§ 3.9 p.m.
§ Baroness Hogg rose to call attention to the fiscal and regulatory burden on businesses; and to move for Papers.
§ The noble Baroness said: My Lords, I am honoured to have been invited to move this Motion. I should like to thank the House for this opportunity and the Minister for what I know will be a thoughtful and considered response. I believe that this debate is extremely timely because it comes at a point of great vulnerability in the business cycle.
§ I must start by declaring my interests, which I hope will also serve as my credentials to speak on this subject. I am currently chairman of two companies. One is large-3i, Britain's leading venture capital company, started nearly 60 years ago and today invested in more than 2,000 businesses across Europe—and one is rather smaller: Frontier Economics, started less than four years ago, which has a turnover of about six and a half million pounds. I am on the board of Carnival, the dual listed company that—uniquely—is in both the FTSE 100 and the S&P 500. I am also on the board of one of Britain's most respected engineering companies, GKN.
§ In all these contexts I see enterprise as being about capturing the value associated with business opportunity. First, for people to do this successfully there clearly needs to be opportunity. Secondly, people have to see and want to take that opportunity. Thirdly, to enable and encourage them to do so, there needs to be the right economic, fiscal and regulatory climate, which is where government, which can destroy enterprise but never create it, come into the picture.
§ When talking of the economic climate I always remind myself that God created economists only in order to make weather forecasters look good. But I think that any fair-minded person would acknowledge that this Government started, in 1997, with the economic climate set fair. Their predecessor had provided British business with important advantages in terms of the fiscal and regulatory regime, the incentives provided by five years of continuous economic growth, widely spread across the economy, strong investment and low inflation.
§ I readily acknowledge that this Government have helped to embed macro-economic stability by their approach to monetary policy. I also should like to pay 1097 tribute to the Chancellor's commitment to competition policy which—again unlike some of his colleagues—he clearly understands to be essential to efficiency and growth. On the fiscal side, I welcome the reduction in capital gains tax to 10 per cent and the development of the Enterprise Management Initiative.
§ But I know that the Minister is too sensible, and too honest, to pretend that everything is sunny today. Perhaps the most serious evidence of trouble has been the collapse in business investment, which helped to precipitate the economic slowdown and the sharp downturn in business confidence. We must hope that the Chancellor is right to forecast in his Budget that the economy will pick up in the second half of this year. But I note that even he is not forecasting much of a recovery in business investment.
§ I think that we have all learnt by now that there is an inverse correlation between the weight of the Budget book and the weight of its contents, so it was with something of a relief that I found that this latest one hits the kitchen scales at close to a kilo. There is this year less micro-engineering in the Budget and some evidence that the Chancellor has recognised the cost of complexity in some of his earlier ideas. Since the hefty increases in national insurance had been announced previously (and the Chancellor did not exactly dwell on them in his Budget speech), all the Budget does is to take roughly the sum of money of which taxpayers have been deprived by a refusal to index their income tax allowances and spread that around elsewhere.
§ Even so, there are interesting tax proposals in the Budget that need clarifying. We have yet to see how the changes to VAT will work out in practice, though I recognise good intentions. On stamp duty the picture is more confused and the Government are in danger of creating damaging uncertainty here. However, as a member of the Select Committee which is having its first shot at reviewing elements of the Finance Bill, I hope that we can mobilise expert opinion on these issues to good effect. I believe that via this important innovation your Lordships' House will be able to expose some of the weaknesses in tax legislation in Britain—the paucity of consultation, the uncertainty created by a lack of preparation or poor drafting, the erratic approach to implementation dates—without in any way infringing the constitutional rights of another place.
§ The key conditions for creating a good fiscal climate are that tax should be fair, that it should not be overcomplicated to administer—either for business or for the public sector—and that it should not be at levels that will drive business away from Britain. The same criteria apply to the regulatory regime.
§ There is something of a paradox involved in making international comparisons. As a member of the European Union we badly need other members to stop dragging their feet on economic reform. Reluctance to proceed with the Lisbon agenda is undoubtedly acting as a drag on growth in our most important market. I commend the Prime Minister's intentions in pursuing this, although I would rather be commending his 1098 success in achieving it. At the same time we need to maintain the edge in terms of light regulation and low business taxation established in the late 1980s and early 1990s in order to attract investment and encourage growth in Britain.
§ Last year the European Venture Capital Association published a benchmarking study of the tax and legal environments in member countries. The fact that Britain was still in the lead is both good news and bad. With Germany in the bottom three, it shows how much needs to be done to give the European economy the stimulus to growth provided by a healthy venture capital market. At the same time it reminds us that the UK has relied on a leading edge which can easily be blunted. The latest international survey of corporate tax rates shows that edge is suffering from some erosion. These warning signs should discourage Ministers from imposing yet more distracting regulation, from conceding regulatory agreements in Brussels that might damage British business, and from counting on business to be the financial source of the Government's spending plans.
§ There are warnings enough even in the Budget arithmetic. This shows how the Chancellor's revenues have been dented by the weakness of the economy, and most notably by the weakness of the corporate sector. Yet he is expecting the overall tax burden to rise rapidly, to over 40 per cent of GDP by 2006. I have to warn noble Lords that the Minister is likely to give them a rather lower percentage because the Government have developed a rather cute way of netting off the total of the tax burden those bits of the social security system that are being combined with the tax system. The proper national accounts measures, free of this distortion, are, however, safely in the Budget Red Book, provided you get as far as page 260. They will show you that the Government plan to have increased the burden of taxation from last year to the end of this Parliament by £150 billion.
§ I say "even in the Budget" because most respected outside commentators believe that the Chancellor is overestimating the revenue that is likely to be generated by the existing tax regime. The important point to note is that this is true even of those—most notably the highly respected National Institute—who go along with the Chancellor's forecasts for economic growth. That is to say, they believe that even if the economy grows at over 2 per cent this year—a number of people have challenged that figure—and accelerates next year, tax revenue will still fall well short of the levels in the Budget Red Book. That means, of course, that tax rates would need to be raised substantially to deliver the tax revenues the Chancellor forecasts.
§ As a member of the President's Council of the CBI, I know how great industry's concerns are that the current levels of regulation and taxation should not be further increased, and about measures in the pipeline from Brussels and Whitehall that may add to the burden. We appreciate the steps that the Chancellor took in his latest Budget to lift a few straws out of the sack, but I fear that his colleagues are still puffing behind him with further loads for the camel's back. Perhaps it is foolish of me to hope that timely warnings 1099 can be helpful, but I shall let hope triumph over experience today and look forward with the greatest confidence to the Minister's response. My Lords, I beg to move for Papers.
§ 3.18 p.m.
§ Lord Haskel
My Lords, I am most grateful to the noble Baroness for moving this Motion. I was very interested to hear her review of the economy but I should like to take this opportunity to lay some of the myths and misapprehensions about the effect of regulation and taxes on business.
If you listen to the rhetoric, you get the impression that if business were free of regulation and taxes, the economy would flourish and the world would be a better place. Yes, there are some countries where there is very low taxation, little regulation and the minimal state. There are the oil rich countries of Nigeria and Angola. Haiti has very little regulation and virtually no taxes. But these are not places where people want to live. People want to live in the G8 countries, which are the most highly taxed and have the most highly regulated economies. People want to live in those countries because they are the most economically successful.
The explanation of this apparent paradox is simple. Business does not exist in isolation, it exists within society. Markets are as much a social phenomenon as an economic one. If business is to operate successfully within a society it has to accept the values of that society and the norms of its communities. Ignoring that has led to the disappearance of many, many businesses.
It is regulation and taxation which balances the needs, rights and responsibilities of society and business and enables them both to thrive. The balance is achieved by long-standing public regulatory institutions, and the economic success of the rich states depends crucially on the quality of institutions such as the Financial Services Authority, the Food Standards Agency, Ofcom and all the others that we have.
Yet if we listen to organisations such as the CBI or the IoD, we get the impression that they want business to be relieved of the burden of regulation, so that they can be free—free to pollute the atmosphere, to sprawl over our countryside, to exploit staff and customers, and to undertake risky and hazardous activities without any responsibility for negligence or mismanagement. I think that most members of those organisations simply would not want to live in a country with that kind of society. However, we are constantly fed misleading information about how excessive the burdens are. Let me give an example.
At the British Chamber of Commerce conference on 31st March, we were told that 3,849 regulatory instruments were passed last year and that the huge burden on business was becoming unbearable. Nothing like that number of statutory instruments come before your Lordships, so I am grateful to Polly Toynbee, who found out a little more about them. It seems that nearly half were to do with local traffic 1100 restrictions in order to allow road works and other activities to take place. Others dealt with stopping arms being exported to terrorists or to countries such as Zimbabwe. Many dealt with regulating bus services. There was a regulation abolishing VAT on lifeboats.
