§ 3.8 p.m.
§ Lord Blackwell
rose to call attention to the case for a low-tax economy; and to move for Papers.
The noble Lord said: My Lords, the size and power of the state, and the proportion of the economy that it appropriates through taxation, is perhaps the crucial dividing issue in politics. Although the issue has been at the heart of political debate for centuries, it is particularly relevant now because it is clear that we have a government who, having raised tax levels significantly, are philosophically committed to even greater power, scope and spending by the central state.
The alternative case for the low-tax economy that I will argue for today is based on two pillars. The first is economics and the fact that excessive spending and taxation by the state is a damaging burden on the growth of the nation's income and wealth, including its capacity to afford better public services in future; and the reality that in an increasingly global trading environment, a high-tax economy will lose trade and jobs to economies with more attractive tax regimes.
The second pillar is democratic values and the belief that a low-tax economy that encourages and rewards enterprise and effort is inherently more compatible with a moral view of personal and social responsibility than one where responsibility is arrogated to the state. It is also more compatible with the preservation of a free and democratic society.
I shall start with the first pillar—the economic arguments. After 30 years in which public spending as a proportion of the economy was gradually reduced, it has risen significantly in recent years, from a low point of 37.1 per cent of GDP in 1999 to a projected 42 per cent in 2005. The figure is considerably higher if one allows for the way in which the figures have been flattered by the redefinition of large blocks of welfare benefit as tax credits, which reduces spending and tax levels at a stroke.
Tax levels have also risen and are guaranteed to rise further to close the budget deficit, if the Government's spending plans are maintained. The rise since 1999 in the proportion of economic output spent by the state—5 per cent of GDP—amounts to roughly £60 billion of spending and taxation each year.
One has to ask, "What do we have to show for this?". Of course, there are some benefits—new hospitals and resurfaced roads—but most of what has been renamed "investment" in new Labour-speak is, in fact, current consumption. Unfortunately, new spending has not been matched by a proportionate increase in outcomes 259 because of the public services' lamentably poor record in productivity, however much the Government struggle to find the most flattering measures.
According to ONS data, general government productivity fell by 1 to 2 per cent a year in each of 1999, 2000 and 2001, the latest dates for which figures are available, after rising slightly in previous years. The economic consequence of diverting national income out of the wealth-creating private sector into the current consumption of public services is, inevitably, to depress productivity growth and growth overall for the economy as a whole. In short, by spending £60 billion of additional money each year to consume public services today, we reduce the growth and wealth creation in the economy and reduce wealth and income levels tomorrow.
That is not all. Alongside the depressing effect of excessive public consumption on economic growth, we must also take account of the negative effect on incentives and enterprise of the high taxation that follows in the wake of high spending. High taxation on businesses reduces their ability to invest, as well as to attract new capital. The rises in direct taxation are on top of the hidden cost of the growing state-imposed burden of regulation, now estimated to cost business £30 billion a year.
The damaging effects of high taxation on business also apply at a personal level. The experience of the 1980s, under the policies of some of my noble friends, demonstrated that lowering taxes on wealth creators and entrepreneurs stimulates sufficient new wealth creation so that, in time, the overall tax take rises rather than falls.
As a result of all those factors, many economic studies, including a major study by the OECD, generally calculate that a rise of 5 per cent in the proportion of GDP taken in government spending and taxation— equivalent to what we have experienced in this country in the past five years—reduces the annual growth rate by 0.25 to 0.5 per cent a year. Conversely, a falling tax take raises economic growth equivalently. Those are significant numbers. Over 20 years, that would add up to a 5 to 10 per cent difference in national income levels and to more than 30 per cent over 50 years. The arguments are magnified if one considers the national economy not in isolation but as it now is—increasingly a part of a global economic endeavour. Why should businesses invest in the UK, employ UK labour or earn UK profits if, by doing so, they ended up losing more of their income in taxation than they would if they invested and employed elsewhere?
The trouble is that we seem to be heading for higher taxes in this country at just the moment when the rest of the world has learnt the lesson and is heading for lower tax rates. In 1997, total government tax and non-tax receipts in the UK, as a percentage of GDP, were exactly in line with the OECD average. Since then, the OECD average has fallen by more than 2 per cent of GDP, while ours has risen by more than 1 per cent, with more to come.
260 Given the analysis of the impact of high taxation on growth, to which I have referred, it is not surprising— though it is no consolation—to note that the euro area, where average government receipts in 1997 were almost 10 per cent of GDP higher than ours and big government market regulation is well entrenched, has suffered an average growth rate since 1997 of more than 0.5 per cent a year less than the UK. That is no consolation, in part because, like the rest of the world, the average tax level in that area has been falling, while ours has risen to meet it.
From an economic perspective, if we are to remain competitive in a global economy and provide incentives for wealth creation, we cannot afford not to cut taxes from their current excessive levels. However, as I said, the arguments for a low-tax economy are not just economic; they are also about fundamental values and morality.
When individuals consent to combine together through the state to pay for common education services, healthcare or poverty relief, they do so as free citizens with a moral purpose. But when the state starts to take on a life of its own, and when it grows to the point where it presents itself as the source of services and welfare to increasingly dependent citizens, that moral purpose becomes debased. If self-reliance and a sense of responsibility for one's family and community are virtues to be commended, the large state is the enemy of those virtues. Individuals become supplicants to a large, impersonal bureaucracy in which knowing how to work the system becomes the most important consideration in improving one's welfare.
When responsibility is passed from the individual to the state, the shoulders of taxpaying citizens can shrug off the personal responsibility that they have to their family and community; it has become someone else's concern. To make matters worse, the cost of taxation raised on every citizen makes it more and more difficult for those who want to shoulder their responsibilities to afford to do so.
We can take savings as an example. Saving is an important source of self-reliance, yet, over the past seven years, the Government's thirst for new taxes to pay for more and more state consumption has led to billions of pounds being taken out of individual pensions and savings pots through the abolition of ACT relief on pensions and through the weakening of ISA and life assurance tax reliefs. At the same time, the introduction of more and more spending on means-tested benefits for pensioners has meant that many people who have saved have found that they are little better off than those who did not. Financial advisers find it increasingly difficult to convince many ordinary people that it is worth their while taking out a private pension in those circumstances.
We could also take the case of low-income families. One in five two-parent families in this country raises children on a combined family income of £15.000 a year or less. Yet, if only one of those parents is working, the family will pay roughly £2,000 of that £15,000 in income tax and another £1,100 in national insurance. A typical family will spend another £3,000 261 to £4,000 on council tax, VAT and other indirect taxes, meaning that, out of £15,000 to support such a family, more than 40 per cent of its gross income will have been taken in tax.
The truth is that it is not just rich people who pay tax. Part of the burden inevitably falls on ordinary, hard-working, struggling families. Indeed, in 2002-03, households in the bottom quintile of incomes had a higher overall tax burden than any other group. In order to help those families survive, the state, having taken so much money off them, then has to invent a panoply of welfare benefits and credits to give them back some of their own money, which they initially earned.
Why save, if savings become an impediment to state handouts? Why work, if the state offers an equivalent income to those with low skills who do not work? Why support your elderly parents, if the state then penalises them through reductions in benefits? The growth in welfare benefits, the recycling of income from individuals back to individuals through the state, has grown enormously under this Government, to the point at which 60 per cent of non-retired households receive more than 10 per cent of their disposable income from cash benefits and families on an income of over £55,000 a year are encouraged to fill in means-tested claim forms in order to get the Chancellor's new tax credits.
There are those who genuinely believe in the nationalisation of family responsibilities into an all-embracing welfare culture, and believe that that is a desirable way of building social solidarity. The noble Lord, Lord Giddens, who is perhaps the high priest of new Labour's Third Way, in his seminal book on the Third Way, which seems to have underpinned much of the Chancellor's tax policy, wrote:Only a welfare state that benefits most of the population will generate a common morality of citizenship".I disagree. The moral view was better described by Edmund Burke two centuries earlier when he wrote:It is better to cherish virtue and humanity by leaving much to free will, even with some loss of object, than to attempt to make men mere machines and instruments of a political benevolence. The world on the whole will gain from liberty, without which virtue cannot exist".For it is not only those whose lives become overly dependent on the state who we have to worry about, it is also the concern that an over-large state corrodes and ultimately risks corrupting those who are put in the position of wielding power over their fellow citizens.
Instead of the state being the servant of the people, it is all too easy for those who represent the state to slip into the mindset that it is they who are the masters, benevolently handing services and benefits to a fortunate citizenship, and it is a small further step for the exercise of that power to be slowly misused and abused by the desire to exercise power to achieve particular ends, or simply to preserve power itself.
It was Lord Acton who in the 19th century famously observed that power tends to corrupt and absolute power to corrupt absolutely. But before him many others, including John Adams, one of the founders of the 262 American constitution, had observed the corrupting influences of power on those who wield it. For example, John Adams wrote that:The jaws of power are always open to devour, and her arm is always stretched out, if possible, to destroy the freedom of thinking, speaking and writing".Ultimately, the argument for a low-tax economy is that only by limiting the scope of the state can we properly defend the democratic values of freedom and liberty from the dangers of over-centralised power and corruption. We cannot take the risk of putting our trust in the benevolence of an ever-larger state.
If the case for a low-tax economy is based on both economic arguments and democratic values, the practical question becomes: how do we achieve a lower tax economy? I believe that the starting point has to be a fundamental shift from the mindset that government spending commitments come first and taxation follows, to the more appropriate mindset that public sector consumption should be contained to the amount of taxation that the country can reasonably afford to pay. Given the growth in spending and taxes over recent years and the pressures of international competition, instead of asking the question, "How can we afford to cut taxes?", we should be declaring that we cannot afford not to cut them.
Cutting out wasteful spending is, of course, an important priority at any time. However, the real answer comes not just in trimming waste, but in imposing a discipline that future growth in government spending over an economic cycle should be lower than the growth in the economy as a whole so that, over time, the ratio of public spending to GDP trends downwards. Since taxes generally rise with or slightly faster than GDP, such a policy would allow a continuing, progressive and virtuous reduction in tax levels, with all the benefits I have described in stimulating faster economic growth, higher productivity and wealth creation, and more encouragement of the virtues of responsible citizens seeking to care for their families and communities.
Let me emphasise, in particular to the Government Benches, that one does not need to advocate cutting government spending to reduce taxes. All that needs to be looked for is more responsibility about the rate at which government spending continues to grow.
This is not the place to describe a list of desirable tax reductions, but I should like briefly to single out three areas that I believe to be high priorities against the objectives that I have set out. First, to reduce the tax taken from low-income families so that they are better able to afford to meet their responsibilities without state intervention, I would argue for raising the point at which income tax starts from its current level of £4,747 to, for example, £7,500, and allowing those allowances to be transferable between couples with dependent children so that no family with an income of under £15,000 is required to pay income tax at all, whether that income is provided by one earner or two. How can we afford to justify taking income tax off a family at that income level?
Secondly, to help people build up independence through savings, I would advocate restoring the tax taken by the Chancellor from pension schemes and 263 putting that back into savings, and improving incentives by raising the amount that can be put aside each year in tax-sheltered ISAs. Given the modest amounts raised by inheritance tax, I would also advocate its abolition to help family independence to be built up over generations.
Thirdly, to reduce the tax cost on business, I would reverse the Chancellor's stealth tax on national insurance rates, which is nothing more than a tax on employment.
As I have set out in a recent publication, which I shall not therefore repeat here, all of these tax proposals would be affordable over one Parliament if public spending grew at just half a per cent less than the economy each year, which is surely a modest objective against the needs I have described.
For my part, I have no doubt at all that the additional money would be far better used if left in the hands of families, savers and businesses than if taken from them by the state and used to fund additional public sector consumption. Not only would the economy benefit, but we would also start to rebuild confidence that society values and respects the virtues of hard work, enterprise and personal responsibility on which our national future and social purpose ultimately depends.
I look forward to the debate. It is a vital topic on which we can express our views today. I welcome the contributions to be made by other noble Lords this afternoon, and in particular the maiden speech by my noble friend Lord Howard of Rising. I beg to move for Papers.
§ 3.27 p.m.
§ Lord Lamont of Lerwick
My Lords, I congratulate my noble friend Lord Blackwell and I am pleased to support his Motion drawing attention to the benefits of low-tax economies.
The Motion that has been put before the House is charmingly simple. Of course, in one sense we all know what the benefits of low-tax economies are—we have more money in our pockets. But my noble friend has deployed another, deeper argument that, over time, lower-tax economies tend to perform better than higher tax economies. There is evidence that high government spending stunts economic growth. Sweden, Finland, Belgium, France and the Netherlands have the highest proportion of public spending at around 45 per cent of GDP, and they have grown more slowly than America, Korea, Switzerland and Ireland, who manage with 30 per cent or less.
It is worth considering why this state of affairs should be. Taxes are a cost. In the end, all taxes are borne exclusively by people as earners, consumers and savers. But because taxes are not zero sum transfer the total cost of the tax burden is greater than the tax revenues that are actually collected.
Taxes have a double cost. First, there is the resource effect when resources are taken from the competitive private sector and spent on the lower productivity activities of the public sector. The result is that the overall productivity of the economy is lowered. There 264 is then the incentive effective. Dead weight losses, as my noble friend pointed out, arise as people alter the way they behave in order to reduce their tax liabilities. Studies in the United States suggest that dead-weight losses for some taxes are a multiple of the tax revenues collected. If the taxes were not there, output and living standards would be higher.
The most notable analysis of this is the one carried out by Professor Martin Feldstein, an economist who may be well known to some Members of this House because he once wrote a paper saying that he thought the euro increased the risk of war in Europe. But, despite that rather provocative analysis, Professor Feldstein is a Harvard economist and a Nobel Prize winner.
His study of the 1993 income tax increases in the United States suggested that a proportional rise in all income tax rates involved a dead-weight loss of nearly two dollars for every dollar of incremental tax revenues—and that is without the resource effect. If you add the resource effect on top of that, the two dollars becomes 2.33 dollars: that is, 2.33 dollars—or pounds—for every dollar or pound of revenue raised. That study is worth bearing in mind.
Britain's move from high tax rates to relatively low tax rates was one of the most important reasons for the transformation in our economic performance after 1979. It gave Britain a huge, albeit diminishing, advantage compared with our competitors. By the end of the chancellorship of my noble friend Lord Lawson, building on the work done by my noble and learned friend Lord Howe of Aberavon, Britain had one of the most competitive tax regimes of any major country in the world.
The Motion of my noble friend Lord Blackwell is timely because one has the impression that today in fiscal policy we are at a tipping point. Having done well, our competitiveness is once again in danger and quite large tax increases may be necessary after the election if it is won by Labour.
Key analysts, including the IFS, the Item Club and NIESR, are forecasting worse outcomes for the public finances than the Treasury's Budget forecast. They say that substantial tax rises after the next election will be necessary on present projections if the golden rule set down by the Chancellor is to be observed. I am not a great fan of the golden rule because of the ambiguity of the concept of investment within the public sector, but I assume that the Chancellor will wish to retain it. According to many independent analysts, that will mean tax increases in a few years' time.
The Government deserve a good deal of credit for having stuck in their first term of office to what they had previously described as vicious Tory spending plans. They had previously described them as attempts to pull down the welfare state by Mr Gradgrind with his own hands. I do not know quite how the Labour Government managed to stick to those plans—it astonished me—but they should be thoroughly congratulated on having done so.
265 Having established a reputation for prudence, they now seem to believe that that reputation can last for ever and that they can return to more traditional policies. From the Pre-Budget Report it appears that there is now a subtle change of direction and—I say this in a constructive spirit—the Government are in danger of undermining what they have done in the past. The saying is "feast and famine". We have had famine and now we are to have the feast.
Public spending is now planned to increase much faster than in the recent past and faster than GDP. This will take public spending back up to 42 per cent of GDP, compared with the 39 per cent inherited from the Conservatives and which fell under Labour to as low as 37.1 percent in 1999.
Unsurprisingly, these expenditure figures are also reflected in the projections for tax and national insurance contributions, which are forecast to increase from the 34.8 per cent inherited in 1996–97 to 38 per cent in 2007–08. The figure in 2007–08 will be the highest since 24 years previously. In fact, those figures of taxation and national insurance to GDP somewhat understate the tax burden because the first tax credits—that is, the working tax credit and the child tax credit—are scored in the national accounts as negative income tax.
Of course all these figures for the ratio of both expenditure and tax to GDP fluctuate with the state of the economy. You can control the numerator but if you cannot control the denominator the other will alter the ratio. These figures, of course, fluctuated under the Conservatives, with public expenditure reaching a high point of 48 per cent in the 1980s and 44 per cent in the 1990s. But the trend was clear, and at the end of the period of Conservative government public expenditure was significantly lower as a percentage of GDP in 1997 than in 1979. Taxes were at 34.8 per cent in 1996–97 compared with 35.9 per cent in 1980.
Of course it is sometimes necessary to put taxes up. I found myself doing that in 1993. But the ratio of taxes to GDP then was 32.8 per cent, the lowest for several decades. Indeed, even with the delayed increases, taxes rose to only 34.8 per cent over the next three years. I made it clear then that I did not believe that further tax increases were either desirable or necessary and that if further adjustments were required they should be on the expenditure side.
The Guardian newspaper pointed out the other day that taxes to GDP are no higher today than they were in the last year of Harold Wilson's government. But that is hardly reassuring. Indeed, it is profoundly depressing when you think of the way in which society and the economy have altered since the Harold Wilson era, when interventionism was the order of the day. Whole areas of the economy—public utilities, trading corporations and, indeed, the state's involvement in municipal housing—have all been moved to the private sector. The share of government in the economy is less, and it ought to reduce in the future. That is the nature of modern society. People want to make decisions for themselves.
266 I remember being deeply impressed by one of the earliest broadcasts made by the Prime Minister. He talked on television about the need for the British tax system to be competitive. I thought, "Now that is something new. A Labour Prime Minister actually talking about the tax system having to be competitive with other countries". He was, of course, quite right. Taxation is part of national competitiveness, along with education, skills standards, transport and the regulatory burden on business.
Sadly, there is evidence from international surveys that the competitiveness of the UK is slipping. Of course such surveys have to be treated cautiously— they are just surveys of people's perception. But if you take the survey of the World Economic Forum, the body that the Prime Minister is addressing either today or tomorrow, or the Swiss Institute for Management Development, or the Wall Street Journals World Economic Freedom Index, in the last the UK has slipped from third to seventh, in the first from fourth to 15th and in the second from ninth to 22nd. The trend of people's perceptions is quite clear.
