§ 3.7 p.m.
§ Lord Skidelsky rose to call attention to current levels of taxation and public expenditure and their consequences; and to move for Papers.
§ The noble Lord said: My Lords, these debates on Wednesday afternoon are a bit of a luxury, especially for busy people. They are not directly connected with legislation, but they give the House the opportunity to consider broad questions of policy in a relatively non-contentious way. I very much hope that this Wednesday slot will survive the reforms of our House, whatever shape they take. The debate this afternoon is really our substitute for a Budget debate. Therefore, I should like to thank in advance those noble Lords who have agreed to take part.
Economic writers have always known that excessive government spending can undermine an economy. Government revenues are derived from taxes and borrowing. If rising taxation destroys the incentives and finances of producers, the economy declines. We have also always known that there comes a point, difficult though it is to define, when tax evasion, tax avoidance, smuggling and other economic crimes become endemic and cause government revenues to collapse. In other words, the truths underlying the famous (or infamous) Laffer curve have been known for centuries. I give the following quotation:
Attacks on people's property remove the incentive to acquire and gain property… When the incentive to acquire and obtain property is gone, people no longer make efforts to acquire any. When attacks on property are extensive and general… business inactivity, too, becomes general… People scatter everywhere… to places outside the jurisdiction of their present government… The population of a region becomes light. The settlements there become empty. The cities lie in ruins".
§ Those words were written by the Arab scholar Ibn Khaldun in 1377 and have been repeated by most economists over the ensuing centuries. They are particularly apposite to the subject of the proposition before us today.
§ Taxation is driven by public spending. This century public spending has risen dramatically as a share of national income in all developed countries. To take just our own country, in 1900 the British Government spent 10 per cent. of national income, roughly the level it had been since the Napoleonic Wars, out of which they also repaid a large part of the national debt incurred during those wars. By 1976, the share had risen from 10 per cent. to 50 per cent.
§ I should like to draw your Lordships' attention to two features of that record which seem of particular interest. First, our most successful period of post-war growth from the late 1940s to the early 1960s coincided with a downward trend of public spending in national income, from 35 per cent. in 1948 to 28 per cent. in 1960. Secondly, we reversed the upward ratchet which started in the early 1960s, earlier than most European countries. Our public spending share peaked at 50 per cent. in 1976 and has fallen fairly steadily ever since—despite the blip in the early 1990s—down to under 40 per cent. today. The European Union share, by contrast, went on 772 rising through the 1980s and has only recently stabilised at a much higher level than our own—at about 50 per cent. of national income.
§ For much of this second period, the UK growth rate has been higher than that of our European partners. They have stagnated; we have discovered a fresh dynamism. Of course there have been other factors in that turnaround, including the supply side reforms of the 1980s. But the main conclusion I draw is that, within fairly wide limits, it is not so much the level of taxation which influences economic performance as the expectation people have of what the tax burden will be—in other words, the expected trend of taxes. If they expect the burden to go up, their efforts will slacken; if they expect it to go down their efforts will quicken.
§ That is very relevant to the present situation. Between 1981 and 1997 the tax burden fell from 39 per cent. to 36 per cent. of GDP. Since 1997 it has started to creep up again as a result of what we call stealth taxes—excise duties, tobacco tax escalators, windfall taxes, reductions of allowances, and so on. It is projected to go up to 37 per cent. by the year 2001—a very small amount, I concede, but one which could have large effects if that is expected to set a trend of rising taxation.
§ That is the first point to which I wish to draw attention. It is not just the level of taxes which determines economic performance, but the expectation of whether taxes will go up or down.
§ My second point is the close connection between the level of taxation and fiscal rules. The reason is that a budget which is balanced to any large extent by borrowing leads to debt accumulation which has to be financed by higher taxes. If one has no budget rules but simply allows borrowing to plug any shortfall of normal taxes, one gets into an unsustainable debt situation which means one then has to raise taxes. So there is a quite close connection between the level and trend of taxation and budget rules. A balanced budget in the normal sense was achieved only once in our country between 1945 and 1988—from 1968–70 when the noble Lord, Lord Jenkins of Hillhead, was Chancellor. I am glad to pay tribute to him for that achievement.
§ Lord McIntosh of Haringey
My Lords, the noble Lord should pay tribute to the member of his Treasury team who is present with us today.
§ Lord Skidelsky
My Lords, I am very glad to add the noble Lord, Lord Taverne, to my tribute. That surplus was achieved only once. However, the budget deficits in the period of the 1950s and 1960s were very moderate—only about 2 to 3 per cent. of national income. As a result of the mass privatisations of the 1980s, the rationale for large scale borrowing for capital spending has largely disappeared. Too often that capital borrowing was simply a euphemism for subsidies. But what do we find now? There are one or two disturbing straws in the wind. Should the Government have put £200 million of the taxpayers' money into the plant at Longbridge, into a private car manufacturer? Is this the first small sign of the revival of the subsidy culture which we thought we had left behind us? I shall be interested to know.
773 The Chancellor of the Exchequer has proclaimed his allegiance to the golden rule: the doctrine that government borrowing should not exceed government investment. Some rule is certainly better than no rule, but I have to point out that this rule is full of holes. Let me explain. The success of an investment in the private sector is measured by the rate of return. So for the capital/current distinction to be useful in the public sector, shadow returns must be calculated for all types of capital spending. Is it really meaningful to identify a shadow return for capital spending to build a prison or school? Is it clear that the return is higher than current spending on an extra prison officer or teacher? Unless an identifiable income stream results from the spending, the analogy between public sector and private sector borrowing breaks down. So we must monitor the golden rule of our prudent Chancellor with great care to make sure it does not become a cover for all kinds of forbidden tricks.
Another aspect of fiscal practice which gives rise to concern is the habit of all governments—I do not exclude Conservative governments—of raising taxes to satisfy populist spending pressures and then reducing the effect of those on the tax burden, especially for the middle classes, through tax reliefs and allowances. The danger is that the abolition or reduction of those allowances, justified though it may be on grounds of simplicity, equity and so on, allows the Chancellor to increase the tax burden without raising tax rates. That has started, and we need to watch it carefully.
I wish to turn in my conclusion from these rather dry technical matters to issues of basic philosophy. The difference between our party and the party on the Benches opposite is—I put as neutrally as I can—that we instinctively favour lower taxes for the sake of freedom and efficiency while it instinctively favours higher public spending for the sake of (let me call it) social justice. Our contention is that lower taxes, by making the economy more productive, will at the same time improve the position of the least well off, especially if the tax-cutting programme pays attention to raising tax thresholds as well as cutting standard and higher rates.
Across the board tax cuts benefit everyone. In particular they get us away from that dreadful and divisive game of counting winners and losers. We need to point out that a tax cut of 3 per cent. increases teachers' pay just as much as a pay rise of 3 per cent., and leaves the community more contented because it is across the board.
So in arguing for this route to social and economic improvement, we draw not only on the logic of Ibn Khaldun and his successors with whom I began, but on the historical experience of all successful societies, including our own. I beg to move for Papers.
§ 3.20 p.m.
§ Lord Haskel
My Lords, the noble Lord, Lord Skidelsky, draws our attention to current levels of taxation and public expenditure. I am not an economist and personally I find the argument over the numbers rather pointless. The noble Lord spoke about 774 expectation, but, after all, the numbers are a matter of record. Taxes are laid out in the Budget Red Book. The same applies to the categorisation of the Government's income and expenditure.
The noble Lord spoke about the expected return on government expenditure on supporting industry. I must point out to him that traditional accounting takes no account of social benefits. Often the expenditure is precisely for that purpose. Categorisation depends on how you view the world. The Treasury has one view of the tax burden and official statisticians have another. Every economist will have his own view about, for instance, whether the working families' tax credit should be accounted for as public spending or as negative taxation. Frankly, I find the argument academic.
The noble Lord spoke about the percentage of GDP taken in taxation. Surely, the significant point is that the level of taxation depends on the rise or fall of economic activity. And so the argument over whether the percentage of GDP taken by the Government is 37 per cent. or 36 per cent. depends on the domestic product. That is what is important.
However, the noble Lord, Lord Skidelsky, calls our attention to the consequences of the current levels of taxation and public expenditure. Now this is much more interesting territory. I would hope that the consequence of our level of taxation and public expenditure is a thriving and competitive economy and a fair and decent society. That is the kind of country I want to live in. Indeed, I congratulate the Government on having stated that as their objective.
Let me take a look at some of the areas of our taxation and public spending to see whether they are directed towards achieving those purposes. Let us take business. Business taxes are complex and there are lots of them. A thriving and competitive economy is not created just by reducing taxes to encourage consumption. Businesses should be taxed in such a way that they are encouraged to invest, to be enterprising, competitive and innovative. We particularly want to encourage small and medium-sized enterprises. A low level of corporation tax does precisely that. Introducing a new 10 per cent. rate for the smallest companies and 20 per cent. for the other SMEs certainly encourages enterprise and productivity.
In spite of what the noble Lord says, businessmen.. especially those operating smaller businesses, are encouraged by tax allowances. And the Government are slowly doing that by introducing a new tax credit on research and development for SMEs from next year by extending the 40 per cent. first year capital allowance for SMEs and by the proposal for all employee share ownership schemes.
Small businesses will also receive some additional benefit, assistance and encouragement from their taxes from the new Small Business Service and its enterprise fund providing loan guarantees. Tax allowances will also be available to encourage the wider use of computers. So there is plenty of opportunity for firms to reduce their tax base by being enterprising and competitive. The whole point of allowances is that firms are enabled to reduce their tax base.
775 However, businessmen, large and small, are also much influenced by what they receive in return for their taxes. If they see a bloated and wasteful public sector, a disastrous roller-coaster economy, a poorly educated workforce and highly fragmented and unequal consumers, they will be unhappy with any level of taxation. Where they see that government finances are under control, that the economy is steady, that the public sector is fairly stable and that the quality of the workforce is improving, they are encouraged by the resulting low inflation and low interest rates and feel that they are getting reasonable value for their taxes. That is one response to the noble Lord's point about expectations. He appears to believe that what is happening is a consequence of the current level of taxation and public spending. I do not believe that it is.
Personal taxation, like business tax, is complex. Much depends on the individual's tax base, his allowances, and, most importantly, their relationship with the benefit system. For years, the tax and benefit systems have been out of step. This created the unemployment trap and the poverty trap which proved not only a disincentive to work but also resulted in more and more children living in poverty.
Since 1979, the wealth of the nation has steadily increased, but so has the number of children living in poverty. That has been largely due to the taxation system. Poor people were paying marginal rates of tax of 70 per cent. Thankfully, the Government have at last begun the integration of the tax and benefit systems in order to spring the dependency trap. Surely, one of the better consequences of the working families' tax credit is the gradual elimination of the poverty and unemployment traps. It must contribute to a fairer society if work pays better than benefits.
Reform of national insurance charges will also increase the work incentive for lower paid people. It makes sense to align national insurance charges with income tax personal allowances. It also makes sense to reduce national insurance for low paid people and to increase it for higher paid people by charging national insurance against benefits in kind and increasing the rate for higher paid self employed people.
