I have real concerns about the decision to reduce the rate of writing-down allowances for new and unrelieved expenditure, as I believe it could impact adversely on smaller businesses and on businesses that are more likely to invest, such as manufacturers. I say this because the Government regularly claim that small businesses are the key to future growth in the economy. Who

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depends on a capital allowance more—a very large or a smaller business? The argument I put to the Minister is that small businesses would be more affected.

Nobody disagrees with the fact that the UK should have a competitive tax regime, and the corporation tax cut should help with that in principle. The Government are paying for it by the measures in clauses 10, 11 and 12—slashing investment allowances by £2.6 billion. The package will penalise companies that invest, particularly manufacturing companies, in order to offer tax cuts that will disproportionately benefit the banks and the financial sector. At a time when the Government claim they are rebalancing the economy by trying to encourage manufacturing, this package could—I say could—do the reverse.

The Institute for Fiscal Studies has said:

“The largest beneficiaries from the package of measures”—

including corporation tax and capital allowances—

“will be high-profit, low investment firms”,

such as financial services, while the cuts to allowances under clauses 10, 11 and 12 will

“have the largest impact on those firms with capital-intensive operations”,

such as manufacturers. That is a direct quote—from page 229, for the Minister’s reference—from the IFS Green Budget 2011. The IFS also agrees:

“The losers would be firms that invested heavily but made little profit—notably in the manufacturing and transport sectors but also some capital-intensive service-sector firms. The winners will be less capital-intensive but more profitable firms, historically typified by the financial sector.”

I do not know whether it will pan out like that in real life, but my point is that if it does, clauses 4 and 10 together will mean giving a corporation tax cut that benefits the financial services sector most and a capital allowance cut that damages the private sector of small and medium-sized manufacturing industries most. That cannot be a good recipe for growth in the economy.

Andrew Gwynne: One of my concerns is that as we try desperately to rebalance the economy, we need to invest in some of the new high-tech and emerging industries, particularly in the renewable energy sector, which is incredibly capital-investment intensive. Does my right hon. Friend worry, like me, that these changes could put off growth in that emerging technology?

Mr Hanson: My hon. Friend makes a valid point, as it is exactly those companies that require capital investment support. The move will penalise companies that invest in manufacturing—for example, the car industry, advanced manufacturing, wind turbine manufacturing, and research and development across the board. These big manufacturing concerns are going to create the jobs of the future as well as protect current manufacturing jobs at a time when consumer demand might well be fragile because of high levels of unemployment, high levels of public spending cuts and general concerns about the squeeze on the economy and on people’s living standards and incomes generally.

PricewaterhouseCoopers has said:

“Many clients will balance the modest reduction in the capital allowances rates with the staggered reduction of the rate of Corporation Tax…Whilst the declining rates of capital allowances,

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in isolation, do not produce any winners, some businesses will benefit when the CT rate change is also taken into consideration. Capital intensive businesses”—

this is the key point—

“are likely to feel the reductions more, since they will have larger capital allowances pools.”

Deloitte has said:

“For some businesses the reduction in writing-down allowances for plant and machinery will be offset by the reduction in the main rate of corporation tax from April 2012.”

We accept that.


and this is the key point—

“capital intensive companies…may not benefit to the same extent.”

2 pm

In its response to the Treasury Committee in the tax experts’ report on the Bill, the Chartered Institute of Taxation reported:

“The various changes to capital allowances do not score well under coherence”—

its key test.

“The changes to short life assets seem to be an attempt to solve problems created by the reduction in writing down allowance rates at a cost of increasing administrative burdens. It would be better to have a proper long-term commitment to capital allowance rates. Reducing capital allowances to 'pay' for corporation tax rate cuts penalise unincorporated businesses and make the business tax system look as if it is lacking coherence.”

I am not arguing that we should not undertake those capital allowance cuts. There may or may not be such an argument to be made, but what worries me is the overall impact of those cuts when married to the corporation tax cut. I am simply asking the Government to make a continuous assessment. I am asking them to publish an assessment six months after the implementation of the capital allowance cuts in April next year and, during the run-up to their implementation, to monitor the economy as it is now, so that we can establish whether they are on the right track.

In a report published yesterday, the Association of Chartered Certified Accountants said that

“it should be borne in mind that for large businesses with significant investment in plant and equipment, any changes to the tax cost of those assets will impact on long-term investment plans.”

I do not know whether that statement will prove to be right or wrong. I am simply saying to the Minister that he should reflect carefully, monitor the situation, and report back to the House. In October 2012, we will have experienced six months of the capital allowance regime and 18 months of the corporation tax cuts. We need to ensure that we are indeed on the right track, and that growth has not been hampered by the Government’s measures.

I should like to know what consultation took place and with which business organisations. I suspect that the consultation was not as thorough as it might have been. Will the Minister tell me with whom he discussed the proposals, when he discussed them, what the responses have been, and what he considers to have been the response across the board from capital-intensive businesses since the announcement in the Budget? When we deal with clauses 11 and 12, I shall want to know whether there was any adverse reaction to them.

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I suggest to the Minister that there should be an assessment of the long-term position. I hope he will accept that the amendment is designed not to torpedo his proposals, but simply to express our concern about certain aspects of the configuration between the corporation tax cut proposed in clause 4 and the capital allowance cut under clause 10 and the clauses that we will consider later. I ask him to place a flag in the sand signifying that after a period the Government will review the impact of those cuts to establish whether the fears expressed by people including my hon. Friends and me are materialising. We hope that they will not materialise, but if they do, we shall need to consider how to change track in due course.

Nigel Mills: It is with a small amount of pleasure that I rise to speak about tax issues, having spent 13 years advising companies on them, mostly under a Labour Government. It was kind of the right hon. Member for Delyn (Mr Hanson) to mention my two former employers and the various comments that they have made, which I happily endorse.

I want to comment on the request for a review of the proposed reduction in capital allowances partly because I think that we are in a strange position overall. The purpose of capital allowances is to give businesses tax relief on their capital investment in order to encourage them to invest in plant and machinery. We used to try to encourage them to invest in industrial buildings and factories, but we have stopped doing that now.

The attraction of the capital allowance system used to be the ability to incentivise people by accelerating tax relief. Forty years ago someone who invested in a piece of equipment with a 10 or 15-year useful life could accelerate the tax relief on it quite far in advance of the overall spread of its useful life, but I am not sure that that is where we are now. How many businesses in our constituencies will invest in equipment when they are not certain that its useful life will be even 10 years? If they expect it to be five or six years, the present mechanism will not work at all.

A simple calculation will show that, given an 18% writing down rate, an investor will still not have received tax relief on 30% of his investment in a piece of equipment. After eight years, he will still have not have received 20%. He may anticipate a fairly large residual scrap value if he can sell the equipment on, but that is on the assumption that a good deal of its useful life remains, and I am not sure how realistic that assumption is.

If we are to have a review, let us review the whole capital allowance system to establish whether it is really giving businesses an incentive to invest. Perhaps we should have a look at what they are actually doing in their accounts. The right hon. Member for Delyn mentioned that. What is the useful life over which they are writing off assets? I think that we may be adding a huge amount of complexity to the system by preventing all the businesses in the country from employing actual accounts depreciation for this purpose, and requiring the creation of a capital allowance pool requiring all the assets to be tracked separately. In the past it was said that businesses were receiving a tax incentive, but this huge and unnecessarily complex system may have an adverse impact on them. Our review should ask whether the capital allowance regime is the right one.

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Later—not today—we will come to clause 12. The Government have responded to some lobbying, and have recognised that it will cause huge problems for manufacturing business in particular. The clause proposes that the lives of short-life assets should end after eight years. Someone who invests in equipment whose life he expects to be less than eight years will have to make a separate election to treat it as a short-life asset rather than putting it in his main capital allowance pool. He can try to obtain the tax relief over the eight years; otherwise, as I have said, he will still have 20% unrelieved. We are building additional complexity into the system, and I am not sure that that is necessary.

The Bill contains various responses to businesses that are trying to find ways around the capital allowance rules. Clause 33, for instance, proposes anti-avoidance rules for long-funding finance leases. Year in year out, we see new and complex rules intended to prevent businesses from getting around the rules. Sometimes they are trying to obtain extra deductions to which they are not entitled, and sometimes they are trying to find ways of receiving a deduction over the period for which they think they should receive it.

If we are to be a tax-simplifying, tax-reforming Government, perhaps the Office of Tax Simplification could conduct a review of whether the capital allowance is still fit for purpose, and whether it is the right way to attract business investment over the next 10 or 15 years. Should we, in fact, try to find a way out of it, and adopt a system that allows businesses simply to look at their accounts to be eligible for some kind of tax relief, rather than having to adjust the depreciation for those assets? I know that that too will be complex, because there will be a huge hangover from the existing system, and there will be problems when people try to accelerate relief over far too short a period. However, I think that all those problems can be addressed, and that we shall be able to stop increasing the complexity of the system.

I cannot vote for the amendment, because I think that it is merely an excuse for a debate. If we are to have a review, let us have a proper one.

Mr Love: In recent years there has been a move in all western countries to reduce the headline rate of corporation tax and widen the tax base, and that is what has been proposed in the Budget. Does the hon. Gentleman support that move?

Nigel Mills: If we want a competitive corporate tax system, the tax rate is key. However, we probably need to examine four things, which include the tax base, as the hon. Gentleman said, and the complexity, stability and predictability of the system. We are in danger of just ticking the first box; I am not sure we are ticking the tax-base box well with this approach, and we are adding extra complexity. Many regimes around the world do not have capital allowances but do let businesses take the depreciation that they see in their accounts. That is a far more attractive, simple and predictable system, because businesses would not think, “I might invest in this piece of equipment, but they might reduce this to 15% in three years’ time and my relief suddenly starts to look different.” As the hon. Gentleman was trying to say, this involves a combination of things. We

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need to get not only the rate right, but the base and the underlying system right; we will not get all the advantages from simply reducing the rate.

However, for most businesses the first headline comparison is about the overall tax rate, so that is the main thing to focus on. I am not going to vote against this rate reduction. Paying for the reduced rate partly by reduced capital allowances is the right way to go in this financial situation, but we need to go in the direction of simplifying our incredibly complex corporate tax system. We can all work out the statistics by saying, “When I started work 13 years ago, my tax legislation was so big and when I left a year ago it was much bigger, and I have not even got the VAT and inheritance tax book.” We can look at how many schedules on income—actual capital—we have and consider how many of them we actually need. The capital allowance regime is part of that problem, because it was written 50 or 100 years ago, when it actually worked. A lot of these things are out of date, so we must look to simplify things if we want to ask businesses to invest. I am not sure that they are going to worry about whether something is at 18% or 20%, but they do want tax relief for their investment over the useful life of their asset provided in a way that is simple for them to manage. I am not sure that we are anywhere near providing that at the moment.

A lot of my clients use the capital allowances regime to add flexibility to how they get tax relief in the years when they have profits and in the right entities in which they have profits. They will not entirely welcome my idea of simplifying this system and taking all that away from them. However, if we are to get a modern, competitive corporate tax system, it must be simple and easy to understand. It must also do what we want it to do: incentivise the investment that we desperately need to have a growing economy.

John McDonnell: I have a fair amount of sympathy with the hon. Member for Amber Valley (Nigel Mills), because if he ever wants to return to his former profession he may well find that he has lost a number of clients as a result of that speech.

The linkage between clauses 4 and 10 is inevitable, as my right hon. Friend the Member for Delyn (Mr Hanson) said from the Front Bench, because the corporation tax reductions are being paid for by these cuts in capital allowances. I do not want to upset the consensus that has emerged on the cuts in corporation tax, but I do not support them and believe that they will be an error in the long run. I address the issue of capital allowances in that context.

I am unclear as to what the Government’s strategy is on stimulating the economy to tackle the recession in a way that rebalances the economy. I thought that this was not just going to be a rebalancing between the public and private sectors. I listened to some of the statements made by the Chancellor and the Secretary of State for Business, Innovation and Skills about rebalancing the economy as between the finance sector and the manufacturing sector, which gained support across the House. We heard about the development of a manufacturing strategy that would enable us to have a balanced economy between the finance, manufacturing and service sectors, so that if there was a crisis in one sector, the whole economy would not collapse as a

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result of overdependence on that sector. However, these Budget measures seem to fly in the face of that balanced approach.

A number of methods can be used to re-stimulate the economy, one of which is tax cuts, including corporation tax cuts, as have been introduced in this Bill. Another method is the more directional approach of considering a form of tax cuts through the capital allowances, whereby the Government try to influence economic behaviour in a way they believe to be beneficial. The other method is to invest in largely capital expenditure through public services—I am talking about public investment.

