Second Reading (and remaining stages)
My Lords, the Finance Bill before us today covers a range of measures of real importance to the strength and growth of our economy. Broadly, they fall into three main categories: our work to help more people to save; our support for businesses; and the additional action we will take against those who avoid or evade taxes.
We consider the Bill against a very sound record of the Government’s economic achievement. The economy is now 7.7% larger than at its peak before the financial crisis. Employment has risen remarkably, up by 2.7 million since 2010, and the fiscal deficit as a share of GDP has been reduced by almost two-thirds.
The Bill was introduced in the other place before the referendum on our membership of the European Union. It is still too early to tell what the economic impact will be. While we are well-placed to take advantage of the opportunities that Brexit creates, there will be some difficult times ahead. Undoubtedly the consequences of the referendum will influence the context for economic policy in future years. I am sure that the Chancellor will take this into account in the Autumn Statement on 23 November, taking decisions in the light of the information that will be available at that point.
Before outlining the main measures in the Bill, I thank the Finance Bill Sub-Committee of the Economic Affairs Committee of this House. The sub-committee scrutinised the draft Finance Bill that the Government published in December, and its findings have been very helpful in a number of areas. I turn to some of the specific issues that the report raised. Noble Lords on the sub-committee may well wish to discuss these or others further, and I may return to some of these points at the end of the debate.
First, the report noted some concern over the consistency of the consultation processes. It is entirely appropriate and right that we are held to account for how the Government develop tax policy, but I note that the Government’s overall record here is actually quite positive. In 2010, we introduced the new tax policy-making process, which includes a cycle of consultation following Budget announcements and the publication of a draft Finance Bill following the Autumn Statement, before final legislation is brought forward. This has very much become the norm for most measures. It will never cover all measures—for example, when action against evasion necessitates announcements with immediate effect, or when government is responding rapidly to the fiscal and economic situation. None the less, I reassure the House that we share a belief in the benefits both to government and to practitioners in enabling better tax law.
The sub-committee also put forward the case for a road map for personal and savings tax. Officials noted in their evidence the constraints on this specific proposal. However, I hope that the business tax road map published at the last Budget, the approach taken to communications for the Making Tax Digital programme and the commitments on the headline rates of taxation all demonstrate the Government’s desire to provide clarity where feasible.
Finally, I note the sub-committee’s support for the Office of Tax Simplification and interest in its resourcing and arrangements. Since its introduction, there have been further discussions on these issues, and the Financial Secretary noted in the other place that agreement had been reached with the Treasury Select Committee on new arrangements for appointing future chairs. Therefore, I hope noble Lords will be reassured that we consider very seriously the points that were highlighted through their scrutiny.
Turning to the issue of personal tax, the Finance Bill takes another major step to reduce tax burdens on those in employment by raising the personal allowance to £11,500 in 2017-18. As a result, 1.3 million individuals will have been taken out of income tax altogether since 2015-16. The Finance Bill goes further by increasing the higher-rate threshold by £2,000 to £45,000 in 2017-18. By that date, a typical higher-rate taxpayer will pay over £1,000 less tax than they did in 2010-11.
Alongside supporting workers through lower taxes, the Government also want to reward savers. In the 2016 Budget, we announced a new lifetime ISA to give savers the flexibility to save towards a first home and retirement at the same time. This Finance Bill introduces a new personal savings allowance from April 2016 so that a basic-rate taxpayer will pay no tax on their savings income of up to £1,000 and higher-rate payers on up to £500. As a result, 95% of taxpayers will pay no income tax on savings. To ensure that support for savers remains well targeted, the Finance Bill reduces the lifetime allowance for the wealthiest pension savers to £1 million from April 2016. Taken together with the changes to the annual allowance and lifetime allowance over the last two Parliaments, the Government will save over £6 billion a year, while delivering a fair and sustainable system.
As part of the Government’s commitment to supporting home ownership and first-time buyers, higher rates of stamp duty land tax will be introduced on purchases of additional residential properties and £60 million of additional receipts will be provided to enable community-led housing developments where the impact of second homes is particularly acute.
Let us also look at how the Bill will support our businesses. It now well known that improving the UK’s productivity is a long-standing interest of mine, and one I am in a position to pursue in government as Commercial Secretary. Of course, a range of measures are needed to support productivity. A tax system that encourages business investment and growth is one, and the Finance Bill takes a number of important steps to secure this. Between 2010 and 2015, the Government cut the main rate of corporation tax from 28% to 20%. The Bill goes even further by cutting corporation tax to 17% in 2020, giving the UK the lowest rate of corporation tax in the G20. A decreasing corporation tax rate means that the Government must address the growing incentive for some people to set themselves up as a company to lower their tax bill. The Government are therefore modernising and simplifying the tax system by abolishing the dividend tax credit and replacing it with a new £5,000 tax-free dividend allowance. They will set the dividend tax rates at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers. These changes will reform an outdated and complex system, while ensuring that 95% of all taxpayers will either gain from, or be unaffected by, the changes.
Supporting business also means encouraging investment into companies to help them access the capital they need to grow and create jobs. That is why the Bill cuts the higher rate of capital gains tax from 28% to 20% and the basic rate from 18% to 10%. It also extends entrepreneurs’ relief to longer-term external investors in unlisted companies.
An apprenticeship system which equips people with the quality of training that they and business need can make an important contribution to improving productivity, and addresses an area where the UK has historically underperformed, perhaps significantly. The Bill introduces an apprenticeship levy of 0.5% of an employer’s pay bill, where it exceeds £3 million from April 2017, to deliver 3 million apprenticeship starts by 2020. Employers will receive a 10% top-up to their monthly levy contributions in England for them to spend on apprenticeship training. In England, funding will be ring-fenced and put in the hands of employers to ensure that it delivers the training they need.
The Finance Bill delivers a radical package of reforms to provide £1 billion of support to the oil and gas industry. This sector supports around 375,000 jobs and has paid over £330 billion in production taxes to date. To ensure that the UK has one of the most competitive global oil and gas tax regimes, and to safeguard jobs and investment, the Finance Bill zero-rates petroleum revenue tax, halves the supplementary charge, and extends the investment and cluster area allowances.
Lastly, I will comment on the number of measures the Finance Bill contains to tackle tax evasion and avoidance—a priority for this Government that is rightly shared by many noble Lords, as well as the general public as a whole. First, the Government are stopping multinationals avoiding paying their fair share of UK tax. This Bill will introduce new rules to address hybrid mismatch arrangements whereby cross-border business structures are used to avoid tax or gain multiple tax deductions for the same expense. It will also tackle contrived arrangements relating to payments of royalties from the UK to countries with no tax treaties.
Secondly, the Finance Bill targets key areas of rapidly growing online VAT evasion by overseas sellers, online marketplaces and UK warehouses, which, alongside other measures in this area, will raise £875 million in tax over the next five years.
Thirdly, the Bill legislates to ensure that profits from the development of UK property are always subject to UK tax. This ensures that UK and overseas developers are on the same footing, and will raise £2.2 billion over the next five years.
Finally, the Bill introduces a new, tougher anti-offshore tax evasion regime. This includes a new criminal offence for tax evasion, new civil penalties for offshore tax evaders and new civil penalties for those who enable offshore tax evasion.
In conclusion, the Finance Bill before us will help more people to save, support businesses and take action against those who avoid or evade taxes. I beg to move.
My Lords, I am pleased to introduce the report of the sub-committee of the Economic Affairs Committee on the draft Finance Bill 2016. I particularly acknowledge the tremendous contribution made to the committee’s work by our specialist advisers, Tony Orhnial and Elspeth Orcharton, and the work of Ayeesha Waller, the clerk to our committee. I thank the Minister for his kind remarks about the committee’s work and for responding to a number of the issues that we raised.
The committee had two overriding concerns: would the measures simplify the personal tax system; and would they reduce the compliance burden imposed on taxpayers? We looked at three separate proposals in the Bill: the reform of taxation on personal savings and dividend income; the new powers for HMRC to issue simple assessments of an individual’s tax liability; and the establishment of a permanent Office of Tax Simplification.
We generally welcome the changes proposed and acknowledge that they have the potential to simplify the tax affairs of many individuals and to consolidate the role of the Office of Tax Simplification. We recommended, for instance, that taxpayers should be given more time than the 30 days proposed to dispute a simple assessment, and to expand the Office of Tax Simplification’s statutory remit to give it an integral role in the future strategy of tax policy. We are pleased to see that the 30-day limit has been extended to 60 days, but were disappointed that the statutory role of the Office of Tax Simplification has not been extended to cover its role in tax policy.
We were very critical of the way these proposals had been developed and of HMRC’s plans for implementing the changes. The Government have trumpeted their new approach to tax policy but often fall far short of what is needed. There was no significant consultation on the taxation of savings income and dividends, which, if it had taken place, could have significantly reduced the complexity of the changes. HMRC’s own research shows that taxpayers are hardly aware of how the current tax system works, let alone the changes. HMRC’s communications strategy continues to rely far too heavily on the website GOV.UK, and on the efforts of banks, building societies and other intermediaries. HMRC simply cannot, and should not try to, subcontract responsibility to third parties for explaining important tax changes.
We were concerned that not all savings instruments will have interest paid without the deduction of tax, but are pleased to note that this will be covered in the 2017 Finance Bill.
We urged the Government to reconsider their decision not to publish route maps outlining their longer-term plans for those areas of the tax system they were proposing to change. Far too often, taxpayers are blindsided by sudden and dramatic changes to tax arrangements which can undermine years of personal tax planning. This is particularly evident in the tax arrangements for personal savings and pensions, which often vary on an annual basis and are now subject to an overall review that could lead to far-reaching changes. Taxpayers need to be supported in making longer-term plans and taking personal financial responsibility. It is the role of government to set a framework that will encourage people to make the appropriate long-term provision for their pension, confident that the Government will resist the temptation to tinker endlessly with the rules.
