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The Budget

March 12, 2008

The Cost of Living

Mr. Mark Field (Cities of London and Westminster) (Con): Essentially, this was a paralysis Budget. There was virtually nothing in the Chancellor’s speech that had not already been announced several times over. It is clear that the Government are hoping that the ever-darkening economic clouds will pass soon, but that might be wishful thinking.

I want to say a little about the tax on non-domiciles. The watering down of the Chancellor’s earlier ill-advised non-dom tax proposal should be welcomed. Retrospective taxation, which seemed to be proposed last autumn, is invariably unjustified, and the intrusive demands for details of overseas earnings and the uncertainty heralded by the Government’s draft legislation risked undermining the UK’s international competitiveness. I find it somewhat disappointing, however, that the Treasury is now intent on pressing ahead even with this diluted legislation on non-doms. There should have been a proper, wide-ranging consultation to allow greater debate, with any recommendations to be implemented in April 2009 rather than in five weeks’ time. The unintended consequences of the Sarbanes-Oxley legislation on New York’s dominance of the financial sector demonstrate just how rapidly any city’s competitive advantage can be lost through knee-jerk political interference.

Nevertheless, I feel that having seen off the Treasury’s set of politically rather than economically motivated proposals, we should return to the wider debate about the desirability of allowing internationally mobile, high-net-worth individuals to avoid making any contribution to domestic tax. Lest we forget, it was the Conservative party’s suggestion on non-doms—designed to fund our policy on inheritance tax—that raised the standard for this entire debate last October. The shadow Treasury plan at that juncture was simple and balanced: non-doms would be charged a flat rate of £25,000, and in return would be entitled to the certainty of not being required to declare their income either on or off shore.

Five months on, the prospect of less clement economic weather, especially in the financial services sphere, has led many commentators to question the wisdom of imposing any tariff on non-doms. We should not forget that the great majority of those who are non-domiciled in the workplace are relatively modestly remunerated—a point raised against a background of some hilarity by the hon. Member for Wolverhampton, South-West (Rob Marris). However, a flat rate charge amounts for those people to a substantial imposition on their overall earnings, but it is rarely of course from this quarter that any vocal complaint has been forthcoming.

By contrast, in my role as the Member of Parliament for the Square Mile, I have been feverishly lobbied by leading financial services players, doing their best to convince me that anything beyond the status quo would result in a non-dom exodus of the job-creating super-rich from London to the cosmopolitan delights of Geneva or Frankfurt. I simply do not buy that. For a start, the attraction to high-net-worth non-doms and their families of living in London is probably worth paying an annual tariff of rather more than £25,000.

It also seems to me a rather slippery slope that the cheerleaders for the non-dom community would have us go down. Once the argument is accepted that a sector and its participants are so important to this nation that they should be exempt from paying a share towards the communal income taxation pot, where do we stop? At this point it is worth stressing that even high-net-worth non-doms contribute extensively via council tax, VAT, other sales taxes and employment taxes on their array of staff. They make a substantial contribution to the Treasury and their status exempts them primarily from taxation on their overseas earnings.

Strangely enough, the illogicality of the entire political class on this matter has gone largely without comment. If the levying of low—to the point of zero—taxes is so essential to job creation in the City, why is the case for lower, more internationally competitive tax rates for all not being made much more forcefully? The case for reducing taxation should apply across the economy, not just to a gilded few, whose special pleading can sound like disguised blackmail.

The aggregate sums that stand to be raised by an annual charge along the lines currently proposed, working on the assumption that none is persuaded to return home, are negligible. Meanwhile no one disputes that we cannot, and should not, kill the financial services goose that lays such a golden egg for the UK as a whole. However, even as someone who represents the City of London, I think there is a worrying over-dependence on the sector for the nation’s economic well-being that makes some action over non-doms desirable.

As an inner London MP, I have watched the influx of overseas money that has distorted house prices and the cost of middle-class living to the severe detriment of many indigenous Londoners. It is this group who feel that they are more than paying their way in collective taxation, yet at the same time are witnessing a marked diminution in the quality of their life. This unease is not a throwback to the politics of envy. Far from it; here is an aspirational, meritocratic group whose resentment is being stoked up by a perception of unfairness.

