Finance Bill

Public Bill Committee, 19 May 2009.

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Peter Atkinson (Conservative, Hexham)

I welcome members of the Committee to the start of our proceedings on the Finance Bill. I have a couple of housekeeping points to make. Jackets may be removed. Will hon. Members ensure that their pagers are switched off? They will have noticed the red boxes. They may keep their Bill papers in them, but will they please return them to the cupboard after each sitting?

I remind the Committee that adequate notice should be given of the intention to table amendments. As a rule, my fellow Chairman and I do not intend to call starred amendments, including any that might be reached during an afternoon sitting of the Committee.

Stephen Timms (Labour, East Ham)

I beg to move,

That the Committee shall meet—

(a) on Tuesdays at 10.30 a.m. and 4.30 p.m., and

(b) on Thursdays (other than Thursday 4 June) at 9.00 a.m. and 1.00 p.m.,

when the House is sitting.

Thank you, Mr. Atkinson, for your welcome. I wish to take the opportunity to say a few words. I extend a warm welcome to you and to your co-Chairman, Mr. Hood. We welcome the experience and the knowledge that you will bring to our proceedings, as well as your firmness and fairness. I am confident that you will guide us so that our deliberations are thorough and to the point. I welcome Mr. Laurence Smyth, who will be assisting the Committee. I also welcome the hon. Members for Fareham, for South-West Hertfordshire and for Hammersmith and Fulham, and other members of the Conservative party who will be supporting them, particularly those who will be serving on the Committee for the first time. We shall be spending a lot of time together during the next few weeks.

I also welcome the hon. Member for Taunton to our proceedings. I am pleased that I shall be stoutly supported throughout our debates by my hon. Friends the Exchequer Secretary and the Economic Secretary, who I am delighted to see here. I know that they will want to join me in welcoming my hon. Friends on the Labour Benches to the Committee and to express warm thanks to them in anticipation of our progress.

I wish to put on the record my thanks to the many advisers and representatives who have already given advice throughout the preparation of the Bill. We shall obviously be welcoming further contributions from them as we scrutinise it in greater depth during the next few weeks. They do a great deal of work and make an important contribution to our task. I look forward to our deliberations as we fulfil our duties in examining the Bill in Committee.

Mark Hoban (Conservative, Fareham)

I also welcome you, Mr. Atkinson, and your co-Chairman, Mr. Hood, to the proceedings. The Financial Secretary and I are veterans of proceedings on the Finance Bill. This is my fourth Bill as a Front Bencher. I participated in proceedings in 2002 as a Back Bencher, so I know what a long haul we have in front of us. I have not quite reached the record established by the Financial Secretary’s predecessor, the right hon. Member for Bristol, South (Dawn Primarolo). She dealt with 13 Finance Bills in Opposition as well as in Government, a record in longevity to which I am not entirely sure that I aspire.

Our proceedings are perhaps the less glamorous aspect of the Budget. All the excitement of Budget day is over and done with. We have moved from a Committee of the whole House to a Public Bill Committee, and the fact that our proceedings are not programmed will give all members of the Committee the chance to explore at length the provisions of the Bill. Labour Members who did not take part in the debate on the Finance Bill in the House will now have the opportunity to voice their concerns about aspects of it. I am disappointed that the hon. Members for Wolverhampton, South-West (Rob Marris) and for Coventry, North-West (Mr. Robinson), the most assiduous participants when the Bill was discussed in the Committee of the whole House, have not found favour with the usual channels to serve here, but perhaps their absence will enable other Labour Members to shine and flourish in the confines of this room.

We are about to undertake an important scrutiny process The Financial Secretary said on the Floor of the House and by letter that the Government would table amendments. It is important to get the Bill right and to approach it with the rigour and seriousness that a Bill affecting so many people requires. I am grateful, as the Financial Secretary is, to the support of House advisers, who give up their time voluntarily to help inform us and to make sure that the scrutiny process is effective. I am grateful to my hon. Friends for joining us in Committee and I am sure that we shall do battle with the Treasury Bench and Labour MPs in a generous and well-spirited way.

Clause 1

Stephen Timms (Labour, East Ham)

We announced in the pre-Budget report and confirmed in the Budget that the basic rate of tax would remain at 20 per cent. and the higher rate of tax at 40 per cent. for the current tax year. As part of a package of measures, we reduced the basic rate to 20 per cent. from 2008-09, which is the lowest rate for more than 75 years, with the 40 per cent. higher rate continuing to apply to higher-rate taxpayers. Taken with the other changes made to personal tax, basic-rate taxpayers are £145 a year better off in April 2009 compared with April 2008. In 2009-10, 21 million households will gain, on average, by about £6 a week compared with April last year.

The tax rates for this year will continue to preserve the two-rate structure for the vast majority of taxpayers. In the pre-Budget report we set out support to low and middle-income families—to help during the global economic downturn—and the fiscal consolidation measures that we would need in the medium term. All of those changes together mean that no one with an income less than £100,000 will see an income tax rise in 2010-11, when the increases take effect. The measures for 2010-11 announced in the Budget will focus only on the highest 2 per cent. of incomes, those above £100,000 a year—the opportunity to debate those matters will come later.

David Gauke (Conservative, South West Hertfordshire)

First, may I say what a great pleasure it is to serve under your chairmanship in this year’s Finance Bill Committee, Mr. Atkinson.

Clause 1 sets out the main rates for income tax, as the Financial Secretary stated. It would be fair to say that the issue of rates is not as prominent this year as it has been. As the Minister said, the Government have preserved the two-tier structure for income tax. The two-tier structure was announced in the Budget of 2007 by the then Chancellor, the current Prime Minister, and is one that will last, it would appear, for two years, and for two years only. The reason why the issue of rates was so prominent last year—I was one of those lucky enough to serve on the Finance Bill Committee—was that the two-tier structure that we see in the clause was established, with a basic rate of 20 per cent. and a higher rate of 40 per cent. That was the first year of the structure, because before that we had the 10p rate. Next year it appears that we shall have an additional 50p rate.

Turning to how we got to where we are with the clause, it was the consequence of the Budget announcement of 2007. In his very last sentence, the then Chancellor announced that he was reducing the basic rate of income tax from 22p to 20p. Earlier in his speech he had announced the abolition of the 10p rate, but he had not made it clear that there would be—even taking into account the reduction to 20p—a substantial number of losers.

The Minister has referred to the structure of income tax and the fact that there would be no losers in 2010-2011. But when the new structure was announced in 2007, it quickly became apparent that 5.3 million households would lose out as a consequence of the abolition of the 10p rate. That number was quickly produced by the Institute for Fiscal Studies soon after that Budget. I served on the Treasury Committee and I remember that that number was broadly confirmed by Treasury officials. When the same figure was put to the then Chancellor the day after, he denied that figure and said—for various technical reasons that I do not intend to go into—that the figure was incorrect. By the time we got to our proceedings last year, it was clear that the figure of 5.3 million households losing out was correct. By that point, Ministers had confirmed the figure in written answers, after it was pursued by the right hon. Member for Birkenhead (Mr. Field), although he pointed out that getting those answers was somewhat difficult and it was not possible to obtain answers about how many individuals would lose out.

I have stated the figures now because the Government have their structure of 20p and 40p in clause 1, but the issue of the losers from the abolition of the 10p rate has not gone away. It is true that during our proceedings last year the Government introduced a compensation package that cost £2.7 billion and raised personal allowances. One could be cynical and say that it was during the Crewe and Nantwich by-election last year. If that was the reason, the package was singularly ineffective. None the less, it confirmed that the increase in personal allowances, which was described as temporary this time last year, would not be withdrawn in the PBR last autumn.

There is still uncertainty as to whether there are a substantial number of losers, and I draw the Committee’s attention to EDM 1279, which has been tabled by the right hon. Member for Birkenhead, who suggests that up to 3.8 million individual taxpayers continue to lose out as a consequence of the new structure. The EDM has been signed by 60 Members—predominantly Labour Members. I could be wrong, but I do not believe that any members of the Committee have signed it, and I suspect that Labour members of the Committee are relieved that they did not sign it because, had they done so, they might not have had the honour of being selected for this Committee. It was EDM 1279, but I fear it is too late now.

The EDM calls for compensation, and we appreciate the fiscal mess that the Government are in. If there is to be a compensation package, the question of affordability will have to be considered. Can the Minister confirm whether that number of up to 3.8 million taxpayers is correct? If it is not, what is the correct number? The question is about the number of individual taxpayers. That is an important point because the Government have always given the number of losers in households. It would still be helpful if the Minister could provide the households number to the Committee, but the point made in a number of instances by the right hon. Member for Birkenhead is that a household may consist of two earners. The example that he often gives is that the man may well benefit from the reduction of 2p in the basic rate of income tax, bringing us to the 20p that we have today, but the woman may be earning less and she may well be losing out as a consequence of the abolition of the 10p rate. Collectively as a household they may well be benefiting, but she as an individual may well be losing. That is why it is interesting to pursue the question of individuals as well as households. That information would therefore be very helpful and it remains astonishing that a Labour Prime Minister, in an attempt to pull a political stunt, was prepared to double income tax for low earners.

The other reason why the issue of rates, which we are debating in clause 1, is perhaps not as prominent as it was last year is that those of us who served last year will recall that the hon. Member for Taunton, on behalf of the Liberal Democrats, tabled a motion to reduce the rate of income tax from 20p to 16p. That, I understand, is no longer the Liberal Democrat position, although we look forward to the hon. Member for Taunton setting out his reasons in due course. I suspect that we will address this when we look at the issue of personal allowances, but I wonder whether the arguments used this time last year on 20p or 16p proved to be so persuasive that the Liberal Democrats changed their course. No doubt we will find out.

The other point I make, with regard to the main rates, is that I do not wish to touch on the various issues relating to the 50p rate which the Government intend to introduce next year. That is for later clauses and my hon. Friend the Member for Hammersmith and Fulham will be setting out our views on those issues. However, I note that in 1997, 2001 and 2005 the Labour party manifestos on which the Government were elected promised not to raise the basic and higher rates of income tax. That, of course, is a pledge that is going to be broken—to the extent that a manifesto pledge in those areas is worth anything from this Government. One can question whether it is even worth asking that question, but I am interested to know from the Financial Secretary whether his party intends to provide a pledge not to raise the standard rate of income tax. Clearly, the Labour party intends to breach its manifesto pledge on the higher rate of income tax, but will it repeat its pledge on the basic rate of income tax and, if it does, will he explain why people should take that in any way seriously?

Save for those brief remarks, Mr. Atkinson, we would be grateful to hear the Minister’s answer, but we are proposing no amendments to clause 1.

Jeremy Browne (Liberal Democrat, Taunton)

Mr. Atkinson, this is my first opportunity to echo the comments made by others in saying how much I am looking forward to serving under your chairmanship, and that of Mr. Hood, during the course of our deliberations.

I have only a few, brief comments to make on what is, after all, a very short clause. However, it is worth putting the clause in the context just given by the hon. Member for South-West Hertfordshire. Of course, the discussion that we had a year ago about this clause focused primarily on the 5 million-plus people in the UK who were losing income as a result of the Government doubling the 10p rate of income tax for those on particularly low earnings. Of course, the Government’s attempts to try and rectify that situation and convince Labour Back Benchers, in particular, and people right across the country that they had not intended to inflict such financial penalties on people on low earnings, meant that there was little opportunity to scrutinise quite serious changes to our system of income tax. The Government did not introduce those proposals in the normal way through a Budget and a Finance Bill so the opportunities for scrutiny were compromised. That is regrettable. Approximately a million people are still net losers as a result of the changes that the Government introduced, even with the compensation that was meant to rectify that issue.

The hon. Member for South-West Hertfordshire reminded us that, at this stage in our deliberations last year, I tabled an amendment to reduce the 20p rate to 16p. It remains Liberal Democrat policy to try to reduce the income tax burden on those on very low earnings. Our preference now is to try to do that through thresholds, rather than the rate itself. But the total amount that we wish to redirect to low earners remains the same. More detail will obviously be made available, possibly in next year’s Finance Bill. We live in times of rapid political change so who knows what will happen?

The other two points that I wish to make are slightly more central to the clause. First, I find it extraordinary that the first clause of this rather substantial piece of legislation contains a word that is misleading. It states:

“the higher rate is 40%”.

It is not the higher rate as anyone understands it in the wider world. As I understand it, compensation and tax credits make marginal rates for those on low incomes variable. Then there is a 20 per cent. rate and the 40 per cent. rate—this is without national insurance. There was then going to be a 45 per cent. rate and there are a whole range of tapers which mean that at some point people are paying marginal rates on their income of 61 per cent. Then it drops off and there is a 50p rate. By no reckoning is 40p the higher rate. It is roughly in the middle. I query whether the Bill is accurate in the impression that it seeks to create when even on line 8 people are invited to believe that 40 per cent. is the highest rate of income tax one can pay, unless one says that it is the higher rather than the highest rate, but I would regard that as splitting hairs.

My final point is about simplicity. In his final Budget as Chancellor, the Prime Minister gave as a reason for having two rates the fact that everyone would know where they stood. It was nice and clear cut. There is merit in greater simplicity, as we have discussed before. Indeed, I am told that “Tolley’s Tax Guide” has increased from 4,555 pages in 1997 to 9,841 pages in 2006. So it has doubled in length in a decade. That is an unreasonably large amount of guidance and legislation to get through in order to understand the tax liabilities in this country. Therefore, greater simplicity is valued by nearly everybody except, perhaps, accountants who benefit from a lack of simplicity.

The Government made a merit of having a more simple structure of income tax, but have then complicated it at every turn to try to target assistance or, indeed, penalties at particular groups in society. We now have a higher rate that is not the higher rate, a system that is meant to be simple that is not simple and large numbers of people on low incomes who have been heavily penalised as a result of the Government’s changes. So it is not a happy start to a long period of reflection and deliberation on other clauses that are probably even less attractive to the general public than this first one.

Stephen Timms (Labour, East Ham)

I note that the content of clause 1 is not very controversial so I will keep my remarks brief. The hon. Member for South-West Hertfordshire asked me about the early-day motion and the reference to 3.8 million people. I am aware of that figure, but I cannot confirm it as I have not seen the analysis and I am not sure of the basis that underpins it. However, the number of households that have lost out as a result of the changes has been reduced from over 5 million—which was the initial announcement, as the hon. Gentleman said—to 600,000 this year, and 500,000 by 2011-12. It will therefore have been reduced by 90 per cent. by that time. The losses that we are talking about are less than £1 a week on average this year. We have made a great deal of progress in addressing the concerns that were raised in the Committee and elsewhere a year ago.

David Gauke (Conservative, South West Hertfordshire)

I note that the Minister is not able to confirm the figure of 3.8 million individuals who have lost out, and again he has given a household number. Is that because the Treasury has simply not done any analysis on how many individuals will lose out, and if not, why not?

Stephen Timms (Labour, East Ham)

It is because the available data are on a household basis. I think that there was some discussion about that last year. I do not know of a sound basis on which to do the individual calculation. The figure of 3.8 million sounds large, and I would be surprised if it was that big, but as I said, I have not seen the analysis and I cannot comment on whether it is a plausible figure. I am confident that the number of households that have lost out will be 600,000 this year and the extent of the losses is extremely modest.

The hon. Member for South-West Hertfordshire raised a point about the changes regarding the new 50p rate, as did the hon. Member for Taunton who also commented on the restriction of allowances. We will come on to those matters shortly so I will not say any more about them at this stage, other than to observe that it is right for us to take action to respond to the biggest economic crisis that the world has seen in 70 years. That requires some fiscal consolidation and we have set out what I will argue is a fair way of taking the necessary action. That is for a later debate, and I commend the clause to the Committee.

Clause 2

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 1, in clause 2, page 2, line 2, at end add—

‘(3) The amount specified in Section 12 of ITA 2007 shall similarly be £37,400.’.

I should say at the beginning that those of us who were in the House on Thursday will be aware that business closed earlier than anticipated. As a consequence, there was something of a hurry to table the amendments. I make no claim that amendment 1 is technically the finest amendment ever placed before the Committee. It is a rather hurried attempt—which I considered to be the lesser of two evils—to submit a flawed but pertinent amendment that would enable the Committee to debate one of the significant issues that face many people in the country, namely the impact on savers of the reduction in interest rates that has occurred in recent months.

We must look at what we can do within the taxation system to help savers at this difficult time. Consequently, amendment 1, which raises the threshold for income tax on savings, is a quick and simple way to bring this matter to the Committee. My party’s policy is to go further than amendment 1, but it is consistent with what the amendment is about, which is to help savers by reducing the burden of income tax on their savings. I hope that that clarification is helpful to the Committee, Mr. Atkinson, before I turn to some of the things that we can do to help savers in the context of clause 2.

Stephen Timms (Labour, East Ham)

I do not entirely understand what the hon. Gentleman is saying. How is the proposal different from the one we debated in the Chamber to remove tax altogether? In a sense it is rather hurried. Is his party’s policy now that tax should be reduced to 10p or to nil?

David Gauke (Conservative, South West Hertfordshire)

That is a perfectly fair question. The policy remains the same—to reduce tax to nil. The amendment arrived literally as the Minister was sitting down on the Adjournment debate—I do not want to conceal that from the Committee. Our policy remains the same, but it is only fair to the Committee that I explain that. If the Minister has been forced to examine in great detail the arguments about extending the basic rate, as I fear he may have done, I should perhaps apologise, but it was a “needs must” amendment—something that was to hand.

The Minister will be aware of our policy for 2009-10 to abolish tax on savings income for all basic rate taxpayers. Applying the 10p rate could be described as a halfway house. The amendment is designed to probe the matter.

Jeremy Browne (Liberal Democrat, Taunton)

A simple question: what are the cost implications of passing amendment 1?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman asks a fair question. We would expect amendment 1, in conjunction with new clause 2, which raises the personal allowance for pensioners, to cost £4.1 billion. We could have found the money by reducing the growth rate in public spending for 2009-10. When we produced the policy, the Government were proposing a 3.4 per cent. real-terms increase in the growth rate. We propose restraint, so that increase should be 2.6 per cent. To put it another way, the Government were going to increase public spending from £620 billion to £650 billion and we suggested that, of that £30 billion increase, £5 billion could be used to help savers.

I suspect there is a degree of sympathy across the Committee for a group of people who have, most of us would say, done the right thing by trying to put money aside and provide some independence for themselves, but who have found their income substantially reduced because of falling interest rates. We estimate that savers have lost approximately £22 billion of annual interest income as a result of rate cuts. Let me be clear: we think it was necessary to reduce interest rates—we are not criticising the Monetary Policy Committee of the Bank of England—but people have lost out as a consequence.

Stephen Timms (Labour, East Ham)

The hon. Gentleman is making a fair point about the impact of what has happened on savers. However, I want to press him a little further on how he proposes to finance the £4.1 billion cost. We have had debates in the Chamber about £5 billion of saving cuts this year, although his party has not given us any details about where they would have made those cuts. From next year, as he knows, we are introducing £5 billion-worth of efficiency savings. Is his party proposing another £5 billion on top of those efficiency savings to pay for this measure, which presumably would be continued into next year?

David Gauke (Conservative, South West Hertfordshire)

What we have is a policy for this year—a policy to find additional funds for savers this year and to make savings this year. There is still an opportunity for the Government to reconsider and to pursue the policy that we advocate. Assuming that they do not do so, next year, if we are in government, we will be in the position next year of having to assess the public finances to identify the savings needed to reduce public spending.

