Surplus Target and Corporation Tax

– in the House of Commons at 4:27 pm on 4th July 2016.

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Photo of John Martin McDonnell John Martin McDonnell Shadow Chancellor of the Exchequer 4:27 pm, 4th July 2016

(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on proposals regarding the Government’s surplus target and plans to further cut corporation tax.

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

In the past week, I have sought to be realistic with the British people about the economic challenges we now face but to mix that realism with reassurance that we can rise to those challenges. The financial contingency plans that the Governor of the Bank of England and I put in place have proved effective to date. Financial markets have adjusted, but I can report today that, although we remain vigilant, they have shown no signs of disorder. We must now respond to developments in the real economy, which will require a supreme national effort.

First, we must look to support demand and ensure that credit flows freely in our economy. The Governor of the Bank of England said on Friday that

“some monetary policy easing will likely be required over the summer”.

Thanks to the reforms that I introduced, the independent Bank of England has the tools that it needs to act against the cycle and support lending in the economy. The Financial Policy Committee will publish its decisions tomorrow, and we stand ready in the Treasury to act in concert with the Bank of England should more need to be done to support funding for lending.

The second part of our national effort must be to maintain Britain’s fiscal credibility. Eight years ago, people questioned Britain’s ability to pay its way in the world; eight years later, British gilts are seen as a safe haven and funding costs have fallen to record lows. We should maintain the fiscal consolidation measures that we have announced. However, our rules were always explicit that, in the face of what the fiscal charter calls a “significant negative shock”, we should allow the automatic stabilisers to operate, and with the consensus of economic forecasters now lowering the forecast growth for the UK next year—from close to 2% before the referendum to 0.4% now—that is what we will do. We must be realistic that the target for a surplus is unlikely to be achieved in 2019-20. The Office for Budget Responsibility will conduct a formal assessment when it produces a new independent forecast in the autumn, and then we will have a clear idea of what additional measures are required to maintain fiscal credibility.

Thirdly, we need to broadcast loud and clear the message that Britain remains the best place in the world to do business. In the past six years, we have reduced Britain’s corporation tax rate from 28% to 20% today, and 17% in the future. I did that at the same time as taking difficult decisions elsewhere to balance the books. In my view, the strongest signal we could send to the world that Britain, after the referendum, is open to the world and ready to do business would be to cut corporation tax still further. We should aim for a rate of 15% and preferably lower, because if we are pro-business, we are pro-jobs, pro-living standards and pro-working people.

Fourthly, the referendum result revealed a deep-seated feeling of disfranchisement in too many of our communities, especially in the midlands and the north of England. As I said in Manchester on Friday, the northern powerhouse is the right response and we need to redouble our efforts with elected mayors and new transport infrastructure. In my view, once both parties have determined who their leader should be, we should then get on and build a new runway in the south-east of England, because we cannot be open to the world if we cannot fly there.

Fifthly and finally, while we must seek with our European neighbours the best possible terms of trade in goods and services, including financial services, now is the time also to redouble our efforts to promote trade with the rest of the world. I have spoken to my US counterparts. Later this month, I will be travelling to China to build on that important new partnership.

To conclude, this is a blueprint to meet our economic challenge. Nothing positive will come from looking back in anger. We must lift our eyes to the horizon ahead and make the best of what is to come.

Photo of John Martin McDonnell John Martin McDonnell Shadow Chancellor of the Exchequer

I would like to thank the Chancellor for his response. I think it is important that, as in the Opposition day debate last week, we set the tone of our response at the level of the national interest and take care to avoid making any statements that would adversely impact on fragile markets.

I have to say, however, that a lack of planning for a leave vote is becoming evident across all policy areas. Instead of a clear plan of action, we have so far had a series of ad hoc statements and announcements, including the grateful abandonment of the “Brexit Budget”, which was to increase the sharply the level of austerity being applied. The fiscal surplus target has been abandoned and today the Chancellor has announced planned reductions in the headline rate of corporation tax.

Rather than ad hoc announcements, we need a framework for economic decision making. Previously, the Government sought to do that with the fiscal charter, which was passed into law last autumn despite Labour opposition. May I ask the Chancellor now, since he is no longer pursuing the fiscal surplus target, if the charter is also to be abandoned? Will he be putting a motion to repeal the law before this House? Will he be seeking to place a new fiscal rule on a similar basis in legislation?

