§ Mr. Matthew Taylor
I beg to move amendment No. 2, in page 41, line 15, leave out "10%" and insert "0%".
The amendment relates to the 10p rate of tax that the Government currently levy on the first part of people's incomes. We believe that the rate should be reduced to zero, effectively extending substantially the tax free allowance that people enjoy. Some 2.7 million people now have a marginal rate of tax of 10 per cent. as a result of the Chancellor's expansion of the band by £300 above indexation. Along with the early introduction of the 10p rate, that has been a substantial cost to him. However, instead of introducing other tax cuts, we believe that he should simply have extended the tax free allowance, taking 2.7 million people out of paying tax altogether.
The cost to the Chancellor of our suggestion would be £4.1 billion in 2001–02 on an accruals basis and that compares with the money that he has already spent in tax 223 cuts. According to the Red Book, he has spent just over £3.5 billion this year, will spend nearly £4.5 billion next year and the figure rises to nearly £5 billion in the year after that. Therefore, it is clear that he had the money available to undertake the type of change that we have suggested. It would be worth just under £200 to people on incomes as low as £6,500 a year.
The key debate is whether the Chancellor is going down the right route in seeking to introduce and then expand the 10p starting rate of tax or whether he would have been better advised, as Liberal Democrats have consistently argued over many years, to expand tax-free allowances to take many people out of paying tax. Instead, he has introduced another complication into the tax system.
The first question to ask relates to the distributional impact of the Chancellor's policy. Would we better help people on the lowest incomes by taking the Chancellor's course of the tax complication of a 10p rate or by taking the Liberal Democrats' choice of extending tax-free allowances? Research undertaken by the Institute for Fiscal Studies shows that spending an equivalent amount of money on either widening the 10p band or cutting it to zero has different distributional impacts that do not affect people in the same way.
Broadly speaking, the poorest 10 per cent. would gain twice as much by the Government cutting the 10p rate to zero than they would by the Government spending the same money on increasing the 10p band. The poorest 50 per cent. would gain more by cutting the 10p rate to zero. That led the Institute for Fiscal Studies to comment in its "Green Budget 2000" that widening the 10p band in the way that the Chancellor has chosen to do is "less redistributive". By contrast, on our suggestion of cutting the 10p band to zero, it said:This approach has a number of beneficial features, including being the most progressive means of redistribution via the income tax system, as it moves some people out of paying tax altogether. Increasing the number of non-taxpayers also acts to simplify the income tax system.That is the second argument for the Liberal Democrats' approach. Cutting tax for people on low incomes and on the first part of their incomes would help to remove complexity.
§ The Paymaster General(Dawn Primarolo)
Will the hon. Gentleman explain exactly how his proposal to introduce a zero rate tax relief band on top of the personal allowance would make the tax system less complex and easier to understand?
§ Mr. Taylor
If the Paymaster General had been listening, she would have understood that I said that, in effect, we would increase the allowance. The nature of this debate and our ability to table amendments to the Finance Bill gives us an opportunity to discuss these issues.
§ Dawn Primarolo
The hon. Gentleman must be clear. Introducing a zero rate tax relief is not the same as increasing the personal allowance. It would add to 224 complexity in the tax system if people had to understand that they have not only a personal allowance, but a zero rate tax relief before they pay the basic rate. He has not dealt with that point.
§ Mr. Taylor
If that is the best that the minds in the Treasury can come up with, I have worries about their ability to brief Ministers. I have said twice—I shall say it again—that our proposal is to increase the tax-free allowance. I shall make absolutely clear the mechanism through which we would do that. We would spend money to turn the 10p rate into a tax-free allowance at equivalent income levels.
In case the Minister is wondering, our approach would be so beneficial in redistributive terms because it would give the maximum benefit at low income, including to part-time earners. That is exactly what the Institute for Fiscal Studies says. The Chancellor has to explain why he has chosen to take such a complex approach in preference to the simplification that we want. The Minister is right: operating two systems—a tax-free allowance and a 10p rate—is complex. If we were proposing, as she suggests, to have two different systems, we would be maintaining the complexity. However, we are not arguing that, because we want simplification. The Institute for Fiscal Studies argues, as does the broad range of those involved in the sector, that there should be a simple system that gives maximum benefit to people on the lowest incomes. Our proposal would take 2.5 million people out of the tax system.