As the Minister has rightly said, the Government believe that it is perfectly possible to find efficiency savings of £5 billion, although that is not altogether surprising in a budget of £650 billion. We note that the Government do not seem to think that there will be any great difficulty in making those savings next year. We wonder why it cannot be done this year.

Jeremy Browne (Liberal Democrat, Taunton)

The hon. Gentleman said a moment ago that what had stimulated the Conservatives to bring forward this policy was a big cut in base interest rates and the impact that that cut had had on savers. Obviously, one sympathises with savers who are in that position. However, should we infer from his comments that the policy would no longer apply if interest rates rose to high levels again? Is it, in effect, like the Conservative fair fuel stabiliser, so that if we were to have very high interest rates, a penal tax would be brought in to punish savers, so that some sort of equilibrium was achieved? That appears to be the logical conclusion to draw from his description of the policy.

David Gauke (Conservative, South West Hertfordshire)

The hon. Member for Taunton sometimes allows his own version of logic to carry him away. There is a short-term and a long-term argument for savings. The short-term argument is particularly acute at the moment, because, as I am sure he is finding in his own constituency, there are people who have not spent rashly or not built up huge debts—quite the reverse—who are still being hit hard, perhaps because of the recklessness of others. That is the short-term argument and that is why we are pursuing this policy.

However, I am grateful for the hon. Gentleman’s intervention, because it brings me on to some of the longer-term issues and in particular why we need to do more to encourage saving. That is a fundamental point about how we rebalance the economy.

We have not been saving as much as we used to. I know that there has been a recovery in the savings ratio in the last few months, as tends to be the case during a recession. The ratio was down at about 1.7 or 1.8 per cent and it is now up at 4.8 per cent. Nevertheless, the fact is that society as a whole has been borrowing too much and saving too little. Our level of household debt has become very considerable—greater than our GDP. Relative to the size of our economy, we have the highest household debt in the G7. Figures from Alliance & Leicester show that 13.5 million Britons did not save in 2008, which is 28 per cent. of the population. Research for MoneyExpert states that a third of adults face financial disaster within two months of losing their jobs, because we do not save enough as a society.

That has several impacts, one of which is a lack of resilience if there is a downturn in the economy, which is what we have unfortunately been experiencing, leaving individuals in a difficult position. The burden on the state also increases if individuals do not have their own savings to protect them from economic and personal difficulties.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman is making a powerful argument for the long-term merits of policy towards savers, but is now the time, in macro-economic terms, to incentivise savings? That is certainly not the normal understanding of a correct response to a recession.

David Gauke (Conservative, South West Hertfordshire)

We think that a tax cut would be helpful; the hon. Gentleman and I have debated such matters in the past. My party believes that the principal response do a downturn such as this should be monetary policy. As I stated earlier, we have no criticism of the reduction in interest rates that has occurred; we need a monetary response. Indeed, we have argued for a long time that more could be done to get credit flowing around the economy. Furthermore, the likes of Christina Roma, who is one of President Obama’s advisers, argue that the multiplier effect of a tax cut, which is, after all, what we are advocating, is as significant as public spending.

I understand the hon. Gentleman’s argument, but one of the difficulties surrounding the whole issue is that there never seems to be a good time to encourage saving. The Government have tended to enjoy the tax revenues from a boom and from a rise in stamp duty owing to an asset bubble and, as a consequence, they have not done enough to encourage saving.

Jeremy Browne (Liberal Democrat, Taunton)

I was going to make the same point as the hon. Member for South Derbyshire and speak of my concern about incentivising saving during a recession. However, I am interested in the response given by the hon. Member for South-West Hertfordshire to that point, because he appears to argue for a fiscal stimulus: he says that this is a good opportunity to cut taxes and put more money in people’s pockets. My understanding of the respective positions of the Government and the Conservative party is that the Government want an unfunded tax cut, but will only give money to people when they spend it, whereas the Conservatives want an unfunded tax cut, but will only give money to people when they save it. Is that the current position?

David Gauke (Conservative, South West Hertfordshire)

The point I am making is that the response to a recession should be monetary. The concern expressed by the hon. Member for South Derbyshire is that that would take resources away from public spending and direct them towards people who save. If one is worried about a Keynesian fiscal stimulus, there are those who still defend a tax cut rather than public spending and argue that it would have precisely the same effect. I return to my essential position that the response has to be monetary. Indeed, the hon. Member for Twickenham has made the point in the Chamber on at least one occasion—I quoted in from the Committee of the whole House last week—that, despite all the arguments, all parties essentially agree that the response should be monetary. There might, however, be a disagreement on fiscal measures on the periphery.

Peter Bone (Conservative, Wellingborough)

I wonder whether we are getting to the crux of the difference between the Government and the Opposition. The Government believe in more and more public spending, whereas the Conservative party believes in controlling public spending and giving tax cuts and more money to people. Does my hon. Friend also agree that it is extraordinary that he is being grilled so much more than the Minister? It is almost as though we are in power already.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for my hon. Friend’s observation. Taking his second point first, I am happy to be grilled and welcome such tension about Conservative party policies, as I am sure he does, and he is quite welcome to intervene on such points.

The Government’s position on public spending is somewhat schizophrenic. They state that now, in 2009, more public spending is necessary and that the Conservatives are all about cuts and being beastly generally, despite the fact that the Government have already slowed their public spending plans and have proposals for future public spending—noticeably after the general election—that are really quite tight and that will involve real-term cuts in departmental expenditure. Yes, there is a difference between our party and the Government: we believe that public spending restraint should start as soon as possible, whereas they are delaying those painful decisions.

There is a feeling, perhaps across the board and the only question is one of timing, that we need to do more to restrain public spending and to help savers. The argument we tend to hear from the Government and their supporters is that that might be right, but now is not the right time. However, the financial difficulties facing savers and the crisis within the balance of our economy are such that we do not have time to waste.

I return to one of the reasons why encouraging saving is important and would be helpful. In recent years we have seen a boom and an explosion of debt and asset prices, not only in the UK, although we have a particular problem, but in much of the west. As a consequence, we face significant global imbalances. In 1997, gross foreign current liabilities were £1,100 billion; by 2008, that figure had quadrupled to £4,400 billion—a sign of the expansion of banking liabilities as a consequence of the savings being created in countries such as China.

To give another example, in 2001 the customer funding gap—a definition used by the Bank of England to express the difference between what banks have lent and borrowed from British households, businesses and institutions—was nil. By June 2008 it was £740 billion, as a consequence of banks funding themselves 40 per cent through wholesale sources. I mention that because there is an imbalance within the global economy. In countries such as China, huge savings were being made and the Chinese economy was clearly expanding rapidly, but because the culture of saving in China and in parts of the developing world is so strong, those savings have essentially come to the UK. We have had an imbalance whereby the west has been consuming while the east has been saving. That creates a degree of instability, which I think is a factor in a lot of the difficulties that western economies have had in the past couple of years.

Since August 2007, those wholesale sources of finance have dried up, and that caused the credit crunch. However, we can also look to the fact that over a long period we in the west largely stopped saving. I shall not exaggerate the impact of our policy and say that the tax cuts that we propose for 2009-10 will effect a transformation. It is a wider problem and there are other factors influencing the fact that we have not been saving enough. However, we could signal the direction that we are going in.

I note that the BBC’s Robert Peston refers to the new capitalism, one element of which is a stronger sense of saving in the UK and other western economies. With interest rates coming down to historically very low levels, the signal to those who may be thinking of saving is, “Is it really worth putting money aside for a rainy day? When things get difficult, you do not get anything for your savings anyway.” That is the immediate difficulty we face.

Although flawed, I hope that amendment 1 has enabled the Committee to probe what we can do to help savers and whether we can reduce income tax. I shall give a couple of examples that relate, not to increasing the pensioner allowance, but to abolishing tax at basic rate for savers. A 60-year-old retired couple, with a total pension income of £12,000, could be £400 a year better off. A 40-year-old single mother, working part-time and earning £100,000, with savings producing £800, could be £160 a year better off. Our proposal is affordable, it would help innocent victims of the downturn and it would signal, in the longer term, that we value savings. We are going to have to save more as a society and we, as a Government, should do what we can to help savers.

John Howell (Conservative, Henley)

I start by thanking my hon. Friend for arguing for savers. I will look at savers who are pensioners. I have been concerned about the Government’s apparent dismissiveness of the impact on pensioners of the reduction in savings interest. In its utterances, the Department for Work and Pensions has been minimising how the impact will fall on pensioners and, particularly, whether it will increase the number of pensioners likely to fall below the margins that one would normally expect. That is partly due to the statistical approach that it uses.

The figures for 2006-07, which are probably the most complete, show that something like 72 per cent. of pensioners were in receipt of income from investments. That is a huge number. The average income was more than £50 per week, which is a significant amount of money. By using the median rather than the average, we can bring that down to £7 and, therefore, dismiss it as insignificant, but even then, if an individual was relying on a notice-based deposit account, their income would have fallen from £7 to £2 a week, as a result of the interest rate cuts. Will the Minister say whether the Treasury is as dismissive of the effect of interest rates on pensioners as the Department for Work and Pensions seems to be?

Stephen Timms (Labour, East Ham)

The amendment would extend the 10 per cent. starting rate for savings income from a band of £2,440 to a band of £37,400. I will respond to the amendment, although I will also comment on what we have now clarified as Conservative policy.

Responding to the points raised by the hon. Member for Henley, it is certainly the case that, although low interest rates have greatly helped families with mortgages, for example, they have reduced the returns for savers. The Government are not at all dismissive of that. I can understand why the amendment has been tabled and I agree that savers need help in difficult times, but I do not agree with the approach set out in the amendment.

The hon. Member for South-West Hertfordshire has helpfully clarified that this is a one-year proposal and the Conservative party would not be committed to it for future years. However, because of the way that income is ordered when an individual’s tax liability is calculated, with tax on savings income being calculated after income from other sources, such as employment, self-employment and pensions has been taxed, the effect of the amendment would be to make the 10 per cent. savings rate disproportionately valuable to savers with higher incomes. That would cost the Exchequer about £250 million.

The concern about disproportionality is even greater in relation to the proposal to abolish tax on savings—we have clarified that that is the Conservatives’ policy. When that proposal was first announced in January, there was some confusion among Conservative Front Benchers about how it would affect higher rate taxpayers. The shadow Chief Secretary said that it would not help higher rate taxpayers, while the shadow Chancellor said that it would. I believe that the shadow Chancellor was right. Indeed, the example that the hon. Member for South-West Hertfordshire just gave—a rather puzzling example about a single mother working part time, earning £100,000 a year—

David Gauke (Conservative, South West Hertfordshire)

£10,000.

Stephen Timms (Labour, East Ham)

Ah, but the hon. Gentleman said £100,000. It makes more sense to refer to someone earning £10,000. Nevertheless, on the basis of his proposal, there would be a benefit for higher rate taxpayers as well. The amendment does not go that far, but it would cut the basic rate on savings to 10 per cent. and would suffer from a similar drawback of being disproportionately valuable to savers with higher incomes.

There are more effective ways of targeting support—particularly for savers who are likely to be facing the greatest difficulties, such as pensioners. That is why the Budget announced three measures to support older people in particular. First, from October this year, we will raise the ISA limits for those aged 50 or over. More than 18 million people hold ISAs, so that will provide support to many savers through the tax system. That is one particularly successful measure of a raft of measures that the Government have taken to increase saving in the economy.

David Gauke (Conservative, South West Hertfordshire)

I have two brief points to make on ISAs. One is on the rather complicated system of different limits depending on one’s age. Can the right hon. Gentleman explain why he has done that? Secondly, how much does he think a person can benefit from the reduced tax as a consequence of the increase in the ISA threshold? Given current interest rates, does he agree that the most it can be is about £30 or £40 a year?

Stephen Timms (Labour, East Ham)

I have not done that calculation, but the figure that the hon. Gentleman suggests may well be right. Of course, his argument a few minutes ago was about the need to increase the incentives to save. Raising the ISA limit in such a way will be a significant incentive.

Secondly, HMRC is launching a tax back campaign, which will contact 2.7 million pension credit recipients. The campaign will encourage pensioner savers to reclaim any tax that they have overpaid on savings and, where possible, register their account to receive income from their savings tax free in the future. Again, that will help pensioners with savings.

Thirdly, and perhaps most significant, the Government will increase the capital disregard in pension credit and housing and council tax benefit for pensioners to £10,000 from this November. That will significantly increase the generosity of pension credit for those who have savings. More than half a million low-income pensioner households will benefit by £4 a week on average, those on the lowest incomes by up to £8 a week.

Mark Todd (Labour, South Derbyshire)

Those measures are certainly welcome. Will the Minister expand a little on the assumed interest rate that is taken into account in calculating the entitlement for housing benefit, when savings that are vestigial that lie within that limit are taken into account? That issue concerns many pensioners whom I represent.

Stephen Timms (Labour, East Ham)

I am aware of the matter, and it has been raised from time to time. It is not accurate to describe that as an assumed interest rate. The assumption that is made is that if someone had a significant capital sum—in the future we are talking about over £10,000—it would be perfectly appropriate for them to use some of that, as well as the interest earned, to meet their expenditure. It would not be right to ignore entirely the benefit of that sum in meeting to expenses.

Peter Bone (Conservative, Wellingborough)

Is the Minister introducing a new concept? I never realised before that the disregard was more than a calculation of the assumed interest. Instead, it says to a pensioner, “You are too rich. You must use some of your savings.” Is that the new policy?

Stephen Timms (Labour, East Ham)

No, it is simply a recognition of the fact that people with savings are able to draw on them to meet their needs—that is, after all, the purpose of savings. That has always been the case, and the basis of the pension credit capital disregard.

That package is much more effective in supporting savers at risk in the current difficulties than the approach suggested in the amendment. In 2011-12, the Government package will cost £190 million a year—not much less than the amendment suggests, and the package will be much better targeted at those who most need the help.

Mr. Atkinson, I have a few remarks on the clause stand part. Clause 2 will raise the basic rate limit from last year’s £34,800 to £37,400 this year, a rise of £800 over indexation. Taken together with the £130 above-indexation increase to the personal allowance made by the next clause, it means that nobody will pay a higher-rate tax on incomes below £43,875. It is an increase in the higher-rate threshold, which will support middle-income families during the global downturn. It also takes the higher-rate threshold for 2009-10 to the same level as the upper earnings and profits limits for national insurance, the point at which somebody stops paying the main 11 per cent. rate of national insurance and starts paying the additional 1 per cent. rate.

In 2011-12 the threshold at which someone starts to pay national insurance will be aligned with the tax-free personal allowance. The levels at which individuals start and stop paying the main rates of tax and of national insurance will be aligned for the first time—a simplification that will be widely welcomed.

One feature of the broad-based fiscal consolidation announced in the pre-Budget report last year included increasing the rates of national insurance by 0.5 per cent. Alignment of the national insurance primary threshold and the income tax personal allowance will mean that those with incomes of less than £20,000 and subject to the full standard rate of national insurance will gain more than they would lose from the rate rise at that point. Looking at all the changes since April 2008, no one with an income of less than £40,000 will be worse off.

The Budget changes build on the pre-Budget report, securing further consolidation targeting the 2 per cent. of individuals with the highest incomes—those most able to contribute—while protecting those with lower incomes. I invite the Committee to support clause 2.

David Gauke (Conservative, South West Hertfordshire)

I shall respond principally to the Minister’s remarks on amendment 1 and our policy on savers. Let me be clear—it has been clear throughout—that our policy to benefit savers was to benefit only basic rate taxpayers and pensioners on modest incomes. That has been the position all the way through, and I hope that that is clear, notwithstanding the remarks of the Minister.

On the package referred to by the Minister, I do not intend to spend a great deal of time on the issue of ISAs, Mr. Atkinson—I am sure that you would warn me off from doing so. To be fair, the Minister has a point about the increase in the ISA limits being a symbolic message of encouragement to saving. However, I note that he did not disagree with my numbers—in practice, it is likely to be around £30 or £40 per person in the current climate.

Stephen Timms (Labour, East Ham)

May I press the hon. Gentleman on his earlier point, that the position of his party is clear on whether higher rate taxpayers will benefit from the measure or not? His point was the point made by the shadow Chief Secretary. However, the shadow Chancellor told the BBC’s “Money Box” programme on 10 January:

“Of course that’s entirely true—that if your entire income is savings and you’re a higher rate taxpayer, then you benefit like other people do from the fact that the basic rate goes to zero—and we never said otherwise. Indeed I’ve made that point as well.”

So, the shadow Chancellor is telling us that higher rate taxpayers will benefit from his proposal.

David Gauke (Conservative, South West Hertfordshire)

I have the Q and A that was circulated internally. We have made it clear that the policy is targeted at basic rate taxpayers. We shall continue to have a tapering system. Indeed, in that interview on “Money Box”, some of the criticism that my hon. Friend the shadow Chancellor was getting was that the policy would not benefit some pensioners who were earning somewhat more. The policy is clear.

The tax back campaign raises two important points, one of which is how our policy would help the lower earners—pensioners who do not receive enough from their savings to pay the basic rate of income tax. There are a large number of such people, who do not always get their tax back and do not always go through the process to reclaim. That is not to say that we do not welcome the Government’s initiative to encourage more people to get their tax back—indeed, I raised the point with the Minister this time last year, asking what the Government were doing about it, and the Low Incomes Tax Reform Group has campaigned on the issue for a long time. None the less, a reasonably substantial number of people—in particular, a reasonably substantial number of pensioners—are not getting their tax back in the way that they should and I suspect that that will continue to be the case. Our policy would help those people.

Peter Bone (Conservative, Wellingborough)

Will the Minister give way—sorry, the shadow Minister? Surely, the situation is this; if those people were not paying any tax under the Conservative policy, we would not have the Revenue spending all the money on a campaign that must be costing a considerable amount of taxpayers’ money.

David Gauke (Conservative, South West Hertfordshire)

Indeed. My hon. Friend is right that our policy would be a lot simpler to administer and that there would not be a need to campaign for pensioners to reclaim the tax that they had overpaid. So he is absolutely right, and his suggestion is clearly helpful.

I note the comments made by the Minister with regard to the national insurance contribution rises. I do not intend to get into a lengthy debate on that issue. I noted that the Minister chose his words very carefully when he discussed who would be gaining and who would not be losing. However, the fact remains that the NI contribution increase that is designed to come into effect immediately after the election will make those people who are earning £20,000 worse off.

I also note the Minister’s comments about the alignment between the upper earnings limit of NI and a higher rate of income tax, which was part of the package announced in 2007. I would be grateful for clarification—this is a genuine question—about a point he made that slightly confused me, which was about the lower earnings limit. As I recall, the original proposal in 2007 was that the point at which one started paying NI contributions and the point at which one started paying income tax was going to be the same. However, that got rather confused by the compensation package for the 10p rate and the increase in the personal allowance. However, there was not an equivalent increase for the point at which one starts paying NI contributions, so that we lost that very simple two-tier system. From what the Minister has said—maybe I have missed a point—the implication is that by 2011 we will be back to that system.

Mr. Timmsindicated assent.

David Gauke (Conservative, South West Hertfordshire)

The Minister is nodding in assent, but I would still be grateful for a little clarification on that issue. Subject to receiving a response to that point, however, I will be seeking leave to withdraw amendment 1.

Peter Atkinson (Conservative, Hexham)

Order. Before the amendment is withdrawn, does the Minister want to respond to that point?

Stephen Timms (Labour, East Ham)

I am happy to do so. I can confirm that, as we announced in the pre-Budget report, we will align the national insurance primary threshold to the level of the income personal tax allowance, with effect from April 2011.

