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Lord Haskel: My Lords, I thank the noble Lord for giving way. Can he say how the £47 billion is made up? For instance, does that include the extra money paid out under the minimum wage?
Lord Brooke of Sutton Mandeville: My Lords, the calculation, as the noble Lord knows well, was presented by the CBI. If the matter of detail is of acute importance to him, I will take a leaf out of the
Minister's book and write to him after the debate. I recognise that when the Government came to office in 1997 they had around their necks the commitment that they had made about not increasing personal taxes. By last year they were reduced to a stealth tax through NICs that were introduced last year and executed this year, falling both on individuals and employers. That £47 billion has inexorably had its effect on business, and has led to the fiscal burden to which this Motion refers.As to regulations, there seems to be broad agreement from a number of different sources. I take the Chamber of Commerce figure of £20 billion which has cumulatively occurred between 1997 and this year. That figure is not markedly different from that quoted by other commentators. If current rates of growth are maintained from year to year, that figure is likely to expand to between £25 billion and £30 billion by 2005, and thus make it comparable to the fiscal figure. My remarks about the £47 billion fiscal burden likewise apply in this regard.
I have sympathy with the Government with regard to regulations. I recognise that we can be defeated in Europe and find ourselves having to administer schemes and directives from Brussels. I take as a particular example—simply because I have reasonably close working knowledge of it—the agency workers directive. I pay tribute to Alan Johnson, who was the Parliamentary Secretary at the DTI in the previous Parliament and who was responsible for handling that. He published a series of drafts about what the directive would say. In the nature of things, agency workers were highly prevalent in my constituency, where the best part of 1 million people came to work. I took the trouble to write to every employer in that field in my constituency not once but twice as the various drafts emerged. We had round-table conversations about the drafts and what their implications would be and, on behalf of the employers, I wrote to Mr Johnson or the relevant official at the DTI to explain what the consequences would be. I pay tribute to Mr Johnson for the manner in which he absorbed those remarks. The process was fairly prolonged, which itself was a commendation of the Government's attitude.
I said that I have sympathy with the Government. The Government were not happy or enthusiastic about or particularly supportive of the directive but Labour Members of the European Parliament had no hesitation in voting for it when it went through Strasbourg, thus inevitably giving the sense that the right hand did not know what the left hand was doing. The CBI's calculation is that the directive will cost 160,000 people their jobs.
I turn to the effect on individual businessmen, who must deal with regulations as well as taxation. I cast my mind back to when I was running a small business in the mid-1960s. The then Chancellor was encouraged to introduce legislation into that government's policy by two Hungarians. I have absolutely no problem with Hungarians; any nation that can generate as English a motion picture as "The Scarlet Pimpernel" with Sir Alexander Korda as a Hungarian impresario,
Baroness Orczy as the Hungarian author and Leslie Howard, who was born in Hungary, as the principal actor, has much going for it. Those two Hungarians encouraged the then Chancellor to introduce legislation requiring a foreign company—the company in which I was working was foreign—automatically to pay its profit in dividends at the end of the year to the parent company unless it could prove that it needed the money to keep in the United Kingdom. In investment terms, that was the exact opposite of the philosophy that governed the Government's policy towards investment when they came to office in 1997. But time passes; 30 years have gone by.I do not know why the Government took that view. It would appear to have placed downward pressure on sterling. It was presumably done in order to raise cash and hope that the money could come back in thereafter. The Inland Revenue required extremely detailed accounts about why one needed not to pay a dividend and to keep the money in this country. I remember spending weekend after weekend preparing schedules, which my wife somewhat resented, explaining why we needed to keep the money here. One's frustration was increased by not knowing why the Government thought that it was useful to employ businessmen's time in that way. In the fullness of time, the Inland Revenue agreed to every proposal that I put to it.
Of course I appreciate all of the arguments about businessmen's other problems, some of which the Minister may adduce. The YouGov poll, which was reported in the Mail on Sunday earlier this year, went to 472 company directors. YouGov has a good record in terms of interactive polling and the accuracy of its political forecasting. It asked the company directors to list three main barriers to growth for their companies. The largest problem was red tape, with 57 per cent; the second was the tax burden, with 44 per cent; the strength of the pound was 8 per cent; being outside the euro was 5 per cent; and I acknowledge that weak demand was 38 per cent. That is an index of the perception of what the business community must live with. I repeat my gratitude to my noble friend for initiating this debate and I look forward to the Minister's response.
3.55 p.m.
