Clause 1 - Income tax charge for tax year 2024-25

Finance (No. 2) Bill – in the House of Commons at 2:06 pm on 8 May 2024.

Alert me about debates like this

Question proposed, That the clause stand part of the Bill.

Photo of Eleanor Laing Eleanor Laing Deputy Speaker and Chairman of Ways and Means, Chair, Standing Orders Committee (Commons), Chair, Standing Orders Committee (Commons), Chair, Parliamentary Works Estimates Commission, Chair, Parliamentary Works Estimates Commission

With this it will be convenient to discuss the following:

Clauses 2 to 4 stand part.

New clause 1—Review of impact of section 2—

“(1) The Chancellor of the Exchequer must, within three months of this Act being passed, publish a review of the expected impact of section 2 of this Act.

(2) The review must include analysis setting out the number of individual taxpayers facing a marginal tax rate in the tax year 2024-25 of—

(a) the basic rate of 20%, and

(b) the higher rate of 40%.

(3) For comparative purposes, the review must take account of—

(a) equivalent actual figures to those in subsection (2)(a) and (b) for the tax years 2021-22, 2022-23 and 2023-24, and

(b) equivalent projected figures to those in subsection (2)(a) and (b) for the tax years 2025-26, 2026-27 and 2027-28.”

This new clause requires a review of how many people will be liable to pay income tax at 20% and 40%, and would compare figures for the current tax year with those for the three preceding and three subsequent tax years.

New clause 4—Review of impact of section 1 on pensioners—

“(1) The Chancellor of the Exchequer must, within three months of this Act being passed, publish a review of the expected impact of section 1 of this Act on those over State Pension age.

(2) The review must include analysis setting out, for the tax year 2024-25—

(a) the total number of people over the State Pension age paying tax under section 1, and

(b) the average tax liability per person of those in subsection (2)(a).

(3) For comparative purposes, the review must take account of equivalent projected figures to those in subsections (2)(a) and (2)(b) for the tax years 2025-26, 2026-27 and 2027-28.”

This new clause requires a review of how many pensioners will be liable to pay income tax this year and in each of the next three years, and what the average pensioner’s tax bill will be in each of those years.

New clause 5—Impact of income tax and corporation tax provisions on Wales, Scotland and Northern Ireland

The Chancellor of the Exchequer must, within three months of this Act being passed, publish an analysis of the impact of the measures in sections 1 to 4, 12 and 13 of this Act on—

(a) Wales,

(b) Scotland, and

(c) Northern Ireland.”

This new clause requires an analysis of the income tax and corporation tax measures in the Bill on Wales, Scotland and Northern Ireland.

New clause 6—Report on impact of section 2—

“Within three months of this Act being passed, the Chancellor of the Exchequer must lay before the House of Commons a report setting out—

(a) the number of taxpayers that will pay income tax at each rate during the tax year 2024-2025 under section 2;

(b) the number of those taxpayers that are pensioners or are of State Pension Age;

(c) comparative figures for each tax year since 2021; and

(d) comparative projected figures for each tax year to 2030.”

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury 2:18, 8 May 2024

It is an honour to open the debate. I will start by setting out how, because of the progress the Government have made, we have been able to cut taxes as part of our plan to reward work and grow the economy.

The Government cut national insurance at both the autumn statement and the spring Budget and have made above-inflation increases to thresholds since 2010, with the basic rate threshold rising from £6,475 to £12,570 today. Taken together, those measures mean that an average worker on £35,400 in 2024-25 will save £1,500 more in personal taxes than they otherwise would have done. Due to the significant real-terms increases to the personal allowance, it is estimated that 1.8 million people will be taken out of income tax altogether by 2024-25, compared with the threshold rising in line with inflation from 2010-11. All workers can now earn £1,000 a month before paying any tax, due to the significant increases to the national insurance starting threshold, which we changed in July 2022.

Let me turn to the first four clauses of the Bill. Income tax is the largest source of Government revenue and helps to fund the UK’s schools, hospitals and defence, and other essential services we all rely on. In 2024-25, it is expected to raise more than £302 billion. Each year, the Government must legislate to charge and set rates of income tax, which is why we are all here today. Clauses 1 to 3 impose an income tax charge and set the rates of it for 2024-25. The rates are not changed by the Bill; rather, we are confirming that they will remain the same.

Clause 1 imposes a charge on individuals to pay income tax for the year 2024-25. Clause 2 sets the main income tax rates—namely the basic rate of 20%, the higher rate of 40% and the additional rate of 45%—for non-savings and non-dividend income of taxpayers in England and Northern Ireland. Those rates are set separately from those in clause 3, as the income tax rates for non-savings and non-dividend income, such as earnings from employment, are devolved to the Scottish and Welsh Governments, and are set by their respective Parliaments. The decision to separate savings and dividends from other forms of income was made as part of the devolution settlement. It ensures that the UK system works effectively and coherently, recognising that dividend and savings income is generally more mobile and generated across the UK, and has some interactions with corporation tax, which is not devolved.

Clause 3 sets the default income tax rates at the same levels as the main rates—namely 20%, 40% and 45%—across the entire UK. These rates apply to the non-savings and non-dividend income of taxpayers who are not subject to the main rates of income tax or to Welsh or Scottish rates of income tax, such as non-UK resident individuals. The clause also sets the savings rates of income tax for all UK taxpayers, again at 20%, 40% and 45%.

As I mentioned, income tax is a vital revenue stream for our public services, without which we could not fund our schools, hospitals, defence and more. It is important that we keep it at its current level.

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

I receive emails from constituents asking me why the Government are not unfreezing the personal tax thresholds.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

We all know that, because of the level of intervention that we had to take, out of necessity, during the pandemic and in response to the cost of living challenges, Government intervention was far greater than any of us anticipated—to the tune of £400 billion in the pandemic and £100 billion for the cost of living challenges. That money has to be paid back, and I think most of our constituents know that. We have seen the same pattern right around the world, where tax levels have had to be higher out of necessity. That means that thresholds have not been able to move in the way that we would normally like. However, now that economic circumstances are changing, we have turned a corner and we are able to reduce taxes, such as for the 27 million people who will receive on average an extra £900 through the national insurance cuts.

