June 2010 Budget - Treasury Contents

5  Business

Industrial policy

85. The Chancellor told us that although the measures to cut the deficit had attracted most public attention, the Budget contained a number of measures designed to assist business:

For example, there is a reduction in the headline rate of corporation tax from 28 pence to 24 pence, a penny a year across the Parliament. There is a reduction in the small companies' tax rate that was set to increase under the plans I inherited and I am reducing it to 20 pence. There is an innovative proposal, which I freely admit has not been tried before by government but we hope it works and will see if it works, and that is to have regional National Insurance rebates for new businesses created in parts of the country outside the south-east and eastern area. There are a series of measures. Alongside those we are publishing a paper on credit conditions later this month. The Green Investment Bank is a very important tool for stimulating investment in a low carbon economy. My colleague, Jeremy Hunt, is looking at increasing the broadband capacity of the United Kingdom. There is a whole suite of policies designed to stimulate investment and send a sign that Britain is open for business. [122]

86. We draw particular attention to the Chancellor's suggestion that this Government would not only be concerned about the balance between the public and the private sector, but would consider the structure of the wider economy and "be more aggressive about promoting certain parts of the economy and certain skills in the economy":

I think born out of the industrial failure of the 1970s came a view that we could be entirely neutral about the structure of the British economy [...] and now there is a recognition that we cannot be entirely neutral, that we want an economy that is based on more investment and exports and where we move up the value chain. [...] there are big sectors, like pharmaceuticals, aerospace, creative industries, which are really important for this country where we already have a comparative advantage, so we are not starting from scratch, which we should be seeking to promote without doling out large sums of money and getting back to some of those mistakes that were made in the past, but nevertheless taking the appropriate tax and regulatory changes that can help support those sectors.[123]

We expect our colleagues on the Business, Innovation and Skills Committee will take the lead in assessing the effectiveness of the Government's tax and regulatory measures in supporting strategic industries.

Credit availability

87. As we noted above witnesses were confident that businesses could fund significant investment from their own resources. Nonetheless in the June pre-Budget forecast the OBR itself identified credit availability as a risk to its forecast.[124] Mr Dicks assured us that the OBR had highlighted the risk credit availability posed:

both in the pre-Budget and the Budget forecasts. We think that these headwinds, the credit conditions headwinds, will ease slowly through time. The other point I made earlier was that internal finance provides a lot, if not most, of the cash for investment. The problems in the banking sector, as a central guess, would become smaller through time.[125]

88. Mr Barrell, of NIESR, cautioned us though that "part of our problem in the run-up to the crisis is that we were borrowing too much. If we are borrowing too much, that means the banks are lending us too much, so perhaps we should hope to see an economy where banks lend rather less than they have been in the medium to long term."[126] On lending to firms, he noted that they "do not report enormous problems with their borrowing and they do have internal resources, but we also have to recognise that this crisis has caused a reassessment of risk and, therefore, a reassessment of the equilibrium capital stock firms want, and they will want to invest less and that will mean they will want to borrow less".[127] Mr Clarke also noted that this may be an issue, telling us that "I am a bit worried by the latest Bank of England Credit Conditions Survey which is showing that the availability of lending that lenders expect over the next three months is going down". [128] Mr Clarke noted that smaller firms could be particularly affected by restrictive credit conditions: "If the bank levy means that banks try to minimise the size of their balance sheets, they may lend less and it is not the big firms that are going to suffer most, it is the SMEs, so that would be a concern at the back of my mind".[129]

89. Mr Bootle emphasised that he thought that "there is both a problem of the demand for bank finance and the supply of bank finance" but that "the OBR was surely right to stress that, on the whole, this is not a significant problem for large companies which have substantial internal resources", due to their access to the bond markets and the equity markets. He thought the problems were "primarily about small- and medium-sized businesses which do not have that access and often do not have internal resources as well." While he acknowledged Mr Barrell's point that "[firms] might want to borrow less because the future does not look so good and they should not be wanting to borrow for investment," he thought "The evidence is too plentiful to ignore, that the banks have tightened their terms extraordinarily and a lot of firms have felt this was very, very destabilising indeed and the reaction has been to say, 'Well, we're just going to have to minimise our dependence on the banks because you can't trust them or depend on them'."[130]