Baroness Noakes: My Lords, I add my thanks to my noble friend Lady Hogg for bringing this important topic before your Lordships' House today and for her excellent introductory speech. I declare an interest as a director of a number of companies.
When considering what to cover in today's debate I felt spoilt for choice. There are so many areas of business life that have been burdened by the Government that we could easily have spent the whole day talking about the harmful effects of the Government's policies.
The productivity analysis in this year's Red Book is damning: UK productivity in terms of output per worker is only three-quarters of that achieved in the
US and, to our shame, we lag behind France and Germany whose economies we do not normally admire. Productivity is now increasing at only half the rate it was at the end of the last period of Conservative government. It is easy to see why that is the case when we look at the fiscal and regulatory burdens that have been created.I shall concentrate on just three areas. I start with the impact that the Government have on small and medium-sized enterprises. I emphasise that I have no personal experience of working in the SME sector but I have met many chartered accountants who work in or advise SMEs. They are absolutely convinced that the Government's policies make life increasingly difficult for them. One of them, a finance director of a successful online business, was quoted in the accountancy press last week. I am conscious that the accountancy press is not the reading of choice of most noble Lords, and they may not have read what he said. He said that Britain is not a good place for small businesses. Like all small businessmen—or perhaps all businessmen—he thought taxes were too high. But his real concern was the increasing burden of regulation. He said:
- "The Government sometimes have a view that time is free and that a finance director's time is well spent in filling in forms".
Nearly 80 per cent of members of the Institute of Directors surveyed earlier this year said that they were spending more time and money on tax-related administration alone. Businesses are the Government's unpaid tax collectors and administrators. That has been the case since PAYE was so ingeniously devised more than 50 years ago. While that affects businesses of all sizes, an increasing burden in this area affects the SME sector disproportionately.
A particular concern in recent years has been the administration of the working families' tax credit system, which has been forced on to business. This year, employers have a new burden in the transition to the working tax credit system. After the transition, about half of the businesses surveyed by the Institute of Directors thought their compliance costs would increase and half thought their costs would stay the same. Not a single business thought that its costs would reduce.
The Chancellor has been endlessly inventive with his schemes of tax credits—he has designed and redesigned them—but he seems blind to their impact on businesses. A further area that small businesses find hard to cope with is the Government's extension of employee rights. We have extra pay and leave for maternity, for paternity and now even for adoption. If you are a small business—
Lord Haskel: My Lords, before the noble Baroness leaves productivity, she told us that although
productivity in France and Germany was higher, according to the OECD there is more regulation in France and Germany. Can she explain that?
Baroness Noakes: My Lords, that is a paradox I cannot explain. It is perhaps easier to see why we lag behind the US in terms of regulatory burden. Other matters must operate to counterbalance the regulatory burden that exists in France and Germany. That is perhaps not the whole story but I believe it is an important part. I shall not let the noble Lord, Lord Haskel, deflect me from talking about the burdens on small businesses and the imposition of additional rights for employees. I spoke of maternity, paternity and adoption leave and pay.
I was about to make the point that a small business finds it difficult to cope with those burdens. The impact that a single employee can make in a business of 40 or 50 employees can be disproportionately large. In turn, that makes it difficult to run a business successfully. Employees now have new rights to ask for flexible working hours. For many small businesses that is a nightmare. To the noble Lord, Lord Haskel, I say that family-friendly policies can cause many problems for small businesses.
I can quite understand why the Government think that all of those changes are a good idea in electoral terms but they seem to ignore the very significant impact experienced at the sharp end by small companies. If we ignore the SME sector we ignore a very important part of the economy. The contribution that SMEs—businesses of 250 employees or fewer—make to the economy accounts for around 40 per cent of GDP. If one harms that sector one potentially harms the engine room of growth in our economy. That can be very difficult. The Government have an important part to play, particularly, I hope, in looking at exemptions from regulation for SMEs so that regulations do not continue to cause economic harm.
My second topic is pensions. I do not need to remind noble Lords that this country has a pensions crisis. A major contributor to that has been the Government's fiscal stealth raid on pension funds, to which my noble friend Lord Brooke referred. The change in the tax credit system is costing pension funds and, therefore, ultimately the businesses that support them £5 billion a year. Another £1.5 billion a year is lost in contracted out rebates. Those annual hits are equivalent to around 15 per cent of pension fund income. That is not insignificant. Cumulatively, pension funds must have lost well over £30 billion. That has increased the financial burden of pensions on businesses. The plain fact is that that financial burden has become so intolerable that companies have been closing their defined benefit schemes in droves. The Association of Consulting Actuaries found that only 40 per cent of final salary schemes were still open to new members and half of those were considering closure.
