§ 11.7 a.m.
§ Lord McIntosh of Haringey
My Lords, I beg to move that this Bill be now read a second time.
In this year's Budget, and with the legislation set in motion by the Finance Bill, the Chancellor of the Exchequer has set out for the country the next steps on the road to a modern and productive Britain. Building on a foundation of economic stability, the Bill sets in statute important proposals on enterprise, innovation, the environment and the business of regeneration. Economic stability is the foundation of all that we seek to achieve. This Government have worked hard to establish a record of competence in the management of the economy.
885 Five years ago, our first Budget set out our objectives, our plans for reform and the disciplines to achieve economic stability, higher employment and sustained prosperity. This year, on 17th April in his Budget speech, the Chancellor was able to report that Britain had enjoyed the lowest inflation and the lowest interest rates for 40 years. For the first time for half a century, unemployment in Britain is lower than in America, Japan and Europe.
Last year, the main economies of the industrialised world started a synchronised slow-down. In the past, in such a slow-down it is Britain that has entered weaker and suffered longer, unable to act because of higher inflation and higher borrowing.
All that has changed. Britain faced this world downturn with low inflation and sound public finances, both delivered by our new monetary and fiscal frameworks. Therefore, this time the Bank of England has been able to adjust policy at the right time and in the right way, last year cutting interest rates seven times. With the support of fiscal policy, we have been able to safeguard both economic stability and growth. Our framework for monetary and fiscal stability has now been tested in the bad times as well as the good, and our policies have not been found wanting.
The challenge for British industry and investors at this time is to build on our hard-won stability and accelerate productivity improvements, increasing levels of output, employment and prosperity. While the economy has been stable, it can and must grow stronger.
There is a clear role for government in establishing the conditions necessary for economic growth. The UK is, and will remain, a low-tax environment. The Bill introduces important measures to modernise taxes, to keep pace with real world developments and with the global economy, to promote enterprise and to cut red tape.
Government are committed to addressing the longer-term challenge of enterprise through higher productivity and investment. The net effect of corporation tax changes introduced since 1997 is to reduce the corporate tax burden on business. We now have the lowest corporation tax rates in British history, and, since 1997, we have cut the tax bills of small companies by more than 30 per cent. That includes cuts in corporation tax and targeted measures, such as the R&D tax credit and permanent 40 per cent first-year allowances.
In this year's Budget and in this year's Finance Bill, we are keeping the momentum going. To enable investment in high growth, high technology industries, Clause 53 and Schedule 12 extend an enhanced research and development tax credit to all companies. That means a £400 million boost for innovation and research in Britain. Clause 44 and Schedule 8 set out an exemption for companies disposing of substantial shareholdings. That will enable companies to restructure without an essential business decision being constrained by the tax system. This new relief 886 forms part of the Government's commitment to reform and modernise the corporate tax regime, ensuring that the UK remains a good place in which to do business.
The Bill establishes a new regime to provide relief for the cost of intangible assets, including intellectual property and goodwill. The new relief, set out in Clause 84 and Schedules 29 and 30, will encourage business to take advantage of opportunities in the knowledge-based economy. This is another important step in our programme of corporate tax reform.
Reform of the taxation of foreign exchange gains and losses, loan relationships and derivative contracts will create a more modern and user-friendly regime. It will give certainty to taxpayers and remove avoidance opportunities so that all companies pay their fair share of tax and compete on a level playing field.
We have consulted extensively on these measures. They have been designed through dialogue with the business community. As a consequence, they have been widely welcomed.
Small businesses account for 55 per cent of all private sector jobs—more than 10 million jobs in all—and nearly half the economy's output, totalling £1 trillion of economic activity. Small firms are important drivers of growth in the economy. Support for small firms is an important theme running through the Bill. In 1997, we cut the small companies' tax rate from 23 pence to 21 pence; in 1998, we cut it again to 20 pence, with a starting rate of 10 pence; and now, in 2002, Clause 31 of the Finance Bill takes it down again —to 19 pence, with immediate effect.
Clause 32 reduces the starting rate of corporation tax, also with immediate effect, from 10 pence to zero. That means that companies with profits of up to £10,000 will pay no corporation tax. That is the most favourable tax regime for small companies in any of the advanced industrial countries.
To fund the growth of our bright young companies, we need to increase the level of business investment. Private equity investment has doubled since 1997. That is an important contribution to an entrepreneurial economy. There is more to be done. To maintain the momentum, the Bill cuts capital gains tax to 20 per cent for business assets held for one year or more, with immediate effect. For business assets held for more than two years the Bill cuts capital gains tax to 10 per cent. That means that overall, Britain has a capital gains tax regime more favourable to enterprise than that of the United States.
I know that for many small businesses, the cost of compliance is an important issue. The Budget set out proposals to reform the administration of VAT; to help smaller firms comply with PAYE and to remove unnecessary regulations. Clauses 23 to 25 set out the steps we are taking in the Bill to simplify and streamline the VAT regime. We do not need to choose between economic growth and environmental protection. The emerging consensus around the idea of sustainable development is an opportunity for British companies. Investing now in energy-saving 887 technologies and techniques is the best way of getting ahead of the game and gaining an important advantage over foreign competitors.
