My Lords, I beg to move that this Bill be now read a second time.

I am pleased to open the debate on this year’s Finance Bill. I intend to provide a general overview of the main provisions of the Bill and, in doing so, shall address the key issues raised in the report on the Finance Bill by the Committee on Economic Affairs, Finance Bill sub-committee. I know that the noble Lord, Lord Vallance, and other members of that committee will also address themselves to these issues. I thank the noble Lord for the work that he and the other members of the sub-committee have done and for the well targeted and useful report that they have produced on this year’s Finance Bill. It contains a number of important points that I hope to address.

This is the sixth report from the committee. Her Majesty’s Revenue and Customs and the Treasury seriously consider its recommendations and these help to inform our approach to, and handling of, future fiscal cycles. I hope that the noble Lord will recognise that we have various proposals which reflect the thinking of the committee and the influence that it has had on government departments.

As we all know, we in the United Kingdom, like the rest of the world, are facing a tough economic time. The ongoing disruption to global financial markets and rising world food and fuel prices are both significant international trends. We need to support families and businesses at this difficult time. However, as well as dealing with today’s economic challenges, which the whole House will recognise as formidable, we have to make progress on our long-term objectives, and I shall hope to show how the Bill produces progress on those matters. The second priority in the Bill is to increase the fairness of our tax system, and, finally, the Budget and the Bill are directed towards supporting the Government’s commitment to protecting the environment, which we all recognise as a significant priority for policy-makers in this country.

Supporting our economy and supporting business are the first priority of this Bill, helping the UK to respond to the challenges that the whole world is facing. The House will be aware that Clause 15 makes provision for the 2 pence per litre increase in fuel duty, which was expected to take place on 1 October 2008. However, in response to the sharp rises in world commodity prices, and with the price of oil almost doubling over the past year to reach a real-terms record high, the Chancellor of the Exchequer announced on Wednesday of this week that the increase would be postponed. That decision will help motorists and businesses to get through this very difficult time. Postponing the planned increase in fuel duty is also consistent with the Government’ commitment to support the Bank of England in maintaining low inflation.

However, even in challenging times such as these, it is vital that we do not lose sight of other priorities. In particular, the Government are committed to increasing the fairness of our society, including the fairness of our tax system. The increase in personal allowances builds on the reduction in the basic rate to 20p, which is its lowest level for 75 years. The House will recognise that the significance of that change has been somewhat drummed out by difficulties over certain aspects of the 10p rate. Some 16 million households gained from the changes, which included removing the 10p starting rate, but some low-income households will have less income as a result of the changes announced last year. That is why, at the Commons Report stage, the Government introduced the amendment to raise the personal allowance to £6,035, benefiting all basic-rate taxpayers at a time when they are facing rising household bills. It will also mean that 4.2 million households will receive as much as, or more than, they originally lost, and 600,000 people on low incomes will be taken out of tax altogether. But we recognise and acknowledge that 1.1 million households will still lose, although we have now halved their losses. The Government are continuing to look at the best way to support those on low incomes in the future, and my right honourable friend the Chancellor has said that he will bring forward additional proposals to do that in the Pre-Budget Report later this year.

We will continue to support families, but we also have to support Britain’s businesses and ensure that Britain remains a competitive place to do business. Last year’s Finance Bill reduced corporation tax to 28 per cent. That rate cut was part of a major package of business tax reforms announced in last year’s Budget. As well as enhancing the UK’s international competitiveness, those changes will encourage investment and promote innovation. Last year’s Budget, as the House will recall, also announced a phased increase in the small companies’ rate to 21 per cent from this April and 22 per cent next year, as set out in Clause 7. This was part of the wider package of changes included in this year’s Finance Bill, which refocuses the incentives for small businesses and encourages them to invest. The package includes the new annual investment allowance introduced by Clause 74, as well as the phasing-out of some out-dated allowances such as the industrial buildings and the agricultural buildings allowances. R&D tax credits are also being further increased by this Bill, and Clause 31 makes the enterprise investment scheme—a tax scheme that supports small businesses—more generous.

The Finance Bill also restructures capital gains tax. The introduction of a single rate of 18 per cent will mean that the system is significantly simpler than before. Critics of the CGT proposals have recognised and approved of that point at least. The Finance Bill sub-committee raised concerns that the UK CGT position may not be internationally competitive, and I appreciate the points it made. However, I take this opportunity to reiterate that the rate is lower than in many other European countries, such as Germany and Italy, and it is also less than half of the rate 10 years ago. Furthermore, the 10 per cent rate for entrepreneurs is one of the lowest CGT rates in the world. I appreciate the concerns that the committee raised about the consultation on the reform of CGT. The Government have very close relationships with the professional bodies and their associations. Indeed, in direct response to concerns raised by business groups, Clause 9 of and Schedule 3 to the Bill also introduce a new entrepreneurs’ relief, providing a targeted 10 per cent tax rate for the first £1 million of business gains. This will benefit 80,000 business owners and investors this year alone, 90 per cent of whom will continue only to pay CGT at 10 per cent. Support such as this allows the Government to encourage enterprise in a positive way—targeting entrepreneurs who wish to invest in and grow their businesses.

At last year’s Budget, we announced a package of changes that will take children out of poverty, pensioners out of paying income tax, and which will make the average household better off. This year’s Budget also included an extra £100 of winter fuel payments for the over-80s, and an extra £50 for the over-60s—benefiting around 9 million households. Those measures are not part of this Bill, but the increase in alcohol duty that helps to pay for these benefits is. Over recent years, as incomes have risen, alcohol has become more affordable, with the cost of the average supermarket bottle of wine falling from around £4.45 to around £4 in today’s prices. Given that, this is the right time to raise alcohol duty.

The personal tax changes are not the only clauses that increase the fairness of our tax system. Clause 10 and Schedule 4 also make significant changes to inheritance tax, giving millions of married couples, civil partners, widows and widowers the reassurance and certainty that their heirs will benefit from both partners’ individual allowances. Therefore, in addition to the existing spouse relief, married couples and civil partners can now leave up to £624,000 to whomever they wish without triggering inheritance tax. In the round that means that fewer than 5 per cent of estates will pay inheritance tax this year.

At the same time, the Bill introduces a number of measures that tackle tax avoidance because it clearly is not fair that people should avoid tax that could—and should—be used to pay for Britain’s public services and to alleviate poverty. The Bill therefore introduces a number of anti-avoidance measures, including ending the artificial use of sideways loss relief and improving the identification of users of disclosed tax avoidance schemes. Of course, increasing the fairness of our tax system means making sure that everyone pays their fair share. It is essential to update tax systems where necessary to ensure that they remain sustainable in today’s society.

People who come to work in Britain from across the world make a huge contribution to our economy and our society. The Finance Bill sub-committee quite rightly highlighted the reform of the taxation of non-domiciled individuals as a very important part of this Finance Bill. The Government share the sub-committee’s desire that the UK tax system should remain internationally competitive. Non-domiciles will continue to be welcome here in Britain, and the UK will remain one of a small number of countries that allow non-domiciles to pay tax only on their earnings here and on money that they bring into the country from abroad.

The overall aim of the changes to the residence and domicile personal tax rules is to deliver a remittance-basis tax system that will continue to support the competitiveness of the United Kingdom by providing an attractive regime for international talent and investment, but which is more sustainable than the current arrangements. This Bill therefore introduces a £30,000 charge for remittance-basis users who have lived here for seven years and choose to continue to use the remittance basis. As we have made clear, money that is not brought into the UK will be tax-free, children will not pay the charge and the charge should be creditable against US tax.

We have tabled an admittedly large number of government amendments to the provisions in this part of the Bill. In large part, this is due to the lengthy and detailed consultations we have carried out with representative bodies and other interested parties on the detail of these changes. It will be recognised that the Government listened in the Commons and took appropriate action.

The Finance Bill sub-committee also raised a number of concerns about the consultation on this issue. Since the Pre-Budget Report and throughout the Finance Bill, we have engaged with interested bodies. The amendments show that the Government listened and responded. They have resulted in several changes to our original proposals and in numerous improvements and simplifications to the Bill as first tabled. I hope they will be appreciated in this House. I can assure the House that the Government will continue to listen.

Given the technical nature of these proposals, the Financial Secretary to the Treasury has asked HMRC officials and the representative bodies to establish a Joint Committee, following Royal Assent of the Bill, to review the operation of this legislation in practice to ensure that the legislation is working as intended by Parliament. Finally, I should reiterate the commitment made by my right honourable friends the Financial Secretary to the Treasury and the Chancellor of the Exchequer that while the Government will work to ensure that these provisions operate as they are supposed to, we have committed to making no further policy changes in this area in this Parliament or the next to ensure that there is stability and certainty.

As I mentioned earlier, it is right that each person should pay his fair share. Equally, however, taxpayers should be treated fairly by those who act on behalf of and under the authority of the Government in matters of taxation. Part 7 of the Bill represents the latest stage of the introduction of a package of measures stemming from the review of HMRC’s powers, deterrents and safeguards. Penalties and time limits have been aligned across taxes where this has been practical and, on balance, of benefit to taxpayers. Other powers have been updated to reflect the changing nature of businesses and the technology they employ.

Additional safeguards have also been introduced in the Bill. Safeguards are a key part of the package and where appropriate they have been built into this primary legislation. The main elements of Schedule 36 include: a requirement to act reasonably; a right to inspect statutory records; a right to visit and inspect business premises; and written information powers. There are also new appeal rights and authorisation requirements. Further safeguards are then planned in guidance and codes of practice, on which HMRC will consult.

This is an example of where we have listened carefully to stakeholders throughout the process. The review of powers is a careful process. It takes between one and two years to develop each proposal, working throughout with business and the professions. We have responded to concerns throughout, making changes where a clear case to do so was made. This approach has been praised by key stakeholders. These powers were the subject of lengthy and rigorous debate in the other place. The Bill aligns powers across taxes where it makes sense to do so and introduces additional taxpayer safeguards. It is right that these matters should be legislated within the Finance Bill, and they will improve clarity and certainty for taxpayers.

The third, but by no means the least, priority of the Bill is protecting the environment. We all know the economic, social and human costs that unmitigated climate change would cause, and the Government are leading UK and international efforts to challenge it. The Bill contains a number of measures to help us to do that. Clause 17 introduces new rates of vehicle excise duty to incentivise motorists to buy more fuel-efficient cars. We are also legislating for increases in the rates of the climate change levy, landfill tax and aggregates levy in 2009-10 to maintain their environmental effectiveness and to provide certainty to businesses. The exemption from stamp duty land tax for zero-carbon homes will also be extended to zero-carbon flats.

The Bill also prepares the way for the use of auctioning in the forthcoming carbon reduction commitment. There will be a major UK emissions trading scheme, complementing the EU emissions trading scheme, demonstrating that the UK is leading the way in developing the use of trading schemes, just as we were instrumental in the establishment of the EU ETS.

The Bill protects our environment, increases fairness and supports our economy. I commend it to the House.

Moved, That the Bill be now read a second time.—(Lord Davies of Oldham.)

My Lords, this is an opportune moment to debate these matters. However, I am astonished that the Minister, in a 20-minute speech, did not mention any of the headlines in this morning’s newspapers: the Financial Times, the Times and other newspapers are carrying stories saying that the Government are to abandon their fiscal rules. He made no mention of that in this important economic debate. Are we to assume that the stories are without foundation, or that he does not know what the Government are going to do? If anything epitomised the Government’s state of chaos, it is this Bill, the economic background, and the Government’s response to it which we can see in our newspapers today.

I well recall that the Prime Minister, in his role as Chancellor, frequently made speeches saying that there will be no return to boom and bust. Well, we have had the boom and today we have had confirmation that we have the bust. The extraordinary thing—it is straight out of Animal Farm—is that the Government’s justification for abandoning the fiscal rule that borrowing should not exceed £40 billion is that, if they do not abandon it, people will not have confidence in it. That is ridiculous. The rule was meant to be a constraint on government. If the constraint is reached but the response is, “We’ll change the rule”, the Government will have as much credibility as Billy Bunter’s postal order. The Treasury is apparently about to declare that we have reached the end of the cycle. This particular cycle will, I think, turn out to be something of a penny farthing. The truth is that the Government have spent all the money from the good times. They have borrowed, and now they are facing the consequences to which the Minister referred—a storm from across the Atlantic which we are ill prepared to meet thanks to the Government’s policies.

The outlook for the economy looks very grim, but the Finance Bill seems to bear no relationship to what is going to happen. We know, for example, that Treasury tax receipts will fall; some estimates suggest that the shortfall might be as much £20 billion. We know, with inflation picking up rather seriously in our economy, that the pressure on public expenditure will increase. For the Government to try to make out that this is some kind of international crisis not of their making simply will not wash.

The Prime Minister was a man who sold umbrellas while the sun was shining. Now that the rain is here, there is nothing to protect us from its effects. A good example of him selling those umbrellas was the nation's gold reserves. He sold 60 per cent of the gold reserves over a period and raised $6.5 billion. He sold our gold reserves at a price of $250 to $330, but the price of gold today is $971. On my calculation, he threw away $20 billion of our money. He has made it more difficult for the elderly and those who are retiring to deal with the economic downturn by his assault on pensions and pension funds through changes in tax and through his tinkering with the rules.

He has added to the problems on inflation. Even today, we hear the Minister telling us that what is in the Bill on fuel duty is not going to happen because, apparently, the penny has dropped with the Government that the effect of putting up fuel duty is to add to the costs of those on low pay and the real inflation that they experience. If one looks at the pressures on ordinary hard-working families in our country, it is clear that the effect of the Government's policies will be that the real rate of inflation that they experience is way beyond the rates that the Government are using to make their calculations. Therefore, the pressure on wages will become enormous, particularly in the public sector, which the Government have allowed to expand without a care for how it will be funded for the future.

The truth of the matter is that public expenditure is now far too high—even the Liberals have noticed this, and I welcome their belated conversion. The real issue which the Finance Bill and the Government should be addressing is how we achieve the growth that we need to meet the requirements of the public services. The answer cannot be to increase borrowing, to risk higher interest rates or to increase taxes. Indeed any sensible Government in the situation would be cutting taxes and reducing regulation and bureaucracy, but the Government cannot do that because they have spent all the money, borrowed up to the hilt and are now having to ask for permission to borrow even more.

The Minister asked us to look at the Finance Bill from the point of view of fairness. I find it difficult to take this Government seriously when they talk about fairness in the tax system. They are a Government who, for political reasons, decided to cut the basic rate of tax from 22p to 20p. They did not fund it by making reductions in expenditure or by reducing the growth rate of expenditure in other areas, they funded it by adding to the burden of tax on the lowest paid. They had a huge political revolt, quite rightly, on their own Benches in response, so they have raised the threshold in the Bill, but they have not raised the threshold to the level at which the 10p rate operated. Therefore, as a result, many people are still worse off. That was a political device introduced by a Chancellor who was no doubt planning an election but then decided to bottle out. As a result, families have been faced with that burden.

