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Like the hon. Gentleman, I was not a Member of this House at that time, and I was not involved in the debates and discussions that took place. In my party—I am sure it is the same in the hon. Gentleman’s party—we discuss these issues, and we often disagree. Some of us had views that were not the majority view—even at the time of the previous Government—about how to set tax rates. But it is clear that the big difference that we have been faced with since 2010 is that there is a gap between Government income and Government expenditure. One of the reasons for that is that Government income fell quite substantially as a result of the recession, as we all know. When individuals lose their jobs, they pay less tax, businesses make less profit, and Government income drops. We also believe, though clearly not everybody accepts, that stimulating the economy during a recession is a positive move.
The decision to raise the rate from 40p was taken in that context. However, it is a debate we need to have constantly. We need to think about how we can fund the things we want to do and on whose shoulders the burden should rest. The IFS said that those on the highest income are bearing the greatest proportion as well as the greatest cash amount and that, therefore, that makes the rest of it all right. I genuinely question that. I think the IFS was looking prospectively at what the impact should be of various measures. I wonder what the out-turn might be regarding the impact on that top group. If they are not really being affected by this tax, the impact will not be as the IFS modelled it in advance.
That is another reason for looking in more detail than at the time of last year’s Budget to review the impact of that additional tax rate. It was measured over a very short period. It is always necessary to look at the overall impact of budgetary measures on living standards. We have asked to look in particular at the living standards of basic rate taxpayers. Even if the IFS figure is an out-turn as well as a prospective one, it still remains the case that to lose 10% of an income in excess of £150,000 or £200,000 is very different from losing 10% or even 5% of a much lower income. That is where the cash terms and the impact on spending power matter.
There is also an impact on the wider economy. One thing that is driving the ongoing recession and causing the economy to stagnate is the fall in living standards. People have less money in their pockets to spend in the way they previously did. I was speaking to a constituent recently whose husband is a taxi driver. He is self-employed and they are not particularly well off but they have seen a substantial drop in income, because, as she said, people are not going out as much. When people are not having as many nights out they are not using taxis as often. They have seen a real reduction in their income because other people have seen a reduction in their disposable income. And on it goes. The path we are marching down will take us back to a bad position.
This is not just about fairness, although that is hugely important. There is also the economic impact of what is happening. The spending power of millions of people is powerful in an economy. I am sure others will be able to give local examples, like the one I have given, showing how important it is that people are able to spend.
At the lower end of the income scale, it is not good enough to say that all is fine because we are raising the income tax threshold and that is the best way to make them better off. People sitting at home are not saying, “This is great and fantastic. Look at how much more money I have got.” They know they have not got very much more money. In fact, on average basic rate taxpayers have less money than before due to measures such as the rise in VAT, price rises and the loss of important benefits.
Child benefit, which goes to every family with children except those earning more than £50,000, has been frozen since 2010. That has an impact on the amount of money coming into households with children. Even before the recent changes, about which there has been some debate, tax credits were frozen prior to the 1% increase introduced by the Welfare Benefits Up-rating Act 2013. Despite having said that they were keen to help working families, the Government froze tax credits. If that happens for two or three years on the trot, it will have an impact. Other people have lost considerable amounts of tax credits because they have dropped off the top end. Because the Government have taken the taper down faster than before and taken away part of tax credits with the change from 80% to 70%, many working families have lost considerable amounts over the past three years. That must be weighed against the question of tax allowances.
We are trying to reduce the deficit and get the economy back on track, and the decision to raise tax allowances has a substantial impact on Government finances. Some Government Members have argued, and I respect them for this, that it is morally right to leave people with their income rather than paying out tax credits, so, in one sense, they would make the change anyway. That is a point of view that we can debate and perhaps disagree on. The measure does not simply take out of tax the people at the lower margin; it removes all basic rate taxpayers, so the total cost to the Government, who are strapped for cash, is quite considerable. Presumably, Ministers had that equation in their head when they drafted the proposals. Their view must have been that it was the right thing to do, even though it would cost the Treasury a considerable amount.