Clause 3 — Basic rate limit for 2013-14

Finance (No. 2) Bill – in the House of Commons at 3:00 pm on 18th April 2013.

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Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 3:00 pm, 18th April 2013

I beg to move amendment 10, page 2, line 11, at end add—

‘(3) The Chancellor shall produce a report on subsection (1) which shall include an assessment of the impact of changes to taxation on the living standards of basic rate taxpayers which shall be placed in the House of Commons Library within three months of Royal Assent.’.

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

With this it will be convenient to discuss clause 3 stand part.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

It is a pleasure to be back at the Dispatch Box. Had amendment 4 been selected for debate, we could have engaged in further discussion about the mansion tax and the 10p income tax rate. However, I think that some of the broader issues that I shall raise in relation to clause 3 are relevant to that subject.

Clause 3 sets the 2013-14 basic rate limit for income tax at £32,010. In doing so, it overrides the indexed amount, which would otherwise have been set at £35,300 as announced in the 2012 autumn statement. The explanatory notes on the clause state that it is

“part of a package of measures”.

I shall say something further about the implications of that package of measures as we go on. Effectively, the rise in the personal allowance from £8,105 to £9,440 for this year and the rise to £10,000 from 2014, however welcome they are and regardless of the difficulties raised concerning those who will not necessarily benefit, will in part be clawed back by the measures implemented in this clause and a further reduction in the basic rate limit next year to £31,865.

We have heard a lot of warm words from the Government about the package. The Chancellor called the rise in the personal allowance an

“historic achievement for this Government and for hard-working families across the country.”—[Hansard, 20 March 2013; Vol. 560, c. 944.]

However, as we heard in the previous debate, there is not that much celebration going on at the moment among most ordinary hard-working families across the country who are seeing their incomes squeezed. There is concern that the announcement and the clause are just smoke and mirrors.

I do not want to repeat the points we made in the earlier debate, but extensive mention has been made of the fact that the Opposition will welcome any steps that will help families and hard-working people through these tough economic times. However, we do not believe that these measures go nearly far enough to make up for what many basic rate taxpayers have already lost thanks to the tax and benefit changes made by this Government. Those measures have indisputably taken money out of the pockets of people who need it.

It is important that we consider the changes in the round rather than focusing on individual measures. That is why we, through a fairly mild-mannered amendment, are calling on the Government to produce a report that would comprehensively assess the impact of changes to taxation on the living standards of basic rate taxpayers. As we all know, times are incredibly tough for families up and down the country, for pensioners and for hard-working people who are paying taxes.

Basic rate taxpayers, who work hard and try to do the right thing, are the ones who are hurting. That has been backed up by various external organisations and commentators, including Citizens Advice, which said about the rise in the personal allowance for basic rate taxpayers:

“This is obviously helpful to all basic rate taxpayers. A single person with earnings of £30,000 a year will for example, gain £5.12 a week in April and will have gained the full £11.37 from the rise in the personal allowance…However”— and this is the important point—

“this does not mean that families on low or even middle earnings will see an actual gain of this much: any rise in net earnings leads to a reduction in housing benefit and council tax benefit.”

We feel that the assessment and report are important because, in reality, 2.4 million families on low incomes will pay on average £138 more in council tax in the year 2013-14 as a result of cuts to council tax benefit, according to the Joseph Rowntree Foundation; 660,000 people will lose an average of £728 a year or £14 a week as a result of the “bedroom tax”, according to figures from the IFS; and child benefit will be frozen for a third year, while tax credits and other working age benefits will increase by just 1%, causing problems for many families. Those are real-terms cuts that will affect 9.7 million households, of which 7.3 million, or 75%, are working households, according to the IFS.