Are those really an unbearable burden on business? Yes, there was a regulation about fitting seatbelts to fork-lift trucks because there had been a number of serious accidents, including fatalities, caused by forklift trucks tipping over. Surely that is something that most reasonable businesses would do anyway, yet it is listed as a burden on business.
Another regulation on the list of burdens was to do with maternity arrangements. Do we really want to label women having children as a burden on business? Surely the end result will be that business will lose 50 per cent of the nation's skills and alienate 50 per cent of the nation's brain power. Is that what business wants to do? I do not think so. Family-friendly working has been shown to bring benefits.
The truth of the matter is that our regulatory institutions—they are proportionate and minimalist—work better than most. That was confirmed in a recent OECD report, which said,entrepreneurs face a better business and regulatory environment in the UK than in most OECD countries".The same applies to the so-called burden of taxation. The noble Baroness, Lady Hogg, pointed out that our burden was less than in most OECD countries. They are catching up. When the average level of corporation tax in the world's 30 richest countries was 37.5 per cent, ours was 30 per cent. They have had to cut their rates to bring the average down to 31 per cent, so ours is being cut yet again, particularly for small businesses. Another example is social insurance, which makes up 21 per cent of employment costs in America, but the average in Europe is 24 per cent. In the UK, it is 13 per cent.
One reason why I think that our institutions work well here is that we have a counter-regulation culture in place, and have had for many years under both Tory and Labour governments. Regulations are looked at to see if they are a barrier to innovation and progress, and we are getting better at it. As David Arculus confirmed recently, we have got much better at consulting on regulation.
In spite of our relatively low fiscal burden and the warm words of the OECD, all is not well with British business. In spite of the low burdens on business, productivity here is lower than in most OECD countries. Could it be that, although we have fewer regulations, the standards are too low? Was the noble Lord, Lord Heseltine, right when he said that a great deal of German productivity gains came because Germany's government imposed even higher standards on manufacturing which could be paid for only by improved productivity? When the EU decided that fridges had to be disposed of without releasing ozone-depleting chemicals into the atmosphere, we had to buy German technology to achieve the required standard.
1101 How do we explain higher productivity in France despite its inflexible and over-regulated employment laws? I am not suggesting that it is because we have too little regulation. I am suggesting that perhaps the market is less effective and slower at driving up standards than regulation—and rising standards is what we all want. The indiscriminate and exaggerated condemnation of regulatory and fiscal burdens does not do business any good in the eyes of the public, who are after all our customers. The recent scandals about pay and dishonesty only add to the mistrust of business by the public.
It is the mentality behind the corporate scandals—that senior executives can use their powerful positions for their personal gain rather than accepting the duty, care and responsibility for the livelihoods of their employees, customers and others who depend on the company—that is worrying. Sadly, the same mentality exists here in Britain and in the US. The opportunities are fewer here than in the United States thanks to our regulatory institutions.
I end where I started. British business should be thankful that we have institutions which regulate effectively and proportionately, and tax relatively lightly. The continued carping and exaggeration by business organisations do us all a disservice, because they seem to be calling for the minimalist state, a place where none of us would want to live. Indeed, it is that exaggerated complaining about regulation which is making business less trusted, and that lack of trust will inevitably lead to calls for yet more regulation.
§ 3.27 p.m.
§ Lord Freeman
My Lords, noble Lords will wish to congratulate my noble friend Lady Hogg on a most excellent speech. It was succinct, clear and comprehensive, and I am sure that at least we on these Benches will very much agree with it. If she will permit me, I do not intend to try to emulate her contribution, but rather to pick up a number of points made by the noble Lord, Lord Haskel. I very often follow him in debate, and each time I find myself in total disagreement, not only with the general tone, but with a lot of the particulars. He is a good debater, but I am sure that noble Lords will appreciate the chance to have some of his assertions properly debated.
I declare an interest as a chairman of an electrical engineering company and a consultant to PricewaterhouseCoopers, which has to grapple with the flow of tax legislation to which my noble friend referred, and on which I want to touch. I do not intend to quote examples or even to get into an argument with the noble Lord about the number of regulations introduced and their sub-categorisation. That is a blind alley that will not be constructive to the debate. However, I want to follow him in looking at the process whereby governments create regulation and parliaments fail to check it.
I have only 20 years' experience in Parliament, which is a mere fraction of the service of many in this Chamber. However, to be frank, we are losing the battle. The noble Lord says that we live in a counter-regulation culture. We do not. I refer to both 1102 government and to Parliament, which, sadly, fails to check the executive. We all live in a culture of regulation in this country. I believe that we are losing the battle. More regulations affecting business are issued each year than can be dealt with under the excellent initiative referred to by the noble Lord, Lord Haskel, introduced by the noble Lord, Lord Heseltine—improved, it must be said, by the present Government in 2001—to introduce deregulation measures. Despite those welcome initiatives there is a continued net increase in regulations which adversely affect business.
The Finance Bill gets longer each year—a point referred to by the noble Baroness, Lady Hogg—and is now becoming almost unwieldy. New initiatives from the Department of Trade and Industry in particular, and state aids, which are offered by a number of departments, although each is individually welcomed by different lobby groups, now amount to a blizzard of initiatives which are extremely complicated to understand and which in many cases are counterproductive.
The problem is that Ministers and civil servants can always justify each new regulation on its merits. But if you look at one regulation incrementally added to the totality of regulation affecting business, there are always arguments for and against. Ministers are always eloquent in arguing that social justice, pressures from Europe, the need for the improvement of the interests of one section of our economy or society over the rest will justify the introduction of a regulation. The problem is that there is no one looking at the totality—not only of those regulations introduced during the course of the year but cumulatively. There is no one making a judgment as to whether, overall, they are in the best interests of our economy. I believe that the burden on business is now intolerable.
§ Lord King of Bridgwater
My Lords, will my noble friend allow me to intervene? Will he, with his great experience, address the point which I do not believe is sufficiently reflected in either the Government's or Parliament's consideration; namely, the ability of the system to administer and deliver what Parliament has enacted? He and I have lived through a period in which all-party support led to the introduction of the Child Support Agency—which proved practically impossible to administer. The problems faced recently by MAFF and then DEFRA were almost beyond the capacity of that ministry to administer and cope. I believe that we now have problems with the tax credit scheme, in regard to which there is a similar qualification. Does my noble friend think that sufficient consideration is given, in terms of worthy measures that might be implemented, as to whether people really consider that the system and the organisation can actually manage to administer what Parliament has enacted?
§ Lord Freeman
My Lords, I am grateful to my noble friend. The short answer is "No". One of the reasons is the lack of practical experience on the part of those 1103 in our great departments—both Ministers and civil servants—but, secondly, the great rush that there always seems to be to introduce a Bill without thinking of the consequences down the line.
I shall conclude my remarks in a few moments by commenting on new proposals coming from the Procedure Committee of another place and from the Procedure Committee in this House which will go some way towards dealing with the problem referred to by my noble friend Lord King; namely, legislating in haste and repenting at leisure.
However, I do not want to leave the comments of the noble Lord, Lord Haskel, about living in a counter-regulation culture and the idea that everything in the garden is rosy. Perhaps I may briefly quote two leaders of industry, to whose comments I believe your Lordships should pay attention. The first is Mr Chris Humphries, a former director-general of the British Chambers of Commerce, whose comments appeared in a press release dated 20th January 2001:Despite all the rhetoric, the reality is that government has dramatically increased the regulatory burdens that threaten small business competitiveness. Excessive red tape is stifling the very enterprises the Government is seeking to promote".Those are considered words from someone who is much respected in industry.
Mr Digby Jones, the director-general of the CBI, was quoted in the Daily Mail on 11th August 2000 as saying:They [businesses] would say that regulation is the most dominating feature of running business. It is no longer creating wealth it is having to deal with regulations".The attitude that I am afraid both national and local government have to introducing not only primary but secondary legislation is that no risk should be taken in making detailed regulations or orders that any eventuality could arise that would embarrass either the Government or the Minister. There are no prizes for taking a balanced judgment about making sure that there is a light touch—that you are looking at the outcomes and not at the specific requirements or processes. In fact, civil servants and Ministers get the blame when things go wrong. So we are not a risk-taking culture.