On 15 August, some five months later than expected, HMRC published its consultation document, Making Tax Digital: Bringing Business Tax into the Digital Age. The document, which totals nearly 250 pages and asks 129 questions, is probably the largest consultation exercise ever undertaken by HMRC and calls for responses by 7 November, just a fortnight before the Autumn Statement.
There is no doubt that, over time, digital returns will simplify the filing process. There are two challenges: first, to make them work for all, and, secondly, not to use the quarterly filings proposed for business as a Trojan horse to disrupt and pressure the cash flow of small businesses by introducing a requirement to make quarterly payments.
Many questions remain. How will elderly people, who are not particularly competent at using online services, manage their tax affairs? How will rural businesses with poor broadband access be able to meet their obligations under the digital system? What help will be available to small businesses to transition to meet the digital filing requirements? We were told by HMRC’s director of process transformation, Emma Churchill, that free software would be made available to small businesses. Subsequently, HMRC announced that it would not make available free software and had agreed to leave it to the commercial sector to deliver the software while support for the transition to digital was being considered. This falls far short of the commitment to provide small businesses with the tools to transition to digital, and it should be reconsidered.
The Government continue to ignore our recommendation, also made in prior years, to introduce robust post-implementation reviews of all major tax reforms and to publish the findings. There is no case for leaving the effectiveness of new tax measures—and of HMRC itself—shrouded in mystery. Will the Government consider this recommendation anew?
The Finance Bill is the last hurrah of George Osborne’s tenure as Chancellor. During his six years as Chancellor he offered great consistency: consistently making the reduction of public sector debt the totemic goal of his economic management plan; consistently failing to meet his debt reduction targets; consistently overestimating the level of corporate investment; and consistently failing to improve—as the Minister acknowledged—Britain’s unacceptable and disappointingly low level of productivity.
By prioritising the reduction in public debt over growing the economy, he squandered the inheritance left by his wise predecessor, my noble friend Lord Darling, who recognised that growth would have to make a significant contribution to debt reduction and sought to achieve a sensible balance in his economic plan between growth and debt reduction. Fortunately, George Osborne’s consistent failure to hit his debt reduction targets proved to be a blessing in disguise, as it helped prevent the economy deteriorating further.
George Osborne also missed an historic opportunity when he failed to take advantage of ultra-low long-term interest rates to use government debt to fund much-needed investment in new and existing infrastructure in the UK. Larry Summers noted in yesterday’s FT that,
“infrastructure investment … can create quality jobs and provide economic stimulus without posing the risks of easy-money policies in the short run”.
Infrastructure spending will also help address our poor productivity.
His successor, when he appeared before the Economic Affairs Committee last Thursday, struck a more nuanced note. Yes, the Government will continue to target the reduction of public sector debt—but over a longer period, and as part of a package that will include an increase in investment in infrastructure and measures to improve productivity. The Minister is clearly having considerable influence. We look forward to seeing his proposals to achieve all this in the Autumn Statement.
Significantly boosting housebuilding, which our committee recommended in its report Building More Homes, is a priority of the new Government. However, it remains to be seen whether the Government have the will to provide the funding to local authorities, which will be an essential part of meeting current demand, particularly for social housing.
Philip Hammond made an important distinction between “grande infrastructure projets”, such as Hinkley Point and HS2, and a range of smaller and medium-scale road and rail improvements which could be implemented quickly and generate benefit over the next few years. It was disappointing to see that one of George Osborne’s important initiatives—the establishment of an infrastructure commission with statutory backing—has been downgraded to a far more modest initiative without any statutory backing. It is unfortunate that the Government are backing off from the commitment to have a strong, independent body to scrutinise infrastructure investment and other major government or taxpayer-financed projects before they are green lit. Can the Minister confirm that the commission will no longer be on a statutory basis and explain how the Government propose to subject future projects like Hinkley Point B and HS2 to robust, independent and transparent scrutiny?
A talented and skilled workforce is a key ingredient to improving productivity. Philip Hammond told us last week that he envisaged that in a post-Brexit world he expects control over the movement of people to be used in a sensible way to facilitate the movement of highly skilled people between financial institutions and businesses to support investment in the UK economy. This was welcome news in the City. Can the Minister confirm that this approach will apply to other sectors of the UK economy, such as manufacturing, the creative economy, the professional services sector and academia?
My Lords, it is a pleasure to follow my noble friend Lord Hollick. I am currently a member of the Economic Affairs Committee but I was not a member when the examination of the tax proposals was carried out, so I do not propose to comment on that. I thank him for his kind remarks on the reduction of the deficit, which only goes to show how difficult forecasting can be, even in the comparatively tranquil times of 2010, never mind where we are just now. Before proceeding further I refer the House to my entry in the Register of Lords’ Interests; in particular, I am a director of Morgan Stanley.
I will start where the Minister started in his speech, by pointing out the obvious—we are debating a Finance Bill which comes from a Budget that was announced six months ago; in many ways it might have been six light years away. It is a long time ago and a lot has changed. The then Chancellor has now gone, although on a personal basis I always found George Osborne to be extremely courteous and helpful, both in government and in opposition. I am sorry that he has gone, but these things happen in politics, and maybe he will return one day. Of course, the economic circumstances in which we consider this Finance Bill are completely different to the ones that prevailed in March, when I guess a majority of people did not think that we would leave the European Union. Some of us saw the warning signs throughout the beginning of this year, but it is fair to say, and blindingly obvious today, that many of the people who campaigned to come out of Europe had no idea that they would win and still less idea of what might happen if they won. That presents a major difficulty.
Every day we hear, especially from those who campaigned to leave the European Union, “Things aren’t quite as bad as everybody thought they’d be”. There is a perfectly obvious reason for that. Nobody said that the day after the referendum the world would come to an end. Now we are in a classic phoney war where nothing is happening. People are not sure about what form these negotiations will take or what position the rest of the European Union will take. Therefore people continue with business as usual; of course they need to buy houses and spend money. No one suggested that they would immediately stop all that. The time we should be apprehensive about is during the course of the next 12 months or two years, when what our options are and what is likely to happen will become clear. I understand why it happened, but there is one thing that I find increasingly frustrating. I listened to the Chancellor last week, who was very clear about where he stood on the single market and was encouraging in many respects. However, when I compare what he said to what the Secretary of State with responsibility for leaving Europe had to say two days earlier, I am none the wiser as to where the Government currently stand.
The Chancellor said something else that was interesting: that we could not be expected to have a running commentary—although we are getting something of that nature from Ministers on a daily basis. He said that the Government would work out their position, negotiate and then come back and show us what they had. But as people have pointed out, you cannot negotiate with 27 other member states and expect to have complete silence and confidentiality while these difficult matters are sorted out. We in this country need to know where the Government stand on key issues such as the single market. We need to know what they intend to do in relation to the vast bulk of European law that applies one way or another in this country, on immigration and other issues. Unless and until we have some idea of where the Government want to be, it will be very difficult for people to take long-term economic decisions.
As the House will know, tax policy has to be seen in the context of the economic and political environment against which people are expected to go about their business and businesses are expected to take decisions. We simply do not have that from the Government. I understand why, in the aftermath of the election of the new leader of the Conservative Party and the Prime Minister, it may be thought that a period of silence would be welcome. However, there will come a point this autumn when the Prime Minister will have to spell out where she stands on all these issues. People will want to know so that we can start to form a view as to what is likely to happen so far as this country is concerned.
I have heard another view expressed on the other side of the channel: all that will happen is that Europe will refuse to talk to us until after we engage Article 50, and then we will have two years, up against the clock. The default option will be that we just leave with nothing. That is not a satisfactory position for the fifth or sixth biggest economy in the world to be in. We need to see some leadership from the Government and some indication as to where and how they intend to proceed, so that we can all make up our minds as to whether we support them or want to see any changes to that. Critically, people in this country, whether in business or as individuals, will want to know where the Government stand.
That brings me to my next point. Obviously the Chancellor is now very much focusing on his Autumn Statement on 23 November. However, for the past six years, not just in this country but in Europe—and, to a certain extent, in the United States; although the US followed a policy very similar to the one that the Government of which I was a member were following up until 2010, and that is perhaps why its economy has been growing rather more strongly than the European economies—monetary policy has been expected to take the strain of our economic recovery. All central banks are either at zero, nearing zero or, in some cases, going into negative territory. On the latter, I am bound to say that I cannot understand how, if the Government are trying to encourage people to be confident and to go out and spend, they can tell them that things are so good we have negative interest rates—that does not seem to be a great way of going about it. Therefore, the Chancellor will have to consider in the Autumn Statement where fiscal policy comes in.
I was encouraged when, as my noble friend Lord Hollick said, Phillip Hammond spoke to us last week in relation to infrastructure projects. I know that that is something dear to the heart of the noble Lord who speaks for the Government today. I hope that the Government will consider some sizeable, but not vast, infrastructure projects in different parts of the country and not just in the south-east of England, that will help boost the economy.
I have said on many occasions that I have never been convinced of the case for HS2. If nothing else, it is likely to absorb resources that need to be spent on other parts of the railway network. I spent some four years in the Department for Transport, so I am aware of what can happen if you start running down the basic lines on which you depend, day to day. Equally, there is the case of Hinkley Point. Look at the costs that will be imposed on consumers. How on earth can that be justified given that, in building a nuclear power station, the risk will never, ever go wholly to the private sector? I have never understood why it makes sense to ask the French Government, which is what EDF is, or the Chinese Government, who are involved in the lending arrangements, to take this on when we could actually do it ourselves. Who knows? We may be able to benefit British industry in the course of doing that.