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

I am grateful to the Minister for giving way a second time. He started by talking about some of the fiscal measures that the Government have taken to reduce tax, but by not unfreezing the personal allowances, are the Government not taking money from one pocket and putting it back in the other?

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

No. I advise the hon. Member and others to look at their wage slip from a few months ago—say, in December last year. They will see a direct impact because of the national insurance changes that we made in January and again in April. People will see that they are paying less national insurance than in the past. That is transparently and clearly a tax cut. We are able to reduce taxation because the direction of travel is changing.

Taxes have increased across the whole of the western world. Our tax level is projected to increase to about 37%, compared with around 39% in Germany, around 42% in Italy and around 46% in France. This is a phenomenon whereby Governments have had to intervene and spend more money and, as an obvious consequence, they have had to increase taxation to a greater level than anticipated or desired.

However, now that we are back to growth and on a firmer footing, the economy has turned a corner, and we are able to reward the hard work of the British public by reducing taxation. We are doing that in the form of income tax cuts. As the Chancellor and the Prime Minister have said on multiple occasions, we wish to continue in that direction of travel. As I said, people should look at their pay packets. I recognise that it is one thing to talk in the Chamber about implementing laws, but people will now see that in their pay packets in a meaningful way. An average worker on £35,400 will be £900 better off as a result of the national insurance cuts. That is a meaningful amount for constituents right across the country, including those in the hon. Gentleman’s constituency.

Another principle of taxation is fairness. Income tax is fair: those with the most contribute the most. The income tax system is highly progressive, with different rates of tax sitting above an internationally high personal allowance. The top 5% of income tax payers are projected to pay nearly half of all income tax in 2023-24. The top 1% are projected to pay more than 28% of income tax. Thanks to the personal allowance, almost a quarter of individuals will not pay income tax at all in 2024-25. It is important to note that the percentage paid by the top earners is greater than it was under the last Labour Government. In other words, the tax system is more progressive under the Conservatives.

Income tax is also internationally competitive. According to the OECD, the UK has some of the most generous starting allowances for income tax and social security contributions in the OECD, and the most generous in the G7—more generous than in France, Germany, Italy, Canada, Japan and the US. According to the OECD, in the United Kingdom the average single worker faced a net average tax rate of 23.7% in 2023, compared with the OECD average of 24.9%. In other words, in the United Kingdom, the take-home pay of an average single worker after tax and benefits was 76.3% of their gross wage, compared with the OECD average of 75.1%.

I have talked a lot of statistics, but what they mean is more money in people’s pockets to spend as they wish—a fundamental Conservative philosophy. We have also been able to return some money to taxpayers now that inflation is falling and the economy is improving, by reducing national insurance contributions. We have put money back into people’s pockets. We have prioritised tax cuts for those in work, and we believe that that is the best way to stimulate growth in the economy overall.

Clause 4 continues the theme of maintaining the income tax arrangements by keeping the starting rate limit for savings at its current level of £5,000 for the 2024-25 tax year. Many colleagues may be familiar with this but some may not, so briefly by way of explanation, the starting rate for savings is an extra £5,000 tax-free allowance for interest from savings, specifically for individuals who have earned incomes of less than £17,570. That supports in particular people with low earned income, such as pensioners who are reliant on savings interest.

The Government made significant changes to the starting rate for savings in 2015, when they raised the threshold to get the starting rate for savings from £2,880 to £5,000, and lowered the starting rate for savings from 10% to 0%. As many Members will be aware, the starting rate limit for savings must be legislated for each year to confirm the band of savings income to which it applies. Again, that is what we are doing today. This clause will ensure that the limit is held at this level. It ensures simplicity and fairness in the tax system, while maintaining a generous tax relief and supporting the public finances by taking fiscally responsible decisions. As well as benefiting from the starting rate for savings—whereby, as I have said, individuals with earned income of less than £17,507 can earn up to £5,000 in savings income free of tax—savers are supported by the personal savings allowance, which provides up to £1,000 of tax-free savings income for basic rate taxpayers. They can also continue to benefit from the annual ISA allowance of £20,000. Moreover, in the spring Budget 2024 the Government introduced the British ISA, which will provide a new allowance of £5,000 in addition to the existing ISA allowance, along with a new tax-free savings opportunity for people to invest in the UK. Taken together, those generous allowances mean that about 85% of savers pay no tax on their savings income. The Government are committed to continuing to help people on all incomes and at all stages of life to save. The significant increase in the starting limit in 2015 means that the taxation arrangements for savings income remain generous, and the Government therefore believe that it is appropriate to retain the starting rate for savings at its existing value at this time.

The Government are managing the public finances in a balanced and responsible way. Our approach to delivering fiscal sustainability is underpinned by fairness, with those on the highest incomes paying a larger share. By maintaining the current rates of income tax and the starting rate limit for savings thresholds, we will ensure that the highest earners contribute more to the revenue, helping the Government to take a balanced approach to revenue raising while still supporting vital public services.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 2:30, 8 May 2024

I rise to speak on behalf of the Opposition to new clauses 1 and 4, which stand in my name and that of my hon. Friend Tulip Siddiq.

“This remains a parliament of record tax rises.”

Those are not my words but those of Paul Johnson, the director of the Institute for Fiscal Studies, following the spring Budget from which this Finance Bill derives. However, the IFS was not alone in its view. In response to the Budget, the Institute for Government was clear as well, saying that taxes were set to rise

“to a post-war high as a result of decisions made by Conservative chancellors over the past 14 years.”

Meanwhile, the National Institute of Economic and Social Research described the Chancellor’s announcements in March as a

“low-key budget…unlikely to unlock the UK’s growth and productivity problems”.

