Lords debate tax impact of Autumn Statement 2023

The Lords take a more relaxed – some would say more civilised – approach to debating fiscal events, waiting a week before giving peers a chance to air their views. Here's a short overview of the discussions that unfolded.

Baroness Vere of Norbiton, the newly appointed Treasury Minister in the Lords, began her remarks by highlighting some of the Autumn Statement’s measures and claimed that the announcements included “the largest business tax cut in modern British history over a five-year period”. She added that the Government’s focus on investment “could see business investment in the UK increase by £20 billion per year in a decade’s time”.

Employment taxes

Both Lord Willetts (Con) and Lord Macpherson of Earl’s Court (Crossbencher) welcomed the cut in national insurance. Macpherson – a former Treasury Permanent Secretary – pointed out that over his adult life the basic rate of income tax has been cut from 35% to 20%, while the employers’ national insurance rate has risen from 8.75% to 13.8%.

He stated that “national insurance is a tax on jobs—it penalises working people and the young—while income tax cuts tend to favour the old, rentiers and those who live off capital”. He asked the minister whether the Government’s policy is now to prioritise national insurance cuts over income tax cuts. The Minister responded: “yes”.

Macpherson said that sooner or later the Government would need to “grasp the nettle and reintroduce a health and social care levy. When they do so, it should be based on the income tax base rather than that of national insurance,” he suggested.

While Baroness Lea of Lymm (Con) welcomed the national insurance rate reduction, she was disappointed that personal income tax thresholds are due to remain frozen at financial year 2021 levels, up to and including financial year 2027. She emphasised that these frozen thresholds increase the personal tax burden through fiscal drag, as stronger wage growth pushes more taxpayers into higher tax bands.

Baroness Noakes (Con), a former ICAEW President, viewed the national insurance reductions as ‘controversial’ and said she believes workers will be paying for this cut themselves ‘through fiscal drag’. She said: “For all the talk in the Autumn Statement about tax cuts, there has been nothing to change the trajectory for this Parliament to be the biggest tax-raising one since the Second World War”.

Lord Howarth of Newport (Lab) argued that the Government should “at least” extract the best value from the existing tax system, “whether by merging national insurance and income tax into a properly progressive system, tackling the chaotic complexity of VAT or addressing the damaging effects of the stamp duty regime”. He expressed disappointment that the Chancellor has shied away from all these possibilities.

On the other hand, Lord Northbrook (Con) and Lord Sikka (Lab) argued that a 2p reduction in national insurance delivers zero benefit to 19 million adults whose annual income is less than £12,570. Sikka continued, asserting that wages are taxed at a higher rate than capital gains, dividends or income from speculative ventures. He stated that: “The freezing of income tax and national insurance thresholds means that, by 2028-29, another 4 million people will be paying income tax; 3 million more will pay tax at the higher rate of 40%; and 400,000 more will end up paying tax at 45%”.

Baroness Meacher (CB) citied the Institute for Public Policy Research, suggesting that the national insurance contribution reductions announced in the Autumn Statement will largely benefit the wealthiest households. She said: “for every £100 spent on these cuts, £46 will benefit the richest fifth of households and only £3 of every £100 will go to the worst-off families”.

Labour spokesperson Lord Livermore referred to the IFS’s calculation that shows “almost every single person in the UK liable for income tax or national insurance will now be paying higher taxes overall” and argued that ‘this was not an Autumn Statement that cut taxes’.

Personal taxes

Lord Willetts advocated for a cut in stamp duty land tax.

Lord Northbrook and Lord Balfe (Con) voiced their concern about the absence of inheritance tax in the Autumn Statement. Balfe stated that “many people in Britain, particularly in the middle classes who keep this country running, hope to inherit part of a house, and about 30% of them believe that they will end up paying inheritance tax. The Minister has not only to reform it but to get it into law before the election”.

Moreover, Lord Leigh of Hurley (Con) asked the Minister about how much inheritance tax is currently sheltered by business property relief.

Responding to the inheritance tax comments, the minister said: “I can assure noble Lords that more than 93% of estates are forecast to have no liability in each year up to and including 2028-29. Those that do are very important in contributing to public finances and in helping to fund vital public services”. She further noted that the Government keep all taxes under review, including SDLT.

Business taxes

Lord Macpherson welcomed the ‘full expensing’ announcement, contending that Britain has a ‘chronic’ problem of underinvestment which contributes to its low growth. “It is right to try to tilt the playing field”, he said.

In contrast, Baroness Noakes believed that full expensing is expensive and achieves very little. She noted that “the policy costs £30 billion over the forecast period but produces extra investment of only £14 billion. I cannot see that this is a good use of taxpayers’ money.” She advocated lower corporation tax and blamed the current rate of 25% as the main reason for the UK has plummeted down the competitiveness league tables for tax.