To improve business energy efficiency, the Bill sets out further exemptions from the climate change levy for electricity from combined heat and power plants and from coal mine methane in recognition of the environmental benefits of those technologies. To encourage the use of cleaner, more efficient vehicles and cleaner fuels, the Bill introduces several vehicle excise duty reforms and duty incentives.
It is only fair that foreign lorries pay their fair share for their use of British roads and the environmental and social costs they impose. The Government therefore aim to introduce a distance-based road user charge for lorries regardless of nationality in 2005 or 2006.
The way we deal with waste says a great deal about our standing as a society. As a responsible government aware of our obligations we are attempting to encourage the sustainable treatment of waste. The Bill increases the standard rate of the landfill tax from £12 to £13. Clause 122 sets out the details.
The Bill also includes important amendments to the operations of the aggregates levy and provides for the phased introduction of the scheme in Northern Ireland. We have responded to the concerns of the sector. The phased introduction will give them time to improve their performance.
It is not all business. Clause 58 and Schedule 18 introduce a package of tax reliefs for community amateur sports clubs and those who donate to them, supporting the valuable role played by community amateur sports clubs in promoting the health and cohesion of their local communities. Clause 97 extends the relief which the Government introduced in the Finance Act 2000 for gifts to charity of listed shares to gifts of lands or buildings.
Clause 98 introduces a measure to encourage giving through a reminder in the tax return providing a valuable boost to charitable giving. Those measures build on the extensive incentives for charitable giving introduced in Budget 2000, which have increased the amount of money donated to charity and enabled organisations in the voluntary and community sector to do even more good work.
I turn to VAT, taxation of cigarettes and alcohol, and estates. We did not extend VAT to essential goods; neither did we raise the rate of VAT. Duties on beer, wine and spirits are frozen. Airport tax, insurance tax and climate change levy are all frozen. For public health reasons, on cigarettes there will be the annual inflation increase. All estates below £250,000 will be exempt from inheritance tax. That is 96 per cent of all estates.
To ensure fairness for taxpayers and businesses, we must also act swiftly to close tax loopholes and be vigilant against tax avoidance. We have decided to act with immediate effect on the avoidance of stamp duty on property; to put an end to three artificial schemes for VAT avoidance, and to review the complex rules of residence and domicile.
888 The UK will remain a low-tax environment, favourable to business and enterprise. The overall tax burden is lower than the EU average and lower than each of our main EU competitors. The atmosphere is right for economic growth. The Bill is a register of our ambition and determination as a government. 'We are ambitious because we believe in a Britain where businesses can grow; entrepreneurs can flourish, and opportunity is open to all.
We believe in a Britain where the Government are responsive to the shifting interests of the business community and legislation keeps pace with developments in world markets. We believe in a Britain where the goals of economic growth and sustainable development are intertwined and where business is the friend of community regeneration. That is what the Bill sets out to achieve; I believe it does. I commend the Bill to the House.
Moved that the Bill be now read a second time.
§ Lord McIntosh of Haringey
§ 11.19 a.m.
§ Lord Northbrook
My Lords, I declare an interest as an investment fund manager.
I am slightly surprised to be the only Back-Bencher speaking today in the debate. One of the reasons for that maybe the lateness that it was put down on the Order Paper. It appeared only early this week. When I inquired about the Speakers' List at the start of the week that also was not ready. That seems slightly at odds with the ambition to have more widespread debate on financial matters in this House. I also wondered why the Second Reading debate could not have been delayed until after the Comprehensive Spending Review is published next week.
I comment on the length of the Finance Bill, which at 500 pages is the third longest ever. Can we not have less lengthy Finance Bills?
I welcome the following features of the Bill: the cut in small companies' corporation tax rate from 20 pence to 19 pence; and the reduction in corporation tax for smaller companies with profits of less than £10,000 from 10 pence to nil. I ask the Minister whether the Government favour incorporation versus the sole trader. I further welcome the capital gains tax cut for business assets held for more than one year, which is reduced to 20 per cent, and those held for two years and more to 10 per cent; and the exemption of chargeable gains for disposal of substantial shareholdings.
Also to be praised is the extension of the research and development tax credit to large companies. I congratulate the Minister on the extension of reliefs for intellectual property and intangible assets.
This year's Budget, which raised taxes to fund the NHS, was every bit as significant as trailed. It will go down with some of the other big tax-raising Budgets in history. Its overall effect will be to increase net taxes by £6.1 billion next year and £7.6 billion in 2004-05. That, according to a BBC Budget commentary, equates to an average of £6 per week for every household in the country.
889 While the good news was that the tax rises do not come into force until next year, the bad news was on national insurance where there was a 1 per cent increase on employees' contributions below the upper earnings limit, and an additional 1 per cent levy on earnings above the limit. Employers' contributions have also been increased by 1 per cent. Thus the top rate of tax on earnings has been surreptitiously raised from 40 per cent to 41 per cent. That has broken an election pledge not to raise income tax. It could also be a licence for further increases in national insurance if enough money is not raised to fund the health service.
Aware of the impact on middle-class voters, the Chancellor on the other hand extended means-tested benefits to households with up to £58,000 total income, in the form of child and working tax credits, which operate in a complicated way.
Higher national insurance contributions will disproportionately affect companies with large work forces, at a time when profits, particularly in manufacturing, are under pressure. There must therefore be concern, as expressed by KPMG in its Budget summary, that that will make the UK a less attractive place to which to locate in the long term, as those extra costs reduce the attractiveness of the UK as a business location.
