Income tax charge for tax year 2020-21

Part of Finance Bill – in a Public Bill Committee at 11:30 am on 4 June 2020.

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Photo of Bridget Phillipson Bridget Phillipson Shadow Chief Secretary to the Treasury 11:30, 4 June 2020

It is a pleasure to serve under your chairmanship, Ms McDonagh, and to welcome other Members to the Committee. I thank the Clerk and all the team in the Public Bill Office for the support that they have provided in recent weeks and will continue to provide as we debate the Bill. Circumstances have been very challenging for staff who have adapted to working remotely. I am grateful for all the discussions and advice that they have been able to offer us. I also extend, via the Minister, our thanks to all the officials in the Treasury who have been working very hard to respond to the crisis that we face. I want to put on the record our thanks for their work, which is often not recognised. Our country’s response to the crisis depends on the work that they undertake on behalf of us all.

I am sure we all accept the importance and necessity of scrutinising the Bill. However, the Opposition find it regrettable that it was not possible to find an alternative arrangement for the Committee stage of the Bill. We hope that the House can resolve the wider issues around protecting those who have shielding responsibilities and making sure that we can all be kept safe at this time. Our proceedings obviously place a great deal of pressure on the staff who are vital to the House’s functioning. Again, I reiterate my thanks to them. We will want to consider certain aspects of the Bill in much greater detail over the coming weeks. I can assure the Minister that we appreciate the pressure that officials are under in responding to the crisis, and that we intend to be responsible in our approach, and will remain focused on our key priorities in the Bill.

Our amendment 5 would require the Government to assess the impact of income taxes in the Bill on tax revenues, and on households and individuals of different income levels. The Government like to tell us that we live in unprecedented times, which is of course true. As such, we need greater scrutiny of policies that may need to be revised in what is clearly becoming an unprecedented economic downturn. The Resolution Foundation estimates that GDP will contract between 10% and 24% owing to the outbreak of covid-19: an economic shock of a kind that has not been seen since the 18th century. Very much is at stake. It is crucial that the Government assess the means by which they generate revenue, given the huge demands facing our public services and economy.

First, we need to know how much revenue we are generating from maintaining income tax rates, in order to determine whether it is enough to meet the demands on our economy and the pressures on public services, as well as the Chancellor’s income support packages. Secondly, we need to better understand its distributional income. Over the past 10 years we have seen large cuts to working age benefits against reductions in direct tax, including a large rise in the tax-free personal allowance. Unsurprisingly, the winners in all this have not been low-income households. According to the Institute for Fiscal Studies, the poor have been disproportionately hit by tax and benefit changes since the Conservatives came to power 10 years ago. The worst-off 10% of households have lost 11% of their income since 2010. When we factor in households with children, that rises to 20%. In contrast, the highest-earning 10% of the population have seen their incomes fall by only 2% in the same period.

In its 2020 Budget analysis, the Resolution Foundation makes it clear that nothing has been done to offset the considerable welfare cuts made by previous Chancellors since 2015. Households in the second net income decile, for example, will eventually be £2,900 a year worse off on average, thanks to the tax and benefit changes announced since 2015, and £900 of that is yet to come; it will result from welfare policies that are still being rolled out. These cuts mean that the incomes of the poorest families have fallen over the last two years, and there is a real risk that child poverty rates will reach record highs by 2024.

We understand that welfare cuts have been offset in some ways by aggregate tax cuts, but those changes have been of most benefit in cash terms to those in the top half of income distribution. That has been tempered by some changes, but we have real concerns about the impact that this situation is having on low and middle-income families. Overall, tax and benefit policy over the last five years has been regressive, with the poorest losing the most, both in proportional terms and cash terms, and already welfare cuts have resulted in the incomes of the poorest families falling. Child poverty is rising, and we have real concerns about that. The Government must take action to address this searing inequality.

