Clause 6
Finance Bill
9:00 am
John Howell (Henley, Conservative)
Allow me to add my congratulations on your appointment as our additional Chairman, Sir Nicholas. Unfortunately, not having been here on Tuesday, you missed the magisterial way in which my hon. Friend the Member for Hammersmith and Fulham explained the whole of clause 6 in great detail, including a large measure of the economic thinking behind it. You missed the delights of Laffer curves and the precision of the calculations of tax rates and their impact on people.
Having reflected since Tuesday’s sitting, I think that, inevitably, it all comes back to the adequacy and quality of the modelling used to underpin the assumptions within the 50 per cent. tax rate. The adequacy of the modelling is a topical subject. The Government will be aware of the wish of the TaxPayers Alliance for more dynamic modelling. I have some problems with that not being comprehensive enough; nevertheless it shows that the idea of modelling is very much on the table. That was recognised by the Institute for Fiscal Studies. One of the other things that seemed obligatory on Tuesday was quoting the IFS, and I have one such quote today. I must put down my glasses because, in my efforts to be frugal these days, I print things with two sides on the same page, so as not to increase expenses. The Committee will therefore have to excuse me if I peer somewhat as I read. The IFS says that, in its initial reaction to the Budget, it seems that the Treasury has
“not accounted for consumer spending falling as a result of this change. If these effects are taken into account, the Government could lose up to £1.5 billion in indirect tax revenues, even if the Treasury is right”.
There is a lot of concern about the underlying modelling that took place to justify the 50 per cent. tax rate—if, indeed, it was done to justify it. Given that it goes to the credibility of the tax system, it is important that it is based not only on political will in the United Kingdom but on analysis.
Matters are made even worse by the abandonment and the absence of the fiscal rules. I did not believe in them very much and nor, it seems, did the Chancellor or the Prime Minister before him; nevertheless, they were at least useful in pointing to a direction in which the Government would go.
I shall not go through the issues that we spoke about on Tuesday in detail, but it is important to understand where the tipping point is in each of the Laffer curves, depending on the range of behaviours. We heard my hon. Friend the Member for Hammersmith and Fulham talk about data on average taxpayers being used to inform decisions about specialist groups, which again goes to the heart of the credibility of the underlying modelling that took place.
The Institute of Chartered Accountants expressed concern about such matters in its pre-Budget submission to the Government and in its post-Budget assessment, in which it called for a detailed economic analysis to be undertaken. It used the same words in its pre-Budget statement, and the fact that it used the same words suggests strongly that it is not happy with the economic analysis done.
We heard about the confusion in the Treasury Committee about the adequacy of the modelling for the 50 per cent. tax rate. My hon. Friend the Member for Northampton, South, who is not here today, quoted question 335 from the proceedings of that Committee. The Chancellor was talking about the £150,000 limit and the 50 per cent. tax rate and said:
“There is no science behind it, it is just simply my judgment that I thought that figure was an appropriate figure. It is the top 1%, as it happens, of earners in this country and I decided that that was the right level”.
Again, there is some confusion.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
Does my hon. Friend infer from that quotation that the figure of 50p was perhaps selected on political rather than economic grounds?
John Howell (Henley, Conservative)
That is a pertinent remark, and it is a pertinent conclusion to draw. In the morning sitting of the Treasury Committee, Mr. Williams, who is the director of personal tax and welfare reform at the Treasury, said that some modelling had taken place. There is therefore confusion about whether the modelling was scientific. Was the Chancellor criticising the modelling that had taken place, which he would have been aware had been described in a little detail in the earlier sitting? Did that modelling take place before he reached his decision on a 50 per cent. tax rate? Was that modelling to justify a decision that had already been taken, or was it modelling that was used to inform a decision before it was taken? We simply do not know the answer to that.
I should also like the Minister, in summing up, to comment on the points raised both by the IFS and the Institute of Chartered Accountants. The Committee would benefit from a much better explanation—perhaps an explanatory memorandum on modelling.
Mark Todd (South Derbyshire, Labour)
I listened with care to the hon. Gentleman, who clearly has concerns about the clause. Maybe he is going to depart from the fence on which his Front-Bench team has sat so far and call a vote on it. Would he like to tell us more about his practical thinking on this day, on this matter?
John Howell (Henley, Conservative)
I thank the hon. Gentleman for exposing the bear trap in front of me with such clarity. [Laughter.] I will not take insults, Sir Nicholas. Perhaps he feels that because I have not been here as long as other Members sitting here today I am going to walk straight into it. I am politically astute enough to realise that the bear trap is there and tiptoe around it, which is precisely what I am going to do. I am not going to depart at all from the comments that have been made by my hon. Friends on the Front Bench.
Peter Bone (Wellingborough, Conservative)
I will almost jump into the bear trap because, let us face it, our party has made it quite clear that it is the wrong measure and is against the interests of the nation. Does my hon. Friend agree with me that, because of the fine mess the Government have got us into, we cannot make any promises until we see what the books are like?
John Howell (Henley, Conservative)
My hon. Friend is completely right. It really is quite outrageous to expect us to make those sorts of promises.
Mr. Toddrose—
John Howell (Henley, Conservative)
Him or me? We need a change of Government before there is any possibility of me becoming a Minister, and I look forward to it. Go on, I will give way now—I have forgotten where I was. [Laughter.]
