Finance Bill

My Lords, I am grateful to the Minister for introducing the debate but I thought his approach was extraordinarily complacent given the financial situation in which we find ourselves. Like my noble friend Lord Forsyth, I am most surprised that he had nothing to say on the Government’s decision to abandon their fiscal rules. The Minister referred to the sub-committee’s well targeted and useful report but, as my noble friend pointed out in his excellent speech, he completely failed to answer properly any of the serious criticisms in the report. Most devastating was the committee’s conclusion that the formulation of tax policy has been marked by uncertainty of direction, exacerbated by poor examples of consultation. In debating the Finance Bill each year, noble Lords are rightly ever mindful of the need to respect the supremacy of another place on these matters. I was not fully aware of the emergence of a convention that your Lordships’ House should concern itself only with technical issues of tax administration, clarification and simplification. As your Lordships are aware, the Finance Bill sub-committee’s terms of reference specifically exclude the consideration of rates or incidence of tax. Of course, this is absurd, and the sub-committee’s most helpful report inevitably covered rates and incidence in relation to the effect on international competitiveness of the new rules on non-domiciled persons. Since the reform of your Lordships’ House in 1999, it has sometimes been questioned whether the statutory restriction of the powers of the House on money Bills is any longer appropriate, especially given the wide disparity in levels of experience and knowledge of such matters in favour of this place rather than another. Even if the present restrictions on your Lordships’ powers are to remain, and perhaps because they exist, it is surely right to question the logic in the restriction on the sub-committee’s right to consider aspects of rates and incidence. On this I agree entirely with my noble friend Lord Higgins. In any event, as noble Lords are aware, matters of rates and tax incidence are often discussed in your Lordships’ House during debates on economic or pension matters and many other areas. I welcome the report of the working party of my noble and learned friend Lord Howe, Making Taxes Simpler, and its endorsement of the recommendation of the commission of my noble friend Lord Forsyth to establish an office of tax simplification—although I am not entirely sure about the nomenclature. I also feel an instinctive aversion to the establishment of additional permanent quangos that tend to add to the cost and complexity of the bureaucracy. We certainly need an OTS now, but I would hope that its ultimate aim would be to do itself out of a job once it had achieved its task under a future Conservative Government—which I hope will in any event apply a ““keep taxes simple”” rule in the Treasury’s management of fiscal affairs. My noble and learned friend Lord Howe’s report also recommends the establishment of a new joint parliamentary Select Committee on taxation. This sensible proposal should do much to improve the quality of tax legislation over what we have seen in the past 10 years. This Joint Committee would of course have no powers to initiate tax changes, but its duty to consider fully the rates and incidence of taxation should not be restricted in any way by the fact that half its members will be drawn from your Lordships’ House. If such a restriction on a new Joint Committee’s scope were to be established, it would greatly reduce the value of such a committee’s reports and advice. As your Lordships are well aware, the Government have not fully compensated 1.1 million of those financially disadvantaged by the abolition of the 10p tax band. Amazingly, £2 billion of the Government’s £2.7 billion 10p tax rescue package has gone to those who had not lost out from the original tax change in any event. The Government’s handling of this issue put the final nail in the coffin of their illusory reputation for fiscal competence and prudent management of the economy. The taxpayer will have to find the additional £2.7 billion on top of the Government’s profligate spending over more than a decade. This point has been reached at a time when we can least afford it, in the early stages of a severe global economic downturn caused by matters largely beyond our control. I remind your Lordships that Mr Brown introduced the 10p tax in the first place. That was the big mistake. It was always a gimmick anyway, applying only to £2,000 of taxable income. What is worse is the fact that Mr Brown had no exit strategy. He should never have introduced a headline-grabbing, politically inspired, ineffective gimmick such as the 10p tax band without considering how he could get rid of it when he needed to. Of course, he has now had to get rid of it to pay for something designed to appeal to middle England in a desperate, last-ditch attempt to hang on to as many of his disappearing constituency of supporters across the country as he can; that is, the 2p reduction in the basic rate of income tax. To try to prevent higher rate taxpayers benefiting from the increase in the personal allowance, the Government have reduced the threshold at which the 40 per cent higher rate tax band applies. As my noble friend Lord Marlesford pointed out, the Treasury has got even that wrong and made an elementary arithmetical error. However, the Government’s failure over many years to increase the 40 per cent rate threshold in line with earnings has in any case amounted to an additional stealth tax, and has doubled the number of people drawn into the 40 per cent higher tax rate band. Rather than increasing the threshold significantly, which is necessary to