(9 years, 5 months ago)
Lords Chamber
That this House approves, for the purposes of section 5 of the European Communities (Amendment) Act 1993, the Government’s assessment as set out in the Budget Report and Autumn Statement, combined with the Office for Budget Responsibility’s Economic and Fiscal Outlook and Fiscal Sustainability Report, which forms the basis of the United Kingdom’s Convergence Programme.
(9 years, 5 months ago)
Lords Chamber
That this House takes note of the economy of the United Kingdom in the light of the Budget Statement.
My Lords, the case that the UK has recovered strongly from its catastrophic financial state in 2010 is hard to dispute—although I am sure some noble Lords will do so. We are now the fastest growing major advanced economy, growing at our fastest since 2007. Employment is at a record high: nearly 2 million jobs have been created during this Parliament, and the claimant count rate has not been lower since 1975. Inflation is at an all-time low. On Friday, the FTSE broke through 7,000 for the first time—both a sign of confidence and a further boost to it. The eye-wateringly high budget deficit of 2010, which represented over 10% of GDP, is forecast to halve to 5% by the end of this financial year. Debt as a proportion of GDP is forecast to fall in 2015-16, in line with the original target set in 2010 by my right honourable friend the Chancellor.
The evidence that this is a journey from “austerity to prosperity” is provided by the latest projections from the OBR for real household disposable income per head, which show that on average households will be around £900 better off in 2015 than they were in 2010. However, risks remain. The deficit is still too high, and productivity too low—challenges the next Government will have to address. Our fiscal plan is to eradicate that deficit by 2018-19, which will require around £30 billion of further consolidation over the next two years—2016-17 and 2017-18. That was initially laid out in December’s Autumn Statement and was reiterated in last week’s Budget. If the Conservative Party is elected, it would achieve that through reductions in the following three areas.
Some £13 billion—from a total department bill of £365 billion—represents a continuation of the same rate of saving we have achieved in this Parliament, during which, according to independent polls, satisfaction with public services has risen; that is not surprising when, for example, crime is down. We will carry on reforming public services by focusing on achieving outcomes more efficiently. A further £12 billion of savings will be found from our very large welfare budget of over £200 billion this year, which must be managed to control cost, and structured so that it pays to work. Finally, £5 billion will come from a variety of measures to reduce tax evasion and avoidance. Again, we have a proven track record of success here. Every year we have introduced initiatives to tackle evasion and avoidance—most recently last Thursday, by my right honourable friend the Chief Secretary to the Treasury. We should be particularly proud that the Prime Minister has put tackling tax erosion at the top of the G8 agenda, as that can be effectively addressed only through international co-operation.
By following our fiscal plan, in the final year of this decade—2019-20—public spending will once again be able to grow in line with the economy while continuing to pay down the national debt. At that point, government spending will represent 36% of GDP—higher than in 1999-2000, when the spending crescendo started, fed by the illusion that the cycle of boom and bust had somehow been abolished, an approach which left this country so exposed when the financial crisis struck. Our aim is not smaller government per se, just better and smarter government. The discipline of extracting better value for taxpayers’ money is healthy—and government needs to remind itself that it is spending taxpayers’ money, not its own.
We need to build in resilience to our public finances to absorb the shocks that experience tells us will inevitably hit our economy. That involves not only reducing debt in the good times—the right thing to do for future generations—but also reforming and derisking the banking sector, which was our priority early in this Parliament. We are now able to recoup some of the £192 billion spent bailing out the banks, with our ongoing disposals of Lloyds Bank shares and the securitisation of mortgages from Northern Rock and Bradford & Bingley. It is, therefore, appropriate that my right honourable friend the Chancellor chose to use these proceeds to pay down our national debt and not to indulge in pre-election giveaways.
Our unrelenting focus on fixing the economy is right. Without a strong economy, we will not be able to invest in what we care about most—the NHS, the education of our children and the defence of the realm. Without a credible plan for the economy, promises in other areas are meaningless. One of this Government’s most valuable legacies will be our commitment to the transparency and independent scrutiny of public finances. We set up the independent OBR, imposed a Charter for Budget Responsibility and publish, at every fiscal event, a distributional analysis of the effects of policy changes. It is now much harder for a Chancellor to fix a problem by plugging an unrealistic assumption into a forecast or to avoid a genuine debate about the choices he or she has made.
Of course, the least painful way in which to reduce the deficit is to increase tax receipts by growing the economy. At the beginning of this Parliament our recovery was held back by a combination of the profound impact of the financial crisis, the continuing problems in the eurozone, and a bout of commodity inflation. As a result, growth picked up only in 2013, at a rate of 1.7%, improving to 2.6% in 2014. At 2.5% for 2015 and 2.3% for 2016, the OBR’s growth forecast is at the modest end of the range; if we achieved the Bank of England forecast through to the end of 2017, this would represent an additional £25 billion of GDP in real terms, a potential upside for the future. However, there are also significant downside risks to this forecast growth, beyond our control, as the UK is not immune from Greece exiting the euro in a disorderly fashion, the situation in Ukraine and Russia, potential weaknesses in emerging markets, or the market impact of how the US Fed may choose to exit its current low interest-rate policy.
