To call attention to the case for a fairer and more progressive tax system; and to move for papers.

My Lords, this debate takes place against two interesting pieces of data that have been published this week: first, the figures showing that the UK is barely out of recession; and, secondly, the study of the growing disparity between rich and poor in our society. The timing is good for another reason. In all probability, this will be the last Liberal Democrat debate day before the general election and perhaps the last time that we will sit on these Benches for such a debate. We have divided the day into two parts united by the common theme of fairness. First, we will discuss our taxation and how its fairness, or lack of it, impinges on all aspects of our society. Then we will look at constitutional reform and how progress on that front, or lack of it, influences the quality of our politics and political institutions and public respect for both.

The debate and themes are timely not only because of the impending general election but because it is exactly 100 years since this House took on the great reforming Liberal Government over the People’s Budget; the clash over that was the catalyst for the first attempt at House of Lords reform, which passed this House 100 years ago this coming August. However, our emphasis on fairness is not simply part of some historical tradition. We on these Benches believe that fairness has to be at the core of government policy because, if it is not, we will not retain our social cohesion in the hard times that lie ahead.

Let me give two illustrations of what I mean. Your Lordships will recall that a couple of weeks ago I complained about the disruption on the Bedford to Brighton train line. Some of those disruptions were caused by a pay dispute with ASLEF drivers. I criticised the drivers at the time and called on them to act with a sense of wider social responsibility to those who rely on their services. In the years ahead, how are we going to persuade workers in the public and private sectors to accept any kind of pay restraint or wider social responsibility while the bonus culture runs rampant and senior bankers insist on paying themselves in figures that look like telephone numbers?

Let me give a more poignant example. I recently saw an interview on television given by the father of a young soldier killed in Afghanistan. In simple terms, the father said that his son had pride in this country and believed that he was fighting to defend it against its enemies; he said that both he and his son thought that such sacrifice was worth while. How do we repay such patriotism if we give in to those who say, “Pay us what we want or we are going to leave this country”?

Although today’s debates are timely in their historical context, it is about tomorrow that we want to talk. We do so because the social cohesion—the togetherness—that is needed to weather the coming storms will require an awareness of that need, which is absent thus far from the approaches of both Labour and the Conservatives. Labour and, in particular, the Prime Minister told us that they had discovered the alchemy that ended boom and bust, but then led us into the worst recession in 80 years. Now the Prime Minister sits brooding in his bunker wondering whether to unleash class war against Mr Cameron and the rest of the Bullingdon Club.

Mr Cameron and Mr Osborne, meanwhile, talk of our broken society, but then are specific only about tax breaks for the rich. Perhaps the noble Baroness, Lady Noakes, can clarify the confusion over tax breaks for married couples, which on our last analysis would affect about 6 per cent of them. Off-message talk from the hard men in the Conservatives’ ranks, such as the noble Lord, Lord Forsyth, is of a slash-and-burn approach to our public sector, reminiscent of the 1980s when Conservative dogma destroyed 20 per cent of our industrial base and left scars in many communities that have not healed to this day.

Will the noble Lord give way?

Ah!

I am most grateful to the noble Lord. I think that he is referring to the fact that I said that by the end of the next Parliament it would be necessary to reduce public expenditure by £75 billion. Given that the structural deficit is nearly £90 billion, how on earth can he describe that as slash and burn? Should we not have an honest debate with the electorate?

Deus ex machina. I am sorry that the noble Lord did not put his name down to speak, because he would have made a great contribution. This debate turns on exactly that issue. There are lots of very easy—rather, relatively simple—ways of saying how we can correct the deficit. I would argue that, if you do that in a way that is perhaps appealing to him and some of his colleagues, the social disruption that will ensue will cause great damage to the fabric of our society.

That is why, in response to these twin failures, the Liberal Democrats’ response has been to put forward proposals on public spending. These caused the Financial Times to write of Nick Clegg, in an editorial on 20 January:

“On the deficit, the Lib Dem leader is proving that honesty is the best politics”.

Our approach to taxation has been equally frank. We do not believe that we will retain cohesion in our society if the poorest wage earners pay a greater proportion of their income in tax than the richest. That is why we will close tax loopholes for the rich and take those earning £10,000 a year and less out of income tax altogether. Our tax reforms would also mean that aspirational middle-class families would receive a fair return for their hard work. The rich and the super-rich will be asked to pay more. In return, they will have the continuing benefit of living in a country that has social harmony and is at peace with itself. We on these Benches take second place to no one in defending individual freedom and the right of everyone to develop his or her talents to the full, but we also insist that, in pursuit of a fair and just society, all should contribute to ensuring that all our citizens enjoy a certain quality of life.

I think that we all know that we are in a phoney war period. I acknowledge that there are tough times ahead, but very few of us have yet to feel the pain because of the stimulus measures that the Government have taken, which we support. Vince Cable spelt out the dilemma on Monday, including the question of,

“how quickly to rectify the budget deficit. Delaying action on the budget risks a secondary infection: a sovereign risk crisis leading to higher borrowing costs. But treatment that is too abrupt—sending off the sickly patient to do 200 press ups in the gym—risks a fresh heart attack: a relapse into recession”.

What lie ahead are hard choices and fine judgments. That is why, as the noble Lord, Lord Forsyth, has just mentioned, we need a much more candid and open debate about both tax and spend. A week ago, Nick Clegg started that process by putting on hold some cherished Liberal Democrat policy pledges and spending commitments on free personal care, more generous citizens’ pensions and universal childcare. These are undoubtedly popular but not realistically affordable, given the mountain that we have to climb.

Both Nick Clegg and Vince Cable have been equally frank about other commitments, including a public sector incomes policy, fundamental reform of public sector pensions, cuts in welfare spending where it impinges on the rich, and attacking the command and control system of Britain’s central government, which puts such a burden on both local government and the NHS. We also have to take a serious look at the substantial costs of defence procurement.

Neither Labour nor the Conservatives have matched the Liberal Democrats for candour, yet the next election cannot simply be a competition about the various alternatives of joy through suffering. Last week, I was sent a report by a symposium looking at the Canadian experience, where tough decisions were taken against a background of open debate and widespread government consultation. The scare stories have already started about the dangers of a hung Parliament, but I believe that a far greater danger is if either the Conservatives or Labour continue to conceal their real intentions and then, in government, try to force though a hitherto hidden agenda on the basis of support that in fact could reflect less that 30 per cent of the electorate.

Whatever Government are in power after the general election, they will, as I said, have to retain social cohesion and widespread public support for the measures necessary to right our economy. The public have to feel that the process is fair, that the pain and rewards are fairly distributed and that those who caused the crisis are justly dealt with.

That brings us to the question of banking reform. It is a matter that goes beyond the remit of today’s debate; nevertheless, it is at the heart of social cohesion. Again, my colleague Vince Cable has been clearest on this matter. In that respect, he has heeded the words of that great Liberal, Winston Churchill, who warned more than 80 years ago against policies that raised finance too high and brought industry too low.

On that front, my noble friend Lord Cotter will be dealing specifically with the challenges facing medium and small-sized businesses—so often the generators of new jobs and new wealth in any economy. What is certain is that sustained recovery will rely on the private sector, especially small and medium-sized businesses, to generate jobs. For this to be possible, we will have to create a business environment conducive to starts-ups and small business, centring on moderate taxes, getting rid of red tape, securing intellectual property rights and ensuring that there is a flow of credit on competitive terms. My noble friends Lady Walmsley and Lady Hamwee will be making similar calls for joined-up government as it applies to young people and to local government.

What the country needs now is not disjointed panic measures but a clear understanding not only of the specific measures that the parties intend to put forward to deal with the present crisis but also of the underlying philosophy behind them. I return to the Financial Times editorial that I quoted earlier. It said:

“Over the past year, the British politicians have mastered the art of talking about fiscal policy without saying anything”.

Of course, we have one of the grand masters of the art replying for the Government today. The FT went on to say that,

“the only national party that has publicly come to terms with the scale of the fiscal crisis is the Liberal Democrats”.

We have done so with a candour not yet matched by either Labour or the Conservatives and we have done so with a sense of fairness absent from both.

One of the most powerful cartoons from the 1920s showed our society as a ladder coming out of flood water. On the top is an obviously wealthy toff, on the middle rung an example of the middle classes and, below him, with his head just above the water, a working-class man. The toff at the top of the ladder is saying, “Listen, I think we are all going to have to take one step down”. The cartoon is headed “Equality of Sacrifice”. We will not get through the storms ahead with that kind of equality of sacrifice. That is why I am proud that this party, a party of conscience and reform, is willing to put forward a fairer alternative to this House today and to the country whenever a general election is called.

My Lords, I agree with the noble Lord, Lord McNally, that economic policy should be developed in a spirit of fairness. I am sorry that he did not acknowledge that the Government have already moved to increase the top rate of income tax to 50 pence and all that the Government have done to help families on low incomes through the tax credit system.

It is clear that public expenditure will be more and more constrained as the Government wrestle to bring the deficit down to satisfy the markets and reduce the burden of debt on our children and our children’s children. In due course—the timing, as the noble Lord said, will be a matter for very fine judgment—we hope that the private sector will successfully take over the strain of driving economic recovery and growth. Correspondingly, we should hope that the private sector will contribute more towards the provision of public services. More than ever, we will need a mixed economy in service provision.

It is ironic that services that we have kept in the public sector precisely because they are so important to our national life, notably health and education, were for so long chronically underfunded in consequence of the necessary limits on public expenditure. I am very pleased that the Government have increased spending as much as they have done on health and education, but year-on-year real terms increases, outstripping the growth of the private sector, could not go on for ever and retrenchment will have to happen.

