Thank you, Mrs. Heal. It is a pleasure to welcome you to the Chair.
In our discussion of clause 3, Mr. Hoban talked about the Chancellor giving with one hand and taking away with the other. The amendments that we have tabled on the income tax clause reiterate that theme. They seek to pursue two different lines of inquiry, and pose questions that I hope will tease out the Government's line of thinking in relation to the announcements that the Chancellor made in his final Budget.
First, we are trying to tease out the Government's arguments behind the Chancellor's proposal to abolish the starting rate of income tax and to cut the basic rate by 2p in the pound. That is dealt with by amendment No. 11 and by amendment No. 12, which has not been selected for debate. It will be interesting to hear the Minister's justification of the abolition of the 10p starting rate, which will result in millions of people who currently pay 10p in the pound seeing their tax rate increase to 20p in the pound.
Secondly, we want to highlight the alternatives that the Government could have considered, given that the Chancellor talked about tax changes that would be "fairer". This is dealt with in amendment No. 10, which, rather than increasing the 10p starting rate to 20p, would get rid of it altogether, thereby lifting people on very low incomes out of tax altogether. It would replace the 10 per cent. rate with a zero rate, which would have the opposite effect to that announced by the Chancellor. Two million people would thereby be lifted out of tax altogether. This was a proposal that our tax commission looked at, in addition to cutting the basic rate of tax by 2p, as the Chancellor has announced. Amendment No. 11 proposes to introduce the basic rate changes that the Chancellor announced with great fanfare in the Budget but which, according to the Government's timetable, will not be introduced until the next financial year.
I shall briefly discuss the context of the proposals. The changes in income tax were announced in the final few words of the Chancellor's final Budget. His explanation of the reasons behind the cut to the basic rate was clear. He said that
"to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p".
That was very clear. My hon. Friend Dr. Cable said in the debate on the Budget resolutions that that announcement had given him a frisson of excitement, because he thought that the proposals put forward by our tax commission were being imitated.
It was less clear how the proposal was to be paid for, however. While the Chancellor was clear about the 2p reduction in income tax, he also said:
"With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax."—[ Hansard, 21 March 2007; Vol. 458, c. 828.]
That is as close as he came to explaining that he was going to get rid of the 10p rate. He did not give any details of the decision to abolish the starting rate at any other point. Instead, we have to look at table 1.2 in the overview on page 13 of the Red Book. Line 15 refers to:
"Removing the starting rate of Income Tax on non-savings income".
That is what will pay for the reduction in the basic rate of income tax to 20p.
Let us not forget, therefore, that the Government have chosen not to put these proposals in the Finance Bill. They are designed to be introduced next year. Perhaps the Chancellor is keen to leave these issues to his successor. Amendments Nos. 11 and 12 propose to introduce the changes immediately. As they would enable the Government to implement their own policy early, I would be interested to hear whether the Minister is considering supporting them. If not, perhaps he will explain why the Government are so keen to delay the changes for a year. Why does introducing them later make them any fairer?
I shall remind the House again of the Chancellor's words: he talked about making working families "better off". How much better off will the Government's changes make the average family? At best—as we have seen in relation to the small business rate changes—people will be no better off. At worst, individuals will be significantly worse off, especially households on low incomes with no children, and single individuals. Ministers have talked about how tax credits will offset that, but let us not forget that large numbers of people do not claim the tax credits to which they are entitled. Many people under 25 on low incomes are not entitled to apply for tax credits in the first place. It is interesting to note that the Chancellor's speech contained no explicit mention of young individuals or childless couples on low incomes—exactly the groups who will be worse off, and for whom the proposals will not be fairer. I would be interested to hear from the Chief Secretary exactly how the proposals make the system fairer.
The amendments are particularly pertinent given the coverage over the weekend of how the wealth of the richest in our society has grown exponentially over the past 10 years—yet the Government proposals will hit those on the lowest incomes. Would it not have been fairer to fund a basic rate tax cut, reducing that growing inequality, by raising taxes for those on very high incomes, instead of raising taxes for those on very low incomes? As the "Rich List" published in The Times at the weekend showed, the only tax that many of those very rich people pay is council tax. Why did the Government not take the opportunity provided by the Bill to introduce measures that would have made the tax system fairer, perhaps by implementing some of the Lyons review's recommendations in the short term?
The 10p rate, which will be abolished in the next Finance Bill, was highlighted in Labour's manifesto, and the Liberal Democrats have proposed reducing the rate to zero rather than increasing it to 20p. The Labour manifesto in 1997 stated:
"Our long-term objective is a lower starting rate of income tax of ten pence in the pound. Reducing the high marginal rates at the bottom end of the earning scale—often 70 or 80 per cent—is not only fair but desirable to encourage employment."
If it was fair to introduce the 10p rate to try to counteract high marginal rates of taxation, why is it now fair to increase that marginal rate of taxation back to 20 per cent.? After being introduced with such a fanfare—preannounced in the manifesto, in the first Budget, and again before being finally introduced—why does the Chancellor now seem keen to dump the 10p rate on the quiet once he has left the Treasury building?
The amendments invite Treasury Ministers to face up to a decision today on the two options laid out. One of those is available to debate right now.