The verdict is clear. People in Britain are facing higher taxes, squeezed living standards and weaker public services, and they have a Government who are unable to undo the damage that they have caused. No matter what the Conservatives now say or do, the truth is that the tax burden is set to rise to its highest level in 70 years. The decisions taken by Conservative Chancellors in this Parliament—and, let’s face it, there have been a few of them—mean that the average family will face a tax bill that is £870 a year higher by 2028-29. For pensioners, it is even worse: people over the state pension ago do not even benefit from any changes in national insurance, which means that pensioner taxpayers will pay an eye-watering £960 more a year by the end of the forecast period.

People across Britain are struggling to make ends meet as they find their wages squeezed and taxes rising relentlessly, yet the Conservatives have decided to tell the British public that they have never had it so good. I note that Ministers are trying to do that again today, telling us that their plan is working, although that is not the reality of life for people who, at the next general election, will be asking themselves whether they and their families feel better off than they did 14 years ago. It is that reality that new clauses 1 and 4 seek to expose: as the Conservatives gaslight the British people, our new clauses are there to call them out.

New clause 1 does that by requiring the Government to come clean over how many people will be liable to pay income tax at 20% and 40% in the current tax year, how the number has changed over the last three years, and how it will change in the three years ahead. We want the Government to admit the impact that their six-year freezing of the income tax personal allowance and the higher rate threshold will have. According to the Office for Budget Responsibility, 3.7 million more people will be paying tax by 2028-29, and 2.7 million more will be paying the higher rate, as a result of the Government’s threshold freezes. Will the Minister repeat those figures and admit that they are correct? We believe that the Chancellor should be honest about this too, and that is what new clause 1 seeks to achieve.

We know that the outcome of the Conservatives’ decisions during the current Parliament is hitting pensioners who pay tax especially hard: because taxpayers over the state pension age do not benefit from any of the changes in national insurance, they will feel the impact of the Conservatives’ tax rises even more. That is why we tabled new clause 4—again, requiring the Chancellor to come clean about the impact of his and his predecessors’ policies. The new clause requires the Chancellor to set out the number of pensioners who will be liable to pay income tax this year and in each of the next three years, and what the average pensioner’s tax bill will be. Pensioners deserve to know the truth about how the Government’s decisions will affect them, and they have good reason to be concerned about this Government.

While Labour has guaranteed that the pensions triple lock will be in our manifesto and protected for the duration of the next Parliament if we win, the Conservatives refuse to say what impact on pensioners their £46 billion unfunded pledge to abolish national insurance altogether would have. As the shadow Chancellor, my right hon. Friend Rachel Reeves said yesterday, it is a tax bombshell aimed squarely at Britain’s pensioners. The Conservatives are refusing to say how they would pay for this massive commitment, so it is hard not to suspect that they are concealing their plans to make pensioners pay the bill. Perhaps they will pay for the revenue lost through the abolition of national insurance by making changes to pension rates or to the state pension age, but if they are planning to keep pensions the same and make up the revenue by raising the basic and higher rates of income tax, that would mean an 8% increase in income tax rates.

My colleagues and I have asked Ministers time and again to come clean about how they would pay for their plans, but they resolutely refuse to do so. They could clear this up right here, right now, by either abandoning their unfunded commitment or explaining how they would pay for it. I would happily give way if the Minister would like to do that, but I suspect that he will not. We know that the Conservatives find the reality of their tax-raising record so hard to bear that they would rather hang on to a reckless, unfunded plan to abolish national insurance to make them feel better about themselves and to desperately try to keep their divided party together. It is crystal clear that for the Conservatives it is party first, country second.

We also know that the Conservatives’ high tax record goes hand in hand with their record of low growth in the economy. Indeed, one of the reasons taxes are so high is the fact that economic growth has been so weak over the past 14 years. Again, no matter what the current set of Ministers say, the idea that the economy is turning a corner is simply not reflected in reality. The truth is that our economy is smaller per person than it was when the right hon. Member for Richmond (Yorks) (Rishi Sunak) became Prime Minister. Our country is forecast by the OECD to have economic growth of just 1% next year, weaker than that in every other G20 country except Russia. If, under the Conservatives, the UK economy had grown at the average OECD rate, it would now be £140 billion larger—and that growth would have provided an extra £50 billion in tax revenues to be invested in our public services. Instead, economic growth is on the floor, taxes are going up, and public services are falling over. That is the Conservative doom loop that we are in. We know that the only way out of the doom loop of ever-rising taxes with nothing to show in return is to get the economy growing with Labour’s plan.

Labour’s plan for economic growth is driven by the need for stability, investment and reform. Stability, something so sorely lacking in the recent years of Conservative chaos, must be the basis of a secure and responsible approach to the economy, and with strong fiscal rules, a new fiscal lock and respect for independent institutions, we will put stability at the heart of our approach.

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

At the beginning of his speech the hon. Gentleman mentioned Paul Johnson, whom the press has quoted today as saying that the Government and the Opposition are tied to the same fiscal path. Is that an ideological decision or a general election tactic? I am genuinely interested in hearing the answer.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

We in the Labour party believe that having fiscal rules that are iron-clad is essential to being trusted to manage the economy in a responsible way that puts family security and family finances first. Having strong fiscal rules and stability underpinning every other decision that we make is absolutely essential to everything that a Government might hope to do. Indeed, that stability forms the foundation for getting the economy growing, because with stability we will be able to work in partnership with businesses to remove the barriers to investment, using catalytic public investment to unlock more than £20 billion from the private sector to invest in the industries of the future. To support that investment, we will reform the systems that our economy needs to thrive, from reform of our planning system and employment rights to devolving powers to elected Mayors on transport, skills, enterprise, energy and planning. That is how Labour will begin to grow the economy if we win the next general election.

We know that a new approach and a new Government are needed, because that is what people across the country are telling us. People want a new approach whereby they can feel better off, rather than struggling to make ends meet as their taxes rise relentlessly. The Conservatives are desperate to distract from the mess they have created. They go from the simply unbelievable, like the Chancellor claiming yesterday that they had abolished low pay, to the unbelievably reckless, like their £46 billion unfunded plan to abolish national insurance. But no matter what they say, or how hard they try to pretend that their plan is working and that people in Britain have never had it so good, people know the reality of life. People know that taxes are at record levels.

