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Budget Resolutions and Economic Situation

I reassure the hon. Member for Coventry, North-West (Mr. Robinson) that I do not intend to question the Chancellor’s sanity, but I do rather question his commitment to social justice for the same reasons that the hon. Gentleman does, with his qualification. Six months ago, I proposed an alternative dream Budget that was tax neutral and included the following features: a 2p cut in income tax; lifting the upper earnings threshold and aligning income tax with national insurance; making greater use of environmental taxes; cutting corporation tax, and offsetting it with reduced allowances on business taxation; and getting rid of the 10p rate of tax. When I got over the frisson of flattery at discovering that that had been mercilessly plagiarised in the Budget, I realised, as many of us did, that there was one important detail that was different: the conversion of the 10p rate not to zero but to 20 per cent. That is a big difference, because instead of 2 million people paying no tax at all, they are paying more tax. That goes to the heart of what the Budget is about. It is not about economic management—it is economically neutral, which is a positive factor—but it is about redistribution and equity and how the gains and losses have fallen. There has been an attempt to introduce another dimension to the debate: what the Conservatives call distributing the proceeds of growth and what the Government call the third rule. That is a somewhat arcane debate because, as I perhaps rather simple-mindedly see it, the Chancellor is already redistributing the proceeds of growth. Approximately 40 per cent. of any increment in growth has been allocated to the public sector, and the remainder has been allocated to private investment and consumption. That is the forecast, and I am perfectly comfortable with it. Unless the Conservatives are willing to set out a different number and how they propose to achieve it, we all have to operate on the working assumption that we are reasonably content with the share of the state in gross domestic product. That is where I start from. I want to tackle the Budget on the Chancellor’s own criteria, and pose three simple tests: is it fairer, is it greener, and is it simpler? On fairness, a useful benchmark is where we are in income and wealth distribution. The data that the Government have made available are a little dated, but the Government suggest that income distribution, measured in the usual statistical way—Gini coefficients and so on—is roughly what it was when the Conservatives left office. It deteriorated for a while, it then improved a little, and it is now more or less what it was when the Conservatives left office. Help for income redistribution has been provided by tax credits, whatever their other problems, but income redistribution has been worsened by the council tax, which is regressive in relation to income. The problem area is the distribution of wealth, and that was the purpose of the question that my right hon. and learned Friend the Member for North-East Fife (Sir Menzies Campbell), the leader of the Liberal Democrats, asked the Prime Minister last week. It is shocking—and it is difficult to explain—that when the Conservatives left office the wealthiest 1 per cent. of the population had 26 per cent. of marketable wealth or financial assets. That figure has now gone up to 34 per cent. When the Conservatives left office, the bottom 50 per cent.—the lowest half of the British population—owned 6 per cent. of the country’s asset wealth. That has now shrunk to 1 per cent. under a Government and a Chancellor who often use the language of social justice, which is an appropriate criterion against which to measure the Budget. The impact of the combination of the 10p tax rate change and the reduction in the standard rate is complex. The Institute for Fiscal Studies has run through the numbers, and it has concluded that one in five people lost out. Almost all of them are low earners who are single or childless couples. A couple of people who came to my advice surgery last Friday illustrate the problem perfectly. One was a widow with part-time earnings, who has never paid more than the 10 per cent. tax rate, as she is in the £5,000 to £8,000 band. She will simply pay more tax, without any offsetting credit. She is struggling to pay council tax and all the other impositions that she faces. The other was a young man who has just graduated and is starting life as a graduate scientist in the under £18,000 band. He is a loser, and he does not have any offsetting gains. Those are the kind of people who lost out in the Budget. In a way, that is not surprising when we recall what the Chancellor said when he introduced the 10p tax rate—the progressive policy that he is now reversing:"““Nearly 2 million people will see their income tax bills cut in half, and take home 90p of every pound they earn.””—[Official Report, 9 March 1999; Vol. 327, c. 188.]" That policy is now being reversed. On the other side, we have to ask who benefits from the Budget, because people clearly have benefited. Some groups have benefited substantially. It is particularly worth focusing on one group: wealthy pensioners. Someone with a pension pot of £1 million, which is certainly reasonably wealthy, and from which with sensible investments they will receive an income of £50,000, will benefit substantially in several ways. They benefit from the lifting of the upper rate of tax. They will not pay national insurance and crucially, and rather oddly, the Government have retained the 10p rate for unearned income. That is difficult to understand. I remember the days when the Labour party put 98 per cent. tax on unearned income as it was considered rather evil, but now it is treated preferentially. When people earn income they have to be charged 20 per cent. at the first rate, yet they pay only 10 per cent. on unearned income. Affluent pensioners who are paying into their savings will receive additional top-rate relief of 40 per cent. and so on, so they benefit in several respects. I do not begrudge them that, but it is worth noting that they are the principal beneficiaries of the Budget. Pensioners who are not merely wealthy but have large capital assets that they realise in the form of capital gains, and take advantage of the maximum taper relief, could also pay as little as 10 per cent. The 10 per cent. rate has gone for wage earners but it remains for unearned income and for capital gains. We saw a good practical illustration of that the other day. When Sir John Ritblatt stood down as chairman of