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The Minister of State, Home Office (Baroness Blatch): My Lords, I have it in command from Her Majesty the Queen to acquaint the House that Her Majesty, having been informed of the purport of the Police (Property) Bill, has consented to place her prerogative and interest so far as they are affected by the Bill, at the disposal of Parliament for the purposes of the Bill.
As many of your Lordships will have noticed, the Bill before us this year is considerably shorter than last year's--something that I am sure will be welcome to everyone. Last year's Finance Act, and a number of others before it, were, I trust, the exception, dealing as they did with a number of large one-offs, such as new rules for self-assessment and the extensive new rules on corporate loan relationships to mention just two. So I hope we are back to something more like a typical length of Finance Bill.
As last year, this Bill opens with a piece of good news: Clause 1 cuts the rate of duty on spirits. The Scotch whisky industry in particular is an important export earner, and it is pleasing that for the second year running we have been able to cut the duty on whisky by 4 per cent. This will reduce the incentive to smuggle, and reinforce the message we have been sending to overseas tax authorities that they should not discriminate against our goods. Also for the second year running, the Government have not raised the duties on wine and beer. This measure will help to allay the drinks industry's concerns over cross-border shopping and smuggling, which was the subject of a short debate in your Lordships' House recently.
Clause 6 of the Bill puts into effect the Government's commitment to increase the duty on road fuel by an average of at least 5 per cent. in real terms each year. This not only plays a significant role in reducing borrowing, but it is an important part of the air quality package in the Budget. We believe it is right to reduce
The Bill contains a number of measures to protect the tax base against erosion from people's attempts to avoid paying the tax they were intended to pay. I have to say that tax avoidance is not an economically useful activity. It is a zero sum game, because those people who have subverted a tax relief, or found some other way of ingeniously reducing their tax liabilities, simply cause everyone else to have to pay more tax; and people and resources are diverted from activities that genuinely benefit the rest of the economy.
Perhaps I may mention a few of the measures we are proposing. We are tackling a leakage of VAT where insurance is sold alongside goods and services. In some cases, part of the price of the package is shifted onto the insurance product, which is taxed at the lower rate of insurance premium tax. We are therefore increasing the rate of insurance premium tax on products of this sort to 17½ per cent. We are also taking steps in Clause 37 to prevent VAT-exempt companies, not normally entitled to recover VAT on their costs, from doing so on commercial property--though here, as in a number of areas, changes have been made to the Bill in another place to reflect the concerns of those affected. As always, we seek to target the avoidance, without damaging people's legitimate commercial relationships. The full package of VAT measures will yield over £700 million in the first year and protect a further £1.6 billion from attack by avoidance schemes.
The Bill also contains measures to protect the income tax and corporation tax base; for example, Schedule 12 alters the tax treatment of certain finance leasing arrangements. The Bill also brings in the new rules that apply where companies buy back their own shares or pay certain special dividends in an attempt to exploit the payment of tax credits to tax exempt institutions. In new clauses added at Report stage in another place, we have protected the corporation tax yield by blocking two types of highly artificial schemes using derivatives and annuities to turn, respectively, interest received into capital, and capital paid into interest.
The Bill also removes or reduces certain tax reliefs. Perhaps I may mention the two most important. Clause 61 provides for the phasing out of the tax relief for profit related pay. This relief was introduced by my noble friend Lord Lawson in 1987, explicitly as a temporary measure to encourage firms to set up PRP
Schedule 14 to the Bill reduces the rate of writing down allowances on long life assets from 25 per cent. to 6 per cent. a year. Twenty-five per cent. a year is too generous for assets with lives of over 25 years. By setting a more realistic rate, and one that is closer to that adopted by companies themselves, investment decisions will be less dependent on their tax treatment.
The Government believe that low tax rates on a broad base are best for the economy and we have taken the further step towards our goal of a 20 pence basic rate of income tax in Clause 54, which cuts the standard rate of income tax to 23 pence.
I finish by mentioning a number of measures we are taking to help small businesses. The cut in income tax in Clause 54 will benefit unincorporated businesses, leaving business men and women more of their own money to spend or invest as they choose. The small companies' rate of corporation tax will also fall to 23 per cent. from next month, benefiting the majority of companies in the country. Small businesses are crucial to the success of the economy. We have listened to their concerns, and responded in this Bill by introducing relaxations to the venture capital trust and the enterprise investment schemes. We are also freezing business rates for small properties this year.
