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Lord McKenzie of Luton: My Lords, I welcome this debate on a low-tax economy which has been secured by the noble Lord, Lord Blackwell. Perhaps as a new boy myself in this Chamber I can take the opportunity to congratulate the noble Lord, Lord Howard, on an impressive and interesting maiden speech. I have no doubt that the subject matter will feature from time to time in the upcoming months as we head towards a general election. It is no coincidence that the title picks up a theme from a series of consultation papers issued from Conservative Central Office in recent weeks.
As a starting point, there are two matters on which we might agree. First, whatever the policy parameters for public expenditure and whatever programmes and policies the government of the day wish to fund, the moneys raised through taxation for that purpose should be spent effectively and should deliver best value. I do not accept the proposition that the public sector is inevitably less efficient than the private sector. Indeed, significant swathes of the public sector are supported directly by the private sector in delivery.
Secondly, we would agree that taxation legislation, however complex the detail which is considered necessary, should be written in as comprehensive a
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manner as possible. The proposition before us today is that moving to a lower tax economy will always lead to an economy that grows faster and ultimately produces increased revenues. I do not believe that that is inevitably the case, nor do I believe that there is an authoritative consensus on that proposition among economists. As a humble accountant, I was comforted by the contribution of the noble Lord, Lord Skidelsky, and his views on the issue. It could be argued that it is the structure rather than the level of the tax that is the more influential.
I would accept that lowering taxes generally or specifically can in some circumstances act as an incentive and a spur to growth—but the reverse might sometimes be the case. A part of the answer must depend on what the taxes are currently funding. Cutting taxes so that public expenditure on education and skills is slashed is unlikely to be in the long-term interest of the economy. Organising education and skills is one of the things that we do in a community, where we do it better. Cutting taxes by means of allowances or tax credits in order to encourage private investment in research and development may well benefit the economy on a long-term basis.
The most beneficial direction of movement in a tax system, higher or lower, therefore depends on its current structure and levels and the public expenditure programmes that it is supporting. An informed debate about change in the level of taxation must be accompanied by an analysis of the consequences for public expenditure. I reject the proposition that freedom is inevitably restricted by the process of taxation. My freedom is enhanced by the opportunity to vote democratically for a government who want to spend collectively in certain areas.
The proposition that a low-tax regime inevitably means that there is no tax avoidance is deeply flawed. One has only to look at systems such as that in Hong Kong where there is a low-tax, flat-rate system but also a huge tax avoidance industry.
Changes to the tax system must also be sustainable. We have our own fairly recent experience of the splurge of tax cuts in the late 1980s, which were financed in part by the massive peak years of North Sea oil revenues but had to be clawed back in the early 1990s. We heard about that from the noble Lord, Lord Lamont. As recession took hold the PSBR threatened to run out of control. The tax increases were introduced in the form of frozen tax allowances, an increased VAT rate, increased employers' national insurance contributions and a VAT base widened to include VAT on domestic fuel. There were also increases in excise duty on petrol and tobacco, with the former set to rise by 5 per cent in real terms each year. Those were the actions of a Conservative government who were cutting taxes that mostly benefited the rich and increasing VAT that was borne disproportionately by the poor.
In its policy pronouncements, the Conservative Party has stated:
"Labour has put up taxes 66 times. Pensioners, landowners, businesses and families on all income levels are paying more".
That is demonstrably not the case, and it is far from being an objective description of this Government's record on tax.
Perhaps I may return first to the list of tax increases that we touched on just before Christmas when debating the Pre-Budget Report. It is not possible in the time available to go through each item on the list. However, some of them are simply anti-avoidance measures that might increase taxes for some who would otherwise avoid their fair share. They are for the benefit of the generality of taxpayers. Perhaps we can hear today which of those measures noble Lords opposite think are appropriate, which they oppose, which they would seek to maintain if in government, and which they would seek to reverse. In some cases this list identifies the withdrawal of a specific tax relief, which is right, but makes no mention of a replacement measure, vocational training being a case in point.
The list identifies the phasing out of the married couples' allowance, but conveniently ignores the introduction of the children's tax credit. The process of phasing out the married couples' allowance was originally initiated under a Conservative Chancellor. Can we hear whether Conservative policy is now to reverse that measure? Similarly, the phasing out of mortgage interest relief was the brainchild of the Conservative government. The list quite rightly includes real increases in petrol and tobacco duty, but again it was the Conservative government who set us on this path. Is consensus on this to be continued or not? What are the Conservative Party's proposals for these duties?
No recognition is given to the tax cuts instigated by this Government. On the same principles of computation as the tax increases list, I could count more than 50 in looking at just two of the Budgets of that period. There have been general cuts in the rates of corporation tax and income tax, and effective rate cuts for capital gains tax. There have been some specific cuts in VAT, incentives for research and development, and investment in technology. The introduction of tax credits for children, families and pensioners has seen significant improvements in the resources available to those most in need.
Where do we currently stand on the tax system overall? Capital gains tax is effectively at its lowest level since the tax was introduced. For business assets, so long as they are held for two years, there is a maximum effective rate of 10 per cent. In addition, there are a range of legitimate reliefs that can reduce or eliminate a tax charge for businesses and individuals. For non-business assets under the taper provisions, there is the prospect of a maximum rate of 24 per cent. Indeed, the Government have uprated the annual exemption each year, unlike their predecessor who froze the exemption for two separate three-year periods.
