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Volume 464: debated on Thursday 18 October 2007

The Chancellor of the Exchequer was asked—

Tax Credits

1. If he will make a statement on the findings of the Parliamentary Commissioner for Administration’s report “Tax Credits: Getting it Wrong”. (158859)

As the House knows, tax credits benefit some 6 million families and nearly 20 million people. We remain committed to continually improving the operational delivery of tax credits. I intend to respond positively to the ombudsman’s report which, for example, makes useful recommendations on the changes to the proposed procedures for recovering overpayments. In the introduction to her report, the ombudsman states:

“I know from HMRC’s response to my first report, and the dialogue that they have since continued to have with my Office, that they are committed to understanding and improving the customer experience.”

I assure the House that I welcome the ombudsman’s second report. It is a helpful and valuable tool that we will use to inform the development of the tax credit system.

I thank the Minister for that answer, but errors are still made in approximately 2 million of the 6 million claims for tax credits. As a result, many people entitled to tax credits do not apply for them. Will the Minister give the figures for my constituency—or for the whole of Edinburgh, including the Chancellor’s constituency—for those who are entitled to, but do not receive, tax credits?

I do not have that specific breakdown, but I can tell the hon. Gentleman that, in Edinburgh, West, 7,300 families and 12,200 children benefit from tax credits. He may also like to know that, in families with children whose household income is under £10,000, 97 per cent. of those entitled to the benefit and support of tax credits are receiving them.

In my constituency, 9,500 families get tax credits, worth an average of £3,000 a year. Recently, I surveyed the almost 150 constituents who have contacted me about tax credit problems: 94 per cent. said that they were satisfied with how their complaint was dealt with, and three quarters of the cases were resolved in the constituents’ favour. Does my right hon. Friend agree that the real threat to tax credits is not miscalculation, which affects relatively few people, but the fact that everybody’s tax credit would be at risk if the Conservatives were ever to get back to power?

I agree with my hon. Friend, and am grateful for the detail that he has provided about customer satisfaction. However, I acknowledge that the ombudsman’s report was highly critical, in particular of Her Majesty’s Revenue and Customs’ decision making about recovery of overpayments. I can tell the House that HMRC will replace the so-called and very disliked “reasonable belief test” with a clearer test that will set out customers’ responsibilities for checking factual information. HMRC will play that information back to customers but, importantly, it will have a time limit for action on mistakes reported to it. I believe that that will lead to a fairer allocation of responsibilities between the customer and the Department.

This is the most damning report, and all of us know from constituency experience that every word is justified—indeed, the language is very moderate. Do not the Government realise that if they give a couple of thousand pounds to a family, that is agreeable to the family, but if they want a thousand pounds back, that causes financial disaster? Will the Government recognise that with this complicated system, it is those who most need help who are least capable of dealing with its complexities?

I acknowledge a degree of justice in what the hon. Gentleman says, but HMRC has taken note of customers’ experiences and feedback in its response to the problem. That response has also been informed by the first report from the ombudsman and by the issues that hon. Members have raised with Ministers in this House. As my hon. Friend the Member for City of York (Hugh Bayley) rightly pointed out, the HMRC is responding in a way that is improving customers’ experience, although I accept that we are not where we want to be when it comes to the delivery of services. A further improvement will follow from the pilot that HMRC began in March and, under the transformation programme, people who report that their household has broken down will be allowed from November to terminate their old joint claim and make new, single claims in one telephone call. So far, more than 70 per cent. of customers involved in the pilot suffered no break in their payments and their new claims were processed within a week. I think that the result will be a material benefit to the more than 170,000 tax credit customers who, unfortunately, find themselves in those circumstances, and we are working to improve the system all the time.

May I say to my right hon. Friend that, when tax credits work, they work very well and are welcomed by everyone, but that the big problem arises when they go wrong, as they stay wrong even when every effort is made to put them right? I look forward to hearing her say that more money will be made available for training and that the software involved will be refined. That is needed because, at present, it fails to recognise when a problem has been rectified. Those are the difficulties that we need to concentrate on, so will she use her good offices to put them right?

I will certainly do that. I assure my hon. Friend that we acknowledge and accept that training is an important aspect of the improvements that HMRC can bring to the customer experience. Indeed, training will be ongoing over the next few weeks to deal with a number of issues across tax credits. However, that is not the only area that we will improve. A lot of work is going on, and I commend the staff of the tax credit offices for their enthusiasm in bringing about improvements to the tax credits customer experience.

Does the Minister accept that there is absolutely nothing in the ombudsman’s report that we and the Prime Minister have not known about for the past two or three years? Why has it taken so long for the Government to get on top of the shambles that has seriously affected many of the people whom the tax credit system was designed to serve? When will the Minister give this new guidance, and will she assure us that she will first consult hon. Members who are concerned about the issue? Will she respond to the ombudsman’s recommendation—

The hon. Gentleman asks a series of questions. I will have to check Hansard if I am to respond to all of them—obviously they were part of his leadership campaign.

