HL Deb 23 November 1983 vol 445 cc256-63

3.50 p.m.

Debate resumed.

Lord Barnett

My Lords, I am delighted to have the opportunity of opening from our side in this debate and I should like to begin by congratulating the noble Lord, Lord Boyd-Carpenter, on choosing this important subject. Also, I feel perhaps a little inhibited in criticising anything he had to say because I have always had enormous regard for him. I served under him when he was chairman of the Public Accounts Committee, a position which I later filled, and there is the fact that, like myself, he is also a former Chief Secretary to the Treasury. So it would be very nice to agree with him this afternoon. However, I am bound to tell your Lordships that there is very little I found in his speech that I could agree with, as I hope to indicate.

If I might say a word to the noble Viscount, Lord Whitelaw, simple assertions, or even complicated ones, do not really make a case: nor is a tax cut equal to a tax reform. In saying that I am not alone, as I am sure your Lordships will appreciate, for I doubt whether there are many on any side of this House or of another place, or in the country, who would accept that either under the present Government or under any previous one we have made any real start to a fundamental reform of our tax system. I hope to return to that in a moment.

Could I say a word to the noble Lord. Lord Boyd-Carpenter? I hope he will not mind my saying that he seemed almost to be saying that prior to 1964 we had, as it were, an almost Utopian situation in this country, with every-thing going swimmingly. Again, being a reasonable man, I am sure he would be the first to recognise that there are very few in any political party who would accept that what happened prior to 1964, in economic or industrial terms, was at all Utopian. Indeed, many on both sides of this House and elsewhere would argue that much of what happened prior to 1964 was responsible for what happened after it.

However. I want to deal briefly, if I may, with the first part of the noble Lord' s Motion, which says (and I quote): To call attention to the urgent need to liberate" — a lovely word!— from the control of Government and other public bodies more of the resources required for the creation of wealth". I think it is fair to say that the noble Lord somewhat exaggerated just what would happen or has happened in the so-called "liberation" of resources where there has been denationalisation in order to create an enormous improvement in "the creation of wealth". The noble Lord, as one would expect. tried his best; but I am afraid he did not succeed, I would have thought. in the eyes of anyone looking at it dispassionately.

For what resources was he referring to? He was referring, presumably, to manpower and to tangible and intangible assets in Government departments and in public bodies generally. The evidence is, at best, inconclusive. Of course there is inefficiency in public bodies, but I would hope that all of us would also accept that there is considerable inefficiency in large private bodies, too. Of course it is possible for the noble Lord to point to companies that have taken over from nationalised industries and to show that in certain circumstances they did better than they had done previously. I must say, however, that his choice of British Shipbuilders was not necessarily a good one, because in private hands they did not exactly do wonderfully well, either.

I am bound to say, too, that anybody looking fairly at what has happened in the case of denationalised industries would have to admit that we would need a much longer experience of how they did in private hands before we jumped to conclusions and made false assertions that everything is now going to go swimmingly and everything is now going to be all for the best, in the best of all possible worlds, simply because a large industry is in private rather than in public hands. Even then it is possible to produce evidence that companies did better in public hands than they did in private hands, as your Lordships will be only too well aware. British Leyland and Rolls-Royce Aero Engines did not exactly do wonderfully well in private hands. Of course, I am not suggesting that they have done brilliantly in public hands, but they have done very much better than was happening when they were in private hands.

The noble Lord referred to British Airways. It has done much better in recent years—very much better under the chairmanship of the noble Lord, Lord King of Wartnaby—but he overlooked the fact that it has done better in public hands and the noble Lord, Lord King, who wants to privatise it, as we know, would be the first to admit that his priority was to get greater efficiency in that industry, and he has achieved it in public hands—

Lord Boyd-Carpenter

My Lords, would the noble Lord allow me to intervene since he has challenged me on this matter?

Lord Barnett

Certainly.

Lord Boyd-Carpenter

Would the noble Lord also allow for the fact that the most welcome recovery under my noble friend' s guidance in British Airways has flowed directly—both in time and in cause—from the decision that it should be liberated?

Lord Barnett

My Lords, really I am surprised at that statement from the noble Lord. I doubt whether the noble Lord, Lord King of Wartnaby, would argue that it is only because of something which may happen this year, next year or some time in the near future that he has achieved whatever success he has. I doubt whether he would assert that.