Economists attribute continuing low productivity growth, both in the UK and elsewhere, to the lingering after-effects of the financial crisis. Reigniting productivity growth is essential for our prosperity, and indeed the OBR forecasts a small increase of 0.9% this year, followed by an increase of 2.5% from 2017. This is credible, if you look at the performance of some of our key manufacturing sectors, such as cars, and service sectors, such as retailing, as well as the opportunities for growth spurred by innovation in technologies such as driverless cars, medical diagnostics and 3D printing. An improved outcome depends in part on the continuing recovery of the banks, so we have a fully functioning financial system, lubricating the reallocation of the economy’s assets to their most efficient uses.
This Government have consistently pursued policies to enhance our growth and productivity through an attractive tax environment and investment in infrastructure, education, skills and training. We have introduced a national infrastructure plan, setting out how we will meet our infrastructure needs for the future. At Autumn Statement, the Government laid out the most ambitious plans in a generation for our transport infrastructure, with huge investment in roads and rail. In this Budget, we set out our strategy for our communications infrastructure, building on our current plan to deliver superfast broadband to 95% of the UK by 2017, by investing in clearing more spectrum to improve mobile services, and setting a new ambition for ultrafast broadband to become available for nearly all. We also built on our education reforms at Budget by introducing postgraduate loans for master’s and PhD students, targeted at supplying the high-end skills that employers have specified. I was delighted to see Sir James Dyson’s support for design engineering at Imperial announced earlier this week.
The tax environment is obviously crucial and we have reduced taxes to stimulate business and investment, illustrated in this Budget by our support to the oil and gas industry. We now expect the companies involved to realign their cost bases to a lower oil price to free up capital for additional investment to boost production in the UK continental shelf. The announcement last week that the Government will carry out a wide-ranging review of business rates will ensure that they are modernised to suit the 21st century.
My right honourable friend the Chancellor has personally spearheaded the northern powerhouse, a second great engine alongside London, for the UK economy. This is based on consolidating northern cities into a super-conurbation, bringing them together through investment in transport and exploiting their strengths in, for example, science and advanced manufacturing. The transport strategy being devised by Transport for the North is aimed at improving connectivity across the region, so that it is not only Manchester and Leeds which benefit but Liverpool, Sheffield, Hull, Newcastle and other cities. However, we are, of course, backing all the regions. We would be delighted to see a south-west powerhouse too.
We want more cities and local authorities following in the footsteps of Manchester and West Yorkshire, with local leaders seizing the opportunity to make key decisions and unleashing higher growth in their areas. The simple theory is that if the long-term growth rate of the slower-growing regions was raised to the forecast rate for the UK as a whole, this could add an extra £90 billion to the UK economy by 2030.
Our strategy is working. Current growth is indeed propelled by business investment, not the household debt that has fuelled past cycles. It is well spread across services, manufacturing and construction and it is geographically balanced. The favourable verdict business gave the Budget speaks for itself. However, this confidence, which is built over the long term, is easily lost by ill thought through interventions prompted by perceived political advantage which only damage the health of the British economy. I am afraid that the Opposition’s foray into the energy markets, criticised by the CBI earlier this week, is a perfect example of what not to do. We now have a situation where investors in energy are reluctant to commit to the UK until after the election—they now regard other countries as less risky, undermining the many years spent building our reputation—and where energy companies are incentivised not to pass on current cost savings to consumers now because they may have price cuts imposed on them later. That is not the way to help businesses succeed or the way to increase living standards.
I will try to shed some light on the living standards debate that the Budget has stimulated. Let us start with the most important fact: the reason living standards fell was the financial crisis and it is people at the bottom of the income scale, particularly those who lost their jobs, who were hit the hardest. The reason living standards have taken some time to recover was the depth of that crisis. In the long run, only productivity improvements will drive the rise in living standards we all seek. That is why growth policies are key.
During the difficult post-crisis period, the Government intervened in the economy in many critical ways to support living standards. Keeping the banks afloat was step one, accompanied by monetary easing to maintain interest rates at record low levels, protecting people with mortgages. The most powerful support to living standards has been the extraordinary performance of the jobs market. Some predicted that adherence to deficit reduction could only result in a jobs Armageddon. That could not have been more wrong. While 400,000 public sector jobs have disappeared, more than five times as many private sector jobs have been created, mostly full-time and skilled. The number of those on jobseeker’s allowance has fallen by 700,000. The youth claimant count is at its lowest since the 1970s. These are not dry statistics. These are real people whose lives have been transformed, and this is a nationwide phenomenon, with all regions benefiting. Alongside job creation, we have put more cash in people’s pockets.
