House of Lords King's Speech debate highlights tax and growth

While the debate spread over five days, it was day four, 22 July, that saw a focus on economic and employment policy, and this report covers speeches made on this day.

Conservative speeches

Conservative frontbencher Lord Callanan welcomed the government's promise not to raise taxes on working people, but added: “Let us see how it works out in practice”. The pandemic “pushed taxes to the limit”, he suggested. The peer made the point that “all taxes are, one way or another, paid by working people”. 

Lord Bridges of Headley partly blamed Covid and the war in Ukraine for high taxes, but argued that other factors like low productivity also matter. He raised concerns that government plans would lead to more spending, taxes, and regulation, which he said would hold Britain back.

Baroness Noakes warned the government about providing more powers to the Office of Budget Responsibility (OBR) and said the Chancellor’s “pro-growth policies may not score fully in the OBR’s modelling, which will in turn constrain what her fiscal rules allow her to do”.

Lord Hodgson of Astley Abbotts advised the minister to be honest with the public, saying that the UK can’t have US “levels of taxation” and European levels of social security as the numbers don’t add up. He urged him to address issues such as the future of the triple lock and outdated local government financing.

Lord Forsyth of Drumlean criticised Labour's policy of putting VAT on school fees, calling it ‘disgraceful’ and harmful to families. “They will be the first Government in the world to tax education, forcing young children to leave their schools as their parents cannot bear the burden of that tax,” he complained. 

Baroness Blackwood of North Oxford and Lord Sarfraz made the case for investing more in R&D and supporting SMEs respectively with Lord Sarfraz suggesting that these enterprises require “cash to continue to grow and innovate”.

Baroness Vere of Norbiton wound up the debate for the Conservatives, praising the previous government for focusing on reducing taxes for businesses and workers, reforming welfare and increasing state productivity. She criticised the new government for having no strategy for economic growth in their missions, saying: “Reading the fine print, we are told that growth will result from a spillover of innovation from meeting these vibey missions.”

Baroness Vere suggested that while the national wealth fund sounds promising for generating economic growth, it appears to be “little more than a rebrand of existing government structures”. She concluded her remarks by claiming that measures in the King’s Speech show a “disconnect in the government’s thinking”, though she thought there were positive aspects to build on.

Labour backbench speeches

Baroness Drake emphasised the pension sector's role in influencing financial market efficiency, driving innovation and stimulating economic investment. She highlighted significant policy issues concerning the governance and regulation of private savings.

Also on the topic of pensions, Lord Wood of Anfield  argued that there are problems in the connection between UK pension funds and investment in the real economy of the UK. He highlighted that the average defined benefit allocation to UK equities fell to less than 2% in 2022. Lord Wood urged the government to look at how the regulation of the pension fund industry connects to investment and whether other financial incentives might be appropriate to encourage more investment in UK equities and UK corporate bonds.

Lord Davies of Brixton stressed the importance of including pension industry representatives and bodies in the government’s review. He claimed that the British economy struggles with utilising investment funds efficiently and argued that the government should address this issue.

Baroness O'Grady of Upper Holloway, the former head of the TUC, told peers: “We should choose to raise additional resources by shifting the burden of taxation from work to wealth”. She said that tax experts predict that taxing capital gains at the same rate as income would net the Treasury £12 billion annually while “restricting tax relief on pensions to the basic rate of income tax would raise a further £14.5 billion”.

Lord Eatwell welcomed the Budget Responsibility Bill, saying it would ensure all significant tax and spending changes are subject to an independent assessment. He stressed that the OBR is crucial for ‘challenging’ Treasury assumptions, however more important is the design of the OBR’s “economic modelling” and “assessment criteria”. The peer added that, initially, the OBR focused solely on the annual fiscal deficit, ignoring whether spending cuts or investments were involved. “That approach can be no part of a growth programme”, he argued. 

Lord Howarth of Newport hoped that the Chancellor would commit to a tax system that is “progressive and green”. He suggested she should levy council tax on the current value of properties, align capital gains and income tax rates, and restrict tax relief on pension contributions to the basic rate, as well as introducing a carbon tax on greenhouse gas emissions.

Lord Layard welcomed the announcement of apprenticeship levy reform, saying there should be a guarantee of an apprenticeship for “every qualified applicant”. He hoped that this could be achieved by the end of the Parliament and quoted that the London School of Economics which has estimated a public benefit to net cost ratio of 13:1 for the apprenticeship guarantee. He asked the minister about plans for implementing the apprenticeship guarantee hinted at in the government’s election manifesto.

Lord Sikka criticised some train companies for their “complex corporate structures, controlled from an entity in Luxembourg, which obviously means tax dodges”. He said 100% of the income of these companies comes from the public purse. “In the last decade, [these companies] have paid £2.7 billion in dividends; they have a profit margin of 41.6%; and no UK tax is paid on any of their dividends,” he lamented.

Lord Sikka also expressed disappointment that the two-child benefit cap has not been removed. If additional revenue is needed he suggested the government tax capital gains and wages equally and levy national insurance on capital gains.

Liberal Democrat speeches

Lib Dem business spokesperson Lord Fox and Baroness Bonham-Carter of Yarnbury both welcomed the government’s announcement of reform of the apprenticeship levy, with the baroness emphasising its importance for the creative industries. Regarding the National Wealth Fund Bill, Baroness Bonham-Carter highlighted the creative industries’ ability to leverage public investment, citing tax credits' contribution to GVA growth. She argued that the UK's tax and social security framework is not “set up to support” freelancers in the creative industries.