There is far too much tax legislation. Here we go again with another Finance Bill in two volumes, adding to our tax code which under the Prime Minister, as Chancellor, has doubled in size. We now have the distinction of having the longest tax code in the world, longer even than India's. This will put us at the top of the international league table for tax complexity, something which will not in any way help with our competitiveness, which the Minister assured us the Bill was concerned with.

I shall not bore the House by giving all the examples of the tinkering by this Chancellor and his predecessor, now the Prime Minister—although I suspect that the Chancellor has a backseat driver in No. 11 in the form of the former Chancellor. I just point out that under Mr Gordon Brown, we had the abolition of retirement relief and the introduction of taper relief; now we have the introduction of entrepreneurs’ relief. Under Mr Brown as Chancellor we had the introduction of the 10p band, then its abolition, then a hiatus, and now we have the raising of the threshold to compensate for the effects of that change. We had the introduction of the zero band of corporation tax for small businesses, then its abolition, and now we have another change.

This has been a period of great instability in the tax system. The one thing that businesses hate more than their costs going up and higher taxes is uncertainty, but this Government have produced it in spades.

I was very struck by the Minister's comments on how this Finance Bill is concerned with fairness. In particular, he said that as a result of the raising of the threshold, people on low incomes will be better off than they were at the time of the Government's initial proposals. I accept that, but what he leaves out is that they are not paying tax at 20p; their effective marginal rate of tax is very much higher, thanks to the incidence of the tax credit system and the benefits system. Single parents moving from part-time to full-time work can pay an effective marginal rate of tax and withdrawal rate of 90 per cent. Those changes have been brought about by this Government; they are the result of initiatives of this Government. We have 5 million people who are economically inactive sitting on benefits. For many of them, going into work would mean paying very high marginal rates of tax.

At the same time, this Government introduced the 10 per cent taper relief, which meant that people in private equity earning tens of millions of pounds were paying tax at 10 per cent. The Bill provides for a sudden change in the capital gains tax regime to raise it to 18 per cent in response to the problem created by the initiative of the Prime Minister, then the Chancellor. It is extraordinary. The effect of the changes to capital gains in the Bill is that tax on hard-working entrepreneurs who create jobs and wealth through their businesses has gone up by 80 per cent and the tax on speculators who are short selling, buying and selling property, or whatever has gone down by 55 per cent. What kind of message does that send out? The abolition of taper relief has created a situation where there is no distinction between short-term and long-term gains and therefore no incentive for people to make investments for the long term at a time when our savings ratio is on the floor and when we want to encourage exactly that kind of activity.

I read the Select Committee’s report early this morning and it is an absolute indictment of the performance of the Treasury and of the Government in the way in which they go about the administration of our tax affairs. It is bad enough to get the policy so badly wrong, but they have been unable to implement it effectively. The report is a tale of incompetence. Reading the evidence, one is almost moved to tears of sympathy for those who are on the receiving end of this stuff. It is a tale of chopping and changing, of information not being provided, of one arm of government not knowing what the other is doing. I commend it to every Member of the House. I hope that the Government take it much more seriously than the Minister appeared to do.

The Minister dealt with none of the fundamental points in the report. He passed very briefly over consultation, but the conclusion that there was a dysfunction between tax policy and its administration struck me as quite extraordinary. This arose when HMRC was created. Guess who took charge of tax policy? It was the Treasury, under the Prime Minister—the previous Chancellor, Mr Gordon Brown. The result, which is clearly set out in the evidence—the committee points to it—is that HMRC, which is responsible for implementing tax policy, has sometimes appeared not to know what the policy was, and vice versa. There is a good example of that in the report. The entrepreneurs’ relief, which the Minister presented as some great idea to help entrepreneurs, was in fact a last-minute panic. When the Government discovered that their capital gains tax proposals were not going to work properly and there was huge outrage among small businesses, they introduced the relief as a measure.

There is evidence in the report that HMRC did not know about the change in policy. Business representatives of accountants and other organisations with important professional responsibilities discussed it with HMRC, which said that it knew nothing about it, even though all the newspapers had been briefed by the Treasury, as they have this morning. That is completely unacceptable. It is very dangerous to have policy and the administration of policy out of kilter. It is a sad tale, and the committee is to be congratulated on the thoroughness with which it has highlighted the need to improve consultation and the proper administration of our tax policy.

I commend to the House the report published last week by my noble and learned friend Lord Howe of Aberavon, who is not in his place at the moment. It contains some very important recommendations, some of which were preceded in the Tax Reform Commission report, which I produced some two years ago. I commend to the Government the radical idea that it might be a good idea to announce by the Pre-Budget Report what the Government propose to do in precise detail and to consult on that.

I love the other place, but looking at its performance in scrutinising this Bill, no one could argue that there was no room for improvement. The proposal to have a Joint Committee of both Houses is very wise, as such a committee would draw on the expertise in this House and perhaps avoid some of the difficulties that have arisen in the past through short-term knee-jerk measures that have not been thought through and have not been discussed with the people who have to implement them and who are on the receiving end of them. It is a humiliating report for the Government, and it shows a business community struggling with instability.

The Minister mentioned competitiveness. This is very important for competitiveness. The compliance costs of all this are enormous. I do not know whether the Treasury talked to HMRC, but even HMRC estimates that the compliance costs of our tax regime are £6 billion for business. Simplifying the tax system and having stability in it improves competitiveness and reduces the costs to business of compliance.

Let me give the Government some credit; the measures that were introduced to reduce the basic rate and to alter the capital gains tax regime were presented then—but not today, I noticed—as simplification measures. However, if you are going to simplify capital gains tax, why do you end up with a rate that is different from the basic rate which is different from the top rate? Do the Government not remember what happened in the 1970s when we had different rates of capital gains tax from the marginal rate of tax at which people paid income? Lots of clever people in the City devise schemes to turn income into capital gains, and I confidently predict that a year from now, if this Government are still in office then, we will have another Finance Bill that will say that we need to close the loopholes that have been created by the changes that we have made to the capital gains tax regime, just as the Government did when they introduced the zero rate of corporation tax for small businesses.

The Minister then argued that the non-doms’ position needed to be dealt with, and that this was an aspect of fairness—this from a Government who reviewed the taxation on non-doms from 2002 and suddenly introduced it about three weeks after the shadow Chancellor indicated that he was going to do something in this area. I make no comment about the coincidence of timing, but it is extraordinary, if you have been looking at something for nearly six years, that you should rush it through in such an ill considered manner, and that as late as the new year, after the Pre-Budget Report, people still did not know how the system was going to operate. All the damage that was done to Britain’s standing in international markets and all the uncertainty that was created could have been avoided.

In short, this is a very sad Bill, which the Government themselves are having to pull back on. They seem to have lost control of public expenditure and run out of ideas and out of road. They have tinkered with the tax system, to the dismay of business and to the damage of our competitiveness, and they have tinkered with the administration of our tax system by merging the Inland Revenue and Customs and Excise, with disastrous results. This is the price that we have paid for having a meddler in Downing Street, and the sooner he is out of there and we have a Government who are genuinely committed to fairer, lower, flatter taxes, the sooner the growth that we need in our economy will return.

My Lords, I am pleased to introduce the report of the Economic Affairs Committee on the Finance Bill 2008, which was so colourfully previewed by the noble Lord, Lord Forsyth of Drumlean. It is the sixth annual report in a wellestablished series that confirms the role of this House in parliamentary scrutiny of Finance Bills. Within its remit, our sub-committee on the Bill offers taxpayers and advisers a forum in which to express their concerns, which our reports then convey, together with our own views and recommendations, in time to inform debate in Parliament.

I thank my fellow members of the sub-committee for the knowledge and wisdom that they brought to bear and for their hard-working and non-partisan approach. I am grateful to the witnesses, professional and official, and, for the first time this year, eminent academics from two of our universities, whose input was essential to our report. I also thank our specialist advisers, Leonard Beighton and Trevor Evans, for their invaluable contribution, as well as the Clerk and our secretary-administrator.

The committee cannot sensibly look at the whole Finance Bill. It has to focus. This year, it chose three topics: changes to capital gains tax; proposals on residence and domicile; and changes to encourage enterprise. As we heard evidence, we became increasingly aware of two issues that cut across these topics: consultation and international competitiveness. Our report considers these issues first. Many private sector witnesses thought that the consultation on both CGT and residence and domicile had been very poorly handled and fell well short of the good practice that they had seen on other topics. Witnesses from Her Majesty’s Treasury and Her Majesty's Revenue and Customs accepted that consultation was a key part of getting tax policy and delivery right, but did not agree that a clear policy statement had been lacking or that the Treasury and HMRC had not worked well together.

We as a committee are firmly in favour of consultation. Despite what officials said to us, we have little doubt, given the strength of feeling of our private sector witnesses, that something went very wrong in the development of these initiatives. We see no reason why there could not have been earlier, better and more open consultation. We are particularly disappointed that the progress we welcomed last year has not been maintained.

Our report recommends that the Treasury and HMRC should critically consider why the private sector was so unhappy and thought that its messages were not getting through to Ministers: they should learn the lessons. They should also look at their record as a whole, learning from well handled examples, which our witnesses acknowledged, and identifying best practice across the board. In the light of that, there should be a dialogue between officials and the private sector to develop a code of practice on consultation on tax policy changes.

The second cross-cutting issue was competitiveness. We recommend that the Government and the Treasury should work to reassure investors of the advantages of investing in the UK under the new CGT regime. Some doubt has been cast on that, at least in the minds of some of our witnesses. But we were particularly concerned by evidence from private sector witnesses that the proposals on residence and domicile seem likely to have had a negative impact on the UK’s competitiveness. We think it vital that everything that can be done is done to retrieve that position. We recommend that economic impact analyses should be published of the changes on CGT, and residence and domicile, at the same time as any future significant tax changes are announced.

I come now specifically to capital gains tax. Under the changes announced in the Pre-Budget Report there would have been one tax rate of 18 per cent on all gains. Indexation and taper reliefs were withdrawn. As a result, the rate of tax on business gains generally went up, while that on other gains went down. The intention was to make the system more straightforward and sustainable and to help investors plan for the long term. But noble Lords will recall that the announcement proved so contentious that in January the Chancellor of the Exchequer announced that there would be an entrepreneurs’ relief under which qualifying gains would be charged at 10 per cent up to a lifetime limit of £1 million.

In our view, given the unwelcome surprises investors received, the feeling that legitimate expectations have been denied, and that long-term gains are no longer treated more favourably than speculative gains, it will take time for certainty and confidence to be restored. So we recommend that the Government should continue their efforts to explain their case, with the aim of restoring that lost confidence. Some people were better placed than others to forestall any increased liability as a result of the changes. This was unfair and we recommend that, in future, the opportunity to forestall should be available either to everyone or to no one.

Indexation of gains made between 1982 and 1998 had previously been frozen. On balance, we thought that the abolition of the freeze was justified, despite the disquiet that was aroused. Although the changes bring about some simplification, CGT remains a complicated tax and we recommend a dialogue aimed at further simplification in future years. We were surprised at the Treasury’s confidence in the forecasts of the yield of the tax and recommend a further explanation. We also believe that breaking the link between the rate of tax on income and on gains might increase the scope for avoidance, a risk on which HMRC should keep an eye. Finally, on entrepreneurs’ relief, we recommend that there should be some means, such as indexation, to ensure that the lifetime limit keeps pace with events.

On residence and domicile, under the changes in the Finance Bill, all those who are non-domiciled and who claim the remittance basis of taxation will have personal allowances withdrawn and longer-term residents will have to pay £30,000 for each year they remain on the remittance basis. Those proposals have been a source of contention since they were announced in the Pre-Budget Report and particularly since the publication of draft legislation in January.

The evidence from our private sector witnesses was harshly critical. Words such as “a real shambles” were used. Officials denied poor handling, although they accepted that, in some respects, the draft legislation had been out of line with the policy intention of Ministers. We considered carefully what officials said to us, but we could not accept that there would have been such strong feeling if everything had been handled as smoothly as they had suggested.

Our report recommends that the Treasury and HMRC should carry out a full review of the reasons why there were so many difficulties. The Finance Bill’s clauses on this topic were not finalised when the Bill was published. That is not good practice and we recommend that if, in future, final provisions cannot be published in the Bill, the proposals should be withdrawn.

Our report surveys the likely impact of the changes at different levels of income, including high net worth individuals and middle income executives whose employers may face a compliance burden. But our main concern is about those of more modest means, such as the migrant worker from eastern Europe, who, with unremitted income of £2,000 or more, would have to decide whether to claim on the remittance basis and be denied personal allowances, or be taxed on worldwide income and subsequently grapple with double tax relief on his overseas income. All our private sector witnesses saw the £2,000 level as too low and some saw it as “ridiculous”.

Officials did not seem overly worried by these compliance concerns. They thought that the calculations were “in reality, quite simple”. We think that HMRC is greatly underestimating the compliance difficulties for people of more modest means. In our view, the provisions as drafted are essentially unworkable and we recommend that the bulk of modest earners should be spared, possibly by raising the level of £2,000 to the level of the personal allowance, which this year is £6,035.

In the Commons Public Bill Committee, the Government promised to think about this further, but the Financial Secretary resisted any increase from the £2,000 level as unnecessary and argued that, for most on modest means, the arising basis would produce the better outcome. We believe that the Government are considerably underestimating the compliance problems and are disappointed that they have not responded to the case for increasing the level. On a more positive note, it was also put to us strongly that there should be comprehensive legislation to determine UK residence, rather than reliance on Revenue practice. We are pleased to note that the Government have accepted the case for looking at this, in consultation with the representative bodies.

Our final topic was the changes to the tax rules for encouraging enterprise, notably an increase in the qualifying limit for investments under the enterprise investment scheme. We were not persuaded that such an increase was economically justified. The committee also looked at venture capital reliefs. By no means all witnesses agreed that these reliefs should continue if the alternative could be a modest contribution towards a general reduction in rates. So we recommend a review to assess the net benefit of the reliefs as against the economic benefit of that modest reduction in tax rates across the board. Finally, we examined the study by the University of Sussex, published by HMRC, on the effectiveness of the venture capital reliefs. Some witnesses questioned its methodology. We recommend a re-examination so that generally accepted conclusions can emerge.

The committee's overall impression is that this year the formulation of tax policy has been marked by uncertainty of direction and exacerbated by examples of poor consultation, which have led to a loss of confidence in the sustainability and predictability of the tax system. The feeling that the system is unstable and subject to unwelcome surprises cannot be good for the competitiveness of the UK economy. Of the topics considered in our report, this impression stems in large part from the handling of the initiatives on CGT and residence and domicile. There were, of course, other topics that we did not address which also contributed to the sense of instability. It is up to the Treasury and HMRC to learn the lessons so that these mistakes are not made next year.

