Finance Bill

My Lords, this is an opportune moment to debate these matters. However, I am astonished that the Minister, in a 20-minute speech, did not mention any of the headlines in this morning’s newspapers: the Financial Times, the Times and other newspapers are carrying stories saying that the Government are to abandon their fiscal rules. He made no mention of that in this important economic debate. Are we to assume that the stories are without foundation, or that he does not know what the Government are going to do? If anything epitomised the Government’s state of chaos, it is this Bill, the economic background, and the Government’s response to it which we can see in our newspapers today. I well recall that the Prime Minister, in his role as Chancellor, frequently made speeches saying that there will be no return to boom and bust. Well, we have had the boom and today we have had confirmation that we have the bust. The extraordinary thing—it is straight out of Animal Farm—is that the Government’s justification for abandoning the fiscal rule that borrowing should not exceed £40 billion is that, if they do not abandon it, people will not have confidence in it. That is ridiculous. The rule was meant to be a constraint on government. If the constraint is reached but the response is, ““We’ll change the rule””, the Government will have as much credibility as Billy Bunter’s postal order. The Treasury is apparently about to declare that we have reached the end of the cycle. This particular cycle will, I think, turn out to be something of a penny farthing. The truth is that the Government have spent all the money from the good times. They have borrowed, and now they are facing the consequences to which the Minister referred—a storm from across the Atlantic which we are ill prepared to meet thanks to the Government’s policies. The outlook for the economy looks very grim, but the Finance Bill seems to bear no relationship to what is going to happen. We know, for example, that Treasury tax receipts will fall; some estimates suggest that the shortfall might be as much £20 billion. We know, with inflation picking up rather seriously in our economy, that the pressure on public expenditure will increase. For the Government to try to make out that this is some kind of international crisis not of their making simply will not wash. The Prime Minister was a man who sold umbrellas while the sun was shining. Now that the rain is here, there is nothing to protect us from its effects. A good example of him selling those umbrellas was the nation's gold reserves. He sold 60 per cent of the gold reserves over a period and raised $6.5 billion. He sold our gold reserves at a price of $250 to $330, but the price of gold today is $971. On my calculation, he threw away $20 billion of our money. He has made it more difficult for the elderly and those who are retiring to deal with the economic downturn by his assault on pensions and pension funds through changes in tax and through his tinkering with the rules. He has added to the problems on inflation. Even today, we hear the Minister telling us that what is in the Bill on fuel duty is not going to happen because, apparently, the penny has dropped with the Government that the effect of putting up fuel duty is to add to the costs of those on low pay and the real inflation that they experience. If one looks at the pressures on ordinary hard-working families in our country, it is clear that the effect of the Government's policies will be that the real rate of inflation that they experience is way beyond the rates that the Government are using to make their calculations. Therefore, the pressure on wages will become enormous, particularly in the public sector, which the Government have allowed to expand without a care for how it will be funded for the future. The truth of the matter is that public expenditure is now far too high—even the Liberals have noticed this, and I welcome their belated conversion. The real issue which the Finance Bill and the Government should be addressing is how we achieve the growth that we need to meet the requirements of the public services. The answer cannot be to increase borrowing, to risk higher interest rates or to increase taxes. Indeed any sensible Government in the situation would be cutting taxes and reducing regulation and bureaucracy, but the Government cannot do that because they have spent all the money, borrowed up to the hilt and are now having to ask for permission to borrow even more. The Minister asked us to look at the Finance Bill from the point of view of fairness. I find it difficult to take this Government seriously when they talk about fairness in the tax system. They are a Government who, for political reasons, decided to cut the basic rate of tax from 22p to 20p. They did not fund it by making reductions in expenditure or by reducing the growth rate of expenditure in other areas, they funded it by adding to the burden of tax on the lowest paid. They had a huge political revolt, quite rightly, on their own Benches in response, so they have raised the threshold in the Bill, but they have not raised the threshold to the level at which the 10p rate operated. Therefore, as a result, many people are still worse off. That was a political device introduced by a Chancellor who was no doubt planning an election but then decided to bottle out. As a result, families have been faced with that burden. There is far too much tax legislation. Here we go again with another Finance Bill in two volumes, adding to our tax code which under the Prime Minister, as Chancellor, has doubled in size. We now have the distinction of having the longest tax code in the world, longer even than India's. This will put us at the top of the international league table for tax complexity, something which will not in any way help with our competitiveness, which the Minister assured us the Bill was concerned with. I shall not bore the House by giving all the examples of the tinkering by this Chancellor and his predecessor, now the Prime Minister—although I suspect that the Chancellor has a backseat driver in No. 11 in the form of the former Chancellor. I just point out that under Mr Gordon Brown, we had the abolition of retirement relief and the introduction of taper relief; now we have the introduction of entrepreneurs’ relief. Under Mr Brown as Chancellor we had the introduction of the 10p band, then its abolition, then a hiatus, and now we have the raising of the threshold to compensate for the effects of that change. We had the introduction of the zero band of corporation tax for small businesses, then its abolition, and now we have another change. This has been a period of great instability in the tax system. The one thing that businesses hate more than their costs going up and higher taxes is uncertainty, but this Government have produced it in spades. I was very struck by the Minister's comments on how this Finance Bill is concerned with fairness. In particular, he said that as a result of the raising of the threshold, people on low incomes will be better off than they were at the time of the Government's initial proposals. I accept that, but what he leaves out is that they are not paying tax at 20p; their effective marginal rate of tax is very much higher, thanks to the incidence of the tax credit system and the benefits system. Single parents moving from part-time to full-time work can pay an effective marginal rate of tax and withdrawal rate of 90 per cent. Those changes have been brought about by this Government; they are the result of initiatives