| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
Lord Shutt of Greetland: My Lords, the Motion for this debate refers to "the case for a low-tax economy". I wondered where to start. One thought was to say, "Well, that is a good idea" and then sit down. Another option was to say, "Just a minute, there is another side of this coin; it is called public expenditure. There is a heck of a lot to that", and then sit down. But the third option is to try to make something of the debate.
I congratulate the noble Lord, Lord Blackwell, on initiating the debate. I had reservations from the start about how it would go, but I was slightly uplifted when, in a way, the noble Lord argued for a slightly lower tax economy. He said that we should hold the line on public expenditure and see whether it can then become a lower percentage.
It was good to hear the maiden speech of the noble Lord, Lord Howard of Rising. I felt a little unhappy at his phrase, "The state provides nothing". I understand why he said it, as the state recycles money, but the right reverend Prelate the Bishop of Worcester would understand the phrase that I have in mind:
That can apply to areas other than the spiritual. The state can cope with that.
I took the Pre-Budget Report as a baseline for looking at the issue. I looked at the historical position. It was interesting that the noble Lords, Lord Blackwell and Lord Lamont, looked at international comparisons. However, page 229 of the report sets out the historical position, including the percentage of GDP described as public sector current receipts over 34 years. Of those 34 years, 22 were Conservative and 12 were Labour. Interestingly, at their height, in 1976–77, Labour receipts constituted 43.3 per cent of GDP, and at their lowest, in 2002–03, they accounted for 37.2 per cent. On the other hand, the highest figure for the Conservative years was 45.8 per cent, in 1981–82, and the lowest was 35.6 per cent, in 1993–94. So there is a wide scale of tax take.
What is the alternative to a low-tax economy? Is it a high one or, as I believe, an appropriate one? What is taxation for? It enables expenditure. I have defined expenditure under three headings: first, redistribution
12 Jan 2005 : Column 296
expenditure, or the Robin Hood expenditure, as part of which there is a very high figure for social security; secondly, intergenerational expenditure, whether paying for the young or the very elderly; and, thirdly, areas of expenditure on which it is difficult for the individual to spend. Reference has been made to the construction of roads: I cannot build my own road, but we must do it somehow corporately. Whether it involves private enterprise is another matter, but it must be done jointly.
The estimated total expenditure for 2005–06 is £520.5 billion. Education, health, local government, defence, social security, Scotland, Wales and Northern Ireland constitute 70 per cent of expenditure. We have mentioned neither transport nor, topically, overseas aid. There will always be opportunities to consider expenditure on the edges, but we can have a low-tax or lower-tax economy only if some of that expenditure is lower. Social security must be flexible. The state of the economy and the employment situation can affect how much is to be spent on social security.
It is difficult to consider the intergenerational spend. All sorts of expectations have been created over the years. People argue, "Well, I've paid for it all those years". It would be difficult to reduce many of the intergenerational spends.
If the areas that we share were diminished, much of life would be duller. The big problem about public expenditure is that people will say that they would like to reduce taxation and reduce expenditure. They are big figures. For example, I have never really warmed to much of what is described as "sport". I can cope without it, but I know how it enriches so many lives. So, I say, "I'll have a bit of the arts, heritage and environment stuff. I'm quite interested in that", but somebody else has got to have some of that expenditure for sport. Public expenditure is like beauty: it lies in the eye of the beholder. Whether we have a high-tax or low-tax economy—or an appropriate-tax economy—it must relate to required expenditure.
There is another area: borrowing. I do not believe that, in reducing taxation, the noble Lord, Lord Blackwell, intends for it to be replaced by borrowing. We should consider some of the areas of taxation. There are the big earners: income tax, national insurance contributions, corporation tax, VAT, the sin taxes—tobacco, gambling, liquor and, perhaps, petrol—council tax and business rates. Do we need too many more? I worry that we have too many taxes. I would sooner settle for fewer taxes, even if they were used to raise rather more.
