Finance Bill

Thank you, Mrs. Heal. It is a pleasure to welcome you to the Chair. In our discussion of clause 3, the hon. Member for Fareham (Mr. Hoban) talked about the Chancellor giving with one hand and taking away with the other. The amendments that we have tabled on the income tax clause reiterate that theme. They seek to pursue two different lines of inquiry, and pose questions that I hope will tease out the Government’s line of thinking in relation to the announcements that the Chancellor made in his final Budget. First, we are trying to tease out the Government’s arguments behind the Chancellor’s proposal to abolish the starting rate of income tax and to cut the basic rate by 2p in the pound. That is dealt with by amendment No. 11 and by amendment No. 12, which has not been selected for debate. It will be interesting to hear the Minister’s justification of the abolition of the 10p starting rate, which will result in millions of people who currently pay 10p in the pound seeing their tax rate increase to 20p in the pound. Secondly, we want to highlight the alternatives that the Government could have considered, given that the Chancellor talked about tax changes that would be ““fairer””. This is dealt with in amendment No. 10, which, rather than increasing the 10p starting rate to 20p, would get rid of it altogether, thereby lifting people on very low incomes out of tax altogether. It would replace the 10 per cent. rate with a zero rate, which would have the opposite effect to that announced by the Chancellor. Two million people would thereby be lifted out of tax altogether. This was a proposal that our tax commission looked at, in addition to cutting the basic rate of tax by 2p, as the Chancellor has announced. Amendment No. 11 proposes to introduce the basic rate changes that the Chancellor announced with great fanfare in the Budget but which, according to the Government’s timetable, will not be introduced until the next financial year. I shall briefly discuss the context of the proposals. The changes in income tax were announced in the final few words of the Chancellor’s final Budget. His explanation of the reasons behind the cut to the basic rate was clear. He said that"““to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p””." That was very clear. My hon. Friend the Member for Twickenham (Dr. Cable) said in the debate on the Budget resolutions that that announcement had given him a frisson of excitement, because he thought that the proposals put forward by our tax commission were being imitated. It was less clear how the proposal was to be paid for, however. While the Chancellor was clear about the 2p reduction in income tax, he also said:"““With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax.””—[Official Report, 21 March 2007; Vol. 458, c. 828.]" That is as close as he came to explaining that he was going to get rid of the 10p rate. He did not give any details of the decision to abolish the starting rate at any other point. Instead, we have to look at table 1.2 in the overview on page 13 of the Red Book. Line 15 refers to:"““Removing the starting rate of Income Tax on non-savings income””." That is what will pay for the reduction in the basic rate of income tax to 20p. Let us not forget, therefore, that the Government have chosen not to put these proposals in the Finance Bill. They are designed to be introduced next year. Perhaps the Chancellor is keen to leave these issues to his successor. Amendments Nos. 11 and 12 propose to introduce the changes immediately. As they would enable the Government to implement their own policy early, I would be interested to hear whether the Minister is considering supporting them. If not, perhaps he will explain why the Government are so keen to delay the changes for a year. Why does introducing them later make them any fairer? I shall remind the House again of the Chancellor’s words: he talked about making working families ““better off””. How much better off will the Government’s changes make the average family? At best—as we have seen in relation to the small business rate changes—people will be no better off. At worst, individuals will be significantly worse off, especially households on low incomes with no children, and single individuals. Ministers have talked about how tax credits will offset that, but let us not forget that large numbers of people do not claim the tax credits to which they are entitled. Many people under 25 on low incomes are not entitled to apply for tax credits in the first place. It is interesting to note that the Chancellor’s speech contained no explicit mention of young individuals or childless couples on low incomes—exactly the groups who will be worse off, and for whom the proposals will not be fairer. I would be interested to hear from the Chief Secretary exactly how the proposals make the system fairer. The amendments are particularly pertinent given the coverage over the weekend of how the wealth of the richest in our society has grown exponentially over the past 10 years—yet the Government proposals will hit those on the lowest incomes. Would it not have been fairer to fund a basic rate tax cut, reducing that growing inequality, by raising taxes for those on very high incomes, instead of raising taxes for those on very low incomes? As the ““Rich List”” published in The Times at the weekend showed, the only tax that many of those very rich people pay is council tax. Why did the Government not take the opportunity provided by the Bill to introduce measures that would have made the tax system fairer, perhaps by implementing some of the Lyons review’s recommendations in the short term? The 10p rate, which will be abolished in the next Finance Bill, was highlighted in Labour’s manifesto, and the Liberal Democrats have proposed reducing the rate to zero rather than increasing it to 20p. The Labour manifesto in 1997 stated:"““Our long-term objective is a lower starting rate of income tax of ten pence in the pound. Reducing the high marginal rates at the bottom end of the earning scale—often 70 or 80 per cent—is not only fair but desirable to encourage employment.””" If it was fair to introduce the 10p rate to try to counteract high marginal rates of taxation, why is it now fair to increase that marginal rate of taxation back to 20 per cent.? After being introduced with such a fanfare—preannounced in the manifesto, in the first Budget, and again before being finally introduced—why does the Chancellor now seem keen to dump the 10p rate on the quiet once he has left the Treasury building? The amendments invite Treasury Ministers to face up to a decision today on the two options laid out. One of those is available to debate right now.