of this Government. We have 5 million people sitting on benefits who are economically inactive. For many of them, going into work would mean paying very high marginal rates of tax. At the same time, this Government introduced the 10 per cent taper relief, which meant that people in private equity earning tens of millions of pounds were paying tax at 10 per cent. The Bill provides for a sudden change in the capital gains tax regime to raise it to 18 per cent in response to the problem created by the initiative of the Prime Minister, then the Chancellor. It is extraordinary. The effect of the changes to capital gains in the Bill is that tax on hard-working entrepreneurs who create jobs and wealth through their businesses has gone up by 80 per cent and the tax on speculators who are short selling, buying and selling property, or whatever has gone down by 55 per cent. What kind of message does that send out? The abolition of taper relief has created a situation where there is no distinction between short-term and long-term gains and therefore no incentive for people to make investments for the long-term at a time when our savings ratio is on the floor and when we want to encourage exactly that kind of activity. I read the Select Committee’s report early this morning and it is an absolute indictment of the performance of the Treasury and of the Government in the way in which they go about the administration of our tax affairs. It is bad enough to get the policy so badly wrong, but they have been unable to implement it effectively. The report is a tale of incompetence. Reading the evidence, one is almost moved to tears of sympathy for those who are on the receiving end of this stuff. It is a tale of chopping and changing, of information not being provided, of one arm of government not knowing what the other is doing. I commend it to every Member of the House. I hope that the Government take it much more seriously than the Minister appeared to do. The Minister dealt with none of the fundamental points in the report. He passed very briefly over consultation, but the conclusion that there was a dysfunction between tax policy and its administration struck me as quite extraordinary. This arose when HMRC was created. Guess who took charge of tax policy? It was the Treasury, under the Prime Minister—the previous Chancellor, Mr Gordon Brown. The result, which is clearly set out in the evidence—the committee points to it—is that HMRC, which is responsible for implementing tax policy, has sometimes appeared not to know what the policy was, and vice versa. There is a good example of that in the report. The entrepreneurs’ relief, which the Minister presented as some great idea to help entrepreneurs, was in fact a last-minute panic. When the Government discovered that their capital gains tax proposals were not going to work properly and there was huge outrage among small businesses, they introduced the relief as a measure. There is evidence in the report that HMRC did not know about the change in policy. Business representatives of accountants and other organisations with important professional responsibilities discussed it with HMRC, which said that it knew nothing about it, even though all the newspapers had been briefed by the Treasury, as they have this morning. That is completely unacceptable. It is very dangerous to have policy and the administration of policy out of kilter. It is a sad tale, and the committee is to be congratulated on the thoroughness with which it has highlighted the need to improve consultation and the proper administration of our tax policy. I commend to the House the report published last week by my noble and learned friend Lord Howe of Aberavon, who is not in his place at the moment. It contains some very important recommendations, some of which were preceded in the Tax Reform Commission report, which I produced some two years ago. I commend to the Government the radical idea that it might be a good idea to announce by the Pre-Budget Report what the Government propose to do in precise detail and to consult on that. I love the other place, but looking at its performance in scrutinising this Bill, no one could argue that there was no room for improvement. The proposal to have a Joint Committee of both Houses is very wise, as such a committee would draw on the expertise in this House and perhaps avoid some of the difficulties that have arisen in the past through short-term knee-jerk measures that have not been thought through and have not been discussed with the people who have to implement them and who are on the receiving end of them. It is a humiliating report for the Government, and it shows a business community struggling with instability. The Minister mentioned competitiveness. This is very important for competitiveness. The compliance costs of all this are enormous. I do not know whether the Treasury talked to HMRC, but even HMRC estimates that the compliance costs of our tax regime are £6 billion for business. Simplifying the tax system and having stability in it improves competitiveness and reduces the costs to business of compliance. Let me give the Government some credit; the measures that were introduced to reduce the basic rate and to alter the capital gains tax regime were presented then—but not today, I noticed—as simplification measures. However, if you are going to simplify capital gains tax, why do you end up with a rate that is different from the basic rate which is different from the top rate? Do the Government not remember what happened in the 1970s when we had different rates of capital gains tax from the marginal rate of tax at which people paid income? Lots of clever people in the City devise schemes to turn income into capital gains, and I confidently predict that a year from now, if this Government are still in office then, we will have another Finance Bill that will say that we need to close the loopholes that have been created by the changes that we have made to the capital tax regime, just as the Government did when they introduced the zero rate of corporation tax for small businesses. The Minister then argued that the non-doms’ position needed to be dealt with, and that this was an aspect of fairness—this from a Government who reviewed the taxation on non-doms from 2002 and suddenly introduced it about three weeks after the shadow Chancellor indicated that he was going to do something in this area. I make no comment about the coincidence of timing, but it is extraordinary, if you have been looking at something for nearly six years, that you should rush it through in such an ill-considered manner, and that as late as the new year, after the Pre-Budget Report, people still did not know how the system was going to operate. All the damage that was done to Britain’s standing in international markets and all the uncertainty that was created could have been avoided. In short, this is a very sad Bill, which the Government themselves are having to pull back on. They seem to have lost control of public expenditure and run out of ideas and out of road. They have tinkered with the tax system, to the dismay of business and to the damage of our competitiveness, and they have tinkered with the administration of our tax system by merging the Inland Revenue and Customs and Excise, with disastrous results. This is the price that we have paid for having a meddler in Downing Street, and the sooner he is out of there and we have a Government who are genuinely committed to fairer, lower, flatter taxes, the sooner the growth that we need in our economy will return.