The Chancellor made a major assumption that he will obtain extra revenues by predicting an increase in the expected growth rate of 3 per cent to 3½ per cent in 2003 and 2½ per cent to 3 per cent in 2004. For 2002 the growth rate is assumed to be 2 per cent to 2½ per cent. The figures for 2003 and 2004 look optimistic in view of the UK first quarter GDP figures which showed growth of 0.1 per cent, although the second quarter figures were a little better. What particularly worries me is the continued weakness of the stock market and its effect on consumer spending.
The Ernst & Young Budget commentary states that:The main worry about the Treasury forecast lies in its view of household spending. Real disposable incomes slowed from 5 per cent growth in 2001 to 1½ per cent this year. The Treasury suggest that consumers will dip into their savings to keep spending growing at 3¼ per cent. We are not so confident now we have seen the shape of the Budget".While most commentators accept that the Budget commitments are sustainable in the short to medium term, they also query whether the Chancellor's long-term commitments on spending will require additional tax increases in the future in order to continue to meet fiscal rules. Martin Wolf in the Financial Times commentary states:The Budget promises are certainly bold. Over the five years to 2007–08, the plans are for total spending on the NHS to rise at 7.4 per cent a year in real terms. Excluding spending on health, current spending is to grow at 2½per cent a year in 2004–05 and 2005–06. Total growth of current spending over those years is to rise at 3.3 per cent. Meanwhile, net public investment is also forecast to rise from 1.8 per cent of gross domestic product in 2003–04 to 2 per cent in 2005–06".890 Also on the subject of possible tax increases the Financial Times of llth July, states:Taxes will probably have to rise by £12bn a year, the equivalent of an extra 4p on the basic rate of income tax, if the government is to meet its ambitions to improve health and other services in the next parliament, according to economists at PwC, the professional services firm".Commentators also note that the Chancellor's assumptions are based on an upward revision in the trend rate of growth. Groups, including the OECD and the respected ITEM Club, have queried the Chancellor's growth forecasts. It is clear that the Chancellor's upward revision of the trend rate of growth is crucial to determining the extent to which he will have to increase taxes beyond 2005. The Budget 2002 document includes a separate publication on trend growth. That states:The analysis concludes that the neutral rate of trend growth over the period covered by the Budget 2002 is 2.75%. However the public finance projections continue to be based on a cautious assumption of a quarter of a percentage point below the central forecast".That is an annual trend growth of 2.5 per cent.
The IFS highlights the importance of the change of assumptions on trend growth in relation to the Chancellor's ability to appear relatively prudent despite announcing such significant spending increases. It states:The net effect of the Budget is to loosen the fiscal stance by £9 billion by 2005-06 relative to what it would have been had not the Chancellor introduced any of the measures contained in the FSBR … It might seem surprising that the fiscal loosening is possible given the Chancellor's desire to meet his fiscal rules with a particular degree of caution. In part, this has been made possible by an increase in projected tax revenues [estimated at £4.6 billion by 2005-06] flowing from more optimistic assumptions about economic growth".The OECD's recent assessment of the UK economy also queried the Treasury's estimate that the trend rate of growth had risen to 2.75 per cent. The OECD's forecasts for growth are below the bottom end of the Treasury's for this year and below the bottom end of the range for next year.
In addition, the prestigious forecast group the ITEM Club has—using the Treasury's model of the economy—questioned the Chancellor's forecast for economic growth. Peter Spencer, its economic adviser, has strongly queried the Chancellor's decision to raise his estimate of the trend rate of economic growth—the long-term rate consistent with stable inflation—from 2.5 per cent to 2.75 per cent. He argued that that allows him to raise his long-term forecast for expected growth in tax revenue, giving the Treasury free rein to plan higher spending without breaking the golden rule. At the end of April, Professor Spencer told the Financial Times:The upward revision seems the opposite to the evidence, which is that the trend rate of the UK economy has been falling rather than rising. The leeway the Chancellor had to cover himself when things went wrong is simply not here now".The ITEM Club forecast growth of only 1.8 per cent this year—below the Chancellor's forecast range of 2 per cent to 2.5 per cent. Next year's ITEM forecast of 2.8 per cent is still below the Chancellor's estimate of 3 per cent to 3.5 per cent.
891 I have several questions for the Minister about the other detailed measures in the Budget. First, why is there a need to tighten up on the United Kingdom branches of foreign banks? Secondly, why is there any need for extra oil company taxation? The Chancellor himself stated in the Pre-Budget Report 2000:While it has been put to me that North Sea oil companies, earning higher profits from higher oil prices should be subject to special taxes, I can tell the House that I am determined not to make short term decisions based on short term factors. The key issue is the level of long term investment in the North Sea. And this will be the approach that will guide budget decisions in future".By this tax rise, he seems to be going against those comments.
What is the message behind the tightening up of the rules on controlled foreign companies? Is that a measure to penalise the tax regime of the Channel Islands and the Isle of Man? Finally, what is the purpose of the review of residence and domicile?
In summary, I praise the measures in the Budget that are favourable to business. I accept that the National Health Service needs more funding, but I fear that it may be a bottomless pit. The approach needs to be changed to that of a more zero-based budget exercise, with a national debate about what the state needs to pay for.
