Finance Bill

My Lords, it is a great pleasure and privilege to follow my noble friend Lady Browning, and I congratulate her on a very eloquent and well judged speech. Her speech illustrated that she brings to this House a huge and valuable breadth of experience on many topics. She served some two decades in the other place, scrutinising legislation, but also spent several years as a Minister—lastly and perhaps most notably at the Ministry of Agriculture, Fisheries and Food, where she made a huge impact. She also spent several years as a shadow Cabinet Minister and vice-chairman of the Conservative Party. Before entering Parliament, she had further varied experiences: as a tutor in adult education; as an auxiliary nurse; in business, as a sales and training manager and as a self-employed entrepreneur; and 10 years as chairman of Women into Business. As she says, she also has a very active interest in mental health and has been an active vice-president of the national Alzheimer's disease society as well as having a personal interest in autism. So it is clear that she has very much to bring to the House on a wide range of matters. We welcome her and look forward to her future contributions. Before I delve into the Finance Bill, I put on record my interests as a director of a number of businesses affected by the tax provisions in this Bill, and in particular of a life company involved in pensions and savings. I shall touch on some of the issues in the Bill that relate to that. I shall talk about some of the specifics in the Bill but, first, I shall say a few words to put it in context. There has been a lot of discussion about fiscal judgment and the scale of the deficit. That is, of course, important—but it is perhaps even more important to look at the policy in the framework of a long-term policy for stimulating growth and wealth creation in the economy. Economic growth is ultimately not determined by one year’s deficit or tax levels but by the size of the labour force and its productivity, which is driven by the success we have in driving entrepreneurship and innovation in the economy, the level of investment and perhaps also our success in generating an environment of free trade. If you start to analyse those factors and their relationship to the Bill, wealth creation as the starting point derives from enterprise and innovation and is crucially dependent on the stimulation of a low-tax economy. There are two components of any economy—the component that pays tax and the component that spends tax. It is vital that any economy keeps those two sectors in balance. If we end up with too much tax falling on the sector that pays tax, the consequence is to drive out wealth creation, to destroy growth and reduce the future welfare of individuals and society. At the beginning of any discussion about fiscal policy and public spending, we must ask how much tax we can afford to pay in a modern, competitive economy. That is the starting point—not the shopping list of what we would like to spend the money on. Since the 1960s, for some 50 years, the UK has only briefly had government tax receipts rising above 40 per cent of GDP. The highest period, when they rose into the mid-40 per cent range, was in the early 1980s, when a previous Government were restoring fiscal balance after a period of spending excesses. But for most of the 50 years since the 1960s, public receipts have ranged in the late 30 per cent range—36, 37 or 38 per cent of GDP. You might think pragmatically, therefore, that experience tells us 40 per cent is something of a natural ceiling on the amount of tax that can easily be raised from the UK economy without damage. There are reasons why that might be true—the need to maintain incentives, the need to maintain international competitiveness, and tax efficiency. Clearly, you get to a point where, as you raise taxes, the tax yield starts to fall rather than rise, particularly as economic growth is depressed. It was perhaps for that reason that the last Conservative Government’s manifesto in 1997 set out a commitment to keep public expenditure at the level it had reached—below 40 per cent—as, if you like, a golden rule. The actual course of public expenditure since 1997 was that it grew remorselessly as a percentage of GDP almost year by year since 2000, to reach 48 per cent of GDP in 2009-10. Government receipts, however, have stayed at the historic levels or 38 or 39 per cent. It is that 10 per cent gap, between the level of public spending and the level of receipts that the Government can raise through taxation, which has caused the budget deficit and the crisis we are now facing. Whatever the banks have done, it was never sustainable for a Government to believe that they could carry on increasing expenditure to the level they had, up to 48 per cent of GDP, and then to go on borrowing at that level. The right answer is not to seek to raise taxes to 48 per cent, which would be a level we have never achieved in this country, but to move spending back to an affordable proportion of GDP, to get the balance between the taxpaying and the tax-spending parts of the economy back into a sensible proportion. That is the way to promote growth in a low-tax economy that ultimately creates wealth that we can all share. I therefore welcome the plans set out in the Budget to reduce spending back to below 40 per cent of GDP by 2015-16. That is an essential plank of sound financial management and restoring a growth economy. I also welcome raising tax thresholds to the low paid, as a first step in the benefits of low taxation—it is a policy that I have written about and argued for over many years and I am delighted that it is now part of government