Mark Todd (South Derbyshire, Labour)
It would be helpful if the hon. Gentleman described what this bear trap is. If it is a matter of principle and this is the wrong policy for the country, then surely his party should vote against it—as indeed should the party of the hon. Member for Taunton, who likewise declined to tell us how he intended to vote on the matter. If it is the case that the measure will not actually raise any money, then surely the point raised by the hon. Member for Wellingborough is irrelevant. It is not going to make the circumstance of our economy any better or worse, so his argument appears confused at the very least.
Nicholas Winterton (Macclesfield, Conservative)
Before the hon. Member for Henley replies to that entertaining intervention, I remind the Committee that we are debating the Government’s Finance Bill and not the alternative Finance Bill of Her Majesty’s Opposition. If the hon. Member for Henley would care to very briefly respond to the hon. Gentleman’s intervention, I will use my discretion and allow him to do so.
John Howell (Henley, Conservative)
I thank you, Sir Nicholas. We see the Speaker’s wisdom in placing you as additional Chairman to the Committee this morning.
The comments from the hon. Member for South Derbyshire follow similar interventions made on Tuesday, and he has the answer there. He is not going to get anything new out of me on that point.
I had better conclude because it is the last day before the Whitsun recess. This is a serious matter, and in some ways I regret the levity with which we have started. In response to the intervention that I made on Tuesday, the Minister said that the extent of worsening in the global downturn that had occurred between the pre-Budget report and the Budget was down to political judgment. Of course political judgment needs to take place—I do not deny that, that is what we are here for—but it cannot be all political judgment. The concerns raised by my hon. Friend the Member for Hammersmith and Fulham, by me in commenting on the modelling, and by the various organisations that I have mentioned today, illustrate the need for the Government to come clean and detail the modelling that took place to make this decision and the timing of it.
Mr. Mark Field (Cities of London and Westminster) (Con) rose—
Mr. Bonerose—
Nicholas Winterton (Macclesfield, Conservative)
I call Mr. Mark Field, the hon. Member for Cities of London and Westminster. The hon. Member for Wellingborough need not worry, he is at the forefront of my mind.
Mark Field (Cities of London and Westminster, Conservative)
And of your eyeline, Sir Nicholas. Thank you for allowing me to contribute briefly to what has been a wide-ranging debate.
One of the more interesting elements of the Minister’s introduction to the clause was when he said that, “The higher band reflects the fact that the wealthy have reaped benefits in past years from the growing economy”. I understand that significant debate took place on Tuesday afternoon about that sentence, not least with the hon. Member for Taunton. It brings into play a worrying precedent: we could have ever more retrospection and an element of or a desire for clawback within the system. The hon. Member for Taunton was right, there are a lot of people who have not necessarily reaped tremendous rewards; they have found it difficult to get on to the housing ladder, despite earning multiples of the national average salary. As the hon. Gentleman is aware, in central London that is often the case.
People in their late 20s and early 30s suddenly earning significant sums of money will, before too long, get caught by the higher tax rate, assuming that it stays at 50 per cent. for incomes of £150,000 or more. Those individuals have not reaped any great benefits from the past, but will pay the price going forward. Therefore, it is worrying that the Government’s justification is couched in those terms. If that is the justification for a 50 per cent. band, it leaves the door open for significant clawback of past gains.
To avoid stepping into the bear trap in South Derbyshire or elsewhere, it comes as little surprise that early opinion polls suggest that an overwhelming majority supported the Government’s plans to impose a higher tax band on those earning over £150,000. One should not give too much credence to opinion polls, which are academic until the tax comes into play. My party leadership has correctly identified the blatant political gauntlet that has been thrown down and is designed to embarrass us. After all, as many have said, the tax band stands to raise negligible additional income. Even the most ambitious thoughts—income compared to borrowings of £175 billion or more—suggest that the income will be fairly tiny. Accordingly, my party is entirely justified in declining to play to the Government’s line. The most urgent priority of any incoming Conservative Government—assuming that happens in the next year—will be to stabilise public finances.
As someone who was a businessman before I entered Parliament, I want low tax. Low tax is phenomenally important, particularly for the entrepreneurial class. Equally, as I have frequently observed in debates and speeches over the past couple of years and in an intervention in this debate, there is an increasing sense of insecurity among an ever larger proportion of the UK work force about the spoils of globalisation being spread inequitably. In many ways, that is a particular danger for the political class because the sense that the spoils of globalisation are unequal no longer comes only from the folk on the traditional left, increasingly, middle-class Tory-voting people have those concerns, with some justification. They see property prices rising astronomically and private education, something that they may have taken for granted, now outside their reach, particularly if they have several children. It is important for the whole political class. I fear that that sense of unease will grow, especially among middle-class professionals, or at least among those who are outside the once gilded corridors of financial and associated services.
However, the predictable truth of the imposition of clause 6 is that the super-rich will not pay a penny more in tax. They are either non-domiciled or in the privileged position of being able to characterise much of their income as capital gains, which will be subject to the unchanged 18 per cent. tax rate. My hon. Friend the Member for Hammersmith and Fulham made that point extremely well. I was an entrepreneur with a relatively small business that turned over about £2 million at its height. There is an opportunity to have a lot of what is effectively income as dividends, taxed through the capital gains regime, or one can sell off a business at some point in the future for the equivalent of an income stream, because that will be charged at only 18 per cent. It seems that such additional revenue that would be obtained through the provision will come only from modestly successful small business people who, I fear, will then have even less incentive, or indeed collateral, to expand their enterprises, as well as from salaried workers who are unable to avoid the increase and who frequently earn sums not wildly in excess of the £150,000 threshold. Their instinct to do the right thing on savings and pensions would be blunted as their disposable income falls significantly.
