My Lords, this Finance Bill gives effect to the tax measures announced in the Chancellor’s Spring Budget. Although just four months ago, that already feels like a Budget from a different age. The subsequent Covid-19 pandemic created an unprecedented shock to the economy and the Government’s policy response was unparalleled. At 20% of GDP, it was the largest peacetime fiscal expansion in British history. Now, in his summer economic update, the Chancellor has continued to accept that he needs to intervene to support the economy by announcing an additional £30 billion of measures that bring the total cost of economic support, according to the Office for Budget Responsibility, to £192 billion, with a further £122 billion spent on loans and deferred taxes since the start of this crisis. Government borrowing is now on course to reach more than £350 billion this year. At an estimated 18% of GDP, the deficit will be twice the size reached during the 2008 global financial crisis.
The UK economy was already exceptionally weak before this pandemic, recording its worst ever average annual growth forecast in the Spring Budget. Going forward, the impact of coronavirus will be vast. This is the deepest recession in history; the economy could contract more this year than in any year since 1706. This week’s monthly GDP data show a steeper decline in March and a slower pickup in May than had been expected, leaving the economy still 25% smaller than before this crisis began. Now, as well as the UK recording the highest excess death rate in the world, Britain is also forecast to suffer the worst recession of any country in the G7.
Against this backdrop of a pandemic-induced recession, the Government have decided that the end of this year is the right time to end the transition period, imposing a red-tape bill on British business of between £7 billion and £13 billion a year. The Government’s paucity of ambition in seeking only a free trade deal, and focusing solely on tariff reduction for goods trade—when modern trade is dominated by supply chains and Britain’s strength lies in services—means that even if they achieve the deal they seek we will still see a reduction in GDP of some 6.7%, compared to staying in the single market. This puts further pressure on business, the economy and the public finances at a time of already unprecedented economic disruption.
My Lords, we are here to debate the annual Finance Bill, introduced in the other place following the Budget on 11 March, over four months ago. During that time, the circumstances in which we find ourselves have changed beyond recognition. The passage of this year’s Finance Bill has taken place in the shadow of a pandemic unprecedented in living memory, to which the Government have responded with one of the largest and most comprehensive economic responses in the world, aiming to protect people’s jobs, incomes and businesses.
The Government have already supported more than 11 million people and jobs through the Coronavirus Job Retention Scheme and the Self-employment Income Support Scheme, and have helped over 1 million businesses to protect jobs through tax caps, tax deferrals, direct cash grants and over 1 million government-backed loans.
In his summer economic update last week, the Chancellor set out plans for phase two of the Government’s economic response. An ambitious plan for jobs will give a job retention bonus to firms that keep on furloughed workers. The new kick-start scheme will directly pay employers to create new jobs for 16 to 24 year-olds at risk of long-term unemployment. To support the high-employing hospitality and tourism industries, the Government will cut VAT on food, accommodation and attractions from 20% to 5% for six months, and fund an “eat out to help out” 50% discount at participating businesses for the month of August.
Additionally, the Covid-19 pandemic and subsequent lockdown have resulted in uncertainty in the housing market. Property transactions fell by as much 50% and house prices have fallen for the first time in eight years. What is more, any housing market freeze is bad for jobs and businesses whose custom relies on a confident housing market, such as retailers, tradespeople and the construction industry.
As lockdown eased, there were signs that the property market was waking up. It is important to encourage this and to drive momentum. The Government are therefore cutting stamp duty land tax by temporarily increasing the nil rate band for residential property from £125,000 to £500,000, with effect until 31 March next year in England and Northern Ireland. It will cut bills for every person who buys a property for more than £125,000 and will support and create jobs. The average buyer, getting on or moving up the housing ladder, will save £4,500, with a maximum saving of £15,000. These measures have all been carefully designed to protect and sustain our economy, the public finances and the health and well-being of the British public while we weather the impact of coronavirus.
Inevitably, my Lords, the March Budget has been overtaken by events and subsequent measures. I think we all recognise that, with the escalating crisis of Covid-19 and lockdown, the Government were faced with an unprecedented challenge which required drastic and radical action.
The measures taken have the benefit of providing cash quickly to individuals and businesses across the United Kingdom. I am sorry to record that the Scottish Government, unable to acknowledge the benefits of being part of the United Kingdom, have responded with churlish denial.
The massive increase in spending has been described as an end to austerity and, in terms of the scale of intervention and the escalation of the budget deficit, that is certainly how it looks. However, I contest that, had the coalition Government not tackled the hangover they inherited from the financial crash, the public finances would have been considerably more fragile than they are. Let us bear in mind that, before Covid-19, the economy was already slowing down and the OBR forecasts were pretty modest.
