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Budget Resolutions and Economic Situation

I am grateful for the hon. Gentleman’s observations. We do not necessarily need another commission, but the rewrite exercise’s remit needs to be expanded to take account of his thought process by allowing for the expertise of the tax industry, which has been devoted selflessly and tirelessly to the rewriting of our tax law in plain English. The lessons that have come out of that should be developed, in partnership with the Treasury and Her Majesty’s Revenue and Customs, into an exercise to improve and simplify the operation of our tax system without putting revenue raising at risk. For 70 or 80 per cent. of the population, what they pay every month in their mortgage has a more profound effect on their financial well-being than a penny or two off the basic rate of tax. On the basis of the average mortgage—£123,000, according to the Council of Mortgage Lenders—a quarter of a point change in the Bank of England’s base rate would cost people £25 a month or £300 a year extra. That has a far more profound importance as regards their personal budgets than the relatively small changes in the tax system that were discussed yesterday. That puts particular emphasis on the continuing importance of monetary policy. I have been worried for some time that the United Kingdom may be running unnecessarily high interest rates because of structural problems in our economy. I asked the Library to provide me with a comparison between average prices, GDP growth rates and interest rates in the UK and the United States over the period 1998 to 2006. In the UK, interest rates were 5 per cent., price changes based on the consumer prices index were 2.9 per cent., and growth was 3.1 per cent. In the United States, interest rates were 3.64 per cent., price changes were slightly below, at 2.9 per cent., and growth was 3.5 per cent. I conclude from that that this other open, free market economy has some advantage allowing it to run lower interest rates than we can, and we should explore why. A recent International Monetary Fund report clearly identified the difference between the inflation rate in the manufacturing and service sectors:"““While goods price inflation has generally been below service price inflation in all three””—" the euro area, the United States and the United Kingdom—"““in the United Kingdom, this has been significantly more pronounced with goods price deflation offsetting strong and fairly stable inflation in services prices””." There is a case for examining whether further structural reform is needed in the economy, particularly in the service sector, to ensure that it is efficient and not unnecessarily driving inflation in this country. That was borne out in the same IMF report in relation to labour productivity growth in tradeables—as it calls the manufacturing sector—in the United Kingdom between 1995 and 2004. A 2.93 per cent. change is quoted, with a 1.4 per cent. increase in productivity for non-tradeables. In the United States, however, the figures are 3.5 per cent. versus 1.99 per cent. That needs to be looked at, and I hope that the Financial Secretary will agree that a consideration of the structural side of the economy has some merits. In previous speeches on the Budget, I have commented on the subject of inheritance tax. Originally, I advocated its abolition, but I recognise that anyone who says that a tax should be abolished must tell the Government, or the Opposition, of the day where the money will come from. Given that more estates are now being drawn into inheritance tax, I decided that an alternative approach was merited. Older people who want to pass on the fruits of their labour have a considerable worry that house price inflation will draw them into the complex web of inheritance tax, with its 40 per cent. marginal rate. There is now a case to re-examine that tax. I posed to the Library of the House the following question. If the inheritance tax threshold remained where it is now, and if all inheritance tax exemptions were removed, what rate of inheritance tax would be necessary to maintain the current yield? The answer that came back was a marginal rate of 10 per cent. If we modified that proposition by continuing the exemption from inheritance tax for the surviving spouse, a rate of 12.5 per cent. would result. With a simpler, more straightforward inheritance tax with low marginal rates, we might not have the situation in which avoidance was the privilege of the rich and sophisticated. That analysis shows that there is a case for re-examining the way in which inheritance tax operates. From the same analysis, I also discovered that if we removed ways of avoiding inheritance tax, and had a threshold of £750,000, we would still be left with a 40 per cent. marginal rate. We can play tunes with the inheritance tax system, and the time is now right for a thorough review to remove complexity and try to introduce a lower marginal rate. I want to conclude my remarks on the environmental element of the Budget. As the Minister will know, I chair the Environment, Food and Rural Affairs Committee, which has been doing considerable work on the citizen’s involvement in climate change and on bioenergy. The way in which the Budget dealt with some environmental challenges was