The Chancellor has announced today that he will redouble his efforts to invest in the northern powerhouse. Of course the details of that are to be decided, but will he tell the House when he expects to have a detailed programme of investment? What scale of investment should we expect? What areas, and how focused will that investment be? Does he now agree with Labour Members, and the Secretary of State for Work and Pensions, that a major programme of Government investment is urgently needed? Does he agree with the Home Secretary’s decision not to give a guarantee to existing EU nationals living and working in this country? What will be the economic effects of that? Will he therefore give a more detailed statement to the House on the economic consequences of this decision?

The Chancellor has promised that, while seeking to boost investment, he will be maintaining

“the consolidation that we put in place last year.”

May I ask him for some clarification on this point? Is he now ruling out any further or additional consolidation in light of the leave vote? Regarding the planned cuts to the headline rate of corporation tax, the news has not been well-received by our international partners. Pascal Lamy of the World Trade Organisation has accused the Chancellor of “tax dumping”. He also highlights the risk to future negotiations with the EU.

I want to raise three critical questions on this issue. The Chancellor’s Budget this year suggested that his one percentage point reduction in the headline corporation tax rate will reduce expected revenues by about £1 billion. Does the Chancellor still hold to that estimate? How will the Chancellor pay for any losses in tax revenues from the proposed corporation tax cuts? Who will pay? The evidence from existing cuts to corporation tax is not favourable. Despite year-on-year reductions in the headline rate to the lowest rate in the G7, business investment remains low by G7 standards and has now fallen for two consecutive quarters.

Businesses are sitting on a cash pile of at least £500 billion yet are failing to invest. What assessment has the Chancellor made that a dramatic reduction in the corporation tax rate will have the desired effect on business investment, given the absence of evidence so far?

Finally, we know that the circumstances after the leave vote will be trying and that major forecasters now anticipate the UK possibly entering a recession over the next year. The Chancellor’s fiscal approach has failed and has been steadily abandoned. In the interests of the country, will he now commit to adopting a fiscal approach that allows the flexibility to invest while maintaining fiscal discipline, as the Opposition and now some on his own side are urging?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

When I became Chancellor, there was a question mark over Britain’s ability to pay its way in the world, and that was reflected in our bond yields, but because of our determined effort over the last six years, when we have hit an economic shock, as we have done in the last two weeks, the response has been a fall in bond yields—because people have confidence in the UK.

First on planning, extensive contingency plans were in place to deal with financial market disorder as a result of a leave vote, and the fact that we are not debating that today shows that those plans have been effective—we remain vigilant, but those plans were in place. Secondly, we must now decide on the new model of our relationship with the EU. That was not on the ballot paper and has to be a decision for Parliament. We set out the options for the country in advance of the referendum debate, and now we must have that discussion.

Thirdly on planning, the fiscal charter specifically provides for the impact of a negative shock, which is what we have had, and as a result the rules of the charter apply. As I say, it is unlikely that the surplus will be achieved in 2019-20—although that will be for the OBR formally to assess—and it will then be up to the Chancellor to produce new plans to restore the public finances to surplus and for Parliament to vote on them. We thought about that in advance: it is in the charter that the House voted on.

The hon. Gentleman talked about investment. On Friday, I met the Labour leader of Manchester City Council, Richard Leese. We talked about how we could redouble our efforts to invest in transport across the Pennines and about devolved powers for mayors and the like. That will be part of our response to the disfranchisement that too many of our citizens in the midlands and the north of England have clearly felt.

Finally, the hon. Gentleman also asked about business confidence and the corporation tax cuts. Not only have our corporation tax cuts given us the lowest corporation tax rate of all the advanced economies of the world, but we have seen a 20% increase in receipts from corporation tax—because businesses are coming to this country, growing their businesses in this country and employing 2 million people. The best response we can send to the world to show that we are open for business is to go on reducing business tax.