The take-up of tax credits is at an unprecedented level. New figures that were published in March showed that 97 per cent. of families on incomes below £10,000 were claiming their entitlement to child tax credits. The changes that I have proposed today, the detail of which will become public after we have finished the consultation with the ombudsman and other organisations with which we are engaged, will improve the way in which customers of the tax credit system are dealt with when overpayments are made. There is a range of reasons why an overpayment can occur. However, the House acknowledges—indeed, the Conservative party has come to acknowledge—the value of tax credits in tackling the serious problem of poverty in society.

For the past two years, HMRC accounts have had to be qualified by the Auditor General because of the tax credit shambles that the ombudsman described in her latest report. The Minister does not sound confident, but can she assure the House that it will be possible to sign off next year’s accounts?

I accept that a position in which the accounts are not signed off is not a good place to be. We are working to bring about changes that will enable the tax credits office to correct that situation. I welcome the Conservative party’s acknowledgment that poverty is a threat that challenges society. It also now accepts that tax credits are proving highly successful in combating child poverty. I go further and welcome the comments of the right hon. Member for Witney (Mr. Cameron) on Tuesday 16 October:

“Do not tell me that a society which can decode the human genome…build the world’s greatest financial centre…and provide the young men and women that form the finest armed forces on earth…cannot fight and win the battle against poverty.”

That is precisely what we in government are doing.

Education and Training

2. What recent assessment he made of the impact on the economy of providing education and training for 16 to 18-year-olds. (158860)

By 2020 the economy will need 5 million more people with higher-level skills. Since 1997, 150,000 more 16 to 18-year-olds are in education or training, and the number of young people in apprenticeships has more than trebled to 250,000. Over the same period, the UK’s gross domestic product per capita has risen from being last in the G7 in 1996 to second only to the US in 2006. To close the gap further, we have committed to expanding the scope of educational and development opportunities for all. We will therefore deliver 3.7 million adult qualifications over the forthcoming comprehensive spending review period.

I am grateful for my hon. Friend’s reply because with the excellent stewardship of Russell Strutt, the principal of Central Sussex college, which has a campus in Crawley, 34 per cent. of 16 to 18-year-olds attending that college receive education maintenance allowances. The allowances have played a significant role in keeping our 16 to 18-year-olds in education, which improves not only their life chances, but the economy of the Gatwick diamond area. Does my hon. Friend agree that that is wise spending for any Government?

My hon. Friend is exactly right. The positive effect of education maintenance allowances is there for all to see—I see it in my constituency. They enable those who might not have been motivated in the past to stay on and get the qualifications and training needed in a modern economy to do just that. That benefits not only those individuals and their potential earning power later in life, but our economy.

I know that the Minister makes great play of the success of the new deal, but does she not recognise the importance of skills that people in their 20s and 30s can take forward? Does she not agree that one of the biggest social concerns here in the capital city is that while literally hundreds of thousands of people come from eastern Europe to take on relatively unskilled jobs, we have the highest level of unemployment— 8.5 per cent.—of any region in the UK?

To drive down rates of unemployment, it is important that we give our young people and young adults the education, training and access to opportunities that they need in a modern economy. I am surprised that the hon. Gentleman did not welcome the fact that we have created 2.6 million extra jobs, and that levels of employment are the highest seen in the economy for many years. I would have expected him to at least acknowledge the Government’s success in terms of employment.

Given the importance of engineering to the economy, what efforts is the Minister making to promote engineering among 16 to 18-year-olds, so that we can ensure that our youngsters have those skills in future, and take them up in the economy?

As we move forwards, it is important to ensure that education and skills training fits high-value jobs and employment opportunities. We and colleagues in the Department for Innovation, Universities and Skills are working closely with employers involved in the train to gain initiative to develop the new diploma, and to ensure that our 250,000 apprenticeships are properly based and focused on high-value jobs. Those are the jobs that we wish our youngsters to be trained for in future. I assure my hon. Friend that manufacturing, technology and engineering feature strongly in our efforts.

The number of 16 to 18-year-olds who are not in education, employment or training rose by 40 per cent. between 1997 and 2006. Given the increase in the number of 16 to 18-year-olds in that invidious position, and in light of those unacceptable facts, how can the Minister justify the spending on the new deal for young people?

First, I would question the hon. Gentleman’s facts. There has in fact been a fall in the number of people who are not in education, employment or training as a percentage of the population concerned in the past 10 years. He also has to recognise that 625,000 more youngsters are in education and training than were 10 years ago, and 189,000 more are in work. He needs to remember that the category of those not in education, employment or training includes parents who are caring for their children, people who are in part-time training, people who have disabilities, and people who are off on gap years.

Financial Advice

The Government are committed to providing high-quality financial advice to all sections of society. That is why we commissioned the independent expert, Otto Thoresen, to examine the feasibility of a high-quality national generic financial advice service. His interim report is due shortly, and his final report is due in the new year. We will respond next spring.