I quote the chairman of the Audit Commission, writing in The Times on Tuesday, 6th May:Extremely bright and committed people are shackled by a system that in no way balances the negligible rewards for success against the daunting penalties for failure".So all the pressures are to gold-plate regulations, to make sure that the regulations are comprehensive and that every eventuality is considered.
What are the solutions? Briefly, let me look at government. Both administrations have tried a number of initiatives over the past 20 years, and particularly over the past 10 years. We had the regulation task forces, led by Frances Maude under the previous administration and by the noble Lord, Lord Haskins, in this Administration. They produced regulatory impact assessments. But all their work was advisory. At the end of the day, if the Minister and the Government did not agree, their advice was ignored.
1104 I pay tribute to both the previous administration and the present one for introducing the deregulation procedure. There is an example on the Order Paper today of an excellent piece of regulatory reform concerning sugar beet research and education. It removes one piece of legislation. But, frankly, that is a very small contribution to dealing with our overall problems. We are not dealing properly with the new flow of legislation.
I believe that within government we need a Minister of Cabinet rank responsible for vetting all primary and secondary legislation, with the support of advisers, and to be of equal rank with the departmental Minister—so that if it can be shown, not only by outside lobby groups but by internal advice, that there is an incremental burden on business, that Cabinet Minister would have the right and the power to argue with his colleagues that the Bill should not proceed.
Secondly, the Chancellor of the Exchequer must grip the problem of tax simplification. My noble and learned friend Lord Howe is chairman of the excellent Tax Law Review Committee. But that committee is examining the clarification of our tax law, not its simplification. The Chancellor should take the initiative and possibly rely on a Select Committee of both Houses of Parliament or on a group of advisers, or both, in simplifying year by year great chunks of our tax law and writing them into the Finance Bill.
I turn finally to Parliament itself. I believe that there is a good deal of work that should be commended. I pay tribute to the various committees of this House and another place which look at whether regulations are intra vires. But the Delegated Powers and Regulatory Reform Committee in this House and the Scrutiny Committee in another place are not dealing with the merits of regulation. I am very pleased that the Procedure Committee in this House has proposed and I understand that we are to have a new procedure in this place in the new Session of Parliament looking at the merits of delegated legislation. That is much to be welcomed.
I regret to inform your Lordships that a similar proposal in another place has been blocked by the Government—at least, that is how it appears. The proposal was to have a Joint Committee of Members of another place and of this House examining the flow of legislation and making a judgment—it must be said that this is a judgment about politics—as to whether the regulations are necessary. I ask the Minister whether it is true that the Government are blocking the creation of a Joint Committee to examine delegated legislation and, if so, whether the Government will think again.
§ 3.40 p.m.
§ Lord Brooke of Sutton Mandeville
My Lords. I join my noble friend Lord Freeman in congratulating my noble friend Lady Hogg not only on having initiated this debate, and providing us with the opportunity of participating in it, but on the quality of the speech that she delivered. My late noble kinsman succeeded her late noble kinsman as Financial Secretary to the 1105 Treasury, and her late noble kinsman succeeded my late noble kinsman seven years later as Chief Secretary to the Treasury. It is therefore a privilege to follow her lead in this debate. This is approximately the anniversary of the last debate which was initiated from these Benches on this subject, which is at least an index that the problem has not gone away during the course of the ensuing year. I hope that I shall avoid duplicating anything that I said a year ago. I shall therefore follow my colleagues in erring on the side of brevity. I hope that I shall not repeat myself.
I acknowledge the proposals in the Budget for the alleviation, at least in some degree, of the problems thrown up by regulations and tax. I like to feel in a modest way that the fact that noble Lords on these Benches have continued to come back to these issues has drawn to the attention of the Government the fact that they needed to improve their record. That is our effect operating in slower time. I compare that with the real time proposals several years ago on corporate structures and international tax arrangements, where I heard, on the morrow of the Budget at one of those breakfasts put on by accounting firms, a tax partner at PricewaterhouseCoopers revealing his concerns about the arrangements which the Budget contained in that regard. Those of us who heard him in that audience were not surprised that the Treasury sought later that day to rubbish him. Indeed, I can recall it happening on the Floor of the House of Commons. Likewise, we were not surprised by the significant number of government amendments to the Finance Bill later in the summer in order to respond to the thrust of those earlier criticisms that he made.
My noble friend Lady Hogg alluded to the welcome reduction in micro-engineering in the Budget, and the Minister will know from the exchanges that he and I have had what pleasure that gives me. The fact that there has been so disappointing a take-up of tax credits is itself an index of how the complexity of schemes that the Chancellor introduces, particularly when they have to be understood by people who are not familiar with these issues, can be a deterrent to the take-up occurring on the scale that the Chancellor would wish. Before the present Government took office in 1997, I served on the Finance Bill with members of the present Government who were then in the Shadow Treasury team. I can remember the future Chancellor of the Exchequer's genuine commitment to increasing productivity and his enthusiasm for training and education. I admired them both.
Five-and-a-half years on from 1997, compared with the five-and-a-half years that went before, one can compare decently and fairly the productivity record in the nation as a whole between the economy under the then Government and the economy under this one. Some might say that five-and-a-half years is not a long enough time scale, but the present Government have been keen to demonstrate to us that boom and bust is now a thing of the past. In that regard the five-and-a-half years that they have been in office seem to me to be a fair comparison. I say in sorrow rather than in anger that it is a genuine disappointment that the growth rate in manufacturing and service industries 1106 has been less than a half of that which it was in the five-and-a-half years before the Conservative Party left office.
One can ask oneself why that might be? An obvious candidate is the reduction in manufacturing investment that has been occurring under the present administration. My noble friend Lady Hogg referred to that. That is an irony after the raid on pension funds that occurred in the first Finance Bill after 1997, when the Government's logic or rationale was that they wished to reduce the amount of dividends paid by corporations, so that that money would go into long term investment. I remember taking part in the Second Reading of the Finance Bill in 1997, and alluding to that aspect of the Government's policy as a mild example of chaos theory. The Chancellor was throwing quite a large boulder into the placid pool of pensions policy. Meanwhile, as happens under chaos theory, in due course little old ladies in sub-post offices up and down the country would be paying extra for their stamps because the Post Office pension fund was in difficulties. It gives me no pleasure at all to find that that is now what is happening—as I understand it the stamps go up in price tomorrow.
There are commentators who take the view that manufacturing investment is now at its lowest point since 1984. The Chancellor's forecasts of the level of manufacturing investment have dropped very sharply from the forecasts that he made in the Budget last year for the current year, compared with the one that he has made in this year's Budget. It is no surprise that in the list of six proposals that the CBI makes for ways in which manufacturing investment can he restored, the second is a reduction in regulatory obstacles. Inevitably figures will be exchanged in debates of this kind, and there is no way in which we will all end up with the same figures on the hymn sheet. However, there is reasonable agreement that the fiscal cost to business of the Government's policies since 1997 has been of the order of £47 billion, if it is carried through to 2005 under existing plans.
That is not quite as much as the largest warrant that I signed as a Lord Commissioner of the Treasury. Such a warrant has to be signed by two members of the Board of the Treasury. In the 1983 general election the only two members of the board who were in London were my noble and learned friend Lord Howe of Aberavon and myself. I joined him in signing a warrant for £49 billion. A million here and a million there soon adds up to serious money and £47 billion is a pretty inexorable burden for business to carry by comparison with what it was carrying before the present Government came into office.
§ Lord Haskel
My Lords, I thank the noble Lord for giving way. Can he say how the £47 billion is made up? For instance, does that include the extra money paid out under the minimum wage?
§ Lord Brooke of Sutton Mandeville
My Lords, the calculation, as the noble Lord knows well, was presented by the CBI. If the matter of detail is of acute importance to him, I will take a leaf out of the 1107 Minister's book and write to him after the debate. I recognise that when the Government came to office in 1997 they had around their necks the commitment that they had made about not increasing personal taxes. By last year they were reduced to a stealth tax through NICs that were introduced last year and executed this year, falling both on individuals and employers. That £47 billion has inexorably had its effect on business, and has led to the fiscal burden to which this Motion refers.
As to regulations, there seems to be broad agreement from a number of different sources. I take the Chamber of Commerce figure of £20 billion which has cumulatively occurred between 1997 and this year. That figure is not markedly different from that quoted by other commentators. If current rates of growth are maintained from year to year, that figure is likely to expand to between £25 billion and £30 billion by 2005, and thus make it comparable to the fiscal figure. My remarks about the £47 billion fiscal burden likewise apply in this regard.
