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Pre-Budget Report 2007

My Lords, it must be a pleasure for the Minister to be able to introduce a broad policy debate such as this, compared with dealing with the travails of Northern Rock and the incompetence of HM Revenue and Customs. I congratulate him on the gusto with which he did so. I alone of the speakers in today’s debate did not participate in last Wednesday’s debate, so, whether or not other noble Lords agree with what I say, they will not have heard it before—at least, not within the past week. The starting point of the Pre-Budget Report is, of course, the outlook for growth. The report forecasts that growth will fall from more than 3 per cent this year to between 2 and 2.5 per cent next year. This is already looking rather optimistic. The Bank of England is now predicting growth of no more than 2 per cent, and the governor has identified a number of risks which might undermine even this figure. The most serious he described as: "““Further tightening of credit conditions and disturbances in financial markets””." Whether these risks materialise will crucially depend on developments in the US economy. Earlier in the autumn, Alan Greenspan said that the likelihood of a recession in the US was approaching 50 per cent and described the financial markets there as moving from euphoria to panic with barely a pause for breath, a process which I suspect we also recognise here. The US faces the twin problems of a credit crisis brought about by reckless lending to the sub-prime market and a balance of payments imbalance which is only sustainable so long as the US can finance it through the sale of government bonds. Faced with a weakening dollar, it is increasingly unclear that investors from the Far East will continue to put their money in the US. Only yesterday, the Chinese premier, speaking in Singapore, expressed concern about how to preserve the value of China’s reserves, which are largely held in dollars. If the US economy falters, it will undoubtedly be bad news for world growth, not least in China. Here in the UK, it could exacerbate the credit crunch and our own balance of payments deficit. Following the Northern Rock débâcle, it is surely inevitable that banks and building societies will in any event be less willing to make risky loans to households, and that such an attitude is likely to extend to businesses with weak balance sheets or risky assets. Like the noble Lord, Lord Marlesford, I have been extremely critical of the banks undertaking risky lending, and such a move to restrict these forms of risky lending will undoubtedly be largely beneficial. More worrying, however, is the decline in the availability of credit more generally, which will slow not only mergers and acquisitions activity, but also investment to good quality projects. The banks and private equity companies are simply facing a credit crunch which will affect all those bodies in which they might otherwise invest. As for the balance of payments, the Governor of the Bank of England has recently called for a rebalancing of the economy from consumer spending to exports in an attempt to deal with our long-term, huge balance of payments deficit. That is only possible if we see a fall in the value of sterling vis-à-vis the dollar. Indeed, there now seems to be a consensus among world financial leaders that the level of the dollar is a major problem. That view has been expressed by the leaders in China, the EU and the US itself in recent times, and I wonder whether the Government agree with that assessment. If so, do they plan to press our international partners for discussions that might have some long-term effect on the value of the dollar? I am somewhat sceptical about the efficacy of such discussions, but to the extent that Governments talking up or talking down currencies can be beneficial, now is surely a good time to be talking up the dollar. Within the overall economic outlook the situation facing many individuals is increasingly grim. They face a squeeze on their real income brought about by the increased level of taxes, about which the noble Lord, Lord Northbrook, has just spoken, and by RPI growth, which is above earnings growth in many cases, with food and fuel rising quite steeply. In both those cases, and particularly in the case of food, I suspect that prices will continue to rise, and they are certainly unlikely to diminish in the short, medium or long term. People are also, in many cases, facing higher mortgage rates, particularly those whose fixed-rate mortgages are coming to an end and who are having to remortgage at a higher rate. The likely consequence of all this is that consumer expenditure will fall, as has already been evidenced by a small fall in retail sales last month. There are therefore many uncertainties about the future path for the economy. It is important at this point that the Government should not add to them by dithering, for example, on Northern Rock. I do intend to repeat all the arguments that we debated yesterday on Northern Rock. The only point I would make is that during the course of the day the Northern Rock share price has plummeted further as the market realises what noble Lords on most sides of the House accepted yesterday, which is that Northern Rock has no value but for the support that it is getting from the Government and therefore it would surely be sensible for the Government to recognise that by bringing it into temporary public ownership. Moving from the macro economy to the overall fiscal stance, we—and I in particular—remain sceptical about the Government’s forecasts. Each year, the Chancellor shows that for each of the following five years there will be a steady, relentless reduction in net borrowing, and each year the figures have to be adjusted upwards. I am afraid that, along with the golden rule, these projections have diminished credibility with each succeeding year. The main excitement generated by the Pre-Budget Report was in