If we are to maintain the level and quality of public services through the process of fiscal rebalancing, we shall need to enlist more resources from the private sector. I want to talk about only one aspect of this and its implications for the tax regime. We need to improve the incentives through the tax system for charitable giving. Noble Lords may ask, “What has this to do with a fairer and more progressive tax system? Aren’t tax breaks for charitable giving a system of reliefs for the rich?”, as the noble Lord, Lord McNally, just suggested. I would respond that they are a means to a fairer tax system because, to the extent that they relieve the pressures on the public purse, they lighten the personal tax burden that would otherwise fall unjustly down the income scale and they relieve the corporate tax burden that would otherwise damage employment. Tax reliefs that help to make possible better funded public services and more employment make for a fairer and more progressive society.

Perhaps I may propose a handful of specific suggestions. My noble friend Lord Mandelson has already signalled significant reductions in planned expenditure on higher education. A few years ago, a task force on voluntary giving to higher education, chaired by Professor Eric Thomas, Vice-Chancellor of Bristol University, submitted a report to the Department for Education and Skills. Its most important recommendation has not been acted on.

At paragraph 10 on page 7, the report states:

“The current tax relief rules prevent donors from deriving an income from, or retaining an interest in, gifts of assets or property to charities. With significant amounts of wealth tied-up in property, these rules are stopping the development of innovative schemes to encourage such gifts. In the USA such schemes, known as ‘planned giving vehicles’, are used to donate significant amounts to the higher education sector. They provide donors with tax relief and regular income in their lifetime whilst guaranteeing the institution capital on the death of donors. With widespread ownership of assets amongst alumni coming up to retirement, and a historically low number of offspring amongst which to leave this wealth, the time is right to develop such schemes in the UK”.

There is a fuller discussion of planned giving on pages 47 to 49. Brief descriptions are given of specific planned giving vehicles that have greatly benefited American universities: remainder interests in personal residence, charitable gift annuities, pooled income funds, charitable remainder trusts and charitable lead trusts.

The report accepts that where a donor retains an interest in an asset gifted, the market value of that interest should be deducted before calculating the true charitable value of the gift for tax relief purposes. The key recommendation is that, instead of the whole gift being treated as ineligible for tax relief—as happens at present in the UK—as in the US, an assessment should be made of what proportion of the gift is charitable and should attract tax relief, with the remainder being taxable. With money raised in that way, universities could for example fund bursaries to support students from low-income households and outreach programmes to encourage more people from households and communities that have not traditionally gone to university to do so.

Tax relief on lifetime giving and on lifetime legacies is a theme also of the Campaign for Private Giving, led by the National Museums Directors’ Conference, the Museums, Libraries and Archives Council and the Arts Council for England, supported by a wide range of cultural bodies, including the Art Fund, English Heritage and the University Museums Group.

As the House is aware, university museums and galleries face a particular threat that their core funding from HEFCE will no longer be protected. That core funding provides the platform for their fundraising and for the benefits that university museums and galleries bring to university teaching and research, as well as to schools, the general public and the wider cultural economy. The case of university museums and galleries illustrates very well the good sense of shaping policy to achieve a better complementarity between public and private funding. The Government exhort universities and cultural institutions to engage more in self-help, to raise more from private sources. They have a corresponding duty to ensure that the scheme of tax reliefs is precisely and efficiently designed to help them do that. That is even more important in a period when less national lottery money is available for the arts and heritage.

To recite the names of university museums and galleries—Whitworth, Hunter, Sainsbury, Courtauld—is to be reminded that great cultural institutions in this country were founded by philanthropists. That tradition must be sustained. Through gifts that can enrich the cultural lives of everyone, as well as through contributions to the betterment of education, of health, of the lives of people who are disabled or homeless, donors also encourage generosity in others, co-operation and the social cohesion to which the noble Lord, Lord McNally, rightly drew our attention several times. That is always precious, and particularly so in hard economic times.

There is much scope to increase giving among those who are well-off in this country. As the campaign says, we need to encourage people to give and we need to make it easier to give. In the cultural field, the Government should ease the complicated restrictions on what charitable organisations can claim from gift aid in relation to admissions charges and the benefits that come from belonging to supporters’ organisations. Those restrictions make it harder to build up the crucial long-term relationships between institutions and donors. Importantly, also, tax relief should be extended, as in the USA, to cover the gift of objects that would be valuable additions to the collections of museums, galleries, libraries and archives. Our “acceptance in lieu” scheme works well if the donor has died. Comparable benefits through income tax and CGT relief should be available to the living who wish to donate important cultural objects.

In support of archives, the Government should improve the douceur scheme, so that it is extended to income tax and the benefit is split 50:50 between the writer and the collecting institution. In the heritage field, the Historic Houses Association, representing the owners of historic houses, who enable all to share in one of the greatest cultural legacies of this country, is very reasonably asking the Government for a tax regime which will support the maintenance of historic buildings for the public benefit.

If in politics we have moved beyond left and right, as my noble friend Lord Giddens has taught us to think, so in the provision of public services, we should move beyond the sterile antithesis of public and private. Collectively, we can find the resources to do what is needed.

My Lords, I spent a good deal of my time in my practice as a barrister dealing with taxation. I was a member of the Institute for Fiscal Studies and sat on some of its committees. The amount of tax needed to be raised varies from year to year, but there are principles that apply to taxation that do not vary. One principle is fairness. Another is that, so far as possible—and I am afraid that that is not very far—taxation should be comprehensible. The classic example of unfairness was the poll tax. It was so unfair that even people who benefited from other people having to pay it recognised it was unfair. It plainly played a crucial part in forcing the resignation of Mrs Thatcher, as she then was, as Prime Minister.

It has been accepted for a century—indeed, ever since Lloyd George’s famous Budget of 1909—that income tax, in particular, should be progressive; that is, that those who have higher incomes should pay a larger proportion of their income than those with lower incomes. I agree with that principle. I believe our party view on this matter is correct: those on the lowest income should not be liable for income tax at all and those with annual incomes above a starting point of £150,000 or £200,000 a year should, at least for the time being, pay a 50 per cent rate of income tax on the income above that starting point.

One point that concerns me is the recent increase in national insurance contributions. Employers’ national insurance contributions are a tax on employment and should not be increased during a time of recession, but they have been. National insurance contributions as a whole need to be reconsidered. Few of those who pay NICs understand how they work. Most people think that NICs go into a pool that will pay for their pensions on their retirement. That is not the case. NICs do not go into a reservoir; they go into a pipe that sprays out money for current pensions. Recent increases in NICs should have been introduced as increases in income tax. They have been introduced as increases in NICs simply to conceal from the public the fact that the Government are reneging on their promises not to increase income tax. When the time arose, they should have said that it was no longer possible to stick to that promise. At the very least, employees’ NICs should be paid on the whole of the employee’s income. There should be no ceiling. Even so, NICs mean that more tax is payable on earned income than on investment income. That is not desirable, and it may be worth considering that employees’ NICs should be absorbed into income tax, at least for those under retirement age. I should, I suppose, declare an interest as I am over retirement age.

Inheritance tax—IHT—is also a matter of fairness. Encouraging people to work in order to leave money to help their children is perfectly legitimate and effective but, taken too far, reductions in IHT would unduly protect hereditary wealth. There has to be a balance. At present, the balance is not unfair to those who pay inheritance tax. Indeed, I think we should consider restoring a tax liability on large gifts, not the ordinary year-to-year gifts, that are made more than seven years before the death of the donor.

I turn to making the tax laws comprehensible. I am afraid that the Prime Minister was disastrous at that when he was Chancellor of the Exchequer. He inherited a tax system that was rather good, due to a large extent to the noble Lord, Lord Lawson of Blaby, whom I am sorry to see is not here today. For example, the noble Lord produced a very sensible system for capital gains tax by making capital gains in real terms taxable at the same rate as income tax. That put an end to tax advisers trying endlessly to convert income into capital gains. The noble Lord’s schemes also produced a fair basis of taxation for trusts.

Under the chancellorship of the now Prime Minister, capital gains tax and taxes on trusts have been made far more complicated and much less fair. Year after year, the Finance Act becomes more and more obese —a little tweak here, a small relief there, the blocking of a minor loophole somewhere else—making it incomprehensible to at least 99.9 per cent of the population: indeed, to fewer than that, because 99.9 per cent means that one person in every thousand understands it, and I do not think that the number is anywhere near that. This achieves next to nothing, and printing huge Finance Acts simply increases government spending and global warming.

Finally, and more seriously, we need to look at tax avoidance, which loses billions of pounds every year. I confess that my practice as a barrister involved a number of tax avoidance schemes, some of which were unbelievably complicated, and I found myself disliking them more and more as time went on. It is a sort of game. Clever tax lawyers or accountants invent some mystic way of converting income into capital or create imaginary losses as deductions from profits. After a short time, normally, the Government learn about the scheme and stop it by putting some new and equally incomprehensible provisions into the next Finance Bill.

We need wide-ranging, broad and general legislation to block tax avoidance by depriving all artificial schemes of tax benefits. That is easier said than done, I admit. Attempts have been made in some other countries and have failed, but they can succeed. The key to success is to create uncertainty as to what may or may not impose tax liability. Lawyers and accountants hate uncertainty because they cannot give definite advice, but a major blow to tax avoidance schemes was struck in 1981 by the decision by the then Appellate Committee of your Lordships’ House in the case of Ramsay v Inland Revenue Commissioners. The decision was unexpected. It said that steps in a scheme that had no purpose except to create an artificial loss should simply be ignored. For a considerable time after that, many avoidance schemes were dropped because of the uncertainty as to whether they would succeed. We need to apply that principle more widely.

That is the way forward. Tax avoidance through artificial schemes is morally wrong and should always be legally wrong.

My Lords, I declare an interest as chief executive of London First, a non-profit-making business membership organisation that works to secure London’s competitiveness as a location for globally mobile business.