This will be the last Finance Bill of this Parliament. It is fitting that it should be, because it crowns five years of achievement on the economy. Since this Government were re-elected in 1992, we have seen five years of uninterrupted growth, with unprecedentedly low rates of inflation. This year, a family on average earnings should be £370 better off after earnings growth, tax and inflation, and over £1,100 better off than before the last election.
We are the party that has the courage to take tough decisions on spending and borrowing to produce the climate for the economic growth and prosperity that we are enjoying today. We are the party that has put in place the conditions for a fall in unemployment to its lowest level in six years, and to one of the lowest levels in the European Union, as my noble and learned friend Lord Fraser of Carmyllie clearly demonstrated at Question Time only a few moments ago. We are the party that believes in letting people keep more of what they earn and save. This Finance Bill proves it. I commend it to your Lordships.
Lord Eatwell: My Lords, I am sure that the whole House is grateful to the noble Lord, Lord Mackay of Ardbrecknish, for once again so ably summarising a complex Finance Bill. I am sure that he has broken all records in the short amount of time that he took to give that summary. However, in his brief summary, the noble Lord failed to mention one of the most significant aspects of the Bill: the fact that it is a tax-increasing Bill. In Clauses 21 to 24 it introduces, as the Minister
This is the fifth tax-increasing Finance Bill in succession since the general election of 1992. To paraphrase Stephen Dorrell, we have had tax increases year on year on year on year on year--and that is after Mr. John Major famously promised the British people on 7th April 1992:
That was not the only promise. There was the promise that the level of national insurance contributions would not be raised. That promise was broken. There was the promise that mortgage interest tax relief would be maintained. That promise was broken. There was the promise, made over and over again, that there would be no increase in VAT. That promise was broken over and over again.
The truly intriguing question is: why? Why did John Major break every promise that he made to cut taxes? Why have the Conservatives increased taxation by such an extent that between the last election and the election on 1st May the average family will have suffered total tax increases of £2,120. Why? Did the Tories simply tell "fibs" in order to get elected? That may be part of the story; I would not know.
However, there is another far more important lesson to learn from this Finance Bill and from all the tax-increasing Finance Acts of this Parliament. The Tories have been forced to raise taxes because of the underlying weakness of the economy. If growth had been stronger, unemployment would have been lower, saving billions of pounds in social security benefits and sharply increasing tax revenues. If investment had been higher, the British economy would have been more competitive, capturing markets at home and abroad and yielding more taxes to the revenue. If consumers had been able to spend with confidence with their expenditure underwritten by a strong and competitive economy, revenues would have been even higher and would have been secure. Instead, five years after the recovery from the depths of the recession the Government are still running a substantial deficit. Even today when consumption spending is growing at rates reminiscent of 1988 and 1989 the consequent increases in tax revenues leave the Government with a huge deficit, with the prospect of fiscal balance retreating ever further into that pie in the sky.
The Minister claimed that the economy was in great shape. It is simply not true. If it were true, there would not be a yawning deficit in the Government's accounts after five years of tax increases year after year. It has been claimed today that in the past month unemployment has fallen by 68,000. That is not true. What is true is that the number of people eligible for job seeker's allowance has fallen by that number, not the number of people unemployed. When the noble Lord sums up perhaps he will explain why in the past year
There is one other aspect of the Finance Bill relevant to the assessment of the platform that the Conservative Party put before the people at the coming general election. Last weekend the Prime Minister said that his goal was to help the people whom he referred to as the "have-nots". If that is so, can the Minister explain why the tax changes in this Finance Bill give a bonus of £5.50 per week to the richest 10 per cent. of the population while taking 50 pence per week away from the poorest 10 per cent.? What a contemptible exercise! This is not an abberation. Year after year the Government's tax changes have hit the poor and benefited the rich. As the Institute for Fiscal Studies has recently shown, the top 1 per cent. of earners with an average income of £120,000 per year have received 30 per cent. of all the tax cuts since 1979 but now pay only 4 per cent. of the tax rises that have been imposed since 1992. Is that a policy for the "have-nots"? No, my Lords. This Government are committed to a policy of inequality. They revel in the misery of the poor. The Prime Minister's new concern for the have-nots is sheer hypocrisy.