It must also be right for our society and for the economy to help families and children. The new children's tax credit and the working families' tax credit do precisely that; the tax allowance on mortgages does not. Pensioners, too, will be guaranteed a minimum income and child benefit will rise to record levels. All those changes must contribute towards a fairer society and help to close the gaps in society. Surely, that is a welcome result of the level of taxation and public spending.
Turning to the environment, I believe that it is quite legitimate for the Government to reduce the tax burden on good things such as payment for work and enterprise and to put the burden on bad things such as pollution. Climate change is recognised by all as a significant environmental threat. Using the tax system to encourage the efficient use of energy and the introduction of renewable sources of energy can only be right.
776 I am most grateful to the noble Lord, Lord Skidelsky, for introducing the debate. I confess that I am a little disappointed by what he had to say. It was as though he was reading from an old script. Indeed, he went back to the 14th century and requoted the old mantras. The world has moved on and so has thinking about taxation. I believe that I have shown that the Government are aware of that, and I hope that the noble Lord, Lord Skidelsky, will not be left behind.
§ 3.30 p.m.
§ Baroness Hogg
My Lords, I congratulate my noble friend Lord Skidelsky on the wording of the Motion, because it is particularly well chosen. It is indeed important tocall attention to … levels of taxation and … expenditure",because they are so deeply buried in the Government's lovely new shiny publications.
My text today is, of course, the monumental, wrist-straining document in which the Chancellor presented his latest Budget. I took the trouble recently to compare this remarkable production, written and edited at the taxpayers' expense, with the equivalent document issued on the 1979 Budget. Those of your Lordships who recall the radical changes made in that once-in-a-generation Budget may also recall that the Treasury managed to describe it simply and straightforwardly in a little red Budget book just 31 pages long.
To describe his latest Budget, however, the Chancellor seems to have needed 190 full pages—A4 size. There can surely be only one of two explanations. One is that his tinkering has so massively over-complicated the tax system that it really does require over 50,000 words to explain what on earth he is trying to do. The alternative is that in every sense of the word this really is a bit thick—that rather a lot of this so-called Budget book consists of a load of wool that the Chancellor wishes to spin over our eyes.
I would like to be both optimistic and charitable and assume that the second explanation is the correct one, because, after all, a waste of paper and Civil Service time would be much less damaging to the economy than making a complicated mess of the taxation system.
I am afraid, however, that there are aspects of Mr. Brown's Budget that plainly are a bit of a muddle, of which the most obvious is his plan for married couples' taxation. At a stroke, he has reneged on the hard-won principle of separate taxation for women, by proposing to make a mother's tax bill dependent on what her husband is earning. The only silver lining is that, since this is one of the many Budget announcements that the Chancellor does not actually intend to do anything about for two years, the Treasury has some time to sort him out.
One will certainly look in vain for a full explanation of such an important policy change in the Budget book. It is not that which is filling up the pages. In Chapter 5, after two sketchy sentences, we are promised "further detail" later in the book—presumably in the hope that 777 we will simply lose interest, because if one turns to the place where it is promised, it just is not there. So what are we being offered in this massive tome?
After wading through the first 94 pages of this document, I finally reached the heading "Financial Statement and Budget Report". Now, that is what it used to say on page 1! What that tells me is rather serious: that the 94 pages in advance are the spin-doctors' preserve, and that the only part of this document to which the Treasury is prepared to give this traditional imprimatur is buried at the back of the book.
And, of course, the Chancellor must be hoping nobody gets quite that far. For example, on page 14 we are told that taxes are being cut this year by £1 billion. It is not until page 120 that we discover that the Chancellor is meanwhile putting taxes up this year by nearly £4 billion. He highlights the cut in the starting rate of income tax on pages 9, 11, 13, 49, 59, 60, 71 and 72—and I am sure that I have missed plenty—but he does not identify until page 97 the fact that he has meanwhile paid for most of this by raising the 20p rate.
This document is riddled with the repetition of claims that are not clearly defined, illustrated by somewhat randomly associated figures, laced together with buzz words. On page 70 there is a dinky little chart purporting to show what will happen to families' living standards, which ignores everything to do with spending taxes, and is only a guess at the position in 2001 anyway. Yet the Government somehow seem to have failed to find space on any of these 190 pages for the traditional tables showing the overall impact of all tax changes on individuals this year.
I have to say that I think it is fortunate that the Treasury is not a private pension provider, because I do not think this would meet the regulator's CAT standards.
I have done time in Whitehall. I have taken my turn at brisking up boring old Treasury announcements. So I am not inclined to be too prissy about presentation. But this is not some trivial hand-out on a Minister's speech. The annual Budget report is an important document of record. It circulates widely. There is a serious public interest in ensuring that the Budget report is balanced, clear and straightforward, factual and unbiased—and, preferably, brief and to the point. Whitehall guidance, admirably re-issued by this Government, is that all such materialshould be objective and explanatory, not tendentious or polemical".All I can say is that someone seems to have nodded off at times between pages 1 and 94. For my part, having read them too, I cannot say that I altogether blame them.
Fortunately, the Chancellor has been rumbled. To quote the Economist:New Labour has raised the art of obfuscating and spinning official information and statistics to new heights. Or should that be lows?".I think he was rumbled partly because of a rather puzzling attempt by some to deny the basic fact that taxation is going up. This led the Institute for Fiscal Studies—on whose Council I have the honour to sit—to dig a bit deeper, and examine the extent to which, in the Economist's words, the numbers have been 778 "flattered by reclassification'". If one gets far enough into the good bit of the Budget book one can, however, find the answer to the tax question. This shows clearly that current Government receipts will go up by over £10 billion this year, and, just to make the point, that these receipts are planned to increase—only modestly, but steadily—as a share of national income. One may have to get to page 154 to find a comprehensive, undistorted answer, but it is there. The Government are planning to raise taxes this year, next year and the year after. I am sure no one in this House would be so misleading, or should I say "misled", as to suggest otherwise.
§ 3.37 p.m.
§ Baroness Sharp of Guildford
My Lords, perhaps I may join others in thanking the noble Lord, Lord Skidelsky, for raising this interesting topic and giving us the opportunity to debate it.
I should like to respond immediately to three of the points that the noble Lord made. The first was that the degree of taxation in society has a considerable effect on incentives. That is only partially true. An enormous amount of work has been done by economists over the years to try to identify how big an incentive effect taxation has. I think the conclusions are that very high rates of taxation create a considerable disincentive effect.
Let us look at times when we have had very high rates of taxation, such as during the Labour administration of the 1974–79 era, and at the compounding of means testing and the poverty trap, a point raised by the noble Lord, Lord Haskel. This is an issue that we should be very much aware of—that the marginal rates of taxation faced by those at the bottom of the income scale, not at the top, are frequently well over 100 per cent. and have probably provided a major disincentive to working.
Secondly, the noble Lord, Lord Skidelsky, raised the issue of investment. Since some time in the 1960s the Government have made no distinction between capital and current expenditure in their accounts. I happened to be working in the Treasury in the early 1960s when we made that distinction. One result of the change is that the capital side of public accounts, of expenditure, has over the course of time been neglected, because current expenditure is always more pressing. There are always incomes to be met, salaries to be paid. Therefore, time and time again when economies have to be made they have been made from the capital side of expenditure. The result, I believe, is that this state has neglected its responsibilities over the years; it has run down the social infrastructure to a point where we are in danger of not being able to meet essential needs.
I give as an example the area in which I work. the economics of basic science, where we are in danger of not being able to meet the needs of modern industrialisation, of new technologies, because in this country we are not putting enough money into research and development.
The third point that the noble Lord made is that, provided we cut taxes and growth increases, we do not have to worry about the poor because they will benefit 779 from faster growth. There is a degree to which the noble Lord is obviously right. He pointed out correctly that in the period from 1950 to the end of the 1960s, when we had the fastest growth rate in this country which we have ever experienced consistently, the poor did very well. But that was also a period in which we introduced major redistributive schemes for the poor.
There is no evidence at all that in the period of the 1980s, at a time when taxation was cut substantially, there was any benefit to the poor. On the contrary, we have seen the distinction between the rich and poor becoming wider than ever before. The trickle-down effect did not work. That is why we are left with a considerable problem in relation to the poor and the issue of poverty.
§ Lord Skidelsky
My Lords, I thank the noble Baroness for giving way. Perhaps she will recall that in my speech I said that as part of any tax-cutting programme tax thresholds should be raised. That was my preferred method for tackling the poverty programme. It is not the only way but it is my preferred method of arranging the tax system.
§ Baroness Sharp of Guildford
My Lords, I am delighted that the noble Lord made that point because it is a point which the Liberal Democrats have been making for a long time.
From these Benches, there is a different proposition which I wish to put to the House. The noble Lord, Lord Skidelsky, suggested that taxation is increasing and should be diminished. As is well known, we believe the opposite; that on the contrary, in certain areas, public expenditure should increase more quickly and that there is considerable justification for raising taxation to meet that increase in public expenditure.
The reason for putting forward that argument is that taxation can be divided into three main areas. One can be justified in terms of public goods. A traditional public good is something like street lighting. You cannot prevent people from benefiting from street lighting. If you ask people whether they will pay for street lighting, they will say that they will not because they know that if muggins next door will pay, there is no reason why they should pay anything towards it. It is called the free-rider problem, and the easiest way out of that dilemma is for the state to raise general taxation to pay for it. Many areas—public lighting, the environment, safety, health, defence, prisons and so on—can be justified on the ground of being public goods.
Secondly, there is redistribution and the noble Lord, Lord Haskel, spoke at considerable length about that. Traditionally, it has been a highly political issue which has divided right from left. I am not sure that that is so any longer. Something like 30 per cent. of UK public expenditure—£100 billion per year—now goes on the social security budget, which is the redistribution budget. All sides struggle to keep it down. It is led largely by issues of old age, illness and unemployment. As the debate that took place here on Monday showed very clearly, it is an area which is extremely difficult to control.
780 The final area of major public expenditure in this country is interesting: it is health and education expenditure. It amounts to about 25 per cent. of public expenditure. In this country we are spending 5.7 of GDP on health and 5 per cent. of GDP on education. We are spending less on health than any other advanced industrialised country. The United States in total spends 12.5 per cent. on health, but even the public sector in the United States, which provides a minimal health service, spends 6.5 per cent.
As regards education, we are spending about the same, on average, as our European partners and the United States. Nevertheless, in terms of education, as we know, one in four in this country is now functionally illiterate.
We are now a globalised economy. Capital is extremely mobile; technology is mobile. A multinational can set up business where it wants to. We cannot compete in this country in terms of low wages. We must compete not in terms of brawn but in terms of brain. We shall create jobs in this country only if we can attract those multinationals and provide them with the labour which is capable of meeting their modern-day technological requirements. Unless we invest in education, we shall not be capable of doing that. That is why, on these Benches, year after year, we have said that there must be more investment in education. It is an investment that we cannot afford not to make.
I know that those on the Government Front Bench will tell me that they have put more money into education. But it is a paltry amount compared with what is required. It is by no means enough to meet the needs of a modern industrialised country when there is currently such a crisis.
It may be argued, too, that we do not need to put in more money; that we can create efficiency savings, which we have been doing in the education and health sectors for a considerable period of time. The problem is that 80 per cent. of the budgets in those sectors are people budgets. Why do people spend money on private education? It is because they want smaller classes. We cannot have smaller classes in our primary schools nor proper nursery education unless we are prepared to spend money on those issues.
