Budget debate and motion on windfall tax (2nd day)

- Thursday, 3rd July 1997

 

Rt Hon Peter Lilley MP

Mr. Peter Lilley (Hitchin and Harpenden): Yesterday was the first time that the trust which the British people put in the Government was put to a real test. We shall see that, as the consequences of the Budget filter through to them, the British people will realise that their trust was misplaced. It was the Prime Minister himself who chose to make trust the central issue of his election campaign—above all, trust that a Labour Government would not revert to tax and spend. Invoking almost biblical language, the Prime Minister claimed to have entered into a new covenant with the British people. He, Tony, claimed to be uniquely trustworthy. To allay fears that Labour would once again tax and spend, he gave the British people clear and categorical assurances.

 

Earlier this year, the Prime Minister told business men in Birmingham: We have no plans to tax at all. He told Daily Express readers: Our plans do not involve raising taxes at all. If we have any such proposals we will make them clear before the election. How does that square with yesterday's Budget—17 new Labour taxes introduced by the Chancellor? They are not taxes on fat cats, but taxes which will ultimately fall on the hard-working, prudent savers of middle Britain. The Labour Government have broken their covenant, they have forfeited their trust and betrayed their pledges.

 

The truth is that there was no need for an emergency Budget now at all. There was no emergency—quite the contrary. No Chancellor has ever inherited a better economic legacy than that bequeathed to the Chancellor by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) and his predecessor.

 

As Lord Healey said yesterday, As we look at this and future Budgets produced by the Labour Administration, we must always remember that rarely, if ever, have a Government had such cause to be grateful to their predecessor when it comes to the economy. When the Chancellor arrived at the Treasury and opened the books, as the phrase has it, he found that, far from there being hidden problems, the economy was doing better than my right hon. and learned Friend had predicted during his Budget last November. Borrowing in the four months between the Budget and the end of the financial year was £3.3 billion lower than forecast, and it has continued on a healthy downward path since then. Revised figures show that growth has been better than we thought it would be. The trade figures have been better than expected, despite the strong pound, and unemployment has been falling faster than forecast.

 

As the new Chancellor could not find anything wrong when he looked at the books, he decided to cook the books. He did, in effect, what any takeover merchant about to asset-strip a sound company would do: he decided to downgrade the forecasts. So he came up with four new assumptions, and got the National Audit Office to examine them. The NAO described his assumptions, rather acidly, as a deliberately cautious interpretation of the evidence. And so they are. Indeed, his new assumptions are not merely cautious; they assume that the Government will fail.

 

The right hon. Gentleman assumes that the Government will fail to privatise anything—that is the black hole of which we warned during the election. He assumes that the Government will fail to get unemployment down. He assumes that they will fail to deter any tax evasion; and fail to get the economy to grow as fast in the future as it has in recent years. So we have four forecast failures by a Labour Administration—a pretty dismal outlook, but, I suppose, a fairly realistic assessment of what this Labour Government may actually achieve.

 

Even the revised forecast that the Chancellor has made did not justify increasing taxes, but he was determined to raise them, because he wanted to tax now in order to be able to spend later.

 

Mr. Dale Campbell-Savours (Workington): The right hon. Gentleman will know that the City has been saying that the economy is overheating and that something has to be done. In those circumstances, would the Opposition have supported raising interest rates, raising taxes or doing nothing? Presumably they would have had to do one of the three—which one would they have selected?

 

Mr. Lilley: Funnily enough, I was just coming to that. The Chancellor justified his decision to raise taxes precisely on the basis of the hon. Gentleman's point—that there are some who believe that consumer spending in the short term is growing too rapidly. Yet, overwhelmingly, the taxes that the Chancellor raised fell not on consumption but on the corporate sector. So presumably the Chancellor does not believe in the thesis; there is therefore no reason why the hon. Gentleman or I should believe it either.

 

Far from trying to take action to deal with a short-term growth in consumer expenditure, the right hon. Gentleman's taxes—by and large—fell on the corporate sector, and were geared to the longer term, by when it is assumed that consumer spending will have slowed, anyway.