If we take into account all of the tax and benefit changes introduced since 2010, including the personal allowance package of which the Government are so proud, analysis of figures published by the independent IFS shows that families will be £891 worse off on average in the new financial year. If the Government do not want to listen to independent figures, how about looking at their own figures? According to the distributional analysis issued by the Treasury after the Budget, the cumulative impact in cash terms for the bottom 10% of households from tax, tax credit and benefit measures in 2013-14 would result in a £200 reduction in incomes for the poorest group in society. What the Government are giving with one hand, they are taking away, and more, with the other. Perhaps the most shameful and the most concerning of all are the Government’s own figures revealing that the changes to support, including in-work support for basic rate taxpayers, will push a further 200,000 children into poverty. That is the real package that we should be concerned about.

The Government have an opportunity here to take that on board, carry out the assessment and provide the report. That would be important for both parts of the coalition. Some people have chosen to characterise the changes that the Government have made as marking the return of the nasty party. Perhaps we would not be entirely surprised at the steps that the Conservatives have taken, but many supporters of the other part of the coalition, the Liberal Democrats, who voted in these measures, will be surprised, and I hope Liberal Democrat Members will consider supporting us to ensure—I see heads shaking so I can only assume they are supporting the Conservative cuts and the measures that the Conservative part of the coalition is taking. I am disappointed that they would not even support the production of the report that the amendment calls for.

If the Government are confident of their actions, if they have nothing to hide, and if members of the coalition, including the Liberal Democrats, honestly believe that all the changes they are making are for the best and that Labour has got it wrong—as they consistently try to portray in the face of evidence and despite the opinion of independent commentators—and if they honestly believe that the changes will help basic rate taxpayers, will make work pay and will help boost the economy, then why do they not agree to commission a report, which would look straightforwardly at how the changes will impact on the living standards of basic rate taxpayers? With regard to the impact on those brought into the higher rate of tax, I hope the Minister will be able to clarify the number of people affected.

We in the Opposition do not believe that the measures in the package proposed by the Government go far enough. We have outlined other elements that could be included to help those who are suffering as a result of the failed economic policies. As I said in an earlier debate, we do not accept the Government’s mantra that we are all in it together—not while cuts to tax credits, in-work support, council tax and housing benefit, maternity pay, sick pay and a range of other benefits are impacting on people who are hard at work. Those changes are being made in the very same month as 267,000 people earning over £150,000 will benefit from a cut in the top rate of tax, including 13,000 people earning over £1 million, who will each receive an average tax cut of £100,000. Again, I am using the Government’s own figures to make those comparisons.

People throughout the country are saying that that simply is not fair and it is not good enough to get the economy working and growth moving again. People believe it is not fair that while some of the wealthiest in our society are receiving £100,000 back from the Government, those at the other end of the scale, those least able to do so, have been asked to shoulder a bigger burden.

I am conscious of the time. Other hon. Members want to speak and we want to hear the Minister’s response. I ask the Minister and those on the Government Benches to recognise the amendment as a straightforward request for a report to be provided. If the Government are confident about what they are doing and if they have nothing to hide or to fear and they want to produce such a report, we of course will work with them on that. Sadly, I have my doubts whether that offer will be accepted but I am always open to being surprised by the Minister, and I look forward to hearing that, for once, he will accept our mild-mannered, straightforward amendment and commit to producing the report.

Photo of Robin Walker Robin Walker Conservative, Worcester

It is a pleasure to take part in this debate and to speak about one of the most important and beneficial changes announced in the Budget. In dealing with the clause stand part element of the debate, I intend to talk about the level of the basic rate of income tax and, more importantly, the increase in the threshold, which, as Cathy Jamieson said, are directly linked.

I would first like to clarify one point, having been contacted by a very concerned constituent who had heard that the basic rate for the top level of tax was being reduced to £32,000 and, as she earns £35,000, was worried that she will suddenly become a 40% taxpayer. It is important to clarify that the basic rate thresholds are set on top of the threshold for paying income tax and that no one is being asked to pay the 40p higher rate until they earn £41,450.

