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Lord Skidelsky: My Lords, I thank the noble Baroness for giving way. Perhaps she will recall that in my speech I said that as part of any tax-cutting programme tax thresholds should be raised. That was my preferred method for tackling the poverty programme. It is not the only way but it is my preferred method of arranging the tax system.

Baroness Sharp of Guildford: My Lords, I am delighted that the noble Lord made that point because it is a point which the Liberal Democrats have been making for a long time.

From these Benches, there is a different proposition which I wish to put to the House. The noble Lord, Lord Skidelsky, suggested that taxation is increasing and should be diminished. As is well known, we believe the opposite; that on the contrary, in certain areas, public expenditure should increase more quickly and that there is considerable justification for raising taxation to meet that increase in public expenditure.

The reason for putting forward that argument is that taxation can be divided into three main areas. One can be justified in terms of public goods. A traditional public good is something like street lighting. You cannot prevent people from benefiting from street lighting. If you ask people whether they will pay for street lighting, they will say that they will not because they know that if muggins next door will pay, there is no reason why they should pay anything towards it. It is called the free-rider problem, and the easiest way out of that dilemma is for the state to raise general taxation to pay for it. Many areas--public lighting, the environment, safety, health, defence, prisons and so on--can be justified on the ground of being public goods.

Secondly, there is redistribution and the noble Lord, Lord Haskel, spoke at considerable length about that. Traditionally, it has been a highly political issue which has divided right from left. I am not sure that that is so any longer. Something like 30 per cent. of UK public expenditure--£100 billion per year--now goes on the social security budget, which is the redistribution budget. All sides struggle to keep it down. It is led largely by issues of old age, illness and unemployment. As the debate that took place here on Monday showed very clearly, it is an area which is extremely difficult to control.

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The final area of major public expenditure in this country is interesting: it is health and education expenditure. It amounts to about 25 per cent. of public expenditure. In this country we are spending 5.7 of GDP on health and 5 per cent. of GDP on education. We are spending less on health than any other advanced industrialised country. The United States in total spends 12.5 per cent. on health, but even the public sector in the United States, which provides a minimal health service, spends 6.5 per cent.

As regards education, we are spending about the same, on average, as our European partners and the United States. Nevertheless, in terms of education, as we know, one in four in this country is now functionally illiterate.

We are now a globalised economy. Capital is extremely mobile; technology is mobile. A multinational can set up business where it wants to. We cannot compete in this country in terms of low wages. We must compete not in terms of brawn but in terms of brain. We shall create jobs in this country only if we can attract those multinationals and provide them with the labour which is capable of meeting their modern-day technological requirements. Unless we invest in education, we shall not be capable of doing that. That is why, on these Benches, year after year, we have said that there must be more investment in education. It is an investment that we cannot afford not to make.

I know that those on the Government Front Bench will tell me that they have put more money into education. But it is a paltry amount compared with what is required. It is by no means enough to meet the needs of a modern industrialised country when there is currently such a crisis.

It may be argued, too, that we do not need to put in more money; that we can create efficiency savings, which we have been doing in the education and health sectors for a considerable period of time. The problem is that 80 per cent. of the budgets in those sectors are people budgets. Why do people spend money on private education? It is because they want smaller classes. We cannot have smaller classes in our primary schools nor proper nursery education unless we are prepared to spend money on those issues.

We are not a highly taxed country. By OECD comparisons, 36 per cent. of the GDP in the UK goes on tax. In the United States and Japan it is about 29 per cent.; in Germany it is at 38 per cent.; in France it is at 45 per cent.; and in Scandinavia it is over 50 per cent. In European terms we are towards the bottom of the league tables. In world terms we are at the lower end of the middle of the league tables. We are a rich country.

We must bear in mind the importance of an increase in expenditure on education and the aspirations of our people in relation to health. We cannot meet the aspirations for a better quality health service unless we are prepared to spend money and put more people into the service. We cannot meet those aspirations unless we increase public expenditure in those two areas.

Unless there are other areas of public expenditure which can provide for the increase necessary in those two areas, we must increase taxation. We cannot afford

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not to invest in education. We must put more money into the National Health Service in order to meet the aspirations of the voters in this country. In both those spheres, we are justified in increasing taxation.

3.38 p.m.

Lord Marlesford: My Lords, I shall not endorse the interesting speech which we have just heard from the noble Baroness, Lady Sharp. However, I shall comment on personal tax levels in this country.