90. The Chancellor thought that there was a need to ensure greater bank lending, but cautioned that "I do not think there is a silver bullet. I do not think there is one thing we can do that is going to suddenly ease up credit conditions."[131] He went on to outline options that could be taken to support business lending, which the Government will report on in a forthcoming Green Paper on business finance:

First of all there are government schemes that can be expanded. In the Budget I expanded the Enterprise Finance Guarantee Scheme by £200 million that is targeted at small businesses who cannot get access to credit. Second, and I know the Select Committee is going to be looking more broadly at the structure of UK banking, we want to encourage more competition in the UK banking sector which was consolidated and has become a hell of a lot more consolidated as a result of the last two years. I welcome new entrants provided they are appropriate for a banking licence. I think we should be encouraging new entrants. [...] The final point I make is that the regulatory uncertainty at an international level about the kind of capital, liquidity and leverage requirements that the G20 and the Financial Stability Board are going to ask about is not helping matters[...][132]

91. The Committee recognises the problems faced by SMEs in raising credit. We will examine these issues as part of our future inquiries.

Bank Levy

92. In the June 2010 Budget the Government announced the introduction of a bank levy starting from 2011. The rationale for this levy is that "banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy".[133] The levy is also designed to encourage banks to move to less risky funding profiles, since tier 1 capital, insured retail deposits and sovereign repos will be excluded when calculating the levy base. When fully applied, the levy is intended to raise £2.5bn a year. Indeed, in his evidence, the Chancellor told us "we made it clear that we are targeting a revenue sum rather than a particular rate because we think that is an appropriate contribution that balances fairness with the competitiveness of the UK banking sector."[134]

93. The Chancellor believes that the bank levy is needed to reflect the implicit price the public has paid in supporting the banking system, and also the fairness to the rest of the society. He said:

The bank levy is designed to do two things. The first is to ensure there is a price paid for the implicit insurance that we all offer as taxpayers for the wholesale funding of banks, which became pretty explicit in the middle of the crisis [...] The other reason, to be absolutely frank, was for reasons of equity. Asking the general population to accept a VAT rise, asking them to accept that there were going to be changes to welfare eligibility and the like, doing these things is a difficult thing for any government to do but I thought it would be totally inappropriate not to ask the banking sector to make a contribution as well. [135]

94. One unintended consequence of the levy is that it may affect banks' ability to lend to the wider economy. There are also concerns that in time banks may be faced with further levies on their business, at European or global level. The Chancellor assured us that proposals for a European Banking Stability Fund financed through direct contributions had not been agreed by Ecofin, but he acknowledged that if such measures were introduced, there could potentially be a conflict if the"prudential regulator here suggests lower capital ratios to encourage more credit into the system but the European Banking Stability Fund is insisting on higher contributions to take cognisance of risk and have two systems effectively working against each other." [136]

95. However the Chancellor insisted that "the most effective tool" for encouraging bank lending "is the capital liquidity requirements. They have a much greater effect on a bank's ability to lend than, say, the bank levy does". Mr Bootle agreed that "the amounts are not huge ... [and that it is] more of a gesture". More importantly, he said, "it is the uncertainty in financial regulation reforms globally that leads to banks' nervousness, hence the hoarding of capital and refusal to lend." [137] Mr Whiting agreed:

There is, clearly, a lot of worry amongst the international banks that this levy will be matched by similar levies in other countries which then will not offset and it will all be cumulative. [...] There is also a worry that this is also adding to the amount of extra regulation that is on the banks. Also that it is setting a bad atmosphere and it is not giving them the confidence to do the extra lending to, as has been said, the small- and medium-sized sector which, in many ways, is the one that is most wanting finance. [138]

96. The Government has announced a consultation on the bank levy, and we will take evidence on the effect of the bank levy and other proposed changes in the UK and international regulatory system as soon as possible.