I know that the hon. Lady's party has been favouring the abolition of the 10p rate, its replacement with a zero rate, and the extension of personal allowances as set out by her party's policy document. The document indicated, however, that the change would be offset by £8 billion of environmental tax rises and other changes. Will she table amendments to the Bill setting out the detail of those changes?
As the Chief Secretary knows, there are constraints on what can be tabled and debated in relation to this year's Finance Bill, and we must respond to the measures before us today. The amendments are about whether the system will be fairer. The Chief Secretary is absolutely right that our tax commission's proposals were fairer, simpler and greener. We will seek to make the case for those measures as best we can, given the constraints in relation to the Finance Bill.
The hon. Lady said that there were restrictions on what can be tabled. I presume that she was referring to the tabling of any amendment that would raise a tax. Will she confirm that last year her party tabled tax-raising amendments in relation to vehicle excise duty?
The hon. Gentleman will know that such amendments can be tabled but not debated, which obviously causes difficulties in relation to the selection of amendments and the package that can be put forward. In addition, we are debating clause 1 rather than the whole Finance Bill, so, unfortunately, we have to consider the measure in isolation.
Will the Chief Secretary explain why, and on what basis, he would feel unable to support now amendment No. 11, tabled by the Liberal Democrats, which reduces the basic rate of tax to 20 per cent.? If the Government want to get rid of the 10p rate, why would that be fairer? It was clearly presented as fairer in the Budget, but in the aftermath of the Budget, Ministers were keener to present it as a simplification measure, which is certainly more logical.
The amendments provide an opportunity for the Treasury to set the record straight and follow through on its announcements in the Budget. I am not clear why it was not able to do that in this year's Finance Bill. If the Government really consider the measure to be fairer, it makes sense to introduce it straight away. Alternatively, is the Treasury keen to postpone certain arguments until after the present Chancellor moves next door to No. 10?
I want to consider the amendments first, and then the wider background to clause 1, especially the 10p income tax band. The official Opposition will not vote in favour of the amendments if they are pressed to a Division. Our primary concern about them is that they have not been properly costed, so it would not be fiscally responsible to vote in favour of them.
We are also concerned by the claim in the Liberal Democrats' tax policy paper that their package amounts to a "green tax switch"; it amounts to nothing of the sort. Well over half the tax rises that the Liberal Democrats say that they would use to fund the reductions have nothing whatever to do with the environment. They plan to fund £4.3 billion of their tax reductions from scrapping higher rate relief on pensions. That is an astounding proposal to put forward at a time when our pension system is in crisis, and to do so without proposing any alternative incentives to save or to tackle the pensions crisis seems wholly irresponsible.
If that is the case, the Department for Work and Pensions does not know what it is talking about. John Lawson, of Standard Life, described the Liberal Democrat tax proposals as "extremely flawed". He continued:
"The Lib Dems need to have a serious rethink of this proposal...Pensions under these proposals would become almost pointless".
"catastrophic effect on pension funding".
Does the hon. Lady agree that it is people contributing at the lower rate of pension tax relief who should be encouraged to save for their pensions? Those contributing larger amounts currently qualify for greater relief, so the people who are already saving more benefit more, while those who are saving less, benefit less.
How does the hon. Lady get round the problem that if one removes a significant tax incentive to save for a pension, fewer people will save for pensions, and the pensions crisis will become even more serious?
May I probe the hon. Lady further, as I am interested in the image that the Opposition are presenting of being most concerned about the poorest? Is not it true that half of all tax relief for pensions goes to those paying the higher rate of tax? Those are the people with the largest pensions, who will be well provided for in old age. Would not a new Conservative party be more interested in redistributing that revenue to those at the bottom who find it most difficult to save, even if it disagrees with the Liberal Democrat proposals for more sweeping tax reform?
We are prepared to examine a range of options to try to encourage people across the income spectrum to save for their pensions, but we simply do not think that a £4.3 billion hit on pensions savings is what our pensions system needs at the moment, and that is what the Liberal Democrats are proposing. Given that the savings ratio has been halved during the 10 years of the Chancellor's tenure at No. 11, we think that the last thing the country needs is the complete abolition of an important incentive to save for old age, particularly when it is not accompanied by any compensating incentives elsewhere in the system.
I am not convinced that the numbers in the Liberal Democrats' tax package add up. When it was first announced, the Institute for Fiscal Studies identified a £500 million underestimate of the cost of their proposed income tax changes. And the problems do not end there. For a start, as we have heard from the Chief Secretary, the Liberal Democrats have not produced any convincing details of how they would raise £8.1 billion in green taxes. Nor am I convinced that they have got their numbers right in the capital gains tax part of their package. They claim that those changes would raise £6.2 billion, but, they seem to have underestimated the impact on behaviour of changes in the system. After all, for many people capital gains tax is a postponable tax. When rates and reliefs are amended to become less favourable to the taxpayer, there is an incentive to sit on assets.
I am delighted to be guided by you, Mrs. Heal. I will, however, refer in passing to an observation by Julia Goldsworthy, who reiterated the Liberal Democrats' support for a local income tax. Far from supporting income tax reductions, her party wants a 4.5 per cent. increase via the local system. I suspect that that is something that her colleagues are not mentioning on the doorsteps this afternoon.
