Seema Malhotra MP

Labour and Co-Operative Member of Parliament for Feltham and Heston

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Seema Malhotra MP, Shadow Chief Secretary to the Treasury, on Business Incentives to Invest

Before I start my speech I’d like to thank the Social Market Foundation for hosting this event, particularly Emran Mian, David Mills and Ellie Groves for getting such a high quality panel and audience together for a breakfast seminar 10 days before Christmas – no mean feat indeed!

A few weeks ago Labour announced that we would be undertaking a project to look at business incentives to invest and the outcomes they achieved.

Recent data from the Bank of England Agents report shows that investment intentions are falling, particularly in manufacturing

We are at a cross roads in our recovery – a recovery which analysis by Professor David Blanchflower, in his speech to Scottish Institute of Directors earlier this week, showed was the worst recovery in 300 years.

And indeed the pace of recovery slowed after 2010 moving away from its trajectory which would have been in line with previous recoveries.

And with every chance a negative shock may come, there’s concern about the housing market, rising consumer debt, falling commodity prices, the slowdown in China – and slowdown in manufacturing. And that’s before the uncertainty over Brexit that is already hitting business confidence.

If ever we needed an investment led recovery for the long term, now is the time.

So today I want to tell you why we in Labour are launching a project looking at Business Incentives to invest, with a particular focus on tax reliefs. This is a parallel debate to the growing scrutiny of tax avoidance with work that has been led on this by Labour including by Dame Margaret Hodge MP, Meg Hiller MP and Shadow Chancellor John McDonnell MP. The recent example of corporate tax non-payment by Mondelez was another example – a clear sign of what also goes wrong without clear rules and scrutiny.

As of December 2014, HMRC listed 398 separate reliefs or expenditures.

All tax systems include tax reliefs or tax expenditures, which in many cases are an essential part of defining the scope and structure of a tax.

Some reliefs are designed to deliver specific policy objectives – by providing behavioural incentives to achieve economic and social goals. The NAO identifies 196 reliefs with social or economic objectives.

So far so good.

Of the reliefs listed by HMRC, 219 of these are reliefs for which HMRC does not know the costs

We agree on the utility of tax reliefs, designed for a purpose but, we should know what difference they make.

Now I hope I won’t be accused of bias towards any particular newspaper if I take as my theme the dictum “Comment is Free but Facts are sacred”.

I think we can roughly translate C P Scott’s sentence into the political realm as “Values are vital but Evidence is crucial.”

Even more so at a time when the cost of tax reliefs, as far as is measurable, is growing when public spending is decreasing.

And the approach to evidence is one of the great dividing lines between the George’s Osborne’s Treasury and Labour’s Treasury Team.

It is an issue of good governance.

It is an issue of the proper stewardship of the nation’s resources.

Getting the best evidence and the best advice is the foundation of Labour’s aim to create a strategic partnership between business and government

One thing that is becoming increasingly plain is that George Osborne is actively hostile to evidence that might conflict with his political priorities. We saw it with tax credits and the reluctance to produce an impact assessment, and the reporting of weekly data on NHS services being cut back so it is harder to identify what is going wrong.

His response to previous reports on tax reliefs shows he appears remarkably uninterested in whether business tax reliefs are effective or efficient.

It means the Treasury cannot demonstrate it is getting value for money for taxpayers.
In this respect the Treasury under George Osborne is not fit for purpose.

But he should be interested because they are crucial for tackling the fundamental weaknesses in the British economy – productivity, infrastructure, exports and the balance of payments.

The Chancellor is failing to tackle them. The verdict of the OBR on his decisions was clear:

– productivity growth revised DOWN
– wage growth forecasts revised DOWN
– public investment languishing at its lowest level of GDP since the late 1990s
– the Chancellor on course to miss his export target by a staggering £360bn

WE KNOW WE NEED INVESTMENT

Business is worried about the Chancellor’s failure to invest in and balance the economy. Only last week John Longworth of the British Chamber of Commerce said on the Today programme:
The economy, is “driven by debt, it’s driven by assets and property… And it’s driven by consumer spending. What we really need is rebalancing whilst the sun shines.”

