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Viscount Trenchard: My Lords, I am grateful to the Minister for introducing the debate. I tend to feel that the ostensible reason given by the Minister for the debate has little real point. We do not believe that the Chancellor cares much what Brussels thinks about our economic policy and performance, and, as my noble friends Lady Noakes and Lord Pearson of Rannoch said in our debate on 5 November, we do not care much either.
It is a great honour to speak immediately after the Minister, but I fear that to speak immediately ahead of the noble Lord, Lord McKenzie of Luton, is foolhardy. I feel rather like a marked man; he always has the last word.
It is also right that we should recognise the Chancellor's wisdom in his decision to give operational independence to the Bank of England. The successful management of an independent monetary policy by the bank is one of the reasons for the basically sound state of our economy and for our continuing economic growth. However, the market reforms carried out by the governments led by my noble friend Lady Thatcher have provided a legacy of an efficient and lean economic structure that, as Anatole Kaletsky pointed out in the Times on 3 December, should enable any reasonably competent Chancellor to maintain healthy public finances and decent economic growth.
Mr Kaletsky also mentioned our third major advantage: we have an economy that is specialised in services, whereas global competition is shifting most manufacturing activity to the Far East. The French and German economies, in contrast, are more heavily dependent on manufacturing. I do not believe that it is likely that we can maintain our strong economic position indefinitely, if we withdraw completely from manufacturing. The Chancellor is right to say that Britain must invest in high value-added, high technology manufacturing, as well as services, and take the tough decisions to achieve American levels of business creation.
The Government's policies, however, seem to be designed to ensure that the state will absorb too great a proportion of our national resources. I will not dwell on the massive waste of resources resulting from the Government's obsession with the regions and regional
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government; I shall look only at national government. The massive increase in Civil Service numbers to 520,000 illustrates the point.
The Minister often talks about the Government's success in reducing unemployment, yet I have not heard him tell the House in which sector the Government have been most successful. I can tell your Lordships that it is the public sector. The large increase in public sector jobs has been paid for by the taxpayer. Tax revenues, which have already risen by £16 billion since the Government took office, are set to rise by a further £26 billion by 2006. The Chancellor optimistically predicts that, of that sum, £12.7 billion will be raised as a result of corporation tax receipts increasing by 44 per cent over the level seen in the previous fiscal year. He also believes that income tax receipts will be 16 per cent higher, national insurance 32 per cent up and stamp duty 27 per cent above last year's level.
The Chancellor needs to be unrealistically optimisticif that is the right wordabout the Government's projected tax receipts, in order to continue to claim that he will not break his golden rule. There is already a deficit of £17 billion in the current fiscal year, in spite of the Chancellor's having received a windfall of £4 billion from higher oil prices. The Chancellor believes that that will be reduced to £12.5 billion by April, but the Institute for Fiscal Studies predicts that it will have increased to £23 billion, breaking the golden rule with a year still to run.
Further, it is hard for us to be optimistic that the Chancellor will be correct in his assessment of future tax revenues. In the fiscal year ended last April, tax revenues were £9.6 billion less than the Government's forecast. Most observers predict that further substantial tax rises will be necessary in the next fiscal year.
Against that background, I fear that it will be difficult for the United Kingdom to achieve American levels of business creation. The necessary levels of corporate and personal taxation will make this country a progressively less attractive location for business investment. Another negative factor is the relentless increase in regulation emanating from Brussels. The overall share of GDP taken by net taxes and national insurance contributions by 200910 is stated to be 42 per cent, predicating a significant rise in the average tax rate.
There are points on which the Government deserve congratulation. Their decision to freeze fuel tax was helpful, as was the announcement that the winter fuel allowance of £200 for pensioners would be increased to £250. However, the allowance of £100 last year, to help pensioners meet their council tax bills, will not be paid in the current fiscal year. What the Chancellor gives with the left hand, he takes awayindeed more sowith the right.
