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Lord McIntosh of Haringey: My Lords, the noble Lord should pay tribute to the member of his Treasury team who is present with us today.

Lord Skidelsky: My Lords, I am very glad to add the noble Lord, Lord Taverne, to my tribute. That surplus was achieved only once. However, the budget deficits in the period of the 1950s and 1960s were very moderate--only about 2 to 3 per cent. of national income. As a result of the mass privatisations of the 1980s, the rationale for large scale borrowing for capital spending has largely disappeared. Too often that capital borrowing was simply a euphemism for subsidies. But what do we find now? There are one or two disturbing straws in the wind. Should the Government have put £200 million of the taxpayers' money into the plant at Longbridge, into a private car manufacturer? Is this the first small sign of the revival of the subsidy culture which we thought we had left behind us? I shall be interested to know.

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The Chancellor of the Exchequer has proclaimed his allegiance to the golden rule: the doctrine that government borrowing should not exceed government investment. Some rule is certainly better than no rule, but I have to point out that this rule is full of holes. Let me explain. The success of an investment in the private sector is measured by the rate of return. So for the capital/current distinction to be useful in the public sector, shadow returns must be calculated for all types of capital spending. Is it really meaningful to identify a shadow return for capital spending to build a prison or school? Is it clear that the return is higher than current spending on an extra prison officer or teacher? Unless an identifiable income stream results from the spending, the analogy between public sector and private sector borrowing breaks down. So we must monitor the golden rule of our prudent Chancellor with great care to make sure it does not become a cover for all kinds of forbidden tricks.

Another aspect of fiscal practice which gives rise to concern is the habit of all governments--I do not exclude Conservative governments--of raising taxes to satisfy populist spending pressures and then reducing the effect of those on the tax burden, especially for the middle classes, through tax reliefs and allowances. The danger is that the abolition or reduction of those allowances, justified though it may be on grounds of simplicity, equity and so on, allows the Chancellor to increase the tax burden without raising tax rates. That has started, and we need to watch it carefully.

I wish to turn in my conclusion from these rather dry technical matters to issues of basic philosophy. The difference between our party and the party on the Benches opposite is--I put as neutrally as I can--that we instinctively favour lower taxes for the sake of freedom and efficiency while it instinctively favours higher public spending for the sake of (let me call it) social justice. Our contention is that lower taxes, by making the economy more productive, will at the same time improve the position of the least well off, especially if the tax-cutting programme pays attention to raising tax thresholds as well as cutting standard and higher rates.

Across the board tax cuts benefit everyone. In particular they get us away from that dreadful and divisive game of counting winners and losers. We need to point out that a tax cut of 3 per cent. increases teachers' pay just as much as a pay rise of 3 per cent., and leaves the community more contented because it is across the board.

So in arguing for this route to social and economic improvement, we draw not only on the logic of Ibn Khaldun and his successors with whom I began, but on the historical experience of all successful societies, including our own. I beg to move for Papers.

3.20 p.m.

Lord Haskel: My Lords, the noble Lord, Lord Skidelsky, draws our attention to current levels of taxation and public expenditure. I am not an economist and personally I find the argument over the numbers rather pointless. The noble Lord spoke about

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expectation, but, after all, the numbers are a matter of record. Taxes are laid out in the Budget Red Book. The same applies to the categorisation of the Government's income and expenditure.

The noble Lord spoke about the expected return on government expenditure on supporting industry. I must point out to him that traditional accounting takes no account of social benefits. Often the expenditure is precisely for that purpose. Categorisation depends on how you view the world. The Treasury has one view of the tax burden and official statisticians have another. Every economist will have his own view about, for instance, whether the working families' tax credit should be accounted for as public spending or as negative taxation. Frankly, I find the argument academic.

The noble Lord spoke about the percentage of GDP taken in taxation. Surely, the significant point is that the level of taxation depends on the rise or fall of economic activity. And so the argument over whether the percentage of GDP taken by the Government is 37 per cent. or 36 per cent. depends on the domestic product. That is what is important.

