Members may recall that I had just recounted an example of a company that was closing its factory in my constituency to move the jobs to eastern Europe, and how I felt that some of the issues around investment in new technology over the years had caused that to happen. The point was debated by hon. Members from all parts of the Committee.
I would like to shift away from anecdotal evidence and ask the Minister questions about other elements of evidence that I feel should inform the debate. There is a picture of different Government interventions that make it more or less likely for companies to choose to invest in better technology, and therefore improve the productivity and success of our economy. Some have already been mentioned: regional development agencies and matters relating to general quality of life. I would like to focus on the difference between corporation tax and investment allowances, and what leads to investment in new technology.
There is a possible world where the Government no doubt believe that their corporation tax will lead to all kinds of good effects. They obviously think that lower corporation tax will lead to new businesses starting—that may be so. They may think that lower corporation tax will lead to companies using increased net profit, acquired through paying less tax, to invest in some of the new technologies that I have mentioned. There is a possible world, therefore, where the best way to have investment in companies in British business is to cut corporation tax. That may be true. It may also be the case that there is no link between lower corporation tax and investment in technology. It may be that actually increased profit is rarely used for investment in better equipment and technology, unless specifically incentivised by Government.
Those are two possible worlds, and in the field of economics it is not necessary to have a politically heated debate. It should be a matter of evidence and demonstration. I would therefore like to ask the Minister what research the Treasury has conducted into the correlation between reduced corporation tax and investment, especially in technology, but also in staff skills. Is it the case, either globally or historically in this country, that where corporation tax has been reduced, investment in those two important factors has increased? To my mind that is an entirely testable theory, and it would be strange of us to make a decision without reference to some of that evidence.
That brings us back to the interventions made this morning by the hon. Member for Watford, who is not here at the moment, on whether changes in taxation lead to changes in behaviour. On the one hand, we heard in an earlier debate that a 50p tax rate could change behaviour and result in non-competitiveness. In this case, however, a reduction in capital allowance will apparently not see a change in behaviour. I do not see consistency in the Government’s arguments.
I thank my hon. Friend for that helpful intervention. My answer to her point is that we should go out and put that to the test. We should look for evidence. We should find out what academic research has been done, and what research has been done by the excellent economists in the Treasury, about how such changes affect behaviour in reality—not in a text book, not in theory, not in our political debate and not as we argue about these things as Labour versus Tories versus Liberal Democrats, but in reality. Otherwise, we are taking a decision that is of very poor quality. So I ask the Minister directly what evidence he has that the corporation tax cut will, if the future resembles the past, lead to increased investment. If there is such evidence, it would be welcome if the Treasury were to share it. I have made a cursory, preliminary search to see if there is any academic research to bear that out, but was unable to find it. If there is such evidence it would be helpful if the Minister could share it.
I am listening to the hon. Lady’s argument carefully. However, the right hon. Member for Delyn said that he supported a reduction in corporation tax. Perhaps the hon. Lady could talk to her right hon. Friend and get the information and evidence that she seeks from the Minister.
The hon. Gentleman is trying to trap me into a disagreement with my right hon. Friend. Of course, my right hon. Friend, as a shadow Minister, is not going to have the sort of evidence for which I have asked the Minister. I mean, come on. I have asked the Minister for the evidence because he is in charge of all the very able Treasury economists who have produced the statistics, the data, the correlation and the regression that will have led the Minister to decide, I hope, that this is the best course of action. It is vital that we put to one side the idea that there ought to be a blustery party political, dogmatic debate about this. Policy made without evidence is, in the best case scenario, just guessing, and in the worst case scenario it is just ideology off the top of one’s head.
It is therefore highly important that the Minister shares with us what research has been done by the Treasury so that we can ensure that this decision, which is so crucial for the good of business and therefore for people’s jobs and quality of life, and for the sustainability of our country, is being made with the best case and not just on instinct or guesswork. This is a question about what is most likely to lead to investment. If we want a flat tax approach in which the Government hand over responsibility for macro decisions to each firm on a micro basis and hope that the framework is good enough to support it, we should have proof that that approach is better. I think that we should try to do what the investment allowances were designed to do, and use our role as Government to intervene in the economy, because it is necessary for the broader picture—for the macro strategy—and for the impact on people’s lives that there be investment in new technology, whether or not a particular firm perceives that to be in its interests at the time.
I worry that there is not enough of a picture being drawn about how the Government will deal with some of these problems. If, two years down the line, we have seen a falling away of investment, what will the Government do? Will they change course on this? It is important that we set that out now. We could have a Japan-like situation, where because of the very severe drop that we have had in the economy, firms choose to keep a larger amount of cash and choose to pay down debts rather than invest, and they do not think about expansion because they are fearful of the situation that was caused by a global crash. I would understand that from the point of view of an individual firm. However, maybe there is a role that the Government need to take to intervene, for the good of the broader economy.
Is there not a danger that Government intervention in the form of a direct corporation tax cut, which my right hon. Friend the Member for Delyn has already demonstrated goes to bigger companies at the expense of investment in small companies, will go straight into the pockets of shareholders and not be reinvested in companies? At least the investment allowances would help the bottom line of the balance sheets and the profitability of companies; one would know that a proportion of that had gone into investment to grow the company. So there is a danger that this particular Government intervention means that shareholder value goes up but not necessarily investment in companies and, therefore, growth and jobs.
I thank my hon. Friend for that insightful intervention. We could have a long debate about shareholder value and how far it indicates real business prospects, but I fear, Mr Gale, that it would test your patience on this amendment, which I would not dream of doing.
The key point for the Minister is to tell us what monitoring is being undertaken by the Treasury to clarify how much of the tax handed back to business through this corporation tax cut over the years to come will be spent on new technology or on research and development, which is a key part of our future. We talked this morning about how we overcome the fact that we have higher wages in this country. Research and development has to be a huge part of that. How much of the tax handed back in this corporation tax cut will be invested in skills and in assets that increase profitability? The Minister has to tell us how he will monitor that so that we can be sure that we take the right decision in Committee.
My hon. Friend has reminded me of something that I should have mentioned. I represent a seat in Wales; I can see her constituency from my bedroom window. I wonder whether the Minister has consulted colleagues in the National Assembly for Wales and the Scottish Parliament, as they have economic responsibility, about the regional difficulties that these capital allowance cuts may cause.
I thank my right hon. Friend for that point. I recently visited Airbus where our constituents work together to make the wings of aeroplanes that are sold around the world, and a most humbling experience it was. If anyone ever complains that Britain does not make things, let me tell them that we do. We make the planes that fly everybody around the world.
The economy is a complicated picture. Wales has a history of manufacturing that has changed over time, but there are many new energy firms in north Wales that might have made use of investment allowances and may or may not be seeing high levels of profit at the moment. I think of some of the enterprise that goes on in mid and west Wales around Trawsfynydd, which I know very well. Those firms have done a huge amount of research and development that has led to them purchasing new technologies to try to drive forward our economy. Has the Treasury discussed these proposals with the National Assembly for Wales, and what does it think the collective impact will be? That is an interesting question.
About 600 of my constituents work in that Airbus factory, and many more work in other factories in Wales. It is not because of the niceties of devolution that we need to work together with colleagues across the border, but because of the cold, hard facts of economic reality, and people’s jobs and their quality of life. When I consider the importance of thinking through all the details and ramifications of this choice, it brings home to me how interconnected the economy is and therefore how important it is that the Minister shares with us today some further details about what monitoring of the investment picture he will do. How does the Treasury think that is connected to tax cuts of various kinds—specifically the corporation tax cut and the reduction in these investment allowances? How does that play out in economies across the borders between England, Wales and Scotland, and no doubt other parts of the United Kingdom as well?
My hon. Friend is making some important points about the differential impact that the proposal could have across the regions of England, but also on England and Scotland. The impact may be felt differently because of the different challenges that areas face.
As I said earlier, I am most interested to hear what impact analysis the Treasury carried out on the differential impact across the regions. In my region, we have also lost the regional development agency, which played a crucial role in securing investment into the area, particularly in manufacturing. That has gone, and now I worry that this proposal will damage the regions in the long term.
I thank my hon. Friend for that helpful point. In previous years, I might have put some questions to the regional development agencies. Now that we do not have those houses of best practice, knowledge and research, the Treasury needs to get a grip on understanding the economy of all parts of the country. Economies cluster very differently across different parts of the country. If the Treasury does not have the expertise to monitor how the reduction in investment allowances is affecting research and development, technology and skills improvement, we are in real danger of too much of a hands-off, step-back, laissez-faire attitude to our economy. It is not that we do not want to make good decisions, we just do not invest in the evidence and research to enable us to make them.