Labour’s answer is to create a strategic state working in partnership with business.

For us the key questions are:

What works?

What measures can we take that will support business help fulfil our national goals?

Central to the new economic agenda that John McDonnell and the Treasury team have been setting out is the creation of a strategic state, working in partnership with business to secure the long-term investment we need to build a more inclusive, productive and competitive economy.

BUT WE NEED TO KNOW WE HAVE VALUE FOR MONEY

The truth is we don’t know whether many of the current business incentives really are effective in delivering their intended outcomes. There is a strong case for saying we need more rigorous scrutiny.

Calls for action have come from:

– The National Audit Office and the Public Accounts Committee;
– tax experts, including, Jolyon Maugham;
– think tanks, like the IPPR,
– and our hosts today the SMF

As well as public investment, we also need to address the under-investment in the corporate sector. Which, as Martin Wolf recently argued in the FT, is a key factor behind current economic weakness.

The structure of our tax system is a critical element of this agenda.

But we need to look hard at whether current structures and reliefs are working effectively to encourage the kind of investment we need to see.

BUT WE NEED A COHERENT AND SUSTAINABLE APPROACH

I believe if we are serious about dealing with the deficit and balancing the books we need to start to apply more effective scrutiny to tax reliefs as we do to public spending.

We need a system of monitoring and accountability that takes a hard look at both sides of the ledger:

For reliefs designed to support businesses to invest we need to ask:

• Is it working for businesses, and for our long term economic development and how do we know?
• Does it offer value for money?
• Is it well targeted?
• What are its fiscal, behavioural, distributional and economic impacts?
• Does it fulfil its original purpose?
• Does it support the ultimate goal of building a more innovative, inclusive, productive and prosperous economy?
• Are there better ways to advance toward these goals – and better ways of spending the money that these tax reliefs are costing?

This not a narrow focus.

We will keep in mind the fact that tax rates and reliefs cannot be treated in isolation. They interact with what is happening in the public realm. Decisions by public institutions on infrastructure and investments are an essential part of the partnership with businesses we will develop.

Now this is clearly a complex area but it’s worth illustrating the point with a few examples.

The first example I will mention is R&D tax credits.

R&D tax credits are costed by the HMRC at £1.7bn in 2014-15.

Again it is clearly right we use the tax system to offer incentives to increase R&D. It’s vital for future productivity, competitiveness and high quality job creation. I recently spoke in a Westminster Hall debate on the need to increase our level of public and private R&D spending to the OECD average.

But we should ask if the current regime is well targeted, whether behaviour really shifts or under what circumstances we may be rewarding investments that would take place anyway.

These are serious questions because the costs of these reliefs are rising steadily, yet the UK is missing targets and falling behind its key competitors on R&D spending.

A second example is entrepreneurs’ relief.

Any close observer of this debate will not have failed to see the questions being asked of Entrepreneurs relief.

Astonishingly, HMRC and the Treasury asked no questions about why the cost of this relief ballooned to over £2bn a year over the last parliament.

Richard Murphy has highlighted data indicating that in 2013-14 the relief resulted in £1.8bn being shared by just 3,000 individuals – who each benefitted to the tune of £600,000 on average.

So again it is a legitimate question to ask as to whether this scheme is serving the purpose for which it was originally intended, and whether at a time of serious fiscal constraints it represents good value for money for the taxpayer.

A third example is the Enterprise Investment Scheme (EIS).

We spend hundreds of millions of pounds a year on schemes like the Enterprise Investment Scheme.

As we read in the FT recently, there are concerns that EIS is supporting a growing market in investment products linked to dependable, low-risk businesses – not the high-risk businesses it was intended for.

We should consider whether it could be better targeted at sectors in greater need of support or those with significant export potential.

Furthermore, the Government has now excluded from this scheme renewable energy projects such as solar and wind.

Their rationale was that these energy generation activities are no longer considered high-risk investments

Put alongside the 87% cut to feed-in tariff subsidies for solar panels, Britain now being at the bottom of the European league for renewables and now international assessments starting to rate Britain as a higher risk for investing in energy due to lack of stability from policy changes made by George Osborne.
Or perhaps we are just seeing a shift in priority away from green investment?