I am grateful to the Minister for giving way but he has just made two comments that are very hard to reconcile. First, he said that living standards depend on productivity growth. He then referred to jobs growth. However, there has been no productivity growth; in fact, the growth in productivity since 2010 has been zero. How does the Minister think that living standards will rise fundamentally if we do not make productivity growth our top priority, as gross national product growth is not the same thing?
I entirely agree with the noble Lord. My reference to employment simply acknowledged that having a job enables people to protect their living standards. I acknowledge that productivity has not improved in recent years. That is the focus for the future. I have said that productivity is still too low; I agree with the noble Lord on that. It is the key to raising living standards.
As I said, we have put more cash in people’s pockets. We have consistently raised the personal tax allowance from £6,457. That is set to rise to £11,000 in 2017. That enhances take-home pay—a change that has dramatically improved the incentive to work—and has benefited 27 million people and taken 4 million out of tax altogether. We have frozen fuel duty and council tax as well as reducing energy bills. We protected pensioners with the triple lock, so that pensioner poverty is the lowest ever, as well as introducing radical changes to both pensions and savings, which suffer in periods of low interest rates, to give savers much more flexibility and remove most of them from tax altogether.
At the beginning of this Parliament, inflation was eroding living standards, driven above 5% in 2011 by global commodity prices. This position has reversed with inflation now at zero. Motor fuel prices have fallen by 16% and food prices by more than 3%. This is different from the kind of stagnation we have seen on the continent. As a result, we are today seeing rising wages outpace the level of falling inflation. The OECD and the IFS both endorse the use of real household disposable income per head as the best measure of living standards because it includes the effect of tax and benefit changes and employment. On this basis, the latest OBR forecasts show living standards rising at their fastest rate in 14 years. They are projected to improve by over 3% in 2015, leaving them higher in 2015 than they were in 2010 and set to rise every year this decade.
I am proud of this Government’s record in rescuing our economy from the perilous condition we inherited, and I am excited by the prospects of what can be accomplished if we are given the opportunity to see our plan through.
Finally, noble Lords will be aware that this week the Government plan to submit their convergence programme to the European Commission, setting out our fiscal plans. It makes sense to combine a review of this programme with our Budget debate, given their identical subject matter.
I thank noble Lords for an excellent and wide-ranging debate. When I first did a Budget debate, the discussion was all about whether growth would ever return. Today, we are discussing whether having the fastest-growing economy in the world, creating 2 million jobs and having zero inflation is a good thing or not. I will drill a little more into the detail on that.
I had thought that we were talking about this Budget but we have also had an interesting discussion because the party opposite has wanted to wallow in whether it was responsible for the financial crisis, which is an open goal that I can scarcely resist. I think everybody agrees that the recession was caused by the financial crisis, starting off in the American mortgage system. However, as my noble friend Lord Northbrook said, the rate at which public spending had expanded by the time we got to the financial crisis left this economy more exposed than it should have been. This was a problem for all recent Governments, who left us too exposed to the financial sector.
The other point, which is not often raised, is that we clearly had very poor financial regulation in the financial crisis. That exacerbated the problems with the banks. I am afraid that the previous Government were the architects of a highly flawed regulatory system, which failed to detect many of the problems. While I am not saying that they are completely guilty, I am saying that there are some very serious cases to answer.
I appeal to the noble Lord to move on in this debate because we are going to get nowhere with it. The regulation he is talking about was of course fully endorsed by his party. It was absolutely thrust on us but with pressure on all sides to do it. He cannot evade or duck the responsibility in this. This was something that happened outside the UK. It was brought into the UK and we did our best about it. We have already heard my noble friend Lord Layard and others explain how we managed to get the economy back on track. I think that it would be worth moving on.
I am very happy to move on. I did not really bring it up. I was just expanding my perspective on a topic that many noble Lords opposite had rehearsed.
With that incentive, I shall move on to living standards. I think everybody accepts that the financial crisis has created an extraordinarily difficult period. As I said in my opening remarks, it affects people at the bottom end of the income spectrum, people with other difficulties to cope with, more than anybody else. The noble Baronesses, Lady Thornton and Lady Smith, were eloquent on some of those issues.
Would the Minister like us to infer that it did not require any touch on the tiller from the Government for that inequality to increase, and that it was to do only with something inherent in the nature of the economy that we have had this growing inequality? Surely what the Government have done has given a massive boost to inequality.
I will try to deal with facts rather than with emotion. I referred earlier to what I think is one of the better legacies of the Government: the transparency with which we measure things. We do it at every fiscal event. The distribution impact of the fiscal changes under this Government has been more favourable to the bottom end of the income spectrum than in any year of the previous Labour Government. That is what the statistics tell you.
Would the Minister like to tell us what has happened to the top-to-bottom ratio?