There is a reason for that. Current global trends show tax to GDP ratios throughout the world falling as countries acknowledge the need to sharpen their competitiveness and act accordingly. Recent OECD data show the tax to GDP ratios in the majority of OECD countries have actually decreased between 1997 and 2004. These countries include Canada, the United States, France, Germany, Italy, Denmark, Sweden and Ireland. The UK is a major exception to the trend. In the UK the GDP ratio has risen between 1997–2004 and, much more importantly, as forecast in the Government's own plans, is expected to increase substantially further in the years up to 2007–08. It looks as though we may be about to converge with the not very encouraging models of the euro-zone. They are cutting their tax to GDP ratios; we are increasing ours and are on course to converge with them.
One OECD study in 1997 concluded that cuts in tax to GDP ratios increase the annual rates of growth of countries by up to between one quarter and one half of a percentage point, depending on the reductions made. If instead of growing at around 2.5 per cent a year, growth rates could be increased to 2.75 or 3 per cent a year, it would be a tremendous benefit. Over time, it would significantly improve countries' living standards.
The UK is risking losing ground to competitors in corporation tax. Rates have been falling quite sharply in recent years in many of the OECD countries, while British rates have remained static. No OECD country has increased rates. The UK's standard rate of corporation tax is still below the OECD and EU average, but there is a trend of rates being cut and we could find ourselves at a disadvantage. Downward pressure on corporation tax rates is likely to continue, both within the EU and globally. We cannot afford not to respond with lower rates.
Let us take the example of Ireland, which has been at the forefront of that policy. In January 2003, it cut its corporation tax rate to 12.5 percent. The policy has resulted in the continuation of Ireland's good record of 267 attracting inward investment. Several of the new members of the EU are also following a policy of promoting very attractive corporate tax regimes. For example, Estonia has a zero tax rate on retained profits. Many of the accession countries to the EU are introducing very low tax rates: flat taxes on income, at a maximum of 20 per cent, and very low corporate tax rates. If the UK is to maintain its competitiveness, we will have to look at this.
We also have to look at the higher rate threshold: the threshold at which people move into the top rate of tax. It is unjust that a partner in Goldman Sachs and a senior policeman or teacher should be paying the same marginal rate. The threshold has not been adjusted with inflation. It would require a very significant adjustment to get it back where it was in the 80s.
If the UK is to maintain its competitiveness and to improve living standards, we cannot put up taxes, as put forward in the Government's plans. Indeed, I hope that a Conservative government would reduce them. The world is moving in a different direction from that of the past and if we wish to maintain our living standards, we must cut taxes and retain our competitiveness.
§ 3.42 p.m.
§ The Lord Bishop of Worcester
My Lords, I recognise that this is a debate of high political confrontation, and for that reason I venture into it with some hesitation. But, as the noble Lord, Lord Blackwell, said, the issues are of considerable importance not just in the realm of economics and policies, but also in the realm of fundamental values. I take comfort from the fact that, although the Apostle exhorts bishops not to be lovers of money, he did not say that they could not be interested in it. As a member of the assets committee of the Church Commissioners, and as somebody who has written on the subject, I therefore felt it important to take up the noble Lord's challenge, specifically in the area of values, to which he frequently referred.
For that reason, and because of the importance of the topic in that area, the doctrine commission of the Church of England, in its recent report Being Human, took a whole chapter on money and its effect on our personal lives. Note that it looked at money's effect on our personal lives, not the other way round. The report recognised that the way in which we regulate our economic affairs has a great effect on who we are as persons. It is not just our personal bank statements that reflect our personal lifestyle and values more eloquently than anything we say. The way in which our public finances are regulated reflects clearly and affects our social consciousness and the values of our society.
I am grateful for this debate, but like most debates on taxation it focuses on the quantity of taxation. However, I noticed that in the process of his reflections, the noble Lord, Lord Blackwell, also focused on many other aspects of our economic life. Much of what he said about the diversion of resources from investment to consumption would apply just as readily to our personal life as to our public life; it is not necessarily specific to taxation. But the debate is about 268 amounts and that has become the area of inter-party competition: which party can tax less is much of the political argument, as I hear it.
However, other issues around taxation are just as significant and I shall spend a few minutes talking about them. Before I do so, I note that the noble Lords, Lord Blackwell and Lord Lamont, both made much of the fact that taxation regimes are now competitive and that that is one of the main reasons why they favour a low-tax economy. It is true that tax rates are competitive, but the countries that the noble Lord, Lord Lamont, cited are all evidently in the developed world. He did not mention the competition that we are in with countries in the two-thirds world and the effect of our competition in rates of taxation on their economies and economic freedom of movement.
I sometimes think that we expect the poorest countries to leap over the phase that we had to go through of major public investment in infrastructure, the health service and so on, and to go straight into the competitive, technological economies that we now have the freedom to achieve. If we take serious note of the competitive nature of taxation, we must also consider the effect that the competition in rates of taxation among the richer countries has on the poorest countries of the world, whose economic freedom is significantly hampered as a result.
I therefore turn to the question on taxation that has to do with quality rather than simply with quantity—that is: who in our society is taxed on what? There is no doubt that such consideration has just as much effect as the naked issue of quantity. We also have to look at what resources are used for. If they are used for consumption, they very evidently fall to the charges levelled against taxation by the noble Lord, Lord Blackwell. But what about public investment and the things that we cannot enjoy unless we enjoy them together? What about the activities that can be undertaken only in community?
My sense is that the decision to move toward some increase in government expenditure arises from a deep public recognition that having had the short, sharp shock of reductions in taxation rates, the associated social costs have to be remedied by public provision. That is one of the ways that we plan for our future and bring it into effect.
As well as expenditure, there are issues to do with how we raise taxes in our economy. In this country, we raise about four-fifths of our taxation from what people earn, either at the point at which they earn it or when they spend it. Much the most significant event in that respect was the move from an emphasis on taxing earnings to taxing expenditure, which came about in the early budgets of the Conservative government of the post-1979 period.
There are some notable examples of what we do not tax. If several billions of pounds accrue to landowners because, as a matter of social policy, we construct the Jubilee Line, and if that is completely untaxed, given that those who live and have land next or near to the line make no specific contribution, how is that just? How is that fair? How have we arrived at a situation where there is precious little taxation of the kinds of 269 wealth which depend on the social infrastructure so that they make no commensurate contribution to it, except in the rather arbitrary and much criticised way surrounding inheritance, for example, when capital is transferred? It seems to me that this debate will fail to address some very important questions if it focuses only on quantity and not on the sources of taxation and the direction of public expenditure.
There is a further issue which we must be prepared to examine. I refer to the character of the money in which taxation is managed and raised; the character of the money that we use in our contemporary world which is a great distance from the time when money was under the exclusive control of the sovereign authority of government; to the well over 90 per cent of the financial instruments that we are accustomed to using; and to the money that is our effective claim on resources which are produced and created by the banking system for private profit.
This is not a harking back to previous years. The New Economics Foundation and the Christian Council for Monetary Justice are arguing for financial reform precisely to produce a situation in which we do not need to achieve our public goals by the medium of taxation so exclusively. If money was created exclusively—even if it was created somewhat more—by government and spent in the economy, we would not be in our current position, where it looks always as though public expenditure is a result of taking money out of people's pockets. Money is a public asset. The money that we physically use in shops declares itself to be the product of our society, regulated by government. Is it not, then, surprising, that we do so little to regulate the production of money and financial instruments within the private sector for profit?
I mention some of these major issues around taxation because it seems to me that this debate must be redeemed from being solely a political debate about numbers, about quantity. I believe that the public are increasingly cynical about finding themselves living in a situation in which politicians vie with one another to produce lower taxation rates. I refer to the recent example in which the main political parties produced—rather out of the air, I thought—target numbers for the reduction of the Civil Service. I think that that proposal was simply competitive; it did nothing other than reduce the morale of public servants. That is not a good way to conduct our politics, and it is not a good way to achieve the kind of taxation regime we wish to achieve.
As I said at the beginning of my remarks, taxation is about our public values and how we display them in the way we spend our money. I believe that our fellow citizens are somewhat cynical about finding themselves living, in effect, in an auction chamber in which they are subjected to the spectacle of political parties deciding how much they would pay or for how much their support can be acquired.
I hope that the fundamental spiritual and values issues around this debate are taken seriously. That will mean discussing matters other than simply those of quantity.
270 I shall detain the House no longer from what it would like to do, which is to welcome the experience and contribution of the noble Lord, Lord Howard of Rising, in his maiden speech.
§ 3.56 p.m.
§ Lord Howard of Rising
My Lords, as this is the first occasion upon which I have had the privilege of addressing your Lordships' House, I crave your indulgence and would like to thank all in this House who have been so kind and courteous to me.
When, as a small boy, I first visited the Houses of Parliament, I never imagined I would have the honour of joining your Lordships' House. It has proved to be one of those happy, but all too rare, occasions when the pleasure of the reality greatly exceeds the expectation.
Today we are debating the low-tax economy. To anyone familiar with the Laffer curve, the financial benefits of a low-tax economy are self-evident. If further proof were necessary, one has only to see how, in recent times, successive Chancellors of the Exchequer have been reluctant to increase direct taxes.
For those of your Lordships who have better things to do with your time than study such arcane matters, the Laffer curve is a proposition that if tax is either 0 per cent or 100 per cent, there is no revenue from taxation. In between, as tax increases from a zero start, it rises to a point where receipts start to fall, because taxpayers' energies are diverted from creating wealth to avoiding taxation. There is ample evidence to demonstrate that this works in practice as well as in theory.
Knowing this, Chancellors have used indirect taxes to keep up with government spending, as a result of which we have arrived, as my noble friend mentioned earlier, at the absurd situation where, according to the latest information from the Office for National Statistics, the poorest 20 per cent of the population pay nearly 40 per cent of their income in taxes—a fact that deserves more attention and is surely yet another argument for lower taxation. There is such a wealth of evidence, for anyone who wishes to see it, that proves how damaging high taxation is to an economy that I would like to emphasise to your Lordships the other major aspect of this subject.
Taxation is not only about economics. More importantly, taxation is about who decides how individual citizens conduct their affairs: whether it is the individual or the state which decides how money belonging to the individual should be spent.
Government itself is penniless—it has no resources of its own—and since anything that government does costs money, the extent to which government can dictate peoples lives is governed by the extent to which it taxes.
Much talk is made of services provided by the state. The state provides nothing—it acts as an intermediary, and an extremely inefficient and expensive one at that, to take from one citizen in order to spend on another.
There are certain matters that can be dealt with only by government, but high taxation allows government to go beyond what is necessary and so interfere with people's freedom. The purpose of government should 271 be to preserve freedom, not to undermine it. How can freedom exist if the state appropriates a large portion of its citizens' material resources?
Over the centuries the role of Parliament has been most marked and distinguished when it has sought to control the power of the executive and protect the people. In many cases the battleground has been taxation, but, always, Parliament has been truest to itself when it has fought to preserve the freedom of the individual and to preserve for citizens of this country the right to go about their own affairs, in their own way, without interference from the state.
Perhaps I may quote William Pitt the Elder, who said:The poorest man may in his cottage bid defiance to all the forces of the Crown. It may be frail—its roof may shake—the wind may blow through it—the storm may enter—the rain may enter— but the King of England cannot enter—all his force dares not cross the threshold of the ruined tenement!".What on earth would William Pitt have thought of today's state which is so intrusive that there are even laws on how you repair a broken window in your own home?
It is distressing that in recent years Parliament has virtually given up its role of controlling the executive. Without this important element of the checks and balances of power, the executive has lost its inhibitions and successive administrations have introduced legislation governing the most minute details of people's lives: taking away from them the right to make their own decisions on a plethora of different matters which should be their affair and no one else's. This interference is both expensive and inefficient and is the driving force behind the need for high taxation.
Low taxes are the friend of freedom—high taxes the enemy. The preservation of the freedom and liberty of the citizens of this country, even if it is to do and say things of which we disapprove, is a matter which should unite this House rather than divide it.
§ 4.4 p.m.
§ Lord Skidelsky
My Lords, on behalf of the whole House, I congratulate the noble Lord, Lord Howard of Rising, on his eloquent and thoughtful maiden speech. He certainly managed to combine a large number of arresting statements within the convention that maiden speeches should be non-controversial. We look forward to his future contributions to our debates based on his wide experience of business life, local government and rural and heritage affairs.
I come to this debate with some form. In a book which was published in 1995 I wrote that,a democratic state … which spends no more than 30 per cent of GDP is one that could enable a great deal of good and do comparatively little harm".The implication of that was that the democratic state would start doing harm if it spent much more than 30 per cent. Ten years later I am wondering whether I still believe this. The question is of no great interest to anyone but myself, but intellectual honesty can, perhaps, add a smidgeon of value to our discussion this afternoon.
272 The figure of 30 per cent was not of course plucked out of the air. It was the average share of GDP spent by governments in the OECD world in 1960, after it had come down from its very high levels during the war. It was what governments in our kinds of societies spent during the so-called "golden age"—a kind of mid-century equipoise which started to unravel almost immediately afterwards. The OECD government share rose to over 40 per cent by 1980—that is a 10 per cent increase—and has continued to rise, though at a much slower rate, ever since. Britain, in fact, has been exceptional in holding to the 1980 share of about 40 per cent, though it has started to creep up again.
One must not think of the increase since 1960 as one in which all items of spending rose in the same proportion. Within the overall total there has been a large shift after 1980 from spending on "economic services" to "social services". Privatisation and the ending of subsidies to industries and regions freed up resources for social security—which includes pensions—health and education. The share of these "big three" in the budget rose from 45 per cent in 1979 to 60 per cent today. But— and this is the crucial point—public spending on these three items has been rising faster than the national income, at an accelerating rate since 1997. And that is why the share of state spending in national income is what it is now.
That the proportion of national income spent on health, education and pensions should have been going up is not in itself surprising. It reflects changes in demography and increasing demand for certain typss of services. That is true of all wealthy societies. However, it is not inevitable that this increased demand should be met mainly from taxation. Indeed, the commonsense expectation is that as societies become richer, an increasing proportion of spending on the "big three" will come from private sources.
The reason that that has not on the whole happened is because it was decided long ago that our main social services should be financed through the tax system. That has not only retarded the growth of private sector alternatives, but it has made it extraordinarily politically difficult to shift some of the payment back to private individuals and households—just think of the row over university fees. And the so-called "transitional costs" of shifting to a privately based pension scheme are horrendous. So, in a sense, we are trapped by all of the past decisions that we have made on these matters over the years.
However, the conclusion seems inescapable. If we go on paying for the social services in the way we have been, or, to put it another way, unless we introduce some element of private payment into the system, public spending and therefore taxes will go on creeping upwards, whatever "efficiency savings" can be conjured up on the way. Is that a prospect that we really want to face?
My question is: how much does it matter whether rising demand for social services is met from the public or the private purse? Today, arguments have been put forward by the advocates of low taxation, some of which are not really very good. Within a wide range, 273 there is no connection between levels of taxation and rates of economic growth. Here I must differ from the noble Lords, Lord Blackwell and Lord Lamont. The statistical basis of such comparisons is very shaky; not enough observations have been made, and they have not been made over a long enough period of time.
While we are in the business of inferring consequences from dodgy statistics, let me add to it. The United States is often cited as an example of an economy rendered more dynamic by relatively low rates of taxation; its government spends only about 34 per cent of GDP. But Japan, whose share of public spending in GDP is about the same, has been virtually stagnant for 15 years. I do not believe that one can draw amazing conclusions from that, but at any rate it shows that we can all bandy statistics around.
In a recent Politeia pamphlet, the economist Vito Tanzi observes:The countries that allowed their public spending to grow significantly more than other countries do not show better quantitative results for"—a range of "socio-economic indicators". That is a careful statement, because what it means is that neither do they show worse quantitative results. So that cannot be an argument in itself for lower spending.
A second argument is that lower taxes increase the incentive to work harder, and thus produce higher incomes and therefore higher revenues for government. That was the basis for the famous, or infamous, Laffer curve. But the proposition is far from self-evident. Let us suppose that someone aims for a post-tax income of £50,000 a year. The higher the tax one pays, the harder it will be to achieve that goal. Will one's reaction be to work harder or less hard? It is argued that what is important is the marginal rather than the average rate, but I doubt that people deliberately aim to depress their pre-tax incomes to avoid paying tax at a higher rate.
A third argument is that public services are inherently less efficient than private services. That is a more compelling argument, but it must be recognised that if markets have become more sophisticated in meeting social demand, the state has also become much smarter in meeting public expectations. It has been forced to respond to the challenge of the market. A good example of that is public/private partnerships, when a government use private contractors to build, maintain and in some cases run publicly financed institutions. Another example is the Prime Minister's rejection of what he calls the "bog-standard comprehensive" in favour of a variety of state schools offering parents choice. Offering vouchers would be a logical next step down that route. The whole idea of "quasi-markets" in the public sector was developed by left-wing academics such as the noble Lord, Lord Plant, precisely to meet the privatisation onslaught of the government led by the noble Baroness, Lady Thatcher.
In conclusion, I return to my earlier question: does it matter whether people spend, say, 30 per cent of their pre-tax incomes on healthcare, education and pensions directly, or whether they give it to the state to 274 spend on their behalf? I ask that with the proviso that the state continues to support those who cannot support themselves. Advocates of lower taxes do themselves a great disservice by concentrating on the economic case, because that is doubtful. The argument has to be made on the basis of political philosophy and morality.
The first point—and here I agree with what other noble Lords have said so far—is the argument for individual liberty. There is a strong historical, logical and in my view entirely valid connection between personal liberty and private property. That has always seemed to me to be the strongest argument for redistribution of property—that is, actual property, and not just redistribution of entitlements to specified income streams. The point about private property is that it does not entitle people to this or that but actually extends their freedom of action. That is why the "right to buy" policy of the 1980s was the most significant breakthrough for personal freedom since the Second World War.
The second argument is about dependency, and how much responsibility people should take for their own lives and the consequences of their actions. The very argument that it makes life easier not to have to think about the education of one's children, one's old age or the effect of one's lifestyle on one's health, because those matters are taken care of by lump payments to the Exchequer, diminishes the moral stature of human beings. We were all brought up to believe that the great end of economic development was to emancipate human beings from dependency which shrank their possibilities for moral growth. However, we are still tethered to systems of social dependency which were devised at a much earlier period to deal with the problems of that time.
So, on balance, I still believe what I wrote 10 years ago. I know that there are moral arguments on the other side, based on considerations of equity and fairness, and those cannot be shirked. I know that the Labour Party will always attach supreme value to those arguments. But the value that I myself attach to personal individual liberty and moral autonomy continues to make me believe that,no more than 30 per cent",is a worthy target for any political party to aim for, however great the practical difficulties in achieving it.
§ 4.16 p.m.
§ Lord MacGregor of Pulham Market
My Lords, like other noble Lords, I congratulate my noble friend Lord Blackwell on the subject that he has chosen for today's debate and on its timeliness. I agree entirely with his philosophy and arguments and will therefore attempt, without I hope too much repetition, only to embellish them with some practical illustrations from my own political experience.
