Popular cuts and the civil service fight back

The Coalition started well. Their cancellation of ID cards, HIPs, and lots of regional government was just what many wanted to hear. Yesterday’s papers contained a few warnings that the civil service empire may strike back.

Mr. Lansley’s wish to streamline the bureaucracy in health has led to claims that Health Authority and PCT chiefs might be in line for massive pay offs. Mr Maude is busy trying to change the basis for redundancy payments, which is far from popular amongst officials. Mr Pickles’ statement that the stifling and expensive Comprehensive Area Assessment bureaucracy is being swept away has not be greeted with announcements of similar cuts in bureaucracy in Councils who had to provide all the information and comply with the system . Instead Councils seem to favour cutting grants to voluntary bodies, and some officers will probably be looking around for the most politically damaging reductions in services possible to put Councillors off the whole idea of saving money.

Meanwhile some MPs are trying to get the government to carry through some politically popular cuts. How about starting by sending many of the 12,000 foreign prisoners back to their homelands, with a clear statement that they will never be allowed back into UK now that we are planning better policed borders? That might help cut prison costs and cut the numbers of new prison places needed.

Why not follow up by asking Mr Hague to go to Brussels and explain that as the UK is having to cut parts of its domestic budgets, we expect Brussels to do at least as much. Would Brussels like to show us what 25% and 40% off their budget might look like, as that could prove very popular.

Most popular of all would be to follow up the PM’s statement that our troops will be out of Afghanistan within five years, with a faster timetable for training the Afghan army and police so we can pull out earlier.

Messrs Holmes and Lilico have produced a very useful guide to pay and staff numbers in the public sector entitled “Controlling public spending”. That shows, for example, that senior officials in national government rose from 5000 to 9000 between 2002 and 2009, public sector “marketing and sales” rose from 11,000 to 29,000, management consultants, actuaries and statisticians from 5000 to 23000 and public relations officers from 5000 to 10000. That shows there is plenty of scope for natural wastage to bring down the totals markedly over the next five years. Presumably the number of receptionists went up from 18000 to 30000 because there were so many new bodies set up.

This big increase in recruitment helped take total public employment on the ONS survey up from just over 6 million to 7.3 million. (6m on the narrower definition). The median salary in the public sector is now 12% higher than in the private sector, and median hourly earnings 30% higher.

Where will growth be fastest in the UK?

During the Labour years London grew fastest, Scotland, Wales and the North slowest. The more public money Labour threw at the poorer and slower growing areas, the more the gap grew in favour of London and the South east. (1998-Q3 2006 London grew 41%, Scotland 16% – from “Freeing Britain to compete”)

The new governemnt has said they want more balanced growth around the country. On Friday the FT devoted a page to a forecast of what is likely to happen. This predicted more of the same, with a much stronger recovery and more jobs generated in London and the South East compared to the rest of the country.

The parts of the country that have the largest public sector failed to grow quickly during the years when Labour was pouring cash into them like a river in flood. Now the growth rate of public spending is to be brought right down, this source of cash will be less vigorous. That does not automatically trigger faster private sector growth.

A thoughtful Labour party in Opposition would ask themselves why did their top top down public sector spending led model fail to ignite the economies that mattered most to them in the strong Labour areas of the North and the devolved countries? Could it be that a balanced economy in any given area requires a stronger and wider ranging private sector? Did Labour’s public sector crowd out or deter the private sector in its core areas?

One of the worst mishaps was the failure of Northern Rock. Northern Rock was a Lanbour flagship. It was an apparent private sector success story, devoted to widening ownership and financing new residential development in the North East. To New Labour it was manna from heaven, a successful financial sector business growing in the North East, with its headquarters there. Was this the model of the future, the answer to Lodnon’s dominance in finance?

The long shadow of Northern’s collapse is cast on future financial enterprise, and private sector led support for other businesses in the Labour areas. The new government needs to be brave and argue in those Labour heartlands that the Labour experiment of leaading with public cash did not work. The government needs to bring the successes of London and the south east to the north, as it brings public spending as a percentage of the total down sensibly. The government’s strategy is to bring public spending’s proportion down through economic growth, taking care not to cut the overall cash expenditures.

It’s a chicken and egg problem. Years of experience shows that the more public spending there is the slower the overall growth. To bring more enterprise to the slower growing areas will take boldness to free the obstacles to enterprise. If we want many more people to run their own business, more larger businesses to set up elsewhere in the UK and more jobs to be created by free enterprise it is going to take much more work on educational success, training, deregulation and lower taxes. Above all, it requires inspiring people to believe they can do things for themselves, and to understand that if you want all your prosperity and jobs to be delivered from Whitehall you will be bitterly disappointed.