The Chancellor has also introduced other complexities into the tax system since he took office. The number of direct tax rates was 24; it is now 47. There were no tax credits; now there are eight, with five more proposed. The tax system is hugely complex. It benefits accountants enormously, because it allows them to earn much more, but it does not benefit those in greatest need. The money would be put to more effective use if it were given to people on the lowest incomes.
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
Does the hon. Gentleman not see advantages in terms of tax simplification in aligning the system of personal allowances with the trigger rates for the payment of national insurance? The Government have moved towards that. If we bring the tax and national insurance systems together, we will achieve a massive measure of tax simplification.
§ Mr. Taylor
The hon. Gentleman and I would probably agree to a large extent on long-term reform, for which the Liberal Democrats have been arguing much longer than others. There are difficulties in that policy, however, because we need to ensure that people are not unfairly penalised, which is why change has to be introduced gradually. I do not disagree with the principle of the hon. Gentleman's argument. Indeed, personal national insurance—employees national insurance—is an anomaly within the tax system. It does not build up an individual insurance fund. We have argued that the basic state pension should be available in full to all and not tied to a contribution record that unfairly penalises people, most of whom have stayed at home to look after children and have a reduced pension as a result. The operation of national insurance gives rise to many issues, but I will be called to order if I discuss them now.
225 The question mark that hangs over the Chancellor's strategy is how he envisages the tax system developing. It is not obvious from the internal logic of introducing the 10p rate and the decision to broaden the band at what point the Chancellor believes the process should be halted. Do the Government believe that the basic rate should gradually become the 10p rate? On what basis have they decided on the £300 increase? In addition, we are increasingly seeing difficult interactions between tax and savings. The tax system has been made more complex.
People who are trying to tackle poverty have argued for our option. They want to take people out of tax altogether in preference to the 10p band. People who deal with tax, such as accountants and those employed by other professional bodies, have also argued that the Government are unnecessarily complicating the system and that it would be better to take some people cut of the tax system. There is only one reason for the Government's decision: the Chancellor is delivering a political message designed to trump the Conservatives. They argued for a 20p rate, so he came up with the 10p rate. That is the only logic behind their decision. The Government have a huge majority, which they expect to keep in the general election. I had hoped that they would have the courage to go for a sensible tax policy to take people out of paying tax instead of introducing a tax complication that is purely designed to wrong-foot the Conservative party.
§ Mr. Taylor
I do not want to hold up the proceedings, but I will give way in a moment if the hon. Gentleman still wants to intervene.
The Government might argue that there is a difference of opinion about strategy, but at least Labour agrees—unlike the Conservatives—that the aim is to have a progressive tax system so that people on the lowest incomes contribute least until their incomes increase, when they are expected to contribute a little more.
The introduction of the 10p rate cuts at the basic rate of income tax but huge increases in indirect taxation have made the tax system more regressive. Under the Conservatives, the rich paid less of their income in tax than the poor, but that has got worse under Labour. People in the poorest fifth of households typically pay 41.4 per cent. of their income in tax in one form or another compared with just 36.5 per cent. for the richest fifth. We know that because it is part of the information provided by the Government in table B on Page 39 of the Red Book. The proportion of income paid in tax has risen for the bottom 80 per cent. of households since 1997–98 and fallen for the richest 20 per cent. Most people are paying more; the rich are paying less; and the very poor are paying substantially more as a percentage of their income than the very rich. The process that we advocate of taking people out of tax would help to turn that around.
It is not just a question of tax; we are also concerned about inequality in our society. The measure of inequality of income after tax—the Gini coefficient—has recorded another increase in the past year and now stands at 40 per cent. That is the highest level for any year for which the Office for National Statistics has data. Almost every measure shows inequality at its highest, or close to its highest, level. Such information is available in April's Economic Trends.
226 We have a Labour Government who are apparently committed to increasing equality in society, but who are actually increasing inequality. They are theoretically supporting progressive taxation, but have increased the regressive nature of tax in the United Kingdom. They have increased tax for the poorest and cut it for the richest. In the process, they have been unable to deliver the improvements in health, education and pensions that people thought they were going to receive back in 1997 when Labour came to office.
Our proposal shows that the Chancellor had a choice about what to do with the money available to him, which he decided to spend on tax cuts. We have used figures in the Red Book to demonstrate that he could have taken 2.5 million people out of paying tax, increased equality and created a more progressive, simpler tax system which would please even the accountants. We believe that the Labour Government should have delivered on that; it is something on which the Liberal Democrats aim to deliver.