I base my case on four propositions in support of the Motion. The first clearly reflects my own political philosophy—and here I follow the latter part of the contribution of the noble Lord, Lord Skidelsky. I was rereading over the Recess the autobiography of my 275 noble friend Lady Thatcher. Very early on in the book, I came across this passage, which she wrote about the start of her government in 1979, on the role of a government in a free society. It underlies, for me, what the debate is all about. She said:It was the job of government to establish a framework of stability … within which individual families and businesses were free to pursue their own dreams and ambitions. We had to get out of the business of telling people what their ambitions should be and how exactly to realise them".I would add to that, on dreams and ambitions, that it has always been a Conservative philosophy to encourage as many people as possible to own their own homes and to build up their own savings and pensions. High taxation regimes hinder that; tax incentives can help.
My second proposition is that, unless the Government specifically aim for a low-tax economy, there will be inexorable pressures to increase public expenditure, many of the increases being new creations of spending by the Government themselves. Without the determination to keep a low-tax economy, I do not believe that there are constraints. I shall illustrate that point later.
My third proposition is that the public sector uses resources less efficiently than the private sector, not least because it is not exposed to the cost pressures of competition facing businesses. One illustration of that is the recent statistic that health expenditure has increased in real terms by 28 per cent, whereas the increase in output is only about 6 per cent. Nor is the public sector often wealth-creating.
The fourth proposition is that we now face intense international competition from the low-cost economies of India and the Far East, especially China. That is a very important new factor. I follow what my noble friend Lord Blackwell said on that matter. If I have time, I shall say a word or two more about the subject.
It is worth recalling the last time we had a high-tax economy in the United Kingdom. I first came to the other place as a Member of Parliament in 1974 and spent the first five years in opposition. During that period, I believe that I was involved in every Standing Committee on the Finance Bill, in company with some of my other noble friends. It was a very salutary experience.
It is hard to remember now the ambition of that Labour Government, but noble Lords will recall that the noble Lord, Lord Healey, talked about taxing the rich "till the pips squeaked". We had a top rate of tax of 98 per cent in the pound, with all the disincentives that that produces. I really do not believe that a top tax rate of 98 per cent encourages people to work harder for that extra 2 per cent. There was also the impact on the black economy, the brain drain and so on. Coupled with that, we had exchange, dividend, price and income and nationalised industries controls, and high levels of government expenditure, despite the high taxation, based on government borrowing. I recall in the middle of one Standing Committee being told that the Chancellor had had to dash back from Heathrow because of the risks with the IMF in relation to 276 lending. As a result of all of this we had a low performing economy, which caused us to be called the "sick man of Europe".
Over the Conservative years we changed all that. The immediate abolition of so many controls led 364 economists to predict dire consequences—and how wrong they were. That had a major impact. Making the tax changes inevitably took time, but as they took effect they energised the economy, brought about huge increases in the self-employed and smalll businesses, huge increases in what individuals were able to keep of what they earned for themselves and their families, and in savings, and entrepreneurs multiplied. Coupled with many other reforms we gradually turned things round to the strong economy that Labour inherited. We also demonstrated that high marginal tax rates do not yield high revenues; indeed, the reverse is true.
The present Chancellor continued this general approach—prudence, of course, was the name of the game—keeping public expenditure under control in his first three years. I believe that his long-term reputation will rest on that although he has largely squandered it since. My noble friends Lord Blackwell and Lord Lamont clearly illustrated the increases that have occurred in public expenditure since 1999—I do not intend to repeat those—and how the tax take has risen. There is an important point here. Although income tax rates themselves have not increased— although I agree entirely with what my noble friend Lord Lamont says about the starting point of higher rate tax—that should not allow the impression to be given that we continue to have a low-tax economy as so many other tax increases have occurred which have resulted in an increase in the overall tax revenue. I refer to the 66 tax rises during the Chancellor's period in office; the non-indexation of thresholds; the many stealth taxes; the national insurance increases; the new taxes comprising the £5 billion taken away from pensions; the substantial reductions in savings and incentives due to tax; and the enormous increase in the yield and the levels of stamp duty, which now, because of the increase in house prices, constitute a major tax take from many families. As the inheritance tax has nothing like kept in touch with the increase in house prices it now constitutes a real wealth tax on large numbers of families. The CBI calculates that businesses have faced a £7.9 billion per year increase in taxes since 1997. There has undoubtedly been a major shift towards a higher tax economy.
A further proposition in relation to public expenditure is worth developing a little further. In a regime where the Chancellor is happy to introduce so many new taxes and higher rates, an attitude of mind towards public expenditure is created among Ministers, Labour Back-Benchers, civil servants, sections of the media and pressure groups. There is not the same constraint on increases in public expenditure when you are increasingly moving to a higher tax economy.
When I was Chief Secretary to the Treasury I frequently had to say to colleagues, "I am sorry we cannot afford that; I just do not have the money". That is an important constraint that many businesses frequently 277 face. Today, I would be inclined to say, "You will have to do what so many businesses have had to do in the past few years; that is, cut your costs to make yourselves more efficient". I would always emphasise the need to ensure that we get value for money from every proposition involving more expenditure. However, we have not seen that happening in the past few years. New policies are developed without proper regard to cumulative costs. Sometimes they can look small. During the debates we had in this House on the child tax fund I asked what the administrative costs would be in its first year. The Minister said that they would amount to £10 million. That does not sound very great in terms of total public expenditure, but £10 million here, £100 million there all accumulates and can make a very big difference. My point here is that there is not the constraint to ask every time, is this justified? Therefore, we have huge wasteful or non-priority expenditure and huge increases in management consultancy costs and advertising expenditure even at that level.
New regulations pour out, but every new regulation and every new regulator has a price tag, not just on the sector that is regulated but in government itself, as do most new policy initiatives. New burdens on local government, with local government having to pay the tax bill because there is not a commensurate increase in central government expenditure, lead to ever increasing rises in council tax, which is in fact another tax. Huge out of control expenditure on such things as the Scottish Parliament, the Millennium Dome and regional assemblies all adds up. They do not look big in themselves but cumulatively, if there is not the determination to keep public expenditure down, they cause public expenditure to soar.
I refer also to the number of civil servants; the micro tinkering of the Chancellor; the introduction of the working tax credit, the pension credit and so on and many other measures that have greatly added to the number of civil servants—up, I believe, by 64,000 since 1999. Now the Chancellor has pledged to cut the number of civil servants. I find it somewhat ironic that the man who through his policies has so substantially increased the number of civil servants is now trying to claim some credit for trying to cut them, although he does not seem to have had much success so far.
No wonder the number of tax inspectors has increased twice as fast as the number of new doctors and nurses. The administrative increases are colossal. I believe that the biggest indictment of this lack of attention to the determination to keep public expenditure under control is shown in the results of the Gershon initiative. It shows what a lax public expenditure regime we have had if he concludes that £20 billion plus can be taken out of public expenditure over the next few years.
My conclusion here—this is one of the strong reasons why I am so much in favour of the determination to have a low-tax economy—is that unless you aim for a low-tax economy you will not drill down on public expenditure, keep it under control, and ensure that every new initiative is totally justified in terms of value for money.
278 I turn briefly to the question of international competition. It was very striking when Christmas shopping to notice how many goods, ranging from clothing, food and footwear to the vast number of children's toys that were purchased, compared even with five years ago, are sourced from India, the Far East and China. We are seeing a great deal of outsourcing of services to those low cost economies. The plain fact is that if we are finding it so difficult now to purchase goods that are manufactured in the United Kingdom, we must realise that the competition of those low cost economies means that we cannot sustain some of our high tax burdens. That new factor is another element in favour of working for a low-cost and low-tax economy.
Finally, above all, it takes time to reverse these trends. It took a great deal of time for our Conservative governments to get to the tax levels and the tax regimes that we set ourselves to achieve at the outset. That is inevitable as it takes time to get real control over public expenditure. Similarly, the other way, increases in public expenditure can occur very quickly and it will take a long time to pull them back. So what has been happening in the past five years— and in the plans for the next three years—is a symptom of an attitude of mind that has ceased to pay regard to prudent running of the economy. The trend is now obvious but the consequences will arise in the period ahead. The next Chancellor will have a very different legacy from the one that the present Chancellor inherited. I think it is common ground now that if a Labour government were returned, taxes would have to rise substantially to pay for that expenditure legacy. If ever the case for a low-tax economy were needed, it can be seen in the contrast between the years 1974 to 1979 and the subsequent years. It looks as though that lesson will have to be learned all over again.
§ 4.29 p.m.
§ Lord McKenzie of Luton
My Lords, I welcome this debate on a low-tax economy which has been secured by the noble Lord, Lord Blackwell. Perhaps as a new boy myself in this Chamber I can take the opportunity to congratulate the noble Lord, Lord Howard, on an impressive and interesting maiden speech. I have no doubt that the subject matter will feature from time to time in the upcoming months as we head towards a general election. It is no coincidence that the title picks up a theme from a series of consultation papers issued from Conservative Central Office in recent weeks.
As a starting point, there are two matters on which we might agree. First, whatever the policy parameters for public expenditure and whatever programmes and policies the government of the day wish to fund, the moneys raised through taxation for that purpose should be spent effectively and should deliver best value. I do not accept the proposition that the public sector is inevitably less efficient than the private sector. Indeed, significant swathes of the public sector are supported directly by the private sector in delivery.
Secondly, we would agree that taxation legislation, however complex the detail which is considered necessary, should be written in as comprehensive a 279 manner as possible. The proposition before us today is that moving to a lower tax economy will always lead to an economy that grows faster and ultimately produces increased revenues. I do not believe that that is inevitably the case, nor do I believe that there is an authoritative consensus on that proposition among economists. As a humble accountant, I was comforted by the contribution of the noble Lord, Lord Skidelsky, and his views on the issue. It could be argued that it is the structure rather than the level of the tax that is the more influential.
I would accept that lowering taxes generally or specifically can in some circumstances act as an incentive and a spur to growth—but the reverse might sometimes be the case. A part of the answer must depend on what the taxes are currently funding. Culling taxes so that public expenditure on education and skills is slashed is unlikely to be in the long-term interest of the economy. Organising education and skills is one of the things that we do in a community, where we do it better. Cutting taxes by means of allowances or tax credits in order to encourage private investment in research and development may well benefit the economy on a long-term basis.
The most beneficial direction of movement in a tax system, higher or lower, therefore depends on its current structure and levels and the public expenditure programmes that it is supporting. An informed debate about change in the level of taxation must be accompanied by an analysis of the consequences for public expenditure. I reject the proposition that freedom is inevitably restricted by the process of taxation. My freedom is enhanced by the opportunity to vote democratically for a government who want to spend collectively in certain areas.
The proposition that a low-tax regime inevitably means that there is no tax avoidance is deeply flawed. One has only to look at systems such as that in Hong Kong where there is a low-tax, flat-rate system but also a huge tax avoidance industry.
Changes to the tax system must also be sustainable. We have our own fairly recent experience of the splurge of tax cuts in the late 1980s, which were financed in part by the massive peak years of North Sea oil revenues but had to be clawed back in the early 1990s. We heard about that from the noble Lord, Lord Lamont. As recession took hold the PSBR threatened to run out of control. The tax increases were introduced in the form of frozen tax allowances, an increased VAT rate, increased employers' national insurance contributions and a VAT base widened to include VAT on domestic fuel. There were also increases in excise duty on petrol and tobacco, with the former set to rise by 5 per cent in real terms each year. Those were the actions of a Conservative government who were cutting taxes that mostly benefited the rich and increasing VAT that was borne disproportionately by the poor.
In its policy pronouncements, the Conservative Party has stated:Labour has put up taxes 66 times. Pensioners, landowners, businesses and families on all income levels are paying more".280 That is demonstrably not the case, and it is far from being an objective description of this Government's record on tax.
Perhaps I may return first to the list of tax increases that we touched on just before Christmas when debating the Pre-Budget Report. It is not possible in the time available to go through each item on the list. However, some of them are simply anti-avoidance measures that might increase taxes for some who would otherwise avoid their fair share. They are for the benefit of the generality of taxpayers. Perhaps we can hear today which of those measures noble Lords opposite think are appropriate, which they oppose, which they would seek to maintain if in government, and which they would seek to reverse. In some cases this list identifies the withdrawal of a specific tax relief, which is right, but makes no mention of a replacement measure, vocational training being a case in point
The list identifies the phasing out of the married couples' allowance, but conveniently ignores the introduction of the children's tax credit. The process of phasing out the married couples' allowance was originally initiated under a Conservative Chancellor. Can we hear whether Conservative policy is now to reverse that measure? Similarly, the phasing out of mortgage interest relief was the brainchild of the Conservative government. The list quite rightly includes real increases in petrol and tobacco duty, but again it: was the Conservative government who set us on this path. Is consensus on this to be continued or not? What are the Conservative Party's proposals for these duties?
No recognition is given to the tax cuts instigated by this Government. On the same principles of computation as the tax increases list, I could count more than 50 in looking at just two of the Budgets of that period. There have been general cuts in the rates of corporation tax and income tax, and effective rate cuts for capital gains tax. There have been some specific cuts in VAT, incentives for research and development, and investment in technology. The introduction of tax credits for children, families and pensioners has seen significant improvements in the resources available to those most in need.
Where do we currently stand on the tax system overall? Capital gains tax is effectively at its lowest level since the tax was introduced. For business assets, so long as they are held for two years, there is a maximum effective rate of 10 per cent. In addition, there are a range of legitimate reliefs that can reduce or eliminate a tax charge for businesses and individuals. For non-business assets under the taper provisions, there is the prospect of a maximum rate of 24 per cent. Indeed, the Government have uprated the annual exemption each year, unlike their predecessor who froze the exemption for two separate three-year periods.
The data show that gains are generated mainly from sales of listed and overseas securities and residential property other than the main home, which, of course, is exempt. More tax is being paid by more people because more people are making bigger gains. I note Conservative proposals to spend either £1 billion to introduce a 10 per cent flat-rate tax, or £2 billion to 281 scrap the tax altogether. It would be interesting to know their view on how that sits with the nation's priorities. What is the income profile of those who would benefit? What public expenditure cuts would be needed to fund this measure?
On the matter of income tax, we now have the lowest starting rate—10 per cent—and basic rate—20 per cent—for decades, with the higher rate remaining unchanged from the inherited rate of 40 per cent. As for savings income, interest is taxed at either 10 per cent, 20 per cent or 40 per cent, which is an improvement on the 20 per cent, 24 per cent, and 40 per cent regime that the Government inherited. For basic and higher rate taxpayers, the treatment of dividend income is equivalent to that which the Government inherited.
I was interested to read Conservative proposals that focused on the uprating of personal allowance thresholds by reference to earnings rather than prices. The range of options proposed has an acknowledged cost of up to £6.7 billion. This aspect of the tax debate is likely to be viewed with a degree of scepticism when the record is examined. The reality is that fiscal drag has been a phenomenon of the tax system under successive governments, but perhaps none more so than the previous Conservative government. The Labour Government are criticised for not always uprating personal allowances. Indeed, it is correct that they failed to do so on one occasion. However, they never failed to uprate the personal allowances for pensioners, and they are committed to increase the minimum income guarantee in line with the higher of earnings and prices. This Government have always uprated the basic rate band.
Contrast that with the record of the previous Conservative government, who kept the personal allowances frozen for three years between 1992–93 and 1994–95, and even extended the freeze to the personal allowance for pensioners for three years. Moreover, the basic rate limit—the level at which the higher rate kicks in—was kept fixed for four successive years. References to the pot and the kettle spring to mind. Yes, more people pay income tax, but 2 million more people have been in jobs since the Government came to power.
We agree that, in its present form, council tax cannot continue to take the strains placed on it without some reform. We will need to reflect on what comes from the review currently under way. Certainly those who propose in the mean time that the solution is a local income tax need to be pressed on the specifics of their proposals, because the devil will be very much in the detail.
None of the policy papers emanating from the Conservative Party, and none of the contributions from noble Lords so far, appears to propose sweeping changes to corporation tax. That is no wonder, given that we have the lowest rate of tax since the regime was introduced 40 years ago. In particular, it is noted that there are no proposals to restore the imputation system and the repayable imputation credit to exempt funds, either at the higher 1979 level of imputation or the lower levels of 1997.1 understand the proposition 282 of the noble Lord, Lord Blackwell, but that is not what is in the policy papers issued from Conservative Central Office.
The reality was that the imputation system was supposed to encourage the distribution of profits, but for many companies it had the reverse effect, and its scrapping has been welcomed. Stamp duty increases will doubtless continue to be raised as an issue, although there have been some reductions in the tax for deprived areas and for intellectual property rights. However, when it comes to a choice, most people, including homeowners, would settle for the current tax structure in the context of a well managed economy with high employment, low inflation and low interest rates than live with lower stamp duty and the 15 per cent interest rates of the boom and bust era.
The reality is that inheritance tax rates have remained unchanged and the threshold raised each year under this Government. While avoidance routes have been curtailed, the structure of the tax has remained largely unchanged from that of the predecessor regime. Certainly house price inflation has brought more situations within the scope of the tax, but projected moderating of house prices will lessen the impact of that. Anyway, we need to see it in context. In 2001–02, the latest year for which I have been able to get figures, there were approximately 600,000 deaths in the UK. That led to 277,000 estates notified for probate, of which only 23,500 were taxed—fewer than 4 per cent.
The Conservatives have flaunted a range of reduction proposals that could cost up to £2.9 billion. It would be good to hear which precisely they intended to make a policy commitment. I am bound to say that, in more than 30 years as a political activist, no one has ever raised with me as one of their main concerns the fact that their inheritance might be impaired by a tax charge. They have expressed views on funding for education, for the health service and for fighting crime. That is the issue. If taxes are to be cut, public expenditure will have to be cut. By our reckoning, and by the Conservative Party's own statements, it is already pledged to cut public expenditure by £35 billion, with a further £15 billion needed to cover additional announced spending commitments.
That level of cuts cannot be achieved without severe impairment of front-line services, so each tax-cut promise must be measured in terms of the impact on the economy, in terms of fewer teachers, doctors, nurses and police officers, and in terms of less money for schools and hospitals. Does it really chime with the mood of the country that there should be reduced taxation for a minority of individuals who would by most standards be regarded as wealthy, when the commitment to give to the poor and dispossessed in the world has never been demonstrated so powerfully?
The Government have delivered not only a period of unparalleled economic growth, but a fairer tax system than they inherited, which still remains competitive by international standards. The moment will doubtless soon come when the country will have its say on who it trusts on tax and the economy. I am confident that the Government's record on those matters will prevail.
§ 4.45 p.m.
§ Lord Saatchi
My Lords, I begin by declaring an interest as a director of the Centre for Policy Studies. In that capacity, I congratulate our chairman, my noble friend Lord Blackwell, on calling this timely debate, assembling such a distinguished list of speakers, and his crystal-clear introduction. Having not spoken in the House for a little while, I am looking forward to hearing my successor on our Front Bench—my noble friend Lady Noakes, who is brilliant—wind up the debate and get the better of the noble Lord, Lord Mclntosh, which is something that I could never quite manage when I did her job.
