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Economic Environment: Growth and Jobs - Motion to Take Note

Part of the debate – in the House of Lords at 11:52 am on 11th July 2019.

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Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe Conservative 11:52 am, 11th July 2019

My Lords, I am honoured and delighted to be leading this debate at such an important time for our country. Of course, most of our thoughts are on the next 100 days, which will make a huge difference to our future and the 66 million people and 5.7 million businesses on these islands, but whatever happens to Brexit the success of business is important to everyone whether, say, they sit in the NHS in Salisbury or in a retirement home in Scarborough. This is because business produces the wealth on which we all depend.

I would like to reflect more deeply on this point. There are many excellent things about being appointed to the House of Lords, especially the chance to scrutinise legislation in a way that is not practicable in the House of Commons. However, I have to say that I have been disappointed by our failure to understand commercial interests and their importance to wealth creation and to the UK’s position in the world. However, I am comforted by the fact that, although no one is guiltless on this matter, attitudes in the Conservative Party are somewhat better than they are elsewhere. We should not underestimate the significance of a culture where enterprise is valued.

The same attitude seems to permeate society at large where too much attention is given to dividing up the cake and to regulating in ways that reduce it than to ensuring it increases. Growth was only 0.3% in the three months to May, despite annual population growth of 0.6%, and output per hour, the key measure of productivity, is now at best flatlining. Against this challenging background, I will explore some of the drivers of growth and what is getting in the way. A key question is whether our tax system helps the economy to grow in both absolute and relative terms. Does it help with our international competitiveness at a time when we will need to trade more broadly? Are we encouraging the magic of digital growth and taxing it fairly?

Before starting my main themes, I should like to thank the Library staff, who, as always, have been unfailingly helpful in assisting me to prepare for this debate.

I turn, first, to certainty. Businesses need to know where the country is going, and at present capital is being held on balance sheets rather than invested. Ask almost any CEO and they will say that US and other firms are holding back from investment. In March, many sought a delayed Brexit as they did not want a no-deal scenario, but I fear that we are now reaching a stage where delay in reaching a conclusion on Brexit is itself possibly the greatest negative factor affecting the economy. Businesses also fear the chaos and extreme socialism of the present Labour leadership. For all those reasons, the economy, hitherto resilient, particularly on employment, is now slowing.

On fiscal responsibility, there is an arms race of new ideas for taxation among both Conservative leaders and the Labour Party. Unfortunately, the necessary lodestone of fiscal responsibility is missing. We must not now put at risk all the good work that we have done in reducing the deficit created by the financial crisis. The national debt is still far too high, at £1.8 trillion, and it costs us £37.5 billion a year—money that could be put to better use.

The tax system is also creaking under the weight of its own complexity. Because I believe in taxing broadly and thinly, I think that we should keep VAT. However, there are hundreds of complications that have taken the entire tax code up to 10 million words—an estimate from the Institute of Chartered Accountants of Scotland, where I am off to after this debate. That is double what it was in 2009, according to the Telegraph. With a simpler approach, we could have avoided some embarrassments. I refer, for example, to Making Tax Digital, to those trading with the EU finding it so difficult to get the tax codes they need to export post Brexit and to the wretched loan charge fiasco.

On regulatory burdens, the complexity of the tax system, when allied with a confusing and growing regulatory system in sector after sector, leads to the dampening of business growth, whatever the underlying strength of the economy. It is no coincidence that labour productivity has been so poor since the crash in areas such as financial services and energy, where there has been so much new regulation. Noble Lords should beware of new uncosted, complex regulation in new areas if we are to retain international competitiveness.

I turn to education and digital education. Having studied what drives growth for so long, both at Tesco and as a Minister—like my noble friend Lord Henley—at the business department, and later at the Treasury, I am convinced that the most important driver of long-term efficiency and productivity is education. I welcome many of the Government’s reforms, including Teach First, and the improvement in standards, especially, for example, in London primaries. However, the schools are too full because the impact of immigration was not provided for under our short-term accounting system.

We are not preparing properly for the future. The apprenticeship levy was meant to herald the sort of vocational education that I have seen operate well in Germany and Austria. However, as was apparent when reading between the polite lines of last Thursday’s debate—which, sadly, I missed—it is a mess. It is not business led as it should be, and the levy in some cases has become simply yet another tax charge on the medium and large businesses that supply most of our quality jobs. Many fine businesses take the view that they are putting in much more than they gain. The apprenticeship levy needs to be turbocharged and simplified, and I await the Government’s review, which I welcome, with some trepidation.

Even more seriously, we are not preparing properly for the digital revolution, which will destroy some jobs as automation and AI take off. This must be balanced by a vast investment in digital skills in schools, alongside literacy and maths, and in higher education, apprenticeships and on-the-job training; otherwise, growth will bring jobs losses, not the job creation that we all seek.