Governments damaging recovery

Around the world, led by President Obama and the EU, governments are busily making the recovery slower and more difficult. It is fashionable to urge and welcome recovery, and even more fashionable to sand bag it at the same time. In vogue are policies to cut bank lending and credit expansion, to tax enterprise, investment and saving, and to raise public spending.

The President has been especially keen to regulate and limit banks more, on a tide of anti bank sentiment. This anger towards the banks has been partly worked up by governments wishing to deflect attention from their own huge mistakes in controlling the money supply and regulating the banks in 2005-09. The rest was brought on by excessive behaviour by the banks themselves. This is not the right time in the economic cycle to throttle credit and clobber banks, popular though it may be politically.

The EU sees this as a time of huge opportunity to regulate “Anglo Saxon capitalism” and is ready with a big raft of measures to control financial activities in a way which will drive more of them out of the EU altogether. The European Central Bank is adamant it will not solve the problem of inadequate money growth anytime soon, though its hands could be forced by markets again.

In the UK the government has taken some welcome steps to assist recovery. It is cutting the Corporation Tax rate to 24% from 28%. It has cut Labour’s planned increase in National Insurance, cut the small business profits tax and promised a review of IR35. It has started to cut Labour’s planned increases in public spending and the huge deficit that went with them.

The measures which have attracted cross party support are less helpful to recovery. The government has confirmed Labour’s hike in Income Tax to 50%. Labour has supported raising Capital Gains Tax to 28%. All main parties support the tax on bank balance sheets, a tax which will limit the banks’ willingness and ability to lend credit to companies for expansion.

Any study of the UK’s recent economic history will show that the consensus measures have been the killers in the past. The Exchange Rate Mechanism was a three party act of vandalism on the UK economy introduced by a Conservative government which understandably took the main public anger for it. The so called independent Bank of England was a Labour measure which Conservatives supported which led to the biggest post war boom and bust in money and credit.

Fortunately the present range of cross party policies will not do damage on anything like that scale. One of the reasons consensus policies can be so damaging is they do not attract the degree of scrutiny, debate and criticism that contested policies attract. Politicians too readily adopt them, thinking that because they are cost free politically they should also be cost free in terms of their impact on a fragile economy. That is rarely the case.

Mr Redwood’s contribution to the Finance Bill debate, 15 July

Mr Redwood: My hon. Friend the Member for Christchurch (Mr Chope) has highlighted the two very important and different issues of health insurance and motor insurance. Let me start with motor insurance, which is a legal obligation that is imposed on everyone who wishes to own and drive a car.

Like my hon. Friend, and, I suspect, everyone else in the House, I think it quite right that there should be that obligation. It reminds people that driving a car is a serious business and that they could do considerable damage to others or themselves if they do it badly. It also means that, were someone to drive badly or to be involved in an accident that was not their fault, there would be redress and injured third parties who might need substantial compensation would not be left without it. For all those reasons, we think that car insurance is a very good idea and we accept that it should be a legal obligation.

The coalition Government think that one way of raising more revenue is to increase the tax on that compulsory purchase, but quite a lot of people in the House think it would be better to raise more revenue from the existing level of insurance tax on motor insurance by getting more people to be insured. We are rightly very concerned that, because of the way in which the insurance market works, a significant number of people, particularly younger people, may not be taking out any insurance or may not be taking out proper insurance for their circumstances, and that that places other people at risk and could mean losses that those young people could not afford to pay if they had an accident. That clearly means a loss of revenue for the Exchequer, because those people are not making their contribution by paying their share of insurance tax. We would like the Minister to consider whether better enforcement of the insurance rules could help with his task of filling the coffers and narrowing the deficit. That might be a better route than increasing the tax. I am sure that the Minister will remind us that we are talking about a 1% increase and that it is quite a modest sum of money. We have been reminded a few times that young people with certain kinds of vehicles, or some young people with any kind of vehicle, can be required to pay a four-figure sum each year for their motor insurance, so we could be talking about £10 or more. The additional increase would not be welcome, because most young people find such sums of money quite large in the first place, and a further 1% would not be helpful.

The increase might only be a straw, but the camel’s back is already well and truly loaded. The poor old motorist is always at the top of any Government’s list when they are rattling the collecting tin and trying to raise more money for a variety of state purposes. I just hope that the Government will reflect on this matter. They will have other opportunities to look at the total burden on the motorist, and they might not wish to consider this particular burden today and therefore immediately grant my hon. Friend the Member for Christchurch’s request. I see no sign of the Minister leaping to his feet to welcome the proposal, just and fair though it might be. We know, for example, that the coalition Government are going to look at a fair fuel levy-an escalator that comes down when the price goes up and goes up when the price comes down, to keep fuel prices at a more realistic level.