 

The Budget raises very large amounts of extra taxation: roughly £6 billion a year, which is £300 for every household in the land. But it seeks to do so in ways that are not easily visible, and are at one remove from the ultimate taxpayer. Unfortunately, however, there is a general rule of taxation, stating that, the less visible a tax is in the short term, the more damage it does in the long term. As taxes work their way through to people's pockets, they do a lot of damage en route. Any attempt to conceal the blame will increase the ultimate pain.

 

There are two big measures in the Budget—the change in advance corporation tax and the windfall tax. Both hit pensions and long-term savings. That is a double whammy for pension funds; it is the Robert Maxwell memorial Budget. No wonder the National Association of Pension Funds has described the Budget as the biggest attack on funded pension provision since the war. Even Robert Maxwell only took £400 million. The ACT change alone, according to the NAPF, will take more than £50 billion of extra pension contributions from employers over the next 10 years.

 

The House will recall that I published a proposal to give every working person in the new generation a funded pension, which would have involved Government putting billions of pounds into pension funds. Labour is taking billions of pounds out of pension funds. That means that Labour's shameful election lie that we would put people's pensions at risk was not merely dishonesty, but rank hypocrisy.

 

In opposition, Labour said that changes to pension arrangements should be introduced in a spirit of bipartisan co-operation. Certainly, major changes should be introduced only after full consultation with the pensions industry. Yet these changes, which radically alter taxation of both pension funds and the corporate sector, have been introduced without consultation with either sector. They have been rushed in after just a few weeks of being tacked together. I fear that, as a result, they are shoddy, incomplete and ill thought out.

 

By definition, if the Government are several billion pounds a year better off, pension funds must be several billion pounds a year worse off. As a result of this tax, in order for the same pension to be paid, members or companies will need to pay more into their pension schemes. The National Association of Pension Funds calculates that a contribution sufficient to pay a pension of £100 a week will now pay only £85 a week. Do the Government plan to tell members of personal pension schemes the amount of the extra contributions that they will need to pay to make up the shortfall?

 

The Chief Secretary to the Treasury (Mr. Alistair Darling): The right hon. Gentleman is trying to pose as a friend of pensioners. Does he not recall that, when he was a Minister at the Department of Social Security, he presided over the regime under which the mis-selling of pensions took place? Does he not remember that he proposed the abolition of tax relief on employee pension contributions, and was it not the Conservative party that was going to abolish the state pension? No wonder no one believes anything that the right hon. Gentleman has to say about pensions. His arguments simply do not stand up.

 

Mr. Lilley: If the right hon. Gentleman can only stand at the Dispatch Box and make a statement that he knows to be untrue, while refusing to answer the question that is posed to him, he discredits his office. I have a number of questions to put to him, and we would rather have more sensible and constructive answers. Not just Conservative Members, but all who are involved with pensions and companies, want to hear answers to those questions. The present national insurance rebate is calculated by the Government so that, assuming a certain after-tax return, it will generate a private pension that is roughly equivalent to the pension that people would have if they stayed in the state earnings-related pensions scheme. If the level of rebate is not revised to reflect the change in taxation, many people with pensions would be best advised to contract back into SERPS. Is that the Government's intention? Will they advise people to opt back into state earnings-related pensions?

 

If the Government do not do that, will they not be guilty of the very mis-selling that the Chief Secretary just accused the last Government of having allowed to happen? Trying to make it suitable, or rather advisable, for people to opt back into SERPS and then not advising them to do so is certainly mis-selling of a kind; moreover, it is the very opposite of what the Government have been saying they intended to do ever since the election. We must ask whether Social Security Ministers who have been saying that they want to enable everyone to opt out of SERPS were aware of the impending change in the tax regime.

 

If the Government do not advise people to opt back into the state scheme, the alternative is that they increase the value of the national insurance rebate to offset the tax change. Do they intend to do that? How much will it cost? Have they asked the Government Actuary to assess that cost? Has that extra cost been factored into the Budget arithmetic?

 

I shall give way to the Chancellor, who will surely want the House to know whether his calculations took that into account. It seems that not only do Social Security Ministers not know, but the Chancellor does not know what is in the Budget, and he does not know its implications for social security. The pensions industry, those who are in pension schemes, particularly those with private pension funds, and those in companies which run occupational pension schemes, want answers to those questions. I hope that we shall have answers before the end of the debate.

