Budget Statement

Baroness Kramer Excerpts

Thursday 21st March 2013 Lords Chamber

[Baroness Kramer]

My Lords, the Chancellor yesterday gave us a Budget that fits the tough economic times that we all acknowledge. I congratulate him on not succumbing to the blandishments of the Opposition. I listened very closely to the noble Lord, Lord Eatwell, and thought that he summarised his own speech by saying that insanity is repeating again and again the failures of the past. He gave us exactly the formula of spend and borrow that the previous Government pursued and that left our economy so structurally weak that, when the financial crisis struck, we found ourselves in dire circumstances, overburdened with debt, and with a structural deficit, no resilience and a fundamental underlying economy that had been neglected for a generation. He now repeats that formula.

The measures in yesterday’s Budget were focused on helping ordinary families with the cost of living, on stimulating new jobs, especially in small and medium-sized businesses, and breathing life into the housing market. Let me make just a few comments on each of the three.

Ordinary families, as we all know, have been feeling the squeeze on their finances. For that reason, I am particularly pleased with a further lifting of the income tax threshold to £10,000 next year. My party promised it and it will be delivered a year early. With this step, nearly 3 million people will be out of income tax altogether; 24 million people will pay £700 a year less in income tax—a genuinely meaningful amount of money; and a person earning the minimum wage will have seen their income tax bill cut in half. I find it frankly extraordinary that, rather than embracing this progress, Labour wishes to substitute a 10p tax band. Under Labour, poorer people would today be paying more income tax than under the coalition. I find that the most extraordinary notion of “fairness”. If one adds to that the measures on fuel duty, childcare and even beer, one sees that ordinary working families now have a little more breathing space.

Childcare is an area where I once worked on Liberal Democrat policy. We made a very difficult decision not to include plans much like those announced this week in our manifesto, because when we looked at the economy that Labour had left us we saw that it was clearly unaffordable in the face of the economic collapse and uncontrolled borrowing environment. But childcare is one of the most challenging issues for working families. I took evidence from many mothers, and sometimes fathers, trying to weigh the long-term financial benefit of growing a career by returning to work against the immediate burden of the most expensive childcare in Europe. The coalition has already made 16 hours a week of free care available to two year-olds in the least well-off families and taken a more intelligent approach to the staff/child ratio in childcare, but we have all known that more is needed and this scheme will make a real difference to working families.

However, I agree that the question of growth is the one on which we have to focus. I looked at Bank of England numbers yesterday which came out ahead of the Budget and the OBR’s forecast. They made it absolutely clear that the most significant cause of undershooting our growth projections is the weakness in the eurozone and the damage it has done to our exports.

Despite that, the private sector has created 1.25 million new jobs, and many of those are in SMEs. Twenty per cent of all the SMEs in the EU are here in the UK. Small and medium-sized businesses are providing more than half the jobs, more than half the exports and, even now, more than half the patent applications. The Government’s employment allowance is therefore just what SMEs need to start adding that “one more job”. Often, that one more job will be a young person, especially if we continue to provide support through apprenticeships and the youth contract. It is right that the employment allowance should become a permanent feature of the structure of British business taxes.

The abolition of stamp duty for AIM will also make a difference, although it must be just part of building a proper framework for raising finance in this country. I have talked now to quite a number of small businesses that simply sold out to the Americans because they could not access the equity that they needed to grow. I have not seen the announcements that my colleague Vince Cable is making today, but if we can combine a revived AIM with the business bank, that, together with proper reform of our still dysfunctional banking system—and I address the noble Lord, Lord Eatwell, who structured this dysfunctional banking system, and the party opposite—we can get a vigorous and rebalanced business base that will provide well paid jobs for our people, especially our young people, who deserve the best.

Earlier in this coalition, we returned large areas of decision-making to local communities but not the funding that would give real power to that decision-making. Last week’s decision to draw departmental money for local growth schemes into a single fund, known now as the Heseltine pot, should overcome that. My noble friend Lord Shipley will speak more extensively for my party on these issues because he is the expert, but I just want to say this, particularly to noble Lord, Lord Deighton, because he is a man of wonderful practicality: I seriously hope that the Heseltine pot will finally release the capacity to get TIF 1 and TIF 2 going—tax increment financing for infrastructure projects, small as well as large, identified by local communities as key to growth.

