Pre-Budget Report

I was involved in the City myself many years ago, and I had very good reasons for leaving it. My right hon. Friend may not be surprised to learn that the City will be well represented in the constituency of Newcastle-under-Lyme during the next election, as my Conservative opponent is 27 and a City lawyer with Sullivan & Cromwell, which advised Lehman Brothers just before it collapsed. He will be close at hand on Monday, when bankers and lawyers will be emptying their wallets at the Carlton club—president, one Margaret Thatcher—for a £65 a head fund-raising dinner. I have the invitation here if my right hon. Friend wishes to take it up. It is clear that the behaviour of City bankers has not changed, even in cases when the banks have benefited from the public purse, even given the reduced competition after the turmoil. The extra levy on banking bonuses is therefore welcome. It is only a short-term measure and it may be subject to fancy avoidance schemes, but it is important in encouraging a greater sense of responsibility in the City. I wish that the Government had done it and been tougher in action and rhetoric before. Shareholders—the major pension funds and insurance companies investing our money—should also have taken a more active stance in the past. In the PBR, the Chancellor also said it was important to take tough decisions on tax now. He said that he was determined that any tax increases would be guided by our values of fairness and responsibility. In a decent, civilised and progressive society, that overall philosophy is surely right. In the PBR, the Chancellor has finally recognised that a quarter of all the money spent on pension tax relief goes to the top 1.5 per cent. of earners. He will now reduce those benefits. I welcome that limited measure, but again wish that the Government had done it before. With respect to fairness in taxation, there is one glaring issue that this PBR, like its predecessors, does not address. That is the rate of capital gains tax which, at 18 per cent., remains lower than the basic rate of income tax and much lower than the higher rate of income tax. As such, it remains unfair: some of the lowest-paid workers will pay a higher rate on hard-earned income than many wealthy people will on unearned income. Also—this is very important—it constitutes a continuing huge incentive to tax avoidance. To eliminate that incentive, therefore, and to protect the tax base, capital gains tax should be aligned with the marginal rate of tax. I hope that the Chancellor will address that glaring anomaly in the Budget. We inherited that position from the Conservatives in 1997. Progressively, we reduced it under taper relief, which between 2001 and 2008 cost the Treasury an enormous amount of money—£28.1 billion. To put that into context, it is £6 billion more than the £22 billion proceeds from the 3G mobile phone licence auction, which itself reaped more for the Treasury than all previous privatisations put together. Far from taking the long view, the move has encouraged exactly the opposite: a constant churning of deals and investments. The British disease became ever more rampant, and frankly it was a huge tax break that in great part went to the City and private equity. I do not yet have figures for how much the change to 18 per cent. is estimated to have cost. In the future, it would be useful if the Treasury could provide them and explain why we have yet to address the glaring anomaly that I have highlighted? According to the Treasury's own figures, a rise in the marginal rate of tax would raise £2 billion for the public finances. The proposal to lift the rate of national insurance by 0.5 per cent. would raise £3 billion and mean that, however regrettably, ordinary families would share the burden. In the interests of fairness, however, it is important that the anomaly be addressed. In conclusion, I welcome much of what is in the PBR, but in many respects, particularly on encouragement for manufacturing and fairness in taxation, we could be much bolder. I hope that the Chancellor will address those issues in the Budget.