However, let me come to the real way that the noble Lord's case was undermined. It was undermined for him—indeed sunk—by one of his right honourable friends in another place yesterday. In answer to a Question in another place yesterday, we were told that the proportion of our GNP taken by public expenditure in the United Kingdom is the lowest in the EEC—not the highest but the lowest—and that was despite the fact that almost every country within the EEC can show a better economic performance than ours in this country under successive Governments, I am bound to concede. It certainly does not prove in any way that what is needed is a so-called "liberation", as the noble Lord put it. Indeed, one could argue the reverse. I do not propose to try to do so. Certainly one cannot prove in any way the assertions made by the noble Lord, for there is no evidence to do so. Even if one takes the return on capital employed which the noble Lord took—that every part of British private manufacturing industry has done magnificently in terms of return on capital employed—has the noble Lord forgotten that it is our manufacturing industry largely in private hands, that has done so badly for so long? Is he suggesting to us on the basis of that evidence that what we need to do is to transform all manufacturing industry which is now in public hands into private hands and it will then do as well as it has done in the past? There is absolutely no evidence for that. He produced none, and for the obvious reason: he could not produce any.

Above all, what I think the noble Lord did—and what anyone does who seeks to argue that what is needed above all to solve our major and serious economic problems is to denationalise everything—is to seek to do huge damage. This is to play political football with major industries in this country by moving them in and out of the public sector—especially when, as I say, it cannot be shown that liberating them has any clear advantage. So, I hope noble Lords, wherever they may sit in this House, will not accept the arguments we have heard from the noble Lord today.

Unlike the noble Lord, I want to spend the greater part of my speech this afternoon on the second part of the Motion, which says: and to diminish the disincentive effects on work and investment of high levels of taxation;". It seemed to me from the speech of the noble Lord and from that of the noble Viscount that what they were saying is that high tax is bad and therefore we should reduce it. In the view of the noble Viscount, that constitutes tax reform. I agree that high levels of taxation can be a disincentive to both work and investment; but it is far too generalised a statement to say that in the way that it was said because there is ample evidence that it does nothing of the kind.

Before turning to the disincentive effect on work, I should like to say a word on investment, which is in the Motion. Successive Governments have tried a variety of investment incentives, many of them quite substantial: cash grants, investment tax allowances of very high levels, regional grants and particular industry grants. Some were effective for a short period—but usually only for a short period. They were usually more effective when there was an economic upturn; usually at a time therefore when one did not really need any specific grants to encourage new investment. The major disincentive for companies as regards investment is not, as the noble Lord sought to have us believe, the levels of taxation. The major disincentive for new investment is when a company cannot see where the additional sales from the extra production provided by that new investment will come from.

Certainly, in recent years nobody could possibly argue that the level of corporation tax was a disincentive for, as the noble Lord must know, most expanding companies hardly paid any mainstream corporation tax. Indeed, some of it, I willingly concede, is due to something that I introduced—a major form of stock relief which largely ensured that for years most companies, particularly the expanding ones, did not pay any corporation tax at all. So it is certainly not possible to argue that the levels of taxation have formed a major disincentive for companies to invest. It has been the level of demand that has largely caused the problem; and I am not suggesting for a moment that it is easy to ensure that the level of demand can be at the kind of sustained levels that most companies should like to see and that I should like to see.

I should now like to turn to what I assume to be the main part of the Motion, although the noble Lord did not dwell on it too much; that is, the high levels of taxation. That is normally taken to mean—indeed, the noble Lord referred to it—the highest level of earned income of 60p and the highest level of investment income tax of 75p. I want to turn in a moment to much higher levels of taxation, in any real sense of the word. I mean the truly high rates at the other end of the income scale, which neither the noble Lord nor the noble Viscount saw fit to dwell upon, for perhaps understandable reasons.

But, first, I think we can all agree that nobody likes paying tax, at whatever level, and tax avoidance—here I declare an interest: I have from time to time indulged in it, both on my own behalf and on that of clients—isnot necessarily at its high point where the tax rates are at the highest points. As the House may know, capital gains tax at 30 per cent. is the major area for tax avoidance schemes—and for very good reasons. People do not like paying tax at whatever level and the greatest area for tax evasion—that is, the illegal form of evasion—is where the rate of VAT is just 15 per cent. So it is just not true to say that it is the very highest levels of taxation that cause either avoidance or evasion.

