Cross-Government Cost Cutting
Baroness Penn Excerpts(2 years, 2 months ago)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government announced the efficiency and savings review in the Autumn Statement to keep spending focused on government priorities and to help departments manage the inflationary and other pressures on their budgets; all savings will be reinvested in departments’ budgets. We need to be ambitious as a Government in finding ways of working more efficiently and focusing spending on where it delivers the greatest value for the taxpayer. The Government will report on progress in the spring.
Lord Bird (CB)
Does the Treasury also measure the costs of cost-cutting, because that is the important thing, is it not? It is all well and good to cut something, but if the damage is greater than the savings, surely it is not wise government to do that.
Baroness Penn (Con)
I put it to the noble Lord that there is a cost to not having efficiency and value for money in our services. That means we can deliver less for people for the money that we are putting into them. We want to see it the other way around, and that is the aim of this review.
Lord Wallace of Saltaire (LD)
Does the Treasury consider capacity when enforcing efficiency cuts on other departments? Later this afternoon we shall discuss the National Security Bill, which has several clauses imposing a new foreign influence registration scheme, which will lead to a great surge in new submissions to the Home Office, which I suspect it does not currently have the capacity to cope with, so it will need to recruit additional civil servants. The Retained EU Law (Revocation and Reform) Bill will also impose new tasks as they are repatriated from tasks we used to share with our European allies. We know what happened when the Home Office cut police numbers and when the criminal justice system’s budget was cut: capacity decreased and the Government are now having to recruit additional police officers. Does the Treasury think about this or is it simply budget-cutting?
Baroness Penn (Con)
Can I reassure the noble Lord that these questions are considered in spending reviews? They are also considered as part of the process of collective agreement when new policy is made between the periods of spending reviews. The noble Lord mentioned the MoJ and the Home Office; they will grow by, respectively, 3.6% and 3.1% a year over this Parliament.
Lord Howell of Guildford (Con)
The noble Lord, Lord Bird, made a very sound and good point. Would the Minister recommend to her Treasury colleagues that the “10%/slash everything” approach to public expenditure used in recent times is not the best way of controlling and curbing the size of the public sector, of improving its efficiency or of cutting out waste? There are techniques that have been tried in the past, namely the policy programme budgeting system, learned from the original Bureau of the Budget in America 40 years ago, and which should be revisited. Such techniques are much more effective in delivering real, effective, cost cuts, which take into account all the side effects that can sometimes overwhelm the original attempt at economy.
Baroness Penn (Con)
My noble friend is right: we must ensure that when we undertake these exercises, we really are delivering efficiency and value for money gains, rather than short-term fixes for departments’ budgets that, in the long term, may create other problems. I can reassure him that no figure is attached to the current exercise; it is about working with departments to see where they can find efficiency savings to help them manage the pressures they are under.
Lord Blunkett (Lab)
My Lords, does the noble Baroness not agree that what she has just said underlines the total failure of the short-term and damaging fixing over the last 12 and a half years?
Baroness Penn (Con)
No, I would not agree with the noble Lord at all. Efficiency savings are something that Governments of all colours have striven to deliver, including in previous comprehensive spending reviews under the Labour Government. It is absolutely right that, when we look at departmental spending, we build in an assumption of improved efficiency and value for money, but also that, at this time of increased inflationary pressures, we put even more work into looking at where we can achieve efficiencies and release savings to be reinvested into those budgets.
Lord Young of Cookham (Con)
My noble friend said that the Government were ambitious in their search for cost-cutting savings. May I suggest that ambition be extended to the number of Ministers in the Government? In 1979 there were two Ministers in the Department of Transport; there are now five. In 1979 there were five Ministers in the DHSS. That department has since been split into two and there are six Ministers in each. Is this not an area worthy of some exploration?
Baroness Penn (Con)
I take my noble friend’s point. The scope of government and what it is attempting to deliver has changed somewhat over that time, but whether the growth in Ministers has matched that scale of delivery is another question.
Baroness Uddin (Non-Afl)
My Lords, I cannot help but wonder what the damaging impact of the lost billions spent on poorly chosen PPE orders is, but will the noble Baroness’s department ensure that services for women fleeing domestic violence are ring-fenced and protected, as we have promised to do in this very Chamber many times?
Baroness Penn (Con)
My Lords, I am sure the Home Office takes that into account. This Government have a strong record on protecting women who have had to flee violence; we brought forward the Domestic Abuse Act, among other things. Even when looking back to previous years, from 2010 onwards those budgets were protected.
Baroness McIntosh of Pickering (Con)
My Lords, would my noble friend look closely at the property portfolio? As of January this year, only 34% of government office property had been onboarded, as it is apparently called. There is obviously scope to add more to this. Will my noble friend look closely at NHS properties in particular? For example, in a city such as York, with all the different organisations that have owned various properties, I would be interested to know how many are occupied and used for NHS purposes at this time.
Baroness Penn (Con)
I reassure my noble friend that the Government continue their efforts to reduce the government estate, and progress is being made to hit the £500 million per annum asset disposal target. There are significant property sales under way, including the empty sites and outdated buildings around the Royal London Hospital, which will create a new home for life sciences in London: the Whitechapel Road life sciences cluster.
Lord Hunt of Kings Heath (Lab)
My Lords, one of the best examples of cross-government working is the vaccine task force headed by Dame Kate Bingham. The noble Baroness will know that Dame Kate very heavily criticised the Government last week for dismantling our vaccines capability and stopping all the initiatives she had put in train. Is that an example of cross-government cost-cutting?
Baroness Penn (Con)
The noble Lord will know that we have increased the budgets in the health service, but that does not reduce the need to look for efficiencies. I pay tribute to the work of Dame Kate Bingham in delivering the results from the vaccine task force. We are now living in a different world from the one in which she did her work. I am sure we will look to learn the lessons from her work and take it forward in the most appropriate way.
Lord Butler of Brockwell (CB)
My Lords, in following up the question from the noble Lord, Lord Young of Cookham, could the Minister also carry out an audit of the number of special advisers?
Baroness Penn (Con)
I do not believe that it is within my responsibilities to carry out an audit of special advisers, but I will take the noble Lord’s point back to the department. I should probably declare an interest as a former special adviser myself; I would not be best placed to undertake such work.
Lord Berkeley (Lab)
My Lords, perhaps I could be helpful to the Minister and give her some advice. If she wants to save £150 billion, she could cancel HS2.
Baroness Penn (Con)
I always welcome helpful advice. However, I am not sure that I can take it up in this case.
Lord Tunnicliffe (Lab)
My Lords, even though markets have stabilised somewhat in recent weeks, our borrowing costs are extraordinarily high. Debt payments are second only to spend on health and social care. Most straightforward efficiency savings have already been implemented, meaning that the Government may have to spend now to achieve savings later. What would that mean for the Chancellor’s fiscal rules, which have already been broken 11 times in 12 years?
Baroness Penn (Con)
My Lords, initiatives to spend to save were included in the different departments’ spending review bids and they are welcomed by the Treasury. Increased evaluation of policy and programmes allows us to divert resources to where they can make the most difference. Another example of spending to save in SR 2021 was putting more money into the Supporting Families programme. That was informed by a strong evaluation which showed that those targeted interventions up front for families experiencing hardship delivered savings in terms of the number of children entering care and the number of adults and juveniles entering the criminal justice system. It is really hard to deliver spend-to-save measures, but where they work, they can be a really effective tool for delivering better public services for less money.
Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022
Baroness Penn Excerpts(2 years, 2 months ago)
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Baroness Penn
That the Grand Committee do consider the Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022.
Relevant document: 19th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, in the Autumn Statement, the Government set out their prioritisation for taxation to be fair by following two broad principles: first, that we ask those with more to contribute more; and, secondly, that we avoid the tax rises that most damage business.
Noble Lords will remember that the National Insurance Contributions (Increase of Thresholds) Act 2022 increased the point at which class 1 and class 4 NICs are paid to align with the personal allowance for income tax. As a result of that legislation, almost 30 million working people are better off. We are here today to discuss the final element of the Government’s ambition to align national insurance contribution thresholds with the personal allowance for income tax.
I note that, in its 19th report, the Secondary Legislation Scrutiny Committee raised these regulations as an instrument of interest. The regulations introduce a new threshold within class 2 NICs from which self-employed individuals start to pay class 2 NICs. This will be known as the lower profits threshold. Class 2 NICs will now be due only if profits exceed the new lower profits threshold, set at £11,908 for the 2022-23 tax year.
The new lower profits threshold will be aligned with the personal allowance. However, the threshold is being set at £11,908 for 2022-23 to reflect the fact that personal NIC thresholds were increased from July this year, meaning that individuals will benefit from an increased threshold for nine months of the tax year. For 2023-24, the self-employed thresholds will be set at £12,570. This means that no one will pay a penny of income tax or national insurance contributions on their first £12,570 of income from 2023-24 onwards, allowing people to keep more of what they earn.
However, this measure goes further. Class 2 NICs are the mechanism by which the self-employed become entitled to certain contributory benefits, such as the state pension and statutory maternity pay. To ensure that individuals do not lose access to their benefit entitlement, the existing small profits threshold will be maintained as the point at which the self-employed gain access to certain contributory benefits. This means that individuals will benefit from the increased threshold for paying class 2 NICs without losing their entitlement to contributory benefits.
This measure will apply retrospectively from the start of the 2022-23 tax year, in line with the provisions made in the parent Act. This means there will be no delay in this measure benefiting around 500,000 self-employed individuals, saving them £163.80 a year. Changes will be delivered via the annual self-assessment process for the vast majority of customers, following the end of the tax year.
These regulations fulfil the Government’s obligation to increase the point at which the self-employed pay class 2 NICs. Importantly, they ensure that thresholds are aligned and our tax code is simplified. I beg to move.
Lord Davies of Brixton (Lab)
My Lords, as a supporter and fan of national insurance, I did not want these regulations to pass unnoted. I am a believer in the national insurance system—I guess there are not many of us left—where people pay contributions and that provides entitlement to national insurance benefits.
It has been understood, from the beginning, that there are people in employment and people who are self-employed. For practical reasons, different sets of rules have to apply to each group of workers. Nevertheless, the objective should always be neutrality in the financial impact, otherwise it is bound to give rise to issues of financial arbitrage regarding being employed or self-employed. That is all well understood. I will avoid going off down the IR35 track; there will be plenty of other opportunities to pursue that.
