David Mowat
Main Page: David Mowat (Conservative - Warrington South)Department Debates - View all David Mowat's debates with the HM Treasury
(12 years, 10 months ago)
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Mr Gauke
Yes, that is the case, but we must consider the consequences of that borrowing for the UK’s debt position. That is the level that we believe is right.
As I set out in Committee, the £2.2 billion represents a floor, not a ceiling. The Bill provides for the limit to be increased to more than £2.2 billion with the approval of the House, but not for it to be reduced to less than £2.2 billion.
David Mowat (Warrington South) (Con)
A few moments ago, the Minister mentioned the pre-payment amount for the Forth road bridge. Did the Treasury consider a toll on that bridge, in much the same way as a toll was considered for the Mersey Gateway bridge next to my constituency? If not, is that not asymmetric governance?
Mr Gauke
The decision on whether to put a toll on the Forth road bridge will be one for the Scottish Government. The Treasury has therefore not considered that proposal. Perhaps my hon. Friend should ask Scottish National party Members what consideration was given to such a toll. I suspect that the answer will be, “Not a lot.” The expression on the face of the hon. Member for Dundee East (Stewart Hosie) is probably confirmation that no consideration was given to my hon. Friend’s suggestion. Asymmetry is inherent in such devolved matters.
The UK Parliament has an interest in ensuring that Scottish Ministers can borrow efficiently and sustainably, because although interest paid on any loans will be funded from within the Scottish budget, it will be included in the UK fiscal aggregates.
Mr Gauke
The Government understand the concerns expressed about the devolved funding arrangements, but we have also made it clear that the priority now must be to reduce the deficit, and any change to the current system and Barnett formula must await the stabilisation of the public finances. The Bill does not rule out or rule in reform of the formula in the future, but we do not believe that now is the right time. A change in the Barnett formula is not the purpose of the Bill, and it would not be appropriate to legislate for it here. As I said, I look forward to this debate, as right hon. and hon. Members will clearly take the opportunity presented by the Bill to express their views on this particular point.
David Mowat
I understand that the Exchequer Secretary does not want to spend too long now talking about the Barnett formula, so I will be quick. He said that we are too busy sorting out the deficit to address the Barnett formula, which I think is a fair and reasonable point. That is why many of us think that we should put in place a process to ensure that by 2015, when, as I understand it, the structural deficit will be eliminated, we can put in place a fair and transparent policy.
Mr Gauke
I understand the views expressed by my hon. Friend. There are a number of changes and developments in this area, not least the powers in the Bill. I agree with him that this will continue to be a live issue, but at this stage I am not in a position to make any promises to him. However, I am sure that this issue will continue to be debated, and strong views will be expressed. I can understand the points he makes, but this is not the time for a legislative solution.
Amendment 23, tabled by the right hon. Member for Birkenhead, is consequential on new clause 8 and would delay the financial provisions in part 3 of the Bill coming into force until two months after the House passes a resolution approving the Chancellor’s proposals for a new funding formula. It would then automatically bring part 3 into force two months after such a resolution. I set out why I did not consider it appropriate to debate at this time a new funding formula for Scotland when I discussed new clause 8. The Government are clear that this is a UK-wide administrative procedure and therefore has no place in the Bill. The Government’s priority is to stabilise the public finances and reduce the deficit before making any changes to the Barnett formula, as I have said.
Even were we able to accept new clause 8, the manner of commencement set out would be problematic because it would create technical problems by potentially bringing in consequential amendments relating to the Scottish variable rate before that itself had been repealed. I am sure that that is not what the right hon. Gentleman intends. The new clause would have other consequences, however. It would mean that clause 32, on borrowing provisions, could not be brought into force until an agreement had been reached on a new funding formula for Scotland. As I have set out, the changes introduced by the Bill are not contingent on a new funding formula being agreed to replace the Barnett formula, so I do not see the need to wait to introduce the borrowing clauses until such a new formula has been agreed.
Amendments 25 and 37, and new clauses 9 and 19, relate to corporation tax and alcohol duties. These amendments propose to increase the power in the Bill to provide for an Order in Council specifying corporation tax and alcohol duties as devolved duties. The Scottish Government have publicly requested that six additional powers be included in the Bill, including powers over corporation tax and alcohol duties. I understand that the First Minister has met colleagues in the Government to highlight those requests. In those meetings, the First Minister agreed to provide detailed written analysis of the benefits to both Scotland and the UK of devolving those powers. No such papers have yet been provided. We await them with interest, because we have yet to hear the case made in detail.
