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Lord Lamont of Lerwick: My Lords, I congratulate my noble friend Lord Blackwell and I am pleased to support his Motion drawing attention to the benefits of low-tax economies.

The Motion that has been put before the House is charmingly simple. Of course, in one sense we all know what the benefits of low-tax economies are—we have more money in our pockets. But my noble friend has deployed another, deeper argument that, over time, lower-tax economies tend to perform better than higher tax economies. There is evidence that high government spending stunts economic growth. Sweden, Finland, Belgium, France and the Netherlands have the highest proportion of public spending at around 45 per cent of GDP, and they have grown more slowly than America, Korea, Switzerland and Ireland, who manage with 30 per cent or less.

It is worth considering why this state of affairs should be. Taxes are a cost. In the end, all taxes are borne exclusively by people as earners, consumers and savers. But because taxes are not zero sum transfer the total cost of the tax burden is greater than the tax revenues that are actually collected.

Taxes have a double cost. First, there is the resource effect when resources are taken from the competitive private sector and spent on the lower productivity activities of the public sector. The result is that the overall productivity of the economy is lowered. There
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is then the incentive effective. Dead weight losses, as my noble friend pointed out, arise as people alter the way they behave in order to reduce their tax liabilities. Studies in the United States suggest that dead-weight losses for some taxes are a multiple of the tax revenues collected. If the taxes were not there, output and living standards would be higher.

The most notable analysis of this is the one carried out by Professor Martin Feldstein, an economist who may be well known to some Members of this House because he once wrote a paper saying that he thought the euro increased the risk of war in Europe. But, despite that rather provocative analysis, Professor Feldstein is a Harvard economist and a Nobel Prize winner.

His study of the 1993 income tax increases in the United States suggested that a proportional rise in all income tax rates involved a dead-weight loss of nearly two dollars for every dollar of incremental tax revenues—and that is without the resource effect. If you add the resource effect on top of that, the two dollars becomes 2.33 dollars: that is, 2.33 dollars—or pounds—for every dollar or pound of revenue raised. That study is worth bearing in mind.

Britain's move from high tax rates to relatively low tax rates was one of the most important reasons for the transformation in our economic performance after 1979. It gave Britain a huge, albeit diminishing, advantage compared with our competitors. By the end of the chancellorship of my noble friend Lord Lawson, building on the work done by my noble and learned friend Lord Howe of Aberavon, Britain had one of the most competitive tax regimes of any major country in the world.

The Motion of my noble friend Lord Blackwell is timely because one has the impression that today in fiscal policy we are at a tipping point. Having done well, our competitiveness is once again in danger and quite large tax increases may be necessary after the election if it is won by Labour.

Key analysts, including the IFS, the Item Club and NIESR, are forecasting worse outcomes for the public finances than the Treasury's Budget forecast. They say that substantial tax rises after the next election will be necessary on present projections if the golden rule set down by the Chancellor is to be observed. I am not a great fan of the golden rule because of the ambiguity of the concept of investment within the public sector, but I assume that the Chancellor will wish to retain it. According to many independent analysts, that will mean tax increases in a few years' time.

The Government deserve a good deal of credit for having stuck in their first term of office to what they had previously described as vicious Tory spending plans. They had previously described them as attempts to pull down the welfare state by Mr Gradgrind with his own hands. I do not know quite how the Labour Government managed to stick to those plans—it astonished me—but they should be thoroughly congratulated on having done so.
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Having established a reputation for prudence, they now seem to believe that that reputation can last for ever and that they can return to more traditional policies. From the Pre-Budget Report it appears that there is now a subtle change of direction and—I say this in a constructive spirit—the Government are in danger of undermining what they have done in the past. The saying is "feast and famine". We have had famine and now we are to have the feast.

Public spending is now planned to increase much faster than in the recent past and faster than GDP. This will take public spending back up to 42 per cent of GDP, compared with the 39 per cent inherited from the Conservatives and which fell under Labour to as low as 37.1 per cent in 1999.

Unsurprisingly, these expenditure figures are also reflected in the projections for tax and national insurance contributions, which are forecast to increase from the 34.8 per cent inherited in 1996-97 to 38 per cent in 2007-08. The figure in 2007-08 will be the highest since 24 years previously. In fact, those figures of taxation and national insurance to GDP somewhat understate the tax burden because the first tax credits—that is, the working tax credit and the child tax credit—are scored in the national accounts as negative income tax.