 

There is another perverse consequence of the change to ACT which the Chancellor failed to mention yesterday. He constantly laments the lack of investment, and claims to want more investment in Britain. He often laments that many British companies invest more overseas. However, his proposed change will make it significantly more advantageous to invest abroad relative to domestic investment than was previously the case. How many Labour Members realised when they cheered yesterday that the first act of the new Chancellor would be to encourage British companies to switch investment from Britain to abroad?

 

To the extent that companies continue to invest in this country, they are discouraged from paying out the fruits of productive investment in mature companies which have few good productive investment opportunities left. They are encouraged instead to retain those funds and invest them in their own companies. That means that less money will be recycled through the capital markets to the new, small, expanding companies which need investment, and will no longer find it so easy or so cheap to get.

 

The other major tax is the windfall tax. It is the only new tax burden that Labour admitted to planning before the election. To make it acceptable, Labour had to pretend that it would not be paid by ordinary people. Last year, the Chancellor said that it would not be paid by ordinary families. The impression was created that it would all fall on the fat cats in the privatised utilities.

 

Now we know. Virtually none of it will be paid by the fat cats. Instead, we are led to believe that it will be paid by an abstract entity called the firm, but as John Kay, the adviser to the Prime Minister and Chancellor has said: There is no such thing as a tax on firms. The effective incidence of all taxes is ultimately on individuals. Normally, the £5 billion cost of this tax would show up in due course in household bills and there would be higher gas, water, electricity and phone bills.

 

As there are nearly 20 million households, that £5 billion tax would, on average, cost each household more than £250, but the extent that regulators prevent the tax from being passed on in higher prices, it will instead fall on the value of shares. Of course, its impact will be the more concentrated on pensioners, who pay a disproportionate amount of household bills out of lower incomes, than if it had ultimately gone through in higher charges. That is because more than half of all shares are held by or on behalf of today's and tomorrow's pensioners.

 

If several billion pounds are siphoned from pension funds by the tax on top of the ACT changes, companies and individuals will have to put in an equal extra amount or suffer lower incomes in retirement. Even if the tax did not fall primarily on pensioners, it is still objectionable in principle. It is not merely retrospective: it is being imposed long after the alleged windfall profits arose. It goes back 15 years, to when BT was originally privatised, much to the chagrin of Iain Vallance. It does not go back to the first privatisation under the influence of the International Monetary Fund—the sale of the Government's stake in BP. It appears that a company's chairman has to become a Minister; voting Labour is not enough, as Iain Vallance found out.

 

Of course, this tax will not be paid primarily by the people who benefited from the original speculative profits. People whom the left vilify as speculators—those who sold the shares fairly soon after they were issued—will not pay a penny of the tax, but pensioners whose schemes invested later for the longer term will bear the full burden.

 

Labour's windfall tax will damage Britain's standing as a country whose Government can be trusted not to behave arbitrarily. It will drive up the cost of capital and, perversely, reduce the revenue that may be obtained from any future privatisation, if the Chancellor eventually finds something to privatise; but the real absurdity is that it is a one-off levy to fund an on-going make-work scheme. The Government cannot fund a permanent programme from a temporary tax.

 

We support the objective of getting young people off welfare and into work. We believe in that passionately. It has been one of the keys to our reforms of social security, employment and education. We have aimed to give people the skills, the incentives and the jobs to get them off welfare and into work, and we have been succeeding.

 

Over the past four years, the number of young people unemployed has come down by 100,000 a year. When the Chancellor first mooted his plan to get 250,000 young people who had been unemployed for six months or more off the dole, 280,000 young people were in that position: there are now fewer than 180,000. We have done a lot of his job for him, and we did it by sensible measures to create real jobs, not by make-work schemes and the skivvy jobs that he proposes.

 

The Secretary of State for Education and Employment (Mr. David Blunkett): Will the right hon. Gentleman give way on that pathetic note? Perhaps he would tell us, therefore, why his party, over the period of its recent office, introduced 30 separate schemes, which he now describes as makeweight?

 

Mr. Lilley: I have no objection in principle to taking measures over and above those that I have described to get people off welfare and into work. I have no objection in principle to the sort of measures that the Chancellor is proposing.