It is instructive to examine the changes in income tax rates proposed for 2008-09 by the Chancellor in his Budget speech. In particular, when we evaluate the 10p band and the 22 per cent. basic rate in clause 1—which the amendments would alter—it makes sense to consider the responses to the Chancellor's announcements.
In reaching a conclusion on the merits of the 10p band, we should assess the Chancellor's proposal to abolish it as from next year. It is striking that the Chancellor's "rabbit out of a hat" announcement on the basic rate does not appear in clause 1. He began his Budget speech by saying that he did not want to follow Gladstone's example and act as Chancellor as well as Prime Minister. However, he still seems very keen to bind the hands of his successor by pre-announcing tax changes for next year, and even later in some instances. Contrary to the spin that he tried so hard to place on the Budget, taxes on income will rise next year as a result of the changes that he announced. The Red Book shows taxes on income rising by £340 million in 2008-09, if we take into account the increases in national insurance and the scrapping of the 10p band.
Serious concern has been expressed about the impact of the loss of the 10p band on those with low incomes. The IFS calculated that 5.3 million families would be worse off as a result of the loss of that band, and other changes proposed in the Budget. That figure was confirmed as being broadly "in the right ball park" by Mark Neale, managing director of the Treasury's Budget, tax and welfare directorate, when he gave evidence to the Treasury Select Committee.
Abolishing the 10p band will result in a transfer of the burden of tax from those on middle incomes to those on low incomes. According to the IFS, the big losers will be people earning between £5,225 and £18,500 a year, particularly those without children, whose loss will not be compensated for by tax credits. Adults without dependent children will be among the hardest hit, because the blow will not be softened to a significant extent by those tax credits. According to the IFS, the poverty rate among that group is now 4 million—the highest since records began in 1961. It is now the largest group of poor people, comprising up about one third of the total. Recent Government data show that child poverty is rising as well—it rose by 100,000 last year—and that the real incomes of the poorest 20 per cent. of the population are falling. There are now more people in entrenched poverty—below 40 per cent. of median earnings—than there were when the Chancellor took over at No. 11.
That does not detract from the real concern expressed by many Members throughout the House about the loss of the 10p band. Let me draw the hon. Lady's attention to what some of them have said.
At the time of the Budget debate, Lynne Jones admitted:
"I think we have to some extent neglected poorer people who have no children. I think that's a cause for concern. It is something that needs to be put right in the long term because there are people who are single who are struggling on low incomes."
"I have a bone to pick with the Chancellor and the Treasury Front Bench about the removal of the 10 per cent. basic rate. I cannot believe that that is the last word from my right hon. and hon. Friends on the subject. It is hurting many people whom the Government never set out in any of their policies—I accept that that is a consequence and not an intention of the Budget—to hurt. Indeed, when the 10p rate was introduced it was precisely to alleviate those problems that, in part, we are now creating." —[ Hansard, 27 March 2007; Vol. 458, c. 1365.]
He went on to say that he hoped there would be a review of the decision to scrap the 10p rate.
Essentially, the Chancellor is relying on tax credits to soften the blow inflicted by the loss of the 10p band. In deciding whether it should be retained, we should examine the tax credit system. The impact of the abolition of the 10p band is even tougher on the poor and the low-paid when we take account of the fact that only 61 per cent. of people entitled to working tax credit claim it. Among people without children, the figure drops to 19 per cent. The Treasury itself has budgeted on the assumption that only 25 per cent. of the working tax credit due to childless households will actually be claimed—and who can blame people for being wary of becoming embroiled in tax credits?
Although we support tax credits in principle and believe that they can and should play a continuing role in alleviating poverty, the tax credit system is broken and in need of drastic reform. Referring to tax credits in connection with the abolition of the 10p band is simply not a complete answer. Their effectiveness in mitigating the impact of the loss of the 10p band is undermined by the current chaos in the tax credit system. The fundamental problem is its complexity. As the National Audit Office has said, that complexity underlies the problems with fraud and overpayment.
The more complex the system, the more likely it is that mistakes will be made. People claiming tax credits must fill up a 12-page form and wade through a 60-page explanatory note. Robin Williamson, of the Low Incomes Tax Reform Group, recently commented:
"A specialist in differential equations from Oxford tried to calculate someone's entitlement"
—tax credit entitlement, that is.
"He got it wrong."
Again, I am grateful for your guidance, Mrs. Heal.
It is of considerable concern that the loss of the 10p band will hit people on low incomes. It will mean that more people are forced into the tax credit system, with all the serious problems that the House has debated on so many occasions. It cannot help in any way to fulfil the Chancellor's declared intention of tackling poverty, either. The Chancellor tried to grab the headlines with an income tax cut in the last few words of his Budget statement, but the Bill gives us no such cut—nor will the legislation to come, given the other tax rises that the Chancellor plans to introduce.
As Mike Warburton of Grant Thornton said of the Budget:
"This is robbing Peter to pay Paul."
Michael Saunders of Citigroup said that the Chancellor's
"version of tax cuts, it appears, is one that still raises the tax burden."
"It is a con trick, there's no doubt about it. I will be amazed if people are duped by it for more than five minutes."
Clause 1 shows more clearly than ever that the Chancellor's 11th and final Budget was a tax con, not a tax cut, and the nation has not been fooled by it.