I congratulate the noble Lord, Lord McNally, on securing this debate. From a business perspective, taxes fund investment, which is vital to our competitiveness: from heavy infrastructure such as Crossrail through to essential social services such as education. Notwithstanding the debate raging in America, few businesses in the UK would covet the health insurance bills that American businesses pay, and by providing the resource for a safety net taxes create the necessary social support for flexible labour markets. I therefore firmly believe that taxes, with a redistributive element, are the price that we pay in Britain for an effective economy as well as a civilised society. There are, however, very different views of what constitute fairer taxes and where the incidence of progression should lie, which is where the nub of this debate lies.

Many of the arguments for progressive taxation were forged in the Britain of 100 years ago when there was a large, poor working class, a relatively small middle class and a geographically immobile upper class, many of whom sat in your Lordships’ House. Now Britain has a vastly expanded middle class. In 1939, 10 million people paid income tax; now the number is around 30 million. The rich—I might even say the nouveau riche—generate their wealth from geographically mobile talents and capital.

Colbert, Louis XIV's Finance Minister, said that taxation was the art of plucking a goose while generating the least amount of hissing. Like it or not, the rich these days will not come to or stay in this country if they are in for a disproportionate plucking. The recent KPMG study, showing that £1 million earners in the UK keep less of their income than in any other developed economy, was read worldwide. Would anyone who earns, or aspires to earn, that sort of money not be discouraged by such a cap on ambition? Of course, London and the UK score highly on many other factors, including quality of life, language, and multiculturalism. Who wants to go out on the town in Zurich?

While we can afford to have top rates which are not the lowest, we cannot afford to have the highest. In any case, there just are not enough rich people to provide us all with the levels of public expenditure we might like. The PBR estimates that the yield from income tax this year will be around £130 billion. The Treasury forecasts that the 10 per cent increase in the top rate from 40 per cent to 50 per cent will raise around £2.5 billion. That, too, is contested because it does not take account of other lost revenues; for example, through VAT when the money is spent. The Treasury may underestimate the dynamic effect of people working less hard, reorienting their tax exposure or just plain leaving the country. Nor does it take account of companies with headquarters outside Europe which are considering where to locate a European regional office, but which may discount the UK because it is considered to be a tax unfriendly jurisdiction. Treasury models never take account of what they cannot see.

The 50 per cent higher rate of income tax represents an important psychological milestone. According to colleagues who regularly work across the Atlantic or in the Far East, it is perceived as a reason why not to come to London. The Institute for Fiscal Studies calculates workplace tax rates for the highest earners at 66 per cent. If this issue is not addressed, we will see the converse of the Thatcher reduction in income tax; that is, a steadily declining contribution from the rich to the Exchequer in the medium term. By comparison, an increase in the basic rate of just 1 per cent raises £4 billion, according to the latest Treasury ready reckoner. The inconvenient truth is that funding good-quality public services requires substantial contributions from the many, not just the few. As we move to close the deficit, how we go about this matters.

My premise is that we want to close the deficit in the manner which does least damage to sustainable economic growth—the first and best way of raising revenue for the Exchequer and creating prosperity. International experience suggests that a mix of roughly 80 per cent spending cuts and 20 per cent tax increases may be the most sustainable way of achieving this outcome. So how will the 20 per cent from tax increases be realised? The Government need to be very wary of taxes which inhibit economic growth over the next few years. We have a high mountain of debt to climb and without economic growth we will be on a slippery slope rather than the cable car to the top. Those taxes which threaten international competitiveness—indeed, which fail to build on our unique position in the world—and those which discourage enterprise or corporate investment should be touched with extreme caution.

If we consider areas where our tax system is less fierce internationally or where we might provide leadership, two taxes merit further consideration. First, VAT could be brought more in line with the rest of the EU, particularly if it is levied on items where purchase is discretionary rather than essential. Secondly, if the UK led international moves towards green-based taxes it would raise revenue while discouraging unsustainable behaviour by business and consumers.

Whatever the next Government decide is the right solution to this conundrum, a vital component is the clear signalling of the way forward. There should be no sudden changes of tack and a thorough consultation with the marketplace to avoid those easy unintended consequences. The uncomfortable truth is that the heavy lifting may have to be done by taxes with a broad base, such as the basic rate of income tax or the standard rate of VAT. But I suspect that this is a view which is most easily expressed from the Cross Benches.

My Lords, I am in the process of writing a book about political jokes and I dipped into my books to find jokes about taxation, some of which, I suspect, have been told already. For example, income tax forms should be printed on Kleenex because so many of us have to pay through the nose; of course you cannot take it with you, but with inheritance tax you cannot leave it behind either. This shows two characteristics of jokes about taxation: first, they seem to be uniformly weak, as noble Lords will have noticed; secondly, they are all about the imposition of tax by the state on individuals as a kind of arbitrary, dogmatic extraction of revenue without legitimacy.

The obverse should be seen to be the case—I am pleased that several previous contributors to the debate have said so—which is that taxation is a key feature of citizenship and a means of social solidarity. Countries that have lax, low taxation rates do not have high levels of social cohesion. Taxation, therefore, should be seen as a positive obligation of citizenship. This observation is also true of progressive taxation. In all industrial countries, the distribution of income and wealth is more equal post rather than pre taxation.

There is also a close and notable correlation between taxation as a proportion of GDP and the egalitarian nature of a society. Countries which are reasonably or strongly egalitarian all have tax ratios of more than 40 per cent of GDP, some substantially over that proportion. Incidentally, we know from Scandinavian countries that a higher ratio of taxation to GDP does not inhibit economic growth and prosperity if you get your act right.

When Labour came into power in 1997 it was faced with a specific problem—that over the previous 20 years the level of economic inequality in this country had risen more steeply than in any other industrial country apart from New Zealand, which also followed at that point liberal free-market policies. In responding to this, however, Labour Governments since 1997 have been wise in not responding with a knee-jerk leftism. It is important to emphasise that progressive taxation is not only about tax rates; it should be understood as the overall impact of a taxation system on the distribution of income and, therefore, the distribution of economic inequality.

There are four main points of new Labour fiscal policy which are important, all of which should be sustained whatever happens next. First, the key emphasis is that it is important to reconcile taxation with wealth and job creation. Tax systems always have implications for wealth creation and it is important to achieve a balance between the two. As I have mentioned, new Labour was especially influenced by the Scandinavian countries, which show that you can have generous tax revenues and a strong welfare state but also be highly competitive in the world marketplace. It surprises some people to know that Finland regularly came top of the World Economic Forum index as the best country in the world in which to do business and that Denmark was often either top or second for quite a long while.

Secondly, it is important to recognise that fiscal systems influence behaviour, and that, where possible, this should be mobilised in a positive way. This is the reason why Labour introduced tax credits. Despite problems with their implementation, I remain a supporter. They have a notable positive side: they are not seen as discriminatory or stigmatising, as orthodox benefits are, and they can also have the positive effect of getting people into work. For that reason, I am not so sure about the policy mentioned by the noble Lord, Lord McNally, of eliminating income tax for those earning below £10,000, because it could create a new poverty trap and does not have the positive consequence of helping to get people into work.

Thirdly, we must deal with the reason for the jokes. A progressive tax system must be integrated with substantial welfare and public service reform. That was the point of introducing into the public services more devolution, choice, flexibility and accountability to the customer. It should be seen as part of Labour's overall package.

Fourthly, it made, and still makes, sense to treat child poverty and redistribution towards children as a fundamental part of what a redistributive tax system should be. We are now at a new stage. My colleague at the LSE, John Hills, to whom I pay tribute, yesterday produced a report from the National Equality Panel. It shows that Britain is a highly unequal country. It shows something that we already knew: that wealth is much more unequal than income. It shows that there is a lot of work to do. However, it also shows two things about Labour's accomplishments. One thing Labour has achieved is to stabilise overall economic inequality. In other industrial countries, including Scandinavian ones, economic inequality has continued to climb. That is not an insubstantial achievement. Moreover, if you look at those in the poorest groups, the Hills report shows that the poorest 10 per cent of the population are 25 per cent better off than they would have been without the tax policies that Labour introduced.

I have used a lot of my time, but we are now at a new stage. We need new policies to attack the inequalities that the Hills report indicates. Briefly, there should be four parts to such a policy framework. First, sustain the emphasis on child poverty, but fund it properly: in other words, inject more money. Secondly, respecting what has been said, keep up the pressure on high earners. This is not just a matter of generating revenue: it is an indicator of social solidarity and therefore should be seen as part of an overall citizenship package. I was always in favour of a hypothecated tax for the top 1 per cent of earners, linked to child poverty. Why should not the super-rich support the super-poor? No one seems to have taken up the suggestion.

Thirdly, we should consider wealth taxes. There are problems with the mansion tax, but countries like Switzerland have progressive wealth taxes. They work reasonably well at a cantonal level. We should consider progressive wealth taxes on all assets, not just on property. I strongly agree with the noble Lord, Lord McNally, that you must have strategic and effective action on the international level. The closing down of tax havens remains a very important prospective task, and I ask the Minister to comment on how far he thinks that we have got with that. Finally, we know that our society is too unequal for its social health and solidarity. The aim of political policy should be to reduce inequalities. It can and should be done.

My Lords, any debate on making the tax system fairer and more progressive must extend to local taxation, where failure to meet these criteria applies in spades. In one of the most centralised countries in Europe, on average only £350 of an estimated £7,000 per head spent by the public sector in each area is controlled by democratically elected councillors. That may be a point for the debate on constitutional reform that will follow. What is certainly for this debate is the high degree—75 per cent—to which local government is dependent on central government grants for its revenue.

