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Mr. Michael Jack (Fylde): I am pleased to have the opportunity to speak in this interesting debate.

The hon. Member for Birmingham, Selly Oak (Lynne Jones), who I know takes a particular interest in tax matters, made a point that is central to this debate: in justifying the proposal, the Government have not declared any strategy about the number of people who should pay tax. Effectively, the measure has an impact on those who will remain at the basic rate or the 10p starting rate—points that I shall develop in a moment.

As the Paymaster General will recall, on page 75 of the Red Book, at paragraph 4.56, the Government have included a passage entitled "Making work pay for all":

In justifying that position, the Government pray in aid their 22p basic rate of income tax. I was delighted to read that that is the lowest rate for 70 years and to see that the Government are moving towards a basic rate of 20p in the pound, which was a Conservative policy. The paragraph also comments on the 10p starting rate.

If the Government are so proud—at paragraph 4.56 of the Red Book—of saying that they want to make work pay for all, why did they choose the method set out in the

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clause to raise revenue? People whose personal allowance is part of a gate-keeping exercise as to whether work pays will find that work pays less than it would have done if the allowances had been indexed. The policy seems to fly in the face of the Government's chosen course of action of making work pay.

As the hon. Member for Birmingham, Selly Oak indicated in her very perceptive remarks, the clause is about the number of people who are brought into the tax system and have to pay tax. I am intrigued to know why, even though only a small amount may be involved, the Government seem to have no regard to the fact that they are bringing into tax a few more people than would otherwise have been included.

While I considered the implications of the measure, I discovered one or two interesting things on which the Paymaster General might like to comment. Looking back to 1991–92, we find that the number of basic rate taxpayers as a proportion of the labour force was 91 per cent. By 1996–97, that level had fallen to 61 per cent., but under the current Government, it has risen to 74 per cent. We are finding that more basic rate taxpayers are in the tax system than were under the previous Conservative Government. If the number of basic rate taxpayers as a percentage of the labour force is rising, one way of avoiding that process would have been to index the allowances and seek other ways of raising the revenue.

Mr. Hendrick: Are not more people working now than ever before? As there are so few unemployed people now by comparison with 1990 and 1991, is it not probably a desirable consequence that more people are paying tax?

Mr. Jack: If the hon. Gentleman had listened, he would have heard me use a proportionate measure rather than an absolute one. If I had used an absolute measure, his line of argument would have been entirely correct, but I was aware that if I were to fall into that trap, an argument would be advanced to destroy the point that I am making. With respect to his analysis, he is wrong. I welcome the fact that there are more people in the labour force, which always has a beneficial effect on the tax take, but that is why I used a proportionate measure.

It is interesting to consider the number of basic rate taxpayers as a percentage of all taxpayers. That proportion was 94 per cent. in 1991 and 63 per cent. in 1996, and it went back up to 76 per cent. in 2001–02. The Government seem to have ignored that rise in the number of basic rate taxpayers, for whom the indexation of allowances at the margin is very important. They must do rather better than simply announcing the stark fact that the measure will happen, which is what the Red Book says; it effectively states merely that personal allowance rates will remain the same. No doubt the Paymaster General will try to justify the measure on the basis that it will raise an extra £700 million in 2003–04 and an extra £850 million in 2004–05, to help the Government's efforts to raise revenue for the health service.

There are, however, other ways in which the Paymaster General could raise substantially more, especially in relation to her responsibility for the indirect tax system. She could do so if she got to grips with the billions of pounds that seem to be disappearing out of the VAT system, as witness the recent report by the National Audit Office. The Government will no doubt respond that they

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have invested more resources at our ports to deal with smuggling, and that the Bill contains measures to tighten up on VAT, just as previous Finance Bills have done. But even with all that tightening up, it is calculated that over £7 billion is going missing. The question I would like to know the answer to is: what will the investment return be if the Government put in yet more resources? If they will get £7 billion, they can afford to spend £1 billion or £2 billion.

7.30 pm

When we were in power, we were challenged about our spend to save initiative, but the principle remains. As the Paymaster General will know, over the years the application of more qualified senior inspectors at the Inland Revenue to some of the more difficult and complex areas of tax, particularly those involving large companies, has yielded considerable amounts of extra tax—well within the scope of this measure. If the Government are going to break faith with the low paid by not indexing their allowances, they have to explain to them why a relatively modest investment in extra facilities to bring in indirect taxes could not surpass by a large measure the amount of money that this proposal seeks to save. If the Government wish to remain true to their cause of making work pay, they have to do quite a lot of explaining of why they are asking the Committee to agree with a proposal that goes fundamentally against that chosen course of action.

Chris Grayling: The measure completely confuses me. I cannot for the life of me understand why a Labour Government are pursuing a policy that will clearly damage people on low incomes.

Let me tell the Paymaster General a story about a lady who came to my constituency surgery a couple of weeks ago. She was very confused about her tax affairs. She said, "I do not understand. I seem to be paying tax and I do not have much of a pension. I received bereavement allowance, which I have now lost, and I am paying £200 a year in tax. I have a low income, and £200 a year is lot of money to me."

We looked through that lady's papers. I am not a qualified tax expert but at first glance it looked as if her tax affairs were correct. Her income was just high enough to pay £200 year in taxation. However, I appreciated why she felt frustrated trying to make do on a low income in an environment where many other costs, such as council tax, are rising sharply. Gas prices have recently jumped upwards. I could understand why she felt under pressure financially.

Why on earth, then, have the Government introduced a measure that will put that lady's tax bill up? Freezing the personal allowance will mean that she will pay tax this year or next year that she would not otherwise have to pay.

Roger Casale: I wonder whether the hon. Gentleman has left out part of the story. Perhaps he would tell the Committee whether, when the pensioner came to see him, he informed her about the pension tax credit, which raises the income of people on modest incomes. I hope that he took the opportunity to point out that valuable benefit to her.

Chris Grayling: That may well be so. Indeed, for that lady's sake, I hope that she does manage to get back some

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of the money that she is paying in extra taxes; but she will have to get to grips with an extremely complex application process of forms and difficult bureaucracy in order to get back some of the money that the Government are taking away.

Dawn Primarolo rose

Chris Grayling: Perhaps the Paymaster General can tell me the logic of taking money away and giving it back again.

Dawn Primarolo: To help the hon. Gentleman out, we are discussing clause 28, which freezes the allowances. Clause 29 increases the personal allowances for pensioners. Pensioners are not included in clause 28.

Chris Grayling: Perhaps the Paymaster General can clarify the matter. My understanding is that the significantly increased amount is for those aged 75 and over. However, even if she is correct, let us look at the gamut of people on low incomes: a student nurse starting her first job, someone earning £4 or £5 an hour in McDonald's, a new graduate in their first job earning a relatively low salary, or someone who has left school and is following an apprenticeship. Freezing the personal allowance this year will increase the tax burden on those people, which should never happen. It is a tax on the low paid and on low incomes. As my right hon. Friend the Member for Fylde (Mr. Jack) has said, it will do nothing to help to get people into work; it will create a disincentive to work. It will create a burden on those who can least afford it.

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