I am sure noble Lords are aware that the underlying weakness of our economy derives from a failure to invest. Often it seems that this Government care about investment only when it is carried out by foreigners. If only British investors were given the same assistance that foreign investors are given. It is only by greater domestic investment in machines, in the skills and ideas of our people and in innovation for the future that the foundations of the economy can be restored.
Of course, it has been necessary for the Labour Party to accept the overall expenditure plans proposed by the Government for this year. The economy that we will inherit has such fundamental weaknesses that it can do no other. But at the coming election the Labour Party proposes a new framework for economic policy that is not merely investment-friendly but sees increased investment in Britain's future as the fundamental goal of economic policy, from a commitment to monetary stability to the new welfare to work programme financed by the windfall tax on the utilities, from a commitment to the golden rule of public spending which ensures that the Government borrow only for investment to the new tax proposals to encourage long-term investment, from the new university for industry to make the latest skills available to all to the provision of long term finance for small businesses. Every new initiative will be geared to the goal of increasing investment. That is the new economic policy which will build the underlying strength that our economy so sadly lacks today. From that underlying strength will come the greater fiscal revenues to ensure that Labour keeps its promise not to increase tax rates. It is that underlying strength that Tory economic policy has singularly failed to deliver. For that
Lord Taverne: My Lords, at this stage of the Parliament I doubt whether the nation is waiting breathless for the speeches to be made on the Second Reading of the Finance Bill in this place. Nevertheless, I should like to make two points on the Finance Bill which I believe are of importance.
I regret to say that it seems that we shall start the election campaign in an atmosphere of unreality and hypocrisy. Let us look for a moment at the major promises relating to tax and spending that have been made by the two main parties. Both the Conservative Party and the Labour Party are committed to improving schools and the National Health Service. Both are committed to maintaining the present expenditure plans of the Government as announced in the Budget. The Labour Party says that there will be no rise in income tax rates. Both promise cuts. The Conservatives promise further cuts in income tax, and Mr. Brown has announced that it is Labour's aim to reduce the lower rate band to 10 per cent. The Finance Bill already sets off along that path--a path that the Government have followed fairly consistently--by lowering income tax rates to 23 per cent.
Unfortunately, these aims are incompatible. I take the example of the National Health Service. Since 1979 expenditure on the NHS has increased in real terms by approximately 72 per cent. For that the Government deserve some credit. The paradox is that, despite that very substantial increase in expenditure on the health service, there is a mass of anecdotal evidence of shortages, rationing, people being unable to get the treatment they need, people being unable to get beds and cases where kidney patients who are over 65 are not allowed to have dialysis. In some respects in this field we have the worst record in Europe. In Britain only some 6 per cent. of kidney patients over 65 receive dialysis treatment, whereas the European average is well over 25 per cent.
Why is this so? There are two main reasons. First, the population has aged, and the older population makes a much greater demand on the health service. Secondly, better and more expensive drugs and treatment are available and the costs rise much faster than the resources that have been devoted to the health service. Despite an average increase in real terms in expenditure on the health service over the past 20 years of some 3 per cent. per annum, the National Health Service has not kept up with rising costs and there is considerable evidence of decay.
What are the Government's plans, endorsed by the main Opposition party, for the National Health Service under the public expenditure programme? The plan is that it should grow in real terms by 0.3 per cent. over the next three years. Inevitably, that means that the quality of treatment will suffer and the health service will fall further into decay.
There is an argument between the Government and the Labour Party about cutting red tape and the number of managers. That will make hardly any difference to the future of the National Health Service. It is a matter of unreality and hypocrisy. It may be that one can squeeze extra resources for the health service from extra charges as recommended by the organisation Health 2000. However, my view--which I believe corresponds to reality--is that the only way in which the NHS can maintain, let alone improve, treatment is for us to spend substantially more on it. It seems to me that the only way that can be done is by adopting the suggestion in this week's Economist--which is surprisingly radical given its general views--that there should be an hypothecated income tax, separated from the rest of income tax, which goes solely to the National Health Service. It would make the issues much clearer. I believe that if people knew where the money was going they would be more willing to pay. The alternative that must be faced by both the Government and the Labour Party is that there will be a two-tier health service: an upper tier with more specialised and better treatment, financed by insurance; and a lower, poorish emergency service financed out of taxation. That is my first point.