I thank my hon. Friend for that answer, but I am extremely concerned about the situation that the Norwich and District citizens advice bureau faces, and I am sure that what I say about Norwich is true of other places across the country. The number of cases dealt with by the debt advisory services has gone from 24,000—that is the average at Carrow road, which is where Norwich City football club’s ground is—to more than 30,000 in the past year. We need guidance on keeping the services going, on helping the advisers, on credit unions, perhaps, and on informing the public of what is available to them. The services are in crisis management and it is not tolerable.

I agree with my hon. Friend, and that is one of the reasons why last week’s pre-Budget report included, I am delighted to say, an announcement of £130 million for our financial inclusion fund over the comprehensive spending review period. That is up from £120 million in the current period. The current fund has been used to pay for about 500 debt advisers across the country. I do not know about the situation in Norwich, but I am happy to look into it. We will decide how to spend the additional money by the end of the year. I would have thought that the availability of those funds would enable us to continue, if not increase, the provision of advice that is already available.

Do the Chancellor and the other Treasury Ministers recall that in past years, their party attached tremendous importance to the ownership of the commanding heights of the economy? What is their policy now towards sovereign wealth funds? Are they taking expert legal advice on how to treat them, bearing in mind that the United States, Germany, France and Japan will not allow their major companies to be bought by foreign Governments, but we, apparently, are contemplating doing so?

I was wondering when the hon. Gentleman would get to the European examples. I was not part of Militant Tendency myself, but I am clear about our current policy. As my right hon. Friend the Chancellor made clear earlier this year, we welcome investment into Britain. We think our country is richer as a result of having open borders, inward investment and open trade. That is our policy, whether it is a sovereign wealth fund or any other that invests in Britain.

The Minister may be aware that the Treasury Committee produced three reports on financial inclusion in 2006 alone. We are pleased to note that the Government have taken up a number of the initiatives proposed. The main conclusion of those reports is that poorer people are excluded from financial services. With that in mind and in advance of Otto Thoresen’s report, does my hon. Friend agree that generic financial advice not tied to particular sales products is the most effective building block in creating an effective financial inclusion strategy?

I agree with my right hon. Friend, and I congratulate him and his Committee on the important work that they are undertaking. The answer to his question is yes, and that is why we have commissioned Otto Thoresen to do his work. He has made it clear that he sees a need for so-called generic financial advice that is not tied to a particular product. We are currently working out the best means of providing that in a way that is accessible to everyone, with different delivery channels depending on the needs of the individual. I look forward to working with him and his Committee in developing these proposals further.

Of course we welcome the Government’s belated attempts to ensure that all families have access to genuinely independent generic advice, but surely that is just one side of the coin when some banks are behaving so irresponsibly? In light of the Chancellor’s comments in the Daily Mail this morning, does the Minister agree that when her Department made the decision to bail out Northern Rock with taxpayers’ money, it should have done so on the condition that the board and senior management were dismissed?

No, absolutely not, because it is the board and the management that are responsible for the company. We are not interested in acting as shadow directors or in any way limiting the freedom of the private sector to work effectively. We took the actions that we took in the public interest to guarantee deposits and prevent contagion in that bank.

On behalf of my hon. Friend the Member for North-East Derbyshire (Natascha Engel) and myself, I congratulate the Government on accepting our sound financial and employment advice, with the result that we have saved the jobs at the Markham tax office from today. It is a wonderful achievement. Whatever she does, my hon. Friend the Minister should not take any financial advice from the Notting Hill finance group. Therein lies a problem. We would finish up with 3 million unemployed, mortgage rates at 10 per cent. and Black Wednesday.

I could not agree more. I congratulate my hon. Friend and my hon. Friend the Member for North-East Derbyshire (Natascha Engel) on the success of their local campaign. I can reassure my hon. Friend the Member for Bolsover (Mr. Skinner) that I have no intention of taking any financial advice from the Opposition, particularly their leader, who I understand was advising the then Government on Black Wednesday.

The Minister and I agree on the need for people to have access to high-quality financial advice, but did she read last week about the tragic case of a Mr. D of Westminster who, following poor advice from his neighbour, increased capital gains tax paid by successful entrepreneurs and cut it for those who sell their second homes? What does she think she can do to make sure that Mr. D and his colleagues get better advice next time round?

I am entirely confident that we acted on the best possible advice. I remind the hon. Gentleman that the headline rate of capital gains tax, even after the changes, is still half what it was when his party was in power. Capital gains tax is now simple and sustainable, and it is one of the most competitive rates internationally. The annual exemption remains at £9,200.

Inheritance Tax

4. What he expects the annual cost to be of the increase in the inheritance tax thresholds announced in the pre-Budget report beyond those announced prior to the pre-Budget report. (158862)

The costs are published in the pre-Budget report, and 12 million married couples and civil partnerships will benefit from a combined inheritance tax allowance of up to £600,000, rising to £700,000 in April 2010. The entitlement will also extend to all 3 million widows and widowers.