I ask the Minister to share the evidence he has about changes to investment allowances and corporation tax. What monitoring will there be of how the reduction in investment allowances impacts as we go forward in this important time for our economy? What might have been the counterfactual situation, if we had kept things as they were? How is the Treasury going to do its job for the whole country, not just the economy to which it is closest, that of London and the south-east? How is it going to do a good job for the whole country? How will it check that the policies made in the Treasury are good ones that work for the entire economy?
It is important for the Minister to consider how the reduction in corporation tax and the move away from investment allowances are going to affect employment, and specifically different kinds of employment. When a company invests in an asset or a new piece of kit to help it be more productive, people will often be encouraged to get new skills—a knock-on benefit of the investment—and the growing company will have the confidence to employ younger people at the beginning of their careers. It has never been more important to encourage that. As my hon. Friend the Member for Edinburgh South mentioned, we need to avoid the majority of the corporation tax cut being handed back to shareholders. It should rather become part of a productive business-led economy that can help solve some of the social ills that are still with us from the recession, such as unemployment and a lack of opportunities such as apprenticeships.
How does the Minister think the measure will affect younger people specifically? If he does not have an estimate, how is the Treasury going to think about and monitor that for the future?
It is a pleasure to serve under your chairmanship, Mr Gale. I want to follow on from a number of questions put to the Minister by my right hon. Friend the Member for Delyn. My remarks concern the relationship between corporation tax and tax allowances; the regional impacts, which are of particular concern to my constituents; the view of the business community; and the impact on the economy as a whole.
Before coming to the House, I was a councillor in my constituency for 27 years, and I have had the pleasure of being deputy leader of Gateshead council for the past eight years. I have therefore come to understand the place well. In that time, the economy of the area has experienced significant changes. Employment in manufacturing has been taken away from very large engineering companies such as Huwood, which manufactured equipment for use in coal mines. Since the necessary changes in the market following the closures of the mines, Huwood is gone. It employed several thousand people within my constituency.
Across the river, Parsons, a heavy engineering company, has been much reduced; it now just ticks over as a business in the locality. Vickers, the armaments manufacturer, which was at the height of its business in the war period, employed 30,000 to 50,000 people on the River Tyne. There were very large industrial engineering concerns in the north-east—Clarke Chapman in my own constituency, Rolls-Royce and Swan Hunter. The names are synonymous with the north-east region, but sadly, all are now gone or much reduced.
I am glad to say that the nature of employment in the area has been much diversified into many small and medium-sized enterprises. The Team Valley trading estate, half of which is in my constituency and half of which is in that of my hon. Friend the Member for Blaydon (Mr Anderson), is typical of the north-east industrial market now. More than 20,000 people are employed in one industrial estate in the heart of Tyneside, but mostly by small and medium-sized enterprises. Those companies employ 100, 150 or 250 people. It is their concerns that I am here to reflect, because those businesses will impact on the potential of the north-east region’s economy and, within the private sector, they will help it to grow out of the recession.
My hon. Friend is clearly setting out the challenges that we in the north-east face. I recognise that picture well, because it is very much the same in my constituency. There has been a move from traditional heavy industry, such as the mines and the next-door shipyards, to a mixed picture and a diversified economy. Does he share my concern that the Government do not seem to understand the challenges faced in the different regions and do not appear to have a strategy to deal with them? They certainly do not have an active industrial policy, which would encourage growth in the private sector, which they say they want.
I am grateful to my hon. Friend, who has pre-empted a comment I was about to make. We have referred in previous debates to the differentiated approach that is required to stimulate the economy in different parts of the country. From the Opposition’s view, it seems as though the Government, or their Ministers, find the concept of regions alien. They do not seem to like the concept, or the idea of having a differentiated regional policy, so one wonders whether they have a devil-take-the-hindmost approach.
I remember that previous Conservative Governments regarded unemployment as a price worth paying. I am glad to say, however, that as high as unemployment is in my constituency at more than 10%, it is not the 18% to 20% of the mid-1980s. There is still, however, significant capacity to grow.
Just for the Committee’s information, I was the chair of the campaign for a north-east assembly, so I have some understanding of what happened, but I will not go into that now, Mr Gale.
We are facing a lack of understanding about the need to develop regional economies.
The hon. Gentleman says that the Government do not have a regional strategy and that they are turning their back on the regions. Surely the setting up of the enterprise zones rather indicates that that is not the case.
I am delighted that we had an enterprise zone in the 1980s; the Metro centre, which is a significant development in the adjoining constituency to mine, was developed on the back of such a zone. Unfortunately, however, the enterprise zone established a shopping centre, and it did not establish growth in the local economy. In fact, there was a significant amount of displacement from other parts of the regional economy. There is a concern that the policy of enterprise zones could lead in that direction again.
My understanding of the rules that the Government are putting down about bidding for enterprise zones shows that they have learnt those lessons. The rules are specifically geared towards manufacturing industry, rather than shopping centres. Does he not agree?
It is interesting that we are comparing and contrasting enterprise zones with capital allowances, given that capital allowances offer a company the opportunity to set up anywhere. Enterprise zones are restrictive, in that companies must set up in a specific, limited, localised area, which may or may not suit manufacturing.
I am grateful to my hon. Friend for his point. The point that I want to develop about small and medium-sized engineering companies in my region is that they are definitely hoping to gain orders and business on the back of the development of the Hitachi plant at Sedgefield. We have been led to believe that, down the line, the Government expect some 5,000 to 7,000 supply-chain jobs to come from that particular venture into the development of high-speed trains, and we are delighted that it is coming our way.
Before my hon. Friend presses on, I want to return to the issue of enterprise zones. Does he share my dismay at the confusion about the location of enterprise zones and what industry-specific work they will be able to do? I do not think that the Chancellor helped matters much when he announced during the Budget that the enterprise zone for part of the north-east would be on Tyneside. That appeared not to be the case. As a Wearside MP, I was certainly rather concerned to hear that it was on Tyneside. My hon. Friends who are Tyneside MPs may feel differently, but there has been significant confusion about the location of the enterprise zone.
I share my hon. Friend’s concern, and I have an additional concern that the enterprise zone might indeed go to Tyneside, but to north Tyneside rather than central Tyneside, where it would much better serve the local economy.
What we have just heard has demonstrated the weaknesses of enterprise zones compared with the more homogeneous support of capital allowances and regional development agencies. This is a step backwards. We really need clarity on a strategy for manufacturing, and I am pleased by what my hon. Friend is saying.
While we are hopeful that there will be significant job gains in high-spec, high-tech and high-skill industries on the back of Hitachi, because the regional economy in the north-east was highly dependent on public expenditure—over 50% of women in the jobs market in my constituency were employed in the public sector—there is now a bit of a downturn in the private sector on the back of the loss of orders from the public sector.
I visited one company on the Team Valley trading estate called Petards Joyce-Loebl, which is a high-tech, high-spec company that provides equipment for Chinooks. It is still waiting for an announcement about helicopter orders. In a newly developed business park right next to the Metro centre, which is called Watermark, there is another company called Russell Telecom and it is waiting for information about superfast broadband. We are waiting on information from the Government that will be vital for those companies’ investments, but at the same time, their capital tax allowances are being eroded before their eyes. We hope that the timing of those announcements does not mean that they miss the boat for those capital allowances.
I have listened with interest to the comments from many of my colleagues across the north-east. The hon. Gentleman has just talked about a telecommunications company which is in a business park right next to the Metro centre. Is that the same Metro centre that is there because the enterprise zone was there? Is that business park in any way linked to the fact that the Metro centre is there?
There was a coke works on the land on which the Metro centre was developed. Part of the facilitation of the enterprise zone allowed the local authority in the area, Gateshead council, to attract many millions of pounds of derelict land reclamation grant. It was on the back of that work by the council that Sir John Hall did the work to develop the Metro centre. Without that work first being done by the local authority, albeit with a central Government grant, that land would probably have remained toxic until this day. It was a genuine public-private partnership that took that work further.
I am grateful to my hon. Friend for amplifying the point. The different Government policies, including the changes in tax allowances, the eradication of the regional development agency, and the very strange rules that have been drawn up for bids to the regional growth fund, which to a large extent have ruled out bids from local small and medium-sized enterprises, the picture for the north-east in the medium term is not hopeful. There is a great deal of unease among the business community about the Government’s attitude towards the regions and the sort of manufacturing enterprises that exist there.
“The largest beneficiaries from the package of measures”— including corporation tax and capital allowances—
“will be high-profit, low investment firms”,
such as financial services. If the IFS takes that attitude, I do not see how the strategy will benefit a region like the north-east. We had a fairly large financial institution in the north-east of England called Northern Rock. It followed the pattern of many financial institutions across the country and invested in dodgy batches of triple A-rated loans from other parts of the world.