As we have a new Prime Minister who has indicated that she is willing to junk an awful lot—she does not now have the embarrassment of her predecessor sitting behind her on the Benches in the House of Commons—perhaps the Government will take a sensible look at how investment in infrastructure could do more to ensure that fiscal policy is supporting monetary policy. I do not think that monetary policy can do this on its own, here or in continental Europe any more than it can in the United States or anywhere else. We need only to look at Japan to see what happens when you give up on fiscal policy. Everything that they seem to try seems to struggle somewhat.
There are many measures in this Bill that are welcome and will benefit people in this country, but we have to accept that the world has moved on and we are kidding ourselves. It may be sunny outside today and the economic conditions may be better than some people thought, but we are about to go into a period where some very difficult decisions will have to be taken. This could be something that we are in for the long haul, at the very time we are still living in the backwash, both political and economic, of the banking crash of 2008. I always thought that it would take a long time to recover from that and unfortunately so it has proved. We are now going into an extremely tricky period and I hope that when the Chancellor comes to his Autumn Statement, his Budget next year and we debate next year’s Finance Bill, we will have a clearer view of where we stand. We are certainly entitled to that and we expect no less of the Government.
My Lords, I continue with the theme excellently elaborated by my noble friend. Treasury Ministers are often said to be like drivers who have to steer the economy by looking in the rear-view mirror, reacting after the event to data that are slow to emerge, to developments that take time to assess and signals that are difficult to distinguish. Those data are contradictory, developments are inconsistent and signals blend in with the background, like closet speed cameras set up to catch unwary motorists. Some say that the situation today is made doubly difficult by the fog of uncertainty in which we are shrouded by the result of the European Union referendum. They say that Britain’s new Prime Minister is not only First Lord of the Treasury, she is also a lady in waiting—waiting for the smoke to clear from the Brexit battlefield. Only then, they argue, will the Government be able to judge just how much damage the referendum result has done to Britain’s economic prospects and how Ministers should respond.
Yes, we face unusual uncertainty today because of Brexit, and many people warned about that; but we are far from flying blind. After all, it was the Prime Minister who was the first to acknowledge that the economy was in trouble and way off the course charted for it by the outgoing Chancellor. Even before taking over at No. 10, she declared that the Government’s target of a budget surplus in 2020 was a dead duck. When talking about the Cameron Government’s budget strategy, she sounded like Cinderella’s stepmother contemplating a child to whom she feels no commitment and for whom she feels no affection. She was clearly fed up with failure.
The reason why the Government have had to abandon their 2020 budget surplus is obvious. It is the same thing that has made them miss every such target since 2010—poor economic growth brought on by the tightest fiscal squeeze among the advanced economies. It is a budget squeeze that the former Chancellor used to boast about and that he planned to continue for the next four years. That was in the days before he swapped the hard hat and high-visibility jacket for a Harry Potter invisibility cloak—presumably it was either that or “Strictly” for him. His squeeze is one that means you fall short of your growth targets causing tax revenue to drop and your debt and deficit targets to go for a burton. Then you demand more spending cuts to reduce the role of the state and bring down government borrowing, so the downward spiral continues on and on. Surely, it was completely clear well before the referendum result that the UK economy was running out of steam. It grew slower last year in 2015 than the year before. It is growing slower still this year and the referendum result means even slower growth next year. The economy has become like the farmer who is always doing worse than last year but better than next year.
Last November, the Bank of England expected the economy to grow by 2.6% in 2017. In February, it cut that forecast to 2.3% and in August, it was cut again to only 0.8%. Independent economists agree that the Treasury’s most recent survey of independent forecasts for GDP growth showed an average forecast for 2017 of only 0.7%. Most of those forecasts were made after the EU referendum. The National Institute for Economic and Social Research reckons there is a 50:50 chance of recession and that Britain is,
“in the midst of a slowdown”.
The Bank of England Monetary Policy Committee was admirably quick to take action to forestall such a slowdown from turning into a slump, but as my noble friend Lord Darling said, there are limits to the effectiveness of monetary action alone when interest rates are already so close to zero. What is needed is complementary action on the fiscal front to give the economy a sharp boost, ratchet up Britain’s growth rate, and bring the public finances back into balance by doing so.
The IMF is calling on Governments to use fiscal policy to stimulate their economies and not rely on monetary measures alone, and so is the US Treasury. Japan has shown the way. The Japanese Government have launched a £33 billion fiscal boost that includes extra infrastructure investment, help for small and medium-sized businesses hit by uncertainty due to Brexit, and higher welfare spending, notably childcare subsidies and cash payments to 22 million low-income households. That is the kind of action that this Government need to take for Britain too. The need is pressing, yet we are not even half way from the EU referendum in June to the new Chancellor’s Autumn Statement when he says he may reset fiscal policy. His decision to delay that Statement until 23 November shows what I think is a reckless lack of urgency in tackling the slowdown.
Abandoning the budget surplus target for 2020 says nothing about easing the squeeze between 2017 and 2019. Paul Johnson of the Institute for Fiscal Studies has pointed out that simply dropping the 2020 surplus target will not mean the end of austerity. It just means that it will go on for longer, potentially until well into the 2020s. The economy is running out of momentum now. Productivity gains have come close to a dead stop. The longer the Chancellor waits, the harder it will become to break out of the vicious circle and breathe fresh life back into an economy that is in dire need of the help that only he can provide.
Britain urgently needs a public investment boost from the Government, otherwise the UK economy will remain trapped in a slow growth/no growth equilibrium that could last for years. The truth is that far from being a successful Chancellor, George Osborne fell behind schedule on his debt targets and went significantly over budget on borrowing, where he became a serial offender. In this past financial year, 2015-16, he delivered a £76 billion borrowing figure, exceeding the figure forecast by my noble friend Lord Darling in his final Labour Budget in March 2010 when he planned to bring down Britain’s budget deficit over the following Parliament to £74 billion in 2014-15.
Yet it was precisely Labour’s £74 billion level of planned borrowing that the new Tory Chancellor condemned when he took over at the Treasury. It would take Britain close to “the brink of bankruptcy”, he fulminated, insisting that Labour could not be trusted. Instead he replaced it in June 2010 with new, tougher targets, halving Labour’s planned borrowing in 2014-15 from £74 billion to £37 billion and setting himself a tight borrowing target of £20 billion for 2015-16. Both of those targets were missed by a mile. By March 2016, debt was £275 billion above George Osborne’s target and the 2015-16 budget deficit was £56 billion higher than he had planned in 2010. So much for the credibility of his “long-term economic plan”.
All his scaremongering about Britain becoming another Greece also proved to be nonsense. Just like under the last Labour Chancellor, my noble friend Lord Darling, even during the banking crisis Britain had no problem financing its budget deficit and the yield on UK government debt dropped to an all-time low of 1.22% in February this year. The Chancellor kept crying wolf while the bond market kept behaving more like Britain’s best friend.
The rate of deficit reduction should be linked to the pace of economic recovery and the Government need to take vigorous fiscal action to promote faster growth with an immediate boost to public investment aimed at housebuilding, infrastructure, education and skills, and low-carbon investment. Looking further ahead, longer life expectancy and increasing demand for what the American management writer Peter Drucker termed “knowledge workers” mean an expanding role for the state in education, pensions and health services, especially elderly care. The Government’s determination to shrink the role of the state is taking our society in entirely the wrong direction. We need to renew the case for a balance between private enterprise and public provision. Jacob Hacker and Paul Pierson say in their 2016 study of the part played by government in helping advanced societies to flourish that:
“The mixed economy remains a spectacular achievement … By combining the power of markets with a strong dose of public authority, we achieved unprecedented prosperity”.
Growing inequality must also be reversed because the real incomes of not only working-class but also middle-class Britons have fallen badly behind, with only the top 10% benefiting from the neoliberal economic era.
Centrist US economic commentator Rana Foroohar’s 2016 book, Makers and Takers, argued that Adam Smith’s vision of market capitalism had broken. Markets, she showed, no longer supported the economy and had delivered only divisive and slower than normal growth, where the very rich got richer and the rest trailed behind. She said:
“Market capitalism was set up to funnel worker savings into new businesses via the financial system. But only 15 per cent of the capital in financial institutions today goes toward that goal—the rest exists in a closed loop of trading and speculation … In the US, finance doubled in size since the 1970s, and now makes up 7 per cent of the economy and takes a quarter of all corporate profits, more than double what it did back then. Yet it creates only 4 per cent of all jobs. Similar figures hold true for the UK”.
Where both a fast-ageing society and a chronic housing shortage demand more not less government, the British state continues to be shrunk by this dogmatic Government’s policy. Our public services are being cut and outsourced. Job insecurity, zero-hours contracts and low pay are rife. Occupational pensions are expiring. Skills lag abysmally. Productivity is embarrassingly low and the trade deficit both embarrassingly and historically high. Frankly, this Finance Bill is at best irrelevant and at worst totally counterproductive to addressing Britain’s deep-seated problems. The Government must radically change course and offer an alternative to such systemic failure.
My Lords, let me return to the report on the Finance Bill by the Economic Affairs Sub-Committee, of which I was a member. That highlighted a number of general concerns about the way in which the tax system is developing that go beyond the specific measures on the taxation of savings. I will focus on the following themes: complexity; destination; compliance; and communication.
I first started working on tax in the Treasury in 1971. In theory, the system worked by adding up all the sources of income, deducting an allowance and then applying a series of rate bands. This rather simple system reached its apotheosis in the late 1980s, when the noble Lord, Lord Lawson, was Chancellor of the Exchequer. Since then, the system has grown progressively more complicated, with a proliferation of separate regimes for different sources of income, each with their own allowances and rate bands.