However, the noble Lord, Lord Skidelsky, calls our attention to the consequences of the current levels of taxation and public expenditure. Now this is much more interesting territory. I would hope that the consequence of our level of taxation and public expenditure is a thriving and competitive economy and a fair and decent society. That is the kind of country I want to live in. Indeed, I congratulate the Government on having stated that as their objective.

Let me take a look at some of the areas of our taxation and public spending to see whether they are directed towards achieving those purposes. Let us take business. Business taxes are complex and there are lots of them. A thriving and competitive economy is not created just by reducing taxes to encourage consumption. Businesses should be taxed in such a way that they are encouraged to invest, to be enterprising, competitive and innovative. We particularly want to encourage small and medium-sized enterprises. A low level of corporation tax does precisely that. Introducing a new 10 per cent. rate for the smallest companies and 20 per cent. for the other SMEs certainly encourages enterprise and productivity.

In spite of what the noble Lord says, businessmen, especially those operating smaller businesses, are encouraged by tax allowances. And the Government are slowly doing that by introducing a new tax credit on research and development for SMEs from next year by extending the 40 per cent. first year capital allowance for SMEs and by the proposal for all employee share ownership schemes.

Small businesses will also receive some additional benefit, assistance and encouragement from their taxes from the new Small Business Service and its enterprise fund providing loan guarantees. Tax allowances will also be available to encourage the wider use of computers. So there is plenty of opportunity for firms to reduce their tax base by being enterprising and competitive. The whole point of allowances is that firms are enabled to reduce their tax base.

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However, businessmen, large and small, are also much influenced by what they receive in return for their taxes. If they see a bloated and wasteful public sector, a disastrous roller-coaster economy, a poorly educated workforce and highly fragmented and unequal consumers, they will be unhappy with any level of taxation. Where they see that government finances are under control, that the economy is steady, that the public sector is fairly stable and that the quality of the workforce is improving, they are encouraged by the resulting low inflation and low interest rates and feel that they are getting reasonable value for their taxes. That is one response to the noble Lord's point about expectations. He appears to believe that what is happening is a consequence of the current level of taxation and public spending. I do not believe that it is.

Personal taxation, like business tax, is complex. Much depends on the individual's tax base, his allowances, and, most importantly, their relationship with the benefit system. For years, the tax and benefit systems have been out of step. This created the unemployment trap and the poverty trap which proved not only a disincentive to work but also resulted in more and more children living in poverty.

Since 1979, the wealth of the nation has steadily increased, but so has the number of children living in poverty. That has been largely due to the taxation system. Poor people were paying marginal rates of tax of 70 per cent. Thankfully, the Government have at last begun the integration of the tax and benefit systems in order to spring the dependency trap. Surely, one of the better consequences of the working families' tax credit is the gradual elimination of the poverty and unemployment traps. It must contribute to a fairer society if work pays better than benefits.

Reform of national insurance charges will also increase the work incentive for lower paid people. It makes sense to align national insurance charges with income tax personal allowances. It also makes sense to reduce national insurance for low paid people and to increase it for higher paid people by charging national insurance against benefits in kind and increasing the rate for higher paid self employed people.

It must also be right for our society and for the economy to help families and children. The new children's tax credit and the working families' tax credit do precisely that; the tax allowance on mortgages does not. Pensioners, too, will be guaranteed a minimum income and child benefit will rise to record levels. All those changes must contribute towards a fairer society and help to close the gaps in society. Surely, that is a welcome result of the level of taxation and public spending.

Turning to the environment, I believe that it is quite legitimate for the Government to reduce the tax burden on good things such as payment for work and enterprise and to put the burden on bad things such as pollution. Climate change is recognised by all as a significant environmental threat. Using the tax system to encourage the efficient use of energy and the introduction of renewable sources of energy can only be right.