The reliable figure that I have for the total cost is £1.4 billion—I am disappointed that my right hon. Friend was unable to give it—which is a similar sum to the cost of introducing long-term care. Why are the Government spending money on Tory priorities, when they could be spending money on much fairer measures to help people whose inheritance is less than £300,000 and who risk losing even that should they need long-term care?

Not for the first time, I do not agree with my hon. Friend, and she will not be surprised to learn that. We should recognise the fact that husbands and wives contribute to assets held by the family, including the family home, and I therefore think it right that, in the event of a widow’s death, she can use her husband’s unexpired inheritance tax allowance, effectively increasing the amount of money that can be deducted from any tax liability. As a result of what we are doing, the allowance covers the value of about 97 per cent. of houses in this country, which is the right thing to do. I also think it right to help people who need long-term care, and we have increased the amount of money available to do that.

Will the Chancellor confirm that the press notice accompanying the March Budget proposals on inheritance tax described them as “fair and targeted” and stated that they will give certainty to families “up to 2010-2011”? Does his claim that his sudden panic doubling of the allowance had nothing to do with the announcement by the shadow Chancellor eight days before give us a completely new definition of political serendipity?

Just before yesterday’s football, I tuned into MPTV, where I saw the hon. Gentleman trying to run that line while questioning Treasury officials—and rather unsuccessfully, at that. The Budget earlier this year set out proposals to increase the allowance. It has always been the case that all taxes are kept under review. I decided at a very early stage that that was the right thing to do on inheritance tax, which is why I did it. The big difference between the Government and the Opposition is that we can make that change, because we can afford to do so. The Conservative proposals would cost more than £3 billion, and they have failed to identify any credible source for raising that money, which adds to the black hole in their finances. They have promised more than £6 billion in tax reductions, but they have offered no convincing explanation of how they would meet that gap.

As I have said, it is, of course, open to any political party to make proposals to increase the threshold, but they must ask themselves where the money would come from. The Conservatives have not identified any credible source for raising anything like the £3.5 billion that they promised in just one conference speech. It is possible to spend an extra £1 billion, but most of the benefit would go to a small minority of estates over £850,000. Both because it would be inequitable to do that and, crucially, because it could not be afforded, it would be wrong to accept the Conservative proposals. All political parties get into huge trouble when they start making promises that they cannot possibly afford. If they do that, they will end up increasing borrowing, putting up interest rates and putting up mortgage rates, which is exactly what happened to the Conservatives in the early 1990s.

Would the Chancellor like to uncross his fingers, look you, Mr. Speaker, straight in the eye and assert that the Government would have made their inheritance tax announcement if the Conservative Opposition had not made their promise to raise the threshold to £1 million?

Yes, I would. It is right to recognise that, in this day and age, most husbands and wives contribute to the family assets. If a husband who has not used up his allowances dies, his wife should be able to inherit them. The key difference between us and the Conservative party is that we can make those tax reductions because we can afford to. The Conservatives have now made tax promises worth more than £6 billion, yet they have no idea how they will be able to finance them.

The raising of the inheritance tax thresholds has certainly been driven by a tripling of UK house prices in the past 10 years or so. Has the Chancellor seen this morning’s international report suggesting that UK house prices are about 40 per cent. higher than they should be economically? Would any amendment be made to inheritance tax policy if house prices drifted down in the next few years, as some people suggest they will?

I read yesterday’s report for this year from the International Monetary Fund—which, incidentally, says yet again that the UK economy will be the fastest-growing major developed economy. Although it has, of course, cut its growth expectations for next year, it also recognises that the UK economy is fundamentally strong and will continue to grow. The IMF’s projections are very much in line with those that I set out to the House last week. On housing, it is encouraging that we are in a position quite different from the one we were in 10 or 15 years ago, when 3 million people were out of work, interest rates hit 15 per cent. and mortgage rates made it very difficult for people to meet their repayments. As I said last week, the UK economy is in a much stronger position than it was at that time. As the IMF recognises, we will get through this time of international uncertainty.

The capital taxes structure of the Chancellor’s inheritance tax proposals extends the recognition of marriage. Do the Government believe that the case for recognising marriage through the tax system is a moral one?

The tax system, which includes inheritance tax, has always recognised marriage. It is important that we recognise and support marriage, but we have always made it clear that we should not discriminate against children simply because of their family circumstances. Since 1997, we have done all we can—through tax credits or child benefit—to help families with children, because that gives children the best possible start in life.

What is the Chancellor’s forecast of house prices that underlies his forecast of revenues for the next two years? In the light of his recent comments that I have heard, he thinks that house prices will fall: by how much, and over what period?

I did not say that. All the projections were set out in last week’s pre-Budget report. Many people expect the housing market to slow, and we cannot be sure what the full effect will be of the problems that started in the United States. In my interview that appeared in today’s Daily Mail, I said that lenders must be realistic when they offer loans. They must be confident that the asset is sufficient to repay the loan and that the repayments can be met. A little realism would be extremely helpful not only for individuals but for the housing market in general.