Of course, though, the big news in the Budget was housing. We have a housing shortage at crisis levels, particularly in affordable housing and especially in London and the south-east. We are building scarcely one-third of what we need. Housebuilding played a key role in enabling the UK to avoid the worst of the Depression in the 1930s, and it has always seemed a no-brainer to drive forward house construction now. I have a strong suspicion that when Vince Cable wrote in the New Statesman that the Government could use their ability to borrow cheaply to support new infrastructure, especially housing, he had this expansion of help to buy in mind.

Help to buy uses existing institutions, so it should be able to take off pretty quickly. It is a massive injection into the housebuilding industry. I am going by the newspaper estimates of £12 billion in total. I notice also that on the back of this announcement, new shares in the housebuilding industry immediately soared—Barratt Developments was up 6.5% by late yesterday—and that response tells you that the market sees this as a way to get construction going. Once again, my noble friend Lord Shipley will say more.

I would very much like the opportunity for a more extensive discussion of monetary policy and monetary activism, because this is a new arena and it cannot be dealt with in the context of a brief debate like this. However, I am so glad that we are engaging in imaginative thinking and opening our minds, not just sticking constantly with conventional wisdom. This is a new opportunity. We are building a stronger economy in a fairer society, and this Budget furthers that goal.

Bank of England: Monetary Policy

Baroness Kramer Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord Newby]

My Lords, inflation has been higher than the 2% target for a number of years. The MPC has taken the view that the target would be met in the medium term and that, because the principal reasons for inflation did not include excessive domestic demand and are therefore less capable of being moderated by increases in our own interest rates, it was wiser to “see through” the temporary increase in inflation above 2% but to work, as the MPC has, on the basis that, in the medium term, inflation would indeed come down to 2%.

[Baroness Kramer]

My Lords, Paul Tucker has floated the notion that the Bank of England could charge banks for holding reserves at the Bank as an incentive to get them to lend to the real economy. Is that an issue that has been actively discussed with the Treasury and what is the Government’s view?

[Lord Newby]

My Lords, again, that is a matter for the Bank of England. To the extent that the Chancellor—and the Treasury—wishes to change the way in which the Bank of England operates, he will have an opportunity tomorrow to set out what any changes might be.

Taxation: Avoidance

Baroness Kramer Excerpts

Thursday 14th March 2013 Lords Chamber

[Lord Newby]

Yes. This is an area to which DfID is giving increasing priority. Last year we supported 48 programmes in 20 countries and spent £20 million in this area. Of course, the extent to which we can do it in any country depends on an assessment of that country’s capacity to take advice and act on it.

[Baroness Kramer]

My Lords, I very much support the GAAR, the general anti-abuse rule, which the Government are bringing in to deal with abusive tax avoidance, but would the Minister agree that the version that the Government are looking at is very narrow, with the double reasonableness test? If it proves ineffective, would it not be wise to review that test sooner rather than later?

[Lord Newby]

The road to the GAAR, as it were, was long and difficult. As the noble Baroness will know, it was resolutely opposed by the party opposite when it was in government. We are making a proportionate start, and hope that it will be successful in dealing with the most egregious tax avoidance schemes. The great thing about it is that it is a deterrent. It will definitely be kept under review, but it is a big step forward, and we should not underestimate that.

EU: Eurozone Financial Transaction Tax

Baroness Kramer Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, we have some examples of where this kind of thing has been done in the past. In 1989, Sweden introduced its version of an FTT and in the first week the volume of bond trading fell by 85%, even though the tax rate was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. Not surprisingly, Sweden is not now supporting the idea of a Europe-wide FTT.

[Baroness Kramer]

My Lords, the original concept of the financial transaction tax was that it would be global and that the funds would be used to assist the developing world. Have the British Government considered that, as many politicians on all sides support those concepts, they might take leadership in this global role, which might strengthen their hand in these much more parochial negotiations with the European Union?