§ Mr. Flight
We have some sympathy with the underlying principles of the amendment, although we do not support it, in part for the reasons stated by the Minister and because it would create the equivalent of a personal allowance of £6,415 at a cost of over £4 billion, and we do not feel that that is fiscally viable right now.
It is a great pity that a massive effort has been devoted to simplifying the wording of tax legislation but not to the principle of simplifying the tax system for the typical citizen. If anything, the Government have an almost obsessive desire further to complicate the tax system as it applies to individuals and companies, including even foreign companies operating in this country. It must be wrong that ordinary citizens are unable to understand the tax rules that apply to them and that millions of people have to use accountants to look after their tax affairs. Surely it is not an insurmountable problem to arrive at a much simpler system.
In principle, the debate is whether to have two rates or to stay with the three rates that have been introduced by this Administration. Crucial to that, as the hon. Member for Truro and St. Austell (Mr. Taylor) pointed out, is the Government's intention. Is the 10 per cent. band just a political gimmick or do they intend to widen it significantly so that it is more in line with a model such as that in Hong Kong? It must be inefficient to have millions of people paying very small amounts of tax at 10 per cent., as at present, when an averaged-out higher personal allowance would potentially take a significant number of people out of tax.
The crucial point is the principle that lies behind the amendment. As the hon. Gentleman pointed out, the message is loud and clear, whether it comes from the Institute for Fiscal Studies or chartered accountants, that there is an urgent need to focus on simplifying our tax system. More and more people will end up doing self-assessment tax returns, so more and more people will fail to understand the tax rules that apply to them and there will be increasing trouble with people making mistakes and feeling that they have been ill treated.
227 The amendment is a point well raised, but the specific mechanism is not operative. The cost of raising personal allowances to over £6,000 is too great a fiscal burden at this stage.
§ The Paymaster General
I understand the Liberal Democrats' main argument that personal allowances should be increased to remove low earners from the tax system. The hon. Member for Truro and St. Austell (Mr. Taylor) knows full well that the Government's response is that an increase in personal allowances benefits higher earners to a greater extent. To achieve our objective of dealing with the poverty trap and the inequality to which the hon. Gentleman referred, we therefore introduced the 10p starting rate of tax. In this Budget we raised the allowance applicable at the 10p rate—that provision is set out in the next clause.
I understand why the Liberal Democrats consistently advance their argument, but the Government reject it because we feel that it does not deal with our objectives of helping those on low incomes and reducing inequality. The hon. Gentleman's arguments were very confused, but I understand that the amendment is a means whereby Liberal Democrat Members can discuss their principled position on personal allowances. The amendment would introduce zero rate relief on £1,880, if the next clause is agreed to. All the arguments that the hon. Gentleman has advanced against the Government apply equally to his proposal because the amendment would result in a personal allowance, a zero rate relief band and subsequent relief bands. He knows that the cost of such a measure would be about £4.8 billion, which is not an insubstantial amount.
The hon. Gentleman asked why there should be a 10p rate. The Government have made it clear that we want to provide an incentive to those on low wages to work harder, earn more and keep more of their earnings, so that we can tackle the poverty trap. The 10p rate is not the only policy that we are using; there is also the minimum wage and the national insurance changes to which my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) referred earlier. We have also introduced the working families tax credit and the children's tax credit, which deal specifically with poverty. The hon. Gentleman will not be surprised to hear that, as a Minister, I favour our approach, with its balanced package, to what the Government agree with him are extremely important issues. The tax system and the supporting in-work benefits must not act as a disincentive to unemployed people to move into employment.
I turn now to the inequality argument advanced by the hon. Gentleman. I am sure that he will acknowledge that the vast number of people on low incomes are receiving benefits and are therefore not paying tax. Government policy assists them by enabling them to keep more money. By introducing programmes such as the new deal, we move people out of unemployment and into paid work. That affects the figures to which the hon. Gentleman referred. He sought to portray a simplistic relationship of cause and effect, but there are other ways to interpret the facts.
The data to which the hon. Gentleman referred relate to the 1999–2000 tax year, and if I am not mistaken they are from the Office for National Statistics. He will know 228 that those figures do not include—indeed, they specifically exclude—the full-year benefits of the working families tax credit, the full effects of the introduction of the 10p rate and the reforms of national insurance, which have benefited those on lower earnings. Taken together over the whole Parliament, all the Government's measures show that we are bearing down on the inequality that the hon. Gentleman seeks to tackle in his amendment. Our judgment is that the balance of using resources is correctly set by widening the 10p band.