Income Tax

5. What estimate he has made of the impact on disposable income of changes in the rate of income tax since 1997. (158863)

As a result of personal tax and benefit reforms since 1997, households are, on average, £1,050 per year better off. Following the publication of September’s inflation figures, I can announce that from next April the basic state pension will rise by £3.40 to £90.70 a week, and by £5.45 to £145.05 a week for a couple. Full details of all the upratings are published today.

I thank the Chancellor for his reply. Is he concerned about the uSwitch report, which says that people’s disposable incomes are at their lowest level for 10 years? Since Labour came to power, council tax has doubled, home prices are, as we have just heard, 40 per cent. above a realistic value according to the IMF, and people are spending a fifth of their disposable income on servicing debt. Sir Alan Greenspan, the former head of the US reserve, believes that there is a 50 per cent. chance of a recession in the USA. What probability does the Chancellor think there is of a recession in the UK?

Disposable income in this country has risen by 25 per cent. since 1997. As the hon. Gentleman will know, many measures, including tax credits, have helped families, particularly families on low incomes with children. That is very important.

As for council tax, we have increased the amount of money available to councils to keep down the level of increases. I made it very clear last week that I see no reason why councils should have to increase their council tax to unacceptable levels. I would say to the hon. Gentleman, who represents the Liberal party, that when one looks at the detail of the Liberal party’s policy, one will find that people who would not consider themselves to be terribly well off would be considerably worse off as a result of a local income tax.

Child Trust Fund

There is no doubt that our policy on child trust funds has increased levels of saving. Before the scheme was introduced, 30 per cent. of children had no savings accounts; now everybody will, regardless of their background, with more than 3 million accounts already being opened for our children. The data that will be published next week on additional contributions by families into accounts will enable us to assess the continuing impact of child trust funds on family saving patterns.

I thank the Minister for that. I invite her to come to Erdington to try to help explain to ordinary families how important it is to top up their child trust fund, particularly in the many communities such as mine where almost one in two of those ordinary families do not have anybody in work.

I would be extremely happy to take up my hon. Friend’s invitation to come to his constituency; it would be a pleasure. In recognition of the difficulties faced by low-income families, the Government give double contributions to children with child trust funds—£500 at birth and £500 at age seven compared with £250 for other families.

My hon. Friend makes an extremely valid point about encouraging family members and friends to top up their children’s accounts. That is why, alongside my right hon. Friend the Secretary of State for Children, Schools and Families, we recently announced £11.5 million for education about the financial implications of child trust funds so that we can encourage the families of the children with such funds to understand that a small amount invested now could make a huge difference later. I will write to my hon. Friend and to all Members of the House to encourage them to take a personal lead in ensuring that their constituents understand the benefits of making small contributions when a child is young so that they have a significant asset at the age of 18.

My hon. Friend has had for several months the results of the second pilot for the savings gateway. I understand that that shows a very positive benefit for family savings. When can we expect those pilots to be rolled out nationwide so that families can take advantage of them?

I am grateful to my hon. Friend for his comments. As the Chancellor announced in the pre-Budget report last week, we are commissioning the necessary technical work to understand how and when a national roll-out could be implemented and when it could happen according to the technical requirements. My predecessor said with regard to the savings gateway that it is not a question of if, but when. I share that view.

Business Taxation

7. What assessment he has made of the likely impact on the competitiveness of the UK economy of the changes to business taxation announced in the pre-Budget report. (158865)

The economy is expected to grow at a faster rate than any of its G7 competitors in 2007, as confirmed in the IMF’s “World Economic Outlook”, which was published yesterday. Last week, I announced several measures to help to maintain that environment and to promote a fairer and simpler tax system.

By giving capital gains tax breaks to benefit business speculators and buy-to-let investors while punishing businesses seeking to invest in the long term, is not the Chancellor putting short-term political expediency before the long-term stability of our economy?

No, 18 per cent. is less than half the headline capital gains tax rate that we had 10 years ago. It is competitive in terms of the other developed countries. Somebody who starts up a business, develops it and then sells it keeps 82 per cent. of the gain that they make. There is a personal allowance of £9,200, which will especially help people who have employee share ownership schemes. There is also roll-over relief, which allows somebody who is selling a business and wants to reinvest their money back into capital gains to do so. The change that we announced is the right thing to do. It simplifies the tax system, which will bring long-term gains to our economy.

Has the Chancellor seen the welcome that the Chartered Institute of Taxation gave to his approach to tax simplification for businesses? Do businesses not clamour for simplification of their taxation? Does he agree that even when proposals have many more winners than losers, it is still a good idea to consult on them?

The proposal that we have put forward has been welcomed in many quarters. Indeed, I noticed that the Conservative party’s tax reform commission criticised the present system, calling it a

“current complex system of taper relief and indexation.”