Having said that, however, I would be grateful if the hon. Gentleman explained the mechanism for achieving the effect that he has described to the Committee, which is that the abolition of income tax on the first part of people’s savings will not benefit higher rate taxpayers. For example, take someone who has earnings of, say, £30,000 and savings income of £20,000, so that their total income puts them into the higher-rate tax band. Presumably someone in that position would benefit from the zero rate that the hon. Gentleman’s party proposes, so that there would be a benefit to higher-rate taxpayers, as the shadow Chancellor said on “Money Box”. I cannot see what mechanism there could be for avoiding the effect that the shadow Chancellor said—rightly, I think—would apply.

I am glad that the hon. Gentleman broadly welcomes the tax back campaign. Let me just make the point that, as we will discuss further when we consider a later clause, 62 per cent. of pensioners pay no income tax, thanks to the very substantial rises in age-related personal allowances that this Government have introduced. A much, much higher proportion of pensioners are out of tax altogether than was the case in 1997.

David Gauke (Conservative, South West Hertfordshire)

On the issue of age-based personal allowances, I will try not to stray into the next debate. The intention is that savers will benefit at basic rate only. I note that the Government were able to increase personal allowances in a way that did not benefit higher rate income tax payers. We are confident that we can find mechanisms in order to deliver our objective, which is to help basic rate payers.

I beg leave to withdraw the amendment.

Clause 3

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss new clause 2—Personal allowances for 2009-10 for those aged over 65

‘(1) For the tax year 2009-10 the amount specified in—

(a) section 36 of ITA 2007, and

(b) section 257(2) of ICTA,

(personal allowance for those aged 65 to 74) is replaced with “£11,490”.

(2) For the tax year 2009-10 the amount specified in—

(a) section 37 of ITA 2007, and

(b) section 257(3) of ICTA,

(personal allowance for those aged 75 and over) is replaced with “£11,640”’.

Stephen Timms (Labour, East Ham)

The clause increases the personal allowance for those aged under 65 by £130 above indexation. Over the last year we have announced a number of changes to personal tax which focus support now on low and middle income households while consolidating the fiscal position in the medium term, targeting those who can afford to pay more while protecting those with the lowest incomes.

In May last year, we announced an in-year rise in the personal allowance worth up to £120 to all basic-rate taxpayers. Most people saw the benefit of that change from last September. In the pre-Budget report, we announced further support for families, reflecting their difficulties at the moment. We rolled forward the increase in the personal allowance, and increased it by a further £130 above inflation. For 2009-10, that means that the tax free personal allowance will increase from £6035 to £6475. The clause makes that change.

The package of measures announced in the pre-Budget report, of which clause 3 is an important element, provides support to all low and middle-income families for the current period, and will mean that some 23 million taxpayers with an income under £40,000 will be, on average, around £145 a year—nearly £3 a week—better off in April 2011, compared to April 2008. Changes since the Budget last year will mean that 800,000 low-income households will be completely taken out of tax. The changes brought in by the clause will also fully compensate about 90 per cent. of households who would have otherwise been paying more net tax from the removal of the 10p tax rate, as we were discussing a few minutes ago.

New clause 2 would raise the age-related allowances for those aged 65 and over by £2,000 from its current level this year. The hon. Member for South-West Hertfordshire said earlier that this was part of a package that he estimated as costing £4 billion. I think that this particular part of it would cost some £1.2 billion. I guess from what he is saying that he envisages it being a one-year only increase in the age-related allowances, with the expectation that the age-related allowance would be reduced again in the following year. That would be an unusual thing to do; changes of this kind to age-related allowances really ought to be on an enduring basis, rather than a temporary basis. It is a significant downside to what he is proposing.

Mr. Atkinson, if I am able to catch your eye at the end of this short debate, perhaps I will say some more about new clause 2, but I commend clause 3 to the Committee.

David Gauke (Conservative, South West Hertfordshire)

On clause 3, I note the increases in personal allowances. The Minister has stated that he also acknowledges that this does not succeed in compensating a number of those who have lost out as a consequence of the 10p rate being abolished. I am sure that point has been noted by his own Back Benchers.

On new clause 2, the Minister said that he could see difficulties in an increase in personal allowances being for one year only. I note that comment. As I have made clear, this policy is for this year and personal allowances would need to be looked at again next year were we in a position to control what those allowances might be and consider the appropriate approach. I was rather struck by the irony that a Minister was querying whether it was appropriate to use the personal allowance on a temporary basis to address a particular problem. Those of us who recall last year’s debates will know that the Government did precisely that with a temporary increase in personal allowances to address the 10p rates, which they made permanent in the PBR. Certainly the intention this time last year—it was almost to the day that the compensation package was announced—was that it was on a temporary basis. I am not sure that the Government are on the strongest ground here.

As the Minister stated, the intention of new clause 2 is to raise the personal allowances for those over 65 and those over 75 by an additional £2,000 a year.

Mark Todd (Labour, South Derbyshire)

The new clause appears to be silent on the issue of the point where the benefit of this increased allowance starts to be lost. There is a point at which this raised allowance for those over 65 deteriorates. Is that adjusted at all within the proposal?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman makes a fair point. It is an important technical point and one which the new clause does not fully address. We recognise that there will be a tapering system. Our policy is aimed at helping those who benefit from the basic rate. We think that these amendments help to achieve that.

I note the Minister’s earlier points about the benefit of raising personal allowances and taking pensioners out of the tax system, but our proposal does not result in some of the difficulties of pensioners having to claim back taxes in certain circumstances. Clearly it helps to take pensioners out of the tax system. I do not intend to run over all the arguments about encouraging saving in order to provide resilience for individuals, to encourage independence and perhaps even to provide stability within our banking system, as I have made those points already. Equally this group has been hit hard by the fall in interest rates in recent months. This must be seen as part of the package to help savers which I addressed earlier. We believe that this is a useful policy. It will help those who have been unfairly affected by the fall in interest rates. An increase in personal allowances in this area is a simple way of redressing that.

Mark Todd (Labour, South Derbyshire)

I want to explore this a little further. If this is targeted at those who have lost income from falling interest rates it will apply to any pensioner over 65 whose income may be drawn from any source. I am not quite clear about the targeting of this in relation to the hon. Gentleman’s argument.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman is right to say that income in a number of other areas has also declined, but this measure needs to be seen as part of a wider package. Pensioners, for example, are in a more difficult position than they were a couple of years ago due to the changing economic climate. We think that the Government should pursue that matter, and to find savings in public spending now in order to provide support to pensioners would be a sensible policy.

Peter Bone (Conservative, Wellingborough)

I have spoken to pensioners in my constituency whose savings income has gone down so drastically that they have had to go back to work. Would not the new clause benefit those people, as they would get an effective reduction in the income tax that they pay?

David Gauke (Conservative, South West Hertfordshire)

That is absolutely true. These are difficult times and there may also be people who have delayed retirement. I can think of constituents who are in exactly that position. Those people deserve our support, and consequently, I commend the new clause to the Committee.

Jeremy Browne (Liberal Democrat, Taunton)

As we saw from our discussions on clause 2, it is important that Opposition parties get the details of their policies right before submitting them to the Committee. As far as I understand, the Conservative party’s policy changes depending on what point on Thursday afternoon it is. Amendment 2, which I tabled, is not being discussed directly, but it is helpfully on the blue sheet that gives notice of amendments. It seeks to provide an opportunity to discuss how different income tax thresholds could benefit different interests and income groups. Unlike the Conservative proposals, this is an extremely robust and well thought through set of proposals by my party, and it will form the centrepiece of our election manifesto.

Peter Bone (Conservative, Wellingborough)

I have a sense of dĂ(c)jĂ -vu. Did not the hon. Gentleman stand up at this time last year and say that his proposals were going to form the centrepiece of the Liberal Democrat manifesto? Will we have new proposals before the election for next year?

Jeremy Browne (Liberal Democrat, Taunton)

Sadly, we have not had an election so we carry on. However, the hon. Gentleman is right—it remains our view that we should give greater assistance to people on low and middle incomes by charging them less in income tax. Last year we suggested that that might be achieved by reducing the basic rate. We are now saying that the same objective could be better achieved by raising thresholds. We propose that instead of the figure of £6,475, the personal allowance should be £10,000. That would result in a reduction for anybody earning in excess of £10,000.

Mark Todd (Labour, South Derbyshire)

On a point of order, Mr. Atkinson, I am not clear which amendment we are discussing. We appear to be hearing a speech in favour of an amendment that has not been selected.

Peter Atkinson (Conservative, Hexham)

That is not a point of order for me, but something that the hon. Member for Taunton might wish to explain.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful to you for providing me with that opportunity, Mr. Atkinson. We feel that the clause would be better if it said £10,000 instead of £6,475, and on that basis, we do not feel able to support it. The stand part debate gives me an ideal opportunity to argue that clause 3 is not a good basis on which to legislate. I hope that the Committee will be convinced by my argument and will reject the clause. We believe that increasing the allowance to £10,000 would have a profound and beneficial impact on people on low and middle incomes. For example, it would represent an income tax cut of £705 for those earning over £10,000, and 4 million people would not pay tax altogether.

I do not wish to try your patience, Mr. Atkinson, but it would not be credible for us to make this case without convincing the Committee and the country that the sums add up and that we have lots of robust proposals for financing this radical and attractive measure.

Peter Atkinson (Conservative, Hexham)

Order. I wish to clear some confusion in my mind. The hon. Gentleman can speak to clause 3 stand part—the entire clause—at this moment. We are not debating only the new clause; we are debating the whole thing. I was not sure whether he was clear on that.

Jeremy Browne (Liberal Democrat, Taunton)

That is what I was hoping to do.

Peter Atkinson (Conservative, Hexham)

At the end of this debate we will put the question whether clause 3 should stand part of the Bill. There will be no division on the new clause; if there is to be one, it will be much later in our proceedings.

Jeremy Browne (Liberal Democrat, Taunton)

I was just seeking to make a point about the Government’s proposed 2009-10 personal allowance for those aged under 65. I do not wish to incur your wrath, Mr. Atkinson—I did not want to speak at length about alternatives put forward by my party. Those will become apparent in time, and I do not wish to get too far from the matter in hand. I want to put on the record, because it is important, that attention will increasingly be paid to the question of how we can alleviate the tax burden on those on low and middle incomes. The Government have in many cases tried to do that with a complex system of tax credits. Our fear is that that leads to excessive complication; the system could be simpler. As we all know from our constituencies, there can be a sizeable administrative burden, which the Government do not always deal with very efficiently. My party is coming up with alternative proposals that we feel would be helpful.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the hon. Gentleman for giving way during his explanation of the clause and his proposals on personal allowances. It has often been said, certainly by his colleagues, that as part of a fiscal stimulus there is a need to raise taxes on the wealthy to fund tax cuts for those on low pay. Is this proposal explicitly part of a fiscal stimulus, or not? Secondly, as I understand it, when this policy was announced, it was going to be financed by abolishing tax relief on higher earners’ pension contributions. Now that the Government have gone some way towards that, does that leave a black hole in the hon. Gentleman’s party’s calculations?

Jeremy Browne (Liberal Democrat, Taunton)

I shall not answer at great length because I do not wish to upset anybody, Mr. Atkinson. The first point is that our proposals are revenue neutral, so there is a shift in the tax burden to try to assist people on low and middle incomes. Therefore, it is not a fiscal stimulus in the sense of borrowing money to fund an overall tax cut. I think most people would accept that those on low and middle incomes tend to spend a higher proportion of their income than those on higher ones, so the effect—admittedly fairly modest—might be to increase overall spending without changing the overall tax burden. Shall I go on to the second point?

David Gauke (Conservative, South West Hertfordshire)

I hope the hon. Gentleman will forgive me for intervening while he responds to the first point, before having a chance to respond to the second. The Liberal Democrat tax policy as presented by the hon. Member for Twickenham, particularly in debates after the PBR, was that there is a need for a fiscal stimulus, but a funded one. I think the hon. Member for Taunton is acknowledging that. Applying his own logic, does this mean that when the time comes for fiscal tightening—if he believes fiscal measures are appropriate—there would be a transfer and that his party would raise taxes on the poorest and cut taxes on the wealthiest, because that would be a fiscal restraint?

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful for that intervention because I wish to share with the Committee my desire to see the tax burden reduced, if possible. I have watched both Labour and Conservative Governments increase taxes on people on low and middle incomes, and I know how much difficulty that causes. That is not a path that I would argue for going down. We are proposing a measure that would help people and households with fairly modest incomes. It is not primarily designed to try to stimulate the economy as a whole, but that would be a beneficial by-product of our policy, were the Government to adopt it. As I said, it would have a modest but nevertheless real stimulus effect because of the different spending patterns of different groups.

Peter Bone (Conservative, Wellingborough)

Will the hon. Gentleman give way?

Jeremy Browne (Liberal Democrat, Taunton)

I will, but first let me finish answering the previous intervention. It is true that one of the measures we are proposing in order to fund the increase in the personal allowance—a reduction in income tax for people on low and middle incomes—is to standardise tax relief on pension contributions at the basic, 20 per cent. rate. To some extent, the Government have taken a dimension of that pot of funding, but quite a small one, because Government policy still allows for pension relief at the upper rate and only cuts it off higher up the income scale.

Peter Bone (Conservative, Wellingborough)

The hon. Gentleman is yet again making a powerful speech on behalf of his party—completely opposite to the one that he made last year, which was also very powerful and persuasive. Last year, I was persuaded; it was an interesting and radical proposal. Presumably, that is why his party dropped it—because I thought it was a good idea.

I must ask the obvious question: how much would the proposal cost? In broad terms, how much would it cost for each of the cuts or changes that would need to be made to make up for the loss?

Jeremy Browne (Liberal Democrat, Taunton)

I am flattered by the hon. Gentleman’s comments and his observation that I am able to argue persuasively in all kinds of forums. His central, flattering observation is not entirely accurate, because I was arguing this time last year that we should make our income tax system better able to assist people on low and middle incomes, and that is the argument I am making today. We can have a discourse about the best way to do that, but we think our proposals would be most effective. On the cost, I could go through all the proposals but perhaps I can refer the hon. Gentleman to my party’s website, where they are given in greater detail. It is not central to clause 3, but if you wish to indulge me, Mr. Atkinson, I will happily give a seminar on the benefits of Lib Dem policy.

Peter Atkinson (Conservative, Hexham)

indicated dissent.

Jeremy Browne (Liberal Democrat, Taunton)

I see you are shaking your head, Mr. Atkinson. [Interruption.] The hon. Member for Rochford and Southend, East says that I do not know. I know only too well—I just do not know whether everyone else on the Committee wishes to know the same amount of detail.

The proposal is a shift—it is not tinkering with the edges—which is why I said it would be the central feature of our manifesto at the next general election. This is an important matter because it relates to many people who pay the basic rate of income tax, including many on the minimum wage who are nevertheless caught up in the threshold at quite a low point below their total income. So it is by no means affluent people whom we are talking about; rather, we are talking about typical households in all our constituencies that would benefit from not having the state take a proportion of their income on the one hand, while on the other coming up with complicated ways of reimbursing individuals whom it feels are unable to live on their post-tax income. We are trying to achieve a more equitable society. My party would not be comfortable with endorsing the figures in clause 3.

Stephen Timms (Labour, East Ham)

Some of the amendments we have been debating this morning seem to be in a shaky condition. Pensioners are often on fixed incomes, and the age-related allowance has at least been raised in line with indexation every year since 1997. In 2008-09 the age-related allowances were increased by £1,180 above inflation for those aged between 65 and 74, and by a higher amount for those aged 75 and over. We also announced that the age-related allowances for those aged 75 and over will rise to £10,000 for the 2011-12 tax year. We have set the allowances this year at £9,490 for an individual aged 65 and over and at £9,640 for someone aged 75 or over, and those increases mean that 62 per cent. of pensioners aged 65 and over will not pay tax. Those measures will lift around 800,000 people out of the tax net altogether, getting towards two thirds of pensioners being outside tax altogether, compared with a much smaller proportion—certainly less than half—in 1997.

We have made good progress in lifting pensioners out of tax altogether, but I cannot support the new clause. It would cost well over £1 billion and give no benefit at all to that group of nearly two thirds of pensioners aged 65 and over who do not pay tax. I say to the hon. Member for South-West Hertfordshire that it simply cannot be right to spend so much for no benefit at all to those on the lowest incomes. There is a balance to be struck. The hon. Member for Taunton has argued for a somewhat larger increase in age-related personal allowances, but I think that he, too, would acknowledge that the announcements we have made represent a substantial change for people aged 65 and over. It is a welcome change that will benefit a large number of pensioners.

The Government have of course made many other changes for the benefit of pensioners. Overall, as recent figures confirm, 900,000 pensioner households have been lifted out of relative poverty since 1997, and a pensioner is now no more likely to be poor than someone from any other part of the population. That is an unusual position to be in. Historically and traditionally, pensioners have always been less well off than the population as a whole. This is the first time in our history that, over an extended period, pensioners are no more likely to be poor than anyone else, and that has been the case since 2003—in both the period of growth and the current downturn. That is an important achievement that the Government have secured. I do not think that the new clause would be right, and I ask the Committee to reject it and to agree that clause 3 should stand part of the Bill.

Clause 4

Stephen Timms (Labour, East Ham)

The clause legislates for the gradual removal of the personal allowance for those with incomes of more than £100,000 a year. The change will take effect from April of next year and, as part of the package of fiscal consolidation measures, the clause ensures that those with the highest 2 per cent. of incomes will no longer get twice the amount of benefit from the personal allowance that a basic rate taxpayer with an income of £10,000 would receive, for example.

The clause withdraws the personal allowance at a rate of £1 for every £2 of an individual’s income above £100,000. Assuming that the personal allowance is £6,475 in 2010-11, it will mean that a taxpayer with an income of more than £112,950 would have the personal allowance fully removed. The clause affects 2 per cent. of taxpayers with the highest incomes—the 2 per cent. in the best position to contribute. The income of that relatively small group has grown by almost 90 per cent. during the past 10 years, twice as fast as for the average taxpayer. It is only right that those in that group should contribute to the fiscal consolidation that is now required. Tapering the allowance means that there is no cliff edge for those with incomes of just more than £100,000 a year. For clarity, I emphasise that no one with an income of less than £100,000 will pay more income tax under the clause. In last year’s pre-Budget report, it was proposed that the personal allowance was half removed above £100,000 and then fully removed above £140,000. However, the global downturn has been more severe than predicted at the time so we have brought forward the second half of the removal of the personal allowance.

For the purpose of the taper, an individual’s income is their adjusted net income. That is the long-established basis for the calculation of the taper that applies to higher amounts of personal allowance for those aged 65 to 74 and those aged 75 and over, as we have just discussed. Broadly, adjusted net income is a person’s income liable to income tax after taking account of pension contributions and gift aid payments. Tax due at the additional rate will be collected in the usual way through a combination of pay-as-you-earn and self-assessment. That does not apply to the vast majority of people—98 per cent. of taxpayers—who will not experience any change in the way in which their tax is calculated.

Peter Bone (Conservative, Wellingborough)

Does the Minister agree that the policy is a clear departure from new Labour principles and that we are now going back to the old Labour idea of taxing the rich because it is right to tax the rich, whereas new Labour was for a vibrant economy to attract people to this country?