Notwithstanding the emollient words of the Minister, we are disappointed that the Government did not feel able to take greater note of the points in our report and act accordingly, particularly given the strength of feeling that remains in the private sector. Although Ministers responded initially, the changes they tabled were largely on technical matters. We remain concerned that they may have significantly underestimated the issues of substance raised by this Bill. I commend our report to the House.

My Lords, it is a great pleasure to follow the noble Lord, Lord Vallance of Tummel, and to congratulate him on the report his committee has produced. It is extremely valuable. For a moment it is worth while to put into context the whole role of the committee because the matter arose in the course of the deliberations of the Joint Committee on Conventions when the question of financial privilege came up, in particular the role of the Economic Affairs Committee of your Lordships’ House. Doubts were expressed by the Government about whether it was appropriate for us to have such a committee and for it to produce the kind of valuable report we are discussing today, which should surely be of value to the Government. It is noted that not only did the Government object, but Mr Jack Straw, the Leader of the House of Commons at that stage, suggested that it was incompatible with the conventions as a quite deliberate claim to additional powers. I am very glad indeed to say that that committee, a broadly based Joint Committee of both Houses with many distinguished members, robustly rejected the idea that it was not appropriate for the Economic Affairs Committee to deal with these matters and felt that it did not raise issues of financial privilege.

On the other hand, one can well understand why the Government were not particularly happy about some of the comments made by the committee, such as:

“We are at a loss to explain the difference in views as to how open the consultation on capital gains tax was”,

and that the review did not work appropriately. The report goes on to say,

“a review which starts with consultation, continues in a desultory way and appears to have petered out, only to be followed by the announcement of wide-ranging proposals which bear little relation to the matters previously under discussion, tends to devalue consultation”.

In opening the debate, the Minister suggested that the Government did eventually take notice of it, but this report is evidence-based. I believe it is absolutely clear that on this occasion—perhaps partly for political reasons, particularly on capital gains tax, and the Government’s impromptu responses to proposals elsewhere, as well as on the question of being domiciled—the issue was not well handled and is of grave concern. The noble Lord has spelt out those concerns, and I hope that the Government will now respond more positively than they have done so far.

It is also true that the extent of Finance Bills now in sheer weight has become completely unmanageable. As long ago as the early 1980s, the Select Committee on Procedure (Finance) said:

“We think it unsatisfactory for the House to have to consider in a single Bill rates of taxation, proposals for new types of taxation, and technical provisions to deal with the law and management of taxes”.

The Select Committee felt that that the Finance Bill should be split into those three areas. If it were to be so divided, the way it is considered would be greatly improved and provide an opportunity for your Lordships’ committee, without in any way impinging on financial privilege, to scrutinise these matters in depth in a way which, with the expertise we have in this House, would be of great benefit more generally. There is a case to be made for splitting discussion on the rate of tax, the tax management side and new taxes. They should be dealt with separately.

What gives me great cause for concern is that the Government and particularly the Treasury are now seriously demoralised and in a state of considerable confusion. We are debating this Finance Bill against a background where HM Revenue and Customs has not even succeeded in producing accounts that are approved by the National Audit Office. We have before us a Finance Bill the administration of which is clearly in a state of confusion. I hope that the Minister can tell us, given that HMRC has to administer this Finance Bill, what the Government are going to do about the fact that the NAO has refused to approve HMRC’s own accounts. To have a financial institution whose accounts have not been approved is a quite remarkable situation.

We are also discussing this Finance Bill in the context of the overall economic situation. It is apparent that since the time of the Budget, there have been massive changes both in revenue and expenditure: the 10p fiasco, the decision not to introduce the additional 2p on fuel duty and the dramatic fall in revenue from stamp duty to mention just a few. All this creates a situation where at this stage, a few months after the Budget, we have no idea what the borrowing requirement really is. We have multiple variables moving in different directions with no immediate response from the Government and no comprehensive statements except on the Equitable Life situation. Apparently the Chancellor is going on holiday until September and no further information will come forward on that or on the general economic situation.

There is a serious concern that I expressed to some extent yesterday in an Oral Question about the relationship between fiscal and monetary policy. The Minister will know only too well that playing golf with just one club is a difficult thing to do; indeed, the expression has been used in similar circumstances in the past. The reality is that we simply have to have co-ordination between monetary and fiscal policy. To rely on the Bank of England armed only with short-term interest rates to cope with the kind of economic problems we face at the present time is absurd. The problem is that we now have an enormous increase in borrowing. As my noble friend Lord Forsyth said a moment or two ago, the headlines today are full of statements about this, along with leaks from the Treasury about what it is going to do about it, particularly on whether the Chancellor’s rules on 40 per cent will be changed. The argument is that it would change the cycle, but trouble arises when considering these things as part of the economic cycle if the person talking about them decides when the cycle begins and ends and, having decided on a particular position, then says, “This is not working correctly. We’ll change the cycle”. But of course they do not change the cycle, they change their definition of the cycle. That is no way to manage the economy.

I turn to another issue that worries me. The question is not simply the huge level of borrowing, but how that borrowing is funded. I put this to the Minister in my Question yesterday, who fortuitously is responding to the debate today as well, by asking whether it would be funded by the public or the banks. In reply he said:

“Well, my Lords, borrowing will of course be funded from the public”.—[Official Report, 17/7/08; col. 1319.]

It makes an enormous difference. If it is funded from the public, the effect on the money supply is mitigated to a greater or lesser extent depending on the extent of the funding, but if it is borrowed from the banks, there is an increase in the money supply. One cannot avoid a sense of déjà vu in these circumstances. The money supply, which was a matter of great concern in earlier periods in our economic history, has not been mentioned, but what worries me is that the enormous increase in borrowing, unmatched by funding from the public, will result in an increase in the money supply and greatly exacerbate the problem of controlling inflation. It is a matter of great concern.

It is wrong to say that this Finance Bill is merely fiddling at the margin. It certainly does more than that—it adds immense confusion to our whole tax system—but in terms of economic management it is not what the whole issue is about, which is the larger macroeconomic variables. I said that we have a sense of déjà vu; it is also the case that on previous occasions, sooner or later, you ended up with the dreaded expression “prices and incomes policy”. It is difficult to avoid the conclusion that that soon will become fashionable again.

I am greatly concerned by the way this is being handled. The reports of the Select Committee, based on evidence, are a great aid to the Government. With so much expertise in your Lordships’ House, we ought through the committee to be of a great deal more use in the future than we are at the moment—despite the fact that we are as helpful as we can be—without in any way impinging on financial privilege.

My Lords, the Select Committee report is clear in language and piercing in thought. I shall not delay your Lordships for long. I want to make two brief points.

First, I am pleased that the new Statistics Authority is assessing the way in which inflation and consumer prices are reported, because damaging confusion has arisen in this sphere. I am sure that the new chairman and deputy chairman of the authority—the admirable duo of Sir Michael Scholar and the noble Lord, Lord Rowe-Beddoe—will clarify the picture soon. I hope that they will persuade the Government to put the Bank of England statistics under the wing of their new authority. Unless they do so, the effectiveness of the new body will be weaker.

My second and more substantive point relates to the state of public finances. I echo the views of my noble friend Lord Forsyth. I find it astonishing that the Minister has come to the House this morning without even mentioning in his opening remarks the state of government spending. In March, the Prime Minister and the Chancellor should have acknowledged the arduous times ahead. Instead, they gave forecasts so clumsy as to distort every edge of reason.

The National Institute of Economic and Social Research and the Institute for Fiscal Studies have demonstrated beyond doubt the scale and gravity of the Government’s problem with public expenditure. The NIESR predicted that the economic slowdown would slice tax revenues by at least £8 billion and stamp duty by £3 billion. The IFS has forecast a budget deficit for next year of well over £40 billion. Indeed, I think that this is a conservative estimate. Michael Saunders, the chief economist of Citigroup, reckons that the deficit could be as high as £80 billion or 5 per cent of GDP.

The IFS has also revealed that, in the years 1979 to 1997, the public sector spent 30 per cent of growth in national output, leaving 70 per cent for the private sector. The corresponding figures for 1997 to 2007, according to the IFS, were 46 per cent for the public sector and a mere 54 per cent for the private sector. That is a dangerous ratio for a liberal market economy.

The budget deficit will soon breach another of the Government’s key fiscal principles—the so-called sustainable investment rule. In addition, the EU Maastricht rule on the ceiling for deficits, set at 3 per cent of GDP, has already been broken at 3.3 per cent. If the report referred to by my noble friend Lord Forsyth in today’s Financial Times is to be believed, the Government, having broken all their fiscal rules, are now intent on rewriting them. This would be a shameful act and should be condemned by us all.

Government borrowing is way ahead of where it was last year and where it was forecast to be this year. The Chancellor’s fiscal targets will be missed by a wide margin and, of course, all this excludes the off-balance-sheet debt, including Northern Rock and PFIs, which mask the even more serious nature of our public finances.

The Government can curb public spending, reform taxes, dampen the growth of money supply or a mixture of all three. A sound Chancellor—Roy Jenkins—took this necessary action, but I doubt the willingness or resolve of Mr Darling. I am sure that he will continue to swell borrowing to the longer-term detriment of the economy. Indeed, this is signalled clearly in today’s press. In the end, however, either the Government will be compelled by events to put our public finances in order or, more likely, the task of tackling the gravity of the deficit will be left to the next Administration.

Treasury officials should be dusting off copies of a short White Paper published in November 1979 under the auspices of my noble and learned friend Lord Howe of Aberavon, to whom my noble friend Lord Stewartby was PPS at the time. The White Paper, entitled The Government’s Expenditure Plans 1980-81, showed the results of that first scrutiny of public finances. Opening with the statement that,

“public expenditure is at the heart of Britain’s present economic difficulties”,

it set out the Government’s three central objectives. The first was to bring down the rate of inflation by reducing the growth of the money supply and by controlling government borrowing. The second was to restore incentives by holding down and, if possible, reducing taxes, particularly on income. The third was to plan for spending that could be compatible with the objectives on borrowing and taxation, with a realistic assessment of the prospects for economic growth.

My belief is that the early years of the next Administration’s term of office will be dominated by restoring order to our public finances. With this in mind, I urge the opposition Front Bench in the other place to study the 1979 White Paper and to consider whether its present policy on public spending is in the nation’s best interests. Yesterday, Mr Cameron suggested that in government he would establish an independent panel to advise on fiscal policy. I need to see more details of this idea. Meanwhile, I remain convinced that fiscal policy cannot and should not be subcontracted. Its creation and execution are the responsibilities of the residents of Downing Street. The reordering of our public finances will overwhelmingly dominate the time of the next Prime Minister and Chancellor from the day they take office, to the exclusion of much else. How they deal with fiscal policy will define the scale of their success.

My Lords, all I can say after that is that I hope that the whole Cabinet reads every word of what my noble friend has just said. Indeed, they should read some of the other speeches that we have heard and, I suspect, some of those that will come after mine.

My main purpose today is to say a few words on the macroeconomic situation. Before I do so, however, I want to say something about the Finance Bill and the Select Committee’s report. It is a good report. It emphasises the need for proper preparation for tax changes and the role of full consultation before they are introduced. It concludes that, if those changes cannot be got right before they are introduced, either they should not be introduced or the introduction should be postponed. That is well illustrated by the farce of the non-dom tax, which has ended up quite unnecessarily scaring off many of those who have formed a crucial component of the growth of the City of London as the world’s leading financial centre. By many measures, that is what the City is: it is ahead of New York, Hong Kong and Tokyo—that is probably the order of financial centres today. But what a condemnation when the noble Lord, Lord Vallance, said that this tax is essentially unworkable. That must be taken back to the Treasury, to HMRC and most of all to Downing Street.

Consultation as a means of avoiding mistakes is nothing new. I remember that when I was lobby correspondent for the Economist I had to follow Mr Denis Healey’s attempts in the middle 1970s to introduce an annual wealth tax. That was prevented by a timely report of a House of Commons Select Committee, which pointed out the catastrophic consequences. The French still suffer from a wealth tax and, although Mr Sarkozy has expressed a great desire to get rid of it, it is almost certain that he will fail to do so.

As others have said, the fact that this two-volume Bill is 452 pages long is a demonstration of the incompetence of this Government. Could there be a simpler and more obvious example? Actually, I have one. When Mr Brown abolished his own 10 per cent tax rate there was, as we all know, a great row in the House of Commons and he had to try to cancel the effects. On 13 May, Mr Darling announced the changes. At a cost of £2.7 billion he raised the individual personal tax allowance by £600. He said:

“However, as the £600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, I am reducing the threshold at which an individual starts to pay tax at the higher rate by £600. The net effect of these changes is that the tax liability of everyone who currently pays tax at 40 per cent will be unaffected by the increase in the personal allowance”.—[Official Report, Commons, 13/5/08; col. 1202.]

I detect that your Lordships have already spotted the nonsense. It contains an elementary arithmetical howler. To raise the personal allowance threshold by £600 on its own would save higher taxpayers £240; that is, 40 per cent of £600. Four times six equals 24—pretty simple stuff. But to lower the 40 per cent threshold by £600 would cost the higher taxpayers only £120, because they would have been paying 20 per cent anyway. He should have lowered the threshold by £1,200 to recoup the full £240. As Sherlock Holmes once said, the calculation is a simple one. When the Treasury was asked why he had made this mistake, the press were told that they had misunderstood what the Chancellor had said. It is a small point, but it illustrates where we have got to. It is not surprising that the Select Committee concluded:

“Our overall impression from the evidence we received was that … the tax system is no longer sustainable or predictable”.

An accountant friend of mine sent me the current issue of a magazine called Taxation containing an article by Mr Mark Lee, the founder of the Tax Advice Network, who I gather is a highly respected tax practitioner. He writes:

“When permitted to do so, HMRC are far better at effective consultations these days than in the past. Sadly, however, it often seems that they (and therefore we) are just going through the motions, especially when deadlines are too short, changes are introduced within days or multiple issues overlap. This is so frustrating, but within the professional bodies we keep trying, even though it often feels like we are bashing our heads against a brick wall”.

What a sad comment.

On one thing I would congratulate the Government: keeping for 20 years the 40 per cent top tax rate introduced by my noble friend Lord Lawson in his 1988 Budget. I remind noble Lords that, when my noble friend Lady Thatcher took office in 1979, she inherited from the noble Lord, Lord Healey, a top tax rate of 98 per cent, which in today’s money—I am grateful to the Minister, who recently gave me a Written Answer with the correct figure—would apply at a taxable income threshold of £98,000. In other words, if we still had the noble Lord, Lord Healey, at the Treasury, and had he not changed his policy, anyone on £98,000 a year could be paying a marginal rate of 98 per cent.