If you believe in representative democracy at local level, that matters; we on these Benches believe that it matters. Among the very many sharing the view is the CLG Select Committee in the Commons, which stated last May in its report, The Balance of Power: Central and Local Government, that:

“The Government should consider options to increase local government's revenue raising powers, in order to promote local accountability and encourage local government autonomy”.

This was in particular to encourage local government to be more proactive—there is real concern that after so many years of central control the legacy is too much a culture of assuming that a council does not have the freedom to innovate and to respond to its particular circumstances.

The Select Committee had previously identified from the evidence guiding principles with which it would be hard to take issue: equity, simplicity, flexibility, transparency and accountability. I do not think that anyone could argue that the council tax or business rates set by and collected on behalf of central government—although, oddly, it is only business rate payers who have statutorily to be consulted on the local budget—meet the criteria. The committee argues that this needs to stay in the “too difficult” tray.

The 75 per cent figure is not uniform in my own borough. Forty-seven per cent, almost half of revenue, comes from the council tax; 12 per cent comes from grant—based on an opaque formula; and more than 40 per cent from the dedicated schools grant. You might think that the 47 per cent figure moves closer to connecting the taxpayer with the relevant sphere of government and improves the link between citizens and their council. However, you should try to explain, as I had to do over the years as a councillor, to people living in council accommodation how it is that they pay more council tax than people living in the large, now privately owned council houses on the other side of the road.

The “why?” is even harder. It cuts little ice to say that your borough receives the lowest amount per head from central government but manages to provide jolly good services for the lowest spend per head. If you are really ambitious, try explaining gearing: that to spend another pound, you have to increase council tax by £7. We should not be surprised by the strength of feeling against council tax and the resistance to it from people on low incomes, particularly pensioners who feel no connection with it and see no value in it.

I was struck by the Select Committee’s comment that local authorities in Denmark and Sweden—I do not know whether Finland comes into this category, too; I am not sure that it looked at it—which raise 70 per cent of their own revenue, look outwards to their own communities and are much less fixated on their relationship with central government.

Local income tax, which Liberal Democrats have long advocated, would by definition be better related to people’s ability to pay. It is no surprise that its supporters stretch over the inquiries. Layfield and Lyons parted company over the sequencing, not over the substance.

The Government respond defensively to such arguments. Yes, they have reduced some ring-fenced funding, but a great deal of it is still tightly designated. Schools funding is structured in such a way that it has moved education a long way towards being a national rather a local service. Pointing, as government have done recently, to local government’s scope to levy fees and charges is not the point. The Government said that parking charges were an example. Does no one in CLG read newspapers or watch the local news? Protests about parking charges feature very regularly, particularly the suspicion that the local authority is charging for parking to pay for other services.

The Government, in a context where the poorest 20 per cent of households pay three times as much in council tax as a proportion of their income as the richest 20 per cent, are unlikely to concede those arguments, or to rush to embrace another idea which, although directly about taxation, is certainly not unrelated. The Select Committee that I mentioned proposed that a Joint Committee of both Houses to monitor government compliance with the constitutional settlement between the spheres of government would,

“provide further impetus to creating and sustaining a pendulum swing in the balance of power between central and local government … To assist the Joint Committee … similar to the provisions under the Human Rights Act, government departments would need to confirm on the front of domestic bills that they complied with the local government statute”,

and would have to give an impact assessment. The report said:

“Professor Tony Travers suggested that such a committee could examine and report on issues such as: the impact of legislation on local government autonomy; the use of regulations and other directions to intervene in local decision-making”—

and they do, at the moment—

“the operation and limitation of local taxation”,

and,

“the impact of central funding mechanisms”—

a good idea, but not a new one.

The Select Committee of this House on relations between central and local government proposed in 1996 that a permanent parliamentary committee should be established to maintain an overview of central/local relations, which would provide accountability and an established forum for scrutiny and an easier mechanism for promoting public debate. The Government in 1996—note the date—were fairly dismissive. I served on that Select Committee, as did my noble friend Lord Tope, who tells me that he recently came across a speech that he made in the following year on that committee’s report, and said that he could make it again now after 13 years of a Labour Government, almost word for word.

Council tax is an unfair tax. It was unfair under a Conservative Government and it is unfair under Labour. I have the view, as has been aired, of tax being a good thing in a representative democracy, for reasons that I hope many of your Lordships share. If the tax levied is unfair, those elected are hugely hampered and, worse, those whom they represented are hampered in assessing their representatives, and democracy itself is damaged.

My Lords, I feel a very lonely voice from these Benches or upper yards, lonely but unbowed. I have great respect for the noble Lord, Lord McNally, but, as he is leaving as I am about to pay him a compliment, I shall return to that later. It is a difficult scene. The Liberal Democrats are organised like a gang and hunt as a pack. They are well organised and try to sing off the same hymn sheet, but often fail. One thing they do is ask lots of questions but never give any answers. Last year we had 6,300 Questions for Written Answers, of which well over 30 per cent were asked by the Liberal Democrat party. The noble Lord, Lord Dykes, asked the most—more than 300—and cost the most, at something around £32,000. When you ask questions, you have to determine whether you are interested in getting an answer or are seeking to promote yourselves.

One thing that I have found in common with others in this debate is a strange word—“cable”. When I was an upper yardman before I became an officer, which meant that I was up on the yards, I always wanted to know what the buzz of the lower deck was. That was the cable deck. If there were real problems when you were at anchor, it was in the cable locker. I was sitting in the Peers' Guest Room, looking at the picture of the battle of St Vincent, and then determined that there were actually 33 St Vincents. Then I thought, “Well, the Liberal party has one—Vince Cable”. I would like to see him in this House, as he is a good man who presents himself well and, as with the noble Baroness, Lady Valentine, the word “cable” comes with him. Is he the sole purveyor of the Liberal Democrat economic policy? Possibly he is.

Today we have an election presentation by the Liberal Democrat party. I have a great advantage that, because of my age and having been here for so long, I have never had a vote in this country—I was disfranchised by the hereditary system. People have tried to disfranchise me completely ever since. But over the past 40 years, I have usually spoken only when things are bad; when things are good, other people want to speak, and are more important. I have spoken through every recession, and it is usually the same problem. The Government have run out of money; the people who are meant to be creating the money are not creating enough. The Government try new schemes to see whether they can get non-government money—they call them PFI projects or things like that. We all forget that we have run out of money, which is a worse situation than the South Sea bubble—it is worse than anything. A word that has disappeared from our dictionary is “trade”, which is the objective of creating added value, whether at home or abroad. Added value was one of the original reasons for Mehrwertsteuer, or value added tax—taxe sur la valeur ajoutée. That is a perfectly reasonable tax to apply, which is not standardised across Europe. Possibly the Government will think about putting it up to the same level as the French, at 19.6 per cent—but for goodness’ sake, if we have a tax, let us have it at a round figure of 20 per cent, so that people can calculate it.

Where the Government have run out of money and have borrowed to fund things, you have a very difficult situation, which other people cannot understand. First, the term “public sector” should be dropped; it should be called “government sector”. The term “private sector” should be dropped, because it is effectively the people. To assume that the public or the people are government is wrong. What the Government have done over the years is to rob us blind—but then Governments always do that. Then the situation emerges that, having run out of money, they do not know what to do. There needs to be a slightly buccaneering and piratical attitude. The first one is, “Let us rob Johnny Foreigner; he is foreign, he is rich, and we want his money”. The next one is, “Let’s see where we can take money away from people—we could have capital taxes on their houses, for example”. Instead, we could be looking at the Government’s own system and structure and say, “What can we rob from ourselves to spend on the things that the people need?”. I do not know.

I come to one of my favourite subjects, as the noble Baroness glittering on the Benches opposite will recall—non-departmental public bodies. In a few weeks, out will come the latest publication on what has been spent on these quangos or angos, or whatever they are. That is nothing against the 90,000 people employed in them, but the accountability bothers me. The accounts will come out a year and a half late and will probably show an expenditure of £43 million—I have to cough here and say, actually, that it is not £43 million but £43 billion, which is more than the defence budget and more than half the National Health Service budget. Do we really need these unaccountable bodies? You start to think about that and get worried.

Then we come to my other favourite subject of trade. As I have explained before, I have been in trade, which people used to think meant that I had to sit below the salt; I never understood why salt was such an important commodity. There is hardly a government department in which the word “trade” exists now. It is the “department of business”—but business is the sort of thing that dogs do in the early morning when you let them out. Trade is about creating the added value. As we suffer already from a balance of payments deficit on manufacturing of well over £100 billion and a devaluation of our currency of 50 per cent—more than of any other currency in the developed world over the past 200 years—if we buy anything from abroad, we buy it with a lower currency. We know that in the shops there has been a boom, because the shops bought their products with a slightly higher currency and are now selling and making a margin at a lower currency. Everyone is beating a path to our door.

I do not blame anyone for this situation, but this is a moment when your Lordships’ House, which can often be non-political, could begin to sing from the same hymn sheet. We have an election coming up and, whichever party comes to power—unfortunately I cannot give any of them my vote because I have been disfranchised—I would say to the people, “You deserve the Government you get because you voted for them”. Over the past few years, I say with much regret, we have had a Government who have failed to create any form of reasonable economic growth, although naturally they will not say that it is their fault.

I live in hope that we will soon have a situation where we wish to reform your Lordships’ House, but the House is actually a terribly cost-effective body—unless we ask too many Questions for Written Answer.

I have a great respect for the way in which the Liberal Democrats in this House have got their act together. I know that they are seeking to win votes, and why shouldn’t they? I pay tribute to the noble Lord, Lord McNally, not only for this debate but for the gentlemanly manner in which he has led his party—although it is, of course, still a pack or a gang.

My Lords, I thank the noble Lord, Lord Selsdon, for his tributes to the Liberal Democrats and to the questions that we ask; it is the Opposition’s role to ask questions of Government.