Thank you, Mrs. Heal, for calling me. May I also thank you for exercising such judgment, which allowed the Opposition enough leeway to tell us what they were really thinking about, which is, of course, what is happening on the streets now: the fight between the Liberal Democrats and the Conservatives. I want to address my comments to the Treasury Bench, where decisions will be made this year and no doubt next year as well. My speech is on the impact of the 10p rate of tax.
Whatever views one has of the Chancellor, one has to be pretty deranged to say that he is not passionate about redistributing resources to the poorest. I willingly sign up to that message. Therefore, I am puzzled that he has allowed this aspect of his Budget to go through. My feeling is that, on this one occasion, he cannot have done his sums.
Those on the Treasury Bench know that, a month ago, I tabled questions asking how many people will be net losers as a result of the abolition of the 10p rate and how many of those people will not be compensated by the tax credit system. I am sure that, when those in the Treasury get around to answering my question a month late, they will be so appalled by the answer that they themselves will look before Report to meet those Labour Members who are going to table amendments—if we possibly can—so that those who are going to lose out will not lose out, at least for a transitionary period.
The issue is twofold: there is redistribution from poorer people to richer people, but there is also redistribution within families. I want to draw the Committee's attention to both those aspects of redistribution, which are unsatisfactory to Labour Members. Members of Parliament, given the salaries that we are on, will benefit from the tax package, but if we let the measure go through next year, those of our constituents who earn a sixth of our salaries will pay about £3 a week more in tax. That cannot have been the aim of the move.
As I said, the redistribution occurs not only in a traditional sense—from poorer people to richer people—but within families. With most families, although not all, it is the men who are higher earners and the women who are lower earners. Therefore, if the abolition goes through, in every family in the land who are in that position, the women generally will pay more tax and their husbands will pay less tax. If the measure is unaccompanied by other protection measures, it will redistribute from women to men within families and, between families, from poorer families to richer families.
As I said earlier, no one who is in control of their marbles believes that the Chancellor is not passionate about redistributing to poorer people. Some of us may have a debate about the methods of that redistribution, but no one should doubt the intent. Therefore, it is a surprise that the measure is going through as it is. I believe that once those in the Treasury, a month late, get around to answering the question that I tabled, they will be so horrified by the findings that they themselves will look at what measures we can take, and those measures should be of a transitionary nature, not permanent.
The move that the Chancellor is making to simplify our tax system as much as possible and to make it easier for people to understand is the right one. The aim is for the standard rate of tax to be the tax rate that determines whether people work harder, train more, get jobs with greater responsibilities and push up their family income as a result. Therefore, I support the desire that the Chancellor has. I cannot believe, however, that he did the sums on the matter, in possibly his last Budget. When he has done the sums, he will not be happy at supporting a change that redistributes income in a family from lower paid women to higher paid men in that household, or more generally from lower paid workers to higher paid workers such as MPs. I hope that when we come to Report it will not be necessary for Labour Members to table amendments and that the Government themselves will make those changes.
It is a great pleasure to follow Mr. Field, whose work on the matter is highly regarded by hon. Members on both sides of the House.
It is a curious amendment, but it is helpful in giving Members an opportunity to debate these matters. Amendment No. 10 would result in a starting rate of income tax of zero per cent. I know why those who tabled the amendment have proposed that, but presumably if one is paying zero per cent. one is not starting to pay income tax. It is not a starting rate; it is a threshold, but it is a useful device to enable us to discuss these matters.
It is useful to be able to discuss these matters. The changes to income tax that will be introduced next year and that we have touched on were perhaps the key consideration when analysing the Budget. The issue of the winners and losers is key. Indeed, as a member of the Treasury Committee, I am pleased that the Labour-dominated Committee has recommended that, in future, the Red Book should set out a clear analysis of winners and losers, so that it is possible to see much earlier who they are. This year, the Red Book set out some examples of winners, but not of losers—curiously. I know that journalists were complaining about the fact that it was impossible to get any losers out of the Treasury. Given that this was a broadly tax-neutral Budget, if there were some winners, presumably there must have been some losers.
The Institute for Fiscal Studies has been much more helpful on the matter. My hon. Friend Mrs. Villiers referred to the IFS's analysis that stated that 5.3 million households would be losers as a consequence of the Budget changes. As we heard from my hon. Friend, that point was confirmed to the Treasury Committee by Mark Neale, a senior Treasury official. He must have felt that he was safe in saying that. He said that
"the figure...is in the right ball-park and is consistent with the Chancellor's statement that four out of five households either gain or remain in the same position as a result of the Budget measures".
He may have felt that that was a perfectly reasonable and safe thing to say. However, Mr. Neale was due to give evidence to the Treasury Committee the day after, alongside the Chancellor, and was curiously withdrawn after the quotation was used in various newspapers. Mr. Neale's absence was not explained, but we all worried about his safety and I hope that no harm has come to him.
The estimate that 5.3 million households would lose out as a result of the Budget was put to the Chancellor, and he was asked whether he accepted it. Given that his own officials had accepted it, one would have thought that he would not have had a problem. However, he advanced two arguments as to why he did not accept that estimate, which was made following the changes in income tax that he announced. The first was that the minimum wage was rising.