Cabinet Ministers.

Yes, my Lords, and certainly every GP—maybe even some Members of your Lordships’ House.

I shall move on to a slightly more macro aspect. Alan Greenspan, the former chairman of the Fed, has much to answer for. He encouraged the creation of the credit bubble in America and even consciously filled it with toxic credit. He admitted as much in his autobiography, published last year, a few weeks before the crisis burst. He said:

“I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk … But I believed then, as now, that the benefits of broadened home ownership are worth the risk”.

It is not just that Mr Greenspan’s reputation must be declining by the month; more seriously, it means that confidence in the judgment of central bankers has taken a blow. The reassurance of politicians and, sadly, central bankers will not in itself stimulate economic activity. The credibility of politicians in these circumstances, in so far as it ever existed, probably evaporated in the 1930s. To make the same mistakes today merely gives a contrary message to what is intended. I have watched with fascination the reaction of Wall Street to the various attempts made at reassurance, whether by the Treasury Secretary, the chairman of the Fed or the White House. In virtually every case, markets moved in the opposite direction to that intended.

It is clear that Fed chairman Ben Bernanke has been under huge pressure to avoid a recession, at least until after the presidential election in November. In my view, he cut interest rates far too fast and too much. The 2 per cent Fed rate is a negative rate of interest. We have seen in Japan the economic stagnation that resulted from such unwise interest rate policies. After some 17 years of adjustment to the bursting of Japan’s bubble, the Nikkei index is today 67 per cent below its all-time high in December 1989.

Low interest rates fail to stimulate industrial investment—noble Lords will remember Keynes’s famous analogy when he described interest rate cuts to stimulate business in a time of depression as,

“pushing on a piece of string”

—because businessmen will invest only if they have confidence in the demand for the product of that investment. The disadvantage of low interest rates is that they can tempt consumers into incurring further debt—we should recognise that debt is a four-letter word. This is precisely what is not needed in a recession that has been caused by the bursting of a bubble filled with toxic credit.

The Bank of England’s judgment has been much sounder. I can see no reason to reduce in coming months the current 5 per cent rate. If inflation continues to increase, it may be necessary to raise the rate. Equally, the ECB has been right to raise rates to 4 per cent. Again, they may have to go higher.

One of the problems that both Governments and central bankers always underestimate is the lag between macroeconomic disasters and the time that the consumer stops shopping. Let us remember also that the richer a country, the bigger the proportion of expenditure that is discretionary and thus the greater the potential fall in demand. It should have been obvious that economic events such as a credit crunch and an explosion in commodity prices have an esoteric content, with consequences that are not at once apparent to the punter in the street. This lag effect is one of the most important factors in economic history. Let us remember that, following the September 1929 Wall Street crash, the Dow did not hit bottom until July 1932, by when it had lost 89 per cent of its value.

Today, the economic outlook is alarming. There still seems to be reluctance in the Government to face up to this. This week, Sir Robert Wilson, until recently the boss of RTZ and one of Britain’s most distinguished industrialists, told the AGM of the Economist Group:

“We are on the threshold of a particularly nasty recession”.

So what can we do about it in Britain? First, of course, we have to maintain the independence of the Bank of England. Secondly, there must be cuts in discretionary expenditure by the Government, particularly in housing. It is the job of a Government to see that citizens are decently housed; it is not their job to expand home ownership. We already have 70 per cent home ownership and it is arguable that that is enough.

It will be necessary to increase government borrowing—I can see no way around that—probably by as much as 5 per cent of GDP. That means that we must not go on borrowing off balance sheet, which is as dangerous in the public sector as it is in the private sector. Taxes should not be increased overall, but nor should they be cut. The 2 per cent postponement of the rise in fuel tax is absurd, because 2p on a gallon is within the variation between one pump and another. Fiddling around with that is tokenism.

In addition, we must have the courage to take more strategic decisions on infrastructure, particularly the building of a new generation of nuclear power stations. If the Government had not spent 10 years making up their mind, we could be about to see the commissioning of a dozen new nuclear power stations in this country. We must try to attract and welcome investment into the UK from the massive sovereign funds that have built up in the oil-producing countries. There will be protectionism to discourage that in both the United States and in some countries in Europe, particularly France, but we should not play that game.

Finally, we should do all that we can to get the Doha trade round into force. It will be hard, but it is far more important and much more certain in its results than that other priority about which the Government bang on: negotiations on global warming.

My Lords, I start with an apology to the noble Lord, Lord Vallance. I shall not be speaking about the Finance Bill—at least, I have one comment on it and that is it. I did not understand the Finance Bill when I was the first chairman of the Finance Sub-Committee and I have made no progress since then.

There was, however, one thing that I did understand about it in my day which comes up again today: the scale of the tax avoidance industry. I remind noble Lords that it was my right honourable friend the present Prime Minister who devoted his time as Chancellor to trying to do something about tax avoidance, but I am afraid that it was rather like the many-headed hydra: the more you cut off one scheme, two more sprang up.

We got our Finance Sub-Committee because of the efforts of Lord Williams of Mostyn, our late lamented friend. As I listened to some of the stuff—I was going to use a even worse word—coming from the opposition Benches, I asked myself, “Didn’t they have 18 years in power? What did they ever do of that sort?” What did they do about tax avoidance? There were too many of their friends in the business, to be perfectly honest. I shall not make too many political points, but I think that they ought to recall that they were in power for quite a long period. When they make a fuss about the economy, we should ask: was it not their Government who raised the unemployment level to 3 million? Now they have the nerve to criticise the present Government because it is the fashionable thing to do. They ought to reflect on their record, to which I shall come on a rather more significant scale. I hope that the noble Baroness, Lady Noakes, when she speaks for the Opposition, will respond appropriately.

My contribution to today’s debate will be confined to economics and macroeconomic policy. This is not to deny the significance of political aspects of policy. After all, those who enter political life do so because they believe that politics are important and I do not criticise them for making political points. Equally, I became an economist because I was convinced of the relevance of economics in elucidating and solving economic problems, not least those to do with economic policy. I still believe that; I still believe that our economic problems are solvable; and I shall go even further by boasting that I think that I know what we ought to do.

My remarks will be dismal to the point of harshness. I expect to make few friends, if any, in your Lordships’ House. Certainly, I expect to make no friends on the Front Benches either on this side or opposite. I do not believe that the political leadership of any of the main parties will welcome what I have to say. I am coming near to the end of my time anyway, so I am not at all sure that I really care.

There is no doubt that the rise in food prices is externally generated. There was a small movement in the period from 2001 to 2007 and then a surge in real food prices, but real food prices now are still well below those of the 1980s and have only recently passed those of the 1990s. The cause simply is that demand has risen and supply, as is normal in this area, has responded slowly. Therefore, the real price of food goes up. No one predicted—I certainly did not—the effect of biofuels, which was supposed to be so good, on food prices. Supply has responded slowly but, in the end, it always adjusts in the case of food. In my judgment it will adjust but we have to bear the consequences of what has happened until the adjustment takes place. In my view, in an obese society, it does no harm that we have to bear some of the consequences.

Equally—and no one doubts it—the energy price rise is also externally generated, and is due to the monopoly power of the OPEC cartel and to additional speculation. Both those price rises are relative but, with other prices slow to fall, which is normal in our economy, the price level rises. On any understanding of the economics of this, the rise in the price level is not the same as inflation. Some noble Lords may never have had an economics lesson, but that is absolutely the case: it is not the same as inflation, in any technical economic sense. It becomes inflation only if firms and households respond by trying to raise other prices and wages and if the Treasury and the MPC facilitate their ability to do so. The Treasury has the main task of seeing that that does not happen. I have not read today’s papers but if what noble Lords have said is in them, the Treasury seems to be doing the opposite of what I am saying—but that is my bad luck.

First, the Treasury must under no circumstances subsidise food or energy. It dawned on at least one commentator in the Financial Times a couple of weeks ago that that is the right thing, although not on most other commentators. On energy in particular, economic theory tells us that when confronted by a monopoly we must first all take the hit; when the real price of energy has gone up, our real standard has to go down. That was a lesson that we did not learn in the previous Labour Government, which is why we ended up with the IMF crisis; we thought that we did not have to take the real hit, but we did—and by “we” I mean all of us have to take it. The sooner that we take that real hit, the better, and the quicker we can get the economy right. Therefore, noble Lords will not be surprised to know—and the noble Lord, Lord Marlesford, is aware of my view—I would have increased the excise duties drastically rather than postpone their increase. But that is just me. The point is that it lowers the demand for oil, hits the profits of the oil cartel, which is the only thing it understands, and causes speculators in oil to start to worry whether their speculation is not suddenly going to reverse itself. They will panic and their speculation will shift the other way. We need to take a ruthless approach to this, but we cannot get away from the fact that we will have a real hit, at least in the immediate future.

I go further—and the point was made following the Question put by the noble Lord, Lord Higgins, yesterday, which I purposely did not join in on, as I told him, because I wanted to say save my remarks for today. My noble friends Lord Barnett and Lord Sheldon also said that fiscal policy must be tightened, not loosened. That seems perfectly obvious. I know that my right honourable friend the Chancellor, out of the goodness of his heart, has been rather too kind to his honourable friends in the other place on these matters. The understanding of my honourable friends in the other place on fiscal issues is minimal at best, and for the most part non-existent. I certainly thought that getting rid of the 10 per cent tax band was a sensible idea. I am also aware that it is immensely difficult to make any change in public policy without hurting some people.

I can cite a classic example of this. I thought that the noble Lord, Lord Forsyth, said that he did not agree with getting rid of the 10 per cent tax band but that he did agree with compensating—but I hope that he did not say that.

My Lords, I very much support getting rid of the 10p band, which was a great simplification. What I objected to was not raising the threshold to the level of the 10p so that it had an onerous effect on the lowest paid.

My Lords, I know about that, but I would not even have done that, which shows how terribly right-wing I am compared with the noble Lord. The classic example of a correct policy under which some people suffered is the abolition of the corn laws, which goes back a long way in the history of his own party. I strongly believe that the abolition of the corn laws was a great step forward, but there were some people who suffered. Rightly, it would never have occurred to those who wanted to do it that they ought to compensate the losers in order to do that. It is not my view generally that if you are keen on reform you always have to compensate the losers. It is a sad state of affairs, but sometimes reform matters more.

What do I also say to my noble friends and right honourable friends in the Government? For the next couple of years the public expenditure side must be kept very tight indeed. The thought that I had is that public expenditure should be indexed by the same index that the MPC is targeting; namely, 2 per cent. I know that the relative price effect will cause that to mean that public expenditure will really be squeezed and that will affect all sorts of deserving people, for whom there is no shortage of pressure groups, whether they are our soldiers, our nurses or our policemen. They have all got to be told, first, simply, “No way”—but if departments want to help them, they must be told to find it within their own budget. It will be indexed by 2 per cent and the departments will have to find the real transfers and take the tough decisions. Without that, I see no hope of any policy having any chance of success in the immediate future. But that policy would work within a fairly short period of time.

What is the task of the MPC? As we know, the MPC’s target is an inflation target; as far as I know from the history of the MPC, and I was in it from the beginning, the subject to that bit has never been allowed to weigh in their minds in any particular way. I disagree with the noble Lord, Lord Marlesford, in that I believe that the economy requires loosening on the MPC’s side, but only if the fiscal side is tightened. In other words, the right policy mix—and again, this is in response to the noble Lord, Lord Higgins—is to have a much tighter fiscal side, which enables the monetary side—well, it is not really the monetary side, because it is not really money. In fact one thing is that despite all the efforts put in to find the measure of the money supply that correlates with inflation—and we are talking about millions of pounds of research money—no one has yet found the measure that works, including those most committed to it. It is strange, but they cannot find it.

My general feeling is that the MPC must wait for a while, until the Treasury demonstrates absolutely that it will not validate inflation on its side or add to inflation expectations. In that case, the MPC can then move—and I hope that that happens sooner rather than later. We must take the income cut without delay because of the oil price rise; there should be no shilly-shallying about the MPC moving when the time is right. But what will really restore confidence is the Treasury talking a very tough story on the fiscal side. Oddly enough, to go a little into politics, if the Treasury were to start talking in that way, that would really restore business confidence and would therefore enable the MPC to do what it needs to do. It would also put the Opposition on the spot and give the Government a chance to fight back—and I intend to put them on the spot now. Instead of the airy-fairy stuff we hear from Mr Cameron, let alone the Liberal Democrats, about what the Conservatives will do some time in a never-to-come future, I should like to know what they would do today. Would they drastically tighten up the fiscal position and then tell us which bits of public expenditure they would cut? I should like to hear also from the Lib Dems what they would do, rather than pretending that eventually there will be efficiency gains. The thing about efficiency gains is that you cannot spend them until you have them, which is a bit too late.

So my view is that, by following my realistic policies, the Government would gain politically and the Opposition would eventually be forced to tell us exactly what they would do to get the economy right.

My Lords, the noble Lord, Lord Peston, said that he was perhaps coming to the end of his time. Many of us in your Lordships’ House profoundly hope that that is not the case. His contributions to our debates are always worth listening to, and you cannot say that of everyone.

The noble Lord has faced us yet again with some of the tough dilemmas that are inherent in our situation. I do not pretend that everything to do with the difficult economic situation is due to the Government. Not only are large-scale international factors at work in the price of commodities, oil and food, there is disruption and dislocation of the proper functioning of the financial system both globally and in our own country. But one has to come back to the point that most of the profound difficulties faced by any Government in trying to introduce a Budget or a Finance Bill have been made worse due to the Government’s spending binge.

One has to look back to 2002, when this process really began in earnest. Year after year, the Budget provided for increased borrowing requirements. The borrowing is cumulative, and in almost every year the actual outturn was worse than had been predicted at the time of the Budget. One cannot go on doing that indefinitely. It is not just the Opposition saying that the national finances are in a mess. Many independent commentators and international organisations, such as the IMF, the OECD, and the EU Finance Ministers, have pointed to the fact that the percentage of debt in this country has exceeded 3 per cent—the Maastricht agreed figure—but the Government have not appeared to take any steps to constrain it. Sooner or later, that has to happen.

That is relevant to the Budget. It means that this year, as in previous years, the Government have had to conduct a desperate search for further sources of revenue. If that comes at a time when individuals are facing a serious squeeze on their personal finances as a result of food prices, energy costs and so on, it goes a long way to explaining why there is such unprecedented taxpayer fury at the impositions in the previous Budget. At the right time, one has to exercise a lot of discipline. As the noble Lord, Lord Peston, said, it may require tough decisions.