My party is right to express concerns. We understand the critical importance to our national economic health of promoting small start-up businesses. Competitive tax rates are essential to encourage entrepreneurs, especially as we make our way out of this deepest of recessions. Conservatives appreciate that raising tax now, even on the wealthiest in our communities, risks prolonging the UK’s economic downturn.
A decade or so ago the decision of the then Labour Opposition to stick to the Tories’ tax and spending plans was an explicit recognition that our economic strategy in the mid-1990s was right for the nation. That is in stark contrast to the situation today. Even in these turbulent times the public should not be taken for fools. No one out there believes that the Government's recklessness with the public finances is worthy of emulation.
The Financial Secretary will understand why the Conservatives wish to make much of the mandate for change, as indeed the Liberal Democrats have. In spite of its being a popular measure, there is no mandate to change the tax rates. It is possible that we will have an election before 5 April next year, in which case this is somewhat academic. The Financial Secretary did not make the same case when he was a young Back Bencher in opposition from 1994. He was happy not to make that case about 22 Tory tax rises when there was an argument after the 1992 election and we clearly did breach an election pledge on tax, because of the terrible economic circumstances when we went into a double-digit recession during the early 1990s. It was never put from the Labour Benches at that time that there was an understanding that, given the economic circumstances, the right thing for the nation, which it eminently proved to be in 1993 and 1994, was to put up taxes. Indeed, his Government, particularly in their first and second terms, reaped the benefits of that stable economy. It is difficult to look at the issue of the mandate without saying that there is some force majeure that comes into play.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The hon. Gentleman makes an interesting case. I wonder whether he thinks there is a difference because the recession in the early 1990s was home-grown, a consequence of Government policy, whereas what we are seeing at the moment is the biggest global economic downturn in 70 years.
Mark Field (Cities of London and Westminster, Conservative)
The right hon. Gentleman makes a well-rehearsed case. Elements of the recession in the early 1990s were worse than in other parts of the world. It was a global recession as well, albeit with a less globalised economy. China and India, for example, were barely coming out of decades or centuries of relatively quiet economic activity. In the past 15 years matters have been transformed. Our argument has been—the proof is in the pudding according to the International Monetary Fund and other independent global forecasters—that in many ways we have a more serious situation simply because we racked up huge debts during a time of plenty and were not putting reserves aside. I accept that we are in a very different stage.
I know that the Financial Secretary shares with me an interest in international affairs. It is very evident that we are still at a relatively early stage of this recession. Only six or seven months ago there was a sense that we were going to be appallingly badly hit as a result of our reliance on financial services. But one effect of the rapid depreciation of the pound has been that we have perhaps got off slightly more lightly than other countries, such as Germany, which only six or seven months ago were seen to have a very stable financial situation with no Government debt. But as the trade situation globally has imploded, such countries’ massive reliance on international trade has made them more vulnerable to what I would call the second stage of this downturn.
Although tactics have been involved, I suspect that my party has been slightly more soft-pedal on this issue than my hon. Friends the Members for Wellingborough and for Northampton, South would have liked. However, there is a sense that we are all in this together. It will take time for us to get out of the downturn and its effects. I will not make any suggestions about how I think that the public finances will be corrected, but clearly, a range of areas of public spending will have to be seriously considered. Nobody denies that. I know that the retort from the Labour Benches will be, “Which hospitals and schools are you going to cut?” However, I suspect that that will land on deaf ears in the electorate.
Even the Government’s own figures, coupled with their ambitious growth figures, leave little doubt that public spending rounds for some years to come will be less generous than they have been over recent years. If there is to be a slowdown or even cuts in public expenditure, it will be the less well-off in our communities who suffer the most. There must, therefore, be a sense that the burden of the overall downturn has been applied across the board. For that reason, at least in the immediate term, I suspect that it is unlikely that a Conservative Government would be in a position to reduce the 50 per cent. tax band, although we would hope to do so as quickly as possible, as we need to encourage entrepreneurs.
My last point is about the importance of the City of London. As a representative of the City, I hope that we can get it back to a strongly competitive state. As I mentioned last Tuesday, it is important to recognise that the City is not made up only of big banks, but provides a range of other financial services. Many of those have thrived in recent months and continue to do so because they have international competitive advantages compared with other parts of the world.
Insurance is a tremendously successful sector, and there are many lessons to be learned from the appalling disasters that beset Lloyd’s only 20 years ago. The setting up of Equitas was an important model for the ways in which we can get out of many of the problems with our banking system. Lloyd’s now goes from strength to strength, which is a great joy to us all.
However, we are clearly reliant—perhaps in all honesty, slightly over-reliant—on the financial services industry. A Faustian bargain was made with our European partners when the big bang took place in 1986. London was, is, and thankfully for some years to come will remain, the great European financial centre. That Faustian bargain probably meant that more industry went out to Germany, agriculture and other advantages went out to France, although we had the financial services.
My instinct is that financial services will remain important. Even during these recessionary times, 30 or 40 million people a year in India and China are joining the middle classes. They are instinctively savers and investors for the future, and will require financial services products in order to save in an effective way. In the immediate and the medium term, the overall cake for financial services will be smaller, and we must do our best to ensure that London’s slice of it is at least maintained if not enlarged. Nevertheless, this issue illustrates the fact that we need to have a slightly more balanced economy. That is not to say that we do not have strength in other areas—we have tremendous success in a range of creative industries such as computer games, where we are global leaders making a terrific amount of money.
