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“However, I can bring forward a proposal for this year that will offset the average loss and which will provide financial support more fairly, quickly and efficiently than any one-off rebate scheme, provided that we legislate for it now in this year’s Finance Bill. For that reason, I am proposing to

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bring forward one measure from the Pre-Budget Report now. I want to help families on low and middle incomes as soon as possible. But my proposal for this year will not only help those on low incomes who lost out but also does more to help all basic-rate taxpaying families at a time when oil and food prices have been rising in every part of the world.

“So, at a cost of £2.7 billion, I will increase the individual personal tax allowance by £600 to £6,035 for this financial year, benefiting all basic-rate taxpayers under 65. This will mean that 22 million people on low and middle incomes will gain an additional £120 this year, and 4.2 million households will receive as much, or more than, they originally lost. The remaining 1.1 million households will see their loss at least halved. In other words, 80 per cent of households are fully compensated, with the remaining 20 per cent compensated by at least half. In addition, 600,000 people on low incomes will be taken out of tax altogether.

“People aged between 60 and 64 whose average loss was £100 will also receive the advantage of the increased personal allowance worth up to £120. They will also receive the additional £50 winter fuel payment for this year, which I announced in the Budget.

“The increased personal allowance will apply to all income for this tax year and so will be backdated to 6 April. As a result, from September, basic rate taxpayers will see a one-off increase in their monthly income of £60 and then an increase of £10 per month for the rest of the financial year

“Higher rate taxpayers were largely unaffected by the reforms announced last year so it is fair to focus this additional support on basic rate taxpayers only. However, as the £600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, I am therefore reducing the threshold at which an individual starts to pay tax at the higher rate by £600. The net effect of these changes is that the tax liability of everyone who currently pays tax at 40 per cent will be unaffected by the increase in the personal allowance. Those brought into the higher rate will gain by up to £120 this year. I propose to legislate for these changes in this year’s Finance Bill so that taxpayers will get the benefit from September.

“Raising the personal allowance is simpler than other solutions. It retains the benefit of a simpler tax system and allows basic rate taxpayers to see the benefits as soon as possible, and for the whole of this financial year.

“My proposal will also provide additional support for individuals and families for this year, including those on middle incomes who have currently benefited from other reforms announced in 2007. We are providing this support at a time when they are facing additional costs. I have brought forward this measure from the Pre-Budget Report in order to ensure that people get the benefit as soon as possible. I shall set out proposals for next year and beyond at that time.

“As I made clear at the time of the Budget, it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows.

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Debt is lower than in the past, and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times, generated by the turbulence in world financial markets and global commodity price inflation. I am able to finance this proposal through borrowing this year, ensuring that we do not take money out of the economy at this time. I will, of course, set out my fiscal projections and decisions in the Pre-Budget Report as usual, consistent with the fiscal rules and in line with the requirements of the code for fiscal stability. For future years, our aim is to continue the same level of support for those on lower incomes and I shall bring forward proposals to do that at the Pre-Budget Report.

“The change that I am announcing today represents the fairest and most effective way to help all those affected as a result of the changes proposed last year. In addition, this family tax cut provides support this year for those on middle incomes at a time where they face increased bills, so supporting the economy. I commend this Statement to the House”.

My Lords, that concludes the Statement.

3.53 pm

Lord Strathclyde: My Lords, I thank the noble Lord for repeating that emergency and unprecedented Statement. He will know, as the rest of the House does, that I lay no claim to being the greatest expert on finance in this House, but I think we can all see that the television correspondent who said last night that the tax change was one of the most spectacular political blunders of modern times was, if anything, making an understatement.

All of us who were out campaigning in the recent local elections know that the astonishing meltdown in the Labour vote has been related directly to the sense of shock and injustice across the country that a Labour Government could have set out to target the poor. When I look across the Chamber and see those stalwart servants of a great party who have given a lifetime to the Labour movement, I know not one of them gave their service for that.

What is worse is that the cut in low take-home pay has kicked in at the very time when household budgets are being poleaxed by rises in fuel and food prices. They face new taxes on their meals, their cars, their quiet pint or their glass of wine. Even their dustbins are now to be taxed almost daily. It comes in when inflation has jumped by the largest amount for six years, and it comes in when even the Housing Minister has let slip that house prices will fall by up to 10 per cent this year and, as she puts it:

People are hurting. Ordinary families are fearful, and that is why this decision has hit homes so hard. They feel that the Government simply do not understand.

