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Economic Environment: Growth and Jobs - Motion to Take Note

Part of the debate – in the House of Lords at 1:02 pm on 11th July 2019.

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Photo of Lord Suri Lord Suri Conservative 1:02 pm, 11th July 2019

My Lords, I start by thanking my noble friend for securing the time for this debate. The tax system is a tricky thing. A former Chancellor of the Exchequer once described changing tax rates or introducing new taxes as pulling a piece of string tied on to five levers, with no guarantee of which would move or at what time. But we can look at the picture as a whole and note some long-term trends that point to where we could do better.

When I first came to this country, the tax burden ran at close to 40%. Lady Thatcher, formerly of this and the other place, got that down to 32%. But since that excellent progress was first made, the burden has been allowed to creep up, quietly but consistently. The TaxPayers’ Alliance has calculated that the tax burden is as high this fiscal year as in 1969-70. Put bluntly, we are paying more than ever in tax and struggling to eke enough out of existing taxes to reach our goals in matters such as infrastructure, the health service or social care.

But we can fix these issues by taking a proactive approach to reordering taxation. Take corporation tax, which is charged on profits. Out of profits, we pay workers for their labour and suppliers for their goods. Out of profits comes the reinvestment that drives productivity. Even if profits are put away in a bank, they are recirculated by lending. Profits drive growth, investment and lending. I am of course glad that corporation taxes have dropped steadily under this Government, but I would like to see them fall far more steeply. Lower corporation tax has actually boosted the tax take considerably. Will the Minister reiterate the Government’s commitment to further lower corporation tax and keep our rate at the lowest in the G7?

We should not shy away from radical solutions, either. The UK has struggled with weak productivity growth over the past decade, and the key to boosting productivity is boosting investment. It has long been recognised as a matter of sound accountancy that ongoing expenses should be deductible. But for investments that run through the long term, such as new plants, buildings or machines, companies can only deduct on a fractional basis. Because investments run down over the years, and inflation and interest charges reduce the value of assets, companies can recover at best a fraction of their investment, and almost never all of it. This matters, since investment in the long term is discouraged, as companies see it as a long-term cost. Full expensing is a tweak to the system. It allows companies to deduct those investments straightaway. This matters a great deal, as it provides a substantial incentive to invest, rather than hold back and spend one’s money or available loans elsewhere.

A 2017 study by Eric Ohrn looked at the difference between states in the USA that allowed full expensing and those that did not. Those that did increased investment by 17.5% and grew wages by 2.5%. Five years thereafter, the states that allowed full expensing had 10.5% higher productivity than those that did not. Full expensing would also allow the Government to pick asset classes to encourage, which may be useful as part of the industrial strategy. Will the Minister consider reviewing the evidence in favour of full expensing?