I am concerned that the largest impact on those firms with capital-intensive operations will not be positive. The IFS also agrees that
“The losers would be firms that invested heavily but made little profit – notably in the manufacturing and transport sectors but also some capital-intensive service-sector firms. The winners would be less capital-intensive but more profitable firms, historically typified by the financial sector.”
So we are really concerned about the attitude of organisations such as the IFS.
My hon. Friend the Member for Sefton Central referred to the Chartered Institute of Taxation earlier. The Government’s growth strategy seems to believe that the most important driver of economic growth is creating a low corporate tax jurisdiction for multinationals, but there is much more to a growth strategy than this. I am concerned about the reliance on multinationals to grow the British economy. I fervently believe that helping small and medium-sized enterprises to grow from within would be a much more stable growth pattern for the future.
The problem with multinationals is that they are not patriotic and do not have the desire to invest in a particular country. They are happy to move capital around the world to where they will get the best return, and that might not necessarily be to the benefit of Britain plc.
The point that my hon. Friend is making is that we will attract the multinationals only if the SMEs are in place. If we do not provide at competitive rates nearby the out-sourcing services that multinationals require, there is no way that they will move here in the first place.
In conclusion, we already have a lower corporation tax than our significant competitor, Germany. The fact that the German manufacturing sector performs so much better than us suggests that there is much more to growing the economy than corporation tax cuts. When considering these measures, the Government must think about the impact that they will have on the regions, the SME sector and the economy as a whole.
We have heard compelling evidence about how the proposals of a change to capital allowances combined with a cut in corporation tax will impact on the economy. The Government have a stated aim of deficit reduction in five years. To achieve that, they have cut public spending by unprecedented amounts, raised VAT and taken a range of other measures. The reduction in capital allowances combined with the cutting of writing down allowances, which was in a previous clause that was debated last week, removes the slight benefit of the corporation tax cut for SMEs, especially, but not exclusively, those in manufacturing.
In Sefton, many small businesses need support at this stage of the economic cycle in order to grow and stimulate the kind of recovery and growth in jobs that are needed to offset the very large losses in the public sector. The 30% cut in Sefton council’s funding is producing great hardship, not just for those people who have lost their jobs but for the small businesses in the area that depend on those people as their customers. The proprietor of one small business in the building industry was telling me recently that he would love to expand. He is ideally placed to benefit from the higher level of capital allowances that are in place at the moment. His business, which is typical of the type of business that benefits from capital allowances at the higher rate of £100,000, will significantly lose out by this measure and will benefit very slightly from the reduction in corporation tax because he does not make vast profits. Put together, the measures penalise the SME sector disproportionately compared with large business.
At this stage of the economic cycle, we need not just cuts but investment if we are to see the kind of growth that is needed for long-term deficit reduction. The loss of customers who work in the public sector is a key problem for small businesses across the country. It is becoming increasingly clear that the lack of a growth strategy will lead to big problems for SMEs across the country.
My hon. Friend said that the policy is an attack on small and medium-sized businesses. During the past 30 years in my constituency, the mining industry has collapsed; we have had a near wipe-out of the steel industry and, most recently, the Boots factory, a major employer, has ceased to exist. We need a diversity of small businesses to underpin growth in areas of low employment.
My hon. Friend makes a powerful point and speaks from constituency experience, as have several Opposition Members. Evidence clearly shows that we need the SME sector to drive growth, and as my hon. Friend the Member for Middlesbrough South and East Cleveland said, we need that growth from the small business sector to encourage the larger businesses as well. Sadly, the measures are aimed at helping the big business sector and the multinationals in this country at the expense of SMEs.
I have been listening carefully to what my hon. Friend said about the importance of SMEs. Some might say that only Opposition Members say that but, in its advice to SMEs about capital allowances on its website, Lloyds TSB says:
“When you buy certain new equipment, invest in buildings or research and development, you can deduct a proportion of the cost from your taxable profits and reduce your business tax bill.
This can be a huge boost to your business, especially as you need to invest to fund growth.”
What does my hon. Friend think about that advice?
I am grateful to my hon. Friend. I do not always find that advice from banks is necessarily reliable, but sometimes they get it right. On that occasion, they were talking a lot of sense.
We referred earlier in the week to the need to get bank lending going again, and the fact that £5 billion less was lent to small businesses in the first three months of the year than was projected. The measures in the Bill allied to the lack of bank lending will make it very difficult for growth to start again in the SME sector. The Government need to examine the measures in conjunction with a strategy for the banks, and they need to look again at proposals such as that put forward by my right hon. Friend the shadow Chancellor.
My hon. Friend will be aware that it is already a difficult climate for SMEs. From my many conversations on the subject, businesses would like to be in a position where they could take on more apprentices, but are finding that difficult in the current climate. What is compounding the problem is the fact that public sector contracts are drying up, whether from local authorities or housing associations. One local electrical contractor in my constituency, Alex Scullion, has made that clear and has had to lay off apprentices. It is a difficult picture all round for SMEs, and surely the Government want all possible measures to be put in place to support the development and growth of SMEs because of the bedrock of economic growth in our communities.
My hon. Friend uses two good examples: apprenticeships and what is happening in the public sector. Both demonstrate the need for an immediate growth strategy. Unless we have that growth we shall not see an increase in apprenticeships, and unless we have continued investment in the public sector, we will have the problems that she and others throughout the country are experiencing in their constituencies, with the knock-on effect of rising unemployment on businesses which will lose their customer base as a result.
My right hon. Friend the shadow Chancellor has rightly proposed the repeat of the successful banking levy on bankers’ bonuses that raised £3.5 billion last year. If that money were invested, it could be used to kick-start many small and medium-sized businesses, particularly in the construction industry. That is one possible growth strategy, and the sort of practical measure that could be used, but is sadly lacking in what is being proposed.
The hon. Gentleman talks about the construction industry. We are all clear that it is a key sector of the economy. I know that it was before he was a Member of this House, but what effect did the abolition of the industrial buildings tax relief and the agricultural buildings tax relief that his Government brought in have on the construction industry?
I am learning to enjoy the hon. Gentleman’s interventions. I am not sure that that had the effect that he hoped I would acknowledge. The point is that we need to support the construction industry, and by cutting capital allowances the Government are doing exactly the opposite.
Perhaps my hon. Friend understands, as I do, what is happening in the construction industry. In my neighbouring constituency of Redcar, the beam mill, which produces long products, has had its orders reduced over the past eight months by more than 70% as a result of the cancellation of Building Schools for the Future projects and hospital products, which has meant that the domestic market for those long products—and also rail—has fallen through the floor.
My hon. Friend makes the point extremely well. My constituency has also suffered from the loss of Building Schools for the Future projects and other public sector projects. The whole of Sefton has lost many millions of pounds of investment from Building Schools for the Future projects that will no longer take place over the coming years.
On the construction industry, during the year that I have been an MP I have had the pleasure of visiting hundreds of new homes that were built using the kick-start money provided by the Labour Government. They are schemes that would otherwise not have gone ahead, which have regenerated areas that were desperately in need of new homes. It is clear to me that that saw the economy through a very difficult time from 2009 onwards, and without it a far greater number of people—whether they are in electrical contracting, directly in the building trade or suppliers—would have gone to the wall. The short-term decisions that the Government are taking are simply not the right ones. We need to look carefully at stimulating growth in the construction industry.
Some more excellent points from my hon. Friend. Again, that emphasises the need for measures such as a repeat of the tax on banking bonuses to be invested at this stage of the economic cycle. Looking at the link between the cut in corporation tax and the changes in allowances, I think that Members on both sides of the Committee would accept that in principle the cut in corporation tax is beneficial to business and to the economy. As someone who ran a small business for many years before coming to this place, I know it is the sort of measure that was certainly beneficial when the previous Labour Government gradually implemented it over a number of years. The trouble is that in those businesses that really need it, it is being blown out of the water by the changes in capital allowances. I believe the evidence shows that £2.6 billion will be lost in the cuts in investment allowances as a result of clauses 10, 11 and 12, which penalise such businesses at a time when they can least afford it.
These changes do not contribute to rebalancing the economy. That is the nub of the Opposition’s argument. Bigger investment allowances help small manufacturing firms expand and build capacity, but that will go out of the window as a result of the changes. As the Institute for Fiscal Studies stated in its “Green Budget”,
“The largest beneficiaries from the package of measures”— including corporation tax and capital allowances—
“will be high-profit, low-investment firms”,
such as financial services, while the cuts under clauses 10, 11 and 12
“will have the largest impact on those firms with capital-intensive operations” such as manufacturers. The IFS agrees:
“The losers would be firms that invested heavily but made little profit—notably in the manufacturing and transport sectors but also some capital-intensive service-sector firms. The winners will be less capital-intensive but more profitable firms, historically typified by the financial sector.”