As to the idea that the highest rates of income tax are a major disincentive, I want to assert and show that that kind of assertion is much exaggerated and is certainly not proven. When there were major cuts in direct taxation at the very highest level in 1979, in the very first Budget of the then Government, what happened? In the years immediately thereafter, we had not only low levels of economic growth; we had negative levels of economic growth; that is, with huge cuts in the highest levels of taxation. Indeed, President Ronald Reagan in the United States made equally very large cuts in taxation on the highest paid, and what did he get in the first few years after he had been installed as President?—again, negative rates of economic growth.

So far as the United Kingdom is concerned, our taxation, as the noble Lord and the House will be aware, as a percentage of GNP is lower than in many countries, certainly in the EEC, with far better economic performance than anything we have yet achieved under any Government. Of course, that is not to say that if the incentive is big enough and personally directed it will not have effect; but it has to be specific and it has to be directly identifiable so that a man or woman might be motivated to do more.

For example, if somebody is earning £50,000 a year, then clearly he might just work a little more and a little longer and be prepared to earn a little more than that modest sum if, for every pound, he paid no tax whatsoever. It is perfectly true that that kind of incentive would work, although my experience tells me that even though individuals on high rates of tax say that it is the tax that is the reason why they do not want to do any more work, the real reason, which the man or woman concerned would prefer not to mention, is that it does not sound so good to say that they would like to play more golf, their ambition had been reduced or they simply had a diminished appetite for work. That is all perfectly understandable, but it is certainly not taxation that is the major reason why they tend to work less. It is usually easier to blame the tax system and the Government of the day than to concede the true reason.

On the other hand, it is certainly true for some that tax levels are a disincentive. It is a very personal reaction. It applies more, I suspect, in the professions where men and women have literally to work very hard and long hours for each extra pound; and, as they are already earning substantial sums, the extra, less tax, makes it less worthwhile working. But in many cases of course even then, the same attitude would apply as for many others on a high rate of tax, and the real reason is that they have earned enough and they would not mind taking it a little easier now.

But as to the real area of growth potential, both personally and for the country, I submit that tax is by no means a disincentive, and I refer to the self-employed and the small companies. The opportunities for legitimate tax avoidance in small expanding firms abound. and the tax system certainly does not in any way prevent a really successful small firm from making very large sums of money, as we have seen in recent years with the growth of the unlisted securities market. But that does not prevent the unsuccessful, small businessmen from blaming the tax system, the Government and anyone else they can find readily to hand.

But the tax that is a really big disincentive, as I have indicated, is at the very lowest level of income, which is called the poverty trap and the unemployment trap level. Taking tax in its broadest sense to include national insurance contributions, which are certainly a tax, and family income supplement and other means tested benefits, there is no doubt whatsoever that tax at those levels is far higher than at the other end of the income scale. Let me give just one example. It is not my own; it comes from the all-party Treasury and Civil Service Select Committee.

In certain instances—and it is not a small number of families—an extra pound of cash is taxed at 30p in the pound, then there is 8¾p national insurance contribution and there is a 50p reduction in family income supplement, making a total tax bill for that man, who is on a very low level of income, of just short of 89 per cent. In fact, it will invariably be higher and be above 100 per cent., because there will be at least 20p to 30p in the pound lost from rent and rate rebates. So it would be a tax disincentive for that person of well over 100 per cent., and we heard nothing of that from either the noble Lord or the noble Viscount.

I say that we are not talking of small numbers because, again, the Treasury and Civil Service Select Committee told us something of the number of people who would be affected. I am quoting from paragraph vii of their report in May this year. They said: Using a relative definition of poverty, the poor are not only always with us but more numerous than ever—just over six million on a narrow definition of those with net incomes at or below supplementary benefit level". They went on to say: perhaps a quarter of the population, on a wider one, if we include those with up to one and a half times supplementary benefit". So we are talking about large numbers of people. Not all of those, but quite a substantial number of people are paying tax at that kind of level. The Minister for Social Security told us in another place on 11th July of this year that the latest study he had done in his department indicated that an estimated 9 per cent. of people did better out of work than in work.