2.15 pm

Let us deal with the formation of policies through this Bill. I am anxious about the fact that clause 4 cuts corporation tax almost as an act of faith, in the belief that that will translate into investment, the stimulation of the economy and, thus, more jobs. Very slight evidence has been produced to suggest that that will happen. My right hon. Friend the Member for Delyn has mentioned the range of debate that has taken place in the Treasury Committee and elsewhere, and the evidence that has been produced by some witnesses, but it is fairly slight. The addition of a further 1p cut in corporation tax at the last minute—again, the Office for Budget Responsibility did not even have time to assess it properly—demonstrates that the calculations have almost been done on the back of a fag packet. This smacks of something that other Chancellors have been prone to in the past: a last-minute political stunt just to surprise us on Budget day. Paying for that cut by cutting capital allowances flies in the face of the argument that the Chancellor and the Prime Minister have put forward in the past about ensuring that we stimulate the manufacturing base to rebalance our economy.

I also find it worrying that the capital allowances are paying not only for the cuts in corporation tax more generally, but for the cuts in the treatment of the taxation requirements on multinationals. The briefing that we received from the House of Commons Library contains a quote from Mr Peston of the BBC about the treatment the Government are proposing for controlled foreign companies. The rules mean that there will be a 5.75% levy on cash held by multinationals in non-trading entities overseas and a low rate of tax, whereas various commentators thought it would be 8%. These are the same multinationals who

“stash cash in tax havens and low-tax countries.”

What seems to be happening is that UK companies that are struggling to obtain loans from banks, in the first instance, to invest in capital equipment to stimulate the local economy, and therefore jobs, and thus have an impact on the economy nationally are having their capital allowances cut so that we can reduce the rate that was intended to be introduced for tax multinational companies, which are avoiding, or evading, tax through the use of tax havens. That contradicts the statements that the Chancellor has made for some time.

Mr Hanson: May I assure my hon. Friend that we will return to those clauses in some detail?

John McDonnell: As my right hon. Friend said earlier, all these clauses are linked and it is difficult to disaggregate them. Clause 10 is certainly being used a mechanism to

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fund the allowances being distributed to companies overall. As I say, I find it extremely difficult to link that to the rationale that has been given by both the Chancellor of the Exchequer and the Prime Minister in the past.

Jim Fitzpatrick: One of the biggest elements of British manufacturing is the food industry. When I was a Minister of State in the Department for Environment, Food and Rural Affairs, the National Farmers Union lobbied me aggressively. Consequently, I lobbied the Treasury, as DEFRA does, about capital allowances in respect of buildings and equipment for the farming community. Has my hon. Friend had a chance to talk to the NFU about the comments he is making? Has he any understanding about whether it is being penalised in order to assist transnational corporations from outside the UK? Is this being done instead of supporting British manufacturing and British business people?

John McDonnell: Strangely enough, given that I represent Hayes and Harlington, an urban area, I do not have an awful lot of engagement with the NFU, although my area does still have one farm left in it. I have an engagement with Hillingdon chamber of commerce—I am meant to be hosting its annual parliamentary lunch at the moment—and a number of its members have explained to me their concerns about the impact on small firms. I share the view of the hon. Member for Amber Valley: capital allowances should not be used just as mechanisms to be manipulated in years of high profit. There is a need for an overall review of capital allowances, but I find it unacceptable to cut them in the short term to pay for corporation tax reductions and for the beneficial treatment of multinational corporations. That is why I support the amendment, which is fairly mild-mannered and simply asks whether we can reconsider the matter.

As my right hon. Friend the Member for Delyn said, I would expect a wise Government to have the Treasury carry out such an assessment regularly. The amendment asks for that process to be more open and transparent and for it to be reported to the House so that we can have a full and thorough debate. I hope that the Minister can assure us that he can at least give us some line of reporting on the implementation of the policy over the coming period.

It worries me that as we cut capital allowances, which will reduce corporation tax in this country, we will get into a cycle just like that in the 1930s with an internecine battle between countries about reducing corporation taxes. That will lead to a policy of beggar thy neighbour in order to secure some short-term gain in the form of overseas investment in the UK. I do not believe that that is the solution and I think it will be found to be counter-productive in the long term, even though there might be some short-term gains to tide the Government over for the next 18 months, if they survive that long.

I believe that the Government are mistaken in bringing forward this process of corporation tax reduction. If we are paying for that through the capital allowances changes, we will divide industry and the private sector. A large number of small firms, particularly in the manufacturing sector, will lose out and will not gain sufficiently as a result of the corporation tax cuts. Other areas of the economy, particularly the finance sector, will gain yet

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again and yet more anxiety will be expressed in the private sector about the Government’s divide-and-rule policy.

Andrew Gwynne: Is it not worse than that? Many of the small manufacturing industries in my constituency have been dependent on an old declining style of manufacturing. The capital allowances were the mechanism that they used to diversify. On my hon. Friend’s point about rebalancing the economy, if we are to do that in areas that are heavily dependent on manufacturing industry, we must allow them to diversify into the new technologies and new manufacturing sectors.

John McDonnell: That is exactly the point that my right hon. Friend the Member for Delyn made and that I wish to reiterate. Capital allowances were introduced as a method of the Government’s trying to shape behaviour within industry as best we could. They were a way to stimulate sectors of the economy, but they have also been used to stimulate innovation. The Government are committed to the stimulation of the green economy and I, like other Members on both sides of the House, deeply regret the Government’s failure to act sufficiently swiftly to establish the green investment bank and to get it up and running, but that is a subject for another debate.

The role of capital allowances, particularly in the environmental field, could be key and cutting them with this broad-brush approach will deny the opportunity to the environmental industries, particularly those involved in the development of renewables, to become world leaders as the Government envisaged that they would in the coming period, an idea that we all supported. This is my right hon. Friend’s point: if a review of the impact of the capital allowances were linked to the disastrous corporation tax policies overall, we would have the opportunity to consider the implications sector by sector and industry by industry as well as the design of the appropriate mechanisms, allowances or other things to stimulate those sectors of industry.

Mr Hanson: Does my hon. Friend accept that one key factor is the lack of a focus on outcomes in the consideration of the impact of the changes in both clause 4 on corporation tax and clause 10 on capital allowances? One key thing that the review would do, if we can secure from the Government today an aspiration to find out what the changes will mean for real jobs and the manufacturing industry, is test in 18 months’ time whether those changes have been successful.

John McDonnell: Let me put it this way, as mildly as I possibly can: we hardly have a description of evidence-based policy making before us. Let us go back to the example of the additional 1p cut given by my right hon. Friend. When the Treasury Committee considered the matter, it invited evidence and Paul Johnson, the director of the Institute for Fiscal Studies, was questioned about the impact it would have. He said that we did not know about that with any precision. We do not know with any precision what the impact of the overall cut in corporation tax will be and we certainly do not know with any precision, globally or sectorally, what the impact of the

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capital allowances cuts will be. We are stepping into the dark and going down the wrong path and that is why we should have the review.

I fear that a number of companies might have planned their development in advance based on the capital allowances that they thought were secure and would be forthcoming because of the statements of the previous Government as well of the Chancellor of the Exchequer over the past 12 months. They will now not proceed with that investment and as a result, the companies might not be put at risk but they will certainly not expand in the way that they planned and that will have consequences for jobs. In certain areas—my right hon. Friend has mentioned at great length the higher unemployment rates in certain regions—the effects on individual communities will be fairly catastrophic if this job growth does not go ahead.

I oppose the reduction in corporation tax, as I think it is misguided. I would prefer it if, instead of cutting taxes to companies and forgoing that income, we could use the income from the top companies and corporations to invest in public infrastructure projects that will get people back to work and stimulate the economy overall. The last thing I would suggest the Government should do, even if they are cutting corporation tax, is pay for that cut with cuts in capital allowances. In my view, that flies in the face of everything that the Government have said about rebalancing the economy, stimulating the manufacturing base and shaping behaviour so that there is a longer-term view of investment in the capital and manufacturing infrastructure of this country based on security and the knowledge of the income that a company will have to invest in the future.

Even if the Government cannot withdraw these provisions on the cuts in capital allowances and reconsider those on the corporation tax, I urge them at least to allow us to reconsider the matter within 18 months, as the amendment says, to see the implications overall. I honestly do not understand the fear within Government of having an open examination of this matter within that time scale. If I were a Minister, I would welcome it. If I were an advocate for this policy, I would welcome the opportunity to come back in 18 months or so and, if necessary, to gloat at its success. I certainly would not want to feel that I was on the run and hiding from the consequences of the decisions that I had proposed in a Finance Bill of this nature.

Mr Love: I echo the final comments of my hon. Friend the Member for Hayes and Harlington (John McDonnell) about the amendment. It mentions capital allowances—that is what we are discussing—and the impact they will have on the UK economy is of particular concern at the moment.

We must comment on the backdrop to this debate, as the economy has stalled over the past six months. We had a very bad final quarter of 2010 and although things improved in the first quarter of this year, the reality is that everyone was expecting much larger growth in the first quarter to compensate to some extent for the lack of growth in the final quarter of last year. If one reads what the commentators and forecasters have said, one sees that there is genuine concern, which is reflected in the figures provided by the Office for Budget Responsibility. The predicted growth rate has gone from 2.6% to 1.7%, but that figure might already be out of date, so there could be further reductions in the rate.

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2.30 pm

It is suggested that unemployment will go up from 8% to 8.2% but, just as other Opposition Members have reflected on unemployment in their areas, I note that unemployment in my constituency is 9.3%, which is just under the London average. With the best will in the world, it is quite hard to see how we are going to turn the corner against the backdrop of what is happening internationally. One point that I think will hit home harder about the Government’s strategy is that the reductions in growth rates and the increases in unemployment mean that there will have to be an additional £43 billion-worth of borrowing over this Parliament at a time when the Government are telling us that the overwhelming strategy is to reduce the deficit.

The Government’s recent paper on the growth strategy also forms part of the backdrop. It would not be hyperbole to say that there has been widespread dismay about the report because it does not contain the germs of ideas that people can reasonably hope will have an impact on the growth of the economy. As far as enterprise zones are concerned, we have been here before: they shift employment around their local region but they do not make a great contribution to growth or employment creation. On the national insurance holiday for small companies outside London and the south-east, we understand from a report in the Financial Times that it is unlikely to measure up to the claims that were made for it when it was introduced last year. Whether it is because of bureaucracy or other problems, it is not being taken up by small businesses and the reality is that it is not going to contribute to strengthening our growth rate.

Andrew Gwynne: My hon. Friend is making a good start to his speech by setting out the background. Not long ago, when the Chancellor was promoting his Budget and introducing the measures that my hon. Friend is talking about, he did so on the basis that it was a Budget for growth. However, do not the OBR’s forecasts show that even with the measures in the Budget, growth is predicted to be lower than it would have been had Labour’s plans remained in place?

Mr Love: Absolutely. One has to question, as I am doing, the Government’s whole strategy, which they call a growth strategy but which does not appear to be delivering what we would expect from a proper growth strategy. Indeed, the previous Government’s growth strategy produced a far better result, as I shall discuss in a moment.

I want to cover two other issues that have caused quite a lot of surprise and concern in relation to the Government’s policies. First, on construction, the first quarter growth figures for this year show one glaring and prominent inadequacy is in construction activity, which is going down rapidly. If we add to that the incoherent policies that the Government are pursuing on house building, planning consents and oiling the wheels of the construction industry’s infrastructure, one can only be very gloomy about the prospects for the next year or two.

Secondly, I will mention manufacturing because it would be part of the report that we are suggesting the Government should produce. Manufacturing did rather

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better than I had suspected it would in the first quarter. Internationally, it seems to be delivering some of the changes in net exports that all the economic forecasters suggested, but we need a much more growth-oriented manufacturing sector if we are to bring about the changes that will be necessary if the changes in capital allowances are to go forward.

Those considerations lead me to conclude that the Budget proposals before us—the reduction in the headline rate and the compensatory measures widening the tax base to pay for that—are the main thrust of the Government’s growth strategy in real terms. The Government suggest that those measures will help to rebalance the economy. I look at all issues as objectively as I can and I have to say that, given the measures being undertaken in the comprehensive spending review in relation to the public sector, we certainly need to do something to boost the private sector. We are told that the measures will do that, but will they? That is the question being addressed in the amendment.