I find myself perhaps most in tune, among all the excellent speeches that we have had so far, with that of the right reverend Prelate the Bishop of Worcester. That is to my surprise and, I am sure, much more to his. He said that we should not focus too much on what the noble Lord, Lord Skidelsky, will know economic textbooks call Q, which is the quantity of money. The right reverend Prelate said the debate should be on a deeper level, and I agree. That said, the distance from Conservative Central Office to the House is such a short one that I hope that noble Lords will forgive me if electoral considerations are still slightly on my mind.
With a general election coming, all of us would like to know, most of all, who will win. If we want to know, we have only to ask ourselves one question, which is, "Who deserves it?". In a holy place, one might ask for forgiveness, and we would want to know who deserved forgiveness. I am told by generals that, in war, you win only if you fight for a noble object. In a court of law, the jury hears the evidence from the parties, then gives them their just desserts. In all those cases, the question is not, "Who will win?", but, "Who deserves to win?". I would like to concentrate on that because in politics, as in law, motive is all.
Today, those on our Benches have a strong motive for wanting people to have more money and more power. Why? Because Conservatives understand how money and power work. The noble Lord, Lord Skidelsky, will be familiar with the economist JK Galbraith's explanation that:The greatest restriction on the liberty of the citizen is a complete absence of money".The more money people have, the freer they can be. The freer they are, the less need they will feel for the Government's cap-in-hand benefit culture. The more power people have, the more independent they can be. The more independent they are, the less need they will feel for the Government's "big government know best" approach.
What is the Government's motive? They have power; they want to keep it. That is why they have employed nearly a million more citizens directly on the state payroll—800,000 more employees, at an annual cost of £19 billion. Those on the Government Front Bench now employ 7 million people, which is 25 per cent of the working population of Britain. That is power, but they want more, so they have nearly doubled the percentage of the population in receipt of 284 state benefits, which is up from 24 per cent to 40 per cent. Most pensioners now need to ask for a state benefit on top of their state pension.
More than half of the population is now financially beholden to the Government. That is how the Government like it, because, as the noble Lord, Lord McIntosh, knows, money is power. That is why they take so much of it in tax and then make you queue up to get it back. But as possession is nine-tenths of the law, they make it hard for you to get it, which is why, as my noble friend Lord Higgins discovered during the passage of the Tax Credits Bill, billions of pounds a year of Government benefits go unclaimed by the people who are entitled to them. The Government keep their money.
Why do they do all this? It is because it is in their roots. Like the rest of us they cannot shake off their genetic inheritance. Whether their party is called old Labour or new Labour, it amounts to the same thing, which is why this debate is timely—big government know best. It is no coincidence that this Government's favourite management tool, the five-year plan, was originally an invention of the Union of Soviet Socialist Republics. On 1 October 1928 the USSR announced the world's first five-year plan. It laid down, for example, that the number of eggs to be eaten per head of population between 1928 and 1933 was to be 155. The allowance of boots was to increase from 0.4 of a pair in 1928 to 0.7 of a pair in 1933. The plan set 50 targets for the whole of Russian industry and agriculture.
We should ask ourselves why a British government, years after the collapse of communism, should be so attracted by the Soviet system. What could possibly be their motive? I would say, exactly the same as its inventor. It gives power to central government. Remember I said that that original five-year plan had 50 targets for the whole of Russia. Today., the Department for Education and Skills has 18 targets, the Home Office has 20, the recent Comprehensive Spending Review had 130 performance targets and the NHS Plan has 400 targets. To manage all that, more managers are required, which is why the Society section of the Guardian, where the Government do their recruiting, now routinely weighs more than the Times and the Sun together. Staff at the Government Car and Despatch Service—a vital body, I am sure— is up 29 per cent. Home Office executives are up 71 per cent. The Immigration and Nationality Directorate is up 126 per cent. The Financial Services Authority now has twice as many staff as the Treasury which created it. Postwatch, the body which supervises the regulator, Postcomm, now has three times more staff than Postcomm itself.
To devise, monitor and report on all those targets, the Government need bodies, units, tsars and inspectors. So, some of these new hirings are for a new inspectorate, OFFA, the Office for Fair Access, which is currently recruiting 300 inspectors to combat suspected fraud by students seeking to avoid the Government's new university fees. Consider the health service. If you are a doctor, here are some of the bodies which have been giving you helpful assistance: the National Institute for 285 Clinical Excellence, the Modernisation Agency, the national service frameworks, the Commission for Healthcare Audit and Inspection, the Commission for Health Improvement, the Commission for Patient and Public Involvement in Health, the Patient Advice and Liaison Service and the Independent Complaints Advocacy Service.
To supervise all of this, you need forms. You need forms with boxes, forms with ticks, forms with crosses, long forms and short forms. If you are a policeman, you fill in a form if you speak to someone in a street. If you are a theatre director, a report form is required on access by demographic and ethnic groups. If you are a taxpayer, you have to navigate forms on 250 complex tax allowances, indexations, tapers, thresholds, reliefs, exemptions and disregards, etc. But if you are over 65, at last you can relax. Your claim form for a pension top-up will come with a helpful 48-page explanatory booklet. Soon there will be a form to check that you are brushing your teeth with the correct circular movement.
Nevertheless, the Government like it that way. This is their motive. It puts them in charge. It makes them the centre of attention. The noble Lord, Lord Butler, the former head of the Civil Service, who I am sorry is not in his seat, said that,with that sort of power, the Government can do whatever it likes".The noble Lord, Lord Skidelsky, said that this sort of power,diminishes the moral stature of human beings".He is right. The people are dependent children, with the Government their master. The complicated tax/benefits system is the chief instrument of the Government's power.
Our Benches want an end to all this, because it is a drift towards a crushing bureaucratic, form-filling, red tape, regulatory, PC nightmare. The noble Lord, Lord McKenzie of Luton, asked what our Benches would do about it. I can help him in two respects. My first example is poorer people, as was that of the noble Lord, Lord Blackwell. This side of your Lordships' House knows that it is unjust that people living below the official poverty line should pay income tax. They should stop. Why? Because they cannot afford it. They should keep more of what they earn. Why? Because they need it. Secondly, our Benches also know that it is unjust that older people who have paid tax for 40 years should continue to pay income tax until they drop down dead—and then pay more in death duties, which are cosmetically now renamed "inheritance tax", on anything that is left. Why? Because they have paid their dues. It is enough. Over-65s should keep more of what they earn. Why? Because they have earned it.
The record shows that the driving motive of conservatism—and I hope my comments have the blessing of the noble Baroness, Lady Thatcher—in the two centuries from Burke, through Thatcher, to Howard, has always been a belief in self-determination, individuality and independence, as many speakers on these Benches have said. In a 286 remarkable essay in 1708, An Answer to the Question: "What is Enlightenment?", Immanuel Kant declared that,to be civilised is to be grown-up".To be grown up, he wrote, is not to abdicate one's responsibilities to others, not to permit oneself to be treated as a child or barter away one's freedom. Unless a creature can determine itself, he said—just as the noble Lord, Lord Skidelsky, said—it is not a moral being. Autonomy is the basis of all morality. Kant was definite on that point. He said that a paternalist government, based on,the benevolence of a ruler who treats his subjects as dependent children … is the greatest conceivable despotism and destroys all freedom".Like Locke, Rousseau, Jefferson and all the great champions of liberal democracy, Conservatives despise such a system.
So today, I should tell the right reverend Prelate, our Benches have as good a motive as any in our history. We want to alter the balance of power between the state and the individual, so that people have more money and more power and the Government have less. We want the people to be big and the state to be small. We want the Government to leave people alone, get off their backs and out of their way.
Beatrice Webb, who, as the noble Lord, Lord Giddens, knows, was the founder of the London School of Economics, used to say that people fell in love with funny things. She said:Some people fall in love with their chauffeur. I fell in love with Soviet Communism".Conservatives fell in love, too, with the exact opposite. Most of all, Conservatives want a free man to be able to say, "I am the captain of my soul".
§ 4.59 p.m.
§ Lord Laidlaw
My Lords, I thank my noble friend Lord Blackwell for initiating what I believe to be a very important debate. But, looking at the red leather opposite, I might be forgiven for assuming that the issue of low taxation is not considered as important by other sides of the House as it is by our Benches.
There has been much erudite discussion and many statistics have been mentioned in the speeches made to date, and I particularly compliment my noble friend Lord Howard of Rising on his excellent maiden speech. However, I thought that I would leave the field of statistics and confine myself to talking about a personal experience in which it was possible to deliver better public services at a substantially lower cost. I think that there are some lessons there for the House and the Government.
I believe we are all in favour of high-quality public services. Yet I am still looking to find the person who pops the champagne corks and goes out to celebrate when he writes his cheque for the Inland Revenue. The problem is reconciling these two highly desirable goals: high-quality and available public services and a lower tax take. Can this Holy Grail be achieved? I believe that there are ways in which it can be improved upon, 287 but certainly not as has happened over the past seven years—not by throwing more and more money at public services as the present Government have done.
Perhaps I may talk about one area in which I am involved—education. Recently in failing schools I have seen poor teachers being paid substantially more with absolutely no effect on the quality of the education delivered to the students.
In another area of public services—the national healthcare system—I recently came across a case that illustrates how we are going wrong. Over Christmas, the 89 year-old mother of one of my most senior employees went to hospital. She was left, vomiting, in a public area for 18 hours before she was seen. But before she was seen, she was asked to sign a form saying that she had been seen immediately on arrival. This Government's reliance on targets has resulted in a focus on statistics rather than on treating patients.
When people want to make major changes in public services, the usual refrain is, "It can't be done". I want to tell your Lordships about what we did in some of the American companies that I own that was supremely successful in changing behaviour. I believe that this example is relevant to the UK.
Most healthcare in the United States is delivered and provided by employers via insurance. Employees sometimes pay a monthly contribution towards that and sometimes they do not. As we all know, the demand for healthcare is insatiable. Costs continue to increase, drugs get more costly and testing becomes more extensive. It would appear that there is no end to the increase in the cost of healthcare, and those costs will continue to rise faster than the rate of inflation. That, of course, is true in the UK as well. So, along with other employers, we were facing increases in our premiums of between 20 and 35 per cent every single year.
US healthcare relies on private delivery but, in reality, it is very similar to the national healthcare system in the UK. First, all costs are pooled so that everyone pays either nothing or a standard amount every month. Secondly, there are no incentives for an individual not to use the service.
In the changes that we planned, we were committed, as is everyone in the UK, to certain basic fundamentals: first, a good service should be available at a low cost; secondly, there should be a safety net for serious illness; and the third objective was that a premium service should be available but at a super-premium price so that that subsidised the people who did not want to buy the premium service.
We tackled that problem, first, by introducing a fee of 30 dollars for every visit to a physician. This was a cost that we knew all our staff could afford. In purchasing power parity, it is perhaps equivalent to £8 in the UK. Secondly, we changed the administration cost of the scheme by introducing on-line claims so that every claimant had to make his claim through the Internet rather than going to full-time healthcare benefit administrators, whose number had increased enormously as the difficulties of making claims grew.
288 What were the results? In this particular sample, we had 1,000 employees. During the year after we introduced the new scheme, there was a 60 per cent reduction in the number of claims and the employees had no additional sick days. Of course, the total cost did not decrease to the same extent as the number of claims because we covered all serious illnesses. But the total cost, as measured by premiums, decreased from 7 million dollars in 2004 to 4 million dollars in 2005.
Translating that American example into the UK idiom, the introduction of a small user tax decreased public expenditure through changing behaviour. General taxation has been, and could have been, decreased in this case but with no reduction in public services. Indeed, taking a broader view, we may even have increased the quality of the public services by allowing the providers to focus on major illnesses rather than on minor ailments. I believe that a modest charge for health services in the UK, solely for those who are in work, could result in a lowering of the cost of delivering those public services while not in any way affecting the essential national healthcare system that we value and need.
User taxes can replace general taxation in a number of cases. Of course, there are very many cases where user taxes do not apply and have no value at all. But another example that I want to give your Lordships concerns our roads in the UK. I think that our roads are a disgrace. I am sure that many noble Lords have wasted thousands of hours sitting on roads in traffic jams and have watched truck-drivers doing the same. Huge amounts of time, and thus billions of pounds, are wasted because we do not have adequate roads and, in particular, adequate motorways. Our road systems are far behind those of the Continent, even in countries such as the Netherlands and Belgium, which have an even higher density of population.
So, believing that, do I think that road users should line up outside No. 11 Downing Street with their hands outstretched, asking the Chancellor to devote more of his general taxation budget on building more roads? No, I do not. I think that the answer is for private enterprise, or a combination of private and public initiatives, to get together and build toll roads where people who need to get from A to B quickly can choose to pay the toll. Those who prefer not to pay can choose not to do so. The M6 experience surely shows that this system of user taxation can be very effective in speeding up our traffic without, at the same lime, relying on general taxation.
That is another way of saying that choice by the individual is the route to better public services at lower taxation rates. In education, it can be done through the voucher system, which allows parents to choose the school that they believe is right for their child. Vouchers force schools to improve their performance and allow the good schools to expand.
Individuals, if given the right motivation through user taxes, will behave rationally. If provided with free public services, for which they have to pay nothing or apparently feel that they pay nothing, they are quite likely to make the wrong choices for the country as a whole.
289 I believe that there are many areas of public services that can be reformed and that it is possible for them to deliver high quality public services but still have a lower tax take through better-considered and better-managed taxation systems. It is not through pumping more of our taxpayers' hard-earned cash into public services, but by using user taxes, where appropriate, to replace general taxation and at the same time improving management of those services, that we can make a difference.
§ 5.10 p.m.
§ Lord Vinson
My Lords, we are all indebted to the noble Lord, Lord Blackwell, for introducing this timely debate. As an original founder director of the CPS, it is wonderful to see the flag still flying so strongly. Taxation lies at the heart of politics. On the day following the Chancellor's Autumn Statement, the headlines in the newspapers and the general tenor of the BBC's announcements were, "Chancellor promises a give-away budget". Nowhere did I hear the balancing argument, "Whose money is it anyway?".
It was a great French philosopher, Frederic Bastiat, who I believe put his finger on the matter nearly two centuries ago when he said,the state is an institution by which everybody tries to live at the expense of everybody else".This Government's budgets are a perfect example of bribing the electors with their own money. As other noble Lords have shown, that in itself would not be so bad if the money were spent efficiently and to good purpose. Alas, that is far from the case. We on this side of the House certainly recognise that the Government are too big; they are spending too much; they are wasting too much; and they are taxing too much.
Of course, the champions of high state expenditure support their case by the undeniable moral argument that the national tribe has a sense of duty to support the poor, the sick, the disabled, the elderly and the less fortunate members of society. However, the point comes when those creating the wealth for such moral purposes begin to say that enough is enough. It cannot be said too often—it has been said many times tonight—that governments do not have any money. Inescapably, one person's handout is another person's tax hike.
Of course, to have conspicuous compassion with other people's money looks wonderful, but there is an equal and opposite rational moral argument; namely, that charity begins at work. Without resource, charity may have heart but it cannot have substance; thus the creation of wealth—or some would say the creation of worth—is the key to compassion. High tax levels indisputably damage that process. There is a limit to the number of feathers that can be plucked from a goose before it starts to hiss.
It was Ronald Reagan who perceived that the moral high ground has two claimants. He said,I'm sure everyone feels sorry for the individual who has fallen by the wayside or who can't keep up in our competitive society, but my own compassion goes beyond that to the millions of 290 unsung men and women who get up every morning, send the kids to school, go to work, try and keep up the payments on their house, pay exorbitant taxes to make possible compassion for the less fortunate, and as a result have to sacrifice many of their own desires and dreams and hopes. Government owes them something better than always finding a new way to make them share the fruit of their toils with others".It is for those reasons that this debate lies at the heart of politics. We on this side share no less compassion than others, but we recognise that wealth creation, the means to do good rather than just feel good, depends fundamentally on human motivation. The more the state spends, the greater the paradox that Aristotle thought of many years ago. He said,That which no one owns, no one will care for",or to put it in modern English, "Where no one really owns, no one really cares".
Worldwide we have evidence that once government spend greater than some 30 per cent of GNP—this relates to some of the early work carried out by the noble Lord, Lord Skidelsky, which has been mentioned— economic inefficiency accelerates and ultimately the means to do good is frustrated by ever-falling productivity. That is exactly the state that this country has now reached. The wealth-creating sector is beginning to be bled white by the wealth-consuming sector.
The moral argument for low taxation is indisputably proven by the facts. The state does not necessarily know best when it comes to taking decisions, and when one talks about the state one must recognise what the state really is—as that great economist, Arthur Marshall, said:Do you mean a state governed by people all wise, all far-seeing, totally impartial and balanced in their judgments, or do you mean a state run by people like you and me?".As the state is administered by people like you and me, it is far better to let decisions be taken in the first place, at first hand, by people like you and me.
As Adam Smith said:It is the highest impertinence and presumption …in kings and ministers to pretend to watch over the economy of private people…They are themselves always, and without exception, the greatest spendthrifts in the society".The Dome and the new Scottish Parliament beautifully illustrate his point.
It is one thing to help those who are in special difficulties or in real need, but when the state collects taxes to provide many of its citizens with services which they are perfectly capable of obtaining for themselves, they perpetrate a grave deception on such taxpayers. As mentioned earlier in the debate, shuffling an individual's earnings from one pocket to another via state administration is inherently inefficient and morally degrading.
Income maintenance today is no longer simply a matter of how much is paid out by the state in welfare benefit. What the state takes away in taxation is equally important. This is a development of the utmost significance that has the deepest moral and welfare implications, but government today is still conducted as if there were no such problem. Ever higher levels of taxation mean that the citizen begins to serve the state rather than the state serving the 291 citizen. All of us must be ever cautious of the self-aggrandisement of power by politicians, a point so well made by the noble Lord, Lord Saatchi.
You have to be a pretty naive soul to claim that government provision of education and health and other welfare services is more efficiently organised than private provision would be. It requires very little inside knowledge of the workings of government bureaucracies to show the falsehood of this belief. This side of the House believes that government should regulate but not necessarily administrate. We believe in letting citizens take their own choice and, for the future, the best way to help those in need is probably through vouchers that give them the right to choose private rather than public provision. We believe in giving power back to the people by decentralising services.
One further point I want to make is on the importance of savings. The higher people are taxed the less they will save. The savings ratio in this country has collapsed and many who should save, and need to save for their retirement, no longer do so because they perfectly sensibly ask the question, "Why bother?".