Claire Perry (Devizes) (Con): In trying to square the circle of how we can raise taxes when there is no money, it is interesting to note that we have not committed to Labour’s rise in fuel tax, which was going to add a further £425 million- [ Interruption. ] If you read the small print in Labour’s last Budget, you will see that there was a plan to raise an additional £425 million-

The First Deputy Chairman: Order. We are not referring to taxes that are not proposed in the Bill. We are talking specifically about the amendments to the Bill.

Mr Redwood: How wise you are, Mr Evans.

I was making the point that the Minister, in responding to this debate on the insurance premium tax, might assuage some of our grief if he were to say that the Government had looked at the total package of taxes on the motorist and that they were aware that this was yet another example of the piling high of taxes on the motorist. Although this individual tax increase will not be large for many motorists-it will be more penal for young drivers and high-risk drivers-it is none the less an additional burden. Even if the Minister cannot accept the amendment, I hope that he will look at other ways of dealing with the problem of fair motoring taxes.

Every time something like this happens to motorists-this time, it is the insurance tax levy-they say, “We are being sandbagged again. Where are those better roads? Where is that safer junction? Where is the wish to spend money on improving the flows on the roads so that we can travel in a more fuel-efficient, green manner of which the Environment Secretary would approve?” There never seems to be the money to do that. We know that this bit of taxation on the motorist, like most others, primarily goes not to making better roads but to a wide range of other purposes; it gets lost in the general coffers.

Lorely Burt: A number of speakers today have singled out specific kinds of insurance, but as I understand it, the Bill proposes to increase insurance premium tax on a whole range of insurance products, which we would encourage people to take in a responsible manner. I have every sympathy for young drivers and for other motorists, but why does the right hon. Gentleman feel that we should specifically single out motorists or people who take out private health insurance? Why should those people be specifically excluded?

Mr Redwood: That is what I am trying to explain, while remaining in order on this narrow amendment. The bottom line of my case is that motorists comprise a large category and, when polled, they say that they feel badly done by because they pay a disproportionate amount of tax and do not get much back. It is argued that motorists ought to pay more because they get the use of the roads, which are provided free at the point of use in most cases. It is not like that, however, because the bulk of the taxes levied on the motorist, including this insurance premium tax, are used for purposes other than roads and motoring. That is why motorists feel hard done by.

I hope that the Minister and his colleagues will consider carefully the general category of the motorist. I would love it if he could make a concession to my hon. Friend the Member for Christchurch, but if he cannot, it would help us and the people we represent if he could say that the Government were at least aware of the bad deal that the motorist has been getting in recent years, and that, where possible, they will do something about that. As we have heard, people in rural areas have no choice; they have to use their cars. People in urban and suburban areas also have no choice at certain times of the day or at weekends. People who work antisocial hours clearly need a car. Most MPs need a car, for example, because we still work antisocial hours.

Mr Liam Byrne (Birmingham, Hodge Hill) (Lab): I am following the right hon. Gentleman’s argument with some care. He said that motorists get only a limited amount back from the taxes that they put in. Does he therefore support arguments in favour of the greater hypothecation of taxes such as the insurance premium tax, to help to resolve that problem?

Mr Redwood: No, I do not. I am sufficiently in tune with Treasury thinking to know that all Treasuries under any Government hate hypothecation, and I understand the complication. Critics of motoring and cars often argue that motorists are walking off with all these free goods, but people have come up with lots of figures that show conclusively that, in a hypothecated way, motorists get a particularly poor deal. People now look at these issues in such a way partly because the green movement has made them do so. It has now been demonstrated that, calculated in a hypothecated way, motorists put in a lot more than they get back. I do not think that the Treasury should operate all its taxation on that basis, but it does need to take account of the mood and the politics surrounding this question, which we are here to represent.

The feeling of unfairness is now quite extreme among the motoring community, and motorists want to communicate through us the fact that they are often motorists because they have to be. There is no train to take them to the shops, for example. The train might be 2 miles away from their home so, unless they have plenty of time to walk to the station, they need to start their journey in the car and sometimes they might as well finish it in the car as well. There is often no alternative, which is why some 86% of our journey miles are carried out by car, and only some 6% by train. There is a basic necessity, which is why we need to be fair when making any tax proposals affecting motorists.

The case of private health insurance is somewhat different, as I am sure my hon. Friend the Member for Christchurch would agree. I make my declaration: I have no private health insurance, so I am not arguing my own case. I rely on the NHS, should ill health befall me, as I am sure do many other Members. However, I am not saying that some of my constituents are wrong to take out private health insurance. It is still a legal thing to do. Indeed, in a way, I feel that I am cheap-skating at their expense, because they are paying twice and I am paying only once. I pay my taxes, and if something happens to me, I hope to receive NHS care, whereas they contribute to everyone else’s NHS care through their taxes-they have no choice, of course, but some of them do it graciously-and then make the additional choice to pay for their own insurance. There is a double advantage: more money comes into the health sector, but when those people become ill they make no claim on the health service, even though they contribute to it.

