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Finance Bill

My Lords, I thank the Minister for introducing his first Finance Bill in your Lordships’ House. I look forward to an excellent debate today, and in particular I await the maiden speech of my noble friend Lord Hamilton of Epsom. The Minister will be aware that the skills of this House as a revising Chamber cannot be used on the Finance Bill, although I am sure that all noble Lords welcome the work of the Economic Affairs Committee in examining certain aspects of it. In this election year, that work has necessarily been reduced, compared with the past two years, but I think that noble Lords will agree that the report is stimulating and useful. I am glad that the Minister took time in his speech to make some detailed responses to it. I know that my noble friend Lord Wakeham, the chairman of the Economic Affairs Committee, will speak later on its report. We on these Benches welcome the report. We hope that, in the fullness of time, your Lordships’ House can play a more substantial role on the technical aspects of Finance Bills, as opposed to their fiscal policy aspects. In the mean time, our Economic Affairs Committee is building a strong case for the competence and credibility of your Lordships’ House to work in this way. Before I turn to the Bill, this debate offers an occasion to look at the Budget from which it is derived, even though it was delivered some four months ago. Since then, economic news has not been encouraging. We on these Benches have long challenged the ability of the Chancellor to stay within his self-imposed golden rule. On 28 June, I specifically asked the Minister whether the Government had any plans to change the definition of the economic cycle for the golden rule. The Minister said:"““My Lords, I confirm that the Government have no such plans””.—[Official Report, 28/6/05; col. 129.]" The kindest thing that I can say about that is that the Minister is clearly not in the confidence of the Chancellor. This morning, the Chancellor announced that he has redefined the golden rule as starting two years earlier, in 1997. Hey presto, the golden rule is met. I hope that when the Minister winds up this evening, he will explain the circumstances of his misleading the House on 28 June. On these Benches, we condemn creative accounting. Our policy is for an independent fiscal projections committee to avoid just such skulduggery. It is interesting that, in opposition, Gordon Brown advocated an independent panel of forecasters, though, in government, he quietly dropped the idea in favour of the pragmatic appeal of the flexibility to cook his books. Cooking the books does not change the fundamentals. Let me remind the Minister that since the Budget none of the experts outside the Treasury has moved towards supporting the Government’s growth forecast for this year. The Bank of England expects only 2.5 per cent. Since the MPC has the benefit of a Treasury representative at its monthly meetings, we might deduce that the Treasury case is not very compelling. I have two specific questions for the Minister about prospects for growth. In the light of the decline in manufacturing output in the three months to April this year and the loss of 1 million manufacturing jobs since 1997, does he still expect 2005 manufacturing output to increase by 1.5 to 2 per cent, as set out in the Budget? Secondly, given the erosion of consumer confidence—which all retailers know about—the collapse of mortgage equity withdrawal and the slowing of household debt, does the Minister still expect household consumption to rise by 2.25 to 2.75 per cent? It is not surprising that tax revenues in the early part of the year are already down and that borrowing is already up. The structural deficit is plain for all to see. Spending cannot run ahead of growth for long, without expenditure cuts or tax increases coming behind. The Chancellor has already acknowledged that his finances are in trouble by postponing his next spending review for two years. Doubtless, he is banking on being in No. 10 before that catches up with him. But I hope that the Minister will want to be straightforward with the House today about the prospects for the economy. I turn to the Bill. In terms of its length, the majority of the Bill is devoted to complicated anti-avoidance legislation. The Chancellor’s approach to the tax system seems to be predicated on the belief that complicated is good. Year after year, he builds complicated systems of reliefs and incentives—some of   which get abused—and then he creates layers of anti-avoidance legislation of almost mind-blowing complexity. When the Chancellor’s obituary is finally written, I predict that the headline will be that he created more tax legislation than any other Chancellor in history. There is another way, and it is built upon a completely different foundation stone—simplicity. My noble friend Lady Wilcox will return to this later in her speech. The Finance Bill perpetuates the practice, elevated to a high art form by the Chancellor, of creating regulation-making powers which significantly alter the position of taxpayers. For