I start with dividends. We must first acknowledge and welcome an important area of simplification. For the last 44 years, since the Labour Government’s classic corporation tax system was abandoned, part of the tax imposed at the company level has served as a credit or offset for tax at the personal level. I must confess that, despite working on this system and being a taxpayer myself, I never succeeded in mastering this. We should welcome the end of the tax credit and welcome the payment of dividends gross, with the personal tax collected as part of personal tax returns. But instead of just adding dividend income into other sources of income, it will now have its own £5,000 allowance, with a separate set of rate bands: 7.5%, 32.5% and 38.1%. I have not the faintest idea why those numbers were chosen or how they relate to the other numbers in the system.
The same process of fragmentation can be seen in the new regime for the taxation of interest. Again, there are benefits, particularly for the majority of people who earn small amounts of interest—these days, you certainly do earn a small amount of interest—but for the minority who pay the majority of tax things are rather different. Again, there is a separate regime—a £1,000 allowance, which is reduced to £500 for higher-rate taxpayers and abolished altogether for top-rate taxpayers—but this system, as the noble Lord, Lord Hollick, pointed out, does not currently apply to a number of important interest sources, such as bond and collective investments, but only to banks and building societies.
Then there is the growing use of another device by restricting the allowance as income rises—for example, to limit the benefit to higher-rate taxpayers of child benefit or to confine the benefit to basic rate taxpayers. The downside of this device is that cliff edges are created, as well as exceptionally high marginal rates. A further complication is that, having introduced the principle of separate taxation—albeit with some transferability of allowances between spouses—the Revenue has introduced a household basis of assessment for operating child benefit and clawing it back. How HMRC distinguishes between the household that created a child and the household that might now be looking after it, I have no idea. There are also separate regimes for capital gains, with their own allowances and rates.
While this proliferation of treatments is growing, HMRC is pursuing a different agenda: giving individuals their own digital tax accounts. Much of the information in such accounts is to be provided by third parties, such as employers, companies or banks. The aim is for the taxpayer to be able to manage their own accounts. But the bottom line is that the individual still has to sign off the account as complete and accurate and be accountable for any errors. This gets more difficult the more complex the system is. The result is that HMRC will save itself a great deal of money, but anyone in the higher-rate bands or with a range of income sources is forced to incur the cost of professional advisers to get the figures right.
Therefore, it is essential that, as well as pursuing greater simplification, HMRC consults fully with taxpayers and communicates the details of the various schemes. In the two proposals that we looked at for the taxation of savings, the level of communication was inadequate. HMRC was lazy, in my view, and relied heavily on companies and banks to explain the changes in dividends and interest. In my view, this is not good enough. It has a responsibility to ensure that people can actually comply.
Finally, there is the question of where all this is going. Twice a year now, the Chancellor of the Exchequer makes a Statement to Parliament. These have become occasions on which to add a few more piecemeal measures. What is missing is any sense of an underlying philosophy, of a destination and a route map to it. Nowhere is this more apparent than in the taxation of pensions, where a decade ago a regime of caps was introduced. That had a logic to it—to limit tax relief for the higher paid—but it has been progressively whittled down to the point where it now barely exists.
For many years the dominant model was known to the cognoscenti as EET: contributions were exempt from tax; the accrual was exempt; but you paid the tax when you withdrew. We seem to be moving progressively towards what might be called TEE: you pay pension contributions out of taxed income; it accrues without tax; and when you withdraw it, you do not pay tax. At present we are stuck in a no man’s land, with features of both systems, such as ISAs and the lifetime ISA. We wondered whether LISAs were a Trojan horse for a full-scale move towards the TEE system. That would be jolly nice for the Chancellor, who would get his tax receipts up front, but precarious for the rest of us, who will have to assume that when we make the withdrawals one or two decades hence he will keep his side of the bargain.
Over the years, a number of studies have been made into the optimal shape of the tax system, by eminent people such as Professor James Meade and Professor James Mirrlees. The noble Baroness, Lady Altmann, has championed a much simpler pensions regime with payment by government to match the contributions made by a taxpayer. This has the merit of being simple, providing the right incentives and being fair to all taxpayers.
It would be a bit much to expect the Chancellor of the Exchequer to come up with the answer to all this by the time of his Autumn Statement on 23 November, but by the time of the Budget we can reasonably expect not further complication but further clarification.
On simplification, I, too, welcome putting the Office of Tax Simplification on a statutory basis but the benefit would be limited if it was there only to clear up the mess. It is important that it gets drawn into the policy formulation phase. I am confident that all these issues about budget secrecy and so on can be properly handled.
Finally, I will make a brief comment on fiscal policy in general. I welcome the abandonment of the idea of a surplus by 2020, but we are told by the Prime Minister that this is simply a matter of timing. The objective of achieving a surplus is retained; we are just to do it at a later date. I do not see the logic of this when such a huge range of infrastructure requirements are unmet in this country. I do not see that it is necessarily wrong to have a deficit, provided that it is small enough that the debt to GDP ratio continues to decline.
My Lords, until about five minutes ago I was very worried for the noble Lord, Lord O’Neill of Gatley, because there was hardly anybody behind him on the Back Benches. When I counted, there was often only one person— probably assigned for that duty—and when they went off, somebody else came in rather morosely. I was thinking of when somebody was to be sacked from the politburo in the old Stalinist days, and that maybe this is the notice the Minister has been given. But now the word has gone out and the troops have come to back him up, although I see that none of them will speak.
As my noble friend Lord Darling said, we are discussing a Budget from so long ago that is not just déjà vu but déjà passé. The issues we have to consider are not so much those in the Finance Bill before us, and on which my noble friend Lord Hollick and his committee have made some useful comments. In the new situation we face of Brexit and its unknown and unestimated effects, however, in which new direction will the economy go?
Let me first take up the issue of monetary policy. Many people have mentioned that we—the Federal Reserve, ourselves and the European Central Bank—have been relying on QE for many years. Monetary policy has now come to the end of its usefulness and there is nothing much that policy can do. Obviously, everyone would now like to have more of a fiscal policy boost. The question then is: does that mean abandoning the strategy that George Osborne set of continually lowering the debt and trying to manage the deficit? Happily, the goal of a surplus by 2020, which I thought was foolish, has been abandoned.
There has been a lot of debate in the blogs about helicopter money. As some noble Lords may be aware, this is being debated among economists: if money has an effect on the economy, how does it transfer itself to the economy? What QE has told us is that money does not transfer to the economy. You can print away and buy as many bonds as you like, but money does not move out of the banks and the corporate cash reserves. Not much investment has taken place, even at very low interest rates. All we have is merger and acquisition activity, buying and selling old capital. No new capital is being generated.
One proposal is that we should have an active spending policy—perhaps for infrastructure, perhaps for other things—that should be financed purely by printing money, so that debt will not go up. There are learned articles that I can refer the noble Lord to. The idea is that if you run a deficit, but finance it purely by printing money, the debt does not go up. Of course, we were told by Milton Friedman and others that the danger was inflation. If there is inflation, every central banker will be relieved because they are hankering for it. In Britain, the figure is down to 0.6%, so if there were to be inflation, which I doubt, it would be welcome. One of the things the new Chancellor may consider between now and the Autumn Statement is some form of helicopter money.
The noble Lord, Lord Skidelsky, and I have been advocating another kind of helicopter money, which is not to waste it on infrastructure and things like that but to give it directly to every person on the electoral roll. Just give everybody £1,000 and see what happens. That would definitely boost the economy. After all, we are giving so much money to the banks and the corporates; we may as well give some money to the punters who have to pay for bank failures. That is not monetary policy or fiscal policy; it is fiscal policy with certain unorthodox aspects of monetary policy. Therefore, it can keep the debt at its current level, or maybe lower, but finance government spending. I know it sounds surprising, but it used to happen all the time before monetary orthodoxy took over.
Turning to productivity, the noble Lord knows that I have grave doubts about the statistical measurement of productivity. I read Robert Gordon’s massive work on why US productivity has gone down and why it is difficult to revive. It struck me that all the notions we have in the economics of productivity, such as total factor productivity, come from a time when manufacturing was dominant: from 1945 to 1975. When manufacturing is dominant and production is in solid commodities, productivity is very easy to measure. We do not have that economy any more. We have a highly service-oriented economy in which one of the ways quality shows itself is by a continuous fall in the price of new products. Every time a new gadget comes out, it is priced lower than the previous edition. We need to think much more radically about what it is we want to achieve when we are trying to measure productivity. Productivity cannot be an aim in itself; it has to be about enhancing welfare. If something is enhancing welfare by improving quality and getting prices down, we are missing something if we go on thinking that productivity is not going up. Some radical thinking is required. Perhaps one of the sacked former Ministers could be employed to think about this; maybe the ex-Chancellor himself, because he is a very thoughtful man.
Finally, I shall say one thing about Brexit negotiations. Obviously, the priority of the people who voted to exit is migration but, as many of my noble friends have said, the complexity of the negotiations on all the other aspects have to be borne in mind, especially financial services. Financial services are obviously a major part of our economy, and we should try our best to preserve as much as possible of the current portfolio—our passport rights and whatever else we can get.
However, one has to be careful politically, because the City is not popular among people who voted for Brexit. We should remember that. A lot of people are still very angry about the rescue of 2008 and about the bonus culture, to say nothing about LIBOR and all those criminal activities. My advice to the Government and to the City would be: if you are going to defend the City—as you should—prepare the political ground carefully, otherwise the Back Benches in the other place will revolt.
My Lords, I thoroughly agree with the extremely sensible advice which my noble friend has just given to the Government and his very perceptive view of the state of the City’s status and reputation—sadly, because it is after all our leading industry in this country—among the public at large.