The debate on non-doms follows hot on the heels of that over the preferential tax rates enjoyed by those working in private equity. It is essentially a middle-class revolt over the unequal rewards to labour in the globalised economy. To their surprise, many highly educated professionals working outside the gilded corridors of the financial services sphere see themselves losing out as the world becomes more integrated and interdependent. The perception that the benefits of globalisation are not being spread either equitably or fairly is fast taking hold amongst an articulate group in our society who in the past instinctively would have regarded themselves as winners in the lottery of life.

The financial services sector is increasingly regarded by a sceptical and bemused general public—I do not necessarily agree with the sentiments, but they are the reality of what is happening—as a one-way bet to untold riches. Only last month, we learned that despite the effects of the credit crunch, overall City bonuses this year will top £7 billion. This is leading to enormous resentment not least from the middle classes, where the material expectations, particularly in London and the south-east, are becoming increasingly bleak. Indeed, the biggest concern I hear from middle-aged constituents is how, short of relying upon inheritance, their children can hope to match, let alone surpass, the standard of living they have taken for granted for decades gone by.

The prospect of non-doms being seen publicly to “pay their way” will help assuage many of these concerns without careering towards fully fledged protectionism, which would be totally undesirable. The City might be wise to seek some accommodation with the Government on this issue.

But the concern of young workers and their ability to match their parents’ standard of living also touches on another serious concern of mine, which I have raised in the past, not least at the last Budget. The dividing lines of 20th-century society—at least in the post-war era—were largely defined by class, but I believe that the first half of this century stands to be shaped by the battle between generations. The debt trail of this Government means that the young people of today, as well as those yet to be born, will foot the bill for both the Government’s private finance initiative-funded investments and the unfunded cost of pensions for older people. PFI might well have led to the construction of tremendous new hospitals in many constituencies throughout the country, but that will have to be paid for in the future; it is a case of jam today, and future generations of taxpayers will foot the bill. I worry that those future generations will have to lower their expectations significantly when the time comes for them to retire and benefit in the same way as previous generations from public pensions.

Members on both sides of the House are being neither open nor transparent about this important issue. It is contained in the category of “ongoing borrowing requirements”. The hon. Member for Wolverhampton, South-West (Rob Marris) referred to groundhog day. We entered the House on the same day seven years ago, and public borrowing is another issue to which the term groundhog day could be applied. Every Budget I have seen has referred to borrowing going back into the black in about four years—and that is the case today, too. There has always been the idea that we are just a few years away from nirvana when everything will have corrected itself. The trouble is, however, that we have an ever larger borrowing requirement going forward.

We politicians are culpable in many respects. There are twice as many voters over 55 as there are under 35, and those voters are twice as likely to vote as younger voters. It is therefore perhaps unrealistic to expect anyone in the political arena to state certain bald facts on this matter. The reason many people well into pensionable age claim they receive so little from the state is that they have failed to pay anything like enough into the system to warrant their receiving what they now believe they are entitled to. Furthermore, the appetite in recent years has been for greater investment in public services, rather than tax cuts. In reality, too much of this much-vaunted “investment” in the public sector has not been wholly paid for by the Treasury’s current revenue. The Government have in truth been using the mechanism of the private finance initiative—now the public-private partnership—as a form of disguised borrowing with repayment postponed for up to 30 years, removing from the public balance sheet some of the capital costs of Government projects. Admittedly, some £30 billion of the capital value of PFI projects has been included on the current balance sheet, but that leaves more than £120 billion of public sector debt currently unaccounted for. That calculation takes no account, of course, of Northern Rock, much of which is likely to remain under state control well into the next decade.

I fear that this off-balance-sheet financing delays some of the tough decisions that need to be made about the future of public spending, and impedes the debate we must now have about how to manage public services not only in the years ahead, but for decades to come. One of the more depressing prospects in the years ahead is that my 40-something generation will be considered to have lived in the very best of times. We are all consuming what we believe we are entitled to, without much regard to the costs, and we run the risk of serious social unrest in the decades ahead as the evidence of this appalling generational pyramid sales scam becomes evident. It is not right that our young people—and many unborn who will have the benefit of British citizenship—will have to meet the liabilities for our short-sighted, selfish approach. I regret that we have not even begun to address some of these issues in today’s safe-pair-of-hands, careful-as-it-goes Budget.

I am grateful to have had the opportunity to say a few words, and I am glad that other Members who have waited a long time to make their contribution to this debate will also be able to do so.