Clause 1 — Charge for 2013-14

Finance (No. 2) Bill – in the House of Commons at 11:30 am on 18th April 2013.

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Votes in this debate

  • Division number 215
    A majority of MPs voted against requiring a report on impact of changing the additional rate of income tax, which applies to income over £150,000.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 11:30 am, 18th April 2013

I beg to move amendment 1, page 1, line 7, at end add—

‘(1) The Chancellor of the Exchequer shall, within three months of the passing of this Act, publish a report on the additional rate of income tax.

(2) This report shall review the impact upon Exchequer receipts of setting the additional rate to 50 per cent. in tax year 2014-15.

(3) The report shall review what impact reducing the additional rate for 2013-14 will have on the amount of income tax currently paid by those with taxable incomes of

(a) over £150,000 per year; and

(b) over £1,000,000 per year.’.

Photo of Dawn Primarolo Dawn Primarolo Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following:

Clause stand part.

Clause 16 stand part.

That schedule 3 be the Third schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

It is a pleasure, Ms Primarolo, to serve under your chairmanship this morning. I shall speak to the Opposition amendment to clause 1 and about clause 16, which relate to income tax rates and reliefs.

The Opposition believe that politics is about priorities—about providing support to those who need it most, rather than to those with the broadest shoulders. This has never been more the case than in the country’s current economic climate—a parlous economic climate which, let us remind ourselves, has seen just 0.8% growth since autumn 2010, compared with the 5.3% that was forecast at the time. The economy continues to stagnate under this Government, leading to the independent Office for Budget Responsibility halving its predictions for 2013 and anticipating growth of only 0.6% this year, compared with the 1.2% forecast just four months ago.

We have surely now reached the stage where we must ask ourselves what further evidence the Chancellor needs before he accepts that his economic plan is catastrophically failing. Once again, I note the lack of Conservative Members on the Government Benches. Perhaps Back Benchers are demonstrating their lack of confidence in the Chancellor’s plan which, I am sure they would agree, is far from acceptable.

The latest criticism of this failure came on Tuesday, with the International Monetary Fund downgrading its forecast for UK economic growth to 0.7%, in contrast to its view a month ago, when the IMF said that growth of 1% could be expected. Having subjected the UK to the biggest downgrade of any developed country for 2013 and 2014, the IMF commented:

“In the United Kingdom, the recovery is progressing slowly, notably in the context of weak external demand and ongoing fiscal consolidation.”

It went on to say:

“Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lacklustre private demand”.

In simple terms, it is time for plan B.

Photo of Alex Cunningham Alex Cunningham Labour, Stockton North

I am grateful to my hon. Friend and fellow north-east MP for giving way. Does she share my view that yesterday’s unemployment figures showing an increase of 70,000 were disgraceful? The north-east of England has suffered a disproportionate increase in unemployment, and 12,000 of those 70,000 are from the region that she and I both represent. Does she agree that this is further evidence of the need for change, particularly in regions such as the one we share?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I very much share the deep concern expressed by my hon. Friend about the figures published yesterday. I hope the Chancellor will start to pay attention to the effect that his economic plan is having on people throughout the country but, I agree, particularly in the north-east, where unemployment is above 10%, which is a shocking figure and spells deep trouble for the long-term entrenchment of unemployment. I will come to that shortly.

As we have heard so often from this out-of-touch Chancellor, he is not for turning, despite the fact that the consequence of his economic failure means that Government borrowing is rising, not falling, with the Tory-led coalition set to borrow £245 billon more than it forecast in autumn 2010. His promise to balance the books by 2015 will not be met and the national debt will not fall until 2017-18 at the earliest. Who knows how many times that will need to be pushed back before the Chancellor realises that his plan is not working?

Of course, that dire situation has led to the downgrading of Britain’s triple A rating by Moody’s and the more recent decision by Fitch to place the UK on rating watch negative, both of which had been prized by the Chancellor and used as cover for the austerity measures he introduced back in 2010.

At a time when living standards are being squeezed, average earnings are rising at their lowest rate since the end of 2009, Government borrowing is up, growth forecasts have been downgraded again, the public services on which people rely are being cut or threatened up and down the country, and ordinary people are being asked to pay the price for the Chancellor’s economic failure, what we needed was a Budget that was on the side of ordinary, hard-working people and families, increasing numbers of whom are clearly struggling to make ends meet.

As my hon. Friend Alex Cunningham noted, unemployment is rising again. What we needed was a Budget that would back Labour’s jobs guarantee, using money raised from the tax on bank bonuses to fund a guaranteed job—a real job—for every young person who has been out of work for a year or more. I am not sure whether Government Members have had a chance to analyse the long-term unemployment figures published yesterday, but I can tell them that in March this year 167,345 adults over the age of 25 had been claiming jobseeker’s allowance for more than 24 months. Let me repeat that figure: 167,345 adults had been out of work for more than two years, compared with 84,765 in February 2012 and 52,895 in February 2011. That is a disturbing rise of 97% since February 2012 and 216% since February 2011.

Targeted and urgent action is required if the unemployment situation is not to become dangerously entrenched. We believe that it is a totally unacceptable state of affairs and that action is needed now to stop people being put on the scrap heap and left there, as they were under the previous Conservative Government—and, of course, so that we do not continue building up long-term costs for the taxpayer.

What we needed from the Budget was a reversal of the Government’s decision to stop tax relief on pension contributions for people earning over £150,000 being limited to 20% to fund Labour’s compulsory jobs guarantee for long-term unemployed adults.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

Perhaps the hon. Lady will remind us of the maximum amount of pension relief an individual could get right up to April 2010, or perhaps a little later. In case she does not know, someone could put just over a quarter of a million pounds a year into their pension fund and get higher-rate tax relief, including at 50%. This Government have lowered that figure to £40,000.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I said that the Budget needed to be about priorities and that we need to look now at how to help people struggling on the lowest incomes and ensure that those with the broadest shoulders bear the greatest burden. In government, Labour took steps to ensure that its pension reliefs were fair to those at the bottom as well as those at the top. This Government have reversed that decision to limit the relief to 20%, and we have seen the result: the impact across the board is being unfairly borne by those at the bottom. When times are as tough as they are now, it cannot be right to subsidise the pension contributions of the top 2% of earners at more than double the rate for people on average incomes who pay the basic rate of tax. However, the Conservatives and Liberal Democrats clearly believe that the time is right to prioritise those earning more than £150,000.

What we got in this year’s Budget, and in the very first clause of the Finance Bill, is the coalition’s unjustifiable and grossly unfair decision to reduce the top rate of income tax from 50p to 45p, a cut that benefits just 267,000 people earning more than £150,000, 13,000 of whom are lucky enough to earn more than £1 million. Indeed, those lucky few are receiving an average tax cut of a whopping £107,000 according to HMRC figures. Who wants to bung a millionaire indeed?

I have no doubt that at this juncture Liberal Democrat Members will want to trumpet the increase in the personal allowance—to pipe up and explain that they are not prioritising the richest in society over those who genuinely need support, but unfortunately for them the facts state otherwise. Let us remind ourselves of the analysis of figures published by the independent Institute for Fiscal Studies. It shows that taking into account all the changes to tax credits and benefits introduced since 2010, households in the UK will, on average, be a staggering £891, or £17 a week, worse off this financial year.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The hon. Gentleman is chuntering from a sedentary position. Does he wish to intervene?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

If you are going to quote from independent reports, you should not quote—

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

The hon. Lady should not quote from reports selectively. Perhaps she should go on to say that the Institute for Fiscal Studies says that the top decile of income earners has been hit hardest by the combination of Government tax changes.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I suggest that the hon. Gentleman is quoting selectively in leaving out the fact that the greatest impact is on the bottom decile of earners. When you take the cuts and changes overall, those at the bottom bear the greatest proportional brunt.

Photo of Debbie Abrahams Debbie Abrahams Labour, Oldham East and Saddleworth

I want to support what my hon. Friend has said. The Chancellor’s own distributional analysis shows that the cumulative impact of tax, tax credit and benefit measures mean net reductions in income for the poorest 4% of households. That is not selective analysis—your own Chancellor’s analysis shows that 40% of the poorest households will be affected.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

It is the hon. Gentleman’s own Chancellor who is quoting selectively from the figures. I thank my hon. Friend for that intervention.

The facts are clear, and beyond the facts is the reality facing households up and down the country. We see people from those households coming into our constituency surgeries week in, week out. We hear stories every day from families who are clearly struggling to make ends meet.

The reality of the Chancellor’s failing plan is bearing out, not just in the statistics but in the reality of people’s day-to-day lives. The cuts to tax credits and child benefit, the granny tax, the mummy tax, the appalling bedroom tax and the huge hike in VAT, which disproportionately impacts on the poorest, hugely outweigh any small benefit from the rise in the personal allowance.

Photo of Yasmin Qureshi Yasmin Qureshi Labour, Bolton South East

My hon. Friend is making an excellent case about all the various cuts and how they are hitting the most vulnerable in our society. Do you think that the Government should be shedding tears for all those people who will be suffering from all the cuts?

The Second Deputy Chairman:

Order. May I remind hon. Members that they are not asking the Chair of this Committee to answer questions or accusing the Chair of anything? The use of the word “you” addresses the Chair directly. It would be good practice to refer to “hon. Members” or “my hon. Friend” rather than using the word “you”, which makes things difficult.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Even some mild empathy from the Chancellor for those bearing the brunt of his catastrophically failing economic plan would be welcome to people up and down the country, who feel that he is extremely out of touch with the reality that they face.