Photo of Andrew Tyrie Andrew Tyrie Chair, Treasury Committee, Chair, Liaison Committee (Commons)

The Chancellor has done the right thing to buttress the decisions of the Bank on monetary policy with fiscal measures, particularly by allowing the automatic stabilisers to kick in. The 2020 fiscal surplus target was always likely to be a casualty at the first sound of Brexit gunfire, and so it has proved—hence the need to take advantage of the charter’s flexibility. Does he agree that, in order most effectively to bolster credibility in the coming years, over the next few months we need to develop a rule that sets fiscal policy in a longer-term framework and which is resilient to changes in the OBR’s short-term forecasts?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

It is clearly likely that we will be impacted by a cyclical downturn in the public finances—we can already see the growth forecasts being adjusted. The OBR will help us to make an assessment of the referendum result’s structural impact on the public finances and our chances of hitting the target—as I say, it looks unlikely that we will hit it—and then, under the fiscal charter, it will be up to the Government to produce a plan that will be debated and voted on by the House. We have provided for this contingency, and now we need to let the OBR do its work.

Photo of Stewart Hosie Stewart Hosie SNP Deputy Leader, Shadow SNP Westminster Group Leader (Economy), Deputy Leader, Scottish National Party

I welcome what the Chancellor said about possible monetary policy easing from the Bank, about the automatic stabilisers and, in particular, about export promotion—we hope that that will be matched by a U-turn on the cuts to the UK Trade & Investment’s export promotion budget.

In general terms, we welcome the U-turn on the arbitrary fiscal surplus rule, which, we should remember, planned to cut more than £40 billion a year and was required to run a balanced current account budget. While we support tax competition and recognise that corporation tax cuts might be a useful tool in the fight against capital flight in the aftermath of the appalling Brexit decision, it is also true if we look at the 2016 Red Book numbers as a guide, that a substantial cut in corporation tax—say, 5%—could, in the absence of behavioural change, lead to a reduction of revenue yield of about £2.5 billion a year. I ask the Chancellor one question in particular. Given that he has abandoned his fiscal rule, will he today rule out any plans to claw back potential losses in revenue yield from the cut in corporation tax, in the absence of behavioural change, through the mechanism of further attacks on the welfare budget?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

First, as a result of the reforms we have made over the last six years, the Bank of England has many more tools at its disposal than it did in the financial crash. Obviously, it can act on monetary policy consistent with its inflation target. The Governor of the Bank of England, speaking in a personal capacity as a member of Monetary Policy Committee, said that easing was likely to be required. A number of other tools, including counter-cyclical financial tools, are available, which means that there is a range of options to deploy. Over the coming weeks, we will hear whether, how and why the Bank of England, which is independent in its decision making, needs to deploy those tools.

I am rather disappointed that the SNP spokesman has not reminded us that it was SNP policy to cut corporation tax. Indeed, that has been its policy for year after year. In the independence referendum, the SNP said that one of the benefits of independence was the ability to cut corporation tax. The great thing about being in the United Kingdom is that the SNP can get corporation tax cuts in any case.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

When did my right hon. Friend decide that he was not going to introduce an emergency Brexit Budget to penalise the people who voted leave?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

We have to be realistic about the economic shock that the referendum result has created, which is acknowledged not just by the Bank Governor but by many independent forecasters—it is reflected in the financial markets. It will have an impact on the public finances, which will partly be cyclical, but also partly structural. In the end, a structural deficit—my hon. Friend, who is a good fiscal conservative, will know this—needs to be addressed through either reduced spending or higher taxes over time. Obviously, as a Conservative, I tend to look at the spending solution rather than the tax one, but that is what happens when there is a structural deficit, as we know to our cost in this country. Let us wait for the OBR to make its assessment in the autumn, then we can collectively decide how to proceed.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

The OBR says that cuts in corporation tax have so far had no discernible impact on either business investment or growth. Indeed, in the latest forecast, despite cuts to corporation tax, business investment was revised down. I urge the Chancellor to look instead at helping small businesses or investing in infrastructure rather than going ahead with further cuts in corporation tax, which so far seem to have made no difference.

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

I am all for supporting small businesses, which is why we have a package of rates relief in the Budget. I am all for making the big transport investments, which this country has, frankly, not done for a generation. That is why I support High Speed 2 and indeed High Speed 3, as well as a new runway in the south-east of England.

