Pre-Budget Report 2006

My Lords, I much enjoyed the speech of the noble Lord, Lord Barnett, even though he was able to sneak in an extra minute while the Whip was away. My thoughts, for what they are worth—not being an economist—on the MPC's role are that I fear that its focus is on inflation at the expense of economic growth and perhaps its role should be more like the Federal Reserve which, as I understand it, has to take a more overall view of events. What should have been the Chancellor’s last Pre-Budget Report was more interesting for its background of reviews rather than the rest of its content. The Leitch review on skills is a welcome contribution to the effort of improving the country's skill base. The Gowers review of intellectual property is a serious attempt to look at the complexities of the intellectual property system. The Barker review, following on her well written 2004 report on housing supply, contains valid criticisms of the current planning system, although her suggestion of the ““son of development land tax”” is unwelcome. The Gershon review has also been a major attempt to cut back on Civil Service costs and has achieved some successes. However, Treasury announcements of job cuts do not coincide with the ONS statistics. The Treasury stated in the 2006 Budget that 32,237 Civil Service posts had been cut since the original review. In contrast, the ONS stated that between the end of quarter one of 2004 and the end of quarter one of 2006, the reductions were only 10,000. Can the Minister explain the discrepancy? The other main positive factor to emerge fromthe Pre-Budget Report is that the Chancellor has increased his growth forecast to 2.75 per cent this year, which was well above his original prediction. I ask the same question as the noble Lord, Lord Barnett, on that. I reserve judgment on his decision to raise the growth forecast except to ask the Minister the justification for that. However, it is noticeable that the Chancellor, as the noble Lord, Lord Barnett, stated, downgraded his growth forecast for 2008 by 0.25 per cent. The Minister may feel that I shall only applaud the PBR, but I have some serious concerns about it. This is not just a case of opposition political criticism, but it is supported by an eminent independent think tank, the Institute for Fiscal Studies, which validates my case that while growth in the economy appears strong, public finances in recent years have been deteriorating. As my noble friend Lord MacGregor stated, the Chancellor has consistently had to revise his borrowing forecasts upwards since 2002. In 2003-04, the Government spent £8.5 billion more than forecast in the previous Budget; in 2004-05, the figure was £6.7 billion; and in 2005-06, it was £5.1 billion. In the 2006 PBR he has increased his future borrowing requirements to 2011 by £7 billion more than forecast in the last Budget. The IFS has also said that the Government have continually pushed forward the date that the current Budget, after adjusting for the cycle, would move back into surplus. That does not take into account, as my noble friend Lord MacGregor said, Network Rail and PFI initiatives of balance sheet spending. To compensate for the increased borrowing problem, the Government have taken various approaches. The first is to raise taxes. The Financial Times of 8 December contained an article in which the IFS pointed out that Gordon Brown has raised taxes by no less than £6 billion a year since the 2005 election, finally facing up to weaknesses in the public finances which could have been predicted. At the time of the last election, Gordon Brown said that there was no need to raise taxes to fund his existing expenditure plans, contrary to independent voices, ranging from the IFS to the International Monetary Fund. Robert Chote, the director of the IFS, has stated that tax increases in two Pre-Budget Reports and one Budget since the election were evidence that the Treasury now accepted that it had been wrong. He said that measures announced by the Chancellor would raise the tax take by £6 billion a year or on average£200 per family from 2008-09. According to the article, the Treasury has not questioned the IFS figures. Can the Minister confirm that? In the Pre-Budget Report, taxes have been increased again: first, there was a hike on fuel tax; and, secondly, the Chancellor has raised air passenger duty. Yet even in regard to that, he has decided to make the tax rise very complicated. He has, in effect, made the tax apply from when passengers fly, not exempting those who bought their tickets before the PBR if they fly after1 February. I can imagine the half-term chaos at airports after then. Tax-avoidance measures are expected to make the tax rise £2 billion in total. To disguise the fact that he has little room for extra government spending, the Chancellor has, not for the first time, taken to re-announcing government spending. As my noble friend Lord MacGregor has already stated, the IFS, in the same article of 8 December, accuses the Chancellor of misleading presentation in rolling many years of educational capital spending into one figure of £36 billion. Luke Sibieta, an IFS research economist, criticises the fact that the money for schools had already been announced in the previous Budget. The new money going to schools was very small and amounted to only £20 a pupil. What was big was old, he said, and what was new was small. Another ruse of the Chancellor has been his tampering with his self-imposed golden rule: that the Government should borrow only to invest over a full economic cycle. In his speech, the Chancellor not for the first time moved the end of the current economic cycle—this time, he moved it forward to 2007 rather than to 2008—allowing him to say that he will be £8 billion in surplus over the full cycle. The IFS has also criticised these changes, saying that the cycle has lengthened and shortened like a yo-yo. It recommended that the