Inequality has not increased at all between the previous Government and this Government. That is not to diminish the problems that people at the bottom end of the scale face. This Government have tried to deal with the root causes of poverty: worklessness, low earnings and poor education. That is where the Government’s premier programmes have been addressed. The number of workless households has fallen by about 600,000 under this Government. Many noble Lords, including my noble friend Lord Shipley, have commented on the situation with respect to employment and the number of jobs that have been created. The noble Baroness, Lady Smith, asked how tax receipts could come down when employment went up. The reason was that we moved up personal allowances and took people out of tax. It is as simple as that.
This Government intervened in many critical ways to protect living standards for people. I shall not go through the list again because we do not have time. The noble Baroness, Lady Thornton, and the noble Lord, Lord Davies, cited zero-hours contracts. They represent just over 2% of the total workforce. Of the jobs created, the majority are at the high or middle end and the vast majority of them are full time. The party opposite should accept that creating 2 million new jobs is okay. It does not have to keep describing what the problems with it are. It is actually a good thing; it is part of the recovery. It is much better to have those people in work. As I have said, the jobs are principally at the middle and high end and they are permanent jobs.
Our focus has been on trying to protect the young and old. We have protected pensioners through the triple lock. The measure again tells us that pensioner poverty is at an all-time low. I listened carefully to the comments made by the noble Baroness, Lady Thornton, about disability. Probably my most rewarding experience in the past 10 years was working on the Paralympics and seeing the difference that they made to people’s perception of the ability in disability. That is a legacy that, on a cross-party basis, we should absolutely build on.
I shall talk about spending cuts as there is significant concern about the potential impact of continuing, in the words of the noble Lord, Lord Layard, the dismantling of public services. That is absolutely not the intention of spending taxpayers’ money more carefully, of looking at ways of reforming public services, of being focused on the outputs and of being more efficient about the inputs that go into them. There is still significant opportunity for reform in delivering public services more efficiently, and that is where the focus of the spending cuts should and will be.
The noble Viscount, Lord Hanworth, asked where privatisation fitted into it. I make no apology for this party being careful with taxpayers’ money. If you really want to look at the record of this Government, we adhered precisely to the spending plan we set out five years ago. We have delivered that in a disciplined way with the public’s view of public services being that they have in fact improved. That is the evidence.
A number of noble Lords, including the noble Lords, Lord Bilimoria and Lord Davies, referred to the defence budget. Let me restate that at £34 billion, we have the second-largest defence budget in NATO. It is the largest in the EU. We are currently spending 2% and we will decide what to do at the next spending round. Again, my preferred approach to spending is that we have to have a plan and understand what we are trying to accomplish, and the budget numbers flow from that. It is about what you are trying to accomplish. I am delighted that the right reverend Prelate the Bishop of Portsmouth was able to acknowledge the tripling of the church roof fund.
Let us switch to the deficit. It is at the heart of the differences in fiscal policy between the parties. We have discussed the case put by the noble Lord, Lord Skidelsky, over the past few years. I was taught Keynesian economics at the feet of the noble Lord, Lord Eatwell, so I certainly understand the theory, but in 2010 this country had a massive, unsustainable deficit and the practical situation was that action needed to be taken to reduce that deficit in order for the public and the markets to have confidence. Frankly, we were faced with no other option but to deal with that as the primary objective and responsibility of government at that time. Had we not dealt with it as effectively as we did, it would have been an irresponsible act and would have left us substantially exposed to future debt costs. It is a bit like a vastly overweight person saying, “I’m going to start a diet in two years’ time, but in the mean time, keep serving me the chips and chocolate”. That is how it would have been.
The Minister talks about the debt, but let us think of the debt that they inherited in 2010, which was £870 billion. That figure has now almost doubled to more than £1,500 billion. Why has that debt doubled in a period when there has been a mania from the Tory Front Bench about having to pay off the debt?
Technically what happened was that we stuck to the spending plans, growth did not recover as we expected, principally because the rest of the world was in recession, so the tax receipts did not come in, and the deficit continued to go up. That is the reality of the situation. If you listen to the two sides on the deficit argument, one is asking why we have not cut fast enough and the other is saying that we have to cut a little slower. I think that, given the circumstances, my right honourable friend the Chancellor has navigated the balance very effectively. My noble friend Lord Flight made that point.
The Minister has failed to answer. In the light of his failure to answer, will the Government adopt a more modest approach to this situation and recognise their failure on debt over the past five years and the kid on that they are trying to exercise on the British public?
The Government’s strategy is crystal clear. The benefit of getting the deficit under control is absolutely worth it in terms of fixing the roof while the sun is shining. That is the philosophy. To do it over a two-year period and to get control of our public finances so that we can then grow and focus on, for example, the productivity argument I shall speak about in a minute is the critical part of the argument.
Does the noble Lord not accept the OBR’s conclusion that the austerity policy slowed down the rate of growth of the economy in 2011-12 and 2012-13? If that is the case, is it not a bit neglectful of him not to take into account the effects of the spending cuts on the economy?