Let us be honest—we still have a very successful manufacturing sector. It is smaller, but it is high resolution and high value-added. In this world where we expect high wages in the economy, we should thrive on that and try to ensure that we get the best out of our research and development. That might be in luxury products—we are going to get big markets from China and India in the future, with 2.5 billion people there.
Nicholas Winterton (Macclesfield, Conservative)
Order. I hesitate to intervene on the hon. Gentleman who represents the City, but this is about the higher rate of tax, not the general economy in this country and on what it depends. I have been generous—as I always will be—to members of the Committee, and particularly the hon. Gentleman. Perhaps he would return to the clause stand part debate and the higher rate of tax.
Mark Field (Cities of London and Westminster, Conservative)
Sir Nicholas, you have not only been generous, you have been over-generous. [Laughter.] I shall criticise you with great praise, of course. This is perhaps a point at which I shall bring my comments to a conclusion. I hope that the Minister takes on board much of what we say. There are grave concerns about what is being proposed. It appears to us ever more to be a political rather than an economic measure, and that cannot be good for this country.
Nicholas Winterton (Macclesfield, Conservative)
I called the Member to speak. I am sure that the hon. Member can make the point in a speech, but briefly.
Mark Todd (South Derbyshire, Labour)
Briefly indeed. First, I thank you, Sir Nicholas, for that gesture and express my enthusiasm for your chairmanship, however brief it is. I recall the last session of last year’s Finance Bill Committee and I can understand your diffidence in not necessarily volunteering to take charge this time.
I want to depart from my gentle probing of the Opposition on this subject and state something of my own view, which is actually in sympathy with some of the arguments expressed. My main reason for supporting this measure is not that I believe it will deliver any substantial revenues. The points made that the sums involved will be relatively small are perfectly reasonable. I see it more in terms of conveying to our nation the importance of equity in our response to this crisis and of stating that those who are best off and best able to bear some burdens should at least contribute some more towards the solutions that we must find.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
As always, the hon. Gentleman is making a thoughtful point. He accepts some of the arguments that this will not raise huge amounts of revenue and he justifies the increase on the basis of equity. I understand the point he is making, but does that argument justify breaking a manifesto pledge? The Government’s justification is that we are in a financial mess which changes things, but it does not change the argument over equity in the same way that it does the argument over the public finances.
Mark Todd (South Derbyshire, Labour)
That is a fair challenge. My answer is that the circumstances could not have been predicted in 2005—certainly not by me—and I do not think informed economic observers thought that we would face anything like these circumstances at the time of the last election. I do not lightly set aside pledges made; but when faced by facts and evidence one must adapt to the circumstances regardless. The electorate will shortly have an opportunity to make a judgment on the realism or otherwise of that argument.
Let me turn to the measure itself. Although I do not think that it will produce substantial revenue, we should ensure that it does no harm. I am worried—I look forward to the Minister setting my mind at rest—that in the haste of preparing this measure, little thought was given to the relative advantages of the various means by which people might choose to avoid paying. There is a variety of ways—there have been references to informed newspaper pieces about what to do if one is hit by this tax. Some have economic benefits; others have none. Bearing it in mind that our purpose is not substantially to raise money, we ought to be ensuring that those who seek advice on how to evade the tax do so in a way that is least harmful to our revenues and most beneficial to our economy at large. We need to look at how to incentivise investment in small businesses and we shall come later to clauses that will cover that and the tool sets that are applied to venture capital trusts, enterprise investment schemes and so on. Worthwhile thought is to be given to how to ensure that those who are seeking to manage their tax affairs do so in ways that help our economy and our Exchequer over time, rather than simply losing that revenue and entrepreneurial spirit to our country.
I will, of course, support the Government in this for the reason that I gave, but more thought needs to be given to how we make this change work. Fortunately, this is a change that will occur in 12 months’ time, and there is plenty of opportunity—
Graham Stuart (Beverley and Holderness, Conservative)
The hon. Gentleman said that he did not expect the measure to produce much in the way of revenue. Without an effective dynamic model with cross-party consensus on its effectiveness, we cannot know for sure what it will do. The hon. Gentleman suggested that equity made it right. If it lost the Exchequer money, would equity still trump effectiveness? At which point would he draw the line? I respect the hon. Gentleman, as do many on both sides of the House, for his integrity in dealing with these issues, but on this point he seems to be doing a number of somersaults in order to support the Government.
Mark Todd (South Derbyshire, Labour)
At times like this, I take references to integrity with care because they are easily trumped. This is a delayed measure. We are not implementing it this year. If we were, I would have been rather more forceful in my criticism. We have some time to reflect on exactly how to design this in a way that does least harm to our revenues and does most benefit to our economy, or at least loses us least, to balance the equity effect, which is important. The hon. Member for Cities of London and Westminster was quite right here; public perceptions are rather important in this. Most people recognise that we face an unprecedented crisis, certainly unprecedented in most people’s lifetimes. Equity is an important dimension. We should respect that, but we need to make sure that in the design of this we provide tools that are of value to our economy and our Exchequer over time, because there are plenty of very expensive people who will be working on this with great care to ensure that they advise their clients properly.