I want to make four points. First, I agree with the Minister that it is too early to assess the economic results of the Brexit referendum outcome. There has been some evidence that, as one would expect, the international trading sector has been stimulated by devaluation, particularly parts of the sector which do not require lead time, such as tourism. I have bought quite a lot of wine, knowing that the next time I see a sterling price list, the prices will be 18% to 20% higher. I imagine anybody who is thinking of buying a BMW or Mercedes has brought that forward, for the same reason. I have no idea at all whether anticipatory purchases of that kind are statistically significant in aggregate, but I expect the Minister knows the answer. However, it is far too early, of course, to have any perception at all of the impact on what is really significant, which, as we have always known, is investment. You can never calculate exactly what is happening when you are talking about opportunity costs, but in my view it will not be for five or 10 years that we will be able to look back and see what impact this will have had on our rate of growth over the relevant period compared with the preceding period. It is then that we will begin to realise some of the damage that has been done.
Secondly, of course, the great economic fact since the Brexit referendum has been that devaluation. Nothing surprises me any longer about the British capacity for self-delusion in these matters and for Panglossian optimism. I do not know whether just to be amused or to be amused and deeply concerned when I hear people say or I read in the Eurosceptic press, “Oh, it’s wonderful, the markets have recovered now from Brexit; the FTSE 250 is back to where it was before the referendum vote”. However, it is not, of course: it is back to where it was in sterling terms, but it is 18% to 20% below where it was in terms of real purchasing power. Being old enough, I have often had occasion in the last few months to remember the words of Harold Wilson about the “pound in your pocket” not being devalued. The same spirit has prevailed over the last few months. I am sorry to have to say that the same final recognition of reality will hit the British people at some point.
My third point is that the Government’s response to all this has been rather confused and regrettable, because for all its evils, devaluation could be a basis for attacking what I think is—after productivity, to which it is related—our major national weakness. That is our balance of payments deficit; it has for some time been at very alarming levels of 5% to 6%, which makes us particularly vulnerable to international investor sentiment and should be a great worry to the Government. Devaluation might, in theory, provide the basis for a greater volume of exports and for greater domestic market share for import substitution industries and services in this country. But we are operating quite close to capacity—the unemployment figures which the Minister quoted show that to be the case—and we are clearly not going to have a revolution overnight in productivity. It is a mathematical impossibility for that to happen unless there is some reduction in domestic consumption or investment—and one hopes it will be consumption.
However, the Government are going in completely the opposite direction by stimulating the economy. The Bank of England is relaxing monetary policy and the Government are relaxing fiscal policy at the same time. The Government have abandoned their programme to restore fiscal balance and go into fiscal surplus before the end of the decade. The statement of policy seems extremely perverse for two reasons: first, it will prevent us achieving the full effect of devaluation on that current account payments deficit, and, secondly, the monetary expansion in particular will mean that the raising of import prices following devaluation will be accommodated, and therefore we will have inflation. When inflation picks up, the Bank of England will have to intervene again—probably in the second half of next year—and put up interest rates to prevent inflation going up beyond the 2% level and higher, which would be contrary to the guidelines by which the Bank is working. We then find ourselves with the prospect of rather volatile monetary policy over the coming period, and that is not a good thing. Above all, it is not good for confidence.
That brings me to my final point. The Minister said that the important thing was investment and I totally agree with him. I do not think he knows what I am saying because he is paying attention to something completely different, so I shall not be able to refer to this in subsequent debates. I am saying to the Minister that I actually agree with him in the emphasis that he is putting on investment, but investment depends upon confidence. Confidence is undermined by volatility of policy and will be particularly undermined by the tremendous instability that the Government are presiding over at the moment in relation to our post-Brexit prospects. It looks as though it will take not just months but perhaps years of negotiation before we know what our relationship will be with the rest of the EU and the European single market. In my view, that is an unforgivable state in which a Government should never leave a nation for whose fortunes they are temporarily responsible. It would be so easy to completely remove that instability and source of uncertainty. I hardly need to remind the Minister that uncertainty is risk, and risk is a cost—it increases the cost of capital, which increases the threshold rate for investment, so it is an automatic response to uncertainty that there will be less investment.
After that enormous uncertainty has been created, the Government are doing nothing at all about reducing it. The Government could do something now—literally this afternoon—to make an enormous contribution to reducing that uncertainty and risk and boosting investment, by saying that whatever happens as a result of these negotiations with the rest of the EU we will remain in the single market. It would be perfectly possible and responsible to say that, because one avenue that will always be open to us is the European Economic Area option that, for example, Norway and Iceland have. Maybe the Government will be able to negotiate something better than that—better in their view, anyway. Personally I am not sure about that at all.
If I were one of our continental partners, I would not want to get involved at all in the negotiating of a bespoke special deal with the UK, for a whole host of reasons. One is that as soon as you start talking about bespoke deals, other members of the existing EU may want a bit of a bespoke arrangement. Secondly, other people with whom the single market already has a structural relationship—EEA members, Switzerland or whoever—may want to renegotiate that to make their own position more equal or more fair in light of what has been agreed with the British. Thirdly, and very importantly for them as for us, the whole thing would go on for years and years. It would be one of those negotiations where nothing was agreed until everything was agreed. That would take the sort of time it normally takes to negotiate an accession agreement to the EU or an international trade or financial agreement—typically, between five and seven years. That would be a complete nightmare for all concerned.
Personally, I doubt whether the continentals would want to get involved in that sort of bespoke negotiation anyway. But even if they did, it would be perfectly possible to go into that sort of negotiation having said at the outset that whatever happens, we will end up still in the single market. That would be the best possible day’s work that the Minister could do for this country, for British industry, for investment in this country and for the future of our prospects for growth, employment and prosperity. I see him smiling. I hope he agrees with me and that he will do it.
I agree with the noble Lord, Lord Davies, about uncertainty, just as I agree with the Minister that this Finance Bill comes to us from a different world, the pre-referendum world. We now know that we face a decade of uncertainty, with growth consequently lower and recession, if there is one, deeper than it would otherwise have been.
I say a decade, as did the noble Lord, Lord Davies, because there are several stages to go through. Unlike the noble Lords, Lord Darling and Lord Davies, I think there will be an Article 50 deal. I think there will also be a framework deal—that is a precondition of the Article 50 deal—and a trade agreement deal. I think all three baskets are perfectly doable; it may take longer than two years, but I do not think anybody would want the default option of the noble Lord, Lord Darling. That is not in the interest of our continental partners any more than it is in ours, so I think a deal will be struck, but it will take two or three years. There will then be another year of uncertainty while it is ratified in the other 27 capitals and here. We need to remember that the trade deal with Ukraine came unstuck in Holland in a referendum, which was fought not over the merits of trade relations with Ukraine but to do with Dutch domestic politics, so there are many hazards on the way.
It is only when the content of our trade agreement with the EU and its status becomes clear that our position in the WTO can be established. We cannot be members in our own right until we have proposed our own MFN schedule of commitments, and that must be accepted by 164 members of the WTO, with plenty of room for mischief-making. Only when we have put forward our baseline MFN offer and it has been accepted can we realistically expect to strike trade deals with third countries. Why should they envisage a concession to us in trade negotiations when they do not know whether it is something we will offer anyway in our schedule for the world? Trade negotiation is a mercantilist arm-wrestling business, where people are looking for national advantage and concessions are hard to win.
So I do not know why Dr Fox is currently out recruiting negotiators, because I think they will have nothing to do for at least five years. We need to go through the extraction process with the EU. That trade deal we can strike, because it is a comprehensive agreement. We then need to become WTO members and have our membership terms approved by 164 members before we will find that even our Antipodean friends are willing and able to negotiate a trade agreement.
So a long period stretches ahead and, in the interim, inward investors will, in my view, tend to look elsewhere. The attractions of the gateway into the market of 550 million will be seen to be going, possibly gone. If Dr Fox is right—and I am sure he is—that we shall be leaving the customs union, British manufacturers, when their goods cross the Irish border or the channel, will be subjected to the rules-of-origin tests, the paperwork, bureaucracy, checks and transaction costs which Mrs Thatcher’s Government rightly took such pride in getting rid of in the 1980s, thanks to the single market programme and Lord Cockfield. All this points to a decade of uncertainty and growth lower than it would otherwise have been. I do not predict a recession; I simply say that that uncertainty must, as the noble Lord, Lord Davies, said, have an effect on the economy as a whole.
So this Finance Bill is pretty irrelevant to the real problems we face, and I agree with those who say that the Autumn Statement is likely to be rather more relevant. Speaking as a member of the committee chaired by the noble Lord, Lord Hollick, I support all that he said about what we would hope for in the Autumn Statement. In particular, I hope that the Chancellor means it when he talks about the importance of investment in infrastructure and encouraging investment in housing—particularly, as the committee emphasised to him, assisting local authorities to invest more in housing than they have been able to do.
That seems to me to be much more important than tax. I noted the Minister taking great credit for the fact that the plan is to have the lowest corporation tax rate in the G20 by 2020. I am much more encouraged by the fact that the current Chancellor has decided that he does not want to implement the faster and deeper cut that his predecessor was proposing after the referendum.
I think that Mrs May’s thinking will probably be slightly different from that of Dr Fox and Mr Davis, and what we read from the noble Lord, Lord Lawson of Blaby. Dr Fox does not want to protect any bits of our industry:
“We must be unreconstructed, unapologetic free traders”.
His schedule of MFN commitments might be quite easy to draft, but it seems to me that, politically, it would be quite difficult to sell in this country: difficult to sell to manufacturers; difficult to sell to farmers; difficult to sell all round. I suspect that Mrs May will prove rather more like Mrs Thatcher, who used to enjoy teasing her Chancellors by talking the Minford talk or the Alan Walters talk, but when it came to the walk she was much more pragmatic and shrewd in her judgment of what the country needed and what the country would take. I suspect that something similar will be seen with Mrs May.
