5 Business |
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. 
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.
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
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.
Mr Dicks assured us that the OBR had highlighted the risk credit
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.
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."
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".
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".
 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".
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'."
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."
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[...]
Committee recognises the problems faced by SMEs in raising credit.
We will examine these issues as part of our future inquiries.
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".
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
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.
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.
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." 
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." 
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.
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.
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.
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.
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.
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.
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
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"
more open than they had been previously:
I am very willing - I would do this anyway off my
own batif 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.
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
Q 239 Back
Office for Budget Responsibility, Pre-Budget forecast,
June 2010, p 13, para 3.16 Back
Q 79 Back
Q 112 Back
Q 112 Back
Q 124 Back
Q 124 Back
Q 112 Back
Q 231 Back
Q 231; HM Treasury, Budget 2010, June 2010, p 28, para
HM Treasury, Bank Levy: a consultation, July 2010 Back
Q 272 Back
Q 270 Back
Q 273 Back
Q 113 Back
Q 113 Back
HM Treasury, Budget 2010, June 2010, p 3 Back
Q 227 Back
Q 228 Back
Ev 58 Back
Q 176 Back
Q 177 Back
Q 281 Back
Q 320 Back