That is consistent with my earlier response, that we did not have that choice because the markets would not have allowed us to continue with the scale of deficit we had.
Many noble Lords made very useful and interesting contributions on the housing market: the noble Lords, Lord McKenzie, Lord Best, Lord McFall, Lord Whitty, the noble Baroness, Lady Valentine, and the noble Lord, Lord Graham, who, with mobile homes, may well have the solution to some of our supply problems. The current status is that over 500,000 homes have been built during this Parliament. Of course, that is also tied to the financial crisis, but planning approval and housing starts are now at their highest for seven years, so they are benefiting from part of the recovery.
I agree with the general sentiment of most noble Lords who contributed on this topic that supply is the principal problem, and that dealing with our planning system, incentivising local authorities to build more, using both sticks and carrots in the process, is absolutely key to the way ahead. The noble Lord, Lord Best, suggested that there was nothing in the 2015 Budget for housing supply, but then referred to all the things in the small print that are going on. The demand-side interventions by my right honourable friend the Chancellor have been very effective; Help to Buy has been a successful policy—more than 80,000 people now own homes who would not have been able to do so before. The OBR and the Bank of England are comfortable that the impact of improving demand in that way has not been highly inflationary to the house price market.
There were lots of comments on pensions and savings, from my noble friends Lord Freeman and Lord Flight—who talked about the savings rate in a very interesting and thoughtful contribution about what we need to do about the long-term savings rate and how important it is—and from my noble friend Lord Northbrook and the noble Lord, Lord McKenzie.
One of the key questions all noble Lords asked was about where we are on Pension Wise, which is the service provided by government to provide guidance to people who are now faced with these new flexibilities. There are three potential channels: the digital channel—noble Lords can go home tonight and look at that, as it is up and running—which gives a description of what the flexibilities are; the telephone channel which is managed by the respected organisation TPAS—you can call up a call centre now and book an appointment with TPAS to have a 45-minute telephone session; and you can also call up Citizens Advice, which is the respected brand that delivers the face-to-face service. Therefore, each of those organisations—TPAS and Citizens Advice—has hired and put its people through a training programme so that they are ready to meet the demand. Of course, that is a very challenging thing to work out, because it is very hard to work out how many people will want what kind of advice, and when. However, we have done everything we can to ensure that that service will be available with the right capacity and the right quality—and to take on board my noble friend Lord Freeman’s point, with support from the FCA there will be plenty of opportunities to have a look at how it is working, and there will be a lot of work around making sure that potential scammers cannot be successful.
It is useful to be critical about growth and productivity performance, because it is important to focus on what we can do to make it better. We should remember that we are growing faster than anybody else at the moment, so it is not all bad news.
My noble friend Lord Taverne and the noble Lord, Lord Hunt of Chesterton, talked about the role of foreign capital coming in—hot money, as my noble friend referred to it. Generally speaking, this economy has enormously benefited from being an open economy, with the advantages that come with that. The noble Lord, Lord Hunt, referred to Hitachi, which has come here to assemble the trains, and has also decided to set up in the UK as the base for its European rail business. So, generally speaking, operating as an open economy has been a hugely successful thing for this economy.
Would my noble friend deal with the question of the danger of the inflow of hot money, which makes us very vulnerable indeed if there is a crisis of any kind? Is not the deficit on the balance of trade a very serious failure of the present Government?
There is a deficit on the balance of trade, although the most recent figures two weeks ago were the strongest that they have been for a very long time. I accept that our relative export and import performances are not as strong as they should be, but I would not put it down to a failure of this Government. It is a chronic long-term challenge, which British industry has to face up to.
Hot money is a complicated subject. In terms of investing and having ownership shares in our big businesses, I frankly do not find that particularly disturbing, because we are in a global market and those ownership positions are traded very actively. As I said, Britain has benefited on a net basis and manages that exposure very effectively.
The noble Lord, Lord Northbrook, asked what the future was for a business rates review and the annual investment allowance. The Chancellor said that that allowance would be looked at in the Autumn Statement next year.
There was a strong consensus for more decentralisation around the House—the noble Baroness, Lady Valentine, for London and my noble friend Lord Shipley, looking at the north-east.
My noble friend Lord Thomas referred to the tidal lagoon in Swansea, and I am delighted that that has moved into the next stage of negotiation. I was also delighted that he pointed out the work that has been done for farmers to help with their volatility by spreading out their taxes over a five-year period.
I am very much in sympathy with the perspective of the noble Lord, Lord Stevenson, on the arts, which is an important part of life and a great national strength. Through the tax system we are doing quite a lot to support the film industry.
In conclusion, I thank noble Lords not just for this debate but over the years that I have been at the Dispatch Box, when we have had very interesting exchanges. I have learnt a lot and improved my perspective from it. I thank my noble friend Lord Newby, who has been my colleague at the Treasury and has been magnificent at the Dispatch Box.