And that makes it to me tragic that Mrs May is not going to Bratislava for the European Council this week. I simply do not understand that. We are members of this club until we leave it, and the empty chair is always a very bad policy. Mrs May should be there. I am told that the decision was taken in the last days of Mr Cameron. If so, that is another example of the disastrous consequences of the casual approach to diplomacy. If Mrs May were in Bratislava and were able—perhaps she is not—to explain how she envisages the Brexit process working, I think that our chances of getting a decent trade deal with our partners would be enhanced. They read the British press and believe that Dr Fox and Mr Davis, and the noble Lord, Lord Lawson of Blaby, are speaking for Britain. They believe we are heading for another big round of deregulation, for much less social protection, for a low-tax, low-wage economy—an offshore Singapore. If that is the kind of competition that they will face, that will colour their approach to trade negotiations with us.
As I say, I do not believe that that is where Mrs May is. If one believes Mrs May on the steps of Downing Street talking about reducing inequality, you do not reduce inequality by reducing wages and jobs. I should think they would find her presentation rather reassuring, and I am sorry that they will have to wait. Once she has decided how she will play this Brexit thing, it is very important that she should at an early stage give us a full explanation not just in this Parliament but in the European Parliament and to the European Council.
I ought to speak to the report of the noble Lord, Lord Hollick. I commend it. It is excellent and he has drawn our attention to all its merits, including the merits of our special advisers who are wonderful. I should add just one footnote to it. He did not mention what we said about the Office of Tax Simplification, which the Finance Bill puts on a statutory footing. Some might think it is a major change; I believe that it is a nugatory change.
My approach to tax simplification is coloured by working as private secretary for the noble Lord, Lord Lawson of Blaby, who shocked the Treasury on arrival by announcing that he wished to abolish one tax in every Budget—and he did. It was not a gimmick; the salutary effect on the Treasury of making it go through the exercise of looking at candidates for abolition was extremely good, and I commend the idea to Chancellor Hammond.
I also remember the Treasury’s great shock when, as he prepared his first Budget, Chancellor Lawson said that he intended to abolish all corporation tax reliefs, to make an instant reduction in the corporation tax rate and—this was the bit that really shocked the Treasury—pledged himself to five successive annual future reductions in the rate. He did so, and it was extraordinarily successful; the effect on certainty and confidence was considerable. That is the challenge for Chancellor Hammond. Can he emulate Chancellor Lawson as a simplifier?
On the need for him to do so, I quote three paragraphs from the excellent report of the committee led by the noble Lord, Lord Hollick. First, I quote from paragraph 228, which says that the first report from the Office of Tax Simplification,
“in November 2010 identified 1,042 tax reliefs in the UK tax system”.
By 2015, 53 had been abolished, but new reliefs had been introduced, making a total of,
“1,156 tax reliefs in statute as at March 2015 … a net increase of 114”.
Secondly, I quote from paragraph 229, which highlights that the Institute of Chartered Accountants pointed out that, in the same period, 2010 to 2015,
“the fact is we have had almost 3,000 pages added to the UK tax code, and that was on top of, I think, 9,000 when we started. It is very difficult to simplify a tax system meaningfully when you are faced with that level of extra legislation”.
Finally, I quote from paragraph 230, which highlights the evidence from the Federation of Small Businesses:
“Despite the laudable efforts of the OTS … We see neither the flow of new legislation abating, nor are we convinced that the administrative impact of tax measures undergo the same level of scrutiny as regulation more generally”.
Noble Lords will, I am sure, agree that one reason why there is inadequate scrutiny of tax regulation is that we do not get our hands on it here—we are made to keep off that grass.
There is a major job to be done in trying to reduce the size of the tax code, and I think that putting the Office of Tax Simplification on a statutory basis will not achieve anything. There are two routes you could go down: you could either follow the OBR route and make it genuinely independent and a power in the land, or you could keep it as it is now, or as it will be, on a statutory footing, inside the Treasury and dependent on the Treasury for pay and rations, but allow it—as it is not allowed now—to see tax measures in advance, and allowed in on the Budget process. As it is, it will remain neither one thing nor the other, as Churchill is said to have said of Alfred Bossom. It is neither going to be genuinely independent nor will it be up-stream. I would have gone for it staying in-house but being up-stream, which is something that the Chancellor could achieve by a flick of the pen, without any further legislation—and I very much hope that he will, as he rises to the dual challenge of reducing the size of the tax code during his time in office and abolishing one tax per Budget.
As several noble Lords have said, this Finance Bill belongs to a previous era—not just the era of George Osborne’s chancellorship but also a past era in a more historical sense, one that began with our membership of the Common Market in the 1970s, was shaped largely by the Thatcher Government and ended with the vote for Brexit in June this year. With our exit from the European Union, Britain has to devise a new political economy from the European one that has shaped our destiny since the 1970s. I will talk about this and develop four or five brief themes. I am afraid I am not going to talk much about my noble friend Lord Hollick’s excellent report.
The first theme is the one referred to by my noble friend Lord Darling. It really is time to end the phoney war about where we are on the consequences of Brexit and what the Government’s policy now is. The Government have got to make some hard choices. They have to decide how much priority they give to the single market. They have to say whether they are prepared to contribute financially in order to get access to European markets and to common policies that are in our interests, such as those for research in our universities. They have to be clear whether they are prepared to accept being members of a market where the regulations are not going to be determined in Britain, because that will be the position. I hope that Mrs May will try to resolve some of these uncertainties in her speech at the Conservative Party conference. In the national interest, I hope that she makes clear that the overriding goal of the Brexit negotiations has to be to retain the maximum economic openness that our economy enjoys as a result of its membership of the European single market.
However, we have to do more than that. We have to try to explain better to people how the benefits of that openness can be shared in a fair and transparent way. I do not know whether something could be made of this in policy terms, but I have just been thinking of the many young people who come to work in Britain from the continent. It is clearly evident, as many economic studies have shown, that they make a very positive contribution to the Exchequer. Could the Government find a way of identifying and hypothecating that tax contribution in order to establish a migration impact fund which dealt with some of the social consequences and tensions that have resulted from free movement?
My second theme is that the Chancellor should launch, in his Autumn Statement, an ambitious public investment programme to address the loss of economic potential as a result of Brexit and the tail-off in economic growth as a result of falling private investment. This should be targeted at new sources of growth and designed to correct the regional imbalances in the economy. We should set up a kind of office of public investment which verifies projects on the basis of their value for money. That would reassure people that borrowing money for these purposes was not wasteful spending, but would actually increase economic growth and, as a result, reduce the burden of our debt in the long term. We have to do something about public investment. In the last days of the Labour Government, under my noble friend Lord Darling, it was running at 3% of GDP. It is now well below 2%. It has got to go up: that has to be done.
My third theme is that this new investment programme needs to be part of a coherent, long-term economic plan. Yes, I use the word “plan”, which the Conservatives used so much in the general election campaign. We have to have a plan and a new industrial strategy, which the new Prime Minister has said she is committed to by changing the name of the BIS department. As I say, we have to have a plan and an industrial strategy. I do not think that that is too difficult to do. In fact, it is a logical fit with Brexit, because the Government have already committed themselves to examine the trading position of the British economy sector by sector. It is a relatively short step from that analysis for the Government to work with business sector by sector to identify strengths and weaknesses and threats and opportunities, and examine what positive help a Government can give to industry’s success. Therefore, I welcome the return of an industrial strategy and hope that it will be taken very seriously. I also hope that it will be backed up by resources and that the EU resources currently available for this purpose through the structural funds will not be abandoned but will actually be amplified by the new Government.
Fourthly, the Brexit vote was clearly a cry of pain from the left-behind in our society and a rejection of the elites. Business has to listen very carefully to that message. We have to find ways of re-legitimising the market economy and capitalism. In the post-war era, we thought that the worst excesses of capitalism had been tamed. Today, they have returned. It is terrible that the models of business that people think about in Britain are people such as Sir Philip Green at BHS and Mike Ashley of Sports Direct. What an example they set. Mrs May is very right to stress the need for better corporate governance. I certainly look forward to those proposals and hope that they have real substance.
We must also think about labour market flexibility. I have always been strongly in favour of labour market flexibility, but has it gone too far in Britain? The noble Lord, Lord O’Neill, mentioned the Government’s new skills funding approach. Surely, this is an opportunity to try to raise standards in areas such as hospitality, catering and social care, where one would hope that, by training people better and paying them higher wages, one could deal with some of the abuses—as I see it—of labour market flexibility, and the dependence of some employers and business models on the ready availability of low-skilled migrant labour.
My final point concerns our policy for sterling. I am not sure what I think about this, but we need a national debate on it. One of the clear consequences of Brexit has been a fairly sizeable devaluation. This, of course, will represent in time a significant squeeze on real wages and living standards. Do the Government think that a fall in sterling is an inevitable consequence of Brexit? Do the authorities see a lower rate for sterling as a desirable thing in these circumstances? Should it go further? Should the exchange rate return in some way as an objective of government and Bank of England policy? The governor of the Bank has pointed out that, with our massive balance of payments deficit, we are dependent on the “kindness of strangers”, as he put it. However, one could ask legitimate questions about some of these foreign inflows. Of course, we welcome—everybody should do so—overseas direct investment. But are the flows that are coming in to finance M&A and property investment, particularly in London, desirable—and could we do something to throw grit in the wheels of those processes in order to make them less desirable? This is something that we need to think about.
There are many challenges with Brexit. As the noble Lord, Lord Kerr, said, the economy is entering a long period of grave uncertainty, and it is only through very bold government action that we can address this. I very much hope that the Government will prove up to the challenge.
My Lords, I feel rather sorry for the Bill. In the number of fascinating speeches that we have heard, the only noble Lord who focused on the Bill to any significant extent was the noble Lord, Lord Turnbull. His description of the complexities of the taxation system—added to rather than diminished by the Bill—left us with our jaws dropping and terror in our eyes. But that has been almost the extent of the discussion of the Finance Bill.