On the face of it—I would be interested in the Minister’s views—this change might be seen as a move towards reducing inequality between the employed and self-employed. However, in practice, it increases the difference. The tell is the fact that there is a cost, in a normal year, of £100 million. In the context of the figures we have seen in recent Budgets, that is not an enormous sum, but it suggests that this is a move away from neutrality and that it further increases the advantages that people perceive in being self-employed as opposed to being employed, with all the problems that flow from that. The background to this is clearly the extent of the acknowledged problem of fake self-employment for financial reasons. Perhaps the Minister would indicate, in broad terms, quite how this change fits in with what I hope is an understanding that there should not be excessive financial advantages in being self-employed.
I heard what the Minister said about the changes to entitlement to benefits. I emphasise that, in achieving neutrality between employed and self-employed contributions, there should equally be neutrality between the benefits paid to people who have paid the different types of contribution.
Baroness Penn (Con)
My Lords, I thank both noble Lords for their contributions to this brief debate. We discussed some of these issues when the parent Act was passed. We also discussed issues around the national insurance system with the introduction and then removal of the health and care levy.
In response to the noble Lord, Lord Davies of Brixton, the intention behind this change to the national insurance system, which I think reflects a longer-term ambition in the manifesto to align the income tax threshold and the NICs threshold, and the reason the measure was brought forward last spring, was to provide people with more money back in their pockets at a time when the cost of living was rising significantly. The most effective option to do this, particularly targeting it at lower-paid, self-employed people or workers, was an uplift in the NICs thresholds. Although it may not deliver on the wider ambition to have greater equality between NICs contributions from the employed and self-employed, none the less it had a very good policy rationale, one that the Government were keen to deliver on.
On that longer-term ambition, perhaps I should not have expressed it in that way because I do not think the Government have any intention at the moment to change how employed and self-employed NICs are treated. The raising of the threshold was a measure focused on helping people with the cost of living. It was seen to be an effective way to target resources at those further down the income scale. This SI seeks to complete the process that started with the Act, but we had to take the powers to do this last element because it was a bit more complicated and we needed a bit more time to work it through. I hope that answers the noble Lord’s question.
Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022
Baroness Penn Excerpts(2 years, 2 months ago)
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Baroness Penn
That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, these regulations provide the legislative framework for tackling money laundering and terrorist financing and set out various measures that businesses must take to protect the UK from illicit financial flows. Under these regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries identified as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes that could pose a significant threat to the UK’s financial system.
This statutory instrument amends the money laundering regulations to update the UK’s list of high-risk third countries. It adds the Democratic Republic of the Congo, Mozambique and Tanzania to the list and removes Nicaragua and Pakistan. This is to mirror lists published by the Financial Action Task Force, the global standard setter for anti-money laundering and counterterrorist financing.
This is the sixth time we have updated the UK list to respond to the evolving risks from third countries. This update ensures that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. In 2018, the Financial Action Task Force assessed that the UK has one of the toughest anti-money laundering regimes in the world. The UK was a founding member of this international body, and we continue to work closely and align with international partners such as the G7 to drive improvements in anti-money laundering and counterterrorist financing systems globally.
FATF has identified that the Democratic Republic of the Congo, Mozambique and Tanzania must each make a range of domestic reforms to address their non-compliance with FATF standards. These include improving their understanding of risk, increasing the effectiveness of their domestic supervision, supporting money laundering investigations and prosecutions and more effective implementation of sanctions.
FATF found that Pakistan and Nicaragua have made the necessary domestic reforms to improve their compliance with FATF standards, which have been confirmed through on-site visits to both countries. In its October public statement, FATF expressed concern at the potential misapplication of FATF standards by Nicaragua, resulting in the suppression of Nicaragua’s non-profit sector. Therefore, although Nicaragua has been removed from FATF’s list, FATF will continue to monitor this issue to ensure that Nicaragua’s oversight of the non-profit sector is risk-based and in line with FATF standards.
Lastly, this high-risk third country list is one of many mechanisms that the Government have to clamp down on illicit financial flows from overseas threats. We will continue to use other mechanisms available to respond to wider threats from other jurisdictions, including applying financial sanctions as necessary.
This amendment to the money laundering regulations will enable them to continue to work as effectively as possible to protect the UK financial system. It is crucial to protect UK businesses and the financial system from money launderers and terrorist financers. I therefore hope that noble Lords will join me in supporting these regulations. I beg to move.
Lord Tunnicliffe (Lab)
My Lords, I am grateful to the Minister for introducing the latest iteration of the Financial Action Task Force’s list of high-risk countries. As she outlined, this is a routine piece of secondary legislation. These Benches are pleased to support its passage.
I want to pick up on a couple of outstanding questions from the Commons debate on this instrument, which took place on Monday. The Minister’s colleague, Andrew Griffith, noted that the
“removal of Nicaragua and Pakistan does not bring to an end any monitoring of those countries, which are covered by a much broader set of arrangements.”—[Official Report, Commons, Delegated Legislation Committee, 5/12/22; col. 6.]
He talked of an “ongoing duty of care” to fight money laundering but did not go into any detail about what that looks like. My understanding is that the duty of care has often been found wanting. Does the Minister agree with that assessment? If so, what work is under way to strengthen the current arrangements? I appreciate that she may not be able to answer that today, so I would be happy for her to write with further details.
My colleague, Tulip Siddiq, raised the Government’s plans to make future versions of these statutory instruments subject to the negative procedure. We appreciate that parliamentary time is finite and that there is an ever-growing body of secondary legislation for us to consider, in part because the Government keep presenting skeleton Bills full of broad delegated powers. The Commons Minister committed to writing with details of how the Government will ensure that Parliament gets the information it needs to discharge its rightful job of scrutinising such decisions. Will the Minister see that such information is passed on to interested parties in this House?
We came across this problem before with the end of EU laws coming to some extent almost between affirmative and negative regulations. That was in the middle of the pandemic, so it got lost there, but there is a need for something more consultative than the negative procedure. The problem with negative procedures is that they are almost invisible. Unless the Secondary Legislation Scrutiny Committee picks up on them, it can be difficult to realise that the instruments are there. If the Government are to introduce a propensity to use negative procedures more, and we can obviously see some sense in that, I hope they will make sure that they have a rethink about how such negative instruments are brought in front of this House in particular.
Finally, I note that Gibraltar continues to feature on the list, despite assurances that the authorities there are making good progress on implementing FATF’s recommendation. Is the Minister able to offer any further comments on that?
Baroness Penn (Con)
I thank the noble Lord for his questions. I can probably expand on my answers in writing, if needs be. On his point about the procedure used for future updates to this list and parliamentary scrutiny of that, I will certainly ensure that any response from my colleague—I believe the EST took this debate—is copied to Members of this House and answers those points.
In this area, future updates to the list will continue to mirror the findings of FATF as an international standards-setter where it has identified countries as having weak anti-money laundering controls. FATF’s decision-making process is underpinned by a robust technical methodology and has a high level of scrutiny of the multilateral process, which the UK is involved in at all stages. We are committed to continue to provide written updates to Parliament on the outcomes of each FATF plenary, as these inform the list.
On this measure, we consider that the procedural change will have quite limited impact, given Parliament’s full support on all updates to the list so far. We can consider the attendance at this debate as perhaps an indicator of that, but I take the point that updates may not always be uncontroversial. Ensuring that Parliament is kept up to date with the outcome of FATF meetings, from which we derive our list, might be a good way to ensure that parliamentarians feel that they are kept abreast of the changes that might then flow through the negative statutory instrument procedure.
On Nicaragua and Pakistan having been removed from the high-risk third country list and the ongoing monitoring in these areas, I mentioned that the Government have concerns about allegations of misuse of AML powers by Nicaragua. We have agreed that Nicaragua should report in February to FATF members on how it is applying anti-money laundering powers proportionately to charities and civil society organisations. We will consider that report and next steps at the time.
In relation to both countries, the list of high-risk third countries is only one of many measures used to combat illicit finance. There are many other measures available to the Government. I am not sure that that completely answers the noble Lord’s point, so I will make sure I read Hansard and write with any further points that I should make.
Front-loaded Child Benefit Bill [HL]
Baroness Penn Excerpts(2 years, 2 months ago)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I start by thanking my noble friend Lord Farmer, and my noble friend Lady Berridge, for bringing these amendments in Committee on his behalf. I acknowledge the dedication they have both shown to this issue. As my noble friend knows, the Government wholeheartedly share her ambition to support parents in caring for their children. Recently, the Chief Secretary to the Treasury has confirmed that, subject to parliamentary approval, child benefit payments will increase in line with the September rate of inflation in 2023.
Like my noble friend, the Government are committed to supporting parents, regardless of whether they choose to leave the workforce in order to carry out childcare duties or remain in the workforce. Details of the UK’s generous parental pay and leave policies were set out at Second Reading. Moreover, it has recently been confirmed that, subject to parliamentary approval, statutory maternity pay, maternity allowance, paternity pay and shared parental pay will all also be uprated in line with September’s inflation in April 2023. For parents who wish to return to the workforce, the Government offer a range of support with childcare costs. I will not go into the details of these policies, which were described at Second Reading. However, the Government do consider these to be appropriate and robust measures to support families with childcare costs. These initiatives also ensure that families on the lowest incomes receive additional support.
To answer the noble Baroness, Lady Sherlock, I do not know exactly why the Government put the child benefit tax charge through the tax system, but I can tell her that the child benefit system is not designed to front-load child benefit payments in the way the Bill intends. It would involve a complex change to the IT system, which would include significant costs for both the IT system and upskilling staff—and we all know the risks around significant IT upgrades and the delays that can occur.
On the noble Baroness’s other questions, current legislation gives His Majesty’s Treasury the power to prescribe different rates of child benefit for different cases. For example, to date that power has been exercised to prescribe different rates, according to whether payments are being made in respect of the first child or subsequent children. Full legal analysis would be needed to determine whether current legislation allows for different rates to be prescribed for different patterns of parenting, but it would not be possible under the current system to prescribe different rates or make child benefit conditional on different parenting behaviours, as the noble Baroness set out. I hope that answers her questions.
Returning to the amendments tabled by my noble friend Lord Farmer, as I say, the Government set out our full position at Second Reading on why we cannot support the Bill as a whole. In addition to the previously raised issues, I will add a few further points worth considering in relation to these proposals. First, the current child benefit system already takes into account the higher costs that families face when they first have children, hence the higher rate paid for the eldest or only child.