To put the issue into context for Government Members, who have willingly voted through this year’s changes, I should say that a two-earner couple with children are losing on average £1,869. The average single parent in work will lose £1,226. A two-earner couple with no children will be £672 worse off, while a one-earner family with children will lose an average of £4,000 in 2013-14. Even worse, this is happening at the same time as 13,000 millionaires are getting a tax cut from this Government worth an average of £107,000. Worst of all, but not surprising given this Government’s shocking attitude towards women, is research showing that 94% of the cuts to household budgets will directly hit women, while 85% of those on incomes over £150,000—so 85% of those who are benefiting from the Government’s tax cut—are men.

That sums up the coalition’s warped sense of priorities in a nutshell—looking after those at the very top while making everybody else pay the price for its economic failure. It is made all the more galling by the Chancellor’s previous promise that we are “all in this together”—although, admittedly, it is a phrase that we hear uttered from his lips a lot less these days. The Government may believe that the way to motivate people on low incomes is to pay them less and the way to motivate those on high incomes is to pay them more, but we think that that approach is misguided, at best. In these challenging economic times, our focus should be placed firmly on those who need our support the most. Our amendment therefore calls on the Government to look again at their decision to cut the top rate of income tax. We believe that that decision by the Conservatives and Liberal Democrats is completely indefensible, and that it is the wrong priority at the worst possible time.

In order for the Chancellor to make a properly informed decision on this vital issue next year, we need a proper assessment of the impact of the cut, as well as an analysis of how much the Treasury would gain if the additional rate were returned to 50% in 2014-15. The Chancellor, who claims to find tax avoidance “morally repugnant”, announced his millionaires’ tax cut in Budget 2012 on the grounds that the behavioural response to the 50p rate introduced by Labour was larger than expected. In other words, because some wealthy people found neat ways to avoid paying the top rate, the Chancellor has, in effect, rewarded them with a tax cut. It would be interesting to see his assessment of the behavioural response to his announcement in view of the extensive media coverage of bankers deferring their bonuses until this financial year in order to gain from the lower top rate, but given his apparent continued determination to fight European plans to cut bankers’ bonuses, I will not hold my breath.

Photo of Robin Walker Robin Walker Conservative, Worcester 11:45 am, 18th April 2013

The hon. Lady is asking for an analysis of what the change in tax rate would do to the Government’s revenues. That is exactly what the previous Labour Government failed to deliver when they made their change. Does she not regret the fact that the Labour Government, in their 13 years in power, continued to levy a top rate of 40% and then made their change to the top rate so late in the day that it failed to raise any additional revenue either under their Government or, because they had not undertaken such a behavioural study of what might happen, under the Government who followed?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I do not follow the hon. Gentleman’s logic that that justifies a non-assessment at this stage. He knows very well that there has been a huge intake from the 50p tax rate which this Government fail to acknowledge. He also knows that we suffered a catastrophic international financial crisis in 2008 to which the Labour Government responded by ensuring that those who could bear it most would take the highest burden, therefore introducing the 50p tax rate. This Government took the first opportunity to abolish it, without even allowing enough time for proper analysis of its effect to take place.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Lady says that there was a huge intake from the 50p rate of income tax. What is her evidence for that?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

HMRC’s report, “The Exchequer effect of the 50 per cent additional rate of income tax”, but I will go into that in more detail in due course.

The Prime Minister went on record and said in this Chamber that the 50p tax rate was cut because it did not raise any money—the Minister seems to have just made the same assertion—but page 39 of HMRC’s report makes it clear that it resulted in a yield of about £1.1 billion, which is hardly a sum to ignore in these straitened financial times. However, what stands out most from HMRC’s assessment—this point was also raised when we debated last year’s Finance Bill—is the number of times that the words “uncertain” and “uncertainty” appear; I nearly lost count, but it is a staggering 30 times. The Chancellor decided to give a tax cut to his millionaire pals before we had a clear picture of the impact of the 50p rate.

That is not just the view of the Opposition. Robert Chote, chairman of the Office for Budget Responsibility, stated:

“This is a judgement based on not even a full year’s data, based in terms of how people have responded to the 50p rate, in particular in terms of those self assessment tax-payers.”

The Institute for Fiscal Studies said:

“By giving out £3 billion to well-off people who pay 50p tax…the Government is banking on a very, very uncertain amount of people changing their behaviour and paying more tax as a result of the fact that you’re taxing them…There is a lot of uncertainty, a lot of risk on this estimate.”

In its report on the 2012 Budget, the Treasury Committee concluded:

“The costs and benefits of reducing the additional tax rate to 45p are both highly uncertain, and could be significantly more or less than the cost included in the Budget. We recommend that HMRC publish in due course a comprehensive assessment of the effect on the Exchequer of the new 45p rate.”

We agree. We need a full and proper assessment of what effect the top rate tax cut has had on tax receipts and we need to be sure that the Government continue to estimate what the gain would be if the additional rate were returned to 50%. We need, as the IFS has previously suggested, to get a clear understanding of whether the short-run response to this tax cut has been symmetric to the introduction of the 50p rate. Will people continue to use the avoidance techniques that the Government clearly believe they employed to avoid the 50p rate, or will some or all of that activity come to an end as a result of the new 45p rate? The Government should commit to our amendment’s request for such a review, if they genuinely seek to maximise revenue to the Exchequer and not to give a tax break to their millionaire friends.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

The hon. Lady is making a good case, particularly on the uncertainty about the reduced revenue yield, but even if the Government and the Red Book are correct and the loss of yield will be only £540 million over the next five years, I am sure she will agree that if £540 million is going spare it would be better to invest it in productive capacity for the future, rather than simply give it away in a tax cut that proves that we are not all in this together.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The hon. Gentleman makes an extremely strong point, and one that I have made repeatedly. This might seem like small change to the Chancellor, but it could make a very big difference to some of the people affected by his failing economic plan.

I am sure, given the concerns recently expressed by apparently senior Liberal Democrats, that Lib Dem Members will join us in calling for a commitment from their Conservative colleagues in the Government. Indeed, only last month a member of the Liberal Democrat tax working group stated:

“While the Treasury’s own figures about the 50p are highly questionable, the politics of cutting tax for the very rich make no sense; there is no reason why a 50p rate shouldn’t be part of a solution for tough times.”

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

We have made it perfectly clear from day one that we do not support the cut to the 50p rate now, and we call on the Government to analyse the impact of the introduction and premature removal of the 50p rate. When we come to publish our next manifesto, we will review the state of the economy and whether a 50p rate would be the right response. I hope that Members of other Opposition parties, as well as Liberal Democrats, will support our amendment, because it would help to establish whether the 50p rate would bring in the additional Exchequer revenue that was anticipated—but if the Government refuse to back it today, we will never know.

The President of the Liberal Democrats, Tim Farron, said:

“Cutting the top rate was a stupid thing to do. It probably raised up to £3bn a year. We should pledge to restore the 50p rate at the next election. It’s not enough to be fair, you have to be seen to be fair.”

Their current, or former, Treasury spokesman—I can never work out which he is—Lord Oakeshott

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

He’s never been Treasury spokesman.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Okay. I am pleased that that has been clarified for the record. Other hon. Members will feel the same.

Lord Oakeshott said:

“In such hard times, we should never have rolled over when the Tories wanted to cut the 50p rate unless we got a mansion tax in return. At the next election, both the mansion tax and a 50p rate should be at the forefront of Lib Dem tax policy.”

I have news for him. Liberal Democrats have had the opportunity to vote for the mansion tax, and today they have the chance to vote for their 50p rate. They do not need to wait for the next manifesto. They can make it happen today. Lord Oakeshott’s is an interesting view, however, given the Liberal Democrats’ decision to vote against their own mansion tax policy twice in as many months. I would join him, however, in urging his party colleagues not to roll over for the Tories on this issue, but to support our amendment.

We are obviously disappointed that our amendment to clause 16 was not selected for debate. The clause introduces schedule 3, which provides for the cap on 11 named income tax reliefs for amounts greater than £50,000 or 25% of an individual’s income. This policy was first announced in 2012. Like many others, the Opposition are pleased that this provision no longer includes the original proposal to limit tax relief on charitable giving. In one of the several U-turns on last year’s omnishambles, the Chancellor was forced to back down on this ill-thought-through policy, which threatened the charitable sector with a cut of up to £500 million in income per year. A powerful campaign backed by more than 1,000 charities was given the very simple title, “Give it Back, George.”

Several concerns about clause 16 remain, however, particularly about its potential impact on entrepreneurialism and small businesses. The Association of Accounting Technicians believes that the restriction of small reliefs on losses runs counter to the Government’s apparent commitment to encourage new business start-ups. It stated:

“In the current economic climate, start-up businesses are likely to operate at a loss in their early years, therefore our view is that an imposition of an arbitrary cap will be a further obstacle to entrepreneurship… Furthermore, existing legislation already prohibits relief for ‘artificial losses’”.

That means that any genuine losses sustained in starting or developing a business should be relievable, in accordance with existing legislation, in a way that enables the entrepreneur to recover tax previously suffered as quickly as possible in order to help to fund their new venture.

The Chartered Institute of Taxation shares similar concerns, describing the cap as a “blunt instrument” that could have an

“adverse effect on genuine businesses and the UK economy” and saying that

“it gives the wrong message to entrepreneurs thinking of setting up a business. The net effect could be to reduce the tax take rather than increase it.”

It has drawn particular attention to concerns that the cap will catch owners of genuine commercial businesses who happen to incur a loss, instead of a profit—for example, where a new business is being established; where a business is weathering economic conditions and concentrating on simply surviving until the climate has improved; and where there has been an exceptional level of business expenditure, such as on the purchase of a major item of machinery or the recruitment of additional staff in anticipation of expansion.