Without providing real information, we simply don’t know why the Chancellor is really making these policy decisions.

This relief illustrates the Government’s worrying approach to designing tax reliefs, chopping and changing policies and not bothering to explain why.

So what do we believe needs to be different?

First, we think it is time for better scrutiny and accounting for outcomes. What gains are delivered through the tax reliefs, and how can that be tracked and reported. How can the cost be better forecast, tracked and managed? We need better accounting – better bookkeeping.

Yet George Osborne’s Treasury only looks at only one side of the ledger. They cut Departmental spending, but then they ignore ways of maximising the outcomes we achieve and accountability from tax income foregone in the form of tax expenditures. These when used for growth however should contribute to a growth in future tax receipts.

Secondly, are we effectively tackling the strategic questions – about whether the tax reliefs we have are fit for purpose? Are they easy to understand? Are they right for achieving our national strategic goals? Will they drive the growth we need in the areas we need? Who will benefit and will it be fair?

Critics are right to say tax relief schemes can make the tax system more complex, less transparent, and open to tax avoidance. That’s particularly true of standalone reliefs like the film tax relief and pose risks to the Exchequer because costs can spiral out of control. That’s why we need to get it right.

Thirdly, how do we build in to our systems a more effective checkpoint system? Is it time for a sunset clause or at least a statutory review of new or existing tax reliefs, and how could that work?

Whichever is chosen, it would certainly allow for a predictable review point, an incentive to provide evidence for why a relief should continue, and informed debate in Parliament – as we would expect for any form of expenditure – around value for money and outcomes delivered.

And fourthly, what role could there be for the Office for Budget Responsibility and National Audit Office in this conversation, for example around forecasts and assessments of the fiscal costs and economic impacts of tax reliefs.

This is a pro-business approach, because it is pro-growth, it’s about the state and industry working in partnership in the interests of the nation.

Our consultation

So let me be clear: I see this as the start of a conversation. We will not jump quickly to conclusions.

The issues raised by many of these reliefs are complex – their impact and effects are often hard to measure and predict and the benefits could be less tangible.

And we would need to avoid the risk of throwing the baby out with the bathwater. We know that

• Any relief is likely to have a combination of costs and benefits that can be difficult to disentangle.

• Even if a relief is being abused, it may still bring a benefit to the economy when used well and for its intended purpose. That might mean reform rather than closure is the right course.

• And we must be careful not to add new complexities and uncertainties into a tax system that is already a maze for most businesses and rightly criticised for its complexity – by the work of the Office for Tax Simplification and others. Complaints from business that they are subject to constant and unpredictable change has real force.

So we want to proceed on the basis of thorough consultation and assessment of the available evidence.

Today I am writing to all FTSE250 companies, as well as key bodies representing small businesses, entrepreneurs, investors, trade unions and third sector organisations, asking for an initial view on:

– How effectively and efficiently our tax system supports investment and innovation?
– What tax reliefs are working well, and which are ineffective or especially open to abuse?
– What more we could do to improve incentives for the kind of investment we want to see?

And we will open this consultation to the public as well, seeking views from citizens and taxpayers on the kind of investment and business behaviour they think our tax system should be incentivising or discouraging.

The responses from businesses, trade unions and charities, and the wider public will inform our work going forward. The scrutiny report that follows this consultation will feed into to both the HMRC and Treasury reviews which Labour has commissioned.

And this will be the basis for the measures a Labour government takes to ensure our tax system boosts investment in an effective and efficient way.

So by putting the spotlight on business incentives today we are taking up the challenge laid down by the NAO, the Public Accounts Committee and others.

The Chancellor is ducking that challenge.

We won’t.

We go into this inquiry with an open mind.

We will go where the evidence takes us.

The starting point will be our values.

Our desire for greater fairness and equality.

But the recognition that we can only achieve this desire with a successful economy.

We also bring to it our belief that we need a balanced economy in order to balance the nation’s finances; our belief that our people’s ambitions for prosperity and security can only be fulfilled through economic growth based on investing in infrastructure, research and development and skills.

For me, competence and compassion go hand in hand.

The British people shouldn’t have to choose between the two.

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