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Lord Wedderburn of Charlton: My Lords, having properly pursued a commitment to outlaw hunting with dogs and use the Parliament Act, on which I lay great stress, is it not more proper for the Government to defend the validity of the Parliament Act, which matters a great deal to all Members of the House and particularly to my noble friends, and to do so in the courts if necessary rather than abstaining from appearing before the judicial process on that question?

Lord Whitty: My Lords, I absolutely agree with my noble friend, but that is exactly what I said. We will
 
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vigorously oppose the Countryside Alliance's position in the courts on the substantive issue of the validity of the Parliament Act. If, however, at the end of that process, the Countryside Alliance requests an injunction having lost that challenge and the courts decide that there are grounds for appeal—all of which is in the courts' hands and not mine—some doubt may remain and clarity will be important. Therefore, the side issue of the date of commencement is less important than the question of the validity of the Parliament Act, as my noble friend Lord Wedderburn insists.

Management of Offenders and Sentencing Bill [HL]

Baroness Scotland of Asthal: My Lords, I beg to introduce a Bill to make further provision relating to the management of offenders, the functions of local probation boards and prisons; to provide for the appointment and functions of Her Majesty's Commissioner for Offender Management and Prisons; to make provision about fines and other matters relating to sentencing; to make provision for the electronic monitoring of persons on bail; and for connected purposes. I beg to move that this Bill be now read a first time.

Moved, That the Bill be now read a first time.—(Baroness Scotland of Asthal.)

On Question, Bill read a first time, and ordered to be printed.

Business of the House: Debates this Day

The Lord President of the Council (Baroness Amos): My Lords, I beg to move the Motion standing in my name on the Order Paper.

Moved, That the debate on the Motion in the name of the Lord Blackwell set down for today shall be limited to five hours and that in the name of the Lord Oxburgh to two hours.—(Baroness Amos.)

On Question, Motion agreed to.

Mental Capacity Bill

The Parliamentary Under-Secretary of State, Department for Constitutional Affairs (Baroness Ashton of Upholland): My Lords, I beg to move the Motion standing in my name on the Order Paper.

Moved, That it be an instruction to the Committee of the Whole House to which the Mental Capacity Bill has been committed that they consider the Bill in the following order:

Clauses 1 to 9 Schedule 1 Clauses 10 to 18
 
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Schedule 2 Clauses 19 to 59 Schedule 3 Clauses 60 to 62 Schedules 4 and 5 Clause 63 Schedules 6 and 7 Clauses 64 and 65.—(Baroness Ashton of Upholland.)

On Question, Motion agreed to.

Low-tax Economy

Lord Blackwell rose to call attention to the case for a low-tax economy; and to move for Papers.

The noble Lord said: My Lords, the size and power of the state, and the proportion of the economy that it appropriates through taxation, is perhaps the crucial dividing issue in politics. Although the issue has been at the heart of political debate for centuries, it is particularly relevant now because it is clear that we have a government who, having raised tax levels significantly, are philosophically committed to even greater power, scope and spending by the central state.

The alternative case for the low-tax economy that I will argue for today is based on two pillars. The first is economics and the fact that excessive spending and taxation by the state is a damaging burden on the growth of the nation's income and wealth, including its capacity to afford better public services in future; and the reality that in an increasingly global trading environment, a high-tax economy will lose trade and jobs to economies with more attractive tax regimes.

The second pillar is democratic values and the belief that a low-tax economy that encourages and rewards enterprise and effort is inherently more compatible with a moral view of personal and social responsibility than one where responsibility is arrogated to the state. It is also more compatible with the preservation of a free and democratic society.

I shall start with the first pillar—the economic arguments. After 30 years in which public spending as a proportion of the economy was gradually reduced, it has risen significantly in recent years, from a low point of 37.1 per cent of GDP in 1999 to a projected 42 per cent in 2005. The figure is considerably higher if one allows for the way in which the figures have been flattered by the redefinition of large blocks of welfare benefit as tax credits, which reduces spending and tax levels at a stroke.

Tax levels have also risen and are guaranteed to rise further to close the budget deficit, if the Government's spending plans are maintained. The rise since 1999 in the proportion of economic output spent by the state—5 per cent of GDP—amounts to roughly £60 billion of spending and taxation each year.

One has to ask, "What do we have to show for this?". Of course, there are some benefits—new hospitals and resurfaced roads—but most of what has been renamed "investment" in new Labour-speak is, in fact, current consumption. Unfortunately, new spending has not been matched by a proportionate increase in outcomes
 
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because of the public services' lamentably poor record in productivity, however much the Government struggle to find the most flattering measures.

According to ONS data, general government productivity fell by 1 to 2 per cent a year in each of 1999, 2000 and 2001, the latest dates for which figures are available, after rising slightly in previous years. The economic consequence of diverting national income out of the wealth-creating private sector into the current consumption of public services is, inevitably, to depress productivity growth and growth overall for the economy as a whole. In short, by spending £60 billion of additional money each year to consume public services today, we reduce the growth and wealth creation in the economy and reduce wealth and income levels tomorrow.