[Lord Newby]

My Lords, the noble Baroness will recall that in 2011 the French Government proposed such a tax at a global level in G20 and there was widespread opposition to it from, among others, the US, China, Australia and Canada. Sadly, there is nowhere near a global consensus on whether such a tax is a good idea, and, equally, there is no consensus, even within the EU, about where the money should go. The French were, and are, keen that at least part of the proceeds should go to development aid, but the Germans, for example, propose that any receipts from the FTT should simply go into the central tax pot.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013

Baroness Kramer Excerpts

Monday 4th March 2013 Grand Committee

[Baroness Kramer]

My Lords, I shall try to keep my comments brief and, if I may, to follow the order in which the noble Lord, Lord Eatwell, addressed the orders to make life a little easier for the Minister. On those elements of the order that attempt to make sure that the FCA and PRA rulebooks appropriately intermesh, and on the comments of Andy Haldane on the risks that arise when you manage through rules rather than through structure, can the Minister give us some assurance that, behind the clarification of the rules, is the cultural commitment to act together as a coherent unit? The fear that Mr Haldane and others have expressed is that, once the institutions see rules, their first reaction is to attempt to game them. I suspect that it is not the number of rules that is the general concern but the coherence of the regulators in making sure that gaming is not a practice that they will permit.

The heart of today’s discussion is to do with LIBOR. I have a general question on the participation of banks in the LIBOR-setting process. It was the strong wish of many that more banks should participate in the process. At the moment, many seem in effect to get a free ride by allowing others to be the participants in the rate-setting process. They then use the rate across the many instruments and transactions that they sign up to, but because they did not participate themselves, they were in many ways getting a free ride, not exposing their internal positions to public view in the way that the participants were and making it much more difficult for other banks to compete against them when some were being transparent and others were not. I wonder where that process has got to. I understand that it was to be voluntary, and I do not know whether we have had any change in who is involved in rate-setting at this point or are likely to in the near future.

At the heart of my questions for the Minister are the sanctions of themselves. We all strongly support the new offence of making false or misleading statements and false or misleading impressions in the submission of benchmark information in the setting of a rate such as LIBOR. One of the underlying concerns has been the way in which the regulator approaches such violations, which is to come down increasingly hard on the individuals who have been clearly and directly involved in that false submission but not to look upwards to those who create the culture and environment in which that behaviour takes place. Tracey McDermott has said on several occasions that the appropriate way to enforce is to find the problem and then follow the trail and to stop questioning at the point where the trail goes cold. That obviously creates for senior management an advantage in wilful ignorance and makes it beneficial for them not to know in any detail what is happening in their organisation, certainly for there to be no trail that would be easy for a regulator to follow. Many of us have come to the conclusion that the regulator needs to have a way to look through that to make senior members of a company accountable for behaviour that is happening on their watch and which they do not know about through negligence, in a sense, rather than through deliberate deceit on the part of those carrying out the wrongful behaviour. Can the Minister make any comments about that?

The underlying concern is that the regulator has sanctions that are strong enough. Many of us have noticed the distinction between the kind of sanctions that a US regulator can use versus those available in the UK. I know that that is not a direct discussion within the order, but it is so closely tied to it that I wonder whether the Minister would comment.

[Lord Newby]

My Lords, I am extremely grateful to noble Lords who have contributed to the debate and will attempt to answer the questions they have raised. The first questions related to the effect of the tearing up, or bifurcation, of the rulebook and how continuity will be retained. I hope that the cultural commitment which the noble Baroness, Lady Kramer, mentioned, pervades those at the head of the new organisations and that it will be carried forward. In formal terms, consistency will be maintained by the operation of the memorandum of understanding between the two bodies, the PRA and the FCA, which we discussed in relation to other orders last week.

This is of course not the first time that there has been an attempt to reduce the number of pages. The FSA at one point consulted on it, but the answer it got back was, “Actually, we do not want the number of pages reduced significantly, because they tell us what to do, and if you reduce the number of pages, that puts more of a requirement on us to exercise our own judgment”. That is the balance that we are grappling with here. On the one hand, everybody wants less regulation, but when the consequence of less prescriptive regulation is that people have to exercise more of their own judgment, sometimes they become less keen.