We are not a highly taxed country. By OECD comparisons, 36 per cent. of the GDP in the UK goes on tax. In the United States and Japan it is about 29 per cent.; in Germany it is at 38 per cent.; in France it is at 45 per cent.; and in Scandinavia it is over 50 per cent. In European terms we are towards the bottom of the league tables. In world terms we are at the lower end of the middle of the league tables. We are a rich country.
We must bear in mind the importance of an increase in expenditure on education and the aspirations of our people in relation to health. We cannot meet the aspirations for a better quality health service unless we are prepared to spend money and put more people into the service. We cannot meet those aspirations unless we increase public expenditure in those two areas.
Unless there are other areas of public expenditure which can provide for the increase necessary in those two areas, we must increase taxation. We cannot afford 781 not to invest in education. We must put more money into the National Health Service in order to meet the aspirations of the voters in this country. In both those spheres, we are justified in increasing taxation.
§ 3.38 p.m.
§ Lord Marlesford
My Lords, I shall not endorse the interesting speech which we have just heard from the noble Baroness, Lady Sharp. However, I shall comment on personal tax levels in this country.
We owe a debt of gratitude to my noble friend Lord Skidelsky for giving us the opportunity to have this debate. I was particularly struck when he referred to the changes in personal taxation as having been one of the major features of the period of Conservative rule. Indeed, there was a revolution in direct taxation under three remarkable Chancellors—one of whom is in the Chamber this afternoon, the other two being my noble and learned friend Lord Howe and my noble friend Lord Lawson—from the time that the government of my noble friend Lady Thatcher were elected. At that time noble Lords will remember that we had a top personal rate of taxation of 98 per cent. It had not fallen below 90 per cent. for some 20 years. Very able people were leaving this country in large numbers in order to avoid the consequences of that tax regime.
I want to talk a little about our present direct tax regime. Before I do so I should like to pay two tributes. First, I should like to say how glad I am that the present Chancellor of the Exchequer has, in three successive Budgets, not significantly changed the structure and pattern of direct taxation in this country. I know that New Labour was elected on a pledge that it would more or less retain the extremely popular and economically successful tax structure which it had inherited. It undertook to retain it, not least, I suspect, because it saw that as an important way of ensuring a useful majority in another place. At any rate, we have had three Budgets in which the tax structure has largely survived.
My second tribute is a more personal one. It is to the noble Lord, Lord McIntosh, who has patiently provided a number of Written Answers to questions I have been asking him on tax levels in Europe. It is the implications of those answers to which I should like to draw your Lordships' attention. He is now fumbling for his papers. Maybe he has taken with him copies of the answers he gave me.
§ Lord McIntosh of Haringey
My Lords, on the contrary, I was merely thinking, with pleasure, how all that work has now come to fruition and that we shall hear the conclusions which the noble Lord is drawing.
§ Lord Marlesford
My Lords, I want to emphasise to your Lordships the extremely favourable tax structure we have in terms of personal taxation in this country in comparison with other members of the EU. I should like to quote a few figures. First, as regards income tax, the top rate, as we know, is 40 per cent. It was reduced to that level by my noble friend Lord Lawson in 1988. It comes into effect at a taxable income of about £32,000 per year. In France the top rate is 54 per cent., which comes into effect at a higher level of £88,000. In 782 Germany it is 56 per cent., as it is in Sweden and Spain. In the Netherlands it is no less than 60 per cent. and comes into effect at £40,000. In Belgium and Denmark it is about 57 to 58 per cent. Even Italy has a rate of about 45 per cent.
Therefore, as regards direct personal taxation, we have, with Portugal, the lowest top rate. That gives the right incentive to those people who create economic wealth in this country.
Secondly, I should like to refer to capital taxation. Six countries in the EU have an annual wealth tax. I well remember in the mid-1970s a previous Chancellor of the Exchequer, the noble Lord, Lord Healey, attempting to introduce a wealth tax in this country. At least he produced a Green Paper proposing it. A House of Commons Select Committee spent a great deal of time examining it, the results of which we published in the Economist when my noble friend Lady Hogg and I were working there together. That leak dismayed the Select Committee and I was hauled in front of the Privileges Committee for leaking it. Nowadays, Select Committees are glad of any publicity for their reports. The wealth tax was abandoned. No one could find a satisfactory manner to avoid it raiding the cash flow of small companies. That represents quite an important difference between us and some of the other countries. In France, for example, the wealth tax has been a significant piece of political baggage that they have so far been unable to throw overboard, but I think that will come.
Capital gains tax in this country is generally viewed as income, as it is in other countries. That seems to me to be perfectly fair and I have no complaints. As regards inheritance tax, this Is the one country where it is not calculated on a family heirs basis as it is in most continental countries. However, significant and sensible changes were made to the structure of inheritance tax in this country by my noble friend Lord Lamont when he was Chancellor of the Exchequer. The top rate is 40 per cent. but there are lower levels for business assets. Other countries have very high rates, particularly for non-familial inheritance. In Belgium it is still 80 per cent., in the Netherlands 68 per cent. and in France 60 per cent., with a threshold of only £1,000 for people who are not direct relations of the deceased person. Here, I believe it is £225,000.
I turn to the VAT: at 17½ per cent., this country is among the lowest rates. One of the boldest things to be done in the 1979 Budget by my noble and learned friend Lord Howe was to make a dramatic change to simplify and increase the rate of VAT so as to shift from direct to indirect taxation. In Denmark and Sweden it is 25 per cent. and in France 20 per cent.
Another particular aspect of our VAT regime which I believe is extremely important is the threshold below which a small business person, small trader or craftsman does not need to register and thus charge VAT. 783 Interestingly, only France and Britain have what I would regard as a sensible level of threshold, which in each case is about £52,000 of annual turnover.
§ Lord McIntosh of Haringey
My Lords, the noble Lord will of course realise that the French threshold rose from 125,000 francs to 500,000 francs as recently as 1st January this year.
§ Lord Marlesford
My Lords, I welcome the way in which certain aspects of the British system have been followed. I said a little earlier that some countries will have to continue to learn from the British experience in economic management. Privatisation is another obvious example.
I believe that this VAT threshold is most important. It encourages people who decide to make a go of a business. It gives them a direct advantage in being able to provide their services free of VAT, often on a small scale, and gives them independence. They are the small entrepreneurs so crucial to the country. It is not just large businesses which are important, but small businesses also. Italy, Belgium, Sweden and the Netherlands have no exemption threshold. That may, of course, have something to do with the disinclination to conform to taxation rules in those countries.
A few months ago I spoke to a senior director of the Ministry of Finance in France. He was complaining to me. He said, "You know, there are now 20,000 Frenchmen living in Kent. We have to get them back. It's your tax system which does it. We must have a level playing field". I am extremely anxious that Her Majesty's Government do not yield to pressure for a level playing field if it would mean losing the extremely favourable tax regime we now have in this country.
Nowadays, one does not hear of entrepreneurs, scientists or academics going abroad because they would be better paid. Such people are coming to this country. This country is becoming a place where the successful, the enterprising, the skilled and the talented can flourish.
I have one final point. I do not think I meet the noble Baroness, Lady Sharp, on this point but perhaps philosophically I have some sympathy with her. I believe that a quid pro quo for a low taxation, for leaving money in the hands of the people who have it, is charitable giving. I do not believe that the charitable giving in this country is anything like as generous as it should be. This week the Sunday Times published its list of the rich. It also had a list of the charitable contributions made by certain wealthy families, and in many cases they were remarkably generous. The lack of comparable giving by other wealthy families suggests there is much more scope in this country for charitable giving.
I have one more figure, thanks to the noble Lord, Lord McIntosh. The 137,000 best-off taxpayers, each of whom has a taxable income greater than £100,000, among them have a gross taxable income in excess of £17 billion. That is around 2 per cent. of GDP. That is a lot of money and even if they were to give 784 only 1 per cent. of their income to charity, that would amount to a £170 million direct donation. Of course, the Government would be sharing in the cost because charitable donations are deductible. I suggest that with the generous personal tax regime we have in this country, people should be considering charitable giving at roughly the levels that wealthy countries are encouraged to set for their international aid programmes.
§ 4 p.m.
§ Lord Higgins
My Lords, I welcome, as does my noble friend Lord Skidelsky, the opportunity to have this debate, rather unusually in your Lordships' House, on public expenditure and taxation. I wish basically to follow the theme set out by my noble friend Lady Hogg with regard to the presentation of matters of taxation and public expenditure. I believe, as she implied, that standards in this respect have been falling. That ought to give us cause for concern. In an age of spin doctors there is far too much, as the Americans would say, "smoke and mirrors" in relation to presentation. Indeed, the noble Lord, Lord Haskel, almost gave the game away when he said that the Treasury has one view of taxation and official statisticians another. There has been some divergence of opinion in that respect.
My noble friend's Motion covers public expenditure and tax. They are now embodied in what is called a unified budget; the two sides have been brought together. However, I must express a disappointment. When we were told that there was to be a unified budget, one's reaction was to say that it would be possible to balance the effect of an increase in public expenditure and the implications of that for taxation, a point made a moment ago by the noble Baroness. But despite having brought the two sides of the equation together, it is still the case in the other place that only the executive can really take a decision about the balance. The House of Commons can vote for reducing public expenditure or taxation, but it is still unable, despite the fact that we have a unified budget, to say it would like to spend more, for example, on education or health, and as a result of that put up taxes. So in that respect it is not a truly unified budget where the two sides can be balanced. All that we and the other place can do is comment on the decisions which the Government have made with regard to the balance between the two when in reality it might be the case that the House of Commons would prefer to deal with it in a different manner.
My noble friend's Motion relates to both public expenditure and taxation. I want to concentrate on taxation. I make only one point on public expenditure, which was very much at the heart of the Government's proposals ahead of the election. They said that they would cut expenditure on social security in order to divert resources into expenditure on health and education. In that respect they have clearly failed. The increase in the social security budget has been very great and will be so over the next three years. The reallocation of resources which they said they were going to carry out has not taken place. The noble Baroness, Lady Sharp 785 of Guildford, was right to point out the importance of the balance between those major items of public expenditure.
I turn to taxation. I take up only one point made by my noble friend Lord Marlesford with regard to the VAT threshold. It has always been a difficult issue. One has to balance the advantage to those below the threshold in relation to the competition of those just above the threshold, and it is a fine balance. I reflect for a moment—it is a long while ago—that when I was considering where the dividing line should come and subsequently legislating on it, the threshold was £7,000. I am therefore slightly horrified to discover where it has now got to as a result of the various economic developments in the intervening time. I should perhaps add that at that time VAT was only at the standard rate of 10 per cent. and there were major items of zero rating, including complete zero rating in relation to fuel.
I want to turn to the issue of whether the presentation of the Government has been adequate in relation to these matters, in particular the question of whether or not there has been a cut in taxation. That was a major item of dispute at the time of the Budget debates and indeed subsequently. I notice with interest a piece by Mr. Anatole Kaletsky who seems recently to have been producing articles of outstanding merit and often of considerable complexity. He had carried out research into the immediate reaction to the Government's Budget. At one point he said,'Everyone's a winner - guaranteed prize for every reader', gushed The Sun headline yesterday morning. 'Apologies for Brown-nosing, but this is brilliant - he's helped every one of us' was the considered view on The Mirror's front-page".The reality of course is that that is not the case. Indeed, when challenged in the House of Commons by the Leader of the Opposition who repeatedly said that there had been an increase in taxes in the first three Budgets and that the Government had not cut taxes but had raised them, the Prime Minister insisted time and again that they had been cut. As Mr. Kaletsky rightly points out, that is simply false.
