The Government must not forget social stability, says Lord McFall in his Finance Bill speech

Lord McFall’s speech in the House of Lords on the Government’s Finance Bill, 18th July 2011. See the original here.

Lord McFall told the Government not to forget that "Economic prosperity is built on a platform of social stability," in the Finance Bill Debate in July

My Lords, I was privileged to be a member of the Finance Bill sub-committee under the excellent chairmanship of the noble Lord, Lord MacGregor of Pulham Market. It is good to have the opportunity this evening to debate a number of those issues and put them in to a wider context.

I want to look first of all at corporation tax. One aspect examined by the committee was the roadmap for corporation tax. There has been a focus on whether this would make the UK economy more or less competitive. The context for this is that the Chancellor in his Budget in March announced that he would cut corporation tax by an additional 1 per cent over and above the cuts previously announced. This was a flagship measure, but to fund it, this year’s Finance Bill will bring in a reduction in allowances available to firms which make significant investments.

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The Government’s The Plan for Growth states:

“Growth was concentrated in a few sectors of the economy and in a few regions of the country”.

I welcome that sentiment. A specific aim of the plan is,

“to encourage investment and exports as a route to a more balanced economy”.

This change to corporation tax would appear to run contrary to that aim. As the Institute for Fiscal Studies said earlier this year:

“The largest beneficiaries from the package of measures will be high-profit, low-investment firms”,

which would include, for example, financial services. Meanwhile the IFS says that cuts to capital allowance will,

“have the largest impact on those firms with capital-intensive operations”,

which include manufacturers. Major investors who are considering the UK as a site for investment are not so easily swayed by a cut in the headline rate when allowances are also being cut. This change could drive investment away from the UK and help the economy to become more focused on the financial sector by raising the effective tax rate for manufacturers.

There are also issues regarding the carbon-floor price system for energy-intensive industries. It has been suggested that this has been implemented in such a way that, according to a report by Thomson Reuters earlier this year, it will place additional costs on businesses amounting to £9.3 billion. Given that these businesses are major employers and, in many cases, major exporters, it goes against the Government’s proposals in The Plan for Growth. There has to be further scrutiny of the impact of these changes. It is important that the whole context of taxation on businesses is taken into account, not just the headline rate of corporate tax.

Oil taxation has been mentioned. This was nothing other than a hasty, politically motivated initiative with no consultation, and we have seen this before: we have seen it with Labour Governments. What happens is that when these proposals are implemented they do have long-term adverse consequences for these industries. As the Chartered Institute of Taxation has said,

“the last minute and precipitate change in Oil tax rates for an industry that is particularly dependent on long-term planning seems wrong”,

and it goes against the Government’s proposals for stable tax planning. The Government should take that issue into consideration. The sub-committee did note that the Government need to retain the flexibility to deal with immediate issues, but informal consultation should still have been possible and witnesses to the sub-committee said that this would have enabled better policy-making, so I hope the Government take that issue on board.

An issue has been mentioned regarding HMRC, which the sub-committee discussed, particularly the skills and resources available and whether it was able to carry out the Government’s new approach to tax legislation. Perhaps more importantly, the committee also heard concerns over whether HMRC was fully able to implement the legislation once it was made, given its staffing problems. By some estimates, tax evasion costs up to £1 out of every £8 that should be collected in taxation, and therefore we need a good staff. This is particularly important given the sheer complexity of legislation being proposed in this Bill-and particularly the proposals on anti-avoidance, which the sub-committee scrutinised at some length.

I welcomed the £900 million the Government have pledged to invest in HMRC to tackle tax evasion. The principle behind this is right: investing more in HMRC staff will save the taxpayer money by helping to close the tax gap. But I am concerned it is insufficient, particularly at a time when cuts have been made to HMRC’s budget; when HMRC is still attempting to absorb the loss of over 20,000 staff since 2004; and when tax legislation is becoming more complex. In the evidence sessions of the Finance Bill sub-committee one tax specialist said of HMRC that:

“a lot of very skilled people have left, that morale is very low, that people are given work that they are not being trained properly to do”.

There is both a short-term and a long-term problem here for the Government. I have raised this issue before in another place when I was Chairman of the Treasury Committee. We said then, even six years after the merger of the Inland Revenue and HM Customs and Excise took place, that the merger,

“had a knock-on effect on performance”,

and we were,

“deeply concerned about employee engagement at HMRC”.

There still exists today the danger that the Government may focus too much on creating complex anti-avoidance legislation, rather than addressing the more fundamental issue of ensuring HMRC is fully resourced to implement that.

Lastly, I turn to something that the committee did not look at: the impact on ordinary people. The flagship policy for ordinary people in this Finance Bill is the significant increase in the tax-free personal allowance for income tax and national insurance-a welcome move, as it will benefit lower income households. However, this is also an area where we need to see the changes made in a wider context, rather than focusing on a single change. For example, the rise in VAT at the beginning of this year is reported to cost the average family with two children £450 a year. That is more than 10 times the benefit that is gained by low-income families from the rise in the personal allowance. That rise in VAT also added nearly 3p to the cost of a litre of fuel-or nearly three times the amount of the reduction in fuel duty that the Government bring in with this Bill. There is a need here to ensure that we take the full context of tax changes into account, and I hope the Government will realise that.

Looking to the future, there are inauspicious signals. Next winter the Chancellor cannot blame the snow. The cuts are coming, and the pressure on wages will not abate until 2015-and that is the Governor of the Bank of England talking when he appeared before the Treasury Committee in another place. I suggest to the Government that they need to be cautious, and I leave them with this important message, given these cuts. Economic prosperity is built on a platform of social stability. If the Government forget that rule they are going to get themselves into more problems. Let us hope they heed it.

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