Peter Bone (Wellingborough, Conservative)
It is a great pleasure to serve under your chairmanship again, Sir Nicholas. It is also a great pleasure to follow the hon. Member for South Derbyshire. He made some good comments and made the first real defence I have heard for the increase to 50p. Had I spoken first, my worry would have been that the hon. Gentleman would rise like a phoenix from the ashes quietly to intervene. It is rather like the umpire’s finger going up in a cricket match and one thinks, “Gosh, I am about to be bowled a bouncer here.” So I am very pleased to have spoken after him.
We need to look at the history of how this has come about and why there is so much debate. Unfortunately, there is not enough debate from the Government side. I would have liked to hear more from Government Members on this issue. But here we are. Clearly Tony Blair made a pledge that income tax rates would not go up. That was signed up to by every Labour candidate. There has to be a very significant reason to depart from that. The hon. Gentleman started to make a defence of it, but I do not believe that it was a strong enough defence. I hope that it will be put to a vote and that the Government Back Benchers who have not spoken will call for a Division, because they clearly want to support their manifesto’s original pledge and vote against the rise to 50p. Nobody on their side, apart from the hon. Member for South Derbyshire, has demurred from the proposal.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
By the same logic, the hon. Member for Taunton should fulfil his party’s manifesto pledge by voting for the new 50p tax rate.
Peter Bone (Wellingborough, Conservative)
I know that the hon. Member for Taunton will vote for the 50p tax rate—it never crossed my mind that he would not. I was impressed with the contribution made by my hon. Friend the Member for Cities of London and Westminster, and I agreed with almost everything that he said. He was wrong on one point, however; there is not a wafer of difference between myself and my right hon. Friend the Member for Witney (Mr. Cameron) and my hon. Friend the Member for Tatton (Mr. Osborne). I agree entirely with their analysis; we should fix taxes for the many and not for the few as soon as we are in power. Other than that one caveat, I agree entirely with my hon. Friend the Member for Cities of London and Westminster.
The hon. Member for South Derbyshire made the case that there was not much economic merit to the matter under discussion. I warn the Government—perhaps this will also help them in terms of the next general election—that, in the past, when Governments have moved away from their manifesto pledges on tax, disaster has befallen them. That was true of John Major, for example. A Government should be for all the people, including the middle classes. That was Tony Blair’s great success—he realised that Governments need everybody on board. To turn to a core vote dog-whistling strategy is very dangerous for the country and for the Government. Whatever happens at the next election, we want some Labour Members in Parliament to form an Opposition; it would be very dangerous if we only had Conservative Members.
On the policy details, I am struggling with the figures in the Red Book. In table 1.2, entitled “Budget 2009 policy decisions”, on page 11, I think that the 2010-11 figure is the only one that does not include any assumption of the 45p tax rate, because that rate was already built into the original forecast. If I am reading the 2010-11 figure correctly, the increase to 50p in the pound will raise £1.13 billion. I think that that is what the Red Book tells us. As many members of the Committee have said, that is not a significant amount of money, and my hon. Friend the Member for Henley has pointed out that we might lose money elsewhere in the tax programme. I agree with those analyses. If the figure is £1.13 billion, may I suggest a pain-free way in which the Government could get rid of the 50p tax rate without impacting on public spending? In fact, my proposal would enable the Government to increase public spending on schools and hospitals, and it would not damage the domestic situation in any way.
This year’s proposed contributions to the European Union are £3 billion, and the latest estimate is that they will increase to £6.5 billion next year, which is an increase of £3.5 billion. Tony Blair said that that would happen only if there was reform to the common agricultural policy. That has not happened, so the Government have an easy way of saying that they have found the money and do not need to implement the 50p tax rate, and none of their Back Benchers would have to vote against them in the Division that will follow this debate. It would be a pain-free solution. Furthermore, it would do the Government an enormous lot of good during the European Union elections. I hope that my contribution has been helpful and constructive for the Government.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I start with a warm welcome to you, Sir Nicholas, our Chairman for the morning sitting. Clause 6 is necessary to ensure that those with the very highest incomes contribute their fair share towards the consolidation that is now required.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
I apologise for jumping in quite so early and am grateful to the Minister for giving way. I noticed his first words—“Clause 6 is necessary”. Is clause 6 necessary for the Government to fulfil their stated policy objective of raising the top rate of income tax to 50p? The new rate is not coming into effect until next year, so why is it necessary to have clause 6 in this year’s Finance Bill?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
It is here because it was important to set out in the Budget how we should achieve the fiscal consolidation required. That is the announcement that we made in the Budget, and the Bill is rightly enacting the Budget decisions. If the hon. Gentleman is suggesting that we should defer the measure until after the election, my view is that we should not. We should be up front with the British people in how we shall achieve the consolidation that everyone can now see is necessary.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
I am grateful for the reply, but I ask again why the new rate is necessary in the Bill? If the Government have stated what their objective is, that is indication enough, is it not? When the Government say that they will do something, they will do it, surely. Why is putting the provision into legislation necessary? I do not see anything in the Finance Bill to raise the level of national insurance contributions, although I acknowledge that that is a different set-up. The provision is here for political reasons, and for political reasons only—there is no need for clause 6.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
It is not here for political reasons. It is here so that the Government have a clearly credible consolidation strategy that will achieve our objectives over the medium term, as we set out. If the hon. Gentleman wishes to vote against the clause, he is perfectly entitled to do so. Indeed, given what we have heard from the Opposition, at one point I thought that they would vote against it, although the implications appear to be that that is not the case.