Secondly, as the noble Baroness, Lady Sherlock, outlined, a parent’s circumstances may change over time, affecting their eligibility for child benefit payments. This may occur for many reasons. For example, a child may leave full-time non-advanced education, or a parent may lose custody of a child. A parent’s income may also increase, such that they become liable for the high-income child benefit charge. If they have chosen to front-load their child benefit payments but become ineligible or opt out in later years, that could affect the fiscal neutrality of this measure. Furthermore, different individuals may claim child benefit in respect of the same child but for different periods of time. The proposals in the Bill would mean that new claimants could be affected or bound by the decisions of the previous claimant. This could be particularly problematic in cases where separated parents are already in conflict over who should claim child benefit.
Thirdly, as the noble Baroness, Lady Sherlock, also noted, the Government currently review the rates of child benefit annually in light of inflation, helping families with rising costs. However, the lack of certainty around how child benefit rates will change in future means that it is not possible to ascertain what an appropriate rate for front-loaded payments would be.
I apologise; I said I was turning to the amendments, but those are our objections to the Bill in principle. I now come to the amendments themselves. I acknowledge that the amendments tabled by my noble friend Lord Farmer would make the Bill more workable for the Government. Amendment 1 would mean that the Bill no longer constrains the Government in setting up a system that specifically front-loads payments on a so-called sliding scale. Instead, as set out in Amendment 3, the Government would be given more flexibility to design such a system, which does not necessarily have to be on a sliding scale. Therefore, the Government have no objections to the amendments. The Bill would potentially need further tidying up to become fully workable, but we recognise that the amendments are a step in the right direction.
Nevertheless, although the Government remain committed to supporting families and children, it is for the reasons previously outlined at Second Reading, and the further points raised today, that the Government cannot support the Bill. I welcome the passion and commitment of both my noble friends in this area, and I am sure that they will continue to press the Government on these important issues. The Government will continue to listen to what they, and all noble Lords, have to say on family policy in the future.
Baroness Berridge (Con)
My Lords, I am grateful for the contributions made, and I hope to briefly answer the points raised. I accept that the calculations are very detailed, even if they on the back of an envelope, and this is precisely why the Bill is in the framework that it is. The modelling and viewing of real-terms changes and nominal rates can be done by the Treasury—we are in this strange triangular relationship here as it is a Private Member’s Bill—so that the Government can do the policy work in advance and work out how we would cope with the change in inflation and purchasing power, and what would happen during those years. I cannot give the noble Baroness detailed answers, but this is precisely why the Bill is in the framework that it is.
The Government should commend themselves rather more on infrastructure. They have set up systems recently that have worked very well—including for vaccines and the EU settlement scheme—so it is possible to create that infrastructure, though I am mindful obviously of the cost. As to what we could give parents, budgets are so tight at the moment that families may want to choose front-loading.
On conditionality, it is not envisaged by the Bill that we would have any kind of sanction. I recognise that think tanks have suggested that, but, again, that is for the Government to work out in the policy detail on people who want to front-load. The noble Baroness has raised queries before about people understanding what they are doing, so there may be some requirement to make sure that they understand what the implications of taking the child benefit, or a proportion of it, in a front-loaded way are.
On legislation, whether it is an additional clause here or it is done under previous primary legislation, I would rely on the Delegated Powers Committee to say which is the best piece of legislation to use to enact these changes.
In many areas of a child’s life, those the child is living with and who have parental responsibility are making all kinds of decisions that affect the outcomes for that child. If they then move, the other parent or foster carer might say that they would not have made that decision. The reality here is that, as in other areas of life, decisions will be made that will affect the child in future.
Repaying money is not what is envisaged, but the noble Baroness, Lady Sherlock, inadvertently raises precisely the first case in which a parent might want to front-load benefits, which is where they sadly have a young child or baby who has a limited life expectancy. Why would you not want to enable that family to front-load their child benefit, bearing in mind the prognosis they have been given? I know that they are often entitled to other benefits and support, but they might also want to do that. That would be a laudable way of using the Bill.
I accept that it is a skeleton Bill. I accept the criticisms and comments made about our statutory instrument procedure, which allows debate but not the opportunity to vote down. However, this is a principle Bill, which would then enable the Government to construct the detailed policy. I thank all noble Lords for their contributions.
Financial Inclusion in England
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Lord Holmes of Richmond
To ask His Majesty’s Government what steps they are taking to increase financial inclusion in England.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
The Government want to ensure that people, regardless of their background or income, have access to useful and affordable financial products and services. To increase financial inclusion, the Government work closely with regulators, industry and consumer groups. Since 2019, we have allocated £100 million of funding from dormant assets towards this. The Government are also promoting financial inclusion through the Financial Services and Markets Bill, for example by introducing legislation to protect access to cash.
Lord Holmes of Richmond (Con)
My Lords, when it comes to financial inclusion, cash still matters materially to millions. Would my noble friend agree that it is not just about access to cash? Acceptance of cash is equally important. Further, as we move increasingly towards digital, would she agree that it is time for the Government to undertake an access to digital payments review to ensure financial inclusion for all?
Baroness Penn (Con)
My Lords, our approach is that accepting cash is a decision for the firms involved. We have taken action to ensure that people can access cash through ATMs and elsewhere. My noble friend also makes an important point about digital inclusion and digital payments. We are looking at how we can promote that alongside financial inclusion in our work through the Financial Inclusion Policy Forum and other avenues.
Baroness Tyler of Enfield (LD)
Will the Minister say which Minister has formal lead responsibility for financial inclusion now? Under the previous arrangements, it was not one but two Ministers: one in Treasury and one in DWP. It is not clear to me who is currently leading. The Minister just referred to the Financial Inclusion Policy Forum. What is going to happen moving forward and how frequently will it meet?
Baroness Penn (Con)
The noble Baroness asks a very good question, and I am afraid I will have to double-check and get back to her. The reason that it has traditionally been a DWP and a Treasury Minister is their joint role on that policy forum. It is not me in the Treasury, but I will find out who it is. The Government and others have found it a useful forum to drive forward action in this area and I am sure they will want it to continue with its good work.
Baroness Bull (CB)
My Lords, will the Minister say what the Government are doing to tackle poverty premium issues in financial services? We know that people on the lowest incomes pay more for credit and insurance, for instance, but issues such as this seem to be kicked between the Treasury, which says it needs more data in order to take action, and the regulator, which says that it is not within its remit to collect that data. How does the Minister expect that the new FCA consumer duty and consumer vulnerability guidance will help tackle the poverty premium, given that they deal primarily with existing customers and do not address the needs of those consumers whom the market finds more expensive and therefore less profitable to serve?
Baroness Penn (Con)
The Government are conscious of the poverty premium. We have used the Financial Inclusion Policy Forum as somewhere that we can bring together different actors on this. I will give some examples of action that we have taken in this area. The FCA, the regulator, has taken action on motor and home insurance to stop customers who are renewing being charged more than new customers. We have also seen the age agreement put in place for older customers to be able to access travel and motor insurance, and some work has been done with the Association of British Insurers looking at the poverty premium, specifically in the rented sector, and it has provided some recommendations to the Government that we are considering how best to take forward.
Lord Young of Cookham (Con)
My Lords, I applaud my noble friend Lord Holmes’s campaign to ensure that physical currency is available and valid, but what are the Government doing to ensure that the currency is fit for purpose? Many noble Lords may recall the farthing. The farthing was withdrawn in 1960 because it was redundant. The 1960 farthing is worth 2.8p today, but the halfpenny was withdrawn in 1984 for the same reason. So what is the life expectancy for the 1p coin languishing in saucers up and down the country?
Baroness Penn (Con)
I am afraid to say to my noble friend that I do not recall the farthing myself. The Government had a consultation on cash and digital payments in 2018 and the responses strongly supported not changing the denominational mix of coinage at that time. However, as with all areas of policy, we keep this under review.
Lord Sikka (Lab)
My Lords, I have met many people who are visiting pawnbrokers, putting down their everyday things just to get a few pounds to enable them to survive. They are paying interest rates of 160% upwards. Does the Minister consider that to be affordable? If not, what is she proposing in order to help these people?
Baroness Penn (Con)
I do not consider that to be affordable at all. We are taking a number of actions in this area. We work closely with Fair4All Finance, the organisation set up to distribute funding from dormant assets. One of its projects is working on the no-interest loans pilot scheme to try to provide a different route and access to credit for those who need it. At the Autumn Statement, we heard from my right honourable friend the Chancellor the action we are taking to direct our support this winter and next year to the most vulnerable households.
Baroness Sater (Con)
My Lords, the Money and Pensions Service has highlighted that children’s attitudes to money are well developed by the age of seven. According to the CBI, prioritising financial education could add nearly £7 billion to the UK economy each year. Does the Minister agree that the Government should consider making financial education a statutory part of the primary school curriculum?
Baroness Penn (Con)
My Lords, financial education in England is covered within both the citizenship and mathematics curricula. The Money and Pensions Service has also published financial education guidance for both primary and secondary schools in England to support school leaders and education decision-makers to enhance the financial education currently delivered in their schools. More broadly, after Covid and other disruptions there has been a commitment by this Government not to make any changes to the national curriculum for the remainder of the Parliament.
Lord Tunnicliffe (Lab)
My Lords, access to bank accounts and other financial services is vital, but so is better protecting people from financial scams and fraud. The Government currently have the economic crime Bill, the Financial Services and Markets Bill and the Online Safety Bill before Parliament; we will shortly see a data Bill too. Can the Minister assure us, perhaps in writing, that the final versions of these Bills will include clear and consistent measures to tackle the scams and other forms of fraud that blight so many people’s lives?
Baroness Penn (Con)
The noble Lord is right to point to the range of Bills before Parliament that will address this issue. We will not be able to address fraud and scams through financial services regulation alone. For example, many fraudsters access people through online platforms, so we need to look at that approach too. Those Bills will contain measures to tackle this, and the Government are also committed to bringing forward a fraud strategy that will bring together work from regulators, government and law enforcement to get a grip on this issue.
Lord Flight (Con)
My Lords, financial involvement is important because it represents people being willing to invest in British businesses and help them to grow. Unfortunately, the volume of direct citizen investment has fallen rather than increased in recent years. I am afraid that the increase in dividend tax and other investment expenses will also discourage this. Can the Government think about methods of encouraging people to invest in this country?
Baroness Penn (Con)
We absolutely want citizens to invest more and we have products, for example to help those on lower incomes form saving habits. We also want institutional investors to invest more in this country, which is why we are taking action on things such as Solvency II.
Baroness Lister of Burtersett (Lab)
My Lords, the primary cause of financial exclusion is poverty. What exactly is the Government’s anti-poverty strategy?