§ 11.32 a.m.
§ Lord Newby
My Lords, debating in your Lordships' House the Government's economic and fiscal programme is a little like waiting for buses: we do not debate the subject for weeks or months on end; but suddenly within three weeks we have three debates on it. If it is a Friday morning in July, it must be time for the Finance Bill. At least it now seems likely that this will be the last time that the House will limit its consideration of the Bill to a few minutes at the end of a Session. Despite the rather alarmist reports in some newspapers earlier in the week, I understand that the plan to allow the Economic Affairs Committee to consider the Finance Bill from next year and to make recommendations to government is to come before your Lordships' House for approval next week. We welcome that.
The economic background against which the Government's taxation and spending plans must be set is more uncertain now than at the time of the Budget. We have several pieces of good news. The pound has depreciated against the rising euro. Manufacturing output has risen for two successive months, and now appears to be coming out of the slump— possibly because of the pound's changing rate against the euro. Consumer spending has come off the boil and the balance of payments is improving.
But against that, the precipitate fall of the stock markets on both sides of the Atlantic places places a major question mark against the outlook for both the US economy and our own. Confidence in the system has also been rocked by accountancy problems. That is likely to have a knock-on effect on consumer confidence.
892 The noble Lord, Lord McIntosh, said that in good economic times and bad the Government have not been found wanting. I fear that that statement, of the kind to which we have become accustomed from the Chancellor, has all the hallmarks of sounding slightly complacent at present—not least in respect of the growth rate. Although to some extent I agree with the noble Lord, Lord Northbrook, about the growth rate, I disagree with him about the change in the trend rate forecast by the Government.
The change in the trend rate is due almost entirely to expected changes in the level of immigration—or, rather, to a continuation of the higher than usual levels of immigration into the United Kingdom of recent years, which have now been projected forward. Funnily enough, that is one of the few areas in which government policy can determine an outcome. If the Government continue with their current policy of welcoming people with skills in short supply, we will undoubtedly have a higher rate of economic growth. My worry about the growth rate concerns riot that expected change from 2.5 per cent to 2.75 per cent but whether the argument that underlies the figure of 2.5 per cent will be sustained in the face of a major collapse in both the stock markets and consumer confidence.
Of course, in the short term, there is virtually nothing that the Chancellor can do to affect many of the variables that we are discussing today. We accept his oft-repeated principle that long-term stability of direction should be the aim of macro-economic: policy. Unfortunately, the Chancellor does not apply the principle of stability to the tax system itself. This Finance Bill, 494 pages long and including 141 clauses and 39 schedules, is the second longest produced by this Chancellor and, as the noble Lord, Lord Northbrook, said, the third longest ever. It brings to almost 2,500 pages the total provision for additional taxation introduced by this Chancellor since he came to office.
As with previous Finance Bills, many of the measures in this Bill require immensely complicated drafting and are of dubious value. They are often either introduced without consultation or ignore completely views expressed during consultation. Let us consider the tax relief on vaccine research. It has 14 pages and two schedules devoted to it, but it is highly unlikely to produce any of the beneficial consequences for which it is intended. Let us consider the proposal to tax the branches of foreign banks based in London. Whatever the details merits of that proposal, it has been completely ineptly handled by the Government. There has been no prior consultation and the timetable for its introduction next January almost certainly means that it will cause maximum disruption and loss of good will from the sector, which is crucial to the long-term future of the City.
Let us consider the changes in North Sea oil taxation. The Government consulted with industry on that for a prolonged period, but then they introduced the 10 per cent supplementary charge on North Sea profits, which completely ignored everything that the industry said. The effect will almost certainly be that 893 exploration and appraisal activity, investment and, as a result, employment in the sector will fall. The net consequence will be that the Government will not collect anything like the level of additional tax that they predicted in the Budget. They will also do significant damage to a major sector of the economy, especially of the economy of the North of Scotland.
I have one question about that change for the Minister. I believe that the long-awaited consultation paper on the abolition of royalty was published yesterday, but that no date was set for the abolition itself. Will the Minister undertake to urge the Treasury to set that date without further delay, so that at least one area of uncertainty can be removed?
My final example of a tax measure that is not all that it seems concerns community amateur sports clubs. The Government have gone a substantial way towards enabling community amateur sports clubs to gain tax relief, but in order for them to gain the maximum relief, they will be required to become charities. For months, the governing bodies of the principal sports argued that that approach would be too costly and burdensome. The Bill now contains welcome provisions under which clubs can gain certain forms of tax relief. However, in order to gain mandatory rate relief—for many clubs, the most important form of tax relief—they must go for charitable status. The problem is that the Charity Commissioners can and do behave in an authoritarian, patronising and unreasonable way.
I shall take the example of Banbury Cricket Club, which has, for decades, benefited from income from a charitable trust. Recently, the Charity Commissioners decided to send an investigating officer to inspect the club. Despite the fact that the club had 32 different local users, the officer said that it must not plan fixture lists in future because that would undermine the club's ability to offer facilities to other community groups. Such a move would, obviously, be impossible for any serious sports club, such as that in Banbury. The officer also suggested that the club should allow the grass to grow on the pitch to a length of 6 to 12 inches, should place picnic tables on it and should encourage people to have picnics and—I quote—"paint butterflies". That is not charity: it is madness. It is hardly surprising that the England and Wales Cricket Board and other governing bodies urge their members not to become charities, as the Government wish.