My second point is concerned solely with taxation. A good deal has been said about helping the poor--the have-nots--but it is now unfortunately clear that both major parties reject any redistributive role for taxation. I joined the Labour Party in my teens because I supported its stand on social justice. I left the Labour Party in the early 1970s because its sense of social justice--if I may over-simplify things--was not combined with any sense of realism. Today, I salute the Labour Party for its conversion to realism, but I regret that it seems virtually to have abandoned any concern for social justice. That is evident from its approach to taxation and to the Finance Bill.
I wish to look for a moment at Mr. Brown's alternative strategy. I recognise that the main priority must be to get people out of the poverty trap and into work, but there will inevitably be a sizeable group--deserted wives, single mothers, disabled people, sick people, old people who depend solely upon the basic state pension, the unskilled, the dregs, as it were of the school system--which will be dependent upon the state and upon very low earnings. What do cuts in income tax do for them? Practically nothing, because most of them do not pay tax. What will the extension of the lower rate band of 20 per cent. do for them? Virtually nothing. As the IFS has shown in the 1997 green budget it benefits the seventh and eighth deciles of the income groups many times more than the bottom three deciles.
What about Mr. Brown's proposals for a 10 per cent. lower rate? That, too, benefits the top five deciles or, if one likes, the top half of earners, much more than it benefits the bottom half. It is claimed that it will help with the poverty trap. The IFS has done some research on that. Let me quote from its 1997 green budget:
The best way to help the lower paid, or the poor, through income tax is by extending allowances, preferably by turning them into tax credits which are worth the same to high and low rate taxpayers, but that, too, does not much help the poverty trap.
The tragedy about Mr. Brown's pledge that there will be no change in income tax rates--I have great respect for Mr. Brown--is that the time will come when he will have to raise taxes. If the Government were by any chance re-elected, they, too, would have to raise taxes. There can be very little doubt that this will have to be done. Whoever the Government are, they will either have to raise taxes or let schools and health become worse. If there is to be no change in income tax rates, then we might be able to get something out of changing the way allowances are charged, but the only real weapon for getting extra tax will be VAT which hurts the poorest most.
It is not fashionable to be concerned with poverty. Both main parties now reject taxation as a way of redistribution. I should like to voice a note of dissent. The primary role of taxes is to raise revenue, and to do so fairly according to ability to pay, but there is still room for a redistributive element, provided that there is not a disincentive to wealth creation.
The Finance Bill reduces taxes. It also raises some taxes. But in so far as it reduces taxes that, to my mind, is a grave error for which the next government will have to pay. If there had been room for tax cuts, then the Bill should have had more regard for social justice. Concern for social justice seems to have been abandoned by Conservatives, and, I regret, the Labour Party alike.
Lord Boyd-Carpenter: My Lords, I am delighted that we have had some little debate this time on the Finance Bill. Noble Lords will recall that the previous Finance Bill was not debated as a result of a government and opposition decision. Today we have had a short debate, inadequate to cover enormously complex and difficult issues that arise on the Finance Bill, but still we have, as a matter of principle, had some discussion of it.
I do not wish to obtrude unduly upon that restraint and, in the circumstances of this Session, inevitable state of affairs. But I want to stress, as the noble Lord opposite stressed, the desirability of cutting VAT. VAT is a very bad tax indeed. It falls, as the noble Lord said, particularly upon those least able to afford it. It is an inflationary tax. It is, indeed, a damaging piece of taxation.
The point that I should like to make on this Second Reading of the Finance Bill is that the government of the day, whoever they may be, should undoubtedly, when we return, cut VAT heavily and restore the ordinary system of taxation. I could of course dilate at
Lord Ezra: My Lords, the time has come in this short debate to wind up and to summarise the position as it has been deployed by previous speakers, and to make a few points in conclusion. In trying to be objective, I should like to start by describing what I believe are the good points of the Bill. First, it has been limited in its scope. It has been a fairly cautious Bill, which I think is appropriate bearing in mind the present delicate balance of the economy.