We know from research conducted by the Equality and Human Rights Commission that the overall impact of policy decisions taken between 2010 and 2017 is regressive. Looking at some of the outcomes that the commission discovered, we see that ethnic minority households will be more adversely effected than white households; the average loss for black households is above 5% of net income, which is more than double the average loss for white households. Households with one or more disabled members will be significantly more adversely impacted than those with no disabled members, and on average, tax and benefit changes will reduce the income for families with a disabled adult by about £2,500 a year. If that family also has a disabled child, the income reduction will be over £5,000 a year, which compares with a reduction of about £1,000 for non-disabled families.

Lone parents will lose around 15% of their net income on average, which is almost £1 in every £6. By contrast, the losses for all the family groups are much smaller, especially for those who are relatively well-off; they are between nothing and 8%. Women lose more than men from reforms at every income level. Overall, women lose about £950 a year on average, which is more than double the losses of men.

In its report, “The shifting shape of UK tax”, the Resolution Foundation has found, when considering marginal rates of tax, including the crucial role played by the benefit system, that the highest rates are concentrated in the bottom half of income distribution, with very high marginal deduction rates of 63% or even 75% being common. I am sure that Members will agree that our tax system cannot be called progressive if the poorest households and average earners continue to experience the greatest proportional loss. We must consider the distributional impact and revenue effects of current rates of income tax as we consider the most pressing issues arising from coronavirus and the impact it has had on our society and economy. It has crippled the job market and risks putting thousands of people—even millions—out of work.

The Resolution Foundation anticipates that in the event of widespread unemployment and closures of firms once the furlough scheme is phased out, a 10% structural unemployment rate, such as the one we sadly saw during the 1980s, could lead to £175 billion being lost in taxes. Alongside that, there will be need for more social security benefits to be paid out. Such a reduction in tax receipts would add to an already higher proportion of working-age adults not paying income tax at all, and given that tax receipts make up so much of Government revenue, it is vital that the Government consider the impact of maintaining rates of employment.

Labour Members believe that we need a tax policy that looks to the economy of the future, and considers the challenges that we must face during this pandemic. It is vital that those individuals who are best placed to contribute do so, and that those who need Government support are able to access it, including the most vulnerable people in our society. Our amendment would allow the Government to reflect on their policy and to measure how much, if at all, it needs to change to fund support during this crisis, together with their other spending plans presented at the Budget earlier this year.

Turning to the question of whether this amendment is necessary, and to respond to the points made by the Minister, I refer to a joint report of the Institute for Fiscal Studies, the Chartered Institute of Taxation and the Institute for Government, which was published back in 2016, and which considered the issue of the absence of post-legislative scrutiny. That report said that post-legislative scrutiny should focus on whether a measure raises the revenue it is expected to raise, whether it is achieving its policy objectives, and whether it is operating as intended—so, whether the measure is still needed, and its impact. Clearly, this is a much broader point, but it is worth the Government considering the impact in this area, where we require clarity up front about what measures will achieve.

The report also pointed out that when Parliament does engage on tax issues, most scrutiny is focused on new proposals, and there is very little capacity or appetite to look at the effectiveness of past measures, or the coherence of the system as a whole. We intend to return to this question later, and particularly to the work that the National Audit Office has been doing in this area. It argues that there is a role for other institutions in considering more effective systematic scrutiny, and suggests that it could perhaps do that, and that there could be a greater role for the Office of Tax Simplification, or perhaps the Office for Budget Responsibility. It also considers what role Parliament might play in all this, perhaps through its Select Committees, and what scope there is for boosting academic evaluations of tax policy.

We had a wide debate on Second Reading about the fact that our public services are overstretched; they have faced a decade of real challenge, and were left ill prepared for the crisis we face. We also face an important challenge in the months and years ahead in recognising the important role that key workers have played during this crisis. Their contribution has been undervalued and not recognised for far too long, and that must change. The measures the Government will adopt in their approach to taxation and social security will play an important role in shaping that. That is why we tabled amendment 5: so that we can have that scrutiny and greater consideration. We want to avoid the mistakes made in the past. The amendment will help the Government to tread carefully, to recognise the challenges we face in responding to the current crisis, and to make evidence-based revisions to policy, both in the here and now in responding to this crisis, and in the future. We hope to push the amendment to a vote.