As hon. Members will recall, the Government are committed to implementing the recommendations of the Calman commission, which considered the merits of devolution for a wide range of taxes and decided that neither corporation tax nor alcohol duties were suitable candidates for devolution. Calman concluded that the potential administrative impact of devolving either tax would be significant. The creation of compliance costs for businesses operating on either side of the border, as well as the increased collection costs for the Government, would be undesirable, especially in the present economic climate. The risks of tax avoidance and arbitrage could also be increased, with additional costs to the Government and the UK Exchequer. These arguments apply to both corporation tax and alcohol duties.
Calman also noted that if comparable levels of public services were to be maintained, the scope for substantive reductions in the rate of corporation tax in Scotland would be limited, unless the Scottish Government were willing significantly to increase revenues from other sources, such as income tax. The figures involved could be significant. For instance, if we take the Scottish Government’s estimate of the corporation tax base, published in their “Government Expenditure and Revenue Scotland” report, and apply the methodologies developed for the Government’s paper on rebalancing the Northern Ireland economy, the cost of reducing Scottish corporation tax to 12.5%—the current rate in the Republic of Ireland—would be just over £2 billion. However, the Scottish economy is very different, not least in the presence of many large multinationals, particularly from the financial sector, whose current activity is unlikely to be adequately covered in the gross value added estimate, but whose profits are additionally likely to be attributable to Scotland with regard to corporation tax.
Provisional HMRC analysis has indicated that losing payments from large Scottish-domiciled groups could add £600 million to the direct costs. Such tax cuts would have to be funded, either by significantly reduced levels of public spending in Scotland or by tax rises in other areas. It is worth noting that these are initial estimates, and are likely significantly to underestimate the scope for profit shifting to Scotland. The model uses similar assumptions to those applied to the costing for Northern Ireland. However, given the geographic proximity of England and Scotland, the integrated infrastructure, the large number of big GB-owned groups with a substantive presence on both sides of the border, and the relatively large and complex nature of the Scottish economy, there are likely to be greater opportunities for groups to shift profits there than may be the case for Northern Ireland.
In addition, corporation tax is a very volatile tax, and would create much more revenue risk for the Scottish budget. For instance, corporate tax receipts fell by 16% from 2008-09 to 2009-10, while income tax receipts fell by 5%. Such a large volatile income stream would place great risk on the Scottish budget. Income tax, which is more predictable and less volatile, is a much more suitable candidate for devolution. The commission based its decision on the strong evidence that it received from the independent expert group and the alcohol retailing and production sector. The evidence identified increased compliance costs and significant scope for tax avoidance, given the mobility of goods such as beer, wine, cider and spirits.
Stewart Hosie
I have already given way five or six times and I want to make progress. There will be plenty of opportunities for hon. Members to intervene later.
There is a very strong case for additional powers. Evidence shows that corporation tax can be a key element in a country’s overall economic strategy and it has the potential to promote economic growth by enhancing international competitiveness and encouraging innovation and investment. As the Minister said, we have long argued for devolution of corporation tax as a powerful means of addressing the economic challenges facing the Scottish economy. We believe that a centralised and uniform corporation tax structure disadvantages nations such as Scotland to the benefit of London and the south-east of England. To say that is not to be anti-London or anti-south-east; it is just to say that when businesses reach a certain size, they tend, other things being equal, to be attracted to the largest conurbations. In the UK, that of course means London.
The evidence base for devolving corporation tax powers to Scotland is pretty clear. Over the last 30 years, as I said at the beginning, Scotland’s economy has grown more slowly relative to both the UK and the average of other small EU countries. One reason for that relatively weaker economic performance has been the relatively smaller corporate sector in Scotland relative to other parts of the UK. Business birth rates are lower, the business base is smaller and Scottish companies typically engage in less research and development.
As I said, there is also evidence that Scottish headquarters drift south of the border once businesses have reached a certain size. Effective use of corporation tax could serve as a powerful tool to address those trends by improving competitiveness and encouraging investment and expansion. Evidence shows that, at the margin, corporation tax rates can be an important factor in international firms’ decisions about foreign direct investment, which is one of the key objectives of the Scottish Government and Scottish Development International.
At the same time, a number of key sectors in the Scottish economy face tough competition from abroad. Companies abroad receive attractive tax breaks as part of allowances in relation to corporate taxation. The computer games industry, for example, has received a very attractive proposition from Dublin, and receives tax breaks in Montreal that have been denied by our Government despite forceful representations to the Minister by members of all parties. Improvements in those areas will help to boost productivity and, ultimately, the competitiveness of the Scottish economy, which will benefit not just Scotland but the United Kingdom as a whole.