The OBR has revised up its economic forecast for business investment when we have introduced corporation tax cuts, so it draws a link between the two. A study on the long-term impact of our corporation tax cuts so far suggests that they have seen an increase in our long-run GDP of 1.3%, which is the equivalent of £24 billion in today’s prices.

Photo of David Rutley David Rutley Conservative, Macclesfield

Before the referendum, the Finance Bill set out the path to lower corporation tax, so I am pleased, following the result, that the Chancellor has set out further steps to reduce it and to invest much more in the northern powerhouse. Will my right hon. Friend tell us what conversations he has had with business leaders about his proactive approach, following the referendum result?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

Over the past 10 days I have had numerous conversations with various business leaders and leaders of financial institutions, and tomorrow I will be meeting the heads of some of the major banks to discuss how we proceed. The overall, and very clear, message from the Prime Minister’s business council, which met on Thursday, was, “Let us send a message round the world that we are not closed for business, we are not turning our back on the world; we are open to business and we are reaching out to the world.” A good way of doing that is to further reduce corporation tax, and then we must make the most of our links not just with our European friends, but with countries such as China, India and the United States, where we should be seeking to strengthen our trading links.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland

Cutting corporation tax in this way is highly likely to annoy our EU partners, which is extremely foolish in the run-up to the article 50 negotiations. Would not a better way of averting the risk of recession be to promise to replace the EU funds we are going to lose, and which were such an important part of the northern devolution deals?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

When it comes to annoying our European partners, I do not think this is going to be the thing that tips the balance after the last couple of weeks. Ireland is a member of the EU and has a 12.5% corporation tax rate. When it comes to investment in the north and the midlands, I am very much open to what further steps we can take. I do not pretend that we have done everything possible; I think there is more we are going to have to do, and all of us collectively—particularly those who represent constituencies in the north and the midlands—need to focus on what we can do to make sure that people feel more enfranchised and connected with this country’s economic success.

Photo of Kit Malthouse Kit Malthouse Conservative, North West Hampshire

The Brexit vote was always going to require a Treasury response so I am pleased the Chancellor has produced one, but, rather than concentrate on the profit and loss, I wonder if he would care to look more at the balance sheet and consider measures to lift or relieve some of the constraints on the operational liquidity of capital in the economy. Our capital base is fundamental to our growth, and taxes and regulations on the operation of capital are significant constraints. So will the Chancellor look at investment allowances, tax breaks on starting new businesses and capital gains tax, in the hope that we can maintain a nice liquid market for capital investment in the UK?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

My hon. Friend is right to say that, while taxes on business profits are important, capital taxes are also vital to stimulating investment. That is why in the Budget we reduced capital gains tax—and, with hindsight, that is an even more sensible move than I thought it was at the time. I am always ready to consider further investment allowances, and we have very successful allowances such as the enterprise investment scheme. Of course, the balance has always got to be between simplification and simplicity of the tax system and new allowances, and sometimes people call on me in the same breath to do both things—not my hon. Friend, because he is very clear in his thinking. We have got those allowances, but reducing headline rates is generally the better approach.

Photo of George Kerevan George Kerevan Scottish National Party, East Lothian

With the benefit of hindsight, does the Chancellor accept that his original threat to introduce a deflationary Budget in the event of a Brexit vote was both bogus and counterproductive?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

What I was setting out with Alistair Darling, my immediate predecessor, was the realism that will be required when we understand that the economy, impacted by the vote, will have an impact on the public finances, and then it will be up to the House of Commons to decide how we proceed. It was important that that information was in the public domain before people voted.

Photo of Kevin Foster Kevin Foster Conservative, Torbay

First, may I put on record my thanks to the Chancellor for the work he has done over the last week in stabilising the economy following the Brexit vote? Gooch & Housego in my constituency is a company that depends on exports. What message does the Chancellor have for such exporting businesses about Britain’s future role in the world, particularly in terms of trade?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

We need to do two things. First, we need to determine our new trading relationship with our European partners; about half of our exports go to the European continent and, in my view, we should be pushing for the best possible terms of trade in goods and business services, including financial services. Secondly, we should be maximising our links with the rest of the world. We have a real opportunity with China. As my hon. Friend will know, I have been very involved in trying to strengthen the relationship with that big emerging economy in our world, but we should also look to our links with Japan, India, the United States and the Commonwealth, and this is a call to action that we need to redouble our efforts.