That measure and the others that I have raised this morning expose deficiencies in the way in which tax law is formulated and implemented. From next year, your Lordships' House will have the chance to examine the Finance Bill and suggest to the Government ways of improving it. In doing so, we are not seeking to undermine the Parliament Act 1911; the Commons will still have complete control of the rates and structure of taxes. However, we will, at least, be able to expose the Bill to serious scrutiny and play our part in making the tax system more efficient and effective.
§ 11.42 a.m.
§ Lord Saatchi
My Lords, these days, politicians receive little praise. Usually, they get off-hand and uninformed criticism from people who wonder about their motives and their behaviour. So I must say, first of all, that the Hansard reports of the well mannered and illuminating debates on the Finance Bill in another place bear witness to the fact that the House of Commons is overwhelmingly occupied by intelligent and responsible people honestly striving to pursue, by their own best lights, the ideals for which the place stands. It is odd that these days a statement of something that we all know to be true comes almost as a surprise.
Secondly, I must thank the noble and learned Lord the Leader of the House. As the noble Lord, Lord Newby, said, this is, perhaps, the last occasion on which your Lordships' House will be confined to such belated and cursory consideration of the Finance Bill. From next year—if the House adopts the proposals put to the Procedure Committee by the noble and learned Lord following his group's review of working practices—we will have new procedures allowing noble Lords far greater opportunity to comment on the Bill.
That reflects ideas put forward by several noble Lords, including the noble Lords, Lord Peston and Lord Barnett, and the noble Lords, Lord Newby and Lord Jacobs, from, respectively, the Labour and Liberal Democrat Benches, as well as well as several noble Lords who sit on these Benches. They drew attention to the financial expertise in your Lordships' House and the value that it could add to the Budget process. It was, surely, an act of disinterested statesmanship by the noble and learned Lord the Leader of the House to open doors that had been closed for a century and, on behalf of the Government, to invite your Lordships' House to consider the Finance Bill at a much earlier stage. I am sure that everyone with an interest in the effective administration of the national finances will join me in thanking him.
We look forward to the establishment, as envisaged by the noble and learned Lord the Leader of the House, of a sub-committee of the Select Committee on Economic Affairs to review next year's Finance Bill and make comments and recommendations on it. The sub-committee will not, as the noble Lord, Lord Newby, said, consider the incidence or rates of tax; it will none the less have much of value to say. It will need to take evidence. I hope that the noble Lord, Lord McIntosh of Haringey, with his normal courtesy to the House, will confirm that Treasury Ministers and officials are to give evidence to it. It is a historic step and a clear sign that, as the House is reformed, it can fairly and legitimately claim to exercise functions and roles that the previous—mainly hereditary—House, so despised by the Government, could not. I cannot 895 put it better than the noble Lord, Lord Oakeshott of Seagrove Bay, who dared to hope that the Treasury would take,some notice of the improvements and amendments that our committee will propose. We will not roar; we will not have teeth; but we will speak with authority and relevant practical experience, and we will be heard",—[Official Report, 4/7/02; col. 427.]That said, are we mad to want the extra role or is there method in what we are doing? I think that there is. My noble friend Lord Northbrook touched on the matter. On Monday, the two volumes of the Finance Bill arrived majestically in your Lordships' House. The Bill's 1,092 pages of clauses and notes—there are 494 pages of the Bill itself and 604 pages of what are laughably known as Explanatory Notes—arrived neatly tied in green ribbon. As the Bill approached the Table, its weight drew gasps from the assembled Peers. I was reminded of Hilaire Belloc's poetic puff:No person, says he,Will be truly content without purchasing three.While a parent will send for a dozen or moreAnd strew them about on the nursery floor".In fact, the magnificent scale of the Bill is only a continuation of a trend we have witnessed over the past live years. It is worth remembering that the first Finance Bill of my noble friend Lady Thatcher's government, which was commended to the House of Commons by my noble and learned friend Lord Howe of Aberavon, ran to just 22 pages. The Bill now before us assures the Chancellor of his place on the Olympic weightlifting podium. He holds gold, silver and bronze medals for raising the three heaviest Finance Bills of all time.
As the noble Lord, Lord Newby, said, the trend towards ever more complex and lengthier Finance Bills is serious. When the Minister talked about modernising tax, he was referring to the fact that, to accommodate that so-called modernisation, Tolley's three standard tax manuals—I gather that they are the bible of tax accountants—now include 855 new pages to explain the Government's new thoughts. The guides, which run to 3,414 pages, are longer than London's residential and business telephone directories put together. Apparently, Tolley's has even had to reduce the print size to cram in more.
So far—I hope that things will be different in a moment or two, but I doubt it—the Government are oblivious to the general clamour about its addiction to meddling, tinkering and over-regulation. Those are the principal complaints of individual and corporate taxpayers alike, for whom the editor of the Financial Times speaks when he complains of a regime of "paralysing complexity". Somebody must hold a torch for simplicity in the system, and it may as well be your Lordships' House. It is true that we will not have the legal power to change anything, but we may, as the noble Lord, Lord Oakeshott of Seagrove Bay, said, have the power to embarrass governments into a better performance.