Now we know that the economy shrunk by 20% in April, and recovery is slow. Billions are being poured into helping people survive the lockdown and measures are trying to stimulate recovery. It is impossible to predict how the economy will recover and what the impact on public finances will be, but a day of reckoning will surely come.
Let me address some of the measures in the Bill. The Minister referred to the reversal of a proposed cut in corporation tax from 19% to 17%. This is projected to yield around £5 billion, but surely that now looks wide of the mark. Some companies may see a profit increase as a result of Covid-19, but surely most will struggle to make a profit or, as recent announcements have shown, even survive. Can the Minister indicate what adjustments have been made to the yield projections?
My Lords, I want belatedly to congratulate the Minister on his appointment to the Treasury. I had the good fortune of supporting from the official Box one of his distinguished predecessors, the noble Earl, Lord Caithness, in a Finance Bill debate back in the 1980s. I wish the Minister well in responding to so many speakers today.
The Chancellor set out a sensible Budget in March, and this is a sensible Bill. He has announced further measures since, all of which should support demand through a very difficult time, but we should be in no doubt that the best way to support the economy is to get on top of the virus and enable people to return to work.
When it comes to a temporary stamp duty cut, timing is everything. In the early 1990s, the re-imposition of the duty after a temporary cut may have added to the housing market slump which had then taken root, but I am happy to defer to the noble Lord, Lord Lamont, on that. In current circumstances, the cut could lift animal spirits and hence demand. In any event, I hope that the Chancellor will take the opportunity to look again at the stamp duty regime. Rates of duty are too high; they discourage people from moving. In a rational world, we would follow Ireland’s example, cut stamp duty rates and introduce a self-assessed property tax, but I am a realist and I do not expect this to happen any time soon.
Of course, dispensing largesse, whether through tax cuts or higher spending, is the easy part of the Treasury’s job. The Fiscal Sustainability Report, published by the independent OBR earlier this week is a reminder of the difficult part. On its central projection, the country will still be a running a deficit of over £100 billion in four years’ time, which is some 4.5% of national income. That suggests to me that we will need tax rises or public spending cuts of at least £50 billion to restore the public finances to a sustainable footing.
My Lords, I thank the Minister for his observations and applaud the bold measures taken by the Chancellor and the announcement last week. Taking the measures as a whole, the UK is, proportionately, giving a larger amount of fiscal support than Germany or Japan and about the same as America. The latest measures, including the furlough bonus scheme, may partially postpone the cliff edge back to January, but it is difficult to believe that we will avoid a tsunami of job losses.
The hard truth is this: no Finance Bill, no fiscal stimulus, no monetary stimulus can entirely compensate for the effects of restrictions such as lockdown and social distancing. Last week, for example, the Government announced a £1.75 billion package of assistance for the arts. It was well received—as well it might be, because it was extremely generous—but I doubt if it will result in theatres or concert venues putting on a single extra performance. Most of the money will go on mothballing facilities, because theatres would need to sell some three out of four seats. In the meantime, in South Korea, “Phantom of the Opera” is selling to packed houses because social distancing does not exist in theatres.
What is true for culture is true for the commercial sector in spades. Financial support is fine; lifting the restrictions is better and should be the goal, when health considerations of course allow. It would be good if Ministers could emphasise this more. Instead, some Ministers talk about social distancing being here to stay, or face masks being here for the foreseeable future. For an economy like ours, largely service-based, in which services depend partly on human proximity, social distancing is not easily compatible with them.
Sir Patrick Vallance has said that there is no reason why people should not work at home, but we have to consider the economic effects on our offices, on the City of London and on the hospitality sector. There is much debate about the cost of the Chancellor’s measures, which he has promised to address in the autumn. He does not need to act then, but he does need to set out a timetable to which he will consider acting in order to show that, long term, the finances will be sustainable.
My Lords, we need to recall that, in attempting to increase revenue, by increasing tax we have in fact reduced revenue in stamp duty terms. This a lesson we need to learn for the future. I ask the Minister to look very closely at how this tax is reintroduced—not only its thresholds but the rationale for it. Simply imposing a large amount of tax does not in fact produce enough revenue for the Treasury.
There is an overwhelming fear in the hearts of many people in this country about the enormous amount of money we are borrowing. There is no alternative, but having been taught in recent years to believe in the age of austerity and the dangers of spending too much money on the public sector, many people fear that we are embarking on a journey whose destination and the time it will take we do not know.