Photo of Stephen Timms Stephen Timms Labour, East Ham

The Chancellor gained his office because he promised in 2010 that he would eradicate the deficit by 2015. He failed on that, as we always knew he would, and he is now giving up on achieving that aim by 2020 or indeed by any specific date. Was not his long-term economic plan, which he has now dumped, only ever just a vacuous slogan?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

We gained office because we were faced with the complete economic mess created under the last Labour Government. We promised to turn that around, and we got a record number of people into work and have had the fastest growing economy for the past three years. When it comes to the deficit, the right hon. Gentleman was a Treasury Minister and he left me with an 11% budget deficit—the highest in the peacetime history of this country—but this year it is forecast to be below 3%, so I will compare our record with Labour’s record.

Photo of Antoinette Sandbach Antoinette Sandbach Conservative, Eddisbury

The Chancellor will be aware that I have many small and medium-sized businesses in my constituency that export to Europe. Will he explain what steps he is taking to ensure that UKTI has a package that will allow such businesses to look more globally for their exports?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

I know my hon. Friend’s constituency well, as it neighbours my own. We represent similar communities in Parliament. We as a country do not have to make a choice between exporting to Europe and exporting to the world; we should be doing both. Of course we should be doing everything we can to maintain close trading links with our European partners, and indeed building on them if that is possible, but we should also be looking for opportunities around the rest of the world. The trip that I am making to China will provide an opportunity to communicate that message, and I have also spoken to the Speaker of Congress and others in the United States Administration about what we can do to strengthen our links with that huge market. In the end, however, the best thing that UKTI can do is to help not only our largest companies but the small businesses that my hon. Friend has referred to. In countries such as Germany, many more small and medium-sized companies are exporting than is the case in the UK, but it is within our own gift to address that and we need to give those companies all the help that we can.

Photo of Seema Malhotra Seema Malhotra Labour/Co-operative, Feltham and Heston

This week marks a year since the Chancellor published his productivity plan, and his record speaks for itself. UK productivity remains at the bottom of the G7 league table and 20% lower than the average. The plan was never a plan. Indeed, his decision today shows that he is continuing down that road. Is it not time for him to do what British businesses are actually calling for, which is to provide investment in our schools, in infrastructure and in affordable housing for workers, rather than doing as he is today and running the risk of our becoming tax haven Britain?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

I do not think that the business community wants higher business taxes, which is the Labour proposal. When it comes to major transport investments, we are making them. Labour was in office during all those years when money was apparently coming in, but where were the major investments in the railways and the roads? Labour Members complain about our energy investments, but where are the power stations that were opened under the Labour Government? The more we look at that period of our economic history, the more we can see what a massive missed opportunity it was.

Photo of Tom Brake Tom Brake Liberal Democrat Spokesperson (Foreign Affairs), Liberal Democrat Chief Whip, Liberal Democrat Shadow Leader of the House of Commons

I am disappointed that none of the leading leave campaigners is here to listen to what Chancellor has to say about the impact of Brexit. Will he put the economy on a war footing to stave off a recession? Will he invest in infrastructure, particularly housing, and prioritise support to small and medium-sized businesses through the British Business Bank, which was set up by the Liberal Democrats in coalition, so that innovative companies will continue to receive support if bank lending dries up?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

The British Business Bank—which was created under a policy announced by me at this Dispatch Box—is working successfully, and I pay tribute to Liberal Democrat colleagues in the coalition Government for helping us to deliver it. Of course it has an important role to play in the future. The right hon. Gentleman is right, in the broader sense, to say that we need to look at what we can do to support demand and credit in the economy. The Bank of England has many tools, and the Governor of the Bank has already indicated that, in his personal opinion, we should be looking at monetary easing.

Photo of Jeremy Quin Jeremy Quin Conservative, Horsham

I congratulate the Chancellor on his fiscal response, and also on his comment on Heathrow in the statement. Will he reassure the House about the strength and stability of the UK banking system, given the reforms of the last six years?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

I thank my hon. Friend for his remarks. I should point out that I did not identify where the additional runway should be in the south-east of England, although I cannot but note that his constituency is next to Gatwick, so that may have been a loaded question.