My hon. Friend the Member for Christchurch is making a reasonable point. Given that it is not illegal to have private insurance, and that those who have it help to eke out NHS funds, should we be taxing it more? That is a very good question to raise. I shall make no stronger statement than that, but it will be interesting to see how the Treasury responds. After all, on this side of the House, we are all now big society fans and advocates- [ Interruption. ] Well, practically all of us, perhaps. There might be one or two of my right hon. and hon. Friends who are not so enthusiastic about it, but I am; I think it is a great idea. The essence of the big society idea is to harness private money, voluntary effort and charitable activity, and to understand that the state cannot solve all the problems. In a complex, difficult and expensive area such as health care and related social care, we need voluntary and private contributions as top-ups, or in addition to public sector care.

This issue poses a particularly interesting question for Ministers. If they are really serious about the big society idea, do they want to increase the taxes on people who make voluntary contributions and take some of the demand away from public services? Ought they not to be encouraging people to do such things? I look forward to hearing my hon. Friend the Minister’s reply to these nice philosophical questions in this wonderful caring, sharing age of coalition government, in which the big society will require some erosion of the old boundaries between public and private.

Bus passes – save us the parade of the bleeding stumps

The bus pass saga shows us that some people in government still in some cases do not get it.

The Conservatives – rightly or wrongly – fought the last election on defending the bus pass. So did Labour, and I guess so did the Lib Dems.

So why did the Transport Department propose cutting Bus pass eligibility as one of its cuts? It was never likely to happen. Worse still, why did someone leak they were doing this, when the idea is for the Treasury’s spending review to look at a wide range of cuts from the easy to the much less acceptable and come to a decision in private, before then going out and trying to sell the end package to Parliament and people?

The language of 40% cuts is unhelpful. They may be looking at 40% real cuts over four years – not the same thing as 40% off next year’s cash which is what most people think they are proposing. They are not going to settle for 40% real cuts over four years or anything near that, given the overall increases in cash spending proposed. Some individual items – like ID cards, CAE bureaucratic controls over Councils and much unelected regional government – will get 100% cuts. That just takes more of the pressure off elsewhere.

The “tax gap” and unpaid tax

Labour’s latest campaign is to close the tax gap. With the help of Richard Murphy they reckon there is £120 billion of unpaid tax, tax evasion and tax avoidance. The last Labour government put the figure at a more modest £40 billion but was never able to close the gap.

This morning I wish to concentrate on unpaid tax. That is tax that has been identified and claimed by Customs and Revenue but not yet paid. In May 2010 this stood at more than £23 billion. Substantial sums were written off during the preceeding year as the Revenue came to recognise that some of this money could not be collected.

Before the election the last government was keen to avoid the Revenue and Customs going in and pushing more companies into administration when they were unable to pay their taxes. It is often the government that institutes bankruptcy proceedings when a company is running out of cash and credit.

Mr Murphy estaimates that 160,000 companies owing £4.8 billion are taking advantage of the last government’s “Time to pay” deferral scheme. This poses a nice problem for the new government. Should they carry on with this scheme and allow more revenue to await collection? Should they accelerate demands for payment and try to wean business off the easy terms scheme? How much of the outstanding tax is truly recoverable?

The Labour MPs who are making a noise about the tax gap should remember that the one bit of it where we can all agree the tax is owing and the gap exists is in the category of late payments and delayed payments of tax. They should also recognise that this is difficult terrain. Their government allowed delay for good reason. They did not want more closures and job losses as the Revenue drove more businesses into bankruptcy. Labour in office had a policy of deliberately widening the tax gap. It is only in opposition they see narrowing it as a good soundbite to try to avoid confronting the need to close the budget deficit in other ways.

Anyone for the Alternative vote?

This week at Westminster Conservative MPs have had to do a lot of sitting around waiting for votes on the Finance Bill. The government has rightly allowed the Opposition as much time as they want to debate it, and that has led to late nights by the last Labour government’s standards.As Labour have dictated the number and timing of the votes they have enjoyed more flexibility.

During this time there has been much talking about the Alternative vote. AV asks voters to rank the candidates in order of preference. People voting for less popular candidates then effectively have a second vote,as their second preference is used to decide who has won.