The Chancellor has met his target on economic growth, but he has again missed his optimistic projections on revenues. Given the strength of sterling, he may not achieve the growth of 3.25 per cent that he expects for this year and next year. In that case, borrowing may need to be higher than £35 billion this year. That £35 billion is itself £8 billionnearly 30 per centhigher than the £27 billion that he projected in the 2003 Budget.
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The truth is that fat government costs money. The taxpayer will have to pay for it in the end. Our national debt rises relentlessly, and the interest alone on the increase on the debt expected over the next three years will cost the Exchequer another £8 billion.
It is no wonder that the Chancellor is forced to drag more and more people into the higher income tax bands and more and more estates into the inheritance tax net. The Government's failure to adjust the inheritance tax threshold to reflect rising house prices has resulted in five times as many estates being subject to inheritance tax as was the case in 1997.
I must be a glutton for punishment to return again, for the third time in six weeks, to a subject on which I was severely chastised by the Minister in his winding-up speech on 25 November. The Government still refuse to reverse or even acknowledge the serious harm done by the abolition in 1997 of dividend tax credits previously received by pension funds and charities. The noble Lord was mistaken in his claim that dividend tax credit was double-counted. The effect of the Government's act was to increase the underlying taxes suffered by bodies that are otherwise exempt from paying taxes. The current system discourages investment in UK equities by pension funds.
Furthermore, the Government's action has resulted in a vicious circle of a badly underperforming stock market and a serious pensions deficit, about which your Lordships' House is all too aware. The Minister claimed that the pensions crisis was caused in part by companies taking pension holidays. But companies were entitled to assume that their pension funds would continue to receive the dividend tax credits. The unexpected and sudden abolition of those credits directly weakened the ability of pension funds to meet expected future liabilities. Companies that took pension holidays, on the other hand, were acting responsibly. It is possible that in the event that stock markets rise significantly in future, they will again be able to do so.
The Minister, in rejecting my argument, claimed to rely on the answer given to me on 5 November by his noble friend Lord McKenzie, who always follows me in these debates. I would not wish to suggest that the noble Lord deliberately misled the House in his assertion that the previous government had anyway reduced the value of the imputation credit from £43 to £25 on every £100 of dividend received by a pension fund. However, the noble Lord omitted to mention that for every £100 of gross income distributed by a United Kingdom company by way of dividend to a pension fund, the net amount received by the fund increased over the same period by 22 per cent, whereas it has correspondingly decreased by 17 per cent under this Government. That is after taking account of the modest decrease2 per centin the rate of corporation tax claimed by the noble Lord, Lord McKenzie, as a justification for the Government's action.
The noble Lord cannot have it both ways. The Government reduced corporation tax by 2 per cent but abolished the whole tax credit worth 25 per cent at the net
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level. The Conservative governments reduced corporation tax by 19 per centfrom 52 to 33 per centover the period and reduced the value of the tax credit by 18 per centfrom 43 to 25 per cent. Incidentally, I would also mention that the principal cause of the Treasury's current raid on other government departmentsin part leading to the need to scrap four infantry battalions about which we heard this morningto provide the £1 billion necessary to avert the need for massive council tax increases at this politically sensitive time, was that councils' mushrooming pension fund debts would otherwise have necessitated large increases.
However, we should give praise where it is due. We must welcome the Chancellor's decision not to apply his threatened further penalty on savers in the reductions in the amounts that can be invested annually in ISAs. No doubt he has been persuaded in part by the lobbying on this point over the past year and more by investors' representative bodies. But why cannot the Chancellor admit his mistake and just get on with it? Why waste time and money with another consultation exercise?
But it is now clear to all that new Labour is the same as old Labour, that this Government's misguided belief that they know best, their wasteful appropriation of an ever-increasing proportion of our national resources, their failure to defend our national interests in Brussels or the freedoms and rights of minorities at home, their arrogant misuse of transitory power to destroy checks and balances in our constitution through ill-thought and ill-conceived reform and their incompetence in wrecking our pensions system and savings culture, will surely ensure that they take their place in history as a government who may have intended, as the noble Lord likes to claim, to make this country a better place to live, but were successful only in making the public sector a better place to work.
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