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Budget Resolutions and Economic Situation

I am famously not in the loop, so I do not know. I was very heartened by what the shadow Chancellor said in his early days about the benefits of moving to a much simpler and flatter tax system. I agree with the shadow Chancellor that in a complex economy such as ours it is not feasible to do suddenly what the east Europeans did and move overnight to a flat rate of tax. It is a caricature of our position to suggest that that is what we advocated. The Chancellor presumably believes in a simpler tax system himself. Why otherwise would he have sought simplification in this Budget? Why is it beyond the bounds of credibility to suggest that a Conservative Government, over the lifetime of a Parliament, could move to a much flatter, simpler tax system, as suggested by Lord Forsyth, in an excellent, well documented paper? It showed, incidentally, that £21 billion of tax cuts were entirely deliverable. Of course, there was an attempt to rubbish that paper, with the same old arguments. Ministers trotted out the tired arguments that Lord Forsyth’s tax cuts would scythe a horrible hole through our public services, when in fact £21 billion is within the margin of error. The point that my friend, Michael Forsyth, made to me on the phone when I was discussing flat taxes with him today—and I put it to my right hon. Friends on the Front Bench—is that unless one reduces the overall burden of taxation, it is difficult, indeed impossible, to achieve flatter and simpler taxes without creating a considerable number of losers. Therefore, we have to have the courage as a political party to start arguing the case for a lower overall burden of taxation, because that is the only way in which we can make progress towards a much flatter rate of tax. I think that there is now an overwhelming case for change, and that the intellectual consensus is starting to change as a result of this Budget. People in all political parties are beginning to recognise that higher taxes are causing real hardships to families, and most of all to the poorest. That is where the moral case for lower taxes comes in. Too many caricature the argument as one that is posed by people who have no interest in compassion and who want simpler and lower taxes only to help the rich. The truth is that higher taxes affect the poorest and most vulnerable members of society to the greatest extent, and that is unfair and immoral. According to well audited national statistics, the poorest 20 per cent. of households pay 36.4 per cent. of their gross income in direct and indirect taxes. That compares with 35.6 per cent. for the richest fifth, and 35.3 per cent. on average. The poorest people pay the highest tax—what a ludicrous situation! That is where we find ourselves after 10 years of a Labour Government, who I accept are composed of people who are entirely honourable and personally committed to reducing the burden on the poorest. What is going on? I have set out the moral case for lower taxation. The PAC and other Select Committees have compiled numerous reports on the matter, and in his speech my right hon. and learned Friend the Member for Rushcliffe talked about the desperation that the poorest in our society face as they try to cope with overpayments in the tax credits system. According to tables A3 and A4 in the Budget statement, people have to start paying income tax and national insurance when they earn only £5,225 a year. That is scarcely believable. Do not people in this House agree that that is a most extraordinary state of affairs? In addition to the moral case for lower taxes, there is also a strong economic case, as I have tried to show with examples from around the world. A recent paper from the Organisation for Economic Co-operation and Development, speaking about the period between 1965 and 1995, concluded:"““Up to one third of the growth deceleration in the OECD would be explained by higher taxes.””" Although the US is not very popular in this House, I shall mention it as another example, as a report from the American Shareholders Association says that"““the US tax cuts of 2003 have already paid for themselves by around 50 per cent.””" I have set out the economic and moral case for tax cuts, and now I turn to the political case—the most important one for us politicians. I am constantly told that the public do not believe promises of tax cuts, that they have no appetite for them and that they want better public services. However, a recent ICM poll found that 71 per cent. Of people believe that"““taxes have risen, we aren’t getting value for money, and the people who suffer the most are the most vulnerable in society””." In addition, 59 per cent. of people believe that"““if Britain reformed public services and cut waste it could lower taxes without having to cut spending on vital services””." By contrast, the poll found that only 36 per cent. of people believe that"““lowering taxes would create damaging instability for the economy””." I have shown that there is a moral and an economic case for tax cuts, and I have spoken of the importance of audit. Like the Chancellor, however, I want to make one final statement before I sit down. It is a bit of a parlour game, but why should I not play it? I want to make a suggestion about what we could do if the Conservative party were about to take on the ship of state and the shadow Chancellor were giving the Budget. It is so radical that the House will probably dismiss it instantly, but it does add up. I think that we should consider using the proceeds of growth to almost treble the tax-free allowance to £15,000, in today’s prices, by the end of our first Parliament or over the next four years. In the process, we should abolish the starting rate of income tax. That higher personal allowance would apply to all taxpayers, including pensioners, and it would benefit senior citizens as well as people of working age. Currently, people of working age can earn just over £5,000 a year before they pay tax, and for pensioners the figure is just over £7,5000. However, if those people were able to earn £15,000 before paying tax, that would constitute a major improvement in the quality of life for all taxpayers. It is difficult for non-experts—for MPs even—to cope with long Budget statements, but if the personal allowance was raised to £15,000, more than 13.5 million people would no longer have to pay any income tax at all. That is more than the number of people who voted for Labour in the 2005 or 2001 general elections. [Interruption.] I agree—I am not the Chancellor, I do not have all the books, and I am not suggesting that we should do all of that now. I am just saying that hon. Members can use the Treasury model and work it out for themselves—it is do-able. If the personal allowance was raised, it would automatically raise the threshold at which people start to pay top-rate income tax. People start to pay the 40 per cent. rate when they earn just under £40,000, but raising the personal allowance to £15,000 in today’s prices and abolishing the starting rate of income tax would mean that people could earn more than £47,000 in today’s prices. That is just one example, but it is realistically achievable over a Government’s lifetime if we take into account economic growth and efficiency gains. However, important choices have to be made, and that is where the pain—the slight pain—comes into my Budget statement. In recent years, the government sector has enjoyed record spending increases, which were mentioned by my right hon. and learned Friend the Member for Rushcliffe. Since 2000, the share of the economy taken up by the state has increased by 7.8 percentage points of GDP, which is faster than for any other country in the Organisation for Economic Co-operation and Development. The Government are literally awash with money—and borrowed money, to be paid for by taxpayers now and in future. The expansion of government has gone far enough. We are suffering too much as taxpayers, and we should therefore consider limiting the annual growth of overall Government spending to inflation over the lifetime of the next Conservative Government. That is affordable and do-able, and I commend it to the House. I do not think that it is going to happen, but I believe it very strongly. Before I conclude, I can only say that I stand by the words of Martin Luther:"““Here I stand. I can do no other. God help me.””"