example, Clauses 17 and 18 enable the Government completely to rewrite the tax regime for authorised unit trusts and for open-ended investment companies by order. Another example which has caused the Association of British Insurers to express concern is paragraph 3 of Schedule 9, which allows the Treasury to rewrite the tax regime for the insurance industry at will. We believe that changes which affect such a significant and tax-sensitive industry should be dealt with by primary legislation. We say that it is wrong in principle for the tax system of this country to be gradually relegated to regulations, subject at best to the negative procedure. Quite simply, a loss of Parliament’s sovereignty is   implied by this Finance Bill and, indeed, by its predecessors. It is not just a question of meaningful parliamentary scrutiny. It is not even about Parliament losing out to the executive. Some of the issues dealt with in orders are so complex—I again cite the taxation of insurers—that I challenge Ministers to say, hand on heart, that they truly understand the implication of the complex orders that result. What the Bill does, de facto, is pass legislative authority to civil servants. That is no way to run a country. My honourable friends in another place sought to amend the Bill in several important respects, and the Government used their parliamentary majority to defeat those attempts. I should like to spend a few minutes on two aspects of those changes because they throw a spotlight on the kind of government we have. Last November, the Government used their parliamentary majority to push through secondary legislation dealing with inheritance tax—the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004, to be precise. This innocuous-sounding order was presented as a deregulatory measure, but the reality was very different. In the old days, before the order, a full inheritance tax return was required for estates at or just below the £275,000 threshold—a threshold so low that it is already dragging too many estates into the inheritance tax net. The order removed the need for 30,000 estates to submit a full account, but the sting was in the tail. Now all estates above £5,000—not only those just below the threshold—have to submit a new return. That means that about 300,000 estates between £5,000 and £275,000 have to fill in the new return. In human terms, we are talking about 300,000 grieving families caught up in this bureaucracy. The new four-page return purports to be simple but, as with so much of the Government’s apparent simplification, the devil is in the detail of 23 pages of accompanying guidance and 16 pages of annexes. The form was criticised for its complexity last week in a Public Accounts Committee report. For example, only 36 per cent of users found the guidance notes easy to understand. My honourable friends in another place moved amendments which would have removed this unnecessary and intrusive burden. The Government’s response was typical; they denied that there was a problem, with a lot of allusions to fairness, implying that these estates of £5,000 and upwards were potential inheritance tax cheats. That is a rather typical socialist attitude towards the asset-owning classes. My honourable friends in another place also moved amendments to implement a system of real estate investment trusts. These have been announced many times by the Government but not delivered. The property industry thinks that it would be good for our commercial property markets and it would add another range of products for our financial services industry. The Government have given no reason for their constant delay. This is just another example of the Government not being sufficiently interested in asset ownership and savings. The Government are facing economic prospects that are less rosy than at the time of the Budget. The country’s finances have a structural deficit building up as a consequence of spending running ahead of economic growth. It gives us on these Benches no joy to see the black hole looming up ahead because that means painful solutions, probably in the form of higher taxes. This Finance Bill is part of the Government’s clumsy approach to economic management. They have built their spending plans on forecast tax revenues which now look uncertain. They see increased yield through the war on tax planning—re-badging it as ““avoidance”” as if that were as bad as tax evasion and, in doing so, blurring the age old principle that a taxpayer may legitimately order his affairs in order to minimise his tax burden. I do not hold a banner for the tax planning industry but, equally, I see the Government’s fiscal focus as dangerously unbalanced—and possibly even counter-productive—if, as has been suggested, it drives new investment away from the UK to shores which are more fiscally friendly. This Finance Bill is not one of which any Government could be proud, although the noble Lord, Lord McKenzie of Luton, has put up a loyal effort today. We will see it pass through its formal stages in your Lordships’ House but not with any sense that it contributes to the economic well-being of our nation.