There can be little doubt that all that is a major cause of what has been described as the black economy and moonlighting, something which the chairman of the Board of Inland Revenue has estimated to be costing this country, in terms of income not taxed, somewhere between 5 and 7½ per cent. of GDP—between £15 billion and £20 billion. Of course, tax evasion does not apply only at the lower end of the income scale but when a man or woman can do better out of work than in work, especially if a modest amount of moonlighting will help, we should not be too surprised if, human nature being what it is, that person takes advantage of the situation. We should not like it; indeed, I certainly do not like it. But the plain fact is that the black economy and moonlighting has been growing. While it is understandable, I am bound to tell your Lordships that in my view, and I hope in everybody else's, it goes a long way towards undermining the very fabric of a civilised society. This is the area which should be concerning your Lordships' House and the other place rather more than some of the points which were made by the noble Lord.

I am bound to say immediately that it is easier to show the extent of the problem than it is to offer a simple solution. Certainly there is no solution by simply arguing for a cut in taxation, as some people do from time to time, whether it be a cut in the rate, which would be of no help whatsoever in the poverty trap or the unemployment trap to which I have referred, or even a reduced rate of tax, or higher thresholds, which personally I would prefer. Although it is better to do that rather than to have a higher starting point, it certainly would not solve the problem of this terrible poverty trap and unemployment trap. But it is no solution, as is sometimes suggested, to make major cuts in public expenditure in order to make major cuts in taxation. Anybody who looks at our public services in this country must recognise that what is vitally needed is not a cut-back but the maintenance and improvement of the level of our public services.

The all-party Select Committee report showed a number of ways in which we might be able to relieve the poverty trap and the unemployment trap. One way, I must tell your Lordships, was not by cutting public expenditure but by increasing it, and increasing it substantially in the one area of public expenditure which would really help—child benefits. That would be the way to begin to get to grips with the problem, but of course it would be very costly and that cost is undoubtedly at the heart of the problem. In 1982, the Inland Revenue estimated that it would cost some £8 billion to raise the tax threshold just to supplementary benefit levels—I repeat, just to supplementary benefit levels. The sub-committee of the Select Committee estimated that income tax changes to deal with the problem might cost as much as £15 billion.

In the Financial Times on 28th April 1983 the very well-known journalist, Sam Brittan, came up, as always, with a very imaginative way of dealing with the problem—imaginative, but in a way which would just about hurt everybody he could lay his hands on. He would, for example, pay for all this by abolishing the marriage allowance, the age allowance, mortgage relief, life assurance relief, the upper earnings limit for national insurance contributions and pensions fund relief and by the payment of a national insurance contribution on investment income. I imagine your Lordships would find most of that unpalatable but that was the way he suggested we might pay for removing the poverty trap and the unemployment trap.

I want to make it quite clear that I am not suggesting anything so drastic, but what I believe it does do, when one looks at the real problem which faces us as a nation, is to put into perspective what the Motion we are debating should be about: the difficulty of finding a solution to the problem. I am grateful to the noble Lord for having introduced this debate in order to give us a chance to discuss a serious problem. On any analysis, even if the Government were able to maintain in perpetuity the present levels of economic growth, which I doubt whether even the Chancellor of the Exchequer would argue, although he might, we should not have sufficient resources more than to tinker with the problem. Many of the solutions simply create an even worse social injustice. That would certainly apply if we cut public expenditure.

As I say, I do not have a simple solution but I do have five suggestions to make. First, we must treat national insurance contributions as the income tax that it really is. Second, we should merge it with income tax and start at a much higher level than that at which it now starts for very low-paid people. Third, we must increase child benefits. If there were to be a substantial increase, speaking for myself I believe that it should be subjected to tax so that those with the highest levels of income do not obtain child benefit. We should also have a much more graduated scale of income tax so that people do not start paying tax at 30 per cent. on ridiculously low levels of income. Finally, I would abolish the family income supplement and the child needs allowance, in that way removing earnings related benefits which do so much damage. Some of this could be paid for by reducing other reliefs. Certainly the marriage allowance, which is unfair, anyway, could go. But if we want to do something about the real disincentives which are in the Motion, if not in the speech of the noble Lord, that is, I believe, the direction in which we have to move. Any new resources obtained from increased economic growth need to be utilised in this way to deal with the real problem which is facing our nation.