A 0.1 per cent rise in economic growth is obviously better than none at all, but it undoubtedly means that everything must be done to nudge forward and sustain recovery. When it comes to business, and to small business in particular, the weight of the burdens placed upon them has a crucial impact. It has been suggested that the total administrative burden placed on business by the UK tax system is approximately £5.1 billion a year, although it may even be more. That is why fair tax and simplification of tax is so important.

The strength of our business sector is vital, not just for the headline figures but to ensure the provision of jobs and the reduction of unemployment. In response to this, our Liberal Democrat tax plans place great emphasis on simplicity. Tax policies should be clear to taxpayers, and our aim is to eliminate complexity in existing legislation. To quote the FSB, the recovery,

“will require a sympathetic tax regime”,

particularly for small firms, which contribute more than 50 per cent of UK turnover.

On top of that, says the FSB, there is another need:

“a stable and predictable business environment”.

I say to this Government, and equally to the previous Conservative Government, business needs stability and certainty. Tax policies must not be retrospective and should provide the taxpayer with certainty over correct treatment.

The complexity of the current system allows some businesses to exploit the system and use loopholes to avoid tax, as has been referred to, while for small businesses the tax system actually requires expensive professional support in order to meet minimum requirements. Overall, the complexity leads to some small businesses failing to meet their tax obligations. For example, many people who are just entering self-employment have been fined for failing to register as self-employed quickly enough. In 2009, over 23,000 people were fined for registering late. Equally, in 2008 HMRC issued over 400,000 fines for late payment of VAT. Tax reliefs, allowable expenses and capital allowances are not widely understood or used by small businesses. The emphasis that we would place on simplicity is important, as well as a sympathetic tax regime.

We need to listen to small businesses. For example, the Federation of Small Businesses suggests the removal of the penalties for late registration as self-employed. As the FSB says, the first few months as a small business are a busy time and many people miss this deadline without realising that it exists. Many self-employed people may not register unless they go straight to an accountant or get other advice.

On the subject of advice, HMRC’s website is a minefield. Unless you know exactly what you need, it is unlikely that you will be able to find information easily. When information is found, it is often complicated, lengthy and difficult to navigate. HMRC guidance on, for example, how to operate statutory sick pay runs to 40 pages. Added to that, tax specialists frequently complain about inaccuracies in the information that is available.

We on these Benches have made clear that we want simplification, a call that resounds throughout the country from those small businesses bearing the burden of trying to understand what they should be doing. Many of them are motivated to do the right thing, but understanding is quite a problem. Under our plans, income and capital gains, for example, would be taxed at the same rate, dramatically simplifying the tax system. We would retain incentives to invest, such as the enterprise scheme and venture capital.

The case is made for simplification, fairness and a sympathetic regime. No Government can promise an overall reduction in taxation, given the condition of the public finances, but we can make the system work more fairly. For a long time now there has been unfairness when it comes to business rates. We on these Benches would ensure that the burden of business rates was spread more equitably between small and large retailers. A figure that is often quoted is that a small shop can be paying something like 30 per cent or more of its money on business rates whereas a larger supermarket shop pays probably only 5 per cent of its money. It would be so important for our retail communities to have that addressed.

We need to ensure that people feel that there is fairness. People would see it as fair if, as the Liberal Democrats have proposed, there were a supplementary profits tax on the banks, which would also serve the important task of requiring the banks to pay a premium for the insurance, the guarantee, that the state provides against counterparty risk.

My last point for the Government is one that I have raised quite a few times. It is clear from the sort of work that we see coming forward from the Federation of Small Businesses and many other small businesses that civil servants and politicians frequently do not understand the difficulties and the complexity of running a small business. Surely it would be of great benefit if civil servants and politicians had a placement in a small business, even if only for a week or two. They would see, as a result of that, just what a struggle it is and what the difficulties are. I hope that that can be taken into account.

I hope that the Government will take heed of the message from the small business community for simplicity, certainty and efficiency from government.

My Lords, I thank the noble Lord, Lord McNally, for getting this issue on to the agenda. Whether he is making party speeches is neither here nor there; this is a subject of profound difficulty and importance to the country.

I declare a couple of historical personal interests: I was in the Inland Revenue for about 20 years, and for about 30 years I was in the Inland Revenue Staff Federation, ending up as general secretary. I was on the old Royal Commission on Income and Wealth—the first quango, I think, to be abolished by Mrs Thatcher, as she then was. That perhaps explains in part why we find ourselves only this week getting a pretty definitive report on what the situation is truly like in the country.

I find very little to disagree with in principle with what a number of Liberal speakers, including the noble Lord, Lord McNally, have said. My problem is with how practical some of that is to implement; I will perhaps come on to that. Although the noble Lord, Lord Goodhart, gave a very good explanation of one issue, which is NIC, in large measure he demonstrated that we are locked into the system that we have in the short term. There are limits to what we can do; the short term is actually quite long. We are talking of at least a full Parliament.

It is not just short-term in the time that it takes to think of what to do. Practical implementation is now extremely difficult. There are not only the problems of revenue, which I will come to a little later, but once you have a computer you are in real trouble. Who has not been to a meeting where two or three of us get diaries out that can tell us in minutes—or seconds—whether we can make another meeting, while she or he sitting with their computer takes a little longer to find what they are looking for?

Much has been said by a number of speakers about the economic problems of the country. My personal view is that that is now being overdone, and that we will get ourselves through this if we keep our heads. What has not been mentioned, if one looks progressively over the next decade, are the problems of growing old—and who should know better about that than us in this House? It is a real problem that we are not seriously addressing, and a very expensive one.

My belief is that we need to begin to think about a fundamental reform of our whole taxation system. John Hills, a much respected professor—the noble Lord, Lord Giddens, mentioned his report—showed some quite alarming figures. On the usual measure of inequality, if you get a lower percentage toward zero you are there, while if you get a higher percentage you are some way off it. The UK’s figure is 33 per cent; Sweden’s is 22 per cent, and Germany, Japan and France all have better figures than ours. When it came to wealth, 2 per cent of our country has none at all—indeed, some have negative wealth. The top 10 per cent have an average of £850,000; the top 1 per cent have an average of £2.6 million or more. Yet yesterday, on the 10 o’clock news, Mrs Theresa May mentioned the report but did not mention income or wealth at all. It was all the problem of Labour on the one hand, and of the need to improve education and employment on the other. She did not mention what was at the heart of the report, which is that if you have low income and low wealth, you are low in almost everything else—including all the services that we all rely on to some degree.

Looking at the history of taxation, we have not done much over the decades that has been fundamental. We abolished Schedule A on houses, which was just as well, perhaps, because the yield could look pretty handsome at today’s prices; we abolished the half-year for employed taxes and invented pay-as-you-earn; we abolished Schedule B, which was for the taxation for farmers and was beginning to look completely silly. Yet that was decades ago, and very little of a fundamental nature has been dealt with since.

People have tried; the late Iain Macleod produced a quite voluminous report, which I do not think that many people ever saw. I was able to see it because the then Chief Inspector of Taxes, Leonard Barford, showed it to me. Sadly, however, Macleod died and I suspect that we missed one of the better Chancellors of the Exchequer over the decades that followed. Anthony Barber had a go with his negative income tax proposals, but they were very quickly overturned when Nicky Calder got hold of the figures and discovered that if Lord Barber’s heart was in the right place, his figures were in fact not—because there was redistribution from the poor to the rich, rather than the other way round. The late John Smith got into real trouble for doing precisely what the Liberal Democrats have recommended, which is a much more stepped system of direct taxation. We are not going to get to that easily.

I am conscious of the time, but I believe that it is important to try to integrate tax and social security benefits. There are many distortions and there is a great lack of understanding, as others have mentioned. That is something which we should try to deal with. The other proposal that I would make is on inheritance tax, where the whole situation has, in my opinion, become completely ludicrous. It is driven by homes and houses, and the yield will probably fall very considerably if either proposal comes into effect. Colbert the economist has been mentioned; of course, historically the dead were not supposed to have any feathers, so they could not wave them about. Yet now, those who hope to inherit are all jumping about with what we have.

I would recommend exploring the concept of an accessions tax; that is to say, a tax whereby inherited money is taxed at the rate of the person who inherits it. That has one special advantage, in that it encourages people making wills to spread their generosity relatively widely, and perhaps to look at those among their families and friends who are less well off. Certainly, we would want to have some exemptions; probably, some kind of lifetime figure exemption, and we would be looking at spouses and legal partners. Yet there would be very considerable merit in doing something of that order.

However, I stress that there are great limits to what can be done with the present system. On local income tax, which the Scots wanted, I wrote to the Scottish Times about the problems. They could not do it inside five years if they wanted to. I believe that it is the case with local income tax that it is not possible or practical to do it within that time, and that would be true of many of the other changes that people want. We have to have a short-term plan—that means for at least four or five years—and we need a longer-term plan for a major reform of our taxation to fit us for the 21st century.

My Lords, I should like to speak today about young workers, one of the groups most affected by our unfair tax system. They are the people who should be paying less tax, partly because that is fair and partly to help them get a start in life.

I am particularly concerned about young workers in this time of recession, which I am not convinced is over. Young people are more in danger of being made unemployed during a recession since they have not built up large redundancy entitlements, which might deter the employer from getting rid of them. When a lot of older people have been made redundant, they will be competing for the same jobs with people who have much more experience—and, probably, self-confidence—and may have better qualifications. Even if they get a job, we take far too much from them people in the way of tax. If they are single and childless, they will not benefit from child benefit or child tax credits. Anyway, it is cheaper for the public purse to deduct less tax in the first place, through an existing system, than to set up a system to give some back.

