Budget Resolutions and Economic Situation

Matt Hancock Excerpts

Friday 23rd March 2012 Commons Chamber

[Matthew Hancock (West Suffolk) (Con)]

It is a great pleasure to serve under your enlightened chairmanship of this debate, Mr Deputy Speaker.

The debate has focused much on the immediate challenges and some specific measures, but I want to focus on the big picture. This Budget has seen a tax cut for 24 million working people and a wide range of measures to help Britain earn its way in the world. After all, this Budget was part of a series of Budgets to tackle the challenge of how to turn this country around after years of economic mismanagement. Some of that requires difficult and controversial decisions to be taken, but the fruits of these labours are not in the next day’s headlines, but in preparing our country for the world we live in.

My generation does not have the certainties of an economic world in which our main competitors were in the west—indeed, in the north-west of the globe and centred around the north Atlantic. We must compete against the growing tigers of the east and the growing and rapidly developing economies of the south, yet our economy was left unprepared for that. We all know that the fiscal situation was dire. Action has been taken over the past two years to deal with our debts, but we also need to ensure that we can earn our way in the world.

Understanding the international context might be helped by a few facts and figures, showing that we cannot any longer rely simply on trading with the old world to earn our living. Over the latest period, demand for UK exports by the European Union has been falling. Compared with January last year, the value of our trade with the EU is down £300 million, while exports to France fell by 14% and by 3.5% to Ireland. Those falls were more than offset by increases in exports to the rest of the world, however. Exports to the rest of the world are up 16% since January last year. Trade with China is up 30%, and trade to India is up 15%. There have also been rises in respect of economies with which we do not have much of a history of trade; our trade with South Korea, for instance, is up 145%. Our trade with our Commonwealth partner, South Africa, is up 57%, too. It is clear that our international trade patterns are changing rapidly, and we can no longer simply rely on Europe and north America to pull us through.

[Mr Ellwood]

My hon. Friend is making a powerful speech. Will he join me in congratulating both UK Trade and Investment on its work in promoting British industry and the Foreign Office on expanding our embassy empire, which had shrunk under the last Government?

[Matthew Hancock]

I compliment UKTI on the turnaround it is undergoing under Lord Green, the exceptional new trade Minister, who has vast experience and extensive contacts across the world. I commend the work he is doing both in the Department for Business, Innovation and Skills and with the Foreign Office, which is putting resources into the effort to increase our trade with the rest of the world, which has languished for so long.

I shall focus now on certain measures that I believe should be taken. Some of them might be controversial in the short term, but in the long term they will all prove to be beneficial and will change views. We must better inform people about the taxes they pay and the effects of those taxes. We also need a simpler and more attractive tax regime, to ensure that people want to create jobs in our country and international companies want to expand here.

We also need an active industrial policy. That is considered a controversial proposal by some of my party colleagues, but my argument is that the Government already put their imprint on the different sectors of the economy. Our financial services regulations are different from our pharmaceutical regulations, for instance. Also, Government decisions on where to put the roads that Opposition Members are happy to welcome has an impact on the rates of development in different parts of our country, and the development of High Speed 2 will, we hope, reduce the north-south divide. The Government have a sector-by-sector stamp, therefore, so we should use the power of Government where it can be a positive force, rather than simply say, “Government must get out of the way.”

[Mark Hendrick]

The last Labour Government produced a defence industrial strategy, drafted by Lord Drayson, which included a development strategy for the industry. The current “National Security through Technology” paper says British companies should not necessarily be given priority in defence procurement, however. What does the hon. Gentleman think about that?

[Matthew Hancock]

Lord Drayson was an unusually good Labour Minister—I would favourably compare him with almost all the others. The defence strategy does, indeed, recognise the need to take into account the interests of our defence industries. That is an important part of the strategy, but not necessarily always the decisive factor.

Returning to the issue of tax, the Government should give a receipt to taxpayers. My hon. Friend the Member for Ipswich (Ben Gummer)—another great Suffolk man—has pioneered that approach. We as individuals would not spend much money without asking for a receipt in return. For most people, their tax bill is the biggest item of expenditure, so such a receipt would be very important. It would also educate the public on the impact of their taxes.