As for my hon. Friend’s broader point, he is right to point to the stability of the banking system. Although we remain vigilant, we are not, today, talking about a banking crisis, despite a very significant adjustment in financial markets. That is because of difficult decisions made by this Government and their coalition predecessor to strengthen the capital requirements, so that banks have 10 times as much capital as they had seven or eight years ago, and to strengthen the oversight of our banking system by putting the Bank of England in charge. I think that those decisions have been justified by what has happened in the last 10 days, but that does not mean that we can ease up; of course we remain vigilant.

Photo of Andrew Gwynne Andrew Gwynne Labour, Denton and Reddish

The Chancellor referred to his fiscal charter, which, of course, has three pillars: the welfare cap, debt reduction in every year of this Parliament, and his target of deficit reduction by 2019-20. We know that he is not going to meet the last one, but can he update the House on the other two pillars?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

The fiscal charter was explicitly designed to ensure that the House of Commons could hold Ministers to account for their fiscal policy, and, indeed, maintain controls on welfare policy. However, it also provided for a specific requirement, in the event of a negative shock, for them to come back to the House of Commons with a new proposal. That, it seems to me, is thinking ahead, and it has been required because of the challenges that we now face in the economy.

Photo of Craig Whittaker Craig Whittaker Conservative, Calder Valley

Nearly 20% of people in the Calder Valley work in manufacturing, much of which involves high-end niche manufacturers who export. Does my right hon. Friend agree that those businesses need us to negotiate trade agreements not just with the European Union but with the rest of the world, and that it would be wise for us to draw breath before rushing into triggering article 50 for our exit from the EU?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

The Prime Minister’s position—which I share, and which I think is sensible for the country—is that we should trigger article 50 when we are clear, collectively, about the new model of the relationship that we want with our European allies, so that we are well prepared for the negotiations on which we would then embark.

Photo of Margaret Ritchie Margaret Ritchie Social Democratic and Labour Party, South Down

The Government have already approved a power for the Northern Ireland Executive to reduce corporation tax. In that context, does the Chancellor accept that the decision to cut corporation tax in Britain to 15% raises issues of attractiveness and competitiveness for the Northern Ireland rate when it comes to foreign direct investment?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

As the hon. Lady knows, we still have to work out the fiscal underpinning of these arrangements, but they allow the Northern Ireland Executive to set any rate that they want. The good news about the reduction in the UK rate is that it applies to businesses throughout Northern Ireland as well, and, to put it, bluntly, makes it cheaper for the Northern Ireland Executive to reduce their corporation tax rate.

Photo of James Cartlidge James Cartlidge Conservative, South Suffolk

I welcome the commitment to lower the corporation tax rate, but may I echo the point made by my hon. Friend Kit Malthouse about the need to look at our corporation tax regime in the round? I recently visited Lavenham Press, a printing company in my constituency, whose representatives pointed out that capital allowances had been cut. Given the importance of manufacturing, may I ask my right hon. Friend at least to keep the issue of capital allowances under review?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

Of course we keep taxes under review. As I have said, my revealed preference is generally to try to reduce reliefs and reduce headline rates, which I think is the least economically distorting approach, but there are many exceptions to that. One of them has been the investment allowance, which we have increased, and which is particularly targeted at small and medium-sized businesses. It now stands at £200,000 as a permanent annual allowance, which is the highest that it has ever been.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

As ever, the Chancellor is fond of having a pop at the previous Labour Government, but there was a crisis in the markets to which that Government had to respond. This is a crisis made in Government to which the markets are responding. With that in mind, and because he has not answered this yet, will he say what proper assessment he has made of the impact of this cut in corporation tax on our country’s productivity crisis?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

First of all, the problems in the financial markets eight years ago hit this country more severely than almost any other country in the world, and the Government at the time take some responsibility for that. Secondly, the challenge we face is one that was delivered by our democracy. It is a democratic outcome that we accept and respect and we have to make it work for our country. I am determined to make that happen.

As the hon. Lady well knows, productivity growth is a challenge in every western democracy at the moment. Indeed, the US is now predicted to have negative productivity growth. Productivity is still growing in the UK, but we need to do more to improve it. Education reform, welfare reform and transport investment are good places to start.