The problems that young workers face are numerous. Looking first at their wages, the national minimum wage for workers over 22 is £5.80 per hour, but the 18 to 21 group gets only £4.83, and 16 and 17 year-olds get £3.57. Of course, those aged up to 18 are also going to have to spend a day a week training in the near future, so their earning time will be reduced. I do not, of course, disapprove of young people training but the fact remains that they will be taking less money home. Currently, the average pay of a working 16 year-old is just over £10,000 per year; it is £14,327 for 18 to 21 year-olds; and £23,502 for those aged between 22 and 29. All that is against the national average of £31,916.

You might think that £10,000 is a lot of money for a 16 year-old living at home, even though they will have to pay tax and national insurance out of it, with travel costs, lunches and, possibly, working clothes as well. But what about those who are not living at home, or whose parents cannot or will not pay for their clothes, food and leisure?

One of the major costs people face these days is housing. There is of course not enough housing available from social housing providers, and the average rents from private landlords are unaffordable for a young person. You have to pay an average of £198 a week in London, with a spread across the country down to the lowest average of £91 a week in the north-east and west. No wonder the Joseph Rowntree Foundation tells us that at least 75,000 young people experienced homelessness at some time in 2006-07. The rules for income levels qualifying for housing benefit vary from place to place but they cover only rent and service charges. They do not cover fuel costs and food. So housing is the biggest headache of all for young and low-paid workers.

Clearly, for the very youngest, purchasing their own home is completely out of reach. The average age of first-time buyers has risen from 26 in 1974 to 31 in 2004, and is 30 now. The average age of those buying without any help from family and friends has risen from 33 in late 2007 to 36 today. It is not hard to see why. The average price of a first-time buyer's property in the third quarter of 2009 was £134,266, and they needed a deposit of more than £33,000. This varies very much across the country. The average in London was £222,000 with a 20 per cent deposit, which is more than £40,000. The cheapest was Scotland with an average price of £93,000 with a 17 per cent deposit. What on earth are we thinking? How can young people possibly afford that?

Crucially, in London the average first-time buyer’s price gets close to the £250,000 threshold for stamp duty, so there are likely to be some who hit it. As other noble Lords may have done, I received a briefing from the Royal Institution of Chartered Surveyors, which believes that the current slab structure for stamp duty distorts the market, disadvantages first-time buyers and older people seeking to downsize. The RICS advocates reform towards a marginal system like income tax, where the higher rates would be paid only on the slice above the threshold. It believes that stamp duty should not be charged for first-time buyers and older people downsizing their homes, an idea which has a great deal to recommend it. It is an unfair tax. At this time of unemployment it restricts people’s ability to chase jobs across the country and take their families with them. Are the Government considering these changes, which could be achieved without reducing the total tax take? It would be undesirable if a lot of breadwinners had to get a job in another city and live alone, leaving their families behind. That will do nothing for family stability, which is so desirable in our society.

The problems of young workers get even more complicated if the young person has decided to stay on in education and go to university or college, with the matter of student debt rearing its head. Up to 2007, the average student debt was between £8,000 and £12,000. The April after the graduate reaches an income of £15,000 per year, he has to start paying off that debt. I tried to find out how many of them cannot afford it. Many do not get to that point for years and the interest, of course, then builds up. A report published in 2008 by the 1994 Group showed that about 11 per cent of young people who graduated in 2002-03 earned less than £15,000 three and a half years later, and so had not started paying off their student debt. A third of them earned less than £20,000 per year, so they did have to pay but found it very difficult. Although I agree with the premise that, on average, you earn more over a lifetime if you have a degree, it can be very hard to get going, even for the well qualified. I heard only yesterday of a young man with an MSc who cannot get a job. We are of course hearing that student debt is likely to climb to an average of £20,000 over the next few years, so the situation will be a lot worse.

These are the problems faced by young workers, however industrious, however keen, and however bright. What are we doing taking a higher percentage of earnings from them than is paid by the directors of the companies for which they work? It really is an unfair system where we take income tax from people earning as little as £10,000. I commend Vince Cable's proposals to the House as being a great deal fairer for young workers and all other low-paid people. I say to the noble Lord, Lord Selsdon, that the country has asked questions in these turbulent times, and St Vincent of Cable has given sensible answers, which I am sure will be popular with the electorate in the coming months.

My Lords, the issue which first got me interested in politics as a teenager was that of fairness—or rather, how to reduce what I thought were many unfair aspects of society. My motivation was essentially a moral one, although that certainly was not how I would have expressed it at the time. What is clear now, however, is that inequality is not just about a moral sense of what is right and wrong—although it certainly is that—but there is now growing acceptance that unequal societies also lead to a range of undesirable social outcomes.

In a remarkable new book by academics Richard Wilkinson and Kate Pickett, called The Spirit Level, they demonstrate, by comparing data across a wide range of developed countries, that more unequal societies suffer from greater social problems. These include life expectancy, infant mortality, obesity, mental illness—including drug and alcohol dependence—teenage births, homicides, imprisonment rates, social mobility, level of trust and the status of women. Some of these are rather surprising, but they are all strongly supported by the evidence. The list demonstrates that while we may want and need, as a society, to take action to tackle each of those problems separately, the best way to tackle them all simultaneously is to promote greater equality.

Promoting equality is not, of course, just about taxation, or even the combined contribution of tax and spend. It also has a lot to do with business ethos, which is why we have been so critical in recent years and months not only about the bonus culture of the banks, but about the runaway salaries of senior management in the private sector, and now, to an alarming extent, in the public sector. Who in their right minds, for example, could have thought that the unqualified head of children’s services at Doncaster Council who was in charge during the recent gruesome attempted murder case was worth a salary of £102,000? The role of taxation and public expenditure in redistributing resources is clearly going to be key to reducing inequality and the social problems that it brings.

As a number of noble Lords have pointed out, the past quarter century has seen a marked increase in income and wealth inequality in the UK. It grew most rapidly during the later Thatcher years. Despite the rhetoric and programmes such as tax credits, it has not been reversed during the Labour years. That is the principal conclusion of Sir John Hill’s report, which was published yesterday.

My Lords, I offer a correction. John Hill’s report says what I said that it said, which is that there was steeply rising inequality during the Tory Government but, since the advent of the Labour Government, there has been a stabilisation. Inequality has not continued to increase as measured by the Gini coefficient or other measures of inequality.

The noble Lord clearly was not listening. I said that it has not been reversed during the Labour years.

Particularly worrying for me is that the arguments in favour of greater equality have largely disappeared from the political debate. The recent social attitudes survey showed that support for redistribution from the better off to the less well off has dropped, with only 38 per cent saying that government should create a more equal society compared with 51 per cent 16 years ago. As John Curtice, professor of politics at Strathclyde University, commented earlier this week, new Labour has failed to make the case for equality and, as a result,

“today the public no longer believes so strongly in the importance of equality and redistribution by the government. New Labour has helped ensure that British public opinion has a more conservative character”.

How do the parties now stand on the use of taxation to reduce inequalities? The Conservatives have shown no evidence of any shift away from their traditional indifference to equality as a political and social issue. On tax, their position, to the extent that it is clear at all, moves in one direction. The few tax measures that they have announced would actually increase inequality rather than reduce it. Abolishing stamp duty on share transactions and raising the inheritance tax threshold will benefit only the already affluent. Their views on supporting marriage via the tax system are vague and shifting, but given that marriage is now relatively rare among some lower income groups, the main beneficiaries of any married person’s tax break are likely to be from the middle classes.

For the Government the position is more mixed. In many ways we support the principles behind tax credits. The problem, however, is that the implementation has been flawed and that they have been set to go far too high up the income scale. As for the 50p tax rate, the interesting thing is that Labour has not really argued in favour of that as an issue related to equality; it has been argued purely as a tax-raising measure. As my noble friend Lord Goodhart pointed out, national insurance has been raised as a proxy for raising income tax, as the ultimate stealth tax. Virtually nobody understands it, and even though they bear it, they do not feel it in the way they would with income tax.

On other issues the Government’s policy seems positively perverse. The 18 per cent capital gains tax, a reversal of the equality between capital and income taxes which the noble Lord, Lord Lawson, introduced, merely serves to encourage already well to do people to push earnings towards capital and away from income. In the early years, at least, of new Labour, a number of Ministers made high-profile expressions of support for the rich and for the idea that personal enrichment was socially valuable. That was very strange. We have tried, I hope, to be rather more consistent in our view that equality matters and that something should be done about it, although I do not think that we were totally immune from the prevailing spirit of the boom years, during which there was huge pressure on all politicians to promote any measures which would further stoke the boom.

We have sought to promote a continuous stream of small changes that, taken together, will lead towards greater equality. In terms of tax, we have argued that, leaving aside the package of tax and expenditure changes which are needed to reduce the deficit, we need a package that brings people out of tax at the bottom by a combination of what we hope are seen to be fair measures. We would abolish the higher rate relief on pension contributions. We would put capital gains tax back up to 40 per cent. We would introduce a tax on high-value property—the noble Lord, Lord Giddens, referred to that as the “mansion” tax—as the first phase of moving towards the policies of my noble friend Lady Hamwee for achieving a more sensible system of local government taxation. We would tackle loopholes via an anti-avoidance rule, as my noble friend Lord Goodhart mentioned. Furthermore, to pick up a point made by the noble Baroness, Lady Valentine, we would introduce green taxation measures. I hope that we would follow the same principles as regards cutting public expenditure or raising taxes to deal with the deficit. Certainly, in terms of measures such as the bank profits tax, which we have already announced, we feel very much that we are moving in that direction.

The collapse of the financial bubble gives us a golden opportunity to argue for a more equal society. The unfettered pursuit of personal gain has been tested to destruction. We must now develop further policies, and not just on tax and public expenditure, which promote greater equality across society as a whole. But more importantly in my view than any individual tax measure, we as politicians must argue with conviction and persistence the case for a more equal society as a good in itself and as the most effective way of tackling a range of deep-seated social problems. As we approach the election, that is exactly what we on these Benches plan to do.