The Institute of Chartered Accountants in England and Wales has said that the measure

“will hit small businesses by restricting loss relief for commercial losses. The measure will reduce cashflow, hamper business growth and could lead to small businesses that are experiencing difficulty in the current economic climate going bust”.

Surely even this Government would not want that outcome as a result of a Budget measure. I would therefore greatly welcome hearing from the Minister that the Chancellor might just be for turning on this issue.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian 12:00 pm, 18th April 2013

It is a pleasure to serve under your chairmanship this morning, Ms Primarolo—[Interruption]. We have just made it into the afternoon. It is also a pleasure to follow my hon. Friend Catherine McKinnell, who made such a strong case for the Opposition’s amendment to clause 1. It is to clause 1 in the main that I wish to address my remarks.

This week and in the days leading up to the funeral of Baroness Thatcher, Government Members have been proud to proclaim themselves as Thatcherites—no more talk of one nation Conservatives or how “We’re all in it together”. I was pleased that my hon. Friend spoke about the impact of this Government’s choices. That is what we are talking about today: their choices and priorities. Proportionately, they are hitting women so much harder than men, while the benefits they are seeking to give—reducing the 50p tax rate to 45p—will disproportionately benefit men.

That was certainly my experience as a woman at home caring for my children through the Thatcher years. I find it almost incomprehensible when I hear people talk about how much she did for women, because that was not my experience, as I genuinely struggled to put food on the table for my children and keep a roof over their heads. For me, the difference we saw in 1997, with the birth of a new Labour Government—new in every way—was predominantly in the increase in child benefit. That is what changed my ability as a mother to care for my children—to provide for them and give them a better life than I had had. This Government have chosen to freeze child benefit, while at the same time giving a tax break to 13,000 millionaires and 267,000 people earning more than £150,000. I would be interested to hear from the Minister—or from other Government Members, if it is not just the Minister who is going to speak on this issue—how many people earning more than £150,000 have come to his surgery or contacted his office to say that times are so tough that they need a tax break. How many people have contacted the Treasury to say that?

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

During this week, from Second Reading onwards, we have seen a dearth of speakers from the Government Benches, yet we have also seen a rise in unemployment figures and clear signs that on average people are facing real cuts in their earnings. Is it not extraordinary that Government Back Benchers seem not to want to speak?

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

As ever, my hon. Friend makes such a reasonable and forceful contribution to the debate. This is shocking complacency from Government Members—their constituents and mine will be watching them—as unemployment rises and as families face an average cut of £17 a week as a result of all the changes they have made since 2010.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Foreign and Commonwealth Affairs)

I might be pre-empting what my hon. Friend is about to say, but with these measures are we not seeing a return to the discredited policy of trickle-down economics, whereby the Government think that if we give more money to the wealthy, they will spend it and boost the economy? However, we know that they are less likely to spend the extra money going into their accounts, whereas people at the bottom, who are really struggling to get by, will spend the money we give them. If we are looking at the economic impact, it is better to give that money to the poorer people.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

Absolutely, and I thank my hon. Friend. I was not about to turn to that issue, but I will develop that point as it affects the local economy in East Lothian.

East Lothian has a number of small towns, some of them market towns. Often, it is the poorest in those communities who spend their money in local shops in the high street; they are not able to take advantage of out-of-town supermarkets. Those high streets are struggling. The Government are taking money out of local economies—out of small high streets in East Lothian—which is having a negative effect. One group of businesses is, however, growing in our high streets: pawnbrokers and high street lenders, which will not improve the lot of the most vulnerable in my constituency.

Photo of Ian Lucas Ian Lucas Shadow Minister (Foreign and Commonwealth Affairs)

That point about our high streets is incredibly important. It is not simply high streets in Labour constituencies that are suffering. Anyone who attends the meetings of the all-party group for town centres will know that, even in leafy Conservative and, dare I say it, Liberal Democrat seats, high streets are struggling. What evidence is there that the windfall for the richest people in our society will contribute in any way to income in our high streets and in our economy? The money is more likely to be spent in Bermuda than in Birmingham.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

My hon. Friend makes an excellent point. The problem is not restricted to high streets. In small rural constituencies, there may be one village shop, where the local post office is located. The post office network is also being put at risk as such small village shops are unable to make a profit. Therefore, we risk losing post office services. We are facing that now in East Lothian. Post office closures may not be planned, but that may be a consequence of the Government’s economic choices.

It seems almost too simplistic to make this point, but Government Members have boasted about the fact that the Government are hurting the richest 10% the most. However, if the Government choose to take £25 a week from a rich family, it will have a lot less impact than taking £17 a week from a hard-working family. Taking that from the richest will not mean they will present themselves at food banks looking for assistance to put food on the table, but that is what the Government are forcing working families increasingly to do. We look forward—look forward is perhaps the wrong term—to hearing the Trussell Trust’s latest figures on the number of people it has fed over the past year. All the indications are that the number has increased significantly; it may be over 500,000. That is a matter of real concern.

Photo of Rob Flello Rob Flello Shadow Minister (Justice)

I am enjoying my hon. Friend’s speech immensely. On that point, just last Thursday, the food bank in Fenton in my constituency had its highest number of visitors yet— 19 people turned up, whereas normally about eight or nine do so. That is a growing trend on top of a growing trend.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

I am sure that Members on both sides of the House are seeing that in their constituencies. I hope that Government Members will visit food banks in their communities to understand the causes of food insecurity. As my hon. Friend the Member for Newcastle upon Tyne North said, it is about the choices the Government are making and their priorities. Earlier we heard the most uncomfortable and distorted logic: when the economy was growing, unemployment was falling, we were investing in health and helping young people into employment, the Labour Government should have taken more money from the rich through a 50p tax rate, just for the sake of it; but when the economy is flat-lining, unemployment has just risen again, poverty and the gap between rich and poor are increasing, it is the right time for this Government to give a tax break to people earning over £150,000. I cannot follow that logic.

The Joseph Rowntree Foundation has estimated that almost 2.5 million families on low incomes will pay £130 more in council tax this year, adding further to the squeeze that working families are suffering. This Government have made their choice, and I think that, as they drive towards the next general election, if they glance in the rear-view mirror, two hazards will make them fail the electoral test. The first is their decision to scrap the 50p rate of tax. The second is their choice to introduce a bedroom tax at the same time. There is a family in Wallyford in my constituency, the Anderson family. Mr Anderson is a full-time carer for his wife, who has a severe form of epilepsy. He is saving this country a small fortune by caring for his wife, but he does it because he wants to, not because he has to. There are times when he needs not to sleep in the same room as his wife—I have his permission to discuss his case in this amount of detail—and he needs to be able to make that choice. He also has a son with spina bifida, who is now enjoying a degree of independence and living away from his family, but he can maintain that independence only by returning home for about three days a week when the weather is bad. Recently, he has been at home for longer—so that bedroom is needed for Mark and his equipment.

I feel ashamed that Mr Anderson should have to come to see me to ask why the Government are choosing to give money to people who are not even asking for it, when he is going to be taxed for having that bedroom. And it is a tax; when the Government take money out of people’s pockets, that is a tax. This Government are choosing to make life much more difficult for a man who has given up work to care for his wife and to support his disabled son and enable him to live as independent a life as possible. That says a lot about the Government’s approach, and it does not surprise me that Government Members are not seeking to contribute to the debate today.

Photo of Jonathan Edwards Jonathan Edwards Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Business, Innovation and Skills), Shadow PC Spokesperson (Transport), Shadow PC Spokesperson (Communities and Local Government), Shadow PC Spokesperson (Culture, Media and Sport), Shadow PC Spokesperson (Wales), Shadow PC Spokesperson (Wales)

The hon. Lady will be aware that the tax cut for people earning more than £3,000 a week was introduced in the last Finance Bill. Members of the parliamentary Labour party abstained in the vote on that Bill. She has made some pretty strong comments today. Is she now saying that that abstention was a catastrophic political mistake?

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

No, I am not. I would say that the catastrophic political mistakes are most often made on the nationalist Benches. We are stating clearly that, if we were in government today, we would not be scrapping the 50p rate. There is no ambivalence or doubt about that. That is the position of Labour Members in the Chamber.

I appeal to Liberal Democrat Members to remember their Lib Dem values, and to all Government Members to think about the people who are contacting them. Are they the people who earn more than £150,000 a year, or are they the families and pensioners who are struggling with the cost of daily living? I urge Government Members to vote according to the representations that they are receiving.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

It is a particular pleasure to serve under your chairmanship today, Ms Primarolo. I welcome you back, and I am glad to see you in fine health.

I have been spurred on by Fiona O’Donnell to speak in the debate and to defend the Government’s policy, which is wise and right and good—[Interruption.] I do not often cheer up the Whips, but if I do so, that will be an added advantage. The amendment tabled by Her Majesty’s official Opposition is completely unnecessary and wrong-headed.

Photo of Ian Lucas Ian Lucas Shadow Minister (Foreign and Commonwealth Affairs)

The hon. Gentleman said that the Government’s policy was wise. He is a moral man, so will he tell me how it can be right for the richest people in our society to have their income boosted while disabled constituents of mine are having theirs reduced?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Because it does not actually work like that. We know from experience that high rates of tax reduce the amount of taxation that is received. The Laffer curve is not a myth. If you put rates up, tax revenues decline.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East 12:15 pm, 18th April 2013

I welcome the hon. Gentleman to the debate, as we have been lacking a challenge up to now and it is always good to be challenged. He makes an argument about the Laffer curve. I am sure he would agree that if tax rates are zero, you do not get anything, and that if tax rates are 100%, you would probably not get anything either. However, the question of where it is right to draw the line in between, in any given economic situation, is surely a matter for debate. You cannot simply say, “Oh, the Laffer curve says we can’t put tax rates up.”