The change is justified, will make a difference and will make the system easier for people to understand. Apparently, 75 per cent. of the people who pay capital gains tax find it so complex that they have to consult a lawyer or accountant. When something reaches that degree of complexity, we need to examine it, and this is the right thing to do.

As there are potentially more than 10 million losers from last week’s proposed changes to capital taxation—6 million in employee share schemes and 4.5 million owners of small and medium-sized enterprises—has the Chancellor calculated how many gainers, such as second-home owners or owners of substantial investment portfolios, there will be?

The hon. Gentleman mentioned employee share option schemes, which I have always supported. As the capital gains tax has an annual allowance of £9,200, it is highly unlikely that many employees in such schemes would exhaust that and therefore have to pay capital gains tax. The tax is paid by a comparatively small number of people and the allowance does protect the people whom I am sure everybody in the House would like to support.

The Chancellor will be aware of the comments made by Scottish Financial Enterprise, the Scottish Chambers of Commerce, the Institute of Directors, the CBI, the Federation of Small Businesses in Scotland, and others about the capital gains tax changes, particularly those on the potential damage to SMEs, which are the bedrock of the Scottish economy. Will he listen to those organisations, and if they can make a credible case that the changes will lead to reduced competitiveness or weakened investment, will he be prepared to review the decision that he took last week?

I am always happy to listen to what Scottish businesses have to say, but I should tell the hon. Gentleman that the number of SMEs has grown by 21 per cent. in this country—there are now more than 760,000 more—and they have gained from a wide variety of measures that support them. Yesterday, I was interested to see a Conservative party press release that said that, according to something called the Entrepreneurs Organisation, if taper relief were to be scrapped, 33 per cent. of the people surveyed would emigrate. I was concerned about that, so I looked up the survey on the website and found that the Conservatives relied upon a survey of 12 people. Moreover, it was carried out three months before I made my announcement, and when I checked to see what the 12 people were saying, I found that one of them had said:

“The UK is a marvellous place to start a business”.

The Conservatives need to do some homework before they start criticising our proposals.

Why does the Chancellor think that he has managed this amazing feat of uniting the CBI, the Institute of Directors, the Federation of Small Businesses and the British Chambers of Commerce in condemning his capital gains proposals? Between now and next April, when he is due to implement the proposals, in which month does he think he will have to withdraw them?

I have made my proposals because I think that they are the right thing to do. Having a single rate of capital gains tax is right. It will help businesses and, taken together with other measures that we have put in place that help businesses, especially those that are starting up, it will be good for the economy. As I said, one of the single biggest things that helps business in this country is the fact that we have a strong, stable economy, precisely because we have not made irresponsible promises on tax and spending, which would undermine the stability upon which businesses depend.

May I press the Chancellor on the one part of his pre-Budget report that was not written by us? The four leading business organisations in the United Kingdom say that the capital gains tax increase came as a

“bolt out of the blue”—

the point made by the hon. Member for Stafford (Mr. Kidney)—and will

“set back the growth of the economy over coming years by discouraging long-term investment”.

Even the Chief Secretary—we welcome the candour that he brings to his job—says that

“Yes, there is a tax rise”


“Yes, there will be losers”.

Is that correct? Who will lose out?

As I said, I believe that having a single rate for capital gains tax is the right thing to do. There are personal allowances of £9,200 and a continuation of roll-over relief that enables people who sell their business and want to re-invest to do so. Inevitably, whenever changes are made to the tax system and the rate is simplified, there will be people who do not like the changes, but they are the right thing to do in the long-term interests of business.

The Chancellor did not actually answer my question and spell out who will lose out, so I will have to do it for him. Millions of small businesses will lose out, and millions of employees who have shares in their company could be at risk. The whole entrepreneurial culture that the previous Chancellor used to bang on about from the Dispatch Box is under threat. That is why the Government’s small business adviser says that the change will penalise investment and Labour Members on the Select Committee are urging the Chancellor to reconsider. Even his good friend the Secretary of State for Business, Enterprise and Regulatory Reform is now lobbying the Treasury to reconsider. Why does the Chancellor not admit that he has made a mistake on capital gains tax and get the U-turn out of the way quickly? The latest survey of business opinion shows that fewer than one in five think that he understands business. He has ceded so much of the political and intellectual agenda to us: why not cede a little more?

If I were the hon. Gentleman, I would not rely over much on surveys if they consist of asking 12 people what they think about a proposal that had not even been promulgated at the time that they were questioned. When we find that one person seriously considered emigrating, we can hardly be impressed by that.

In relation to the proposals generally, I think that simplifying the tax system is necessary and a single rate of capital gains tax is the right thing to do. Although I accept that some people are not entirely happy about it, others have welcomed the proposal, and therefore I intend to proceed with the changes that we are making. In the long term, they will benefit businesses, along with all the other measures that we are taking to support business—not just small businesses, but larger companies, through the reduction in corporation tax.

Council Tax

8. What estimate he has made of the impact on disposable income of changes in the levels of council tax since 1997. (158866)

Between 1997-98 and 2005-06, average net council tax paid by households has increased by £6 a week in real terms. Over the same period, disposable income increased by £90 a week in real terms.