I, too, asked a parliamentary question, which was referred to the Department of Trade and Industry. Unlike the right hon. Member for Birkenhead, I have had some success in getting an answer. It contained an analysis of those people earning the national minimum wage, broken down by salary. The fact is that the majority of those on the minimum wage have an annual salary of less than £5,000, so they will be unaffected by the income tax changes. The remaining 171,000 earn over £5,000. Let us assume that all 171,000 are losers; I do not think that we can necessarily do that, but for argument's sake let us do so. Let us assume also that they are in separate households, which is highly unlikely. That takes us to 171,000 households who are on the minimum wage and whose income therefore, one could say, will increase over the course of the year. That will not make much of a dent in the figure of 5.3 million households that the IFS estimates will lose out as a result of the Budget, and the figure of 171,000 is, perhaps, optimistic.
The minimum wage is lower for younger earners, and they will be too young to be entitled to tax credits. For those people, this will have a penal effect.
The hon. Lady's comments bring me to the second argument that the Chancellor used in disputing the figure of 5.3 million household losers, which was the take-up of working tax credits. I will not dwell on the point, but he claimed that the take-up will substantially increase. For households with no children, the current take-up rate by expenditure is about 25 per cent., and by person it is 19 per cent.
In giving evidence to the Treasury Committee, the Chancellor produced some figures which no one had seen before. They related to working tax credit take-up as a whole, as opposed to households without children. He said that a further 100,000 were now claiming, but he was not able to give a percentage figure. I recall reading an article in The Daily Telegraph that reported that the Chancellor once tore a strip off an official who was unable to give percentage figures. The Chancellor gave an overall number, and I have tabled a parliamentary question to find out the percentage for households without children.
Given that the Chancellor had claimed that there was an increase and confidently predicted further increases, I decided to table yet another parliamentary question, and again I have had success in obtaining an answer. I do not know whether the right hon. Member for Birkenhead feels victimised by that. Perhaps I am more popular with the Chancellor than he is.
I could not be less popular with the Chancellor, as my hon. Friend points out.
I tabled a parliamentary question on the level of take-up of working tax credit that the Treasury anticipated over the next few years, to which I received the answer that the Government do not make forward projections for take-up rates.
Therefore, the Chancellor has used two arguments, neither of which holds water. It appears that the changes in income tax announced in the Budget will result in 5.3 million households losing out. If the Chief Secretary would like to dispute those figures, I would be grateful to hear that and to understand the argument. However, this is a substantial change. At a time when the economy is doing well, 5.3 million households will lose out, and those households are generally the poorest, not the richest.
I shall be brief. As an old lag who has attended many debates on pensions over a long period—and perhaps I should state that I have a personal financial interest in the basic pension, which I have been receiving for some seven years now—I can recall a pensions crisis. I recall the 17 years under the Tory Government when the level of the basic pension was cut following their severing of the link with earnings in 1980. A few years later, they cut in half the value of the state earnings-related pension scheme. The introduction of SERPS under Barbara Castle in 1975 was one of the most progressive moves ever made, and it was supported by all parties in the House. The Tory Government also promoted the personal pension scam that robbed 6 million people, who received derisory pensions compared with the amount of money put into them. It was left up to the Labour Government to put that right. Therefore, there was a pensions crisis.
We must resist the fiction that is promoted by the Opposition parties and the tabloid press in an effort to convince people, especially pensioners, that what they read in the newspapers is true and that they should not believe their own personal experience over the past 10 years. That experience has been a very successful one. For a period of six years I used to get up in the early hours of the morning—
I shall confine my remarks to the subject under discussion, although there is a temptation not to do so in one's "anecdotage". I certainly shall not support the amendment although, like other Members, I am very concerned about this measure in the Budget and find myself at a complete loss to explain to my constituents who are on low pay and who will not receive any compensatory payments why it will be introduced. I want to repeat what my right hon. Friend Mr. Field said to the Government: there is time to reflect and to come up with a different solution. The Chancellor's record over the past 10 years has been splendid and there has not been a need to restore the link with earnings because the pension credit, winter fuel payments and other allowances have meant that for the first time in many years pensioners have received justice.
Will my hon. Friend briefly comment on the fact that if this measure is passed it will be an attack on many women because, generally, women are lower paid than men? Therefore, the proposal will lead to a redistribution within households from women to men.
It is strange that this measure has been introduced at the same time as the splendid Pensions Bill—for the first time in 30 years there is proposed legislation that is based not on someone putting their finger up in the air to find out which way the political wind is blowing and acting in accordance, but on evidence and facts. That Bill will give justice to women. Unfortunately, this element of the Budget will have unintended consequences, and I urge the Government to look at it again.
I, too, oppose the amendments. They are uncosted and my hunch is that they would cost billions of pounds to implement. The Conservatives also oppose the amendments. However, I agree that it is strange that Mrs. Villiers talked about higher rate tax relief and the capital gains tax regime, both of which principally benefit the rich in our society—although it is not as if the Conservatives have ever cared about the poor. She completely overlooks the minimum wage and the fact that child poverty and pensioner poverty rose massively when the Conservatives were last in office.
However, although the amendments are uncosted, I associate myself with the remarks of my right hon. Friend Mr. Field and my hon. Friend Paul Flynn about the abolition of the 10 per cent. starting rate proposed for next year's Finance Bill by the Chancellor in his Budget this year.