Stephen Timms (Labour, East Ham)

No, it is not. The policy is consistent with the new Labour commitment to fairness in the tax system. Everyone throughout the world recognises that consolidation is required. The new Labour approach to achieving that consolidation is to make sure that those who are best in a position to afford an additional contribution should be asked to contribute more. Clause 4 ensures that those with incomes of more than £100,000 a year make a fair contribution to the consolidation that is required. It also removes an unfairness in the tax system that has been discussed over the years whereby people with very high incomes receive twice as much benefit from the personal allowance as somebody who pays tax at the basic rate. Therefore, there is a further fairness benefit.

Greg Hands (Conservative, Hammersmith and Fulham)

It is a pleasure to serve under your chairmanship, Mr. Atkinson, and I look forward to our deliberations in the coming weeks. This is my second Finance Bill; last year I considered it from the Back Benches. I can only assume that I did something wrong to be put on it pretty much full time from then on, but I am looking forward to it.

It is ironic that this is called clause 4—I refer to the intervention by my hon. Friend the Member for Wellingborough’ intervention about this marking the end of new Labour. The clause allows us to examine the perverse structure of the marginal tax rates proposed by the Government. What the Government propose is, thankfully, slightly simpler than the two-stage proposal outlined in the pre-Budget report 2008, to which the Minister referred. Nevertheless, the proposals introduce considerable complexity into the income tax system and associated tax calculations.

In terms of the revenue raised, which is important to look at, the withdrawal of the personal allowance from individuals with incomes above £100,000 is estimated to raise £890 million in 2010-11, rising to £1.4 billion in 2011-12. As before, those figures combine the estimates for the 2008 PBR staged restriction of the personal allowance with the Budget 2009 announcement. The Budget report estimates that the total yield from removing the personal allowance will be £1.5 billion come 2012-13.

As the Minister says, the Government propose that, from 6 April 2010, the personal allowance for individuals with an adjusted net income of over £100,000 will be limited by £1 for every £2 over the limit. Based on 2009-10 personal allowances, that means that individuals with an adjusted net income of £112,950 or more will not benefit from the tax-free personal allowance. Meanwhile, using the 2009-10 personal allowance figure of £6,475, withdrawing the personal allowance at a rate of £1 for every £2 of income over £100,000 results in a marginal income tax rate of 60 per cent., or 61.5 per cent. with national insurance contributions, on income between £100,000 and £112,950.

Mark Todd (Labour, South Derbyshire)

All those figures are based on there being no behavioural change in the individuals involved. Is the h G going to expand on the issues that that raises?

Greg Hands (Conservative, Hammersmith and Fulham)

I am, and I thank the hon. Gentleman for that intervention. One of the great weaknesses in the Government’s case is that, as far as I can tell, there has been no study of any behavioural changes, either from this or from the change to the 50p tax rate in clause 6, which we will come to in due course.

The volume of changes in this year’s Budget has added considerably to the overall convolution. Phasing out these allowances, probably more than anything else, has added massive complexity to our tax system. One way of evidencing that is to look at the profusion of marginal tax rates expected to be within the system from 2011. Using current income points, which may change by 2011, we see 11 different effective tax rates, including national insurance contributions: from an income of zero to £5,715 there is an effective tax rate of zero; from £5,715 to £6,420 there is an effective tax rate of 11.5 per cent.; from £6,421 to £6,745 it is 50.5 per cent.; and from £6,746 to £18,023 it is 70.5 per cent.. It then falls sharply to 31.5 per cent. for income between £18,024 and £43,875. It then goes back up, so for income between £43,876 and £50,000 it is 41.5 per cent. Between £50,001 and £58,170, it goes back up to 48.17 per cent., but, between £58,171 and £100,000, it goes back down again to 41.5 per cent. Between £100,001 and £112,950, it reaches its highest rate of all of 61.5 per cent. before going back down to 41.5 per cent. in the penultimate tax bracket of £112,951 to £150,000.

Mark Todd (Labour, South Derbyshire)

Will the hon. Gentleman give way?

Greg Hands (Conservative, Hammersmith and Fulham)

I am first going to finish referring to the table, because it is important to have it on record so that we have a feel for how the figures will work and for the complexity of the system. The final rate, for those earning over £150,000, reverts to 51.5 per cent. That is a total rollercoaster ride and I will talk about some of its implications in due course.

Mark Todd (Labour, South Derbyshire)

I admire the hon. Gentleman for his research. I am sure that he has a table for taxpayers who are over 65, from which he will be able to set out a similar set of figures.

Greg Hands (Conservative, Hammersmith and Fulham)

I do not wish to try your patience, Mr. Atkinson, but the same principle and degree of complexity are involved in that context too. For our purposes this morning, one table will suffice to illustrate the complications in, and the potential effect of, the 11 different marginal tax rates.

The issue gives rise to the absurd position that a taxpayer earning £105,000 has a marginal rate of 61.5 per cent. on additional income, while a taxpayer earning £155,000, which is 50 per cent. more, has a marginal rate of only 51.5 per cent. Furthermore, a taxpayer earning £125,000, which is somewhere in between those two figures, has a marginal rate of just 41.5 per cent. It makes absolutely no sense, and I would like a proper explanation from the Government of their work on the rates. We will now have 16 different personal tax rates, including those levied on trusts and dividend income, and the only people who will benefit from all of the complexity will be tax consultants. What are the Minister’s thoughts on that?

In terms of practicalities, the issue also raises significant problems for the PAYE system with associated costs for both Her Majesty’s Revenue and Customs and for taxpayers who are in PAYE. The actual amount of the allowance depends on the level of income in the tax year, which will not be known until after the end of that year. The PAYE system cannot deal effectively with such situations, and will have to be based on estimates. In circumstances where an individual’s usual income is well below £100,000, but they receive a one-off bonus taking it up to, for example, £120,000, the taxpayer will face a pretty much unprecedented underpayment of in excess of £2,590 at the end of the tax year, simply because PAYE will not be able to deal with the level of complexity associated with the 11 different marginal tax rates. In turn, that taxpayer expected PAYE to be collected at the right amount throughout the year and not at the end of it. Such a situation will throw certain fundamentals of the PAYE system into question and cause difficulties for individuals, HMRC and tax planners. The proposals do not sit comfortably with the PAYE system, which is not designed for that sort of complexity.

John Pugh (Liberal Democrat, Southport)

I am listening very carefully to the hon. Gentleman, but some of the problems that he mentions are intrinsic to the system itself and are not dependent on the proposal under discussion, are they not? He illustrates a series of problems that will occur, but they would occur in any system in which allowances are reduced. Do all of the problems derive from the simple fact that there are 11 different bands?

Greg Hands (Conservative, Hammersmith and Fulham)

The system that the Government propose and the phasing out of the allowance above £100,000 will add immensely to that complexity. The hon. Gentleman is right to say that there is already a certain amount of complexity, but the amount of complexity added by the proposals is entirely disproportionate to that which already exists.

Those with income subject to PAYE in and around some of the bands will be subject to estimated PAYE codes, which will in many cases lead to under or over-payments of tax and in-year requests for change and coding notices, which will put further strain on the tax administrative system. The result will be an increase in the need for form-filling, the issue and processing of which, together with making the associated payments, repayments or coding adjustments, will increase the administrative burden and costs for many taxpayers and HMRC.

Peter Bone (Conservative, Wellingborough)

Perhaps I should declare an interest as a fellow of the Institute of Chartered Accountants in England and Wales, as clearly this could be welcomed as a job creation scheme for accountants. I was not aware of those facts, and my hon. Friend has helpfully brought them to the Committee’s attention, but is it not just a stealth tax whereby taxation on higher earners is increased without actually saying that that is what it is? Are the Govt not trying to do that by the back door?

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is absolutely right. It is a more stealthy way of raising yet more revenue from higher earners. I do not wish to trespass on the major debate we are to have on clause 6, but I think that he is quite right. He is also right that that will act as a boon and incentive to many in the tax planning industry for additional bands that should not be there.

I will introduce two sets of comments from observers on the associated payments, repayments and coding adjustments. The second is actually from the Institute of Chartered Accountants but the first is from the Chartered Institute of Taxation, which, with regard to these proposals, states:

“We consider that a more appropriate method would have been to lower the threshold at which the 50% band is introduced or to set a rate between 40% and 50% for the band of income between £100,000 and £150,000.”

I am not in a position to endorse that, but I would be interested to hear the Minister’s response to the proposal. The CIT went on to state:

“HMRC/HM Treasury (HMT) models could predict the level at which these would need to be set to yield the same revenue as the current proposals, yet with reduced administrative burdens for HMRC, tax agents and tax payers.”

What consideration has the Minister given to those suggestions?

The ICAEW made more or less the same point:

“A more straightforward option would be for personal allowances to be given in full, but for the rate of tax applying to be higher over, say, £100,000 of taxable income. This would have the benefit that PAYE would then be able to deal effectively with bonuses etc so that underpayments of tax would be less likely. Analysis will need to be done to identify an appropriate rate of tax and there will be winners and losers.”

What consideration has the Minister given to that proposal? He has explained the rationale in terms of his belief that those who have been and are earning more should be paying more, but can he explain the rationale behind the plethora of new marginal tax rates that he is creating? That seems to breach the principle that everyone is entitled to receive a certain amount of income on which they pay no tax, but it also seems to breach the undertaking that the Minister gave personally, along with the Government, not to make our tax code too complicated. That cumbersome and complicated schedule of marginal tax rates will surely lead to gross distortions in the system, so I would be grateful to hear what studies have been done of that change with people outside.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend will recall the 2007 Budget, in which the then Chancellor, the current Prime Minister, proudly announced that for the first time the UK would have only two rates of tax on personal income, combining national insurance and income tax, and a simplification process, having abolished the 10p rate. Now we seem to have more bands than ever.

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is, of course, quite right. That is yet another example of the Government’s economic and tax policy unwinding disastrously over the past two years with the former Chancellor, now as Prime Minister, continuing patterns of disastrous stewardship of the finances.

My other question is about what behavioural changes there will be. What behavioural changes does the Minister predict will happen on the overall tax take from those changes? At the moment, they seem to be predicated entirely on no behavioural change, which was the point made by the hon. Member for South Derbyshire in his intervention. How does the Minister feel about jeopardising our long-treasured, progressive system of taxation, where bands go up the more that one earns, and introducing this rollercoaster? What impact will that have on the message that the Government are sending out to the people of this country?

Peter Bone (Conservative, Wellingborough)

It is a great pleasure to serve under your chairmanship, Mr. Atkinson. We are seeing a clear change in Government policy here. The stealth tax is still present—they are trying to get it through the back door. It is an attempt to tax higher earners, going away from the Tony Blair philosophy that swept Labour into power. Now the Government believe in tax-and-spend, while the Conservatives believe in lower taxation and responsible spending. That is good for the election that is on the horizon.

I remember last year, in every debate, whoever was Chancellor stood up and said, “We believe in making a simple tax system. We want to remove complications and have as few rates as possible.” What we now have is a complete and utter reversal, which I think is a mistake. Honesty would have been the better policy—not fiddling with personal allowances but simply putting the tax rate up on higher earners, if that was what the Government believed was right. Then we can have a proper debate. The days of stealth taxes should be over.

John Pugh (Liberal Democrat, Southport)

I have a few brief comments. Regarding the points made by the Government about complexity, hon. Members will recall that the Liberal Democrats’ proposal was targeted at those people earning £100,000 and more. It was abandoned at a celebrated occasion at a party conference, when we made what was called the green tax switch. The Government have a different way of doing it—they have a less severe redistribution in their proposal than in ours. The reasons why the Lib Dems modified their position are the very issues that I would like the Minister to address now.

It has been suggested that if we introduce such a proposal, people who are in the unfortunate category of earning £100,000, looking with envy at the people who earn £98,000, will simply find a way to take their reward via other means such as capital gains. It was also argued, when we changed our position apropos the higher tax band, that some of the gains in redistribution would ultimately be somewhat spurious. Some of the reductions in social inequity that would follow were probably more imagined than real. Will the Minister familiarise me with his thinking about those proposals in terms of their effects on tax avoidance and people taking their reward in different ways? The Minister may well acknowledge a genuine redistribution urge here, but what does he think the proposals will do to low incomes?

Stephen Timms (Labour, East Ham)

I do not agree with Opposition Members’ characterisation of the measure. Regarding complexity, as I said in my earlier remarks, the threshold for income tax and national insurance will, under the proposals that I have set out, including some of those in the Bill, be fully aligned for individuals for the first time. Some of the steps in the table read out by the hon. Member for Hammersmith and Fulham will be removed. The only parts of his table that are affected by the measure that we are discussing now are right at the top end of the income range. As I have underlined, only 2 per cent. of people—those on the highest incomes—will be affected. The full allowance will still be available for 98 per cent. of taxpayers. The 2 per cent. whom we are talking about are already required to complete self-assessment forms. Hence, there will be no additional form-filling for them—it will all be done through the form that they already have to complete.

Greg Hands (Conservative, Hammersmith and Fulham)

Surely the Minister must realise that anybody who is likely to be earning between £100,000and £112,950 is likely to change their behaviour as a result of these changes. At the weekend, in The Sunday Times there was an article entitled “Five ways to turn income into capital gains”. That is precisely the sort of thing that I think will lead to behavioural change, which he claims will be avoided.

Stephen Timms (Labour, East Ham)

I will come on to the question of behavioural change in a moment. The hon. Gentleman’s charge was that people would have to fill in more forms and I am simply pointing out to him that that is not the case. They already complete a self-assessment form. That is all that is required for the calculation to be successfully completed, so there will not be any more forms for them to fill in.

Greg Hands (Conservative, Hammersmith and Fulham)

Surely there will be more forms to be filled in if a mistake has been made, which is quite likely to happen. People will have to resubmit their tax returns, on the basis that mistakes are far more likely with this very complicated structure.

Stephen Timms (Labour, East Ham)

There is no basis for that assertion at all. People will complete their self-assessment form in the way that they do now. They will state their income and the calculation will be made. There is no reason at all why this change will alter the accuracy with which people complete their forms.

There is a clear case on fairness grounds for this change, which I touched on in my earlier remarks. At the moment, a taxpayer gets relief from their personal allowance at the highest rate of tax that they pay. That means that a basic rate taxpayer gets the benefit of £1,295 and a higher-rate taxpayer gets the benefit of twice that sum, which is £2,590. It is entirely right, at a time when all of us acknowledge that fiscal consolidation is required, that people at the high end of the income range should contribute somewhat more.

Mark Todd (Labour, South Derbyshire)

I entirely accept my right hon. Friend’s argument about fairness. However, I must admit that I have been puzzled about the mechanisms that have been chosen, which are likely to incentivise behavioural change in a group of people who are well able to pay for advice to maximise the benefit of that change. What calculation has the Treasury done on the net revenue that will be lost as a result of this proposal from people simply altering their behaviour, such as topping up—admittedly, only temporarily—their pensions, putting money into venture capital trusts, or using a variety of mechanisms that would achieve the outcome that they desire?

Stephen Timms (Labour, East Ham)

First, an assessment has been made and the figures in the Red Book take account of anticipated behavioural changes. I noticed that the Institute for Fiscal Studies described those assumptions as being not unreasonable; they are sensible assessments of the kind of changes that will be required.

However, I would caution my hon. Friend on one point. Sometimes there is a suggestion in these discussions that, in reality, we cannot increase the tax paid by people on high incomes. That is not the point that he made, but it is sometimes suggested that, if there is to be fiscal consolidation, the practical reality is that the additional contributions have to come from those on lower incomes. That is not his position, or my position, but I think that it is very important that we resist that view and that we proceed with measures such as this one, which require, as I have already set out, an additional contribution in tax from the 2 per cent. of highest earners in the country.

Greg Hands (Conservative, Hammersmith and Fulham)

The Minister is being generous in giving way. He can correct me if I am wrong, but I do not think that I have seen anywhere an assessment of the phasing-out of the allowances. I am sure that he is right that there have been assessments. I think that the issue was debated by the Treasury Committee, to assess the impact on behavioural changes caused by the 50p tax rate. However, I do not think that I have seen anywhere in the Red Book an assessment of the changes to the phasing-out of the allowances. Therefore, if such an assessment is in the Red Book, can he tell us what the numbers are?

Stephen Timms (Labour, East Ham)

Yes. The assessment was done for both measures together, rather than for each measure separately. So the figures apply to both measures.

Greg Hands (Conservative, Hammersmith and Fulham)

Surely the Minister must realise that there are two very separate issues here. They are the 50p tax rate for those earning more than £150,000 and the changes in the allowances, which will make behaviour very susceptible to these very small changes in income. For example, people may get a bonus towards the end of the year. which might take them from £95,000 to £115,000. But the behavioural change there will be very different from that of someone who is currently on £250,000 and considering whether to leave the country. Those are two different things and I should be grateful to hear what separation he has made of those two considerations.

Stephen Timms (Labour, East Ham)

The hon. Gentleman is right, of course. There are different issues and there will be a number of kinds of behaviour. There has been talk of people going for capital gains. There will be a variety of different behavioural responses that people will perfectly appropriately pursue. My point was that the figures, such as those discussed in the Treasury Committee, relate to that variety as a whole. That is the basis on which the assessment has been made. I have no doubt that the individual steps were looked at when that assessment was put together, but the figures that have been set out relate to the measures as a whole.

John Pugh (Liberal Democrat, Southport)

Is the Minister able—not necessarily now—to tell us what the fiscal benefits of this measure are and what they would have been if anticipated behavioural change had not been read into that? What benefit will this achieve for the Treasury and what allowance is being made for people’s behavioural change?

Stephen Timms (Labour, East Ham)

As we heard, this was discussed at the Treasury Committee. If one looks at the theoretical take from the measures in the clause, the scorecard revenue that we expect to receive is 36 per cent. of that total theoretical revenue. That has been fully taken into account in the Red Book.

I understand the point about a high marginal rate over a portion of income, but the measure that the clause set outs is the right way to seek a contribution to consolidation from this group of taxpayers. It is relatively straightforward to implement. It ensures that taxpayers with incomes in this income bracket pay a maximum of £2,590 towards fiscal consolidation and it minimises the behavioural impact too. As I said earlier, the taper will operate on exactly the same principles as the familiar taper for age-related allowances. All those affected will be within the self-assessment regimes already. I do not agree that having another rate for income tax between 40 and 50 per cent. would have been better. Doing this through the personal allowance tapering and using a mechanism that is already familiar in the tax system is the appropriate way to go.

Fiscal consolidation is always difficult. Those who are asked to contribute more in the future than in the past will, understandably, have some regrets. But those whose income is at the highest end of the income spectrum have seen their incomes rise the fastest over the past decade. So it is absolutely fair to ask them to contribute rather more.

David Gauke (Conservative, South West Hertfordshire)

The Minister makes the point that people who lose out because of, to use a phrase he has used a number of times this morning, fiscal consolidation, will feel aggrieved. But does he not agree that they will feel particularly aggrieved if a tax rise is contrary to an express commitment in a manifesto?

Stephen Timms (Labour, East Ham)

In a period in which we are seeing an utterly unprecedented crisis in the world economy, I think that people are looking to the Government to take the right decisions and safeguard the economy, families and businesses. The situation that we are in at the moment is unprecedented and requires very bold measures on the part of the Government. We have put bold measures in place and this is one of them. People will recognise that that is the right thing to do.

Clause 5

Peter Atkinson (Conservative, Hexham)

Clause 5 is a one-line clause that introduces schedule 1. Both clause and schedule relate to the abolition of personal reliefs for non-residents. It might be more convenient for the Committee to have a general debate as if those two things were being considered together under clause 5, as long as that does not cause any problems.

