We have had an interesting debate that has addressed what are perhaps two of the most controversial issues in the Budget: the change to age-related allowances and the reduction in the 50p rate of income tax. The debate has lasted three hours, but at one stage I thought we might finish early, until we heard the tour de force from my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg). I hope that I will have time to respond to the various comments that have been made. We heard the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) quote Groucho Marx, which I suppose is an improvement on other Marxes who might have been quoted, although I was reminded of the other Groucho Marx line:
“I’ve had a perfectly wonderful evening, but this wasn’t it”,
at least until I heard the speech from my hon. Friend the Member for North East Somerset.
The changes the Government have made to the rates and thresholds of income tax will provide a competitive platform for our tax system while also ensuring fairness. The measures in the Bill will reduce the additional rate of income tax in 2013-14 to 45p, increase the personal
allowance to £8,105 and simplify the working of age-related allowances. I will discuss each of the amendments in turn, but it is important first to set out why the Government have taken this approach.
The fact is that the 50p rate of income tax has not raised the revenue it was intended to raise. It is currently the highest statutory income tax rate in the G20. When we came to power we inherited an economy that the previous Government had driven into a parlous state, with regard to not only the state of the public finances but our overall competitiveness. The fact is that the 50p rate came in only at the fag end of the Labour Government, who for 13 years had kept the 40p rate, and when they brought in the 50p rate they declared that it was temporary. There was a reason for that: they recognised that the 50p rate would damage our competitiveness. The hard evidence backs up that claim. The report by HMRC sets out that the 50p rate is distortive, damaging to international competitiveness and an economically inefficient way of raising revenue.
In short, the 50p rate is a failed policy. We were told that it would raise over £2 billion and, given the crippling deficit we were left, that was not something we could just wave away as if it did not matter. However, higher taxes are worthwhile only if they raise more revenue, and the analysis by HMRC shows that at best the yield would be £1 billion, and at worst it may raise nothing at all. That is because the behavioural response has been substantially larger than expected.