Lord Northbrook reiterated Noakes’s point and argued that the benefits of full expensing are ‘more than cancelled out’ by the increase in the corporation tax rate. He provided details that the benefits of full expensing to companies forecast in the five years from 2023-24 are £19.6 billion, while the extra corporation tax burden in the same period is forecast as £42.8 billion.

Lord Eatwell (Lab) observed that making full expensing permanent is expected (by the OBR) to increase long-run potential output by slightly below 0.2% of GDP per annum. However, this positive impact is, according to the OBR, offset by the reduction in the public capital stock as a share of GDP, which “would likely also have a material, negative impact on potential output” over the forecast period. He concluded: “Here, the OBR has, sotto voce, identified a fundamental error in the Government’s approach to investment and growth: their failure to recognise that public services are complementary to the efficiency of private sector investment.”

Lib Dem Treasury spokesperson Baroness Kramer observed that the OBR expects full expensing of new investment to be fully offset by the faster retirement of existing capital. “Modernisation of equipment and software is surely a good thing, but it is not the dramatic industrial expansion this Government seem to promise as a consequence of this particular tax change.”

Responding to these points the minister reiterated that the Government has prioritised the business tax cut as a targeted way to support businesses that invest. She continued: “This policy will drive 0.1% GDP growth in the next five years, increasing to slightly below 0.2% in the long run… Full expensing brings forward relief that would otherwise be claimed over decades, meaning that the costs are highest in the policy’s introduction.”

While acknowledging that Chancellor did not have enough room for manoeuvre, Baroness Lea also wished that corporation tax could have been cut.

The DUP peer, Lord Weir of Ballyholme, suggested that a reduction in corporation tax “can lead to a much greater tax yield”. He provided an example that the Republic of Ireland has maintained a corporation tax rate of 12.5% for many years and it is now projected to have a budget surplus of around £56 billion or £57 billion in 2027.

Lord Leigh welcomed the R&D announcement and told the House that the Economic Affairs Committee’s Finance Bill Sub-Committee, which he chairs, will soon produce a report on R&D tax credits. He was delighted to see Government’s commitment to OECD Pillar 2 and said “the tax treatment of multinationals, in my opinion, needs urgent attention. If we do not get that right, I still want to see a digital sales tax, which I have consistently advocated”.

Baroness Featherstone (Lib Dem) spoke on the creative industries. She began by saying that the ‘big players’ in the film industry “are breathing a sigh of relief, having seen off the threatened restrictions on tax credit relief for commercial party transactions.” She urged the Government to hurry up with expanding tax relief to cover expenditure on visual effects.

Featherstone stressed that tax reliefs are “a proven road to putting a rocket under an industry’s capability to attract investment to this country and to boost exports”. So, she continued, “where were tax reliefs for the fashion industry; for publishing, where tax relief would incentivise UK production of published works; for live events, where the UK would increase its share of the market and grow skilled jobs throughout the UK; and for music production, where tax relief would incentivise the creation of new music and attract inward investment?” She welcomed clarity on theatre tax relief, but wondered why it is not being made indefinite? There was also no word about museums and galleries tax relief being made permanent, she added. Finally, she noted the Publishers Association’s disappointment that the Government did not axe VAT on audiobooks.

On the issue of VAT, Lord Northbrook raised concern about ‘tourist VAT tax’ and was not happy that Government did not take action in the Autumn Statement.

Levels of taxation

Lord Howarth accused the Chancellor of gambling “the wafer-thin margin forecast by the OBR” to cut taxes. “He claims that his tax cuts will enable public services to be better funded; the reality is that he has funded tax cuts at the expense of public services.”  Additionally, Howarth suggested that Hunt has ‘no interest’ in tax reforms relating to carbon and road pricing, arguing that these sort of reform would be beneficial to the economy.

Lord Thomas of Gresford (Lib Dem) expressed his disappointment about the Autumn Statement and referred to it as the “final blow to the credibility of this Conservative Government”.

Lord Frost (Con) and Lord O'Neill of Gatley (CB) agreed that the tax burden is currently high. Frost  noted that even with the reduced tax increases announced in the Autumn Statement “we are still heading for the highest levels of tax and spend ever seen in this country outside wartime”.

“There are three foundations for growth: low taxes, low regulation and a small state. This Autumn Statement achieves none of these things, and for us it is not surprising that economic growth remains feeble”, stressed Baroness Noakes.

On the other hand, Lord Dobbs (Con), applauded the Government’s determination to boost growth by cutting taxes and hoped that this trend is not “a pre-election jolly” but rather a “long-term mission” for the Government.

Lord Desai (Crossbencher) said the idea that tax cuts increase growth was a fallacy. To successfully introduce tax cuts you have to be ‘hard on the economics’ he continued. “You cannot go on planning picnics when you do not have any food in the larder.”

Desai asked the Government to stop talking about tax cuts, saying: “any time you talk about tax cuts, the markets panic and put up the cost of borrowing….. So please can we not have tax cuts, because it will wreck the economy before the next Government come to power?”

You can read the full debate here.