PricewaterhouseCoopers has said:
“Many clients will balance the modest reduction in capital allowances rates with the staggered reduction of the rate of Corporation Tax. Whilst the declining rates of capital allowances, in isolation, do not produce any winners, some businesses will benefit when the CT rate change is also taken into consideration. Capital intensive businesses...are likely to feel the reductions more, since they will have larger capital allowances pools”.
As someone who trained with one of the predecessors of PricewaterhouseCoopers, I am likely to accept their word because I know that it is well researched.
To summarise, the Government announced an additional 1p cut in corporation tax over and above the changes announced in the previous Budget. The June Budget set out a corporation tax cut of 4p implemented over the next four years, but these corporation tax cuts are paid for, in large part, by slashing investment allowances that encourage businesses to take a longer-term view. The UK should have a competitive tax regime and a corporation tax cut should, in principle, help this, but the Government are paying for it by slashing investment allowances by £2.6 billion and the package penalises companies who invest, particularly in manufacturing, in order to offer tax cuts that disproportionately benefit the banks. At a time when the Government claim to be rebalancing the economy by encouraging manufacturing, this package does the reverse.
Most of the benefit is going to large rather than small companies. For every pound going to small companies, more than £4 is going to large companies. This is the wrong approach, it is completely unbalanced, it does not rebalance the economy in the way that is claimed for it and the Government should look again at their approach and create a growth strategy.
It is a great pleasure, Mr Gale, to contribute to this importance Finance Bill under your chairmanship. I would like to look at some examples from my own constituency and my own experience of how a cut in investment allowances is the wrong way to go in promoting the growth and employment that we all wish to see. The Chancellor, when he got to his feet during the recent Budget debate, said he would be promoting a Budget for growth. It must have been the first Budget for growth in the history of this great place that downgraded growth in every year after he sat down from making those claims.
I always welcome interventions from the hon. Gentleman, who always makes a very useful contribution. My right hon. Friend the Member for Edinburgh South West, to whom he refers, represents my neighbouring constituency and I would never disagree with anything he says, but let us take it away from the politicians and into the hands of the Office for Budget Responsibility who said clearly, with the figures they produced on the back of the Budget, that growth in this country would fall in every year of this cycle and unemployment would increase. The figures from the independent Office for Budget Responsibility, set up by the Chancellor himself, show quite clearly that the growth figures have gone down, as my right hon. Friend would, I am sure, acknowledge. It is written in black and white in the Office for Budget Responsibility’s documents: 2.6% to 1.7%. I believe that part of that reduction in growth comes from some of the decisions that have been made and if we are looking to rebalance the economy, surely the best way of doing that is to take away some of the levers that the large multinationals—in particular, the financial sector—have on the economy and put them into the hands of small businesses and manufacturing businesses who use investment allowances to grow their business.
As I mentioned this morning, Mr. Gale, under the fine chairmanship of Mr Hood—I am sorry you were not here and I would be delighted if my right hon. Friend the Member for Delyn wanted to go over exactly the same points again later for your own edification—the profitability of companies comes from investment. If we are only looking at cutting corporation tax cut for large companies and companies in the financial sector, we are doing a disservice to the real drivers of the economy, who want to create employment and growth. Those drivers of the economy—companies that use investment allowances to invest—invest to drive up their profits. Therefore, the corporation tax cut, while welcome, comes at the end of the stage for their companies and not at the beginning in terms of some of the financial services sector.
I am delighted that the hon. Gentleman called me his hon. Friend. I would like to return that compliment because he is my hon. Friend as well. We spent some time on the American exchange trip together just last year. As they say, what goes on tour stays on tour.
On the particular point, many companies at the moment are using working capital to invest in infrastructure because the banks are not lending to them. When we challenge the banks about their lending, they tell us that the money is there and that the companies are not coming forward for it. Perhaps that is a symptom of the fact that they are worried about the future and their profits. If investment allowances were still in place at a far more generous level than the Government are looking at at the moment, perhaps companies would borrow money from banks to invest. But why would they if they are not going to get investment allowances and are worried about their bottom line and profits? In my constituency and experience, many small businesses look week to week to make sure that they can pay the salaries of their employees, rather than investing in large-scale machinery. That can only be turned around by telling companies that the Government are right behind them in terms of their business investment aims.
The issue about investment allowances also flies somewhat in the face of the Government’s entrepreneurial relief. Entrepreneurs are creating businesses from scratch to drive growth and employment in the country, and the entrepreneurial reliefs that the Government have put in place are incredibly welcome in terms of extending that. However, the entrepreneurs will be looking at this and saying, “We want to be able to invest in the infrastructure and machinery of our businesses,” and the investment allowances that are written down over time certainly help them to do so. There is, therefore, a little bit of a contradiction in the Government’s policy of driving growth through private business.
Such has been the length, extent and excellence of the debate that I do not think that I will be able to stay to listen to the Minister’s response. However, it seems to me that, despite its length, the debate has not looked at unincorporated businesses that pay tax on a self-assessment basis. They will not benefit from the corporation tax cut, but will in effect face a reduction in the allowance.
That is an incredibly pertinent point, but the hon. Gentleman is missing the point that the allowance is less than it was before. Therefore he is agreeing with the premise here. I am sorry that he will not be here—he will miss a wonderful speech in response from everyone’s favourite or at least second-favourite Treasury Minister in the room.
I would like to highlight three companies: one from my constituency, one from Edinburgh and one from my own background. The one from Edinburgh is Sellex Galileo, which has been branching out for many years into the space industry and developing products within it. Although they do not directly fall under investment allowances because most of their work is done through research and development, much of what they produce is done through subsidiary companies and other suppliers in the supply chain. When they come up with a new idea and technology that allows them to develop something, they need the supply chain companies to manufacture it. In many cases, the only way they can do that is by investment allowances to allow those supply chain companies to invest in the equipment they require. Surely that is the way that we need to work in terms of running around the investment allowances to create growth and employment in the country, and to be able to allow supply-chain companies to invest in what the larger companies need in order for them to be sustainable.
Does my hon. Friend agree that our debate on this clause is extremely important at this particular moment, given that we are seeing the price of transporting supply goods to large manufacturers increasing all the time? The business case for the supply chain in the UK is incredibly strong at the moment, but if we now pull the rug of investment allowances out from underneath supply chain companies we are potentially making a huge mistake.
My hon. Friend makes probably the starkest point that we have heard this afternoon about investment allowances and the supply chain. I say that because if we consider the Government’s quest for export-related growth we can see that one of the reasons Germany has been able to outstrip most of mainland Europe in increasing exports to drive its economy is because it has a well established supply chain, particularly in the car industry. The Business, Innovation and Skills Committee recently visited China to see how the UK could best put policies in place to export goods to China, the largest growing market. One of the key things that emerged from that trip is that the supply chains in the UK are either broken or the major companies that are using the supply chains are finding it very difficult to find suppliers.
The car industry is one of the key examples. Earlier, one of my hon. Friends mentioned the engines and other products that are developed in this country. Those can only be made with a supply chain that is fitting and able to supply major companies. If we are considering a corporation tax cut for the large companies that will benefit from such a cut, we must also consider that they need a supply chain in place. If a large company says, “We require product X,” it would be in the interest of the Government to ensure that the supply chain company that can supply that product has the financial support that it needs. Then the supply chain company could invest in what are sometimes risky pieces of machinery that will benefit it in the long term without having to consider whether or not it will enjoy a corporation tax cut in the future rather than having its board decide on a particular investment allowance at that time. I think that that would help.
A lot of companies in supply chains across the UK are in that position at the moment. My friend the hon. Member for Bristol West made the point that investment allowances enable companies such as those in supply chains to invest with a greater degree of security, knowing that they can write off an asset over a period of time through those investment allowances rather than hoping that the profitability and the sustainability of the particular product that they have been asked to produce creates additional profit in the future that they can benefit from in the form of a corporation tax cut.
My hon. Friend makes an excellent point, which I think has been made by others in the Committee. The point is that with allowances comes the ability to make judgments on purchasing and investment dependent upon a sector’s industrial cycle.
Absolutely. That is a critical point that connects very well with the point that my hon. Friend the Member for Wirral South made about supply chains in her intervention. It gives people a certain degree of security that the value of the asset they are being asked to develop allows them to make that investment decision over a longer period of time, rather than their having to look at the bottom-line balance sheet in terms of where the corporation tax cut might come in.
The corporation tax cut is welcome, but in terms of jobs and growth in the manufacturing sector in the area that I represent and other areas such as the north-east of England, including “Gatesheid”, as I think it is called—[Laughter.] My hon. Friend the Member for Gateshead makes a very strong case for the importance of these particular investment allowances in his part of the world.