My honourable friends in another place voted against the Third Reading of the Bill, partly because of the unexpected and unwelcome appearance of the 896 supplementary charge on the UK oil and gas extraction industry, something to which the noble Lord, Lord Newby, referred. On the other hand, the Government listened to some of the comments by our party in Committee, and I am happy to repeat the thanks that my noble friend Lord Northbrook gave for certain aspects of the Bill. However, that should be set against the £6 billion a year of extra taxation with which business has been burdened in the past five years, not to mention the additional £5 billion a year in extra regulatory costs, which were not mentioned in the Minister's speech. A new regulation affecting business has been introduced every 26 minutes of the working day since the Government came into office. That rate is exceeded only by government press releases, emission of which occurs every four minutes.
As a result of what the Minister called modernising the corporation tax regime, UK corporate taxation is now 13.2 per cent of GDP, versus 12.7 per cent in Germany and 9.5 per cent in America. This Bill will take the UK proportion even higher. Meanwhile, individual taxpayers will be poorer as a result of the Bill. The Inland Revenue apparently now projects an increase in the number of people paying the top 40 per cent tax rate from 2 million in the last year of Conservative administration to 3 million next year. Meanwhile, the freezing of basic personal allowances, the oldest stealth tax in the book, has prevented those allowances being where they should be, at roughly double their present level.
The total tax take will therefore rise by many billions of pounds as a result of this Bill. The Government claim that all that is for the benefit of public services. However, no one seems convinced. I gather that in word association tests, the word that people now choose to reflect their view of the Government is "disappointment". Presumably, that is because in the past five years taxes have gone up and public services have remained the same or deteriorated.
The fact is that when the Minister spoke of a low tax environment, which I think was his phrase—I know that he will not contradict it, although his words gave a completely different impression—he perhaps overlooked the fact that tax revenues have increased by £100 billion per year over the past five years. If allowances are made for the changes in accounting practices, the actual share of GDP taken in taxation, according to the Government's own Red Book figures, will have risen by 5 per cent between 1997 arid 2006, from approximately 35 to 40 per cent.
Economists, doctors and the public alike are rightly sceptical that the increase in NHS spending without reform of the system will succeed in improving the delivery of healthcare. They are not wrong. The Government's own figures show that they expect wage and price inflation to eat up most of the extra cash. That is because since 1999 public sector wages have increased 4 per cent faster than those in the private sector.
I conclude by considering two omissions from the Bill, which your Lordships may consider striking. First, the Bill does not address the pensions crisis 897 which perhaps has arisen as a direct result of the Finance Act 1997. The £5 billion per year tax on dividends introduced by that Act created a vicious circle. It directly reduced pension entitlements by the amount of tax and, by greatly reducing the attraction of equities relative to all other asset classes held by pension funds, reduced the demand for equities and therefore contributed directly to the price falls now seen in the stock market. The only reference to pensions in 1,000 pages appears in Clause 29, which provides for a measly £55 million-worth of allowances to be given to pensioners aged 65 to 74.
The other striking omission relates to national insurance and the increases that formed a key part of the Chancellor's Budget Statement. Those were not mentioned by the Minister in his opening remarks either. The charm for the Government of putting tax increases into a completely separate National Insurance Contributions Bill, rather than in this Finance Bill, is the public's complete lack of understanding of the working of the contributory system, which the noble Lord, Lord Newby, called "complex and opaque". As the right reverend Prelate the Bishop of Derby said in your Lordships' House the other day, putting tax rises in the National Insurance Contributions Bill, rather than in this Bill, is merely a device for exploiting public ignorance and raising money less visibly, because people dislike the idea of paying straightforward income tax.
By such errors of omission and commission, the Bill threatens all the theoretical economic foundations on which the Chancellor's framework is built, of which the Minister is so proud. The framework's main pillars—the independence of the Bank of England, the symmetrical inflation target and the code of fiscal stability—are all much less solid than the Minister may like to think. Incidentally, any idea that the European code may save us has been dashed by the new French finance Minister, Francis Mer, who said:Le code de stabilityé européan n'est pas inscrit dans le marbre".That is probably just as well, because the reality of our economy is that the private sector, for the first time since 1992, has registered two consecutive quarters of negative real spending growth. The UK has recorded the slowest pace of economic growth of any G7 country in the first quarter of this year.
It is perhaps even more to the point that a more detailed output breakdown, for which I am indebted to my co-author, Dr Peter Warburton—I find this very worrying— reveals that the so-called hot private sector service sectors, that is, business, financial and telecommunications services, have delivered half of all the output growth in the UK economy in the past five years. The other 80 per cent of the economy has grown at 2 per cent per annum or less in every year since 1994. That over-reliance on the output growth of the hot sectors, which is now decelerating sharply, threatens to undermine the Government's objective of steady and stable growth, of which the Minister made so much.
New Labour was right to break away from the simple equation that higher tax rates equal better public services and greater social justice. With this 898 Finance Bill, it has begun to slip back into the old ways of thinking. Only two things are needed to bring back to life the dead body of old Labour. This Bill provides the first—tax. In Monday's comprehensive spending review, we shall have the second—spend. By Monday night, the resurrection will be complete.
§ Lord McIntosh of Haringey
My Lords, I am grateful to all noble Lords who have taken part in this short and rather concentrated debate.