The devolution of corporation tax powers is not solely about making possible the creation of a more competitive environment within the Scottish economy; it also about increasing and promoting accountability. A greater devolution of economic policy levers and tax revenues means that the Scottish Government will have the levers that they need to increase sustainable economic growth, and an opportunity to reinvest the proceeds of that growth—higher long-run tax revenues—in Scotland’s public sector. Having control over corporation tax would also mean that the Scottish Government would bear the risk on the economic levers. We believe that positive reform must be about balancing the revenue and expenditure implications of policy choices, and about giving policy makers the levers to promote economic growth.
Stewart Hosie
The hon. Gentleman must have been asleep for the last 14 minutes, because that is precisely the question that the hon. Member for Edinburgh East (Sheila Gilmore) asked. I am surprised that he did not hear or understand my answer to her question, which was that the corporation tax yield would fill the gap caused by the reduction in block grant.
David Mowat
The hon. Gentleman made a powerful point a few moments ago, if I heard him aright. He said that, unlike the United Kingdom, which has a significant deficit, Scotland had experienced a surplus over the last few years. Can he tell us how, in reaching that conclusion, he accounted for the bail-out of Royal Bank of Scotland?
Stewart Hosie
I have two answers to that question. The first is that in the 40 years before the crisis, Scotland experienced a surplus on average. The second relates directly to the hon. Gentleman's question. I am fed up with the argument that runs “Scottish banks bad, English banks good.” There seems to be a failure of basic understanding. Northern Rock took £20 billion, as did the Lloyds banking group. No one seems to speak about Northern Rock. Bradford & Bingley required £37 billion. RBS required £45 billion, but a large chunk of that related to the asset protection scheme. It was not a question of Scottish banks’ being bad and needing to be bailed out while all other banks were fine.
I do not want to drift too far from the new clause, but the Office for Budget Responsibility made it clear in its assessment earlier this year that the net impact of the financial crisis measures would be a surplus of £3.5 billion for the taxpayer. It is interesting that the hon. Gentleman does not seem to know what the out-turn figure is likely to be.
Amendment 25 provides for powers to charge a tax charged on the profits of companies—
Iain Stewart
The Barnett formula has not been in operation for the duration of the Union and only since 1978, so it is a comparatively new beast.
Yesterday, the right hon. Gentleman was speaking in the debate on the Pensions Bill where one of the arguments against the changes the Government are proposing is that the time scale to allow people to adjust their behaviour should not be less than 10 years. A similar approach should be taken to funding; there should be a process of evolution, not revolution. If we rush too hastily into the argument on the basis of misinformation, we risk splitting the Union asunder.
David Mowat
My hon. Friend is right. If a change is made to the block grant, as it must be at some point soon, there will be a long transition period, which may be as long as 10 years, but that is no reason not to do a review, put the matter on a needs basis and start that 10-year period. A transition of 10 years is reasonable.
Iain Stewart
I am grateful to my hon. Friend. I have a suggestion to make about how we can move forward. In this country we have never had a territorially based system of taxation or spending. From taxation receipts we do not know in detail which part of the United Kingdom contributes what in taxes. There are many estimates and forecasts, but there is little hard evidence.
David Mowat
I want to make a few points about the excellent speech made by the right hon. Member for Birkenhead (Mr Field) on new clause 8, but before I do so I shall nail a couple of red herrings.
People have talked about priorities. It is absolutely right that the Scottish Government have the ability to set free prescriptions if that is their priority. It is absolutely right that there can be free tuition and almost free social care. Those priorities should be set in Scotland and it is the Scottish Government’s right to do that. The difficulty arises if they have a different baseline of spending. Nothing I have heard this evening convinces me or my constituents that there is no problem in that regard.
In the course of their remarks a number of Members said that we need more facts on these matters. Who can argue with that? Everyone is in favour of facts. In my previous career, however, when I heard people call for facts, it was often a delaying mechanism. There have been many reviews of the block grant formula over the past two or three years, most recently a superb piece of work by the House of Lords Select Committee in 2008, whose recommendation was unequivocal; similarly, Holtham. The Calman commission made the point that it was not a proxy for need. Most persuasively, Lord Barnett is clear that the formula was never intended to be used as it has been over the past 30 years. He, I believe, will table an amendment to that effect when the Bill goes forward.
I am not making the case for Scotland or Northern Ireland having less money or Wales having more. I am making case for the consideration to be based on need, and I will go wherever that takes us. “Based on need” means that we take into account relative population changes. One of the problems with Barnett is that over the past 30 years it has not properly reflected the fact that in both Wales and England population has increased more rapidly than in Scotland. Similarly, a needs-based formula would look at indices such as how many old people there are in a community, how many very young and how many disabled, as well as unemployment levels and indices of poverty. It is not rocket science. I do not mind what the answer is, but I will answer the question: what is likely to be the result of a needs-based formula?