There are real problems in presentation. My noble friend Lady Hogg referred to the Red Book. We rely a great deal for our understanding of these matters on the Red Book which, as she rightly pointed out, a little over 20 years ago was an exceedingly slim volume. But it was an objective volume. One could rely absolutely on what it said whereas the present extremely glossy and heavy volume contains a great deal of opinion rather than fact. That is something which gives us cause for concern.
The other documents on which we rely increasingly in addition to the Red Book are the series of press releases which are issued at the same time. Those again were an innovation of the early 1970s. I believe that they were a good innovation and that people outside rely heavily on them for factual information. For those in business who need to react rapidly to what the Chancellor has said, the press releases are extremely valuable. But it is important that they should be impartial, and I do not believe that that is now the case.
786 I give one example of a Treasury press release dated 9th March with regard to income tax. There was a paragraph on the new lop rate of income tax which was widely welcomed, and a second paragraph referring to the cut in the basic rate of income tax to 22p. But there was no mention at all of the 20p band of income tax having been abolished. One would have thought at the very least that that was worth mentioning. It is a specific item which I believe to be important. Similarly, if one is going to put forward a comprehensive and balanced picture, it is true that there are cash flow savings for the small employer covered by Inland Revenue Notice 22 with regard to specific changes. But there is no mention of the effect which the introduction of the working families' tax credit would be likely to have on the cash flow of small companies. Indeed, the Government, on a Second Reading earlier this week, made it absolutely clear that they did not propose to give way on that particular matter. So there are real problems here in that respect.
I turn now to a rather more specific point and one which I believe to be important; namely, the exchanges which took place yesterday during Question Time with regard to the Government's press releases. Noble Lords will recall that the noble Lord, Lord Rix, asked what had happened with regard to the Government's press release which stated that pensioners who suffered as a result of the abolition of the bereavement allowance, which is due to happen in April 2000, would be more than compensated as a result of the proposed new bereavement payment. As the Minister recognised yesterday, the statement made in the press release was untrue. It is not the case that that change will more than compensate pensioners. One must acknowledge that the noble Baroness, Lady Hollis, apologised most clearly yesterday for what was a mistake. Indeed, I would be in the forefront of those who accept the apology which was made. However, it does not bring us to the end of the matter.
As I pointed out when quoting from reports in the popular press a few moments ago, we were all under the impression that everyone would gain. However, as a result of the change, we now find that that is not the case. Although the noble Baroness has apologised, the question remains as to whether those affected who were misled at the time feel that this is adequate. At all events, I believe that we are entitled to know who was responsible for the mistake and what action has been taken as a result. More particularly, we need to know whether the Government propose to do anything to help those who will be adversely affected by the change. I have in mind especially widows aged 60 to 64 who do not get the higher tax allowances and who are, therefore, more adversely affected. It is most important that such matters should be checked and that the presentation which is put forward should be such that we can rely on the statements which the Government and the Chancellor of the Exchequer make. I believe that there are important issues involved as regards presentation which need to be considered further.
I have spoken for longer than I intended. I have but one further point to make in relation to public expenditure and taxation. The whole basis of our 787 parliamentary system of control of the executive has always been based on the control of public expenditure and taxation. I view with growing concern the possibility that these matters may increasingly be transferred to Brussels as a result of a policy of harmonisation. No doubt in some respects there may be a case for doing so. There are the present problems of smuggling, as mentioned earlier, which arise because of the big difference between our tax rates on tobacco and alcohol. Such matters give cause for concern. Perhaps there is a case for a more standard view in that respect, not least because the EU seems to be remarkably schizophrenic on, for example, the question of tobacco. Indeed, part of it argues that taxes ought to go up while other parts argue that taxes ought to remain as they are. Of course, these are matters for the future, but noble Lords are right to be concerned about the degree of parliamentary control on the two most important aspects of economic management; namely, taxation and public expenditure, to which my noble friend Lord Skidelsky has rightly drawn our attention.
§ 4.14 p.m.
§ Baroness Platt of Writtle
My Lords, I, too, am most grateful to my noble friend Lord Skidelsky for initiating this important debate, although I am no tax expert and will concentrate on two points in particular. I believe in the vital importance of trade and commerce to the future prosperity of this country. The taxation system has a profound effect, often in unexpected ways, on the success of our industry and commerce. In this connection, I would also place great emphasis on the importance of manufacturing industry. That seems, in my view wrongly, to be unfashionable these days. I should declare an interest here as a non-executive director of our small family business and also—I shall return to this point later—I should say that my husband has a diesel car.
Today everyone emphasises the importance of the service sector in international trade and commerce. As a liveryman of the Worshipful Company of Engineers in the City of London, I would not wish in any way to gainsay that. May our financial services continue to take a leading place in the world and flourish root and branch forever! However, a healthy services sector depends to an important extent on a healthy national manufacturing sector who comprise, in the first place, initial customers and therefore payers for those services.
Manufacturing today depends on being ahead of the world in high technology, high added value industry—although we must not forget to encourage our bread and butter industries—may be low added value. Often one has to import simple household articles which could perfectly well be made here because shops only seem to buy from abroad, whether it be kettles, hammers, deep freezers or toasters. I would wish to see them better made in Britain, thereby providing employment and reducing our national trade deficit.
However, high technology manufacture depends on high technology well-qualified staff; and there should always be investment in good training and continued professional development, as other noble Lords have 788 said this afternoon, if our industry is to keep ahead of the rest of the world. Investment in expensive new technological machinery to improve productivity is also essential. Both those fundamentals need fiscal incentives. They are a great burden on small and medium-sized enterprises long before profit arrives on the market for the new invention.
If I were Chancellor of the Exchequer—which, fortunately, is not likely to happen—I would impose a statutory duty on the Treasury not only to balance the annual budget but also to look ahead for our commercial prosperity to the next five to 10 years and to plan those fiscal incentives for our industry and commerce in close consultation with industry and commerce so that the proposals are down-to-earth and practical. Civil servants are not experts in running business, especially small business, and they must take advice in formulating proposals. If plans are well laid, industry and commerce will prosper and the Inland Revenue will rake in increased taxes in a few years' time. New ideas take time to reach markets, so returns will take time to arrive. But if our industry and commerce prospers, employment will rise and everyone will benefit, including the Treasury.
I should like to make another detailed but very important point about the last Budget, which hiked up substantially the tax on diesel fuel to the predictable fury of the road haulage industry, which depends vitally on diesel fuel. My noble friend Lord Marlesford said that not many industries were thinking of going abroad, but the latter is. I believe in the importance of the environment, sustainable development and the reduction of NOx, SO2 and CO2 in reducing global warming. I therefore use public transport whenever possible and take the very good advice given by the DETR in its new leaflet on fuel economy issued in January this year. I can tell noble Lords that it is well worth reading. However, if one looks down the list of vehicles and their fuel consumption, where are the best figures? They are to be found in relation to cars with diesel engines. Lower fuel consumption reduces CO2 production immediately, so surely we want to encourage people to buy diesel cars. Putting up the tax does not do that.
The report of our Select Committee on Science and Technology in 1995 was full of good, long-term strategies for reducing global warming from road transport in a variety of ways— gas-powered vehicles, fuel cells, and bi-powered vehicles using different fuels for urban and long distance travel. All these longer term improvements, which will have to be developed through ingenious and innovative research and development by the motor industry and its expert, well qualified engineers, need careful fiscal planning if we in this country are to be ahead of the international field in reducing global warming and selling our expertise to other countries throughout the world. Again, the Treasury needs to get together with industry in planning future fiscal strategy so that we achieve these longer term aims both for the environment and our own prosperity.
As I waited for my train today I noted with pleasure a goods train going by fully loaded with containers, probably from Felixstowe. That is fine for long distance 789 travel, and to encourage it Britain may need to develop efficient terminals in London and the major cities for quick transfer of containers, perhaps by piggy back lorries. However, the majority of long journeys in this country are less than 50 miles, and they may involve short hops between supermarkets and small firms. Trains are no good for that. Even as regards longer journeys, every train journey requires a lorry journey at either end to deliver to final destinations.
All the goods we need and buy in the shops have to be delivered by lorry transport. Therefore a tax on diesel is a tax on every person in this country as prices of goods will inevitably rise to pay for that tax. That is a "stealth" tax, if ever there was one. Road haulage is the major life blood for industry and commerce travelling our national road arteries. By all means let us plan lorry deliveries efficiently to fill lorries and for goods to arrive just in time in the shops for our families. That requires less tax on fuel and vehicles to enable our road haulage companies and shops to prosper to provide employment for their staff and not to go abroad, and to keep down the cost of living for everyone. Her Majesty's Government must act now to achieve that aim with regard to the taxation system as soon as possible.
§ 4.22 p.m.
§ The Earl of Northesk
My Lords, I, too, thank my noble friend Lord Skidelsky for giving us the opportunity to debate this matter.
A week or so ago Peter Kellner, writing in the Evening Standard, commented that in 2001–02 we—that is, the public—shall be £1.6 billion worse off, compared with the taxation and benefit policies bequeathed by the Tories. Labour, then, is taxing more, and spending more, than the Conservatives would have done. That fact should be beyond dispute … Real political debate should concern the merits of Labour's strategies (do we want lower tax or more spent on schools and hospitals?) not the facts that underpin them".I agree with Mr. Kellner on two counts. First, whatever gloss, whatever obfuscation, is put upon the figures, it is manifestly the case that the Government, by stealth or otherwise, are,taxing more, and spending more, than the Conservatives would have done".Secondly, he is entirely right that debate should focus on the "merits of Labour's strategies". This is precisely what my noble friend's Motion invites us to do.
In this I have a particular axe to grind; namely, excise duty, specifically on tobacco product. We had a reasonable run at this subject during Question Time earlier today but I make no apology for returning to it. I should perhaps also point out for those of your Lordships who are not aware of it that I am a wholly unreconstructed smoker. Excise duty is not per se one of the kaleidoscope of "stealth" taxes that the Chancellor has initiated in his Budgets to date. No, it seems to me that it is increasingly being used as the Treasury's blunt instrument. a fiscal cudgel to pummel what are perceived to he wayward social attitudes into submission. In this context it would be churlish not to admit that there are good health grounds for imposing sensible, but proportionate, duty on tobacco product. 790 Few would argue with such a proposition. At the same time, of course, excise duty also raises substantial revenue.
I hope your Lordships will forgive me if I mention a few facts and figures, which I hope the Minister can confirm. The UK's tobacco industry currently contributes some £10.3 billion a year to the Exchequer of which some £8.3 billion is tobacco excise duty specifically, the highest in real terms of any country in the world. In his Budget the Chancellor raised cigarette tax by 17.5p for a packet of 20, an increase of 6.3 per cent. Since coming into office, this Government have raised cigarette tax by 57.5p. As a result, an equivalent packet of 20 cigarettes costing £2.05 in Belgium now costs £3.88 in the UK. What are the consequences of this obsessional interest of the Treasury—and, it has to be said, the health lobby—in attempting to tax tobacco product into perdition?