Baroness Penn (Con)
My Lords, as I said earlier, in the Autumn Statement we set out the significant support that this Government are providing to the most vulnerable households. In fact, in the analysis of that Autumn Statement, it was those in the lowest income deciles who stood to gain the most from the policies we announced.
Autumn Statement 2022
Baroness Penn Excerpts(2 years, 2 months ago)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, it is a privilege to open this debate on behalf of the Government and to set out today our plan to tackle the cost of living and to rebuild our economy. I start by welcoming the noble Baroness, Lady Lea of Lymm, to the House, and I look forward to hearing her maiden speech. I congratulate all noble Lords on their dedication to this debate over other, footballing matters that may be happening this evening.
The Government’s priorities in this Autumn Statement are
“stability, growth and public services”.
We have been honest about the challenges we face and fair in our solutions. We have taken difficult decisions to tackle inflation and to keep mortgage increases down but, in doing so, we have protected the most vulnerable. Our plan will lead to a shallower downturn, lower energy bills, lower interest rates, higher long-term growth and a stronger NHS and education system.
I turn to the first priority in the Autumn Statement: stability. High inflation is the enemy of stability. The Office for Budget Responsibility confirms that “global factors” are the primary cause of current inflation. The world is still dealing with the fallout from the Covid pandemic: furlough, vaccines and the response of our NHS protected us from the worst of the pandemic, but they all need to be paid for, and the lasting impact on the supply chains has made goods more expensive. This has been made worse by an energy crisis made in Russia. Since Putin’s invasion of Ukraine, wholesale gas and electricity prices have risen to eight times their historical average. The OBR forecast the UK’s inflation rate to be 9.1% this year and 7.4% next year. However, inflation is higher in Germany, the Netherlands and Europe, and the OBR has confirmed that our actions in the Autumn Statement will help inflation to fall sharply from the middle of next year.
Higher energy prices have fed through to forecasts for growth. Overall, this year, the economy is still forecast to grow by 4.2%. GDP is then forecast to fall by 1.4% in 2023, before rising to 1.3% in 2024, and 2.6% and 2.7% in the following years. This has also impacted our public finances, so we need a clear plan to support our economy and to restore our public finances.
The decisions that the Chancellor made in the Autumn Statement mean that, over the next five years, borrowing will be more than halved. This year, we are forecast to borrow 7.1% of GDP; next year, it will be 5.5% of GDP; and, by 2027-28, it will fall to 2.4% of GDP. The Chancellor also confirmed two new fiscal rules: first, that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period, and, secondly, that public sector borrowing over the same period must be below 3% of GDP. In short, as growth slows, we will use fiscal policy to support the economy; then, once growth returns, we will increase the pace of consolidation to get debt falling. With just under half the £55 billion of consolidation coming from tax, and just over half coming from spending, this is a balanced plan for stability.
I turn now to our plans for tax. Our decisions on tax have been guided by two broad principles: we are asking those who have more to contribute more, and we will avoid the tax rises that most damage growth. On personal taxes, we are reducing the threshold at which the 45p rate becomes payable from £150,000 to £125,140. At the same time, we are maintaining at current levels the income tax personal allowance, the higher rate threshold, the main national insurance thresholds and the inheritance tax thresholds for a further two years, until April 2028.
We are also reforming allowances on unearned income, something that we have discussed many times in this House. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024. The annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year, then to £3,000 from April 2024. Those changes still leave us with more general core personal allowances overall than countries such as Germany, Ireland, France and Canada.
On business taxes, we have decided to freeze employers’ NICs thresholds until April 2028, but we will retain the employment allowance at its new, higher level of £5,000. That means that the smallest 40% of businesses will still pay no NICs at all. On VAT, we already have a registration threshold more than twice as high as the EU and OECD averages, but we will maintain it at its current level until March 2026. We will implement the internationally agreed OECD pillar II global corporation minimum tax rate and take further steps to tackle tax avoidance and evasion. Together those measures will raise an additional £2.3 billion by 2027-28.
We will also increase the energy profits levy from 25% to 35% from 1 January until March 2028, and we will introduce a new temporary 45% levy on electricity generators, reflecting the fact that the structure of our energy market creates windfall profits for low-carbon electricity generation too. Together those taxes will raise more than £14 billion for the public purse next year.
Finally, on business rates, we believe that bills should accurately reflect market values and so will proceed with the revaluation of business properties from April 2023. However, we will soften the impact on businesses, with nearly £14 billion of support over the next five years. Nearly two-thirds of properties will not pay a penny more next year.
Just as we want to support businesses, we need to provide a shelter for those most at risk from the economic storm. To do so, we are uprating pensions and benefits by 10.1% next year, and we are accepting the recommendation of the Low Pay Commission to increase the national living wage by 9.7% next year, which is worth more than £1,600 to a full-time worker. We are also providing £55 billion in help for households and businesses with their energy bills, one of the largest support plans in Europe. This includes continuing the energy price guarantee for a further 12 months from April at a higher level of £3,000 for the average household.
Despite some difficult decisions, we are protecting our public services, with funding rising in real terms over the next five years. Overall departmental spending will grow at an average of 3.7% per year over the spending review 2021 period, but departments will be required to find efficiency savings to manage pressures from inflation. After the spending review period, day-to-day spending will continue to grow in real terms at 1% a year until 2027-28.
This does not mean that there will not be difficult decisions. For example, while we remain committed to the 0.7% ODA target in the longer term, the OBR forecasts show the fiscal situation means that ODA will remain at around 0.5% for the forecast period. In the current global context, we recognise the need to increase defence spending, but we must first review and update the integrated review, written as it was before the Ukraine invasion. Until then, we will continue to maintain the defence budget at least 2% of GDP, consistent with our NATO commitment.
We must promote our security abroad, but we also need to invest in priorities at home. Our first priority is investment in our health and care system. To recruit and retain our dedicated NHS workforce, the Department of Health and Social Care and the NHS will publish an independently verified plan for the number of doctors, nurses and other professionals we will need in five, 10 and 15 years’ time—something that I know this House has called for.
I turn to social care. The 1.6 million employees in the sector are working extremely hard. Local authorities have rightly raised concerns about their capacity to deliver the Dilnot reforms immediately, so we will delay their implementation for two years, allocating the funding to allow local authorities to provide more care packages. We also know that we must expand the capacity of the social care system to free up some of the 13,500 hospital beds that are occupied by those who should be at home.
To expand the capacity of the social care system in England, we will make available up to £2.8 billion of extra funding, increasing to £4.7 billion in 2024-25. To deliver ever greater care, the NHS will also need to look at efficiency savings, but we will still need to invest more to meet our aims. Because of the difficult decisions taken elsewhere, we will increase the NHS budget in each of the next two years by an extra £3.3 billion. Taken together, these actions will ensure that up to £8 billion of additional funding is made available for health and social care in 2024-25.
However, a healthy country is not sufficient; we need a skilled one too, so we are not just going to protect the education and schools budget, we are going to increase it. The core schools budget will rise by £2.3 billion in both 2023-24 and 2024-25, restoring 2010 levels of per-pupil funding in real terms, and the Barnett consequentials mean an extra £1.5 billion for the Scottish Government, £1.2 billion for the Welsh Government and £650 million for the Northern Ireland Executive.
I turn to the third priority in the Autumn Statement: growth. As my right honourable friend the Prime Minister set out in his Mais lecture last year, to grow the economy we need to invest in three things: people, capital and ideas. On people, alongside our investment in schools and the health service, Sir Michael Barber will advise the Government on the implementation of our ambitious skills programme. Just as we look to improve opportunities for those in education, we are determined to help people already in work to raise their incomes, progress in work and become financially independent. That is why we will ask more than 600,000 more people on universal credit to meet a work coach so that they can get the support they need to increase their hours or earnings.
On capital, we remain committed to building the roads, rail, broadband and 5G infrastructure we need. To do so, we will maintain our capital budgets at the same level in cash terms for the next three years. We will proceed with Sizewell C and deliver the key Northern Powerhouse Rail, HS2 to Manchester and east-west rail. We are building new hospitals and rolling out gigabit broadband.
Finally, on ideas, we will continue to support innovation in our economy and remain committed to increasing public funding for R&D to £20 billion by 2024-25. We will also continue our work to support the transformation of scientific breakthroughs into breakout businesses. By the end of this year we will decide and announce changes to EU regulations in five key growth industries: digital technology, life sciences, green industries, financial services and advanced manufacturing. The Chief Scientific Adviser, Sir Patrick Vallance, will also lead new work on how we should change regulations to better support the safe and fast introduction of emerging new technologies.
It has been impossible to condense the full range of action in the Autumn Statement into my opening speech, and I look forward to responding to all noble Lords’ contributions at the end of the debate, but I hope I have been able to demonstrate that in the midst of a global economic challenge, this Government will respond in the way this country does best. United, we will use our resourcefulness and resilience to get through the storm. We will shelter the most vulnerable as we do so. We are taking difficult decisions but, in doing so, we are bringing about stability and security and setting our country up for growth in the days ahead. I beg to move.
Baroness Penn (Con)
My Lords, I thank all noble Lords for their contributions to this debate. Given the range of expertise that has been contributed today, I will spend my time directly addressing as many noble Lords’ comments as possible.
Many noble Lords reflected on the economic circumstances that we find ourselves in. My noble friend Lord Lamont is correct in his analysis that there is no greater enemy than inflation. He reminded the House, as did the OBR, that the inflation we face is predominantly down to global forces, as my noble friend Lord Flight also noted. High inflation puts pressure on households managing those rising costs and, in turn, dampens growth. We have to be honest with people that we cannot shelter them from all of the effects of this economic storm. In our fiscal policy, we must be careful not to stimulate the economy in a way that makes it more difficult for the Bank of England to reduce inflation, leading to higher interest rates. So we have had to target our fiscal policy carefully.
But it is worth reminding noble Lords of the extent of the support that we are providing. Overall policy decisions since the Spring Statement provide support of £64 billion this year and £40 billion next year, which represents a combination of universal support, through the energy price guarantee, and targeted cost of living payments. In response to the noble Lord, Lord Rogan, the Government are working to ensure that the people of Northern Ireland receive energy bills support scheme support as soon as possible. I reassure him and the people of Northern Ireland that support will reach them this winter.
We have also taken action to uprate pensions and benefits in line with inflation, which I note, in the context of the contribution of the noble Lord, Lord Rooker, was a recommendation from Barnardo’s. We have accepted the Low Pay Commission’s recommendation to increase the national living wage by 9.7%.