The Minister and the Chancellor have told us that a lower rate of corporation tax should act as a signal that we are open for business. There is some evidence that that approach has worked previously to a limited extent, but the question is whether it will work in the current economy. I am not a sceptic but, like the shadow Minister, I would like to see some Government projections about the number of businesses they expect to come from other countries either to expand existing operations or to start new ones here as a result of that signal.

In his Budget statement, the Chancellor proclaimed from the Treasury Bench that we have

“the lowest corporation tax in the G7”—[Official Report, 23 March 2011; Vol. 525, c. 955.]

but we already had the lowest rate of corporation tax in the G7. If all we are trying to do is send a signal, surely we could have proclaimed that. There is also the wider Group of Twenty to consider. Looking at countries such as Ireland we must ask whether it is feasible and rational for our strategy to be to compete with that in Ireland. As we know, there is debate in Northern Ireland about whether corporation tax should come down to the level in the rest of the island. There is genuine debate about that, but I do not think it is being suggested that we want to compete with Ireland. We compete with the major G7 economies and our rate is already below theirs. The cut in corporation tax will re-emphasise that, but what we would like to know from the Minister is what benefit that will deliver to the British economy.

Andrew Gwynne: Is it not a fact that for the international companies seeking to invest inwardly in the United Kingdom, corporation tax is only one small part of the overall picture? They are looking at much more than just the headline tax rate.

Mr Love: Yes, absolutely. If we look at business investment, which in some senses reflects how optimistic employers, manufacturers and other parts of the economy are about the future, we will see that we have not had the increase in business investment that all the forecasters, economists and coalition politicians have been telling us we should have. That reflects the wider issues in the economy that should be of such major concern. We cannot expect a cut in corporation tax to solve all the problems, but the merit of the amendment is that it

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proposes that the Government try to indicate how much additional growth and employment will be created as a result. In the previous debate, the Minister suggested that a cut in corporation tax would boost investment.

The Second Deputy Chairman of Ways and Means (Dawn Primarolo): Order. I appreciate that the Government themselves have said that corporation tax and capital allowances are part of a package, and I have therefore allowed a linked debate, even though we have finished debating corporation tax. However, the hon. Gentleman needs to focus a little more on capital allowances, which are the subject of the amendment.

Mr Love: Thank you for your guidance, Ms Primarolo. I will move swiftly on to capital allowances. The Government have discussed the need to widen the tax base and they have told us that reducing capital allowances is partly a method of paying for the cut in the headline rate. As I mentioned in an intervention, that phenomenon has been apparent in most western countries in recent years and, indeed, all the economists project that there will be much greater competition in business taxes. Corporation tax is likely to continue to come down, and the reduction will be partly made up by widening the tax base.

Like my right hon. Friend the Member for Delyn (Mr Hanson), I am prepared to consider the changes to capital allowances, although I am concerned about the cut in the annual investment allowance from £100,000 to £25,000. I am perfectly happy, however, to look at that if we are reassured that the proposal in the amendment will make a significant difference. As has been said—and I have said so myself—the Office for Budget Responsibility added a rather sceptical note to the debate by suggesting, even though it had been informed at a late stage of the 1% cut in corporation tax, that that would not have a great impact on growth.

Finally, I want to focus on the issue of who will benefit from the changes to capital allowances. As a number of Opposition Members have said, high-profit, low-investment companies will be the main beneficiaries of the package, which is unfair and, if I may say so, will not achieve the rebalancing of the economy that the Chancellor has promoted for a considerable period, away from financial services towards the manufacturing and production of export-oriented goods. The change militates against all that. In particular—and I refer to the cut from £100,000 to £25,000—it will penalise manufacturing, particularly businesses with high capital costs. My right hon. Friend the Member for Delyn mentioned the motor industry and others, but I am concerned, because I have a number of small, capital-intensive manufacturers in my constituency. Sadly, they are only a remnant of the manufacturing sector that we had 25 or 30 years ago, but we need them and we need to promote them. I am therefore worried about the Government’s proposals.

2.45 pm

Andrew Gwynne: My hon. Friend has been incredibly generous in accepting interventions. I am not sure of the extent of the manufacturing base in his constituency, but I imagine that it is pretty similar to mine. Small manufacturing industries tend, as he said, to be a remnant

4 May 2011 : Column 710

of the larger-scale manufacturing that once operated in our constituencies. Does he not regard the capital allowances scheme as a mechanism for manufacturing industries, however small, to diversify into the new sector?

Mr Love: I agree. If we take the coalition at face value, it has suggested that we need a vibrant small business and manufacturing sector, much of it consisting of small businesses. I would think that it would want to promote that by incentivising it through the taxation system. One wonders whether the measure would achieve that. I do not want to suggest, without any concrete figures, that that will in fact happen. We urge the Government to produce those figures, so that we can all make a judgment. Indeed, they can make a judgment about whether their policy has achieved their objectives.

Jim Fitzpatrick: My hon. Friend, like most of the speakers in this debate, is generously supporting the modest amendment tabled by our right hon. Friend the Member for Delyn. It does not attack what the Government are trying to do; it is just asking for

“an assessment of the impact of the changes”.

We are therefore giving the Government the benefit of the doubt, as their proposal may well be beneficial and positive. As my right hon. Friend has said, the Treasury will examine, monitor and scrutinise the impact of the measure on businesses, so what is wrong about publishing an account as suggested by the amendment?

Mr Love: I agree, as other Members do, that that is not an unreasonable request. If the Government choose not to support the amendment, are they concerned about the impact of capital allowances and the prospects for the UK economy? One wonders whether they do not want the debate that would ensue in 2012 when, if we are to believe Government figures and the OBR, the economy should turn a corner. That would be an appropriate time at which to carry out that investigation.

There are 5 million small businesses in this country, and it is a symbol of the unity that we occasionally achieve in the Chamber that Members from all parts of the House recognise the role that they play now and, importantly, in future. If we add to the impact of capital allowances on small businesses the failure of the banking system in this country to provide the credit necessary to expand the sector, I wonder whether we can achieve all that the Government hope to achieve through the shift from public sector to private sector activity. I merely raise that as an additional issue, but I hope that the Government will address the credit needs of the small business sector a little more robustly. That is what underpins the amendment.

John McDonnell: I apologise, Ms Primarolo, for leaving the Chamber earlier. Should there not be some consultation of small businesses in particular so that they could describe the nature of the investments that they would forgo if they failed to secure the capital allowances that they normally secured under previous regimes? That would allow the Government to assess the overall impact of the loss of those investments to sectors of industry and on employment overall.

Mr Love: My hon. Friend makes my point. That is exactly why, once the changes have been introduced, we need to review and assess their impact, particularly on

4 May 2011 : Column 711

small businesses and more generally on the economy. We would like to be reassured that the headline rate cap with the changes to the allowances will make a material and positive difference to the economy.

I commend the amendment to the Committee and in particular to the Minister. I hope he will consider carefully what is asked for and agree that it is a constructive amendment that he can support. I hope that together we can make a real difference to the prospects for the UK economy.

Mr Gauke: Amendment 6 would require the Chancellor to publish by 31 October 2012 an assessment of the impact of the proposed changes to capital allowances on the UK economy, as we have heard. The amendment was tabled to clause 10, which reduces the rates of writing-down allowance on the main rate pool of plant and machinery expenditure to 18% and on the special rate pool to 8%. Before I deal with the amendment, I will explain the purpose of clause 10, which is key to the amendment.

Capital allowances allow businesses to write off their expenditure on capital assets, such as plant and machinery, against their taxable income. They act as a simple, statutory system in place of commercial depreciation. Capital allowances are given at different rates, depending on the year of investment and the type of asset acquired. The principal year-on-year allowance for plant or machinery expenditure is the writing-down allowance. The main rate is currently 20% per annum, and the special rate is 10%.

Both are calculated on the reducing-balance basis. We are making changes also to the annual investment allowance, in clause 11, reducing it to £25,000, as we have heard, and extending the short-life assets regime from four to eight years, in clause 12.

The changes announced last year, which are given effect by clauses 10 and 11, enable a reduction in the main rate of corporation tax, which will reaffirm Britain’s competitive tax system and support enterprise and growth. The right hon. Member for Delyn (Mr Hanson) was right to highlight the fact that this is part of a package. In his earlier remarks, the hon. Member for Edmonton (Mr Love) pointed out that this was a partial contribution. There is none the less a gap, and further funding has been found—from the bank levy, for example—which has enabled us to reduce the corporation tax rate.

We have already debated the benefits of reducing the corporation tax rate and we have returned to that topic to some extent in the present debate. I note that it does not have the support of all hon. Members, although it is supported by the Opposition Front-Bench team. It is helpful to repeat what was said by John Cridland, the director general of the CBI:

“The extra 1p cut in corporation tax will help firms increase investment.”

The objective is not just to reduce the amount of tax that companies pay, but to enable them to invest and grow businesses in the United Kingdom. I am pleased that that is welcomed throughout much of the Chamber.

Our initial assessment of the package as a whole suggested that that would lead to an additional £13 billion of business investment by 2016 by making the cost of capital investment cheaper. The additional reductions in corporation tax rate and the extension of the short-life

4 May 2011 : Column 712

assets regime will help to increase further the levels of investment by business. We estimate that the overall effect of these measures will be to reduce the tax liabilities of the manufacturing sector by around £700 million by 2015. The changes to the rates of writing-down allowances do not mean that businesses will not continue to receive full tax relief for their investments in plant and machinery. Rather, the relief will be over a slightly extended time frame.

Let me give an example. Where it would have taken 11 years under the current rate to write off more than 90% of the cost of a machine, it will now take 12 years. Meanwhile, the rates will continue to align broadly with average rates of depreciation across the economy. This does not mean that we intend to remove capital allowances in favour of pure accounting depreciation.

On the issue raised by my hon. Friend the Member for Amber Valley (Nigel Mills), the previous Government did consult in some detail on their reform of corporation tax between 2002 and 2004. I am sure you remember it well, Ms Primarolo. The business response to that consultation was strongly in favour of retaining capital allowances. It was argued that capital allowances provide certainty and a level playing field, with the same rates of allowances applying to all. The flexibility of the system allows the pooling of expenditure and the ability to claim less than full allowances, depending on the individual’s business circumstances. My hon. Friend set out the case for a different approach to capital allowances. He brings great expertise on the matter and there is ongoing debate, but we do not intend to reopen discussion of that point.

Nigel Mills: I am grateful to my hon. Friend for reminding me of that study from almost a decade ago. I gently point out to him that the rate of capital allowances was quite a bit higher at the time of the study. If he did the same exercise now, he might get a slightly different answer.

Mr Gauke: Again, my hon. Friend raises an interesting point. We look forward to receiving any representations that he may wish to make on that. He is right to say that the rate of capital allowances has changed since 2004, and he highlighted in an intervention the fact that the previous Government—as I am sure you will recall well, Ms Primarolo—reduced writing-down allowances in 2007, a point that my hon. Friend made to the right hon. Member for Delyn.

In response to those Opposition Members who raised their concern about the approach that the Government have been taking, I point out the approach taken by their Government in the previous Parliament, when they were all Members of this place. Whereas we are reducing the writing-down allowance from 20% to 18%, the previous Government reduced it from 25% to 20%. In our case that is a contribution towards reducing the main rate of corporation tax from 28% to 23%. The previous Government reduced it from 30% to 28%. Ours is a much more generous package for business and as a consequence a much better package for manufacturing than that contained in the 2007 Budget, where essentially the entire reduction in corporation tax from 30% to 28% was paid for by the reduction in the writing-down allowance from 25% to 20%.

4 May 2011 : Column 713

On amendment 6, the Government are fully committed to providing greater transparency on the impact of tax measures. I am sure Opposition Members have examined the tax information and impact notes that we published on 9 December relating to clauses 10 and 11, and the additional note that we published at Budget in relation to clause 12. It is clear that there is no need to publish a report into the impact of the capital allowances changes. We have provided a great deal of detail already, but for those hon. Members who have not had the opportunity to read the published notes, let me provide a brief summary.

The note states:

“The OBR assessment of the package was that the cuts in CT”—

that is, corporation tax—

“rates more than offset the reductions in investment allowances”,

and that the businesses affected

“will benefit from related reductions in the rates of CT.”

As I said earlier, we expect the overall effects of the cuts in corporation tax rates and capital allowances changes to lead to an additional £13 billion of investment, and the additional changes to increase that further.