That is not all. Alongside the depressing effect of excessive public consumption on economic growth, we must also take account of the negative effect on incentives and enterprise of the high taxation that follows in the wake of high spending. High taxation on businesses reduces their ability to invest, as well as to attract new capital. The rises in direct taxation are on top of the hidden cost of the growing state-imposed burden of regulation, now estimated to cost business £30 billion a year.

The damaging effects of high taxation on business also apply at a personal level. The experience of the 1980s, under the policies of some of my noble friends, demonstrated that lowering taxes on wealth creators and entrepreneurs stimulates sufficient new wealth creation so that, in time, the overall tax take rises rather than falls.

As a result of all those factors, many economic studies, including a major study by the OECD, generally calculate that a rise of 5 per cent in the proportion of GDP taken in government spending and taxation—equivalent to what we have experienced in this country in the past five years—reduces the annual growth rate by 0.25 to 0.5 per cent a year. Conversely, a falling tax take raises economic growth equivalently. Those are significant numbers. Over 20 years, that would add up to a 5 to 10 per cent difference in national income levels and to more than 30 per cent over 50 years. The arguments are magnified if one considers the national economy not in isolation but as it now is—increasingly a part of a global economic endeavour. Why should businesses invest in the UK, employ UK labour or earn UK profits if, by doing so, they ended up losing more of their income in taxation than they would if they invested and employed elsewhere?

The trouble is that we seem to be heading for higher taxes in this country at just the moment when the rest of the world has learnt the lesson and is heading for lower tax rates. In 1997, total government tax and non-tax receipts in the UK, as a percentage of GDP, were exactly in line with the OECD average. Since then, the OECD average has fallen by more than 2 per cent of GDP, while ours has risen by more than 1 per cent, with more to come.
 
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Given the analysis of the impact of high taxation on growth, to which I have referred, it is not surprising—though it is no consolation—to note that the euro area, where average government receipts in 1997 were almost 10 per cent of GDP higher than ours and big government market regulation is well entrenched, has suffered an average growth rate since 1997 of more than 0.5 per cent a year less than the UK. That is no consolation, in part because, like the rest of the world, the average tax level in that area has been falling, while ours has risen to meet it.

From an economic perspective, if we are to remain competitive in a global economy and provide incentives for wealth creation, we cannot afford not to cut taxes from their current excessive levels. However, as I said, the arguments for a low-tax economy are not just economic; they are also about fundamental values and morality.

When individuals consent to combine together through the state to pay for common education services, healthcare or poverty relief, they do so as free citizens with a moral purpose. But when the state starts to take on a life of its own, and when it grows to the point where it presents itself as the source of services and welfare to increasingly dependent citizens, that moral purpose becomes debased. If self-reliance and a sense of responsibility for one's family and community are virtues to be commended, the large state is the enemy of those virtues. Individuals become supplicants to a large, impersonal bureaucracy in which knowing how to work the system becomes the most important consideration in improving one's welfare.

When responsibility is passed from the individual to the state, the shoulders of taxpaying citizens can shrug off the personal responsibility that they have to their family and community; it has become someone else's concern. To make matters worse, the cost of taxation raised on every citizen makes it more and more difficult for those who want to shoulder their responsibilities to afford to do so.

We can take savings as an example. Saving is an important source of self-reliance, yet, over the past seven years, the Government's thirst for new taxes to pay for more and more state consumption has led to billions of pounds being taken out of individual pensions and savings pots through the abolition of ACT relief on pensions and through the weakening of ISA and life assurance tax reliefs. At the same time, the introduction of more and more spending on means-tested benefits for pensioners has meant that many people who have saved have found that they are little better off than those who did not. Financial advisers find it increasingly difficult to convince many ordinary people that it is worth their while taking out a private pension in those circumstances.

We could also take the case of low-income families. One in five two-parent families in this country raises children on a combined family income of £15,000 a year or less. Yet, if only one of those parents is working, the family will pay roughly £2,000 of that £15,000 in income tax and another £1,100 in national insurance. A typical family will spend another £3,000
 
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to £4,000 on council tax, VAT and other indirect taxes, meaning that, out of £15,000 to support such a family, more than 40 per cent of its gross income will have been taken in tax.

The truth is that it is not just rich people who pay tax. Part of the burden inevitably falls on ordinary, hard-working, struggling families. Indeed, in 2002–03, households in the bottom quintile of incomes had a higher overall tax burden than any other group. In order to help those families survive, the state, having taken so much money off them, then has to invent a panoply of welfare benefits and credits to give them back some of their own money, which they initially earned.

Why save, if savings become an impediment to state handouts? Why work, if the state offers an equivalent income to those with low skills who do not work? Why support your elderly parents, if the state then penalises them through reductions in benefits? The growth in welfare benefits, the recycling of income from individuals back to individuals through the state, has grown enormously under this Government, to the point at which 60 per cent of non-retired households receive more than 10 per cent of their disposable income from cash benefits and families on an income of over £55,000 a year are encouraged to fill in means-tested claim forms in order to get the Chancellor's new tax credits.