I am sure that I am not the only Member of your Lordships’ House who has a clear memory of the 1981 Budget, which was an austere Budget formulated in very difficult circumstances. There had been oil shocks and heavy expenditure by a previous Labour Government. We had to bite the bullet. Doing that, and having the courage to do it, meant that the reaction was not particularly hostile. Many people accepted that it was necessary. We were told that that sort of Budget would be very unpopular and should hardly be contemplated at a time of recession, because it would make it worse. Three hundred and sixty four economists wrote a famous letter saying that the Budget would make things worse. Actually, all economists pretty much agree now that the economy began to recover almost simultaneously with that austere Budget. I expect that it will happen again if that is what takes place this time.

Taxpayers’ sensitivity to changes now is very great. Some of the rows that have followed this year’s Budget and Finance Bill have been fiercer than I can remember on any other occasion. It is because they are being clobbered when they have already been clobbered year after year, and when they do not feel that the higher taxes they have been paying have produced revenue that was wisely spent and where the benefits could be seen to be coming through. That carries with it a lesson that any Government contemplating a Budget in difficult times have to bear in mind.

I do not want to discuss the details of issues such as the 10p band, vehicle excise duty, capital gains tax, non-domiciles, fuel duty and so on, because they have had enormous coverage, including quite a bit this morning. Those issues are generally very well known. However, one has to look at some of the aspects of them because of what they tell us about the Government’s approach to the problems we face.

I shall use the 10p case as an example. There is a vivid phrase used in the military, the “flash-to-bang time”, which measures the time it takes after a detonation for the sound of the explosion to be heard. The flash-to-bang time is critical in military terms, but it is also critical in political terms. The flash on the 10p issue came last year with the announcement of the abolition of the rate, but the bang came only a year later when taxpayers found that their latest payslip was incorporating the results. And the lid blew off. It was an explosion that was much louder for having been introduced in that way, louder than it would have been had a more candid assessment been made at the time.

The explosion also produced a very perverse consequence: the Crewe and Nantwich package, which will apparently cost £2.7 billion in revenue. I have read in several places that £2 billion of the £2.7 billion will go to people who did not lose out by removal of the 10p band. That is absolutely crazy, especially since, as the Minister has honestly conceded, it will leave about 1 million households still worse off. That is a terribly bad deal for the taxpayer. It is the sort of deal that, unsurprisingly, is resented. I can only wonder what assessments were made about winners and losers. What assessments were made a year ago when the whole proposal was first floated? What sort of assessment has the Treasury made of the consequences for borrowing—the subject of speeches by my noble friends—as a result of these significant changes?

I am more than 20 years out of date on the inner workings of the Treasury and Finance Bills and so on. But we were always careful to measure the impact of specific tax changes on different types of households or individuals to ensure that they were not too severe in any particular case. Can such a process have been gone through here? I do not believe so; otherwise they would not have come up with the answer they found.

I have lost track now—this is what mariners call dead reckoning, where you work out where you might be if certain assumptions are right, and hope that you have not gone aground in the mean time. However, if you add the extra debt that will arise from the £2.7 billion, it will affect public expenditure not only this year but year after year. Once you have borrowed £2.7 billion, you have an ongoing annual increase in public expenditure of well over £100 million merely to service the debt. You cannot go on doing that year after year. You certainly cannot do it after you have taken a judgment in the Budget, seeking to erode it by adjusting so many of the component parts that the original arithmetic is no longer valid. I do not know what the correct arithmetic is today. We would find it helpful if the Minister could enlighten us.

This flash-to-bang time business is becoming a bit of a habit. The vehicle excise duty increase was first delayed for six months, and now I understand that the Glasgow announcement means that it will be deferred for even longer. We have these budgets where parts of the components are being suspended for different lengths of time. Getting any grasp of what it means for overall debt is becoming technically very difficult to do.

The following is a very political remark, but I shall say it in a low key. The position has not been helped by the sort of duplicity with which the former Chancellor presented his Budget and his figures, and of which he was so fond. One found that all the dirt was in the Red Book, while the Budget speech itself was bland and full of presentational skills. That really does bounce back and explode in one’s face after a very short time once people realise that the measures they heard are no longer the whole truth. They resent it.

The combination of all those factors has led to an unusual degree of disillusionment. It suggests that policy is often made on the hoof; that individual changes are not properly costed; that the costings are not explained; that the proposals are ill thought out and require amendment, while the amendment process itself becomes increasingly foggy; and that decisions are too often seen to be taken as a result of political calculation rather than for the genuine financial and economic needs of the country. Unpicking these Budget measures one by one by varying revenue costs undoubtedly undermines the integrity of the Budget process itself. It encourages taxpayers to regard the overall Budget judgment as flexible and the individual measures as open to renegotiation. You cannot have these jelly-like, wobbly Budgets which significantly change their shape after the Budget is introduced. However you look at it, it is not the way to run our national finances.

My Lords, I am grateful to the Minister for introducing the debate but I thought his approach was extraordinarily complacent given the financial situation in which we find ourselves. Like my noble friend Lord Forsyth, I am most surprised that he had nothing to say on the Government’s decision to abandon their fiscal rules. The Minister referred to the sub-committee’s well targeted and useful report but, as my noble friend pointed out in his excellent speech, he completely failed to answer properly any of the serious criticisms in the report. Most devastating was the committee’s conclusion that the formulation of tax policy has been marked by uncertainty of direction, exacerbated by poor examples of consultation.

In debating the Finance Bill each year, noble Lords are rightly ever mindful of the need to respect the supremacy of another place on these matters. I was not fully aware of the emergence of a convention that your Lordships’ House should concern itself only with technical issues of tax administration, clarification and simplification. As your Lordships are aware, the Finance Bill sub-committee’s terms of reference specifically exclude the consideration of rates or incidence of tax. Of course, this is absurd, and the sub-committee’s most helpful report inevitably covered rates and incidence in relation to the effect on international competitiveness of the new rules on non-domiciled persons.

Since the reform of your Lordships’ House in 1999, it has sometimes been questioned whether the statutory restriction of the powers of the House on money Bills is any longer appropriate, especially given the wide disparity in levels of experience and knowledge of such matters in favour of this place rather than another. Even if the present restrictions on your Lordships’ powers are to remain, and perhaps because they exist, it is surely right to question the logic in the restriction on the sub-committee’s right to consider aspects of rates and incidence. On this I agree entirely with my noble friend Lord Higgins.

In any event, as noble Lords are aware, matters of rates and tax incidence are often discussed in your Lordships’ House during debates on economic or pension matters and many other areas. I welcome the report of the working party of my noble and learned friend Lord Howe, Making Taxes Simpler, and its endorsement of the recommendation of the commission of my noble friend Lord Forsyth to establish an office of tax simplification—although I am not entirely sure about the nomenclature. I also feel an instinctive aversion to the establishment of additional permanent quangos that tend to add to the cost and complexity of the bureaucracy. We certainly need an OTS now, but I would hope that its ultimate aim would be to do itself out of a job once it had achieved its task under a future Conservative Government—which I hope will in any event apply a “keep taxes simple” rule in the Treasury’s management of fiscal affairs.

My noble and learned friend Lord Howe’s report also recommends the establishment of a new joint parliamentary Select Committee on taxation. This sensible proposal should do much to improve the quality of tax legislation over what we have seen in the past 10 years. This Joint Committee would of course have no powers to initiate tax changes, but its duty to consider fully the rates and incidence of taxation should not be restricted in any way by the fact that half its members will be drawn from your Lordships’ House. If such a restriction on a new Joint Committee’s scope were to be established, it would greatly reduce the value of such a committee’s reports and advice.

As your Lordships are well aware, the Government have not fully compensated 1.1 million of those financially disadvantaged by the abolition of the 10p tax band. Amazingly, £2 billion of the Government’s £2.7 billion 10p tax rescue package has gone to those who had not lost out from the original tax change in any event. The Government’s handling of this issue put the final nail in the coffin of their illusory reputation for fiscal competence and prudent management of the economy. The taxpayer will have to find the additional £2.7 billion on top of the Government’s profligate spending over more than a decade. This point has been reached at a time when we can least afford it, in the early stages of a severe global economic downturn caused by matters largely beyond our control.

I remind your Lordships that Mr Brown introduced the 10p tax in the first place. That was the big mistake. It was always a gimmick anyway, applying only to £2,000 of taxable income. What is worse is the fact that Mr Brown had no exit strategy. He should never have introduced a headline-grabbing, politically inspired, ineffective gimmick such as the 10p tax band without considering how he could get rid of it when he needed to. Of course, he has now had to get rid of it to pay for something designed to appeal to middle England in a desperate, last-ditch attempt to hang on to as many of his disappearing constituency of supporters across the country as he can; that is, the 2p reduction in the basic rate of income tax.

To try to prevent higher rate taxpayers benefiting from the increase in the personal allowance, the Government have reduced the threshold at which the 40 per cent higher rate tax band applies. As my noble friend Lord Marlesford pointed out, the Treasury has got even that wrong and made an elementary arithmetical error. However, the Government’s failure over many years to increase the 40 per cent rate threshold in line with earnings has in any case amounted to an additional stealth tax, and has doubled the number of people drawn into the 40 per cent higher tax rate band. Rather than increasing the threshold significantly, which is necessary to restore our standing in the international competitiveness league, the Government’s reduction of the threshold is a major mistake, especially at a time of rising inflation. The Government have largely destroyed the United Kingdom’s attractiveness as a low-tax economy and the natural location of choice for international companies seeking to establish their European headquarters. To retain our status as the preferred location we need low rates of income tax and corporation tax.

It is often argued that our income tax rates are still comparatively low. That is to some extent true, but the level at which we reach the higher rate band is comparatively low and getting lower. The United Kingdom is no longer competitive in terms of income tax for someone earning £40,000 a year. In terms of corporation tax, too, we have slipped a long way down the league table since this Government came into office. The Finance Bill’s proposals on both capital gains tax and the taxation of non-domiciled persons will also have a counterproductive effect on revenues in return for no gain. As the sub-committee’s report concludes, “something went wrong” in the development of the capital gains tax and residence and domicile initiatives.

The phasing-out of taper relief discourages long-term investment. The attractiveness of London as a tax location for non-domiciled persons has already been reduced by rises in tax rates. There is a practical argument that foreign heads of companies based in London have already faced significant tax rises, and that now is the worse possible time to introduce intrusive measures such as the £30,000 charge. At least if this Government’s persistent tax rises and introduction of stealth taxes had provided the resources to help the poorest members of our society it would have had some merit. However, the recent ONS statistics make it clear that taxation levied on the poorest 20 per cent of households is increasing and has reached the surprisingly high level of 38.6 per cent, up from 36.4 per cent in the previous year.

Neither has the condition of the public finances improved. The public sector current budget is £9.3 billion in deficit; £2.2 billion more than in 2007-08. Public sector net borrowing has risen to £12.7 billion, an increase of as much as 50 per cent from the previous year. None of this takes any account of the effects of the Northern Rock acquisition, which the Government have kept off-balance-sheet, with the staggering amount of £25 billion plus around the same sum in guarantees.

As my right honourable friend David Cameron said, the 2008 Budget was a bad news budget. The Government have introduced new stealth taxes on cars and alcohol but are in no position to offer offsetting tax reductions elsewhere, in spite of benefiting from a windfall resulting from much higher oil prices. Why have the Government reversed their policy on favouring diesel over petrol? Not so long ago diesel was priced a few pence cheaper than petrol per litre. Now diesel is around 15 pence more expensive. I understand that our tax take from diesel is the highest of any country in the EU. Could the Minister tell the House what changes in the respective rates of tax on petrol and diesel the Government have made in the past two years?

The Treasury is going to reform Gordon Brown’s already completely discredited fiscal rules. The House is aware that the Government have tinkered with these rules on several occasions in the past, backdating the beginning of the previous cycle to include an extra period of responsible management and lower borrowing inherited from the previous Conservative Government, and reclassifying maintenance spending on the roads as investment. However, even with extensive tinkering, the Government will not be able to keep to the rules that the Prime Minister himself invented, and has often argued to be of crucial importance.

The Government have decided to mortgage our future and our children’s future. If it is no longer necessary to keep net debt at a level below 40 per cent of GDP, what level will be acceptable? I should like to hear from the Minister what the Treasury now thinks is an acceptable level of borrowing. We know that the Prime Minister has been told by Mr Almunia, the Economic and Monetary Affairs Commissioner, that the UK’s budget deficit is excessive. That is, of course, true, but we do not need the EU to tell us that. The Second Reading debate in the House of Commons also revealed various instances where the EU had either not approved government measures, such as the increase in the amount of relief under the enterprise investment scheme, or where proposals to change rates of duty, such as the Conservative proposals on alcohol duty, would fall foul of EU rules.

We already have a degree of enforced tax harmonisation. Against this background, the news that the Government have ratified the Lisbon treaty, which will surely ultimately lead to much greater harmonisation, is deeply depressing. Of course, as noble Lords know, there was no need to ratify the treaty at this point because it cannot come into force until all member states agree, and this is happily, at least for now, impossible.

It is deplorable that the Government’s financial management has so destroyed incentives to save, and that the savings ratio is rock bottom. In the same Budget when he introduced the gimmicky and disastrous 10p tax band, Mr Brown abolished the favourable tax status which had formerly applied to our previously excellent and world renowned pensions system, leading to its near total destruction. So now we have no savings and wrecked pensions as we go into a severe economic downturn. I would not wish to be in the Minister’s shoes today as he replies to this debate, but I look forward to hearing contributions from other noble Lords.

My Lords, I, too, thank the Minister for introducing the debate. I agree that he sounded very complacent about the country’s economic problems. I am also most grateful to the noble Lord, Lord Vallance of Tummel, for his outstanding report. I again agree that the Minister failed to answer any of the major questions asked.

I am always anxious to give praise where it is due for positive aspects of the Finance Bill. I welcome the cut in the basic rate of income tax from 22 per cent to 20 per cent; the lowering of the mainstream corporation tax rate from 30 per cent to 28 per cent; and the enhancements to the enterprise initiative scheme and inheritance tax measures, although those were introduced only in response to our proposed measures.

However, most other positive measures are fairly few and far between and do not deserve special mention. This may be reflected in the lack of Labour speakers today, but their lack of quantity was certainly made up for by the quality of the speech of the noble Lord, Lord Peston, who we hope will be with us for many years to come.

The Minister blamed the UK’s problems on the international downturn, but what he failed to say was much more significant. I shall focus on the economy as a whole, comment on individual tax measures and examine management issues at the Treasury and Inland Revenue. I accept the international economic problems mentioned by the Minister. What is much less impressive, as many other speakers have said, is the state of the UK Government’s finances. In simple terms, the Government failed to put aside money when the weather was good to prepare for a rainy day. They have embarked on a huge spending spree, but the results and benefits are often not clear. The Chancellor now finds that there is not enough room for fiscal manoeuvre to cope adequately with an economic downturn.