My Lords, I, too, congratulate the noble Lord, Lord McNally, on choosing to focus this debate on taxation. We can tell that we are well and truly in an election period when no less than the leader of the Liberal Democrats in your Lordships’ House comes to a Thursday debate to talk about a subject that I for one have certainly not heard him talk about for as long as I have been in your Lordships’ House.

We know that the Liberal Democrats have fought elections on platforms that are largely unelectable—namely, those of shed loads of public expenditure funded by high tax rates and local income tax in particular. The big question might be whether the latest proposals that the noble Lord, Lord Newby, and others have outlined fairly represent what a Liberal Democrat Government would do, if such a thing ever came to pass, but I do not expect to find the answer to that question any time soon.

I shall start by saying that I agree with the noble Lord, Lord McNally. We completely agree that fairness should be at the core of government policy and that the tax system should be fair. I hope that the noble Lord, Lord McNally, is not too shocked by that agreement. When I researched the Liberal Democrats’ tax policies for the purposes of today’s debate, I found that they say that the principles on which they have based their latest proposals are very similar to those that you would find, for example, in the report of the Tax Reform Commission, which was chaired by my noble friend Lord Forsyth. My noble friend had his name down to speak today but then discovered that he could not be here for the winding-up speeches. Therefore, he withdrew his name this morning, which he regrets that he had to do. The Liberal Democrats and the Conservatives both use terms such as “efficiency”, “fairness”, “simplicity” and “transparency”, but I suspect that we do not endow all those terms with exactly the same meaning. We may well find that the Liberal Democrats and the Conservative Party are divided by a common language.

We are probably in the same place on simplicity. We have criticised the Government for the excessive complication of the tax system. As a result of the Government’s policies towards the tax system over the past 13 years, we now have the longest fiscal code in the world, which is not an achievement to be proud of. We have explored this in many debates and it is clear that the Government do not even get to first base on understanding that simplification requires a completely different mindset. My own party has a policy that is based on a study done by my noble and learned friend Lord Howe of Aberavon and we intend to create an office of tax simplification in order to tackle this, as well as ensuring that Finance Bill clauses get proper technical scrutiny, including the involvement of your Lordships’ House.

The area in which we will probably find differences between these Benches, the Liberal Democrat Benches and, indeed, the Labour Benches is what we mean by fairness. We have heard today that both the Labour Party and the Liberal Democrats favour progressive taxes which they think are fair. We do not oppose progression in our tax system but we believe that there are limits on the amount that the state should raise in taxes to spend as public expenditure. We do not see taxpayers at the higher end of the income spectrum as resources with capacity to pay ever rising amounts of tax to fund ever higher expenditure. We certainly do not believe in redistribution for its own sake. For us, fairness is about protecting those most in need at the bottom end of the income distribution rather than levelling down from the top. We do not believe that progression is a virtue in its own right. Conservatives have a long tradition of espousing low taxes and low tax rates. We remain at heart a party that aspires to low tax rates. That inevitably reduces the scope for progression.

My honourable friend Mr George Osborne has said that we will need to retain the 50 per cent tax rate due to be introduced this year by the Government, because—I use my noble friend Lord Selsdon’s phrase—the country has “run out of money”. We have also said that we could not think of reducing the top rate of tax while we impose a pay freeze on public sector workers, but noble Lords should be in no doubt that it grieves us mightily that the Government have so mismanaged the economy that we have been forced into these high tax rates that they are about to inflict. We have the same approach to the withdrawal of personal allowances above income levels of £100,000, because, in particular, that involves marginal tax rates of up to 67 per cent.

High marginal tax rates are already a great problem of the current tax and benefit system. This affects the poor even more than the rich. Under this Government, the number of people experiencing marginal rates of more than 80 per cent has reduced a little, but there are still 340,000 people in that category. Next year, the Government estimate that 2.3 million people will have marginal tax rates of more than 60 per cent—an increase of nearly 50 per cent since the Government got their hands on our tax system. Most of those will be people on benefits or tax credits, for whom the incentives to work simply do not exist. High withdrawal rates are near relatives of high rates of taxation and progression and they are certainly not fair.

We know that the Liberal Democrats support the Government on these higher taxes and, indeed, would go even further, as the noble Lord, Lord Newby, reminded us, by reducing tax relief on pension contributions. If we are allowed to form the next Government, I do not know when we would be able to move in the opposite direction, but we firmly believe that it is in our interests to do so—the interests of our whole country—once the damage inflicted by the Labour Party on our economy has been put right.

We believe that our approach is entirely fair, because the citizens of our country will benefit from a tax system that encourages enterprise and wealth creation. Jobs will not be created from redistribution; they will come only if we have an economy that rewards success and encourages people and investment to be based here, as the noble Baroness, Lady Valentine, reminded us. We need a tax system that supports that.

My noble friend Lord Lawson showed with his tax-cutting 1987 Budget that you can combine lower tax rates with higher tax yields. That can only benefit the country as a whole. The 1987 tax changes complemented the other economic and fiscal polices of the Government, which made the UK a very attractive place for businesses to set up and operate. One of the Liberal Democrat principles is the competitiveness of the tax system, which we completely support. However, I say to the noble Lord, Lord McNally, that a tax system with marginal rates that vie for top position among the developed countries is not competitive.

One element of the Liberal Democrats’ tax policy is close to the hearts of many in my party. In 2001, my noble friend Lord Saatchi wrote a pamphlet called Poor People! Stop Paying Tax, in which he advocated a personal allowance of £10,000, so that people in lower income brackets did not pay tax only to have it handed back to them in benefits or tax credits. This was clearly the inspiration for the Liberal Democrats’ tax policy and we are mightily impressed that they have taken to heart my noble friend’s recommendations.

The noble Lord, Lord McNally, dared me to talk about marriage and taxation. He said that he had calculated that our policy would affect only 6 per cent of people. I have no idea how he arrived at that figure. While we have said that we intend to recognise marriage—we would do that during our first Parliament, once the economic position is clearer—we have not said how we will do that. It is perhaps better to have a debate on that when matters are clearer. I cannot bring myself to mention the Liberal Democrats’ proposals on a mansions tax or a capital gains tax.

I conclude by saying that we have focused today’s debate on direct, not indirect, taxes. Indirect taxes are regressive rather than progressive and bear much more heavily on lower-income groups. Perhaps we have heard little from the Liberal Democrat Benches on this issue because by far the largest indirect tax money-raiser is VAT, which of course was invented in Europe. For all the Liberal Democrats’ adherence to progressive tax systems, I expect that they, too, believe that taxing drinkers, smokers and drivers is justified by higher principles. At the very least, that demonstrates that the words “fairer” and “progressive” in the title of our debate are capable of very many interpretations.

My Lords, this have been a most interesting and fascinating debate. I am not quite sure whether the noble Lord, Lord Selsdon, managed to get out his compliment to the leader of the Liberal Party, but I will be critical of the leader of the Liberal Party, although not for his opening speech, which was beautifully composed and presented and which covered the maximum amount of generality with a limited amount of detail. My criticism is this: the title of this debate calls attention to,

“the case for a fairer and more progressive tax system”.

Given, as the noble Lord indicated, that this is possibly the last occasion on which the Liberal Party has the chance to discuss such an important issue as the economy, particularly this dimension of the economy, how is it that his party thinks that the debate should revolve around the tax system and not cover the benefits position at all? The noble Lord will obviously understand that, far from accepting his point that we are delightfully vague about what we are going to do, I refer, in responding on behalf of the Government, to that famous saying: why look in the crystal ball when you can read the book? We stand on our record on these issues.

On the question of redistribution, the record is bound to include not just taxation but benefits. We have taken half a million children out of poverty and increased resources for the most poorly paid members of our society and those with the fewest resources through our extensive benefits changes and the introduction of tax credits. It is not just a matter of taxation, not least because, as the noble Lord will appreciate, when one is discussing income tax, the impact on those with the lowest income in our society is very limited indeed. I was grateful to my noble friend Lord Christopher, with his vast experience of these issues, for making that point forcefully. My noble friend Lord Giddens also contributed in those terms. They were eager to establish that the Government’s efforts on redistribution must take in benefits as well as taxation. Yet the perspective in most representations from the Liberal Democrat Benches ignored those factors.

I emphasise this issue with regard to income inequality also. After all, the noble Lord, Lord Goodhart, and, to be fair, the noble Lord, Lord McNally, as well as other noble colleagues, emphasised that aspects of inequality in our society are an issue that a Government should address as a matter of principle. Of course the Labour Government agree with that. We emphasise that, when we came to power in 1997, we had witnessed, as a legacy of the two decades in which the Conservative Party had been in power, the most significant growth in inequality of any advanced society. The noble Baroness makes no bones about the fact that she does not look on the tax system as having anything to do with redistribution, so we know and understand exactly where the Conservative Party comes from on those matters.

My noble friend Lord Giddens emphasised the fact that, against the background of two decades of a significant move towards inequality in our society, our Government in one decade have stopped that trend—although not in its tracks, because this is an express that takes some stopping. Two decades of those policies produced levels of inequality that are enormously difficult to counteract. The Government are proud of the extent to which they have been able to deal with the issue for the least well-off in society, but we recognise that the process of creating a fairer society, though an important objective, is very difficult, given the obvious constraints that we have identified.