Some noble Lords, including the noble Lord, Lord Fox, questioned the profile of the Government’s consolidation plans. But, again, we have had to strike a balance, providing support to households and the economy while inflation is high and growth is low—then, once growth returns, we will increase the pace of consolidation to get debt falling. The OBR delivered its verdict on our plans, saying that the recession will be shallower than it would otherwise have been, jobs will be protected and inflation will come down.
I must also correct the assertions of the noble Lords, Lord Hain and Lord Howarth of Newport, the noble Baroness, Lady Jones, and others that these plans are a return to austerity. In 2010, total departmental spending fell by about 3% a year; in this Parliament, it will rise at 3.6% a year in real terms. This is not just more money for public services; it is also considerably more money than the Benches opposite have committed to.
The noble Lord, Lord Hain, also claimed that the Autumn Statement would open the door to a Labour Government, but I remain slightly at a loss as to what Labour’s economic plans are. The noble Lord opposite made a valiant attempt to set some of them out, but I remain unclear: does it sign up to the need to consolidate our public finances? If it does, does it agree that we have taken a balanced approach between tax and spend? If it does not, what would it do differently?
I also profoundly, and perhaps unsurprisingly, disagree with the Benches opposite on this Government’s economic record. Over the last 12 years, alongside EU exit, the Government have had the third fastest growth in the G7. Since 2010, we have grown faster than France, Germany, Italy or Japan, and we have the lowest unemployment in nearly 50 years.
I will correct one further point from the noble Lord, Lord Razzall, and others, on the London Stock Exchange missing out to Paris. We had a Question on this the other week, where we addressed in quite a lot of detail why that is not the case. I also thank the noble Baroness, Lady Kramer, for reminding us of Labour’s own record on the economy.
Perhaps it is time for a little more consensus, and, in this debate, I heard more consensus on the need to improve productivity. Many noble Lords—including the noble Lord, Lord Eatwell, my noble friend Lord Horam and others—spoke about the need for greater investment in public sources of growth. The Government agree, which is why public spending on capital investment will remain at the record highs set at the 2021 spending review, delivering more than £600 billion of investment over the next five years. I can only ask the noble Lord, Lord Eatwell, why he could not persuade his own party of the need for this in government, with capital budgets next year being more than double those under the previous Labour Government.
Noble Lords also spoke powerfully of the need to improve private sector investment, and many spoke about the need to support R&D. The noble Lords, Lord Fox and Lord Londesborough, among others, expressed concern about the Government’s planned changes to R&D tax credits for SMEs, and many noble Lords spoke about the importance more broadly of R&D, including my noble friend Lady Blackwood. I assure noble Lords that the Government remain unequivocal in their support for R&D, including recommitting to the largest ever R&D spending increase over an SR period. Our aim is to ensure that the spending is as effective as possible and to do more to work towards a simplified, single R&D tax credit for all.
The noble Lord, Lord Londesborough, asked whether the Government have considered the impact on productivity of the changes that we are proposing. From my experience looking at the R&D tax credit, the officials working on this think of almost nothing other than how we can make the R&D tax credit system the most effective it can be. We must recognise that the SME scheme has become a target for fraud. That is not to say that noble Lords did not make important points on the need to support research-intensive SMEs in particular. Ahead of the Budget, the Government will work with industry to understand whether further support is necessary for R&D-intensive SMEs without significant changes to the overall costs of the scheme. Over the SR period, we also increasing funding for Innovate UK by 50%, and 70% of Innovate UK’s grants benefit small and medium-sized enterprises.
Also on investment, the noble Lord, Lord Bilimoria, asked about doing more regarding small modular reactors. I agree with him that, for Britain to achieve energy security, a pipeline of new nuclear is needed, alongside the large-scale project that we have committed to in Sizewell C. Today, the Government have confirmed their commitment to set up Great British Nuclear, an arm’s-length body which will develop a resilient pipeline for new builds beyond just Sizewell C.
On energy more broadly, many noble Lords, including the formidable noble Baronesses, Lady Hayman and Lady Jones of Moulsecoomb, raised questions about our approach to energy and climate change. I reassure noble Lords that the Government remain fully committed to reaching net zero by 2050, and to seizing the opportunities for growth through that transition.
On specific questions around the energy profits levy, several noble Lords, including the noble Lord, Lord Sikka, expressed concern about the design of the levy and the investment incentives in it. The Government have always been clear that the tax regime is intended to strike a balance between ensuring a fair tax return for the UK from its resources and continuing to encourage investment in the North Sea, supporting jobs and our energy security. I reassure the noble Lord that the Autumn Statement sets out that the Government expect to raise £41.6 billion from the EPL between 2022-23 and 2027-28, in addition to the £39 billion paid through existing taxes, ensuring that oil and gas companies pay their fair share.
The UK will also receive tax revenues from the investments made under the investment allowance, as and when they generate a profit. Given that these companies are mostly the same ones that are innovating and producing renewable energies, their investments will bring wider economic benefits through jobs, a secure supply chain and more progress towards net zero. Conversely, my noble friend Lord Leigh of Hurley voiced concerns about the impact of the EPL on independent UK companies and suggested that we use an approach more akin to the one that we have taken with electricity generators. His concerns are precisely why we have included such a generous investment allowance, which demonstrates our commitment to encouraging investment in the North Sea to strengthen the UK’s vital offshore oil and gas sector, putting more UK gas on the grid for longer and bolstering our energy security.
The noble Baroness, Lady Hayman, was also concerned about investment incentives for renewables under the electricity generators levy. The EGL is charged on a different basis from the energy profits levy and at a lower combined rate; the EPL is applied to total profits, whereas the EGL applies to only extraordinary returns above a given level. I reassure noble Lords that the electricity generators levy is designed in a way that maintains incentives for investment and preserves the effect of existing government support. Renewable generators will be able to deduct investment costs from their corporation tax.
Lord Eatwell (Lab)
I know that the Minister would not want to mislead the House, so I was very surprised by her figures on government investment. I looked up the OBR figures and, as a share of GDP, public sector net investment is now half what it was in the last year of the Labour Government.
Baroness Penn (Con)
My Lords, the statistics that I gave referred to overall levels of investment, not expressed as a percentage of GDP. I stand by the figures that I gave to the House.
Lord Hain (Lab)
I am very grateful to the Minister, but can I ask her to correct her statement about the last Labour Government’s record? We had 10 years of consistent economic growth, never surpassed in Britain’s economic history, with low inflation, high employment and massive investment in public services, prior to the global banking crisis, for which we were culpable only to the extent that every Government in the world were culpable. Surely, she should correct what she has said in argument to me.
Baroness Penn (Con)
I am not sure exactly which bit of what I said the noble Lord wants me to correct. I stated the Government’s record on economic growth since 2010, and I simply referred to the comments of the noble Baroness, Lady Kramer, on the recession that was also experienced under the previous Labour Government.
I return to the subject of energy. The noble Baroness, Lady Hayman, asked about energy efficiency. Warmer homes and buildings are key to reducing bills, creating jobs along the way and meeting our targets on climate change. That is why we are committed to driving improvements in energy efficiency, with a new ambition to reduce the UK’s final energy consumption from buildings and industry by 15% by 2030. A new ECO+ installation scheme was announced earlier this week.
I disagree with the analysis that this is jam tomorrow; we have £6 billion of new government capital funding that will be made available from 2025 to2028, but that is in addition to the £6.6 billion allocated in this Parliament. The aim of that kind of longer-term projection of funding is to create consistency and allow businesses and the supply chain to build up and plan for the future, which can be something that we struggle with in the provision of energy efficiency measures. We are also launching the energy efficiency task force and expanding our public awareness campaign to help reduce bills for households and protect vulnerable people over the winter and beyond.
In response to my noble friend Lord Leigh of Hurley, on other tax measures and the taxation of US groups trading in the UK, the UK has long been committed to tackling base erosion and profit-shifting, which is why we introduced the diverted profits tax in 2015 and the corporation interest restriction rules in 2017. I am glad that he welcomed progress on Pillar 2, which we will legislate for in the spring 2023 Finance Bill, but I agree with him that we need to make further progress on Pillar 1. That is why we continue to work internationally on finalising Pillar 1, so that the corresponding multilateral convention can be ready for signature in the first half of 2023, allowing for implementation in 2024.
Other noble Lords noted some strange political alliances that seemingly might have formed in the course of this debate. The noble Lords, Lord Sikka and Lord Howarth of Newport, but also my noble friends Lord Bridges and Lady Noakes raised concerns around the Government’s decision to freeze the personal allowance and other tax thresholds. I say to noble Lords that despite the need to increase taxes—I fully acknowledge that freezing thresholds is a tax increase, I am not trying to hide it in any way—given that the personal allowance nearly doubled across the last decade, it will still be £2,150 higher by April 2028 than it would have been had it been uprated by inflation each year since 2010. The noble Lord, Lord Sikka, also asked about the distributional impacts of tax. I cannot answer his specific point, but on average it is households in the poorest income deciles that are gaining the most next year as a result of decisions taken in the Autumn Statement.
I take seriously the concerns expressed by my noble friends Lady Noakes and Lord Bridges. The Government have had to take difficult decisions and we are being honest about that. We want a low-tax economy, but first must come economic stability, and we need everyone to contribute a little towards sustainable public finances. I know it will be little comfort to them to be reminded that the UK tax system remains competitive, with the tax-to-GDP ratio meaning that we are still in the middle of the pack within the G7 and lower than such countries as France, Germany and Italy. As I say, the Government take their challenge on growth seriously and we have taken some tax decisions to prioritise this; for example, keeping the annual investment allowance level that was set in the growth plan permanently at £1 million, rather than reverting to £200,000 from 1 April 2023.
My noble friend Lord Bridges rightly identified a greater range of actions that we must take to set the conditions of growth beyond tax policy. A key area and opportunity post Brexit is regulation, and I hope he will welcome the action on Solvency II that we have announced and the measures in the forthcoming Financial Services Bill, which we will seek to replicate across other growth sectors across the UK economy, such as life sciences, as spoken about passionately by my noble friend Lady Blackwood. Many noble Lords, including the noble Lord, Lord Shipley, and my noble friend Lord Tugendhat, raised the issue of housing. The noble Lord, Lord Shipley, spoke about the need to build more houses for social rent: that is exactly what the Government are doing, through such measures as removing the cap on councils borrowing against their housing revenue account. I reassure him also that we are still committed to ending no-fault evictions.
