Queen's Speech Debate: The Economy and Pensions
Speaking during the Economy debate on the Queen's Speech, Philip Dunne MP, a member of the Treasury Select Committee, accused the Chancellor of "muddle and confusion" over both his handling of the Northern Rock crisis and the Capital Gains Tax proposals in the Pre Budget Report.
Citing evidence before the committee of former MPC member Prof Willem Buiter on Tuesday, Mr Dunne said the Chancellor and his predecessor bore responsibility for the first run on the bank in 141 years through their dithering decisions during the vital week in September.
6.15 pm
Mr. Philip Dunne (Ludlow) (Con): I must apologise to you, Madam Deputy Speaker, for not being able to attend the opening speeches this afternoon as a result of my Select Committee duties.
It is a great pleasure to contribute to the debate on the Gracious Speech and to follow the hon. Member for Northampton, North (Ms Keeble), who clearly either read a different Queen's Speech or made a very different interpretation of the one that I read. I am afraid that I found the speech a great disappointment. It lacked the famous vision about which much has been said in and outside the Chamber. It seemed to lack a recognition of many of the problems that beset our economy, to which I wish to address most of my remarks. Consequently, it lacked any serious attempt to provide solutions to the problems that we face.
We must remember that the economy is currently facing challenges posed by global shifts in economic power from, broadly speaking, the industrialised nations of the 20th century to what will become the technological nations of the 21st century. In part, the way in which our economy reacts to that is causing seismic changes. Currently, this country has the lowest savings ratio that it has ever had, business investment in manufacturing is half the level of 10 years ago and we are rapidly losing our historic manufacturing base. Nothing in the Queen's Speech attempts to address those fundamental problems. In part, that is the result of a change of leadership at the top of Government. Now that senior members of the Government are four months into their new roles, we have the opportunity to see how they are getting on.
The new Chancellor has, I must admit, an unenviable position to defend. In the third month of his reign as Chancellor, he has presided over the first run on a bank in this country for 141 years. I will return to that in a moment. Last month, the Chancellor also had the opportunity to introduce a pre-Budget report. His disappointing performance in that pre-Budget report and subsequent events have shown him unravelling before our eyes. There were relatively few innovations in the pre-Budget report of the Chancellor's own inspiration. He seemed to look elsewhere for inspiration, notably to some of the inheritance tax proposals introduced so spectacularly by my hon. Friend the Member for Tatton (Mr. Osborne) a few days before the pre-Budget report. Miraculously, those proposals appeared in the Chancellor's speech, and he has found it difficult to admit to the date on which he first started to think about them.
The one idea that the Chancellor had of his own was to simplify capital gains tax on business. He introduced a flat rate instead of the plethora of rates, tapers and reliefs. That can undoubtedly be traced back to the desire to introduce a higher rate of taxation on private equity executives who had been exploiting an apparent loophole-it was not a loophole, but a 10 per cent. rate of capital gains tax introduced by the Prime Minister, when he was Chancellor, back in 1998. Undoubtedly, that was one of the few measures for which the business community would regularly applaud the Prime Minister during his tenure as Chancellor. His successor decided that instead of living with a competitive rate of capital gains tax for entrepreneurs, he would virtually double the rate to 18 per cent. to address a politically inspired assault on a very narrow segment of the business community, namely private equity executives.
That idea was ill thought through. We know that it was ill thought through because the Chancellor confessed in evidence to the Treasury Committee that he had not discussed the proposed changes in capital gains tax with any of the traditional representatives of business, large and small, with whom the Treasury normally has regular dialogues, not about taxation rates but about fundamental changes in the structure of taxation. He was forced to make that admission because the representatives themselves were telling anyone who cared to ask them that there had been no consultation on the changes before their introduction. It is not surprising that this rushed measure introduced to deal with another problem has caused uproar in the business community. Such is the uproar that the Chancellor has had to come crawling back to the House to say that he is thinking of introducing some reliefs.
Let us spend a moment thinking about the consequences of the muddle over this measure for the economic lifeblood of the country, particularly the small business man. By introducing an 80 per cent. increase in capital gains tax, the Chancellor is clobbering the owners of the 4.5 million small and medium-sized businesses that represent the engine of growth in the economy as we move into the new era to which I referred at the beginning of my speech. They have been most vociferous about the effect that the increase will have on the way in which they plan investment in their businesses.
The Chancellor's action has also had a significant impact on savers in employee share schemes, some of whom were expecting to pay tax at rates as low as 5 per cent. under reliefs and other schemes that will remain in place until the Finance Bill is enacted. According to ProShare, hundreds of thousands of them will have to pay tax at the new 18 per cent. rate.
