Finance Bill

My Lords, it is difficult to welcome a Finance Bill which increases taxation, and it will most certainly be unpopular. However, I do not have the slightest doubt that it is absolutely essential if we are to deal with the situation that we have inherited, which requires drastic measures on both taxation and public expenditure. The Bill is probably one of the smallest that we have had for very many years and, in terms of pounds per page, probably more effective. It is not entirely clear to what extent the Government believe that they will increase revenue in either the current year or next year, but the Minister may be able to enlighten us in that respect. None the less, I think that we are going to see an increase in revenue but it is going to take some time, in the same way that cutting public expenditure takes some time. Therefore, the argument about whether one should make these changes quickly or slowly seems to be largely irrelevant. We know that an immediate impact of any scale is not possible, and the process is therefore bound to take place over a considerable period. However, we need to get on with it as fast as possible and that is effectively what this Finance Bill does. First, I welcome without reservation the point made in my noble friend’s opening remarks regarding the abolition of the requirement to take an annuity at the age of 75. On at least three occasions from the opposition Front Bench, I moved an amendment to do just that, with suitable safeguards, and I think that the Government would be wise to look at those safeguards. This House, by a very large majority, supported the view that I expressed, but on each occasion the amendment then went to another place, where it was reversed. Therefore, I am absolutely delighted that, despite the arguments that tend to be made within the Treasury, the Government have at long last decided to take action on this. I have only one small caveat, which is that there appears to be some delay in implementing the measure, which means that people who are about to become pensioners will be forced to take out an annuity when annuity rates are so appallingly low. My noble friend shakes his head; if he is right, I should be delighted to hear why. Apart from that, I want to concentrate on three specific points and then a more general one. The first relates to VAT. I made representations on this to the Chancellor ahead of the Budget because I was deeply disturbed by a recommendation from the International Monetary Fund that we should eliminate our process of zero-rating in order to raise more money. I think that that would have been completely wrong. No tax in our system has ever had the kind of scrutiny that VAT had when I had the task of steering it through the House of Commons. Ahead of the Conservative victory in 1970, we went into it in great detail. It had pre-legislative scrutiny; it had extraordinary examination at Committee, Report and Third Reading in the House of Commons; and the structure that we designed was intended to prevent the change from SET and purchase tax—both of which we abolished—being regressive. I have no idea why the IMF thinks it appropriate to go into detail about taxation in this way but, had the Chancellor gone along with the IMF’s views, the measure would certainly have been regressive. On the other hand, the Chancellor has found it necessary to increase the rate of VAT to 20 per cent—exactly double the rate that it was when I introduced the tax—and this is going to have a substantial effect. Popular commentators are all saying that it is inflationary. It is, of course, cost inflationary but demand deflationary, depending on what the Chancellor does with the money. Certainly, if he simply puts it in a mattress somewhere, that is substantially deflationary and the overall effect may be in that direction. None the less the step that he has taken to increase the rate to 20 per cent was certainly better than the alternative for reasons that I have just given. I turn now to capital gains tax. There was huge anticipation during the election that, given the policy of the Liberal Democrats, and so on, it might be raised in line with the top rate of income tax to perhaps 40 or 50 per cent. Again, together with colleagues, I made some representations to the Chancellor and said that it would be totally wrong to increase the rate of capital gains tax without making some allowance for the fact that inflation was built into those gains and therefore it was important to have some form of indexation or other recognition of the length of time that the asset has been held. Alas, in that respect we were not successful in persuading the Chancellor who came up with the rather strange compromise, evidently reflecting the needs of the coalition, that we should have an increase in rate of 28 per cent but no indexation. I think that that is quite wrong for the reason I mentioned—that the Chancellor is taxing again, which is entirely due to previous inflation, and which may stretch back over 20 years. Pensioners and others may be in a very difficult situation because of such a low rate of return on their savings and find it necessary to liquidate some of their assets, so to tax them on that gain without allowing for inflation is wrong. It is effectively a tax on wealth. I therefore hope very much that when the matter is discussed in another place—alas, we cannot do so—allowance will be made for that and it can be changed. I said that this appeared to be in line with the coalition agreement, and it is crucial in that context to say that we should not go along with proposals put up by either part of the coalition on the basis that it keeps it together or become involved in horse trading rather than saying that it is justified on its merits. In that context, I go along with the noble Lord, Lord Desai, in relation to the student taxation proposals, put forward by Mr Vince Cable. A detailed examination of that shows that it would be a very bad tax indeed and ought not to be proceeded with. Finally, I want to put the Finance Bill in context. There is no doubt that it represents a very substantial fiscal tightening. It has been pointed out that it may lead to consequences with regard to double-dip recessions and other fashionable ideas of that sort. Against that background it is important to have an appropriate monetary policy, and there seems to be a conspiracy of silence with regard to that. I read some of the papers over the weekend and just before. There were diagrams of every conceivable economic variable but not a single one showing what is happening to the money supply. Pessimistic forecasts were being made by the chief economist of the Bank of England who also did not mention the money supply. I have said before to the noble Lord, Lord Myners, and I say it now to my noble friend on the Front Bench that it is very important to distinguish between the price of money—interest rates—and the quantity of money. Monetary policy, strictly interpreted, is concerned with both, but in fact it is the money supply side that is really important against the fiscal background that I have described. I think there is a strong case for easing monetary policy further by way of quantitative easing or, alternatively, as I suggested in questions to my noble friend, by the Debt Management Office pursuing a policy of funding that effectively frustrates the effect of the quantitative easing. To make it absolutely clear, I refer to the Bank of England’s 20 July provisional estimates of what is happening to the money supply. Seasonally adjusted provisional figures for June show that M4 fell by £0.7 billion in the month, and if you look at the graphs for growth rates in M4 from December to now, it falls off a cliff, despite quantitative easing. Therefore, despite the efforts of the Bank of England in that respect, we have not succeeded in having a growth of money supply that is consistent with a growth in the economy, but if we are to get out of the hole the economy is now in, it is essential that we should have a fixed plan for increasing the level of aggregate demand. Of course, there will be queries at that stage. My noble friend Lord Spicer, who I am delighted to see here, referred to the danger of inflation. The level of inflation is much higher than the Bank of England’s target rate, but we need to look at this situation very carefully to see to what extent increasing the money supply in line with the level of growth we would like to see is likely to prove inflationary. This is not a simple issue, but the way the figures look at the moment is being ignored. We are not following a monetary policy that is consistent with our objectives. I have the privilege of being followed by my successor bar two, or perhaps three, as the chair of the Treasury Select Committee in the other place, which I was for 14 years, and I will be interested to know his views on this subject. We need to wake up on this issue because it is being ignored.