My noble friend Lady Cumberlege asked about our commitment to community pharmacists and the issue of funding there. The plan for patients set out the further expanded role of pharmacies agreed in the community pharmacy contractual framework for the next two years, as well as an additional £100 million investment to recognise the pressures facing the sector. The Government have also committed to look further by enabling pharmacists with more prescribing powers and making more simple diagnostic tests available in community pharmacies.
In response to the noble Lord, Lord Rogan, I welcome the 25th anniversary of the Belfast agreement and I am extremely pleased that we confirmed in the Autumn Statement that we are funding the planned trade and investment event in Northern Ireland. DIT will work with local partners as this is taken forward, including with Invest NI.
The noble Lord, Lord Bilimoria, asked about defence spending. As I said in my opening speech, we recognise the need to increase defence spending, but before we make announcements on that, we need to refresh the integrated review, which was drafted before Russia’s invasion of Ukraine.
The right reverend Prelate the Bishop of Gloucester referred to the benefit of women’s programmes for preventing female offending and the savings to the Ministry of Justice as a result. In September, the Ministry of Justice announced that almost £21 million will be invested in women’s services to tackle the causes of female offending and cut crime.
The noble Lord, Lord Livingston of Parkhead, asked an interesting question about the difference between the Bank of England and OBR forecasts. Given the number of recent changes in fiscal policy and the volatility in financial and energy markets, the range of external forecasts is wide. Differences will partly reflect when each forecast was produced and the differences in assumptions about government policy, interest rates and energy prices, but I take his wider point.
I congratulate my noble friend Lady Lea on her excellent maiden speech. I know she brings a wealth of economic experience, not least from her own time working in the Treasury. I look forward to working with her in the future.
We have faced two enormous shocks in the last three years. The pandemic has caused supply chain disruption, slowed growth and increased debt levels, and Putin’s war in Ukraine has caused energy prices to spike. This has added up to inflation at levels not seen in a generation, hitting the pockets of families across the country. That is why tackling inflation is our priority. It makes everyone worse off, especially the most vulnerable, so we have taken difficult decisions that will mean taxes go up and spending will not rise by as much as previously planned. When we take into account the need to invest more in areas such as our NHS, it means hard choices to be made elsewhere.
However, I remind noble Lords that we fight these economic challenges from a position of relative strength. Unemployment is close to the lowest level it has been in nearly 50 years, and the UK is forecast to have had the fastest growth in the G7 in 2022. We also have incredible strengths within our country that aid our mission: our teachers, our NHS workforce, our armed services, and everyone who works in our public sector—day in, day out—to deliver the services upon which we rely.
We are inventive and resourceful, and the innovative, intuitive and ambitious people who make up our private sector will drive our growth. Combine this with the decisions taken over the last 12 years and the results are clear to see: employment is up by millions compared to 2010; we have had the third highest real GDP growth rate in the G7 since 2010; renewable energy production is growing faster than in any other large country in Europe since 2010; thousands more children are in good and outstanding schools compared to 2010; and we have record numbers of doctors in the NHS. Now, because of the difficult decisions we take in our plan, we are strengthening our public finances, bearing down on inflation and supporting jobs—all while protecting public services.
The Autumn Statement is a plan that provides stability. It is a plan for growth and a plan for public services. I beg to move.
Lord Skidelsky (CB)
Before the noble Baroness sits down, could I ask a question, please?
Baroness Penn (Con)
There were many questions that noble Lords asked that I did not get to in the time available. Maybe I should write to all those who have participated in this debate to make sure that I address all the points raised but do not detain noble Lords any further.
Lord Skidelsky (CB)
Could the Minister explain how fiscal consolidation, particularly cutting public spending, promotes growth?
Baroness Penn (Con)
My Lords, there is probably a longer conversation to be had, but I did set out how the profile that we have taken in our approach to consolidation supports growth at this time but also gets our public finances on to a sustainable footing. I am now sitting down; I will take no further interventions.
Money Laundering Regulations: Politically Exposed Persons
Baroness Penn Excerpts(2 years, 2 months ago)
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Baroness Hayter of Kentish Town
To ask His Majesty’s Government what further consideration they have given to the impact of Anti Money Laundering Regulations on Politically Exposed Persons.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the recent review of the money laundering regulations concluded that there is still work to do to better understand the risk profile of domestic politically exposed persons—PEPs. It is crucial that the Government fully explore and understand any potential consequences of changing requirements on domestic PEPs before making any amendments to the UK’s anti-money laundering regime. This work is ongoing and part of the Government’s wider economic crime strategy.
Baroness Hayter of Kentish Town (Lab)
I thank the Minister for that Answer, but I am afraid that I do not understand it. On 5 July, she said that the review had been concluded and that no change was needed, despite all the evidence that she has had from Members of your Lordships’ House. Unbeknown to us but very helpfully, after that, the Lord Speaker wrote to the FCA on 21 July. However, the FCA’s reply on 15 August simply repeated that firms should act proportionately in dealing with PEPs. Two hours ago, we all received a letter from the Minister which says: “It cannot be acceptable that Parliamentarians and their families are denied access to personal finance.” However, as we will hear from the noble Lords, Lord Vaizey and Lord Kirkhope, and others no doubt, banks are still refusing to handle accounts of their family members, and other colleagues of mine are finding that their accounts are being closed. The system is not working. Can the Minister agree to meet me and other concerned Members of your Lordships’ House, together with the FCA and HMT officials, so that we can make progress? Clearly, led by itself, HMT is unable to do so.
Baroness Penn (Con)
I would be very happy to meet with the noble Baroness and other interested Peers to see what more we can do. I will clarify one point. The review of the money laundering regulations concluded earlier this year. One of the outcomes was that there was more work to do to better understand the risk profile of domestic PEPs. That work is ongoing. When we have a better understanding of the risk profile and any potential consequences of changing the classification of domestic PEPs, we will take our work forward accordingly. In the meantime, it is important that people are treated fairly by the financial institutions that they work with. We have included a list of points of contact for some of the major banks so that people who are having problems can receive help where it is needed. If Members have issues, I encourage them to make use of the Financial Ombudsman Service, if they need to, as a route to address any problems.
Lord Kirkhope of Harrogate (Con)
My Lords, I thank my noble friend the Minister for her letter, which clarifies the current position to some extent. As one of those who was involved for a long time in drafting these regulations in Brussels, it was absolutely required that we should put “proportional” into them—unusually for regulations in Brussels. Can the Minister do more to force the FCA and the financial institutions to take some notice of that proportionality? Can we please make sure that this indiscriminate application to public servants—and their families, including my own—of draconian measures can be put aside, and that we can take a sensible and proper view towards anti-money laundering arrangements?
Baroness Penn (Con)
I absolutely agree with my noble friend on the importance of that word and of a proportionate approach being taken in the implementation of these regulations. I know that concerns have been raised in the past. We have convened previous meetings with the FCA and the banks to make this message known to them. Hopefully, the points of contact that we have provided will provide a further remedy to any noble Lords who are affected. We are also looking at the broader system to see whether we can change the designation of domestic PEPs. However, we need to look very carefully at this and take our time to make sure that we do that work properly.
Lord Sharkey (LD)
My Lords, the FCA guidelines, which are five years old, make clear that Members of this House should be treated as low risk unless there are other factors at play. There is no point to these guidelines if they are not being enforced. What assessment have the Government made of the FCA’s record on enforcement of the guidelines? Have any sanctions ever been imposed on those who break them?
Baroness Penn (Con)
My Lords, as I have said, we have had an ongoing dialogue with the FCA around the guidelines. In turn, they have had engagement with those that they regulate. I do not have any statistics for the noble Lord on enforcement action. However, one area where we have some statistics is that, since 2018, the Financial Ombudsman Service has received fewer than 10 complaints in this area. That is not to say that people have not experienced problems, but I would encourage them to use the points of contact and, where they are experiencing problems, to advance those complaints, so that we can have better data with which to assess the impact of the issue.
Lord Vaizey of Didcot (Con)
My Lords, I have used my noble friend the Minister’s point of contact. My son was refused an account with Starling Bank. I got through to a senior executive there, who stated to me very clearly that: “It is our policy not to give accounts to the relatives of Members of the House of Lords.” That is about as clear a breach of the regulations as you could have. Will the Minister use her convening power to collect in one room the banks, the FCA and Treasury officials? Let us sort this out and introduce some common sense.
Baroness Penn (Con)
I cannot comment on an individual case, but I can be absolutely clear with my noble friend that the FCA has been clear that designation as a PEP should not be a reason to end a business relationship. I said to the noble Baroness, Lady Hayter, that I am very happy to have a meeting, and I will use all the efforts of my convening power to bring to the table those I cannot directly commit to attending the meeting today.
Lord Hunt of Kings Heath (Lab)
My Lords, the Minister has said on two or three occasions that great care is needed in any review of the regulations, despite the fact that it is quite clear that the FCA guidance is not being followed by a number of banks. What is this huge amount of work that still needs to be done before we see a change in the regulations?
Baroness Penn (Con)
My Lords, there is a difference between looking at the FCA guidance and whether it is being properly adhered to and whether that could help solve the problem that noble Lords are talking about. We have made continuous efforts to look at that but, given the wider sentiment we have heard in this House, we also want to look at whether we can make a more substantive change to how domestic PEPs are regulated. That is a wider piece of work that could have unintended consequences, so we need to look at that carefully.
Lord Forsyth of Drumlean (Con)
My Lords, what was the point of us leaving the European Union to take back control if Ministers cannot direct the FCA to show a bit of common sense? I declare my interest as chairman of a bank.
Baroness Penn (Con)
My Lords, the standards for our anti-money laundering regulations come from the FATF, which defines an international approach. My noble friend is right that we have the opportunity, having left the EU, to adapt the anti-money laundering regulations to make them more proportionate and more effective. We have already done that in a number of areas, and the piece of work we are going to do, looking at the evidence around the risk of domestic PEPs, is a further area in which we can do some work.
Lord Macpherson of Earl’s Court (CB)
My Lords, I declare an interest as chairman of Hoare’s bank. To pick up on the point made by the noble Lord, Lord Forsyth, it is now several years since we left the European Union. The Treasury has regulatory powers to change the relevant legislation, and the Government are determined to prove the benefits of Brexit. Surely it is time to use those powers to make progress on this issue.
Baroness Penn (Con)
I agree with the noble Lord that we should make use of the new powers we have. As I said to the House previously, we have already made a series of amendments to the money laundering regulations to reduce unnecessary burdens—for example, scrapping the requirement for the creation of a bank account portal, which was seen as disproportionate. There is more work to do in this area, and that work is under way. We published the review of our anti-money laundering regulations in June, and we are committed to consulting on broader changes to our approach. The main focus of that is on the supervisory bodies for anti-money laundering regulations, but this issue is also being looked at as part of that work.