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

Of course, that is only part of the story, because the threshold before one pays 40% has gone down from £37,500 to £32,000, a reduction of over £5,000, while the 20% threshold has gone from £6,500 to £10,000, which is an increase of only £3,500. In fact, 670,000 more people are now paying the 40p rate than were doing so three years ago, so many more people now fall within a tax band that used to be only for the rich.

Photo of Robin Walker Robin Walker Conservative, Worcester

I take the hon. Gentleman’s point. I had thought that his party was in favour of progressive taxation. Certainly, I believe that raising the income tax threshold and taking many people out of tax is one of the coalition Government’s great achievements. It was a Liberal Democrat policy at the general election, and on this occasion I will admit that they had an excellent idea.

The coalition Government are right to recognise that it is vital to make work pay and that that cannot be done through welfare reforms alone. By also ensuring that people can keep more of the money they earn, we will stimulate the economy, reward work and alter the balance between dependency and opportunity.

I am delighted that Ministers have been able to bring forward planned changes to the income tax threshold by a year so that workers at the lower end of the wage spectrum will not have to wait until 2015 to pay less tax. As a result of the changes announced in the Budget, more than 34,000 people in Worcester will receive a tax cut and 3,370 people who would have been paying income tax in 2010 will pay none at all. That will not only reward those people, but directly stimulate our local economy—we have heard from Labour Members about the importance of people having money in their pockets to spend in the shops. In four years, the threshold at which people have to pay tax will have been raised by 50%, which is good news for millions of part-time workers who have been taken out of the tax system altogether and full-time workers on average earnings who benefit from a reduced burden of income tax.

The Opposition have downplayed those changes and focused on changes to tax credits to argue that some working families will be worse off. In doing so, they show a profound misunderstanding of the pride people take in the money they earn and their desire to support themselves. It is far better for the individual and their family to earn their money, keep the fruits of their labour and be able to spend it as they see fit than for it to be taken away and for the individual to be dependent on the faceless benignity of an all-knowing state that might choose to hand a proportion of it back—might—but that, if Labour ever gets control of the Treasury again, might find itself without the means to do so.

To listen to some of the speeches we have heard from the Opposition over the past few weeks, one might be forgiven for believing that the tax credits system, as it currently stands, was a vital part of Attlee’s welfare state and a bastion of the post-war consensus; it is not and it was not. In its current form, it is the creation not of a Beveridge or a Bevan, but of Mr Brown, who so rarely graces the House with his presence. I am glad that that complex system, which takes money away from working people to feed it through the Government sausage machine and re-allocate some of it, is to be rolled into universal credit and reformed to ensure that work will always pay.

It is far better to remove the tax from thousands of hard-working people in my constituency, and millions across the country, so that they can keep the money they have earned for their needs, their homes and their families. If we are to support families, it is far better, as Mr Field has argued, to use public money to invest in early intervention than to use it to prop up a complex system of credits that fails properly to support work and has always failed to reach millions of the people who, in theory, are eligible for it.

The fact that the Government are increasing the tax threshold shows that we are rewarding work at the same time as simplifying the tax system. The fact that we have been able to bring forward those changes shows that there is a sense of urgency about delivering an unalloyed public benefit, which many Labour Members have supported today.

I would argue that the same sense of urgency should be brought to the issue of child care support for working families. The Prime Minister set out exciting policies on that before the Budget but my constituents are being asked to wait until 2015 for the support. I have heard from many constituents who are delighted to hear that it will be available through the tax system but are then devastated to realise that by the time it is implemented, their children will have grown out of the eligibility criteria.

If a thing is worth doing, it is worth doing now. I urge the bright and brilliant men and women of the Treasury to bend their backs to the task of bringing those valuable initiatives forward in the shortest possible time. While they are at it, I urge them to consider a proper transferable married person’s tax allowance to support the family.

