As he will be aware, the level set out in the Budget is still twice that of public sector investment as a proportion of GDP in 1997, when we inherited it from his party. Will he also take this opportunity to say whether his party supports Crossrail?

Mr. Hammond: Let me deal first with the public sector investment. The right hon. Lady did not take the opportunity to confirm in her intervention that public sector investment as a percentage of GDP will halve. It will halve over the coming years—I do not think that the Government have been shouting that from the rooftops. We believe that Crossrail is a good project. It fits very well with our agenda of improving rail infrastructure — [ Interruption. ] She sits there, chuntering about guaranteeing to support this project or that project. Do the Government have no conception of the scale of the hole that they have dug? Every single programme and project will have to be reassessed and re-evaluated. Each project will have to demonstrate its value for money and its effectiveness in an extraordinarily tight fiscal climate created by the disaster that the Government have visited on this country.

This year sees the continuation of the recent trend for the Budget to be increasingly disjoined from the Finance Bill that follows it. Annual taxes are announced years in advance, not for the purpose of providing greater forewarning and more stability and transparency in the system, but for pure political advantage. An early announcement by this Government does not mean greater certainty. Last November, the tax rate was to be 45p from 2011. By this April, it had become 50p from 2010.

This country’s tax system is losing credibility and the process by which tax changes are made not in response to long-term economic challenges but in pursuit of short-term tactical political gain is causing immense damage to our international competitiveness. It all started with the pre-announcement of the abolition of the 10p rate and the reduction of the basic rate in the Prime Minister’s last Budget as Chancellor in 2007. It accelerated with the disastrous pre-Budget report of October 2007, as we saw the first example of the now familiar phenomenon of the Prime Minister trying to head off a catastrophic loss of confidence in him on his own Benches. It continued with the 2008 Budget, with last year’s pre-Budget report and now with this 2009 Budget.

Before I move on, perhaps the Chief Secretary could clarify one issue. She talked about the new 50p tax rate. Will she clarify whether it is intended to be a permanent feature of the tax system or a temporary arrangement? The Chancellor said in his interview with the Daily Mail on 23 April—it was a perfectly fair point—that he would have to ask people on higher earnings

signalling a temporary increase to contribute to resolving the mess in the public finances. That is hugely significant, because the behavioural response to
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a temporary surcharge on higher earners could be quite different from the response to a clear break with the established consensus on top marginal rates.

Will the Chief Secretary tell us whether the signal sent out by the Chancellor is the Prime Minister’s policy? If so, would it also be the policy of a Labour party led by the right hon. and learned Member for Camberwell and Peckham (Ms Harman) or by the right hon. Member for Kingston upon Hull, West and Hessle (Alan Johnson)? If the Chief Secretary cannot speak for them, would it be the policy of a Labour party led by her or by someone very close to her? If she cannot clarify that point now, perhaps the Financial Secretary can do so in the winding-up speech this evening. It is a very important point, which needs clarification.

Mr. Robert Syms (Poole) (Con): Is not the logical conclusion that the range of measures to increase the top rate of tax means that the Government will eventually have to come back to the House early next year to reform capital gains tax, which is now very much out of kilter with the income tax rates? That is one reason why they will not collect the sort of money that they expect. People will avoid it and they will try to capitalise their incomes.

Mr. Hammond: My hon. Friend makes a good point. The Government have clearly already sought to close one of the most obvious loopholes to people who are subject to the higher rate of tax by restricting pension relief. Capital gains tax remains a potential loophole, however, and he might well be right that the Government, for all their silence on the issue now, will simply abandon any pretence of a low-tax competitive regime and will resort to higher tax rates in capital gains, too.

The Budget brought home to the British public the scale of the challenges facing our public finances, even if the impact of addressing them has been pushed out to the other side of a general election. The recession that is afflicting the economy will mercifully be behind us at some point, for the simple reason that the Prime Minister did not abolish boom and bust. The economic cycle, I am glad to say, survives and will eventually turn upwards, but the hole in our public finances will remain even if the economy bounces back in line with the most optimistic projections that we have heard. It is a structural deficit, which is the result of a Government recklessly living beyond their means since they started their 2001 general election campaign, repeatedly making promises to the electorate that the country could not afford. That is not even bribing people with their own money; it is bribing them with their children’s and grandchildren’s money.

Mr. Newmark: On the subject of ending boom and bust and cycles, does my hon. Friend believe there is any credibility whatever to the Red Book’s projection, in table 2.1, that growth will decline 31/2 per cent.; suddenly and miraculously increase next year by 11/4 per cent.; and then, in 2011, go up to 31/2 per cent.? Does anyone my hon. Friend knows, beyond the Chancellor and his Chief Secretary, believe there is any credibility in these forecasts?

Mr. Hammond: I shall come to that point in a moment, but the simple answer to my hon. Friend’s question is no. I do not know anyone else who believes these forecasts. While he is on the subject of cycles, as I have said before, I think the only cycle that the Prime Minister
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understands or is interested in is the political cycle, and our economy is being run with regard to the political cycle, not the economic cycle.