There are those who genuinely believe in the nationalisation of family responsibilities into an all-embracing welfare culture, and believe that that is a desirable way of building social solidarity. The noble Lord, Lord Giddens, who is perhaps the high priest of new Labour's Third Way, in his seminal book on the Third Way, which seems to have underpinned much of the Chancellor's tax policy, wrote:

"Only a welfare state that benefits most of the population will generate a common morality of citizenship".

I disagree. The moral view was better described by Edmund Burke two centuries earlier when he wrote:

"It is better to cherish virtue and humanity by leaving much to free will, even with some loss of object, than to attempt to make men mere machines and instruments of a political benevolence. The world on the whole will gain from liberty, without which virtue cannot exist".

For it is not only those whose lives become overly dependent on the state who we have to worry about, it is also the concern that an over-large state corrodes and ultimately risks corrupting those who are put in the position of wielding power over their fellow citizens.

Instead of the state being the servant of the people, it is all too easy for those who represent the state to slip into the mindset that it is they who are the masters, benevolently handing services and benefits to a fortunate citizenship, and it is a small further step for the exercise of that power to be slowly misused and abused by the desire to exercise power to achieve particular ends, or simply to preserve power itself.

It was Lord Acton who in the 19th century famously observed that power tends to corrupt and absolute power to corrupt absolutely. But before him many others, including John Adams, one of the founders of the
 
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American constitution, had observed the corrupting influences of power on those who wield it. For example, John Adams wrote that:

"The jaws of power are always open to devour, and her arm is always stretched out, if possible, to destroy the freedom of thinking, speaking and writing".

Ultimately, the argument for a low-tax economy is that only by limiting the scope of the state can we properly defend the democratic values of freedom and liberty from the dangers of over-centralised power and corruption. We cannot take the risk of putting our trust in the benevolence of an ever-larger state.

If the case for a low-tax economy is based on both economic arguments and democratic values, the practical question becomes: how do we achieve a lower tax economy? I believe that the starting point has to be a fundamental shift from the mindset that government spending commitments come first and taxation follows, to the more appropriate mindset that public sector consumption should be contained to the amount of taxation that the country can reasonably afford to pay. Given the growth in spending and taxes over recent years and the pressures of international competition, instead of asking the question, "How can we afford to cut taxes?", we should be declaring that we cannot afford not to cut them.

Cutting out wasteful spending is, of course, an important priority at any time. However, the real answer comes not just in trimming waste, but in imposing a discipline that future growth in government spending over an economic cycle should be lower than the growth in the economy as a whole so that, over time, the ratio of public spending to GDP trends downwards. Since taxes generally rise with or slightly faster than GDP, such a policy would allow a continuing, progressive and virtuous reduction in tax levels, with all the benefits I have described in stimulating faster economic growth, higher productivity and wealth creation, and more encouragement of the virtues of responsible citizens seeking to care for their families and communities.

Let me emphasise, in particular to the Government Benches, that one does not need to advocate cutting government spending to reduce taxes. All that needs to be looked for is more responsibility about the rate at which government spending continues to grow.

This is not the place to describe a list of desirable tax reductions, but I should like briefly to single out three areas that I believe to be high priorities against the objectives that I have set out. First, to reduce the tax taken from low-income families so that they are better able to afford to meet their responsibilities without state intervention, I would argue for raising the point at which income tax starts from its current level of £4,747 to, for example, £7,500, and allowing those allowances to be transferable between couples with dependent children so that no family with an income of under £15,000 is required to pay income tax at all, whether that income is provided by one earner or two. How can we afford to justify taking income tax off a family at that income level?

Secondly, to help people build up independence through savings, I would advocate restoring the tax taken by the Chancellor from pension schemes and
 
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putting that back into savings, and improving incentives by raising the amount that can be put aside each year in tax-sheltered ISAs. Given the modest amounts raised by inheritance tax, I would also advocate its abolition to help family independence to be built up over generations.

Thirdly, to reduce the tax cost on business, I would reverse the Chancellor's stealth tax on national insurance rates, which is nothing more than a tax on employment.

As I have set out in a recent publication, which I shall not therefore repeat here, all of these tax proposals would be affordable over one Parliament if public spending grew at just half a per cent less than the economy each year, which is surely a modest objective against the needs I have described.

For my part, I have no doubt at all that the additional money would be far better used if left in the hands of families, savers and businesses than if taken from them by the state and used to fund additional public sector consumption. Not only would the economy benefit, but we would also start to rebuild confidence that society values and respects the virtues of hard work, enterprise and personal responsibility on which our national future and social purpose ultimately depends.

I look forward to the debate. It is a vital topic on which we can express our views today. I welcome the contributions to be made by other noble Lords this afternoon, and in particular the maiden speech by my noble friend Lord Howard of Rising. I beg to move for Papers.

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