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I am most grateful to the noble Lord, Lord Skidelsky, for introducing the debate. I confess that I am a little disappointed by what he had to say. It was as though he was reading from an old script. Indeed, he went back to the 14th century and requoted the old mantras. The world has moved on and so has thinking about taxation. I believe that I have shown that the Government are aware of that, and I hope that the noble Lord, Lord Skidelsky, will not be left behind.

3.30 p.m.

Baroness Hogg: My Lords, I congratulate my noble friend Lord Skidelsky on the wording of the Motion, because it is particularly well chosen. It is indeed important to

    "call attention to ... levels of taxation and ... expenditure", because they are so deeply buried in the Government's lovely new shiny publications.

My text today is, of course, the monumental, wrist-straining document in which the Chancellor presented his latest Budget. I took the trouble recently to compare this remarkable production, written and edited at the taxpayers' expense, with the equivalent document issued on the 1979 Budget. Those of your Lordships who recall the radical changes made in that once-in-a-generation Budget may also recall that the Treasury managed to describe it simply and straightforwardly in a little red Budget book just 31 pages long.

To describe his latest Budget, however, the Chancellor seems to have needed 190 full pages--A4 size. There can surely be only one of two explanations. One is that his tinkering has so massively over-complicated the tax system that it really does require over 50,000 words to explain what on earth he is trying to do. The alternative is that in every sense of the word this really is a bit thick--that rather a lot of this so-called Budget book consists of a load of wool that the Chancellor wishes to spin over our eyes.

I would like to be both optimistic and charitable and assume that the second explanation is the correct one, because, after all, a waste of paper and Civil Service time would be much less damaging to the economy than making a complicated mess of the taxation system.

I am afraid, however, that there are aspects of Mr. Brown's Budget that plainly are a bit of a muddle, of which the most obvious is his plan for married couples' taxation. At a stroke, he has reneged on the hard-won principle of separate taxation for women, by proposing to make a mother's tax bill dependent on what her husband is earning. The only silver lining is that, since this is one of the many Budget announcements that the Chancellor does not actually intend to do anything about for two years, the Treasury has some time to sort him out.

One will certainly look in vain for a full explanation of such an important policy change in the Budget book. It is not that which is filling up the pages. In Chapter 5, after two sketchy sentences, we are promised "further detail" later in the book--presumably in the hope that

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we will simply lose interest, because if one turns to the place where it is promised, it just is not there. So what are we being offered in this massive tome?

After wading through the first 94 pages of this document, I finally reached the heading "Financial Statement and Budget Report". Now, that is what it used to say on page 1! What that tells me is rather serious: that the 94 pages in advance are the spin-doctors' preserve, and that the only part of this document to which the Treasury is prepared to give this traditional imprimatur is buried at the back of the book.

And, of course, the Chancellor must be hoping nobody gets quite that far. For example, on page 14 we are told that taxes are being cut this year by £1 billion. It is not until page 120 that we discover that the Chancellor is meanwhile putting taxes up this year by nearly £4 billion. He highlights the cut in the starting rate of income tax on pages 9, 11, 13, 49, 59, 60, 71 and 72--and I am sure that I have missed plenty--but he does not identify until page 97 the fact that he has meanwhile paid for most of this by raising the 20p rate.

This document is riddled with the repetition of claims that are not clearly defined, illustrated by somewhat randomly associated figures, laced together with buzz words. On page 70 there is a dinky little chart purporting to show what will happen to families' living standards, which ignores everything to do with spending taxes, and is only a guess at the position in 2001 anyway. Yet the Government somehow seem to have failed to find space on any of these 190 pages for the traditional tables showing the overall impact of all tax changes on individuals this year.

I have to say that I think it is fortunate that the Treasury is not a private pension provider, because I do not think this would meet the regulator's CAT standards.