policy. I also welcome, of course, the plan to start the reduction in corporation tax rate and the aim to reduce corporate tax rates to 24 per cent. Many noble Lords have raised arguments about the speed of adjustment and whether the speed of adjustment back to an affordable level of spending is appropriate, but as the noble Lord, Lord Desai, pointed out earlier, these so-called cuts are cuts against planned public expenditure. If you look at the proposed course of public expenditure set out in the Red Book, you will see, as the noble Lord said, that current public expenditure is more or less flat over this period, reducing, I think, by 1 per cent in real terms by the end of the planning period. I have no doubt that there are many opportunities, having had such a large rise in public expenditure in recent years, to create efficiencies, to cut out waste and to find low priorities which can be reduced, which will ultimately benefit the efficiency and productivity of public services. If there are those who believe that a fiscal stimulus is still required—or a greater fiscal stimulus; the noble Lord, Lord Stern, said that the Government should keep this under review—we should remember that there are two ways of delivering a fiscal stimulus. You can either spend more, or you can reduce taxes. Against the background I have just described, I have no doubt that, if there is need for more fiscal stimulus, it should not be created by carrying on spending at profligate levels; it should be done by taking earlier action to meet the tax objectives that will restore growth in the economy. At a time when the private sector is struggling in an austerity period, when many in the private sector are suffering low or negative wage rises, reductions in overtime and so on, it seems perverse that anyone should propose that more money should be taken out of people’s wage packets, or VAT raised higher than it has been, in order to carry on subsidising inefficiency or waste in the public sector. It is much better to do what we need to do to create an efficient public sector. If a fiscal stimulus is needed at any point, the Government should move further and faster to reduce taxation. The second element of driving growth and productivity is investment. The counterpart to investment is, of course, a high-savings economy. High-savings economies are high-growth economies. At full employment, a high-savings economy is one in which more of the output is devoted to investment goods, driving future wealth creation and future opportunities to raise incomes and welfare. Therefore, I welcome the proposals to encourage savings in the Finance Bill. In particular, I welcome the proposal to end the tax penalty for high earners who put money into retirement provision. Like the Minister, I understand and accept the need to limit the tax benefit from pension tax relief for high earners, but I believe that a much more sensible route to go down is to have a limit on the annual contribution, which is fairer and less likely to damage the maintenance of pension schemes for those companies that have schemes covering the whole employee workforce. I should like to raise a few points that the Minister and his colleagues might consider in the review that they are conducting. The first is whether the annual limit might be smoothed over two or three years so that, when somebody comes into an inheritance, makes a house sale or receives a redundancy payment, for example, they can take advantage of that and put a lump sum in the pension scheme, perhaps spreading the annual allowance over two or three years. Of course, that would be done without an increase in the total amount of money that people could put into a pension scheme. Secondly, I ask my noble friend to consider whether, as part of the reforms, the Government might abolish the lifetime limit on the value of a pension pot. If there is an annual limit on the amount that can be put in, it seems unnecessary also to limit the success with which that is invested. It is quite difficult for people who are near that limit to understand what the investment performance will be and whether they should put more money into the pension. If they happen to be successful, they will be penalised, so it seems to me that we should consider just limiting the amount that is put in, as that would be a fairer system. Finally, I suggest that the Minister might consider removing the distinction between the annual allowance for pensions and that for other forms of tax-efficient saving, such as ISAs. Many people would be encouraged to save more if they knew that they did not have to lock away the money on day one until retirement but could build up sums in an ISA and transfer that to a pension later. However, these are all points to consider and I very much welcome the review that will take place. My final point is on the importance of free trade in encouraging growth and wealth creation. Free trade is perhaps not directly related to the Bill, but I am encouraged by the emphasis that the Government are putting on encouraging trade between the faster-growing economies around the world. I cannot resist the temptation to say to my noble friend that, when the expenditure review comes out in the autumn, we might look carefully at the amount of money and the priority given to expanding the European Union’s External Action Service and diplomatic posts and compare that with the amount of money that we put into supporting our own commercial embassies and other forms of support overseas. In summary, I am extremely encouraged by the aims of financial policy set out in the Bill and by many of the measures in it. I believe that the Bill deserves every support.