I begin with a matter of housekeeping. The noble Lord, Lord Northbrook, complained about the short notice of this debate. The rules of the House do not allow us to include in the Minutes of Proceedings or future Business any legislation that has not arrived from the House of Commons. This legislation was passed by the House of Commons only late on Thursday night. It therefore came to this House for First Reading on Monday, and the speakers' list could not be produced until that time. I appreciate the inconvenience that that must have caused.
The noble Lord, Lord Northbrook, also referred to the bad timing of the Finance Bill coming here before the comprehensive spending review, which will come before us, if the Opposition choose to have the Statement repeated, on Monday of next week. The timing of the Finance Bill has been known for some time and has been included in the forthcoming Business for all that time. The timing of the comprehensive spending review became apparent only during the middle of this week. Neither the House authorities nor anyone else could have done anything about that. It would have been preferable to debate them jointly—I am not sure in what order—on the same day.
All three noble Lords referred to the length and weight of the Bill. It is true that it is lengthy. However, 300 pages—60 per cent of the total—were published in draft, or consulted upon, substantially before the Budget. That is the benefit of a Pre-Budget Report in November, before a March or April Finance Bill and Budget Statement. Therefore, the opportunity for consultation has been much greater than it was in previous years, when there was no Pre-Budget Report. In addition, the Bill abolishes 200 pages of financial legislation. We therefore have to take the net figure, not the gross figure. In practice, it has worked well. In a press release produced at the end of May, the Chartered Institute of Taxation praised both the Finance Bill and the process of consultation. It felt that, where there has been consultation—it is not always appropriate—it had been carried out well.
I am grateful to the noble Lord, Lord Northbrook, for his welcome to a number of aspects of business taxation. He asked whether this meant that we favoured incorporated over unincorporated businesses. The answer to that is no. The difference between incorporation, non-incorporation and sole traders varies under different circumstances. For example, on occasion an unincorporated business can do better in terms of tax relief for losses or pension contributions than can an incorporated business. I have done that myself by using a partnership instead 899 of a limited company for exactly that purpose. The advantage for non-incorporation remains in place. In addition, some of the provisions in financial legislation, such as capital allowances, apply both to incorporated and unincorporated businesses.
The noble Lord and other noble Lords referred to the rises in national insurance contributions. Some criticisms were expressed that those had been introduced in a separate Bill. They had to be introduced in separate legislation because, under the rules set by the House of Commons over many years, the Finance Bill does not deal with changes made to the National Insurance Fund. I should have thought that noble Lords would welcome the fact that the National Insurance Contributions Bill was so transparent and that it drew attention to the changes in national insurance contributions rather than their being buried within a long Finance Bill. We certainly have nothing to apologise for, either in the way that the rises in national insurance contributions have been implemented or, indeed in implementing them at all. They follow the Beveridge principle that those in work should contribute for the benefit of those not in work. If we had introduced, for example, increases in the tax on pensioners' incomes, I think that there would have been some justified complaint. We might have seen lobbies led by Jack Jones outside the Palace of Westminster.
Both the noble Lords, Lord Northbrook and Lord Saatchi, referred to the existence and the treatment of tax credits. Again we have nothing to apologise for in the existence of tax credits, the Tax Credits Bill which has recently passed through Parliament—it will make a major contribution to the reduction of poverty in this country—or for the way in which it has been done in terms of the treatment of tax credits in the national accounts. I do not know whether it is fully realised that because we have adopted generally accepted accounting practices in all of these matters—we are practically the only country in the developed world to have done so—tax credits in particular count as income tax only in very limited circumstances. Only 12 per cent of working families' tax credits count as negative income tax and therefore affect what the noble Lord, Lord Saatchi, calls the "tax burden", but what I call the "ratio between gross domestic product, taxes and social security payments".
§ Lord Saatchi
My Lords, I am most grateful to the Minister. I accept completely that the public accounts now conform with generally accepted accounting principles. Why did it take the Government five years to reach the position they are in today?
§ Lord McIntosh of Haringey
My Lords, with the Government Resource and Accounts Act 2000 we had to bring to a successful conclusion the process of the move towards resource accounting, started by the previous government and faithfully carried through by this Government. It is to be implemented this year. One can have generally accepted accounting principles only if one has proper resource accounting instead of cash accounting. I should have thought that by now that would have been a fairly non-party point.
900 Perhaps I may turn back to the points put to me by the noble Lord, Lord Northbrook. He thought that we have been optimistic in our forecasts of growth rate. I shall respond by saying that I do not think so. Our neutral estimate of trend growth for the 2002 Budget, medium-term projections, is 2.75 per cent, which falls within the range of forecasts made by respected external organisations such as the OECD and the International Monetary Fund. The IMF Article IV Consultation, published in 2001, stated that the UK economy would average potential growth of 2.8 per cent over 2001-05, up from an average potential growth of 2.5 per cent over the previous five years. Furthermore, our public finance assumption has been declared reasonable and cautious by the National Audit Office.
Of course we are alert to the risks of the recent fall in the stock market, as we were to the fall which took place after September 11th. We have been exceedingly cautious in our forecasts. We are aware of the potential effect on consumer spending, to which the noble Lord referred, although it must be said that that has not happened yet. We think that there are now clear signs that growth in the economy is strengthening, in particular for manufacturing industry, according to the most recent figures. Furthermore, we are not alone in those beliefs.