Today we want the Conservatives to at least come clean and admit how many more people are paying tax as a result of their decisions in this Parliament, and how hard they are hitting pensioners in particular. Frankly, however, no matter whether they come clean, come the general election, people across Britain will ask themselves whether they and their family feel better off today than they did 14 years ago. The answer to that question is the reality from which the Conservatives cannot hide.

Photo of John Redwood John Redwood Conservative, Wokingham

I have declared my business interests in the Register of Members’ Financial Interests.

I rise to speak in support of tax-cutting proposals. We are not discussing the national insurance reductions in this group of clauses, but both previous speakers have spent some of their time discussing them because they are relevant, as they are the other side of the issues related to the correct levels and thresholds for income tax, which are the proper matter of our current debate. I wanted any kind of tax cut in the Budget, because we are over-taxed and the right kinds of tax cuts can speed up growth, which all the major parties in this House want, although there are some disagreements about the exact mix of policies that might create it.

The first thing we need from the Treasury is for its official forecasts and those of the OBR to have greater belief in the fact that if we promote more growth by cutting some tax rates, we may end up with more tax revenue. The best generator of more revenue to pay for our public services is a growing economy. The best generator of more growth is productivity improvements, and there is particular scope for such improvements in the public sector. The public sector was badly damaged by the covid experience. We lost a lot of productivity through the hasty and unnecessary reorganisation of public services during the pandemic, but we are finding it hard work and slow going to get the lost productivity back.

I welcome the fact that, in the latest set of Budget numbers, the Government have put in future productivity recoveries over the next few years, but it is slow progress, even to get back to the levels of productivity in 2019. I put it to the Government that they do not need to spend extra money on new technology, such as artificial intelligence, to get back to the levels of 2019. They may wish to recommend schemes for AI investment to get above 2019 levels but, by definition, we were able to get to 2019 levels of productivity without AI, because it had not been invented at that stage.

There should be more common agreement about the urgency of productivity recovery in public services. We are missing out on at least £20 billion due to the productivity problems that have developed since 2020 and the lockdown experience. However, there is also a source of extra revenue from lower taxes, because if we cut tax rates in the right way, we will generate more cash, rather than less. I think everybody now agrees that cutting certain taxes has that effect, because it is quite obvious that if we impose certain kinds of turnover or activity taxes, they will lower turnover and activity. Indeed, many taxes are imposed with a moral wish to lower activity or usage rates. For example, alcohol and tobacco attract higher taxes because the wish is that people buy them less or, in the case of tobacco, do not buy them at all. We get the same effect with things that we should be promoting.

One of my proposals to the Government is that they should be extremely worried about the large decline in the number of self-employed people since 2019. Some of that the inevitable consequence of lockdown, which led to older people who were working for themselves being unable to work and deciding to retire a bit earlier, but quite a lot of it is not. Some of it is due to people of younger ages being deterred by their experiences, and some of it is because young people are not coming forward to replace those who were self-employed. It was not just lockdown or the disruptions around that time that caused this problem; it was also the IR35 tax changes, which went through in two tranches, culminating at about the time we experienced the problems of lockdown.

We have lost more than 800,000 self-employed people, partly through a self-inflicted tax wound. The decision was taken in two stages to introduce the idea that a person acting as the customer of a self-employed contractor has a duty to satisfy themselves about their tax status, and can be liable if they have made a mistake in their tax status. That meant it became extremely difficult for quite a lot of self-employed people to get contracts from both smaller and bigger businesses, because why would the executive take the risk that they could, in the end, be tied up in a dispute with His Majesty’s Revenue and Customs that they did not want? It was simpler not to allow a self-employed person to win a contract, because there was tax bureaucracy and an investigation that could put them both on the wrong end of a tax bill and on the wrong end of a moral issue where it looked as if they were helping someone to fiddle their taxes.

HMRC has always had issues with how to define someone as a genuinely self-employed person. There are lots of obvious requirements, because none of us wants to see people who are effectively employed by a single employer taking advantage of tax breaks that were designed to deal with the extra risk of being self-employed, including the lack of benefits that someone gets if they are genuinely self-employed. If they are not getting sick pay and paid holiday, they are in a rather different category from those of us who are employed, who get such benefits from our employer built into the overall package.

The normal sorts of tests include whether someone is working for more than one employer. Do they have a contract for services or an employment contract? Do they have sick pay? Do they have holiday entitlement? Do they have other benefits? These are the tests that we would normally apply to decide whether someone is genuinely self-employed. We have got too tough from the revenue side, and we have lost a lot of self-employed people. We are not recruiting the extra self-employed people we want, who are vital to the growth and vitality of an economy. If we had a few hundred thousand more self-employed people, they would be the innovators, the price cutters and the people who go the extra distance to provide an additional service. They would find customers and be useful challengers to the big businesses. They would not destroy the big businesses but would keep them on their mettle and make them understand that they, too, have to listen more to what customers want, because customer service improvement is often generated first by the self-employed or a small business.

I turn now to small businesses themselves. If a self-employed person takes the giant bureaucratic step of taking on an employee or two, they will have all the bureaucracy and the extra tax that goes with that. We need to make it as easy as possible for them to grow their small business, and I am very pleased that the Government have now said that they can raise the VAT threshold, because registering for VAT is a colossal additional commitment that a small business has to make. It means diverting a lot of energy into tax compliance, rather than finding more customers and serving them better, so we should seek to delay that until the business is rather bigger than the level that is currently recommended. I urge the Government, who I know are interested in a growth strategy, to allow people to put off the day when they have to register for VAT, so that they can concentrate rather more on that period of growth.