I welcome many initiatives in the Budget and I hope that the Chair will not rule me out of order if I touch briefly on a few of the others that will make a real difference to people in Worcester. Freezing once again the duty on fuel is more than welcome and much appreciated. Removing the much loathed beer duty escalator will raise a toast in many of Worcester’s pubs. The employment allowance will help more small businesses to create vitally needed jobs.

Returning to my opening remarks and the matter under consideration, I make one suggestion for the future, and I sincerely hope that Treasury Ministers can take it on board. Raising the income tax threshold is and has been the right thing to do, and it remains so. It is wonderful that we have brought forward to 2014 the date at which the threshold will reach the magic number of £10,000. However, today we should open a debate about that number. The figure of £10,000 was not worked out by economists or in careful consultation with employers and workers, nor was it based on any reflection of financial reality; it was drawn up as a manifesto promise in a party conference on the eve of an election.

In my view, the Conservative party missed out by not making that promise ourselves. Today we should start to consider the level at which the threshold for income tax should be set in the future. I believe that it should be the same as the earnings of a full-time worker on the minimum wage.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I was hoping that my hon. Friend would make that point. He has already acknowledged the Liberal Democrat pledge on the £10,000 threshold at the last election. We have already decided that at the next general election we are going to link the income tax threshold to the national minimum wage, which is currently £12,071. If my hon. Friend is about to say that he endorses the Liberal Democrat position at the next general election, I will welcome that.

Photo of Robin Walker Robin Walker Conservative, Worcester

I will certainly urge my party to adopt a similar position. Raising the threshold to £11,500 or £12,000 in future Budgets would help millions more people and provide further stimulus. That, along with other policies that my party supports, and which the Liberal Democrats do not always support, such as keeping a freeze on council tax, could make a real difference. Raising the threshold would extend the legacy of that valuable change and do even more to make work pay. I urge Ministers to consider it for the future and commend them on the difficult job that they are doing well.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

Mr Walker has perpetuated some of the myths about some of the last Government’s policies. For example, he suggested that it would be better to put money into early intervention—presumably, that would involve paying things such as tax credits. Of course, it was not an either/or.

Anyone looking at the setting up of Sure Start and all the reports that were done on the importance of early intervention would see that we did not think, as is sometimes suggested, that the only solution to deprivation, child poverty and so on was simply to put money in. Money is part of the issue, but we certainly did not see things in terms of either/or. All the people up and down the country who have seen reductions in Sure Start services, for example, see that now it is not only not either/or—in many cases, it is neither/nor.

It is all very well for the Government to say, “We’re leaving you your own money so that is fine,” but the bottom line is that people have less money in their pockets. What has been suggested is a give-away in income tax is more than balanced, for many low-paid workers, by the reduction in tax credits and other provision. What matters to those people is how much they have to spend. Saying, “Oh, it’s wonderful that you’re getting to keep your own money” is no use. They cannot necessarily buy the things that they need.

The situation with child care is similar. The hon. Member for Worcester was right to say that the Government measure on that is not coming in right now; moreover, many people have already seen a cut in help. Child care tax credits were cut by the Government for many low-paid working families, so it has already happened.

The tax credits system was particularly beneficial for single parents, over 350,000 of whom went into employment as a direct result. There are serious concerns about universal credit as the answer to all this, particularly for single parents. Gingerbread and other organisations representing single parents have pointed out that their position could be worse under universal credit.

Not only that, but there are changes to the restrictions and conditions put on to single parents when they go back into work. Under the previous Government, they had real flexibility and an understanding that the kind of work they could do had to tie in with their family and caring responsibilities. Those flexibilities are going to be swept aside under universal credit. The regulations now contain only one from a whole group of flexibilities. For that group in particular, and possibly for others, this system, far from being better, may well be worse.