I have sympathy with the Government with regard to regulations. I recognise that we can be defeated in Europe and find ourselves having to administer schemes and directives from Brussels. I take as a particular example—simply because I have reasonably close working knowledge of it—the agency workers directive. I pay tribute to Alan Johnson, who was the Parliamentary Secretary at the DTI in the previous Parliament and who was responsible for handling that. He published a series of drafts about what the directive would say. In the nature of things, agency workers were highly prevalent in my constituency, where the best part of 1 million people came to work. I took the trouble to write to every employer in that field in my constituency not once but twice as the various drafts emerged. We had round-table conversations about the drafts and what their implications would be and, on behalf of the employers, I wrote to Mr Johnson or the relevant official at the DTI to explain what the consequences would be. I pay tribute to Mr Johnson for the manner in which he absorbed those remarks. The process was fairly prolonged, which itself was a commendation of the Government's attitude.
I said that I have sympathy with the Government. The Government were not happy or enthusiastic about or particularly supportive of the directive but Labour Members of the European Parliament had no hesitation in voting for it when it went through Strasbourg, thus inevitably giving the sense that the right hand did not know what the left hand was doing. The CBI's calculation is that the directive will cost 160,000 people their jobs.
I turn to the effect on individual businessmen, who must deal with regulations as well as taxation. I cast my mind back to when I was running a small business in the mid-1960s. The then Chancellor was encouraged to introduce legislation into that government's policy by two Hungarians. I have absolutely no problem with Hungarians; any nation that can generate as English a motion picture as "The Scarlet Pimpernel" with Sir Alexander Korda as a Hungarian impresario, 1108 Baroness Orczy as the Hungarian author and Leslie Howard, who was born in Hungary, as the principal actor, has much going for it. Those two Hungarians encouraged the then Chancellor to introduce legislation requiring a foreign company—the company in which I was working was foreign—automatically to pay its profit in dividends at the end of the year to the parent company unless it could prove that it needed the money to keep in the United Kingdom. In investment terms, that was the exact opposite of the philosophy that governed the Government's policy towards investment when they came to office in 1997. But time passes; 30 years have gone by.
I do not know why the Government took that view. It would appear to have placed downward pressure on sterling. It was presumably done in order to raise cash and hope that the money could come back in thereafter. The Inland Revenue required extremely detailed accounts about why one needed not to pay a dividend and to keep the money in this country. I remember spending weekend after weekend preparing schedules, which my wife somewhat resented, explaining why we needed to keep the money here. One's frustration was increased by not knowing why the Government thought that it was useful to employ businessmen's time in that way. In the fullness of time, the Inland Revenue agreed to every proposal that I put to it.
Of course I appreciate all of the arguments about businessmen's other problems, some of which the Minister may adduce. The YouGov poll, which was reported in the Mail on Sunday earlier this year, went to 472 company directors. YouGov has a good record in terms of interactive polling and the accuracy of its political forecasting. It asked the company directors to list three main barriers to growth for their companies. The largest problem was red tape, with 57 per cent; the second was the tax burden, with 44 per cent: the strength of the pound was 8 per cent; being outside the euro was 5 per cent; and I acknowledge that weak demand was 38 per cent. That is an index of the perception of what the business community must live with. I repeat my gratitude to my noble friend for initiating this debate and I look forward to the Minister's response.
§ 3.55 p.m.
§ Baroness Noakes
My Lords, I add my thanks to my noble friend Lady Hogg for bringing this important topic before your Lordships' House today and for her excellent introductory speech. I declare an interest as a director of a number of companies.
When considering what to cover in today's debate I felt spoilt for choice. There are so many areas of business life that have been burdened by the Government that we could easily have spent the whole day talking about the harmful effects of the Government's policies.
The productivity analysis in this year's Red Book is damning: UK productivity in terms of output per worker is only three-quarters of that achieved in the 1109 US and, to our shame, we lag behind France and Germany whose economies we do not normally admire. Productivity is now increasing at only half the rate it was at the end of the last period of Conservative government. It is easy to see why that is the case when we look at the fiscal and regulatory burdens that have been created.
I shall concentrate on just three areas. I start with the impact that the Government have on small and medium-sized enterprises. I emphasise that I have no personal experience of working in the SME sector but I have met many chartered accountants who work in or advise SMEs. They are absolutely convinced that the Government's policies make life increasingly difficult for them. One of them, a finance director of a successful online business, was quoted in the accountancy press last week. I am conscious that the accountancy press is not the reading of choice of most noble Lords, and they may not have read what he said. He said that Britain is not a good place for small businesses. Like all small businessmen—or perhaps all businessmen—he thought taxes were too high. But his real concern was the increasing burden of regulation. He said:The Government sometimes have a view that time is free and that a finance director's time is well spent in filling in forms".Filling in forms is not value-adding work. The time could be better spent building businesses. It is the diversion of time from running the business, rather than the direct cost of regulation, that is so devastating.
Nearly 80 per cent of members of the Institute of Directors surveyed earlier this year said that they were spending more time and money on tax-related administration alone. Businesses are the Government's unpaid tax collectors and administrators. That has been the case since PAYE was so ingeniously devised more than 50 years ago. While that affects businesses of all sizes, an increasing burden in this area affects the SME sector disproportionately.
A particular concern in recent years has been the administration of the working families' tax credit system, which has been forced on to business. This year, employers have a new burden in the transition to the working tax credit system. After the transition, about half of the businesses surveyed by the Institute of Directors thought their compliance costs would increase and half thought their costs would stay the same. Not a single business thought that its costs would reduce.
The Chancellor has been endlessly inventive with his schemes of tax credits—he has designed and redesigned them—but he seems blind to their impact on businesses. A further area that small businesses find hard to cope with is the Government's extension of employee rights. We have extra pay and leave for maternity, for paternity and now even for adoption. If you are a small business—
§ Lord Haskel
My Lords, before the noble Baroness leaves productivity, she told us that although 1110 productivity in France and Germany was higher, according to the OECD there is more regulation in France and Germany. Can she explain that?
§ Baroness Noakes
My Lords, that is a paradox I cannot explain. It is perhaps easier to see why we lag behind the US in terms of regulatory burden. Other matters must operate to counterbalance the regulatory burden that exists in France and Germany. That is perhaps not the whole story but I believe it is an important part. I shall not let the noble Lord, Lord Haskel, deflect me from talking about the burdens on small businesses and the imposition of additional rights for employees. I spoke of maternity, paternity and adoption leave and pay.
I was about to make the point that a small business finds it difficult to cope with those burdens. The impact that a single employee can make in a business of 40 or 50 employees can be disproportionately large. In turn, that makes it difficult to run a business successfully. Employees now have new rights to ask for flexible working hours. For many small businesses that is a nightmare. To the noble Lord, Lord Haskel, I say that family-friendly policies can cause many problems for small businesses.
I can quite understand why the Government think that all of those changes are a good idea in electoral terms but they seem to ignore the very significant impact experienced at the sharp end by small companies. If we ignore the SME sector we ignore a very important part of the economy. The contribution that SMEs—businesses of 250 employees or fewer—make to the economy accounts for around 40 per cent of GDP. If one harms that sector one potentially harms the engine room of growth in our economy. That can be very difficult. The Government have an important part to play, particularly, I hope, in looking at exemptions from regulation for SMEs so that regulations do not continue to cause economic harm.
My second topic is pensions. I do not need to remind noble Lords that this country has a pensions crisis. A major contributor to that has been the Government's fiscal stealth raid on pension funds, to which my noble friend Lord Brooke referred. The change in the tax credit system is costing pension funds and, therefore, ultimately the businesses that support them £5 billion a year. Another £1.5 billion a year is lost in contracted out rebates. Those annual hits are equivalent to around 15 per cent of pension fund income. That is not insignificant. Cumulatively, pension funds must have lost well over £30 billion. That has increased the financial burden of pensions on businesses. The plain fact is that that financial burden has become so intolerable that companies have been closing their defined benefit schemes in droves. The Association of Consulting Actuaries found that only 40 per cent of final salary schemes were still open to new members and half of those were considering closure.
On the subject of pensions we must remember the Government's big idea of stakeholder pensions which all employers with more than five employees were obliged to set up. The result of all of that effort by businesses was that 90 per cent of employer-designated 1111 stakeholder schemes have no members at all and the Government have missed their target of 5 million stakeholder pensions by a mile. Only a little over 1 million people have signed up. The Government have created a pensions crisis but have no solutions. The Green Paper published last year was a damp squib in terms of policies but the small print shows an alarming potential for increasing the regulatory burdens on employers.