Turning to the issue of national insurance versus income tax, which we are about to vote on, I began my remarks by saying that I was happy to support the national insurance reduction. It will help those in employment and promote higher real incomes and more spending, which is what we need for a growth strategy and to cheer the country up a bit. However, we need to hear a bit more of the Government’s thinking before we turn the wider proposal—it is not yet proper policy, because it has not been given a budget or a timetable—into a firm manifesto pledge on our main priority for future tax changes. For example, we need a statement from the Government on how people will earn their entitlement to the state retirement pension if there are no longer any employee contributions, because our current entitlement to the state retirement pension is based on the number of years of contributions we have made through NI. We can change that; this Parliament can do anything it likes on those sorts of issues, but it has not changed it yet.

I think this needs some kind of Green Paper or White Paper—some kind of thought-through model of what the state retirement pension scheme will look like if we want to end up with no employee national insurance contributions at all. It might require the abolition of the national insurance fund and having just a payroll tax on employers in the future, because the fund would not look quite the same without the employee contributions. At the moment, broadly speaking, the fund pays for the state retirement pension, with a little balance on top. Long gone are the days when it paid for the health service and many of the other benefits. If we read the details, we can see that there are just a few rather modest residual contributory benefits left. We need some kind of new presentation or analysis of what might happen to the fund.

It is also important to ensure balance and fairness in the distribution of tax reductions, so I think there have to be some tax reductions for those who have completed their working lives and are no longer in receipt of employment income. It would be wrong for the Conservative party to rule out tax reductions that help those who have retired—those who now have investment income because they saved hard and worked hard during their working lives. There needs to be some balance in how we allocate those reductions.

I would also say to the Government that, as they think forward to their next fiscal event, as I think we now have to call them—an autumn statement, a mini-Budget or whatever the latest terminology is—there is more scope in the numbers to have a better return of money to taxpayers than this quite cautious Budget we are voting on tonight gives us the opportunity to do. I do not think we can afford the incredibly expensive habits of the loss-making Bank of England. I fully understand that the Bank of England is completely independent in setting the base rate, setting out its inflation forecasts and conducting its monetary policy through the Monetary Policy Committee, and nothing I am suggesting would in any way interfere with that.

However, we have a parallel policy, which began under Chancellor Darling and the Labour Government and continued under successive Conservative Chancellors. It was always a joint policy of the Treasury and the Bank to create money to buy bonds and to create a jointly held portfolio. Successive Chancellors of the Exchequer needed not only to give their authority to do that—proving that it was not an independent Bank policy—but to give an indemnity to the Bank against all losses. I say to those on the Treasury Bench that we, as a country, have now paid the Bank of England, I believe, £49 billion for losses over the last year and a half or so, and if we believe the OBR numbers, there are many tens of billions in losses to come over the next five years. Those losses come from three different sources, and some, although not all, are avoidable.

The Treasury and the Bank need to discuss those colossal losses and to understand that the United Kingdom and the Bank of England are now very much out of line with the practice of, say, the European Central Bank, which followed a similar policy of creating money and buying bonds in the bad days, but which is not trying to get rid of them all as quickly as the Bank of England. The ECB is not selling them in the market at colossal losses, particularly the long bonds that are sitting on very large losses, because there is no need to sell them. Also, the ECB is not paying its full overnight rate on bank reserves, which would create a bigger running loss. The Bank of England never used to pay any money on reserves prior to 2006. The ECB has reinstituted zero interest on minimum reserves and has a lower deposit rate than the base rate. So I think there are things to learn from the European Central Bank so that the Bank of England could come back without such huge losses that substantially distort our fiscal policy.

The principle of independent monetary policy setting the base rate and forecasting inflation is important, but so too was the independence of fiscal policy from Bank and other outside interference. Now, however, the Bank of England is a dominant influence on our fiscal policy because its losses are so enormous, and that obviously affects what is available to spend or to offer by way of tax reductions. I hope that those on the Treasury Bench are in listening mode on these matters, because if sensible changes were agreed, we could look forward to a little bit more tax reduction and flexibility, and maybe a little more spending where we are hurting—on some features of the health service, perhaps—so that we could reinforce our growth policy with appropriate policies that were eminently affordable.

Members of the House who are interested will know that I am critical of the current control mechanism. I do not think it is very good. It would be much better to have something more like the American system, which has both an inflation and a growth control over the economy. I am suspicious of an economy that is effectively guided by a single five-year forecast by the OBR. I do not believe that the OBR or anybody else has much idea of what the budget deficit is going to be in five years’ time, because there are so many different things that can come along to change it. So, far from that being an iron rule, it is an arbitrary rule. Almost the only thing we know about that number is that it is likely to be wrong.

We need rather more concern about how much we are borrowing in-year and in the next year, because those two things are much more forecastable. I am not in favour of any expansion in the amount of borrowing planned for this year or next year. We have quite a lot of debt, which is why I have tried to identify ways in which the budget arithmetic and the fiscal arithmetic could look rather better if we cut the taxes that can generate more revenue and those that have a cost, but balance that with reductions in expenditure. I have looked at two big pots: Bank of England losses and productivity shortfall.

There is a third area to look for savings, which I know the Government are actively pursuing: getting people back into work and helping, supporting and encouraging those who feel that they cannot return to the workforce to be able to do so. I trust that this is generally supported around the Committee. It could enrich those people’s lives and raise their standard of living, but it could also add to our tax revenues and therefore make lower taxes or better public services that much more affordable. My only criticism of the Government’s efforts on this is that I would just like them to speed up. This needs doing more quickly and on a bigger scale.

The ideas that we have heard and the work that has been put in are, on the whole, very sensible, but we need better results, because a large number of people do not feel that they can be part of the workforce at the moment, and I am sure that some of them could be better off if they felt they were getting the right support. Working has to be worth while, and that also requires the policy changes that are now going through to say that we are not always going to invite people in legally from abroad to do low-paid jobs when what we want is better-paid jobs in Britain and more jobs that engage the potential British workforce who are definitely out there.