Farmers and Landowners: Tax Consequences
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Lord Carrington (CB)
In begging leave to ask the Question standing in my name on the Order Paper, I declare my interest as a farmer and landowner. I also take this opportunity to humbly apologise to the House for failing to declare these interests during a supplementary question I was scrambling to ask during last week’s Question on the private rented sector.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, farming is going through the biggest change in a generation. The Government are introducing policies in England that work for farm businesses, food production and the environment. Some stakeholders have raised concerns that tax rules, particularly inheritance tax rules, might be a barrier to land use change in certain situations. The Treasury, HMRC and Defra have been working closely to consider the potential need for changes to the tax system, including where rules may need to be clarified.
Lord Carrington (CB)
I thank the Minister for her kind words; however, we need a little more action. It would seem to be a platitude to say that the tax system should align with the Government’s climate change and environmental objectives but, over a year since the passing of the Environment Act, there is still no legislation looking at how the tax system effects the sequestration of carbon and biodiversity net gain. Can the Minister confirm that these activities will have the same tax status as traditional farming activities, and be considered as trading income rather than investment income? Secondly, can she confirm that these activities will attract the same inheritance tax reliefs currently available? Without such reliefs, higher agricultural land values as a result of carbon sequestration and biodiversity net gain will disincentivise the farmer from joining these schemes.
Baroness Penn (Con)
I am afraid that I cannot give the noble Lord the Answer he desires. I can confirm that HMRC is discussing the issues he has raised with Defra both to clarify how existing law applies, for example, to the production, sale and use of carbon units in different environmental schemes, and to look at the inheritance tax question he raised. The Government have shown that we will act to clarify the tax rules where appropriate for the farming programme. For example, legislation is being introduced to clarify that payments under the lump sum exit scheme for farmers are treated as capital receipts and, therefore, charged to capital gains tax or, for companies, to corporation tax as chargeable gains.
Lord Palmer of Childs Hill (LD)
My Lords, I hear what the Minister says but the government paper of October 2021 said that the Government would
“review guidance on the tax treatment of trees and woodlands, to provide greater clarity to landowners on how new and existing trees on their land affect tax liabilities.”
Nothing has been forthcoming. Can the Minister update the House on the progress of the review? She mentioned HMRC but most people do not know what the guidance is.
Baroness Penn (Con)
My Lords, we are iterating our approach as we develop these schemes. Quite a lot of them are new, and many different aspects are being piloted or developed. It is important that, as development happens, we take into account the tax considerations and implications of the new schemes. I can reassure noble Lords that we are aware of some of these questions and issues. We are looking at them very closely and, as the policies are developed, we are taking that into account in the Treasury’s input into Defra schemes.
Lord Jones (Lab)
My Lords, does the Minister guarantee that her taxation policies will not bear down unjustly and negatively on the upland farming areas of England and Wales? I have in mind the Borders, Cumbria, the Pennines, Cefn Gwlad—the heartland landscape of Wales—and the moorland communities of the south-west. Does she acknowledge that, already, besides taxation, the big problems are elevation and climate, and that these historic communities do not need further problems arising from her department’s taxation policy?
Baroness Penn (Con)
I reassure the noble Lord that we are cognisant of the need to ensure that our tax policy and our environmental land management schemes are working with and not against each other. It is an area of some complexity. With respect to how different farmers are affected—the noble Lord mentioned upland farmers—we are trying to look at the whole system and its different levels of complexity to make sure that we get to the right approach.
Baroness Bakewell of Hardington Mandeville (LD)
My Lords, the current environmental land management schemes have three elements: the sustainable farming incentive, which is up and running, and the local nature recovery and landscape strands, which are still in pilot stage and will not be fully launched until 2024. Farming is a profession that requires very long-term planning. How do the Government expect farmers to engage fully with ELMS if they do not know what the impact on them will be, either financially or in expected tax commitments?
Baroness Penn (Con)
Part of what the noble Baroness alighted on reflects our approach: as we pilot and iterate these schemes, we will learn and look at their implications for taxes. How they are designed might have different impacts, so we cannot prejudge that. I reassure noble Lords that tax rules should not have a bearing on many environmental activities under the ELM schemes, such as improving soil health. Many farmers already undertake these activities or have changed their land use within the tax rules currently in place.
Baroness Hayman of Ullock (Lab)
My Lords, I listened carefully to the Minister’s responses. There are a lot of doubts among farmers about what ELMS will actually mean, and there is too much uncertainty to allow them to plan properly for the future. Does the Minister properly understand why some parties are just not comfortable about entering into a scheme for which the tax implications are unclear, and which might not even exist in a few years’ time? Farmers need clear advice today, so when will the Government be able to provide that clarity?
Baroness Penn (Con)
As I said, many of the tax rules should not have a bearing on many of the environmental activities under ELMS. We already have several schemes under way, with a high take-up among farmers. But we understand that there could be broader implications, particularly for the landscape recovery scheme, and we are carefully looking at this. The 22 initial projects are receiving funding through that scheme, and people have felt able to sign up to them under the existing tax rules and systems. But we will look at those projects and implications as part of our design.
The Earl of Caithness (Con)
My Lords, I urge my noble friend to look urgently at this problem, which is very serious for farmers and landowners, who cannot make a decision with any certainty, given that the tax regime might change. What incentive is there for a farmer to do the good thing for biodiversity if they will be taxed badly for it?
Baroness Penn (Con)
As I said, the tax rules should not have a bearing on many environmental activities under the ELM schemes. We are cognisant, particularly where there may be a change of land use, that this could invoke questions of tax treatments—although, even if the land may not be used for agriculture any more, it may often still qualify for business property relief, for example, as an alternative inheritance tax relief.
Baroness Meacher (CB)
My Lords, following up the question from the Labour Front Bench, could the Minister indicate the timing? When will the Government be able to clarify these issues in relation to the many parts the Minister referred to?
Baroness Penn (Con)
As I understand it—I am working hard to make sure that I fully understand the tax implications of these schemes, but I am not yet as well versed in these things as my noble friend Lord Benyon—we are still designing the landscape recovery scheme and piloting different approaches. Those schemes are not expected to be rolled out in full until 2024, so that work is ongoing. On other schemes that are already in place, we do not expect the larger-scale schemes for farmers, such as the sustainable farming initiative, to have significant tax implications for farmers.
Stock Markets
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The Lord Bishop of St Albans
To ask His Majesty’s Government what assessment they have made of the impact of Paris overtaking London as Europe’s most valuable stock market.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, according to the Global Financial Centres Index, London is the second highest-ranked financial centre in the world after New York, while Paris is 10th. The UK continues to be the pre-eminent financial centre for derivatives and foreign exchange trading. In all equities instruments, the UK almost doubles France’s total market capitalisation at $6.2 trillion. To support the UK’s competitiveness, the Government are undertaking ambitious reforms to keep pace with innovation.
The Lord Bishop of St Albans
My Lords, I totally accept that there are various people trying to analyse the levels of trading—although it was a wake-up call last year when on some grounds Amsterdam was seen to overtake London as the premier financial trading centre, and last week some of those organisations claimed that Paris had overtaken London as the premier stock exchange. In the light of us trying to build an economy which properly rewards our workers and protects our environment, what are His Majesty’s Government doing to increase confidence in London’s reputation in financial trading and as the premier stock market?
Baroness Penn (Con)
I am so glad that the right reverend Prelate has given me a chance to set out what the Government are doing. The Financial Services and Markets Bill has just completed its work in Commons Committee, setting forward a whole range of reforms to inherited EU law to make us more competitive. He also mentioned the environment. The Government’s ambition is to make London the premier place for green finance, to ensure that our financial markets take into account the challenge of climate change, so that we then can ensure that we are pursuing green growth across the whole of our economy.
Lord Lilley (Con)
My Lords, having lived and worshipped for nearly 40 years in the diocese of the right reverend Prelate the Bishop of St Albans, I have benefited greatly over the years from the spiritual advice that I have received from his predecessors and my local clergy. But is my noble friend aware that this is the first time I have ever heard a bishop of the Church of England complain that the stock market is not high enough? Is that because the bishops have ceased to worry about spreading Christianity and now propose the worship of Mammon, or is it simply a delayed anti-Brexit point, which is not the role of the bishops?
Baroness Penn (Con)
I cannot speak for the right reverend Prelate but he mentioned two things. One was ensuring green growth, which I have addressed, and the other was workers and jobs. Maybe he knows that there are 2.3 million jobs supported by the financial services sector, with two-thirds of these outside London in finance hubs including Birmingham.
Lord Anderson of Swansea (Lab)
My Lords, what is the Government’s considered view on which provides the greatest pressure on the standing of London as a financial centre: Brexit, or the chaos and instability caused by the last Conservative Government?
Baroness Penn (Con)
My Lords, I do not accept the premise of the noble Lord’s question, which he may be unsurprised to hear. In fact, in 2021, over 120 companies chose to list in London, the highest number since 2014 and ahead of its European competitors. These listings raised a total of £17 billion, the most raised in 15 years.
Lord Razzall (LD)
My Lords, I am sure that the noble Baroness must accept that in 2015 the value of the London Stock Exchange was twice that of the French stock exchange, and today it is lower. Will she also accept that there could be a number of reasons for this? First, it could be, as the Governor of the Bank of England said this week, that the markets have lost confidence across the board in the UK economy. Secondly, could it be because of the damage to the economy that the previous Prime Minister did in her 44 days? Thirdly, could this be—whatever the noble Lord, Lord Lilley, might think—a result of Brexit, as the Times said today? Or does she agree that it is all three?
Baroness Penn (Con)
I think the noble Lord forgot to mention a global pandemic and Putin’s war in Ukraine. He also forgot to acknowledge the point that I have made throughout this Question that London continues to be either the highest or second highest-ranking financial centre in the world.
Lord Bellingham (Con)
My Lords, obviously we cannot be complacent, but can the Minister remind the House that Paris has 795 listed companies on its exchange, whereas London has 2,484 companies. We should look not just at the most valuable companies, such as LVMH, which is quoted in Paris and has a market capital of over €300 billion, but at all those small companies that are raising capital on the London market.
Baroness Penn (Con)
I think my noble friend has reminded the House on my behalf of those figures. I take the opportunity to say that we are not complacent about London’s position, and we are doing a lot of work beyond the Financial Services and Markets Bill to ensure that it remains competitive—the listings review from the noble Lord, Lord Hill, the second capital raising review and the wholesale markets review, among other pieces of work. The FCA has already delivered a number of rule changes based on the listings review to ensure that we remain competitive.