I thank the Chief Secretary for that answer, but the Chancellor has already said this morning that councils should not have to keep raising council tax. However, in the pre-Budget statement, he said that it will rise by up to 5 per cent. every year. The average council tax bill for a band D property was £688 in 1997 and it will be £1,529 at the end of the comprehensive spending review—an increase of 122 per cent. How can the Chief Secretary justify that burden, and when will the Government show leadership and introduce a fair and sensible system of local taxation?

May I correct the hon. Gentleman? The Chancellor did not say that council tax would increase by 5 per cent. He said that the resources made available in the spending review will allow councils to keep rises substantially below 5 per cent.

In the three years of this spending review, including the current year, we have seen three of the four lowest council tax rises on record. I know that the hon. Gentleman and his colleagues like to blame us for everything, but I hope that he will accept that his party has some responsibility in these matters. I gently point out to him that the average council tax per dwelling for 2007-08 in Labour areas is £938, but in Lib Dem council areas it is £1,139—a grand total of £199 more.

I can add to what the Chief Secretary said. In Aberdeen, under a Liberal council, our council tax is far higher than it ever was under a Labour council. What assessment has my right hon. Friend made of the impact on disposable income of a local income tax, if it were to be introduced? In particular, what would the impact be on families where both parents are working, at a time in their lives when expenditure on such things as a mortgage or bringing up children is probably at its highest?

My hon. Friend is right to raise such matters. It is important that we proceed with great caution in this area, and explain clearly to the public the implications of any changes to the council tax system. To amplify her point, I shall quote from the Lyons report, in which Sir Michael Lyons concluded:

“I am not convinced, for example, that a pensioner household with a relatively modest income but significant savings or housing equity, is less able to pay than a young family with a larger income but no other assets. In this light I have some concerns, about whether abandoning property taxes for income taxes would be fair; in practice, this might simply replace one sort of perceived unfairness with another.”

Members on the Opposition Benches would do well to read and reflect on Sir Michael’s comments.

I remind the Chief Secretary that in places such as Worcestershire, the council tax has more than doubled since 1997, which places a terrific burden on pensioners, who have not seen their pensions go up by 100 per cent. He might remember that back in 2005, the Government deemed that the burden of the council tax on pensioners was such that they should be eligible for £200 help towards it. However, since 2005, this help has not been forthcoming. Can the Chief Secretary explain why?

The Government have made help available to pensioners to deal with the council tax through council tax benefits. The council tax benefit rules are more generous for pensioners in that, if the claimant is over 60 and receives the guaranteed element of pension credit, there is no upper limit on the amount of capital that they may have.

We are helping pensioners through the council tax system, but I also gently point out to the hon. Lady that, whereas the average council tax per dwelling in 2007-08 in Labour areas is £938, in Conservative areas it is £1,200—although that is slightly lower than in Lib Dem areas. I ask her for a little more humility in these matters, and more acceptance of the responsibility of the effects of her colleagues’ political decisions.

Does my right hon. Friend agree that one of the technical factors that tends to cause council tax increases in some areas is the operation of the floors-and-ceilings regime? It is intended to aid the transition to appropriate funding for local authorities, but over a long period—in the case of Broxtowe, five years—it has the effect of leaving the council underfunded. Will he raise that issue in discussions with his colleagues in the Department for Communities and Local Government?

I thank my hon. Friend for his question. Having attended last week the cross-party group SIGOMA, the special interest group of municipal authorities, which represents a number of councils, I am more familiar than I ever wanted to be with the effects of damping, double damping and floors and ceilings. Now that the overall allocations have been made to Departments in the spending review, the matters that he raises are primarily the responsibility of the Secretary of State for the Department for Communities and Local Government. I am sure that the representations that he, along with other hon. Members, is making about the fairness of the allocation system for the fund will be heard during the course of the next few weeks and months.

Efficiency Savings

10. If he will make a statement on the level of efficiency savings required from local authorities in 2008-09. (158868)

“Delivering Value for Money in Local Government” sets out the expected value-for-money savings for the years covered by the comprehensive spending review, and has been published on the Department for Communities and Local Government website. The target of 3 per cent. of net cash-releasing savings per annum is consistent with the wider public sector target. The relevant figures for 2008-09 show net cash-releasing savings of £1.1 billion resource and £0.4 billion capital.

Will the 3 per cent. efficiency saving target be applied after the revenue support grant is given to councils or will it be top-sliced off the national RSG settlement before it is distributed to councils?

The distribution of the revenue support grant has been decided in the comprehensive spending review by an examination of the potential for efficiency savings and the pressures on specific individual resources. That has led to the 1 per cent. real-terms increase in the comprehensive spending review 2007 for local authorities. If the hon. Gentleman was accurate and top-slicing had occurred, the settlement would be minus 3 per cent.