Photo of Dawn Primarolo Dawn Primarolo Deputy Speaker (Second Deputy Chairman of Ways and Means)

Order. I remind the Committee that the guidance on conventions and courtesies is quite clear on the language to be used in the Chamber. Hon. Members will know that “you” refers to the Chair as all remarks are made through the Chair. I would therefore be grateful if hon. Members would refer to each other by their constituency names, or as “the hon. Member”, “my hon. Friend” or “the Minister”. They should desist from saying “you”; otherwise, I might feel the need to answer the debate as well, and then we would have disorder. We do not want that, do we, Mr Rees-Mogg?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Ms Primarolo, your answer to the debate would be so fine that it would hold the rest of us silent.

Sheila Gilmore is absolutely right. It is difficult to say at exactly what point on the Laffer curve revenue is maximised. As I understand it, however, the latest academic studies suggest that around 37% is the level at which income tax revenues would be maximised. That is why I would favour the Government going further and reducing the rate of income tax to the level at which it was kept by the Labour party when it was in office.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

I did not think that I had spurred the hon. Gentleman to speak; given his posture during my speech, I thought that I had woken him from his slumbers. Do we have another split in the coalition here? Lib Dem Members have been criticising the previous Labour Government for not having the 50p rate for longer.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The coalition is, I am sure, united at the highest level, but that does not mean that Back Benchers do not sometimes disagree. My hon. Friend Stephen Williams and I often discuss these matters, and we do not invariably agree on every aspect of them. The Lib Dems have their own particular policies, which they will no doubt put forward in an election campaign, but the coalition at large is committed to a single policy.

I want to come back to the amendment, which is about getting back to the 50p rate. We already have a situation in which the top 1% of taxpayers pay nearly 28% of the total income tax receipts—that is, £50 billion. If the rate of tax is put up to too high a level, people will change their behaviour to alter the amount of tax they pay. That is very straightforward, and they can do a number of things. Some people leave the country, so that their tax is paid overseas. Some work less hard, reducing their earnings to reduce their tax payments.

Some use pension funds or legitimate forms of tax avoidance to minimise their income. That is all perfectly well known by those on the Opposition Front Bench, who are a fine and intelligent group of people, yet they try to make political points on the argument about fairness. Fairness seems to me to be about doing what is right.

Photo of Julie Hilling Julie Hilling Opposition Whip (Commons)

It seems to me that the argument is not that we should reduce tax so that people will be kind enough to pay it; rather, we should be looking into closing down tax avoidance schemes. We should be presenting the moral case that everyone should be paying in according to their ability to pay, particularly in these difficult times.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

However much we tackle tax avoidance, if we set tax rates at so high a level that people decide not to work, no legislation can force them to work to earn more. Unless we want to be like the Russia of the 1980s, we cannot pass a law to prevent people from leaving the country to work elsewhere if the taxes are too high here.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

The point is constantly made that the top 1% pay a very high proportion of income tax and that that makes this measure okay, but presumably they pay that because their income is high. The gap in this country between low-income people and high-income people has widened considerably. That happened under the Government of the late Baroness Thatcher, but, admittedly, not enough was done to address it under the subsequent Labour Government. The point, however, is that if people are paying so much, it is because they have the income to do so.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The hon. Lady almost makes my argument for me. In 1979, that hallowed year in which the great lady to whom she referred came to office, the highest rate of income tax was 98%, and the proportion of income tax revenues paid by the top 1% was about 10%. When the rate fell, the proportion paid by the top 1% went up, so more money came from the richest in society when rates were lower. Lower rates of taxation therefore resulted in the advantage of an increase in revenue for the Government and the ability to spend more on the services deemed necessary.

This argument was proved in 1979 when the rate went down from 98% to about 60% and again in 1988 when it went down from 60% to 40%. On both occasions, the amount of tax revenue increased because people were willing to work harder and people were attracted to work in this country—so the burden was, indeed, put on to the shoulders of those best able to bear it.

An argument is made about fairness. We say it is fairer to have a high rate of tax. We say that that is symbolically right—that we should have it so that people know they are doing something difficult and we are all in this together—but what is the symbolism of saying to people we will take less tax from them, and what is the symbolism of having lower revenue for the Government?

Photo of Julie Hilling Julie Hilling Opposition Whip (Commons)

Her Majesty’s Revenue and Customs says that in the one year when the 50% tax rate applied, revenues went up—the figure it is currently giving is

£1 billion. It is therefore difficult to argue that we should get rid of this tax rate, especially as we do not yet have all the evidence. We are only beginning to get the evidence now, because people are paying that rate now.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

In fact, HMRC came out with figures showing the tax paid by the highest taxpayers declined; there was a loss in revenue of £6 billion, I think. I would prefer to take the actual figures that come in. I may be disloyal on this point—for which I hope those on the Treasury Bench will forgive me—but I think that forecasts from Her Majesty’s Treasury are absolutely useless. We do not want to go on economic forecasts; we want to follow facts, and the facts on the revenue that has historically come in make it clear that lower rates increase the tax take.

Photo of Julie Hilling Julie Hilling Opposition Whip (Commons)

It is my understanding that, although tax takes went down in the first year when people could pre-pay and will definitely go down in this year when people will post-pay, they rose in the middle year, which is the one full year when the rate has applied, and for which people are now paying their taxes.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The problem with that argument is that we have facts that show that the amount of revenue has gone down. Over a three-year period it has gone down very substantially, because the rate was high. The hon. Lady’s comments also serve to illustrate the following point on my behalf, for which I am grateful: when tax rates are raised, people change their behaviour so that the tax they pay is reduced. That is where the Laffer curve comes in. Income is reduced when tax rates are too high.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Foreign and Commonwealth Affairs)

I am sure that the hon. Gentleman is a student of behavioural psychology, as he is of so many other subjects, so can he explain why the Government believe that if we give more money to wealthy people that encourages them to work harder, whereas the lower paid are encouraged to work harder if we give them less money?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The hon. Lady—my near neighbour, as she represents a Bristol constituency—is very wise and does, I am sure, understand this point. The answer is that the question being asked differs between benefits and earnings, although the argument is essentially the same. Inevitably, where there is a level of benefits that discourages people from working, if that increases more slowly, it encourages people to work. It is an identical argument to the one that says people keep more of the money they earn if taxes are set lower.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

The problem for many people at present is that the jobs simply are not out there. In my speech on Monday I explained that I had used the Government’s new universal job match. When I put in “shop assistant” on behalf of a constituent of mine, I discovered there were 76 entries, which sounds good, but 57 of them were for vacancies all over the region, not just in my city, and involved going around delivering catalogues and trying to sell things to people. Those are the kinds of so-called “jobs” that are out there, and that explains why people cannot find work.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I am always doubtful when people are sniffy about jobs that people take. I and others in the Conservative party voluntarily go around knocking on people’s doors trying to sell them party policies. That is known as canvassing, and I wish I got paid for that activity, but I do it out of the goodness of my heart. I do not think one should be sniffy about jobs that people might apply for; they are all welcome and all valuable.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

The hon. Gentleman is completely out of touch on this point. The point is not that people are being sniffy, picky or choosy about jobs. The point is that someone might live in Edinburgh East while the job is in Fife, and we do not all have drivers and chauffeurs to take us to Fife to do the job.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I wish I was in this fortunate position of having a chauffeur or driver to take me to Fife to get a job. When I tried for a job in Fife in 1997, I was distinctly unsuccessful, and came back to a job in London, but that is slightly beside the point.

The overall point is that income at whatever levels has a determinant effect on the employment people seek and the work they are willing to do. That applies to benefits— paying benefits at too high a level can create a benefit trap that makes it not worthwhile for people to apply for jobs—and it applies very clearly to high tax rates when people decide not to earn.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

There is some research that counters part of the hon. Gentleman’s argument. In the 1980s in Germany they found that if the income of people on very high salaries is increased, they want to take more time off to enjoy it. There comes a point when they have so much income that what they want is time, not more money.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

As always, the hon. Gentleman makes a very interesting point, but if we aggregate across society at large, the determining factor will be that people want to earn more money. Although some individuals may prefer leisure, of course, many will want to continue earning to increase their standard of living or to provide for future generations. We are slightly moving away from the point, however, and there are some key aspects to which I wish to return.

I mentioned fairness. It is a bizarre definition of fairness to say that it is fair to set tax rates at a level that raises less tax. That is an argument that makes PR and spin and the like much more important than the realities of economics, and it is bad politics as well as dreadful economics.

I also want to tackle the question of the morality of taxation. Is it morally right that people should pay half their earnings over to the Government? I think it is morally wrong. I think there is a moral case for low taxation and allowing people to keep the fruits of their labours, and when the rate gets to 50% that is simply too high in a moral sense, even if it is economically successful, which it is not. I do not believe the state has the right to take half of somebody’s earnings.

Photo of Rob Flello Rob Flello Shadow Minister (Justice)

Is it morally right that time and again constituents come to my surgery with the figures in front of them, saying, “This is my income and these are my outgoings; I cannot afford to live”, because of the low level of their income and the apparent inability of the benefits system now to support them?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I obviously do not know about the individual cases that come to the hon. Gentleman’s surgery, but with a benefits bill for this country of £220 billion a year, there really ought to be—

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

It is rising, as the hon. Gentleman says. There is a huge amount of money in the benefits system. If it is not going to the right people, that will be rectified by the reforms being pushed through by my right hon. Friend the Secretary of State for Work and Pensions, which are some of the Government’s most ambitious and important changes.