§ Mr. Matthew Taylor
The hon. Lady will be aware that statistics released in the past few days confirm that the gap between the richest and the poorest in this country has continued to widen. She has a good record of campaigning on poverty issues during the period in which I have been in the House. Does it not concern her that the Government's choice of cutting direct taxes while increasing indirect taxes inevitably increases the tax burden on those on the lowest incomes while cutting the burden on those on the highest incomes?
§ Dawn Primarolo
The hon. Gentleman has probably, like me, read the IFS study that shows that the disposable income of those on the lowest incomes is increasing. We must both be careful about how we use the figures. I take that as a correction to myself not to stretch certain issues too far.
As a result of the introduction of the 10p rate which, as I explained, is part of a wider set of policy objectives, including the minimum wage, national insurance reform and working families tax credit—which will move into integrated child credit in 2003–3 million people have had their tax bills halved, including 2.2 million low-paid workers. My right hon. Friend the Chancellor's proposals to increase the 10p band, which are the subject of clause 51, will halve marginal rates of tax for a further 450,000 people.
I accept that Liberal Democrat Members always want more, and that they want us to go further this evening. However, the Government believe that targeted tax cuts are part of a broader package to help those on low pay and, specifically, to help the unemployed into employment; that is the way forward. That package is affordable for the country; the extra £4.8 billion that the hon. Member for Truro and St. Austell proposes to spend in his amendment is not. While I have every sympathy with the hon. Gentleman's principled position, I do not agree with the methods that he seeks to use to achieve his objectives, so I urge my hon. Friends to vote against the amendment, should he push it to a vote.
§ Mr. Taylor
Having listened to the hon. Lady, I am worried that the Government are still advancing a case that nobody outside the House sees as anything other than a continuation of the Chancellor's political effort, begun in opposition, to rock the Conservatives. That has complicated tax. Everyone who deals with poverty argues that our route is better.
I am glad we have had an opportunity to debate the issue and I hope that the Paymaster General and her colleagues will reflect on it. Perhaps it is better to have movement on that after the election, rather than before. People are aware of the penny that we would put on tax for education and the higher rate that we would introduce 229 for people with an income of over £100,000 a year to pay for our education, health and pensions policies, but this is an opportunity to make the point that we are also arguing for a tax cut for those on the lowest incomes. My hon. Friends and I believe that the Government have made the wrong choice; the Paymaster General has not addressed that in arguing that the amendment should be rejected on a technical point. We therefore wish to press it to a vote.
§ Question put, That the amendment be made:—
§ The Committee divided: Ayes 41, Noes 281.231
|Division No. 193]
|Beith, Rt Hon A J
|Michie, Mrs Ray (Argyll & Bute)
|Bell, Martin (Tatton)
|Brand, Dr Peter
|Paisley, Rev Ian
|Campbell, Rt Hon Menzies (NF Fife)
|Robinson, Peter (Belfast E)
|Ross, William (E Lond'y)
|Russell, Bob (Colchester)
|Davey, Edward (Kingston)
|Smith, Sir Robert (W Ab'd'ns)
|Taylor, Matthew (Truro)
|Foster, Don (Bath)
|Thomas, Simon (Ceredigion)
|George, Andrew (St Ives)
|Tonge, Dr Jenny
|Harris, Dr Evan
|Wigley, Rt Hon Dafydd
|Kennedy, Rt Hon Charles (Ross Skye & Inverness W)
|Tellers for the Ayes:
|Mr. Steve Webb and
|Mr. David Heath.
