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Lord Northbrook: My Lords, first, I declare an interest as an investment fund manager. I do not know whether it is going to become standard practice for me to speak after the noble Lord, Lord McKenzie of Luton, but I have to declare a measure of astonishment at some of his words on the Government's taxation policy, particularly as he seemed to ignore the huge
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increases in national insurance contributions that have taken place since the Government came to power. The Government had said that they would not increase rates of taxation at all, but national insurance should be considered part of the tax system, particularly when such contributions affect middle England, policemen, nurses and so forth. The other area where stealth taxes are particularly apparent is in the increases in stamp duty, which again hit middle England on the house-buying front. So I am slightly surprised.
As the BBC News website puts it:
"This was the Chancellor's final performance before the election and he was even more of a conjuror than normal. Despite large and growing deficits, he managed to give money away to children, council tax critics",
and to curb fuel tax increases to motorists. He also changed his mind on cutting savings limits, of which more later.
First, as always I should like to praise one or two measures in the Budget. The decision to give pensioners aged over 70 and 80 additional payments as part of the winter fuel allowance is welcome, as are the measures to extend the child trust fund scheme at birth and age seven, with certain caveats which I shall mention later.
I am also pleased that the Government are to consult on a fairer and more coherent tax system for the 300,000 smaller businesses. The Chancellor must have read my Budget speech last July, when I complained about the effect of IR 591 on smaller companies. To recap, the story is as follows.
Since 1997, the Government have encouraged the incorporation of businesses by lowering the rate of corporation tax from 23 per cent to 20 per cent. In 1999 they created a starting rate of 10 per cent, which was lowered to zero in 2002. The Government then panicked in the 2004 Budget because they felt that too many companies were taking advantage of the new system and slapped a tax on any distributions out of smaller companies, thus causing alarm and upset to those who had converted from sole traders to limited companies because they thought that the Government were promoting incorporation to favour business. Hence the promise in the Pre-Budget Report to make life easier for smaller companies, while welcome, needs to be treated with caution because the Government's record in this area is not good.
The Chancellor must also have read my comments in the same speech in July on ISAs, when I complained that the Government were planning to lower the ISA limit from £7,000 to £5,000 from April 2006. I said:
"ISAs should be at the centre of their strategy to encourage long-term savings".—[Official Report, 20/7/04; col. 193.]
Lo and behold—I am sure not as a consequence—the Government are considering extending the £7,000 limit until 2009. But why only until then? Why not make it more permanent?
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This still does not make up for the damage that new Labour has done to savings since 1997. First, as my noble friend Lord Trenchard said, the Government raided pension funds and deprived them of dividend tax credits of £5 billion a year, hoping that no one would notice. Secondly, they cut the individual tax-free savings limit from the total of £10,800 available in 1997 through a combination of general PEPs, single company PEPs and TESSAs, reducing it to £7,000 a year. Thirdly, they removed the 10 per cent tax credit available on ISA dividend income. How does that encourage people to save?
This action is reflected in the decline of the savings ratio since 1997. In the six years from 1998 to 2003, the household savings ratio has never been higher than 6.7 per cent. In the previous six years to 1997, it was never lower than 9.3 per cent.
As for the child tax credit, which I praised earlier, I see from the Times today that there may be a problem with sufficient providers in the administration system. In view of the small sum involved, I wonder whether it would not have been better to have cut tax rates.
If people are not saving, they are certainly spending. The build-up of household debt to a figure of £1 trillion is a cause for concern. The deputy chairman of the Bank of England, Sir Andrew Large, said last March that he was conscious of the build-up in household debt and,
"in particular the possibility that the potential vulnerabilities stemming from higher debt levels do in fact crystallize at some point and trigger a sharp demand slowdown that could have an impact on monetary stability".
Not only is personal debt a problem but the Government's borrowing situation is getting worse and is in danger, as has already been stated by my noble friend Lord Trenchard, of breaching the golden rule. The Institute of Fiscal Studies states that by increasing the current budget deficit forecast by £2 billion for this year and £1.4 billion next year, the Treasury cuts the margin of error in meeting the golden rule to only £8 billion, including £3.9 billion in the reserve for unforeseen spending needs.
In its press release, the IFS highlighted the Chancellor's reliance on strong tax revenues to meet his forecasts. It stated:
"Whether the improvement in the current budget balance materializes on the desired scale depends in large part whether tax revenues rebound as strongly in the medium term as the Chancellor continues to hope".
As has been stated by my noble friend Lord Trenchard, this relies mainly on a substantial increase in corporation tax receipts, which the Chancellor conceded will once again be lower than expected this year. The IFS agrees with the shadow Chancellor that if tax receipts do not meet the Chancellor's projections he will have to raise taxes.
"The Chancellor is predicting that the tax burden will rise by 2.2 per cent of national income over what is likely to be the next parliamentary term. This represents an increase in taxation equivalent to £26 billion in today's money, compared to the £16 billion seen since Labour came into office. Voters may not be so happy with these further increases in tax".
The IFS told the Financial Times on 4 December that there is only a six in 10 chance of the golden rule being met. Carl Emmerson, the IFS deputy director, said:
"At best the Chancellor has a 62 per cent chance of success. If the trends of the first seven months of this financial year were continued the Chancellor would have only a 34 per cent chance of keeping government borrowing inside the golden rule limit".
City institutions also believe that the Chancellor has been too optimistic in his forecasts. The investment bank, Morgan Stanley, stated in its Pre-Budget Report commentary that:
"Given the current outcomes this year for spending and tax receipts there are upside risks to the Treasury's projections for borrowing in 2004–5 and 2005–6".
Credit Suisse First Boston goes further. It states:
"The authorities are nothing if not consistent. The Pre-Budget Report again asserts that the public finances are on course to improve and to satisfy the fiscal rules. The problem with these forecasts is that they simply haven't been right. The Pre-Budget Reports of two or three years ago were more than 1% of GDP out on the following year's current balance. On current trends last year's forecast looks set to go more or less the same way . . . Last year's budget report forecast that this year's current balance would be a deficit of some £8 billion. This year's budget raised that forecast to £11 billion and the Pre-Budget Report has now raised it to £12.5 billion. The fact is however that more than half way through the year the twelve month running total is over £12 billion higher than that and hasn't been falling at anything like the required rate".
So, in effect, that is the missing £10 billion that the authority's forecast depend on.
Even normally sympathetic newspapers such as the Times are starting to question the Chancellor's figures. Gary Duncan, its economic editor, writes:
"The red ink grows darker and deeper. So does Gordon Brown's woes over the deteriorating state of public finances . . . The extra red ink comes as tax revenues continue to defy the Chancellor's optimistic projections".
The OECD, in its economic outlook for the UK written just before the Pre-Budget Report, also expresses caution. It states:
contrary to the figures stated in the Pre-Budget Report—
"and in the absence of a spontaneous rise in taxes, additional action may be required to achieve a decisive and sustainable reduction".
In summary, I cannot approve the Government's assessment as set out in the Pre-Budget Report for the purposes of Section 5 of the European Communities (Amendment) Act 1993. I am concerned in particular about the increasing budget deficit and, contrary to the Minister, I do not believe that the extra money being spent in health and education, in particular, is being spent wisely or well.
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