Stephen Timms (Labour, East Ham)

As you said, Mr. Atkinson, clause 5 introduces schedule 1. It achieves a more consistent treatment in the provision of personal allowances and reliefs from income tax for all non-UK residents and non-European economic area citizens, thereby ensuring that the legislation complies with the Human Rights Act 1998.

The clause removes entitlement to personal allowances and reliefs from those who currently enjoy them solely on the grounds of Commonwealth citizenship. I am confident that the large majority of non-resident Commonwealth citizens who currently claim UK personal allowances and reliefs will still be entitled to do so through other provisions. Those will include double taxation agreements that allow non-resident, non-EEA citizens to claim UK personal allowances and reliefs. Among other things, the agreements provide for Commonwealth citizens who have become or served as members of the British armed forces, to get that entitlement.

The opening paragraph of schedule 1 removes most of the personal allowances and reliefs in question. Those include personal allowances, married couples allowance, blind person’s allowance and life assurance premiums. Having mentioned blind person’s allowances, I should point out that it is unlikely that anyone would be affected by that change, as the current rules for eligibility for that allowance are already predicated on a person living in the UK.

Paragraphs 2 and 3 provide for a number of consequential amendments in relation to life assurance premiums and limits on relief for those premiums. That has the effect of removing entitlement from non-resident individuals who currently claim them solely by virtue of being Commonwealth citizens. The remaining paragraphs make the consequential changes necessary to ensure consistency through all the relevant tax legislation on this matter.

The result of the changes taken together is that non-UK-resident Commonwealth citizens will no longer qualify for personal allowances and reliefs by reference to their citizenship status alone. It does not affect their entitlement to personal allowances and reliefs under other qualifying conditions or double taxation agreements. The amendments in the schedule will take effect in the tax year 2010-11 and subsequent tax years. I commend the clause and schedule to the Committee.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the Minister for his explanation of what at first does not appear to be a particularly controversial provision. However, there is a lot of controversy embedded in this, and there are a large number of people to whom this country owes something of an obligation who are likely to be affected. I would be grateful to hear what estimate the Minister has of the number of persons likely to be affected.

As the Minister said, this will principally affect 14 different Commonwealth countries with which the UK does not currently have a dual taxation treaty. I understand those 14 countries to be the Bahamas, Cameroon, the Cook Islands, Dominica, the Maldives, Mozambique, Nauru, Niue—a country of which I have not heard, for which I must apologise to the citizens of Niue—Saint Lucia, Saint Vincent and the Grenadines, Samoa, Tanzania, Tonga and Vanuatu.

Bob Blizzard (Labour, Waveney)

The hon. Gentleman obviously had no constituents affected by the phone scams of a few years ago—constituents were getting huge bills from BT, running up to hundreds of pounds, for mysterious phone calls made to Nauru. Unfortunately, BT never recompensed those people.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the hon. Gentleman for his telling and knowledgeable intervention. He is right—I had a constituency case of someone running up such bills on a phone line to Vanuatu, rather than Nauru.

Some of the 14 countries involved are pretty mainstream, larger countries, such as Tanzania, Cameroon and the Bahamas. A certain number of residents of those countries will have previously worked in the UK, which I shall come on to in due course, but I would suggest a fair few of my constituents would be among them—some of the Minister’s constituents may also be affected. It is worth pointing out that the countries that we talked about cover a pretty vast range of likely income areas, ranging from the Bahamas—I am not for one moment suggesting that the Bahamas is entirely full of wealthy people seeking to avoid tax, but on a per capita basis it is doing rather well—to Tanzania and Cameroon, which are very much developing countries.

I want to raise a few of the points made by the Low Incomes Tax Reform Group in reference to clause 5. The group is concerned that people who have served the United Kingdom in the past, returned to their home countries and become pensioners will suddenly find themselves liable to UK taxation perhaps for the first time since they were in the UK. It goes on to mention the Ministry of Defence, recruiting for the military, and the NHS, for nurses:

“Non-resident individuals will no longer qualify for reliefs and allowances including the basic and age-related personal allowances, married couples’ allowance, blind person’s allowance and relief for life assurance solely by virtue of being a Commonwealth citizen. These allowances are particularly relevant for pensioners.”

For the Government to introduce a penalising measure seems slightly bizarre. For example, many from the SS Windrush generation, came over and served in this country in public service in the 1950s and ’60s, and will have now returned to islands such as St. Lucia, St. Vincent and the Grenadines. I would be grateful to know whether the Minister has considered that and whether he has had any discussions with either of the Governments involved or, for example, with any of the SS Windrush support groups that are still around in this country. Going back to the LITRG:

“It does seem perverse that a supposed action in the name of Human Rights brings a range of low income pensioners in some of the poorest countries of the world into the ' UK tax net ‘out of the blue’.”

I have a few questions for the Minister. Most obviously, why is he introducing the set of measures now? What specific proposals does he have to negotiate double taxation treaties with the 14 countries that are not covered but which are affected? What discussions has he had with the Governments of the 14 countries? What are his feelings about creating two classes of Commonwealth citizen? Our relations with the Commonwealth are important, but the measure will suddenly create two different classes of Commonwealth citizens. How many people in each of the 14 countries will be affected and what study has he done of the type of people who will be affected? Is the reason why he changed the rules really that the old rules were not compliant with the Human Rights Act, which was what was implied in the guidance notes? Finally, how much will all those measures actually raise? The Minister needs to be ready to answer a large number of questions for the benefit of the Committee.

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92) - Clause 5

Peter Atkinson (Conservative, Hexham)

We anticipate Divisions in the House during our proceedings this afternoon. If there are Divisions, I will suspend the Committee for 15 minutes for the first Division, and a further 15 if there is a second.

Stephen Timms (Labour, East Ham)

Welcome back to the Chair, Mr. Atkinson. May I mention in passing the letter that I have just written to members of the Committee? It encloses regulations for schedule 3 and some explanations regarding order-making powers, and I hope hon. Members will have the opportunity to look at it.

In response to the points made by the hon. Member for Hammersmith and Fulham before the break, in relation to clause 5 and schedule 1, I hope to reassure him on some of the perfectly understandable concerns that he raised. First, he asked why we are taking the action now—or how had the matter arisen. During the drafting of the Income Tax Act 2007, lawyers made the point that granting personal allowances solely on the fact that somebody is a Commonwealth citizen would be discrimination on the basis of nationality and therefore should not be continued. They advised that the law needed to be changed as soon as was practical and we have been looking at various options, taking a bit of time. This is the first opportunity that we have had since then to put the decision right.

Greg Hands (Conservative, Hammersmith and Fulham)

That is rather what I expected. Have the Government considered the knock-on effects? What impact might that ruling have on other aspects that are defined purely on the basis of nationality, such as the eligibility to vote in this country?

Stephen Timms (Labour, East Ham)

I will discuss the implications of the measure and the changes that we are making here later. For now, I will say that if other problems of that kind were raised, they would need to be addressed in the same way. I do not think that that is the case in the example cited by the hon. Gentleman, but there may well be other circumstances in which steps would need to be taken.

Greg Hands (Conservative, Hammersmith and Fulham)

Are there any implications for EU nationals? Will they be affected by the same consideration?

Stephen Timms (Labour, East Ham)

No, there is no implication for EU nationals. The matter is purely about people who are not resident in the UK but, up until now, have been entitled to personal allowances in UK tax on the sole basis of being Commonwealth citizens. Hence, it is rather unusual. The hon. Gentleman expressed a concern on behalf of his constituents, and, of course, if they are his constituents, by definition they are resident in the UK and will therefore continue to benefit from allowances in the normal way.

Most Commonwealth citizens with income liable to tax in the UK will still be able to claim UK personal allowance. That is either, as I have said, because they live here or because they qualify under other provisions. I will run through what some of those provisions are.

To be affected by the change, a person must be non-resident in the UK. If they are resident here, they are qualified in the normal way, but even if they were non-resident, there would be other provisions, under which most will probably be eligible for personal allowances and reliefs.

Those provisions were set out in the Income Tax Act 2007, and they include, for example, anyone who

“(a) is resident in the Isle of Man or the Channel Islands,

(b) has previously resided in the United Kingdom and is resident abroad for the sake of the health of—

(i) the individual, or

(ii) a member of the individual’s family who is resident with the individual,

(c) is a person who is or has been employed in the service of the Crown,”—

I think the hon. Gentleman referred to nurses working with the Ministry of Defence as an example, and their position should be safeguarded by that particular provision—

“(d) is employed in the service of any territory under Her Majesty’s protection,

(e) is employed in the service of a missionary society, or

(f) is a person whose late spouse or late civil partner was employed in the service of the Crown.”

A wide range of people who are non-resident and are Commonwealth citizens could still benefit from the allowances on the basis of those provisions.

Greg Hands (Conservative, Hammersmith and Fulham)

The right hon. Gentleman mentioned employees of the Crown and various other categories. Will other public sector employees be included? For example, I mentioned the SS Windrush generation who came over and were employed predominantly by London Transport. Will employees who have since gone back to their home country be covered?

Stephen Timms (Labour, East Ham)

I do not think that a London Transport employee would count as an employee of the Crown, but they might qualify under the other provisions that I have set out; it would depend on their circumstances. The hon. Gentleman made the point about the 14 territories where double taxation agreements are not in place. They are all quite small in relative terms. I have no doubt that we could find people who would lose personal allowances as a result of the measure, but the question is whether they should be advantaged relative to somebody from a non-Commonwealth country who is in the same position. The legal advice is clear that they should not be. The measure simply enacts that decision.

Greg Hands (Conservative, Hammersmith and Fulham)

The right hon. Gentleman says that the numbers who would be affected are very small, but he has not answered my question about what those numbers might be and what kind of study the Treasury has done on the numbers involved, which could be rather a lot.

The 2001 census gives one an idea of the number of people involved who are resident in the UK or have not returned to their home country—8,265 from St. Lucia and 7,091 from St. Vincent and the Grenadines, not to mention Tanzania and Cameroon. Substantial populations have returned to their home country. If the numbers are small, the right hon. Gentleman must have some idea what they are.

Stephen Timms (Labour, East Ham)

No, I do not. The numbers that the hon. Gentleman just read out refer to people who are resident in the UK and receive tax allowances on that basis. My point is that the group we are talking about are people who were in that position in the past but have since gone back to their home country and are still benefiting from personal tax allowances. I put it to him that that is quite a small group.

Greg Hands (Conservative, Hammersmith and Fulham)

I shall tell the right hon. Gentleman why I quoted those numbers. I am perfectly well aware that those are people who in 2001 were in the UK and are not affected by the clause. I merely point out that they form quite substantial parts of some of our populations in this country—for example, about 3 per cent. of the black Caribbean population of this country. In all likelihood, the numbers who have returned to their home country, or indeed gone to a third Commonwealth country that is on the list, could be considerable. I am rather disturbed that the Minister does not seem to have any firmer numbers on the people we are dealing with here.

Stephen Timms (Labour, East Ham)

In an attempt to be helpful, let me give the hon. Gentleman some data in the case of Tanzania, which is the country on his list with the highest number of citizens coming to the UK. In 2007, 75 individuals came to the UK with work permits; 890 came for full-time study; 1,255 were given extended right to remain, including 900 students; and 360 became British citizens. Very few students or those in the UK for short visits will have any UK source income when they return to Tanzania. That is the basis on which I say that the majority will not be affected. They would have to be people who, for some reason, were getting income from the UK but were not in the UK any longer. Pensioners are covered elsewhere, as I have said.

If we were able to identify a few people who had lost out, an alternative method of computation that may limit their liabilities is set out in sections 811 to 814 of the Income Tax (Earnings and Pensions) Act 2003. That computation disregards certain types of income, including some pensions such as the statutory retirement pension or a pension provided under a registered pension scheme; some savings and investment income; and some social security payments.

I hope that the hon. Gentleman feels that those who have served the country—those who have worked for London Transport, for example—are unlikely to be affected and could take advantage of the provisions under the 2003 legislation. That is over and above the protection provided by the fact that income, such as bank account interest and foreign dividends, can be paid gross to non-residents so there would be no tax liability.

Greg Hands (Conservative, Hammersmith and Fulham)

Will the right hon. Gentleman say more about what discussions he has had with the high commissions of the 14 countries concerned? Have the Government attempted to publicise in the local media the changes of those 14 countries, for example? Have they contacted any of the individuals in the 14 countries?

Stephen Timms (Labour, East Ham)

The hon. Gentleman is making a valiant effort, so I shall give him one more reassuring piece of information. As we set out in the Red Book, the measure has been scored as raising negligible yield. I am not saying that no one will be affected, but the measure will not bring in significant additional tax revenue to the Exchequer. We are aligning the position for Commonwealth citizens with that for all other non-European economic area citizens who receive United Kingdom-source income. There have not been discussions with the individual Governments concerned, but the measure will not come into effect until April next year so there will be the opportunity to rewrite guidance and advise those who are affected.

The hon. Gentleman is perfectly right to draw attention to potential concerns, and I hope that I have reassured him that the measure is quite minor. The matter was identified a couple of years ago as needing to be put right, which the clause and schedule are doing.

Greg Hands (Conservative, Hammersmith and Fulham)

A final question: has the Financial Secretary considered giving grandfather rights to those who can currently take advantage of their personal allowances, so that they may continue before they are affected by the measure?

Stephen Timms (Labour, East Ham)

As I understand it from legal advice, there would not be a legal basis for taking such action. We are not in a position to discriminate in that way. The clause puts the position right and removes the discrimination.

Clause 6

Peter Atkinson (Conservative, Hexham)

It may be more convenient for the Committee to debate clause 6 in tandem with schedule 2. I do not know whether that will create problems. If it is difficult, we shall discuss them separately.

Greg Hands (Conservative, Hammersmith and Fulham)

Mr. Atkinson, I certainly prefer to discuss schedule 2 separately. I have some technical points to make that are specific to it. If it is possible to have a separate debate, I should be grateful.

Peter Atkinson (Conservative, Hexham)

In that case, I will accept a wide-ranging debate on clause 6, and we can deal with the more technical matters under schedule 2. I hope that everyone finds that suitable.

Stephen Timms (Labour, East Ham)

I am happy to take your guidance, Mr. Atkinson, and comment on both the clause and the schedule, but I shall also be happy to have a separate conversation about the schedule when we reach that stage.

Clause 6 introduces schedule 2, which provides for the additional rate of tax from 2010-11. The rate will be set at 50 per cent. in 2010-11 and apply to those with taxable incomes above £150,000 a year. As you will recall, it was announced in the pre-Budget report in November that we would be introducing a 45 per cent. rate in April 2011. However, the global downturn has been worse than predicted and, as a result, more consolidation is required. That is why the additional rate has been brought forward and raised by five percentage points to 50 per cent.

Mark Field (Conservative, Cities of London and Westminster)

In view of the Budget’s optimistic projections for growth in the next few years, on what basis did the Treasury feel it necessary to change its proposal for a 45p tax rate? After all, if Government figures are to be believed, we shall have growth racing away at 3.5 per cent. within the next year or so. On the basis of that figure very little obvious change has been made in relation to public expenditure, so why the radical change on taxation?

Stephen Timms (Labour, East Ham)

Because, as I said, expectations for the world economy have gone backwards—in an adverse direction—to a significant extent since November of last year. The International Monetary Fund has revised its forecasts two or three times in that period—downwards in all cases—so what we needed to do was what we put in place in the Budget: a trajectory that we could deliver on, getting us back to balance by a later point than we said in November, by 2017 rather 2015. The measure is an important contribution to that.

Several hon. Membersrose—

Stephen Timms (Labour, East Ham)

I have a rich choice of interventions to select from—I shall take the hon. Member for Cities of London and Westminster first.

Mark Field (Conservative, Cities of London and Westminster)

A choice made only in ascending order, obviously, which I fully understand.

Those concerns have been expressed to me. Do we have an assurance from the Financial Secretary that there will be no further downward projections regarding the world economy? Is the matter now set in stone? The position has deteriorated appallingly since last November—or so he would tell us. Is he now entirely clear that the figures are final, and we shall have no further downward projections in the months and years to come?

Stephen Timms (Labour, East Ham)

All I can say to the hon. Gentleman is that the projection at the time of the Budget was the best available, given the data at that point. I wish I could tell the Committee with absolute confidence what will be happening in the next one, two or three years, but in reality we are not in that happy position.

Peter Bone (Conservative, Wellingborough)

The logic of the Financial Secretary’s argument is that he cannot confirm the figure for the top rate. If the growth forecasts are worse than predicted, the logic is that he will come back and say, “Well, it is 60 or 70 per cent.” Perhaps we shall go back to the days of 98 per cent., or even the negative of 101 per cent., which we had under a Labour Government.

Stephen Timms (Labour, East Ham)

The question before the Committee is whether it is right to raise the level to 50 per cent., as in the clause and schedule. My case to the Committee is that it most certainly is right. I am conscious that, and pleased that, the hon. Gentleman’s party has not dissented from that view, and I want to set out the basis for that being the right decision.

Greg Hands (Conservative, Hammersmith and Fulham)

The Financial Secretary is being most generous in giving way. One of the most important things is surely the stability and predictability of the UK tax system. In that regard, what kind of message does he think it shows that the 45p tax rate has been abolished before it has even been introduced?

Stephen Timms (Labour, East Ham)

The hon. Gentleman will, I think, have noticed that there has been unprecedented turbulence in the world economy over the past few months. I hope that that has not passed him by. Policy needs to change in the light of circumstances. We have moved swiftly and boldly—that is absolutely the right thing to do—to maintain the stability of the British economy and to put the public finances on the right trajectory for balance.

John Howell (Conservative, Henley)

The point that many of us are struggling to understand here—we all understand that the global economic situation, and particularly the situation in the UK, worsened between the pre-Budget report and the Budget—is that there is a world of difference between those sweeping, global pictures that the Financial Secretary has painted and the specifics of the difference between the pre-Budget report and the Budget. What we would like to understand is how he has got from one to the other.

Stephen Timms (Labour, East Ham)

That is the very stuff of politics—to take the grand sweep, to see what is going on in the world and to decide what one will do in response. I shall set out the basis of what I want to put to the Committee. As I said, I am pleased that the Conservative party has not dissented from the view that this is an important measure, contributing to the consolidation that is now required. We have certainly looked carefully at the likely impact, on both individuals and the economy, as a consequence of the 50 per cent. rate.

What I can say to the Committee is that the UK will remain a competitive place for business—that, of course, is absolutely essential—with a tax burden that compares well internationally. The UK tax to gross domestic product ratio, 37.1 per cent., continues to rank below the EU15 average. UK top rates, taking into account social security contributions as well, will continue to fall into the range of that of other G7 countries. Overall, the UK tax regime remains very competitive, with, of course, the lowest corporation tax rate in the G7 and a capital gains tax rate below that in the US and Germany, for example. I welcome the international surveys consistently showing that the UK has a business-friendly environment and a competitive tax system. The World Bank’s study of 181 countries, “Doing Business 2009”, placed the UK sixth in the world and second in the EU for ease of doing business.

Stewart Hosie (Scottish National Party, Dundee East)

The Financial Secretary is talking about the competitive tax rate. May I bring him back to the clause for a moment? Subsection (4)(b) states: “‘for 32.5% substitute 42.5%’”. If I have read the Red Book correctly, table A3, annotation 2, states:

“The rates applicable to dividends are 10 per cent for dividend income up to the basic rate limit and 32.5 per cent above that.”