In my village at home there are a number of instances of good citizens who have been thrifty all their lives, but whose standard of living in retirement is infinitely less than those who have never saved a penny, either through ill-fortune or over-expenditure, but are now fully supported by the state giving them a higher standard of living than those who have saved. This inherent unfairness is all too clear to see. But this perverse situation could be rectified by raising the level at which savings income is disregarded when citizens are means tested for support, and not least by raising overall the tax threshold so that millions caught in the tax trap are freed from it and from the disincentives to work.
Neither of those desirable goals can be achieved unless overall state expenditure is halted and then reduced. The moral case for lower taxation is irrefutable. I hope this debate will further that purpose.
§ 5.20 p.m.
§ Lord Kalms
My Lords, I should like to approach the debate from a different angle. There are others far more qualified in this House to give chapter and verse to the statistics and data that lead inexorably to the conclusion that we have an overtaxed economy, as my noble friend Lord Blackwell so eloquently expressed when he put down his marker for this debate.
Rather, I want to provide some narrative to the statistics, using my business experience over a long period, and under many administrations, which, with honourable exceptions, were not able to tackle and control progressive and harmful taxation levels.
The debate should not be about tax alone. It must include its Siamese twin, regulation, because both have their impact on the profitability of business—the source of all wealth.
Having been at the sharp end of both tax and regulation and worn over the years several different hats, there is a path I want to develop in this debate.
292 My theme is simply the foundation of all wealth creation—the bottom line—the amount after tax and imposed costs that is available for reinvestment or distribution. The seed corn line—the raison d'être of commerce.
Like others in your Lordships' House, at some time in the 1960s I was paying tax at 98 per cent and even at one time I was, due to a quirk in the system regarding one of my children's trusts, privileged to pay over 100 per cent tax. I was not amused. But of course there were consequences. And the whole process of wealth creation ground to a crawl. Motivation had been smashed; the return on effort annihilated.
It was not until the Thatcher government reduced tax sufficiently to spur the wealth creators that a damaged economy picked itself up and started moving ahead, one might have imagined towards Elysian fields.
But that is not the way of this Treasury. Blessed or cursed with a short memory, it never entered the soul of our financial master that taxation is a delicate instrument, to be used more as a rapier than a blunderbuss and to be used as a corrective device for overheating or stimulating and not merely to fill the coffers of a profligate bureaucracy.
Today we are facing a critical phase of the old confrontation between wealth creation and bureaucracy. For "bureaucracy" you can read "big government". Indeed, to know thine enemies we should also include Brussels, which is synonymous with uncosted regulation.
It is a conflict between strong forces. On one side there are those who create wealth, who add value, who invent, employ, manufacture, distribute, provide services, who understand risk in return for reward, who plan and dream the growth of their small empires and who accept the social responsibility of their teams by recognising the need to grow; and on the other side are government and bureaucracy who honourably need to regulate excesses and to provide safety nets, safeguard pensions, defend the borders and do all the necessary chores that democracy demands.
Seemingly it is a balanced relationship. I pose the question: have the wealth creators kept their part of the pact? Perhaps imperfectly, but decidedly yes. And the Government? I submit that they have fallen substantially short.
The bureaucrats grow, they need more feeding and grow bigger. A vicious circle of insatiable expenditure needs constant increasing nourishment—called taxation. The need for prudence is a wonderfully seductive word to set against tax increases: the gloved hand with the iron fist. Every time you read "prudence" try substituting "profligate".
There is insufficient resistance by industry to a creative Chancellor finding unending streams of tax sources. And they are not stealth taxes—a misnomer if ever there was one—they are just plain taxes on the wealth-creating community. Unwisely they slice away at the base of wealth creation, which is investment and distribution of profits, which instead are channelled into a bureaucratic pool skilled in the ways of embedded spending.
293 Let me for one moment be anecdotal from a senior vantage view. Any businessman who in his career has been privileged to serve with the NHS will be very aware of the waste, layered bureaucracy, lack of economic discipline and the very large sums that slosh about looking for a home. It was for me a shattering experience when the hospital I chaired—a large London teaching hospital—was in my first year running a huge deficit for the first 11 months.
By a miracle, certain arbitrage, regional, balancing, retrospective adjustment funds appeared in the 12th month to enable us to hit all our financial targets and avoid embarrassing some central bureaucracy. In my self-defence, all the cuts and economies that I was pressing for during the year were agreed and then quietly ignored by those who knew about the miracle of the 12th month.
In business, as a chairman, I would have had to put out a profits warning after about two months, and regularly thereafter. And, of course, as things turned out all right at the end, I would have been fired for giving false warnings, incompetence and probably share manipulation.
Let me return to my own business patch. Over the years, the Budget period has been one of severe anxiety, impossible to forecast and so often seemingly adversarial. I remember when a sales tax went up from zero to 50 per cent at one swoop. I remember when an overnight import surcharge immediately added 5 per cent to all our costs. I remember one Budget when a new VAT rate was imposed that would start in 30 days, causing us the biggest boom and bust that I have ever known. In more recent years, an iniquitous premium tax was introduced, selectively and arbitrarily, on a potential growth area of business.
Yet on no occasion were we warned or were part of any discussions. How can any system of tax, which should be a privilege to pay, so often be so burdensome and unhelpful to business?
Within my critique there is another major aspect of the business point of view. I fear that our latest Budgets are contrived in soundproof rooms where sunlight never appears. Certainly our Chancellor has never appeared to take a holistic view of his captive market. If he had, he would find a rather unhappy image. Businesses today, in addition to his limitless impositions, are snowed under by a perverse expansion of corporate governance, almost limitless legislation on social and health and safety issues which are having a serious impact on the seed corn line.
Many of those schemes are ill-conceived but are approved by powerful bureaucracies which are for ever extending those powers. The cost of servicing the extraordinary amount of new legislation, much of it emanating from Brussels—and this Government do not miss their own opportunities—is, regretfully, totally unreported and is not an accounting imperative. Yet the true costs of implementing regulation are never clearly calculated, and therefore never isolated and identified.
My noble friend Lord Blackwell suggested the uncosted part of our regulatory overheads is estimated at £30 billion and yet, because it is only an estimate, it 294 misses some of the glare of exposure. It is a sum so vast, so indefensible, that it must be reduced to meaningful components if it is to be significantly tackled.
That brings me back to my holistic argument. Surely any Chancellor, before imposing increased taxes, should consider the indirect costs that have already been imposed during a given period. I will propose today a better way of quantifying this massive sum. That completes my critique.
Perhaps I may now move into a constructive mode. The report and accounts of a company are the public exposure of its strengths and weaknesses. It is a powerful and respected document, audited and closely analysed. As of now, new accounting laws are being imposed that make accounts the grazing ground only for experts. New language accounting laws mean that we must be, inter alia, qualified crystal gazers, with penalties for gazing wrongly. Yet, perversely, there is no rule which states that it is a requirement of a company to state the true cost and impact of tax and regulations imposed during the previous year. That is a glaring omission. Now, that would be an interesting, indeed fascinating, figure that would expose once and for all the true cost of taxation and the impact on profitability, with all that that implies.
I am proposing that a company should, as good practice, provide in its annual report and accounts full costs and analysis of all the taxes that it pays and collects for government, including VAT, Excise duty, social security, the business rate, stamp duty, environmental taxes, imposts and surcharges. In addition, it should provide a full analysis of the real costs of all regulation— namely, the cost of absorbing, implementing and complying. It should also state the number of extra employees to supervise a Brussels initiative, and the true cost of employment tribunals, where most of the time it does not pay to defend against a claimant, the costs being so perverse and not reclaimable if you win.
In my industry, electrical distribution, a company should be required to state the massive moneys and costs involved in administering the new waste electrical and electronic equipment regulations. How about the real cost to a company of maternity and paternity leave? At this point, I am arguing only for a requirement to state the costs of so many government initiatives and not the merit, or otherwise, of any one initiative. I want a company to show its shareholders how much the myriad of tax and overhead imposition have cost them during the last accounting period.
I have given only a tiny handful of examples. I want this data fully audited and shown annually in the report and accounts of companies. I accept that some figures will be estimates. We need to show the real impact, present and future, on the potential profitability of the business. Yes, it would add a small cost to the audit fee, but it would have a massive impact on understanding the dangers of impacting the bottom line—the seed corn line, on which all progress and ambition is dependent. It would be a major data source for government and business, giving us at any one moment the hard evidence of the consequences of uncosted and often ill-conceived regulations and how they affect individual businesses.
295 I recognise that, as a former chairman of a FTSE 100 company, I might have to be persuaded of the idea of separately reporting the year's tax and overhead imposition. After all, I had been trained to reassure shareholders not to panic. We would cope with the impositions of life in general and Chancellors, bureaucrats and Brussels in particular as, say, the Pharaoh dealt with nine of the plagues. But as a chairman I believe that I could be persuaded on the merit of the argument, particularly with pre-knowledge of the 10th plague; the dearth of seed corn.
I conclude by arguing that the battle for lower taxes, whether direct or bureaucracy-driven costs, will best be fought if companies, the largest bearers of these burdens, record the facts annually and in some depth of analysis. We would have an invaluable weapon in our hands, one which any sensible Chancellor will have to, and may well want to, take into account.
§ 5.34 p.m.
§ Lord Shutt of Greetland
My Lords, the Motion for this debate refers to "the case for a low-tax economy". I wondered where to start. One thought was to say, '"Well, that is a good idea" and then sit down. Another option was to say, "Just a minute, there is another side of this coin; it is called public expenditure. There is a heck of a lot to that", and then sit down. But the third option is to try to make something of the debate.
I congratulate the noble Lord, Lord Blackwell, on initiating the debate. 1 had reservations from the start about how it would go, but I was slightly uplifted when, in a way, the noble Lord argued for a slightly lower tax economy. He said that we should hold the line on public expenditure and see whether it can then become a lower percentage.
It was good to hear the maiden speech of the noble Lord, Lord Howard of Rising. I felt a little unhappy at his phrase, "The state provides nothing". I understand why he said it, as the state recycles money, but the right reverend Prelate the Bishop of Worcester would understand the phrase that I have in mind:'underneath are the everlasting arms".That can apply to areas other than the spiritual. The state can cope with that.
I took the Pre-Budget Report as a baseline for looking at the issue. I looked at the historical position. It was interesting that the noble Lords, Lord Blackwell and Lord Lamont, looked at international comparisons. However, page 229 of the report sets out the historical position, including the percentage of GDP described as public sector current receipts over 34 years. Of those 34 years, 22 were Conservative and 12 were Labour. Interestingly, at their height, in 1976–77, Labour receipts constituted 43.3 per cent of GDP, and at their lowest, in 2002–03, they accounted for 37.2 per cent. On the other hand, the highest figure for the Conservative years was 45.8 per cent, in 1981–82, and the lowest was 35.6 per cent, in 1993–94. So there is a wide scale of tax take.
What is the alternative to a low-tax economy? Is it a high one or, as I believe, an appropriate one? What is taxation for? It enables expenditure. I have defined expenditure under three headings: first, redistribution 296 expenditure, or the Robin Hood expenditure, as part of which there is a very high figure for social security; secondly, intergenerational expenditure, whether paying for the young or the very elderly; and. thirdly, areas of expenditure on which it is difficult for the individual to spend. Reference has been made to the construction of roads: I cannot build my own road., but we must do it somehow corporately. Whether it involves private enterprise is another matter, but it must be done jointly.
The estimated total expenditure for 2005–06 is £520.5 billion. Education, health, local government, defence, social security, Scotland, Wales and Northern Ireland constitute 70 per cent of expenditure. We have mentioned neither transport nor, topically, overseas aid. There will always be opportunities to consider expenditure on the edges, but we can have a low-tax or lower-tax economy only if some of that expenditure is lower. Social security must be flexible. The state of the economy and the employment situation can affect how much is to be spent on social security.
It is difficult to consider the intergenerational spend. All sorts of expectations have been created over the years. People argue, "Well, I've paid for it all those years". It would be difficult to reduce many of the intergenerational spends.
If the areas that we share were diminished, much of life would be duller. The big problem about public expenditure is that people will say that they would like to reduce taxation and reduce expenditure. They are big figures. For example, I have never really warmed to much of what is described as "sport". I can cope without it, but I know how it enriches so many lives. So, I say, "I'll have a bit of the arts, heritage and environment stuff. I'm quite interested in that", but somebody else has got to have some of that expenditure for sport. Public expenditure is like beauty: it lies in the eye of the beholder. Whether we have a high-tax or low-tax economy—or an appropriate-tax economy-it must relate to required expenditure.
There is another area: borrowing. I do not believe that, in reducing taxation, the noble Lord, Lord Blackwell, intends for it to be replaced by borrowing. We should consider some of the areas of taxation. There are the big earners: income tax, national insurance contributions, corporation tax, VAT, the sin taxes—tobacco, gambling, liquor and, perhaps, petrol—council tax and business rates. Do we need too many more? I worry that we have too many taxes. I would sooner settle for fewer taxes, even if they were used to raise rather more.
I question the capital taxes that we have—for example, stamp duty on houses. If we are encouraging people to be mobile, imposing stamp duty at a time when people have all the other expenses of moving house is not a good idea. There is also capital gains tax. There is a sense in which, sometimes, it can be optional. An asset can be retained or it can be sold. Some people may be retaining assets that, perhaps, ought to be sold. It does not suit them for it to be that way. Although, as the noble Lord, Lord McKenzie of Luton, said, the 24 per cent tax may be less than it used 297 to be, people will still say, "I'd sooner have 100 per cent of that asset, rather than changing it", even though it would be better if they were to change it.
I am not happy about inheritance tax. It seems to me that inheritance tax need not be paid, because people can send it down a generation. Perhaps it is not sensible for that to happen, but people may be doing it now, when they should not be doing it. The fact of inheritance tax is making people do that. The price of houses in London and the south-east means that there will not be many estates in that area that are not liable to inheritance tax. Obviously, that will not apply to estates that pass to a widow or widower, but, if the widow or widower dies, it is likely that there will be inheritance tax on any estate in the south-east involving a property.
Of course, there are no grounds for punitive or vindictive taxation. I remember, in my early days on the rocky road towards becoming a humble provincial chartered accountant, income tax of eight-and-threepence in the pound, surtax of 10 shillings and a 10 per cent surcharge on top of that. No one would dare put that in a manifesto, and it was not put in the manifesto when Harold Wilson and his government introduced it. There are no grounds for that. However, it is important that taxation should be appropriate and in accord with the important public expenditure that we need.
One is tempted to take on many of the speakers in the debate, but I shall leave that to my colleague who is winding up. Of course, we have to watch the details, but we should keep it simple.
§ 5.46 p.m.
§ Viscount Trenchard
My Lords, I am grateful to my noble friend Lord Blackwell for introducing the debate. I congratulate him on his excellent speech. It is also gratifying to have an opportunity to talk about the economy and tax as a result of my noble friend's initiative, rather than as part of a fairly pointless and demeaning process deriving from the Maastricht Treaty.
It is timely that your Lordships' House should have this opportunity to remind itself of the benefits of a low-tax economy. We are becoming fully aware only now of how much damage has been done to our economy since this Government came to power. The Chancellor stubbornly maintains that he will not break his golden rule, but government borrowing had, at the end of November, already reached £32.7 billion. The Institute for Fiscal Studies believes that he will need a current budget surplus of £11.7 billion over the four months to the end of this financial year.
It may be true that the increasing tax burden on British business and individuals will yield higher tax receipts than last year, but it is becoming ever clearer that tax revenues will not plug the hole. The Government will surely not allow the Treasury to cut public expenditure to the extent necessary to achieve the same effect so close to a general election. In addition, the IMF has told the Chancellor that he must move ahead expeditiously with plans to cut borrowing, so I expect that he is feeling hemmed in on all sides.
298 Since the 2001 Budget, the Chancellor has consistently missed his tax revenue forecasts, largely because the UK economy has failed to grow in line with expectations. It may not matter much if the Chancellor breaks a rule of his own making, but our future prosperity depends crucially on maintaining and improving our international competitiveness. Our rankings have been slipping seriously since the Government came to power. The International Institute for Management Development ranked the UK as the ninth most competitive economy in 1997 but only the 22nd in 2004, whereas the World Economic Forum has dropped us from fourth place to eleventh since 1998.
It is important that we adopt policies that will restore our competitiveness. However, the Chancellor's plans to increase government spending from 37.1 per cent to 41.9 per cent of GDP over the current economic cycle predicate a significant tax increase. That is exactly the opposite of what we so badly need.
The noble Lord, Lord Skidelsky, correctly pointed out that we should not set too much store by statistics. He also said that the argument that a low ratio of government spending to GDP encouraged growth was not supported by the evidence of the Japanese case. However, I suggest respectfully to the noble Lord—he is not in his place at present—that a large part of the Japanese private sector is actually a kind of quasi-public sector, operating under effective government control and insulated from the competitive forces of the free market.
The Chancellor makes much of the need to maintain a growing and healthy economy in order to meet the challenges from China and India. He has said that his aim is to ensure that by 2015 Britain achieves American levels of business creation. However, that is just not going to happen, as he well knows, unless we quickly change tack and adopt new policies to reduce the size of the public sector. As Ruth Lea pointed out in her recent paper entitled, For the economy's sake we cannot afford not to cut taxes, and as my noble friends Lord Blackwell and Lord Lamont of Lerwick have so clearly explained, other major countries are reducing their tax-to-GDP ratio, whereas under this Government we have been increasing ours. An OECD study released in 1997 showed that a cut in the tax-to-GDP ratio would actually increase annual growth. Even if we could achieve increased growth rates of only 0.5 per cent a year—3 per cent rather than 2.5 per cent, say—GDP would be some 11 per cent higher after 20 years. Other studies show the greater impact.
As was pointed out in the Financial Times on 29 December, tax advisers are now warning multinational companies against establishing their European headquarters in the United Kingdom. UK Trade & Investment's latest investment bulletin admits that,some of the smaller markets, in particular Switzerland and Ireland, have successfully positioned themselves as serious competitors to the UK for certain types of European headquarters operation".299 The Government are steadily throwing away some of the important advantages that have helped us to attract the lion's share of investment in Europe by non-European companies. Our relatively attractive tax regime is perhaps the most important of those. However, corporation tax rates have been falling quite sharply over recent years in many other countries, whereas British rates have been static, ignoring the fact that the Government have increased employers' national insurance contributions. Ireland, by contrast, has nearly halved its corporation tax rate to a mere 12.5 per cent.
The UK has also enjoyed a reputation as a stable business environment with a relatively light regulatory touch. The costs of compliance with the huge amount of new regulation, much of it emanating from Brussels, can also be viewed as a kind of additional tax which does not show up in the figures.
This Government have also imposed substantial effective tax increases on pensions and savings, and on home ownership and inheritance. They have failed to raise the starting point of the 40 per cent higher income tax rate band in line with earnings. The increase in employees' national insurance contributions is also a kind of additional income tax.