On the subject of pensions we must remember the Government's big idea of stakeholder pensions which all employers with more than five employees were obliged to set up. The result of all of that effort by businesses was that 90 per cent of employer-designated
stakeholder schemes have no members at all and the Government have missed their target of 5 million stakeholder pensions by a mile. Only a little over 1 million people have signed up. The Government have created a pensions crisis but have no solutions. The Green Paper published last year was a damp squib in terms of policies but the small print shows an alarming potential for increasing the regulatory burdens on employers.The third and last area I shall cover is the impact of regulation in the health sector and in particular as it affects care homes. In relation to the NHS the Government have never been happier than when prescribing in the minutest detail how things should be done. For the past six years they have been busily micro-managing the NHS. It was perhaps no surprise that the diversity of provision in the largely private care home sector was too tempting to resist.
With great enthusiasm the Government devised a new regulatory regime for care homes including new standards to be met down to the smallest details such as the width of doors. Many things were wrong with those standards. Some showed that the Government did not understand how care was delivered to certain types of resident. Others clearly showed that the Government did not understand the economic impact of their recommendations in terms of the cost of alterations to care homes. Above all the Government failed to understand that many of those businesses were small businesses that simply could not or would not live within such a complex regulatory regime.
Very late in the day the Government watered down the standards, but it was too late. Care home owners had already thrown in the towel. The facts are that 60,000 care home beds have been lost since the Government came to power. In many cases the regulations were the straw that broke the camel's back. The care home sector has been decimated at a time when society, with an ageing population, needs it most.
I know that the Government talk a good story on deregulation and I have no doubt that we shall be hearing more of the same from the Minister today. But there is a simple way in which the Government could show their deregulatory intent: they could have an annual budget for the regulatory burdens on business and a department that needed to impose burdens could have a share of that budget. Unlike all other budgets, it should go down every year, so that if a department wanted to impose additional burdens, first, it would have to play a zero sum game to find burdens that it could reduce and, secondly, it would have to examine its total burdens to see what further reductions it would have to make. If that simple discipline were imposed on departments by the Government, in particular by the Treasury, that could have a very important impact. I commend that to the Government.
4.7 p.m.
Lord Razzall: My Lords, I join noble Lords in thanking the noble Baroness for introducing the debate. Having listened to the early speeches, particularly those from the noble Baroness, Lady Hogg, and the noble Lord, Lord Freeman, I was optimistic that the debate would be about steps that the Government should take to reduce the regulatory burden in the United Kingdom, rather than the partisan discussion that appears to have emerged in the past couple of speeches. They seem to suggest that until 1997 we lived in a regulation-free low-tax successful economy and that since then we have lived in an unsuccessful economy because of the groaning burdens that this Government have imposed on industry.
That is the impression that one would have received from listening to the attacks that the noble Baroness, Lady Noakes, and the noble Lord, Lord Brooke, made on the Government's record. In relation to pension funds, for example, they made no mention of the cataclysmic collapse in stock markets in the past two to three years or the fact that the whole of the private sector during the 1990s took a pensions holiday because they were advised by their actuaries so to do. If one listens to the noble Baroness, Lady Noakes, or to the noble Lord, Lord Brooke, that is entirely the fault of the Government. Such is party politics even in your Lordships' House.
Then the noble Lord, Lord Haskel, tells us that we live in a regulation-free climate and that this country has the best government in the world for regulation of businesses. Again, that does not help us much in the debate. As an outside observer and as someone who has not been a member of a party that has been in government during the period, I would have thought that it would be fair to say—both sides could agree on this—that by and large we are probably less regulated than continental Europe. Those of us who have conducted business in the United States would probably suggest that we are less regulated than that bastion of capitalism. Those on this side of the House who wish to argue that regulation in this country depresses our rate of growth below that of other countries have a difficulty explaining the French and German examples—and, indeed, the example of the United States of America. Anyone who has done business there groans under the regulation forms that have to be filled in.
Having said all that, we on these Benches consider that the way to approach the matter is not to be complacent and say, "Yes, we are a successful economy". There are problems with regulations. Indeed, on every page of my party's most recent manifesto, we printed a regulation that we would want a future government to repeal. There are 25 of them, many of which still exist.