We owe a debt of gratitude to my noble friend Lord Skidelsky for giving us the opportunity to have this debate. I was particularly struck when he referred to the changes in personal taxation as having been one of the major features of the period of Conservative rule. Indeed, there was a revolution in direct taxation under three remarkable Chancellors--one of whom is in the Chamber this afternoon, the other two being my noble and learned friend Lord Howe and my noble friend Lord Lawson--from the time that the government of my noble friend Lady Thatcher were elected. At that time noble Lords will remember that we had a top personal rate of taxation of 98 per cent. It had not fallen below 90 per cent. for some 20 years. Very able people were leaving this country in large numbers in order to avoid the consequences of that tax regime.

I want to talk a little about our present direct tax regime. Before I do so I should like to pay two tributes. First, I should like to say how glad I am that the present Chancellor of the Exchequer has, in three successive Budgets, not significantly changed the structure and pattern of direct taxation in this country. I know that New Labour was elected on a pledge that it would more or less retain the extremely popular and economically successful tax structure which it had inherited. It undertook to retain it, not least, I suspect, because it saw that as an important way of ensuring a useful majority in another place. At any rate, we have had three Budgets in which the tax structure has largely survived.

My second tribute is a more personal one. It is to the noble Lord, Lord McIntosh, who has patiently provided a number of Written Answers to questions I have been asking him on tax levels in Europe. It is the implications of those answers to which I should like to draw your Lordships' attention. He is now fumbling for his papers. Maybe he has taken with him copies of the answers he gave me.

Lord McIntosh of Haringey: My Lords, on the contrary, I was merely thinking, with pleasure, how all that work has now come to fruition and that we shall hear the conclusions which the noble Lord is drawing.

Lord Marlesford: My Lords, I want to emphasise to your Lordships the extremely favourable tax structure we have in terms of personal taxation in this country in comparison with other members of the EU. I should like to quote a few figures. First, as regards income tax, the top rate, as we know, is 40 per cent. It was reduced to that level by my noble friend Lord Lawson in 1988. It comes into effect at a taxable income of about £32,000 per year. In France the top rate is 54 per cent., which comes into effect at a higher level of £88,000. In

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Germany it is 56 per cent., as it is in Sweden and Spain. In the Netherlands it is no less than 60 per cent. and comes into effect at £40,000. In Belgium and Denmark it is about 57 to 58 per cent. Even Italy has a rate of about 45 per cent.

Therefore, as regards direct personal taxation, we have, with Portugal, the lowest top rate. That gives the right incentive to those people who create economic wealth in this country.

Secondly, I should like to refer to capital taxation. Six countries in the EU have an annual wealth tax. I well remember in the mid-1970s a previous Chancellor of the Exchequer, the noble Lord, Lord Healey, attempting to introduce a wealth tax in this country. At least he produced a Green Paper proposing it. A House of Commons Select Committee spent a great deal of time examining it, the results of which we published in the Economist when my noble friend Lady Hogg and I were working there together. That leak dismayed the Select Committee and I was hauled in front of the Privileges Committee for leaking it. Nowadays, Select Committees are glad of any publicity for their reports. The wealth tax was abandoned. No one could find a satisfactory manner to avoid it raiding the cash flow of small companies. That represents quite an important difference between us and some of the other countries. In France, for example, the wealth tax has been a significant piece of political baggage that they have so far been unable to throw overboard, but I think that will come.

Capital gains tax in this country is generally viewed as income, as it is in other countries. That seems to me to be perfectly fair and I have no complaints. As regards inheritance tax, this is the one country where it is not calculated on a family heirs basis as it is in most continental countries. However, significant and sensible changes were made to the structure of inheritance tax in this country by my noble friend Lord Lamont when he was Chancellor of the Exchequer. The top rate is 40 per cent. but there are lower levels for business assets. Other countries have very high rates, particularly for non-familial inheritance. In Belgium it is still 80 per cent., in the Netherlands 68 per cent. and in France 60 per cent., with a threshold of only £1,000 for people who are not direct relations of the deceased person. Here, I believe it is £225,000.

I turn to the VAT: at 17½ per cent., this country is among the lowest rates. One of the boldest things to be done in the 1979 Budget by my noble and learned friend Lord Howe was to make a dramatic change to simplify and increase the rate of VAT so as to shift from direct to indirect taxation. In Denmark and Sweden it is 25 per cent. and in France 20 per cent.

Another particular aspect of our VAT regime which I believe is extremely important is the threshold below which a small business person, small trader or craftsman does not need to register and thus charge VAT.

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Interestingly, only France and Britain have what I would regard as a sensible level of threshold, which in each case is about £52,000 of annual turnover.

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