I have some sympathy for the Chancellor of the Exchequer. Like everyone else, he knows where the blame for this fiasco lies. It lies with a Prime Minister who knew, when he announced the abolition of the 10p rate as Chancellor, that his plot to unseat Mr Blair had succeeded. It lies with a Prime Minister who thought, when he announced it, that he would have

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had a general election before it came into effect, only he lacked the courage and decisiveness to call that election and now those problems are rebounding on him. We should not make the Chancellor of the Exchequer, still less the noble Lord, Lord Davies of Oldham, the fall guy for that, but we can all imagine what the noble Lord really has to say in private when he is on the train home north with his Back-Bench colleagues, although I am sure he puts it in better language than the Cabinet vocabulary revealed in Mr Prescott’s memoirs.

The Government should apologise profusely to the 5.3 million families who have been hit by Mr Brown’s policy. My colleagues in another place will look carefully at the details of today’s announcement. We and 5.3 million families have learnt to wait for the small print with the Prime Minister before coming to any final conclusions. But we welcome this anyhow for all those hard-pressed families, although we are far from clear whether they have been compensated adequately. Can the noble Lord confirm that all 5.3 million families who have lost out will be fully compensated? Can he confirm that all compensation will be backdated, and does he accept that the discredited system of tax credits, which so many people of all ages fail to claim and which in many cases is incorrectly calculated, is no long-term solution to social need?

We are now seeing an era of record spending, record taxation, record borrowing, constant fiddling with the tax system and massive over-regulation collapsing in chaos and confusion. Confidence in the country is collapsing, confidence in the Prime Minister is collapsing, and the unedifying and distasteful succession of tawdry memoirs from the Downing Street court reveal a Government riven by hatred, jealousy and petty rivalry. Thank goodness that we are spared that in this place. It is a picture of a Government obsessed with internal battles for power and out of touch with the real worries of the public. That is why the whole fiasco of the 10p tax rate has been so damaging: lack of touch, lack of feel, lack of vision, and a Government who no longer know how to lead or to listen. This belated bungling lurch of a U-turn offers no hope for the future of our country or for those millions of struggling families caught up in the mess that the Prime Minister himself has created.

3.58 pm

Lord Newby: My Lords, I thank the noble Lord for repeating the Statement. It would have been even more satisfactory if we had had sight of it in advance. Dealing with Statements on tax changes completely on the hoof is extremely difficult, particularly as over the years this Government have become a dab hand at couching Statements in terms that require a little reading before they can be fully understood.

It is a great pleasure to follow the noble Lord, Lord Strathclyde. His outrage on behalf of the poor is a wonder to behold. I am privileged to have been here to listen to it. I have not heard it from those Benches in the past, and unless I have missed something, I heard nothing today about what the Conservatives would have done, how they would pay for this, or any vestige of a policy whatever. That substantiates what seem to

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me to be completely vacuous claims to have at the heart of their philosophy those hard-pressed families to whom the noble Lord referred so movingly.

As a result of what the Government have done and the Chancellor’s announcement today, 20 per cent of those who would have lost out from the abolition of the 10p tax rate will still lose out. Our suggestion would have ensured that no one lost out. A calculation would have been made in terms of the combined effect of the lowering of the basic rate and the abolition of the 10p rate on each individual’s tax liability and an individual tax rebate made to compensate those individuals. We asked tax practitioners about the feasibility of this. We understand that the Low Incomes Tax Reform Group was, in any event, about to propose it. That method seems to fulfil what the Chancellor said that he was going to do; namely, to ensure that no one would be worse off. As I say, unless I am mistaken, 20 per cent of those who would have been worse off—more than a million families—will still be worse off as a result of the Chancellor’s Statement today. Can the noble Lord confirm that 20 per cent of families will still be worse off as a result of what the Government have said today?