Although this is not strictly in scope, as the amendment is to clause 10, I hope I may be allowed to make a few comments about the other changes to capital allowances in the Bill, to which we shall return in Committee upstairs. The reduction in the annual investment allowance to £25,000 is estimated to affect between 100,000 and 200,000 businesses. As the tax information and impact note clearly states, however:

“The CT reform package will promote higher levels of business investment than would otherwise have been the case.”

Further, more than 95% of businesses in the UK will be unaffected, as the qualifying capital expenditure will continue to be completely covered by the annual investment allowance, so companies, be they small, medium or large, will benefit from the CT cuts, including the cut in the small profits rate in clause 5, while most unincorporated businesses, which by their nature tend to be the smallest businesses in the economy, will still have their expenditure covered by the annual investment allowance.

3 pm

Clause 12 contains changes to the short-life assets regime, which will enable a business to obtain allowances that equate to the actual depreciation of the asset over the period of actual ownership. That change was described by Terry Scuoler, the chief executive of the Engineering Employers Federation, the country’s leading manufacturing organisation, as a change that

“will make the tax system more efficient and remove in part barriers to investment.”

The change will better recognise the cost to business of investing in modern machines with shorter lives.

I can understand the right hon. Member for Delyn wanting to table an amendment calling for a report. It is a mechanism that Oppositions down the ages have used; it has been well used during our debates in Committee of the whole House and, indeed, I suspect that I may well have tabled such amendments in the past as an Opposition Front Bencher. They tend to be tabled and they tend to be rejected. Of course, the Government will

4 May 2011 : Column 714

always keep matters under review, but the proposed amendment does not add very much of great value. The changes that we are setting out to corporation tax are a vital component of the reforms that are essential if we are to achieve our goal of creating the most competitive tax system in the G20, and we have already set out clearly the impact of the changes to capital allowances.

The right hon. Gentleman raised the question about employment and manufacturing, but the fact is that in the three months to February employment rose by 143,000, while in the first quarter of this year manufacturing grew by 1.1%, and in Q4 of 2010 the net rate of return of manufacturing companies rose to 10.4%, up from 8.6% in Q3.

We are taking steps to support manufacturing and to make the UK more competitive with a stronger tax system. I therefore propose that the clause stand part of the Bill and ask the right hon. Gentleman to withdraw his amendment.

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): I call Mr Hanson.

Mr Hanson: Good afternoon, Mr Evans. Can I welcome you to the Chair of this seemingly unending Committee, which has been going on for the past couple of days?

I have listened very carefully to the Minister, but I think that the amendment is very modest: we are asking for a report in 18 months’ time, in October 2012, on the impact of the changes. We ask for that, because my right hon. and hon. Friends retain an element of concern that the cut in manufacturing capital allowances will damage some manufacturing sectors. Based on those concerns, we wish to continue to reflect on those matters, and I therefore wish to put the amendment to a Division, so that we can place on the record our concerns about the capital allowance cuts and state that we wish to review the matter very clearly in 18 months’ time, in October 2012.

Question put, That the amendment be made.

The Committee divided:

Ayes 121, Noes 249.

Division No. 267]

[3.3 pm


Abbott, Ms Diane

Abrahams, Debbie

Ainsworth, rh Mr Bob

Alexander, Heidi

Ali, Rushanara

Anderson, Mr David

Bailey, Mr Adrian

Balls, rh Ed

Barron, rh Mr Kevin

Bayley, Hugh

Beckett, rh Margaret

Begg, Dame Anne

Benn, rh Hilary

Berger, Luciana

Blunkett, rh Mr David

Brennan, Kevin

Brown, Lyn

Brown, rh Mr Nicholas

Burnham, rh Andy

Byrne, rh Mr Liam

Campbell, Mr Alan

Campbell, Mr Ronnie

Chapman, Mrs Jenny

Clwyd, rh Ann

Coffey, Ann

Cooper, Rosie

Cooper, rh Yvette

Creasy, Stella

Cruddas, Jon

Cryer, John

Cunningham, Mr Jim

Cunningham, Tony

Dakin, Nic

David, Mr Wayne

Denham, rh Mr John

Donohoe, Mr Brian H.

Dowd, Jim

Eagle, Ms Angela

Eagle, Maria

Efford, Clive

Elliott, Julie

Ellman, Mrs Louise

Engel, Natascha

Fitzpatrick, Jim

Flint, rh Caroline

Fovargue, Yvonne

Gapes, Mike

Gardiner, Barry

Glindon, Mrs Mary

Goodman, Helen

Green, Kate

Gwynne, Andrew

Hanson, rh Mr David

Hendrick, Mark

Heyes, David

Hilling, Julie

Hodge, rh Margaret

Hodgson, Mrs Sharon

Hopkins, Kelvin

Hosie, Stewart

Howarth, rh Mr George

Jackson, Glenda

James, Mrs Siân C.

Johnson, rh Alan

Johnson, Diana

Jones, Mr Kevan

Kaufman, rh Sir Gerald

Lavery, Ian

Lewis, Mr Ivan

Lloyd, Tony

Love, Mr Andrew

MacShane, rh Mr Denis

Mactaggart, Fiona

Mahmood, Mr Khalid

Mahmood, Shabana

McCann, Mr Michael

McDonagh, Siobhain

McDonnell, John

McFadden, rh Mr Pat

McGovern, Alison

Meacher, rh Mr Michael

Meale, Mr Alan

Mearns, Ian

Miliband, rh David

Miller, Andrew

Morris, Grahame M.


Mudie, Mr George

Nandy, Lisa

Pearce, Teresa

Phillipson, Bridget

Pound, Stephen

Raynsford, rh Mr Nick

Reed, Mr Jamie

Reynolds, Emma

Robertson, John

Robinson, Mr Geoffrey

Rotheram, Steve

Ruddock, rh Joan

Sharma, Mr Virendra

Sheerman, Mr Barry

Skinner, Mr Dennis

Slaughter, Mr Andy

Smith, rh Mr Andrew

Stringer, Graham

Stuart, Ms Gisela

Sutcliffe, Mr Gerry

Thomas, Mr Gareth

Timms, rh Stephen

Trickett, Jon

Turner, Karl

Twigg, Derek

Twigg, Stephen

Umunna, Mr Chuka

Vaz, Valerie

Walley, Joan

Watts, Mr Dave

Whitehead, Dr Alan

Wicks, rh Malcolm

Williamson, Chris

Winnick, Mr David

Winterton, rh Ms Rosie

Tellers for the Ayes:

David Wright and

Phil Wilson


Adams, Nigel

Afriyie, Adam

Aldous, Peter

Amess, Mr David

Andrew, Stuart

Arbuthnot, rh Mr James

Bacon, Mr Richard

Bagshawe, Ms Louise

Baker, Norman

Baker, Steve

Baldry, Tony

Baldwin, Harriett

Barclay, Stephen

Barker, Gregory

Baron, Mr John

Barwell, Gavin

Bebb, Guto

Bellingham, Mr Henry

Benyon, Richard

Beresford, Sir Paul

Bingham, Andrew

Binley, Mr Brian

Blackman, Bob

Blunt, Mr Crispin

Boles, Nick

Bradley, Karen

Brady, Mr Graham

Brake, Tom

Bray, Angie

Brazier, Mr Julian

Brine, Mr Steve

Brokenshire, James

Bruce, Fiona

Bruce, rh Malcolm

Buckland, Mr Robert

Burley, Mr Aidan

Burns, rh Mr Simon

Burrowes, Mr David

Burstow, Paul

Burt, Alistair

Cable, rh Vince

Cairns, Alun

Carmichael, rh Mr Alistair

Carmichael, Neil

Cash, Mr William

Chishti, Rehman

Clappison, Mr James

Clarke, rh Mr Kenneth

Clifton-Brown, Geoffrey

Coffey, Dr Thérèse

Collins, Damian

Crabb, Stephen

Crouch, Tracey

Davies, Philip

de Bois, Nick

Dinenage, Caroline

Djanogly, Mr Jonathan

Dorries, Nadine

Doyle-Price, Jackie

Duncan Smith, rh Mr Iain

Dunne, Mr Philip

Ellis, Michael

Ellison, Jane

Ellwood, Mr Tobias

Elphicke, Charlie

Eustice, George

Evans, Jonathan

Evennett, Mr David

Fabricant, Michael

Fallon, Michael

Featherstone, Lynne

Foster, rh Mr Don

Francois, rh Mr Mark

Freeman, George

Freer, Mike

Fuller, Richard

Garnier, Mr Edward

Gauke, Mr David

Gibb, Mr Nick

Gilbert, Stephen

Gillan, rh Mrs Cheryl

Glen, John

Goldsmith, Zac

Goodwill, Mr Robert

Grant, Mrs Helen

Gray, Mr James

Grayling, rh Chris

Green, Damian

Greening, Justine

Grieve, rh Mr Dominic

Griffiths, Andrew

Gummer, Ben

Gyimah, Mr Sam

Hames, Duncan

Hammond, rh Mr Philip

Hammond, Stephen

Hancock, Matthew

Hands, Greg

Harper, Mr Mark

Harris, Rebecca

Hart, Simon

Harvey, Nick

Heald, Oliver

Heath, Mr David

Heaton-Harris, Chris

Hemming, John

Henderson, Gordon

Hendry, Charles

Herbert, rh Nick

Hinds, Damian

Hoban, Mr Mark

Hollingbery, George

Hollobone, Mr Philip

Hopkins, Kris

Horwood, Martin

Howarth, Mr Gerald

Howell, John

Hunt, rh Mr Jeremy

Hurd, Mr Nick

James, Margot

Jenkin, Mr Bernard

Johnson, Gareth

Johnson, Joseph

Jones, Andrew

Jones, Mr David

Jones, Mr Marcus

Kawczynski, Daniel

Kelly, Chris

Kirby, Simon

Knight, rh Mr Greg

Kwarteng, Kwasi

Lamb, Norman

Lancaster, Mark

Lansley, rh Mr Andrew

Laws, rh Mr David

Leadsom, Andrea

Lee, Jessica

Lee, Dr Phillip

Lefroy, Jeremy

Leigh, Mr Edward

Leslie, Charlotte

Lidington, rh Mr David

Lilley, rh Mr Peter

Lord, Jonathan

Loughton, Tim

Luff, Peter

Macleod, Mary

Main, Mrs Anne

May, rh Mrs Theresa

McCartney, Jason

McIntosh, Miss Anne

McPartland, Stephen

McVey, Esther

Menzies, Mark

Mercer, Patrick

Metcalfe, Stephen

Miller, Maria

Mills, Nigel

Moore, rh Michael

Mordaunt, Penny

Morris, David

Morris, James

Mosley, Stephen

Murray, Sheryll

Murrison, Dr Andrew

Neill, Robert

Newton, Sarah

Nokes, Caroline

Nuttall, Mr David

O'Brien, Mr Stephen

Offord, Mr Matthew

Ottaway, Richard

Paice, rh Mr James

Patel, Priti

Pawsey, Mark

Penrose, John

Perry, Claire

Phillips, Stephen

Pickles, rh Mr Eric

Pincher, Christopher

Pugh, John

Raab, Mr Dominic

Randall, rh Mr John

Reckless, Mark

Redwood, rh Mr John

Rees-Mogg, Jacob

Reid, Mr Alan

Robathan, rh Mr Andrew

Robertson, Hugh

Rogerson, Dan

Rosindell, Andrew

Rudd, Amber

Ruffley, Mr David

Russell, Bob

Rutley, David

Scott, Mr Lee

Selous, Andrew

Sharma, Alok

Shelbrooke, Alec

Simmonds, Mark

Simpson, Mr Keith

Smith, Miss Chloe

Smith, Henry

Smith, Julian

Smith, Sir Robert

Soames, Nicholas

Soubry, Anna

Spencer, Mr Mark

Stanley, rh Sir John

Stevenson, John

Stewart, Bob

Stewart, Iain

Stewart, Rory

Streeter, Mr Gary

Stride, Mel

Stuart, Mr Graham

Swales, Ian

Swayne, Mr Desmond

Swire, rh Mr Hugo

Syms, Mr Robert

Tapsell, Sir Peter

Teather, Sarah

Timpson, Mr Edward

Truss, Elizabeth

Turner, Mr Andrew

Tyrie, Mr Andrew

Uppal, Paul

Vaizey, Mr Edward

Vara, Mr Shailesh

Villiers, rh Mrs Theresa

Walker, Mr Robin

Wallace, Mr Ben

Walter, Mr Robert

Watkinson, Angela

Weatherley, Mike

Webb, Steve

White, Chris

Whittaker, Craig

Whittingdale, Mr John

Wiggin, Bill

Willetts, rh Mr David

Williamson, Gavin

Willott, Jenny

Wilson, Mr Rob

Wollaston, Dr Sarah

Wright, Simon

Yeo, Mr Tim

Young, rh Sir George

Zahawi, Nadhim

Tellers for the Noes:

Mr Brooks Newmark and

Jeremy Wright

Question accordingly negatived.