To go back to morality, I believe that it is immoral to take more than half of somebody’s earnings in taxation.

I will finish on the point that has been raised about the economic benefit of money depending on where it goes, and whether it is better going into the pocket of somebody on benefit who will spend it immediately or going into the pocket of somebody on £150,000 a year. That economic argument has been taken to an extreme point that ignores many other aspects of the movement of money. There is a basic economic principle that money must find a home. Unless the person who earns £150,000 a year stuffs his mattress with £5 notes, their money goes into the economy—[Interruption.]

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East 12:30 pm, 18th April 2013

Order. I ask hon. Members to desist from commentary during the contributions of other hon. Members.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Unless such money is put in a mattress, it has an effect, because it goes into the banks. As hon. Members know, the banks have been short of capital to lend out and short of deposits.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

My study of economics, which I also used to teach, always showed that the rich have a lower marginal propensity to consume than the poor. If we want to drive economic growth, we should give money to poor people because they spend it immediately in the domestic economy, rather than hiding their surplus cash in tax havens abroad.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I am grateful to the hon. Gentleman for that intervention, because it demonstrates an unduly simplistic approach. Indeed, poorer people may have a higher propensity to spend than richer people, but that is not the end point of the economic cycle. There need to be deposits in banks so that money can be lent to businesses—small businesses as well as large—and so that people can take out mortgages. There is a cycle and a flow of money.

Photo of Andy McDonald Andy McDonald Labour, Middlesbrough

Will the hon. Gentleman explain why, when I speak to banks—I had a conversation with Barclays bank not many weeks ago—they say that they do have deposits and the ability to lend, but that money is not flowing out because people are not approaching them? Is that the reason or is it that the terms on which they propose to lend money are so onerous that the transactions do not proceed? Whichever it is, my understanding is that the banks do have the funds.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

One of the major flaws that led to the banking crisis was that loan-to-deposit ratios across the banking sector were out of kilter. Banks were lending more than they had on deposit and were therefore entirely dependent on the wholesale market. The wholesale market dried up, which led to a huge calling in of loans. That was at the heart of the financial crisis.

The banks may be saying that they are more comfortable with their loan-to-deposit ratios, but if one looks at the figures, even HSBC’s loan-to-deposit ratio—for its UK business, rather than its international business—is about 100%. Historically, banks have been more comfortable in the 70% to 80% range. We therefore do need more savings in the economy and those come from the better-off saving some of the income that they earn.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

The hon. Gentleman seems to be making a powerful case for the reintroduction of exchange controls, so that money made in the domestic economy goes into the domestic banks and helps us all.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I do not agree with the hon. Gentleman on that at all, because this country attracts a huge amount of foreign investment. Sticking to the example of the Hongkong and Shanghai Banking Corporation, that company was able to ease its way through the financial crisis because it could lend its overseas deposits to its British business. It was on the backs of savers in Hong Kong and China that HSBC was secure during that period.

Rich people saving their income is a good thing economically because it boosts the pool of saving that is available for productive investment, such as loans to businesses and individuals. Even if the argument were right that this policy is a great boondoggle for the wealthy, which it is not, it would be beneficial because it would help the economy get back on to a path to growth by providing the capital that is needed for the banks to lend.

In summary, it is clear that putting rates up leads to less tax. That is not a sensible thing to do when the Government are short of money. It is not fair, indeed it is unfair, because it puts a greater burden on other members of society who have less ability to pay. It is not morally defensible because high rates of tax are not a moral good and low rates a moral evil; in fact, it is the other way round. People have a right to keep the money that they earn, unless the state can show that it is essential to take it. That is economically beneficial because one of the great problems of our economy is a lack of saving. We are not in the paradox of thrift circumstance, in which excess savings deflate the economy.

For all those reasons, the amendment should be rejected and Her Majesty’s Government should be proud of what they have done. Indeed, they should go further and look to get the higher rate of tax down to 40% and perhaps even to that magic figure of 37%, which, as

I said earlier, some studies show would be the perfect rate to maximise revenue, encourage people to work hard and continue us on our path to success.

Photo of Andy McDonald Andy McDonald Labour, Middlesbrough

It is a pleasure to serve under your chairmanship, Mr Hood.

I will address the amendment directly. The lowering of the top rate of income tax to 45p will benefit 267,000 people who earn more than £150,000. In my view, it cannot be right that those who earn more than £1 million a year will receive a tax cut of more than £100,000. Families across the country will be £891 worse off on average as a result of the Chancellor’s changes to tax, tax credits and benefits since 2010. I am at a loss as to how that fits with the concept that we are all in it together. The 1% cap on tax credits and working-age benefits means a cut in real terms. At the bottom, inflation outstrips increases in earnings, whereas at the top, earnings outstrip inflation.

Acres of copy have been written about Baroness Thatcher over the past week, but one of her utterances that has not received the attention that it deserves is her expression of disappointment that, despite having made it possible for a small minority of people to gain control of the majority of the wealth of this country, that has not given rise to a greater degree of charity or generosity. Interestingly, it is often those who have the least who give the most. Two examples of such generosity are imprinted on my mind. The first was in 1984, when people from my community made regular trips up to Easington colliery with bags and boxes of food to assist families in County Durham who were finding life such a struggle.

The second example is from recent weeks, when I visited one of the five food banks in my constituency run by the Trussell Trust. It was heartbreaking to hear from the local director of the trust, Nigel Perrott, that food parcels were being sent to my town of Middlesbrough from places such as York and Thirsk. He hails from the home counties and credits people in that part of the country with tremendous generosity. However, he said that he had been surprised and overwhelmed by the generosity of the people of Middlesbrough. When they come out of the supermarkets, they do not donate the occasional tin of beans or packet of rice, but bags and bags of food. It seems that everything changes, but nothing changes. It is perhaps no coincidence that such desperate need arises when the Conservative party is in power.

We used to hear a lot from the Prime Minister about the big society, although a lot less so recently. The genuine big society is, as it ever was, ordinary people looking after each other.

Photo of Rob Flello Rob Flello Shadow Minister (Justice)

I am enjoying my hon. Friend’s contribution, albeit that it is tinged with quite a lot of despair. To reinforce his point, last Saturday a trolley push organised by the Trussell Trust gathered more than 325 kilos of food from the people of Stoke-on-Trent for the people of Stoke-on-Trent.

Photo of Andy McDonald Andy McDonald Labour, Middlesbrough

My hon. Friend makes a telling point and I would not want to diminish the importance of what I am saying by qualifying what he said about despair. As in his constituency, this Friday we will have a wonderful demonstration of generosity in my constituency with the same sort of event—a trolley push. My point, however, which I wish to reinforce, is that there is such a spirit of determination and people are so resilient that they will not be beaten by this situation. However, they will come through it not because of this Government but despite them.

While tax cuts are being handed out to millionaires, 40% of children in my constituency are living in poverty. I cannot see how fairness and the apparent principles of a big society are influencing or informing this Government’s policies one iota. I do not wish to dwell too much on the negativity, but it is unavoidable given that my constituency is the second worst in the country for long-term unemployment. We are asking for fair treatment. North-east England is the only net exporting region in the country; our contribution to the national economy is massive but the people see little of the benefits. It is about fairness.

The Prime Minister and Chancellor have repeatedly said that those with the broadest shoulders should bear the largest load. They claim that the 45p tax rate raises more revenue, but one data point is totally unreliable, as has been exposed in the Chamber today. It is also clear that the richest will arrange their affairs, especially when such a reduction was so well telegraphed. The richest have benefited most from our society, and the amount of tax they pay is proportionately more than their numbers, but proportionately less than their wealth. Relative to their income, the Chancellor’s biggest tax rise—that on VAT—hurts those at the bottom most. The rich still do very well, with company directors getting inflation-busting pay increases, and bank executives getting huge bonuses, which the Prime Minister went to Brussels to defend.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

The Committee may already know, and people will be interested to hear that, in the past two years, pay increases for the top 10% were on average 5.5% in both years. The top 10% have increased their pay by 11%. The Government claim that the rich are making a greater contribution, but they have very thick wallets to start with and, frankly, are sitting comfortably.

Photo of Andy McDonald Andy McDonald Labour, Middlesbrough

That is exactly right. I was going to make that point another way and say that company directors of the FTSE 100 received on average a 50% pay rise in 2011—Income Data Service provided that information. The well-off enjoy the benefits of many interesting incentive schemes that are not available to ordinary working people such as Mrs O’Reilly or Mr Hussain in my constituency, where the average income for a full-time employee is less than £500.

With your indulgence, Mr Hood, I would like to mention another area where I perceive there to be immense financial irresponsibility. A measure has gone through the House this week that has deprived the Treasury of significant funds that could be much more wisely invested and directed. The Enterprise and Regulatory Reform Bill was discussed in the Chamber some days ago, and I asked myself whether any conversation had taken place between the Treasury and other ministerial colleagues. As a result of that Bill, many people who have sustained catastrophic injuries will not be able to secure the compensation that they deserve or need. We are talking about hundreds of millions of pounds, and that is further evidence of the Government’s direction of travel that punishes and penalises those in greatest need. This is not about lottery wins but much-needed capital and income streams that pay for vital and lifelong care and support for physiotherapy, speech therapy, transport and accommodation.