I question the capital taxes that we have—for example, stamp duty on houses. If we are encouraging people to be mobile, imposing stamp duty at a time when people have all the other expenses of moving house is not a good idea. There is also capital gains tax. There is a sense in which, sometimes, it can be optional. An asset can be retained or it can be sold. Some people may be retaining assets that, perhaps, ought to be sold. It does not suit them for it to be that way. Although, as the noble Lord, Lord McKenzie of Luton, said, the 24 per cent tax may be less than it used
12 Jan 2005 : Column 297
to be, people will still say, "I'd sooner have 100 per cent of that asset, rather than changing it", even though it would be better if they were to change it.
I am not happy about inheritance tax. It seems to me that inheritance tax need not be paid, because people can send it down a generation. Perhaps it is not sensible for that to happen, but people may be doing it now, when they should not be doing it. The fact of inheritance tax is making people do that. The price of houses in London and the south-east means that there will not be many estates in that area that are not liable to inheritance tax. Obviously, that will not apply to estates that pass to a widow or widower, but, if the widow or widower dies, it is likely that there will be inheritance tax on any estate in the south-east involving a property.
Of course, there are no grounds for punitive or vindictive taxation. I remember, in my early days on the rocky road towards becoming a humble provincial chartered accountant, income tax of eight-and-threepence in the pound, surtax of 10 shillings and a 10 per cent surcharge on top of that. No one would dare put that in a manifesto, and it was not put in the manifesto when Harold Wilson and his government introduced it. There are no grounds for that. However, it is important that taxation should be appropriate and in accord with the important public expenditure that we need.
One is tempted to take on many of the speakers in the debate, but I shall leave that to my colleague who is winding up. Of course, we have to watch the details, but we should keep it simple.
Viscount Trenchard: My Lords, I am grateful to my noble friend Lord Blackwell for introducing the debate. I congratulate him on his excellent speech. It is also gratifying to have an opportunity to talk about the economy and tax as a result of my noble friend's initiative, rather than as part of a fairly pointless and demeaning process deriving from the Maastricht Treaty.
It is timely that your Lordships' House should have this opportunity to remind itself of the benefits of a low-tax economy. We are becoming fully aware only now of how much damage has been done to our economy since this Government came to power. The Chancellor stubbornly maintains that he will not break his golden rule, but government borrowing had, at the end of November, already reached £32.7 billion. The Institute for Fiscal Studies believes that he will need a current budget surplus of £11.7 billion over the four months to the end of this financial year.
It may be true that the increasing tax burden on British business and individuals will yield higher tax receipts than last year, but it is becoming ever clearer that tax revenues will not plug the hole. The Government will surely not allow the Treasury to cut public expenditure to the extent necessary to achieve the same effect so close to a general election. In addition, the IMF has told the Chancellor that he must move ahead expeditiously with plans to cut borrowing, so I expect that he is feeling hemmed in on all sides.
12 Jan 2005 : Column 298
Since the 2001 Budget, the Chancellor has consistently missed his tax revenue forecasts, largely because the UK economy has failed to grow in line with expectations. It may not matter much if the Chancellor breaks a rule of his own making, but our future prosperity depends crucially on maintaining and improving our international competitiveness. Our rankings have been slipping seriously since the Government came to power. The International Institute for Management Development ranked the UK as the ninth most competitive economy in 1997 but only the 22nd in 2004, whereas the World Economic Forum has dropped us from fourth place to eleventh since 1998.
It is important that we adopt policies that will restore our competitiveness. However, the Chancellor's plans to increase government spending from 37.1 per cent to 41.9 per cent of GDP over the current economic cycle predicate a significant tax increase. That is exactly the opposite of what we so badly need.
The noble Lord, Lord Skidelsky, correctly pointed out that we should not set too much store by statistics. He also said that the argument that a low ratio of government spending to GDP encouraged growth was not supported by the evidence of the Japanese case. However, I suggest respectfully to the noble Lord—he is not in his place at present—that a large part of the Japanese private sector is actually a kind of quasi-public sector, operating under effective government control and insulated from the competitive forces of the free market.