The data show that gains are generated mainly from sales of listed and overseas securities and residential property other than the main home, which, of course, is exempt. More tax is being paid by more people because more people are making bigger gains. I note Conservative proposals to spend either £1 billion to introduce a 10 per cent flat-rate tax, or £2 billion to
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scrap the tax altogether. It would be interesting to know their view on how that sits with the nation's priorities. What is the income profile of those who would benefit? What public expenditure cuts would be needed to fund this measure?
On the matter of income tax, we now have the lowest starting rate—10 per cent—and basic rate—20 per cent—for decades, with the higher rate remaining unchanged from the inherited rate of 40 per cent. As for savings income, interest is taxed at either 10 per cent, 20 per cent or 40 per cent, which is an improvement on the 20 per cent, 24 per cent, and 40 per cent regime that the Government inherited. For basic and higher rate taxpayers, the treatment of dividend income is equivalent to that which the Government inherited.
I was interested to read Conservative proposals that focused on the uprating of personal allowance thresholds by reference to earnings rather than prices. The range of options proposed has an acknowledged cost of up to £6.7 billion. This aspect of the tax debate is likely to be viewed with a degree of scepticism when the record is examined. The reality is that fiscal drag has been a phenomenon of the tax system under successive governments, but perhaps none more so than the previous Conservative government. The Labour Government are criticised for not always uprating personal allowances. Indeed, it is correct that they failed to do so on one occasion. However, they never failed to uprate the personal allowances for pensioners, and they are committed to increase the minimum income guarantee in line with the higher of earnings and prices. This Government have always uprated the basic rate band.
Contrast that with the record of the previous Conservative government, who kept the personal allowances frozen for three years between 1992–93 and 1994–95, and even extended the freeze to the personal allowance for pensioners for three years. Moreover, the basic rate limit—the level at which the higher rate kicks in—was kept fixed for four successive years. References to the pot and the kettle spring to mind. Yes, more people pay income tax, but 2 million more people have been in jobs since the Government came to power.
We agree that, in its present form, council tax cannot continue to take the strains placed on it without some reform. We will need to reflect on what comes from the review currently under way. Certainly those who propose in the mean time that the solution is a local income tax need to be pressed on the specifics of their proposals, because the devil will be very much in the detail.
None of the policy papers emanating from the Conservative Party, and none of the contributions from noble Lords so far, appears to propose sweeping changes to corporation tax. That is no wonder, given that we have the lowest rate of tax since the regime was introduced 40 years ago. In particular, it is noted that there are no proposals to restore the imputation system and the repayable imputation credit to exempt funds, either at the higher 1979 level of imputation or the lower levels of 1997. I understand the proposition
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of the noble Lord, Lord Blackwell, but that is not what is in the policy papers issued from Conservative Central Office.
The reality was that the imputation system was supposed to encourage the distribution of profits, but for many companies it had the reverse effect, and its scrapping has been welcomed. Stamp duty increases will doubtless continue to be raised as an issue, although there have been some reductions in the tax for deprived areas and for intellectual property rights. However, when it comes to a choice, most people, including homeowners, would settle for the current tax structure in the context of a well managed economy with high employment, low inflation and low interest rates than live with lower stamp duty and the 15 per cent interest rates of the boom and bust era.
The reality is that inheritance tax rates have remained unchanged and the threshold raised each year under this Government. While avoidance routes have been curtailed, the structure of the tax has remained largely unchanged from that of the predecessor regime. Certainly house price inflation has brought more situations within the scope of the tax, but projected moderating of house prices will lessen the impact of that. Anyway, we need to see it in context. In 2001–02, the latest year for which I have been able to get figures, there were approximately 600,000 deaths in the UK. That led to 277,000 estates notified for probate, of which only 23,500 were taxed—fewer than 4 per cent.
The Conservatives have flaunted a range of reduction proposals that could cost up to £2.9 billion. It would be good to hear which precisely they intended to make a policy commitment. I am bound to say that, in more than 30 years as a political activist, no one has ever raised with me as one of their main concerns the fact that their inheritance might be impaired by a tax charge. They have expressed views on funding for education, for the health service and for fighting crime. That is the issue. If taxes are to be cut, public expenditure will have to be cut. By our reckoning, and by the Conservative Party's own statements, it is already pledged to cut public expenditure by £35 billion, with a further £15 billion needed to cover additional announced spending commitments.
That level of cuts cannot be achieved without severe impairment of front-line services, so each tax-cut promise must be measured in terms of the impact on the economy, in terms of fewer teachers, doctors, nurses and police officers, and in terms of less money for schools and hospitals. Does it really chime with the mood of the country that there should be reduced taxation for a minority of individuals who would by most standards be regarded as wealthy, when the commitment to give to the poor and dispossessed in the world has never been demonstrated so powerfully?
The Government have delivered not only a period of unparalleled economic growth, but a fairer tax system than they inherited, which still remains competitive by international standards. The moment will doubtless soon come when the country will have its say on who it trusts on tax and the economy. I am confident that the Government's record on those matters will prevail.
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4.45 p.m.
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