4 May 2011 : Column 715

4 May 2011 : Column 716

4 May 2011 : Column 717

Clause 10 ordered to stand part of the Bill.

Clause 35

Reduction in childcare relief for higher earners

Question proposed, That the clause stand part of the Bill.

Mr Hanson: Once again, Mr Evans, I welcome you and look forward to your time in the Chair as we debate clause 35 of the Finance Bill. You will of course be aware that we tabled an amendment to the clause that you have chosen not to select, which is your prerogative; we are relaxed about that. However, it is important that we test and discuss the issues in the clause with Ministers to examine its impact, as well as the impact of other changes that form part of this package of measures.

Our concerns centre on the effects of the various changes that have been made to child care support. Clause 35 introduces changes to the higher rate taxpayer relief for child care—an issue that caused some discussion in the last months of the previous Labour Government and will undoubtedly cause further discussion today. We need to look at the clause not only in its own context but in the light of the wider taxation and benefit policies that the Government are progressing. This is part of a number of measures that will address a range of issues to do with child care and families generally. I also want to consider some of the technical matters that outside groups have raised with me and with other hon. Members regarding the wording of the clause and, if I may slightly stray outside the scope of the debate, the wording of schedule 8, which is related to it and to which we will return in Committee in due course.

The background to clause 35 will be familiar to my right hon. Friend the Member for Edinburgh South West (Mr Darling) because it had its genesis in discussions that took place as part of the previous Labour Government’s proposals. Members will be aware that

4 May 2011 : Column 718

in 2009 my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown), as Prime Minister, announced to the Labour party conference proposals that he brought before the House later that year regarding child care relief and basic rate relief.

In government, Labour’s plan was to use the savings from limiting child care relief to basic rate relief to fund an expansion of child care places for two-year-olds in England, with potential consequential reliefs and amendments for Wales, Scotland and Northern Ireland. There was some controversy and discussion on those matters. The Exchequer Secretary will be aware that there was extensive discussion in the Labour Government about those matters, and that under the leadership of my right hon. Friend the Member for Kirkcaldy and Cowdenbeath, they settled on limiting child care relief to basic rate relief, with the purpose of funding an expansion of child care places for two-year-olds.

I would like clarification from the Exchequer Secretary today on—[ Interruption. ] Don’t worry, I am still here. The hon. Member for Crewe and Nantwich (Mr Timpson) will know that one picks up the occasional sedentary remark. Unless I reflect back on the last remark, it will not appear in Hansard, and on this occasion, I will not reflect back on it. As can be seen, Government Members have expressed an interest in my speech.

The Government have made changes to the Labour Government’s proposals on basic rate relief and the expansion of child care places for two-year-olds. Indeed, the Government’s proposals are markedly different on the child care element, to which the relief is linked. The Labour Government had planned some 250,000 child care places for two-year-olds from low-income families, although I accept that that was scaled down to about 65,000 child care places. The Government proposals before the Committee will increase from 10 to 15 the hours for the pilot of child care places for 28,000 children. There is a significant expenditure saving in clause 35, compared with the Labour Government proposals. I think that it is worth focusing on those issues today, because if the scope of the discussion that I have given is accepted, this measure cannot be divorced from the reasons why the Labour Government intended to undertake the purpose of clause 35 and what the current Government are now doing with that resource.

From January this year, value added tax will cost families with children an extra £450 a year on average. That is one of a range of measures on the table that will press hard on the ability of individuals to provide child care at affordable levels.

The Government are pressing ahead with the change that my right hon. Friend the Member for Kirkcaldy and Cowdenbeath proposed in government to pay for the trebling of the number of free child care places available to the most deprived two-year-olds. We accept that the relief, which is manifested in clause 35, was badly targeted. That is why we made those changes in government, and our proposal would have paid for more of the poorest in our society to have child care. I want the Exchequer Secretary to explain how the resultant savings from the proposals will be invested to support issues such as child care for people in our community.

At the same time, the Government are hitting family finances in other ways, such as through child tax credits and through child benefit being frozen, and indeed being cut for many people in the years ahead. The families who will be affected by this measure will soon

4 May 2011 : Column 719

be affected by other measures, particularly that on child benefit. The taxation changes in clause 35 need to be seen in the light of the decision to withdraw child benefit from April 2013 from households containing at least one higher rate taxpayer.

Mr Gauke: I am following the right hon. Gentleman’s speech closely. Will he clarify for the Committee whether the Labour party has a specific proposal on what the savings from this measure should be used for? Is it committed to using them for nursery places, or for something else?

Mr Hanson: As I have said, the Labour Government’s original proposal, which was announced by the then Prime Minister, was to use the resources saved from this badly targeted tax relief to support the extension of child care for two-year-olds in poorer families. Our purpose at the time was to expand the number of places to about 250,000. There were discussions in the Government, and the Exchequer Secretary knows that the figure we settled on was about 65,000 child care places. I understand that he proposes to stick to the pilot of 28,000 places, and I would be grateful for clarification on that, and to extend the number of hours to 15 hours per week. That is significantly less than what was proposed by the previous Government.

Mr Gauke: Does the Labour party remain committed to its proposals in government to use that funding for 65,000 child care places?

Mr Hanson: Actually, Ministers answer the questions and the Opposition ask them. I have been clear with the Exchequer Secretary about the proposal that we outlined in government, and that will be our view. We are potentially four years from government.

I am simply pressing the Exchequer Secretary to explain what the impact is of clause 35, and why there has been a significant change—unless he wishes to clarify that further—to the proposals announced by the previous Government on extending child care for two-year-olds. It is important that we know not just what the clause means, because it will restrict child care support for higher rate families. The purpose of our proposal in government was to expand child care arrangements for poorer and lower-income families. The Government are now squeezing the middle while—unless the Exchequer Secretary clarifies that the contrary is the case—not providing the same level of child care places that were originally proposed by the Labour Government.

This measure is coupled with a range of other measures, which are not before the Committee in clause 35, but which I hope you will give me the scope to touch on, Mr Evans. There are real-terms cuts to child benefit, which is frozen at £75.40 this year for families; the baby element of child tax credits, which is worth £545 a year, has been scrapped; benefits have been set on a permanently lower path of inflation; the basic and 30-hour elements of working tax credit have been frozen; and the second income threshold for the family element of child tax credit has been cut. Those measures all add to the pressures on child care responsibilities and on families.

Andrew Gwynne: My right hon. Friend has set out a series of measures that the Government are implementing in the Budget. Does he find it ironic that those measures

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come from the Conservative party, given that the Prime Minister claimed before the general election that he would lead the most family friendly Government in history? Those measures are penalising hard-working families, and women more than men.

Mr Hanson: Indeed. It is a fact of life that child care often remains the prime responsibility of the woman. Child benefit is paid to the woman for that purpose. Clause 35 does not deal with child benefit—I do not wish to test your patience, Mr Evans—but, in principle, the purpose of the Labour Government’s original policy proposals was to expand free child care for people who could not afford it otherwise, to help to support women to get back into work and to help individuals to support their children.

As I understand it—I am willing to be contradicted and to hear clarification from the Minister—the impact of the proposals is that fewer child care places will be available than the previous Labour Government proposed. That must be a matter of some concern. Indeed, in our original amendment, we proposed a review of child care provision to consider the impact of all these measures. Clause 35 proposes changing higher-rate relief to basic-rate relief for higher-rate taxpayers, but we should not consider it in isolation; it is only one change among many on child benefit and the other issues that I have mentioned that raise concern among the official Opposition.

3.30 pm

The Minister will know, because we discussed this in the debate on the last group of amendments, that the OECD has recently released a report that warned that child poverty was set to rise, thanks to the Government’s policies. I am proud of the fact that one of things that we did was to lift more than 500,000 children out of poverty. Sadly, it looks as though that policy will be reversed. The impact of clause 35 and the Government’s proposals on spending the associated resources represent a different choice from the one that the previous Labour Government intended to make, and the Minister needs to focus on that.

The Labour Government made progress on tackling child poverty. When we left office, it was expected that about 1 million children would be lifted out of poverty by our actions. The impact of clause 35, as I read it, relates to high earners. I accept that the relief was badly targeted, but I repeat that I want the Minister to clarify how the changes in expenditure that he proposes as a result of clause 35 will impact on child poverty issues.

The OECD has found that

“progress in the UK has stalled, and”

child poverty

“is now predicted to increase”.

The measures in clause 35 will not assist the progress that the previous Labour Government made in providing a lift out of child poverty for the poorest families in society. At a stroke, unless the Minister contradicts me, by not using the expenditure as originally planned by the previous Government, he will be removing the ability to invest in the child care places that were planned for the poorest members of our society.

Mr Geoffrey Robinson (Coventry North West) (Lab): My right hon. Friend touches on the great steps made under the previous Government to alleviate child poverty.

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Was he by any chance present during Prime Minister’s Question Time today, when the Prime Minister made it clear that we had reached the end of the road in terms of taxation measures to achieve that? In particular, he said that he was absolutely against further redistributive measures. The proposals, which are separate from straightforward taxation measures, will take further steps to aggravate, not alleviate, child poverty.

Mr Hanson: The Minister has an opportunity to clarify the Government’s approach to the provision of child care. That is clearly linked to clause 35, because the Labour Government’s original proposals were designed to meet the objectives that my hon. Friend has indicated. That point is made, and I want the Minister to clarify his approach to child poverty and how the Government propose to fund child care places for two-year-olds.

Agencies and organisations outside the House have made a range of comments on clause 35. It is worth giving the Minister an opportunity to respond to them, and I hope that he will offer some reassurance. Some of the comments also relate to the accompanying schedule. I appreciate that the Committee is not considering that now, but it is very much linked to the clause.

The Low Incomes Tax Reform Group, which, as the Minister will know, is an initiative of the Chartered Institute of Taxation, has raised with me some real concerns about clause 35 and schedule 8. It is concerned about the complex interactions of tax-free vouchers with tax credits and child care cost support, the dynamics of which it believes changed again after 6 April 2011. It is important that the Minister responds to its concern about the poor channels of advice for employees and employers about the implementation of the scheme proposed under clause 35.

The group believes that there may have been errors—under the previous Government, I admit—in HMRC’s online calculator, and it is concerned about how the implementation of these measures will be taken forward. It is particularly concerned that although the system is designed for fairness, the results that it produces may not be fair. I shall give some examples, if I may, of its concerns about clause 35.

The group is particularly concerned that the clause will remain reliant on interpretation according to guidance published in draft on HMRC’s website, which it believes is inconsistent with the clause. I am not making any assessment of the group’s judgment call on that matter, I am simply placing it on the table because this Committee debate gives the Exchequer Secretary the opportunity to examine whether that concern is justified. He may be able to provide some comfort by giving his interpretation.

The group has raised the concern that under schedule 8 —the schedule will be discussed in the Public Bill Committee, but it is worth mentioning now—the changes will apply only to those whose employer estimates them to be higher rate or additional rate taxpayers at a particular point in time, rather than to those who are actually found to be so by a final assessment. It is important that either now or when we discuss schedule 8 in the Public Bill Committee, the Exchequer Secretary reflects upon that concern and provides some clarity about when the assessment will be made on whether individuals are higher rate or additional rate taxpayers.

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We need to know at what stage in the financial year that assessment will be made, who will make it, how much of a burden it will be on employers and employees and whether the figures and facts that HMRC will use in the calculation are sound and to his satisfaction. They must be seen to be just and fair.

The Low Incomes Tax Reform Group has expressed concern that the change may have equality impacts, for example on employees who become long-term sick or disabled, on women or on those who switch to part-time work in the course of the year. It suggests that there should be some flexibility in the interpretation of clause 35 and schedule 8.

The Library has calculated that overall, families will be some £1,700 a year worse off due to the Government’s tax and benefit changes, of which clause 35 is one. As my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) mentioned, the Prime Minister promised to lead the most family-friendly Government ever, and I should like to hear from the Exchequer Secretary where the proposal, when linked to the proposals on child benefit and the working tax credit and the others that we know about, fits into the Government’s overall strategy for child care.

We accept that there will have to be difficult and challenging decisions, and I reconfirm that the previous Labour Government wished the targeting now set out in clause 35 to progress.