As I understand it, that figure is now going from 32.5 to 42.5 per cent.—a rise of more than 30 per cent. Does the Financial Secretary think it right that basic rate taxpayers who have dividend income above the basic rate threshold should be—if I have understood this correctly—subject to an increase from 32.5 to 42.5 per cent.?

Stephen Timms (Labour, East Ham)

I shall come to the implications for some of the other rates in a moment. The point I am making is about the 50 per cent. rate on income above £150,000, but there are some knock-on consequences, which I will spell out in a moment.

In answer to the hon. Gentleman’s question, yes, this measure is consistent with the competitiveness of the UK as a place for investment in business, consistent with fairness, and consistent with the consolidation that is needed over the next few years. The measure will raise more than £6 billion in its first three years. That estimate takes into account, as all our estimates do, behavioural consequences of the change, about which we had some discussion this morning. As I also mentioned this morning, the assumptions that underpin our view of the yield coming from this measure were confirmed by the Institute for Fiscal Studies in its post-Budget briefing as “not unreasonable”.

Some have suggested that the behaviour impacts are such that we should not make that change. I do not agree with that, because without this measure, focused on those with the very highest incomes, funding would need to be found elsewhere. Our choice has been to look, in this clause, to those who are in the best position, who are most able to afford to pay, and whose incomes have risen a good deal faster than the average over the last decade.

Brian Binley (Conservative, Northampton South)

I am a little surprised that the Financial Secretary mentioned the Institute for Fiscal Studies, because it also predicted that the tax would generate almost nothing. I am wondering whether the definition of “almost nothing” and agreement with the Financial Secretary coincide. This causes me concern, and I am also concerned that the Chancellor said that there was no science to choosing the 50 per cent. tax rate. I want to be absolutely sure that this is a revenue-raising measure. Will the Financial Secretary give me a total assurance that that is the case and that it will not in fact diminish revenues, which is a possibility?

Stephen Timms (Labour, East Ham)

I simply refer the hon. Gentleman to the post-Budget presentation by the IFS, which I have in front of me. The IFS says on one of its slides:

“How much will the 50% rate raise? HM Treasury says £2.4 bn.”

A little further down, it says:

“Government’s assumptions not unreasonable.”

That was my point, and it is certainly my view that the measure will raise a substantial amount for the Exchequer and make an important contribution to the consolidation that is required.

Let me move on to the question put by the hon. Member for Dundee, East about some of the consequences or knock-on effects of the change. The rate of tax due on dividends over the same income threshold is raised, as he said, to 42.5 per cent. The clause also raises the trust rate to 50 per cent. and the dividend trust rate to 42.5 per cent., to ensure that there is no incentive for somebody to put money into a trust simply to reduce tax liability.

On dividend income, let me be clear: dividend income over £150,000 will be subject to the 42.5 per cent. rate; a rate of 32.5 per cent. will continue to apply up to that amount. In other words, basic rate taxpayers, about whom the hon. Gentleman is particularly concerned, in receipt of dividends will not be affected.

Another consequence of the 50 per cent. tax rate is the impact on special rates of tax in the pensions tax rules. Those rules operate on the basis that individuals receive tax relief at their top tax rate on pension savings up to prescribed limits. If those saving limits are exceeded, tax charges are applied to recover tax relief on contributions. The clause puts in place powers to vary the rates for those special pensions tax charges in regulations, a point that is mentioned in the letter that has been circulated this afternoon.

We have thought very carefully about how the further money required for fiscal consolidation should be raised. We are clear that it is right to require those who benefited most in the last decade and who are in the best position to pay to contribute more. That is the basis for the clause. I will now give way to the hon. Gentleman.

Greg Hands (Conservative, Hammersmith and Fulham)

The Financial Secretary really is being very generous in giving way. Can he just tell us how he thinks he will present to the electors of East Ham at some point within the next 13 months the fact that he has broken his own general election manifesto pledge from 2005? Perhaps he thinks otherwise, but the manifesto said clearly:

“We will not raise the basic or top rates of income tax in the next Parliament.”

Stephen Timms (Labour, East Ham)

The measure is rather popular among my constituents in East Ham. They look to the Government to take the right decisions for the future of our country. In extraordinary circumstances, of the sort that we have seen in the world economy in the past few months, it is right of the Government to put in place the measures that are needed to safeguard the economy, families and businesses, and to secure the consolidation that will be needed in the next few years. The measure is an important step towards doing that.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the right hon. Gentleman for that response. I think that he is saying that the measure will be popular in East Ham and that he will campaign on that basis. Is he also saying that he will campaign nationwide on the basis that the measure will be popular?

Stephen Timms (Labour, East Ham)

I believe that it is a popular measure nationwide.

Greg Hands (Conservative, Hammersmith and Fulham)

We have got to the heart of the matter. I am now going to talk at some length about the 50p tax rate and ancillary matters. I hope to cover quite a wide range of topics, including, first, the reactions to the proposed 50p rate and, secondly, a question that we have not really covered yet, which is whether the proposed 50p rate will be a temporary measure or permanent. Thirdly, I will examine whether the measure will raise the amount that it is claimed it will raise, and whether it might not be beyond the point of revenue maximisation. Fourthly, I will look at the UK’s overall economic competitiveness. Fifthly, I will look at the political background and reasons for introducing the 50p tax rate and some of the other measures. I will also look at the complexity that the abolition of the 45p tax rate—before it was even introduced—will add to the unpredictability of the UK tax code. Furthermore, I will discuss some of the more technical provisions relating to trust dividends and pensions before drawing some conclusions.

This is the first rise in the top rate of tax since 1974, after 35 years of it either being stable or reduced. It is worth reiterating that the Government estimate that the new 50p rate on earnings above £150,000 will raise £1.13 billion in 2010-11, rising to £2.52 billion in 2011-12. However, the new tax rate’s implementation is largely the result of political posturing. The change sends the wrong signal to entrepreneurs who are in the UK and to those who might be attracted to come here, and it will lead many to question the UK’s economic competitiveness, especially in relation to its tax code. The proposal also adds to massive uncertainty about the UK tax system and is a reminder of the importance of predictability in that system. Moreover, it adds significantly to UK tax complexity, which, as we heard this morning, is already a developing theme in our deliberations on the Bill. The 11 different marginal tax rates that have been created in recent years are incredibly complex.

Questions remain about whether the proposal will raise anything like the amount that has been suggested, and I am disturbed by the earlier evidence that, in the Treasury’s assessment of what the measures will yield, it did not separate the phasing out of allowances on the one hand, and the introduction of the 50p tax rate on the other. There seems to be an assumption that those two factors will prompt the same behavioural reaction, but people’s reactions may well be very different. For example, somebody who currently earns £95,000 but may expect to earn £105,000 might go about not earning that extra £10,000, but doing something else; on the other hand, somebody who earns £250,000 might decide to relocate. It is fundamentally flawed to throw two kinds of consideration into the same estimate of revenue.

The ancillary changes to pension and dividend rates act as a severe disincentive to save and they send the wrong message on saving—my hon. Friend the Member for South-West Hertfordshire spoke earlier about the importance of our savings culture. Also, the change to the trust rates might have a perverse impact on many who are not well off and are about to suffer undue hardship as a result of the Government’s measures.

Reactions to the 50p tax rate announcement were very interesting. We will turn to focus groups in due course.

Jeremy Browne (Liberal Democrat, Taunton)

From the tenor of the hon. Gentleman’s introductory remarks, one could be forgiven for thinking that he is opposed to the 50p tax rate.

Greg Hands (Conservative, Hammersmith and Fulham)

Our pledge is clear: we do not think that it is the right thing to do, but we are not pledged to reverse it. It will have to take its place in the queue of other tax measures that we will look at. Our priority will be to lower the tax burden on those on a medium income, so reversing the 0.5 per cent. rise in national insurance contributions for those earning more than £19,000 will be our priority. But that does not prevent anybody from raising a number of questions about the 50p tax rate.

Brian Binley (Conservative, Northampton South)

Is not the other reason that we cannot make promises and mislead people that we do not know what mess this Government will get us in to? Is not that the truth of the matter?

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is absolutely right. Public finances are in an appalling and worsening state. The Financial Secretary has already spoken about why he had to scrap his own 45p tax rate, which he launched only a few months ago. To then have the nerve to say that we should state what our first Budget might look like, a full year in advance of when we might be elected, shows real cheek.

There was large-scale condemnation of the move to a 50p tax rate. I mentioned focus groups, which, interestingly, cropped up in Second Reading when the right hon. Member for North Tyneside (Mr. Byers) referred to them. I will come back to examine some points that he made.

Even those who one might expect to be natural supporters of the 50p rate tempered their praise. For example, an editorial in The Guardian, which one might have expected to support it—I think that, broadly, it did—commented that the measure was

“a commendable attempt to share the pain”,

which sounds fair enough from the Government’s point of view,

“—but it will not do much to plug the yawning gap in the public finances, seeing as it was not combined with measures on property or capital.”

So, even The Guardian was not was not particularly supportive of the new tax rate. Hamish McRae inThe Independent said:

“Leave aside the breaking of the New Labour covenant on tax rates, it is plain stupid to make a change that brings in less revenue, not more. If you need more revenue you have to be honest and acknowledge that it must come from higher basic rate income tax and higher VAT.”

Similarly, The Economist observed that the changes

“will irritate the 1-2% of taxpayers affected; but it will hardly solve the problem. That will require broader, more painful measures in the medium term”.

Moving on to those who are a little more outright in their condemnation, The Times, in its editorial, said:

“The decision to raise the top rate of tax to 50 per cent will punish some bankers, but will simply send others scurrying to Geneva.

The vast majority of the 350,000 people earning more than £150,000 will, of course, stay in the UK. They will not complain. They will call their accountants. A higher rate of tax is likely to generate much less revenue than the Treasury hopes, and much more avoidance.”

I have almost finished quoting the newspapers, but it is important to gauge the reaction to the biggest change to our tax code on the top rate in 35 years. The Financial Times editorial said:

“A fair tax system must be progressive.”

We saw earlier how the 11 new marginal tax rates are eroding the progressive nature of our tax system. The editorial continued:

“But the more a country raises money from a small number of rich people, the fewer of them it will find it has. Raising serious revenue requires a broad tax base, not an assault on a small minority of high earners.

But these rises are not about raising money”.

In an article in yesterday’s Evening Standard on the overall competitiveness of the UK in relation to tax and the economy generally, Sir Richard Branson, the founder of the Virgin Group, said:

“Higher taxes may be politically attractive in the short term, but I think this could be a real hindrance to the next wave of UK entrepreneurs and international companies looking to invest in the UK.”

Peter Bone (Conservative, Wellingborough)

My hon. Friend is giving some excellent examples of the folly of the Government’s policy. The Financial Secretary let it out of the bag; there is no financial reason; it is being done because it is popular in his constituency. This is a dog whistling campaign to get the Labour party core vote out, so it is not decimated at the next election.

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend gets to the heart of the matter, which is why I asked whether the Financial Secretary was going to campaign on this issue nationwide believing that higher taxes will be popular and will make people more likely to vote Labour. The history of the Labour party in the past 15 years suggests that the opposite is the case.

Jeremy Browne (Liberal Democrat, Taunton)

Does the hon. Gentleman anticipate that Tony Blair will join the Financial Secretary on the campaign trail? By all accounts he regards this as a betrayal of his legacy as leader and originator of new Labour—

Peter Atkinson (Conservative, Hexham)

Order. I am anxious to keep the debate to clause 6.

Greg Hands (Conservative, Hammersmith and Fulham)

Thank you for that guidance, Mr. Atkinson. I was going to mention Tony Blair because it is important to reference manifesto pledges. I have signed up to receive the e-mails and funny bulletins from the Tony Blair Faith Foundation and about his middle east activities. I have not seen anything in those e-mails about the 50p tax rate, but I am led to believe that he has condemned it quite strongly in private conversations with leading people in the Labour party. I think he said that it would be “a terrible mistake”.

I shall also talk a little about how in the last Parliament one political party was pledged to introduce a 50p top rate of tax—the Liberal Democrats. I was going to mention some of what the then Prime Minister, Mr. Blair, said to attack the 50p top rate of tax. It will make uncomfortable listening for some Labour Members.

I am still looking at the reactions to the 50p top rate of tax. Richard Lambert, the director general of the CBI, said that he had spoken to some business people who were considering relocating as a result of the new measures, which he described as highly unwelcome.

Perhaps the most interesting reaction was from a gentleman who was until quite recently a member of the Government. Lord Jones of Birmingham, the former Business Minister, was one of the Prime Minister’s personal appointments. He resigned earlier this year—perhaps he had more foresight than some and could see what was coming down the road. Referring to the new 50p higher rate of tax he said:

“I thought New Labour was about empowering people, not a command economy mentality and the politics of revenge.”

He also said:

“The greatest criticism was that there was no vision. The overriding thing was a feeling of disappointment. I was hoping to see leadership”.

I believe that Ministers were led astray by the focus groups.

Mark Todd (Labour, South Derbyshire)

I want to ask the hon. Gentleman about the imprint of the fence on his bottom on this subject. He is making a powerful speech attacking this measure, but I have yet to hear him say either that he will oppose the clause or that he would seek to reverse the measure at a future date. I would welcome an explanation of his posture, uncomfortable as it seems.

Greg Hands (Conservative, Hammersmith and Fulham)

I repeat what I said earlier, although I thought I had made it absolutely clear. We do not believe that this is the right thing to do, but we cannot pledge to reverse it. It will be difficult to say what the public finances will look like in 12 or 13 months’ time, or hopefully less. The Exchequer Secretary chuckles, but I was interested to read her reaction in a debate on a statutory instrument in January. When my predecessor, my hon. Friend the Member for Putney (Justine Greening), asked her what was coming up in the Budget, the hon. Lady replied that it would be irresponsible of the Government to say what might be in the Budget three months in advance. It is a bit rich for Labour Members to ask us to set policy a year or perhaps longer in advance.

Mark Todd (Labour, South Derbyshire)

I certainly look forward to receiving a leaflet through my door explaining that particular position. Can I suggest to the hon. Gentleman that there are two issues to confront here? The first is revenue raising, and I largely agree with the thrust of the argument about the relatively small sum the measure will raise. My right hon. Friend the Financial Secretary made that point himself. However, there is also the message of equity in a state and country at large that is facing an economic crisis and the need to share the burdens. There is an argument for saying that those who are best off should pay more in those circumstances.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman makes two interesting points. First, on revenue raising, I shall talk about whether the measure will in fact raise the sums that we all agree are really quite small when seen in the wider context of our huge budget deficit.

Greg Hands (Conservative, Hammersmith and Fulham)

I think that I was in the middle of—

Peter Bone (Conservative, Wellingborough)

On a point of order, Mr. Atkinson. If there is a statement by Mr. Speaker early this evening, will the Committee be adjourned?

Peter Atkinson (Conservative, Hexham)

In normal circumstances, the Committee would adjourn only for Divisions, but in view of the importance of what such a statement might contain, I shall seek further advice.

Mark Hoban (Conservative, Fareham)

On a point of order, Mr. Atkinson. Should not the Government be providing the quorum for a Committee such as this? Only two Government Members are present; it is the Opposition Members who are making the Committee quorate and able to continue its proceedings.

Peter Atkinson (Conservative, Hexham)

That is a point of observation, rather than a point of order.

Greg Hands (Conservative, Hammersmith and Fulham)

Before the multiple Divisions, I was in the middle of responding to an intervention from the hon. Member for South Derbyshire, who is obviously still involved in one of those Divisions—no, he is returning as I speak. The first point that he raised was about how much revenue the 50p tax rate would raise. His second point was about equity and whether it is fair. Equity is a tempting argument, but the problem is that it is predicated on those higher rate taxpayers staying exactly where they are. There is not much point in having a more equitable tax arrangement if the people at whom it is directed change their behaviour, move out of the country, start putting more of their cash into something else, work less or get more involved in charitable activities.

If the 50p tax rate is so equitable, why did the Government not introduce it earlier? If it is equitable from the Government’s perspective now, surely that was also the case in 1997. The reality is that the Government are scrabbling around, trying to find a way to fill the gap, and soaking the rich is too politically tempting, at least for the Government under the current Prime Minister.

In any case, the world has changed a great deal since 1997. We have become more globalised and the tax code has become more complex, which will generally make it easier to avoid paying tax. It is also much easier for people to locate elsewhere. With modern communications and the ability to travel very quickly, it is much easier to do business outside the UK. I hear what the hon. Gentleman says about equity, but we have to ask ourselves why, if the 50p tax rate is equitable now, it was not equitable in 1997.

I shall now explore whether the measure, at least in the Government’s eyes, is to be temporary or permanent. The interview with the Chancellor in the Daily Mail on 23 April was fascinating. He said that he would have to ask people on higher earnings

“to contribute a bit more while we resolve this situation”.

Suddenly, that introduced huge uncertainty about the timing. I think that we were led to believe that the measure might be permanent, but suddenly the Chancellor was saying that it applied only

“while we resolve this situation.”

Jeremy Browne (Liberal Democrat, Taunton)

Does the hon. Gentleman think that the Chancellor had in mind the period until the economy returns to growth, which he predicts will be at the turn of the year, or the period until 2031, when public borrowing will be back to the 40 per cent. that the Prime Minister previously set as the maximum level?

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman raises a very interesting question: quite what is meant by “this situation”? That might have referred to the banking crisis and the ongoing immediate financial crisis. Perhaps the Chancellor was not referring to the economy; perhaps he was not referring to budget deficits and overall levels of indebtedness. However, his comment introduced enormous uncertainty into the equation, not least because the Leader of the House, I think on the same day, implied that the change was to be made permanent. What will define this new term of resolving the situation? How long does the Financial Secretary expect the measure to be in place? If it is abolished, will tax allowances be reintroduced for higher rate taxpayers? Are the two things inextricably linked in his mind, or might some separation come about in the Government’s thinking?

There may be a hypothetical element to those questions, but they are important. For example, the behavioural response of higher rate taxpayers to a temporary surcharge on higher earners could be rather different from their response to a permanent system of higher taxes, which would mark a clear break with the established consensus on top marginal rates of tax. Tax predictability is important, and we need the Financial Secretary to shed some light on it.

The area of greatest controversy, which was mentioned in earlier interventions, is whether the 50p tax rate will raise all that the Treasury says it will. It is worth taking a quick look at the 45p tax rate—a rate that was abolished before it was introduced. In the pre-Budget report, we saw the reality that it is taxes on the many rather than on the rich that will fill the hole. The PBR estimated that introducing the 45 per cent. rate and raising the tax rate on trusts to 45 per cent. would raise £670 million in 2011-12, but that restricting the personal allowance for individuals with incomes of more than £100,000 would raise £1.32 billion in the same year.

By contrast, the PBR said that increasing the rates of national insurance by half a percentage point on employees, employers and the self-employed would have raised an estimated £5.4 billion in 2011-12. That increase in national insurance contributions would have raised eight times the revenue that would have been raised by the 45p tax rate, and five times the amount that was going to be raised by phasing out the allowances. With the 50p tax rate, that ratio is obviously tighter, but a much larger amount of tax is still being raised from the many than from the few. The real losers under this Budget and the Government’s approach in general are those being paid more than £19,000, who will have to cough up more on their national insurances contributions.

The words of the Institute of Chartered Accountants in England and Wales were instructive. It says:

“Whilst higher taxes for higher earners may be politically popular, the actual amounts they raise are relatively small and will make hardly a dent in the UK’s overdraft”.