I shall not ask the Minister to answer about all 25 when he responds, because we would run out of time. I shall not even ask him to write to me, because I know the answer. However, at least five characteristics cause
a problem in the imposition of regulation by central government. Perhaps I may briefly describe them and give one or two examples.The first, which has been touched on, is what has become known as gold-plating of European Union legislation. Your Lordships would not expect someone from my party to disagree with the optimism with which a large number of European Union directives, especially employment legislation, have been implemented. However, to take the Working Time Directive as an example, we supported it, as did the Government, but its implementation in this country has been cumbersome and contrasts with the light touch employed elsewhere in continental Europe.
Far too often, governments—this is not an attack on the Labour government, but on governments of all persuasions—fail to adopt that light-touch approach, which involves providing a high-level legal framework that avoids complex and mandatory record-keeping, but which workers can use to assert their rights where necessary. Regulatory impact assessments, which have been mentioned, help in that area, but to be more effective they should be performed by an independent body, rather than by government departments. That process works extremely well in the Netherlands, by the way. So the first point is gold-plating and over-zealous implementation of European Union legislation.
The second area in which governments of both persuasions have been guilty is where conflicting UK and European Union regulations address the same issue. One example is coming down the track with the proposed European Union duty to trade fairly, which, if the Government behave in the way in which governments normally behave, will sit alongside existing UK customer protections.
We have argued in favour of the general duty to trade fairly and will support implementation of the directive when it is introduced, but we shall require that its application to each sphere of business is clarified simply. If there is a conflict between the European directive to trade fairly and existing UK law, that UK law must be repealed. In the past, there has been a tendency to leave in place UK law that is in conflict with or touches on the same points as European directives, increasing the burden of regulation on British industry.
My third point concerns multiple layers of application. The best example of that is the fire regulations. With the Fire Precautions Act 1971, the Fire Precautions Regulations 1977 and local Acts and by-laws, more than 100 different regulations are currently actively in place which affect dealing with fire problems. That requires each layer of regulation to be assessed to identify the requirements applying to a business at any one time—a major burden on large, small and medium-sized firms alike.
Where regulations are amended or updated, it should be a requirement that a single explanation of the regulations that apply is produced. When a new regulation is introduced, any owner, operator or director of a business should receive an explanation of exactly what regulations apply to that activity.
My fourth point concerns the requirement to provide information under the Statistics of Trade Act 1947. That is a major irritation to large sectors of British industry. I have in my hand a letter from a small manufacturing company in Stockport—at the heart of our manufacturing sector in the North West—which, under that Act, is required to report regularly on the following: its quarterly capital expenditure; annual business inquiries, parts 1 and 2; monthly wages and salaries; quarterly stocks; a survey of research and development carried out in the UK in the current year; the annual register inquiry; an annual inquiry into international trade and services; an annual/quarterly production inquiry; and a sales quarterly inquiry.
The writer of the letter states that when the company has slowed down and not filled in the forms, the Office for National Statistics in Newport has told it that it will refer it to the enforcement squad under Section 1 of the Statistics of Trade Act 1947. That is an example of the sort of thing discussed by the noble Baroness, Lady Noakes, which seriously reduces the productivity of British industry because of people having to be employed to answer such inquiries.
What is the remedy? One remedy would be that any regulation should be governed by a sunset clause, lapsing automatically unless positively reimposed, prompting the Government to assess whether the regulations were strictly necessary. I should have thought that regulations under the Statistics of Trade Act 1947 could well fall into that category.
My final point, which I have saved until last because it concerns a major con trick on British industry by governments of all persuasions, is the use of business to administer government policy. The most effective method of collection of tax was imposed through the pay-as-you-earn system, which has enabled enormous numbers of people in the private sector to collect tax on behalf of central government. The Inland Revenue does not collect PAYE; employees working for business do. That cost is imposed on British industry.
Similarly, when value added tax was introduced, the system was clever. The private sector collects VAT, not Customs and Excise. The most recent example of that is the administration of the working families' tax credit, which provides an additional cost to business. Governments of all persuasions should consider that fifth area and whether it is the most efficient use of the private sector's time to be the free collection agency of tax revenue.
In conclusion, I agree with the noble Lord, Lord Freeman: the problem is that governments of all persuasions start with questions asked here and in another place. Every time one of your Lordships stands up to ask, "What are the Government going to do about X, Y or Z?", if the Minister replies, "We shall consider it", that process inevitably grinds its way through the system and ends with a new regulation.
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