|Abbott, Ms Diane
|Butler, Mrs Christine
|Adams, Mrs Irene (Paisley N)
|Campbell, Alan (Tynemouth)
|Campbell, Mrs Anne (C'bridge)
|Ainsworth, Robert (Cov'try NE)
|Campbell, Ronnie (Blyth V)
|Anderson, Rt Hon Donald (Swansea E)
|Armstrong, Rt Hon Ms Hilary
|Chapman, Ben (Wirral S)
|Atherton, Ms Candy
|Clark, Rt Hon Dr David (S Shields)
|Clark, Dr Lynda (Edinburgh Pentlands)
|Clark, Paul (Gillingham)
|Clarke, Charles (Norwich S)
|Clarke, Eric (Midlothian)
|Begg, Miss Anne
|Benn, Hilary (Leeds C)
|Bennett, Andrew F
|Coffey, Ms Ann
|Blears, Ms Hazel
|Cook, Frank (Stockton N)
|Blunkett, Rt Hon David
|Bradley, Rt Hon Keith (Withington)
|Brinton, Mrs Helen
|Cryer, John (Hornchurch)
|Buck, Ms Karen
|Cunningham, Jim (Cov'try S)
|Curtis—Thomas, Mrs Claire
|Jones, Dr Lynne (Selly Oak)
|Jones, Martyn (Clwyd S)
|Davey, Valerie (Bristol W)
|Jowell, Rt Hon Ms Tessa
|Davies, Rt Hon Denzil (Llanelli)
|Kaufman, Rt Hon Gerald
|Dean, Mrs Janet
|Keeble, Ms Sally
|Denham, Rt Hon John
|Kennedy, Jane (Wavertree)
|Donohoe, Brian H
|Khabra, Piara S
|King, Andy (Rugby & Kenilworth)
|Drown, Ms Julia
|King, Ms Oona (Bethnal Green)
|Dunwoody, Mrs Gwyneth
|Ladyman, Dr Stephen
|Eagle, Angela (Wallasey)
|Lawrence, Mrs Jackie
|Eagle, Maria (L'pool Garston)
|Lewis, Ivan (Bury S)
|Ellman, Mrs Louise
|Lewis, Terry (Worsley)
|Field, Rt Hon Frank
|Liddell, Rt Hon Mrs Helen
|Lloyd, Tony (Manchester C)
|Foster, Rt Hon Derek
|Foster, Michael Jabez (Hastings)
|McCartney, Rt Hon Ian (Makerfield)
|Foster, Michael J (Worcester)
|George, Rt Hon Bruce (Walsall S)
|Gibson, Dr Ian
|Gilroy, Mrs Linda
|McKenna, Mrs Rosemary
|Golding, Mrs Llin
|Gordon, Mrs Eileen
|Griffiths, Jane (Reading E)
|Griffiths, Nigel (Edinburgh S)
|Mahon, Mrs Alice
|Griffiths, Win (Bridgend)
|Mandelson, Rt Hon Peter
|Marshall, David (Shettleston)
|Marshall, Jim (Leicester S)
|Hall, Mike (Weaver Vale)
|Hall, Patrick (Bedford)
|Meacher, Rt Hon Michael
|Henderson, Doug (Newcastle N)
|Michael, Rt Hon Alun
|Michie, Bill (Shef'ld Heeley)
|Moran, Ms Margaret
|Hewitt, Ms Patricia
|Morgan, Ms Julie (Cardiff N)
|Murphy, Denis (Wansbeck)
|Hoon, Rt Hon Geoffrey
|Murphy, Jim (Eastwood)
|Naysmith, Dr Doug
|O'Brien, Bill (Normanton)
|Howarth, Rt Hon Alan (Newport E)
|O'Brien, Mike (N Warks)
|Howells, Dr Kim
|Hughes, Ms Beverley (Stretford)
|Organ, Mrs Diana
|Hughes, Kevin (Doncaster N)
|Osborne, Ms Sandra
|Humble, Mrs Joan
|Pendry, Rt Hon Tom
|Perham, Ms Linda
|Iddon, Dr Brian
|Pike, Peter L
|Jackson, Helen (Hillsborough)
|Johnson, Alan (Hull W & Hessle)
|Powell, Sir Raymond
|Johnson, Miss Melanie (Welwyn Hatfield)
|Prentice, Ms Bridget (Lewisham E)
|Prentice, Gordon (Pendle)
|Jones, Rt Hon Barry (Alyn)
|Jones, Helen (Warrington N)
|Jones, Jon Owen (Cardiff C)
|Straw, Rt Hon Jack
|Raynsford, Rt Hon Nick
|Stuart, Ms Gisela
|Reed, Andrew (Loughborough)
|Robertson, John (Glasgow Anniesland)
|Taylor, Rt Hon Mrs Ann (Dewsbury)
|Roche, Mrs Barbara
|Taylor, Ms Dari (Stockton S)
|Ross, Ernie (Dundee W)
|Taylor, David (NW Leics)
|Russell, Ms Christine (Chester)
|Turner, Dennis (Wolverh'ton SE)
|Turner, Dr Desmond (Kemptown)
|Turner, Neil (Wigan)
|Twigg, Derek (Halton)
|Sheldon, Rt Hon Robert
|Simpson, Alan (Nottingham S)
|Wareing, Robert N
|Smith, Rt Hon Andrew (Oxford E)
|Smith, Angela (Basildon)
|Whitehead, Dr Alan
|Smith, Miss Geraldine (Morecambe & Lunesdale)
|Williams, Rt Hon Alan (Swansea W)
|Smith, Jacqui (Redditch)
|Smith, John (Glamorgan)
|Williams, Alan W (E Carmarthen)
|Smith, Llew (Blaenau Gwent)
|Winterton, Ms Rosie (Doncaster C)
|Southworth, Ms Helen
|Squire, Ms Rachel
|Starkey, Dr Phyllis
|Wright, Anthony D (Gt Yarmouth)
|Stewart, David (Inverness E)
|Tellers for the Noes:
|Stewart, Ian (Eccles)
|Mrs. Anne McGuire and
|Strang, Rt Hon Dr Gavin
|Mr. Ian Pearson.