Infrastructure is not for today’s debate but I support the Government’s infrastructure fund, which is another productivity driver. We just need to get on with building the roads, digital networks, housing and rail facilities in the Government’s plans. More competence is as important as more money.

I must refer to the Taylor review of working practices, to which my noble friend the Minister very helpfully drew my attention when we met earlier in the week. This analyses how to improve working practices to the advantage of all. I was particularly struck by section 4, on management-employee relations, where the objective is that workers are engaged and heard, which I know is so important. On the same theme—I refer to my business interests as listed on the register—I am a director of Capita plc, which has recently appointed two employee directors to the board; having met the individuals concerned, I am very hopeful that they will make a strong contribution to the success of the company.

I now turn explicitly to the tax system and must say how much I look forward to today’s contributions on the specifics. I have already criticised tax complexity—which is possibly top of my list, because it is a slow killer that people do not notice—but I would like to highlight some specific areas where the structure of tax, especially for business, needs to be looked at.

As a former retailer, as everybody knows, I know that retail, the heart of thousands of towns and villages across the country, is disproportionately affected by business rates. According to the British Retail Consortium, the industry constitutes 5% of the economy but pays 10% of business taxes and 25% of business rates. Moreover, the Treasury requires a fixed amount in business rates every year. This is no longer a sensible or viable policy; the take needs to be reduced. Also, the present system of transitional relief is unfair. Month after month, we see the bigger shops failing and taking with them many small shops. This week’s figures bring the problem home: in the three months to June, non-food instore sales fell by 4.1%, like for like, while online retail sales, excluding food, grew by 3.3%

I support the digital services tax in principle, but it should be higher and the proceeds should be used to offset business rates and help the desperate situation on the high street. Rates should be frozen with no upward adjustment until the vibrancy of our towns and cities is restored or the business taxation system reformed.

It is clear that the property market is slowing and that the recent increases in stamp duty have discouraged people from moving whenever it can be avoided—especially at the top end, where the level reaches 12%. This has had a deleterious effect on the movement of labour, which is vital to our growth. Stamp duty must be reformed, especially with a view to encouraging mobility and empty nesters trading down to release family homes. It is not just a matter of concern at the lower end, which leadership candidates have highlighted.

The Government should be congratulated on what they have done for small businesses on rates and their proposals to give the Small Business Commissioner more teeth. They have also established the British Business Bank, which is now five years old and the subject of an inquiry in the other place. My own view is that this bank needs to increase in scale and remit and that it can help smaller businesses enormously, not only in London but especially outside it.

However, the tax environment remains a struggle for millions of small businesses and, as your Lordships’ Economics Affairs Committee report Making Tax Digital for VAT: Treating Small Businesses Fairly highlighted, the change to digital returns has created great difficulties for some small businesses. The work I have done with business across the country also suggests that the complexity of the tax, national insurance and auto-enrolment pension systems—which I support—taken together are made much worse by the inadequacy of free advice from HMRC and others.

If we are to flourish in a world that is growing faster than us, we need to have more regard to international competitiveness. Some of this Government’s reforms to corporation and other taxes have been good and have reduced the incentive for offshoring. The reduction in corporation tax from 28% to 19% was George Osborne’s best move and has even increased revenues thanks to the magic of the Laffer curve. It will fall to 17% in 2020, which is a further boost to responsible, tax-paying businesses. Likewise, there is a good case for increasing thresholds for the higher marginal income tax rates, because it will encourage enterprise.

I am also a fan of a taxation and accounting system which supports our huge service sector, our invisible exports and intellectual property; these are all areas in which Britain is strong. I know how much BEIS has done to increase R&D funding in this country, but the tax system has also been supportive. UK-registered firms have claimed R&D tax credits worth £3.5 billion and 1,025 companies have saved £943 million in corporation tax from the patent box.

With such a myriad of taxes and so much complexity, I have barely scraped the surface of this important subject. However, I hope I have helped to make the case for a more informed and supportive attitude to business. While I know it is not my noble friend’s direct responsibility, I hope he agrees that the structure of business taxes needs to be looked at by the new leadership and that there is a case for change.

The Chancellor has already announced a welcome digital services tax on the larger digital players to help redress the unfairness of the current system, but it needs to increase quickly and be used to ease the burden of rates on the high street. It cannot be right that Amazon paid £4.6 million in UK tax in 2017 and the beloved Marks & Spencer paid £98.3 million.

Finally, we must support a culture of enterprise. If we do this, we are not only taking the right moral stance but we are bound to boost the economy further. The choice is not between lower taxes for business and more wealth for the public. Lower taxes, carefully crafted, will encourage growth to the benefit of all.