There is an underlying issue when we talk about trying to regenerate the economy. Walking into this building this morning—and indeed last week, for the first time since March—one could see the problem with one’s own eyes: the people are simply not there. They are not there because they are afraid, or they can see that there are alternative ways of working—Sir Patrick Vallance tells them one thing, the Prime Minister tells them another. The fact is, the streets are largely empty in this part of London, which is symptomatic of the rest of the country. We need to get our act together, bearing in mind that, if there were to be a second spike, our economy would be in colossal difficulty.
In the 1970s, this country made a huge mistake in turning its back on manufacturing. We are not making things, and our service sector is vulnerable to very short-term issues. As has already been mentioned, the furlough was a bold announcement. But, speaking as someone who takes a keen interest in the APPG on aerospace, I know that if we do not find a sectoral resolution for aerospace, we will have great difficulties. We are number two in the world in aerospace, but that could very quickly slip away from us.
My Lords, I want to make a few remarks about the emergency stamp duty provisions announced in the Summer Statement. Cutting stamp duty to stimulate the economy is a classic response to a recession. It stimulates not just the housing market but economic activity around house purchases. At least, that is the theory. The evidence on just how much genuinely new activity it stimulates is patchy, to say the least. If you are one of the hundreds of thousands of workers who has lost their job or expects to, this will not make you move house. Most likely, it will bring forward some planned purchases, but I doubt it will stimulate many new ones.
So, what will it do? First, it will reward people for living in the south-east. The Resolution Foundation has called the measure
“a tax cut for Londoners”.
As my noble friend Lord Livermore reminded us, the average gain if you buy a house in the capital will be £14,200. The average gain in the north-east will be zero.
Secondly, this is a cash boost for buy-to-let-landlords. Experts suggest that the move will certainly lead to greater transfer of buy-to-let properties into limited company structures to take advantage of mortgage tax relief, so that is one activity that will definitely be stimulated.
Thirdly, sellers will win, as they will now be able to renegotiate asking prices to take advantage of the extra cash available to buyers. So, another activity this will stimulate is arbitrage between buyers and sellers. Fourthly, sellers may also win when March comes around, as price spikes occur when the cliff edge of the end of this tax break looms. What happens to the property market after that is anyone’s guess.
Lastly, relatively speaking, first-time buyers will lose, unless they are wealthy ones in London, because the stamp duty proposal spells the end of the period of using the tax to give preferential help to those who have never owned property before. So the stamp duty measures will generate lots of activity and may well pull forward some transactions, but at the price of greater regional inequality, loss of policy focus on promoting home-ownership and first-time buyers through stamp duty tax, and uncertainty and volatility when March of next year comes into view. Is this really where the Government’s fiscal focus should be at a time of unprecedented shocks to jobs, growth and confidence in our economy?
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This week’s Fiscal Sustainability Report from the Office for Budget Responsibility highlights the risk of huge job losses from this pandemic unless we see further government action. It estimates that 15% of furloughed workers will lose their jobs, meaning that unemployment would peak at 12%—some 4 million people—by the end of this year. The Labour Party has consistently argued that the furlough scheme must now evolve to deliver sectoral-specific support, targeting help where it is needed most, supporting employment in industries that are viable in the long term and protecting our country’s economic capacity for the future. Instead, the Chancellor announced in his economic update that the furlough scheme will be wound down in October, replacing it with a much less generous and very poorly targeted jobs retention bonus. The risk now is that billions of pounds will be spent on a policy that does very little to protect jobs.
The Institute for Fiscal Studies has warned that a majority of this money will go to jobs that would
“have been returned from furlough anyway”
while the Resolution Foundation argues that
“the deadweight in the scheme will be large”
while
“the scale and temporary nature of the bonus means”
that it will have no “major impact on employment”. The Resolution Foundation went on to conclude that this lack of further action on jobs leaves the Chancellor risking higher unemployment this autumn.
The temporary cut in stamp duty, also announced by the Chancellor, raises further questions about the Government’s willingness to target support on the areas that need it most. He announced that the first £500,000 of residential property purchases would be stamp duty-exempt for the next nine months—a measure we are also debating today. All measures which help to get the economy moving are of course welcome and, at a cost of £3.8 billion, it is a very significant revenue giveaway. But the main beneficiaries will be buyers of costlier properties in London and the south-east. The average buyer in London will be more than £14,000 better off, while the average buyer in the north-east will gain nothing.
The threshold increase also temporarily removes one of the few advantages that young people had in the housing market, while doing almost nothing to help first-time buyers. By including second-home buyers and buy-to-let investors, this measure will cost an additional £1.3 billion. It is surely right that we examine whether this delivers value for money, or whether these funds could be better spent supporting much-needed genuinely affordable and social housing.