Capital Gains Tax

97. One of the headline measures in the Budget was an increase in Capital Gains Tax (CGT) from 18% to 28% for higher and additional rate taxpayers, with an increase in the entrepreneur's relief lifetime limit to £5 million from £2 million.[139] In evidence, the Chancellor defended this decision with reference to revenue generation and fairness:

I faced a situation when I took office that the capital gains tax regime was being abused, that the 18% rate that I inherited was so much lower than income tax rates of 40% or 50% that a multitude of schemes had been created and were being created to shift income that there was a hole in the tax system that needed to be plugged. I also felt, as indeed did other members of the Government, for reasons of equity an 18% capital gains tax rate was quite difficult to justify when we were going to be asking from other parts of the population, other parts of the income distribution, for people to make a contribution to closing the deficit that it was appropriate to look to increase capital gains.[140]

98. We questioned the Chancellor on the impact of this proposal on businesses and entrepreneurs. He argued:

The first point I make is that the entrepreneurial relief is a very considerable one, so it is only people who are going to be making more than £5 million of lifetime gains in creating a business who would face the 28% rate whereas, for example, someone selling a second home will now face the 28% rate. After all, it was 24% just a couple of years ago so I do not think there will be many people whose fundamental life planning would have been thrown entirely off course by this. I accept it is a tax increase and no one likes a tax increase.[141]

The Treasury has since written to us with more detail about the reasons for choosing the 28% rate and their rejection of indexation and taper relief schemes.[142]

99. We questioned Treasury officials about the impact of the change in CGT rates on members of employee share ownership schemes. Mr Troup said that the Treasury had considered the position of such schemes when drawing up the proposals, including the fact that members of such schemes cannot chose when they realise their assets. However, they had concluded:

If we had settled on a 40% or 50% capital gains tax rate I think the point about employee share schemes would probably have been more of a factor. As it was, at 28% there was no need to make a specific exemption for employee share schemes.[143]

Mr Troup also indicated that including members of such schemes in the entrepreneurial relief:

would have made the definitions considerably more difficult and would also have given rise to a significant amount of forestalling because we would not have been able to introduce that straightaway.[144]

100. The Chancellor also drew attention to existing tax advantages for members of such schemes, including the annual allowance of up to £10,100. He suggested that the doors to such schemes were "very much"[145] more open than they had been previously:

I am very willing - I would do this anyway off my own bat—if the mood of some Members of this Committee is to go away and look at this and perhaps come back with further thoughts on how to encourage employee share ownership schemes.[146]

101. We recognise the Chancellor's willingness to reconsider the effect of his proposals in encouraging existing and potential share ownership schemes. We look forward to hearing from him on this before next year's Budget.

122   Q 225 Back

123   Q 239 Back

124   Office for Budget Responsibility, Pre-Budget forecast, June 2010, p 13, para 3.16  Back

125   Q 79 Back

126   Q 112 Back

127   Q 112 Back

128   Q 124 Back

129   Q 124 Back

130   Q 112 Back

131   Q 231 Back

132   Q 231; HM Treasury, Budget 2010, June 2010, p 28, para 1.74 Back

133   HM Treasury, Bank Levy: a consultation, July 2010 Back

134   Q 272 Back

135   Q 270 Back

136   Q 273 Back

137   Q 113 Back

138   Q 113 Back

139   HM Treasury, Budget 2010, June 2010, p 3 Back

140   Q 227 Back

141   Q 228 Back

142   Ev 58 Back

143   Q 176 Back

144   Q 177 Back

145   Q 281 Back

146   Q 320 Back

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Prepared 23 July 2010