Conservatives fought the last election against this – and any other – proposal to change the voting system. Labour, who fought for it, are having second thoughts now they see the whole Coalition government package of electoral changes. They used to think that Lib Dem first choice voters would put Labour second choice, and thereby help Labour to beat the Tories. Now they are not so sure. They are worried that the AV would mean more Lib Dem voters putting Conservatives as second chocie, and thereby hurting Labour more. The Conservative signatories to the Coalition government agreed to further a referendum, but made clear most Conservatives would be campaigning for a No vote.

This leaves open various questions for Parliament. Amongst those being discussed are When should this referendum occur? Should there be any minimum requirement of support for a Yes verdict? How is the linkage of the AV issue to equal sized constituencies to work in practise?

There is also the general question of how should the Yes and No campaigns be organised? Are these best as umbrella organisations which are not the property of any particular political party? (This seems to be the way it will go). Who outside the political parties feels strongly enough about it to want to lead and spend on it? Have we any idea who might win? It seems quite open at the moment.

I would like to hear your views on what should be done. To those who say this is not an important issue, and is a distraction from the business of sorting out the economy and the public sector, Ministers reply “This is the price of Coalition”.

An AV election:

Each voter ranks the three candidates 1st ,2nd and 3 rd preference.

First preferences (based on a typical Con/Lab marginal)

Conservative 40%
Labour 35%
Lib Dem 25%

Lib Dem candidate removed, Lib Dem voters second preferences awarded to relevant candidate:

Would it then be

Conservative 52.5% (getting half Lib Dem 2nd preferences)
Labour 47.5%

or as Labour used to think

Conservative 47.5% (getting 30% Lib Dem 2nd second preferences)
Labour 52.5% (getting 70% of Lib dem 2nd prefs) ?

The true public debt

This site has long argued that public debt and liabilities amount to £3-4 trillion, thanks to the last government.

Yesterday ONS produced its paper seeking to expose the true state of the public accounts. They think we can add to the £890 billion net debt the last government owned up to the following figures:

Banking liabilities £1- 1.5 tn
Unfunded public service pensions £0.8-1.2 tn
Unfunded state pensions £1.2tn
PFI £0.2 tn
Guarantees etc £0.5tn

That makes a grand total of £4.6tn to £5.5tn

It all goes to show my £3-4 trillion (which excluded the state pension scheme) was a sensible forecast. The majority of this is the result of the last 13 years.

Do Councillors want to be free?

On Monday a group of MPs were reviewing the government’s progress with a couple of Ministers. In the discussion time and again issues came up about how local government would respond to their new freedoms. MPs are very conscious that many a new government has set out planning to grant more freedoms to Councils and to live with the results, only to end up regulating and controlling them more. Margaret Thatcher stepped in when ratepayers were unhappy with the high level of local taxes and imposed a cap on how much Councils could tax. Labour arrived in office in 1997 keen to give Councils more powers, only to sink them under the biggest weight of circulars, regulations , controls and money with strings attached that local government has ever seen. By April 2010 local government in the UK was just the outpost of Whitehall in each community, implementing Labour’s policies across the board.

The Coalition government has so far moved swiftly and purposefully to restore recently lost and long lost freedoms to local government. More of the money will be sent as a single grant so Councils can choose how to spend it. Regional plans and housing targets have been torn up. The Comprehensive Area Assessments that brought so much bureaucracy and control over Councils are being abolished.

The way is now open to Councillors to show leadership and to innovate in their localities. They no longer have to do so many things because the government is telling them to do so. By the same token they now have to defend how the money is being spent and how the planning decisons are being taken, as they are truly their decisions.

I welcome this. My one misgiving is there is a generation of senior officers in local government who only know how to work under Labour’s top down down target driven highly bureaucratic system. Their first impulse when they hear of the Coalition’s changes is to ask “What have they put in place of whatever the government is scrapping?” “What does the government want us to do instead?” The answer is simple. The government is not putting things in place of centralised plans, guidance and demands. It is just saying “serve your electors and local communities, and answer to them for the services you provide and the tax you raise”.

Let me go a little futher today in helping Conservative Councillors. What should they do? The first task is to cut the central overhead substantially to reflect the new reality. Far fewer senior officers are needed in the new regime, as there is no longer that demand for so much communication with central government, and so much work to comply with circulars, guidance and the special grants regimes. Put on a strict no recuitment policy and use natural wastage to run down numbers,reorganising posts as people leave.

The second task is to end all those partnerships and networks that slowed the system down and wasted so much senior time. If you need to involve an outside body in a policy then do so when you need to in the easiest way possible. If you want to know the local mood then Councillors can tell the Council- that is their job to gauge it.

The third task is to concentrate Council activities on core services which are valued by the local communtiy, and take the Council out of other areas where it need not interfere or spend money.

The fourth task is to ensure local schools are driving up standards, and understand the new freedoms for Heads and teachers which the government is granting.