As we all know, smuggling of excise product—both tobacco and alcohol—is now rife because of the hugely wide differential in price that now exists between the UK and our immediate continental neighbours. In effect, this Government's policy—and that of the party of these Benches when it was in office, I make no distinction—is to incite criminal activity. This carries with it profound implications for law and order policies in general. It is not only the fact that smuggling has the potential to be such a profitable enterprise. That, of itself, explains why it is that so much of the evidence indicates that it is an enterprise that is proving increasingly attractive to highly organised criminal gangs, not least those actively involved in drug trafficking. It is also the fact that the existing resources of Customs and Excise and the operation of our criminal justice system mean that the chances of being caught and convicted are negligible and that the penalties available to the courts are not and cannot be an effective deterrent.
Here, with all due respect to the Minister—bearing in mind our exchange at Question Time—I can assure him that there was a report on Meridian TV last week which revealed plans for 1,000 Customs jobs to be cut in the south of England. The report included, not surprisingly, an expression of concern from a senior Customs officer that such an action will have a severely deleterious effect on Customs and Excise's ability to combat the menace of smuggling.
What of the health argument? I have already suggested that some level of duty on tobacco product is justifiable. I have no difficulty with that. However, the available statistics suggest that, while the regulated market has shrunk by 8 per cent., the "unregulated" market of smuggled product is on the increase. Illegal sales currently account for 80 per cent. of handrolling tobacco sold in the UK; here an association with the drug culture is manifest. The black market is estimated at 8 per cent. of the total cigarette market and is increasing at the rate of 5 per cent. per annum. The statistics suggest that the crucial group of under-age smokers, by definition an unregulated market and those for whom a propensity to smoke is most perilous, is on the increase. However else children may be obtaining their packets of cigarettes, they certainly are not doing 791 so legally. It does not stretch credibility to suppose that there is a correlation between smuggled product and youth smoking. Indeed, it is worth making the point that high tobacco duty is, by its very nature, regressive. Not only does it have a detrimental impact upon the most vulnerable, it also acts disproportionately upon the poorest in our society. Where in this is that much vaunted word "fairness"? Given this, it is difficult to escape the conclusion that the consequence of the Government's excise tax policy is that their own very worthy health and social policy objectives are being seriously undermined.
Finally, what are the revenue implications of the persistent hike in tobacco duty? The noble Lord, Lord Stoddart of Swindon, in a recent Question on this matter, suggested to his noble friend the Minister that the law of diminishing returns was beginning to operate in this area. The Minister denied this categorically, stating:I simply do not agree with my noble friend that we have reached the point of diminishing returns".—[Official Report, 18/3/99; col. 827.]Very gently, I suggest that that is a smidgen disingenuous. The Red Book states quite clearly that anticipated revenue from tobacco product for 1999–2000 is £7 billion, compared with its current level of £8.3 billion. At a pinch it might be possible for the Government to argue that that is an indication of the success of their policy of reducing consumption overall. Would that it were so. But it is the Chancellor's own estimate that reveal that revenue losses in this area are now running at £1.5 billion. If that is not the operation of a semblance of diminishing returns, I am a Dutchman!
In conclusion, it is no surprise that Mario Monti, the EU Commissioner with responsibility for taxation, has observed thatMember states with high tax rates would have to recognise that tackling the smuggling problem fully may require them to reduce national rates".I simply wish that the Treasury was prepared to recognise this.
§ 4.31 p.m.
§ Lord Dahrendorf
My Lords, may I crave indulgence for a small philosophical comment on a subject of which many noble Lords, as the debate has shown, know a great deal more than I do? Taxation is a classical subject of parliamentary debate, yet something odd has happened. The Official Opposition keep on saying that the Government are raising taxes by stealth, the implication being that lower taxes are intrinsically a good thing. The Government keep on saying that they have not raised taxes and that the level of taxation is in fact 0.4 per cent. or 0.5 per cent. lower than it was on 1st May 1997. The implication is the same: that there is something intrinsically bad about taxation.
I want to argue that the level of taxation defines the boundary between what is properly in the public realm and what is not. One can take decisions about that. And different groups in given countries, and indeed different 792 countries, take different decisions. Let me make three comments which are all, I hope, relevant to the main subject of our debate.
First of all, many speakers have quoted the differences in levels of taxation between different countries, including different countries in Europe. My good friend the noble Lord, Lord Skidelsky, to whom we owe this debate, referred to the fact that the total level of taxation in this country is under 40 per cent. of GDP, and on average in the rest of the European Union it is 50 per cent. or above. That is true, but I would argue that it simply indicates different attitudes to what is properly in the public realm and what is not. What is more, I would argue that these different attitudes are all viable. It is wrong to presume that those who are over 50 per cent. will have to come down to 40 per cent. just as it is wrong to presume that those who are under 40 per cent. will have to go up to 50 per cent.
There are fundamentally different attitudes, and these different attitudes have their own justification. In other words, I am genuinely and deeply against harmonisation of taxation in the countries of Europe because of the different political and economic cultures in those countries. It is a general philosophical point, which could be illustrated in a number of ways, which I shall not do at this point.
It leads me to a second and equally important issue. At the same time as seeing these differences, there are of course changes: countries redefining the limits of the public realm. It is true that in a number of continental countries there is now a tendency—I think a welcome tendency—to let the pendulum swing a little more in the private business zone direction. Equally, I believe that there is a good case for saying that in this country the pendulum should swing a little more in the public direction and that there has been a neglect in the public realm of the public space in the widest sense.
My noble friend Lady Sharp of Guildford pointed very plausibly to the various objectives of taxation and public expenditure. She talked about the public good, about redistribution and about health and education. The noble Lord, Lord Skidelsky, I believe, started with Ibn Khaldun and with the statement that excessive government spending can undermine an economy. It all depends on what you call excessive, of course, but may I suggest that if you neglect the public realm it can also undermine the economy.
One of the great subjects of European developments is locational competition of business. Countries should be able to try to attract businesses by using the instruments at their disposal. While I accept the sometimes rather vague notion of level playing fields, I think it is at least as important that differences are there and are allowed. But a sensible public realm is part of an attractive environment for business. To mention obvious examples, if the infrastructure of a country deteriorates—and I am afraid it has deteriorated in this country—and if it deteriorates beyond a certain point then it is literally impossible to attract business from other countries, together with investment, because that is one element.
793 If vocational training does not work and if therefore skilled labour is not available, because that is part and parcel of an attractive location for business, it is therefore part and parcel of what needs to be done in the public realm. It may be argued that vocational training is sufficiently in the interests of business to be capable of private finance. I believe that is a mistaken argument. In another context I would be happy to make the case for publicly supported vocational training. However, it is not just vocational training. It is general education as well, starting at the nursery end and going on through the educational system. So an attractive public realm is part and parcel of a society which creates sustainable wealth over a long period and tries to attract investment from within and without.
My third point is that of course one has to think carefully about the kinds of taxation that are used. This subject has arisen by reference to a number of specific issues. They are clearly important, but it is an important question of whether we go down the route to hypothecation, for example, or whether we stick to general taxation. To me, it is a very important issue because it is so closely related to the future of representative government and, as a traditionalist in these matters, I am strongly in favour of general, rather than hypothecated, taxation. I rather regret that the popular view seems to be that taxation is acceptable only if those who pay the taxes know exactly what the money is to be spent on. I hope that in parliamentary debate we can hold against this. There is also the important question of whether we increasingly abandon direct taxation in favour of indirect taxation, or stick to a principle which is very closely related to citizenship and civic participation. Income tax is an important element of a civic society.
I should like to sum up such points, such reflections, which are more general than much of what has been said here. by making one plea: that we lift the taboo over the subject of taxation; that we discuss more seriously whether there are not issues where it is in the specific and general interests of a civilised and advanced society to be open for increases in taxation where there are clear objectives and purposes; and to discuss the pros and cons of more or fewer taxes. A more rational tax debate would be a great step forward for the political culture of this country.
§ 4.41 p.m.
§ Lord Selsdon
My Lords, it has been a long time since I have dared to speak in one of these economic debates. I used to feel that it was a Wednesday debate and I was reminded of Wednesday's child being full of woe. It was always bad news: there was a balance of payments deficit, interest rates were too high, taxation was too high, there were budget deficits and so on. Now, for the first time, we have a structured economy that seems perfectly reasonable and I wonder what the future will be. My noble friend has chosen well the phraseology of this debate which applies a certain use of French words—subterfuge and camouflage, possibly to be followed by that awful word "sabotage". There is nothing wrong with the economy at the moment.
794 I am interested in people's perception rather than their expectation. Here I will go back to my friend Professor Laffer. I have always liked the Laffer curve and the general concept that if one had nil taxation. one would have a breakdown of law and order; and if one had 100 per cent taxation, one would have no revenue. Somewhere between the two was the correct point, which was not an exact point but what was perceived to be fair. That might be two for the state, one for me, or three for the state, one for me. But if it was too many for the state, productivity fell.
In order to correct that imbalance, one had to reduce effective taxation quite dramatically, which we have done if we take the figure down to 40 per cent. as compared to 50 per cent. in the EU. This has contributed fairly strongly to the revitalisation of our economy. But I am concerned about what the base of that economy now is.
One of the saddest moments of my life was standing in this place when the nationalisation of the shipbuilding industry was taking place. My family have been keen on ships—I like ships and my grandfather was the last Member of Parliament for Maryhill in Glasgow. The Clyde was a place I loved and I set out to try to help save some of those shipbuilding firms. Nationalisation way back then—despite the Geddes Report and the creation of British Shipbuilders and the problems with Upper Clyde Shipbuilders—wiped out that industry.
I should like to remind your Lordships that we have successfully—either because we have been in a post-imperial society or a post-industrial society—wiped out our greatest industries. A hundred years ago, 85 per cent. of the ships of the world were built in the United Kingdom; at the start of the First World War, 50 per cent. of all the ships floating on the surface of the earth were built on the Clyde: and 74 per cent. of all steam locomotives were built on the Clyde. Now, of course, 50 per cent. of all personal computers in Europe are built in Scotland. Here we are—I am a Scot—wanting to get rid of one of the main bases of our industrial economy. Then, suddenly, today or yesterday, we have the collapse of Kvaener Govan and the destruction of the last shipbuilding enterprise in Scotland, give or take a few smaller ones.
It is interesting that after the First World War 40 per cent. of the ships of the world were built in the United Kingdom; that fell to 30 per cent.; two years ago that fell to 1 per cent.; and now it is down to nothing. We have of course Harland and Wolff. But the industry has not necessarily collapsed worldwide. We were leaders in the mining and mining equipment industry; we were leaders in long-wall mining and other mining activities. That has steadily disappeared. So, too, has the textile industry and its great machinery.
All of those industries often had very good trade associations, but their decline is not related to the United Kingdom economy alone but to the role of the United Kingdom in the world economy. We exported equipment, bought back the end products, and were in partnership with our colonies or imperial Britain. Now we could equally well be in partnership with much of 795 the world because we are one of the most favoured nations in terms of partnership. That, too, has something to do with taxation, a point made by my noble friend Lord Marlesford.