As was so eloquently pointed out by my noble friend Lord Howard of Rising in his most impressive maiden speech, tax rates above a certain level are counter-productive and will result in the tax base shrinking. The Government's aim should be to fix tax rates at the optimum level to maximise the size of the tax base. In this way it would be possible to achieve the lowest possible tax rates for all. As shown in a recent paper published by the Adam Smith Institute, it is telling that as a result of the actions of my noble and learned friend Lord Howe of Aberavon and my noble friend Lord Lawson of Blaby, in reducing the top rate of income tax from 83 per cent to 40 per cent, the Inland Revenue contribution to central government tax revenue rose from 55.9 per cent to 58.2 per cent, and the highest 10 per cent of earners increased their contribution to total revenues from 35 per cent to 42 per cent.
I believe that there is a strong argument for the adoption of a flat tax and that this would surely maximise the tax base. It would not be good for the tax avoidance industry, but would increase further the contribution to total revenues made by the highest 10 per cent of earners, which no doubt would give pleasure to noble Lords opposite. Just by way of example, if the personal allowance was set at £10,000 with a 25 per cent flat rate of tax, a person earning £20,000 a year would pay tax of £2,500. Someone earning £1 million a year, 50 times as much, would pay tax of £247,500, some 99 times the contribution of the person on £20,000. Noble Lords will recognise that such a tax regime would still be progressive. Those who could afford to pay more would still contribute by far the greatest share, but it would radically simplify the tax system, saving taxpayers a huge amount in direct and indirect costs. It would give a considerable boost to the economy by improving incentives to work, save and invest.
300 I agree with my noble friend Lord Blackwell that,Britain cannot afford to continue with the destruction of its pension savings".I earnestly hope that the next Conservative government will clearly commit themselves to restoring the £5 billion stealth tax taken from our pension funds by reintroducing the dividend tax credit. This would be fair as it would avoid the double taxation of savings, it would be logical and it would provide a boost to our seriously underperforming stock market, which would itself provide significant benefits to the wider economy, encouraging investment and job creation. It would also enable underfunded pension schemes quickly to make up a part of their deficits.
The Government are putting people off saving for their retirement at a time when their own policies are making it more essential that they do save. Furthermore, indications that tax legislation may be changed retrospectively in the future are wholly unsatisfactory. The Treasury discussion paper referred to in paragraph 5.102 of the Pre-Budget Report is rather strange. It refers to the Government's wish that the legal form of a small business should reflect commercial rather than tax considerations. It also states in paragraph 1.8 that incorporation is,often as a result of marketed tax avoidance schemes".But, as the Minister is surely aware, by far the most important factor leading to small business incorporations in recent years has been the Chancellor's zero rate corporation tax band introduced in 2002. Instead of simply admitting his mistake and reversing it, he has now introduced the absurdly complicated non-corporate distribution tax. That is why the Inland Revenue was only able to publish the updated annual corporate tax return, CT600, in November, and the complex calculations necessary to cope with it are why the main software houses are still having difficulties in producing programs to cope with these changes.
Noble Lords may have seen the interesting interview of the noble Lord, Lord Butler of Brockwell. in the Spectator of 11 December. The noble Lord pointed out that Civil Service numbers were reduced from 735,000 to 450,000 between 1979 and 1998. But, as national statistics reveal, public sector net employment has increased by some 530,000 since the Labour Government were elected, and around one-third of the Conservatives' cuts in Civil Service numbers has already been reversed. John Oughton, the successor to Sir Peter Gershon at the Office of Government Commerce, has predicted that the public sector is set to grow by around another 250,000 people after taking account of the redundancies expected from the Government's so-called efficiency programme.
The people are beginning to recognise that government spending is spinning out of control, and that there is no commensurate improvement in public services. The Taxpayers' Alliance, a non-partisan, grass-roots campaign for lower taxes, claims that at least £50 billion of taxpayers' money was wasted or spent on useless projects by the Government in 2003. The Government have responded to the criticism that 301 much of the public spending increase has been wasted on bureaucracy, new quangos and the like rather than on delivering improvements in public services by commissioning the Gershon review. However, I agree with Ruth Lea that the elimination of £21 billion-worth of waste identified by Sir Peter Gershon is unambitious.
The National Audit Office has reported that a 54 per cent increase in expenditure on public sector goods and services has produced only a 12 per cent increase in measured outputs. I therefore cannot agree with the noble Lord, Lord McKenzie, that tax cuts will not have a beneficial effect on the economy in the long term. I am grateful to have the opportunity today to speak after the noble Lord rather than prior to him.
I also take issue with the noble Lord's statement about the tax avoidance industry in Hong Kong. I represented Kleinwort Benson in Japan for many years and was constantly receiving tax advice from people, including many members of the noble Lord's profession. I was advised that, where possible, to locate expatriates in Hong Kong was infinitely preferable to Tokyo because the Hong Kong tax rate is much lower, is flat, and the Japanese rates were, especially at that time, very high. Indeed, it is certainly the case that the Hong Kong Revenue gains because many people based in Asia are officially tax-domiciled in Hong Kong when perhaps they could or should be tax-domiciled in some other place.
Unfortunately, after a reasonably promising start as far as their management of the economy is concerned, the Government have now started to harm the nation's prosperity by the creation of an overly large, bloated, cumbersome and expensive public sector. As a recent YouGov survey showed, 71 per cent of respondents agreed that the welfare state has become too inefficient, with many undeserving people getting too much while genuinely needy people struggle to get by.
My noble friend Lord Blackwell has convincingly made the case why Britain cannot afford not to cut taxes. I believe that the people will recognise the truth of this and return to office a government who are capable of reining in the state and reducing it to its proper role of serving the people.
§ 6.2 p.m.
§ Lord Steinberg
My Lords, I must confess a little disappointment that immediately the debate started the Government Benches practically emptied of Members. It may be, perhaps, that they did not want to listen to the good advice coming from these Benches. So many left, it was rather like the exodus of the children of Israel from Egypt.
I, too, compliment the noble Lord, Lord Howard, on his maiden speech. When I had the great honour of being introduced to this House, the announcement was made on 1 May and 46 new Peers were created, five of whom were on the Conservative Benches. Four have spoken in the debate today and the other was in attendance for part of the debate. I could ask myself, "Where are the other 41?".
302 I have always paid a great deal of money in tax. Sometimes I resented it and occasionally I was happy to pay it. I recall that early on in my business career I did not pay my tax on time. I was called in to have an interview with the collector of taxes in Belfast, who said to me, "Mr Steinberg, you earned the money. We are not a credit bureau. You pay the tax".
I believe that the Government have a strategy to extract as much tax as possible from individuals and companies and not necessarily pay attention to their genuine concerns. In that regard, I appreciated the speech of the noble Lord, Lord McKenzie, who gave an unreconstructed view of Labour's thinking. I hope that I will similarly give an unreconstructed view of Conservative thinking.
Perhaps I may start with the tax on gambling, a business with which I am associated and in which I declare an interest. It pays exceedingly high rates of tax. The general betting tax is levied at 15 per cent of gross profits. In casinos, taxation on gross profits runs from 2½ per cent right through to 40 per cent. So the popularity of the high-roller in the press must always take into account that you really only make 60 per cent of his gross losses.
I am not painting a picture where I would ask noble Lords to put out the begging bowl, nor am I asking for a flag day, but I am thinking that our party's policy of taxation on people who spend money rather than on those who save money is a correct and proper policy. People do manage to thrive in a low tax economy which encourages enterprise and, more by luck than judgment, people so far have managed the huge increases in taxation the Government have levied, particularly over the past five years.
I did not mention the earlier two years, when the Government rode on the back of the previous Conservative administration. They were content then to operate their fiscal policies as previously. But the figure has often been repeated—I shall repeat it again, as have other speakers—that there have been 66 tax increases, principally through a stealth approach. It is the approach with which I violently disagree. If the Government ever wanted to be absolutely straightforward with the public, they should have announced their tax increases in a normal way.
When people and companies earn money it would be reasonable for them to hold on to the largest percentage of their earnings. In this very House of Lords on 7 March 1766, Lord Camden said:Whatever is a man's own is absolutely his own; no man hath a right to take it from him without his consent either expressed by himself or representative".It is a shame that stealth taxes have become part of our vocabulary—at least on this side of the House—and to have them repeated as many as 66 times is something of which the Government should not feel proud.
The very first stealth tax the Government introduced was the raid on dividends, which has caused— practically in its entirety—the collapse of savings through pensions. The Government say that it is the weakness of the stock market. That is a part of the reason but they are wrong to say that it is the major part. Five 303 billion pounds a year was then grabbed and it has gradually increased. Compounded over the intervening years, Government have now taken a grab of more than £40 billion in the seven years they have been in power. Perhaps it would be useful to ask what the total figure is. Then you will realise why the pensions that people receive are being severely devalued. It used to be said that a man's home was his castle and his pension was guaranteed, but now neither of these things are sacrosanct.
I shall now refer to the area of taxation which concerns me deeply. If we accept—and I imagine that most of us would accept—that one's home is one's castle, how can it be justifiable to tax people twice, once when they earn their money and a second time when they die? I am referring, of course, to inheritance tax, which has become a burden around the necks of most people in our property-owning society. If someone bought a house 20 years or more ago, the probability is that that home has grown sufficiently in value to eat up that part which is free of inheritance tax. When one spends one's working life preparing for eventual retirement, it cannot be right that the family home has got to be sold to pay inheritance tax. It is pretty well immoral.
In a number of countries there is no inheritance tax. Your Lordships may be interested to know that on 1 January 2005 Sweden removed its inheritance tax. There is also no inheritance tax in Australia, Germany and Canada.
Seybert's Statistical Annals of the United States said:What are the inevitable consequences of being too fond of glory? Taxes upon every article which enters into a mouth or covers the back or is placed under the foot. Taxes on everything on earth and the waters under the earth".The Government have not quite reached taxation under the waters, but I am sure they will if they get the chance.
Homes play a major part in the well-being of the country. Although the Government are correct in saying that interest rates and inflation are at a very low rate, this is undoubtedly part of a world-wide phenomenon. Bear in mind that our interest rate is still more than twice that of the USA and is several times more than that of Japan. When figures are quoted, the Government mention nothing but the glorified unemployment figures. They do not mention the 2.7 million people on long-term invalidity benefit.
Coupled with inheritance tax, particularly on one's home, it was interesting to read in the press on Sunday that in 1997, when Labour came to power, 70 per cent of first-time buyers paid no stamp duty. Last year only 24 per cent were fortunate enough to pay no duty and first-time buyers now face an average bill of more than £1,000. It is people in middle England who are being squeezed so severely. A country that staggers under the burden of high personal tax cannot be happy. That is why we Conservatives are so much in favour of a low-tax economy.
304 I am surprised that no one has yet quoted Benjamin Franklin in this debate. He wrote:In this world nothing is certain but death and taxes".Speaking 14th on the list, I thought that another noble Lord was bound to use that quotation before me. I rated the odds at 5:2 on, so I ask noble Lords to watch out: 5:2 on chances can be beaten.
Let me return to the subject of inheritance tax. Currently the tax-free band for inheritance tax is £263,000. If one looks at the record of the Labour Government, and I know it is has been mentioned during the past seven and a half years, one will see that the value of housing has increased considerably, whereas the inheritance tax ceiling has been raised marginally. In a property-owning democracy, it is surely right and proper that people are not penalised beyond the grave and that their beneficiaries do not have to pay substantial amounts of tax or to sell assets that include people's life work or home.
I am in favour of a scheme that increases substantially the upper limit for inheritance tax or of a comparative scheme that eliminates the main home from inclusion in the calculations of inheritance tax. Inheritance tax is iniquitous, but even more iniquitous was the retrospective legislation from the Treasury to cover the schemes by which people tried to ensure that the family home would be passed on to future generations. Unless I am wildly mistaken, the Government introduced retrospective legislation as far back as 1986, which is an unparalleled shame and disgrace.
On 14 December, I submitted the following Written Question:Whether the proposals contained in the Chancellor's pre-Budget report will result in more people paying tax at the top rate; and, if so, how many".On 21 December, I received the following response:Estimates of the number of higher rate tax payers for 2005–06 depend on the level of the basic rate limit. This will be announced in the usual manner in Budget 2005".—[Official Report, 21/12/04; col. WA 141.]This is a complete fudge. I shall now ask the question again. If the basic rate of tax remains the same, and the Budget confirms that, would the Treasury agree that approximately 100,000 people will be dragged into the top rate tax band? This debate is all about lower taxation and that question is asked on the basis that it would appear that more people are being dragged into the top tax band.
In conclusion, I remind the House, as has been done before from these Benches, that it was a Labour Government that increased the top rate of tax to 83 per cent and had an additional tax rate of 15 per cent on investment income, resulting in a total tax rate of 98 per cent for many entrepreneurs. Unlike my noble friend Lord Kalms, at that time I was not in a position to be paying that rate of tax.
I also remind the House that the Prime Minister said that his Government would not increase the top rate of tax from 40 per cent but they have introduced 66 stealth taxes. Those taxes have effectively reduced the entrepreneurship of people in this country and 305 have created a heavy burden on all classes of the population. One of the most iniquitous increases is probably the increase in national insurance, which is effectively an increase in the top rate of tax. It is no surprise that savings under this Government have halved. In the Conservative party, we believe in lower rates of tax that will reward people throughout the country. I hope that some of the points that I have made strike home on the rather empty Benches opposite.
§ 6.16 p.m.
§ Baroness Seccombe
My Lords, I add my thanks to my noble friend Lord Blackwell for initiating this important and fascinating debate. This is a strange debate for me to make a contribution. I have no expertise in the subject, and the only experience I can claim is many years of poring over the financial pages in the daily newspapers, where one can find conflicting ideas about the apparent health of our economy. I believe that one finds what one wants to believe and then sticks with it. That way it is much simpler. Sometimes you are right and sometimes you are wrong. The position is probably similar for the heavyweight journalists who put their minds to these problems.
As I am speaking from the Back Benches, these are my views and not necessarily those of my Front Bench. My only reason for speaking at all is that I feel so strongly that a certain group of people has been treated very harshly by this Government.
In the 1980s, the Labour Party fought tooth and nail to frustrate the Conservative government led by my noble friend Lady Thatcher in their quest to give people the chance of owning their own home. Thousands of people availed themselves of the opportunity and proudly improved their property. With their new front doors and windows, it was obvious from the very beginning which were the houses that had been purchased. Instead of the drabness and awful uniformity of local authority housing—which was nearly always in need of repair, as I know from my time as a county councillor—other residents noticed that privately owned houses looked better and were obviously cared for better. As a consequence standards were raised throughout the area.
It was a most exhilarating time to be around as people experienced the newfound pleasure of being a property owner. I found it very strange that it was the Labour Party that was dead set against giving others the chance that many members of another place enjoyed themselves.
Since that time, many people have become share-owners and become thoroughly involved in a revolution which has given them a stake in society that was unknown in socialist Britain. Thousands of families have been released from being trapped in a particular house. We should never forget that it was a Conservative government who provided mobility and freedom for millions of people.
306 Over the years, minds have turned to passing assets on to children, which is a very natural and laudable instinct. I am concerned about those who have struggled to purchase their council house. Two foreign holidays a year or extravagant living was not for them: mortgages had to be paid and expenditure had to be curtailed to match. They did not take the attitude that once all the money had gone the state would provide, so make merry while you have it. The freedom that came with ownership brought responsibilities, which, on the whole, have been discharged.
This brings me to my unease, which I share with my noble friend Lord Steinberg. The rise in the value of property means that today 2.4 million homes are worth more than the inheritance tax threshold of £263,000, a considerable number of which are council houses. It is therefore not too difficult to see that the people who took the risk 20 years ago will be paying inheritance tax. The number of estates paying inheritance tax has increased 75 per cent since 1997. Surely this tax was not meant to hit hard-working people of modest means. I always thought it was meant to penalise only the super-rich.
Let me give your Lordships an example. I was horrified to read that if someone died leaving an estate totalling £425,000—made up of a property worth £350,000, contents of £25,000 and savings of £50,000—and after, say, £6,000 had been deducted for debts and funeral expenses, that would leave £419,000 on which inheritance tax at 40 per cent—£62,400— would then have to be paid.
There is also the problem of long-term care. None of us knows what our needs will be in our latter years, and most people are only too aware of the vast amount required for care either at home or in a nursing home. Those with only very modest means and no assets never have to concern themselves with such matters, as the state will always provide. However, those who may have what is now a property of some value but very little income have to live with the fact that this Government will raid their estate after their death—in my opinion, a shocking state of affairs.
As, thank goodness, we do not know how long we will live, it is impossible for most of us to pass anything on to our heirs during our lifetime, and thus avoid tax implications. However, if you are really prosperous, you are in a position to do so. The rich are able to take advantage of smart devices to preserve their estates, but I think you have to be pretty wealthy indeed to afford the lawyers' fees to set up these intricate schemes. Now that we have a Government who appear to believe in retrospective legislation, these plans may be to no avail.
Today the rise in the value of a home—138 per cent since 1997—has found many hard-working, middle-of-the-road people in difficulties. I have thought long and hard, and have come to the conclusion that there should be a substantial hike in the figure where inheritance tax kicks in. I suggest that such a sum should be £500,000. This would relieve many people of a great deal of anxiety and enable them to leave the next generation their estate intact and, in most cases, free of government confiscation.
307 I know that there are other anomalies in our taxation system and many other deserving cases, but I urge a Conservative government, when the situation enables them to introduce tax cuts, to consider such a measure and bring more fairness to our taxation system. There must be many thousands of people who deserve such deliberation and would, I am certain, be eternally grateful.
§ 6.24 p.m.
§ Lord Marlesford
My Lords, the House owes a debt of gratitude to my noble friend Lord Blackwell. With the election on the horizon, well within sight, and tax an important issue, as is always the case in any election in this country, this debate gives the House an opportunity to discuss it. The opportunity has been seized eagerly by the massed ranks of those on the Benches opposite. We must remind ourselves that the old idea that this House is mainly Tory is not true. The latest figure is that there are 202 Tory Peers and 201 Labour Peers. So we are pretty equal, as everybody can see.
Let us start with a basic fact on which we can all agree. It is not governments who make countries prosperous, although they can be very successful in preventing them being prosperous, it is individuals. If we assume—and perhaps we can agree on this too—that the socialist system of state enterprise is now abandoned throughout the world, although it does, I agree, linger on in North Korea and Cuba, it is on capitalism that we now depend. Following a visit to the Central Party School in Beijing in November, I learnt that the country was determined to stick with capitalism and the market economy. The Chinese for "capitalism and the market economy" is "socialism with Chinese characteristics". That is what is releasing a torrent of high-quality, high-tech, low-cost goods from the most entrepreneurial people in the world.