 

Mr. Campbell-Savours: The right hon. Gentleman referred to "skivvy jobs".

 

Mr. Lilley: I was quoting the term used by Labour Members to describe the regime that we established for 16 to 18-year-olds, which is precisely what they want to extend to 18 to 25-year-olds. We established a scheme under which people had the option of education, of training or of work, but not of benefit. He proposes to establish that benefit regime and to extend it to those people. We have no objection to that in principle, and no objection in principle to the proposal to introduce job subsidies. It is just that we think that it will not work, and we know that it will not save money. We set up a study to examine similar schemes throughout the world, and it discovered that not a single scheme saved more in benefit than it cost in subsidies and in employing people on make-work schemes.

 

Mr. Blunkett: Will the right hon. Gentleman tell us, therefore, why his Government introduced three schemes, including workstart, that involved a job subsidy of the sort that he is now attacking?

 

Mr. Lilley: I have just told the right hon. Gentleman that I do not attack these schemes in principle. Had he listened to me during the Queen's Speech, he would find those very words. We believe that there can be a social case for them, but that there is no financial case; and it was the financial case that the Opposition put to the electorate before the election. They claimed that the savings on social security would be greater than the cost of the schemes, and that they would be able to transfer the savings on social security to the education budget. All talk of that has disappeared, because it is nonsense.

 

There are no such savings, because a large part of the cost of subsidy goes to young people who would have got jobs anyway. A further element goes to people who displace people who had jobs, or who would have got jobs but were not entitled to the subsidy. Yet a further element goes to people who are on the schemes only for the six months that the subsidy lasts and then return to benefit. For all those reasons, the costs far exceed benefit savings.

 

I repeat that there may be a social case for such schemes. The Conservative Government certainly thought that there was, for example, to help those who had been unemployed for a long time—two years or more, and we introduced a pilot scheme. The dead weight in that circumstance is far less—because far fewer people get back into work after they have been unemployed for more than two years—so there is a far greater chance that a high proportion of the costs will be met by benefit savings.

 

When the Labour Government try to pretend, as they did before the election, that they have come up with a magic scheme that will enable the right hon. Gentleman to increase his departmental budget, they are deluding both themselves and the British people. The schemes might work to the extent that the subsidy reduces the cost of employing people. If the Government accept that reducing the cost of employing people will create some additional jobs, surely they must also accept that increasing the cost of employing people—by, for example, adopting the national minimum wage and importing European social costs—will reduce the number of jobs.

 

The subsidies are temporary, and apply to only a few hundred thousand people. The increases in employment costs are permanent, and apply to millions of people. The net effect of the Government's proposals will be to drive people out of work and into welfare, and the cost of that will be far greater than could possibly be met by a windfall tax.

 

As well as changes to help young people who are unemployed, the Chancellor made much of his plans for lone parents. However, he did not bother to inform the House of one aspect of his plans that was hidden away in his departmental press releases.

 

The House may recall that, before the election, I announced, but did not have time to implement, plans to equalise the benefits payable to new lone parents to make them equal to those available to married couples in similar circumstances. That is fair, it does not send out the wrong signals about marriage and the value of two-parent families, and, in the long run, it saves £500 million a year.

 

However, that was anathema to the politically correct denizens of the Government Benches. Before the election, the then Leader of the Opposition, now the Prime Minister, was asked on the "World at One" programme: Are you going to stick with the Conservative plans to equalise benefits for lone parents with those of married couples? The right hon. Gentleman replied, No. It is not easy to misunderstand that reply—it was a quite simple, unusually straightforward "No." He told the people of this country that he would not implement my plans.

 

But yesterday, only moments after the nauseating spiel we heard from the Prime Minister about his integrity and how he always sticks to his promises, the Chancellor broke that promise. We now know that the right hon. Gentleman will implement my plans—I welcome that—with total disregard for the pledge the Prime Minister made to the electorate before the election.

 

The Prime Minister is keen to emphasise that this Budget is no more or less than his party promised during the election campaign. However, before 1 May he was asked a number of clear questions, to each of which he replied, "No." Would he put up taxes at all? No. Would his July Budget go beyond his windfall tax plan? No. Would Labour implement my lone-parent benefit reforms? No. Would Labour leave a £1.5 billion black hole by refusing to privatise assets? No. Would Labour alter Conservative departmental spending plans? No.