§ Question accordingly negatived.
§ Question proposed, That the clause stand part of the Bill.
§ Mr. Flight
The issues that we wish to raise in relation to clause 50 are represented by amendments that were not selected. Our argument is that the clause does nothing in the area of tax policy to relieve or compensate those who have suffered most from Labour's 48 stealth taxes, equivalent as they are to a 10p increase in income tax. The categories that we believe should be compensated are savers, married people in cases where one spouse has chosen to stay at home to look after the children, and those who are retired.
The Conservative view is that it would be correct to remove the starting and basic income tax rate on savings; to abolish the 10p ordinary rate of income tax on dividends; and in particular to restore to individuals who are non-taxpayers but who are in receipt of dividends their right to claim a 10 per cent. tax credit in cash. The failure to address that is, in our view, Labour's single most unjust policy in respect of personal taxation. The issue has been raised many times and it affects 660,000 people.
People's savings have been accumulated out of income that has been taxed. It is therefore a question of principle as to whether the fruits of that taxed income should again be taxed. A further issue is the volatility in the savings rate that has occurred under the present Administration, and the economic good sense of seeking to achieve a much more stable savings rate.
It may surprise the Government to learn that of the 12 million shareholders in this country, almost 60 per cent. belong to socio-economic groups C1, C2 and D/E. 232 We want to encourage saving by the many. Proposals to relieve savings from basic and lower rate tax would also go some way to offset Labour's £5 billion a year stealth tax on pension funds. It will cost the average family an extra £400 a year to keep its pension fund capable of producing the same pension as it would have done before the removal of the advance corporation tax credit. The Government are no doubt aware that Tesco, for example, has advised its staff that contributions need to be increased by some 15 per cent. a year just to stand still.
On the wider issue of savings and the volatility of savings, there is a major point to be made about the Government's overall fiscal policy. They love to boast of the extent to which they have reduced Government debt, but they do not comment on the fact that personal debt has increased by almost the same amount as Government debt has gone down. They do not reveal the fact that disposable incomes have grown by considerably less than the economy as a whole—on average, by 1.7 per cent. The reason why the savings rate has more than halved is that individuals have been borrowing more in order to keep up their consumption.
The danger of this posture, especially now that we are entering much more difficult economic climate, as the Chancellor now admits, is that individuals will look to de-gear and to rebuild their net savings, quite sharply reducing their consumption in the process. That is precisely what leads to the ups and downs—the booms and busts—of the business cycle. The Chancellor is making optimistic noises about the British economy. I trust that they will prove well founded, but the Minister knows that growth it the first quarter was only some 0.3 per cent., annualised at 1.2 per cent. The evidence is that the savings rate is bouncing back up rather more sharply than is desirable. Our view is that the tax policy in relation to savings should be designed to stabilise the savings rate as far as possible.
§ 8 pm
§ Mr. Bercow
I am grateful to my hon. Friend for giving way, as he is an acknowledged expert on these matters. In the context of the halving of the savings ratio, which is common ground among all hon. Members, what assessment has he made of the likely impact on that state of affairs of the substitution of the inferior ISAs for the superior TESSAs?
§ Mr. Flight
I thank my hon. Friend for that question. As everyone knows, the main issue with ISAs is that they are too complicated. People still do not understand clearly the difference between mini-ISAs and maxi-ISAs. In terms of the savings that ISAs have attracted, the figures appear reasonably satisfactory—excepting those for recent months. The relevant figures are difficult to distil, as large sums have been transferred into ISAs from building society accounts that did not qualify in the past.