The Chancellor’s announcement of targeted VAT cuts on hospitality, leisure and tourism are of course welcome, when local businesses are desperately in need of that support, as is the kick-start scheme to create jobs for young people, particularly since young workers have been among those hardest hit by this crisis so far. This policy is almost an exact replica of the Future Jobs Fund, introduced during the global financial crisis and previously cancelled by this Government. The scale of job creation required will be a major delivery challenge, requiring many jobs to be created by local authorities decimated by a decade of cuts. In a signal of a potential return to such austerity, the Chancellor warned in his statement last week:
“Over the medium term, we must, and we will, put our public finances back on a sustainable footing.”—[Official Report, Commons, 8/7/20; col. 974.]
Before this crisis, public finances were already rapidly deteriorating, with debt having doubled to £2 trillion and being set to reach nearly 80% of GDP. If the Chancellor now decides to increase taxes before the recovery, or to cut public services, he risks damaging demand and inhibiting the growth that our economy and public finances desperately need. The Chancellor must also ensure that the distribution of any such measures is borne more fairly than in the previous decade, when money was found to reduce the top rate of income tax while the incomes of the poorest in society were cut by some 15%.
Ultimately, very few of the measures announced by the Chancellor so far will make a significant difference if people are unwilling, or unable, to leave their homes in the months ahead. The British economy is being held back, not because families are waiting for £10 off their restaurant bill but because they are still worried for their health.
The Government were too slow into lockdown, too slow on track and trace and are now too slow on saving jobs. They have damaged public confidence and, in turn, harmed consumer demand. Only when the Government have in place an exit strategy that generates confidence will they be able to genuinely address the huge challenges that our country and economy must now confront.
Of course, there is still some way to go to overcome this pandemic. As we do so, the Bill will make its own valuable contribution to the efforts of our health and emergency services across the country. The Bill exempts from vehicle excise duty those vehicles purpose-built to transport NHS products. It introduces legislation to ensure that workers who have returned to public sector jobs to help fight the effects of this pandemic will face no adverse pensions consequences from doing so. It legislates reforms to the pensions tapered annual allowance, so that doctors can spend more time treating patients without facing exceedingly high tax bills.
However, our collective efforts in the here and now cannot come at the expense of planning for tomorrow. In the words of the Prime Minister,
“our long national hibernation is beginning to come to an end”.—[Official Report, Commons, 23/6/20; col. 1170.]
Alongside the measures we have already taken in our plan for jobs to support employment across the country, now is the time to set about reinvigorating the economy and safeguarding our public finances.
Our police, teachers, armed services and many other public sector workers have all played their part in this pandemic, alongside the tremendous efforts of front-line NHS staff. These public sector workers cannot be provided for if the public finances are not protected with a fair and sustainable tax system. Maintaining the corporation tax rate at 19% instead of pursuing further cuts is the right approach—this is still the lowest headline rate in the G20, which demonstrates the UK’s strength as a location for inward investment.
This Government have always been clear that everybody must pay their fair share of tax. We have therefore introduced the digital services tax, legislated for in the Bill. This tax, set at a rate of 2% on revenues from digital services of larger companies, will ensure that digital businesses pay a fair share of UK tax and more accurately reflect the significant value that these businesses derive from their UK users.
As we look ahead to recovery, we must ensure that businesses receive the support that they need. That is why, in addition to all the measures the Chancellor set out last week in his plan for jobs, we have also delayed the extension of off-payroll working reforms to the private sector to April 2021. Businesses need time to prepare for these reforms and requiring them to do so during the pandemic would have been burdensome.
This Bill goes even further to support enterprise in this country, which will be desperately needed in the coming months. This Government remain committed, as ever, to levelling up all nations and regions of the United Kingdom. Britain has a long and proud history of innovation. Increasing the research and development expenditure rate to 13% will allow this to continue for businesses across the country. The structures and buildings allowance rate increase will aid investment in new shops, factories and agricultural buildings, helping to stimulate capital investment across the UK.
We must also acknowledge that Covid-19 is not the only challenge that we face. This Government have committed to reducing the United Kingdom’s carbon emissions to net zero by 2050. The Bill will take us further towards that target. Not only does it pave the way for the upcoming plastic packaging tax but it removes the vehicle excise duty expensive car supplement for zero-emissions vehicles and legislates for a carbon pricing regime now that the UK has left the European Union. Together, these measures will help ensure that the UK’s post-Covid-19 economy is greener than before.