Let us consider the car scrappage scheme. In a lot of instances, the way that that scheme operated was almost like a reverse investment allowance for the public, because the Government said, “We will allow you to scrap your old car for a certain amount of funds that you can then put towards a new car.” That not only allowed the car industry to be supported but helped to get older cars and cars that were probably less environmentally friendly off the road. With that scheme, the Government were essentially saying to the general public, “We will give you an investment allowance of x amount of cash through the framework of Government, in order for you to make that investment in a far more environmentally friendly vehicle, which will then support the car industry.” That was almost an investment allowance in reverse for the public. That clearly showed that when policies like that are put in place, they not only support employment and growth in the country, but support the public in buying new goods, including more environmentally friendly cars.
The second company I would like to look at in connection with clause 11 is the Royal Observatory of Edinburgh, a world leader in providing technology and manufacturing support to the EELT. That is an acronym for something incredibly complex and scientific: the European extra-large telescope. That telescope, based in Chile, is 42 metres wide and will be the largest piece of infrastructure in the world.
Such institutions are not covered by the same investment allowance and corporation tax profile, but their supply chain is. The Royal Observatory has developed a 42-metre mirror that is operated on many small arms. One can imagine it in the desert in Chile pointing at the sky, trying to find a Liberal Democrat left in an English council, and stars that it can then look at. This 42-metre mirror has to move across the sky to identify something unimaginably far away. The Observatory has had to develop 128 arms to go around the mirror to take that piece of technology. That requirement had to be put to a supplier in the chain, which had to invest in microscopic manufacturing tools to make that incredibly complex piece of equipment.
From the perspective of the directors of that supplier, they have to decide whether to invest in a piece of technology that may never come to fruition. Of course, in Edinburgh and at the Royal Observatory, we all hope that it does. However, from the perspective of that supplier, the question is, whether to invest in it itself—in the hope that the technology works, and profits increase, with a welcome accompanying corporation tax benefit—or whether to invest in its own business, company and reputation, to be able to create profits for the future, through some proper investment allowances. There is a very keen and real issue about where companies will invest in the supply chain to be able to make those technologies work.
My third point relates to my own business, something I mentioned this morning. We were driving back through the Scottish borders one Sunday with a friend who had been made redundant from a financial institution. As we drove past a derelict hotel bearing a banner that said “Save us from the greedy developers”, the friend made a flippant, throwaway suggestion that we should rescue it. Six weeks later we were in our overalls and on our hands and knees cutting tiles and sorting out the establishment. We got support through various organisations to do so.
The reason I highlight that is that when a company is faced with a decision to invest in new equipment, it takes that decision in the round, with the last thing in mind the bottom-line profit. Making profit is the bonus, but getting there is the key. When making these decisions, it is a case of whether to buy the £2,000 range for the kitchen or the £1,000 range and develop a different menu. It has to be decided whether to put various things into the infrastructure of the business such as till systems or an abacus. That kind of investment decision is made by companies all the time, on the basis of what will benefit the company and what will take the profitability of the company forward. A company is based on growth, employment and jobs.
The hotel was sold some time ago, but I believe it still operates profitably. It must have at least 30 staff and supports the local community. I am not saying that investment allowances were the be-all and end-all of that, but they allowed decisions to be made at the coalface to go towards the profitability of the company in the longer term. Investment allowances are critical to that. Anyone who has been in business—manufacturing or hospitality—where they have had to invest money in upgrading infrastructure or technology would welcome investment allowances. Nobody in business would tell you otherwise. The business that I ran for that period of time never made a profit, so a corporation tax cut would not have benefited us, but the writing-off of investment allowances did. That is very much key.
The hon. Gentleman actually makes a good point, and although he makes it flippantly, it is worth considering. Many businesses, in fact the vast majority, do not make any money, let alone massive profits. They survive on their ability to generate income to keep the business going. When we took the hotel on, it already had a massive debt infrastructure. We turned it into less of a debt infrastructure and passed it on to someone who, no doubt, is making a profit out of it now. Business is not necessarily about buying an apple for £1, selling it for £2 and pocketing the £1. What is important is where someone takes a business from and where they take it to.
In the process of leading a business from A to B, investment allowances inform part of the decisions that make businesses suitable for sale. Our object with the business in my example was to turn a derelict hotel, which some landowner in the borders was looking to demolish in order to build flats, into a community facility—it is a well used hotel for tourists and the community alike. Yes, its profitability was never forthcoming, but that was not our aim, and we sold the business on to someone who has taken it on and made a profit. It now employs 30-odd staff. I think that doing that is more valid than making flippant remakes about why I came into politics. I came into politics to create jobs in communities such as the one I represent, not to make flippant remarks about whether people are here because they have nothing better to do. The Finance Bill Committee feels like that for all the right reasons.
I echo my hon. Friend’s sentiments. Someone will correct me if I am wrong, but Skype—a company that does not charge its users and makes minimal, if any, profit—has recently been sold for, I think, £4 billion.
That highlights how businesses are not hugely profitable sometimes, but Skype, although under a different regime, will have made investment decisions in order to make the company worth £4 billion. That does not necessarily mean that the bottom-line profit of that company is anything other than in the red, but when have companies ever been bought and sold differently? The only way that industry works is by taking something of no value and turning it into something that has value.
My hon. Friend has sparked off an interesting thought: next year, if one of the hospitality companies in Edinburgh was looking to invest in modernising its equipment, but chose not to make that investment because it faced a cut in capital allowances and fragile spending power for the hospitality and retail sector, would that help the economy?
My right hon. Friend is right. That would not help the economy grow. Looking at the specifics of the hospitality industry at the moment, we can see that the major problem is lack of consumer confidence, and that is for a variety of reasons, 95% of which are the responsibility of the current Government—VAT, the threat of unemployment, the cut in public sector jobs and so on. Consumer confidence is not feeding through to those companies’ profitability or their ability even to break even. If they are not allowed to take investment decisions to provide a different offer or to become a better company, they will not see the corporation tax cut because they will never get to that stage of profitability. That is one of the key elements of this package of measures, which are not about growth but about some other issue.
I have two other points, one of which is about the banks themselves. Edinburgh is one of the largest financial centres, not just in Europe, but in the world. I think I made this point earlier, but it is key: now that the Scottish National party has taken majority control in Scotland, it is looking to wrestle responsibility for corporation tax from the UK Government. That is the wrong thing to do, but the party is doing it because it knows that the independence discussions and the uncertainty about the constitutional settlement would make the major banking and financial institutions, which employ hundreds of thousands of people in Edinburgh and the surrounding area, and support employment all over the country, take fright and flee. The Scottish Government want control of corporation tax so that they can give those banking and financial institutions a corporation tax cut to keep them where they are.
That shows us that corporation tax cuts are best targeted at low-manufacture and high-profit companies that are not able to spend money on investment allowances—helping the big guys but not the small guys. The only way to help the latter is to improve the supply chains, and the only way to do that is to give small businesses the investment allowances they need to invest in new technologies and new ways of working, and improve their businesses.
My final point is on employability and skills. Up until the worldwide economic crash, youth unemployment in my constituency sat at 0.01%, and we had, I think, only 14 long-term unemployed young people, because of the various programmes in place to get them back to work, including the new deal and the JET—job education training—programme. That ladder of opportunity has now been kicked away, in terms of higher education and the future jobs fund, and we need to find new ways of skilling people. The best way to reskill young people in particular is for a manufacturing organisation to invest in a new piece of technology and reskill its current work force, and then provide apprenticeships and the reskilling of young people so that the organisation has the confidence to bring them in.
This is all part of the same package. The lack of investment allowances means that if a company does not invest in a particular piece of new technology, the new jobs do not come and the ability to have young people skilled in the new technology is not there, creating a vicious circle of lower growth and lower employment. If this is about a Budget for growth, the key is to combine corporation tax cuts with capital allowances, which are so crucial if businesses are to invest in jobs and the future. That is why the amendment is critical in ensuring that the Government properly focus on growth instead of solely on their friends.
It is a pleasure to serve under your chairmanship, Mr Gale, and a pleasure to follow my hon. Friend the Member for Edinburgh South, who has most succinctly put the case for supporting the sensible amendment.
According to the most recent figures from the Office for National Statistics, the UK has a £600 billion corporate surplus, due to businesses lacking the confidence to invest in the future because the Government cuts are going too far, too fast. If we are to rebalance the economy we need to increase investment, which in Britain has always been low compared with some other countries. Cutting investment allowances does nothing to ensure that the corporate surplus goes into investment in Britain. This Chancellor goes down in history not only as a Chancellor who presented a Budget for growth while predictions for growth were being downgraded even as he spoke, but as one who said that the Budget was to support exports, manufacturing and investment, and then introduced provisions to cut investment allowances—hardly the best way to support investment.