I emphasise that it is not just the Opposition that is saying this, but respected independent institutions. For example, the OECD stated in its June outlook for the UK that the slowing economy is likely to limit tax revenues, and that the government deficit now seems likely to move above 3 per cent of GDP, putting the fiscal rules at risk. The well-respected Institute for Fiscal Studies stated, following its analysis of the public finance figures for May:

“The forecasts for Budget 2008, combined with Mr Darling’s May 13th mini-budget announcement of a £2.7 billion give-away to basic rate taxpayers this year, suggest he has virtually no room for manoeuvre against the sustainable investment rule over the next few years”.

Indeed, the 2008 Budget projections show the rule coming within a whisker of being broken, with debt reaching 39.8 per cent of GDP in 2010-11, just under the 40 per cent ceiling. Also, I believe that tax revenues will come considerably lower than anticipated due to the weakness of the financial sector, on which the UK is so reliant these days.

No wonder we read in the Financial Times and other newspapers about the rewrite of the Treasury economic rules. Maybe it should follow the advice of the noble Lord, Lord Peston, and tighten fiscal policy. It seems to me that it is doing the complete opposite. What level might the Equitable Life compensation situation come out at? What is the estimate of the PFI liabilities, which I understand must be declared from next March in the Government’s accounts? That may also put strain on the finances.

My next key area of economic concern is inflation. I am only an amateur economist, but cognoscenti of my speeches will know that I have been concerned about this since December 2006, although economic experts such as the noble Lord, Lord Peston, have told me that I may be incorrect. All that I can do is quote the figures most recently produced for May to back up my continuing worries over the issue. Rising fuel and food costs pushed the CPI in June up no less than 0.5 percentage to 3.8 per cent, which is the highest level for 15 years and well above the Government’s 2 per cent target. As important is the retail prices index measure, which is used as a benchmark in pay negotiations, and which rose to 4.6 per cent in June from 4.3 per cent in May.

A further inflationary portent was seen in the June factory gate inflation price figures published this Monday, which show factory gate inflation rising by double figures for the first time in more than 20 years. According to the FT, the danger of this development is that it could feed through to consumer inflation in due course.

Having expressed my general concerns about the UK economy, I shall now move on to examine four specific measures. First, I will look at the abolition of the 10p rate of income tax. As other noble Lords have stated, that rightly caused such a furore when originally proposed that a £2.7 billion rescue package had to be produced. Even after that, nearly 1 million people are still worse off by more than £1 a week. The Treasury Select Committee estimated in its report of 27 June that there were still 1.1 million losing households and that, as Chancellor, Gordon Brown acted for the,

“perceived benefit of seeming to pull rabbits from the hat”,

when he cut 2p from the basic rate of income tax and paid for it by abolishing the 10p rate. The Minister has indicated what further assistance may be given, but can he give any more concrete details of what that may be in the autumn?

Vehicle excise duty has been covered by some other speakers. Although it was not made clear in the Budget 2008, the Treasury has abolished the exemption from higher VED rates for cars that emit more than 186 grams of CO₂ per kilometre and which were registered between March 2001 and March 2006. In a Written Answer on 9 July, Angela Eagle admitted that 44 per cent of drivers will pay more VED as a result of the changes. Not only has that been proved to be another stealth tax buried in the fine print of the Red Book, it involves retrospective legislation in a most pernicious way. If it applied to new cars only, I would be more prepared to accept it. However, by making it applicable to previous purchases, it is very unfair and unsurprisingly has caused great anger, even among Labour supporters. Will there be another U-turn on this plan after such general protests?

If muddle and confusion have been features of the 10p tax abolition and the VED situation, the third issue, CGT reform, has seen just as bad problems. Once again, like the 0 per cent corporation tax rate for smaller companies, the Government have abolished a rate which they introduced. It was only after a great hue and cry from businesses that the entrepreneurs’ relief was introduced. The Lords economic affairs sub-committee on the Finance Bill made some very relevant comments on the CGT changes. The committee first stated:

“We see no reason why there could not have been earlier, better and more open consultation”,

on CGT. The committee went on to say that,

“in the light of developments both here and in other countries, the overall impression being given today is of a less competitive tax environment. We also think that announcing unexpected tax changes adds to the perception of reduced competitiveness”.

The committee also believed that the introduction of entrepreneurs’ relief added a measure of complication, as it was not framed as simply as might have been possible.

Briefly, word on the non-dom situation the UK economy will suffer from the introduction of the new £30,000 levy. Anecdotal evidence that I have received suggests that considerable numbers are considering leaving the UK to set up in principalities such as Monaco or in Switzerland. Any Government would be making a big mistake to tax such individuals, as they pay considerable amounts of PAYE tax on their employees and VAT on their expenditure.

Legislative chaos seems to be matched by departmental problems. The Times in an article of 4 July stated that there is a collapse of morale in the Treasury,

“after a string of U-turns and interference by No. 10”.

The article goes on to say that, in another blow to the Chancellor’s independence, Gordon Brown has asked him to carry out a review of green taxation to pave the way for further climbdowns on fuel duty—which has now happened—and VED this autumn. According to the article, there is another problem, this time with the National Audit Office. Apparently, as my noble friend Lord Higgins stated, the NAO is unhappy with the way in which the nationalisation of Northern Rock is being treated in the Treasury’s books.

The Treasury’s annual report was published on 3 July, most unusually without the normal department resource accounts. Will the Minister confirm, as my noble friend Lord Higgins has asked, that the resource accounts will be published before the Summer Recess, as I understand is required? Will the accounts be qualified? Finally, in the Times article, a so-called “senior Treasury figure” spoke of a “crisis of identity” in what was once Whitehall’s most powerful department. He said that it was a depressing place to work.

Problems persist in another government-related area; HMRC. Despite assurances that have been given to me and others that the issue was under control, it was disclosed on Tuesday that another £1.5 billion of taxpayers’ money was lost to fraud, so-called accidental over-claims and other areas in 2006-07 in the area of tax credits. That means that, according to the NAO, almost £14 billion has been lost in fraud and overpayment of tax claims since tax credits were introduced in 2003. What is being done to stem that continuous loss of money? The tax credit system is so complicated that it is easily abused by fraudsters, misunderstood by claimants and mismanaged by officials.

It is well known that HMRC has also experienced major problems with the loss of the personal data of 25 million people. The Poynter report produced on this incident said that the loss was “entirely avoidable”. It does not blame individual officials but highlights serious institutional deficiencies at HMRC, in direct contradiction to the claims at that time by the Prime Minister and the Chancellor. Can the Minister say what has been done to correct those deficiencies?

As many other speakers have stated, one of the main planks of the Labour Government’s policy in 1997 was economic confidence. Unfortunately, that has been totally broken and we are all going to suffer for a very long time.

My Lords, I congratulate the Economic Affairs Committee on its report, because it highlights a central and recurrent theme of the Government’s performance on economic management, tax and public expenditure, which has been a central theme of this debate—a total lack of competence.

On capital gains tax, we on these Benches agree with the principle of abolishing taper relief; indeed, it was in our tax commission’s proposals. Where the Government started to go wrong was on their motivation for making the changes. They were panicked into them, because of the effective jibe by Jon Moulton that private equity bosses were paying less tax than their cleaners. That was clearly unacceptable, so the Government had to do something. Where we disagreed, and where the Government seem to have made a first fundamental error, was on the basis on which they made the changes. An 18 per cent single rate, as the noble Lord, Lord Forsyth, pointed out, is not a simplifying rate, because it does not align with income tax rates and there will undoubtedly be a significant amount of effort put into avoidance, particularly to avoid the 40 per cent rate.

The new rate raises some curious anomalies, which the Government simply cannot support. How can we reduce the tax payable on the sale of second homes at a time when everyone agrees that we need to do more to encourage broader home ownership and broader occupation of homes in areas where there are high levels of second homes? There are major structural problems, which the Government did not really understand. The Government then had to make panic changes. The entrepreneurs’ relief was a panic response to the universal condemnation of the changes by the business community. The Economic Affairs Committee’s report makes it clear that the entrepreneurs’ relief changes are not sustainable and that further changes will be needed. It is clearly a botched job.

However, the incompetence with which those changes were introduced pales into insignificance compared to the incompetence around the introduction of the residence and domicile changes. This will become a case study in how not to make tax changes. Again, we support the principle of taxing non-doms at a fair rate, as we made clear before the changes were introduced. Noble Lords will remember that the changes took place in the way that they did because, in his conference speech, Mr Osborne proposed taxing non-doms. I say to the noble Viscount, Lord Trenchard, and the noble Lord, Lord Northbrook, that although these may well be appalling changes that will devastate the economy, they should talk to their colleague Mr Osborne, because he panicked the Government into introducing the changes in the first place.

After introducing those changes, the Treasury decided to slip in a lot of other changes via the back door. That was done in January. There was chaos and confusion. Therefore, in the Budget there was a series of concessions on trusts, the day counting rules and de minimis levels to deal with some of the problems. However, these were carried out at the last minute, so that when the Finance Bill was published the poor officials and parliamentary draftsmen had not got around to drafting the legislation. The noble Lord says that we should be grateful for that, because it allowed consultation to take place. However, we know that the Government were allegedly reviewing this from 2002. To say that as a result of their panic we should be grateful simply because they have been trying at the last minute to make sure that the problems that they were causing were minimised really will not wash. It is clear that further amendments to the changes will be needed, under pressure from the people who are affected and mere common sense. Although the Government said that they would not make any substantive changes to taxation of non-doms before the next election, I would be amazed if none at all was made in the next Finance Bill.

As the Select Committee points out, there are three clear problems: first, a lack of clear policy rationale behind the changes; secondly, unstable changes, because they are badly thought through; and, thirdly, the exposure of serious rifts between the Treasury and HMRC on how to make the changes, which reflects the fact that the Treasury is unable to deal with detailed tax policy measures. Treasury morale may be bad, but the morale of HMRC, particularly among those who administer tax on the ground, is significantly worse, not least because of the cuts in staff and the clear failure to introduce priorities that reflect the changes.

What should we do in this area to reduce the likelihood of repeat performances? The noble and learned Lord, Lord Howe of Aberavon, produced an interesting report that proposes an office of tax simplification. That is too narrow, because although we all want simpler taxes, a simple tax system is only one feature of a satisfactory one.

A better proposal has been put forward by the Chartered Institute of Taxation, which is to establish a tax law commission that would be broadly analogous to the Law Commission. It would have three roles. First, it would have a statutory right to be consulted on any tax changes that affected the tax structure, as opposed to simple rate and threshold changes. Secondly, if the Government asked, the commission would have a duty to investigate any area of tax law that the Government wished to restructure and simplify. We have looked, for example, at the tax rewrite Bills as they come forward. It is clear that the present system, although valuable, is only partial. When we looked at the first of those Bills, on capital allowances, we saw a raft of historic bits of legislation. One that caught my eye related to dredgers. Clearly, there had been some problem with dredgers, donkey’s years ago, which was dealt with in a law that is still there. The Government should be able to say to the new tax law commission, “Would you please look at this area of tax?”, and it could produce a report in the same way as the Law Commission does. Thirdly, the new commission should have the power itself to undertake reviews of the operation of particular areas of taxation that, in its view, could be improved and simplified. That would need legislation, but it could be easily done.

My Lords, rather than our setting up a new quango, could not precisely those three functions be carried out by a committee of this House?

No, my Lords, I do not think so, because a lot of this work, with all due respect to your Lordships, is immensely technical and there needs to be a body of tax practitioners who can grapple with the detail. It would not be the best use of your Lordships’ time to try to examine that detail. Frankly, I do not think that your Lordships have the up-to-date or relevant technical expertise that such a committee would need. However, I was about to say that I agree with the noble Lord, Lord Higgins, about the need for a tax management Bill that Members of this House and another place could look at.

Until now I have talked about second-order tax changes on which the Government have made a mess, but the real howler has been the abolition of the 10 pence tax rate. This change was introduced to assuage middle-class concerns about the rising general level of taxation. When it came in, it was opposed only by Frank Field and my colleagues in another place. With all due respect to the Conservatives, the righteous indignation that we have heard from them on this measure in recent months was not heard at the time. This measure, and the way that the Government have had to retreat on it, has already cost £2.7 billion. One million people are still losing out and the Government will probably have to make further concessions later in the year. It is a real horror story.

In a normal year, I am sure that these issues would have dominated our debate, but this is not a normal year. As a number of noble Lords have said, we are facing a perfect economic storm with the near collapse of the banking sector and the unprecedentedly swift collapse of the housing market and housebuilding, combined with soaring oil and food prices. Obviously, those are not all the Government’s fault but, unfortunately for the Government, largely because they took credit for benign economic circumstances, which were not their doing either, they can hardly be surprised if they now find themselves taking the blame for some of these broader global issues.

However, in my view, in a number of respects their response has been too slow in view of the size of the problem. I shall quickly refer to just three examples. First, as we have pointed out before, we were promised a banking Bill before the summer in order to reassure depositors that their deposits were safe. At a time when there are clearly ongoing problems in the banking sector, not least with foreign banks that have a lot of UK depositors, it seems to me completely inadequate that it is likely to be well into next year before we have a revised depositor protection scheme on the statute book. That should have been done with a greater sense of urgency.

Secondly, the collapse of the housing market should, in our view, have led to a stronger response from the Government. They should have allowed registered social landlords to borrow against their assets to buy up complete but unsold or half-complete buildings so that the construction sector did not come to an almost total stop.

Finally—this touches on what the noble Lord, Lord Ryder, said—we have been arguing for some time that the definition of inflation used by the Bank of England should take into account house values. The problem is that, in times of house price rises, the signals given to the Bank of England lead to too loose a position and, in times of house price falls, they lead to one that is arguably too tight. Incidentally, I completely agree with the noble Lord, Lord Ryder, about bringing the statistics produced by the Bank of England under the Statistics Board. When he asked Ministers about that omission, answer came there none.

However, the major consequence for the Government of the economic circumstances in which we now find ourselves is the fact that, as a number of noble Lords have said, the reduction in revenue and the increase in expenditure caused by rising unemployment will drive a coach and horses through the public finances. That raises two questions. First, what will happen regarding the fiscal rules? Secondly—this reflects what the noble Lord, Lord Peston, said—never mind the rules, what will be done about the substance of tax and expenditure?

The Government’s argument for dispensing with the rules—namely, that a new economic cycle began in March—is pathetic. They should accept, as we all do, that the rules of the game have changed to a considerable extent in that, arguably, we are facing the biggest economic downturn that we have seen since the 1930s. In those circumstances, to paraphrase Keynes, circumstances have changed and the rules should change, too. The Government should just admit that. However, if they are to change the rules, it is important that they put in place some structure that enables any new rules to have more credibility than the current ones. We have argued for some time for the establishment of a fiscal policy committee, not to set fiscal policy but to review how the Government are performing against their own rules and to make recommendations accordingly. I hope that the Minister will take that proposal back to his Treasury colleagues.