We also need to know the impact of our taxes for policy making. It is extraordinary that the Labour party ignores the behavioural impact of high taxes. It is hardly surprising that it managed to mess up the public finances so comprehensively if it denies, as the shadow Chancellor does, the impact of high taxes on incentives and the amount of future tax money the Exchequer receives.

Secondly, we need a simple and attractive tax system, especially on corporation tax. All taxes are, eventually, paid by individuals, but it is companies that make so many decisions about where to locate jobs. So although a high corporation tax still falls on individuals, it puts companies off expanding or coming to Britain. By having an attractive corporation tax rate, we can attract companies to this country. Ultimately, the corporation tax would still be paid by UK residents, whether it was paid indirectly involving the companies or in any other way the tax is raised.

[Owen Smith]

If the corporation tax rate has been so effective, will the hon. Gentleman explain why, according to the OBR, the volume of business investment in Britain is set to decrease by 0.7% this year and is down 7% over the past year?

[Matthew Hancock]

I shall give a direct answer to that. When GlaxoSmithKline announced 1,000 jobs and half a billion pounds of investment the day after the Budget, it cited the lower corporation tax rates as a reason for doing so.

[Owen Smith]

rose—

[Matthew Hancock]

I cannot give way, as I have only a minute left. This denial of the impact of the 45p rate is surprising, given that the Labour party is not pledged to implement the old rate again.

The third point I shall make is the importance of an industrial policy. Whether we like it or not, the Government have a stamp in this area, so I am very supportive of the following: the announcement on help for our creative industries, which was warmly welcomed, as Britain’s creative industries are the biggest in the world; the enterprise zones; the research and development tax credits; the moves on transport infrastructure, which has been talked about many times, where the start date for the work on the A11 has been announced and brought forward, and there is to be more road infrastructure, paid for both by the taxpayer and through innovative other means; and more for university research facilities. Let us contrast all that with what was called a “backwater”—the previous Government’s business Department. It all shows that the results of this Budget will be growth in the future, business confidence and a great deal of support in the months and years to come.

--- Later in debate ---

[Owen Smith]

In a moment.

Those numbers are absolutely crucial to the debate because they are crucial to the claims of fairness and fiscal neutrality. The key number is that relating to the 50p rate costing only £100 million, because the OBR endorses HMRC’s findings. That is what the Government estimate will be the long-run annual cost to the Treasury of cutting the 50p rate. The Chancellor swept the number aside the other day as though it were nothing, just as he swept aside with an imperious flourish of his hand the £1 billion that we actually saw going into the Exchequer in the first year of the 50p rate.

[Matthew Hancock]

Is it any wonder that Labour left everything in such a mess given that it does not accept that higher taxes have behavioural consequences? Is the hon. Gentleman saying that Labour will never again look at the impact of tax rises on people’s behaviour?

[Owen Smith]

We absolutely agree that taxes and changes in the income tax rate have an impact on “behavioural yield”, to use the Treasury’s phrase. That is why, when we calculated in March 2010 the revenues that would be realised—

[Matthew Hancock]

Wrong.

[Owen Smith]

It is interesting that the hon. Gentleman says that; I am going to explain why it is not wrong and why we are right. At first glance, it looks very simple. Page 51 of the HMRC report shows the cost of cutting the 50p rate—the money that will be forgone by the Exchequer—as £3 billion, not £100 million. The next line covers the behavioural impact to which the hon. Gentleman has referred—the one based on the Laffer curve and a bit of undergraduate economic text in the previous 50 pages—and says that the Exchequer will get back £2.9 billion rising to £3.9 billion over the spending period. The key point is that all that is entirely based on a taxable income elasticity measure of 0.45. If we plug that into the equation we get this £100 million gap. Of course, the previous Treasury figures were predicated on a 0.35 number—a more conservative estimate— and that would have given £2.7 billion in revenues each year.