I have done time in Whitehall. I have taken my turn at brisking up boring old Treasury announcements. So I am not inclined to be too prissy about presentation. But this is not some trivial hand-out on a Minister's speech. The annual Budget report is an important document of record. It circulates widely. There is a serious public interest in ensuring that the Budget report is balanced, clear and straightforward, factual and unbiased--and, preferably, brief and to the point. Whitehall guidance, admirably re-issued by this Government, is that all such material

    "should be objective and explanatory, not tendentious or polemical". All I can say is that someone seems to have nodded off at times between pages 1 and 94. For my part, having read them too, I cannot say that I altogether blame them.

Fortunately, the Chancellor has been rumbled. To quote the Economist:

    "New Labour has raised the art of obfuscating and spinning official information and statistics to new heights. Or should that be lows?".

I think he was rumbled partly because of a rather puzzling attempt by some to deny the basic fact that taxation is going up. This led the Institute for Fiscal Studies--on whose Council I have the honour to sit--to dig a bit deeper, and examine the extent to which, in the Economist's words, the numbers have been

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"flattered by reclassification". If one gets far enough into the good bit of the Budget book one can, however, find the answer to the tax question. This shows clearly that current Government receipts will go up by over £10 billion this year, and, just to make the point, that these receipts are planned to increase--only modestly, but steadily--as a share of national income. One may have to get to page 154 to find a comprehensive, undistorted answer, but it is there. The Government are planning to raise taxes this year, next year and the year after. I am sure no one in this House would be so misleading, or should I say "misled", as to suggest otherwise.

3.37 p.m.

Baroness Sharp of Guildford: My Lords, perhaps I may join others in thanking the noble Lord, Lord Skidelsky, for raising this interesting topic and giving us the opportunity to debate it.

I should like to respond immediately to three of the points that the noble Lord made. The first was that the degree of taxation in society has a considerable effect on incentives. That is only partially true. An enormous amount of work has been done by economists over the years to try to identify how big an incentive effect taxation has. I think the conclusions are that very high rates of taxation create a considerable disincentive effect.

Let us look at times when we have had very high rates of taxation, such as during the Labour administration of the 1974-79 era, and at the compounding of means testing and the poverty trap, a point raised by the noble Lord, Lord Haskel. This is an issue that we should be very much aware of--that the marginal rates of taxation faced by those at the bottom of the income scale, not at the top, are frequently well over 100 per cent. and have probably provided a major disincentive to working.

Secondly, the noble Lord, Lord Skidelsky, raised the issue of investment. Since some time in the 1960s the Government have made no distinction between capital and current expenditure in their accounts. I happened to be working in the Treasury in the early 1960s when we made that distinction. One result of the change is that the capital side of public accounts, of expenditure, has over the course of time been neglected, because current expenditure is always more pressing. There are always incomes to be met, salaries to be paid. Therefore, time and time again when economies have to be made they have been made from the capital side of expenditure. The result, I believe, is that this state has neglected its responsibilities over the years; it has run down the social infrastructure to a point where we are in danger of not being able to meet essential needs.

I give as an example the area in which I work, the economics of basic science, where we are in danger of not being able to meet the needs of modern industrialisation, of new technologies, because in this country we are not putting enough money into research and development.

The third point that the noble Lord made is that, provided we cut taxes and growth increases, we do not have to worry about the poor because they will benefit

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from faster growth. There is a degree to which the noble Lord is obviously right. He pointed out correctly that in the period from 1950 to the end of the 1960s, when we had the fastest growth rate in this country which we have ever experienced consistently, the poor did very well. But that was also a period in which we introduced major redistributive schemes for the poor.

There is no evidence at all that in the period of the 1980s, at a time when taxation was cut substantially, there was any benefit to the poor. On the contrary, we have seen the distinction between the rich and poor becoming wider than ever before. The trickle-down effect did not work. That is why we are left with a considerable problem in relation to the poor and the issue of poverty.

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