I turn to the rules themselves and what we might do. So far as concerns the golden rule, we believe that we should be working on the assumption of a small surplus over the cycle and that medium-term fiscal planning should include a commitment to an annual surplus of, say, £5 billion over the cycle. The public debt rule will undoubtedly be breached. We are looking forward very much to hearing the Government’s response. Yesterday at Question Time, we rehearsed the options, to which the noble Lord, Lord Peston, referred—that is, public expenditure, cuts or tax rises. I absolutely agree with him that there will have to be some movement in those areas. I do not think that we can just throw the rules out and do nothing. Much as I would like to be able to give my standard half-hour speech on Liberal Democrat tax policy, I shall just say that, when we talk of cutting public expenditure, we plan to do it not via efficiency savings but via specific identified programmes, of which ID cards are an obvious example.

The Government have sailed into this perfect economic storm by promoting the captain to admiral, with the admiral unable to take his hands off the wheel, and, having lost their way, they are now planning to tear up the charts. We have little confidence that they have the faintest clue how to steer us into a safer economic haven.

My Lords, it is a pleasure to spend the last Friday before the Summer Recess debating the Finance Bill and yet another excellent report by the Finance Bill sub-committee of the Economic Affairs Committee of your Lordships’ House. I support everything that other noble Lords, and in particular my noble friends, have said about it. I thank the noble Lord, Lord Vallance, and his committee for producing such a stimulating report.

We do not regard it as appropriate that the Government should schedule our debate on the Finance Bill for a Friday, especially one which had not even been scheduled as a sitting day. We have accepted it this year on the basis that it does not form a precedent. The Government might have hoped that they would have been dissuading my noble friends from coming in by scheduling business in this way, but I am proud of so many of my noble friends for taking the trouble to turn up and for making so many strong speeches today.

My noble friend Lord Forsyth started with a tour de force—a critique of the Government’s mismanagement of the economy as well as their addiction for tax complexity. My noble friend Lord Higgins pressed the Minister on the Government’s extra borrowing and their monetary consequences, to which I hope he will reply. Likewise, my noble friend Lord Marlesford had some harsh words about how HMRC and the Treasury now operate.

My noble friend Lord Ryder took us back to the issues that we faced when we came to power in 1979, as indeed did my noble friend Lord Stewartby. My noble and learned friend Lord Howe of Aberavon, who to his great regret is unfortunately not able to be with us today, had to face some hard truths when we came to power at that time. Lastly, my noble friends Lord Trenchard and Lord Northbrook, between them completed the charge sheet on the Government’s incompetence in handling our economy and on tax matters. I am glad that the noble Lord, Lord Newby, agrees with our diagnosis that incompetence is now the hallmark of this Government.

The noble Lord, Lord Peston, who I hope will be with us for very many more years, started with some highly contentious remarks about my party’s approach to anti-avoidance, which I entirely repudiate. He then redeemed himself by going on to say many things with which we agree. He asked what we would do. It is not the role of Her Majesty’s Official Opposition to come to this Dispatch Box to say what we would do if we were in power. The purpose of such debates is for Ministers to account for what the Government are doing.

My Lords, do I understand correctly that the noble Baroness is not going to tell us what the Government ought to do and is waiting for pie in the sky in the future? She could have listened to the noble Lord, Lord Forsyth, who pretty well said what ought to be done. He is sitting not that far from the noble Baroness. Is she not going to tell us what should be the correct policy for the present day?

My Lords, of course I am not going to tell the noble Lord such a thing because we are not in government. We have said consistently that we cannot say what we will do when in government—I hope that that day is not far away—until we see how bad the economy is. At the moment only those with privileged access to the Treasury know exactly how bad things are. I can tell the noble Lord, Lord Peston, that we have shown, by what my noble and learned friend Lord Howe of Aberavon did when we were first back in power in 1979, that we can take hard decisions. We expect that we will have to take hard decisions and we will not be afraid of them, but it would be wholly inappropriate for us today hypothetically to say what we would do if we were sitting on the Benches opposite. The noble Lord, Lord Peston, does not expect any other answer.

Unfortunately this House cannot alter the Finance Bill, so by tradition, as has been the case today, our debate ranges over much wider issues, starting with the Budget from which the Bill emanates. Our debate is not timely in relation to the Budget but we do have the benefit of being able to judge it at a distance. There has been no good economic news since March. Governments are tested and judged not in the good times but on how well they cope with the bad. The prevailing view—not just from these Benches—is that they are failing.

The Prime Minister, when he was Chancellor, used regularly to boast that he had eliminated boom and bust. The last time that the current Chancellor used the words “boom and bust” was last June, just before he took office. Once he got the keys to No. 11. he had to confront the fact that Mr Brown had bequeathed his Chancellor the very circumstances that he used to claim he had vanquished. The truth is that the Government have failed to prepare the economy for a downturn and they blame global pressures as if it has nothing whatever to do with them. They failed to fix the roof while the sun was shining.

In the Budget, the Chancellor had to downgrade his growth forecast for this year, but he said that it would bounce back in 2009. Most commentators disagree. Consensus is around 1.7 per cent for growth this year, which is already below the bottom end of the Government’s range. The median for next year is only 1.4 per cent, which is way below the Government’s figure. Will the Minister say whether the Government are sticking to their forecasts? Is it not time to come clean with Parliament and not hide behind the formula that we must wait for the pre-Budget report some time this autumn?

Household finances are under extreme stress. The inflation genie is out of the bottle with RPI currently at 4.6 per cent. CPI is way outside its target range at 3.8 per cent and more than double the rate when the Government came to power. The Chancellor’s response is of the “let them eat cake” variety by insisting that wage settlements track the 2 per cent CPI target to keep inflation down. What he really means is that people in this country must suffer a real fall in their standard of living—a point that the Governor of the Bank of England starkly made in his annual Mansion House speech last month.

It is deeply depressing, though hardly surprising, that the healthy savings ratio that this Government inherited has been decimated and is now down to 1959 levels. Consumers have been borrowing and spending the Government out of economic trouble for some time, but they are now running on empty. In 1997, the Government invented some fiscal rules, and the Prime Minister then immediately started playing fast and loose with them. Not for him the independent assessment that my party will introduce, which my right honourable friend Mr David Cameron spoke about yesterday.

We have known for some time that nobody outside the Treasury takes the golden rule seriously, and in the news that has emerged in the past 24 hours we hear that the Treasury is going to rewrite the sustainable investment rule, to which a number of noble Lords referred. We know that it has run out of devices, such as ignoring the nationalised Northern Rock debt, in some vain attempt to avoid admitting that the 40 per cent of GDP rule will be bust. Since the Budget, the Chancellor has been handing out electoral sweeteners whenever a by-election comes along. We had £2.7 billion for the 10p rate and earlier this week there was £550 million for fuel duty with an eye to Glasgow. That will all end up in extra borrowing. This morning’s statistics on public finance contain more evidence of borrowing and of the deficit in the economy being fundamentally out of control. In relation to the sustainable investment rule, will the Minister today confirm what the Treasury plans to do? We have heard the leaks that have been coming from the Treasury, but we believe that the Government should today make plain what they intend.

We have warned for years that building the UK’s finances on the foundation of a structural deficit is unwise. Noble Lords will know that I am not a fan of the EU, and am even less so if the EU interferes in our economy, but when we are faced with incompetence of a high order, even I welcome the EU’s Economic and Monetary Affairs Commissioner telling the Government to take steps to correct our excessive deficit by 2009-10. Will the Minister say how the Government intend to respond to the EU?

Let me now turn to the Finance Bill itself. It is not as long as some earlier ones but, as my noble friend Lord Forsyth pointed out, it is a two-volume monster and, as was also pointed out, we have the longest tax code in the world and almost certainly the most complex one. The Government have shown almost no interest in tax simplification. The only example they can come up with is the simplification of capital gains tax but, as other noble Lords pointed out, that too is surrounded by its own complexities.

My noble and learned friend Lord Howe of Aberavon, who has been referred to by a number of noble Lords, has recently published his report Making Taxes Simpler. It is in line with the recommendations of my noble friend Lord Forsyth’s earlier report on tax. We will create an office of tax simplification and will publish Finance Bill proposals no later than the Pre-Budget Report. The noble Lord, Lord Newby, said that our concept of an office of tax simplification needed to be broader, but I refer him to my noble and learned friend’s report. At paragraph 3.2, it states:

“The OTS would have a much wider remit”—

this is much wider than the proposals put forward by the Chartered Institute of Taxation and the CBI—

“to examine such areas of fiscal law as seemed to it appropriate and to put forward proposals for tax law reform and simplification”.

I believe that our proposals are fully in line with what the noble Lord, Lord Newby, referred to. I hope that my noble and learned friend’s other proposal, which is for a standing Select Committee of both Houses, will also come to fruition. That will line up with some of the points that my noble friend Lord Higgins made earlier. The Treasury dismissed my noble and learned friend’s report without even reading it, which speaks volumes for its approach to our fiscal code.

We have heard a lot today about the Finance Bill giving effect to proposals in the 2007 Budget, which included the infamous removal of the 10p tax rate, and then the subsequent U-turns to try to put that right. I am sure that it came as a surprise to many in the Labour Party to find that their leader had engineered the package of changes in the full knowledge that they would hurt 5.3 million poor people. My noble friend Lord Stewartby charitably said that the consequences had not been analysed, but I have to correct him: the Government have admitted that they were fully analysed and the Chancellor, as he then was, knew exactly what he was doing. The U-turn is said to be for one year only—

My Lords, I thank my noble friend for giving way. Is it not obvious that when the Chancellor, who realised that he was going to be Prime Minister, knew the consequences, he did not expect them to happen until after he had called the general election in the autumn? Is that not the explanation for the puzzlement of my noble friend Lord Stewartby: this was not in the script; that is why this apparent contradiction arises?

My Lords, my noble friend Lord Forsyth is entirely correct: it was clearly designed to be a bit of the detail that would never be fully analysed until after the general election, by which time the Prime Minister hoped that it would all be too late. Of course, the timing and life did not work out quite as he expected, so those proposals got the scrutiny that they deserved—by all parties, I must say to the noble Lord, Lord Newby, including the Prime Minister's own party.

On how that moves on, the Government have claimed that it is for one year only, but the Institute for Fiscal Studies says that in that case, the reversal will affect 18 million people. Can the Minister give us some clue about how the Government are going to dig themselves out of that hole?

My noble friends also referred to vehicle excise duty. That is another example of the Prime Minister’s nasty little habit of hitting the poor, because the small print on the vehicle excise duty changes, as my honourable friend, Justine Greening, managed to get revealed in another place, the retrospective element of the changes, meant that the poorest families, who typically drive the older cars, are the ones who get hit. It was not correct for the Government to claim that most families would benefit from the changes. It was dressed up as a green tax, but the retrospective element does nothing to alter behaviour; it just picks the pockets of the less well off.

The Treasury Select Committee in another place stated in its report entitled Budget Measures and Low Income Households that the Budget shows that the Prime Minister's policies are driven not by conviction but by short-term political calculation, with the poorest in society paying the price. For all the Government’s fine talk of lifting people out of poverty, their record is poor. The latest report on households below average income showed that income inequality is at its highest since records began and that both relative and absolute poverty have recently been increasing. Does the Minister think that the Government will hit their target of halving child poverty by 2010 and, if so, how?

My noble friends have already referred to the way that this Finance Bill includes the final version of those panicky measures on capital gains tax and non-domiciles introduced in the Pre-Budget Report. The sub-committee on the Finance Bill was rightly scathing about this whole saga and reported the widespread criticism from the private sector about the development of policy and the lack of proper consultation. It will not be clear for some time whether these measures will be as damaging to enterprise and business as many now expect, but it is clear that the Government have forfeited the trust of those who act for taxpayers, if not of taxpayers themselves.

The Government have been warned for many years that the cumulative effect of their attacks on the multinational corporate sector would result in companies that are internationally mobile upping sticks. This year, it has started to happen. The Chancellor has at last emerged from a state of denial and promised to take those concerns into account. This Finance Bill does not contain a big attack on business but, as the sub-committee of the Economic Affairs Committee pointed out, the overall impact of the Bill on business is negative, because it damages the UK's competitiveness.

In the period since the Budget, we have learnt all we need to know about this Government. They deliberately aim to hit the poor and will tell any number of untruths until finally found out. They backtrack, U-turn and dither over major changes. Worst of all, through incompetence and recklessness, they have failed to prepare our economy for the hard times that are now hitting our citizens.

My Lords, I am grateful to all noble Lords who have spoken in this debate, and I am particularly grateful to the noble Lord, Lord Vallance, for amplifying the message from the committee, whose work we all respect.

There have been times in our debate on the general issues—it has been fairly a political debate as opposed to a Finance Bill debate—when assertions have been made by those on the other side without too much evidence to back them up. My noble friend Lord Peston, while saying that he had nought to say for my comfort about what the Government should do, asked what the Opposition think they would do. The answer came there none; nor came there much evidence. The noble Baroness, Lady Noakes, said that such is the impact on international business that the flight has begun. I presume that this is the same flight that it was contended would occur when the non-domiciles left the country in droves. I anticipated, given the prescience of the Opposition—they always base their contentions on established fact—that we would have strings of indices for this. This is, after all, a financial debate in which figures might feature prominently, but not at all; there has been no supporting evidence for these contentions.

My Lords, I was at pains to point out that we would not yet see the evidence of the impact of the changes that were so clumsily introduced by the noble Lord’s Government. We expect to see them over time, but we do not expect to see them even before the ink has dried on the Bill.

In other words, my Lords, the charges against the Government are conjecture rather than anything that is happening. The noble Baroness will see when she reads Hansard that she has said that we can already see the impact. I cannot see it, because I do not believe that there is any evidence of it.

The debate started off with fairly lofty assertions in these terms. The noble Lord, Lord Forsyth, began with the absolute bombshell that the Government, as revealed today, are about to abandon their fiscal rules. That is press speculation. After all, this proposition in the press appears to be based on comments that were made three months ago by an official in Westminster. Here we have a splendid splash, which certainly gave the noble Lord, Lord Forsyth, an excellent opportunity to deploy his oratorical arts, but what is in it? What is the substance?

It is the case that the Office for National Statistics intends to review its analysis of the categorisation of government expenditure, borrowing and receipts, and we have to take that into account, but it is also certainly the case, as I have had the opportunity of quoting to the House in the past, that we have reaped the rewards of the strategy that was pursued over the past decade of the economic cycle. As my noble friend Lord Peston indicated, Lord Keynes was fond of saying that, when times change, judgments have to change as well. The one thing that we all have in common in this House today is that we are in significant, changing times.