Secondly, I very much welcome what has been done to help small firms. That is highly desirable. Thirdly, as the noble Lord reminded us, it has been a shorter Bill. It is still pretty long. It is over 200 pages long, but it is easier to manage than the two volumes that we have been used to in recent times.
That said, however, and looking at it in the longer perspective, I believe that it is an opportunity missed. When one looks back on the development of the British economy over the years--certainly over the years since the last world war--what emerges strongly is that we have tended to consume at an increasing rate, but at the same time our investment has not developed in line with that. So we have been strong on consumption, but relatively weak on investment.
I should like to see in successive Finance Bills an attempt to correct that imbalance. Unless we can do so, we shall soon run out of the ability to consume more. Of course, increased consumption is highly desirable, but it has to be supported by corresponding increases in investment. Our performance in investment, even with the benefit of the inward investment of which noble Lords opposite continue to remind us, compares poorly with our main competitors.
The Bill, if subjected to that test, does not show up too well. First, it further stimulates consumption by the admittedly modest reductions in income tax. Many people believe that probably this is not the time to reduce direct taxation because of all the other calls on the economy. Furthermore, later this year there will be a windfall payment by the building societies which will be converting to PLCs. That has been variously estimated at anything from £10 billion to £18 billion, which is the equivalent to several pence off income tax. No one knows how much of that very large windfall will go into increased consumption or increased savings, so there could be a big boost to consumption.
Furthermore, we have the unfortunate situation in the public sector where investment in certain vital areas is diminishing, despite what the Government may say to the contrary. We have been talking a great deal about the Government's plans for London Underground. Although the amount of funding which the Government provide to the Underground has risen over the years, it is, on the basis of statements by the management of the Underground, inadequate to meet normal maintenance. Therefore, users of the Underground can expect more delays as a result of signalling failures and other deficiencies. The Government's solution is to privatise, but on their own estimate, if they were returned to power, it would take three years before a privatisation Bill could be introduced and five years of privatisation before investment in the Underground could reach a proper level. That is eight years from now, but what will happen during that period? It is a gloomy prospect, indeed.
We are led to believe that the Government in their manifesto will be putting forward proposals on the Post Office. It happens to be a successfully run public-sector company, but it is now being pushed into great difficulty by the Government taking virtually the whole of its post-tax profits in enforced dividends. That is totally unheard of in the private sector. No quoted company would be distributing more than about one-third of its post-tax earnings, but Government have been taking up to 90 per cent. from the Post Office.
In my opinion, there are insufficient stimuli to investment in the private sector, and in vital investment in the public sector there is a deficiency. It should be the task of successive Finance Bills to try to put the balance right between stimulating consumption on the one hand and increasing investment on the other.
Lord Mackay of Ardbrecknish: My Lords, this has been a short but interesting debate. Perhaps I may say to my noble friend Lord Boyd-Carpenter that my recollection of my time as Minister answerable for Treasury matters at this Dispatch Box is that we have debated the Finance Bill every year. We may not be allowed to amend it, but that is by long tradition and convention. Perhaps my noble friend is confusing the Finance Bill with the Consolidated Fund Bill, which I managed to get through your Lordships' House quickly yesterday afternoon, perhaps without my noble friend noticing.
We have had a number of debates on the economy in recent times. One took place a fortnight ago and there were a number in the autumn and early winter. We have not been short of debates. The noble Lords, Lord Ezra and Lord Eatwell, and myself have discussed these matters on a number of occasions to such an extent--
However, I must make one or two comments in summing up. My noble friend Lord Boyd-Carpenter and the noble Lord, Lord Taverne, showed hostility to value added tax. Perhaps my noble friend and I can argue that on another day. However, I am surprised that the noble Lord, Lord Taverne, is not aware of the limitations imposed on any government in reducing value added tax. It is called the Sixth VAT Directive and it has something to do with the European Union. I understand from some of the noble Lord's previous interventions that he is an enthusiastic supporter and would tie us in even further to the European Union--
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