The Chancellor, in his Budget, was therefore torn between a desire to hide from the electorate the scale of the adjustment that would be required until after one more election, and a desire to send a signal to the bond markets that would induce them to continue funding the Government’s unprecedented borrowing requirement. So what we got was the usual fudge: optimistic growth projections that unravelled within minutes of the Budget and have been further undermined by the Office for National Statistics data published since, and tax increases for ordinary families now, but with much, much more to come after the election, starting with the tax on jobs that will hit everybody on £20,000 a year or more in 2011, all under cover of the smoke generated by the 50p distraction tax “on the rich”, designed to fool the gullible.

We also got a slashing of planned public expenditure growth. After allowing for the increased cost of servicing the huge pile of debt that this Government are building up, and of benefits for those joining the dole queue, there will be real-terms cuts equivalent to 2.3 per cent. in departmental expenditure totals. That is on top of the halving of capital expenditure budgets. It is an unprecedented scale of cuts in departmental expenditure. All this from a man who told us in 2005 that further efficiency savings were not possible, and that any reductions would necessarily involve cuts in front-line services. He was wrong then, and I suspect he would wish to argue now that he was wrong then. The fact is that a Government who said no further efficiency savings were possible subsequently claimed to have made £26 billion-worth of efficiency savings, and to have identified a further £15 billion-worth of efficiency savings. They have no credibility left on spending: no one believes a word they say any more.

Mr. Graham Stuart: My constituents, particularly those who live in rural areas of Holderness, many of them perhaps historically Labour voters, feel betrayed because they know that their national insurance is going to go up and that they are paying more to fuel their cars, which they need to try to find work, and they are expecting to see higher rates on drink when they go to their local pub—at a time when pubs are closing at the rate of 40 a week. As a final insult from this Budget, if they go for a game of bingo at the end of the week to try to cheer themselves up, they see that £105 million is being taken from bingo players. This Government and this Budget are hitting ordinary people; they are not hitting the rich, and they are trying to disguise it.

Mr. Hammond: My hon. Friend is exactly right: it is a distraction Budget. What his constituents do not know, however, because understandably they have not sat and read the detail of the Budget Red Book, is that this is only the start. They will be hit by a further £45 billion a year of taxes as the Chancellor struggles to close the gap that his disastrous policies and those of his predecessor have opened up. Even if we accept the highly optimistic assumptions about the pattern of tax receipts in the recovery, the Chancellor still acknowledges that it will be 2017 before the current Budget is back in balance, and 2032 before our debt is back under control.

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One clear victim of this Budget is the credibility of Treasury forecasting. The whole process is undermined if nobody, but nobody—except the Chancellor—believes the forecasts for growth and for tax revenues. The case for an independent office of budget responsibility was made by the Chancellor’s Budget speech more effectively than any of its proponents could have hoped. No Chancellor in future should be able to build his Budget on foundations of sand—to treat the Budget process as a political manoeuvre rather than as an exercise in fiscal responsibility. We will attempt to insert into this Finance Bill provisions to ensure that before next year’s Budget, a rigorous and independent approach to forecasting is established, ending the farce that we witnessed on Budget day, as the Budget growth projections unravelled before our very eyes, rendering the entire Budget Red Book almost immediately redundant.

I have some specific issues to raise on several clauses, but first I should like to set out three key themes linking our main criticism of the Bill: first, its failure to rise to the challenge of building the competitiveness of the UK as a place to do business in the recovery; secondly, its failure to support savers at a time when rebuilding the savings culture will be critical to Britain’s future; and thirdly, its abject failure to balance the rights and responsibilities of taxpayers and the Revenue as it extends and expands Revenue powers. I shall elaborate on each.

Britain is in the depths of the worst recession since the second world war. Unemployment is rising at the fastest rate since records began and the public finances are set next year for a bigger deficit than that of any other G20 country. But even in these circumstances, this should have been a Finance Bill for the recovery. We do not know when it will come, but we need to be sending powerful signals to business about the tax landscape in the UK in the future, to ensure the investment and the jobs that Britain will need when Labour’s recession is over.

Rebuilding Britain’s competitiveness should be the key focus of this Bill—and, of course, competitiveness requires a regime that ensures fiscal discipline in the future as the bedrock on which a strong economy can be built. It also means addressing the long-standing challenges that Britain faces in productivity, infrastructure and skills. It means modernising Britain’s public services and its welfare system, but it also means ensuring a competitive tax system. That is not just about the quantity of tax, important as that is. Business understands that the disastrous fiscal position that the country faces means that there is no immediate prospect of moderating the overall tax burden, but powerful, revenue-neutral signals can still be sent, even at a time of intense fiscal pressure. The nature of the tax code, the certainty of its impact, the manner of its making and the clarity of its future direction all contribute to tax competitiveness.

In a global marketplace, Britain will never be able to compete on tax burden with emerging economies with a limited social infrastructure, but we can and must compensate for our higher taxes by offering a more stable and predictable regime with greater transparency and more certainty—in short, the benefits a business might expect from locating in a higher-tax, mature jurisdiction. What we cannot do—it is simply not an option—is expect to be able to levy developed-country
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tax levels with the uncertainty, arbitrariness and unpredictability more usually associated with the tax regimes in developing economies.