My Lords, I apologise to the Minister, but this really will not do. A serious story in the Times and the lead story in the Financial Times says that the Government will abandon their 40 per cent target for debt. We need to know whether that story is just speculation, as he implies. He is now teasing us by saying that, when the circumstances change, things have to change. Do the Government plan to change that target or not? Listening to the debate this afternoon, it appears that the Government have no option. It really is an insult to Parliament for us to have a debate on these matters and not to be told what someone has obviously briefed the press on at some stage earlier this week.

My Lords, as I have indicated to noble Lords, the Government of course will evaluate their overall strategy against changes which are to occur in the identification of the figures for crucial aspects of government operation. We will look at that at that time, and it may be in the context of the very significant change in the international environment. After all, noble Lords cannot at one moment say that we may be facing the greatest crisis since the great depression of 1929 and then say, “Well, of course, we would expect the Government to continue in a straightforward linear progress with regard to the operations over the past decade”.

The position I want to establish with regard to this Finance Bill is that the Government have an excellent record of managing public finances over the past decade. I know that the noble Lord does not take contentions from this side too seriously, but he must know that the facts of the achievements of this Government in all criteria of note in economic statistics over the past decade compare remarkably well with the performance of the previous Administration. One illustration of hard fact in this debate today was that Denis Healey had a 98 per cent tax rate. Grudgingly, or not with too much enthusiasm, it was recognised, I think, by the noble Lord, Lord Marlesford, that, over the past decade, this Government have pursued the position of the 40 per cent tax rate, which was introduced by a Conservative Administration and the then Nigel Lawson, now the noble Lord, Lord Lawson.

My Lords, the Minister has moved away from the subject. Are the Government planning to abandon their fiscal rules or not? Saying that they might or that they might not adds to uncertainty in the City and the economy, which is very bad for Britain. Surely, the Government should be in a position to tell us whether or not they are going to abandon their fiscal rules.

My Lords, I am merely reflecting the fact that times require certain changes as regards the Government, which is why we will look again at the situation in the Pre-Budget Report. The noble Lord will have to contain himself. We have got the necessity of looking at fundamentals of public expenditure and income because of the changes in the Office for National Statistics over the summer. The noble Lord will not expect me to respond to what he has put forward, which was only speculation in the press and based on evidence presented three months ago.

My Lords, the Minister is still not answering the simple question, but he has also now introduced another red herring; namely, that there will be some changes in the Office for National Statistics during the summer that will affect the outcome of this. Perhaps he can explain that to the House.

My Lords, notice has been given of some changes with regard to the analysis of public expenditure and receipts at the ONS, which will require us to look at certain aspects of these issues again. I was merely trying to give the House some basis on which I think that the speculation has emerged. I have indicated that there was a reference three months ago. That is the best I can do. There is nothing else in the story.

My Lords, I am surprised that the Minister is not answering the question. I have here the exact quote from today’s Financial Times in an article written by Chris Giles, the economics editor. It is not written by a reporter and on a page at the back of the newspaper. It is on the front page. The opening paragraph states:

“Treasury officials are working … on plans to reform Gordon Brown’s fiscal rules on spending and debt with a new framework that would … allow for increased borrowing”.

The Minister has a chance today to deny the story, and if he refuses to deny it, we must accept it as an admission. The Minister is tacitly admitting it; this is not speculation.

Well, my Lords, the noble Lord refers to an article based on an official’s response to questions. I do not have any comments on this. What would his level of criticism be of a Government who proposed changes to the fiscal rules without the Chancellor going before the other place to indicate such a significant matter? Of course these matters are to be debated in the proper fora. The idea that I am meant to reply to remarks that are three months old, a newspaper story published today and no real evidence on such a colossally important matter, and that it would be vouchsafed to me as a Treasury spokesman in the Lords to make such an announcement, is a flight of fancy. I am not going to dwell on this issue any more. I have been speaking on it for 11 minutes, when noble Lords are eager for my responses to all the issues they have raised in the debate. They will have to let me get on.

The noble Lord, Lord Forsyth, suggested that the drive towards fairness in the system had been mortgaged by the position of the 10p tax rate. The error contained in that matter has been acknowledged and I cannot deny the Opposition the opportunity of making as much of it as they do, but there is a suggestion that that vitiates a decade of government concerned with budgetary fairness. The sole definition of the poor was made by the noble Baroness when she said that people who own older cars might be caught by vehicle excise duty. Let me say that the Government’s definition of poverty is that which they inherited from the previous Administration. That is what the Government have been concerned with in our strategy of taking pensioners out of poverty as far as we can and reducing child poverty significantly. This Budget has been another step along that road. It would be as well if noble Lords recognised those virtues.

The noble Lord, Lord Vallance—

My Lords, I cannot let the Minister get away with those assertions on fairness. Could he explain why income inequality is the highest since records began?

My Lords, the interesting issue as regards income inequality is the development of the super-rich in this country and the extraordinary changes that have taken place at the top end of the scale—

It is the tax rules, my Lords.

It is not our tax rules, my Lords, but a reflection of the fact that the Government have been successful in the enterprise economy by producing the resources that, the noble Lord will recognise, have resulted in a very real increase in average income across the whole country.

Let me just say that when speaking at this Box I can take a lot of criticism from the Opposition; one gets used to the burden that has to be borne. I am being challenged by the Opposition on the basis that they are concerned about reducing inequality and fairness. Given not only their record but also the principles they follow, noble Lords will excuse me if I do not take that position too seriously.

My Lords, could my noble friend remind noble Lords which Government stopped the index-linking of pensions to average wage rises and switched them to average price rises? Will he also remind us which Chancellor of the Exchequer devoted the whole of his time in power to trying to offset that as best he could in order to help pensioners who had suffered from that lack of index-linking? The sums we are talking about are very large indeed, but noble Lords opposite do not seem to remember who created the problem in the first place.

My Lords, I am grateful to my noble friend. I do not need to repeat his remarks except to say that we have high ambitions to restore the link with earnings and thereby end the period when pensioners were dealt with so unfairly—which, of course, coincided with the initial decision made by the other side.

The noble Lord, Lord Vallance, will recognise that I was caught in the embarrassing position when opening the debate of having to comment on his report before he had had the chance to deploy his case. I understand that he did not think the comments that I made about the report met the full force of the criticism. On issues of consultation, it is clear from what one can see in their representations on domicile taxation that witnesses were unhappy and would rather have been left with the old system. But the old system framework was riddled with loopholes. Although the Treasury could always carry out more consultation—in fact, it is carrying out more consultation than it has ever done in the past—people who want to defend an older system that has loopholes are not going to express their enormous enthusiasm when the Government are concerned to introduce a system that plugs some of the gaps.

We regret that the debate we have had on these issues overlooked the fact that the £2,000 limit equates to capital overseas investment of around £40,000. Those are fairly substantial sums. If we raised the limit, as was suggested, to £6,000 at the basic rate, it would mean that people with £120,000 could afford to leave that money overseas and continue to enjoy this generous remittance basis and a tax-free personal allowance in addition. The Treasury had a case against that position and I would venture that, however much consultation took place on the issue, some are likely to be unassuaged.

The noble Lords, Lord Higgins and Lord Northbrook, raised the issue of Equitable Life. We all recognise that Equitable Life raises significant problems, not only in terms of resources but in the responsibility of the Government vis-à-vis policy holders and their losses. We will take our time but we have indicated that we will respond to this issue by October. It will be a statement of the greatest significance and, much as this House is greatly respected in the Treasury, I feel that the Chancellor of the Exchequer or a senior member of the Cabinet is likely to make the announcement rather than a noble Lord from this Dispatch Box.

The noble Lord, Lord Higgins, also raised the issue of how taxation bodies can be respected when they are criticised for not having their accounts signed off. That largely applies to one area of work that the National Audit Office has criticised. It is critical of the Government with regard to expenditure but it was also critical of the system that the previous Government had in place when they were in office. It took a decade of steady pressure from this Government to get error and fraud in social security—the noble Lord, Lord Higgins, is well versed in this—down to 5 per cent from the 13 per cent which obtained under the previous Administration. I understand the chiding from the noble Lord but I hope he will put that in perspective and recognise that this expenditure is very difficult to control.

My Lords, as I understand it, it is not an issue of fraud. I understand that the accounts have not been approved because of the way in which Her Majesty’s Revenue and Customs had dealt with the matter. From the Front Bench opposite I warned at the time about having a system where the Inland Revenue is asked by the Chancellor to distribute money and then distributes far too much, causing endless misery to the poorest members of our society in getting the money back when it has overpaid. My understanding is that that is the point at issue with regard to the accounts. It is an absolute disgrace, and the record could not be clearer: I warned that this would happen.

My Lords, the noble Lord has made his point and I have done my best to respond to it. We will have to stand in disagreement about the position for the time being.

The noble Lord, Lord Ryder, raised some interesting issues, particularly over the management of the economy as a whole. Regarding this much vaunted concept that the Government have been involved in increasing debt significantly, over the economic cycle which began in 1997, when debt was at 43.3 per cent, we have got it down to 36.6 per cent by 2006-07.

I appreciate that times are a-changing. We are moving into a position of the greatest concern to us all, and we are going to have manifold debates on these issues. I respect opinions about the strategy to be adopted for the future, but I counsel noble Lords that the Government’s judicious record over the past 10 years bears active scrutiny.

I emphasise that if noble Lords are going to refer back to the past Administration, they should look at the most classic, obvious difference between the time we are in at present and the one when they were in power: Britain was an oil-rich economy then, while now we are purchasing energy—not just oil, but gas as well—because of the natural features of the ending of the North Sea assets. These may be harsh facts but they are attendant also upon the very real success of this Government in the past, and they are why we need to adjust—as all sides are asking me to indicate the Government are doing—to the changing situation.

I suppose that my noble friend Lord Peston must now sign up to the fact that economics is the dismal science after all, as he proved to be slightly gloomier than any other contributor to the debate. I hear what he says about the privations that have to be undergone. Why does my noble friend think the Government are so firm on the question of pay increases in the public sector at present? If it is suggested on the Opposition side that the Government never approach the roof until the rain starts, have they not noticed the number of three-year agreements that have been concluded on the crucial issue of pay, which is so important to the public sector?

I take no joy in the fact—nor, I think, do the noble Lords opposite—that, as my noble friend says, there will be some decline in living standards. None of us can take joy in that fact, because it means that many of our fellow citizens will find things more difficult than they have in the recent past. However, I assure my noble friend that the Government are making the necessary adjustments to these issues, and are well equipped to guide the country through what we all recognise will be a difficult period.

I accept what the noble Lord, Lord Stewartby, said in his comments: sensitivity to tax changes is now very high. The noble Lord, who has been in the Treasury in interesting times, says that the reaction of the public to any tax increase is very sharp these days. Indeed it is. However, in difficult times, as has been reiterated on all sides of the House, difficult decisions will have to be taken.

The noble Viscount, Lord Trenchard, will not agree with what I said about the fiscal rules, but he will recognise that in my response to the noble Lord, Lord Forsyth, who introduced the issue first, I did my best to respond to his point. The noble Viscount said that we had slipped in the corporation tax league table, but British corporation tax still compares well with that in most of the other advanced economies. Other advanced economies are showing exactly the same strains as the British economy in coping with the present circumstances.

My Lords, I thank the Minister for trying to address my point. I take it that he agrees with my point that when this Government came into office, British corporation tax rates ranked very high up—that is, we had a very low rate of corporation tax. We were about fourth or fifth in the current EU 27, whereas we are now about 15th. We have fallen a long way down because our corporation tax has been reduced less than our partners have reduced theirs.

My Lords, I hear what the noble Viscount says. He will know, however, that the Germans, for instance, have been racing to catch up with us rather than it being the other way round. So he should perhaps not overemphasise the point. The noble Lord, Lord Newby, made a forceful speech and pointed to the fact that we are all in new circumstances.

My Lords, I do not want in any way to curtail the debate. However, I should point out that although it is a tradition of this House that the Minister should answer the questions asked of him—and no Minister does it better than my noble friend—there is another tradition which says that there should not be so many questions that his speech goes on endlessly. As I hope the House will agree, a whole series of questions has been asked, although not many were asked when noble Lords gave their speeches. That is quite right. It is also quite right that my noble friend should be asked questions in his capacity as Minister. However, perhaps I may gently venture that we have had enough questions. Perhaps my noble friend should be allowed to finish his speech and then we can end the debate. I hope that that is the proper thing to say.

My Lords, the noble Lord, Lord Bach, is right to point that out, but I think that he would accept that we are entitled to have questions answered by the Minister and not avoided. That is the only reason why my noble friends and I have sought further clarification.

My Lords, of course I respect the noble Baroness’s point that additional clarification is helpful to us all. Whether consistent repetition is quite as necessary is a different matter entirely, and I shall seek to avoid it.

The noble Lord, Lord Newby, mentioned the banking Bill. As he knows, I did not say that we would have it before the Recess; I said that we intend to produce draft clauses in the most crucial areas. He also suggested that adjustments in the Finance Bill were panic measures. If the Government had not made amendments to the Finance Bill after the strength of the representations made—to which his noble friend gave good testimony with his committee and which were the subject of intensive and aggressive debate in the country—we would have been open to the charge that, far from being a listening Government, we were turning our backs to public opinion. The changes reflected the necessity of responding to anxieties. I emphasise again to the noble Lord, Lord Newby, as I did to the noble Lord, Lord Vallance, that the Treasury values opportunities for effective pre-legislative consultation and will continue to do that with regard to the preparations for the Pre-Budget Report and, eventually, for the Budget next year.

The noble Baroness, Lady Noakes, did me the considerable service of summing up and reinforcing the points made largely by her own Back-Benchers during this debate. I agree with her that those points were made very forcibly; she said how much she appreciated how many of her Back-Benchers contributed to the debate. I had a word with the noble Lord, Lord Forsyth, yesterday and, having seen that his name was not down at that point, I said how dismayed I would be if he were not present. I join with her in saying how absolutely overjoyed I am that he played his part in this debate. He made a speech of which the noble Baroness on the Front Bench would have been justifiably proud, if she had had the opportunity to deliver it without sounding inordinately repetitious.

I shall say one thing on this Budget. International judgments on it are somewhat different from that which has been the theme of today. The International Monetary Fund said:

“For over a decade, the United Kingdom has sustained low inflation and rapid economic growth … the fruit of strong policies and policy frameworks”.

It said that the 2008 Budget judgment,

“was appropriate, as was its commitment to fiscal tightening over the next few years”—

something that has not been acknowledged across the House. It said:

“Key elements of the fiscal framework should also be retained”,

and that the inflation-targeting regime should remain unaltered. On that last point, I can be positive.

My Lords, will the Minister be able to write to me with answers to the queries in my speech which he was unable to cover in the time?

My Lords, I am grateful to the noble Lord for the chance to give that assurance.

On Question, Bill read a second time; Committee negatived.

Then, Standing Order 47 having been dispensed with, Bill read a third time, and passed.