restore our standing in the international competitiveness league, the Government’s reduction of the threshold is a major mistake, especially at a time of rising inflation. The Government have largely destroyed the United Kingdom’s attractiveness as a low-tax economy and the natural location of choice for international companies seeking to establish their European headquarters. To retain our status as the preferred location we need low rates of income tax and corporation tax. It is often argued that our income tax rates are still comparatively low. That is to some extent true, but the level at which we reach the higher rate band is comparatively low and getting lower. The United Kingdom is no longer competitive in terms of income tax for someone earning £40,000 a year. In terms of corporation tax, too, we have slipped a long way down the league table since this Government came into office. The Finance Bill’s proposals on both capital gains tax and the taxation of non-domiciled persons will also have a counterproductive effect on revenues in return for no gain. As the sub-committee’s report concludes, ““something went wrong”” in the development of the capital gains tax and residence and domicile initiatives. The phasing-out of taper relief discourages long-term investment. The attractiveness of London as a tax location for non-domiciled persons has already been reduced by rises in tax rates. There is a practical argument that foreign heads of companies based in London have already faced significant tax rises, and that now is the worse possible time to introduce intrusive measures such as the £30,000 charge. At least if this Government’s persistent tax rises and introduction of stealth taxes had provided the resources to help the poorest members of our society it would have had some merit. However, the recent ONS statistics make it clear that taxation levied on the poorest 20 per cent of households is increasing and has reached the surprisingly high level of 38.6 per cent, up from 36.4 per cent in the previous year. Neither has the condition of the public finances improved. The public sector current budget is £9.3 billion in deficit; £2.2 billion more than in 2007-08. Public sector net borrowing has risen to £12.7 billion, an increase of as much as 50 per cent from the previous year. None of this takes any account of the effects of the Northern Rock acquisition, which the Government have kept off-balance-sheet, with the staggering amount of £25 billion plus around the same sum in guarantees. As my right honourable friend David Cameron said, the 2008 Budget was a bad news budget. The Government have introduced new stealth taxes on cars and alcohol but are in no position to offer offsetting tax reductions elsewhere, in spite of benefiting from a windfall resulting from much higher oil prices. Why have the Government reversed their policy on favouring diesel over petrol? Not so long ago diesel was priced a few pence cheaper than petrol per litre. Now diesel is around 15 pence more expensive. I understand that our tax take from diesel is the highest of any country in the EU. Could the Minister tell the House what changes in the respective rates of tax on petrol and diesel the Government have made in the past two years? The Treasury is going to reform Gordon Brown’s already completely discredited fiscal rules. The House is aware that the Government have tinkered with these rules on several occasions in the past, backdating the beginning of the previous cycle to include an extra period of responsible management and lower borrowing inherited from the previous Conservative Government, and reclassifying maintenance spending on the roads as investment. However, even with extensive tinkering, the Government will not be able to keep to the rules that the Prime Minister himself invented, and has often argued to be of crucial importance. The Government have decided to mortgage our future and our children’s future. If it is no longer necessary to keep net debt at a level below 40 per cent of GDP, what level will be acceptable? I should like to hear from the Minister what the Treasury now thinks is an acceptable level of borrowing. We know that the Prime Minister has been told by Mr Almunia, the Economic and Monetary Affairs Commissioner, that the UK’s budget deficit is excessive. That is, of course, true, but we do not need the EU to tell us that. The Second Reading debate in the House of Commons also revealed various instances where the EU had either not approved government measures, such as the increase in the amount of relief under the enterprise investment scheme, or where proposals to change rates of duty, such as the Conservative proposals on alcohol duty, would fall foul of EU rules. We already have a degree of enforced tax harmonisation. Against this background, the news that the Government have ratified the Lisbon treaty, which will surely ultimately lead to much greater harmonisation, is deeply depressing. Of course, as noble Lords know, there was no need to ratify the treaty at this point because it cannot come into force until all member states agree, and this is happily, at least for now, impossible. It is deplorable that the Government’s financial management has so destroyed incentives to save, and that the savings ratio is rock bottom. In the same Budget when he introduced the gimmicky and disastrous 10p tax band, Mr Brown abolished the favourable tax status which had formerly applied to our previously excellent and world renowned pensions system, leading to its near total destruction. So now we have no savings and wrecked pensions as we go into a severe economic downturn. I would not wish to be in the Minister’s shoes today as he replies to this debate, but I look forward to hearing contributions from other noble Lords.