I do not think we need the two new clauses kindly proposed by Labour, which probably already has quite a lot of the knowledge that the new clauses seek, as James Murray implied. If we do not increase the thresholds, of course more people will end up paying tax. I do not want too many more people paying the higher rate of tax, but to get an upward shift in the thresholds in due course, we will need to go over the issues to see where we could free up some cash. The Government should look at the losses, the employment situation and productivity to find their crock of gold, and then we can all be happier.

Photo of Drew Hendry Drew Hendry Shadow SNP Spokesperson (Economy) 3:00, 8 May 2024

As we scrutinise the Finance (No. 2) Bill in detail, starting with clauses 1 to 4, we see that the legislation serves as a profound symbol of a Government who have run aground. The Bill starkly exposes the UK Government’s complacency in the face of the cost of living crisis that continues to devastate homes across Scotland and, indeed, the other nations of the UK. Households are still reeling from the catastrophic decisions made by this Westminster Government.

As we have heard from the Government, clauses 1 to 4 are about household incomes, but the Bill falls dramatically short of meeting the urgent needs in our communities. I am used to this place lacking in humanity, but where is the humanity? It is never shown on these domestic issues. People in our communities need and want help. They want to know how they will pay for their soaring mortgage bills, their food bills—up by more than a quarter in the past two years—their ballooning car insurance premiums, their energy bills, which are still nearly 60% higher than in the winter of 2021-22, according to Library research, and much else. The clauses before the Committee do not really get to that issue.

The shadow Minister is right to talk about the per capita GDP issue in the UK, which is an utter disgrace, but what is Labour’s plan? More Brexit, more austerity and more being wedded to the fiscal rules that got us into this place. This is a damp and ineffective piece of navel-gazing from folk who had the wrong idea in the first place. Time and again, that idea has failed, but they have repackaged it and put it forward once more. Austerity is bust. It does not work, and it is madness for both the Conservative party and the Labour party to continue pursuing it, but that is what they do. This broken institution is not listening to people.

Clauses 1 and 2 could have invested in the economy. The Minister talks about devolution, but instead of devolution of investment, we are getting the devolution of his cuts. The spring Budget slashed Scottish capital funding by 16.1%, severely restricting Scotland’s aspiration for new hospitals and more. I note that the shadow Minister was happy to quote the Institute for Fiscal Studies, and Labour and the Tories are both maintaining what the Institute for Fiscal Studies has called a “conspiracy of silence” on the magnitude of the cuts required in the coming Parliament.

The former Labour leader in Scotland, Kezia Dugdale, makes it clear in an article published today that voting for Labour in Scotland would mean that people have to pay for tuition fees, and possibly for prescriptions and personal care. They are likely to see fewer child poverty interventions such as the Scottish child payment, an SNP initiative that is already lifting 100,000 children out of poverty. If they vote for Labour, people in Scotland are likely to see those things scaled back. That is the reality of the future under Labour: more austerity. Voting for a compliant, so-called Scottish Labour will have real-life consequences for the people of Scotland.

Although we will support Labour’s new clauses 1 and 4, which would offer some scrutiny of what is going wrong with the Government’s policy, Labour is ultimately only slavishly following this horrible, extremist, worn-out and clueless Tory Government, who are hollowed out by their right wing. It is testament to a Government devoid of ideas and vision, in this fag-end Parliament characterised by minimal legislative activity, that the Bill contains a mere 26 clauses, compared with last year’s 352.

Photo of John Redwood John Redwood Conservative, Wokingham

Can the hon. Gentleman tell us why Scotland grows less quickly than England, despite having more public spending per head?

Photo of Drew Hendry Drew Hendry Shadow SNP Spokesperson (Economy)

Had the right hon. Gentleman done any real research, he would know that the figures for the UK are skewed dramatically by the overheated economy of London and the south-east, which buck the UK trend. If he looks at the figures for all the counties of England, including those in the north of England, he will see how the Government are letting down the people of England across the piece. But of course he does not want to do that. He just wants to make a lazy characterisation of what is happening, saying nothing about people’s potential, which is being ignored and run down by this place, this Government and the official Opposition, who have no idea how to change that.

Clauses 1 to 4 aim to maintain the current rates of income tax, including the savings rates, for another financial year. However, they do little to mitigate the Government’s broader fiscal missteps. In contrast, Scotland’s progressive approach to income tax under the SNP— I almost choked when we heard about progressive taxation earlier—has not only shielded public services from Westminster’s austerity but enhanced them, generating approximately £1.5 billion in additional revenue. We are protecting those on lower incomes, because most people in Scotland pay less income tax and dramatically less council tax than people in England.

All the scare stories about people leaving Scotland because of its progressive policies have proved to be rubbish. The report from His Majesty’s Revenue and Customs has shown that more higher-rate taxpayers have moved to Scotland. The revenue that the Scottish Government are attracting supports a wide array of social benefits, from free prescriptions to university tuition, which significantly reduces the cost of living for Scottish residents. Those are all things that this Parliament would attack, and Kezia Dugdale has today posted a warning about what would happen if Labour got its hands on the Scottish Parliament.

Photo of Ben Lake Ben Lake Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Environment, Food and Rural Affairs), Shadow PC Spokesperson (Education), Shadow PC Spokesperson (Digital, Culture, Media & Sport), Shadow PC Spokesperson (Health and Social Care), Shadow PC Spokesperson (Housing, Communities & Local Government), Shadow PC Spokesperson (The Constitution and Welsh Affairs)

New clause 5, in my name, would require the UK Government to review the impact of the tax measures announced in the spring Budget on Wales, Scotland and Northern Ireland. The Committee will, of course, recognise that the nations and regions of the UK differ in key respects—in their strengths, their weaknesses and their needs. To a large extent, the UK tax system operates as though economic and social conditions are uniform across these isles, so I would like the Government to consider what impact this universal approach to central taxation is having on different parts of the UK, in the hope that a better understanding of such matters will help to inform and improve tax policy decisions.