Of course all these figures for the ratio of both expenditure and tax to GDP fluctuate with the state of the economy. You can control the numerator but if you cannot control the denominator the other will alter the ratio. These figures, of course, fluctuated under the Conservatives, with public expenditure reaching a high point of 48 per cent in the 1980s and 44 per cent in the 1990s. But the trend was clear, and at the end of the period of Conservative government public expenditure was significantly lower as a percentage of GDP in 1997 than in 1979. Taxes were at 34.8 per cent in 1996-97 compared with 35.9 per cent in 1980.

Of course it is sometimes necessary to put taxes up. I found myself doing that in 1993. But the ratio of taxes to GDP then was 32.8 per cent, the lowest for several decades. Indeed, even with the delayed increases, taxes rose to only 34.8 per cent over the next three years. I made it clear then that I did not believe that further tax increases were either desirable or necessary and that if further adjustments were required they should be on the expenditure side.

The Guardian newspaper pointed out the other day that taxes to GDP are no higher today than they were in the last year of Harold Wilson's government. But that is hardly reassuring. Indeed, it is profoundly depressing when you think of the way in which society and the economy have altered since the Harold Wilson era, when interventionism was the order of the day. Whole areas of the economy—public utilities, trading corporations and, indeed, the state's involvement in municipal housing—have all been moved to the private sector. The share of government in the economy is less, and it ought to reduce in the future. That is the nature of modern society. People want to make decisions for themselves.
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I remember being deeply impressed by one of the earliest broadcasts made by the Prime Minister. He talked on television about the need for the British tax system to be competitive. I thought, "Now that is something new. A Labour Prime Minister actually talking about the tax system having to be competitive with other countries". He was, of course, quite right. Taxation is part of national competitiveness, along with education, skills standards, transport and the regulatory burden on business.

Sadly, there is evidence from international surveys that the competitiveness of the UK is slipping. Of course such surveys have to be treated cautiously—they are just surveys of people's perception. But if you take the survey of the World Economic Forum, the body that the Prime Minister is addressing either today or tomorrow, or the Swiss Institute for Management Development, or the Wall Street Journal's World Economic Freedom Index, in the last the UK has slipped from third to seventh, in the first from fourth to 15th and in the second from ninth to 22nd. The trend of people's perceptions is quite clear.

There is a reason for that. Current global trends show tax to GDP ratios throughout the world falling as countries acknowledge the need to sharpen their competitiveness and act accordingly. Recent OECD data show the tax to GDP ratios in the majority of OECD countries have actually decreased between 1997 and 2004. These countries include Canada, the United States, France, Germany, Italy, Denmark, Sweden and Ireland. The UK is a major exception to the trend. In the UK the GDP ratio has risen between 1997–2004 and, much more importantly, as forecast in the Government's own plans, is expected to increase substantially further in the years up to 2007–08. It looks as though we may be about to converge with the not very encouraging models of the euro-zone. They are cutting their tax to GDP ratios; we are increasing ours and are on course to converge with them.

One OECD study in 1997 concluded that cuts in tax to GDP ratios increase the annual rates of growth of countries by up to between one quarter and one half of a percentage point, depending on the reductions made. If instead of growing at around 2.5 per cent a year, growth rates could be increased to 2.75 or 3 per cent a year, it would be a tremendous benefit. Over time, it would significantly improve countries' living standards.

The UK is risking losing ground to competitors in corporation tax. Rates have been falling quite sharply in recent years in many of the OECD countries, while British rates have remained static. No OECD country has increased rates. The UK's standard rate of corporation tax is still below the OECD and EU average, but there is a trend of rates being cut and we could find ourselves at a disadvantage. Downward pressure on corporation tax rates is likely to continue, both within the EU and globally. We cannot afford not to respond with lower rates.

Let us take the example of Ireland, which has been at the forefront of that policy. In January 2003, it cut its corporation tax rate to 12.5 per cent. The policy has resulted in the continuation of Ireland's good record of
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attracting inward investment. Several of the new members of the EU are also following a policy of promoting very attractive corporate tax regimes. For example, Estonia has a zero tax rate on retained profits. Many of the accession countries to the EU are introducing very low tax rates: flat taxes on income, at a maximum of 20 per cent, and very low corporate tax rates. If the UK is to maintain its competitiveness, we will have to look at this.

We also have to look at the higher rate threshold: the threshold at which people move into the top rate of tax. It is unjust that a partner in Goldman Sachs and a senior policeman or teacher should be paying the same marginal rate. The threshold has not been adjusted with inflation. It would require a very significant adjustment to get it back where it was in the 80s.

If the UK is to maintain its competitiveness and to improve living standards, we cannot put up taxes, as put forward in the Government's plans. Indeed, I hope that a Conservative government would reduce them. The world is moving in a different direction from that of the past and if we wish to maintain our living standards, we must cut taxes and retain our competitiveness.

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