During this Bill’s passage, our daily lives and our economic outlook have changed dramatically. However, alongside the Chancellor’s ambitious package of measures, including most recently the plan for jobs, this Bill represents a strong foundation on which to rebuild our economy and protect the public finances as we weather the impact of the virus. The Bill supports businesses, it supports the vulnerable and it supports our fantastic key workers. For these reasons, I commend it to the House.
A couple of measures in the Budget are designed to claw back revenue to HMRC, but the timing could not be worse. The loan charge proposals have hit many people hard. Some have been able to negotiate a deal with their employers, who effectively pick up the tax liability, but those who have not face real difficulty if they are forced to pay back earnings which they thought were legitimate and have probably spent. The issue of IR35 is one that we have been wrestling with for years. It convulsed the UK offshore oil and gas industry, as my constituency casework proved. Surely the case for further delaying implementation of these two measures is well made, and I hope that the Government will consider it.
The furlough scheme has been widely welcomed, but will all those furloughed have jobs to return to? Or will the Government have to fund increased unemployment, and will individuals be struggling because of the loss of their jobs?
Bounce-back loans totalling £30 billion have been rolled out, but normal due diligence has been suspended by government guarantees. What default estimate does the Government expect from those? Some people have already had access to finance in the form of grants and cheap loans, but many self-employed people have been given nothing. Such people are the backbone of the economy and provide essential, skilled services and they deserve better. Will the Government consider supporting them as they struggle to return to work and to cope with a total lack of income during lockdown?
For the hospitality industry, the VAT cut is of course welcome. However, not every hotel or restaurant can open cost-effectively this late in the season. There are considerable costs in social distancing in hotels and restaurants. For many, it can be justified only for a full season. Will the Government consider extending the VAT cut to boost bookings for what we hope will be a full season next year?
The digital services tax is a small start to what will need to be an international move to ensure that digital companies pay a fair share of tax on profits derived from their operations in individual countries. It is expected to deliver £275 million in the current tax year, rising to £440 million in 2023-24. The objective must be to ensure that digital companies are taxed fairly and equitably in the same way as other companies and pay proportionately.
The stamp duty Bill is projected to cost £3.8 billion, which is offered as a scattergun approach. Would it not have been better to target it towards first-time buyers rather than giving a kickback to many transactions that would have gone ahead anyway? Can the Minister comment on the different approaches taken by Scotland and Wales, which concentrate the benefit on the lower end of the market? Have the Government considered the effect on the lettings market? Will not landlords take advantage of this holiday to put currently let flats on the market? This would cause distress and expense to tenants forced to look for alternative accommodation, which was surely not the intention of the measure.
Finally—I declare an interest in that my wife is a local councillor—can I put in a demand that the Government recognise the crucial role played by local authorities in helping to cope with this crisis? This surely underlines the case for a fundamental review of local government finance so that it is not left at the mercy of short-term whims of the Government, happy to burden councils with responsibilities but not to provide the funding.
I hope that the mantra for moving out of this unprecedented shock is to build a fairer, more sustainable and more caring society. That is certainly what the Liberal Democrats are committed to.
Public spending cuts can play a part—in my view, the abolition of the so-called triple lock for uprating the state pension is long overdue—but given the Government’s promise of no return to austerity, tax increases will have to deliver the bulk of the consolidation. For my part, I would recommend a social solidarity charge, payable on all income and with no reliefs. As the economy comes off life support, I encourage Treasury Ministers to lead a national debate about how the country will live within its means in the medium term.
There is, however, another cloud approaching: private and corporate indebtedness. The longer restrictions go on, the greater this becomes. Already in the US, some banks have made huge provisions. The new head of the OBR has warned of the possible need for a massive write-off of toxic Covid debt in order to stop the economy stagnating. The Chancellor has already rejected this, but I fear he may find, as politicians so often do, that words are for eating. He has been bold and I applaud it, but the difficult part is yet to come.
We need to refocus our economy and take this opportunity, but we need to remember that making things is how we generate the most revenue, and we are simply not doing it.
The unintended consequence of this, of course, arises from a more fundamental problem: the stamp duty itself. It is a bad tax. It applies only when a house is sold, so discouraging mobility and first-time buyers, and its cliff edges mean that there are perverse incentives to distort the price and save on tax. The sensible strategy on stamp duty, in my view, would be to abolish it and tax the huge windfalls that come from owning housing property, particularly for the top quarter of our population, in other ways: a housing services tax, for example, as recommended by the Mirrlees commission many years ago. I also see from the newspapers that the Chancellor is passing an interested eye on revisiting a capital gains tax. But I live in hope that perhaps he and the Treasury will be persuaded to use this moment to think about a more sensible general approach to taxing assets, especially housing, in ways that the curious side-effects of this stamp duty proposal suggest are urgently needed.