Without the ability to secure those services from such funds, those with traumatic brain injuries and spinal cord injuries will have to look to the statutory services as there is nowhere else for them to go. As everyone in this Committee is aware, those services are under incredible pressure, and the Bill means that those innocent people will not be able to go out and purchase the services that they need. Somebody suffering from a spinal cord injury must rely on when the district nurse can get to their home to attend to their intimate and personal needs, rather than use funds that would otherwise be available to get on with their lives.

Not only does the Bill remove significant sums of money from the economy, it delivers a windfall to insurance companies. They will be rubbing their hands while innocent victims are left without redress. To add insult to injury, the compensation recovery unit will be deprived of millions of pounds through this system. We are kissing goodbye to the recovery of benefits, the disability living allowance, jobseeker’s allowance and so on. That money will stop flowing into the nation’s coffers. I wonder whether the Treasury realises that it is cutting off its nose to spite its face.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member) 12:45 pm, 18th April 2013

I am grateful to my hon. Friend for his enormous generosity in giving way. I have a schedule from a constituent that details his personal means. Until the beginning of this month he had £21.25 a week left for food and clothing after paying his utility bills and allowing £6 for bus fares. After the introduction of the empty bedroom tax, which will cost £10.31, he will end up with under £11 a week for food. Some problem could happen along the lines mentioned by my hon. Friend, but assuming that nothing else is needed, he will have just £11 a week. We would not want that desperate situation to happen in a developing country, let alone in Britain. How can we justify giving money to the richest when people are in despair and poverty?

Photo of Andy McDonald Andy McDonald Labour, Middlesbrough

I absolutely agree. People are getting down to the pennies, not the pounds, yet this month multimillionaires will get an extra £2,000 a week. We should be thoroughly ashamed of delivering that to our people. I sometimes wonder what on earth we mean by patriotism in our land. We can wave our flags and hold the necessary ceremonial events, but where do the people come in? For my money, patriotism must be about our people. We sometimes lose sight of that and get confused by the panoply and array of colourful images of patriotism that do not go to the heart of the living and working conditions of our people.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

My hon. Friend mentions patriotism, which reminds me of yesterday’s great spectacle of Baroness Thatcher’s funeral, which many people would have enjoyed watching on television. However, let us not forget that that £10 million would have kept my constituent going on his previous income for 10,000 years, and on his new income for 20,000 years. Is that not a disgrace?

Photo of Andy McDonald Andy McDonald Labour, Middlesbrough

My hon. Friend’s point is well made —he expresses it well.

I shall conclude by highlighting the lack, as I perceive it, of any conversion among Departments. There is a desire to offer assistance to the insurance industry, which will no doubt be delighted that it will no longer have to pay compensation to people in the circumstances I have described. I strongly suspect that the measure will not help our industries one jot—I do not foresee any massive reduction in the employers’ liability premiums that will be charged as a result of the measure—and, frankly, the insurance industry is laughing all the way to the bank. I do not know whether it is laughing with or at the Government, but in any event, it is has received a fabulous return at the country’s expense.

All that is happening in the run-up to workers memorial day. It saddens me immensely that we will commemorate the dead and fight for the living on that day when employers know that the regulations we have fought so hard to introduce to our workplaces to promote a safety culture have no teeth whatever. As a result of the measures, there will be an increase in deaths and serious injuries in the workplace. That, too, will be visited on the statutory services. We are compounding error on error. I urge the Government to think carefully about the impact of those policies.

The point is well made that the Treasury is defending the rich and powerful against ordinary working people. The reflex of Government Members is to protect the powerful against the powerless; those with a voice against the voiceless; and those who control the wealth of this nation against those who build it.

Several hon. Members:


Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. Before I call the next speaker, I should say that I am mindful to call the Minister at 1.15 pm. Hon. Members should therefore bear that in mind when they make their contributions.

Photo of Nia Griffith Nia Griffith Shadow Minister (Wales)

I rise to support the proposals in the names of my hon. Friends.

On the one hand, Government Members accuse Labour Members of always wanting to clobber the rich, but on the other they accuse us of not introducing the 50p rate early enough. We had a vibrant economy, but everything changed with the enormous banking crisis in 2008. In response, we had to introduce a deficit reduction plan, part of which was the perfectly logical introduction of the 50p tax rate.

I make no apology for Labour’s firm commitment to the redistribution of wealth through the taxation system. The majority of citizens in western European democracies share that view. The taxation system is not the only redistribution mechanism. Other mechanisms include the minimum wage, which the Labour Government introduced. I hope the Government retain the minimum wage and increase it year on year in line with inflation. It worries me that it is going up by only 1.9% this year, while inflation races ahead. It is important that we have such mechanisms, but taxation is an important mechanism in the redistribution of wealth. The vast majority of people in this country recognise the need for all to contribute to the many public services we enjoy, and the need for some redistribution through the taxation system.

The economic argument that my hon. Friend Ian Lucas advanced about money going back into local economies is extremely strong. People on the lowest incomes tend to spend money immediately, so it goes immediately back into the local economy and helps the local high street. Local businesses are going bust because people simply do not have the money to spend. They are struggling. They are turning to food banks—they are unable to buy food, never mind Christmas presents, clothes and the rest of it.

Local economies are struggling enormously. We have heard from many wise sources that the Chancellor needs to get his act together on stimulating the economy, and putting the money in the pockets of people who have the lowest incomes, who will then use it immediately in the local economy, is one way of doing so. That is not happening, which is why the Opposition are so angry about the cut in tax from 50% to 45% when there is an enormous squeeze on those on lower incomes.

One of the most insidious changes is the change to tax credits. They are difficult to explain because they have been designed to suit each individual household, which makes it more difficult to speak about them in a more general sense. Nevertheless, let us look at the changes. First, there has been an increase in the tax credit clawback. The whole point of tax credits is that they are an incentive for people to work if they can find it. Many who are on low incomes cannot get more hours, and the maximum amount that many can be paid for the hours they work in a full-time week still qualifies them for tax credit. Any reduction in that tax credit is therefore counter-productive—it does not help people at all.

The child care tax credit has also been reduced. That is another seemingly mad policy. The money is desperately needed to help people to work. The family element of tax credit has been abolished, as has the 50-plus element, and the working tax credit has been frozen. Given current inflation, the proposed cap of 1% on increases in working tax credit and child tax credit is effectively another cut—it is a cut in what lower-income families can buy with the money they have, with the catastrophic effect that all hon. Members see in our local economies and high streets.

In Wales alone, the tax credit measures will suck some £794 million—much-needed money for lower-income families—out of the economy. The whole point of tax credits was that they were calculated on what it was reasonable for a family to live on, which helped those whose earnings did not meet that rate to keep going.

Photo of Kevan Jones Kevan Jones Shadow Minister (Defence)

In communities such as mine and that of my hon. Friend, the poor spend money—they have no saving capability. Does she agree that the measures therefore have a double impact on local shops and economies?

Photo of Nia Griffith Nia Griffith Shadow Minister (Wales)

My hon. Friend makes a good point. That is the iniquity of the cut from 50% to 45%. Effectively, a cut in one place unfortunately means that people suffer in other places. Those on the highest incomes can afford to cushion themselves and do not need to spend money straight away. Even someone who earns just £10,000 above the £150,000 mark will benefit significantly. Instead of paying £5,000 in tax, they will pay £4,500. They will have a gain after tax of £500. Most people do not see anything like that increase in their income—incomes are frozen. If someone earning £50,000 has even a 1% increase, they will not get that £500 because it would be taxed. With all the different changes that are being imposed on them, families are losing far more—they are losing, on average, £895 per year.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

My hon. Friend will know that the Government’s alleged strategy is that the private sector will move in and generate growth as the public sector is pulled back. In Wales, there is a higher proportion of public sector employment and, as she has said, £790 million will be taken out of demand, and savings rates among people in work are increasing because of insecurity. The whole concoction is pushing Wales and similar regions into negative growth. Does she agree that we should stimulate growth by giving more money to people who are poor, because they spend it?

Photo of Nia Griffith Nia Griffith Shadow Minister (Wales)

I absolutely agree with my hon. Friend. We should get more stimulus into the economy and get more people into work doing useful things, such as through infrastructure projects, which he has championed in our local area. It certainly does not help to have more people thrown out of work. It will obviously lower their incomes immediately, but it will also have a direct effect on the local economy.

What I find most worrying is the amount of destitution. We all know that benefit rates have never really been set at rates that are entirely able to cover people’s needs. We know that there has always been a compromise. This year’s decision to raise benefits only by 1%—less than the rate of inflation—is absolutely unprecedented. Not even in Thatcher’s time was that done. We are now seeing as a result that people simply cannot make ends meet.

The bedroom tax affects 46% of the working age families in social housing who get housing benefit in Wales—40,000 homes. It is actually a cut, as there is nowhere else for them go; they have no alternative. The housing stock has already been allocated and some people on the waiting list do not qualify. With two adults and two children under 10—or two children of the same sex under 16—families do not qualify for a three-bedroom house. As I say, it is just a cut. People are consequently unable to buy food and now have to go to food banks. They are unable to pay their fuel bills and unable to pay their rent bills.

All that seems to me to be mad. The cost of it all to the public purse will escalate in the long term. To get it right, we should keep a redistributive taxation system and keep the 50p rate of tax for the top earners. That would allow us more flexibility in dealing with those on the lowest incomes. That would be much fairer, and I think that the majority of people in this country firmly believe in fairness—and that is what they would like to see.