We are the most favoured place in the world for a foreigner to live and work. It is pretty galling for some people to realise that when they go out and buy a meal in a restaurant they are paying far more than the foreigner who pays tax only on his UK earnings. But that has contributed to a large extent to encouraging senior management worldwide to want to come to live in England. People will say, "The Japanese want to play golf and it is cheaper to live here"—that may be one reason—but we have attracted the greatest amount of foreign investment of all the countries of the European Union. That attitude and the wish to come here continue.
But there are cracks in the paving, or should I say in the terrazzo tiles. In a short period of time we went from having a great motor car manufacturing industry, which was based entirely on the motor car or transport, to losing and wiping out that sector. Very quickly, over a period of about seven years, we returned to being a net exporter of motor cars. We were competitive, we had the modern technology, and the cars became good again. Foreigners wanted to buy them and they bought them in great numbers. All the problems of electronics and so on were ironed out and we produced good products. Now the cracks are there. There is again intervention by the state in an industry that may, for whatever reason, be declining—there is a decline in the demand for automotives—and money is going in in terms of public expenditure.
I hate the idea of declining industries and I hate the idea of them being supported falsely by governments. The base of our economy as it is today bothers me; who will pay tax in the future. I was involved in the report of a committee on manufacturing chaired by the noble Lord, Lord Aldington, some 25 years ago. We pointed out that we were concerned about what would happen to manufacturing industry when oil ran out. As my noble friend said, if we did not manufacture things, what would we service—other people's manufactures? That report—which was rubbished by my party and by everybody else—was correct, although there is no pleasure in being right after the event. We saw manufacturing industry as a percentage of GDP fall from 32 or 33 per cent.—I was discussing this with the noble Lord, Lord Stoddart of Swindon, before the debate—to 20 per cent., according to the Library.
In the meantime there are two sectors which have started to emerge and overtake. One is financial intermediation. Instead of manufacturing accounting for something like 30 per cent. of the economy, financial intermediation is up to nearly 30 per cent. The other sector is wholesaling and retailing. These are businesses where, although added value is created, it is not the same value as the added value created in other sectors. I am not objecting to those industries charging large hourly or daily rates, or to retailers and wholesalers doubling the entry price of their products before they hit the markets, but these kinds of factors are making us uncompetitive.
796 We must add to that some of the taxation now being applied—whether it be on alcohol, on cigarettes or in particular on diesel fuel, which is outrageous. For a period of time we had no diesel cars because they were more expensive. But they are far better. As my noble friend pointed out, the emission is far lower and the mileage is less. Yet, suddenly, as though somebody feels that they want to force lorries off the road, the price of diesel is increased. I do not understand, when energy costs worldwide have come down in real terms to below 1974 prices, why we have this strange differential when we are an energy nation.
In the United States, five litres of fuel can be bought for the equivalent of one litre in Europe. I do not understand that. Why should we have a high-cost energy policy? It is because the Government need to tax fuel in order to have more money. Why should it be cheaper to buy a bottle of whisky in a supermarket in France than at a duty-free shop in London when these are our own products? Looking at the subject on another level, why do we suddenly find that over the past six to nine months the word has spread across the Continent of Europe that the United Kingdom is too expensive to visit and to set up projects here. Yet our labour rates are not high. It is these kinds of taxes in the economy that come through, not as stealth tax, but as adding a greater proportion of tax to the economy as a whole.
I am not particularly worried about all this. I do not think that noble Lords opposite are worried; otherwise, more of them might well have spoken. The Government have inherited, for whatever reason, a strong economy and there is a good opportunity. It has to be said that my own party made some pretty disastrous mistakes by raising interest rates so rapidly that we created a form of deflation for a while.
There is a small perception by Professor Laffer that I should like to see introduced. It is to have a generally friendly Inland Revenue. The cheapest way to get rid of your Lordships would be to bankrupt us all! It would mean that we could no longer sit in this House. The Inland Revenue in this country has always been fairer than any other revenue in Europe. Yet on the Continent of Europe there is one thing that Professor Laffer likes. In general, people in Europe think of their income as a net income, not a gross income. The British are so proud of their gross income of so many hundreds, or tens, of thousands a year that they show off; they feel socially insecure. We could perhaps shift that direction and ask: what do we actually receive? How many noble Lords know what their net income is each year? Most noble Lords probably know their gross income. I am a man for more net!
§ 4.51 p.m.
§ Viscount Torrington
My Lords, I wish to add my thanks to the noble Lord, Lord Skidelsky, for introducing this debate and for his excellent tour of the development of taxation in this country. Like my noble friend Lady Platt, I am no economist. I shall stick to areas that have already been touched upon but which demand further exploration.
797 Some 36 years ago the Oxford Union held a debate on the redistribution of wealth. In the course of that debate, I inadvertently drew the fury of the Left upon myself by declaring that, because I drove a large old American car, I paid more tax each time I filled it up than most of my contemporaries paid in a year.
It was a cheap jibe, but it is uncomfortably close to the truth today: we Brits have just about the highest road fuel taxes in Europe. As my noble friend Lady Platt mentioned, our haulage firms are now hit by excessively high diesel fuel costs. But they are also now beset by the highest licensing charges in Europe. Many are apparently considering re-registering their vehicle fleets outside the United Kingdom. We may yet see the redoubtable Eddie Stobart setting up house next to the almost unpronounceable Mr. Norbert Dentressangle. No doubt all will be fitting their lorries with tanks that are sufficiently large that they never have to fill them up with diesel fuel in the United Kingdom when they do business here.
I agree to some extent with the noble Lord, Lord Dahrendorf, that any thinking person accepts that taxation, both direct and indirect, is a package deal, and different countries have evolved different balances and mixes of taxes to fill the public purse. But whether we like it or not, we are now engaged in the Europe-wide debate on tax harmonisation. As a Euro-fence-sitting Tory, I should nevertheless reckon myself firmly against any attempt by Brussels bureaucrats to enforce harmonisation across the board. But I do believe that the natural laws of competition demand, and should make for, a certain degree of harmonisation, particularly in matters such as excise duties. It really is not reasonable to expect a man travelling home by car to resist filling up his boot with cheap beer and wine at a continental port in order to save his business for his local wine merchant in England, who is forced to sell the same goods at much higher prices.
The inevitable consequence of that is that British retailers in the south are missing out on a massive amount of business. I appreciate that it is illegal to buy liquor in commercial quantities, duty paid, in Europe and bring it back to Britain for resale. That is the reason for the Customs initiative described earlier in response to a Starred Question. However, it seems to me that that flies in the face of the objectives of a Europe without frontiers and shows that we still have a long way to go to achieve a common market. HM Customs and Excise would say that it is losing a fair amount of revenue—I believe the figure given by the noble Lord, Lord McIntosh, was £220 million—thanks to both the legal and not so legal parts of the cross-frontier booze and baccy trade. By contrast, I would argue, like the noble Lord, Lord Stoddart, that Customs and Excise is not so much losing revenue as harbouring an unrealistic and unreasonable expectation of ever having such revenue in the first place given the imbalance of duties on either side of a mere 20 mile wide waterway in what most people now believe, perhaps erroneously, to be a customs union. The system itself has something wrong with it if moving goods from one part of a customs union—for customs purposes one country—to another part is a criminal offence.
798 To return to the road haulage industry in the context of harmonisation, I recently heard an excellent argument. put forward to the effect that continental lorries entering Britain should be made to pay a toll or temporary road tax to cover the cost of the use of our motorway system. The Government, in defending themselves over their decision in the Budget to make Britain's truckers pay the highest licence charges in Europe, claim that although continental lorry licences are cheaper than those in the UK, European truckers have to pay heavy road tolls in many countries. Unfortunately, expensively registered British trucks have to pay those same tolls when engaged in international transport.
Her Majesty's Government should therefore seriously consider reducing the recent increases in licensing charges for British trucks and instituting a simple foreign commercial vehicle charge. The Swiss do that, even for private cars, as I know to my cost. Woe betide any foreign-registered vehicle, be it a car or a truck, found on a Swiss motorway without its tax sticker.
Such a charge could be payable through the purchase of a windscreen sticker which, like the Swiss version, would tear apart if removed. The stickers could be available at the port of entry and at truck stops, and be valid for a range of periods and for a range of vehicle weights. We could even offer reciprocity: allowing trucks from countries that levy no motorway tolls or road use charges on British-registered trucks to be exempt from the charge.
Returning finally to excise duties, I note that such bodies as the Brewers and Licensed Victualers Association have been uncharacteristically silent since the Budget, presumably because, for once, drink was not seriously clobbered. But could this be the beginning of harmonisation—of recognition by the Government that in a free market you simply cannot expect people to pay high prices in your shop when the guy next door is offering the same goods at a massive discount? Perhaps, as my noble friend Lord Northesk hoped, realisation is dawning, and excise duties will have to change.
§ 4.57 p.m.
§ Lord Saatchi
My Lords, I am very sorry to have missed the opening remarks from the two Front Benches and some of the earlier speeches in this debate. I apologise, and look forward to reading them in Hansard tomorrow.
Perhaps I may also congratulate my noble friend Lord Skidelsky on the timing of this debate, to coincide precisely with the 200th anniversary of the introduction of income tax into Britain. I hope that some noble Lords may have seen the excellent Inland Revenue exhibition to mark that anniversary, which showed the many fascinating twists and turns in the evolution of taxation in our country.
I also declare a special interest in this debate as the co-author of a pamphlet on taxation and public expenditure policy to be published by the Centre for Policy Studies next Tuesday, which the CPS is following with a debate on the subject in May.
For many years a simple question has troubled British governments: how to spend more money on good things such as health and education without ever-increasing 799 taxes. Many serious attempts have been made to address that issue in the past, but most have failed. The overall tax burden has risen from below 30 per cent. of UK GDP in the 1950s to 37 per cent. in 1998, defeating many determined efforts to reduce it.
Next Tuesday will be the 20th anniversary of when my noble friend Lady Thatcher became Prime Minister. Nobody could have wished for a more forceful and determined advocate of tax reduction; yet even my noble friend, with all her unique power, was not able to achieve that goal. According to some estimates—probably depending on which side of your Lordships' House one sits—the tax burden is heading for a record 38 per cent. in the next two years.
Judging from the plans set out in their Red Book, the new Labour Government have decided to raise tax, just as the previous Conservative Government did. These habitual responses to economic difficulty illustrate the problem. Faced with the legitimate need to maintain sound public finances, successive British governments, both Labour and Conservative, have chosen to raise the overall burden of taxation. That has been going on for 40 years.
Most British governments since the Second World War have been elected on a promise to keep taxes down: yet most left office with taxes higher than when they came to power. The tax burden has gone up, whichever party has been in government. It is not as though this steady increase has achieved a noble purpose. There has been a remorseless increase, in communities all over Britain, of the linked problems which are now commonly described as social exclusion: poor housing, poor public health, low standards of education and high rates of crime. The tax and benefits system is supposed to make things better, through the redistribution of income and wealth. Instead, it makes things worse by reinforcing the very conditions that lead to social exclusion. At the same time, we are paying more tax than at any point in our peacetime history, which in itself inhibits the economic growth and job creation which could form part of the solution to the problems of social exclusion.
At the end of the day, the terrible problem at the heart of the present system never goes away. We have all grown painfully familiar with it. Taxes always seem to be going up, yet there never seems to be enough money to spend on health and education. We saw that again in the latest NHS crisis last winter.