The most coherent piece of work that has been done on this, notwithstanding the book by my hon. Friend the Member for Milton Keynes South (Iain Stewart), was by Professor David Bell of Stirling university. In evidence to the House of Lords Select Committee, his estimate was that the current allocation that Scotland receives is roughly 120% of that which is due in England and it should be closer to 105% or 107%. A difference of that order implies a yearly difference of £4.5 billion or, over the lifetime of this Parliament, a difference of £22 billion. I do not know if that is right, but Professor David Bell did a lot of work on that, as did the Holtham committee and others in respect of the House of Lords Select Committee.
The question might arise why we need to fix the problem now. There are a number of reasons—not just the fact that the Bill would be a convenient place to do it, although that is true, and not just because of the resentment that is felt in England and Wales. The right hon. Member for Birkenhead used an important word—“sourness”, which debases all of us and it is not the right answer to those of us who are Unionists. If we are not careful, we will be building up a bank of sympathy for devolution or separation in England.
The Bill for the first time equates Scottish levels of income tax to the level of the grant. I am concerned that unless we make the necessary reform to the block grant, it will become almost impossible to do in future. If the figure of £4.5 billion put forward by Professor Bell of Stirling university were correct, that would imply that Scottish basic rate of income tax would have to rise by about 11p in the pound to make up for that shortfall. But that is not the reason that we need to act; there is a moral reason.
I meet my constituents, have seminars and talk about the fact that we have lost Building Schools for the Future money in Warrington. We have lost the education maintenance allowance in Warrington and England. We could pay for an awful lot of things with some of the £4.5 billion. Of course, as many have said, there would have to be transitional arrangements, but that is not a reason for not starting. I think that it would be over 10 years or more.
I am genuinely mystified by the stance of Government Front Benchers on the matter. I have read carefully the replies that Ministers have given when asked about this, and they seem to come back to two basic points. The first, which is often made, is that the formula is expedient. It is true that it is easy to do—my understanding is that the whole thing is done by one guy in the Treasury—but that does not seem a great reason to continue with it. The second is that we are too busy fixing the deficit to make the change and that it must wait. As I said in an intervention, I am prepared to accept that reason, but my understanding is that we are on target to fix the structural deficit by 2015, which is before most of the Bill’s financial provisions will take effect, so I see no reason why we do not start to set up the commission that would have to look at a needs-based formula for Wales, England and Scotland. The formula must be fair, transparent and moral.
One final point I wish to make is that I do not support the amendment in so far as it puts a limit of plus or minus 5% on the amount, which I think is wrong. The point is that it should be needs-based. I would be quite happy if a consequence of the needs-based analysis was that Scotland ended up, as I think it would, with more than 105%. I do not support the amendment for the technical reason I have explained, but its basic thrust is right and it is very important that the House addresses this.
Mark Lazarowicz
I want to make a few points on the question of whether corporation tax should be devolved to the Scottish Parliament, as the SNP proposes. Given the time, I will make my comments as briefly as possible.
There is a respectable intellectual argument that cutting business taxes has a beneficial effect on some businesses and encouraging growth, but we cannot assume that that will automatically be the case. What is important is the effect that a cut in corporation tax would inevitably have on tax revenues. SNP Members were asked time and again in the debate how they could cut corporation tax while protecting public spending, and time and again they did not answer. If their theories are right, businesses might grow in time, but they cannot claim that there will be immediate growth that will make up for a loss in corporation tax. That is not because there is a lack of entrepreneurial spirit among the Scottish people. We must accept that any taxation policy cannot just be a general theory that applies in any circumstance. We have to look at the actual situation in a particular location and at a particular time.
The fact is that the biggest beneficiaries of a reduction in corporation tax in Scotland would be the big banks and power companies, not small and medium-sized businesses. Why on earth would cutting bank taxation encourage the banks to invest more in the Scottish economy and promote jobs? There are many other ways to encourage business growth in Scotland, and at the moment the Scottish Government have those powers. The Bill will give them more such powers, which is what should be done, rather than cutting corporation tax for beneficiaries, which we cannot assume will benefit the Scottish economy and Scottish business.
Another point is that if the Scottish Government were to go ahead with a corporation tax reduction, as they suggest, how can we assume that there would be no response from the UK Government? If the Scottish Government’s policies were to lead to a substantial transfer of businesses from England to Scotland, there would of course be a response at UK level, and at the end of the day that would lead to an overall driving down of the UK Government’s tax base. That in turn would inevitably lead to cuts in public services and public spending, and the SNP has to recognise that if it is to address the issue seriously.
I am not opposed to looking again at taxation and to considering all options, but I do not want us to go ahead with proposals that could have consequences that we cannot reverse. If the SNP is to pursue that line, it has to give us more information about the consequences of its policies. If it does not do so, it will be rightly criticised for coming forward with ideas that are all talk and no reality.