The measure will adversely affect a group that has not been mentioned—I have some in my constituency, some of whom have written to me: people who have taken early retirement, often on grounds of ill health, who will therefore not benefit from the rise in personal allowances for pensioners and are not eligible for tax credits because they are not working.
I urge my right hon. Friend the Chief Secretary and his team to look again at the proposals for next year. They should reject the proposals in the Liberal Democrat amendments before us, but they should look again at the abolition of the 10 per cent. starting rate, because it will have some unintended consequences which are beginning to be teased out.
The clause to which the amendments apply imposes income tax for 2007-08—each year's Finance Bill has to plan for subsequent years—but keeps income tax rates unchanged for the current year at 10 per cent., 22 per cent. and 40 per cent. The combined effect of the amendments would be to replace the current starting rate band by a zero rate band and to cut the basic rate for this year from 22p to 20p. Mrs. Villiers and my hon. Friend Rob Marris said that that was not costed. I can tell the House that the total cost of implementing these two amendments this year would be £13.8 billion, which I would have thought is quite a tidy sum even for the Liberal Democrats. Therefore, I agree with the hon. Lady that the Liberal Democrats tax proposals are flawed. Julia Goldsworthy, who speaks for the Liberal Democrats on these matters, is wholly at liberty to table amendments to the Finance Bill setting out in detail how £8.1 billion in environmental taxes would be made up, along with other details of the package outlined in her party's policy document. The great majority of Members would warmly welcome that information.
My right hon. Friend has enlightened us on the £13.8 billion figure. He might not have the information with him, but could he have a stab at saying what the higher rate referred to in clause 1(c), which is currently 40 per cent., would have to rise to in order to make up the £13.8 billion? Would it have to be 75 per cent., or 98 per cent., perchance?
It would certainly have to be a large figure. Unfortunately, I do not have that figure to hand, but—who knows?—during the course of my remarks I might be able to do the calculation that my hon. Friend asks for.
I very much agree with my right hon. Friend on that point.
The amendments would introduce only some elements of the package of reforms to the tax and benefit system announced by my right hon. Friend the Chancellor in the Budget. The House will of course have the opportunity to debate those changes in full when they are legislated for, and I very much look forward to that debate.
Let me set out the background to the Budget announcements. There has been a major programme of reform to the tax and benefit system in the 10 years since 1997, with the aims of reducing, and over time eradicating, child poverty, which doubled during the 18 years of the previous Government; of supporting families; of promoting saving; and of ensuring security for all in old age. We have made very big changes to advance all those objectives. The Budget introduced the next stage in that programme by offering more support for work, families and pensioners. The package comprised eight separate reforms, including changes to income tax personal allowances, to national insurance thresholds and to tax credits. Between them, they amount to a total net reduction in personal taxation of £2.5 billion. Let me underline that point. It has been said in the debate, correctly, that the Budget as a whole is fiscally neutral, but the personal taxation elements constitute a net reduction of £2.5 billion.
That is very interesting, because if my memory serves me right, according to the 2006 report on income-related benefits, uncollected working tax credits alone amounted to £2.4 billion—a figure almost equal to the £2.62 billion expected to be given away in the two subsequent years. Is this not just smoke and mirrors? Is not this "balanced" Budget based on not contributing £2.5 billion a year to those entitled to collect it?
No, this certainly is not smoke and mirrors; rather, it is an actual reduction. An examination of tax, national insurance and tax credits shows a reduction of take to the Treasury of £2.5 billion. The Budget also increased taxation on polluting activities, announced a major reform of empty property rate relief, and addressed avoidance. Those three measures between them provided the resources to enable this £2.5 billion reduction in personal taxation, which I can assure the hon. Gentleman is a real reduction that will be enjoyed by his constituents.
Does the right hon. Gentleman not accept, however, that the IFS is correct in stating that 5.3 million households are worse off as a consequence of the changes announced in the Budget?
I would agree with the IFS that there are many more gainers from this package than losers. I cannot confirm the figure that the hon. Gentleman gives, for some of the reasons that he set out earlier. He will doubtless be familiar with the IFS's analysis immediately after the Budget, which is available in slide form in a PowerPoint presentation on its website. It shows that the Budget package raises household incomes in every decile, and that the biggest proportionate increases are in the lowest three income deciles. I underline for the Committee the extent to which this Budget is consistent with the pattern of changes that we have made in the past 10 years. In particular, it improves the position of those on low incomes.
I am very grateful to the Chief Secretary for giving way. Does he agree that table C6, on page 279 of the Red Book, reveals that tax will be up by £2 billion per year when all the Budget measures announced up to 2011 kick in, on top of £2.4 billion in tax increases trailed in the year leading up to the Budget, as set out in table A2, on page 210 of the Red Book? This is not a tax-cutting Budget.
No, it is a fiscally neutral Budget, as my right hon. Friend the Chancellor said at the time. That is the correct representation of what happened in this Budget.
The changes that I described are offsetting measures to enable this very substantial reduction in personal taxation. They also simplify the tax system, while protecting and boosting the incomes of vulnerable groups. We have had some discussion of what the IFS has said, so let me quote what its director said about the Budget package:
"To reform the system in a useful way, within tight financial constraints and with only modest gains and losses should be a cause for congratulation rather than criticism."