Lord Rooker (Lab)
Is not London the money laundering capital of the world?
Baroness Penn (Con)
The noble Lord will know that risks come alongside being a premier financial centre. The important thing is that we take action to address those risks. That is what the Government have been doing and will continue to do. We had part one of the economic crime Bill in the previous Session and part two will be forthcoming.
Lord Watts (Lab)
My Lords, the rest of Europe faces the same problem as the UK. Why are we are being hit harder than many other European countries?
Baroness Penn (Con)
The noble Lord is right in one respect: both the rest of Europe and the UK face heightened energy prices as a result of the war in Ukraine, and jurisdictions such as the US do not face equal pressures. But the UK also faces a tightness in its labour market that we see in the US, for example, that is not seen in other European countries. Factors have come together to make things harder for the UK in the current circumstances.
Lord Houghton of Richmond (CB)
Is it possible to produce a definitive ranking order of the causes of our economic woes, specifying war in Ukraine, Brexit, Covid and a defined period of government mismanagement? It seems to me that everybody hides behind a mix of them. Is it possible to have an independent and defined ranking order of them to cut away some of the dispute?
Baroness Penn (Con)
Our biggest economic challenge right now is the high levels of inflation that we are facing as a country, and the biggest driver of that inflation is heightened energy prices caused by the war in Ukraine. Yes, there are other factors at play, but I think those two things are undisputed.
Lord Stoneham of Droxford (LD)
The fact of the matter is that the Government have weakened the City by their policies towards the single market and Europe. I wonder what the Government are doing about the fact that people who work in the City selling financial services—I declare my interest, as a member of my family works in the City—cannot sell or are restricted in selling in Europe unless they are accompanied by somebody from the country in Europe where they are trying to sell, because of the deal we have with Europe. This is weakening the City.
Baroness Penn (Con)
I disagree with the noble Lord. I think that our leaving the EU presents opportunities for the City, which is exactly what the Government plan to capitalise on through the Financial Services and Markets Bill and other things that I have already mentioned. We do not just trade with Europe, and we continue to be one of the pre-eminent global financial centres in the world.
Lord Kamall (Con)
My Lords, my noble friend is absolutely right to say that there are a number of ways of measuring the rankings of different financial centres. In the ranking to which the Question refers, one reason why Paris has overtaken London is because of the value of LVMH—one company, which has doubled its share price. It shows the challenge of making sure that we are attracting growth companies. What are the City and Government doing to make sure that we continue to attract growth companies to list in London?
Baroness Penn (Con)
My noble friend is absolutely right that one factor in play here is that different sectors are represented more strongly in the different stock markets, which have been affected differently by the global uncertainty and inflationary pressures that we have faced. On his point about what we are doing to attract investment into the UK, I say that two elements of the growth plan that were retained were around the annual investment and small enterprise investment—I will get the acronym wrong, but I refer to the other investment allowances. We consider that to be incredibly important. I have mentioned before a number of the changes to listing rules including, for example, dual class share structures, which have been taken forward by the FCA.
Bank of England: Libor System
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I thank my noble friend Lord James of Blackheath for securing this debate. I too wish him well with his recovery. I am grateful to other noble Lords for their contributions. I recognise the work my noble friend has done to raise the profile of issues relating to Libor. However, it would of course be inappropriate for me to comment on any specific cases.
As we have heard, Libor is a benchmark which seeks to reflect the rate at which banks lend to each other in wholesale markets. It has been important historically not just for how our financial services industry operates but for mortgage holders, borrowers and lenders in households and businesses across the country and internationally. At its height, approximately $400 trillion of financial contracts referenced Libor. It was published in all major currencies, including the dollar, sterling, yen, the euro and the Swiss franc, and for various time periods. As noble Lords have described, in 2012, it emerged that Libor was being manipulated for financial gain, in what became known as the Libor scandal.
To digress slightly, I want to reiterate the point that this Government’s position on financial market abuse is clear: it undermines the integrity of public markets, reduces public confidence in them and impairs the effectiveness of financial markets. Therefore, those found guilty of such an offence should be held to account.
The noble Baroness, Lady Kramer, asked whether we had a figure for the overall impact of Libor manipulation. I do not believe that we do, but the seriousness with which we took this issue and the response by the regulators and law enforcement show that, even without such a figure, we appreciate the scale of what was implied by the scandal.
I am sure we will have much more detailed debates on these issues in the forthcoming Financial Services and Markets Bill but I reassure the noble Baroness that it is a question not of deregulating the markets but of improving the regulation and having regulation that is better tailored to the UK. We have the opportunity to look at what works in this country rather than across 27 different jurisdictions. That is the spirit in which the Government are taking forward that Bill. I hope that provides some reassurance.
Following the subsequent government-commissioned Wheatley review and the establishment of the Parliamentary Commission on Banking Standards, Libor came under the regulatory jurisdiction of the FCA in 2013. This led to significant improvements to the regulation and governance of Libor. However, following the 2008 financial crisis, the ways in which banks raised short-term capital changed fundamentally. In particular, banks increasingly moved away from borrowing from other banks to fulfil funding needs. As a result, the unsecured interbank lending market, which Libor seeks to measure, became increasingly shallow.
Furthermore, in light of fundamental changes to bank capital-raising, in 2014 the G20’s Financial Stability Board declared that the continued use of Libor represented a
“serious source of … systemic risk”
and encouraged national authorities and financial institutions to move to alternative rates. In line with this transition plan, in 2017 the FCA announced that Libor would be published only until the end of 2021. Since then, the Government, the FCA and the Bank of England have worked together to support a market-led transition away from Libor.
As noble Lords in this Room will know, because the two noble Lords opposite me were here for the passage of the Financial Services Act 2021 and, unlike me, for the Critical Benchmarks (References and Administrators’ Liability) Act 2021, these gave the FCA the power to compel the production of synthetic Libor rates. I note that on the basis of the framework the wind-down of Libor is progressing well. Synthetic Libor provides for continuity of a Libor setting for up to 10 years. This is for the benefit of the contracts which have proved very difficult to transition—the tough legacy contracts; in other words, it is a safety net for tough legacy contracts.
The noble Baroness, Lady Kramer, said that synthetic Libor is no longer available. That is not quite correct. Since the end of 2021, we have seen a greater than anticipated reduction in the overall stock of Libor-referencing contracts, but synthetic Libor remains available where it is needed. The noble Lord, Lord Tunnicliffe, asked about additional steps the Treasury and regulators have taken to assist those who are unable to transition in time. The synthetic Libor rates for certain sterling and yen settings are there for the benefit of those who were unable to transition. The FCA will consider the data on remaining exposures when taking decisions on how long to continue its rates.
The noble Lord asked specifically about when a final decision on the winding-up of the synthetic three-month sterling Libor rate will be taken and how much notice will be provided. Over the summer the FCA published consultations on the future of the remaining Libor rates. In line with its requirement to consult on its decisions relating to synthetic Libor, the FCA will respond to the consultations in due course, but it understands and factors in the need to ensure that adequate notice is provided.
The synthetic rates for sterling and yen Libor seek to replicate as far as possible the economic outcomes that would have been achieved under Libor’s panel bank methodology. The FCA selected a methodology in line with the global consensus of firms and regulators, including extensive domestic consultation.
As many noble Lords will know, the synthetic sterling rate is calculated using the Bank of England’s sterling overnight index average—SONIA—which is administered by the Bank of England and, importantly, is based on approximately £60 billion worth of actual transactions of the interest rates that banks pay tomorrow, sterling overnight from other financial institutions and institutional investors each day. This means that SONIA is far more robust and resilient to any risks of manipulation, such as those seen before 2012. By imposing a synthetic methodology based on SONIA, the FCA can provide more time for certain legacy contracts to move to alternative benchmarks, thus reducing the risk of disruption.
The Libor benchmark has been globally important for many years, not just for those who work in financial services but for people across the country and around the globe. But, given the fundamental changes in global finance in the past 20 years, it has been appropriate to transition away from Libor safely and predictably. The UK is the home of Libor and has taken action to support the global, market-led transition away from it, reaffirming our commitment to being a trusted custodian of a global financial services sector.
The work of the UK authorities to encourage the transition away from Libor has been highly successful so far. For instance, of the estimated £30 trillion of sterling Libor exposures outstanding at the beginning of 2021, estimates show that less than 1% now remain on synthetic sterling Libor. I hope that that goes some way to answering the noble Lord’s question about the estimated number of unresolved cases. If we had not played the role that we did, the disorderly cessation of Libor could have presented a significant global financial stability risk because of the vast number and variety of contracts that reference it.
My noble friend Lord James asked what steps the Government are taking to ensure that the Libor system remains available. I hope that I have been clear about why the Government have taken the action they have to ensure a smooth and orderly wind-down of Libor. The Government continue to encourage transition away from Libor to more robust risk-free rates, such as the Bank of England’s SONIA. The Question also referred to the risk of the collapse of interbank lending. The interbank lending market that Libor seeks to measure is of course just one way that banks can fund themselves. Banks have a range of possible sources of funding available to them, including savers’ retail deposits and investors’ wholesale funding, as well as the banks’ capital base. As I said, the way in which banks fund themselves has fundamentally changed since 2008.
Of course, the other thing that has changed since 2008 is that the banking sector is substantially more resilient than before the financial crisis, with higher levels of capital and liquidity. This is because of reforms introduced after the financial crisis that require banks to hold more capital and reduce their reliance on short-term funding, such as interbank lending. For example, banks are now required to hold enough liquid assets to meet their projected outflows for at least the next 30 days, and to have enough funding with a maturity of greater than a year to fund their assets.
In addition, I reassure noble Lords that the Bank of England has a range of tools and facilities that can be called upon to support bank liquidity in the event of market stress, including liquidity insurance facilities, which are used to ensure that it achieves its financial stability objectives. These facilities can be called upon if banks stop lending to each other in the event of market stress.
To conclude, overall, the reforms introduced since 2008 have increased the financial stability of the system and will prevent the costs of banks failing from falling upon taxpayers. The sensible management of the wind-down of Libor is vital not only to the integrity of the UK’s markets but to the UK’s credibility internationally. We have worked closely with international partners in the approach that we have taken, and we received praise from them for that. The Government will continue to engage with regulators to ensure a smooth ultimate end to this transition and, in doing so, underline the UK’s reputation as a well-regulated and effective global financial centre.