I particularly want to focus on manufacturing. Manufacturing appears to be becoming the new squeezed middle, squeezed between a Government who are cutting too far, too fast, and the banking system, which seems to be the preferred repository of bonuses from the Government.
It is a great pleasure to serve under your chairmanship, Mr Gale. Between 1997 and last year, 1.3 million manufacturing jobs were lost in this country. Would the hon. Gentleman call that the squeezed middle as well?
Manufacturing is a big challenge, and at the moment we have a squeeze on manufacturing and no optimism for it in the economy. I am very concerned. In my constituency, Tata, which is not only one of the largest companies in the world, but one of the largest companies employing people in the UK, has a significant supply chain both in the constituency and beyond, and we need ways to encourage and reward companies for investing in the future.
My hon. Friend is right that we should be worried about the future of manufacturing. The world is very different from 10, 15, or 20 years ago, with the competition and growth of economies in China, India, Brazil, and elsewhere in the former developing countries. To compete effectively against such countries, we have to get the regime right in this country now. It is no good looking at what has gone on in the past; we have to get it right now, and we have to get the right policies in place. That is why issues such as capital allowances and creating a strong, growing economy are so important, and why there is so much concern among many organisations about the Government’s plans for cuts in capital allowances.
My hon. Friend puts the case very well. As has been pointed out by my hon. Friends, the existing challenge to manufacturing relates to construction, and particularly, as my hon. Friend the Member for Middlesbrough South and East Cleveland has pointed out, to long product sales across the country, which have had a real impact on manufacturing and the steel industry in particular.
Capital allowances, especially for manufacturing now, allow an ability to take risk out of the market. Manufacturing is suffering most—and this is why it is the squeezed middle in this context—because we have banks that are unwilling to lend to firms, and we have a Government who, rather than giving a helping hand, have a closed fist. Therefore, firms are squeezed on the very elements of finance legislation that allow them to get that investment in.
My hon. Friend has clearly spelled out the situation and spoken eloquently about the squeeze on manufacturing between the Government and the banks, which is a pertinent point.
Let us look at the other challenges facing high energy-using manufacturing at the moment: there is the threat of carbon floor prices, the challenges of emissions trading, and the danger that we operate in such a way that we export emissions to Ukraine and Russia—such places outside the EU—and in that way, also export jobs.
Is my hon. Friend, like me, concerned that in the consultation in November and December on carbon floor pricing—and with other elements of the Bill that are linked to capital allowances—manufacturing had absolutely no input? It was left to one side, and the Department of Energy and Climate Change and the Department for Business, Innovation and Skills were sidelined for a Treasury-led policy.
I share my hon. Friend’s concerns that the voice of manufacturing is not being heard properly. I also welcome the earlier intervention made by the hon. Member for Watford, who reminded us that manufacturing has faced challenges over time. However, if we look at the previous Government’s record in responding to those challenges—infrastructure was put in place around regional development agencies, and capital investment opportunities were created through capital allowances—there was a different approach from the one that there is now. That is why this is a very challenging time and why it is so important that the amendment in the name of my right hon. Friend the Member for Delyn is supported this afternoon.
We need to learn lessons from recoveries from big recessions—for example, from what happened to the Japanese economy in the 1990s. Richard Koo, of the Nomura Research Institute in Tokyo, said that after the Japanese recession, at the turn of the decade many businesses remained in what he described as a “balance sheet recession”, preferring to pay down debt and protect cash flows, yet to shun investment. That is the danger that we currently face. That is why the capital allowance system encourages businesses not to go down that route. My hon. Friend the Member for Edinburgh South spelled out how businesses need these incentives to encourage them in the direction in which we want them to go.
Does my hon. Friend agree that the problem with this debate is that we see ourselves in too simplistic terms? We talk about tax competitiveness without realising that the challenge of the next decade, post-recession, is about which countries have managed to grow and expand their economies, and which countries stave off the worst vestiges of decline, but bump along the bottom, with no growth, no expansion and a reducing population as people leave for better climates.
My hon. Friend is quite right. Growth tends to be higher in countries that have a higher investment in social and intellectual assets, as well as good capital infrastructures. That is the point she is underlining. That is why countries such as Germany and Korea have prospered in recent years. The Government are in danger of having too simplistic a view, thinking that cutting corporation taxes will automatically lead to investment. All the evidence from the research demonstrates that that will not necessarily happen. There needs to be an investment strategy. To cut investment allowances at this time sends completely the wrong message.
Capital allowances are a significant part of the support infrastructure for business. They can boost investment and they need to be retained. If the Government fail to raise business investment then our economy could stagnate over a prolonged period. None of us want that. It is crucial that these discriminating tools of fiscal policy allow capital allowances to incentivise investment at a time of low business confidence. That is exactly what we need. The danger of this proposal, which reduces capital allowances, is that it gives completely the wrong message and the wrong driver to the economy at this sensitive time. I hope that all members of the Committee reflect on the far-reaching debate we have been having today, and support my right hon. Friend’s amendment.
May I, like my hon. Friends and other colleagues, say what a pleasure it is to serve under your chairmanship again, Mr Gale? My hon. Friend the Member for Scunthorpe mentioned the squeezed middle. In this context, manufacturing is the squeezed middle between the banking sector and the Government. Clauses 11 and 12 propose a reduction in capital allowances, as part of a blend of policies that either make balanced good sense or are predisposed with the desires of one or more dominant sectors, which are having greater influence on this Budget and these Treasury policies than others.
I want to ask the Ministers present a number of questions. Are the reduced capital allowances based on available evidence? Is there any evidence the Ministers can give the Committee now or at a later stage for that proposal? Are reduced capital allowances, balanced with corporation tax, favourable or not to SMEs? What has the SME community said about the reduction in capital allowances? What is the regional impact of the reduction in capital allowances, particularly on my region of the north-east? Yes, we have a large public sector in the north-east, but we also have a large heavy manufacturing sector, particularly in my area around Teesside and Teesport north and south of the river. What effect will the reduction in capital allowances have on the chemical industry? We have to remember that the UK’s largest export product is chemicals. The chemical sector makes up 30% of this country’s exports.
What evidence is there for the Government taking on these policies in response to cyclical industrial patterns per sector and per industry? How do the Government believe that after a year of reduced growth rates this policy is helping de-risk the market? We see across the pond in America a policy of intensive investment over the last two years. Yes, they have now come up with a far more austere budget, once they have obtained growth, but we have revised growth figures down and down and down over the last 12 months. How are we de-risking the market with a policy like this?
What was the CBI’s response—not just its response in relation to the capital allowances; what were its members’ responses? Not EEF—I am talking about the other members, particularly in manufacturing, because certain players in the CBI are far more dominant than others, and simply quoting the CBI in relation to capital allowances or other Treasury policies is not good enough. What consultation have the Minister and the ministerial team had with the Chemical Industries Association? The North East of England Process Industry Cluster? Tata? Lucite? Other large, industrial, energy-intensive users? This is particularly pertinent to my region, as colleagues will agree.
How does the policy ensure domestic demand? We have talked about manufacturing growth; yes, it has grown, but not back to the stable levels we saw three or four years ago. It has grown back. How does this policy, in relation to capital allowances, generate domestic demand? We are seeing the effects of a drop in domestic demand in my area, and in that of my hon. Friend the Member for Scunthorpe. There are dangerously low levels of domestic demand, from which certain internal sectors within particular industries are suffering more.
I would compare that effect to the BRIC nations—Brazil, Russia, India and China. While the Government, to a certain extent, and the banks for a number of years, have applied a credit squeeze here, we are now seeing credit squeezes in places such as China and India. Will the manufacturing boost that we have benefited from in the last 10 to 12 months continue? Without capital allowances to soften the blow come quarter 3 or quarter 4, when the Chinese and Indian credit squeeze on consumption for industrial product tightens, what do we have in place to pick up the pieces? It will occur, especially as countries such as China and India are cornering markets such as iron ore and oil. China has only just got into an oilfield around Cuba, which was ignored for political as well as industrial reasons—it is high in sulphur. They are now investing there to take that oil, and also purchasing as much coke and iron ore as they can around the world. How will we compete? How will we manage our own economy through that very difficult period when we will be unable to compete for raw materials and feed our own industries?
China is an incredibly useful example. Not only are the Chinese Government and economy investing in all of these raw products around the world, but they are buying up water as well. That is another key issue in terms of the drivers of an economy as large as China’s and how we will compete, particularly our small businesses. When a major world player is buying up the world’s water it is a serious concern.
