Finance Bill

My Lords, I welcome the emergency Budget as a whole. The emergency that we face is that, as the Minister said, one pound in every four that we spend is being borrowed. I could not quite believe—if I heard correctly—the remark of the noble Lord, Lord Tunnicliffe, that Labour policies prevented the UK falling into recession. Under Labour, Britain had the longest and deepest recession on record. Britain has had the longest recession in the G20, with six consecutive quarters of negative growth—more than any other major economy. The coalition has inherited from its predecessor the largest budget deficit of any Government in Europe with the exception of Ireland. This is at the very moment when fear about the sustainability of sovereign debt is the greatest risk to the recovery of European economies. The second quarter preliminary GDP figures published on Friday show that there is some light at the end of the tunnel, but there is still a need for the strong measures proposed in the Budget. The Office for Budget Responsibility has downgraded the previous Government’s overoptimistic growth forecasts to more sensible figures of 1.2 per cent for 2010 and 2.3 per cent for 2011. It has also increased the estimate of the structural deficit. The majority of debt reduction measures are to come with proposed spending cuts. I welcome the forecast that public sector net borrowing will decline from the horrendous figure of £149 billion to £37 billion by 2014-15. Taking the consolidation as a whole, Table 1.1 in the Red Book—which, as a whole, seems much more straightforward this year—shows that roughly three-quarters of the total cumulatively will be made up of spending cuts by 2015-16. This is where the challenge comes. Paragraph 1.4 of the Red Book says that once you discount the ring-fenced departments, other departments could see average real cuts to their budgets of around 25 per cent over the four years. This is where the coalition must keep its nerve. There is likely to be strong departmental resistance and special case pleading against the 25 per cent reductions to their budgets. There are also likely to be strikes over the proposed pay freeze and reduced pension arrangements for much of the public sector workforce. The general public must continue to be told why these sacrifices are necessary. I move on the tax measures proposed in the Budget. On VAT, the noble Lord, Lord Tunnicliffe, seems to be unaware of the former Chancellor’s view that VAT had to be raised and has not yet read the third man’s book on the subject. Like Alistair Darling, I understand the need to raise VAT to 20 per cent next January, while not especially welcoming it. I support the new bank levy. Likewise, I back the increase in insurance premium tax. I welcome the reduction in the main rate of corporation tax from 28 per cent to 24 per cent over the next four years, and the plans to reduce from 21 per cent to 20 per cent the small companies corporation tax rather than increase it, as the previous Government proposed, as the Minister stated. I accept the need for an increase in the capital gains tax rate but regret that there is not a lower rate for business assets. I applaud the increase in the lifetime limit for CGT entrepreneurial relief. However, I feel that it sends the wrong message to our manufacturing companies to cut the annual investment allowance by 75 per cent from 2012-13 and the writing down allowances together with the abolition of the agricultural building allowance to nil by 2011. I declare an interest as a landowner. The situation is well summed up by the accountants Saffery Champness. It says, ““It seems that tax relief on investment by businesses is not considered a priority””. How does the reduction in capital allowances square with the Government’s wishes to encourage a more manufacturing-based economy? In the area of personal tax the situation is more complicated. The 50 per cent higher rate of tax proposed by the previous Government still stands but must be reversed as soon as possible. How much extra revenue does the coalition anticipate it will bring in? With regard to national insurance, despite the current Chancellor’s protestations in the run-up to the election, it is still the case that employer and employee rates are going to rise by 1 per cent with effect from April 2011. This will be mitigated to an extent by the fact that the level at which employers will start to pay NIC will increase by £21 per week above indexation from April 2011. The tax take from national insurance is forecast—per table C11 of the Red Book—to increase from £97 billion in 2008-09 to £128 billion in 2015-16. However, should not the Minister be a little concerned that it sends the wrong signal as a tax on jobs that may hinder the recovery? Would it not have been better to tax alcohol and tobacco more heavily or to consider motorway tolls? But overall, as I said, I support the Government’s decision to take rapid steps to cut the deficit. The dangerous result of doing nothing for a period was demonstrated by what happened in Greece. We could not take the risk of interest rates for our debt rapidly increasing. Another measure I strongly support is the creation of the Office for Budget Responsibility. This has already brought a more realistic tone to government economic forecasts. However, it must be seen to be independent of the Treasury. First, this means not being in the same building. Secondly, as Sir Alan Budd told the Treasury Select Committee on 20 July, it must be free of ministerial interference. It did not, for instance, look good that the OBR tweaked its budget forecasts at the last minute to erase 175,000 job losses by 2014. Sir Alan also admitted that the OBR does not have its own economic models but uses the Treasury’s. The Treasury Select Committee in a separate report stated: "““It is unfortunate that the independence of the OBR has been called into question. This makes it all the more important to get the structure and the statutory basis of the permanent organisation right, as both the OBR and the Chancellor recognise””." What progress is being made in finding a new chairman of the OBR? I welcome another new body set up by the Chancellor, the Office of Tax Simplification. I am particularly pleased that John Whiting, a former tax partner at PWC, has been chosen to lead it. However, two issues are important: first, that it is genuinely independent; and, secondly, that Ministers are prepared to act on its recommendations. The coalition has produced an interesting document, Tax Policy Making: a New Approach. I highlight two areas here: first, to reconsider the requirement to purchase a compulsory annuity at the age of 75; and, secondly, a review of PAYE to consider how the system could be made easier for employers to operate. My only criticism is that it fails to consider how this House could usefully further scrutinise finance Bills, building on the useful reports of the Economic Affairs sub-committee. Overall, the emergency Budget puts in place a credible plan as approved by the OECD to eliminate the UK’s structural current budget deficit over the lifetime of this Parliament. The medicine is tough and may dampen growth in the short term but it should help to support a more sustainable recovery in the longer term.