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
Part of the problem, although we talked about it in the context of the 50p rate, is that the clause did not mention the 50p rate, but an “additional rate”. We know from the PBR last year that a 45p rate was to be introduced in 2011; in this year’s Budget the Government said that a 50p rate would be introduced in 2010. Who knows what the Budget decision will be next year, when the Chancellor gives his final Budget? We are discussing a clause in which no rate is defined or set, and we shall not know until next year whether the Government are prepared to carry through their commitment.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
We shall carry it through. The point that I want to emphasise to the Committee is the importance of having a clear strategy, which everyone can see, for fiscal consolidation over the next few years.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
No. I shall make a little progress before I give way again, but I shall look forward very much to the hon. Gentleman’s intervention a little later.
The hon. Member for Hammersmith and Fulham gave the Committee a long list of objections to the clause, but his case is flawed by the fact that he is not going to vote against clause stand part. If he is not persuaded by his own arguments, I shall not detain the Committee long responding to them. However, I shall respond briefly to some of the arguments.
First, on the estimate of the revenue from the measure, the hon. Gentleman asked some questions about elasticities and the figures used. The behavioural estimates that underpin the figures in the Red Book are based on taxable income elasticities—how much declared income reduces, for whatever reason, for each percentage point decrease in post-tax income. We have chosen to use a figure for taxable income elasticity, as the hon. Gentleman acknowledged, of 0.35. We looked at all the evidence available for the UK—including the IFS figure of 0.46, as he said—most of which consists of studies looking at the 1980s and the 1990s, and at the academic evidence available for a range of other countries, the USA in particular.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
The Financial Secretary seems to be arguing that the IFS figure of 0.46 is outdated because it was derived from behavioural observations from the 1980s. However, surely it is far more likely that higher rate earners will be much more able to avoid tax today than in the 1980s, due to greater international mobility, the greater ability to conduct business from a different home country and the greater ability of such people to tap into expertise in tax and accounting. For all those reasons, he is surely making the wrong assumption about behavioural changes in the last 20 years.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The hon. Gentleman is absolutely right that the judgment needs to be based on the present circumstances and not those of previous decades. The Government have taken a number of policy measures, for example those announced in the 2004 statement by my predecessor, my right hon. Friend the Member for Bristol, South (Dawn Primarolo)—
Mr. Handsrose—
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The hon. Gentleman must let me respond to his point before I give way again. That 2004 statement by my right hon. Friend was about anti-avoidance measures and the regime requiring anti-avoidance products to be disclosed. All those measures are likely to have had a downward impact on taxable income elasticity in the UK. Also, structural differences between the tax systems in the US and the UK mean that it is likely that taxable income elasticity is lower here.
Laura Moffatt (Crawley, Labour)
It is a pleasure to serve under your chairmanship, Sir Nicholas.
We are having an interesting debate about who might avoid paying tax. Will my right hon. Friend restate to my constituents just what the money raised will be used for in these very difficult times—extraordinary times, globally?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
My hon. Friend is absolutely right to draw the Committee’s attention to that fundamental point. What we need to do is support families and households through this difficult time in the economy—the degree of difficulty is unprecedented—to maintain investment, in the way that we set out in the Budget. We must do so to protect the economy, individuals and particularly employment, which was the highest priority of all in the Budget, to get through the downturn in the best possible shape—indeed to make the downturn shorter and shallower than it would otherwise have been—
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
And to protect the nation’s interests in that way.
Having resisted the hon. Gentleman’s attempt to intervene earlier, I feel that I owe it to him to give way now. In fact, it is a pleasure to do so.
Peter Bone (Wellingborough, Conservative)
In my original attempt to intervene, I was going to say that if the measure is not necessary, it should not be in the Bill because that is bad drafting and that would be a real reason for everyone on this Committee to vote against it.
My intervention now is different. The measure is supposed to protect employment. Unemployment in my constituency is 84 per cent. higher than it was when John Major left office. How can the Minister possibly say that anything the Labour Government do will protect employment in Wellingborough?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The record on unemployment is extremely clear, as the hon. Gentleman knows. The steps that we have taken in the Budget will be particularly effective in tackling the problem of unemployment. Perhaps the most important step was the jobs guarantee, which will ensure that, from next January, anybody under 25 who has been out of work for 12 months will be guaranteed a job or training place. There is funding for 100,000 new socially useful jobs, to allow that guarantee to be discharged.
Mark Field (Cities of London and Westminster, Conservative)
If I may, I want to assist the Minister to answer the question put by the hon. Member for Crawley, who asked where all the additional money would go. About £2.75 billion—perhaps as much as £3 billion—of the money that is raised will go to pay off less than one tenth of the money that this Government will have to borrow because of the mess and debt that they have stacked up. That is the true answer. It will only make that much difference; a tiny element of the borrowing will be paid off on the debt interest.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The measure will yield £6 billion over the forecast period. Opposition Members may not feel that that is a large sum, but £6 billion is an important element in our consolidation of the strategy, which is needed and must be in place in the period ahead.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
The Minister is most generous in giving way so often. Can I take him back to the point about the modelling? Going back to the dispute this week between the Treasury and the IFS about different rates of tax avoidance, the Minister seems to be saying that the assumption in the Treasury model is a rate of 0.35 for those earning more than £150,000. Will he tell us what the Treasury’s assumption is for the general population?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The measure will not apply to the general population, but will apply to, as I have emphasised, the highest-earning 1 per cent. of taxpayers.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
I should explain myself a little more clearly. I talked about the matter at some length in my contribution on Tuesday.
Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)
It obviously was not clear.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
It may have been unclear—or perhaps not great in clarity. I think the point made by the IFS is that the 0.35 ratio is roughly the same rate that is used for the general population. Why should higher earners be held to have exactly the same propensity to avoid tax as the general population, when precisely the opposite appears to be the case?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The figure that the IFS suggested, to which the hon. Member for Hammersmith and Fulham referred to in his lengthy contribution the other day, was 0.46, which is an elasticity, rather than a rate. However, the IFS acknowledged in its report of 20 April that that is a tentative estimate. It also made it clear that the estimate was subject to uncertainty about the extent to which growth in top incomes was due to structural changes rather than tax reductions. The assessment made by our experts is that 0.35 is the right figure to use.
Graham Stuart (Beverley and Holderness, Conservative)
I am extremely grateful to the Minister for giving way; he has been astonishingly generous. Will he share with us what the range of estimates is? The Treasury must have picked an elasticity figure to go on, and I am interested to know what were the risk factors, what were the lowest figures given in Treasury advice to Ministers, what was the smallest elasticity attributed to that highly mobile, high-earning group, and what was the greatest elasticity—the greatest risk. Secondly, given the importance of the matter, will the Minister share the advice that was given to allow the general public to have a better understanding of the impact? Like the hon. Member for Crawley, I am concerned about the impact on public services, on which ordinary people in my constituency depend.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
We produced not a range, but a figure for the modelling to be carried out, and that figure was, as I have said, 0.35. [Interruption.] I am grateful to Opposition Members for their acknowledgment of my extreme generosity, but I must make a little more progress before I give way again.
We are talking about £6 billion being raised in the first three years of the measure, which is an important contribution to consolidation. It is right that that part of the consolidation comes from those most able to pay, rather than hitting those on low or middle incomes. There is an important dimension of fairness, and 98 per cent. of taxpayers will not be affected by the measure.
On the changes that we will make to national insurance contributions as part of the consolidation, which was also mentioned in the debate, we raised national insurance because it is broad based. The changes will apply to employees, the self-employed and employers, spreading the burden across the economy and across all sectors. It will protect those who do not pay national insurance, including those who rely on savings and those of state pension age.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
I am grateful that the Minister is maintaining his reputation for his generosity. When will we see some legislation implementing the increases in national insurance contributions, on the basis that his argument is that we need to show—to use his phrase—a credible fiscal consolidation?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
Separate legislation will be needed because that measure cannot be set out in the Finance Bill. Those responsible for the legislative programme will set out the details at the appropriate time.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
Will the right hon. Gentleman give way?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I am not in a position to make any announcements on that subject today, but I will of course give way again to the hon. Gentleman.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
I am grateful for the Minister’s comment about how that will be done at the appropriate time, but will it be in this parliamentary Session? Given that he is so anxious to set out legislation that demonstrates a credible approach to the fiscal crisis, why have we got one measure now, but the national insurance contributions stuff perhaps after the elections?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
We have the income tax measure now because we have the Finance Bill, in which it appropriately sits. I am sorry to disappoint the hon. Gentleman, but as I have said, I am not able to make an announcement on national insurance legislation.
We have had an interesting debate. We have discussed the important subject of the UK’s international competitiveness and carefully considered the impacts both on individuals and on the UK economy. Our conclusion is that with the 50 per cent. rate the UK will continue to be a competitive place for business, with a tax burden that compares well internationally. I referred on Tuesday to the international benchmarking work that has been done on that subject. We have taken the lead in announcing our future plans for fiscal consolidation, which is part of the boldness to which the International Monetary Fund paid tribute in its report yesterday. We have been absolutely right to do that, and other countries are also considering ways of doing it, most notably the USA.
I enjoyed the comments made by hon. Member for Cities of London and Westminster, but I say to him that the US budget has proposed taxes on high-income Americans totalling some $637 billion over the next 10 years. I enjoyed attending the reception for the City of London that he hosted on Tuesday evening in the House, and I remain confident—he affirmed this as well—that the City and the UK as a whole will continue to be strongly competitive in the years ahead.
Graham Stuart (Beverley and Holderness, Conservative)
Does the right hon. Gentleman believe that high earners in the UK are a more internationally mobile group than those in the United States? Comparisons are often made between this country and Sweden, which has a higher tax rate. Does he accept that if an economy depends on internationally mobile people to a larger extent, greater care has to be taken with the higher tax levels?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
There certainly is a competitive world market for talent; we need to factor that into our considerations, and we have done so. On that basis, we are confident that the measure is the right one. The 50p tax rate has a job to do. It will make an important contribution to the medium-term fiscal consolidation of the economy.
My hon. Friend the Member for South Derbyshire was right to highlight the concern about fairness. The question has been asked whether the measure will be permanent or temporary. The fiscal consolidation that we need will take some time, as the Red Book set out. All I can say to the Committee about that is that we will, of course, keep all taxes under review.