Economy: Rating Agencies

Baroness Kramer Excerpts

Wednesday 27th February 2013 Lords Chamber

[Lord Deighton]

The noble Lord makes some very important observations. First, as I am sure he knows, one of the rating agencies is being sued by the US Government, reflecting the very concerns that he brings out. With respect to relatively simple credit considerations, and in terms of the UK economy the information is all out there, the Chancellor’s economic policy and the performance of the UK economy is evaluated every second of every day by the financial markets. The verdict of those markets is reflected in our historically low gilt yields. This morning we were trading in the 10-year gilt below 2%, which is the most profound commentary on the success of the UK Government’s current economic policy.

[Baroness Kramer]

My Lords, the underlying issue is surely growth. Yesterday, Paul Tucker, deputy governor of the Bank of England, floated the idea of levying a penalty on banks that park their money at the central bank rather than putting it into the real economy. What comment does the Minister have to make on that strategy?

[Lord Deighton]

My noble friend raises the question of monetary policy. We have had a number of debates on creativity to restore a focus on growth and not purely on short-term inflation targeting. All these ideas are welcome and demonstrate the importance of generating growth. We should have the debate but be very focused on sticking to a monetary policy that understands the importance of the medium-term inflation target, while accepting a degree of flexibility around output.

Some specific measures that the Government have taken, such as FLS, were recommended in the Moody’s review as a very positive sign, so other ideas should certainly be debated and considered.

Banking: LIBOR and EURIBOR

Baroness Kramer Excerpts

Tuesday 12th February 2013 Lords Chamber

[Lord Deighton]

The penalty levels are a matter for the FSA. In 2010, it re-established the code under which it assesses the fines to make them more transparent. It is an area which has been recently reviewed.

[Baroness Kramer]

My Lords, may I at least commend the FSA for a new penalty regime which affected misbehaviour after 6 March 2010 and finally had some serious fines behind it? However, I still recommend the US system of triple damages. Does the Minister agree that it is crucial that the Government and all politicians stand behind the regulator in fierce enforcement and tough penalties? It was the slack that we saw cut for the banks under the previous Government that demonstrated to people that government and the regulator seemed to be on the side of the banks and not the people or the taxpayers?

[Lord Deighton]

My noble friend makes an extremely good point that under the new regime it is critical that government and regulators are seen to work together and to represent the interests of the consumers.

Banking Reform

Baroness Kramer Excerpts

Monday 4th February 2013 Lords Chamber

[Lord Newby]

My Lords, I smile with amusement when the noble Lord accuses the Government of not taking this issue seriously. When his party was in his power, and we and I suggested to it and him that they do exactly that, we were told that it was irrelevant to the problems that we were facing and that we should definitely not do it. I will certainly not take any lessons from him about the importance of this issue.

As for whether the legislation should include reserve powers to implement full separation across the sector, this was put to the Governor of the Bank of England, who said that he did not want such reserve powers. More importantly, general reserve powers would give huge power outwith Parliament to tear up the provisions of the Bill as we envisage it, and fundamentally change some of the ways that we see it working. The Government think that if you got to the point where that was a possibility, or you wanted those powers, the appropriate way to do it would be to come back to Parliament, rather than leaving it to the regulator to exercise what would be very sweeping powers indeed.

[Baroness Kramer]

My Lords, I will not repeat the question on reserve powers. I have a feeling that this House will take it on if the Government do not.

May I ask a question about the competition aspects of the Chancellor’s speech? His comments were welcome but to be able to change from one bank to another when all those banks are essentially alike is not real choice. Will the Government look seriously at splitting up some of the major banks, especially those in which we have ownership? I have not read the Statement but can he comment on whether Chancellor or the legislation will allow the FPC to set the level of the leverage back-stop so that it could be higher than the rather modest levels proposed under Basel III?

Economy: Growth

Baroness Kramer Excerpts

Tuesday 29th January 2013 Lords Chamber

[Baroness Kramer]

My Lords, the Minister is going to be tired of being welcomed to his new role, but let me join with others there. I also want to congratulate him on sponsoring what is not an easy debate so early in his ministerial career. It speaks of leadership and this House, on all sides, likes and appreciates leadership. I also want to thank the House for its indulgence. After the first four speeches, I had to join the Parliamentary Commission on Banking Standards or it would not have been quorate. I think we can all agree that getting the banks into a stable financial situation is a priority. Everything else that we may do for growth in the economy will all be reasonably for naught if we cannot sort our banking structure out, so again I thank the House for that.