The Chancellor makes much of the need to maintain a growing and healthy economy in order to meet the challenges from China and India. He has said that his aim is to ensure that by 2015 Britain achieves American levels of business creation. However, that is just not going to happen, as he well knows, unless we quickly change tack and adopt new policies to reduce the size of the public sector. As Ruth Lea pointed out in her recent paper entitled, For the economy's sake we cannot afford not to cut taxes, and as my noble friends Lord Blackwell and Lord Lamont of Lerwick have so clearly explained, other major countries are reducing their tax-to-GDP ratio, whereas under this Government we have been increasing ours. An OECD study released in 1997 showed that a cut in the tax-to-GDP ratio would actually increase annual growth. Even if we could achieve increased growth rates of only 0.5 per cent a year—3 per cent rather than 2.5 per cent, say—GDP would be some 11 per cent higher after 20 years. Other studies show the greater impact.
As was pointed out in the Financial Times on 29 December, tax advisers are now warning multinational companies against establishing their European headquarters in the United Kingdom. UK Trade & Investment's latest investment bulletin admits that,
"some of the smaller markets, in particular Switzerland and Ireland, have successfully positioned themselves as serious competitors to the UK for certain types of European headquarters operation".
The Government are steadily throwing away some of the important advantages that have helped us to attract the lion's share of investment in Europe by non-European companies. Our relatively attractive tax regime is perhaps the most important of those. However, corporation tax rates have been falling quite sharply over recent years in many other countries, whereas British rates have been static, ignoring the fact that the Government have increased employers' national insurance contributions. Ireland, by contrast, has nearly halved its corporation tax rate to a mere 12.5 per cent.
The UK has also enjoyed a reputation as a stable business environment with a relatively light regulatory touch. The costs of compliance with the huge amount of new regulation, much of it emanating from Brussels, can also be viewed as a kind of additional tax which does not show up in the figures.
This Government have also imposed substantial effective tax increases on pensions and savings, and on home ownership and inheritance. They have failed to raise the starting point of the 40 per cent higher income tax rate band in line with earnings. The increase in employees' national insurance contributions is also a kind of additional income tax.
As was so eloquently pointed out by my noble friend Lord Howard of Rising in his most impressive maiden speech, tax rates above a certain level are counter-productive and will result in the tax base shrinking. The Government's aim should be to fix tax rates at the optimum level to maximise the size of the tax base. In this way it would be possible to achieve the lowest possible tax rates for all. As shown in a recent paper published by the Adam Smith Institute, it is telling that as a result of the actions of my noble and learned friend Lord Howe of Aberavon and my noble friend Lord Lawson of Blaby, in reducing the top rate of income tax from 83 per cent to 40 per cent, the Inland Revenue contribution to central government tax revenue rose from 55.9 per cent to 58.2 per cent, and the highest 10 per cent of earners increased their contribution to total revenues from 35 per cent to 42 per cent.
I believe that there is a strong argument for the adoption of a flat tax and that this would surely maximise the tax base. It would not be good for the tax avoidance industry, but would increase further the contribution to total revenues made by the highest 10 per cent of earners, which no doubt would give pleasure to noble Lords opposite. Just by way of example, if the personal allowance was set at £10,000 with a 25 per cent flat rate of tax, a person earning £20,000 a year would pay tax of £2,500. Someone earning £1 million a year, 50 times as much, would pay tax of £247,500, some 99 times the contribution of the person on £20,000. Noble Lords will recognise that such a tax regime would still be progressive. Those who could afford to pay more would still contribute by far the greatest share, but it would radically simplify the tax system, saving taxpayers a huge amount in direct and indirect costs. It would give a considerable boost to the economy by improving incentives to work, save and invest.