The hon. Member for Hammersmith and Fulham has also made some important comments on the trust rate of tax and concerns about the effect of the changes to the trust rate on vulnerable people and those on low incomes; he also referred to dividend taxation. The trust rate of tax will be increased in line with the higher rate of income tax of 50 per cent. to prevent people from using trusts to benefit from the difference between the trust rate of tax and the additional rate of income tax. However, income paid to beneficiaries who receive income from discretionary or accumulation trusts carries a credit at the trust rate, which from 2010 will be 50 per cent., so those who do not pay income tax of 50 per cent. will be able to set the tax credit against their total chargeable income and claim back any surplus income tax, as they can now. The standard rate band also taxes the first £1,000 of trust income from a discretionary trust at only 20 per cent., which benefits a large number of small trusts, as many of them have income under that figure.
The hon. Gentleman mentioned in particular the special tax regime that applies to vulnerable beneficiaries. Those rules, including the definition of disability, were consulted on in detail during the trust modernisation programme, which ran between 2003 and 2006. The special tax regime is for trusts used by vulnerable people who are unable to look after their financial affairs. More general support for disabled people is provided elsewhere in the tax and benefits system. I understand his point that the definition of disability is a sensitive issue and that the understanding of what constitutes disability is continually evolving. Officials have recently discussed with groups such as the Disability Benefits Consortium the definition of disability in relation to trusts.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
That is an important point. The Minister has confirmed that he has been in discussions with the DBC, but my information is that it remains unsatisfied with the set of provisions. Can he confirm that that is correct? What is his impression from the discussions he has had with the DBC and the Low Income Tax Reform Group?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I can confirm that those discussions are continuing and have not yet reached a conclusion. I have no doubt that those groups will continue to press their case. The issue is not the rate of tax ultimately paid, but whether it is necessary for reclaims to be made against the higher rate of tax. That is an important question, so those discussions will continue.
The hon. Gentleman claimed that the additional dividend rate would discourage investment in equities. The tax rate is to be 42.5 per cent., which is 10 percentage points above the existing higher rate on dividends, so matching the changes to the income tax main rate to keep things as straightforward as possible. I put it to him that the changes strike the right balance between raising revenue as fairly as possible and encouraging wealth creation. No only are dividend rates lower than the tax rates on other income, but they are reduced further by the dividend tax credit available to almost all investors. The existing credit will remain in place and at the same size—one ninth of the value of the dividend—which encourages investment by individuals and reflects the fact that tax has already been paid by the company.
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
May I come back to the intervention I wanted to make earlier, which was about the Chancellor’s comments on the justification for the 50p rate? In an interview with the Daily Mail on 23 April he said that he would be calling on people with higher earnings
“to contribute a bit more while we resolve this situation.”
I appreciate that it is difficult for the Minister to say when the situation will be resolved, but can he at least tell us to which situation the Chancellor was referring? Was he talking about the financial crisis or the position of our public finances and the ongoing budget deficit?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
He was speaking about the need for a period of consolidation. As I said a few moments ago, the consolidation will take some time to be concluded, as we set out in the Red Book. Our assessment in the Budget is that the public finances will be back in balance by the later part of the coming decade.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
If the rate is to be increased to 50p until the situation is resolved and the Minister anticipates that it will be resolved around the later part of the decade—I do not know whether he is referring to 2017 or 2018—when the Government project they will have a balanced budget again, is he saying, without making a commitment, that the broad intention would be to lower or abolish the higher rate and return it to the current 40p rate? Is that what the Government have in mind?
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I am saying that my right hon. Friend the Chancellor will make assessments of the right rates of tax in each Budget. The hon. Gentleman no doubt envisages my right hon. Friend making that assessment again in 2017, and he is probably right about that. The Chancellor will make the assessment at the time.
I want to respond to a couple of points made by other hon. Members in the debate before I conclude. The hon. Member for Henley was concerned that the VAT impacts were not accounted for, but they are, in the normal way. The economic forecast reflects the 50p rate—the rate was input into the Treasury model; the economic forecast was the output of that and VAT receipts were then computed in the normal way.
The hon. Member for Cities of London and Westminster made the point, which others have made, about how diversion into capital gains could be more attractive. Differentials between tax on capital and income are not new in the UK tax system. In the 1970s we had a substantial gap and it has been a familiar feature of the UK tax system, which is why the statute book contains a significant amount of anti-avoidance legislation. Indeed, clause 49 has further provisions, so that can be dealt with as well.
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
No, I shall now conclude. By way of summary, the Government have thought carefully about how the further money required for the consolidation should be raised. It is right that those who are in the best position to do so should be asked to make a contribution, which is what clause 6 achieves.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
On a point of order, Sir Nicholas.
Nicholas Winterton (Macclesfield, Conservative)
I shall take it, but I cannot think what the point of order is. I shall listen and judge accordingly.
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
It is the convention that income tax rates are set on an annual basis for the year ahead. Despite the Minister being pressed, we have had no justification for the necessity of the clause or what its legislative effect is. Sir Nicholas, can you advise me whether the clause would therefore appear to be fairly harmless and to have no impact, and could therefore be enacted next year? Is it appropriate that such a clause is included in the Bill, when it does not appear to have any legislative effect?
Nicholas Winterton (Macclesfield, Conservative)
The answer to the final part of the question, in my opinion, is yes. It appears to me, and I have taken a little advice, that the clause deals with setting a framework for a higher rate of tax. The level of that tax can be set in a future Budget. I hope that that deals with the hon. Gentleman’s point of order. I understand his point and clearly there is some confusion. The clause, in my estimation and on the advice that I have taken, is the setting of a top rate of tax, without specifying that top rate of tax, which could come in future legislation.