The laudable ambition to level up the nations and regions of the UK is testament to the different circumstances prevailing across these isles. The Welsh tax base is different from others in the UK. Wages in Wales are much lower than the UK average, productivity is lower, and our proportion of elderly citizens is higher. We should ensure that the tax system reflects that reality and, at the very least, we should make sure that we fully understand the differential impact of tax decisions, whether it be the freezing of the personal allowance, reductions to national insurance contributions, or decisions on corporation tax, on different areas.

I concede, of course, that some fiscal devolution has taken place and that the Welsh Government have the power to set supplementary Welsh rates of income tax. However, these powers are not as advanced as those possessed by the Scottish Parliament, which allow the Scottish Government to create new income tax band thresholds to better tailor their tax system to the specific needs of the Scottish people.

A review of the impact of income tax policy specifically on Wales could include looking at how it interacts with the current Welsh rates of income tax and inform the debate on any further devolution of tax-raising powers to Wales in the future. Extending the reviews to other devolved nations would allow for a comparative study on how UK tax policy interplays with the different fiscal devolution settlements in place across these islands, which would also be to the benefit of future tax policy decisions and any Government levelling-up strategy.

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

Following Brexit, the UK Government could have been extremely radical: they could have devolved corporation tax to Wales, Scotland and Northern Ireland, and they could have fully devolved income tax and VAT. Is it not amazing that following Brexit, and all the pain that it has caused, there is a complete lack of ambition about using any powers that Brexit enables?

Photo of Ben Lake Ben Lake Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Environment, Food and Rural Affairs), Shadow PC Spokesperson (Education), Shadow PC Spokesperson (Digital, Culture, Media & Sport), Shadow PC Spokesperson (Health and Social Care), Shadow PC Spokesperson (Housing, Communities & Local Government), Shadow PC Spokesperson (The Constitution and Welsh Affairs)

I could not agree more. We were told that one of the supposed benefits of withdrawing from the European Union would be the liberty to tailor our tax powers; to devolve them to different parts of the UK in a bespoke way, so as to promote growth and better reflect the needs of the people. I agree that it is remarkable that the UK Government have thus far failed to make real the supposed benefits of Brexit. This review of tax policy could touch on those things. It would also be useful given the important link between tax decisions and public spending and, indeed, economic growth.

Photo of John Redwood John Redwood Conservative, Wokingham

Were a future Parliament to grant these tax powers to Wales, would the hon. Gentleman think that in order to promote faster growth in Wales he should cut taxes below English rates, or would he put them higher than English rates?

Photo of Ben Lake Ben Lake Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Environment, Food and Rural Affairs), Shadow PC Spokesperson (Education), Shadow PC Spokesperson (Digital, Culture, Media & Sport), Shadow PC Spokesperson (Health and Social Care), Shadow PC Spokesperson (Housing, Communities & Local Government), Shadow PC Spokesperson (The Constitution and Welsh Affairs)

I am not one to make up policy on the hoof, but the review could look at that, and if the evidence shows that tax decisions could be made to promote growth and to level up, which I think the right hon. Gentleman is in favour of, we should follow that evidence and do so.

Our continued reliance on the Barnett formula to allocate funds between the UK’s nations is problematic not only due to its flaws, but because of its inconsistent application in recent years, which has meant that Wales has lost out on billions of pounds of much-needed public investment. Members will be familiar with the concerns raised by communities across Wales regarding the way in which HS2 spending has been classified. Although not a single inch of track or rail was to be laid in Wales itself, it was categorised as an England and Wales project under the statement of funding policy, thus depriving Wales of significant consequential funding that the Barnett formula would otherwise have provided. The latest estimates suggest that Wales has lost £4 billion in consequential funding—money that could have transformed the country’s public transport infrastructure.

I understand that there will be reluctance within Government to move away from the Barnett formula, not least because devising a needs-based formula is far from simple. However, if we are to retain the Barnett formula, the funding floor should at the very least be updated to use census data from 2021 rather than the 2001 data it currently uses. I am sure the Minister will agree that much has changed since 2001—when I was actually still in primary school. The needs and population of Wales have changed considerably, so it is only reasonable that the funding floor element of the Barnett formula is at least brought up to date.

Such a consideration could be included in the review that I propose, as well as a review of the implications of UK tax policy in Wales. Again, all of this analysis and information could help inform debate for future tax policy decisions and ultimately ensure that we have a tax system that is fit for purpose and meets the needs of people in Wales.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

I thank the Members who have spoken for their contributions to the debate. As we have discussed, the Government have shown their commitment to keeping taxes low in order to support people to keep more of what they earn. That is why we have nearly doubled the income tax personal allowance since 2010, ensuring that some of the lowest earners do not pay income tax, while also benefiting higher-rate taxpayers.

The Government have shown that we are also committed to ensuring that older people can live with the dignity and respect they deserve, and the state pension is the foundation of state support for them. Thanks to the Government honouring our commitment to the triple lock, the basic and new state pensions increased by 8.5% this April—one of the largest ever cash increases in the state pension. Those on the new full state pension will therefore be £900 per year better off. That £900 figure is significant, because of course that is the average amount by which 27 million employees will benefit from the national insurance cut: £900 additional for many pensioners and £900 additional for 27 million workers. I think most people will agree that is fair.

Of course, the tax system treats pensioners fairly. Pensioners whose sole income is the full rate of the basic or new state pension do not currently pay any income tax. Individuals working above the state pension age also do not pay national insurance contributions, meaning they already pay a lower rate of tax on their income from work. This means that someone over the state pension age earning the average salary of £34,500 pays £1,826 less tax than someone underneath the state pension age as no national insurance contributions are paid on that income.

Turning to the amendments to the income tax measures, new clauses 1, 4 and 6 would require the Government to publish reports providing information on the number of income tax payers by their marginal rate, the number of pensioners paying income tax and their average tax liabilities. These reports would cover past years and forecasts for future years. The Government consider these amendments to be unnecessary given the information that is already publicly available. HMRC publishes statistics for past years that cover the number of income tax payers, including breakdowns by marginal rate and age, and the Department for Work and Pensions publishes figures for pensioners’ average incomes. The Office for Budget Responsibility is the Government’s independent forecaster, and most recently it published projections of the number of income tax payers for future years in its “Economic and fiscal outlook”—EFO—at the spring Budget. These also include breakdowns by marginal rate.