§ Dawn Primarolo
The hon. Gentleman is being uncharacteristically disingenuous. Perhaps he will tell the hon. Member for Buckingham (Mr. Bercow) that, as he well knows, a third more people are investing in ISAs than invested in TESSAs and PEPs together in their last and most successful year. In total, 8.5 million people 233 invested some £28.4 billion in ISAs in their first year. ISAs are doing extremely well, especially for people who want to save smaller amounts.
§ Mr. Flight
I thank the Paymaster General for those figures, but I point out that they do not tell the entire story. The preponderance of ISAs involves people who were already building society savers and who merely switched a modest cash element of their savings from outside an ISA to within one.
§ Mr. Flight
Yes, but the argument that ISAs have created huge numbers of new savers does not stand up.
Let us consider also how total volumes of savings in the various good years of TESSAs and PEPs compare with those in the best years of ISAs. When the Government introduced ISAs, they admitted that their primary objective was to reduce the tax cost that was previously associated with PEPs and TESSAs. Indeed, that objective was set out in their Green Paper. Although they have been forced by the pressure of public opinion to keep the ISA level at £7,000 rather than to reduce it to £5,000, the benefits to the community in terms of tax incentives have been marginally less than those of PEPs and TESSAs.
In respect of the tax positions of people who are retired and of those who will be retiring, one of the particularly objectionable aspects of the Government's fiscal policy was the removal of married couples allowance for all people who were going to retire in future. The spin was that retired people would continue to receive the allowance, but that applied only to people who were already 65 and receiving the money. Many people made their retirement plans on the basis that they would qualify for the allowance, but reached 65 this year and cannot receive it.
The Opposition propose to increase the age allowance by £2,000 a year for everyone over 65; that would more than compensate for the circumstances that I am describing. It would take 1 million retired people out of tax and benefit almost 3 million more people by approximately £400 a year. It would also be a powerful antidote to the major swing towards a means-tested society that has occurred under the current Administration. The proportion of retired people on means testing has increased from 37 per cent. to 56 per cent. It is especially demeaning for people in the latter part of their lives to have to come cap in hand for means-tested benefits. Many pensioners are paying tax and also qualify for means-tested benefits. The measures that we propose for 2003–04 would be a major swing back towards enabling people to stand on their own feet and allowing most pensioners to come out of the tax net altogether.
I want to comment now on tax and marriage and on couples in which one spouse wants to stay at home and bring up young children. We propose to restore a tax incentive for marriage and to acknowledge the importance of stability for people who are bringing up young children. We would recognise the contribution made by parents who are looking after young children or caring for elderly relatives by allowing the non-working spouse who is staying at home to transfer his or her personal tax allowance, which is now £4,535 a year, to the working spouse.
234 That arrangement would be worth up to £1,000 a year, depending on tax rates and full usage of the personal allowance. In particular, it would enable many people who would prefer to work part time rather than full time to do so, in order to give them more time to look after young children. Such a tax change would offer a tremendous benefit to almost 4 million married couples with children aged under 11. In more than one respect, the Government have penalised through taxation—I trust that they have not done so intentionally—married couples where one spouse wishes to stay at home to look after children.
Let us also consider widows. We are supposed to have a caring Labour Government, but the position of widows has deteriorated under this Administration. Unlike the Labour party, we propose to cancel any tax burden for widowed parents by making the continuing widowed mothers allowance and the new widowed parents allowance, both of which are worth £87.50 a week, free of tax in future.
Our concern is what the clause does not do. It merely repeats the tax bands as they were last year and does nothing to compensate the main sufferers under Labour's tax policies. We want to put on record the key areas in which the future Conservative Government would propose to use by 2003–04 the £8 billion—not £16 billion—of tax savings that we have identified, in order to do justice to the people who have suffered and to return a stable savings regime throughout the country.
§ Dawn Primarolo
I want to contribute very briefly to this short debate. I begin by reminding the hon. Member for Arundel and South Downs (Mr. Flight) of something that he knows well: household wealth is at a record high and the ratio of household debt to wealth has fallen. As he follows such matters very closely, he knows also that the Bank of England said in its quarterly bulletin for spring 2001 that the UK household saving ratio did not seem unusually low when adjusted for changes in inflation rates in the past 30 years. When I challenged him, he had the good grace to concede the success of ISAs in assisting people who wish to save. He also acknowledged that they were more successful than their predecessors, PEPs and TESSAs.