Historically, in both America and Europe, those who have made the greatest contribution to economic development under the capitalist system were motivated by the urge to enrich themselves and their families. Those who have been most successful and have contributed most to their countries have generated wealth far beyond their capacity to absorb it or their need to pass it on. Many of the most successful have gone on to found the great charitable and philanthropic organisations which have done so much to enrich their countries, both socially and culturally. From America, the names of Carnegie, Mellon, Rockefeller and Ford spring to mind. In Britain, we might think of Nuffield, Wellcome, Rowntree and Sainsbury.
There should be one purpose only of taxation, and that is to raise the revenue necessary for public purposes and to do it without discouraging wealth creation. There are not now, I believe, many in Britain who see redistribution of wealth as a prime aim. This does not, of course, mean that taxation cannot and should not be progressive, but it must be most cautiously so.
308 Thus the structure of tax should be used to grow the economy. It can be the most powerful tool for this purpose. That does not mean inventing some spurious economic theory, such as that of Professor Kaldor, who burdened the noble Lord, Lord Callaghan, when Chancellor of the Exchequer, with the absurd selective employment tax in the 1960s. It means taking full account of human nature, even when it is not at its most beautiful.
The watchword of the present Chancellor of the Exchequer has always been prudence. I therefore congratulate him and the Government on keeping in place through seven and a half long years the 40 per cent top rate of income tax which was so courageously and imaginatively introduced by my noble friend Lord Lawson of Blaby in his 1988 Budget.
The Labour Party found it necessary to include in both of its election-winning manifestos a pledge to retain 40 per cent as the top rate of income tax. We are all eagerly waiting to see if it repeats the pledge for its third manifesto. If it is not in the manifesto, we can be quite certain that the top rate will not be retained, whatever the Prime Minister's lips may tell us.
There are, of course, those who still do not recognise the enormous damage done by the confiscatory rates of tax under earlier Labour governments. The top marginal rate of 98 per cent, referred to by my noble friend Lord Lamont and others, which applied for five years between 1974–75 and 19781974–79 kicked in at an income threshold which, when adjusted to today's prices, would be little over £80,000 a year. Think of it. If the former Chancellor of the Exchequer, the noble Lord, Lord Healey, had still been in power, anyone with more than £80,000 a year could be paying 98 per cent tax. Indeed, the noble Lord, Lord Healey, whose personality I have always admired, told me a while ago that he did not actually think the 98 per cent rate had done any harm to the economy, it had merely made people work harder. However, noble Lords may remember some of the economic headlines that reached even the tabloids—subjects such as unemployment, inflation and especially the brain drain, to which no one still refers.
There are those, including the Liberal Democrat Party, who believe that the top rate of tax could be higher. I believe that their bid at the moment is 50 per cent plus a local income tax, although I see noble Lords on those Benches shaking their heads. Perhaps we will hear more later. Even severe increases in income tax have a surprisingly low yield. Five years ago, the noble Lord, Lord Mclntosh, in a Written Answer (Official Report, 19/12/02; col. WA 165), told me that if we took 50 per cent on income between £100,000 and £500,000, 60 per cent between £500,000 and £1 million and 70 per cent over £1 million pounds, it would produce a mere £3.1 billion. By 2002, that figure had nearly doubled to £5.7 billion. The number of taxpayers affected might be only 290,000, but I suggest that they are a pretty crucial wealth-creating group in this country.
There are those who would like to see a narrowing in the gap between the bottom 10 per cent of society and the top 10 per cent. I too would like to see more 309 done for the bottom 10 per cent. However, although in theory higher taxes can do it, in practice I doubt if they can. It is hard to make the poor richer by making the rich poorer. It does not work. My noble friend Lord Saatchi made that point very clearly in his excellent speech.
To find an extra £5 billion or even £10 billion from better government is not impossible. The Conservative Party and my noble Friend Lord Saatchi's team have already identified savings much greater than that. Much can be done by cutting out over-regulation—and the present Government are becoming guiltier every passing day of increasing regulation. Sadly, I have no time to set out any examples, but I have many relating to Defra, which is one of the main culprits. I am looking forward to opportunities to take them up with the noble Lord, Lord Whitty, in the weeks to come.
It is particularly important to realise that we live in a tax-competitive world. In terms of income tax and many other taxes we are still one of the lowest in Europe. Some EU countries would like tax harmonisation. Rightly, HMG have resisted that. No wonder one of the directors of the French Ministry of Finance said to me years ago, "We have 30,000 Frenchmen living in Kent who are refugees from our tax system. We have got to get them back. We have to have a level playing field". "Ah, whose level?", I asked him. He smiled.
I have a few examples of EU taxation. Denmark has a 59 per cent top rate and threshold of only £28,000. Sweden has 57 per cent and Belgium has 54 per cent with a very low threshold indeed. There is competition in taxation, as we have heard, especially in corporation tax. The Baltic states, which have very low corporation tax, are getting terrible stick from the French who regard it as the most unfair form of taxation and the French are even trying to deny them structural funds as a penalty.
Another area where tax competition is important is VAT, which I think is an excellent tax. It collects a lot of revenue, it is economically efficient and relatively easy to collect and police. However, when I say that competition is important I do not in the case of VAT necessarily mean in rates. At 17.5 per cent, we are at the low end, well below Sweden, Denmark and Hungary, which have 25 per cent VAT, but above the three tiny countries that have 15 per cent. If I were Chancellor, I might be tempted to use VAT if I had to raise more tax. An extra 1 per cent would raise £4.4 billion and £11 billion if we went up to a 20 per cent VAT rate.
But there is another really important aspect of VAT, which, when fully utilised, can be a great economic benefit. I refer to the threshold above which people have to register for VAT. A high threshold helps small businesses where the main input is labour and the main clients are those who are not registered for VAT and do not therefore have the ability to claim back the VAT that they pay. Typical examples would be small tradesmen, such as plumbers or carpenters, hairdressers and others who are self-employed and do jobs for domestic households and private customers.
310 At present, the UK has the highest VAT threshold in the EU, at £58,000. There is a proposal for an EU Council directive to amend the existing directive 77/388/EEC. Among other things, the new directive would raise the threshold to 100,000 euros or £70,000. The threshold in Germany is only £11,000, in France it is £51,000 for goods and £18,000 for services. Italy, Spain, Sweden and the Netherlands have no threshold so everyone has to register for VAT. I hope that the Chancellor will make full use of this EU change. It would encourage more entrepreneurs to enter the bottom rung of the business ladder, reduce the administrative burden on those who find record keeping a particular burden and please householders who are already clobbered by high council taxes.
The national insurance contribution is another example where we could have better economic management. We all know that the demographic and actuarial balance between earners and pensioners means that we all need to work longer. The actuaries work out that we should work until we are 72 to balance the books. At present pensioners pay no NIC on their earnings. Would it not be possible to offer some NIC relief, perhaps on a sliding scale, to employers employing older people?
Finally, a word about capital taxation. Thank goodness that we have avoided the wealth tax, which drives many wealthy and successful Frenchmen out of France, particularly when they retire. We had a narrow squeak because the noble Lord, Lord Healey, tried to introduce a wealth tax in 1976. As a number of noble Lords have said, inheritance tax is becoming a real political issue, partly because of the high value of houses.
Actually, I believe that we could use stamp duty as an alternative to inheritance tax. In a sense, stamp duty is a more voluntary tax. You choose how much to pay for a house and obviously work out what the price will be including stamp duty. If we increased the 1 per cent and 4 per cent rates by 1 per cent each that would give approximately £2 billion, which would enable the inheritance tax rate to come down to 20 per cent. That would be much better than raising the threshold because at the same £2 billion cost the threshold would have to be raised by an amount that would not exclude many houses in London. Anyone with a home costing more than £379,000 would still be caught by the tax.
I hope that we will hear from the noble Lord, Lord Mclntosh, an indication of his attitude to the philosophy of taxation.
§ 6.38 p.m.
§ Lord Newby
My Lords, I also congratulate the noble Lord, Lord Blackwell, on initiating such a timely debate. Taxation and how tax revenue will be spent will, as always, be central to the forthcoming general election campaign. I also congratulate the noble Lord, Lord Howard of Rising, on his maiden speech. I am just sorry that I could not agree with much of it.
The debate has been broad enough to encompass the largely theoretical and the completely pragmatic, but the central question raised by the noble Lord, 311 Lord Blackwell, is absolutely central to the type of society that we want to live in. Perhaps that is why there has been reference to such a wide range of philosophers, from Aristotle to Beatrice Webb. Incidentally, nearly all of them lived in an age when life was nasty, brutish and short—not a standard of life or form of society to which many in your Lordships House would today wish to return.
If I were the noble Lord moving the Motion on the Order Paper, I would want to draw attention to the case for the lowest level of taxation consistent with high-quality public services for all. I suspect that that is the question that most individuals would ask when considering the optimum level of taxation. It is a question of appropriateness, to use the word of my noble friend Lord Shutt. But to take the noble Lord, Lord Blackwell, on his own terms, I shall consider a number of questions from what is probably an unreconstructed Liberal Democrat point of view.
Are taxes in the UK today too high, on both economic and moral grounds? That is the nub of the case presented by the noble Lord, Lord Blackwell. What would be the consequences of his proposals, and those of the Conservative Party, on taxation? Finally, what do we believe in, as regards changes that might usefully be made to the structure of taxation?
First, I address the economic arguments behind the question whether taxes are too high. I believe that the level of taxes at the moment does not prove a major disincentive to individuals and companies. There is little evidence to suggest that they do. Certainly, the marginal tax rates for high earners in this country are less than in a number of the more successful European economies. For example, it is interesting that Finland, which has a top tax rate of 53 per cent, was recently selected by the International Institute for Management Development in Lausanne as the most competitive developed country in Europe. Even in Sweden, with a tax take at 54 per cent of GDP and a top tax rate of 56.5 per cent of GDP, growth remains steady. Although businessmen grumble about both personal and business taxes, they accept that they have world-class public services and that the government there have moved with the times to reform them, to make them more efficient and effective.
Some noble Lords have blamed low growth in Germany and elsewhere in Europe on tax levels, but I believe that that is extremely simplistic. I strongly share the view expressed by the noble Lord, Lord Skidelsky, that there is no straightforward correlation between taxation and growth over a wide range of tax levels. That view is supported if one considers the tiger economies of India and China. I do not agree with the noble Lord, Lord MacGregor of Pulham Market, that we could beat the competition in consumer goods in China and India by reducing taxation. Our future as a successful economy lies with high-value added goods and services, not in a race to the bottom with those countries. In sum, I do not believe that the level of taxation is hindering economic growth.
What about the moral case? We have heard some fascinating arguments about morality and taxation, and I wish that I had time to engage with the right 312 reverend Prelate the Bishop of Worcester at greater length on the issue. The noble Lord, Lord Blackwell, argued that the current level of taxation has debased moral responsibility, by which I believe that he must have meant that the level of taxation today has had that effect, compared with the level in the later years of the previous Conservative government. That is an immensely simplistic view. One can argue about whether the overall level of moral responsibility now is less than it was before the Labour Government put taxation up. That is in itself an extremely dubious assertion—but then to argue that it is also due to the rising level of taxation is not in my view credible. Nor do I believe that this Government are more corroded, in Burkes sense, than their Conservative predecessors. I would love to have time to pursue that matter, using case studies from members of both governments and politicians from a much longer historical period.
We then heard a series of arguments that taxation equated to dictatorship and that freedom was in inverse proportion to taxation. At best, I believe that that is only half the argument. What about freedom from want, treatable illness, fear of attack and ignorance? Without taxation, and without an element of redistributed taxation, those freedoms would simply be out of reach for a very large proportion of society. That being so, I find simply unsustainable the statement made by the noble Lord, Lord Vinson, that the moral case for lower taxation is irrefutable.
Where I do agree with the noble Lord, Lord Blackwell, is that taxation is too complex, and regulation even more so. If anything, it is regulation that is becoming a disincentive to economic activity rather than the level of taxation. A number of examples have been given as to why that might be the case. I also believe that public services could be run more efficiently. There are a number of ways in which that might be done—one of them being if they were much less rigidly controlled from the centre. To that limited extent, I agree with the noble Lord, Lord Saatchi, that there are far too many central targets. However, I am not sure that I would go all the way with him in saying, in effect, that there should be no targets for achievement set for public servants. I cannot believe that that is how he runs M&C Saatchi.
I was also extremely interested in the suggestion made by the noble Lord, Lord Laidlaw, about user taxes. Certainly in one respect at least—namely with regard to road user pricing—I have a lot of sympathy with what he says.
What about the specific tax proposals of the noble Lord, Lord Blackwell? As one would expect from the noble Lord, they are extremely thoughtful and undoubtedly have a logic. Raising the personal tax allowances has long been a Liberal Democrat aspiration, but the reason why it is an aspiration and why we have never made it a firm manifesto commitment with a set timetable for implementation is simply the cost. Equally, his other change would be to reduce taxation. That would be quite desirable, other things being equal. In fact, would it not be great if we could just abolish altogether a raft of taxes? But the problem is the cost—and here I fear that the noble Lord runs into difficulties.
313 On paper, allowing public spending to grow at 0.5 per cent less than GDP looks a relatively modest aspiration. But to argue that that degree of savings— which amounts after five years to £30 billion a year— can be achieved by reducing waste and inefficiency, as the noble Lord suggests in his CPS pamphlet, is a mirage.
The Government are trying to achieve very substantial efficiency savings already via the Gershon process. In previous debates, I have drawn the attention of the House to some of the more dubious proposals in Gershon. I do not believe that it will be successful to the extent that the Government believe it will be, nor do I believe that the James review will be any more successful in yielding credible efficiency savings on a grand scale. What the James review may do is to scrap whole programmes, which, although we might disagree with the specifics, is at least the honest way in which to reduce government expenditure. It is the great weakness of the noble Lords approach that he does not advocate a similar proposal.
The noble Lord is, however, a significant step ahead of the official Conservative Party position, in that he has spelt out exactly which taxes he is in favour of cutting, and how. The Conservatives have set themselves a sterner public expenditure test—namely, to keep public expenditure growth at 1 per cent less than the growth in GNP over the course of the economic cycle, but we have not yet the faintest idea of how the Conservatives intend to do that. Perhaps the noble Baroness, Lady Noakes, will tell us in her wind-up speech.
Unlike the proposals of the noble Lord, Lord Blackwell, we do not know what tax cuts the Conservative Party supports. Over recent months, the Conservatives have produced a series of options papers. The one on income tax and national insurance thresholds, for example, gave five options, costing between £0.2 billion and £6.7 billion per year. Another came out yesterday, and two more are to come. People are being invited to help the Conservatives with the consultation by telling them how much tax they would like back. None of those options, incidentally, has the other side of the equation attached. Could the noble Baroness let us know when we will know the outcome of those reviews?
§ Baroness Noakes
My Lords, perhaps the noble Lord is practising for the time when we are again in government, but I remind him that it is not normal for the Official Opposition to respond to such debates.
§ Lord Newby
My Lords, it is incumbent on any political party that will face a general election campaign in effect 10 weeks from now to tell us the 314 basis on which it will fight the most important aspect of its campaign; that is, to tell us what its taxation policy comprises. If, as is the case, 10 weeks from Easter—which will be the effective start of the general election campaign—two consultation papers on taxation have yet to be published, how on earth will voters know, in advance of the general election campaign, what the Conservative Party policy is? It may not be appropriate for the noble Baroness to explain that today; I would be very happy if the shadow Chancellor did it next week—
§ Lord Sheppard of Didgemere
My Lords, if the noble Lord intends to enlighten the electorate, will he confirm that the shaking of the head from his Benches earlier means 55 plus 1 per cent for national insurance?
§ Lord Newby
My Lords, I am very happy to do that. If I am not interrupted, I shall have time to tell the House what our policy is. I shall move to it straight away. I have two minutes and therefore I shall speak very quickly.
The overall aim of our tax proposals is to make the system fairer and simpler—no one will disagree with that. There are two principal components: first, we would abolish council tax and replace it with a local income tax, which by definition more accurately reflects an individuals ability to pay. To answer the question posed by the noble Lord, Lord McKenzie of Luton, regarding the previous economics debate, our definition of "income" for local income tax purposes will be the same as the definition of income for income tax purposes. Secondly, we would ask the richest 1 per cent of the population to pay 50 per cent of their income in tax on income over £ 100,000. Local income tax would be paid by those with incomes up to £100,000, not above. Therefore, 50 per cent would be the top total tax rate. There are three specific purposes in doing that. It would result in no top-up fees; no payment for personal care; and a cut in local taxes. Beyond those tax changes we would impose upon ourselves the discipline that any increase in expenditure must be met by a reduction in a programme or function elsewhere. We therefore propose to scrap the DTI, child trust funds and the ID card proposals to help fund our expenditure priorities, and not rely on spurious efficiency savings.
The level of taxation and the uses to which tax revenues are put are issues that lie at the heart of the political debate. Sometimes it is argued by those who do not vote that their abstention is caused by the fact that all politicians and their policies are indistinguishable. Todays debate has demonstrated that that is definitely not the case when it comes to taxation. The forthcoming election will give voters the chance to decide which of the visions for taxation set out today commands the greatest support.
§ Lord Sheppard of Didgemere
My Lords, if the answer regarding the figure of 56 per cent is yes, did I misunderstand?
§ 6.53 p.m.
§ Baroness Noakes
My Lords, today my noble friend Lord Blackwell made a powerful case for a low-tax economy. I have to confess that before Christmas I had unseasonal thoughts towards my noble friend as he in effect set my Christmas Recess homework. However, given the range and quality of speeches made today, I withdraw all those thoughts. The debate has been a very great success and I pay tribute to him.
We have also had the privilege of hearing a powerful maiden speech from my noble friend Lord Howard of Rising. He showed what a depth of business experience he can bring to our deliberations. I look forward to hearing him speak in many other debates, especially debates involving the economy.
I agree with my noble friends who pointed to the sparsity of noble Lords on the Benches opposite. That is rather a good indication that the Labour Party has no interest in low taxation; rather, it aims to tax as much as it can get away with and then spend or redistribute as much as it can get away with. Labour believes that once it has secured money in the Governments coffers through taxation, it is then its money to spend as it wishes. My noble friend Lord Saatchi brilliantly laid out the genetic traces of that in the Labour Party.
Our beliefs are quite different. We believe that we should pay as little tax as is necessary to support essential expenditure, and that so far as possible people should choose how to spend their money —a case espoused by my noble friend Lord Laidlaw. We also believe that taxation never ceases to be taxpayers money and that it should be spent as carefully as taxpayers spend their own money.
We have heard today from several noble Lords about the economic arguments for low taxation. I am not an economist and I say simply that for me those arguments are compelling. In economic terms high taxes are self-defeating because they lower economic growth, drive enterprises abroad and do not produce better public services. I simply agree to disagree with the noble Lord, Lord Newby.