Grahame M. Morris (Easington) (Lab): Is there not also an issue to consider about clause 35 breaking the principle of universality—the idea that benefits apply irrespective of income?

Mr Hanson: There is, and my hon. Friend will know that we have been very clear that the Government’s wider proposed changes to child benefit are not fair or equitable, and that child benefit should remain universal. The former Prime Minister, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath, and the former Chancellor, my right hon. Friend the Member for Edinburgh South West, decided that child care was poorly targeted, but that if universality was to be broken, we must provide help and support to the poorest families to ensure that they had child care for two-year-olds. The Labour Government planned some 65,000 to 68,000 child care places as a result of the measures that are now in clause 35. The current Government have accepted those measures in principle, as we did, but unless the Exchequer Secretary tells me otherwise I do not believe they are delivering the outputs that we planned as a benefit of saving resources.

John Cryer (Leyton and Wanstead) (Lab): We know that whenever means-testing is put in place, there is a cost because of the bureaucracy that is needed to administer it. Does my right hon. Friend have any idea how much this particular method of means-testing will cost?

Mr Hanson: My hon. Friend raises an interesting point. That is another issue that we wish to explore not just today, but when we debate schedule 8 upstairs in Committee at a later date. The element of complexity and randomness in the application of the clause has been raised with me by the Low Incomes Tax Reform Group. It is incumbent on the Exchequer Secretary to answer those criticisms before we consent to the clause.

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There are choices to be made in tackling the deficit and we must look at the options. The then Labour Government made the same choice, but would have ensured that more child care places were available.

Andrew Gwynne: My right hon. Friend makes his case on clause 35 and says that the previous Labour Government considered the possibility of targeting. However, they did so in the context of a wider range of measures available to families to support them in the upbringing of children. Does he share my dismay that clause 35 is being introduced against a backdrop of absolutely clobbering families hard and removing benefits that have made a huge difference to them in my constituency, and no doubt in his?

Mr Hanson: If I may, Mr Evans, I shall try to touch briefly on the wider policies to which my hon. Friend refers. I am conscious that clause 35 is specific to higher-rate tax relief—

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. I am delighted that Members mention clause 35 from time to time, but it is really quite specific. This is not a general debate on child care or indeed on other policies. Perhaps we could focus more on the provisions contained in clause 35.

Mr Hanson: We have known each other since our elections to the House on 9 April 1992, Mr Evans, and as ever, I shall try to keep to your strictures as the good Chairman that you are. You will note that amendment 8, which you did not select, would have prompted a wide-ranging discussion on the impact on child care. I am trying to focus on clause 35 and not to stray into amendment 8 or the issues that my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) touched on. However, those issues are important when we are looking at the impact of clause 35 on a particular group of people, because that same group of people will lose child benefit and a range of other child care support measures because of their income, and that will shatter the principle of universality that my hon. Friend the Member for Easington (Grahame M. Morris) mentioned.

The Opposition will listen to the debate on clause 35, but we might oppose it. However, there are important points to be examined and answered in detail today. First, how do we use the resource? Secondly, how do we implement the policy? Thirdly, will the Minister answer the challenges made by external bodies about the operation of the clause in practice?

Grahame M. Morris: As my right hon. Friend the Member for Delyn (Mr Hanson) has already indicated, clause 35 introduces schedule 8, which contains the provisions for reducing child care relief for higher earners. My understanding is that the latter measure will be dealt with at a later stage upstairs in Committee.

As has been indicated, Labour considered proposing a similar change, but at its heart, it was trebling the number of free child care places available for the most deprived two-year-olds. That is the problem with the Government’s measure. The Labour party considered better ways of targeting support for child care to support both child care and the family throughout its time in government, but it seems that the coalition is taking

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money away from families completely, without retargeting it at those who are most in need. There is a basic contradiction between Labour’s position and that of the coalition Government. Indeed, the Government’s policies across the board seem to be an attack on families, and other groups in our society. Under their policies, middle-income and working-class families are hit harder than those at the top of society, and their policies do not redirect money into better-targeted child care.

3.45 pm

Mr Robinson: Rather than a redirection of money, is this not simply camouflage for a straightforward cut? It is a breach in the universality principle that strikes at the very foundations that hold the nation together.

Grahame M. Morris: My hon. Friend has hit the nail on the head: there is a fundamental point of principle here. I suspect that there is much more in the clause than is apparent that breaks this principle of universality. The debate on clause 35 concerns not only the immediate measure of removing child care tax relief from higher earners, but the course that the Chancellor is charting against families and the welfare state. On child care tax relief, it is worth remembering that it was John Major, when he was Chancellor in 1990, who first introduced relief for employer-supported child care, and as has been pointed out, that was extended by my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) when he was Chancellor. It is right that Labour considered changes to this relief in order to better focus Government support on child care.

The last Labour Government considered tax rate reliefs of this kind. Hon. Members have referred to expert bodies. However, the tax faculty of the Institute of Chartered Accountants argued that it would

“be burdensome, disproportionate and open to manipulation and abuse”,

so it ruled out this tactic of preventing benefit from being paid to higher earners or excluding them from the system. As I mentioned earlier, the real danger of the Chancellor and coalition Government’s tax and benefit policies is that they could push middle Britain out of the welfare state. It is a squeeze on middle England. Taken with the decision to end child tax credits and child benefit for families with a single high-band earner from 2013, it seems to me and Opposition colleagues to be a concerted attack on the fabric of the universality of the welfare state.

In the light of the rhetoric that surrounded the measure, and given that it appeared that the Government were intent on making immediate cuts, it came as a surprise to me and other Opposition Members that when it was announced, it was delayed until as late as 2013. That was a surprise because it seemed to be an attack on a core vote area of the Conservative party—perhaps it is no longer such a core vote area. It was a further surprise that a party that in opposition had consistently called for tax cuts for married couples seemed in government to want to attack them as soon as they had children. At the time—I believe it remains the case today—there was considerable concern that this policy was ill-thought-out, and that it was a party political stunt from a Conservative party and a coalition Government still finding their feet.

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John Cryer: Does my hon. Friend agree—this is in line with the intervention from my hon. Friend the Member for Coventry North West (Mr Robinson)—that this badly thought out measure is an attack on the collective ethos of society, which is always dangerous?

Grahame M. Morris: I am grateful for that point. Others have made it, and I have tried to echo its sentiments. The Government have the opportunity to rethink the implications of this decision, because implementation is not until 2013, so I hope that the Minister will address that point at the close of the debate. I am sure that hon. Members will recall that when the measure was proposed, Labour was engaged in a leadership election. Perhaps it was an attempt to steal the headlines.

However, from representations that I have received from expert groups, individuals and constituents—I am sure that other Members have received similar representations—it seems that the policy has been shown to be ill thought out. Whatever one’s views about middle England—whether it exists, whether it should be protected —it is crystal clear that the policy will disproportionately affect families with a single high earner. As someone who considers himself a socialist and something of a champion of the working classes and those at the lower end of the income spectrum, I think that there is a basic issue in this debate about justice and fairness. For families with a single high earner and perhaps no second earner, there is a clear injustice and anomaly when compared with a family with two high earners, as both families would lose the same amount.

Julie Hilling (Bolton West) (Lab): I wonder whether my hon. Friend has come across people in his constituency, as I have in mine, who are talking about giving up work—contrary to the belief shared on both sides of the Committee that work should pay and that the best thing for families is for parents to be in work—because of the effect of everything that is happening, including losing child care and the other benefits that higher earners receive. Does he share my view that that is clearly not the best thing for families or our society when we are trying to grow our economy again?

Grahame M. Morris: I am grateful to my hon. Friend: that is a good point well made. There are a number of levels where the Government now have an opportunity to stop, reflect and listen to representations—to steal a phrase from the Health Secretary—about the impact of the policy on the economy. I am sure that that impact was never intended, but it should certainly be taken into account if people now have a perverse incentive not to engage actively in earning a living and making a contribution to society.

Child benefit is a key part of the welfare state, and one that applies the principle of universality to all families in recognition of society’s duty to support not just families, but future generations. I had always assumed that that was a cross-party commitment, irrespective of party political allegiance. However, by taking away £1,000 in child benefit and child tax credits from families earning just over £40,000, the coalition Government are damaging our system of welfare for the future. We know—or at least we suspect—that the measure is more to do with trying to undermine the strong support of

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middle England and the middle classes for the welfare state. We on the Opposition Benches suspect that the purpose of the measure is to move British politics in a new direction. My concern is that an Americanised system of low taxation with a basic safety net to catch those at the very bottom would be a move in the wrong direction.

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. This is becoming more of a general debate about the welfare state, which is clearly not what is dealt with in clause 35, which is actually quite specific. I have given a lot of latitude up to now, but we must now focus on clause 35.

Grahame M. Morris: Thank you, Mr Evans. I shall try to ensure that we focus on the clause.

Let me quote some figures from the House of Commons Library that give some detail on the implications of the clause. The Library has calculated that some families will be £1,700 a year worse off owing to the Government’s proposed tax and benefit changes. The Chartered Institute of Taxation has warned of the

“considerable increase in the effective tax burden of those on incomes in the £40,000 to 50,000 bracket”,

which the clause deals with. The Chartered Institute of Taxation also said that

“increasing the tax burden on middle-income households while withdrawing tax credits and child benefit from them will result in their being squeezed proportionately more than those on higher incomes”.

In addition to families on more than £40,000 a year losing benefits, as set out in the clause, families will lose £450 a year on average because of the VAT increase. Added to that, child benefit has been frozen for three years, which equates to a real-terms cut of more than £75 this year for a family with three children, and the baby element of the child tax credit, which is worth £545 a year, has been scrapped. Added together, that all amounts to a quite astonishing attack.

The Chancellor’s answer to cutting the deficit has been to shrink growth and cut support for families and the most vulnerable. In my constituency, take-home pay is almost 20% lower than the national average. Young men and women have struggled to raise families in my area, which has been blighted by unemployment for more than three decades. The previous Government not only provided greater financial support for those struggling families; they also invested in schools and communities, and tried to revitalise and diversify the economy and create new jobs. The programme offered by this Government, and particularly the provisions in clause 35, will turn the clock back to the 1980s, not only for Easington and large parts of County Durham and the north-east but for many of the great cities in the north and for many people who aspire to raise themselves up and to progress.

My contention is that the clause breaks with the principle of universality and that that is likely to be followed up with tax cuts as a pre-election sweetener. In that way, the Government are beginning the process of undermining our welfare state, which they appear to have opposed in one form or another since its foundation 60 years ago. The last Labour Government significantly increased income-related support for families through tax credits, and they also systematically increased child

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benefit and maintained their commitment to progressive universalism. The Chancellor has frozen child benefit for three years, ditched progressive universalism and hiked up VAT—

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. The hon. Gentleman is now going much wider than clause 35. Does he wish to resume?

Grahame M. Morris: Yes, I will try to bring my remarks back to the clause.

I am fully aware that the amendment that was tabled in the name of my hon. Friends on the Front Bench was not selected—[ Interruption. ] We shall not be able to talk about it in the debate. Getting back to clause 35, we would require the Government to look at how their policies of tax and spend are affecting families right across Britain—

The Parliamentary Under-Secretary of State for Education (Tim Loughton): Have you read the clause?

Ms Diane Abbott (Hackney North and Stoke Newington) (Lab): Will my hon. Friend give way?

Grahame M. Morris: I will happily give way to my hon. Friend.

Ms Abbott: Does my hon. Friend agree that all Labour Members have read the clause and that it is precisely because we have read it that we are so opposed to it? It is also important, in giving our opposition its full flavour, that we put it in context.

Grahame M. Morris: I am grateful for that intervention. My hon. Friend makes a reasonable point. All that we are trying to do is give the Government a chance to reflect on a bad decision that has been made in haste, and to look at the impact that these measures will have on families. That is not a revolutionary approach. It seems quite reasonable to me. The Government will have ample opportunity to reflect on these matters, because the provisions will not be implemented until 2013. Were they to do so, I hope that that would provide the impetus for a wide-ranging debate on whether the coalition will push ahead with its policy on child benefit and child tax credits, and on what the implications of that will be for families, for the broader economy and for society.

Mr Robinson: I am conscious of your strictures, Mr Evans, and I am in no way challenging the Chair, but I understand the difficulty that my hon. Friend is having in considering clause 35 on its own. It can be considered only in the wider context of the other measures that together amount to an attack on families by a Government who said that they were going to be the most green-friendly Government ever—never mind the most friendly Government ever. It is the cumulative effect of all those measures that makes those claims so vainglorious and empty. That illustrates the difficulty that my hon. Friend is having, and that I would have if I were to contribute to the debate, although I would try to be a little stricter if I could. We cannot isolate the clause from the whole package of proposals that will compound the effect of this one.