International economic comparisons help to explain this phenomenon. They suggest that a higher tax burden is associated with weaker economic performance and less money to spend on public services in the long run. These comparisons are indicative of a negative relationship between government size and full employment and between high tax rates and full employment.
The dynamic effect of a low tax burden on an economy is illustrated by the position in the United States. The US government taxes only 28 per cent. of national income; but, instead of finding this insufficient to meet its spending needs, the independent US 800 congressional budget office expects that the US economy, from a 28 per cent. tax burden, will generate a budget surplus over the next 10 years of a staggering 2,400 billion dollars, while we struggle to avoid budget deficits with a tax burden of 38 per cent.
Calls for modernisation of the tax and benefit system are not new. The question that arises is: why has it never happened? There is one simple explanation. It is not because our political leaders are oblivious to the need. On the contrary, there is almost universal agreement about what the problems are and the urgency of tackling them. Rather, a national culture has emerged which stops political leaders taking the required action.
British politicians have become paralysed by fear of public reaction to fundamental reform of our system of tax and benefits. Every action that is proposed is always analysed in terms of winners and losers, short-term effects and precise calculations of personal financial advantage and thereby political advantage.
Unless we change our political culture, we shall never change the dependency culture which has been inadvertently created. Agreement is needed that we are on the wrong path and that we must change to a different one. Yet there is little sign of such an agreement on the horizon. On the contrary, the political position is exactly as it has been for many years. My noble friend Lord Skidelsky touched on that in his opening remarks.
The Right always said that one should cut tax, and the only way that it could think of to do that was by cutting public spending. The Left always said that tax served a moral purpose and that it would be cruel and uncaring to cut public spending. So that was it: stalemate. The tax burden went up, whoever was in office. That is why it is no longer sufficient to change politicians; we need to change to a new path. We need a bold and radical approach.
The true battleground for reform at the start of the 21st century is not the National Health Service or the education system but the tax and welfare payments system. Until the UK embraces a fundamental reform of that system, it will stagger under the weight of an ever-increasing tax burden and will struggle to make adequate resources available to public health or education. If opinion polls are any guide, there is enormous public support for the reallocation of government expenditure towards front-line healthcare and primary and secondary education. Yet this transformation has proved elusive, even for a Government with a massive parliamentary majority.
Incremental reform of the existing tax, national insurance and benefit systems over the past 30 years has created a highly complex and contradictory framework of transfer payments between government and individuals. All attempts to unravel the wasteful and unintended features of the transfer system, such as the unemployment and poverty traps, have been half-hearted and piecemeal. In 1999 the problems loom as large as ever and the human and financial costs of large-scale benefit dependency are still escalating.
801 The current system of taxation and transfer payments is a horse designed by a committee which has been in standing session for 200 years. The outcome is an ungainly beast of burden. The time is ripe for fundamental reform.
§ 5.6 p.m.
§ Lord Taverne
My Lords, I look forward to reading the pamphlet co-authored by the noble Lord, Lord Saatchi, which is to be published next week. On the basis of what he said today, some of the arguments might he familiar, but I am sure that they will be more persuasively presented than ever before.
I found the speech of the noble Lord, Lord Skidelsky, refreshing. It was non-partisan and philosophical in its approach. Indeed, the debate has been more illuminating than I had expected, partly because some of the most fundamental questions of politics have been raised, perhaps as a result of the tone set in the noble Lord's speech.
I too should like to approach the matter in a non-partisan fashion. Some of my remarks may not be altogether approved of by my Liberal Democrat colleagues. I wish to start with the general and look at the link between tax rates and growth. As the noble Lord, Lord Skidelsky, said, there has been much argument that high public spending and high taxes lead to lower rates of growth, although he favoured the view that it is when public spending is going down and when expectations are for lower tax that one sees the most favourable growth effect, which is an interesting thesis.
I have always been fascinated by the academic work on tax and incentives and have found it inconclusive and not totally persuasive. The academic literature suggests that there is no particular effect either way. Tax acts as a disincentive to work in one way because people prefer leisure. On the other hand, if people wish to reach a particular level of income, it acts as an incentive to work because they have to work more to achieve that income.
I found the work inconclusive and not always persuasive, partly as a gut reaction which is widely shared. I would not argue that, when I was at the Treasury in the period to which the noble Lord, Lord Skidelsky, referred, when we had a budget surplus and a rate of growth of over 4 per cent. per year, our tax system was ideal. We had a top rate of 83 per cent. and a 15 per cent. unearned income rate on top of that. I agree that one of the most important things that the Conservative government did was to reduce those rates. The noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson, when Chancellor, reduced those rates, although I believe that the noble Lord, Lord Lawson, went too far. I have never felt it necessary for the top rate of tax to be below 50 per cent. Undoubtedly the rates had been too high. I agree with the noble Lord, Lord Marlesford, and the noble Baroness, Lady Sharp, that very high tax rates seem to have a distorting effect.
I have doubts as to whether expectations of future rates determine growth. The noble Lord, Lord Saatchi, referred to the fact that the United States has very low taxes as a proportion of GDP and has recently had a high growth rate. But the comparison between 802 the United States and Europe depends very much on the particular period that one takes. The fact that the economy of the United States has grown faster than that of the Continent of Europe is a fairly recent phenomenon. If one considers the post-war period, generally the European Union has achieved a faster rate of growth.
There are now particular difficulties about considering countries with high levels of public spending. The three most successful countries in Europe in terms of growth are Ireland, the Netherlands and Denmark. Denmark and the Netherlands have very high rates of tax and public spending. Perhaps there has been a recent change because of globalisation. It may well be that in the present climate there must be a reduction of taxation levels in Europe; and certainly it appears that capital taxes have an effect.
I am struck by the huge difference between the number of employees of venture capital companies represented on the American NASDAQ market (9 million) and those employed by the very few companies represented on the equivalent European market, EASDAQ (9,000). That is a new market, but it appears that the creation of jobs will depend to a considerable extent in future on venture capital. This is a field in which the euro should help to create a much deeper and more liquid capital market on the Continent. That raises the question whether capital gains tax is too high. I suspect that here I lose some of my colleagues.
I was always struck by the fact that during President Carter's administration, despite his own wishes, United States capital gains tax was reduced and there followed an explosion in small and medium-sized technological companies, particularly around the Boston hemicycle. I believe that the connection between venture capital and its enormously important role in future and the level of capital gains tax is more important than income tax.
I turn to some particular points that have been made relating to the Budget. On the whole, I much admire the general approach of the Chancellor of the Exchequer. He has made a number of important mistakes. He made a mistake in his early Budgets in taxing companies rather than consumption, particularly his taxation of pension funds. Referring to the speeches made by the noble Baroness, Lady Hogg, and the noble Lord, Lord Higgins, I believe that the charge of obfuscation in the Red Book is made out. The energy tax is mistaken, although unlike other noble Lords who have spoken I believe that the Chancellor would have been much better advised to go for a carbon tax. That would have been much more effective in its impact on the environment and, if recycled, would have done a great deal to increase the number of jobs.
However, I am impressed by the Chancellor's overall strategy. He has not repeated the mistakes of former Labour Chancellors—for example, the noble Lord, Lord Callaghan, in 1964 and the noble Lord, Lord Healey, in 1974—when public expenditure was expanded to a degree that could not be contained and in subsequent years the Labour government struggled to control excessive public expenditure. Gordon Brown has not made that mistake. What is more, the Chancellor has 803 been extremely effective in the presentation of the public accounts and his whole approach to the Golden Rule, whatever the particular criticisms may be. Certainly in his Budget he has shown himself to be particularly adroit. To cut the basic rate of tax and to start to introduce a 10 per cent. tax was almost a brilliant stroke. He shot the Conservative fox.
But while it was politically adroit, I cannot say that it was a justified measure. The Chancellor has reduced the amount of money available for public services. If one looks at the proposed measures, as shown by the speeches of my noble friends Lord Dahrendorf and Lady Sharp, nowadays it is the Liberal Democrats who are the champions of public services. If one considers the needs of education, a higher level of spending on that service is required not just for the quality of society but for economic reasons. Although the economies of Germany and France are not greatly flourishing, their exports and manufacturing industries are much more successful than ours. Why? The reason is that the standard of education in those countries is much higher than ours. The proportion of unskilled labour in Germany is about 16 per cent. whereas in the United Kingdom it is 61 per cent.
One must also consider the very great needs of the National Health Service. One should not criticise the record of the Government too much. They have provided for a rise in spending on the NHS in real terms in this Parliament of 3.8 per cent., which compares with 3.1 per cent. under the previous Conservative government, which is not a bad record on the face of it. I believe that we should look at the percentages and not the billions that are trotted out, often several times, as new announcements.
One must face the fact that the standard of the National Health Service is very poor in European terms. Rationing is prevalent and will increase. The inexorable rise in cost will not be met by the present provision for National Health Service spending. I believe that in time more radical measures will have to be taken and that in the end we shall face the choice of continuing rationing, which is totally unacceptable, restricting the NHS to a basic service and recourse to reinsurance and private provision, which I also regard as wholly unacceptable, or, if we want to keep the NHS as a universal and comprehensive service, the need for charges. That is a form of hypothecation that I believe is acceptable.
The case for charges was powerfully made out in a book on the health service by Mr. John Wilman of the Financial Times. We must face the fact that we cannot pursue the aim of lower taxation and good quality public services. The quality of our public services is essential to the quality of our society and is much more important than a 1 per cent. cut for political reasons in the standard rate of income tax.
§ 5.17 p.m.
§ Lord McIntosh of Haringey
My Lords, I join with other noble Lords in congratulating the noble Lord, Lord Skidelsky, on initiating this debate, which has been of very high quality. My noble friend Lord Haskel made a 804 very thoughtful speech, but there have been some very high quality contributions from Opposition Benches, which is all the more remarkable in that as of yesterday morning it appeared that the debate would collapse. Clearly the Opposition Whips had to persuade people to speak at short notice because nearly all of the names were put down yesterday. Perhaps the contributions were all the better for that. I always believe that one of the curses of Wednesday debates is that people read out speeches that they have written postprandially on a Sunday afternoon. The speeches have been a good deal fresher today and I am grateful to have had the opportunity to listen to them.
This debate could have been on three alternative subjects. The noble Lord, Lord Skidelsky, described it as our version of a Budget debate, but it has not been very much that. To a considerable extent it has been a rational debate about taxation, as the noble Lord, Lord Dahrendorf, described it. It could have been a theological debate about definitions of taxation, tax credits and all those things that occupied the mind of the Treasury Select Committee of another place in its recent report. I prepared an elaborate defence of the Treasury against those criticisms and against Mr. Ruffley and the House of Commons Library. Your Lordships will be pleased to know that I do not have to use any of it because none of those criticisms has surfaced in the debate this afternoon.
What has surfaced, quite understandably, is a complaint about the presentation of the Budget figures. I do not think that we can be blamed for the way in which the Sun or the Mirror interpret the Budget, unless we have positively misled them, which I do not believe. Nevertheless, I accept the point made by the noble Baroness, Lady Hogg, that as Budgets have become more complex, and as we have moved to a Budget which covers income as well as expenditure, the Red Book is hard going. It is true that some of the important material is towards the end of the Red Book rather than in a more prominent place. For those who do not read to the end—and I wonder how many do—I can see that there could be difficulties.