Paul Farrelly (Newcastle-under-Lyme) (Lab): Many years ago, when I was advising mostly small businesses on sales, the level of capital gains tax-under a Conservative Government-was the same as the higher rate of income tax. Even after these changes it will be at half that level, and below the standard rate of income tax. I think that those who realise capital gains are still being given a very good deal. Does the hon. Gentleman not agree?
Mr. Dunne: I believe that since the hon. Gentleman left professional practice, capital gains tax rates have fallen in our main competitor nations. The new 18 per cent. rate is substantially higher than the rate for those seeking to set up businesses in Switzerland, Hong Kong or Ireland, and I think it is higher even than the rate in France. As I said at the outset, we are now in a global environment. People do not decide where to locate their businesses purely from an incorporation point of view or in the light of the current level of income tax-
Mr. Oliver Heald (North-East Hertfordshire) (Con): What about taper relief?
Mr. Dunne: Indeed, the abolition of taper relief has a significant impact on the actual level of tax that people must pay.
Mr. Heald: Is it not particularly dismal that this is a tax on our future as a nation, and that it hits young people? It is all of a piece with the Government's failure to consider the proposals to remove stamp duty on first-time purchases of houses, and in the same bracket as their failure to include in the Queen's Speech any measure to reduce the number of young people who are still unemployed and not being trained.
Mr. Dunne: I entirely agree. There was very little in the Queen's Speech to stimulate the economy, and quite a lot to restrain entrepreneurial endeavour.
It not only those who will be affected by the tax changes who have been complaining so much; it is Ministers themselves. The Minister for Trade Promotion and Industry has been quoted as saying that this is a terrible proposal, and he is supposed to have been having a quiet word with the Chancellor. A week after the Minister made that statement in Bolton, I asked the Chancellor whether they had had an opportunity to speak and I regret to say that they had not. Either the Chancellor was not listening when the Minister was passing on the views of business men from Bolton, or they do not talk very often.
As a consequence of that measure, there is now a form of paralysis in the small business environment. Investing for capital gain in one's business is a long-term process. It is not undertaken lightly. One does not switch in and out of that. Through abolishing the taper, the Government have removed an encouragement for long-term investment. They are now actively encouraging short-term investment. Because of the muddle over whether any reliefs will be introduced in the Finance Bill, individuals who make investment decisions do not know what to do. They have a six-month window of uncertainty about whether there will be any relief, and whether they should sell their business now if they have been thinking of retiring in the foreseeable future, or hang on. They do not know. It is characteristic of the muddle that is at the heart of the Government. I urge the Economic Secretary to encourage the Chancellor to publish his proposals on the reliefs as soon as possible-not to wait until the next Budget-so that people have time to understand where the Government's thinking is going and possibly to act on it.
I would like to talk finally about another area of muddle and confusion and its effect on the stability of the economy. Those of us on the Treasury Committee-there are a couple of its members present-had the benefit earlier this week of hearing Professor Buiter, one of the original members of the Monetary Policy Committee, give his views on the causes of the problems in the system that gave rise directly and indirectly to the terrible run on the bank, which the economy should never have suffered. He made it crystal clear that in his view, and in the view of other learned economists who have given evidence to us, the tripartite regulatory system that was established by the present Chancellor when he was Chief Secretary in 1997 is fundamentally flawed. There is no clarity as to who is responsible for taking the ultimate decisions that have to be taken.
Mr. Simon: To be clear, the professor did say that it works but that it did not work well. He mentioned one change: if the Bank were given some oversight of liquidity, it would work very well. It is not quite as bad as the hon. Gentleman is making out.
Mr. Dunne: The hon. Gentleman is being a little kind-hearted in his interpretation of what we heard. A number of criticisms were levelled about the system. Some aspects of the tripartite system did not work well, including the fact that no joint statement was made by the three components of the system. The professor specifically criticised the Chancellor and his predecessor, the Prime Minister, for dithering and not making an announcement to back up the proposals for the lender of last resort, with a deposit guarantee at the same time.
The hon. Gentleman will recall that the three-day interval was the main reason why the run took the time it took. Had a clear statement been made and had deposit protection been put in place at the same time as the lending facility was established, there would not have been a run on the bank. That shows that it is difficult in a tripartite system to have clarity as to who is in charge and who makes the decision. That system was set up by the Chancellor and his predecessor. Effectively, they have been fingered with some element of responsibility for that. It goes back to the issue that I was discussing earlier. When we look at competence in the stewardship of the economy, we have to face the fact that we have a set of senior Ministers in place who are presiding over muddle and confusion. I regret that that is the case, but that is the situation that we find ourselves in. I thank you for calling me, Madam Deputy Speaker.
6.29 pm