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The First Deputy Chairman of Ways and Means (Mr Nigel Evans): I thank the hon. Member for his advice, which I am not going to take. We are talking very narrowly about clause 35.

Grahame M. Morris: I am sure you will be pleased to hear, Mr Evans, that I shall conclude my remarks in a few moments.

4 pm

Mr Hanson: Does my hon. Friend accept that the original proposals of the previous Labour Government to increase the number of child care places for two-year-olds in the poorest areas would have benefited Easington, County Durham and many other poor areas in the north of England, as it would have benefited similar parts of constituencies elsewhere? That is why we are focusing on the impact of clause 35 not just on tax relief for higher earners but in respect of what could have been done with the spending.

Grahame M. Morris: I am glad that my right hon. Friend has taken the opportunity to place that excellent point on the record.

I hope that the Government will take the opportunity to take a breath and reflect further on clause 35 rather than digging into the position announced last October, as the provisions will not be implemented until two years from now. Why does the Chancellor not agree to look again at the effect of his taxation policies? He has an opportunity to do so before 2013. He needs to reflect on the impact of the removal of child care tax relief, child benefit and child tax credits, which, taken together, mark an attack not just on families but on the welfare state as a whole.

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): I now have to announce the result of the deferred Division on the Budget report and the UK’s convergence programme. The Ayes were 249 and the Noes were 139, so the Ayes have it.

[The Division list is published at the end of today’s debates .]

Andrew Gwynne: It was not my intention to speak in the clause 35 stand part debate. Having listened to my right hon. Friend the Member for Delyn (Mr Hanson) and my hon. Friend the Member for Easington (Grahame M. Morris), however, I have decided that it is important for me to do so.

As has already been said, the clause introduces schedule 8, which introduces changes to the higher rate taxpayer relief for child care. That was first announced by the Government and, as my right hon. Friend the shadow Minister said, Labour does not oppose it, except for the important point—I bear in mind your earlier strictures on not extending the debate too widely, Mr Evans—that the measure has a wider impact on the Government’s child care policy and how it fits in with the Budget measures.

I have some sympathy with the notion of expanding child care places for two-year-olds. The previous Labour Government made greater provision for early years education, which has been incredibly beneficial to those children. I declare an interest in that all three of my

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children went through early years education under a Labour Government and, thanks to that Government’s investment, they are doing brilliantly at primary and secondary school.

Ms Abbott: Would my hon. Friend care to share with the Committee the name of the primary school?

Andrew Gwynne: I am happy to say that all three of my children went to St Anne’s primary school in Denton, where my wife, who is up for election tomorrow, is a chair of the governors. My eldest son goes to Audenshaw high school, which is also in my constituency, and all my children are getting a first-class education in those schools.

Let me return to clause 35, Mr Evans, for fear of being told off by your good self for straying too wide of the issue. The issue, for Labour Members, is this. We support the extra investment in child care for two-year-olds, especially in constituencies such as mine. Denton and Reddish is quite a deprived constituency, which covers five wards in the Tameside metropolitan borough—which is, I believe, the 52nd most deprived local authority in England—and the two Reddish wards in Stockport, which, although Stockport itself is a much more prosperous borough, are the two most deprived wards in the constituency. Investment in early years education has made a big difference to young people in constituencies such as Denton and Reddish. I would particularly welcome extra investment in nursery education in those deprived communities and, indeed, the Labour party proposed to provide it. I am pleased that the present Government are pressing ahead with a change that we proposed when we were in government.

Where we differ is in our approach to targeting. My hon. Friend the Member for Easington made a valid point about that. Although I understand the arguments for targeting as a way of ensuring that communities such as his and mine receive the benefit of extra early years provision, some constituents who are better off than the average in my constituency tell me—and it is difficult to argue against what they say—that they pay considerably higher taxes and pay into a welfare state system, and that they expect to get at least something in return. Those payments are their buy-in to the universal welfare system. I take on board your strictures, Mr Evans, but I also take on board the points made by my hon. Friend.

John Cryer: What concerns me about the changes is their incoherent nature. It appears that there have been knee-jerk reactions to save a bit of money here and a bit of money there. I fear that the Tory party may be moving from being, as Disraeli said, the party of organised hypocrisy to being the party of disorganised hypocrisy. For the benefit of Government Members, incidentally, Disraeli was a Prime Minister, and a Tory Prime Minister.

Andrew Gwynne: I entirely understand what my hon. Friend has said. There is a real inconsistency in the Government’s approach. While I think it commendable to raise additional money to target early years provision, particularly in constituencies such as mine, I also think that the Government’s so-called family-friendly approach

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is deeply questionable. As I said earlier in an intervention, when the Prime Minister was Leader of the Opposition he made it clear that he would be proud to lead the most family-friendly Government in history. Whether the Government are family-friendly is, of course, a matter for debate and conjecture. I can only say that the constituents who regularly come to my advice bureau seem to have been clobbered time and again by the changes that the Government are implementing, many of which—

The First Deputy Chairman: Order. The hon. Gentleman is much too wide of the mark again. If he cares to look at page 21 of the Bill, he will see that clause 35 is only 11 words long and is drafted quite precisely. Will he now please focus on the clause?

Andrew Gwynne: I will do so, Mr Evans, and I take your point precisely.

Mr Robinson: We are not opposing the 11 words per se. [Interruption.] We are not going to vote on them, to my knowledge. The point is that the expansion of child care for two-year-olds is not funded, and that is what the whole of our modification to the existing legislation was intended to do. Does my hon. Friend agree that that is the problem with this legislation?

Andrew Gwynne: Absolutely. The funding of these measures needs to fit within the wider context, as set out perfectly eloquently by my right hon. Friend the Member for Delyn (Mr Hanson). He was given a certain degree of leeway by the Chairman to put all this in the context of the wider changes that this Government have introduced on family policy.

Clause 35 goes some way towards dealing with the issues raised about tackling child poverty. The clause intends to ensure that extra resource is released for early years provision, and we support that. As I said, we proposed to do that when we were in government and, as my right hon. Friend mentioned, it highlights the real progress that was made on tackling child poverty during the Labour years, as was highlighted in the OECD report. I do not know whether the clause will have any impact on the Government’s ambitions to tackle child poverty, because that remains to be seen, but some of these changes could well start to have an impact. The explanatory notes state:

“Approximately 450,000 parents currently qualify for the relief.”

I am sure that the Treasury stands by that figure, as it produced the explanatory notes. Those 450,000 people will be concerned by these changes and the Government will have to answer the question that they will be asking: what do they get out of the system? If they are to miss out on this relief as a result of the Government’s changes and the extra child care places are targeted, the Government will have to deal with the points that my hon. Friend the Member for Easington was answering on the general principle of universality.

Having said that, it is important that this Government maintain a commitment to early years education. There is a degree of consensus across the House on the benefits of ensuring that children can start their education as young as possible, whether or not that is education through play in the context of early years provision—I think that we probably all agree on that. I note that the

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Under-Secretary of State for Education, the hon. Member for East Worthing and Shoreham (Tim Loughton), who has responsibility for children, is in his place. During the last general election campaign he visited a Sure Start centre in Horton Green, in my constituency, with the Conservative candidate. He also had his photograph taken outside my house as part of that campaign, and I was pleased that the then Opposition had visited a Sure Start children’s centre in my constituency. That underlined the background motive of the clause, which is to ensure that more resource is put into the early years.

However, as my right hon. Friend the Member for Delyn made clear, people have concerns that this Government are not family-friendly, because what they are giving with one hand, they are taking with another. Many of the measures that they have introduced in this Budget, of which clause 35 is part, are deeply damaging to families.

Mr Hanson: As I mentioned in my speech—it is further confirmed by the Institute of Chartered Accountants in England and Wales—the provision in clause 35 is based on an estimate of whether the employer will have earnings that exceed the higher rate limit on a particular payday. That causes some difficulties with fairness because there will be people who work part time, who change circumstances or who are on maternity leave for part of the year and the implementation of this is as potentially worrying as the policy—

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. The shadow Minister is talking about the schedule, which, as he knows, will be discussed in the Public Bill Committee.

Andrew Gwynne: Having heard your ruling, Mr Evans, I would not wish to stray on to the issue of the schedule. Suffice it to say that HMRC is often very good at making a complicated system far worse, as we have seen in the past with tax credits. That is straying quite wide of clause 35, however.

Let me bring my comments to a close. The Government’s intentions are good—they want to invest more in early years—but I think they are going about it in the wrong way. Their wider family-oriented policies are deeply flawed and clause 35 fails the fairness test. We need the Government seriously to rethink the range of family policies that they have introduced in the Budget, of which clause 35 plays an important part.

4.15 pm

Ms Abbott: I am grateful to have the opportunity to say why clause 35 should not stand part of the Bill. As my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) said, the fundamental problem with the clause, which in principle at least the outgoing Labour Government were going to promote, is that in its new guise it fails the fairness test. As we go into election season tomorrow and tomorrow night, the fairness of what the Government are doing will be foremost in our electorate’s mind.

Clause 35 deals with higher rate taxpayer relief for child care. In Hackney, I represent one of the most deprived areas of the country but I do have some higher rate taxpayers. It being Hackney, my higher rate taxpayers are people of discernment and intelligence and they are

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Labour-voting higher rate taxpayers, but none the less my concern overall is for the most deprived in our community.

When clause 35 is stripped of any pretence of helping low-income families with child care, it is astonishing to see that this Government should so nakedly seek to attack many of their supporters. It is unthinking, chaotic and disorganised and it is not even politically coherent. When we put it in the context, as my right hon. Friend the Member for Delyn (Mr Hanson) sought to do, of the other changes in taxes and benefits that will affect middle England—the cuts in the amount that parents can claim for child care, the freezes to child benefit, the changes to the baby element of child tax credit, the freezing of the basic 30-hour element of working tax credit, the changes to the second income threshold for the family element of child tax credits or the withdrawal rates for tax credits—we see a frontal financial assault on middle England, the very people who the Government will look to for support not just in the local elections in 24 hours’ time but as they move forward.

Why are the Government seeking to attack middle England in such a way? Is it because we have a Cabinet of millionaires? Do they not understand what it is to struggle to make ends meet, even on a relatively middling salary in a relatively middling condition of life? Is it ignorance or uncaringness about how the majority of people live? Who knows: there can be no question but that as the totality of the changes to taxes and benefits as well as the job losses in the public sector come to the attention of middle England, it will be hard for those people to understand or believe that the Government have their interests at heart.

Another significant consideration about clause 35 and the suite of changes to child care, family tax and welfare issues is the effect they will have on women. One reason why issues such as tax relief on child care and particularly child benefit remain so emotive in public discourse is that they go back to the original child benefit which some Members might remember was paid to the mother, who had her own child benefit book. For many mothers, that was the only money of their own that they had—that was certainly the case in my family. Even though those payments are now paid through the tax system and to the family as a whole, these are still emotive issues in ordinary families who remember the old child benefit system and remember that the money went to mothers. The reason why it went to mothers was that it was always understood that child benefit was an effective benefit because mothers spent it on their children.

With a Cabinet of millionaires, the Government do not understand how middle England is struggling. They do not understand how people in middle England fear for the future even if, on paper, they have good salaries and good jobs. They do not understand the emotive content of issues such as child benefit and child tax credit to ordinary women in ordinary families. Ordinary women are looking at the totality of the changes that the Government are making and asking, “Do they really understand my life? Do they really understand what it is to pay bills at the end of the month or to juggle a job and child care and to support the rest of my family?” When one looks at clause 35, presented naked, without the commitment that we had to help lower-paid families with child care, the answer seems to be that, no,

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they do not understand. The Cabinet of millionaires does not know what it is to be in the middle and to feel as though you are just one wage packet away from a really difficult situation.

In the past decade, middle England has been encouraged to over-leverage itself and been facilitated in doing so, and people are now trying to down-leverage by paying off more of their credit cards and trying to bring down their burden of debt. The Government may say that the £1,000 that people will lose because of changes to this tax relief is only a small amount, but for someone who is juggling their salary to pay off debt, worrying about paying their children’s tuition fees as they go through university and also worrying about how to pay for the care of elderly family members, that money will make the difference between their sums adding up or not adding up at the end of the month.