The third and last area I shall cover is the impact of regulation in the health sector and in particular as it affects care homes. In relation to the NHS the Government have never been happier than when prescribing in the minutest detail how things should be done. For the past six years they have been busily micro-managing the NHS. It was perhaps no surprise that the diversity of provision in the largely private care home sector was too tempting to resist.
With great enthusiasm the Government devised a new regulatory regime for care homes including new standards to be met down to the smallest details such as the width of doors. Many things were wrong with those standards. Some showed that the Government did not understand how care was delivered to certain types of resident. Others clearly showed that the Government did not understand the economic impact of their recommendations in terms of the cost of alterations to care homes. Above all the Government failed to understand that many of those businesses were small businesses that simply could not or would not live within such a complex regulatory regime.
Very late in the day the Government watered down the standards, but it was too late. Care home owners had already thrown in the towel. The facts are that 60,000 care home beds have been lost since the Government came to power. In many cases the regulations were the straw that broke the camel's back. The care home sector has been decimated at a time when society, with an ageing population, needs it most.
I know that the Government talk a good story on deregulation and I have no doubt that we shall be hearing more of the same from the Minister today. But there is a simple way in which the Government could show their deregulatory intent: they could have an annual budget for the regulatory burdens on business and a department that needed to impose burdens could have a share of that budget. Unlike all other budgets, it should go down every year, so that if a department wanted to impose additional burdens, first, it would have to play a zero sum game to find burdens that it could reduce and, secondly, it would have to examine its total burdens to see what further reductions it would have to make. If that simple discipline were imposed on departments by the Government, in particular by the Treasury, that could have a very important impact. I commend that to the Government.
§ 4.7 p.m.
§ Lord Razzall
My Lords, I join noble Lords in thanking the noble Baroness for introducing the debate. Having listened to the early speeches, particularly those from the noble Baroness, Lady Hogg, and the noble Lord, Lord Freeman, I was optimistic that the debate would be about steps that the Government should take to reduce the regulatory burden in the United Kingdom, rather than the partisan discussion that appears to have emerged in the past couple of speeches. They seem to suggest that until 1997 we lived in a regulation-free low-tax successful economy and that since then we have lived in an unsuccessful economy because of the groaning burdens that this Government have imposed on industry.
That is the impression that one would have received from listening to the attacks that the noble Baroness. Lady Noakes, and the noble Lord, Lord Brooke, made on the Government's record. In relation to pension funds, for example, they made no mention of the cataclysmic collapse in stock markets in the past two to three years or the fact that the whole of the private sector during the 1990s took a pensions holiday because they were advised by their actuaries so to do. If one listens to the noble Baroness, Lady Noakes, or to the noble Lord, Lord Brooke, that is entirely the fault of the Government. Such is party politics even in your Lordships' House.
Then the noble Lord, Lord Haskel, tells us that we live in a regulation-free climate and that this country has the best government in the world for regulation of businesses. Again, that does not help us much in the debate. As an outside observer and as someone who has not been a member of a party that has been in government during the period, I would have thought that it would be fair to say—both sides could agree on this—that by and large we are probably less regulated than continental Europe. Those of us who have conducted business in the United States would probably suggest that we are less regulated than that bastion of capitalism. Those on this side of the House who wish to argue that regulation in this country depresses our rate of growth below that of other countries have a difficulty explaining the French and German examples—and, indeed, the example of the United States of America. Anyone who has done business there groans under the regulation forms that have to be filled in.
Having said all that, we on these Benches consider that the way to approach the matter is not to be complacent and say, "Yes, we are a successful economy". There are problems with regulations. Indeed, on every page of my party's most recent manifesto, we printed a regulation that we would want a future government to repeal. There are 25 of them, many of which still exist.
I shall not ask the Minister to answer about all 25 when he responds, because we would run out of time. I shall not even ask him to write to me, because I know the answer. However, at least five characteristics cause 1113 a problem in the imposition of regulation by central government. Perhaps I may briefly describe them and give one or two examples.
The first, which has been touched on, is what has become known as gold-plating of European Union legislation. Your Lordships would not expect someone from my party to disagree with the optimism with which a large number of European Union directives, especially employment legislation, have been implemented. However, to take the Working Time Directive as an example, we supported it, as did the Government, but its implementation in this country has been cumbersome and contrasts with the light touch employed elsewhere in continental Europe.
Far too often, governments—this is not an attack on the Labour government, but on governments of all persuasions—fail to adopt that light-touch approach, which involves providing a high-level legal framework that avoids complex and mandatory record-keeping, but which workers can use to assert their rights where necessary. Regulatory impact assessments, which have been mentioned, help in that area, but to be more effective they should be performed by an independent body, rather than by government departments. That process works extremely well in the Netherlands, by the way. So the first point is gold-plating and over-zealous implementation of European Union legislation.
The second area in which governments of both persuasions have been guilty is where conflicting UK and European Union regulations address the same issue. One example is coming down the track with the proposed European Union duty to trade fairly, which, if the Government behave in the way in which governments normally behave, will sit alongside existing UK customer protections.
We have argued in favour of the general duty to trade fairly and will support implementation of the directive when it is introduced, but we shall require that its application to each sphere of business is clarified simply. If there is a conflict between the European directive to trade fairly and existing UK law, that UK law must be repealed. In the past, there has been a tendency to leave in place UK law that is in conflict with or touches on the same points as European directives, increasing the burden of regulation on British industry.
My third point concerns multiple layers of application. The best example of that is the fire regulations. With the Fire Precautions Act 1971, the Fire Precautions Regulations 1977 and local Acts and by-laws, more than 100 different regulations are currently actively in place which affect dealing with fire problems. That requires each layer of regulation to be assessed to identify the requirements applying to a business at any one time—a major burden on large, small and medium-sized firms alike.
Where regulations are amended or updated, it should be a requirement that a single explanation of the regulations that apply is produced. When a new regulation is introduced, any owner, operator or director of a business should receive an explanation of exactly what regulations apply to that activity.
1114 My fourth point concerns the requirement to provide information under the Statistics of Trade Act 1947. That is a major irritation to large sectors of British industry. I have in my hand a letter from a small manufacturing company in Stockport—at the heart of our manufacturing sector in the North West—which, under that Act, is required to report regularly on the following: its quarterly capital expenditure; annual business inquiries, parts 1 and 2; monthly wages and salaries; quarterly stocks; a survey of research and development carried out in the UK in the current year; the annual register inquiry; an annual inquiry into international trade and services; an annual/quarterly production inquiry; and a sales quarterly inquiry.
The writer of the letter states that when the company has slowed down and not filled in the forms, the Office for National Statistics in Newport has told it that it will refer it to the enforcement squad under Section 1 of the Statistics of Trade Act 1947. That is an example of the sort of thing discussed by the noble Baroness, Lady Noakes, which seriously reduces the productivity of British industry because of people having to be employed to answer such inquiries.
What is the remedy? One remedy would be that any regulation should be governed by a sunset clause, lapsing automatically unless positively reimposed, prompting the Government to assess whether the regulations were strictly necessary. I should have thought that regulations under the Statistics of Trade Act 1947 could well fall into that category.
My final point, which I have saved until last because it concerns a major con trick on British industry by governments of all persuasions, is the use of business to administer government policy. The most effective method of collection of tax was imposed through the pay-as-you-earn system, which has enabled enormous numbers of people in the private sector to collect tax on behalf of central government. The Inland Revenue does not collect PAYE; employees working for business do. That cost is imposed on British industry.
Similarly, when value added tax was introduced, the system was clever. The private sector collects VAT, not Customs and Excise. The most recent example of that is the administration of the working families' tax credit, which provides an additional cost to business. Governments of all persuasions should consider that fifth area and whether it is the most efficient use of the private sector's time to be the free collection agency of tax revenue.
In conclusion, I agree with the noble Lord, Lord Freeman: the problem is that governments of all persuasions start with questions asked here and in another place. Every time one of your Lordships stands up to ask, "What are the Government going to do about X, Y or Z?", if the Minister replies, "We shall consider it", that process inevitably grinds its way through the system and ends with a new regulation.
§ Lord Freeman
My Lords, I am grateful to the noble Lord for giving way; time is still with him. He helpfully referred to scrutiny of European legislation. Does he agree that we have an anomaly? Your Lordships' 1115 House scrutinises European legislation upstream, as it were—before detailed directives and regulations are drafted—while the other place carefully scrutinises legislation when it is issued as directives and regulations; but the left and right hand do not appear to grasp each other.
§ Lord Razzall
My Lords, I agree entirely with what the noble Lord, Lord Freeman, says, except for one word that he used. He said that the other place looked "carefully" at what comes out of Europe. I agree entirely that the left and right hands are not in tune in monitoring changes.