In other respects, strangely, the Government are not so keen on people keeping their own money. Some changes have actually punished people for saving and being careful. One of those was the restriction on the receipt of employment and support allowance to a year. That means that at the end of that year, people who have savings, or have an early retirement pension because they retired sick, or have a partner in work but often only part-time work, no longer receive the benefit, so suddenly their income is reduced by as much as £91 a week. The argument we were given was that people should use up their own savings first before the state helps them.

Under universal credit, somebody in employment who has capital over the level of £6,000 will begin to have any benefit they get reduced as a result, and if they have more than £16,000, they will lose it altogether. People who may have been saving for their retirement or saving with a view to being able to buy a house, will find that they have to use that money up, because that is what the Government are saying. Not all these policies are even coherent. Let us look properly at the effects of tax rates on all income groups, because it would be very helpful to everyone if we did so.

Photo of David Gauke David Gauke The Exchequer Secretary 3:45 pm, 18th April 2013

Clause 3 sets the basic rate limit for income tax for the 2013-14 tax year. Let me make it clear at the outset, as I did in the previous debate, that we understand the financial pressures faced by households. As a Government, we have taken action to reward employment and to support hard-working families. That is why we have increased the personal allowance. I endorse the remarks made by my hon. Friend Mr Walker in support of the policy we have pursued. Budget 2013 announced that we will go further, with the personal allowance increasing by a further £560 to reach £10,000 in 2014-15, meeting the Government’s commitment a whole year early. These changes will benefit 25 million individuals and will take 2.7 million people out of income tax altogether by April 2014.

Clause 3 reduces the basic rate limit by £2,360 to £32,010 in 2013-14. When combined with the £1,335 increase in the personal allowance provided for by clause 2, the higher rate tax threshold for 2013-14 will be reduced to £41,450. This allowance increase will benefit all taxpayers with incomes below £116,000 by £200 a year on average in real terms. About 30% of the gains from the personal allowance increase for 2013-14 will be shared with most higher-rate taxpayers. The national insurance upper earnings and profits limits remain aligned with the higher rate tax threshold.

It might be helpful if I set out the reasons for this change. I have explained that this coalition Government are committed to creating a fairer tax system that rewards work, with real-terms progress every year towards increasing the personal allowance to £10,000. We are meeting that target one year ahead of schedule and the final step towards it will be legislated on in next year’s Finance Bill. For now, the £1,335 increase in the personal allowance, introduced by clause 2, represents a major milestone on the journey to £10,000. The changes that we are making for the 2013-14 tax year will lift an additional 1.1 million individuals out of income tax altogether and give 24 million taxpayers an average real-terms gain of more than £200 a year. For the typical basic rate taxpayer, that will mean an extra £267 of cash in their pocket for 2013-14, which is an extra £5 a week since the start of the new tax year.

On the specific issue of gains for higher rate taxpayers, when increasing the personal allowance by £10,000 in 2011-12 we also had to make sure it was consistent with bringing the public finances under control. Therefore, higher rate taxpayers did not benefit from that increase. However, we decided that the benefits of later increases should be shared with higher rate taxpayers. This supports growth by increasing the rewards to work for a wide range of individuals.

The £1,335 increase from April 2013 was announced in two parts. For the increase of £1,100 announced at Budget 2012, rather than pass on the full benefit of the personal allowance to higher rate taxpayers, an equivalent amount of funding was provided to assist in the fair implementation of the child benefit reforms. However, gains from the additional £235 increase announced at autumn statement 2012 have been passed on equally.

At that time the Government also decided that the higher rate tax threshold—the point above which the higher rate tax starts to be paid—will increase by 1% in both 2014-15 and 2015-16. These will be cash increases, the first in this Parliament, and they will ensure that higher rate taxpayers will gain equally from future increases to the personal allowance. The Government recognise that these are below-inflation increases, so they also raise about £1 billion in revenue to support our efforts to deal with the large deficit we inherited from the Labour party. We make no attempts to conceal that and have been very open and up front about it.