I hope that the Committee shares that sentiment about my right hon. Friend's Budget,
The hon. Member for Falmouth and Camborne asked on Second Reading and again today why the package of measures was being introduced next year and not this year. A number of elements of the package cannot be introduced without further primary legislation, such as changes to the upper earnings limit for national insurance and to empty property rate relief, which will clearly take some time. In addition, the package entails significant changes to payroll systems, and it would not be reasonable to expect them to be implemented in just a few weeks. That is why the package of measures that I have identified, and which permits us to make this dramatic reduction in personal taxation of £2.5 billion, needs to be introduced next year, rather than this.
I am no supporter of the Liberals' proposals and I certainly would not support these amendments, but the Chief Secretary is suggesting that he cannot do this year many of the things that he wants to do because they require primary legislation. Last year's Finance Bill was twice as long—two full volumes—with three volumes of explanatory notes. This is not an argument that we can take seriously, surely.
I am interested to hear the hon. Gentleman calling for longer and more complex Finance Bills; that is rather contrary to the mood of the Committee. The changes that I am referring to would not be made in a Finance Bill; they need separate legislation.
We are of course also being careful to ensure that the benefits that this package will bring are not at the expense of the UK's underlying economic and fiscal stability, which have made these reforms possible and have been the principal sources of Britain's welcome economic transformation over the past decade.
As I said, the hon. Member for Falmouth and Camborne asked why these changes will be introduced from April 2008 and are not being included in this year's Finance Bill. Income tax is an annual charge re-imposed each year in the Finance Bill, and the convention is that changes to the rates are legislated for in the year in which they come into effect. I have done a little research on that point and, as far as I have been able to establish, there have been no instances in recent decades of income tax changes being legislated for other than in the year in which they take effect, so in line with that convention, next year's Finance Bill will legislate for the personal tax reforms for 2008-09 that were announced in this year's Budget.
The amendment proposes removal of the starting rate and replacing it with a new zero-rate band, in effect increasing personal allowances. The total cost of those changes would, as I have said, be £13.8 billion, but it would be a very untargeted measure, which would be of most benefit to those on higher incomes.
Our policy is to target help where it is needed, so the Budget package included a major investment in tax credits. Tax credits benefit about 6 million families and 10 million children and reach far more low and moderate-income families than any previous system of income-related financial support. By using that mechanism we can continue to give extra help to low-income families, whereas simply increasing tax-free personal allowances would not have that effect, as the figures I shall give in a moment will show.
I understand the Chief Secretary's argument that lifting the threshold is not targeted, but does not the same argument apply to cutting the basic rate of tax? That is completely untargeted and will have the disadvantage of not benefiting people on the lowest incomes, whereas raising the starting rate threshold, as we suggest, would benefit them.
That is why there is a package of measures, which includes national insurance, income tax and tax credits. The overall effect of the package will particularly benefit households on the lowest incomes, as the IFS analysis rightly shows. After all, personal allowances can only cut a family's tax bill to zero, whereas tax credits can go further and make a payment to the family. Personal allowances cannot provide support tailored to a family's circumstances, such as the number of children in the family or whether a disabled child is a family member. Tax credits, by contrast, can do that and are doing it.
If the Government invested £1 billion in raising personal allowances, a low-income worker would be only 68p a week better off. Using the same money to extend the working tax credit means that workers on low incomes could see an increase in their incomes of more than 10 times as much—£7.10 a week. That is why the Budget proposals are so much better than those being made by the hon. Lady and her hon. Friends.
The hon. Lady asked for specific figures. As a result of the Budget package, by April 2009, households will be £100 a year better off on average; households with children will be £200 a year better off on average; and in the least well-off fifth of the population, households with children will, on average, be £350 better off. The changes to make those figures possible will be in next year's Finance Bill. The House will have the opportunity to debate them then and I look forward to that debate.
I shall gladly look further into the point made by my right hon. Friend the Member for Birkenhead, but I do not think that the package redistributes away from women to men, once the impact of tax credits is taken into account. Child tax credit is paid to the main carer, who is usually the mother, and the child element will rise by £150 a year above earnings indexation, so taken with the other effects of the package, there will not be the redistributive effect that my right hon. Friend suggested.
As my right hon. Friend is so confident, does it mean that I shall soon receive a reply to my question, so that his confidence can be set out in the Official Report? Three groups of people have been highlighted in the debate. Low-paid workers, who are largely women, may not qualify or might not claim. There will be redistribution in families, from the lower-paid who will pay higher tax—largely women—to the men in the household who will receive tax cuts. The third group is equally important: those who have had to take early retirement and will thus not qualify for the higher personal allowances.
I am confident that my right hon. Friend will receive an answer to his question shortly; as I fear I told him that in a previous debate, I had better make sure that it actually happens this time.
I hope that I have answered his point about redistribution from women to men. If my right hon. Friend looks at the package as a whole, including the increase in the child tax credit, he will see that it will not have that redistributive effect. He is right in the sense that some people who might otherwise be regarded as losers will, if one looks at the impact on the household as a whole, not be losers. That point occurred to me when Mr. Gauke was talking about the impact of the increase in the minimum wage; some people who are not among the 170,000 to whom he referred will be in households that might otherwise be regarded as losers from the package, but the increase in the minimum wage means that in fact they may not be losers.