I am a little surprised at the hon. Gentleman, who knows a great deal about the subject, because once again his point about the tax on savings is a red herring. He tried to claim that the same money is taxed twice. He knows that that is not the case: the tax applies to earned, additional income that has not already been taxed. He slipped quickly over that point because he does not try to mislead the House. He seemed to claim that the same money was taxed twice, but I am sure that he did not mean that, because he knows that it is not so.
The hon. Gentleman made several points, and presented the Conservative party's manifesto on tax on pensions, the age-related allowance, savings and the married couples allowance. He failed to point out that 90 per cent. of the age-related personal allowances, which Conservative Members say they will provide for the over-65s, would go to the richest 30 per cent. of pensioners. Sixty per cent. of the gain would go to the richest 20 per cent. He also failed to point out that only four out of 10 pensioners pay tax. Some of our pensioners experience poverty not because they pay tax but because their income is low. The Government have therefore introduced the minimum 235 income guarantee, increases in the state pension, and the £200 winter fuel allowance, and made a commitment to the pension tax credit. I shall go no further because I am straying beyond the clause.
§ Dawn Primarolo
I shall give way first to the hon. Member for Kingston and Surbiton (Mr. Davey), who is itching to intervene.
§ Dawn Primarolo
I shall not act as a referee between the Liberal Democrats and the Conservatives about which party has the marginally better policy. I believe that the Government have the best policy.
§ Mr. Flight
The Paymaster General may have misunderstood our proposals. Pensioners who pay tax at the rate of 40 per cent. would not benefit from our proposals. The 3 million pensioners in the middle, who pay the standard rate of tax, would be the main beneficiaries.
§ Dawn Primarolo
I am grateful to the hon. Gentleman for confirming that not all pensioners would benefit from Conservative party proposals on the age-related allowance. The publicity and—dare I say it?—the spin implied that all pensioners would gain from the change. Clearly, that is not the case.
§ Mr. Bercow
The Paymaster General invariably makes the best fist of a poor case. It is, none the less, a poor case. We are considering a position whereby the interest earned on income that has already been taxed is at stake. It is mere casuistry for the hon. Lady to dance on the head of a pin. My hon. Friend the Member for Arundel and South Downs, whose expertise the Paymaster General has graciously and rightly acknowledged, made the point that people are being taxed twice for the same money. That is so blindingly obvious that only an extraordinarily clever person could fail to see the point.
§ Dawn Primarolo
The hon. Gentleman is extraordinarily clever. If he cares to study the way in which investments are taxed, he will realise that they are taxed on the interest that they earn. That money has not been taxed before.
§ Dawn Primarolo
That is how tax law works. If Conservatives want to explain the benefit of their suggested policy change in that way, that is fine. However, they should not suggest that the money is taxed twice.
236 I dealt with savings in my intervention on the hon. Member for Arundel and South Downs and in my initial comments. He also considered the married couples allowance. First, the Conservatives said that they would reintroduce the married couples allowance, then they said that they would not. They then claimed that they would limit the number of those who would gain from it. Again, the proposals lack clarity. Eight out of 10 married couples and eight of 10 families with children would gain nothing. Single parents and married couples with both partners working would gain nothing. That also applies to married couples with children of secondary school age. However, the Government's policies—the 10p starting rate, the working families tax credit, the minimum wage, the children's tax credit, increases in child benefit and reform of the national insurance system—are all targeted at helping families on low income.
Clause 50 establishes income tax for 2001–02. It shows that the Government have kept their promises on tax rates. We promised not to increase the top rate of tax, which remains at 40 per cent. We promised not to raise the basic rate of tax. The Chancellor's stewardship of the economy, ably assisted by my right hon. Friend the Chief Secretary, has meant that we were able to make a cut of 1p in the basic rate last year, to 22p. We promised to introduce the new starting rate of 10p and we have done that. The next clause expands that provision.
We are halving the marginal rate of tax for nearly 3 million people. Our policies mean that the direct tax burden on a single earner family on average earnings and with two children will fall from 21.5 per cent. in 1996–97 to 18.1 per cent. by 2001—the lowest since 1972. The Government keep their promises on tax, and I commend the clause to the Committee.
§ Question put and agreed to.
§ Clause 50 ordered to stand part of the Bill.