New clause 5 would require the Government to publish an analysis of the impact of the incoming corporation tax measures in this Finance Bill on Wales, Scotland and Northern Ireland. As Members will know, income tax rates for non-saving, non-dividend income in Scotland and Wales are set by their respective Parliaments. HMRC regularly publishes income tax statistics that include breakdowns by country—for example, it publishes the number of taxpayers in each nation and breaks this down by their marginal rates of income tax and by their age and sex. Corporation tax, which will be more substantially covered by the Exchequer Secretary later in proceedings, applies UK-wide, and clauses 12 and 13 maintain the current approach from April 2025. The OBR produces regular forecasts on the impact of the current policy being applied in future years and HMRC analyses receipts and liabilities in its annual corporation tax statistics publications. We therefore believe that these new clauses are unnecessary.

I thank my right hon. Friend Sir John Redwood for his comments—he always makes considered and thoughtful contributions. He rightly pointed out the importance of the low-tax strategy adopted by this Government, which is of course an instinct of all Conservatives: we increase taxes out of necessary but always reduce them where possible out of choice. He was also right to point out the necessity of ensuring that we increase public sector productivity given that, as he recognised, it has fallen by about 5.9% since the pandemic. We need to get that productivity level up again and go further. He will be aware that the Chief Secretary to the Treasury is very focused on this area.

My right hon. Friend the Member for Wokingham raised many other comments that we have spoken about directly, relating to the self-employed and the innovators of the UK economy, which I always take on board. He also mentioned the Bank of England, which of course is independent, and the separation of fiscal and monetary policy is a key feature of the UK’s economic framework. The Government do not comment on the conduct or effectiveness of monetary policy, but I am sure that many people will have heard his comments.

With the greatest respect, I will turn to the comments made by the Scottish National party spokesperson, whom I know well and like very much. I think even he will regret making comments such as a “right-wing extremist Government”—he knows better than that. We are not a right-wing extremist Government.

Photo of Drew Hendry Drew Hendry Shadow SNP Spokesperson (Economy) 3:15, 8 May 2024

Just to be clear, I was saying that the Tories have been hollowed out by the extremists on the right wing within their Government, not that we have an extremist right-wing Government—that is, of course, for people out there to make their mind up about.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

I think the hon. Gentleman just dug even deeper there. As I say, I like him but I do not always like what he says. On income tax, I do not think that everybody in Scotland would share his enthusiasm for the Scottish tax system, given that the thresholds and rates are higher, to the tune of up to 5%.

Turning to my opposite number, James Murray, I will try to avoid the déjà vu all over again—we seem to have the same debate again and again. Yet again we have heard a Labour party spokesman constantly talking Britain down, as if we are in some declinist environment of failure upon failure. That is not a characterisation of the UK, its economy or our constituents that I recognise. I wish he had greater optimism and enthusiasm, and could support the UK economy and the workers to a greater degree. After all, the UK is doing incredibly well.

The hon. Member for Ealing North was right to recognise that all of our constituents are facing extraordinarily difficult times, but he is wrong to believe that is something unique to the UK economy; it is as a result of the pandemic and the cost of living challenges, which have had an impact right the way around the world. Given the extraordinary circumstances that the whole developed world has found itself in, what is extraordinary is how the UK has performed so well. I wish he would recognise the great optimism and the potential future of the UK economy.

For example, the International Monetary Fund has forecast that this country will grow faster than Germany, France, Italy and Japan over the next few years to 2028-29. The hon. Gentleman should also recognise that since the Conservatives came to power in 2010, the UK economy has generated an average of 800 jobs per day. Since Brexit, the UK has gone up the global export league tables, from seventh to fourth. We are the second largest exporter of services in the world and have reached record levels of service exports recently. We have overtaken France to become the eighth largest manufacturer in the world. We have the third largest tech economy, after the United States and China. We have the largest film, TV and creative industries sector in Europe, and one of the world’s leading biotech and life sciences industries—again, it is the largest in Europe.

We are leading the world in renewables, with the first, second, third and fourth biggest offshore wind farms in the world. I could go on, but I will not detain the Committee too much longer, Dame Eleanor. If the hon. Gentleman could recognise just one or a few of those success stories, he might have greater confidence in the UK economy and be able to talk it up. Anybody aspiring to be in government must champion the UK around the world, instead of talking us down. Otherwise, the impact they would have on investment in the UK economy is appalling.

Let me deal with the scaremongering in what the hon. Member for Ealing North and others have been declaring in the past few days about national insurance and the impact on pensions—I found that behaviour deplorable. It could be complete scaremongering because, as we have said, he is not aware of how NI impacts health and pensions. The amount of money spent on pensions is about £130 billion. Welfare spending is £260 billion. NHS spending is £160 billion. That is far higher than the total amount paid for by NI. So to try to suggest some direct correlation and say that reducing NI puts pensions at risk all of a sudden is either economically utterly incompetent or it is sheer scaremongering—neither are particularly attractive attributes in somebody aspiring to be in government. I therefore hope that he will have the decency to take that back. As I said, this scaremongering of pensioners, from the whole Opposition Front Bench, is despicable, although we can perhaps expect it from the Opposition.

Moreover, it is utterly hypocritical, because when we had the NI debate not so long ago, the Opposition spokespeople, the Opposition Front Benchers and the Leader of the Opposition said that they supported our NI cuts, but when it came to a vote they did not. That should make the British people ask: why would the Opposition say one thing and do another. First, I should say that is not a surprise to me, but could it also be that at some future point they might hope to be in a situation where they could reverse that decision and say, “We did not actually vote for it, after all”? Again, they should be straight with the British public.

I thank hon. Members for their contributions—some more than others. The debates will continue, but I hope that I have explained why we do not accept the new clauses. I ask that the clauses we have put forward should stand part of the Bill.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.