The Treasury Select Committee commented on that at considerable length. I wish to make only two points about its conclusions. First, its general conclusion was that it got there in the end: that the figures in Table B9 on page 120 are comprehensive, and set out the various options for interpretation of what is meant by the tax burden.
The second point arises from what Andrew Dilnot said to the committee. It is reported at paragraph 16 of the report. He said:It is possible to say … [as the Chancellor did] 'changes announced in this Budget will cut the tax burden' and that can be a true statement, while it is also a true statement to say that, as a result of all the Budgets of this Parliament, taxes will be going up in April. It is also the case that the Chancellor can state that net tax and social security contributions fall between this year and next as a percentage of GDP despite the fact that tax payments are going to rise next year as a result of the Budgets we have already seen".I congratulate any noble Lord who can read that and conclude that there is a single right way to present figures. Clearly we are all applying different criteria. Our definition involves net taxes and social security contributions. That at least has the benefit that it is 805 recognisable by those who are taxed. In other words, it is recognisable in terms of the net impact of all government activities on the household and companies sector.
The noble Baroness, Lady Hogg, began by praising the 1979 Red Book and suggested that our more complex presentation nowadays has an element of obfuscation in it. It is true that the Treasury issues shortened leaflets for public consumption about the Budget. I have before me a press comment on a leaflet headed A Budget for lasting prosperity containing such tendentious statements as,The Budget helps deliver high quality public services. The Government will spend more on the services people care most about while maintaining firm control of public spending. The Budget takes steps to achieve this by spending money to save money. The Budget helps business and enterprise. The Budget helps the environment. Recent inflation performance has been the best over half a century".Peter Kellner of the Evening Standard—he has already been quoted—comments that,This material should have been financed out of party funds. To be specific, the Conservative Party should have paid for it for those quotations all come from a leaflet issued by the Treasury following Kenneth Clarke's last Budget in November 1996".I rest my case. I think that we can now move on to rational taxation debate and to a Budget debate.
§ Baroness Hogg
My Lords, I am grateful to the Minister for giving way. Does the noble Lord accept that there is a difference between pamphlets—we can debate who should pay for what; it sounds as though I would he in total agreement—and the Red Book? It is important that the Red Book is kept free from such polemics. My argument related to the extent to which the Red Book had been sliding towards the pamphleteering end of publications. That is a matter about which we should be concerned.
§ Lord McIntosh of Haringey
My Lords, I listened to the noble Baroness's argument as closely as I read the Red Book. I find the words "sliding towards" somewhat equivocal. I do not think that she indicated satisfactorily that there was obfuscation or any misleading, either intentionally or unintentionally. She said that the real complications were set out later in the volume. I accept that. But I do not think that that is the kind of criticism which has been made, for example, by Mr. David Ruffley.
I should love to take part in a rational taxation debate. I should love to take part in a debate about Laffer curves. I agree very much with what the noble Lord, Lord Dahrendorf, said about it not being taken for granted that low taxation is good or bad, and high taxation bad or good. The question is what it is being used for.
I was also interested in the observations of the noble Lord, Lord Skidelsky, about expectations. He takes expectations over a long period. I hope he will accept that when one comes to a range of possible options between 36 per cent. and 38 or 39 per cent. of GDP, expectations do not come into it. While these are public figures in the sense that everyone is entitled to know them, they are not figures which affect people's view of 806 the way in which Government approach matters. They certainly do not justify saying either that the Government are a tax and spend government in disguise or, as the Liberals wish to say, that we are not sufficiently a tax and spend government.
What comes out of the rational debate—I am not capable of taking part in it at an academic level—is that we have a perception by ordinary people, and will do so over the next year, of lower taxes being paid: a 10 per cent. starting rate now; a lower national insurance contribution for 20 million people; working families' tax credits in October of this year which will save £24 a week for 1.5 million families; and the 22 per cent. basic rate next year. That is the perception which the Government intended to give and have given. I believe that it will be reflected in public opinion in the future.
I turn now to a debate on the Budget. I shall have to cut it short. This is a Budget about economic stability. We inherited a situation of rapidly rising inflation, with unsustainable levels of public borrowing. We took tough decisions in 1997–98. We took the control of short-term monetary policy outside political control; and we set public finances on a stable footing. They are all witness, as the Treasury Select Committee agreed, to a particularly tight fiscal stance. So we have inflation under control. It is on target. We have interest rates under control. The peak over the past two years has been 7.5 per cent. compared with figures of 15 per cent. for a whole year in previous economic cycles. Long-term interest rates are now the lowest for 40 years. The mortgage rate is the lowest for 33 years.
The noble Lord, Lord Skidelsky, made great play of the Budget deficits. We inherited a Budget deficit of £28 billion. We now have a Budget surplus of £1 billion. The noble Lord, Lord Higgins, questioned our spending controls. The expectation for this Parliament is real growth of 1.5 per cent. per annum in spending compared with 2.75 per cent. in the former Parliament. We have 400,000 extra jobs since the election. Youth unemployment has declined by 57 per cent. Long-term unemployment has been cut in half.
In a situation in which a quarter of the world is in recession, we have been relatively stable in an uncertain world. I accept all that has been said by the noble Lords, Lord Higgins and Lord Selsdon, and the noble Baroness, Lady Platt, and others about manufacturing. However, manufacturing is not in recession—or if it has been it was for only a short time. There is already an improvement in business expectation surveys. The contrast we must make is with the early 1990s when manufacturing output declined by 7 per cent. and investment by 28 per cent. and 1 million jobs were lost in manufacturing.
The Budget supports the monetary policy. The Monetary Policy Committee has found it possible to loosen the policy because we have locked in the fiscal tightening. We have been able to give a £6 billion boost as the economy moves below trend and we have been able to allocate an additional £2 billion of public investment. During the next five years, we expect a 807 surplus of £34 billion, compared with a £149 billion deficit under the Conservative government during the time in which they doubled the national debt.
I accept what has been said about the need for support for productivity and enterprise. We are below our American and European competitors. However, in helping investment and innovation we are reducing corporation tax by 3 pence to 30 per cent. The small company's rate will be reduced from 23 per cent. to 20 per cent. There will be a 10 per cent. starting rate for 270,000 firms. As regards innovation, we have the R&D tax credit for new and small businesses which will underwrite almost one-third of their research and development costs. The Small Business Service will provide detailed support for small businesses.
The noble Baroness, Lady Platt, was right about the need for high technology training. That is an important part of the lifelong learning programmes of the Department for Education and Employment.
I refer to the environment only because it has arisen as an issue in relation to road haulage. However, I should like to speak at length on the Kyoto targets and the plans to implement the Marshall Report. However, I cannot accept the arguments used by the hauliers about the road haulage industry. It is true that in line with our existing commitments we have increased the price of diesel fuel by 6p a litre, but we have increased the differential for ultra low sulphur diesel. The changes we have made to vehicle excise duty very much favour the vehicles which are cleaner and cause less damage to the roads. Our policies on vehicle excise duty and fuel duty are driven by business concerns, but they are also driven by environmental concerns. Anyone who examines the evidence objectively will agree that the overall tax burden, taking into account labour costs and corporation tax, is very favourable in this country compared with European countries.
As regards families, it is true that we are replacing the married couples' allowance. The noble Baroness, Lady Hogg, made that point. Of course, the allowance was made at the same rate to all married couples, including lone parents and cohabiting parents. It could be made twice to a single couple in the year that they separated. The new children's tax credit is more generous and will be better focused where it is needed for children. Under the MCA the claimant had to be a man; now the claimant can be either a man or a woman. Before leaving that matter, I should like to point out that the social security budget is not out of control. It will rise at less than half the rate of the previous government's, and it will not be spent on subsidising unemployment but on improving the conditions of life of poorer families in our society.
As I race through my speech, I turn to our provision for the elderly. There is a £1 billion pensioner package in the budget. Minimum income guarantees will be uprated in line with earnings, not with prices. The winter fuel allowance has been quintupled. Single pensioners will not pay tax below £5,720. A typical pensioner household will be better off by £240 a year.
808 Of course one of the most important things is encouraging work rather than dependency. In that sphere, we are abolishing the national insurance entry fee and aligning the lower earnings limit with income tax. That is an enormously important change because it means there will be no income tax or national insurance paid on the first £87 a week. In October, we are introducing the working families' tax credit which means that families with a full-time earner will have a minimum income of £200 a week. That is £10,000 a year. There will be no taxation on earnings up to £235 a week.
I shall skip over the provisions relating to the over 50s, although I know that they are of interest to your Lordships, because I want to say a few words about public services. It is true that there is a huge need, in particular, for capital expenditure on public services. The noble Baroness, Lady Sharp, made that point very effectively. We no longer have the rule that £1 of revenue and £1 of capital equal £2. For that reason, we have been able to set up the capital modernisation fund which, among many other things, will apply to accident and emergency units and the hospital building programme, which is the largest since the war. We have allocated £0.4 billion for modern technology for the National Health Service. I could go on.
Further, as regards revenue expenditure, noble Lords do not appear to like us talking about the £19 billion provided over, three years, but that will be used to provide smaller class sizes, more nursery education, better pay for teachers, and literacy and numeracy training referred to by the noble Baroness, Lady Sharp, and for vocational training referred to by the noble Lord, Lord Dahrendorf.
Yes, I shall refer again to the £21 billion for the health service because it means, among other things, 7,000 new doctors and 15,000 more nurses, and in conditions of fair pay for nurses.
I do not apologise for this being a Budget debate rather than a taxation debate. There are one or two further points to which I must reply, but given the time I have taken I must do so in writing. However, I say to the noble Earl, Lord Northesk, that we are in no way ashamed of having increased the price of 20 cigarettes by 57.5p. When we are accused of suffering from diminishing returns I point out that there are two kinds of diminishing returns. One is losing revenue, the other is stopping people smoking. If we are doing the latter we are happy to put up with diminishing returns. I hasten to say that diminishing returns do not mean diminishing revenue.
The VAT threshold was mentioned by the noble Lord, Lord Marlesford. Customs and Excise carried out a consultation exercise last year and the conclusion was that this worked both ways. If you are just below the threshold you do not like the fact that you cannot cover the tax on your raw materials; if you are above the threshold you can recover it, but you have to charge your customers. I do not believe that there is any particular problem with the VAT threshold.
To the extent that this has been a Budget debate, the Government have been grateful for the opportunity to respond to it. To the extent that it has been a debate 809 about rational taxation, I personally have been pleased to hear it although I cannot claim to have made a positive contribution. I am grateful to all noble Lords who have taken part.
§ 5.29 p.m.
§ Lord Skidelsky
My Lords, I count it as something of a success for our debate to have reduced the Minister to such evident distress that he had to read out the bulk of his prepared speech. I enjoyed the first part of his remarks a great deal more than those he rushed through.
I have always preferred high quality in debate to a large quantity of speakers. We have been exceptionally fortunate today in both respects. As the noble Lord, Lord McIntosh of Haringey, said, the debate has covered philosophical, technical and special topics. All have been relevant to the Motion. All who took part have been highly knowledgeable, and I am extremely grateful for their contributions. I beg leave to withdraw my Motion for Papers.
§ Motion for Papers, by leave, withdrawn.