11. What recent assessment he has made of the economic impact of the quality and range of skills of the UK work force. (158869)

As Lord Leitch set out in his independent report about the United Kingdom’s long-term skills needs, the improving skills profile in the UK work force over time has contributed to economic growth. The Government will increase expenditure on higher education and adult skills in England by more than £2 billion in the next three years. That will support further improvements in the UK skills base at all levels.

I warmly welcome the investment in skills that was announced in the past week. Does my hon. Friend agree that, if we are to use the money effectively, it is important to point out that the skills required for excellence in our traditional manufacturing such as engineering and automotive are highly transferable to growth areas—for example, environmental technologies? Does she also agree that making that link in practice in our initiatives is important not only for prosperity but for raising aspiration in industrial areas, such as mine and hers, that are undergoing transition?

I could not agree more with my hon. Friend. In passing, I note that the National Skills Academy for Manufacturing was formally launched this year and that its head office is in the west midlands. One of the pilot areas for the train to gain technical level 3 skills in the workplace is also in the west midlands. Nearly 7,000 west midlands businesses have been engaged with 8,000 low-skilled employees to improve their basic skills.

Council Tax

12. What estimate he has made of the impact of the spending plans announced in the comprehensive spending review on the level of council tax in the next three years. (158870)

As my right hon. Friend the Chancellor set out in his pre-Budget report statement, we expect the overall council tax rise in the next three years to be substantially below 5 per cent.

Is the Chief Secretary aware that the Local Government Association has described the spending plans as the worst financial settlement for councils in a decade? Is not it the case that, in counties such as Essex, where demand-led social services such as social care are increasingly costly—the costs are rising far faster than inflation—the inevitable result of the settlement will be higher council tax bills, which hit pensioners and many of the most vulnerable in society hardest?

Under the Government since 1997, real-terms growth in the funds that central Government provide to local government has happened in every single year. That was not the case before 1997, when there were real-terms cuts in the funding to local government. The funds allocated last week fulfil the bottom-line request of the Local Government Association in its formal submission to the comprehensive spending review. It is now up to councils to keep council tax down, and, as I pointed out to the hon. Member for Bromsgrove (Miss Kirkbride) a moment ago, the Conservative party bears as much responsibility as any other party for ensuring that that happens.

Tax Credits

13. What plans he has to tackle the issues concerning the tax credit system identified by the Parliamentary Commissioner for Administration. (158871)

As I said earlier, the ombudsman’s report is highly critical of Her Majesty’s Revenue and Customs and the tax credit system. On the positive side, it recognises HMRC’s progress on administration and welcomes the change in policy that I outlined today for recovering overpayment. It makes further recommendations to ensure that the policy is effective. Her Majesty’s Revenue and Customs does not want to reject any recommendations outright. Some require thought about exactly how we respond to them, and I believe that we will be able to respond positively.

I thank the Minister for her answer. I hope that she will respond positively to point 4.4, which asks:

“Does such a system…truly meet the needs of this particular customer group?”

I hope, too, that she will take on board the advice of Citizens Advice that it might be time to look again at introducing fixed awards, which would improve stability. Is not the fundamental problem that people who are trying to budget on a weekly basis cannot cope with the retrospective nature of the changes to their finances? That puts them in such a difficult position that it is beginning to frighten people off from claiming.

Citizens Advice has produced a serious report that looks at the issue carefully, but I do not see any evidence in a fall-off in the numbers of claimants who are receiving their entitlements. I acknowledge that there is a fear and I take that seriously, but tax credits offer a flexible system of support for 6 million families, as I have said, which equates to nearly 20 million people. Up to 700,000 families would receive less support under a fixed system. Although we are considering all such ideas, that is not the way to go. We must improve the delivery and administration of tax credits, which I believe is a better system than a fixed payments system.

Climate Change

15. What recent assessment he has made of the likely impact on the economy of climate change over the next 10 years. (158873)

The Stern review found that the costs of avoiding the most dangerous impacts of climate change are significant but manageable and could amount to around 1 per cent. of global gross domestic product. Those costs will be minimised with co-ordinated international action and are significantly less than the costs of inaction. Modelling for the energy White Paper suggests that there could be transition costs to the UK economy of between 1 and 2 per cent. of gross domestic product in 2020 in reducing emissions by 30 per cent., working from the 1990 base.

Climate change is of course a huge problem facing our country and the world. Far too often in this Chamber and around the world, we have debates on the causes of climate change, but not enough on the effects. May I seek my hon. Friend’s assurance that the Treasury will liaise with other Departments to ensure that that imbalance is rectified and that we have much more co-ordinated action between Departments, perhaps led by the Treasury as the main funder, on adapting to the inevitable climate change that we will experience, and are already experiencing, this century?

I can reassure my hon. Friend that that is precisely what the Treasury will be doing. The climate change Bill, which is due to come before the House, will create for the first time measured carbon markets and reductions. That will give us a tool to enable co-ordinated action in the UK. However, as he is aware, since the UK is responsible for only 2 per cent. of world emissions, international action is a key too.