The noble Lord queried my comment that the UK has the lightest tax burden. I suppose that he was referring in the main to business tax, although I am not sure. However, it is not true: the UK business tax burden at 7.3 per cent is significantly lower than the European Union average of 10 per cent. That was the figure for 1999, which is the most recent figure published by the OECD. We are confident that our estimates are correct.
The noble Lord, Lord Northbrook, went on to ask me four specific questions. His first question concerned taxation of UK branches of foreign banks. We have made those changes because the OECD stated that we were out of line with international practice. We believe that it is right to be in line with such practice.
The noble Lords, Lord Northbrook and Lord Newby, both asked about oil company taxation. The answer to that question is that there have been two elements of change to oil company taxation. First, there has indeed been a 10 per cent rise, but that increase is justified by the profits being made by oil companies. Of course they are all doing so because they have licences from the UK Government. Secondly, neither the noble Lord, Lord Northbrook, nor the noble Lord, Lord Newby, appeared to recognise that at the same time we have been encouraging further exploration by offering the extension of 100 per cent first-year allowances. On balance, those are prudent policies.
The noble Lord, Lord Northbrook, also asked me about controlled foreign companies, in particular with regard to the Channel Islands and the Isle of Man. We have to provide protection against harmful tax 901 practices wherever we can, and that is what we have been trying to do. But these are reserve powers that will be brought into effect only if it is found to be necessary.
The noble Lord asked me about the purpose of the review of the definitions of "residence" and "domicile". This has arisen as a direct response to complaints that have been made by tax planners. The existing rules are unclear. After extensive consultation, therefore, we would aim to make them clearer.
The noble Lord, Lord Newby, referred to a number of aspects of good macro-economic news—for which I am grateful—although he accused us of complacency. I hope that I answered that accusation in my response to the question of the noble Lord, Lord Northbrook, about growth rates. The noble Lord, Lord Newby, approved of our policies for longer term stability. I am grateful for that and for a number of his other comments.
As to the noble Lord's question in regard to royalties, we have been in consultation on this issue for a considerable time, even though a formal announcement was made only last week. He asked us to set a date for abolition. Several dates have been suggested but we believe that propriety dictates that we should set a date for abolition only after the formal consultation is complete. In other words, we should hear from everyone before making up our minds.
I am baffled by the noble Lord's reference to community amateur sports clubs and charitable status. I had no idea that the Charity Commission would behave as it has towards Banbury Cricket Club. I shall make inquiries into the matter and I shall write to him about that and the more general issue of whether it is appropriate for community amateur sports clubs to take on charitable status in order to benefit from the changes made in the Budget.
I am grateful for the comment of the noble Lord, Lord Saatchi, in regard to the Committee proceedings on the Bill in the House of Commons. It added greatly to the comity between the two Houses, which we are all keen to preserve. I do not have any comments to make on what either he or the noble Lord, Lord Newby, said about the report of the Leader's Group and the Procedure Committee. That is a matter for the House to consider on 24th July. Like others, the noble Lord queried the argument in regard to the low tax environment. I hope that I answered his query when I responded to the comment of the noble Lord, Lord Northbrook.
I am surprised that the noble Lord also queried whether we were tackling pensioner poverty. Yes, of course there was a period some years ago in which the rigid adherence to the formula gave rise to a 75 pence increase in the basic state pension. That created a great deal of anger. But, if we look at the policies as a whole, we can defend the way in which we are tackling pensioner poverty. We are offering extra financial support to the poorest pensioners through a minimum income guarantee; we are rewarding those who have saved for their retirement through the new pension credit, which will take effect from 2003; we are helping 902 all pensioners by guaranteeing a minimum increase in the annual basic state pension; we are providing additional help with the cost of winter fuel; and we are creating a sustainable system of support which will enable today's workforce, tomorrow's pensioners, to plan ahead and make decent provision for their retirement, protecting themselves against poverty in the future. I shall not stray into the debate on pension regimes, which started yesterday and which, no doubt, will continue.
I have dealt with the criticisms made by the noble Lord about tax rises being in the National Insurance Contributions Bill rather than in this Bill.
The noble Lord made comments, as he has done on a number of occasions, about regulation on business and the number of statutory instruments. I should remind him that more than 90 per cent of statutory instruments have no impact on business and that many of the remainder—such as road traffic orders—have only a local or temporary effect. A better measure of the burdens imposed by regulation is the number of regulatory impact assessments produced by departments showing which proposals would have a significant impact on business. In 2001, only 3 per cent of all regulatory measures, including primary legislation, had a significant impact on business. This has been true for a number of years. I am not saying that we should aim only for stability; I am saying that we should aim for a real reduction.
Returning to the question of the noble Lord, Lord Newby, about charities, the issue of rates relief is for individual authorities. The Office of the Deputy Prime Minister has issued a consultation paper. I shall write to the noble Lord on this issue.
The contributions made in the debate have been, on the whole, helpful and realistic. I hope that the House will agree that they have not dented the claims that I made in my opening speech. This Finance Bill is in line with our reputation for stability and prudence and with our ambition for greater wealth, prosperity and justice in our society.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order 46 having been dispensed with (pursuant to Resolution of 9th July), Bill read a third time and passed.