I think the Chief Secretary is acknowledging that were it not for the impact of tax credits a significant number of people would lose out under the Budget—5.3 million people are losing out, but the impact would be even harsher without the operation of tax credits. What is he doing to get women who are not claiming tax credit to claim it?
The hon. Lady asks me to comment on the position before 1997, before there were tax credits. It is true that the system we inherited was extremely unfair, so we changed it. She is right: tax credits are an indispensable element in the far fairer system that we have now, which improves incentives for work and, in particular, strengthens the position of families on low incomes. The take-up of tax credits among families and households with the lowest incomes is high—far higher than for family income supplement and other mechanisms that were used in the past. In that sense, tax credits have been particularly successful, but we are working to increase take-up further. Over the past few weeks, a series of pilots have been set up in three parts of the country to try out a number of mechanisms for increasing take-up and we are analysing the results. No doubt we shall be able to do more to increase take-up of tax credits, which are an indispensable element of the personal tax and benefit system.
I remind the House that all that the clause does is to keep income tax rates unchanged for the current year, at 10 per cent., 22 per cent. and 40 per cent., so I hope that the House will reject the amendments.
Despite the almost universal scorn poured on the amendments, I am pleased that we have been able to have this constructive and important debate. As Mr. Gauke said, the reason why it has been so difficult to table amendments is that Opposition parties cannot cover all the aspects of the proposals announced in the Budget.
It is clear, however, where the costs will come from and where they will go. Table 1.2 shows that removal of the starting rate of income tax will raise revenue of £7.3 billion for the Treasury in the first year. The cost of reducing the basic rate will be £8 billion, which will partly be offset by aligning income tax and national insurance contributions. The Chief Secretary is right to say that changes to national insurance contributions require primary legislation, but the Finance Bill is primary legislation, so it could be used to adjust primary legislation on national insurance. He may say that in recent decades there has been no announcement of such changes to take effect in the same year, but over the past 10 years there have been no income tax changes at all.
The right hon. Gentleman is right, but that was pre-announced over many years.
I wanted to focus tightly on the clause and amendments, which is why I did not refer to local income tax. I am happy to discuss it with Mrs. Villiers, but I was referring to the recommendations of the Lyons report, which highlighted interim measures by which to deal with people living in the most valuable houses that have seen the greatest increase who may not be paying a proportionate amount. That might be a way of addressing the current inequality whereby the richest 20 per cent. of our society pay a lower proportion of their income in tax than the poorest 20 per cent. I have heard nothing from the Conservative Members about what they would do to tackle the issue, despite all the warm words.
On that very point, would not the hon. Lady make a stronger case if she were prepared to say that we should have a more progressive income tax system all the way up the income range, with much higher taxes on the very rich?
There are many ways of making the tax system more transparent and progressive, and there is no shame at all in saying that that should be a goal. The fact that the Conservatives have criticised our proposals on a higher rate of pensions tax relief shows what they actually believe. They speak all these warm words about making society fairer, but they are not prepared to put their money where their mouths are.
The key concern was raised by Mr. Field, who made an eloquent case. The Chancellor was beguiled. It is difficult to know whether he was beguiled more by the prospect of grabbing the headlines in his final Budget or, unfortunately, by the tax credit system. The intent behind it is incredibly worthy and no one on the Liberal Democrat Benches doubts the Chancellor's passion about these issues. Perhaps, however, his enthusiasm for the tax credit system is misguided when take-up rates are low in some areas. The tax changes introduced next year will disproportionately affect some groups.
I wonder whether the Liberal Democrats noticed what was almost a throw-away phrase by the Chief Secretary when he said that if we reflect on the impact of the Budget within households—the transference of higher tax for women, but lower tax for men, albeit with tax credits and so forth—it becomes clear that the overall change will benefit families. I thought that the whole principle of independent taxation was that there would be a difference within families—even within families that get on well together.
The right hon. Gentleman makes a very good point. The same principle applies to tax credits. Overall, millions of families have been lifted out of tax, but unfortunately, millions of families have also encountered overpayments and are struggling to understand whether or not they have to repay them and, if so, whether it is justifiable to do so. The overall picture may look more rosy than the experience of many individuals.
The Chief Secretary is right to say that the tax proposals will make the tax system simpler. Removing the 10p starting rate will make it simpler, as will aligning national insurance with income tax bands, but there are consequences that will follow such simplification. I would therefore refer the Chief Secretary back to the Chancellor's own remarks in the Budget speech, when he claimed that these changes would make the system fairer. He did not make enough play of the simplification, which could be accompanied by many unfair elements. It is important to recognise that.
As I said at the outset, I am not pressing the amendments, but we have had a valuable debate. We are limited in what we can do now, but I greatly look forward to further discussions and hope that Ministers will table some effective amendments on Report. I particularly hope that the Chief Secretary and his colleagues will pass on the sentiments expressed in our debate to whoever succeeds the present Chancellor so that, if we have this discussion next year, the debate will take into account the eloquent views expressed today. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The First Deputy Chairman of Ways and Means, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, put forthwith the Question, pursuant to
Question agreed to.
Clause 1 ordered to stand part of the Bill.