The fifth task is to set realistic building targets and create a suitable local plan which allows growth but also protects those parts of the landscape that local people value.

The sixth task is to buy better, to cut costs.

The aim should be a lower Council tax. It can be delivered whilst raising standards in the core services. This government’s changes allow a large reduction to be made in the overhead.

John Redwood’s contribution to the Finance Bill debate, 12 July

Mr Redwood: Let me start by saying a few words about my new hon. Friend the Member for Lincoln (Karl McCartney). I am sure that the House will join me in praising him for his speech and in wishing him every success now that he has joined us here. It is good to hear someone with a radio face with a passionate voice for his constituency. If he continues that, I am sure that his constituents will be well served. It was great to be reminded of the hugely important Lincoln cathedral, which many of us have visited and admired, and of the fact that Parliaments were once more peripatetic. In those days, there was probably less security and fewer people in the baggage train, so it was probably cheaper to take Parliament around the country than it would be today. I fear that he might have quite a long wait before the next Parliament at Lincoln.

We are here to debate tax avoidance and evasion. I listened carefully to the hon. Member for Hayes and Harlington (John McDonnell), but I think that the House is pursuing a will-o’-the-wisp if it seriously believes that there is £120 billion of tax evasion and avoidance generally, and that there is substantial tax evasion and avoidance in particular on corporation tax, which we are debating, that we can tackle and get the money in from. Every hon. Member would like to think that there is an easy way out of the financial crisis. If there were a great pot of money representing tax dodging that we could identify and bring into the Treasury, it would have been done by now. It is not a matter of party dispute. If there are tax evaders out there whom we know about, they need to be brought to book-we all agree with that. Labour spent 13 years trying to do it, but the hon. Gentleman does not think that it did it well enough, and is now urging the coalition Government to do it. The coalition Government will pursue it in similar ways, with similar intensity, to the outgoing Labour Government. I fear that they will be no more successful than the previous Government at finding that £120 billion pot of gold because, in all honesty, I do not think that it exists in the form that hon. Members wish that it did.

Let us take evasion-the more serious case. I am sure that everyone in the House agrees that if someone is deliberately evading tax, it is a criminal offence. The House has said that it is a serious offence, and made it a criminal offence, or series of criminal offences, and we wish to see those people pursued and prosecuted. In the case of corporation tax, for example, if a company deliberately misreports its income, and says that it receives less income than it earned-one way of misleading the tax authorities over corporation tax-the book should be straightened, the record corrected, and they should be prosecuted. If the company deliberately overstates its costs to try to suppress its profits-the other way in which people could evade corporation tax, if they were seeking to do so-that, too, should be something that the authorities can identify on investigation, leading to a correction of the accounts. False accounting would be involved, as well as the criminal offence of tax evasion, and there are methods of tackling it. The state has a range of powers, introduced by Governments of all persuasions, to allow company investigation, including second-guessing the audit, and going in if it is thought that crooked directors are misrepresenting their costs or revenues, and the auditors have missed it. I wish my right hon. and hon. Friends the Ministers in the Treasury every success in trying to capture genuine crooks, because we do not need them in our community, and we need to flush them out.

There is another kind of failure to pay the amount of tax that the corporation tax authorities think is correct which, in some people’s language, could be evasion. A company may report honestly its revenues and costs, but comes to a different conclusion from the Revenue about what the taxable profit should be, given its income stream and costs. It attempts to understand the complexity of the law-it may well have its own tax advisers and auditors in support, because any medium or large company does not do this in isolation; the directors want the comfort of knowing that they have serious tax experts behind them, because of the complications of the law-and it makes its case to the Revenue, which disagrees with them. I do not think that that should be treated as a severe criminal offence leading to the imprisonment of the directors. What should usually happen-and what tends to happen-is a fierce of exchange of views between the Revenue, which is trying for one view of the tax, and the company and its tax advisers with a different view. Eventually, agreement is reached. If it is thought to be a bad case, the Revenue has the power to impose financial penalties as well as to secure the tax that it thinks that it is owed.

Clive Efford (Eltham) (Lab): I am interested in the right hon. Gentleman’s train of thought, but will he clarify something? Is he saying that there is no such thing as avoidance of corporation tax, or is he saying that anything that comes about is just the result of a misunderstanding?

Mr Redwood: Has the hon. Gentleman been in the Chamber while I have been talking? The first part of my speech was about bad cases of evasion in which a company has deliberately misrepresented its financial condition. Like him, I think that those cases should be taken seriously, and prosecution should result. I am going on to the second set of cases, in which evasion is thought to have taken place according to the Revenue, but when we look at what is going on there is a genuine disagreement between one group of tax experts, lawyers and company advisers and another lot advising the Revenue, which sometimes needs to consult counsel on these complicated matters to try to reach a conclusion. Such cases are often sorted out slightly more amicably, and rightly so, because the companies concerned were obviously not trying to do down the Revenue but to pay the minimum amount of tax to comply with the law, as most sensible people try to do, and there was a disagreement that had to be sorted out sensibly. That might result in financial penalties or in an agreement not to have financial penalties, but usually the Revenue has a certain amount of strength in having its way.