Opposition amendment 10 calls for a report on the cost of living for basic rate taxpayers. As I have said, we recognise the pressures that households face and we are taking action to support them with the cost of living. Indeed, in our debate earlier this afternoon I set out some of the policies. I have touched in this speech on the personal allowance and one could also point to our policies on fuel duty and beer duty, which were announced in the recent Budget, and on council tax, which are all intended to relive households from some of the pressures they face.

The Government have taken unprecedented steps to publish a distributional analysis alongside each Budget and autumn statement document. Such analysis shows the impact of all the Government’s policies on household incomes and separates the impact of tax measures from their other policies. It is important to consider all the Government’s policies, not just their taxation measures. The distributional analysis published at the Budget shows that the top 20% of households continue to make the greatest contribution towards reducing the deficit, both as a percentage of their income and in cash terms. We believe that producing a further report to supplement that would be unnecessary and a waste of money.

We have debated the wider point of the cost of living in two debates this afternoon, although admittedly this second debate has been short. As I made clear, the Government recognise the considerable pressures, consequent on rising commodity, food and fuel prices, that our constituents have felt strongly in recent years. The Government have taken difficult decisions to try to reduce the deficit, and undeniably that has had an impact on people, but we ought to be straight with the British public: whoever is in government will have to take measures to reduce the deficit. Anyone in a position of responsibility has to recognise that we cannot continue borrowing 11% or 12% of our economy. [Hon. Members: “But you are!”] While in office, we have reduced the deficit by a third.

Having listened to Opposition speeches this afternoon, I do not for one moment doubt their sincerity, but there has been the temptation to ignore the fact that there is a very large deficit that has to be dealt with by raising taxes, cutting spending or a combination of the two, and to pretend otherwise is to not be straight with the British public. Some of this afternoon’s speeches have given every indication that Labour is content with being a repository for people’s anger. To use even stronger language, Labour often gives every indication of being simple fellow-travellers in sympathy, but not leaders. That is Labour’s approach.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

Would the Minister not rather be understanding of people’s very real anger than just ignore it? [Interruption.]

Photo of David Gauke David Gauke The Exchequer Secretary

As the Financial Secretary to the Treasury points out, people should be angry about the state of the public finances left to us by the Labour party. I described Labour as the “repository for people’s anger” and as a “simply fellow-traveller in sympathy”, not leaders, because those were the words of the last successful leader of the Labour party, Tony Blair. I am afraid that Labour is too often in its comfort zone. We know that there are pressures on living standards, but ignoring the deficit is no way to deal with them. The Government are prepared to take those difficult decisions, while Labour is failing to address them.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I am disappointed to hear the Minister resort once again to the same tired, old mantra.

We have listened this afternoon to some passionate speeches from Opposition Members talking about the very real experiences of their constituents, and it is disappointing that once again the Government choose not to recognise them. They do not seem to recognise their responsibility for the deficit and debt now—for the fact that they have to borrow more, for the lack of growth, for the fact that people are not getting back into work in the way we would want and for the problems with living standards.

Sadly, we saw some crocodile tears from the Minister, who on the one hand wants to say, “Yes, we understand the impact on people”, but on the other is not prepared to do anything about it. Opposition Members are rightly angry on behalf of their constituents. They are angry about the bedroom tax and about the fact that the Government have chosen today not to do something on VAT that would have made a difference to people in our communities who will also be angry that the Government will not even accept a mild-mannered request, as I described it earlier, for a report on the impact of the Government’s policies on basic rate taxpayers. For that reason, I intend to press the amendment to a vote.

Question put, That the amendment be made.

The Committee divided:

Ayes 192, Noes 248.

Division number 217 Finance (No. 2) Bill — Clause 3 — Basic rate limit for 2013-14

Aye: 192 MPs

No: 248 MPs

Ayes: A-Z by last name


Nos: A-Z by last name


Question accordingly negatived.

More than four and a half 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 business at that time (Standing Order No. 83D).

Clause 3 ordered to stand part of the Bill.