I was in Alaska over the summer. There, when a mother bear is with her cubs, if a potential new papa bear comes along he slaughters the cubs. I rather think that we are in that situation now, with the Bill set for the slaughterhouse and unlikely to survive Brexit, the new Prime Minister and the new Chancellor.
Most noble Lords who spoke today covered broad issues, mainly Brexit-driven but with a very broad scope and range. I will extract two things from the speeches. The noble Lord, Lord Kerr, laid out the timetable according to which detachment from the EU has to progress. It is an exact timetable; it is not an issue but a series of representations of the actual fact of the timetable and the length of time it will take to go through Article 50, the negotiations, the WTO process and other stages. I hope that the Government will take on board that timetable. I have now had conversations with two government Ministers who seemed to have no idea that that is the timetable that we face and that has to be part of the thinking and decision-making of the Government.
The second issue is to say to the Government that the ongoing uncertainty is simply unacceptable. “Brexit is Brexit” three months after the referendum is not a satisfactory set of answers. I speak regularly with businesses, as do many noble Lords. We have gone from being asked questions about what we think the Government might be thinking to questions about whether the Government have any competence. That is dangerous territory to get into and I honestly think that we deserve to see the framework and the basic principles. One noble Lord said just now that it is possible that they will be told to the world at the Conservative Party conference. But this is Parliament and this is the place where those principles and frameworks should be brought before us. This is a big, important issue that goes far beyond the entertainment of a party conference.
I will talk a bit about the Bill. There are a few good measures that are worth saving, including raising the personal tax allowance to £11,500, which is a good Liberal Democrat policy, and cutting business rates for small businesses—a long-overdue relief for small businesses. But I hope that the Government will treat this just as a holding measure, because the framework for business taxes in this country is frankly unfit for purpose. I do not mind quick interim measures to tackle a problem, but we need something far more fundamental. Reforms of stamp duty must be right. Improvements to ISAs matter little with interest rates so low, but they go in the right direction. The whole issue around pensions, pension inequality and the structure of pensions was not tackled in the Bill—and it must be done.
The power of the Treasury to force companies to publish how much money they make and the tax they pay in each country where they operate, and the transparency amendment which the Government accepted, are both good as part of the programme to tackle tax avoidance. But again, this is a very timid and limited programme to tackle tax avoidance. On income tax relief for irrecoverable P2P loans—a small issue that pleased me greatly—if we are going to have challenges to the major banks, as surely we must, we have to make sure that issues like that are put on a level playing field.
However, there are serious problems and omissions in the Bill. First, it was predicated on a fiscal mandate that made no sense from the beginning: creating an overall budget surplus by 2019-20, and not just in the current account. You can argue about the date but quite frankly, the way it was defined, not as a surplus in the current account but including investment spending, was always daft. That target has had the impact of diminishing the Government’s infrastructure ambitions. At a time when we need growth, that is not an acceptable way to treat investment spending, and is particularly misjudged, as other noble Lords have said, when borrowing is so cheap. We debated that to some degree in my Private Member’s Bill on Friday. The Minister today will be aware, although I am sure that he will not admit it, of our lack of ambition in housing, broadband, energy—especially renewables—hospitals, schools and even transport outside London. Today some noble Lords have criticised HS2. I remain a backer of HS2, because quite frankly the Indian system of strapping people to the roofs of trains is not acceptable. I do not know how you will deal with the number of people trying to travel north out of London without a new line, and HS2 is the answer.
The Bill cuts corporate tax rates. The Government cannot make a coherent argument for such cuts, especially when they are financed by welfare cuts to poor working families, disabled people and young people. We already have among the lowest corporate tax rates in the OECD. However, it has evidently done us absolutely no good in persuading businesses to invest in new projects or in R&D: both are already at exceptionally low levels and major companies are sitting on a mountain of cash. Further cuts in corporate tax rates may please business but we have already learned that they will not motivate it. A race to the bottom in corporate tax rates is not a wise move for any major economy. It simply becomes beggar-my-neighbour.
Despite toughening the tax anti-avoidance rules in line with BEPS, which I totally support, it still looks as if the online giants will have plenty of scope in the UK to limit their tax payments. Action on tax avoidance is timid in the Bill, which still focuses on abuse, leaving plenty of grey areas where many companies stake out their tax minimisation strategy. I look forward to the debate in the House we will have later tonight which addresses that issue. As Liberal Democrats, we have commissioned Vince Cable and a panel of experts to look at business tax as a whole. The annual exercise of trying to catch the loopholes has become a nonsense. We need a new framework for business tax that recognises that value has shifted from hard assets to intellectual property, from local to global, and from employees to what is optimistically called the shared economy, in which the workforce carries the risk.
As for the cut in capital gains tax, which the Minister presented as such a positive, in the coalition years we raised capital gains tax to be close to income tax, which is a genuinely sound principle. Frankly, how the Government could think of cutting capital gains tax at a time like this, when so many people are still feeling austerity, is beyond me. It shows this ongoing focus on people who are much better off rather than on ordinary people.
In closing I challenge the Government on just three narrow but important issues. The first is to join the noble Lord, Lord Hollick, in calling for much more support for small businesses to go digital in their tax filings; and to be absolutely certain that they stand by their commitment to make quarterly tax reporting voluntary and not mandatory, which is an impossible burden for many small businesses.
The apprenticeship levy—essentially a payroll tax—is structured in such a way that an employee share ownership company pays more levy than a conventional company because of the way the dividend exclusion is defined. That is wrong; we need to embrace and encourage those shared ownership and mutual companies, which should not be deliberately disadvantaged.
Young people have received numerous blows from Conservative Budgets. In this Bill they are hard-hit again by the hike in tax on insurance premiums, because young people pay—I often suspect unfairly—higher insurance premiums for just about every insurance product. The Government did not think this through and acted as if they were not aware of it. They need to remedy this rapidly.
The Bill may soon become an Act, but shortly after that it really will be forgotten. I hope that the Government will take on board what has been discussed in this debate; it has brought up a wide range of general issues, including intergenerational fairness and the oncoming impact of artificial intelligence and machine learning, which will completely change job structures in the next five or more years. There are so many issues to be looked at and this is a great opportunity to do so. I hope that the Government, before they get to the Autumn Statement, will allow this House and the other place to engage in a much broader debate on many of the issues that were raised today.
My Lords, it can sometimes seem a little lonely for a Minister addressing the House on issues such as the Finance Bill and the Budget. He sees before him a significant number of Members of the Opposition, some of whom have had experience in high office, including my noble friend Lord Darling as Chancellor, but he may not have too much support behind him. It was interesting today to see that the Minister had no support behind him: there has not been a single speaker from his Benches. Of course the House is reasonably full, reflecting the importance of this debate and the issues—
My Lords, that is a convenient excuse. I have no doubt that it is important to prioritise attending such meetings. However, the noble Lord will also recognise that a prime duty of Members of this House is to attend debates and actually engage in them, particularly in circumstances where the Opposition will have some trenchant things to say about the main subject of the debate. But there have been no speakers from the Minister’s Benches. That may also be a reflection of the fact that the Government Benches have largely decided that the last Budget is wholly irrelevant to our present situation.
Several noble Lords have made that point quite explicitly. Even the noble Baroness, Lady Kramer, indicated that she had difficulty seeing the significance of the Finance Bill, which now belongs to the past and which was introduced by a previous Chancellor—a Chancellor who conspicuously failed in the significant tests that, had he been providing any supervision of the economy, he ought to have met. The deficit was postponed from 2015 to a putative surplus in 2019 and 2020. Growth, which he put forward in 2010, fell considerably below his optimistic forecasts. He even failed to match the growth levels that my noble friend Lord Darling presided over when he was Chancellor. Living standards for a very substantial section of our population have fallen. There have been no pay increases since 2010 and inflation has taken its toll. I imagine that, at this stage, members of the governing party are happy to see the back of the Finance Bill and its objectives.
Nevertheless, we have to recognise one absolutely critical aspect of the Finance Bill and I want to itemise that. The Government emphasised that cuts in corporation tax and capital gains tax would help investment in the economy and help to boost British industry and enterprise, but there was never a reference to any deleterious effects. This is a manifestly unfair Finance Bill. It is asking ordinary people to sustain the cost of cutbacks in crucial areas of government expenditure while tax breaks are given to those among the wealthiest in our society.
We are critical of the Bill. We were critical of it in the other place and we are critical of its general propositions here. But of course the debate has moved on in several respects. This House had the benefit of a report introduced today by the chair of the Economic Affairs Committee, my noble friend Lord Hollick, who emphasised the fact that the Government had discreet weaknesses in their position over the subject of that report. We can all see the advantages to the taxation system of modernising the receipt of taxes, but the digital economy clearly presents enormous challenges for ordinary people. It is not the case that everyone in this country is completely au fait with how the digital economy is meant to work and who have the confidence to respond in those terms. But there is no indication that the Government have any real awareness of that. In the report that my noble friend commented on, that point was emphasised.
The report also emphasised that the Government pay lip service to the concept of tax simplification. It says positive things about the Office of Tax Simplification, but not what the committee emphasised, which was any suggestion of adequate resources for that office to be able to carry out its role. We recognise that the Government have some regard for the Office of Tax Simplification. They certainly accepted amendments to place greater emphasis on the role of the Treasury Select Committee in the other place with regard to personnel. But the fundamental point remains that the report sought greater resources for the Office of Tax Simplification. It wanted much more consideration of the way in which the ordinary taxpayer will respond to the digital revolution and it wanted greater consultation about the development of tax law so that matters should be simpler for the ordinary taxpayer. I hope that the Minister will address those points because they are an important part of this debate so ably introduced by my noble friend Lord Hollick.