Government should leave the dating of the cycle to an independent body to avoid accusations of changes motivated by political calculations or, better still, should move away from measuring the state of public finances over a specific period. This moving around of the golden rule seems to have discredited it considerably. Another area of concern to which the Chancellor has not really referred in the PBR is inflation. The latest CPI and RPI figures were published on12 December. The CPI—the Chancellor’s preferred measure of inflation—climbed by 2.7 per cent, up from the 2.4 per cent increase in the previous month. This is the fastest rate of increase since January 1997. This is the seventh consecutive month in which the CPI has been above the bank’s target of 2 per cent. Independent commentators suggest that the MPC could remain in tightening mode on interest rates in the New Year. As a result, there is concern that higher headline prices could bolster consumers’ inflation expectations, as reflected in a speech by Paul Tucker, the Bank of England’s director for markets. A survey by the Recruitment and Employment Confederation and accountants KPMG showed that the rate of pay inflation for permanent jobs is running at its highest level for almost six years and at a 22-month high for temporary work. The study said that competition for talent against a background of rising demand for staff was pushing up wage bills. A series of recent high-profile private-sector wage settlements, such as the annual rises of at least 4 per cent won by thousands of workers at Ford, Rolls-Royce and National Air Traffic Services have suggested that annual wage demands are increasingly linked to the increases in the RPI rather than the CPI. The RPI, which includes interest payments on mortgages, climbed in the12 months to November by 3.9 per cent, up from 3.7 per cent in October. This is the highest reading since May 1998, according to the ONS. Does the Minister share my concern about the increase in inflation? As usual in Gordon Brown’s Budget or Pre-Budget Reports, there was a sting in the tail in the small print. As with smaller companies’ corporation tax, it involved the withdrawal of tax relief already introduced by the Chancellor. According to the Financial Times of 8 December, tens of thousands of people who had hoped to bequeath a substantial amount of their pension to their relatives have had their hopes dashed by a pre-Budget measure that could see more than 80 per cent of money inherited from pensions wiped out by taxes. Thus, the Chancellor has removed a freedom over personal pensions that he introduced only eight months ago. Under new rules introduced in April, those over75 could pass on their entire pension to their families, subject only to inheritance tax. In the Pre-Budget Report, however, Gordon Brown announced that, in addition to inheritance tax at 40 per cent, a new tax on death at, "““up to 70 per cent””," will be levied on these pots. Effectively, this measure forces many pension investors back into annuities, just a month after they won the freedom to avoid buying one from an insurance company once they reach the age of 75. As the shadow pensions Minister in the other place stated, "““We are trying to bolster confidence in pensions. This seems likely to have the opposite effect.""It is typical of Gordon Brown’s mixture of confusion, complication and confiscation””." Could the Minister ask the Chancellor to rethink this unfair change of law for personal pensions? Despite the commissioning of the Stern report, the IFS comments that the Pre-Budget Report was not that green, as already endorsed by the noble Lord, Lord Barnett. As the trustee of a new charity, I must declare an interest in this area. As the IFS states, fuel duty is by far the biggest green tax—it raises about2 per cent of gross domestic product. All other green taxes raise about 1 per cent collectively. Since 2000, the decision to allow the level of fuel duty to be whittled away by inflation has caused a big drop in green taxation. Even after the PBR rise of 1.25p a litre, fuel duties will still be 16 per cent lower after inflation than in 2000. If the Treasury were to restore fuel duties to their peak level, it would raise £4 billion for the Government. What does the Minister think of this idea—maybe cutting other taxes to make up for this increase? Interestingly, the IFS feels that the Government should tax air passenger duty per flight rather than per person. On the subject of additional taxation, I referred to the Barker report on planning, which I will examine in a little more detail.. Kate Barker recommended that Government should use tax measures to extract some of the windfall gain that accrues to landowners—I declare an interest as an owner of agricultural land—from the sale of land for residential development. She said: "““Government should impose a planning-gain supplement on the granting of planning permission””." I disagree with this policy. I believe in the Conservative Party view that we should oppose this plan for a new development land tax—a stealth taxon homes and urban renewal. High taxes on development will undermine regeneration and will inevitably be passed on in the form of higher prices for new homes. The proposals would undermine the housing market and discourage the provision of affordable housing to rent and buy. Additional taxation will not be revenue-neutral. It will encourage land-banking—namely, holding back land for development—which will mean less land for new homes. It has also been unsuccessful under a previous Labour Government, due to its complexity to implement. What is the state of play on this new development land tax? I understand that consultation may still be going on. For all the reasons above, I am unable to take note "““with approval of the Government’s assessment as set out in the Pre-Budget Report 2006 for the purposes of section 5 of European Communities (Amendment) Act 1993””."