That is evasion, and then there is avoidance, which is much more problematic. I am sure that billions-worth of avoidance is going on all the time, because it is a perfectly legal approach; one man’s avoidance is another man’s sensible tax planning. That is why I asked the hon. Member for Hayes and Harlington for an example relating to personal income tax, which is easier for people listening in to this debate to understand. Many small savers switch from tax-paying savings to tax-free savings, which is avoidance of tax, is it not? They realise that they can do better by having a tax-exempt savings product; surely we should not condemn that, because it is about someone trying to get the most for their money. Indeed, that is something that the Government positively encourage. They encourage tax avoidance because they say, “We have the unique power to provide tax-exempt products for savings, and we want you to buy ours rather than the taxed private sector product.”

Stephen Timms (East Ham) (Lab): My hon. Friend the Member for Eltham (Clive Efford) asked a telling question, and I am not sure what the right hon. Gentleman’s answer is. The question is this: does he deprecate any tax avoidance, or is he saying that as long as it is strictly in compliance with the law, anything goes? As he knows, there have been some very ingenious, and indeed expensive, schemes used by companies to avoid paying tax, clearly contrary to the spirit of the law but arguably in compliance with the letter of the law. Does he not deprecate that kind of activity?

Mr Redwood: I do not want to get drawn into the moral issue of deprecating or not deprecating: what I am interested in is the efficiency of revenue collection and the clarity of the law for the people having to meet it. It is the job of this House to have a clear tax law that people have to follow, and we often have these debates to try to carry out that task. Sometimes tax law is so complicated, or people outside this House are so ingenious, that there are ways round it that I might disagree with and the right hon. Gentleman will often disagree with, and that is when we come back to legislate again. We say, “We haven’t done our job well enough. People are avoiding tax more easily than we would like them to be able to, and so we’re going to add another complication”-or sometimes even a simplification or clarification-“to the tax law to try to capture that.” That is the job of this House. The shadow spokesman and I will sometimes agree that an avoidance scheme goes too far and we need to legislate to stop it; on other occasions, we will disagree. I will say, “That’s perfectly rational tax planning-don’t be such a party pooper”, he will say, “I don’t like people getting away with that kind of thing”, and we will have our disagreements.

Mr Love: Given the thrust of the right hon. Gentleman’s remarks, does he agree with my hon. Friend the Member for Hayes and Harlington (John McDonnell) that cutting the number of HMRC employees by 10,000 might not assist in the process that he is outlining of ensuring that those who take part in avoidance are brought to book?

Mr Redwood: It would clearly be a false economy to cut back on the number of staff needed to tackle serious cases of tax evasion; I do not think anybody wants to do that, and I certainly would not recommend it to Front Benchers. It would also be wrong, however, to exempt Revenue and Customs from pressure to improve efficiency and to do more with less at a time of enormous strictures on public spending. I hope that there will be ways to accommodate the hon. Gentleman’s wish for us still to have Revenue and Customs pursuing tax evasion and our coming back to legislate on tax avoidance that it thinks is going too far, as we have under past Conservative and Labour Governments, and that that will be done efficiently and effectively in the way that we wish to see.

John McDonnell: To follow up on the question of my right hon. Friend the Member for East Ham (Stephen Timms), are there any measures that the right hon. Gentleman would consider tax avoidance that should be brought within the purview of Her Majesty’s Revenue and Customs, such as the large-scale offshoring mechanisms that corporations use to avoid tax? All that the amendment asks is for a report to be made about the measures that the Government will take on such issues.

Mr Redwood: I do not necessarily disagree about the need for us to consider another report on tax avoidance and evasion, but I am trying to set some of the parameters for that report and the framework of the debate. This is an opportunity to discuss why the matter is difficult, and why past Governments have not lived up to the hon. Gentleman’s expectations. I have no problem with having a report, although I do not want to link it to the particular corporation tax rate in clause 1, as his amendment would.

John McDonnell: I am grateful for that response. Successive Governments have pragmatically examined the latest tax avoidance mechanisms and then sought to work through them systematically to address them. The amendment is intended simply to bring forward a report on those mechanisms so that the House can have more oversight of that process.