The problem starts with us. Noble Lords stand up to ask what the Government are going to do about different issues. The noble Lord, Lord Dormand, very often asks what the Government will do about excessive pay. He is right: what will the Government do about it?
§ Lord Dormand of Easington
My Lords, I am glad that the noble Lord is adding to my case. But he has probably noticed that recently, in the papers, the Government have specifically mentioned doing something. Not before time, if I may say so.
§ Lord Razzall
My Lords, the point that I was making is that, if you have succeeded in your campaign to get the Government to do something about excessive pay, it will add to the regulatory burden on business in complying with what you want. The problem always starts with us.
§ 4.21 p.m.
§ Lord Saatchi
My Lords, I, too, thank my noble friend Lady Hogg for allowing us the opportunity for this timely debate in your Lordships' House. As always, it is a pleasure and a privilege to make the winding-up speech for our Benches in a debate to which so many distinguished noble Lords have contributed. It is often said that there is a special merit in the composition of your Lordships' House through its ability to bring into play in debates such as this one people with real experience and specialist knowledge of economic affairs. That has been clearly evident again today.
My noble friend Lady Hogg, who, I assure noble Lords, knows as much about the subject as anyone I know, set the scene in a typically pointed and robust introduction. Let me try to sum up in the same spirit. It is a striking fact that the debate coincides with the report today from the manufacturing industry which says that government policies are doing it more harm than good. Apparently, new measures such as the climate change levy, higher national insurance contributions and employment law red tape make matters worse for it, while so-called DTI assistance policies suffer from extreme bureaucracy and therefore fail to make things better.
1116 It is certainly a grim fact that, despite the Prime Minister's Better Regulation Task Force, the new Regulatory Impact Unit in the Cabinet Office and the Regulatory Reform Act 2001, it is a losing battle, as my noble friend Lord Freeman said. New regulation affecting business has been introduced every 26 minutes of the working day since the Government came into office, a rate exceeded only by government press releases, the emission of which occurs every four minutes. In the mean time, as my noble friend Lord Freeman said, and my noble friend Lady Noakes underlined, while taxes on business have increased in the past six years so have the cost and complexity of compliance.
The question is whether anyone actually cares. Imagine the journey of a missive from industry to the splendid desk of the Chancellor in the new glittering palace of the Treasury. Consider, for example, the sort of submissions that my noble friend Lord Freeman read out to us from the British Chambers of Commerce or the CBI. That would constitute the sort of "carping and exaggerated complaints" that the noble Lord, Lord Haskel—I think that they were his words—read out. Picture the scene when those weighty tomes from the CBI, the IoD or the British Chambers of Commerce pass across the desks of the Chancellor's staff. Imagine the reaction from those who learned their economics at the knee of the noble Lord, Lord Haskel. "What do the fat cats want today?" one of them would ask. "What are they complaining about now?" another would groan.
Why do they say such things? Why are the Government so profoundly anti-business? Doctors say that our faults today are often explained by genetic defects inherited from a previous generation. That certainly seems to apply to the Benches opposite, whose birth defects in relation to business arose at the first meeting of the International Working Men's Association at St Martin's Hall in London in September 1864. Then, a group of long-forgotten individuals—except that one of them was Karl Marx—published the resolutions of their new party. The first was:The economical emancipation of the working classes".From whom were they to be emancipated? As the noble Lord, Lord Haskel, implied, and the Communist manifesto made clear, from the "capitalist exploiters" of course. As Beatrice Webb said later:Some people fall in love with their chauffeur. I fell in love with Soviet Communism".The descendants of that famous gathering in 1864, now comfortably seated on the Front Bench opposite—yes, you two—believe that "unbridled capitalism", usually associated with America, should be reined in, controlled, or, as the noble Lord, Lord Haskel, put it, balanced. Hence, the anti-globalisation, anti-multinational corporation agenda that drives the EU, to which our own Government have succumbed.
Like the EU, our Government present themselves as the quintessence of caring, overlooking the fact that labour laws that they enact to protect employees end up costing them their jobs. Those are the unintended 1117 and accidental consequences of which my noble friend Lord Brooke spoke. It is, perhaps, why a German consultant told Die Welt last week:I would not recommend any investment in manufacturing in Germany".It is probably also why French company bankruptcies rose by 17 per cent last year. It is also why in both countries—I think that the noble Lord, Lord Razzall, said that those countries had a light touch—unemployment is twice that of America or Britain. On the second part of my noble friend's theme in this debate, it is also why, mesmerised by the idea of unfair tax competition, the Government are set on their path of closing the gap in tax between the UK and the euro-zone by the brilliant expedient of raising our tax burden to their level.
Do I exaggerate? I shall trace a direct line from that meeting in 1864 to another meeting that took place a few years ago in Brussels. Again, this story will particularly appeal to the noble Lord, Lord Razzall. At that time, my right honourable friend Michael Howard was the Secretary of State for Employment. There was the threat of a new EU directive concerning employment law that he thought would be likely to lead to a loss of jobs, lower profits, higher costs and more unemployment. Michael Howard gathered from an article that a finance Minister of one of the EU states had some sympathy with that view, so he got on a plane and went to see him. He told the Minister that he was against the new directive because he was worried that it would put up costs, lead to job losses, lower pay and higher unemployment, and asked him whether he would support his opposition to it. The Minister looked at him in an uncomprehending way and asked, "But if we all do the same, what is the problem?"
That brings me to the basic problem. I shall suggest to noble Lords a test of this Government's approach to business. I know that in a few moments the Minister will contest the basis of the tests and, I am sure, will offer his own marking system. The test concerns the type of leadership that the Government give to business by the example that they themselves set for businessmen. I shall take some headings from the coursework at Harvard Business School. Perhaps we can consider what a hard-pressed businessman would make of what the Government do with them.
I shall start with the heading "Cost control". Some 154,000 people have been laid off in manufacturing industry in the past 12 months. Who hires them? The Government. Some 124,000 people were hired in the same period in what is called public administration. What is the result? The most accurate gauge of public sector inflation—known, for some reason, as the GDP deflator for government consumption—rose by 2.2 per cent a year in the five years to 1998. By the end of 1999, it was running at 4 per cent. It rose to 5.75 per cent in 2000. In the financial year to the end of last March, the figure was 6.5 per cent—three times the economy's overall inflation rate of 1.8 per cent.
The number of pages of recruitment advertisements in the "Society" section of the Guardian has trebled from an average of 50, in 1997, to an average of 150 1118 today. Like my noble friend Lady Hogg, I carried out a weight test. I can confirm that, at 327 grammes, the "Society" section of the Guardian, where the Government do their hiring, now weighs more than the Financial Times, The Times and the Daily Mirror put together. Meantime, head office costs—I am talking about No. 10—which are a good and telling measure of the mindset at the top of an organisation, have doubled from £6.9 million in 1997 to £13 million today, partly because of a doubling of the number of PR men.
Any savvy business school student could work out the result. Output per worker in the public sector rose by 0.3 per cent in the past year, versus 3.5 per cent for the private sector. That is why 70 per cent of' the public are right to say that the new national insurance contributions money will be wasted. Seventy per cent of it is wasted in higher costs.
I shall take a second heading from Harvard: "Debt management". Every businessman knows how crucial it is. What would your Lordships do with a finance director who said that he needed to borrow £32 billion in the next financial year, then said that he needed £54 billion, then said that he wanted £72 billion of new debt, then, last November, said that he needed £100 billion, before, two weeks ago, saying that he made it £118 billion—all in the space of 18 months? Care with debt, as any good business school teaches, is always vital for the good business manager. What example do the Government give? Income is up 1.5 per cent and spending up 7.5 per cent. The Government's response is, "Don't worry, we'll borrow the money to fill the black hole".
§ Lord Razzall
My Lords, would the noble Lord, Lord Saatchi, be prepared, in order to elucidate his point, which I well understand in the context of criticism of governments, to give similar figures for 1996 and 1997?
§ Lord Razzall
My Lords, I mean figures for the amount of borrowing that the Conservative government left this Government with.
§ Lord Saatchi
My Lords, that is a good idea. As we know, the Government made a great deal of the fact that they had repaid the debts of their predecessor. We now know what happened.
§ Lord Razzall
My Lords, I thought that the point that the noble Lord was going to make was that, when the finance director—the Chancellor of the 1119 Exchequer—for 1996 and 1997 got to the ballot box, he was sacked by the electorate in the way that he ought to have been.