The Government’s lack of understanding of the reality of life for many ordinary British people, even those who are, on paper, so much better off today, such as some of my constituents in Hackney, shines through in the clause and in the thoughtless and heedless way in which the Government have brought the measures forward. They have not sought to balance them with measures that might help the poorest, although that might have helped middle England to understand why the changes are being made. Currently, given the way in which the measures are being introduced, all that middle England can understand is that the Government do not understand what a struggle it is for middle-income families, and even some families in which the sole wage earner is a higher rate taxpayer, to make ends meet. Of course, similar proposals were originally brought forward by Labour, but in a very different context. Clause 35 has been brought forward in the context of a series of other measures that will also have an impact.

Mr Robinson: Not only were the Labour proposals brought forward in a different context, but the Labour Government were going to use the money to extend child care for two-year-olds in the least well-off families. Is not that the whole point? Is it not strange that the Government, who are so concerned about cost-effectiveness and getting the most out of every penny they spend, do not realise that all the studies show that the earlier an intervention is made the more effective it is? By not doing what the Labour Government wanted to do and extending that child care to two-year-olds, they are denying themselves the very basis on which they could have realised that principle.

Ms Abbott: That is an important intervention. This is a Government who know the price of everything and the value of nothing. Had they been willing to continue both halves of our policy—taking away tax relief for higher-income taxpayers and extending child care to two-year-olds for low-income families—in the long run, they would realise a cash benefit. I know from my own constituency that the earlier we can make an impact on people, the earlier we can give families support with properly funded child care, the sooner we can save the state money on education and a range of social issues. As I said, these are people who know the price of everything and the value of nothing.

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Clause 35 is the shell of something that the outgoing Labour Government introduced, but it lacks the counterbalancing measures that we were going to introduce. It reflects a Government who do not understand that families are struggling in the current climate, and who do not understand the significance of those tax and welfare arrangements for women. They will pay a price for that lack of understanding in the local elections tomorrow, as middle England looks on the Conservative-led coalition and says, not that this is the most family-friendly Government ever but that this is the most middle-income-family-hostile Conservative-led Government ever.

Kate Green (Stretford and Urmston) (Lab): I am pleased to speak in this stand part debate. I, too, want to express concerns about the proposals on child care, particularly the intention to change taxation.

It is not the change to taxation in relation to child care with which I wish to take issue but the broader context of funding and provision for child care, and the lost opportunity that the clause represents. Opposition Members accept that in straitened financial circumstances it is appropriate to look at the taxation system and tax breaks for higher earners and better-off families, and that it may be appropriate to rebalance the tax take and those tax breaks. However, we believe very strongly that there are better ways to redistribute—a word that is perhaps more popular among Opposition Members than Government Members—that money for the benefit of families and children and, in relation to clause 35, to achieve adequate child care provision.

Mr Robinson: Did my hon. Friend attend Prime Minister’s questions, given that she said that “redistribute” was a word heard more often among Opposition Members, and redistribution is perhaps a policy more often pursued by the Opposition? The Prime Minister ruled out redistribution almost unilaterally as a means by which we could help—

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. I listened to the Prime Minister at PMQs, and I did not hear him refer once to clause 35. This is rather specific. I know that the hon. Member for Stretford and Urmston (Kate Green) wants to talk about the broader generalities, but that is not what clause 35 is about; otherwise the debate would be very general indeed.

Kate Green: I am grateful, Mr Evans. I am mindful of the provisions in clause 35, which is specifically about taxation and tax breaks for child care. This is about redistribution, and I will say in passing—just one sentence, I promise—that I am proud of Labour’s record on redistribution. We do not talk about it as loudly and proudly as we should in my view, but a set of redistributive policies since 1997 took 600,000 children out of poverty.

To return to the meat of the clause, I am proud of the way in which we redistributed spending in favour of families and children, particularly the spending that we directed towards building significantly increased child care provision. That is a significant creation of child care provision. It is not perfect, as a number of families are still not provided for, but by any measure it was a step change in provision and a fundamental change in the child care landscape which resulted from Labour policies over the past 13 years.

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4.30 pm

This is not a matter of contention across the House. We are all proud of Sure Start. Across the House I see hon. Members welcoming the Sure Start facilities in their local community, filled with admiration for the way they can support young parents and families, and filled with admiration for the way they can be a hub of children’s and family services in the community. It is common ground across the House that Sure Start has been an incredibly valued addition to the landscape of support for families with children. That has assisted and will continue to assist, I hope, with so many of the Government’s goals in relation to social mobility, improving attainment, raising aspiration and so on—a point to which I hope to return in the course of my remarks.

I am also extremely proud of the free nursery provision that we introduced for three and four-year-olds, and pleased that the Government are extending that to two-year-olds. I certainly welcome that extension, but I have not been able to find very much else to welcome in the Government’s investment in child care. That is why I say that clause 35 is a lost opportunity. It would have allowed more funding to be directed to child care provision and to extending child care provision. It is a regret and a shame that that is not happening. As a result, the challenges that we continue to face in providing good quality affordable and accessible child care to all parents and their children who want it have, regrettably, not been met.

Ms Abbott: Does my hon. Friend agree that the failure to grasp the opportunity to redistribute income in favour of child care for some of our more poorly paid families is the more surprising, given that the Tory-led coalition allegedly believes in the big society? What more important anchor of the big society is there than high-quality child care?

Kate Green: My hon. Friend is right. She highlights another of the Government’s key strategic objectives, an objective that commands great support and interest across the House, but the Government fail to put in the infrastructure and the investment that would enable them to deliver such an objective. Again, that is a matter of regret.

Any parent will say that child care remains an enormous challenge for families, particularly in terms of helping parents to access the labour market, but much more broadly than that. We know that UK parents already pay the highest child care charges of any parents in the OECD. That is probably why in the OECD report just last week on progress on child poverty across the OECD nations, it was specifically identified—

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. This is turning into a general debate on child poverty and that is not what clause 35 is about. It is about higher earners. I am sure the hon. Lady has read the clause. Will she speak just to clause 35, please?

Kate Green: I beg your pardon. This was not intended to be a general discourse on child poverty. There was a specific reference in the OECD report to the importance of child care, and it is specifically that element of the report that I feel is relevant to the clause, but I entirely

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accept that we are discussing the implications particularly of the provision to remove the tax break for higher earners. My point is what do we do with that money. That must be a financial consideration too.

Mr Robinson: Does my hon. Friend agree that a big opportunity is missed to extend more widely the provision of child care for two-year-olds? That is directly relevant to clause 35. In my constituency, for example, there are two child centres that already have facilities in place for that extension, which cannot be funded because the Government have decided not to pursue the policy that we had in mind. That could have been the basis for using those facilities, which now lie idle.

Kate Green: Indeed, and that does not make good fiscal sense. It cannot be sensible for public money to be invested but then not exploited for the benefit of the community, those families and, indeed, the economy. In the context of this Finance Bill debate, that surely has to be at the heart of our scrutiny of its clauses.

It is also important that we understand just how much is going on to make it even more challenging for parents to afford child care, and therefore why it was all the more important to use the funding that the tax break before us is saving in order to replace some of the funding that is being lost for the provision of child care.

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): Order. Just to inform the House, I am not going to allow a general debate, either, about what the money could have been spent on. We are talking about the merits, just simply, of clause 35.

Kate Green: I am grateful.

What is important about the legislation behind clause 35 is that it retained all parents, higher-income parents as well as lower-income parents, in a single integrated child care market. It ensured that all parents received some financial support that helped to create, expand and ensure the quality of that market.

When lots of families participate in a child care market, the market is sustained, secure and improved in terms of what it can offer to families, and that is important for raising the aspirations of families and children, a particularly important strand of the Government’s social mobility strategy. If we are to remove higher-income families from the ambit of the child care market, and Opposition Members all understand why the Government might choose to do so, it is very important indeed that we recognise the potentially deleterious effects on the quality of the child care market for those families who remain within it—those families whom we want to remain within it because of the improvements that it can secure for children’s outcomes. Importantly, therefore, when removing that tax advantage we must be very careful to ensure that we compensate for any damaging effects that its removal might have on the general landscape of child care provision, including its quality and its availability for other families who remain within its ambit.

This is very much a debate in the context of a Finance Bill. It is therefore a debate about what works most effectively for the economic strength of the country, and it is very much a debate about how best we come through the recovery and start to promote the return of

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the growth that we all hope to see. We have just begun to see it return hesitantly and slowly, but we now want to see it improve.

Ms Abbott: My hon. Friend touches on the fact that this is a debate about clause 35 of the Finance Bill, but it is also about how we as a society get through the current financial crisis. Does she agree that one way we will get through the current financial crisis is by something that clause 35 undermines: social cohesion and the principle of universality? To have the clause without the counter-balancing arrangements of child care for two-year-olds and the lower paid is to undermine the process of social cohesion, which is the only way we will get through the current financial crisis.

Kate Green: My hon. Friend leads us into really important territory: the issue of universal provision. If we are going to start to eat into that universal approach, for good reasons, we have to be very mindful of and careful about the consequences, so my hon. Friend is right to highlight the consequences for social cohesion, which is a key fundamental of good economic growth.

We are not going to do well as a national economy if we have to compensate all the time for a fractured society, a society of strains and tensions, in which the public pick up the cost all the time in order to remedy the damage that that causes. My hon. Friend is therefore absolutely right to point out that undermining the universal approach has potentially dangerous consequences for our economic performance down the line—[ Interruption. ] I sense that the Chairman fears that I am straying slightly—

The First Deputy Chairman: Not slightly!

Kate Green: Not slightly—straying from the ambit of clause 35.

My hon. Friend’s point is correct: fundamentally, the clause removes a universal approach, an approach that keeps everyone in the context of the child care market and the wider social community. That is a really important point.

It is also important to recognise that we are talking about developing children’s long-term economic potential. I do not like to think of our children as future economic actors—I like to think of them enjoying and making the most of their childhood now—but they are the next generation of providers and sustainers of our economy and community care for us in our old age. Removing this financial support from some families and not placing it in the child care market means that some children will be more likely to lose the advantages that good-quality, professional, formal child care can bring.

Andrew Gwynne: My hon. Friend is adding great expertise to the debate with her background in this area of policy. Although clause 35 was a mechanism that was suggested by the previous Labour Government, is not the difference between our approach and that of the Government that we would have invested the money raised back into child care provision?

The First Deputy Chairman: Order. I am not going to allow any further discussion as to what the money could have been spent on. This debate is simply about clause 35.

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I know that the hon. Lady has expertise in this matter, so I ask her to restrict herself to clause 35, which relates to higher earners’ child care.

Kate Green: I am grateful, Mr Evans. I was mindful of your earlier injunction not to stray into a discussion of what the money be spent on, and I do not intend to do that.

Ms Abbott: Will my hon. Friend give way?

Kate Green: In a moment.

I should like to talk about what this provision will mean in terms of the number of children likely to access good-quality child care provision in future. The knock-on effect of clause 35 will be that not only the children of the families from whom this tax break has now been removed will be affected, but so too will the increased number of children who will fall out of the ambit of affordable, good-quality child care. I say that not only because of the importance of a universal market that tends to raise quality and aspirations but because starting to chip away at the money that is flowing into this market, which will inevitably happen, means that some parents who are currently able to afford to access the formal child care market will decide not to do so.

As money starts to be withdrawn from the market, provision generally will start to be reduced, and in turn other parents will find it more difficult to access it, whether or not they have financial support from other measures such as the child care element of the working tax credit to enable them to do so. Then we will be in a downward spiral. By removing funding at the top but not putting it back elsewhere, we start to shrink the child care market, and the more it shrinks the more it continues to shrink. The problem with this market, as we have seen again and again, is the insufficiency and unpredictability of provision, and those elements will be put under further pressure because there will be less money to sustain the market even at the current levels.

I am conscious that a couple of my hon. Friends wanted to intervene, and I do not want to deprive them of the opportunity to add their comments if they would still like to do so.

Ms Abbott: I have listened with great interest to what my hon. Friend has said about the effect of clause 35 on the child care market, which is very germane to the discussion. We heard from the Chancellor of the Exchequer many months ago that we were all in this together. What message does clause 35 send to people? It says to higher income tax payers that they are not in it with everybody else, and it says the same to the very poorest families with two-year-olds who will not get the improvement in child care that we would have promised them. That is a very divisive, non-communitarian message.

Kate Green: My hon. Friend is right. We are beginning to say that child care is only for some children, not for all children. Yet we know that it is universal, mixed child care settings that produce the best outcomes for the most disadvantaged children. It is key to social mobility and to raising aspiration that children engage with other children in mixed child care and educational settings. The clause will make further inroads into that approach.