Second Reading and Remaining Stages

Part of Finance Bill – in the House of Lords at 9:31 pm on 20th July 2009.

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Photo of Lord Northbrook Lord Northbrook Conservative 9:31 pm, 20th July 2009

My Lords, I always start by welcoming positive items in the Budget. This year, I give praise for the increase in first-year capital allowances, the deferral of business rate payments, the strategic investment fund provided that it is managed in a sensible fashion and the car scrappage scheme. I also warmly welcome the increase in ISA limits. They are all small beer in the scheme of things, but they are still welcome. My speech will focus on the economic background to the Finance Bill. Then I will look at one of the main tax-raising measures. Finally, I will move on to discuss once again the excellent Economic Affairs Committee report issues.

The 2009 Budget was delivered against the background of the Budget deficit as a share of the economy both this fiscal year and the next, being the largest since World War II. This year alone the Government will borrow a breathtaking £175 billion, representing 12.4 per cent of GDP. There has also been the worst fall in national output since 1945 and the fastest rise in unemployment in our history. In his opening remarks, the Minister sounded rather complacent. He said that output was stabilising, that public finances would be stabilised for the future and that we would be living within our means. Most worrying is the level of public borrowing. Already this year the Government have borrowed £30 billion. According to June figures, total outstanding government debt has risen to £775 billion, which is no less than £150 billion more than one year ago and equal to 55 per cent of UK GDP.

According to independent forecasters, the latest highest forecast for the debt figure this year is £202 billion, which is already a 15 per cent increase over the Budget forecast of the £175 billion which has already been mentioned. In May, the rating agency, Standard & Poor's, warned that soaring UK public debt levels had led it to put Britain's credit rating on notice that it could be downgraded. Standard & Poor's said that the UK's triple-A rating was at risk without a credible plan to put its debts on a "secure downward trajectory".

Judging by the article in the Sunday Times even the Minister may be getting disillusioned and perhaps relying on divine intervention to help out. What are the Government planning to do about the debt problem to rein in spending? The answer is that they plan to do very little in the short term. According to table A1 in the Red Book the impact of the Budget for 2009-10 is to increase net index spending by £5 billion. In 2010-11, there will be little change to net Exchequer spending and in 2011-12, there will be a decrease of £5 billion. The Table A1 figures are made on very optimistic assumptions for economic recovery. GDP growth is assumed at 1 per cent for 2010, which may be achievable, but the 2011 forecast of 3.5 per cent still looks very optimistic. If the growth figures are not achieved, and the Treasury Committee in its report on the Budget is particularly cautious on the Chancellor's 2011 forecast, the debt situation will be much worse. As my noble friend Lord Naseby stated, we need a spending review, and we need it now.

One of the main tax-raising measures in the Budget is the increase in the top rate of income tax to 50 per cent from 2010-11. The Pre-Budget Report last November had originally proposed a new top rate of 45 per cent a year later. The Institute for Fiscal Studies, commenting on the top rate of the original 45 per cent plan, argued strongly that it will cost the Exchequer rather than raise money as it will encourage avoidance schemes and persuade many high earners to leave the country for a lower tax regime. Anatole Kaletsky in the Times of 27 April took the same view, saying it was,

"likely to be self-defeating, or at best utterly futile".

He went on:

"Even in the unlikely event that Mr Darling's pre-election tax gesture did manage to raise the odd billion, thesesums would be far too small to have any impact on public borrowing projections ... the decision to rush forward this reform amidst a recession will do serious damage to the economy and thepublic finances. Hopes of quick improvement in UKeconomic conditions assumed by Treasury forecasts rely more than ever on maintaining the City's role as the dominant centre of global financial and business services".

The Financial Services Global Competitiveness Group, setup by the Treasury, produced a report in May, on the very day of our last economic debate which the Minister did his best to keep away from us. One of its important conclusions was that,

"maintaining a stable, sustainable and competitive tax system is important for ensuring that business and financial centres can continue to provide an attractive location for international financial institutions".

Can I ask the Minister how that rock solid report squares up with the shifting sands of a top rate of tax changing in the PBR from 40 to 45 per cent for individuals which then only a few months later in the Budget goes up to 50 per cent? Or how the extra tax on non-domiciles is in line with this report? As Anatole Kaletsky pointedout, the Budget Red Book says that the financial sector provided 25 per cent of the £47 billion of Britain's total corporation tax revenues before the recession, plus a

"significant proportion of income tax and national insurance receipts".

But these receipts are expected to decline by £25 billion during this financial year. That is more than half of the total decline expected in tax revenues as a result of the recession. Overall, the new higher rate of tax seems to be deliberately designed to stop the UK's financial and service sectors returning to the predominance they enjoyed. Can the Minister tell the House if this is the Government's deliberate intention?

I now move on to the Economic Affairs Committee report. The first issue tackled is the foreign profits reform package. This is a very complicated area and I am no tax expert, but I quote from a Deloitte Budget commentary:

"One of the most competitive features of the UK tax system in the past has been the lack of any generallimitations on the tax deductibility of interest".

There is now proposed a worldwide debt cap on tax deductibility of interest. This, according to the shadow Financial Secretary Mark Hoban in another place will mean that there is,

"a risk of incentivising debt at the expense of international businesses that use their own resources to fund inward investment".—[Hansard, Commons, 8/8/09; col. 1073.]

Will the Minister say whether the Government will take on board the recommendations of the Economic Affairs Committee and delay implementation of the worldwide debt cap until sufficient consultation has been undertaken? Also, can the Government give assurances that they will not have to resort to retrospective tax legislation in future as a result of the repeal of Section 765?

I now turn to the second major issue covered—REITs. I welcomed their introduction in 2007 as a means of enabling greater efficiency and flexibility in the UK property investment market. However, to date, no residential property REIT has been established. The Economic Affairs Committee concluded that,

"officials should take a more flexible and responsive approach. HMT and HMRC should look again at proposals by representative bodies especially for the residential sector. The official approach seems complacent and unduly cautious and there could be reconsideration of, for example, the total entry charge, now that there is more than two years' experience of REITs' operations'.

The accountants Deloitte also agreed that not enough had been done to help REITs. Does the Minister agree that reforms to REITs did not go far enough?

I turn now to the final topic the committee considered—the pension special annual allowance. The committee reported that,

"making a significant change so soon after the major redesign of the whole system significantly detracted"— as my noble friend Lord Forsyth said—

"from the simplicity, consistency and certainty which are hallmarks of a good tax system. The undermining of the regime may very well set a precedent and sap confidence. Given the potential effect on savings we found this regrettable".

In summary, the Budget does little to give assurance that the Government are on top of a parlous economic situation. We may be over the worse of the banking crisis but serious economic problems remain and the major tax-raising measure is being introduced more for political short-term reasons than for sound long-term planning. This is not the way to ensure economic recovery.