The Minister also needs to respond to points made by my noble friends Lord Darling and Lord Hain. They emphasised the extent to which it is essential for the Government to change their order of priorities and develop a strategy for growth that enables us to improve what I know the Minister is concerned about—levels of productivity. They will not increase while we are trailing at low levels of growth. It is important for the Minister to respond to the fundamental issue that for the last six years we have had a great weakness in the British economy that no amount of concentration on reduction of debt has done anything greatly to assuage. That is why the Minister needs to respond to these crucial issues raised in the debate.
Noble Lords who subsequently followed my noble friends largely regarded the issues of the Finance Bill as passé and not part of the crucial issues of the debate about our economy at the present time.
Of course, we have moved into the fog of Brexit. We are grateful to the noble Lord, Lord Kerr, who sought clarification on some of the issues, the first of which is an indication of the timescale for when certain aspects will need to be negotiated. I have seen nothing from the Government that remotely approaches anything as definitive as that. Nor have I seen any recognition on the part of the Government of the point made by the noble Lord, Lord Kerr, when he said that it is important that those who are involved in determining our negotiations with the European community should acknowledge that this is an entirely capitalist economy. It is an exercise in which they will expect to get the best deals they can for themselves as much as we will strive to do on behalf of our people. That is a tough agenda, but I have seen nothing yet to show that the Government are facing up to it, particularly when one of the key figures of Brexit, the Secretary of State Liam Fox, attacks British industry for being more interested in playing golf than improving its business record.
These are serious issues which the Government need to take hold of very rapidly indeed, yet thus far we have had nothing but evasion when challenges are presented, and indeed they have been presented today with great force in this House. We all recognise the primacy of the other place when it comes to financial issues, but occasionally we are given the chance to debate the nature of the challenges in our economy. Consideration of the Finance Bill gives us no chance to amend or challenge it because that is the responsibility of the elected House, but as I say, we have a chance to comment on the economy and to point the way forward to a more constructive position than what obtains at the moment.
What we have now is obvious. We have economic failure on the part of the Government in previous years now allied to a decision by the British people to throw a great deal of our trading position into hazard. It is important that the Government should take every opportunity to clarify how they are going to go about the Brexit process. That does not mean that they should give away their negotiating position, but they should reassure people that they understand what the approach will be and how long it will take. Thus far, we have had nothing.
My Lords, not for the first time when discussing these matters, we have had an extremely interesting debate which has been conducted in a sporting manner with a number of noble Lords also providing us with great humour. I thank all noble Lords for their excellent and insightful contributions. I was going to start by highlighting the concern of the noble Lord, Lord Desai, for my well-being as a result of the situation behind me, but my noble friend Lord Forsyth came to the rescue and explained the competition that I was facing today, so I do not need to do so.
I apologise in advance because, as is always the case, I will not be able to respond to the considerable diversity of topics which have been raised, but I will try my hardest to do so. Debating the full sweep of a Finance Bill is pretty challenging, as is trying to respond to all the points that have been raised. I will try, as I often do, to answer by topic—I have highlighted eight which I will wade into shortly—rather than answering each noble Lord who offered specific remarks. Before I do so, I am particularly grateful to the noble Lord, Lord Hollick, and the members of his Finance Bill sub-committee for their substantial and insightful report on the draft Bill and, more broadly, for the superb work his committee does.
The first of the eight topics concerns the tax matters that the noble Lords, Lord Hollick, Lord Turnbull and Lord Kerr, and the noble Baroness, Lady Kramer, touched on probably more than most. Contrary to the flavour of some comments, the Office of Tax Simplification plays an important role in the tax policy-making process. Where its recommendations are taken forward, HMRC and HMT discuss them and their underlying rationale with the OTS and seek to involve it in developing their approach and some of the implementation. Many specific things were said by the noble Lords and the noble Baroness—particularly the noble Lords, Lord Kerr and Lord Hollick—but I do not really have the time to address those. However, the OTS is an important advisory body. I should highlight that we expanded the number of people supporting that important work. That remains the full intention.
Moving to some broader issues that virtually everybody talked about, the second topic is the economy. Obviously, there is my own background: as everybody knows, I have been immersed in the never-ending challenges of trying to guess where any economy is going—at that moment in time as well as in the future. It is fair to say that at this exact moment, so far, the evidence of economic performance has been a little better than one might have expected. As a number of noble Lords pointed out, it may be far too premature to make too permanent a judgment on that. The noble Lord, Lord Darling, highlighted his directorship with Morgan Stanley, and I cannot resist saying that it and my own previous organisation are among the few that revised upwards their forecasts for the UK economy in the past couple of weeks. Of course, as always, we do not really know why there was such an apparently robust rebound in many indicators in August; we have no idea whether those will remain. Many noble Lords outlined all the various reasons why that would not necessarily be the case, but that is the situation, certainly in the near term, and I would not be overly surprised if a number of other independent organisations also adopted a slightly less negative tone.
Linked to the many interesting ideas about fiscal policy and the framework going forward—I listened carefully and took note of virtually all those ideas—among those who, as always but particularly in this environment, will have to think carefully is the OBR. The noble Lord, Lord Darling, did not have to live with the structure we were presented with in the OBR. Its assessment of the short and particularly the medium-term consequences of Brexit and, in parallel, of long-term productivity will have, as always, a significant bearing on the circumstances in which the Chancellor will be able to make his Autumn Statement.
I turn to my fourth topic: the fiscal policy framework and debts, on which a considerable number of comments were made and advice was given. Of course, due to the extraordinary and ongoing low levels of bond yields here and elsewhere in the world, it is always tempting to undertake whatever form of infrastructure spending one might think of, be it big projects, small projects or otherwise. But one also has to think carefully about what sort of infrastructure spending is going to give cyclical boosts and what might give a more permanent boost to productivity.
I still do not have the answer to this and I have not been persuaded by others. We do not entirely know, even if the data were accurate—notwithstanding the very important comments of the noble Lord, Lord Desai—quite why productivity is apparently weak here and in many other parts of the world. But it is not entirely impossible that one consequence might be that the private sector is worried about the very large levels of public sector debt in many developed countries, and at some point there may be considerably higher taxes as a consequence of that—who knows?
I will come on to this more specifically in a moment but as we have seen from the comments of both the Prime Minister and the Chancellor about the fiscal policy framework, one should be careful of anything that seems like a free lunch. The example of Japan is often discussed by continental European economies and many others—the indirect effect on productivity of the overhang of a long-term problem of high debt should not be dismissed entirely.
When it comes to the specific infrastructure goals, as I have said, both the Chancellor and the Prime Minister have made it reasonably clear that they see some scope for different ways of thinking about some of these issues. I suspect that in the Autumn Statement we will get a flavour of that. Obviously, given my own interests, I am heavily involved in trying to think through some of these things and how they may indeed help overall productivity and sustain growth, particularly with respect to some of our regional challenges.
I will touch quickly on two other issues before I sum up. A lot was said, not surprisingly, about trade and the single market. I am pretty sure that we will find out at the appropriate time—when the Prime Minister chooses—what our stance is on the single market and, indeed, many other complex related issues. We will all just have to be patient and wait for that to appear. But I would like to add something that reflects my own very considerable experience of thinking about international trade. As important as free trade deals are, one should not forget that the biggest drivers of trade between different countries and regions of the world are virtually always the levels and rates of change of domestic demand in one place relative to another. It is no surprise that the largest rates of growth of trade over the short, medium and long term are generally with those places that have the largest rates of domestic demand. That is not to diminish the scale of the challenge, but we should neither overly exaggerate nor ignore other factors that are very important for international trade.
I will briefly comment on sterling and monetary policy, which many people referred to. I am sure I do not need to remind your Lordships, but in so far as the Bank of England is given a mandate to achieve an inflation target, it is its independent role to choose what it does on monetary policy. Of course, it has to give some kind of consideration to fiscal policy, but it is its job to do what it thinks is right to achieve an inflation target of 2% over the medium term, unless that mandate is changed. Of course, the Government do not have a stance on sterling because we do not have a policy on it. It is typically a consequence of many factors, including particularly the policies that the Bank of England chooses.
Lastly, on productivity, I always welcome picking up on the experience and wisdom in our debates. There may continue to be considerable problems with measuring productivity; the noble Lord, Lord Desai, emphasised this and a couple of others touched on it. I do not have the time to go into this issue today, but considerable problems remain here and in many other places around the developed world in this regard. Notwithstanding the fact that we have seen a reasonably significant decline in the pound—when people talk about the scale of the decline, that is from where the pound was trading at midnight on the day of the referendum to where it is today; compared to where it was trading in the preceding weeks, the decline is not quite as big as people often say—it is important to look at a range of broader financial indicators. Interestingly, then, there are no signs that the financial markets seem to believe or be concerned that the UK’s productivity performance is as weak as the data appear to show, relative to the rest of the G7 countries. That could of course change within one minute of my saying that, but it continues to be the case and has been for many years.
That said, it may well be that, as important as productivity is, it should not be a goal in itself. A couple of noble Lords made some very interesting comments about this; again, the noble Lord, Lord Desai, highlighted this point. One thing that sometimes gets overlooked is that our productivity performance may seem as weak as the indicators show partly, if not largely, because of the remarkable flexibility that has come about in our labour market. It should not be forgotten—I have mentioned this before in debates—that the big surprise going back over the past six years is just how much job creation has occurred in this country. The way productivity is calculated perhaps explains in part why our productivity rates seem so weak. The way to deal with that, as a couple of your Lordships hinted at, is to act directly to make the labour market less flexible. However, there would of course be a consequence from doing that.
Let me quickly come to a close because I know that some of your Lordships are awaiting a further debate. I thank all noble Lords again for the quality of the debate, and the ideas and food for thought that many have provided in a number of areas. Despite what a couple of people said, I believe that, in time, we will be able to look back on the central measures in the Bill with some confidence, as being widely beneficial to helping sustain our economic performance, and allowing people and households to see that benefit. In that regard, I commend the Bill to the House.
Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time, and passed.