British Land he described frankly how he had been able to benefit from the Chancellor’s tax relief. He had gained about £20 million simply by being able to take advantage of the reliefs on the large share portfolio that he held as chairman of that company. There are beneficiaries of the Government’s tax changes, but they are not the people about whom the Government should primarily be concerned. I have one more point about distribution and fairness. We know that the Government have laboured for 10 years to produce changes and alternatives to the council tax system. We have had the Lyons report, which runs to about 600 pages—I do not know whether anybody in the Chamber has actually read it yet. The report offers the Government two alternatives. One is to change the system radically in a way that reflects ability to pay, but the Government clearly do not want to go down that route. They were offered the alternative of ameliorating the system somewhat by changing the number of bands. It is striking that we have heard not a peep about how the Government propose to respond to the Lyons report, if at all. Their most regressive tax has been laboured over and endlessly reviewed, but at the end of the day the Government have absolutely nothing to say about it. In terms of greenness, it is clear that there are some changes which, as far as they go, are perfectly welcome and are things that we have advocated. We would argue for a much wider band of vehicle excise duty rates, along the lines recommended by the all-party environment group. The Government have made a small move in that direction and we have no question about the principle of vehicle taxation. However, we are more critical about what they have been doing in respect of the aviation sector. It has long been realised that airlines pay nothing remotely like the amount of tax they should, for a variety of reasons: partly because of pollution and the absence of any form of fuel duty, although there are of course good treaty reasons for that; partly because the slots available to them free of charge take no account of the externalities and congestion involved; and partly because their landing charges are cross-subsidised. For a long time there has been a powerful case for significantly increasing and changing the nature of taxation on aviation, but in a very cack-handed way the Government have introduced ticket duties that have caused a great deal of damage to small tourist operators because of the retrospective way in which they were applied. The more important economic point is that the tax bears absolutely no relation to the environmental impact. Charges are on tickets rather than on aircraft. We have the absurd phenomenon that in Mr. Stelios’s Easyjet, full to the gills, every passenger pays the full air traffic duty, whereas half-empty flights leaving from major airports pay far less tax because it is levied per passenger rather than per aircraft. It is a highly inefficient, environmentally ineffective form of taxation and needs to be radically changed if the Government are really serious about environmental impacts. My third question is whether the Budget has introduced more simplicity. The answer is yes in some respects, and that is welcome. We have got rid of a rate of direct taxation, which is desirable. The alignment of national insurance and income tax is a difficult reform, for which tax reformers have long argued, so it is welcome that the Government are moving in that direction. It is also welcome that they have embraced at least the principle of cutting corporation tax and reducing allowances. However, in some respects the simplification is not working—or not working satisfactorily. I wholly identify with the comments made by the Conservative spokesman, the hon. Member for Hertford and Stortford (Mr. Prisk), about the impact on small business, which will lose about £850 million as a result of the changes to incorporation. Corporation tax rate on such businesses will rise in effect from 19 to 22 per cent. and they will receive only a proportion—we do not know how much—of the new capital allowance. There will be damaging effects for them. Where the tax system is inherently complicated there are the severest problems. My hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) rightly raised the appalling problems that are being created for North sea oil revenue. The Secretary of State dealt with them at some length, so I shall not rehearse all the arguments. The key point is that the Government cannot entirely escape responsibility for the collapse in revenue. Tallow, one of the operators, describes the current tax rate, subsequent to the supplementary tax of two years ago, as punitive relative to the vast increase in costs. I think costs have risen by several hundred per cent. in the North sea. Another operator, Premier Oils, says that it no longer makes sense to develop the fields. It is not as though the situation was not foreseen. The Liberal Democrats opposed the tax increases; my hon. Friend the Member for West Aberdeenshire and Kincardine spoke eloquently and at great length predicting exactly what has now occurred. Complex tax changes are involved in another area where they are bound to have negative impacts: the provisions relating to management service companies and IR35. The Conservative spokesman did not mention it, but we argued the case several years ago. I can understand where the Treasury is coming from. There are undoubtedly people who abuse the system. There is evasion of national insurance and we understand that the Revenue has an obligation to try to deal with it, but our practical experience is that the Government’s actions, unless they are carefully calibrated, will be completely counter-productive. Although there are people who cheat, hundreds of thousands of people need to operate on flexible contracts. Unless the tax system captures that there will be considerable costs. I shall give some examples. Grant Thornton, the tax adviser, has already warned that one of the knock-on effects of cracking down on contractors will be a big increase in the cost of the Olympics, because the project will be financed by flexible contractors. If we lose them, the costs will rise. The main user of flexible contract workers is the NHS, whose costs will rise if the Government get things wrong. Public sector IT contracts are already escalating out of control and that situation could be seriously aggravated. Although the Government can reasonably claim that they have improved the tax system through simplification in some respects, there are many areas where they already have caused, or will cause, serious damage.