Cable and Goldsworthy quiz Darling on 10p tax rate

10.48.29am BST (GMT +0100) Wed 14th May 2008

[May 13] Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I of course welcome measures to lift low earners out of tax, and for a few hours this announcement may well get the Chancellor out of the difficulties that he created for himself.

How many of the 5.3 million losers will be fully compensated by the measure? A quick back-of-the-envelope calculation-that is all that he has allowed us to do, because he is hiding behind market sensitivity-suggests that to compensate the losers, he would have needed to raise the threshold by £1,000. Clearly the Treasury has done the sums and has looked at the various categories, including pensioners, low-paid workers, and part-time and full-time workers. Can he tell us precisely how many of the 5.3 million losers will be fully compensated within the year?

Secondly, the Chancellor has imposed an apparent levy on high earners; the money will be clawed back from them. How long will that measure be in place, and how much of the £2.4 billion cost will be paid for by that route, rather than through additional borrowing?

Can the right hon. Gentleman also explain in a little more detail his reasons for rejecting the idea of a tax rebate? Over the past few days, I have had discussions with tax practitioners, including people from the low incomes tax reform group, which I know he relies on very heavily. That group suggests that it would be perfectly simple for the Inland Revenue to calculate the tax that people would have paid under the old 10p/20p system, and rebate them fully for their losses. The group will come forward with a proposal to that effect in the next few days. Why is the measure that he described more complex than that, and why does it do less to guarantee payments?

Finally, the Chancellor is quite right to focus attention on the low-paid workers, many of them earning well below the minimum wage, who pay tax. It is welcome that he is moving in the direction of lifting them out of tax. All of us will have to focus on how that is done and how it is paid for. I hope that today's measures are not just another short-term gimmick, but the beginning of a process through which the low-paid pay less tax.

Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour): The hon. Gentleman raises four perfectly pertinent questions, which I shall answer. May I acknowledge his welcome for the measure that I am proposing?

First, I said in my statement that 4.2 million households will receive as much as, or more than, they originally lost. The remaining 1.1 million householders will have their loss at least halved. In addition, those people might be benefiting from tax credits and other measures. I set out to try to offset the average loss; I think that that is what the majority of people in the House wanted us to do. The hon. Gentleman also asked how the measure is being paid for. This year, it is being paid for by borrowing. As for what I have done in relation to higher rate tax payers, under the tax system, every single taxpayer gets the same personal allowance, but because I wanted to ensure that the help went to basic rate taxpayers only, I made a change there. People who currently pay the 40 per cent. rate will not pay any more, so the cost is covered by borrowing.

The hon. Gentleman also asked why I did not use a rebate. I looked into that very carefully. I had always thought that the Liberals' policy was to use allowances. He is nodding; it is not clear why he is wishing on me something that he does not want himself, but there we are. I considered the issue of rebates, and I saw that that would be horrendously complicated. We would have to set up a new system. In addition to that, the Inland Revenue tells me that every year about half a million people move, and the Revenue does not know their addresses, so their cheques would go missing. When I looked at the proposal, and at the comparative costs, which are not actually that different, I decided that it would be far better to do something simpler and easy to understand. It is easy to understand that personal tax allowances will be raised by £600 a year. Basic rate taxpayers will therefore get £60 in their pay packet from September, and £10 a month thereafter.

The hon. Gentleman's final question was what would happen in future years. I have said that I will set that out in the pre-Budget report, but I repeat what I said in my statement: in addition to helping those people who have an income of up to £20,000-those whom people were principally concerned about-we are helping those whose incomes go up to £40,000. Given the current circumstances, in which people face increasing bills because of what is going on in the world commodity markets and the financial markets, this year it is right to do more to help people on low and middle incomes-in other words, all those on the basic rate tax-as other countries have done. That is why I think that my proposal is far better and far more effective, and goes far further, than the measures that many people were asking for just three weeks ago.

. . Julia Goldsworthy (Shadow Secretary of State for Communities and Local Government, Department for Communities and Local Government; Falmouth & Camborne, Liberal Democrat): There are still 1.1 million low-income households that will lose out as a result of today's announcement, even though all the people who had previously been paying the basic rate of tax will gain. Why does the Chancellor consider that this group remains the least deserving poor, in his opinion?

Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour): As I said earlier, I wanted to introduce a system that was simple, that was quick to get on to the statute book, and that, above all, was quick to get the money into the hands of as many taxpayers as possible. The problem with the sort of scheme to which the hon. Lady refers-a rebate scheme, because that is the only way in which one could do individual calculations-is that it would be cumbersome and complicated. I suspect that if we set it up, she and her party would be the first to criticise it.