Despite the argument that we have been having, the British economy is in a very different situation five years on from the one that we inherited. We have stabilised the public finances. There is a very valid debate about the pace at which deficit reduction continues from here, but the circumstances of the economy will have a great deal to do with that, as they did over the past five years. For me, the focus is really on two things, both of which I would describe as productivity challenges. One is in the public sector, delivering great outcomes but in a much smarter way with more limited inputs. The same applies to the private sector, where the Government’s job is to create an environment in which we can unleash the inherent dynamism of that sector and, frankly, let them get on with it.
(9 years, 7 months ago)
Lords ChamberMy Lords, I thank noble Lords for an excellent, instructive debate; it has been thought provoking for me, absolutely. I congratulate the noble Lord, Lord Adonis, and endorse the point that the noble Lord, Lord Berkeley, made about his contribution and his receiving the European Railway Award. I was delighted that HS1 and Eurostar could get the noble Lord back here safely and on time to kick off the debate in a most interesting way.
This debate has also been useful in reinforcing the fact that infrastructure really does need to be centre stage: it is at the heart of our economic strategy—I think there is absolutely bipartisan endorsement of that. We have talked about the great opportunity that infrastructure brings, and we all agree that it is a key driver of economic growth. Transport, communications and energy systems help people and businesses improve their productivity, and as a result improve the rate of growth of the country. The construction projects, where we build them, are great short-term spurs to growth and skilled jobs. Infrastructure is also the key to unlocking growth in our regions. It is also a critical way of unlocking the housing growth that has been a big part of many of the contributions made by noble Lords.
The challenge, of course, is that historically we have underinvested, for a variety of reasons. What do we need to fix to cure that historical underinvestment? It has something to do with the shorter-term horizons of the political environment, which do not quite match the longer-term needs and gestation periods of investment in infrastructure. How do we tackle that more effectively? The noble Lord, Lord Adonis, referred to our ranking as 27th in the World Economic Forum. My noble friend Lord Horam was appropriately horrified by that. I should just point out that those rankings are a result of the home audience’s subjectively evaluating what it thinks of its own infrastructure, so it probably says more about the British psychology than about the objective state of our infrastructure. Noble Lords might listen more carefully to the IMF review.
According to the Institution of Civil Engineers, this ranking was developed for the World Economic Forum. It is rather topical.
It is topical, but it was still a subjective review of our own psychology. The IMF review in 2009 says that the UK has the fastest-improving infrastructure in the G7, which is clearly a good thing. We managed to get cross-party support for the Olympic Games. We started off with a Labour Government and a Labour mayor, and ended up with a coalition Government and a Conservative mayor, and there really was not a single slip when the baton was handed over because there was very effective cross-party support. I suspect that the nature of our immovable deadline—with Her Majesty the Queen’s parachuting into the Olympic Stadium on 27 July 2012—and our British fear of being embarrassed in public were probably helpful disciplines in getting us to that successful outcome.
There are three simple components to the Government’s plan to deliver our infrastructure more effectively: first, to have a plan; secondly, to have the money; and, thirdly, to focus on delivery so that we get it done very effectively in terms of the Government’s performance as a client and industry’s performance as the deliverer of that infrastructure. Everything that we have done as a Government has been about refining how we do those three things and making them better. I will therefore structure my comments and my responses to noble Lords’ questions around those three components of the plan.
We have a comprehensive, cross-sector plan; it is the national infrastructure plan—a number of noble Lords referred to it. It is a lot better now in 2015 than it was in 2010, simply because we have iterated it and built upon it, and we should do that every year. It was unfair of the noble Lord, Lord Adonis, to say that it is not really a plan. It is a plan and it does have timescales. At the beginning, it was a little more like a list of projects, but now it is a plan and is underpinned by a clear strategy. We have a road investment strategy: it is the road investment strategy which drove the list of projects which then enabled us to put a five-year funding plan in place.
I take on board the comments by my noble friend Lord Bradshaw that we need to invest early enough to get capacity right—the lead times on this are absolutely critical. My noble friend Lord Flight pointed out that the plan was improving. It is rather boring government: each year, each section gets a little bit better; each year, the strategy which we pull out of the departments responsible for those areas gets better. That refinement is going on. It is a plan that is backed and supported by industry; we work with industry to develop it; and it is a plan that has given industry and investors the certainty to plan against the pipeline which, because we have now been doing it for five years, they are just about beginning to believe in. We need to keep doing it over and again. Government’s work is done at the front end of that pipeline; that is, turning the concepts or solving the problems, and creating investable projects. As a noble Lord said, it is not the finance that is the constraint; it is shaping such projects into investable projects so that they can be carried out.