Lord Lee of Trafford acknowledged the challenges the Chancellor faces in her growth strategy task, needing to balance tax increases (such as to CGT and possibly inheritance tax) with avoiding ‘blunting’ businesses and enterprises. However, he warned the Chancellor that ending business property relief, which impacts Alternative Investment Market shares, could hinder growth. Lord Lee encouraged the Chancellor to improve financial education in schools by gifting NatWest shares to teach students about the stock market.

Lib Dem work and pensions spokesperson Lord Palmer of Childs Hill supported the idea of removing the two-child limit to reduce child poverty and was glad to hear that a bill on pension schemes had been included in the King’s Speech. He emphasised the importance of automatic enrolment for people with modest incomes as “without a big step forward, they will either retire poor or have to work beyond their ever-increasing pension age”.

Baroness Benjamin urged the government to review the two-child limit in the autumn Budget as well as raising the tax credit for animation and television to 40%.

Lib Dem Treasury spokesperson Baroness Kramer highlighted the importance of small businesses' role in the economy and suggested that their access to finance remains “utterly inadequate”. She asked the government to scrap the current structure of business rates and replace it with a ‘fairer’ levy on commercial property owners - “a form of land value tax”.

Other speakers

Lord Morse, the former head of the National Audit Office and a crossbench (CB) peer, discussed UK business and investment and suggested that planned five-year stability in the corporation tax rates could help provide confidence, provided “this apparent stability is not undermined by hidden taxes on business, such as might occur as part of the planned business rates reform”. He also emphasised a shared industrial strategy that could help businesses with ‘stable’ planning.

Lord Freyberg (CB) also welcomed proposals to introduce longer-term funding settlements for research tied to key pillars of the government’s industrial strategy, including the life sciences, arguing that private investment in life sciences R&D contributes £5 billion annually. In the meantime, Lord O'Neill of Gatley (CB) suggested that a “credible refinement” of the fiscal rule is necessary to boost public investment and productivity.

Another crossbencher Lord Mair praised the government's commitment to reform the apprenticeship levy and emphasised the importance of supporting UK universities and enhancing future apprenticeships, including degree apprenticeships, for the country's technological advancement. 

Lord Wigley (Plaid Cymru) criticised what he called the economic mismanagement of Wales by the Conservatives and also argued that the current Labour government has ‘ignored’ Wales’s demand for replacing the Barnett formula with a needs-based formula. He asked the government how they are planning to raise the economic activity rates in all parts of the country.

Lord Gadhia (Non-affiliated) questioned the government’s claim about the ‘challenging’ economic inheritance, suggesting that the fiscal drag from freezing tax thresholds would “do a lot of the heavy lifting” on raising tax revenues. He said the Chancellor “may well have more wind in her sails than she is willing to admit right now”. The peer stated: “Let us hope that luck and wisdom remain on her side, because the alternative options for raising taxes, given the manifesto lock on income tax, national insurance and VAT, all look very unappealing, and could damage incentives for wealth creation and risk choking off growth before it has properly begun.”

Lord Truscott (Non-affiliated) welcomed some of the measures in the King’s Speech including the budget responsibility and national wealth fund bills. He wished the latter bill had been introduced earlier (in the 1980s) “when, unlike Norway, our North Sea oil and gas bonanza was blown on tax cuts for the already wealthy”.

Lord Truscott suggested reforming inheritance tax to transfer more wealth to those who need it and fund the government’s ‘ambitious’ programme. He claimed that people would prefer “to have their estate taxed after they are gone, rather than pay higher taxes during their lifetime. Switching the burden of taxation, even to a limited degree, from income to inherited wealth is one way to achieve this. It avoids the pitfalls of a wealth or property tax, which can hit the living, who are often cash poor but property rich”.

He said replacing IHT with a lifetime receipts tax “would deal with the fallacious argument that IHT is double taxation”. Agricultural property and business asset exemptions could be restricted to family businesses and farms, he continued. “IHT could also be made a progressive tax, so the effective rate increases with the size of the fortune, rather than decreasing as now.” If the UK taxed the same proportion of inheritance and gifts as South Korea did in 2022, it would have raised about £14 billion in 2019-20, rather than the £5 billion raised, he claimed.

Government response

The new Financial Secretary to the Treasury (FST), Lord Livermore, told the House that if the UK economy had grown at the average rate of other OECD economies, it would now be over £140 billion larger. He suggested that this figure could have resulted in an additional £58 billion in tax revenues in the last year alone.

In response to criticism about the government’s plans for the OBR from Lord Forsyth and Baroness Noakes, the minister said the OBR is ‘praised’ by the OECD as a “model independent fiscal institution”. He continued that strengthening the OBR would “deliver on the promised fiscal lock”.

Regarding Lord Lee’s suggestion about NatWest shares, the FST highlighted that he would not be able to comment on specific sales due to ‘commercial and market’ sensitivity. He appreciated the support from some peers for the pension schemes bill, saying that it aims to improve outcomes for over 15 million private sector pension savers and support the government’s growth mission.

The minister reiterated the government’s commitments on tax, with no increase in national insurance or in the basic, higher or additional rates of income tax or VAT. He continued that corporation tax would also be capped at its current rate for the duration of the Parliament.

Lord Livermore agreed with the members regarding reforming the skills system and assured Lord Layard that the proposal for an apprenticeship guarantee would be carefully considered.

On the two-child limit policy, the FST reported that the Secretaries of State for Work and Pensions and for Education will co-chair a new ministerial task force to drive cross-government action on child poverty, starting with developing a new strategy in line with the government’s opportunity mission. He added that the government would also review universal credit to make work pay and tackle poverty.

Full debate