I was able to hear the first four speeches and was then in plenty of time to hear the noble Lord, Lord Desai. Those speeches were all a sort of tour de force with the combat of different schools of economic thought. I dare not trespass into that territory—that is not where my intellectual capacities are—but I found it fascinating and I suspect, like many people, that I concluded that is very hard to listen to abstract theory and come away with conclusions. I hope that the House will not mind if I try to be simpler and perhaps a little more practical.

I do not think you have to have a grasp of economic theory to recognise that the previous Labour Government hideously overspent from about 2004, ramping up public spending so that when the financial crisis hit in 2008, because of our spending and debt levels we had no resilience and no cushion to deal with that crisis. I do not think you have to come with a background in economic theory to recognise that the very laissez-faire attitude towards the banks essentially led to the booking of absolutely false profits by those institutions and ephemeral tax revenues, which were taken as a permanent tax stream by the Labour Government.

I do not think you have to have an economics background to recognise that over a longer time than the Labour period—over a generation—we allowed our economy to become unbalanced. The noble Lord, Lord Desai, described that exceedingly well. We became overly dependent on the financial services sector. We failed to make sure that vigour extended beyond the south-east and covered the rest of the country. In perhaps the cruellest rub of all, we neglected providing the kind of skills to our young people who were not going to take the academic route but needed vocational training and apprenticeships. They could have generated the kind of jobs and economic strength that would come from those skills. We chose to neglect all those things; that whole series of imbalances is now being tackled by this coalition. Taking that long-term view and taking on the challenge of dealing with these absolutely fundamental weaknesses in our economy strike me as being some of the most important measures that this coalition has taken.

I want to name check in some sense Vince Cable—he has not been mentioned, at least while I have been here—for bringing forward, fostering and pushing an industrial strategy, something which we have seriously neglected. He has finally provided sector-specific support to industries that can lead us into growth, whether they are pharmaceuticals, green industries or aviation, and the development of the domestic supply chain—an area that really had no focus in the past. There has been investment in innovation and R&D and there is now an absolute sea-change in capital allowances, to encourage investment in new technologies by business. There is action on finance to deal with absolute market failure, which even those changes that we are making will not address. That is, in the Green Investment Bank, the British business bank and very substantial increases in export guarantees.

When the noble Lord, Lord Deighton, spoke, what excited me the most about his extraordinary speech was his focus on doing and delivering. In that context, I would like to add something slightly different to this debate, because as a doer and deliverer I am going to ask him if he might be willing to think small. We have such a bent in this country for looking at the large—the large business, the grands projets and the big bank—while we neglect the heartland of our economy. SMEs as a sector, not just in the UK but overall in the EU, account for all of our new job creation. That is not just in tough times such as these; it has also been true in the years of prosperity. New start-ups and small businesses are absolutely key to our growth and we have an enviable range of SMEs in the UK. Some 20% of all the SMEs in the EU are in this country. I do not think that registers on the general consciousness.

I recognise that this Government have taken steps to strengthen small businesses, from tax breaks to investors through the EIS, regulatory preferences, new support through UKTI and Funding for Lending. However, let me suggest that it is not enough and it is not brought into a coherent strategy and programme. The problems of SMEs are incredibly granular. I listened yesterday to Xavier Rolet of the LSE talking about the problems of raising equity for SMEs, in large part because all the rules are a scaled-down version of those written for blue-chip companies, rather than being designed for the small players.

I am on the SME Select Committee on exports, where I hear about the problems of protecting intellectual property for small exporters, especially for SMEs that decide to try to export to the BRICs. Again and again, this House has heard the complaint that small companies and microcompanies cannot access credit from the traditional banks. We lack those networks that supply such credit in successful countries, such as the community development finance institutions in the USA and the Sparkassen in Germany. This list could go on for several pages; I suspect that in today’s debate many more issues concerning SMEs will have been raised.