disappointing, although it would be churlish not to put on record my appreciation of the £50 million to be spent on preserving rain forests, which I wholly applaud. I also applaud the extra £6 million for the low-carbon buildings programme. A time will come, however, when grant subsidy by the Government will not be sufficient for the introduction to the United Kingdom of alternative, sustainable ways, with low greenhouse gas emissions, of generating heat and electric power. I recommend to the Financial Secretary that the energy review include some analysis of adopting the system in Germany, where the buy-in tariff on self-generated electricity provides a return to the individual of four times the price paid for purchasing electricity centrally, which has dramatically increased the amount of power generated by renewables sources to 10 per cent., at no cost to the German Government and with no grants. The better buy-back price guaranteed for a period of 20 years, with the cost spread out among all electricity users, means that the average German household spends only €2 extra on their electricity bills, while still delivering a 10 per cent. renewable rate. Neither this country’s renewables obligation certificate, nor Ofgem’s proposals for consultation on the removal or replacement of the current ROC system, replicate the German success, which has led to widespread localised electricity generation through photovoltaic cells, wind or combined heat and power. Communities in this country are anxious to get involved in reducing greenhouse gas emissions. Again, Germany provides substantial examples of local investment by local people in combined heat and power schemes, thus removing the burden from Government but ensuring that the community has the right conditions to fund effectively their own environmental programmes. Will the Financial Secretary consider a third way in the range of individual savings accounts provided to encourage personal and private investment in energy-saving projects? Either personal involvement in an ISA dedicated to that purpose or changing the operation of venture capital taxation to encourage more investment in localised schemes, coupled with improved buy-back prices for electricity, could radically transform the opportunities for localised power and heat generation. The Financial Secretary should also consider the derogation on duty for biofuels. When the price of oil went up, the numbers wishing to invest in biofuels production substantially increased. It has become clear during the Select Committee’s inquiry, however, that some producers reduce production as the price of oil decreases, as it is no longer profitable, and the duty derogation does not provide an effective subsidy to cover the additional costs. Is it not possible to vary that subsidy according to the price of hydrocarbon fuel, so that the amount of money going back to a biofuel producer when the price is $80 or $90 a barrel is considerably more than when the price decreases to $50 or less? Take-up of the Government’s help to the second-generation biofuels industry needs further encouragement if we are to sort out the food-fuel paradox, because such investment is slower in this country than in continental Europe. I am surprised that those on both Front Benches have shown so little imagination in regard to aviation emissions. They could have come up with better ways of drawing to passengers’ attention the carbon implications of their journeys. I would favour not a tax but a carbon offset scheme, enabling people to know how much carbon their journeys were costing. Some of the work of the CarbonNeutral Company, for instance, could help to identify the carbon cost of journeys. Most important, the money raised could be put in a pot and help to fund carbon dioxide-reducing activity. Perhaps there could be a special lottery fund for localised and community-based activity, or a fund to give further support to projects such as the low carbon buildings programme. BP has developed a carbon offset programme allowing motorists to offset with money the carbon in the fuel that they buy. The company tells me that the results of its customer survey convey the clear message that customers want the money to be spent locally rather than remotely. The time has come for more imaginative offset programmes. It must be made clear to people that the money they must pay as a consequence of their carbon expenditure can be spent on reducing carbon in their areas and communities. Budgets are like Chinese meals. This Budget is certainly like that. You noticed it on the day, but you woke up the following day wondering what it really was that you ate. I know from my time as a Treasury Minister that this will turn out to be rather a disappointing Budget. The cheers on Budget day collapsed very quickly as people saw the true meaning of the so-called 2p off tax. What it really means is a tax take from the less well off: a reduction in payable tax credit. Disappointment will be inevitable, and the forthcoming attraction is a public expenditure round that will squeeze the amount available for the provision of Britain’s vital and valuable services. In the light of the observations of the shadow Chancellor, my hon. Friend the Member for Tatton (Mr. Osborne), I look forward to a real change of tenure at both No. 10 and No. 11 Downing street.