Photo of Debbie Abrahams Debbie Abrahams Labour, Oldham East and Saddleworth 1:00 pm, 18th April 2013

It is a pleasure to serve under your chairmanship, Mr Hood.

I came to this House just over two years ago, and the main reason I got into politics was my belief in making Britain a fairer society—a more equal society in which the gap between the haves and the have-nots is narrow and in which we protect and look after our most vulnerable people. I believe that to be intuitively right and just, and there is also significant evidence to show that a fairer society benefits everybody in respect not only of life expectancy improvements and mental health benefits, but of educational attainments, improvements in social mobility and in rates of offending. All of us benefit from having a fairer society. Unfortunately, the measures in this Bill contribute not one jot to such a society.

As I said in my speech on the Budget a week or so ago, this Government absolutely fail the anti-poverty test. My hon. Friend Catherine McKinnell mentioned the analysis by the Institute for Fiscal Studies, but there are also those of the Joseph Rowntree Foundation, the Child Poverty Action Group, the Resolution Foundation, the New Economics Foundation—and the list goes on. They all reached the same conclusion: the poorer people are, the worse off they are.

Raising the personal allowance does little for the lowest-paid workers, many of whom do not pay tax anyway. Over 682,000 working families receiving child tax credit earn less than £6,420, so I am afraid that they will not benefit at all from the increase in the tax threshold. Taken in conjunction with the welfare cuts they are now facing, the lowest earning taxpayers will receive an income boost of 32p a week or £16.80 a year as compared with those not claiming housing benefit or council tax benefit of up to £112 a year. That does not take into account the impact of the 20% VAT hike back in 2011, the additional 26% rise in food prices since 2009 or the 20% increase in energy costs that households face on their household bills. Nearly 8,000 households in my Oldham East and Saddleworth constituency—nearly one in four—already live in fuel poverty. How are they meant to cope? As other Members have said, our constituency surgeries are crammed with families that are desperate about how they are going to cope in the coming weeks and months. My constituency now has a food bank—the first ever in modern Oldham—and the number of recipients of food bank support has trebled over the last quarter. I am deeply concerned about that.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

I visited the food bank in my own constituency only last Monday, and the key issue put to me was that food banks were designed as places of crisis able to give two or three parcels to people in the moment of crisis—for instance, when benefits had been delayed or something had gone wrong. They were not designed to sustain life over time. I mentioned earlier a constituent whose money available for food had gone down from £21 to £11; he just cannot cope on an ongoing basis. If the food banks do not save him, he is on the way out.

Photo of Debbie Abrahams Debbie Abrahams Labour, Oldham East and Saddleworth

My hon. Friend makes an excellent point. We are not talking only about people on out-of-work benefits either, as many of the families affected are working families that are struggling to survive.

As I have mentioned, the Chancellor’s own distributional analysis shows that the cumulative impact of tax, tax credit and benefit measures means net reductions in income for the poorest 40% of households in the country. Although there is strong evidence to show, as other countries have shown, that increasing the spending power of the poorest families helps to boost economies, the Chancellor has done nothing to help them or the economy.

In the short term, the Child Poverty Action Group has estimated that between 2010 and 2015 absolute child poverty will have increased by 600,000 as a result of the Government’s spending plans. Two wards in my constituency have child poverty levels affecting nearly one in two households. That is absolutely unacceptable in a society such as ours. It leads one to question what the Government mean when they say they are committed to child poverty, let alone how they are fulfilling their obligations under the Child Poverty Act 2010.

I also have deep concerns about the impact, particularly of the new benefit changes, on people with disabilities. One in four disabled people already live in poverty, and with the recent welfare changes that is set to increase. I fear that this could be enough to drive people over the edge.

Many of us have already said that these measures are ideologically driven. In tandem with the downgrading of equality and human rights in the Enterprise and Regulatory Reform Bill, which we debated on Tuesday, it is clear that this coalition Government have no commitment to a fairer society. As we have heard before, this is all about choices, and it is quite clear where this Government’s priorities lie. Their response to their failing economic policies is to give tax breaks to the wealthiest in society—£3 billion to more than 300,000 people earning over £150,000 a year, with an average gain of £10,000. What is there for people on low pay? Absolutely nothing. When we take the tax and tax credit benefits into account, we realise that it is not just the poor who are being hit. We know that the average loss to households for this coming financial year is £891.

The Chancellor said in last year’s autumn statement that we needed a welfare system that we could afford. Tax credits and benefits form part of the “automatic stabilisers” that help dampen economies in booms and boost it in recession. That is what we have seen. In spite of the disappointing employment figures yesterday, the effect on unemployment has been less during this recession and in the past because of these stabilisers.

The choices the Government make are underpinned by their ideology—to create an “us and them” culture with power and wealth retained by the wealthy and powerful. By attacking universal benefits such as child benefit, they hope people will start to see our welfare system as irrelevant—and then quietly dismantle it. I am proud of our model of social welfare, born out of the second world war when we literally were “all in it together”. I want to retain this model with its principles of inclusion, support and security for all, protecting any one of us, should we fall on hard times, assuring our dignity and the basics of life, and helping us all back on our feet. It is often said that the mark of a civilised society is how we care for our most vulnerable. It is a mark of this Government, their ideological priorities and their economic incompetence that they are singularly failing to do that. Fortunately, as recent opinion polls have shown, the British public are seeing through this Government. They are exposing and seeing through the myths peddled by this Government. I shall leave it there to allow more hon. Members to participate in the debate.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

Every week during Prime Minister’s Question Time the Leader of the Opposition asks why, at a time when there is so much poverty and a need for austerity, the richest in society are benefiting from a cut in the 50p income tax rate, and the Prime Minister replies, “We will raise more money from the 45p rate than from the 50p rate.” We all know why that is, and the Minister knows why it is. It is because rich people are able to manage their affairs and can move their income between tax years, and in this instance they will simply move it into the 45p year. The Minister knows that, and he also knows that if we retained the 50p rate on a sustained basis, we would gather more money.

The Minister shakes his head with a smug expression, but he knows that, and he also knows that many people already pay 52p in the pound. Those with incomes of £32,000 or £42,000 are paying 40% in tax plus 12% in national insurance. The Minister’s claim that we could not possibly have a 50p rate because all those rich people would get on their yachts and leave Britain is absolute rubbish.

Photo of David Gauke David Gauke The Exchequer Secretary

Let me make two points. First, I do not know whether the hon. Gentleman has read the HMRC report on the 50p rate, but if he has, he will have seen that a large element of the loss is due to a reduction in economic activity, and has nothing to do with tax avoidance. Secondly, I am afraid that he has got his facts wrong: people stop paying 12% in national insurance contributions as soon as they reach the higher-rate threshold.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

That is not my understanding. According to the Minister’s own analysis of economic activity, which he mentioned, the yield from a 50p rate would be greater over a period. The analysis factors in the behavioural change to which I have referred, namely rich people moving their incomes around. It is also the case that people are paying the rates to which I referred. I have commissioned research from the House of Commons Library. It is all very well for the Minister to sit there nodding away, but that is the fact of the matter. It is completely unjustifiable that, at a time when the incomes of some of my constituents are being reduced to about £11 a week and they are on a starvation diet, his rich friends should be enabled to have this extra money.

The Minister continues to resist calls for a bankers’ bonus tax. At one moment he claims that bankers should be taxed in that way, and at the next moment he gives them 5p back. It is absolutely preposterous. The Minister hopes that the food banks that are now emerging in their thousands will help to cope with the Dickensian circumstances that he is causing, in which people are starving in their own homes, but, as I have already pointed out, unless a supplement to the social security system is introduced such people will not be able to survive.

The Minister is pushing us into a situation in which the state is withdrawing in the hope that the charitable sector will help to sustain certain very poor communities. It is absolutely appalling. We have a dementor Government who are sucking the lifeblood out of our poorest communities. Those people want to spend their money, and would otherwise be reviving our local economies. All that they want is a chance to work, and to do a job.

We should be investing in infrastructure, skills and connectivity. We should be marketing local areas and helping businesses to succeed and create jobs, rather than taking away the demand in those local areas. We should also be promoting spending. At present everyone is saving instead of spending because they are scared of the future, but we do not want a future of fear; we want a future of hope. We do not want a future of division; we want a future that cares and a future that works. We want a “one nation” Britain, rather than a divided and weak society moving forward under the Tories.

I hope that the Minister will think again about the need for those with the broadest shoulders to make the highest contribution, rather than just smirking with his colleagues. I would guess that they—in their richer communities in the divided Britain whose divisions they are accentuating—will not have to deal with the number of people who approach our surgeries in despair, asking what they can do with the very limited amount of money that they have.

Some of the changes in the Budget are completely unnecessary. The bedroom tax was originally expected to raise £490 million. The figure has just been revised to £400 million, but in fact the tax will raise no money at all. It was supposedly intended to confront the problem of rising housing benefit costs, which have doubled over the last 10 years, but we know that 70% of that rise was due to the fact that not enough houses were being built and private-sector rents were going up. The displacement into the private sector of people who are being punished because their children have grown up will simply increase housing benefit costs further.

The Minister knows in his heart, and from the analysis, that such changes are unnecessary. They will not raise money, so why make them? Why not let the rich pay a little bit more towards the public good? Even if the bedroom tax does raise £400 million, the Minister is spending £12 billion on ever-increasing tax thresholds. While that in itself is welcome, the fact remains that these changes are about choices. If the Minister’s choice is to give the richest more and hand a bit from the very poorest to the squeezed middle, he is taking the wrong direction in terms of the prosperous and united Britain that I believe we all want to see.