There is no point in trying to tackle this as a piecemeal add-on to various different policies in different departments. I wish that the Government would consider having a dedicated team working across departments, going through obstacle by obstacle with the single mandate of releasing growth in our SME sector. Frankly, the big guys can take over themselves; this is where we can make change and with small companies, small changes make an immediate impact. We all know what the impact on jobs would be if SMEs which were planning to expand, perhaps to hire just one more person, did it six months earlier than they had originally planned. The gain that we can get, with its impact on growth, could be tremendous if we agree to focus.

I move into the area of the noble Lord, Lord Deighton, by referring to small infrastructure. I am very supportive of the big infrastructure projects such as HS2. There is a whole range of them. We have neglected infrastructure in this country; I would not argue with that. However, as many people have said, large infrastructure has a long lead time and I want to make a plea for small infrastructure projects. In the Local Government Finance Act 2012, the Government put in place the legal framework for tax increment financing though a structure known as TIF1. This would allow local authorities to receive part of the uplift in business rates resulting from new infrastructure and, on that promise, to obtain the financing to enable those projects to go ahead in the first place. A perfect arrangement, your Lordships might think, for transport links to enable a new industrial park or for an opportunity to finance key housing.

This is not the time to go through the details of the legislation but, in effect, what the Government did was to give with the one hand, by creating the framework for TIF1. They then took away all the potential by severely limiting the period during which local authorities could capture those business rate increases. The argument is about general accounting and the relationship with the Treasury, and whatever else, but given that we need growth this is absolute madness. Just about every local authority in the country will have a few good, but small, infrastructure projects that would stimulate economic development locally. We need those to be breaking ground and I urge the Government to go back and capture that low-hanging fruit of small, local infrastructure projects which could feed quickly into growth.

Lastly, on small lending, this House is well aware that we are quite unique in the developed world in having so much of our banking service dominated by five huge players, all of them so like each other that few individuals or businesses ever bother to move their accounts, despite high levels of dissatisfaction. Everyone recognises that competition for these banks is one of the best ways to challenge what became a tainted culture and a lack of focus on the customer. But while new, big players may have a role, I want to argue for change to include a network of small players. This means community banks, specialist small business banks, crowd funders, peer-to-peer lenders and credit unions—in other words, to have real variety and choice capable of meeting much wider needs than our banks currently meet.

A lot of the enabling legislation is now in place, but to take it from a possibility and a theory to reality, recognition, action and support from our Government and our regulators are needed. It makes for a messier world but, I would argue, a more stable, capable and honest one. That is the argument that I would like to put to the Minister. Of course he must act on large projects and, with infrastructure, they would be a large part of his plate. Will he look at the small and the quick? We need economic growth now, not in 10 or 15 years’ time. It seems to me that we have many quick wins of which we are not taking advantage.

Taxation: Tax Havens

Baroness Kramer Excerpts

Wednesday 9th January 2013 Lords Chamber

[Lord Newby]

My Lords, there has been a lot of activity to increase transparency in relation to the Channel Islands and the Isle of Man so that we can now request information about an individual’s tax affairs. A major change is that we are moving towards what is called an enhanced automatic tax information exchange, the first of which was signed with the Isle of Man. This means that every year we will automatically get details of the tax affairs of UK-based individuals with accounts in those countries. We will find out what payments have been made into bank accounts in those countries so that we can make sure that those people are paying adequate amounts of tax. That deals with individuals, however, whereas the Question of the noble Lord, Lord Dubs, deals more with corporates.

[Baroness Kramer]

My Lords, perhaps I may pick up on the Minister’s comment. On 1 January the Foreign Account Tax Compliance Act, commonly known as FATCA, came into force in the United States. This Act requires all foreign financial institutions—banks, credit unions, pension managers and insurance companies—to find out which of their clients are liable for US tax and to send details of their account balances and transactions to the US authorities. When can we have our own FATCA—and I do not mind if we call it FATCAT—in the UK?

[Lord Newby]

My Lords, we signed the first agreement based on the FATCA principles with the Isle of Man in December. What is very significant about that Act is that places such as the Cayman Islands will be required to provide automatic information directly to the US about US citizens. We are now in negotiations with all Crown dependencies and overseas territories to see whether we can put in place equivalent provisions with them. If we do, it will revolutionise the amount of information that we get about the affairs of British citizens who are due to pay tax here and who have bank accounts in those territories.