§ Lord Saatchi
My Lords, I am not sure that I completely follow that point, but I am sure that it was a good one.
The third course heading is "Transparency". Business school students are taught never to weave a tangled web and never to engage in too-clever-by-half accounting practices because it will all unravel in the end. What is the Government's example to business? First, they tried to bury £15 billion a year of tax credit costs in the notes to their accounts. Currently, they are trying to magic about £100 billion of debt off their balance sheet by the creation of special purpose vehicles that carry the debt away from the public gaze. It is no wonder that Professor Likierman, chief adviser to the Treasury on such matters, said:Reader understanding [of financial reports in the public sector] is sometimes felt by those who compile them to be a disadvantage".I end the series of tests with the final Harvard coursework heading. It is probably the most crucial, as it concerns human relations, a vital issue to everyone in business. The heading is "Profit-related compensation". Business school students are taught that pay should be linked to results, which could be sales, profits, market share, share price, customer satisfaction or whatever. In a bizarre caricature of business school teaching, the Government have somehow absorbed into their collective brain the idea of business-like targets for their employees. So it was that the Secretary of State for Health told a radio programme on 4th March that,Everyone has targets these days. It's part of the currency of management in the private sector".Today, the Government have more targets than there were in the first Soviet five-year plan, published in October, 1928. In its initial form, that plan prescribed just 50 targets for industry: the 2002 Comprehensive Spending Review contains 130 such performance targets. The Department for Education and Skills has 18 targets, the Home Office has 20, and the NHS Plan contains 400, some of which, I am sure, deal with what my noble friend Lady Noakes described in the care home area.
The editor of the Guardian agrees with what my noble friend Lord King of Bridgwater said about what, I think, he called the inability of the system to administer what Parliament has enacted. Here is what he said about the Government's business-like approach:They have become the modern day equivalent of Russian train managers who, in the most oppressive period of Soviet rule, sent out numerous empty trains through the middle of the night to fulfil their timetable targets".We can see why Lenin warned the second Comintern in 1920 that that approach was "an infantile disorder". The result is not just a ham sandwich without mustard or trifle without custard, which would be bad enough, but a dysfunctional hybrid, a bizarre caricature of the capitalist business model.
1120 The Government directly employ 25 per cent of the population—7 million people. They control the lives of 40 per cent of the population by, first, taxing them and, then, allowing them to claim means-tested benefits. They have made 90 per cent of the population eligible for a government credit. It is on to that body that the Government are attempting to graft the head of the American type of businessman that, they say, they so admire. They are putting a panther's head on a camel's body. Is it any wonder that the monster so created is doomed to die?
With regard to the regulation or taxation of business, the Government are nobbled by their heritage. As all my noble friends said today and as my noble friend Lady Thatcher—I am sorry not to see her in her place today—once memorably said,The facts of life do invariably turn out to be Tory".
§ 4.37 p.m.
§ Lord McIntosh of Haringey
My Lords, I am particularly grateful, for two reasons, to the noble Baroness, Lady Hogg, for introducing the debate. First, there is the more personal reason that she anticipated a response from me that would, she said, be thoughtful and considered. I shall try to achieve that, although I cannot promise that I will. I must say to her that I thought that her introductory speech was thoughtful and considered, and I am grateful for it. It was a contrast to some of the speeches that followed.
The second reason why I am grateful to the noble Baroness is that she added to the words of her Motion. To the phrase "fiscal and regulatory burden", she added the word "economic". That was right. We cannot think about the position of business in this country or in any country without considering the economic circumstances as well as the fiscal and regulatory circumstances. As one who ran a small business myself for 30 years—I have declared that interest before—I believe that it was the economic climate, rather than the fiscal and regulatory burden, that was the key to whether I slept at night, whether I could employ people and whether the business was successful.
In the 1980s, I paid interest at a rate of something like 16 per cent and, because of international connections, was able to go to a Swiss private hank and get finance at 7 per cent. It was then that I realised that there was something wrong with the way in which that government conducted economic policy. That was enormously more important to me than fiscal burdens. I paid corporation tax roughly every other year because it was advantageous to claim it back in the years when I could avoid paying it. That is true of a great number of small and medium enterprises. As to regulatory burdens, yes, I went quite frequently to the office on Saturday afternoons and Sunday mornings to complete the VAT returns. I hasten to say that that was much more serious than any other regulatory burden. It is only under the present Government that small enterprises have been relieved of that burden by being allowed to make a VAT return on the basis of turnover rather than on the basis of a collation of transactions.
1121 I return to the economic climate because that seems to be the most important consideration. Of course it is true that our economic performance has improved over the past six years; of course it is also true that some of the foundations for that were set in the previous few years. But we are in an economy which has the lowest inflation for 30 years; which has the lowest business interest rates for nearly 50 years; which has the lowest unemployment rate since the 1970s; and which has faster growth than any other major EU economy. Any honest businessman or woman will say that that is more important than the other issues which have been debated today.
The noble Baroness, Lady Hogg, made a legitimate point about levels of business investment, to which I shall return. Business investment is not dependent on fiscal or regulatory burdens, it is dependent on volatility or stability in the economy. That is what we should have been debating. If the noble Baroness, Lady Hogg, had put down her full Motion at the beginning rather than the more limited Motion, perhaps the debate would have been a little wider and would have benefited for it.
I turn therefore to the issue of taxation. I have heard it said—indeed the CBI has said—that business taxes have risen by over £47 billion. I studied those figures in some detail and I shall respond to them. But I look at taxation in the context of the fact that we have the lowest corporation tax rates in history and that we have capital gains tax on business assets at 10 per cent, which the noble Baroness, Lady Hogg, specifically welcomed. That is a lower figure than in the United States. Within the past year, the OECD said that this is a "lightly taxed economy". We have a high VAT threshold which is of enormous importance to small businesses, as well as having the option of more simplified VAT calculation.
The CBI said, and the noble Lord, Lord Saatchi, repeated it, that taxes on business have increased. I listened to the points made by the noble Lord, Lord Brooke, about the CBI and I have looked at those figures. The £47 billion figure that he quoted includes the abolition of payable tax credits which removed a major distortion in the tax system and which encouraged companies to pay out their profits as dividends rather than retaining them for reinvestment in the business. It includes the windfall tax, which was a clear Labour manifesto commitment and a one-off tax—£5.2 billion of which was spent on measures of direct benefit to business, including employer subsidies and efforts to enhance labour supply.
The figures include the increase in employer national insurance contributions announced in the Budget 2002, which have just taken effect, and which of course are of huge benefit to business because the money is going into the National Health Service to improve the health of employees. The CBI said that workplace absence cost over £10 billion in 2002. Above all, the CBI figures are aggregated over a period of eight years, which gives a somewhat misleading picture.
1122 Therefore, I challenge the view that the Government have raised business taxes by more than 47 per cent. I point to the rates of business taxation as evidence that our fiscal system is far from being inimical to business and is recognised, not just in this country but internationally, as being favourable to business.
Returning to the economy, it is true that we arc not isolated from the global economy. Unlike the position in the 1990s, world trade is falling—profits, markets and investments are falling, as is the volume of world trade. As my noble friend Lord Haskel and the noble Baroness, Lady Noakes, noted, of course that has an effect on productivity. Until the slow-down in the world economy our productivity was rising fast. Our productivity was the fastest growing in Europe. We were closing the gap with France and Germany and I believe we are closing that gap still. But clearly a world slow-down makes a huge difference.
A large part of my speaking notes, such as they are, was devoted to matters which have not been raised in debate—in other words, to the actual regulatory regime for business. It is interesting that few of the matters I noted as being a significant element in the regulatory regime of business came up in debate. That must be because—I am glad to hear—they are no longer in controversy in this House. On listening to business leaders and to those who write letters to the business press, there are constant complaints about employment legislation, environmental legislation and other such matters. But today there has been a strange silence on nearly all of these points. There are those in business who would say that the Conservative Opposition have pulled their punches. The noble Lord, Lord Brooke, in particular, commented on the cost of employment legislation. But he quoted the gross figures which include the value of benefits to recipients. The gross costs of employment legislation are indeed £5 billion; namely, I per cent of the wages and salaries bill or £4 per employee per week. But the administrative cost, which is what we ought to be concerned with, is one penny per employee per week. In respect of tax credits, as the noble Lord, Lord Razzall, pointed out, yes, for more than 50 years we have been using business as tax collectors. Governments of all shades have done so and I do not hear the Conservative Party saying that it will abandon that and go back on PAYE. The real cost of tax credits is the implementation costs and not the gross costs. I have heard no criticism of that.