12 Jan 2005 : Column 300
I agree with my noble friend Lord Blackwell that,
I earnestly hope that the next Conservative government will clearly commit themselves to restoring the £5 billion stealth tax taken from our pension funds by reintroducing the dividend tax credit. This would be fair as it would avoid the double taxation of savings, it would be logical and it would provide a boost to our seriously underperforming stock market, which would itself provide significant benefits to the wider economy, encouraging investment and job creation. It would also enable underfunded pension schemes quickly to make up a part of their deficits.
The Government are putting people off saving for their retirement at a time when their own policies are making it more essential that they do save. Furthermore, indications that tax legislation may be changed retrospectively in the future are wholly unsatisfactory. The Treasury discussion paper referred to in paragraph 5.102 of the Pre-Budget Report is rather strange. It refers to the Government's wish that the legal form of a small business should reflect commercial rather than tax considerations. It also states in paragraph 1.8 that incorporation is,
But, as the Minister is surely aware, by far the most important factor leading to small business incorporations in recent years has been the Chancellor's zero rate corporation tax band introduced in 2002. Instead of simply admitting his mistake and reversing it, he has now introduced the absurdly complicated non-corporate distribution tax. That is why the Inland Revenue was only able to publish the updated annual corporate tax return, CT600, in November, and the complex calculations necessary to cope with it are why the main software houses are still having difficulties in producing programs to cope with these changes.
Noble Lords may have seen the interesting interview of the noble Lord, Lord Butler of Brockwell, in the Spectator of 11 December. The noble Lord pointed out that Civil Service numbers were reduced from 735,000 to 450,000 between 1979 and 1998. But, as national statistics reveal, public sector net employment has increased by some 530,000 since the Labour Government were elected, and around one-third of the Conservatives' cuts in Civil Service numbers has already been reversed. John Oughton, the successor to Sir Peter Gershon at the Office of Government Commerce, has predicted that the public sector is set to grow by around another 250,000 people after taking account of the redundancies expected from the Government's so-called efficiency programme.
The people are beginning to recognise that government spending is spinning out of control, and that there is no commensurate improvement in public services. The Taxpayers' Alliance, a non-partisan, grass-roots campaign for lower taxes, claims that at least £50 billion of taxpayers' money was wasted or spent on useless projects by the Government in 2003. The Government have responded to the criticism that
12 Jan 2005 : Column 301
much of the public spending increase has been wasted on bureaucracy, new quangos and the like rather than on delivering improvements in public services by commissioning the Gershon review. However, I agree with Ruth Lea that the elimination of £21 billion-worth of waste identified by Sir Peter Gershon is unambitious.
The National Audit Office has reported that a 54 per cent increase in expenditure on public sector goods and services has produced only a 12 per cent increase in measured outputs. I therefore cannot agree with the noble Lord, Lord McKenzie, that tax cuts will not have a beneficial effect on the economy in the long term. I am grateful to have the opportunity today to speak after the noble Lord rather than prior to him.
I also take issue with the noble Lord's statement about the tax avoidance industry in Hong Kong. I represented Kleinwort Benson in Japan for many years and was constantly receiving tax advice from people, including many members of the noble Lord's profession. I was advised that, where possible, to locate expatriates in Hong Kong was infinitely preferable to Tokyo because the Hong Kong tax rate is much lower, is flat, and the Japanese rates were, especially at that time, very high. Indeed, it is certainly the case that the Hong Kong Revenue gains because many people based in Asia are officially tax-domiciled in Hong Kong when perhaps they could or should be tax-domiciled in some other place.
Unfortunately, after a reasonably promising start as far as their management of the economy is concerned, the Government have now started to harm the nation's prosperity by the creation of an overly large, bloated, cumbersome and expensive public sector. As a recent YouGov survey showed, 71 per cent of respondents agreed that the welfare state has become too inefficient, with many undeserving people getting too much while genuinely needy people struggle to get by.
My noble friend Lord Blackwell has convincingly made the case why Britain cannot afford not to cut taxes. I believe that the people will recognise the truth of this and return to office a government who are capable of reining in the state and reducing it to its proper role of serving the people.
| Next Section | Back to Table of Contents | Lords Hansard Home Page |