There is a broader picture here, and I think there are members of the Government who recognise it. We have to work with them and help them in this debate. We have seen, for example, the Secretary of State for Energy and Climate Change referring to industries in my area, such as steel and chemicals, as sunset industries, whereas the Secretary of State for Business, Innovation and Skills is arguing the case on the carbon floor price. The debate is still live and kicking, and at least the Opposition get it, because for a number of reasons we understand that manufacturing does have a future, and we want to see that future blossom and develop.
There are also the front-line effects of capital allowance reductions—the consequences. Capital allowances allow firms, particularly in heavy industry, the space and the wherewithal to ensure that health and safety requirements on site are met. I know that from my own experience. That is not just in heavy industry. Farming is the sector that is suffering the most from accidents at work. The squeeze is hurting farmers. They are trying to balance their budgets as well. Sometimes, they would like to renew their equipment but they have to balance the books.
Does my hon. Friend share my concern, which others have voiced, that there does not appear to have been enough analysis of the impact of the changes before they have been pushed through? The OBR was unable to analyse the effects of the corporation tax cut and the change to fuel duty and incorporate the analysis into the predictions for the Budget. Does he share my concern that it is the lack of analysis of the effect of the change to capital allowances that is very worrying? What we really need from Government, as we have said in relation to other clauses, is greater evidence. That is why the amendment is so important, in calling for that work to be done.
I thank my hon. Friend for his comments. This is all part of an argument that we get occasionally from the Government, based on agglomeration theory in relation to industry, but none of the policies under discussion conform to that type of view. It looks to me as though certain sectors have the ear of the Government at the moment, while other sectors certainly do not. That is pertinent to manufacturing, because there are a number of issues here that could severely hurt it and damage its long-term future.
To return to my point about health and safety, my own back story is that in 1996, when I was 16 or 17, I was an agency worker at Lionweld Kennedy, which is a steel components firm in Middlesbrough. I was a fettler and grinder—a glamorous title. I had to take beams of steel or architectural platforms and file them down to smooth components. I did not know it at the time—unfortunately, the company had very few employees and was not allowed to unionise us—but that role was at one of the highest risks, perhaps, for vibration white finger. I was a 16 or 17-year-old who had gone away to try to make as much money as possible to help me go to university and so on, and I was not aware of the risks to my own health. If it had wanted to, the company on site could, through capital allowances, have tapped into funds or made those capital investments for free, lessening the risk to my health as well as the risk to its pocket of potential future litigation.
I am a former trade union official. I remember representing workers at Sheffield Forgemasters and Firth Rixson in Sheffield, Teesside Cast Products and other steelworks, including some in the constituency of my hon. Friend the Member for Scunthorpe, and high levels of hand-arm vibration were everywhere. People were working on presses that were more than 100 years old, with vibrations going through their bodies. A firm handshake with big, burly men of 55 would have crushed their hands, because they did not have any grip left. For good reason, that equipment needs to be renewed.
Legislation is in place whereby such pieces of equipment have to be changed due to their detrimental effect on the health of employees. How will important companies such as Sheffield Forgemasters, Firth Rixson and Tata Steel be able to constantly renew equipment, for whatever reason—in this case, the health of their workers—to make sure that they are not damaging their employees, who will, ultimately, only pursue litigation against their employers for putting them in that physical condition? We have to think about a long-term policy that helps manufacturing and industry, takes the risk out of the market and stops industry being pinned down, either by litigation by its own employees, who have been physically damaged, or by the Government, who, frankly, do not get it.
We have had a lengthy and thorough debate on clause 11 and amendments 6 and 7. As we have heard, clause 11 reduces the maximum amount of annual investment allowance to £25,000 from April 2012. I shall come on to amendments 6 and 7 shortly, but I want first to set out the reasons for changing the AIA.
That AIA enables businesses to claim full tax relief on most plant and machinery expenditure in the year in which it is incurred. Clauses 10 and 12 make related changes to the capital allowances regime, with changes to the main rate and special rate of writing-down allowances and a doubling of the disposal period to extend the scope of the short-life asset regime.
The reduction of the AIA was announced in the June 2010 Budget. Since April 2008, businesses regardless of size have been able to claim the AIA on up to £50,000 of their expenditure each year on most plant and machinery, with the maximum increased to £100,000 from April 2010. Businesses are able to claim the AIA in respect of their expenditure on both general and special rate plant and machinery. So, in effect, the AIA is a 100% allowance that applies to qualifying expenditure up to an annual amount.
The change in clause 11 will contribute towards a reduction in the main and small profits rates of corporation tax, which will provide strong support for enterprise and growth in the UK. It is fair to say, as the right hon. Member for Delyn has acknowledged throughout, that the provision is part of a package and has to be viewed in that context.
The corporate tax package announced in the June Budget will create a competitive corporate tax system and help ensure that the world knows that the UK is open for business. The AIA has always been designed to provide SMEs with help on simplification and cash flow. That will continue to be the case.
Some 95% of all businesses will continue to have all of their annual capital expenditure covered by the AIA. Those businesses that invest more than £25,000 will continue to be eligible for plant and machinery writing-down allowances on expenditure not covered by the AIA.
The Opposition’s argument is that somehow this step is anti-small business. I must stress that 95% of businesses will be unaffected by the change. They will continue to be able to claim all their capital allowances under the existing AIA regime.
The hon. Member for Sefton Central and my hon. Friend the Member for Brecon and Radnorshire both asked about unincorporated businesses, which do not benefit from the corporation tax cuts. Unincorporated businesses are overwhelmingly those smaller businesses that do not have capital expenditure above the £25,000 limit stated in clause 11.
The Exchequer Secretary is telling us how much small businesses and large businesses will either gain or lose because of the changes. Does he accept the analysis that shows that, for every £1 that goes to small companies, more than £4 goes to large companies? If he does, does he accept that that is a cause for concern when small businesses have to be the drivers of growth and recovery?
In our announcements on tax, rather than increasing the corporation tax rate from 21% to 22% as the previous Government planned to do, we are reducing it to 20%. We are expanding the SME R and D tax credits regime from 175% to 200% this year, and from 200% to 225% next year, which is as generous a regime as can be found anywhere in the world. We are increasing the size of qualifying companies and making other improvements within the EIS and VCT regime. We are extending the small business rate relief holiday, which will benefit more than 500,000 small businesses, for a further year from 1 October 2011. This Government have a proud record in providing support to small businesses. Given that Opposition Members would have increased the level of corporation tax on small businesses, I am not sure that their complaints sit terribly well.
We also heard an argument that the measures are an attack on manufacturing. This Government take manufacturing seriously. The hon. Member for Wirral South was absolutely right to say that sometimes people knock manufacturing in this country and say, “All the manufacturing has gone.” When she visits an Airbus factory near her constituency—in the constituency of the right hon. Member for Delyn—she sees an example of UK manufacturing that is the best in the world. I was struck by the quote from Airbus, which said, “Without us, it is just a bus.” Airbus is hugely important.
Despite the fact that there are a number of very successful manufacturing businesses in the UK, there has been a certain amount of talking down of manufacturing here. The hon. Member for Scunthorpe, who is normally moderate and careful in his words, talked about the squeeze in manufacturing and the lack of optimism in manufacturing. The EEF predicts that manufacturing will grow by 3.5% this year and engineering by 7%, and these forecasts have recently been revised upwards. In March, the CBI said:
“The manufacturing recovery is picking up pace…Total order books have strengthened…a firming of domestic demand adds to the healthy export outlook.”
The position for manufacturing is looking good at the moment.
Just for my information and to be helpful for the record, will the Minister say what proportion of the growth in manufacturing over the past year the Treasury attributes to increasing domestic demand and what proportion to the position of the pound?
Clearly, the depreciation of the currency aids manufacturing and exports. From what we have heard from some hon. Members, one would think that this change in the annual investment allowance is somehow the death knell for manufacturing. The position of manufacturing looks strong. Given the overall package and our reforms of the short-life asset regime, which we will come to shortly, we are putting in place conditions for manufacturing to grow in the future.
It is well documented that the OBR could not factor in the 1p additional corporation tax cut because the Chancellor brought it to the table too late before his Budget. Indeed, many commentators suggested that he may have panicked about the cut. Would the Minister not contend that, rather than making that additional corporation tax cut on top of what had already been announced to make the UK one of the most competitive countries in Europe in terms of corporation tax, it would have been better to reassess the investment allowances part of that to give a little more flexibility to the industries that we have been considering this afternoon?