Minister says:-
It was supposedly intended to confront the problem of rising housing benefit costs, which have doubled over the last 10 years, but we know that 70% of that rise was due to the fact that not enough houses were being built and private-sector rents were going up.
I beg to differ.
Why don't ministers tell the truth for once.
The real reason there is a 70% rise in housing benefits, is because his last and the present coalition government have allowed millions of immigrants into this country, who all want somewhere to live.
Of course, more people than jobs drive down wages, don't they.
Nuff said

Submitted by Mr Raymond Neal

Photo of David Gauke David Gauke The Exchequer Secretary 1:15 pm, 18th April 2013

Let me say something about clauses 1 and 16. Clause 1 deals with the income tax charge for 2013-14, which requires legislation every year. I assume that Labour Members will not oppose the clause, given that the legislation raises £154 billion a year. However, a few weeks ago they did oppose the income tax charge in the Budget resolutions. If they had been successful, the deficit would have increased by more than £150 billion a year. Moreover, whereas the Government have taken some 2.7 million people out of income tax, Labour would have taken about 30 million people out of it, including millionaires.

I understood Catherine McKinnell to be opposed to clause 16. I shall say more about that shortly, but let me first comment on the three main parts of her interesting speech. She began by calling for greater economic growth in the economy. That section of her speech was followed by a part opposing the abolition of the 50p rate of income tax and containing no acknowledgment that it was an anti-growth measure which was not helping the United Kingdom to grow, which was sending a signal that the UK was not open for business, and which was higher than the rates imposed by many of our competitors. The third part of her speech set out her opposition to the cap on reliefs contained in clause 16 and schedule 3.


The hon. Lady says that concern is not opposition, but what she said sounded an awful lot like opposition to me.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

As the Minister may know, in Denmark the standard rate of income tax is about 30% and the higher rate is about 60%. Denmark has a very successful economy. High tax rates do not equal poor economic performance.

Photo of David Gauke David Gauke The Exchequer Secretary

The fact remains that the 50p rate was higher than the rates imposed by many of our competitors. It was also considerably higher than the rate imposed by the hon. Gentleman’s party, a rate that stood at 40p for 155 of the 156 or so months during which his party was in office. I appreciate that he has always been very consistent in this regard, and I assume that he considers even the 50p rate to be too low.

Photo of David Gauke David Gauke The Exchequer Secretary

I thank the hon. Gentleman for confirming that. However, I am not entirely clear about the principled position of those on his party’s Front Bench. I do not know whether they think that 50p, 60p, 45p or 40p is the right rate.

Photo of David Gauke David Gauke The Exchequer Secretary

I will give way to the hon. Lady, who may provide me with an answer.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Is the Minister seriously blaming the 50p tax rate for stagnating growth? If so, can he explain why, although the Government removed the 50p rate in this year’s Budget, the Office for Budget Responsibility has downgraded its growth forecast for each of the next three years?

Photo of David Gauke David Gauke The Exchequer Secretary

We know what the big issues are with growth. We are having to deal with the aftermath of the financial crisis, with the eurozone crisis, with high commodity prices and with the terrible fiscal situation we inherited from Labour. Having an uncompetitive top rate of income tax does not help, a point that previous Labour Governments recognised until we got to the fag end of the previous Government when, as a political ploy, the then Prime Minister put the rate up to 50p. It is striking how the Opposition will not confirm that they will return to a 50p rate.

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

I am grateful to the Minister for his generosity in giving way. Does he agree with the trickle-down theory, which is that if we give the rich more money the poor will eventually get a bit more? Or does he believe that it is more of a trickle-up and that if one crushes the poor, like the dementors I mentioned, one can take their money and give it to the rich, so that we have the bloated group of people whom he represents side by side with people in massive poverty?

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman refers to dementors, and I am afraid that he is living in the world of fairy tales and Harry Potter with his economics. It is this Government who are taking people out of income tax and this Government who are providing support to low earners. The fact is that a 50p rate was not effective.

We heard many speeches about a tax cut for millionaires and so on. The hon. Member for Newcastle upon Tyne North made it pretty clear that she disliked clause 16 and schedule 3, which introduce a cap on reliefs. Such reliefs exist for good reasons and can encourage certain activities and behaviours that benefit both our economy and wider society, such as entrepreneurship and investment, which help to drive growth. We are committed to supporting such activity, but that support should not be limitless, especially at a time when the priority is to balance the public finances. In the past, some individuals have been able to offset unlimited reliefs against their income to reduce their income tax bills to zero. Those are often very wealthy individuals who can end up paying a lower tax rate than the people they employ to clean their offices. That is simply not right and some individuals have been able to do that year after year.

It is right and fair that we should seek to prevent such activity by limiting uncapped reliefs. That is what clause 16 and schedule 3 do: they cap the use of previously unlimited income tax reliefs at £50,000 or 25% of an individual’s income, whichever is the greater. The cap came into effect on 6 April this year. The changes will affect only around 7,500 individuals and more than 90% of the revenue will come from those with an income of more than £150,000—that is, those who pay the additional rate of income tax. The limit is expected to raise about £200 million a year, significantly more than the cost of reducing the 50% rate down to 45%.

One question that has been asked is whether the provision will hurt start-ups and SMEs. Some 90% of trading losses set against general income in a tax year are less than £15,000 a year, well below the threshold for the cap. Business loss reliefs are not intended to subsidise businesses that have no chance of success. We have a generous regime, but we do not believe that it should be without limit. Unlimited reliefs mean that some people, often with high incomes, can pay little or no income tax year on year. We do not believe that that is fair. There will be no limit on trade or property losses set against profits from the same trade or property business in another year and business loss reliefs are not intended to subsidise established businesses that make losses year after year.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Can the Minister provide reassurance that he has taken on board the concerns raised by a number of accountancy organisations, whose opinions are very reputable, that the change will not only counteract the clamping down that the Government are correctly introducing but hamper the growth of genuine small businesses that are struggling? I would say that those businesses are struggling because of the Chancellor’s failing economic plan.

Photo of David Gauke David Gauke The Exchequer Secretary

Of course, we have consulted on this policy and have listened very carefully to the representations we have received. If we are serious about raising revenue in a way that does not damage the economy, the cap on reliefs is a sensible approach. It is a matter of fairness and I would have thought that hon. Members from all parties would agree that it is wrong for us to have a system whereby people can drive down their tax bill year after year to very low rates despite being high earners. That is exactly what this measure is about.

The measure demonstrates that as a Government we are doing more to raise money from the wealthy. In Budget 2010, we increased higher rate capital gains tax; in Budget 2011, we tackled avoidance through disguised remuneration, which was opposed by the Opposition; in Budget 2012, we raised stamp duty on high-value homes; in the autumn statement 2012, we took action to reduce the cost of pensions tax relief; and in Budget 2013 we announced further measures to tackle offshore tax evasion by high earners. Under this Government, the richest now pay more in income tax than in any year under Labour.

Amendment 1 requests a review, and HMRC published a thorough and very well-researched report at Budget 2012 that showed the effect of the additional rate of income tax. Those matters were debated at considerable length last year and the report shows that the rate was not raising the money that the previous Government intended it to raise. It is illogical to maintain a tax rate that is not effective at raising revenue from high earners and that risks damaging growth. We have found better ways of raising money from the wealthy that raise more money but do less damage to the economy.

We always keep tax rates under review, but I note the inclusion of a request for a review in the amendment. It seems to me that the purpose of the amendment is not just to enable us to have another debate on the 50p rate today but to enable the Labour party to find an escape route from its policy. Until a few days ago, it was against getting rid of the 50p rate. Labour will not answer the question, however, of what it will do at the next election. Its holding position is clearly that it will have a review. The Labour party knows that to go into the next election campaigning for an increase to the 50p rate would simply underline that it is anti-enterprise. It knows such an increase would damage the economy and is trying to find an escape route. Despite all the bluster in all the speeches we have heard today, Labour will not confirm that that is the policy it supports. It is all about posturing, not about practicality. That is why they did not have a 50p rate when they were in government and why they are trying to slip away from it now, hoping that no one will notice. I recommend that clauses 1 and 16 and schedule three stand part of the Bill and we hope that they will have all-party support.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank the Minister for his response and the completely fictional rewriting of HMRC’s report on the impact of the 50p rate of tax, which showed very clearly that it brought in additional revenue of about £1.1 billion. Who knows how much more it might have brought in had the Government not abolished it at such an early stage, before there was even the opportunity to collect the data that would have given a picture of the longer-term impact?

We will press amendment 1 to a vote, and we are asking for a proper review of the impact of the 50p rate of tax so that members of the public can know the truth about the amount of revenue it would have brought in had this Government not opted to give a tax cut to millionaires while letting ordinary people bear the brunt of the Chancellor’s utterly failing economic plan.

Question put, That the amendment be made.

The Committee divided:

Ayes 203, Noes 264.

Division number 215 Finance Bill — Clause 1 — Report on Impact of Additional Rate of Income Tax for Income Over £150,000

A majority of MPs voted against requiring a report on impact of changing the additional rate of income tax, which applies to income over £150,000.

Aye: 203 MPs

No: 264 MPs

Ayes: A-Z by last name


Nos: A-Z by last name


Absent: 178 MPs

Absents: A-Z by last name

Question accordingly negatived.

More than two hours having elapsed since the commencement of proceedings, the proceedings were interrupted (Programme Order, 15 April).

The Chair put forthwith the Question necessary for the disposal of the business to be concluded at that time (Standing Order No. 83D).

Clauses 1 and 16 ordered to stand part of the Bill.

Schedule 3 agreed to.