Photo of Andrew Bridgen Andrew Bridgen Chair, Regulatory Reform Committee

From the moment the result of the EU referendum was announced and the British people said that they wanted to leave the European Union, prominent commentators in most areas of the media have revelled in running down the British economy and its future prospects. With employment at a record high and unemployment at a 10-year low, does my right hon. Friend agree that the British economy is well placed to face the future?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

I completely agree with my hon. Friend. We are well placed because we have got behind Britain’s businesses, large and small. The essential decision that we—he and I and our colleagues—took collectively six years ago was to push for a private sector recovery, rather than to continually pump in Government money to try to sustain the economy. That approach has been vindicated by the record numbers of jobs and businesses created and our record growth compared with other advanced economies.

Photo of Alan Brown Alan Brown Scottish National Party, Kilmarnock and Loudoun

A few weeks ago, we were told that a punishment Budget would be presented to Parliament if there was a leave vote. We are now told that we do not need one and that we can cut corporation tax. The contingency plan that the Chancellor is taking credit for is actually the work of the Bank of England, which presented him with the chance to go into hiding in the aftermath of the leave vote. Given the failure to meet targets and the number of U-turns, is it not the case that the Chancellor is making up a plan as he goes along?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

The contingency plans that we had in place were joint plans of the Treasury and the Bank of England and require the authorisation of a Chancellor in certain aspects. Based on the assessment we made before the referendum of the different models available to the UK, we now have to make a decision about how we want to proceed as a country. I am clear that we want the closest possible economic links, so that vital industries—not just manufacturing, but financial services, which is important to the Scottish economy—are able to trade as freely as possible with our European neighbours.

Photo of Alan Mak Alan Mak Conservative, Havant

The UK is a world leader in the financial services sector, which employs hundreds of thousands across the country and contributes substantially to corporation tax receipts. Will the Chancellor continue to do all that he can to protect this vital sector?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

Financial services is our largest private sector employer, and two thirds of its jobs are outside our capital city. It is a vital industry in the many different towns and cities of the United Kingdom. One of our key priorities is ensuring not only that our financial services industry continues to be a real success and that it is able to sell its services into Europe, but that we strengthen our links with other great global financial centres and economies. For example, becoming the offshore trading centre for the renminbi has been one of the real success stories of recent years.

Photo of Nick Smith Nick Smith Shadow Minister (Environment, Food and Rural Affairs)

Will the Chancellor support investment in projects such as further upgrading the Heads of the Valleys Road and electrifying the south Wales metro? Improving transport links will help to improve employment in the south Wales valleys and boost demand across the UK.

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

I am always happy to consider any good proposals to make further investment in our transport infrastructure. We of course support the electrification of railway lines both into south Wales and through the valleys. The Cardiff city deal has just been signed for the wider Cardiff city region, but if the hon. Gentleman has further proposals, I am happy to look at them.

Photo of Mike Wood Mike Wood Conservative, Dudley South

When the Chancellor cut corporation tax in the Budget, he reduced the losses that banks could offset against corporation tax liabilities. Will he consider extending that to ensure that while we have the lowest possible rates, everyone pays their fair share of corporation tax?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

My hon. Friend rightly says that as well as reducing corporation tax rates, we did a lot to reduce some of the reliefs that have been used—and some that have been abused. Broadly speaking, that is the right direction of travel for our tax system.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

That is not a prize I get often. I welcome the Chancellor’s decision to further reduce the rate of corporation tax—I called for it in the Budget debate last week, so I ought to welcome it. To get the most benefit out of that, we need to simplify our business tax system further to make it more attractive. Will he therefore agree to hold a review to try to make our system as simple as it can be?

Photo of George Osborne George Osborne Chancellor of the Exchequer and First Secretary of State

We are seeking to make our business tax system simpler, and our Office of Tax Simplification will be on a statutory footing and will help us. Let me be a bit discursive at the end here. In this job, I get many requests for tax reliefs and tax breaks for particular things, all of which are very worthy and sensible. They do, however, complicate the tax system. Sometimes the more difficult path is to say that welcome though lots of different reliefs would be, the simpler thing would be to reduce the rate. Broadly speaking—there are exceptions to this—that is the approach that I have followed and intend to follow in the future.