When the Chancellor announced his package of policies in June 2010—and this addresses the point raised by the hon. Member for Wirral South about the modelling—the OBR looked at the impact of the corporation tax package on business investment. It modelled that, using the average reduction in tax rates and academic evidence from the UK and around the world as well as business investment responses. It forecast a future business investment increase of £13 billion by 2016. The OBR report in that Budget makes that very clear. It confirms that the growth of business investment and the intentions for further increases are based on information from businesses themselves. It stated that the reductions in the rate of corporation tax underpin its forecast for strong business investment growth over the next five years. It was argued that businesses do not necessarily want that, but it is worth quoting the British Chambers of Commerce in a survey of its members last year:
“Asked about corporation tax, 90% of companies stated that the Government should proceed with lowering the headline rates at the expense of tax allowances.”
We welcome the Opposition’s support for lowering the headline rate.
It is also worth considering the previous Administration’s record on enhanced capital allowances. They conceded that the effects on investment of enhanced capital allowances are probably modest. When they introduced the generous temporary 40% first-year allowances for all businesses for 2009-10, the increase in investment was estimated to be less than 1%. We believe that we are getting the balance right. It is right that we move forward in this way.
Amendment 6 would seek to reduce the AIA to its original value of £50,000. Although I understand the reasoning behind such a proposal, we do not believe that it is the right way to support business, and it would involve disrupting the overall package for business that we have set out. The changes that we are making within the corporation tax package will, as I said, encourage additional investment of £13 billion by the end of this Parliament. The manufacturing sector will benefit from the reductions in corporation tax to the tune of £700 million each year by 2015.
I must make this point, as I made it in the context of the changes to the writing-down allowance. We have heard several passionate speeches from the Opposition. In 2007, the Labour Government cut capital allowances and reduced the writing-down allowance much more substantially than we have done to fund a reduction in the CT headline rate. We think that we have done the right thing, because it was important to reduce our corporation tax rate, but from listening to the Opposition today, all that appears to be forgotten. The industrial buildings allowance was scrapped, as my hon. Friend the Member for Brecon and Radnorshire highlighted; so was the agricultural buildings allowance. It is worth reminding the Opposition of that.
We have heard the Opposition argue that we should reverse the policy, but we have not heard anything about what the cost would be. I will enlighten the Committee. In 2013-14, the cost of amendment 6 would be £300 million, and for the years following, it would be £250 million. I am aware that all spending commitments proposed by the Opposition must be agreed by the shadow Chancellor and the Leader of the Opposition, but I am not sure whether that applies to tax expenditures. [Interruption.] Well, we have heard a lot of passionate speeches in support of amendment 6, and I am sure that when it comes to it, there will be voices calling for a Division. We will note that carefully.
As I said, fewer than 1% of all businesses would benefit from amendment 6, and 95% of businesses’ capital expenditure would still be covered by the AIA. Any compromise on our planned reduction in the rate of corporation tax would affect not only businesses directly but the approach to encouraging business. It would also contradict the position, which I warmly welcomed, professed by the right hon. Member for Delyn only last week, which was that he was in favour of the reductions in corporation tax.
There is no evidence to suggest that such a change would have any significant impact on investment. We think that it is right to focus the simplification and cash flow benefits of this valuable relief on smaller businesses, in conformity with the original policy purpose. Moreover, the cuts in the small profits rate of corporation tax will benefit smaller companies seeking to invest and grow.
I am not entirely surprised that we have heard relatively little about amendment 7 during the debate, because I confess that we find it somewhat puzzling. I know what tabling amendments can be like in opposition, and I suspect that this is one of those moments when closer scrutiny shows that an amendment does not quite do what was intended.
Subsection (3) is wholly to the taxpayer’s advantage, because we seek to limit the Government’s existing power to change the AIA’s value by secondary legislation. In future, changes by statutory instrument will be able only to increase the amount of the AIA—something wholly beneficial to business. At the moment, the power exists to increase or decrease the amount introduced by the previous Government as part of the original 2008 legislation, in which a subsection states:
“The Treasury may by order substitute for the amounts for the time being specified in subsection (5) such other amount as it thinks fit.”
So the Government could reduce the £25,000 limit by secondary legislation to £5,000, for example. Under the clause, the amount can only become greater—we can only increase it—so I do not quite understand why the right hon. Member for Delyn wants to remove subsection (3), so that we would still have the power to reduce the amount by order. Perhaps he will explain.
If the Minister reads the Hansard report of this morning’s proceedings, he will see exactly what I said. I made the point that this is a probing amendment to find out whether that was the case. My purpose is to test whether the intention is simply to revise the amount upwards. Given that he is cutting allowances by three quarters, the Bill seems to include a bit of a churlish change.
Well, the Bill is churlish to the extent of making a change. I am grateful to the right hon. Gentleman for saying that this is merely a probing amendment, but it is somewhat puzzling and seems to run counter to his general argument. I am pleased if he welcomes subsection (3), but I did not detect much of a welcome for it this morning.
Clause 11 is a vital component of the reforms to corporation tax that are essential to achieve our goal of creating the most competitive tax system in the G20. The change is sensible and fiscally sound as part of a broader package. The AIA will still cover the annual capital expenditure of 95% of businesses. We will ensure that Parliament retains full oversight of any future reductions in the AIA. I therefore ask the right hon. Gentleman to withdraw the amendment, and I recommend that the clause stand part of the Bill.
We have had a fruitful debate of some length, but this is an important issue about the contribution of capital allowances to helping support manufacturing industry. I hope that the Minister will refer to Hansard, because I said that the purpose of amendment 7 was to tease out from the Government whether they intended to create a floor, so that the capital allowance could not be reduced still further. He confirmed in his final contribution that that is the intention. That was the amendment’s purpose.
As I mentioned this morning, the Conservatives argued before the election that capital allowances should be reduced to 12.5%, but the clause will give the Treasury the ability to raise the allowance but not to reduce it. The amendment’s purpose was to confirm that point. I am pleased that the Minister has said publicly that he does not intend to reduce the capital allowance still further. That is a positive development.
Amendment 6 on the £50,000 limit is a probing amendment designed to test the reasons why the Minister felt that the figure should be reduced from £100,000 to £25,000. I will not press the amendment to a Division—I will withdraw it in due course—because, as he has said, it involves a spending commitment. At this stage, we cannot judge the commitments for future years, when a Labour Government have been elected in due course. We will reflect on those spending commitments when we consider those points. My hon. Friends the Members for Wirral South, for Sefton Central, for Edinburgh South, for Scunthorpe, for Middlesbrough South and East Cleveland and, indeed, other hon. Friends in interventions have made the case very strongly that the proposal in clause 11 is ill thought out and has got the potential to damage small businesses.
This morning, we looked at representations—not from my hon. Friends but from business organisations outside the House—that express real concerns that the clause as drafted will benefit big businesses and financial institutions and disadvantage small and medium-sized businesses. The comments and speeches from my hon. Friends in support of my original comments have indicated that.
We heard from my hon. Friend the Member for Wirral South about the impact on small businesses in her constituency. My hon. Friend the Member for Gateshead talked about the abolition of the RDAs and the need for that level of support to be there to help small businesses because they are the leading suppliers for big businesses in his area. My hon. Friend the Member for Sefton Central mentioned similar issues surrounding the need for investment for growth. My hon. Friend the Member for Edinburgh South spoke with real experience of building and managing a small business in his area. That experience demonstrated that the supply chain is very important and that small businesses are part of that. My hon. Friends the Members for Scunthorpe and for Middlesbrough South and East Cleveland made similar important points. We are concerned about the impact of the clause.
Although we will withdraw the amendment, the Minister needs to use that well-known phrase “a pause for reflection and thought,” which is common at the moment on issues where there is considerable criticism from outside the House on key matters. I strongly take the view that the clause will be disproportionately beneficial to large businesses and will have an impact on small businesses. In terms of regional impact, the clause has not had the regional assessment that my hon. Friends mentioned. As far as I can see, in Scotland and in my area of Wales, where devolved Administrations deal with economic development, there has been no real engagement with the impact of the measure on the growth of the manufacturing industry.
I did not get any indication from the Minister about what he has discussed with DBIS and DECC—Departments in his own Government—on the issues and how they feel about it. Greater thought needs to be given to the clause. We will not press the amendment to a vote but give the Minister the opportunity to reflect on the matter and bring back proposals on Report to deal with the issue in more detail. The Minister needs to reflect on the impact of capital allowances and to listen to the representations that we have put on record today from a range of bodies—from the Institute of Hospitality to the EEF, to individual tax and accountancy firms across the north-east and other regions—and the experience of my hon. Friends.
We will not press the amendment to a vote because, as the Minister rightly pointed out, it relates to spending commitments designed simply to test his logic. However, I am not content with clause 11 because it is not well thought out. We will vote against it. When hon. Members have listened to the arguments and decided to vote with us, the Minister can take the measure away, reflect on it and bring back some proposals on Report that adequately meet the needs of organisations outside the House.
I beg to ask leave to withdraw the amendment.