Talking of constraints, I listened carefully to the proposals from the Liberal Democrat Benches. I say “proposals”, but they were largely criticisms of what currently obtains in the tax structure without too much clarification of what the Liberal Democrats would put in its place. I make the most obvious point: we defend the council tax system. We do not regard it as perfectly modulated so far as concerns ability to pay, but a substantial dimension of it relates to the ownership of property and the ability to pay. I noted that the noble Baroness, Lady Hamwee, was critical of the council tax system. However, apart from the enormous practical difficulties of introducing a local income tax, we know that public opinion of it is such that it scarcely rates as a viable alternative. That is why I do not think that the Government should be challenged about the way in which they deal with local taxation. I give way to the noble Baroness.

My Lords, I cannot resist. Does the noble Lord defend the property-related aspects of council tax when the banding is so out of date and so irrelevant? Does he not pay tribute to my honourable friend Vince Cable for proposing a tax—the so-called mansion tax, which I do not think is a particularly good term—and then for being brave enough to listen to comments about it and to modify the proposals, which I think are now gathering considerable support?

The noble Baroness may contend that, but it will probably be tested in the not-too-distant future. The Liberal Democrat Benches suggest that a lot will be concealed in the debate before the nation. However, I have a different view: I think that general elections are entirely healthy in that respect. Due to the sheer level of media challenge and penetration today and the clashes between all the significant contestants in the election, all these points will be examined closely. I do not think that the Labour Party and a Labour Government defending their record will have too much difficulty in refuting the position put forward by the Liberal Democrats.

One important point put forward by the noble Lord, Lord McNally—I accept that this is an issue of considerable public interest—concerned bank bonuses. I emphasise that this is not a question of income tax. The Government attach great importance to the pay practices that have contributed to the excessive risks taken by banks, which have led us into the economic difficulties of the past two decades. We are concerned to ensure that the banks are challenged. That will be done through a payroll tax, which will be paid by the banks. The employees will continue to pay income tax and national insurance as normal, but banks will face a payroll tax if they engage in strategies for pay that we—and, I think, the nation—are not prepared to countenance as a result of the experience of the past two years.

I was grateful to my noble friend Lord Howarth for introducing a constructive dimension into the debate on the subject of support for charities. We are continuing to explore how best to help the third sector through gift aid. I know that my noble friend has been working hard in this area and we are grateful to him for that. The Government commissioned research, published only a month ago, on these issues and we are considering the findings in discussion with the sector. I have no doubt that a great deal can emerge from this process. My noble friend is right to identify certain aspects of the university sector, particularly university museums and art galleries, which can benefit from an examination of this issue.

The noble Baroness, Lady Valentine, as usual, identified the issues that concern London. We all know of her sterling work in advancing the interests of London business. With regard to tax, we start from a very competitive position. We all recognise the strains that we will be going through as we meet the problems of the deficit, but we should not underestimate the extent to which other large economies will also face those strains. The idea that at present the German economy, for example, is a picture of rosy optimism is a complete misjudgment of the position. Our international competitors will be facing these issues as well, but we start with a tax system that compares favourably with many others, as I hope the noble Baroness will recognise.

Apart from congratulating the leader of the Liberal Democrats, the noble Lord, Lord Selsdon, emphasised the importance of trade. He will know that the forecasts over the coming year for the expansion of world trade are significant and that the United Kingdom is well placed in these terms. He also talked about the depreciation of the currency, but that gives the United Kingdom some advantages. It is up to our producers and companies to take advantage of what, after two years of significant decline, will clearly be a recovery in trade.

On the question of fairness, my noble friend Lord Giddens also mentioned tax havens and the boltholes into which those with significant resources can place their resources to minimise tax. I emphasise that, during the presidency of the G20 over which my right honourable friend the Prime Minister presided, we saw a step change in international efforts to tackle tax havens and evasions. The drive from the European Community is very strong in this respect. We are part of that international drive and it is something in which the United States is also interested. A new, tough approach to offshore tax evasion, more robust penalties for non-disclosure of income and a requirement to notify the Revenue of overseas bank accounts in certain jurisdictions are all part of our programme. We are also consulting on potential changes to information requirements for non-resident trusts. Legislation will be brought forward to ensure that those who fail to declare offshore tax liabilities, attracted by deliberate tax evasion, face tough penalties. In the future, offshore evaders could face penalties of up to 200 per cent of the tax due. That is an earnest of intent. In straitened and difficult times, it is necessary that all those who control resources in the United Kingdom and who depend on business in United Kingdom, including the contribution of fellow workers, should pay their proper amount of tax.

The noble Lord, Lord Cotter, concentrated more on smaller businesses as regards taxation. The World Bank perspective is that the United Kingdom compares favourably on the ease of paying taxes. I know that the noble Lord, Lord Cotter, indicated how difficult it is, but I do not know anyone who pays taxes who does not think that it is difficult, simply because they have to make a contribution to the Exchequer. We should bear in mind the position identified by my noble friend Lord Giddens, which is that the rate of tax paying is up. That contributes to a good and stable society, from which we all benefit. We derive a significant amount of public good from taxation.

On our tax measures, the noble Baroness was kind enough to give us only a glancing blow when she talked about the size of the material that needs to be identified with regard to our taxation system. The judgment of the World Bank is that the United Kingdom compares well with other major countries as regards the ease with which taxation demands are complied with. There is always a case for tax simplification. However, the noble Lord, Lord Cotter, will appreciate that although it is an easy phrase to conjure up—after all, the noble Baroness, Lady Noakes, committed any future Conservative Government to tax simplification at an unspecified date—it is easier said than done.

My Lords, does the Minister not acknowledge the widespread criticism of clarity on taxation through HMRC’s website? Many people alluded to that and I think that clarity and explanation are much desired by business.

My Lords, I accept that point. I emphasise that the Revenue is strenuous in its attempts to make things clear. It will be appreciated that, at present, the Revenue is a good deal more open and friendly in its relationships with taxpayers than it was a decade or two ago. I accept that there is always room for improvement.

The noble Baroness, Lady Walmsley, talked about jobs and the position facing young people. I have great sympathy with the broad point being put forward, which is that we do not want young people, particularly those starting out on their careers, disproportionately to pay the price of our economic difficulties. That would blight the early stages of individuals’ careers, whether going into higher education or into youth jobs; it would be unfair to them and would be likely to stain their position for a considerable period. That is why we have committed ourselves to a guaranteed job, work experience or training for all 18 to 24 year-olds claiming jobseeker’s allowance and we shall ensure that access will be mandatory from 10 months into the claim. We are addressing that issue. The noble Baroness spoke of it in terms of objectives, to which we entirely subscribe. I have no doubt that the Government’s strategy on this will bear fruit.

The noble Lord, Lord Newby, emphasised the issues of inequality. I hope that he will think that I have addressed that. I shall make a few more comments, because he will be all too well aware that, when he talks the language of redistribution and difficult choices, no one speaking on behalf of the Government will be bested on that. I emphasise the issues on benefits and other measures, because not only is the achievement or record of the past decade reversing the trend towards greater inequality that obtained in the 1980s and early 1990s under the previous Government, but we also had a plethora of policies in regard to that. There was not just the question of tax policy, which my noble friend Lord Giddens hinted at, but real achievements in other areas as well.

One should not underestimate the significance of the national minimum wage as regards being fair to the less well-off in our society. We should not brush that aside—far from it. We should recognise the achievement of working families tax credits. I accept the point made by the noble Lord, Lord Newby, that for a couple of years there were real difficulties while we were getting tax credits right. The system is complex, but it is now bringing real benefits to people. The introduction of the new tax credits in 2003 has substantially extended the system so that we have an infinitely fairer society than the one for which we took responsibility when we came to power in 1997. Household survey data show that living standards for the poorest 20 per cent of households have risen by 15 per cent a year in real terms since 1997-98, which contrasts sharply with the period in the 1980s and 1990s when living standards of the poorest 20 per cent of households rose by less than 1 per cent a year, while those of the richest households rose by 2.5 per cent.

We are confident in our response to these proposals on tax policy. I say, as a last riposte to the noble Lord, Lord McNally, who said that this will not be an open debate, that he knows that I am speaking against a background of government policies that have been clear in the past. We had the Pre-Budget Statement just before Christmas and there will be a Budget before the general election. If he thinks that that Budget will be anything other than an opportunity for engaging in debate with the nation and identifying our priorities, he has forgotten the time when he observed the other place rather more closely. I know that our debates on the Budget are necessarily more limited, but he will recognise that the Budget will be a very significant event in the debates before the general election, whenever it comes. Therefore, on the question of openness, the Government are proud of their policy and clear about what they are presenting to the nation.

My Lords, it is always a great pleasure to listen to the noble Lord, Lord Davies. He takes me back to my youth when there was a particularly eloquent local politician in Lancashire of whom they said, “He could plait sawdust”. That is what the Minister has been doing for the past 20 minutes, along with using that favourite standby of debaters in a corner, when he argued that he would have much preferred to debate a different Motion from the one before the House. Nevertheless, the speech was good.

I am pleased that the noble Baroness, Lady Noakes, clarified the situation about the noble Lord, Lord Forsyth. I was genuinely sorry that he did not take part in the debate. I noticed that he paid us the courtesy of sitting through a good deal of the debate. Not having a speech from the noble Lord, Lord Forsyth, is not quite “Hamlet” without the prince, but more “Othello” without Iago.

In that spirit, let me say that we have had an excellent debate today, with some really thoughtful contributions. As the House may have gathered, the Liberal Democrats are very confident about the case that we will put to the country. This has been like an out-of-town production before the show moves to the West End. One thought that came to my mind is that, given all this openness and willingness to debate, and as we have broken the mould by arranging a televised debate between the three party leaders, what better than a televised debate between Vince Cable, George Osborne and Mr Darling? That would interest the country as well and would enable it to hear about some of the issues that have been debated today. In the mean time, I thank all those who have contributed. They have done so in just the kind of non-partisan way that we on these Benches intended when we tabled the Motion, which I beg leave to withdraw.