Jeremy Browne (Liberal Democrat, Taunton)

If that is true, there is surely no barrier to the Conservatives repealing this proposed item of legislation at the earliest opportunity.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman raises an important question. It has been posed before. As I shall say later, the jury is still out on whether the 50p tax rate will raise significant tax revenues; and, if so, how much it will raise. I shall also say a little about the modelling done by the Treasury and by the Institute for Fiscal Studies, to which the Financial Secretary referred earlier.

First, I return to the comments of the ICAEW. It said:

“the Red Book anticipates that these measures will bring in only about £3bn, not a huge sum when compared to overall government spending of £671bn forecast for 2009/10 and receipts of £496bn.”

That means a Budget deficit of £175 billion, but the 50p tax rate will raise only £3 billion of that—it will plug only a small part of that hole.

In the IFS post-Budget briefing—I think that the Financial Secretary is flicking through a copy as I speak—Robert Chote, its director, put the changes to income tax on the wealthy into context. I am not sure whether the Financial Secretary and I will end up quoting the same paragraphs, but this is what Mr. Chote said in his post-Budget briefing:

“Much attention has focused on the income tax increases on the rich, which the Treasury hopes will raise £7 billion a year. Even if this estimate is correct, the gain will partly be offset by losses of VAT and other indirect tax revenues buried in other Budget forecasting changes.”

He continued:

“We should also bear in mind that increases in fuel duty and National Insurance will raise a roughly similar amount—and from a much broader range of families.”

He went on:

“And all the tax increases announced to date will in total raise only about 10 per cent. of the money the Treasury is looking for by 2017-18. So the main burden of the looming tightening—at least over the next few years—is likely to fall on the users of public services.”

That is a slightly different flavour from that given earlier by the Financial Secretary.

Interestingly, in a presentation on the Budget changes to direct taxes and benefits, another officer of the IFS, Stuart Adam, noted:

“Huge uncertainty about how much people will reduce their taxable income in response”,

observing that they might

“work less, retire earlier, emigrate, contribute more to pension or charity, convert income to capital gains, incorporate, invest in tax avoidance”.

That is a huge menu of available options, many of which will immediately look quite attractive. Moreover, the Treasury’s estimate that the 50p tax rate would raise £2.4 billion ignored any effect on consumer spending and the consequent fall in indirect tax revenue. Not just the IFS, but one of the Government’s favourite commentators, the Centre for Economics and Business Research, was perhaps even more condemnatory than the IFS in its press release:

“Government will lose £800 million from tax hikes on the rich. Budget tax increases on those earning over £100,000 will reduce government revenues by £800 million and hit the City of London; 25,000 to go into tax exile.”

Prior to the pre-Budget report in November, the CEBR estimated in its document, entitled “Would a 45 per cent. tax rate raise any revenue at all?”, that the likely 45 per cent. tax rate on income over £150,000 a year would cost the economy 35,000 jobs and, over a 10-year period, cost the country £2 billion in revenues. That was the word from the CEBR, which is normally quite favourable to the Government.

The Treasury Committee was also rather doubtful about some of the claims made for the amount that might be raised. It said, admittedly more neutrally:

“We believe that there are considerable uncertainties over the yield to be raised by the 50 per cent. top rate of income tax.”

The Treasury, I note, did not deny a report in TheSunday Telegraph on 26 April about its internal modelling, which I will come to in more detail in due course. The internal modelling suggested that 69 per cent. of those affected would dodge some of the new tax. The report states that the Budget made

“cautious assumptions about any impact on tax revenue through behavioural changes.”

If the Treasury really does have private estimates that more than half the new top-rate taxpayers will seek to avoid the tax, we call on it to publish them so that we can all see what impact this may have.

That leads me to my next area, which is whether we have reached the revenue maximisation point with the top rate of tax. It is worth, therefore, looking at some of the history of top tax rates in the UK. Back in the 1980s, just before the 1988 Budget, the top 1 per cent. of earners paid 14 per cent. of all the income tax paid in this country. By 1997—it took some time to work through fully—that had risen from 14 to 21 per cent. A major reason for that was that the top rate was cut from 60 to 40 per cent.

Returning to our friend the IFS, it has produced a sophisticated version of this sort of modelling, which some might call the Laffer curve, perhaps using too simplistic a view of the IFS model. The IFS has done some study on “taxable income elasticity”. It put this proposition to us, saying

“suppose the marginal tax rate was originally 50 per cent. and increased to 50.5 per cent. Then the net-of-tax rate would have fallen from 50 per cent. to 49.5 per cent., or a fall of 1 per cent.”.

If the elasticity were 0.46—this is the figure the IFS has used, based on the last time the top rate of tax came down in the late 1980s—it says that gross income would fall by 0.46 per cent. I am sorry: this is a slightly complicated argument, but it is important in trying to answer the question raised by the hon. Member for Taunton as to whether this measure will yield more tax intake.

The IFS is using its own model, which is admittedly based on some assumptions that are a little dated. However, they are still probably the most recent assumptions that anybody can make in assessing people’s behavioural change when they face different tax rates. The IFS then calculates that increasing the tax rate above 40 per cent. would result in the Government collecting less tax from the rich.

Her Majesty’s Revenue and Customs apparently uses in its own modelling a figure of 0.35 instead of the figure of 0.46 that the IFS uses. Nobody can say with any certainty which figure is right, but at least the IFS figure is based on an historical example. As I will explain in a moment, the Treasury’s figure of 0.35 is based on far more questionable evidence.

Nevertheless, the Treasury uses the figure of 0.35. Using that figure and putting it back into the IFS model produces an optimum revenue-raising rate of 57.3 per cent. My understanding of the Treasury model, which I think is the same as the IFS’s understanding of the Treasury model, is that the tax maximisation point is not a 50p top rate of tax, but a 57.3p top rate of tax. I would be grateful for a ministerial explanation of that. Perhaps he will agree to publish some of the findings of the Treasury model.

The IFS drew out of the Treasury the assumptions that it used when it was deciding what the 45 per cent. tax rate would draw from the very rich. It turns out that the Treasury had its own version of the Laffer curve, but the elasticity ratio—in other words, the lengths to which the rich would go to avoid paying this tax—was put down as low as 0.35, as I have said. A rate of 1.0 means that the rich will avoid everything, whereas a rate of zero means that there will be no change in behaviour.

So, as I say, the Treasury figure was as low as 0.35, whereas the IFS figure was 0.46. That is where the crux of the argument lies—in trying to predict likely behaviour. So far, the Treasury has either not come clean about its methodology or is perhaps deliberately obscuring some of its results with its assumption.

In other words, the Government think that there is far less proclivity to avoid tax by higher earners than the IFS does. However, I must stress that the IFS has conducted the study. It is the organisation that looked at historical rates and used some figures that might have some reasonable basis.

The Treasury’s figure of 0.36 suggested that the tax maximisation point is around 55 per cent., or 57.3 per cent. for earnings over £150,000. I would be interested to hear from the Financial Secretary how the Treasury arrived at that figure of 0.36; it does not seem that the Treasury itself is willing to say. However, it does seem that the figure of 0.36 per cent. is just a tiny bit lower than the figure that one would get for the country as a whole.

So, there seems to be significant evidence that the Treasury’s modelling is that a high earner is just as likely as somebody who is perhaps earning an average wage of £25,000 to try to avoid tax, yet all the experience and all the observation of the issue suggest to us that the opposite is true, and that a higher-rate earner is far more likely to try to avoid tax and will probably be more able to do so. They are likely to be in a profession that will be more easily transposed. Of course, they are also more likely to be able to afford better accountants, better tax advice and so on.

It seems to me that the Treasury has deployed the elasticity ratio for the average British worker and simply applied it at the same rate of 0.36 to those on £150,000 a year. The Treasury tries to justify that by saying that the rich would normally have an elasticity ratio of 0.4, but it has downgraded that figure to 0.35 because it has abolished the personal allowance, conveniently getting close to the rate for the general population.

However, the IFS curve suggests that the peak-yielding tax rate is about 42.5 per cent. It is fair to say that the IFS does not like to say things with any degree of absolute certainty under its model. All the time, it stresses how much uncertainty there is, and obviously there is a lot of uncertainty in these models. Within them, one is predicting the behaviour of a set of people, given various hypothetical changes that have not even happened yet.

According to the IFS model, if its figure of 0.46 is correct, the 50p tax rate will lose rather a lot of money, as anything over 42.5 per cent. starts to yield less for the Exchequer. Is the IFS being realistic? To be fair, it is saying, as I have already mentioned, that there are a large number of assumptions behind the model. Its assumptions are compiled thus:

“Using information on how the income share of the richest 1 per cent. of adults changed during the 1980s, the last time marginal tax rates for the very rich were altered.”

Are we in a situation similar to that of the 1980s? That is a relevant question. It is difficult to judge, but I think that there is evidence that avoidance is likely to be higher now than it was then, for the reasons that I have talked about, such as labour mobility, the ability to move where one is working and the ability to carry out one’s work in the UK even though the work is based abroad. We have to be extremely careful due to the greater globalisation that we have seen over the past 20 years.

Peter Bone (Conservative, Wellingborough)

My hon. Friend is making a powerful and interesting argument, which has much merit. If a business person in this country was on a fairly high income and the top rate was 40 per cent., they might say, “I do not care. I will pay that.” But the more that goes up, the more they will think about the whole issue. That is the reality of the situation. It was recognised by Tony Blair, and that was part of the success of new Labour, but it has been abandoned here today.

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is absolutely right. It would be too simplistic to suggest that there is a specific point at which higher earners or entrepreneurs will say, “I will remain in the UK or I will leave.” There are all kinds of different stages, one of which might be to pay for better tax planning and better accounting, and for more similar services, as a way to avoid that higher tax rate. Therefore, great doubts exist as to whether the Treasury has got its guesstimates right. It is betting a lot, it seems, that the revenue maximisation point is a tax rate on top earners of around 56 per cent. The IFS suggests that it is 42.5 per cent.—an enormous difference, which shows the great leap into the dark being taken by the Government.

On the same subject, the Institute of Chartered Accountants has argued that a detailed economic analysis should be made of the proposed change before any final decision is taken to proceed with the increase. I know that many others feel the same—that it would be better to have a proper study first.

Brian Binley (Conservative, Northampton South)

I congratulate my hon. Friend on his speech. His point about the Government’s analysis when introducing the measure adds great concern when one understands that the Chancellor has admitted that there was no science behind the Government’s decision. Are they not an irresponsible Government, grasping for political purposes without knowing the impact, the effect or, indeed, the overall revenue return?

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is right. That has been characteristic of tax-making policy over the past two years. It has been based on a series of political whims and machinations, rather than proper study and assessment of the changes in tax rates.

We must bear it in mind that the Government have gained some merit in keeping various tax rates stable over some years before 2007, but now they are throwing away all those years of stability based on a series of whims, which, as my hon. Friend points out, are not based on any science. I have been looking at some of the so-called science involved in the modelling, and I think a lot of it is at best questionable.

On the question whether the measure will raise what the Government say it will raise, I doubt the Treasury modelling, relative to what the IFS is saying. Neither is likely to have exactly the right answer, as a huge number of assumptions are being used, but I feel that the IFS has a slightly more reputable basis for its modelling than the Treasury, although, of course, the Minister may tell us a little more about the Treasury’s modelling in due course. The Treasury seems to use average human behaviour—that of the whole population—to predict the behaviour of the top 2 per cent. of top earners.

Secondly, the Treasury underestimates modern mobility and the ability of people today to avoid paying tax, compared with that 20 years ago. I am disturbed by the fact that in the Red Book figures and the assessment of the revenue raised, the Treasury has drawn no difference between the consideration of the 50p tax rate and the phasing out of the personal allowances. We need to model the two separately. In many cases, different people are involved and we are looking at different types of behaviour.

I will move on to the question of UK economic competitiveness. The impact of the measures on the UK’s competitive position should not be underestimated. For a moment I will return to our old favourite the CEBR, which used to be the Government’s favourite. On the changes it said:

“Our provisional calculations suggest that if these were implemented, over 3 years there would be a loss in UK jobs building up to 140,000; a loss in GDP in the City of London of 3% and a loss in tax revenues for the government of £800 million a year. About 25,000 high end taxpayers would be likely to shift tax regimes, with the low tax cantons in Switzerland like Zug the likely largest gainers.”

I have never been to Zug, so I do not have any first-hand experience of its attractions. However, it is perfectly possible that we might be jeopardising the UK’s overall economic competitiveness by increasing temptation beyond a certain point for people to make that move. The CEBR goes further:

“We can understand the tough choices that governments might have to make when they have to trade off the prospect of raising revenues against the potential damage that higher taxes might do to the economy. But the evidence here seems to be that the damage to the economy is so great that there is no trade off. The economy is worse and revenues are lower.”

That is very important.

The ICAEW has similarly expressed concern about the combined impact of the various proposed changes to the income tax rules—the 50p tax rate, the removal of personal allowances for those with income exceeding £100,000 and the pensions changes—on the UK as a place to live, work and invest. As I have mentioned, a further effect could be that some existing high earners are driven to move abroad, and the changes could also drive away aspirational young people who want to find a better and more rewarding life elsewhere.

My constituency currently has a lot of French nationals who are essentially here because in their view, France charges too high a top rate of tax. It also has a large number of Polish citizens who are not here primarily for tax reasons, but if the tax regime becomes a lot tougher, especially with the increase in national insurance for those earning above £19,000, they may be tempted to go back.

Jeremy Browne (Liberal Democrat, Taunton)

On that topic, has the hon. Gentleman given any consideration to Arsene Wenger, the Arsenal football club manager’s thoughts that this measure may drive away footballers who are able to ply their trade in many markets? Those players give great pleasure to people who watch premiership football.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman raises an interesting point. I think that I am the only Conservative MP who has a premiership football club in their constituency. In fact, I represent two—Fulham and Chelsea. It would be remiss of me to comment on what arrangements Arsenal may have made, but the impact of the 50p tax rate on Chelsea football club could be significant. However, I do not want to stray down that road, as there will be different views about the desirability of all those highly paid footballers’ being in the country.

Mark Todd (Labour, South Derbyshire)

I draw the hon. Gentleman’s attention to the remarks of the England manager who has been concerned at the prevalence of foreign footballers within the premier league. There is an issue to be balanced here.

Peter Atkinson (Conservative, Hexham)

It may be an issue, but not for clause 6.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the hon. Gentleman for that intervention. Last year, the tradition was talking about cricket during the Finance Bill; perhaps this year it will be football, even without the hon. Member for Ealing, North (Stephen Pound), who last year almost always pulled us back into the world of football.

To finish my point, I believe that there will be moves to transfer activity from higher earners to interesting but less remunerative activities and charities. That might be an important side effect, but it is likely to have a bad impact on tax revenues.

I was interested in the Bischoff report that was released earlier this month. The headline in the Daily Mail was, “Report warns of tax threat to Square Mile”.

Mark Hoban (Conservative, Fareham)

It was a Treasury report.

Greg Hands (Conservative, Hammersmith and Fulham)

As my hon. Friend says, it was a Treasury-sponsored report. According to the Daily Mail, the report said that

“confusion over Whitehall tax policy had put Britain’s reputation as a destination for financial high fliers at risk last year.”

That was before this year’s proposed rises. The article continued:

“Questions about the ‘clarity and continuity’ of tax policies became an issue in 2008, the report into the future of the UK’s financial services sector said.”

The report stated:

“This may have raised issues about the UK’s attractiveness as a centre for international financial services and indeed other industries—beyond which its reputation as an attractive investment destination might have been questioned.”

Mark Field (Conservative, Cities of London and Westminster)

My hon. Friend is making an interesting and persuasive case. Does he share my concern that the making of tax policy, whether here or abroad, focuses too much on overseas nationals? Perhaps we should focus more on ensuring that those who benefit from setting up businesses, employing people and making large profits here have a long-term commitment to this country.

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend makes an important point. In the last couple of minutes, our discussion has perhaps been sidelined into the subject of foreigners who are resident here, such as footballers. His point is important and powerful. The question is not just one of foreign nationals, as one can see from the City. To return to the Bischoff report, huge numbers of people working in the City are not foreign nationals but UK subjects.

If my information is correct, the Chancellor co-chaired the group with the former Citigroup chairman, Sir Win Bischoff. Doubtless, the Chancellor was a little perturbed by the results of the report. Sir Win said that the question of tax was “important”. He added:

“In relation to developed countries, we want a competitive tax system and one that is predictable and stable.”

That relates to my earlier point about the importance of the UK tax code being predictable and stable. That has been blown out of the water by the events of the last two years.

Brian Binley (Conservative, Northampton South)

My hon. Friend touches on the City. That area of our economy seemed to receive great favour under the premierships of Mr. Blair and his successor. How does my hon. Friend think this Government intend to promote the City as an international centre, while increasing taxes in this way? Does that not defeat the object?

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend makes an important point, which would be best answered by the Minister. Obviously, business cannot return to how it was prior to 2007-08, but London must continue to be an important and powerful financial services centre, not least because we need to generate tax revenues. We need something to plug the £175 billion deficit that I referred to earlier. Getting the City back into a productive mode in which it produces those tax revenues should be an important Government policy.

Returning to the UK’s competitiveness, the Financial Secretary mentioned briefly how the higher rates of tax in the UK stack up against those of other G20 economies. A PricewaterhouseCoopers press release after the Budget stated:

“From next April, a year earlier than expected, the UK will rank 18th among the G20 economies in terms of income tax and social security rates for senior executives, based on current rates. The change applies to both domestic and overseas high-earners working in the UK.

This increased tax take could accelerate the movement of high earners and top performers in industries like finance and technology to other established and growing economic hubs. Countries like Switzerland will look increasingly attractive to some of the people in the key industries needed to lead the UK out of the recession.”

We have to worry about the competitive position of London as a City, too. We have talked a little about that, but it is worth examining in more detail. The position is vital to restoring overall tax revenues in the country. London needs to remain a premier—if not the premier—international financial centre. I am not making a call to go back to business as usual as it was prior to 2007; that is a matter for a separate debate, but I am calling for the City of London to be restored to being a tax-generating part of our economy.

Mark Field (Conservative, Cities of London and Westminster)

I hope to address one or two of those issues later, but it should be stressed first and foremost that the City of London is still a pretty substantial tax generator in several areas that have not been badly affected by recent events, such as insurance. Will my hon. Friend give some thought to whether, with a bit of 20:20 hindsight, we have become a little over-reliant on financial services not only in the City of London, but throughout the United Kingdom in recent years? Given that it will take some time to adapt to other industries that will be of importance, such as creative industries in all their facets, perhaps we should focus on that, too, and not return to the situation that has been so prevalent over the past 12 years when the Government have prostrated themselves before global financial services with non-domiciles and the like, to what might be the detriment of a balanced economy.

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is absolutely right. Experience shows that, during the nine years of this decade, as an economy we have become too dependent on financial services. If I am not mistaken, four fifths of all new jobs in the economy since 2000 have been created in financial services. However, it is not exclusive to say that we need to diversify and rebuild the City of London as a generator of tax revenues. I appreciate my hon. Friend’s point about the insurance sector, but we are not talking about the whole of the City of London having suddenly stopped being in business. A huge tax generation is already going on. It is possible to do both, and diversify and rebuild the tax base.