Mr Redwood: As the hon. Gentleman knows, I am all in favour of more oversight by this House, and the more informed a debate we can have about this and other issues the better. Public debate in Britain has been stifled in recent years for all sorts of political reasons that we need not go into. It is better if we can bring such debates out into the open, but we need collectively to think through what avoidance is and what evasion is. If we do not know that, we cannot hope to guess its scale or optimise our measures for dealing with the features of it that we do not like. I am trying to deal with avoidance, on which I believe there is more scope for disagreement than on evasion, which we are all against.

I return to the point that some people’s avoidance is a bad practice and other people’s is common sense. Let us take another example of a matter on which the Government encourage avoidance. I gave one from personal tax, but we ought to be concentrating on corporation tax. The previous Labour Government were keen to encourage avoidance of corporation tax because they wanted companies to invest-a perfectly worthy aim. They said to companies, “If you invest more than you otherwise would do, that is an allowance against your corporation tax so that you will be able to avoid some tax in order to invest more.” One debate that the Committee will have is whether this Government are cracking down too much on investment avoidance by removing some of that allowance and giving everybody the benefit of a lower rate. I hope that Opposition Members will see that they are not as pure as they think they are on avoidance, and that there are certain types of avoidance that they see as a very good thing. It is a well-known feature of many tax structures to encourage avoidance in order to encourage good works or change conduct.

Mark Tami (Alyn and Deeside) (Lab): The right hon. Gentleman talks about avoidance all the time, but is it not about the Government giving companies incentives to invest, rather than allowing them to avoid tax?

Mr Redwood: The hon. Gentleman has made my point beautifully. I have just said that one man’s avoidance is another man’s tax incentive-that is exactly the point that I am trying to make. There are good types of avoidance and bad types. Sometimes all the parties in the House agree that a certain type of avoidance is bad, and then it is in our own gift, because we are the legislature, to table business on any day to stop that tax avoidance in its tracks by changing legislation explicitly and clearly to send a signal. At other times we come together to legislate in favour of tax avoidance, because there are things that we wish to encourage. As he rightly says, sometimes the best thing to do is to give people a lower tax bill to encourage such procedures. That is surely encouragement of tax avoidance of a benign kind and a perfectly reasonable thing to do.

Mark Tami indicated dissent.

Mr Redwood: The hon. Gentleman shakes his head, but what else is it? Why are people investing more than they otherwise would have done? Because they are allowed to avoid tax and pay less tax than they otherwise would.

Stephen Timms: The right hon. Gentleman is uncharacteristically abusing the English language. To say that something that is explicitly provided for in the law is tax avoidance is not what most people mean by the term.

Mr Redwood: Fine-that is a very good linguistic point, and if the right hon. Gentleman wishes to define tax avoidance more narrowly as actions that we all disagree with, we can do that and it makes the debate much simpler. However, he has to understand that there are a series of grey areas, and it is not a black-and-white matter. There is not a set of actions that everybody agrees are tax avoidance and another set that everybody agrees are perfectly reasonable incentives or sensible ways of paying less tax.

Let us get on to the more difficult corporation tax cases, having dealt with the investment one-everybody in the House thinks that investment is a good thing and that corporations should therefore pay less tax one way or another, either through the rate of tax or through explicit relief.

Let us consider overseas offshoring, which has already been mentioned. Multinational companies have some flexibility about where they invest, borrow and carry out their activities, and they regard the taxation regime as one of the important considerations in determining all those matters. If it is benign, they are more inclined to borrow the money, put up the facilities and earn the full profits in the country concerned by carrying out the whole process and adding all the value. However, if the taxation regime is more hostile to enterprise, they might make different arrangements. Any country that takes part in the multinational free enterprise world has a choice. It must decide whether it wants to be tax friendly, in which case it has to allow people to pay rather less tax, or tax tough, in which case those who stay will end up paying more tax, but there will not be so many businesses here, and some will decide to offshore more of their activities.

Offshoring presents a difficult set of cases. I am sure that Opposition Members can find examples of offshoring that we would all regard as unacceptable avoidance, but much other offshoring represents simple, rational business decision making because the country being offshored against does not have a favourable tax regime, and that is why our decisions tonight and on other occasions when we try to settle the corporation tax regime are terribly important to whether our constituents get more jobs, whether our businesses make more money and whether more action will take place here. Companies have many footloose decisions that they can make about where to borrow, where to spend, where to invest, where to create jobs and how much value to add.

I see nothing wrong with more parliamentary accountability and scrutiny. If my hon. Friends have more capacity to produce a report on tax avoidance and evasion, it would be useful. I hope that my remarks have outlined some of the complexities of trying to determine the elements of avoidance that are to be condemned and about which we need to legislate more, and those that are simply common sense, or even tax promotion schemes, which the Government are producing.

I remind the House that I have recorded in the Register of Members’ Financial Interests that I offer business advice to a global industrial company and to an investment company.