I have heard no criticism of the minimum wage, which is criticised widely outside. I have heard criticism of pensions policy, but that was answered very effectively by the noble Lord, Lord Razzall. I do not propose to repeat what he said because I could not say it as well. I have heard hardly any criticism of the working time directive, holidays, time off, or maternity leave. Yes, the noble Baroness, Lady Noakes, criticised flexible working, although she failed to recognise that the flexible working provisions allow a request to be made to the employer for flexible working; they do not require the request to be fulfilled.
1123 I have heard no criticism of what employers complain about often; namely, trade union recognition and the role of employment tribunals. There was some comment about agency work and the noble Lord, Lord Brooke, paid tribute to Alan Johnson. There was reference to the extraordinary claim made by the CBI that this measure will cost 160,000 jobs. We heard that type of claim about the minimum wage when it was introduced and we shall sit quite comfortably until we hear whether the claim is fulfilled. Of course, the noble Lord, Lord Brooke, knows as well as I do that agency work was used as a way of avoiding employment protection laws. It had to be dealt with and has been dealt with effectively.
Turning to manufacturing industry, I heard no comment today on the beneficial aspects of government policy—for example, the way in which we set up the small firms loan guarantee scheme, which we debated last week, the regional venture capital funds or the regional selective assistance. All of these were set up with the support of both the CBI and the TUC. One would have thought that there might be some discussion of that in a debate in your Lordships' House. While criticism has been made of manufacturing investment and manufacturing productivity levels, to both of which I have responded, so far as I can see, that criticism has not been related effectively to fiscal and regulatory burdens.
We recognise the productivity gap between us and other European countries, but no one answered the legitimate questions of my noble friend Lord Haskel about why it should be true that there is higher productivity where there is also a higher degree of regulation.
§ Baroness Hogg
My Lords, I am most grateful to the Minister for allowing me to intervene. Does he recognise that in those areas where the level of unemployment is higher, there is a false calculation; that is, if he were to measure output across the entire workforce in countries with higher rates of unemployment than the UK, the so-called productivity gap would disappear?
§ Lord McIntosh of Haringey
My Lords, I am not sure whether it is true to say that productivity is measured across the entire workforce rather than across the actual or potential workforce. I shall have to think about it. The point made by the noble Baroness sounds reasonable, but I am not convinced that that is how the statistics are produced.
§ Lord King of Bridgwater
My Lords, if the noble Lord is adducing in support of his argument the question posed by the noble Lord, Lord Haskel, why is it the case that the Prime Minister has been trying to persuade the governments of Europe to adopt a more flexible and less regulatory approach? The noble Lord's arguments appear to be totally contrary to his own Government's policy.
§ Lord McIntosh of Haringey
My Lords, my noble friend Lord Haskel sought to point out that there are 1124 many different ways of running one's own economy and that, within the European Union, there is room for diversity of social and economic policies. My right honourable friend the Prime Minister certainly would not dissent from that.
I should have thought that some reference would have been made to the way in which the Government have encouraged competition. I am grateful for the passing reference made by the noble Baroness, Lady Hogg, but surely the Government's support for competition—it is an outstanding feature of this administration—ought to be a relevant subject for debate.
I listened to all that was said about small and medium enterprises and I agree with the noble Baroness, Lady Noakes, that the old phrase, "They are the engine room of growth"—we must coin a new cliché—still rings true. However, when the noble Lord, Lord Freeman, quoted the Director-General of the CBI, Digby Jones, on the effect of regulation on small businesses, he cited a remark made in February 2001. In January of this year Digby Jones was quoted in the Sunday Express as saying,Britain is definitely the best place to do business compared with the rest of Europe. We also have a more entrepreneurial legislative and fiscal framework than the United States".I suggest that we look to comments made in 2003 rather than those made in 2001.
The noble Lord, Lord Saatchi, said that DTI help for small businesses was too complex and bureaucratic. He was entirely right to make that point. That is why in December of last year the Secretary of State announced a "bonfire of support services". The department has cut the number of different support services from well over 100 to approximately 25. We are now allowing a 12-week period between the passing of regulations and their implementation so that the Small Business Service has sufficient time to ensure that small businesses can comply with and benefit from the newly organised services.
The Anderson and Growth Plus study entitled Not Just Peanuts awarded the United Kingdom first place in a study of business environments, saying that we are the country providing the most "entrepreneur-friendly environment". The other countries studied were nine European nations and the United States.
I had hoped to hear reference made to companies legislation or the draft Bill, while no reference at all—except in an attack on the climate change levy by the noble Lord, Lord Saatchi—was made to environmental legislation, landfill tax or packaging regulations, all of which are enormously helpful to business as well as to consumers. Furthermore, no reference was made to science and innovation and to the Government's science policy. Noble Lords did not mention the fact that while we comprise 1 per cent of the world's population, we have 5 per cent of global science budgets, while our R&D tax credits have already amounted to over £400 million per year and are continuing to increase.
I believe that I have dealt with practically all the points, but I refer now to the regulatory aspect of the debate. We have gathered sufficient evidence to say 1125 that, of the approximately 4,000 statutory instruments referred to, some 95 per cent of them have no effect whatsoever on business. In February 2002 we put in place the Regulatory Reform Action Plan. Some 500 measures were identified and already over one-quarter have been implemented. Certainly the Better Regulation Task Force, under the competent leadership of Mr David Arculus, is more effective not only as regards consultation but also at going into action, above all in persuading departments to put forward deregulation proposals. Although the task force may be only advisory, as the noble Lord, Lord Freeman, pointed out, it is finally having an effect.
I turn to the EU regulatory burden. Both the noble Lord, Lord Razzall, and the noble Baroness, Lady Hogg, referred to this issue. Because we are a part of the European Union, consumers enjoy lower prices, employees have better jobs with higher minimum standards and business has access to one of the largest and richest markets in the world. Surely that is worth while.
I listened to what was said about an annual regulatory budget, but as my right honourable friend the Chancellor announced in the Budget this year, departments are now to be accountable in their departmental reports for reporting progress on deregulation. Furthermore, on the issue of sunset clauses raised by the noble Lord, Lord Razzall, the guide to regulatory impact assessments produced in January of this year cites examples of good practice in sunset clauses. It is something to which we are not at all antagonistic.
We have had a debate introduced with great skill and clarity, for which I thank the noble Baroness, Lady Hogg. We heard a series of speeches to which I have listened with interest, although sometimes with a degree of incredulity. However, I hope that we have reached a conclusion which is worthy of your Lordships' House. I am grateful to all noble Lords who have taken part.
§ Lord Freeman
My Lords, the Minister has dealt with many points set out in his brief, even if they were not raised in the debate, but he has not responded to the point I put to him in my remarks. If he cannot answer the point I made about the Government's approach to a Joint Select Committee to deal with the merits of secondary legislation, will he undertake to write to me?
§ Lord McIntosh of Haringey
My Lords, I understand that a form of tacit agreement has been reached between the House of Commons and the House of Lords to the effect that we would try it out first. The Commons will then look at our experience before reaching a decision on whether to take up the proposal.
§ Lord King of Bridgwater
My Lords, I, too, wish to draw attention to a point I mentioned in my brief intervention, but which was not covered by the Minister in his remarks. I do not expect an answer 1126 today, but I should like to think that the point has been registered. It is not a party political matter; rather it derives from my experience on both sides of the problem. One of the considerations that must be taken into account is this: can the system, the organisation or the department actually handle what has been legislated for and is then to be regulated? That can add to the regulatory burden, one which can prove to be an impossible burden for the department itself.
§ Lord McIntosh of Haringey
My Lords, I agree entirely with the noble Lord, Lord King, although I do not believe he will be satisfied if I say that that is exactly what my noble friend Lord Macdonald is doing with the Regulatory Impact Unit in the Cabinet Office, because it is clear that setting up a structure is not the same as ensuring that it is implemented. However, I can certainly give the noble Lord an assurance that the Government are keenly aware of the problem he has raised.
§ 4.59 p.m.
§ Baroness Hogg
My Lords, I am most grateful to all noble Lords who have taken part in what has been an excellent debate. It was brief and to the point, and I do not propose to spoil our timekeeping. I thank the Minister for his remarks. Personally, I thought that I had heard rather more points mentioned in the debate than he appeared to think were raised. Nonetheless it was clear that he had done his homework and his recital on the issues that are of concern to business was extremely helpful. I know he will have listened to the views that have been expressed and I hope that we will be able to move forward on some of the issues. I beg leave to withdraw the Motion for Papers.
§ Motion for Papers, by leave, withdrawn.