Ten years ago, the Prime Minister set out his three principles for the UK’s tax system: simplicity, fairness and competitiveness—a long-term, strategic approach to business taxation. However, what we have had in the last few Budgets is the very opposite: a shambles of initiatives, often half-baked, often unworkable and often reversed during the legislative process or thereafter, some of them—the 2007 pre-Budget report springs to mind—literally put together on the back of a fag packet in response to immediate political pressures. We have seen the abolition of the 10p tax rate, the fiasco of the non-dom tax charge and the disaster of the capital gains tax taper relief abolition—and the pattern continues.

If we cannot reduce the tax burden on business, we have to redouble our efforts to reduce the compliance burden to maintain Britain’s global competitiveness. Sadly, the Bill is a missed opportunity, at a crucial moment in our economic history, to send those powerful positive signals. It will further erode Britain’s standing as a stable, predictable and business-friendly jurisdiction in which to operate.

I now turn to the second theme: pensions and savings. The economy that will rise from the ashes of this recession will differ in shape and structure from the pre-August 2007 economy. It will be built on equity, not debt. It will depend on our savings ratio, not our borrowing capacity. The Prime Minister appeared to understand that important shift. As recently as last month, he was hinting in radio interviews that he would do something for savers in the Budget. What we got was a limited, complex change to the individual savings account regime that the industry has condemned as burdensome and confusing, and some very ambiguous signals on pensions that will further undermine long-term saving; I will return to those in a moment, when I address some specific provisions of the Bill.

There was nothing in the Budget to match the Leader of the Opposition’s bold proposal for this year’s Budget. He proposed the abolition of income tax on savings income for basic-rate taxpayers, and an immediate increase in the pensioner tax-free allowance of £2,000 a year—all funded by advancing to the current year the introduction of the efficiency savings that, in the pre-Budget report, the Chief Secretary announced that she had identified, although apparently she could not bring herself to deliver them until after a general election. Let me be clear: it is not a fiscal tightening to take taxpayers’ money back out of the pocket of Government, and redistribute it to hard-pressed taxpayers with a high propensity to spend—people, in particular pensioners, whose savings income has been very much squeezed, in some cases leaving them almost at the point of destitution. On that second count, the Bill fails miserably to rise to the challenge of shaping and building the new economy based on savings and equity, not mountains of excessive debt and easy credit.

Thirdly, the Finance Bill advances still further the Government’s agenda of enhanced powers and increased discretion for Her Majesty’s Revenue and Customs. With additional powers should come additional responsibilities, and if Britain’s business tax regime is to remain competitive and internationally attractive, the extra powers have to come with proper safeguards, and
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have to be matched by obligations on HMRC. The concept of a taxpayers’ charter, setting out the rights and obligations of taxpayers and the Revenue, appears to be dead. In clause 91, it becomes an HMRC charter—nothing much more than a mission statement prepared and delivered by HMRC, setting out its aspirations. That is a far cry from the statement of rights and responsibilities for both taxpayers and Revenue authorities to which many thought that the Government were committed.

Let me make it clear to the Chief Secretary that we will support the creation of powers that HMRC genuinely needs to prevent unlawful tax evasion and to counter complex tax avoidance, but the burden on ordinary, law-abiding taxpayers has increased exponentially over the past decade, as Britain’s tax code has doubled in length to overtake India’s as the longest in the world. We need a focus on the simplification that the Prime Minister promised, and pressure on the Revenue to deal fairly with taxpayers. For example, we could match the new restrictions on time for reclaiming overpaid tax with an obligation on HMRC to make prompt repayments.

I would like to address a number of clauses in the Bill, making specific observations and putting questions to the Financial Secretary to the Treasury. Clauses 4 and 6, to which the Chief Secretary has referred, introduce the withdrawal of personal allowances on incomes above £100,000, and the multiple additional tax rates that will be required to give effect to the 50p tax proposal, which is to be introduced next year. We on the Conservative Benches—and, in fact, some on the Labour Benches—know the Prime Minister’s motive in seeking to create another of his beloved dividing lines. It is a political gesture; he is throwing some red meat to the heartland vote as he abandons any pretence of reaching out to aspirational Britain ahead of the next general election. The right hon. Member for North Tyneside (Mr. Byers) was correct to say that the measure

Mr. Newmark: Does my hon. Friend not share the concern that I felt when I read in an Institute for Fiscal Studies report that the measure is indeed just a political gesture? The IFS says that the measure will raise almost nothing.

Mr. Hammond: My hon. Friend raises an important point. The view of some independent experts is that the new top rate of tax may raise significantly less than the Chancellor predicted, having used the static model that is used to produce the Red Book’s projections. There was no taking account of behavioural impacts; it was assumed that the very high-rate taxpayers, who are probably very mobile in many cases, would simply leave their affairs as they were, and would not consider relocating away from the United Kingdom, so I share some of my hon. Friend’s concerns.

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