Before this Government came to power Mr Blair said,weve no plans to increase tax at all,but that was spin. What he really meant was, We have no plans to increase tax in a way that we think you will notice. Since then, we have had the 66 stealth tax rises, as several of my noble friends, especially my noble friend Lord Steinberg, pointed out. But, of course, the tax-paying public do eventually notice that Gordon Browns hand is in their pocket for longer each year. Tax independence day—the day that taxpayers start working for themselves rather than the Chancellor—was six days later last year than in 1997. I expect that it will be even later in 2005. It is no comfort that our tax freedom day is a few weeks ahead of that in the euro-zone because it is a good seven weeks later than it is in the US. On the basis of the Pre-Budget Report figures, the average household will pay £6,500 more tax this fiscal year than in 1996–97.
316 As several of my noble friends have already pointed out, most commentators now agree that the Chancellor will meet his golden rule only with the help of tax increases in a Labour third term. Since your Lordships House last debated this issue just before Christmas, the news has been solidly in one direction—that of exposing the Chancellors fragile finances. My noble friend Lord Trenchard has already related that by the end of November the Chancellor had racked up borrowing of £33 billion, which makes his latest prediction of borrowing for the year of £34 billion look fanciful. The small print of the Pre-Budget Report shows that for the next financial year both council tax and income tax receipts will rise by 8 per cent—way above the rate of inflation. So if we do not get new taxes or tax rate rises next year, we shall certainly do so after that, if there is a Labour third term. The Chancellors figures show the tax/GDP ratio rising from 35.6 per cent last year to 38.4 per cent in 2009–10. If anyone in No. 1 Horse Guards Road thinks that that will be achieved without new taxes or tax rate rises, I would like to know what they are on.
I am looking forward to hearing what Mr Blair says when he is asked the question—which he will be during the forthcoming general election period—about tax rises, because Treasury Ministers have thus far wriggled and squirmed whenever they have been asked the question, and they have refused to deny that taxes will rise. During the previous general election period Mr Blair was asked whether any reasonable person would not suppose that the Government proposed to increase national insurance contributions. He said: They shouldnt. But, of course, that is exactly what the Government did.
The rest of the world has noticed that the U Ktax burden is rising, and that the UK is no longer the place of choice for investment. We used to be a low-tax economy with flexible labour markets and light regulation, but all of our hard-won advantages created during the previous Conservative governments term of office are disappearing, and unsurprisingly we have taken a dive in the international league tables for competitiveness. My noble friends Lord Lamont, Lord MacGregor and Lord Trenchard comprehensively drew attention to that.
We believe that the United Kingdom must regain its competitiveness to attract inward investment, and tax is a key element of that. My noble friend Lord Marlesford has already referred to the EUs tax harmonisation agenda, which would destroy our ability to use our tax system to compete internationally. We have genuine fears that despite the so-called red line in the EU constitution, this Government have protected us too little from the designs of Europe to achieve tax harmonisation by stealth, because the euro-zone is a high-tax, high-spending zone, and tax harmonisation in any degree can only be bad for our economy.
I will now address the broader aspect of the case for lower taxation. No natural law says that the state should have a share of an individuals income. The state must legislate, backed by the threat of imprisonment, to take the money; it is essentially coercive. The length of Finance Acts, which are now 600-plus pages and rising, 317 underlines the facts that individuals do not hand over the money voluntarily. Society accepts that harm can be done to an individual by taking his money in order to meet the wider needs of society. Implicit in acceptance of the coercive act of taxation is a requirement that tax is spent wisely. That is why in any debate about taxation we cannot separate taxation from spending. The ability to tax carries a corresponding duty to achieve value for money. If a government do not spend their citizens money well, they lose their moral authority to take the money in the first place. The good that they do with the money should always be greater than the harm done by taking it away from an individual. Expenditure that does not outweigh that harm should not be undertaken.
Measuring good and harm is extraordinarily difficult, even in the corporate sector, as my noble friend Lord Kalms pointed out. That has certainly borne a lot of the harm. He has his own ideas for highlighting the amount of that harm, which are interesting. We know that expenditure that does not add value cannot be justified. Unfortunately, that is what we have seen in spades with this Government, as several of my noble friends, including my noble friend Lord MacGregor, have amply demonstrated. The Chancellor took our money and spent it on public sector jobs which have not added value. We now have a Civil Service the size of Sheffield, and in health and education administrators have increased faster than front-line professionals. To add insult to injury, these public sector jobs are stacking up future public expenditure in the form of pension promises that exceed private sector norms and will therefore be value-destroying in the future.
The productivity of the public sector is dire. No independent studies have shown anything but a loss of public sector efficiency since 1998. The very best result is that the public sector has been getting worse in terms of efficiency by around 1 per cent each year, and most of the studies have shown much worse figures. A recent study for the European Central Bank showed that if we performed at the level of the best, we could spend 16 per cent less; at current levels of expenditure that amounts to £80 billion a year. That can be compared with the £20 billion savings announced by the Chancellor as part of the Gershon review, already described today as "unambitious". The bottom line is that this Government have not spent taxpayers' money wisely. That is why we believe that they have forfeited their authority to tax people at current levels, let alone the increased levels that are promised down the line.
Our policies are for lower taxes. My honourable friend Oliver Letwin will soon be announcing our expenditure plans, which will show how we, unlike the current Government, will spend money wisely and achieve value for money. Importantly, they will show how we can start the journey towards being a low-tax economy. I am sure that the noble Lord, Lord McKenzie, will be interested, since he flatteringly devoted most of his speech to our policies. Based on what the noble Lord, Lord Newby, said in his speech, he too has an interest. As the noble Lord helpfully pointed out, we are consulting on the 318 options for lower taxation. Inevitably, there are more good ways of reducing taxes than will be capable of being accommodated in the first instance, which is why we are consulting widely. We will be setting out our plans for that in good time for the next election, but tonight is not the time to set out those plans.
Let me be clear. When we talk about lower taxes, we are aiming at tax cuts not for the rich but for the many. I hope that the right reverend Prelate the Bishop of Worcester will be reassured by that. Some noble Lords have related what we are considering, which includes taking more people out of the tax net through higher personal allowances, reducing council tax and, as my noble friend Lady Seccombe and my noble friend Lord Steinberg have pointed out, stopping the iniquity of inheritance tax being a tax on ordinary people's homes. There are other options, such as those outlined by my noble friend Lord Vinson in relation to savings income. Those too are important.
I shall be interested to hear the Minister's views on the benefits of a low-tax economy. When he replies, I hope that he will deal with one simple question—do the Government believe that poverty is best dealt with by high taxation or low taxation? Put another way, is it better to use high taxes to make the rich poorer, or to use low taxes to help the poor to become wealthy? His answer to that question shall reveal a lot.
§ 7.7 p.m.
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord Mclntosh of Haringey)
My Lords, the answer to that question is, "has the noble Baroness, Lady Noakes, stopped beating her husband?". The assumption behind that question is that low taxes discourage poverty, whereas high taxes encourage poverty, which of course is clearly not the case.
I have had some difficulty in finding a word to describe this debate that would be acceptable to your Lordships, because I found great discord between the views of the Conservative Back Benches and what it is possible for the Conservative Front Bench to say. This is clearly an election debate; I expected it to be that. The noble Lord, Lord Blackwell, is a serious thinker in the Conservative cause, and what he says and what his Centre for Policy Studies says are clearly taken seriously by the Conservative Party. The noble Lord, Lord Saatchi, confirmed the political nature of the debate by giving us a preview of at least one of the Conservative Party election broadcasts, for which we are grateful, because we can do a textual analysis, and what is called in the Labour Party a "rebuttal" will be made that much easier.
What we have here is a focused debate; focused on the formulation proposed by the noble Lord, Lord Blackwell, of an economic model—which I call an ideological case—for low taxation, but which has not in fact come down to earth. It did not relate to the choices that the people of this country will have to 319 make at the next election, whenever it comes. That is confirmed by the inability, which I quite understand, of the noble Baroness, Lady Noakes, to commit herself in advance to what her party will say. I can be sure that some, if not all, of the views expressed by her Back Benches will not find expression in a Conservative Party manifesto. There are good reasons for that, which I will set out in a minute.
Before I do that, I want to echo what was said by the right reverend Prelate the Bishop of Worcester. It struck me as extraordinary that we should have a debate about the economic and ideological advantages of lower taxation that had virtually no reference to or discussion about what taxation was for. It came from the right reverend Prelate, the noble Lord, Lord Shutt, and, to a certain extent, the noble Lord, Lord Marlesford. It certainly came from the noble Lord, Lord McKenzie. To discuss the virtues of lower taxation without discussing why we have taxation at all is "Hamlet" without the prince. We have to set out our stand of what taxation is for and what we understand to be the taxation regime in this country.
The primary aim of taxation policy is surely to raise sufficient revenue for government to pay for the public services that the people demand while keeping the overall burden of tax as low as possible. The United Kingdom is a lightly-taxed economy—no one gave figures to rebut that—and the Government are committed to it remaining so. The noble Lord, Lord Marlesford, acknowledged that. The noble Lord, Lord Newby, after thinking about it carefully over Christmas, said that our levels of taxation were not too high. We have a taxation regime that aims to play its part in making and keeping the United Kingdom the most competitive place for international business. It encourages innovation, productivity and competitiveness, acts as a spur for investment and economic growth, corrects market failures and supports our social policy objectives.
There's the rub, because a Conservative manifesto is not likely to say what Back-Benchers here have said about social services, education, health or law and order. The noble Lord, Lord Skidelsky, is entirely right: the Conservative Party is trapped. It does not know whether its ideological pursuit of lower taxation will allow it to cut expenditure on the public services, which the people of this country have now shown in two elections that they want, and will show again that they want. They were denied quality public services under a Conservative government. The Conservative Party is trapped, because it cannot openly advocate— even though some speakers today have done—cuts in social services, education, health or law and order, even if they are dressed up as encouraging private individuals to make their own provision for those public goods.
That is a position that the Conservative Party finds it impossible to get out of. It will try to get out of it in the next week or so by saying that there is £80 billion of waste in public expenditure that can be got rid of, which will enable them to do wonderful things. The argument about waste is the most difficult argument for an opposition to make, particularly in the light of the very thorough, effective and demanding review 320 that Sir Peter Gershon has carried out of public expenditure in this country, and the conclusion that he has come to, which is that,to go further or faster than the savings set out in (my) Review during the period 2005-06 to 2007-08"—that is the current spending review period—would put at risk the delivery of public services".That is the situation that Mr David James and the Conservative Party will have to answer, if they are to have any credibility, rather than a basic and visceral claim that there is waste in public services. Of course there is waste in public services; there is waste in private industry as well. There is always waste, and good managers can always find it. We have been doing so; we have been doing the work and we know how difficult it will be.
That is not to say that there are not advantages in a lightly taxed economy. Such an economy meets our economic and social policy objectives. It ensures that the taxation regime stays up to date and flexible to meet the demands imposed by globalisation. It keeps business taxes as low as possible—again, no one has sought to claim that they have risen under this Government— which means that the right incentives are in place to reward entrepreneurship and risk-taking, and to promote productivity, competitiveness, economic growth and investment. For personal taxes, it means that the right incentives are in place to reward work and effort. Tax credits can be used to assist hard-working families and reduce child poverty, and tax relief can be used to foster our social policy objectives by assisting and promoting investment in disadvantaged areas.
I did not even see any eyebrows rise when I said that the economy was lightly taxed, but it is. By 2005–06, households will be on average £800 a year better off in real terms, following personal tax and benefit measures introduced since 1997. Pensioner households will be on average £1,350 a year better off in real terms. The tax-GDP ratio stood at 35.7 per cent of total output in 2003-04, down from a peak of 38.9 per cent in 1984ߝ85. The tax-GDP ratio in 2004ߝ05 is estimated at 36.2 per cent of GDP, about the same as that in 1997ߝ98, and although it is projected to rise by around two percentage points of GDP during the forecast period, it is still well below the highs of nearly 40 per cent of GDP reached in the mid-1980s. When the noble Lord, Lord MacGregor, looks back at a high-tax economy, as he attempted to do, he should look at the figures in the most recent Pre-Budget Report. The UK total tax burden is well below the average for both the EU15 and the EU25, and we have a lower standard rate of VAT than 20 of the other 24 EU countries. The noble Lord, Lord Newby, acknowledged that.
I will not take time with the fiscal rules, as there was no effective criticism of our performance in achieving them. However, I want to say something about the effect of taxation on lower-paid families and better-off families. A strong economy—it is universally agreed that that is what we have—means that all groups gain from a rise in living standards. Since 1997, there has been a real increase of 22 per cent for a single-earner couple on male mean earnings with two children, and of 19 per cent for 321 the same couple without children. That gives the lie to what the noble Lord, Lord Blackwell, said about poor people being hit by taxes.
By April 2005, nearly 17.9 million households— more than 70 per cent of households—will have gained as a result of personal tax and benefit measures introduced since 1997. As a result of those measures, around 80 per cent of households with children and 95 per cent of pensioner households will have gained by April this year. Some 4.6 million households will have gained as a result of the introduction of working and child tax credits, compared to the system of children's tax credit and working families' tax credit that the Conservative government had. Let us not think that tax credits are entirely an invention of the Labour Government. The direct tax burden on a single-earner family on average earnings with two children will be 20.4 per cent in 2005ߝ06, 0.5 percentage points lower than in 1997ߝ98.
What does that mean for low-paid workers? Single parents working part-time and earning the national minimum wage—£4.85 per hour—will not pay income tax or national insurance contributions if they work up to 18 hours per week. If they work 22 hours per week, they will be paying just £3.27 per week in income tax and NICs—an average direct tax burden of 3 per cent. That is not quite like the dramatic examples given by the noble Lord, Lord Saatchi.
These parents are eligible for far more in tax credits than they pay in tax. A single parent working 22 hours per week at the national minimum wage earns £106.70 per week and is eligible for working tax credit of £56 per week—seventeen times more than their income tax and NICs bill. A couple without children and with annual earnings of £10,500 receives more through working tax credit than they pay in income tax and NICs.
I welcome the comments of the noble Baroness, Lady Noakes, that any tax cuts from a Conservative government would not benefit the rich—although that contradicts comments from the Benches behind her. But the noble Lords, Lord Blackwell and Lord Saatchi, cannot argue that our changes bring more to the rich. That cannot be sustained by the facts.
Regarding moderate and high earning families, a couple with two children and one parent working, with earnings of up to £ 18,000 per year, will receive more through child tax credit and child benefit than they pay in income tax and national insurance. A dual earner couple with two children and a joint income of up to £34,500 per year and with maximum eligible childcare costs, £200 per week, is eligible for more tax credits than the second earner pays in income tax and NICs.
No-one has referred to the fact that in that context you have to consider the effect of the tax system on whether work is worth while and how it makes work pay. The disincentive to work under the Conservative tax system was such that it has been possible for us to increase employment in this country by 1.8 million over the past seven-and-a-half years. We are committed to making work pay, the reform of the tax 322 and benefit system to improve work incentives and reduce tax burdens, especially for those on low incomes. If anyone says that there are more people paying tax now than there were in 1997, indeed there are. There are more people paying tax because there are more people working and able to pay tax. That is the benefit of the tax system that we have.
What is the alternative from the Conservative Party? I pay tribute to the noble Lord, Lord Newby, who tries hard. In the last two minutes of his speech he set out what he would agree were marginal changes to the tax policies of this Government, to which he has occasionally paid credit. But, for the Conservative Party, the position is enormously more difficult, because, as the noble Lord, Lord Skidelsky, said, it is trapped. It is trapped, not only because the Conservatives cannot specify the tax cuts or the savings in public expenditure that they want, but because they have consistently committed themselves to higher public expenditure.
Let us consider Mr David Davies, who on 6 October, said that police numbers would increase by 5,000 a year over and above the level that the party inherited. He said that the party was aiming for target of 40,000 extra police. That would cost £2 billion. Mr Davies, again on 6 October, said that within the first month a Conservative government would start their new prison building programme, announcing plans to create 20,000 extra prison places. That would cost £580 million. I am being very selective here. Regarding scrapping tuition fees, Shadow Education Secretary Tim Collins on 8 September, promised an extra £2.1 billion investment in higher education. Let us "net" that out and say that it would be only £1 billion in extra expenditure. A Conservative Party document on social housing in October 2003 said that the Conservatives would use the proceeds to provide new social housing—as many as 15,000 new homes a year. Being very modest, let us say that it would cost £1 billion.
There are so many examples, that I could provide a complete list that added up to £15 billion, without even mentioning the patients' passport for private care, which would cost £1.2 billion. David Willets' proposal at the Conservative Party Conference on 6 October to link pensions to earnings would cost £2.9 billion. Mr Willets again proposed a lifetime savings account which would cost £1 billion. Tim Collins at the Conservative Party Conference promised 600,000 school places, which would cost £2.9 billion. From the sublime to the ridiculous, the Conservatives would spend £ 17 million on scrapping fishing rod licences and £46 million on retaining Type 3 frigates.
It is not credible. It does not add up. It cannot be made to add up. We have heard nostalgic and moving references, including to Immanuel Kant in 1709, Lord Camden in 1766 and Edmund Burke, all of whom thought that taxation was coercion, as the noble Baroness, Lady Noakes, said. If we want to provide the standard of public life that is not of private affluence and public squalor, but that the people of this country have come to expect, have the right to expect and are determined to continue to expect, the 323 nostrums which have been expressed today will not satisfy the people of this country at this election or at any election.
§ 7.26 p.m.
§ Lord Blackwell
My Lords, I shall not detain the House for long, but I thank all noble Lords who have spoken and to pay tribute to the outstanding maiden speech of the noble Lord, Lord Howard of Rising.
Lord Mclntosh of Haringey
My Lords, I apologise to the House for failing to say what I had written but have lost. It was a first-class speech and I was very interested to hear it, although, like the noble Lord, Lord Newby, I agreed with little of it. I apologise for not saying so.
§ Lord Blackwell
My Lords, not at all. I was also about to thank the Minister for his reply. I shall not pick up all the points that he made. Although I am sure that he will seek to interpret it in other ways, I repeat that it is not necessary to argue for reducing public expenditure to reduce taxes, it is simply necessary to argue for public expenditure that grows a little less fast than the economy. That is an important technical and real point.
I listened carefully to all contributions. While there are different degrees of enthusiasm for reducing taxation, I did not hear anyone argue for a higher tax economy. I was delighted to hear the noble Lord, Lord McIntosh of Haringey, say that the Government's objective was, indeed, a lightly taxed economy. The problem is that after 30 years of falling public expenditure as a percentage of GDP, we are now back on a trend where public expenditure as a percentage of GDP is rising, and taxes are rising and will rise with it. Whatever the objective, the reality is that the Government's policies are moving towards a higher taxed economy. This debate has drawn attention to the importance of these issues, including the economic and political arguments around the need for a low or lightly taxed economy. If the debate has done nothing other than to focus attention on those arguments, it has served its purpose. I beg leave to withdraw the Motion for Papers.
§ Motion for Papers, by leave, withdrawn.