relation to the Government’s proposals on tax, particularly in relation to the lesser taxes, in terms of revenue at least, capital gains tax and inheritance tax and the position of non-doms. Here I have to acknowledge that George Osborne’s speech to the Conservative Party conference on inheritance tax and non-doms had an extraordinary, electrifying effect on the Government. I say the Government rather than the Chancellor because I do not believe that the Government’s actions on these two taxes emanated from No. 11 Downing Street, but from No. 10. On inheritance tax, it is surely right to increase the threshold because the tax was increasingly being paid by modest, middle-class families who were benefiting from the recent, very rapid rise in house prices. The main problem now with inheritance tax is that it is still far too easy to evade by the very wealthy who can use expensive tax advisers to minimise their eligibility. I accept that this is an extraordinarily difficult issue to resolve, but as someone who strongly believes in the principle of inheritance tax, I hope very much that he will keep trying. On non-doms, we now have a rough-and-ready proposal to ensure that they do at least pay some tax. However, three further measures are needed in relation to non-doms to make the position fairer and less open to abuse. First, they should be required to pay capital gains tax on the sale of their properties in the UK; secondly, there should be a review of the different tax treatment of various forms of investment in the UK and US and amendments to our tax treaty with the US to avoid double taxation; and thirdly, the rules for qualifying for non-dom status should be tightened. I recently met a City banker of Irish extraction who explained to me that although he had lived in the UK all his life and intended to spend his remaining days in the UK, he was now being advised by his accountant that because his father had been born in Ireland he could qualify for non-dom status here. It seems to me that that is not the purpose of having a non-dom rule, and in respect of those who have lived here all their lives with no intention of moving elsewhere, the rules could beneficially be tightened. The third contentious tax change was on capital gains tax where taper relief is to be abolished. We support the principle of abolishing taper relief. It gave too great a benefit to those in the private sector who could organise their affairs so as to qualify for it, and I do not simply mean private equity bosses. I do not believe that 18 per cent will prove to be a penal rate, or that it will have a significant, or even discernable, impact on entrepreneurialism in the UK. What I think is sometimes forgotten is that taper relief was the creation of the current Prime Minister. Previous Conservative Governments clearly did not find it necessary. Some amendments may be needed to the Government’s current bald proposals, and I would mention just two. It is a mistake to reduce capital gains tax on second homes from 24 per cent to 18 per cent. Given the current status of the market in housing, particularly in parts of the country such as Cornwall, any measure that makes the ownership of second homes more attractive seems to me to be mistaken. I also think that there is an argument for a tax-free band for proprietors and working directors on retirement. That existed in the past, and it should be reinstated. On the general principle, I hope that the Government will not succumb to too much industry lobbying to reverse their position on taper relief. The lobbying at the moment reminds me very much of the lobbying on the minimum wage, when the CBI and others argued that the introduction of the minimum wage would lead to at least a quarter of a million job losses. The truth was that it led to no such thing. One area of the Government’s tax proposals that is extremely unsatisfactory relates to local government finance. The Pre-Budget Report proposes that council tax should continue to rise by 5 per cent per annum. This tax bears particularly hard on low-income families and pensioners. Each passing year without a revaluation creates more anomalies and brings opprobrium on local government that is simply unjustified. I do not expect the Minister to defend council tax—I think the Government have long since stopped attempting that impossible job—but I wish that he would give some encouragement to the thought that the Lyons report might be resuscitated. I think that Jonny Wilkinson would be impressed by the distance that the Government have kicked it into the long grass. Although we do not agree with all of it, that is highly unfortunate. On public services, the problem that the Government now face is that there is a gap between the amount of money that has gone in and the public’s view of the benefits that have emerged. I do not believe that the way forward or the way in which this will be dealt with is the Government’s current approach of seeking major additional so-called savings. The single major reason why increased public expenditure has not produced the results that people expected is that the Government from the centre have been too prescriptive in the way in which they have wished their policies to be implemented, with the result that teachers, nurses and police staff are spending far too much time on the bureaucracy imposed on them from the centre. When someone such as the nurse of the year resigns from the NHS in frustration with the paperwork and the bureaucracy with which she is confronted, it is a telling indictment on the way in which the Government have sought to reform—or, rather, not reform—the public services. We are entering a period of uncertainty tinged with apprehension. It will require decisiveness and a sure touch to steer us through it. The Prime Minister was, in one sense, fortunate to leave the Chancellorship when he did. He will not, however, be able to escape the political consequences of the Government’s uncertain economic management.