The claim I would make for this Government’s achievement is that we have got to grips with the short-term delivery challenges. We have put in place a plan to 2020-21. Many of the projects last through the 2020s. The next step is to develop a plan that addresses the UK’s infrastructure needs in the much longer term—which is where we should spend a moment addressing the case made by the noble Lord, Lord Adonis, for a national infrastructure commission, which was supported by many noble Lords here. I agree that the next stage of work is to look at our longer-term needs and to ensure that we develop strategies for them. Out of those strategies will come the work to develop the projects that will give us the outcomes that we are all looking for. I absolutely agree that that is the next stage of work.
I agree also that there is a significant role for independent expert advice. That was what we did in wrestling runway capacity in the south-east to the ground with the Davies commission. If one looks at the amount of work that has gone into solving one particular problem within one sector of the broader transport area, one sees that the kind of effort that we are talking about here is very broadly based. Defining the precise scope is an interesting question. The noble Lord, Lord Maxton, referred to the infrastructure of the internet. In the National Infrastructure Plan, there is a chapter on communications. The Government are producing a digital strategy just as they have produced a road investment strategy. So these things are all under way. I also accept the point made by the noble Lord, Lord Hunt, about integrated systems. We have very good plans for each sector, but we need to be much smarter in the longer term about understanding integration opportunities and interdependence. We have, too, to understand climate change; we have to understand the impact of technology. Those are all the things that we need to figure out.
The discussion that needs to take place on how we do this—my noble friend Lord Sassoon referred to it— is about how heavy we make the machinery to accomplish it. My experience in business and especially in government is that we need people who can get to outcomes, not people who can create layers of process. I am very nervous about signing up to quite heavily constructed process when my experience has been that what we need in government is the ability to get these things moving.
If that is where the plan fits in, let me spend a little time talking about the money. Our infrastructure is financed either publicly, from taxpayer money, or privately. Quite a lot of it is financed with a mix. Two-thirds of it is financed in the private sector. On the publicly financed component, we can effectively retain a good bipartisan approach, but I think that this Government have been very successful in stabilising our public finances, which is what has created the room for us to be able to spend more ambitiously on infrastructure. That is a big difference between the parties. The success in stabilising those public finances has been what through successive fiscal events has enabled us to invest more effectively in public infrastructure. On the public side, we are talking about the road network, the flood protection environment and Network Rail as the three key sectors. We have also made settlements that last right through the Parliament, which is the first time that we have ever done that. If I look at all the things that we have done in the past four years, turning a one-year financial settlement into one that lasts to 2021 has been the single most transformational thing, because those sectors can now plan, build and construct, and have much more effective delivery, by having that medium to long-term planning environment. It is absolutely transformational.
We need to work through the system to make sure that the agencies responsible, such as the Highways Agency, the Environment Agency and Broadband Delivery UK, have the skills to be able to work with industry to realise the full benefits of that longer commitment of public money. I am delighted that we have been able to finance some of the pet or favourite schemes of noble Lords; for example, the interest of my noble friend Lady Maddock in the A1 north of Newcastle and connectivity with Berwick. As my noble friend Lord Attlee pointed out, such a longer commitment is the key to avoiding the feast and famine of past years and getting the sequencing right. If you have a five to six-year settlement, you can sequence it intelligently through that period, rather than having to make sure that you have spent all the money in year 1 because you are never quite sure whether it is going to be there tomorrow.
I have talked about the fact that we in the UK are pioneers in private finance. We do private finance of infrastructure better than anybody in the world. We introduced privatisation; we introduced public/private partnerships—as my noble friend Lord Sassoon pointed out, unfortunately the PFIs were not always as well executed as they should be, but getting the balance right is hugely important. A number of things make the environment that we have got here right. We are a very attractive location for overseas investment. Of course, we cannot be complacent; we need to keep making it better. The noble Baroness, Lady O’Cathain, was very articulate about the stability of this marketplace, the clear property rights and our world-class regulation—which a number of noble Lords referred to, including my noble friend Lord Sassoon. Preserving the independence of that regulatory framework is critical. I am particularly pleased with the combined work that the regulators are doing through the new body that we set up, the UK Regulators Network, to focus on the key issues such as affordability, cross-sector infrastructure investment and how we engage with consumers to facilitate switching. The Government have also intervened in a variety of sectors to support financing, including the new electricity market reforms. The noble Lord, Lord Rooker, referred to nuclear and the way in which we are driving that forward. The noble Lord, Lord Liddle, talked about Cumbria. We are doing an enormous amount of work to get all three big nuclear projects off the ground—not only Hinkley Point, but also NuGen and Horizon. That will ultimately be for the benefit of the economy in Cumbria too. I agree with the noble Lord, Lord Whitty, that work is needed on the demand side of energy just as much as on the supply side. All these sectors are critical.
I support my noble friend Lord Horam in his call to accelerate fracking. We have put the planning environment and the tax incentives in place. It is now down to the developers to determine if the economics are there for them. My noble friend Lord Ridley said that there are alternative models—which other countries have embraced—for funding our roads. The noble Lord, Lord Rooker, backed this up.