The second leg of this equation is how one pays for the £2.7 billion of extra expenditure that this change will cause. The Conservatives have no suggestion to make. The Government are clawing back some of the cost by reducing the tax threshold on higher rate taxpayers but I think the noble Lord said that, to the extent that there was a shortfall, the Government would finance it by borrowing in this financial year. Given the state of the public finances, any further borrowing at this stage is most unwise. We would have urged the Government to consider—although I suspect that our urging will not force the Chancellor to change his mind—deferring the benefit of the reduction in the basic rate—the 2p cut—for those on very high incomes, say, over £100,000 a year, for one year. So, in this year at least, there would have been no additional cost to the Exchequer from this change. There is a precedent for such a move. The former wild left-wing Chancellor, Roy Jenkins, made such a levy for one year only during his period as Chancellor of the Exchequer.

This is a sorry Statement by a sorry Government. To listen to it without hearing any of the background, one would have thought that it was a great idea long in gestation and that it will help to save poorer families from undue tax burdens. However, we know that this has been occasioned by a Back-Bench rebellion that has had a very slow fuse but a final major explosive effect. The timing of today’s Statement is entirely related to the holding of the Crewe by-election next week. It is a shoddy Statement by an increasingly shoddy Government. We can join the Conservatives in only one respect—in denouncing the process which has led to it being made today.

4.04 pm

Lord Davies of Oldham: My Lords, I am grateful to both noble Lords who have responded to the Statement. I agree with the noble Lord, Lord Newby, that it comes as something of a shock to many in this House,

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and it certainly will have done in the other place, to discover just how sensitive the Conservative conscience is about the poor. The Government have taken 600,000 children out of poverty. Who on earth was in power when those children were in poverty, if it was not the Administration of the other side? We are only halfway to our target, such is the depth of poverty in this country.

We have always maintained, as we do with this Statement, that we will continue to concentrate our resources on the less well off in society and to eradicate poverty. The Opposition are present only when there is some issue with regard to taxation that they can address for short-term political advantage. They never at any stage participated constructively in the debate about what was to be done about the situation in which the country found itself, nor have we had any indication today of an alternative strategy for dealing with this issue.

The Government, however, have made it clear through the Statement that we intend to fulfil the objectives we had all along. First, we want to make the taxation system as simple and straightforward as possible, hence the clear reduction from 22 per cent to the settled standard rate of 20 per cent. Secondly, we want to address those groups of people who are identified as having lost out through the abolition of the 10p position. We have done that.

The noble Lord, Lord Newby, has the merit of suggesting alternative strategies. His position is one in which no relief would be given to hard-pressed taxpayers this year, by definition; when he says that every individual case should have been analysed, calibrated and calculated, he is enjoining a full budgetary process. It would take the time of another Budget, and relief for hard-pressed families would have to wait upon that development. The Government have recognised the great public concern about the position and taken action that produces the quickest possible remedies for this position.

I confirm to the noble Lord that 80 per cent of taxpayers will be compensated in full. We always said that we were about compensation for the average of the loss, for the simple reason that any other approach would require a degree of calculation that would incur significant delay. In order that we are able to act quickly we have to make broad judgments and take a broad decision about the question of the tax threshold, which, as the noble Lord will recognise, we have done. We are making it clear that the other 20 per cent will be compensated at least to half of what they have lost, so there is compensation for those people too, but there will be full compensation for 80 per cent of those who lost out.

The noble Lord, Lord Strathclyde, indicated that he was concerned about the state of the economy. We are all concerned about that; we recognise the global forces that are at work. We can recall that when oil prices went up to considerably less than they are today, the other side was in government and reaping the benefits of those increased prices without there being much of an onslaught on the issue of poverty, despite the resources it enjoyed. Now that Britain is no longer a major producer of oil—I am not discounting North Sea oil, but we all recognise that the energy

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position has changed—high oil prices affect us significantly, as do food prices, but we are not even halfway to the levels that the other side was prepared to tolerate year after year in inflation rates, house price increases and, crucially for the welfare of our people, high unemployment levels, thereby rendering ordinary families vulnerable.

So we will not take any lessons from the other side on the politics of this position. I respect that the noble Lord, Lord Strathclyde, does not specialise in economics, and he made the best fist he could of the general political situation, but the country will judge whether the Government have acted effectively and judiciously. I have not the slightest doubt that the country will recognise that the Government are taking massive steps to remedy a problem which had occurred and which is now largely tackled.