 

Only two months ago, Labour answered no five times. Yesterday, however, we learned that the true answers to those questions were yes, yes, yes and yes. [HON. MEMBERS: "That is only four."] And yes. [LAUGHTER.] Is it not extraordinary how Labour Members are proud of the number of pledges that they have broken? They do not want me to underestimate them, and in future I will not.

 

The Budget provides not only the opposite of what Labour told voters it would provide, it will accomplish the opposite of what the Chancellor claimed, only yesterday, that it would accomplish. He said that it was a Budget designed to curb a consumer boom; yet the overwhelming bulk of the tax burden will fall on the corporate sector. He said that it was a Budget to control houses prices; yet its net effect will be to make investing in houses more attractive than investing in equities. He said that it was a Budget to encourage long-term investment; yet its biggest effect will be to hit long-term investment in pension funds. He said that it was a Budget to encourage investment in the United Kingdom; yet its measures will encourage people to invest abroad.

 

Today, the cheers of Labour Back Benchers may still be ringing in the Chancellor's ears. Tomorrow, I fear that he will find that those cheers have turned to hollow laughter.

 

The Secretary of State for Education and Employment (Mr. David Blunkett): I welcome the shadow Chancellor to his new post: may he hold it with distinction for many a long year. Before commenting on his speech, I should like to accord him a tribute. I acknowledge that he does care about young people, about their exclusion from society and about their need to be able to earn their own living and to lift themselves off the scrap heap of time. I accept that he should like those young people to be in jobs and able to develop their own families. After hearing the shadow Chancellor's speech today, however, I am totally unclear about whether he supports our measures, whether he is in favour of job subsidies or whether he believes that the Government should intervene in the labour market to help clearly disadvantaged unemployed people. The shadow Chancellor has contradicted himself in this debate several times already. He said, for example, that he is in favour of programmes organised by the Government, but that he is not in favour of our programme. He is also in favour of subsidies, but he is not in favour of our subsidy. He is in favour of the Government raising money to spend on young people, but only if it is not raised from a windfall tax on the utilities. Presumably the shadow Chancellor would be in favour of raising money to help young people if the burden fell on the backs of someone else—such as pensioners, whom the previous Government required to pay VAT on domestic fuel bills. The previous Government imposed 22 tax increases that affected everyone, although the burden of most of them fell on individuals.

 

My right hon. Friend the Chancellor has introduced a windfall tax on profits which, in the 1980s, the present shadow Chancellor clearly believed—because he came close to admitting it—were excessive. The shadow Chancellor seemed to say that it is all right to raise money to help young people, but only if it does not come from windfall profits. If the money is to come from a windfall tax that demonstrates those excess profits—the billions of pounds of profits made over the past 15 years—he is agin it. He made an extraordinary admission. He is in favour of the type of intervention that we propose—although he would like it to cost less and not to be based on quality, continuity and employability, which are the hallmarks of our programme—and he is agin it.

 

Yesterday, my right hon. Friend the Chancellor announced a programme that has received almost overwhelming applause and the unified commitment of the British people. He presented the most popular Budget in decades, and he did so in a manner that showed considerable aplomb. He has given hope to the British people. They now have hope that the legacy that we inherited—a legacy of neglecting investment in our health service, in our education, training and employment programmes and in our housing—will be ended.

 

There is neglect in the education system, which the right hon. Gentleman and his colleagues have left us to clear up: 600 primary schools rely on outside toilets, and there are 25,000 temporary classrooms. There is a legacy of redundancy among teachers and a legacy of disrepair in schools with crumbling walls, leaking roofs and window frames that rattle, which creates an environment not fit to teach in. That is why my right hon. Friend the Chancellor's announcement yesterday was welcomed by parents, governors and teachers and by communities across Britain.

 

An investment of £1.3 billion over the coming years to tackle that disrepair is morally right, economically sensible and will bring about social cohesion. It allows those who want a job to have a sensible job to meet a need in our community, by linking public and private, as my hon. Friend the Paymaster General will be assisting us in doing.

 

 

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