The Mayor of London made some interesting comments about the 50p tax rate, but his comments that should have been given more attention were those about the threat that the high rates of tax and regulation make to the role of London. I was interested to read a piece written by Anthony Browne, the head of policy in the Mayor’s office. He warned that, after the Budget, the extra taxes could push higher earners to other countries without bringing in revenue to the Treasury, which is the matter before us here today. He said:

“Far more than the rest of the UK, London has an internationally mobile workforce, and its success depends on being a global magnet for talent and business. Having a competitive tax regime is a key part of that, but we will now have the highest income tax rate of any major economy in Europe, or any global commercial centre. This new barrage of taxes on high earners comes on top of the government’s assaults on non-doms, which is also a largely London phenomenon. It sends out a message that high earners are not welcome, when they are not only welcome in London, but an essential ingredient in London’s success. This isn’t about defending the rich, but defending the economy. If high earners either stop coming here, start leaving, or simply work less, it would be a real setback for the London economy. The government will have achieved a real double-whammy—it will have failed to raise much extra revenue, and at the same time strangled the economy. The government must not kill the goose that lays the golden egg.”

Lindsay Roy (Labour, Glenrothes)

It is a pleasure to serve under your chairmanship, Mr. Atkinson. Is the hon. Gentleman hinting that the 50 per cent. tax regime might tempt some of the 19 millionaires in the shadow Cabinet to leave the country?

Greg Hands (Conservative, Hammersmith and Fulham)

I am not sure of the basis to that question, but I am sure that it is not relevant to the discussion. It has taken the hon. Gentleman some considerable time to come around to asking that question, which he clearly read from a piece of paper. We are five or six hours into the debate, and it says something that it took him that long to pluck up the courage to ask it.

Mark Field (Conservative, Cities of London and Westminster)

Does my hon. Friend agree that it would be the prospect of another five years of ruinous Labour government, rather than a 50 per cent. tax, that would send however many millionaires we have in the shadow Cabinet from these shores?

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend makes an interesting speculative point, but I would probably be best advised not to go down that road.

London generates 17 per cent. of UK GDP; there are four times as many high earners in London as in the rest of the country, and 145,000 Londoners will be hit by the changes. It is not only the Mayor’s office, but respected commentators such as Tony Travers who have been talking about the importance of London to the economy and how the Government should not kill off London by putting on too high a rate of tax. In the Evening Standard of 23 April—the day after the Budget—he said:

“Now the bad news: that continued economic strength means that Londoners will pay for yesterday’s Budget. The Chancellor’s dash for indebtedness will in time lead to higher taxes...First, because the capital and its region are home to many of the country’s highest earners. A 50p top tax rate...will raise far more from the London area than elsewhere. Some people will see this result as fair, others not. But whatever the equity of the change, it will fall disproportionately on London’s taxpayers...Second, the vast growth of government debt will lead to higher taxes for many years to come. Research has shown that London and the South-East ‘export’ tax to the rest of the UK. That is, taxes raised in and around the capital exceed the amount spent by government within the area—by up to £20 billion a year. For many years, this pattern has allowed public services to be provided in other regions to a higher standard than their own taxpayers could otherwise afford.”

Stewart Hosie (Scottish National Party, Dundee East)

May I bring the hon. Gentleman back to the financial sector generally, rather than just the City of London, although he is doing a stoic job of defending it? For a moment, I thought that he was the Member for London First. This is about receipts from the financial sector and revenue yield. We know that the five-year forecast for the revenue yield from financial services and housing is down, but even in five years’ time it will not be back to its 2007 position, so what does he think needs to happen with the tax rates to stimulate growth and return to the yields we had before the recession started?

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman raises an interesting point, which comes to the nub of the matter. I do not know whether his five-year figure about housing and finance yields returning is right, although I do not disbelieve it, but that is part of the problem. It is important that our tax revenues are increased as quickly as they reasonably can be, so I hope that the five-year figure is wrong. On his general point about where we will raise the taxes, we are going to have to see what happens to public finances over the next year, unless the Government wish to call a general election before then.

On financial centres and which had the highest tax rates, I cannot remember exactly what the Financial Secretary said about that, but I was interested to read an article in the Financial Times of Thursday 7 May, entitled, “City of London will be the most highly-taxed financial centre in the world.” The article considered the different percentages of their own income that people are able to keep. Dubai, unsurprisingly—I do not think we could ever compete with Dubai—allows people who work there to keep 95 per cent. of their income. That amount falls to 85 per cent. in Hong Kong, 82 per cent. in Singapore, 80 per cent. in Guernsey, 68 per cent. in Zurich and 62 per cent. in Tokyo. Crucially, the current amount in London is 61 per cent., which is higher than New York, Frankfurt or Paris, but the effect of the change will be that higher rate earners in London will keep only 50 per cent. of their taxable pay. Having been more competitive than New York, Frankfurt and Paris, it is now less competitive than all three of those important financial centres. It is worth remembering that someone who earns £250,000—some on the Government Benches decry people earning such levels—pays £125,000 per annum in tax, which, according to www.mysalary.co.uk, pays the salaries of about six nurses. It is important to retain these higher rate taxpayers as far as we reasonably can.

I want to talk about the political reasons behind the 50p tax rate. As we know, the Prime Minister loves creating his beloved dividing lines. Exploring the negative impact that the new rate might have on our future tax revenues, our economic competitiveness and so on leads one to conclude that it was a political gesture. Labour has reversed into a core-vote strategy. I was very interested to be in the Chamber when the right hon. Member for North Tyneside made his speech. Unusually, I do not have to qualify which speech, because he has made only one in the past year—according to his www.theyworkforyou.com entry. However, he obviously saved his first speech in 13 months for a big occasion. He said:

“I am told that when the proposal—

the 50p tax rate—

“was put to the various focus groups that political parties use nowadays, it received broad support as a popular measure”.

He also said that

“focus groups are not always right...It has to be right that when we need to raise revenue, we should focus on those with more money, rather than less, but to raise significant amounts of money, which is what we need to do given the present financial circumstances, we need a broad tax base. The 50p rate for those earning more than £150,000 will apply to some 350,000 taxpayers in this country. They simply do not provide the broad base to raise the revenue that will be needed in our present circumstances...That leads one to consider why the 50p rate was introduced in the first place. When one looks at the fact that it is being brought forward to April 2010, probably just a few weeks away from a general election, and when one considers that it targets a very small number of taxpayers, the only sensible conclusion to draw is that the 50p-rate proposal has more to do with political positioning and tactical manoeuvring than a principled, strategic approach to taxation and the raising of revenue.

He talked about “cynical political reasons” and continued:

“that simply will not work in our interests.”—[Official Report, 27 April 2009; Vol. 491, c. 615-616.]

He also raised the important question of whether the changes are intended to be permanent or temporary.

Ten years ago, the Prime Minister, as Chancellor, set out his three principles for the UK tax system. The three words were incredibly revealing—simplicity, fairness and competitiveness. In the past two years, he has busted all three of those principles. As we discussed this morning, “simplicity” has been completely broken by the 11 marginal tax rates. “Fairness” was destroyed by last year’s 10p fiasco, and the 50p tax rate has put UK “competitiveness” in severe danger. That is not to mention the breaking of the Labour manifesto pledge mentioned earlier. It is worth remembering exactly what Labour said in 2005:

“Our economic record has finally laid to rest the view that Labour could not be trusted with the economy. We are winning the argument that economic dynamism and social justice must go hand in hand...Labour believes tax policy should continue to be governed by the health of the public finances, the requirement for public investment and the needs of families, business and the environment...We will not raise the basic or top rates of income tax in the next Parliament.”

I shall compare that with the Liberal Democrats’ 2005 party political manifesto:

“Our package of tough choices on spending, and fairer taxes, means that most people will be better off. There is only one proposed net tax rise (to 50 per cent. on the proportion of incomes over £100,000 a year, affecting just one per cent. of taxpayers)”.

They go on to list a menu of things that will be afforded by the tax rise.

I found that absolutely fascinating. We mentioned the figure of Tony Blair earlier. One of Tony Blair’s favourite things to do during the 2001 to 2005 Parliament was attack Liberal Democrat questioners on their commitment to the 50p tax rate. In fact, I found 13 separate sessions of Prime Minister’s questions in which the then Prime Minister did so. For example, in the last Prime Minister’s questions before the general election, in answer to a question by the then leader of the Liberal Democrats, the right hon. Member for Ross, Skye and Lochaber (Mr. Kennedy), he said:

“I do not think that his proposal to take that money out of general taxation by a 50 per cent. top rate of tax is something that will recommend itself to people. It is a proposal that in my view would not raise the money that he thinks it would raise.”—[Official Report, 6 April 2005; Vol. 432, c. 1413.]

That was the last Prime Minister’s questions before Parliament was dissolved before the election. It was the election Prime Minister’s questions. That was the election manifesto on which Labour fought in 2005. Before that, Tony Blair said to the then Liberal Democrat MP for Newbury, David Rendel, that increasing investment

“by means of a 50 per cent. top rate tax...would not be good for the economy. Even if we raised the money—which we would not”.—[Official Report, 21 July 2004; Vol. 424, c. 327.]

It goes on ad infinitum; there are another 13. Tony Blair was quite sure that Labour was going into the election committed to not having a 50p tax rate and not raising the highest rate of income tax.

On the question of UK tax predictability, or rather unpredictability, a more subtle message is being taken by many out there that the UK’s tax system is no longer as stable as it was. For example, the planned 45p rate is being altered five months after its announcement, before it has even been introduced. It would have been tempting to believe that the early announcements of new tax rates in the pre-Budget review were meant to help people plan and predict, but the reality is that they were put there for pure political advantage. An early announcement by this Government does not mean greater certainty. As I said, last November, the top tax rate was to be 45p from 2011, but by this April it had become 50p from 2010.

The country’s tax system is losing credibility, and the process by which tax changes are made—not in response to long-term economic challenges but in pursuit of short-term tactical political gain—is causing immense damage to our international reputation and competitiveness. It all started with the pre-announcement of the abolition of the 10p rate and the reduction of the basic rate in the Prime Minister’s last Budget as Chancellor in 2007. It accelerated with the disastrous pre-Budget report of October 2007, as we saw the first example of the now-familiar phenomenon of the Prime Minister trying to head off a catastrophic loss of confidence in him on his own Benches. It continued with the 2008 Budget, with last year’s pre-Budget report and now with the 2009 Budget.

We must ask ourselves whether the £150,000 tax point at which the higher rate is charged will remain constant. My reading is that the Treasury has no plans to increase or index the £150,000 level at which the new 50p rate will apply, which will mean that hundreds of thousands more people will be caught as wages rise. Other income taxes, of course, rise in line with inflation.

The Chancellor has estimated that about 300,000 people will face the new 50p rate when it is introduced next year. However, accountants calculate that over the next decade, about 750,000 people—that is more than twice as many as in the current situation—will end up paying the 50p tax rate unless the £150,000 limit is raised. Anyone currently earning about £100,000 will pay the new 50p rate by 2020 if they enjoy average wage increases. They will also lose valuable tax breaks on their pensions.

John Ball at Watson Wyatt, a firm of actuaries— I am sorry; does my hon. Friend the Member for Northampton, South wish to intervene?

Brian Binley (Conservative, Northampton South)

No; I am listening intently.

Greg Hands (Conservative, Hammersmith and Fulham)

He said:

“Freezing the threshold would suck thousands more people in, particularly if big fiscal deficits, low interest rates, a weak pound and quantitative easing unleash a period of high inflation.”

The sudden, hasty introduction of the 50p rate is a huge blow to Britain’s reputation for tax stability and reasonable tax predictability.

On the complexity of UK taxes, the measures introduced will increase the differential between capital gains tax at 18 per cent. and income tax at 50 per cent., fuelling interest in structuring investments to fall within the CGT legislation rather than the income tax legislation. The reasons given for CGT unification in 2007 were, as the argument went, that the differential between the top rate of income tax, which was then at 40 per cent., and the 10 per cent. CGT rate was causing all sorts of people—mainly private equity—to dress up income as capital gains. The Government argued that they needed to unite the CGT rate as a way of preventing people from moving what was essentially income into capital gains. The differential then was 30 per cent. and under the proposals it will now be 32 per cent., so it remains to be seen what on earth is the basis for the Government’s 50p rate, as referenced to CGT.

I mentioned earlier The Sunday Times report at the weekend, “Five ways to turn income into capital gains”, which says:

“Converting income into capital gains has become the holy grail of tax planning following the government’s plan to increase the top rate of tax to 50 per cent.”

Is this really what the Government wanted? Grant Thornton accountants said:

“If you are able to put your earnings into a business you can really take advantage of the...CGT...rate—however, the ordinary man on the street has limited opportunities here.”

Is this really what the Government wanted? The ordinary man on the street would not be able to avoid high rates of tax through CGT, whereas those who can afford their own accountant could.

I think that I will end there. [Hon. Members: “Shame.”] All right, in that case I will talk about trust dividends and pensions, because there seems to be some level of popular demand. On trusts, I was interested to read the briefings provided by the Low Incomes Tax Reform Group and the Disability Benefits Consortium. This is an area of immense complexity, but I will try to do justice to the serious concerns of those organisations about the trust and dividend tax rates.

Clause 6 increases the trust rate and the dividend trust rate for discretionary and accumulation trusts from 40 per cent. to 50 per cent. and from 32.5 per cent. to 42.5 per cent. respectively. That point was also raised by the hon. Member for Dundee, East. The 32.5 per cent. to 42.5 per cent. rates were originally prescribed in the Finance Act 2004 to counter the use of trusts for tax avoidance purposes.

In the Finance Act 2005, provisions were introduced with the intention of protecting vulnerable beneficiaries of trusts from the effects of those high rates. The focus of that legislation was mainly disabled persons and children with a deceased parent. So clause 6 has an important impact on Britain’s tax code. Those provisions work currently by allowing the trustees of trusts with a vulnerable beneficiary to deduct from their tax liabilities at the appropriate trust rate, which we have just discussed, the difference between it and what the tax would be if computed at the rate that would be chargeable on the vulnerable beneficiary as an individual. So it is designed to help vulnerable individuals, but I have been told that the mechanism for computing relief is too complicated and, from my brief examination of the relevant parts of the clause and the schedule, I believe that that is so. Also, the statutory definition of a disabled person for those purposes is too narrow. Consequently, from April 2010 some small trusts for vulnerable individuals will be charged income tax at 50 per cent. on trust income.

I cannot imagine that that will be popular on the Government Benches. We are talking about vulnerable individuals and disabled people being charged income tax at 50 per cent. on the income of their trust, which was set up specifically for them. None of that can be reclaimed on behalf of the beneficiary. Under the Mental Health Act 1983, a disabled person is defined as someone who is in receipt of attendance allowance—the highest or middle care component of disability living allowance—or someone who has a mental disorder that prevents them from looking after their affairs. That definition is too narrow, which means that a trust for people who are disabled, but whose disability is of the wrong sort will be liable for the 50 per cent. trust rate. Is the Minister satisfied with that result of his proposed changes?

Who loses out? According to the Disability Benefits Consortium, the beneficiaries who are likely to suffer from that unintended side effect of clause 6 include the following: first, those with conditions such as Down’s, bipolar disorder or severe autism; secondly, vulnerable beneficiaries who do not come within the definition; thirdly, those without the right combination of benefits; and, fourthly, those who are entitled to the prescribed benefits, but who do not claim them. That raises many issues for the Minister to deal with. It seems that the law of unintended consequences has struck many times over.

I may talk more about trusts and pensions when we debate the schedule in due course, but I want to draw some conclusions purely in relation to the 50p tax rate. First, like the right hon. Member for North Tyneside, we think that the 50p tax rate is a crass political move, rather than a considered and well thought through change to the UK tax code. Secondly, its significance is big and could be monumental in sending out signals about doing business in the UK—this is first increase in the highest rate of income tax since 1974.

Thirdly, we doubt whether the Treasury has properly modelled the impact—indeed, in terms of modelling the impact, there is no differentiation between 50p and the phasing out of the allowances, as we heard earlier. Also, the Treasury is using behavioural assumptions about average taxpayers to suggest the behaviour of 300,000 highest earners, which is clearly nonsense. Fourthly, there is a complete lack of clarity on whether the change is permanent, which is what the Leader of the House said, or temporary, as the Chancellor, the right hon. Member for Airdrie and Shotts and other old stalwarts of Labour said on Second Reading. It is vital for us to get clarification on the matter.

Fifthly, the changes are likely to have a perverse impact on pensions, dividends and trusts. Disincentivising people to put money away in pensions will retard the savings culture that we need to encourage and, after 12 years of a truly dreadful UK stock market performance, it is perverse to make it less attractive to invest in UK equity—I will talk about that when we debate the schedule. On trusts, the biggest impact is, shockingly, likely to be on disabled people, recipients of compensation from accidents and other vulnerable persons.

Finally, the 50p tax rate has broken a clear Labour manifesto pledge, which I believe was made by every single Labour Member who is a member of this Committee.

Jeremy Browne (Liberal Democrat, Taunton)

It is a pleasure to follow an extremely comprehensive contribution. I do not say that sarcastically; this is an important policy development and it is right that it is scrutinised in detail. The hon. Member for Hammersmith and Fulham performed a service to the Committee by examining the proposal in the detail that he did. However, I do not wish to speak at quite that length—not least because I agree with some of the points made by the previous speaker and I do not wish to repeat them just for the sake of form.

The only thing I would say to the Conservative party is that, although the intellectual case made by the hon. Gentleman—many other members of the Committee also make such a case—seems reasonably compelling and the Conservatives certainly believe it with great fervour, they appear to lack the courage of their convictions. I have heard Conservative MPs—including some who do not serve on this Committee, for example, the right hon. Member for Wokingham (Mr. Redwood)—say that this is an elaborate trap that has been placed by the Government to lure the Conservatives into being typecast as defenders of the rich and privileged. All Government policies and taxes are a trap in the sense that they provide an opportunity for differentiation between the governing party and those parties not in Government. To refuse to engage with Government policy merely because there is a risk that it will be contrasted unfavourably with one’s own policy is to abandon all democratic politics and give the electorate a diminished choice. The Conservative party, as the largest Opposition party, have some duty to try to articulate choices with regard to not only how they contribute to debate, but how they frame votes and manifestos at the general election.

Turning briefly to the proposal before us, I echo the point that it is a betrayal of Labour’s 2005 general election manifesto commitment—the quote has been given and I will not repeat it. The manifesto on which the Labour party stood and won an unprecedented third general election in 2005 emphatically did not state that they would leave income tax rates the same unless economic circumstances make it attractive for them to do otherwise. It was perfectly possible for the Labour party to have put that caveat in their manifesto and to have said that it was an aspiration to leave the top rate of tax as it was at 40 per cent. but that they could not make a firm commitment or an absolute promise to do so because they were not in a position in 2005 to know how the economy would be in 2009-10. It would have been entirely honourable for the Labour party to put forward that position at the general election, but it did not do so.

As the hon. Member for Hammersmith and Fulham has said, the then leader of the Labour party, apart from promising to serve as leader for the entire duration of this Parliament if Labour won, also spoke disparagingly about the concept of a 50p tax rate for people on higher earnings. He made that case, which Labour Members at the time cheered with great gusto and then made to the electorate in their constituencies. Who knows, quite a few Labour Members here today might not be Members had they, when speaking to the electorate in their constituencies, squared with them and said, “We cannot give you a commitment to keep the top rate at 40p.”

Perhaps many of the exceedingly wealthy donors who have bankrolled the Labour party over the years might not have been so generous with their contributions, which, after all, funded election addresses and propaganda put through doors by Labour party candidates, had they known that what the Labour party meant when it said that it would not raise the top rate of income tax was that it would not be raised unless the Labour Government were given an excuse to do so, which is a rather different commitment.

The rest of the debate is in Hansard.