4.10 pm

Lord Howe of Aberavon: My Lords, it is an astonishing thing to hear the noble Lord holding forth about general economic problems—oil prices, oil revenue and everything else—when he only occasionally refers to the proposition that he is talking now about remedying the consequences of a grotesque misjudgment which ought never to have taken place. All the rest of it is irrelevant to the changes being made and announced today.

What astonishes me is that the abolition of the reduced rate band was not being done for the first time. In my 1980 Budget I said:

Some 1,300 Inland Revenue jobs were removed as a result of that simplification, so it was an entirely justifiable thing to do. But the way in which this Government have set about doing it is not by any straw of the imagination justifiable. In that Budget I said:

which was then running

At the same time, I decided,

in other words, to raise the threshold—but

in order to avoid giving undue benefits to people at the higher end of the scale.

I summed it up in these terms:

In other words, the exercise was fully thought through and effectively conducted. The chaos we have been facing in the months since the current Prime Minister introduced these changes last year is a wholly self-inflicted wound caused by lack of competence and a failure even to study the precedent that we had set for them 27 years earlier.

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Baroness Royall of Blaisdon: My Lords, may I respectfully point out that this is an opportunity to question the Government on the Statement and not to make statements?

Lord Davies of Oldham: My Lords, the noble and learned Lord, Lord Howe, charged me with commenting more generally about the economy, but I was merely replying to the noble Lord, Lord Strathclyde, who was kind enough to introduce those wider issues of the economy and the situation in which the nation finds itself at present.

The noble and learned Lord described his Budget of that time, a time when poor and lower income families had none of the advantages of tax credits or the additional benefits that support families in need and have made such significant inroads into the level of poverty in this country. I recognise that he identified a Budget of many years ago that pursued that strategy, but over the past few months I have not seen his friends in the other place identifying that the solution they wish to put forward is to follow the noble and learned Lord in his Budget of 1980.

The noble and learned Lord will, however, recognise that the Government have acted fairly regarding the vast majority of people whom we have identified as losers from the abolition of the 10p position—a position which, after all, was introduced in 1999 with the specific objective of aiding those who were less well off. It was a quick and immediate method of bringing advantages to them. However, this tax rate should no longer play its part in our strategy for remedying poverty. That is why we have abolished it and why we now have compensation in place for those who lose out from its abolition.

Lord Taverne: My Lords, I welcome the Government’s Statement and their belated conversion to a more effective approach. Do they now firmly agree that, as the noble and learned Lord, Lord Howe, pointed out, it is an elementary fact of our tax policy that a multiplicity of rates and lower band rates are not the best way of aiding the poor and do not simplify the tax system? I personally think that the introduction of the lower rate by the noble Lord, Lord Lamont, was a great mistake and that the Government were right to abolish the 10p rate. However, will the Minister convey to his colleagues that the best way to approach this is not to pursue tactical advantage but to keep the tax system simple and raise the thresholds, which they should have done in the first place, and not to go for a gimmick?

Lord Davies of Oldham: My Lords, I agree with the noble Lord, Lord Taverne, because he merely confirms the objectives of the 2007 Budget, which were to simplify the tax system by having a standard rate of 20 per cent and to abolish the 10p rate. The Statement addresses the consequences for some people of the abolition of the 10p rate. We recognise that it was a mistake not to have recognised that at the time. Of course we subscribe to the principles that the noble Lord mentioned with regard to the Budget, but he will recognise that tax is only one dimension of building a fairer, better and more equal society. Measures such as

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tax credits and child benefit are of great importance in targeting poverty in a way which is very difficult to achieve through the tax system.

Lord Barnett: My Lords, with great respect, the noble Lord, Lord Strathclyde, should stick to not speaking on financial matters. He should not describe the whole thing as a spectacular blunder when he and his honourable and right honourable friends in another place never for one moment referred to it as that when the 10p rate was introduced. In fact, they opposed the introduction of the 10p rate and they opposed its removal. He should therefore be careful when talking about spectacular U-turns and political rants. However I am very fond of him, and I shall want his support on occasion, so I will say no more.

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