The noble Lord, Lord McFall, talked about potential investment in infrastructure by the big insurance companies and the challenges they sometimes face. Of the £25 billion they said they would put up, £5 billion is already committed, so that is moving ahead pro rata. We have helped with making the Solvency II rules as benign as possible to support that development.
The third component of what we are trying to do is to get smarter on delivery, what we do in government and how we can help industry get better at it. We are much more focused on government intervention to unblock things in our top 40 projects. My noble friend Lord Marland referred to it as “energetic” and “enabling”—making sure that we have joined-up government. I ran an exercise in upgrading the commercial capability across the key departments. My noble friend Lord Cavendish correctly pointed out that it does not come that naturally to government. We have to ship in a lot of the commercial expertise; otherwise we are outgunned in big commercial negotiations. There is a lot of work going on there. We have put our top people in key leadership positions. Of all the things we have done in HS2, persuading David Higgins to be its chairman has probably been the single factor which will make most difference in the effectiveness of its delivery.
Many noble Lords made observations about the need to improve the planning system. That is part of the responsibility of government in enhancing delivery. We have done a series of things. My noble friend Lord Freeman referred to the national networks policy. The noble Lord, Lord Berkeley, referred to draining the swamps and trying not to listen too much to the frogs. At the next Budget, we will consult on CPOs, and ideas about how to financially motivate getting to the right point more quickly will be our underlying objective.
With industry, we have worked at ways to improve project initiation—how projects are set up and delivered. In the first three years we took £3 billion out of a big set of projects through working with industry and we are continuing that engagement to look at change in their own delivery. An important component is getting skills right. When I started this job, the construction companies came to see me to say, “We want work”. Now they say, “Slow down, because we do not have the capacity to deliver it all”. Skills are at the heart of this. My noble friend Lady O’Cathain was spot on when she said that the important short-term and medium-term challenges were to get that right. Apprenticeships are absolutely at the heart of that. I am delighted that we have the HS2 colleges set up in Birmingham and Doncaster. My right honourable friend Patrick McLoughlin, who is clearly doing a very good job as a successor to the noble Lord, Lord Adonis, was at Crossrail on Monday, celebrating its breaking through its 400-apprentice model.
I have not said much about rebalancing the economy, a subject which many noble Lords raised. The noble Lord, Lord Adonis, talked about devolution. My noble friend Lady Maddock talked about local authorities. The noble Lord, Lord Liddle, spoke about cream cakes and Cumbria. The noble Lord, Lord Rogers, talked about cities and urban regeneration. I think we all accept that we have not invested sufficiently in infrastructure in the regions, and that needs to be corrected. We are trying to do it. Chapter 2 of the National Infrastructure Plan is all about getting that right. The underlying, driving theory of HS2 is to empower the northern cities so that they can have the same kind of economics of agglomeration that can drive growth. We have seen it similarly in London.
I agree that there is a link between infrastructure and housing. Battersea is a great example. We guarantee extending the Northern Line and suddenly Battersea creates 30,000 homes. That kind of relationship needs to be worked out right around the world.
In conclusion, we must relentlessly continue our work to deliver the pipeline that we have. It is necessary to work at everything I have talked about—the plan, the money, the delivery—to ensure that consumers and businesses reap the benefits. As I believe we have demonstrated in this Parliament, where there is a clear plan to build and finance the infrastructure that we need and a powerful programme to drive its delivery, then that infrastructure can and will meet its potential to be a real engine of our economic growth.
(9 years, 8 months ago)
Lords ChamberMy Lords, I congratulate my noble friend Lord Rose on his muscular magic and sparkle. He meets my noble friend Lord Palumbo’s definition of someone who can get something done as a template for the perfect politician. I was actually hired with that objective, and it is not always that easy, but we are all trying our best.
Yesterday’s Autumn Statement provides a lot of information about the UK economy and gives us the opportunity to do what we have done today, which is to evaluate the effectiveness of what the Government are doing and to discuss some of the knottier problems we face.
I think that the good news—the “success story”, as my noble friend Lord Lawson described it—is well understood. At 3% this year, we have strong growth—the fastest in the G7; it is well balanced across manufacturing, construction and services. As my noble friend Lord Younger said—my noble friend Lord Lawson commented on it, too—it is the envy of other European countries, although I appreciate that the noble Lord, Lord Lea of Crondall, does not agree with that. We have record numbers in employment based on significant job creation by the private sector—2 million since 2010; my noble friend Lady Bottomley described it as a 1,000 a jobs a day. Inflation has sunk below the target of 2%; energy and food prices have fallen, helped by a strong pound; and of course interest rates have stayed low.
That is the picture. We have heard today views on the key subjects of the deficit and living standards, and a range of questions around what I would lump into the “productivity” category. I shall try, coherently where I can, to go through those in order and respond—again, where I can—to noble Lords’ observations and questions as I go along, but we are somewhat constrained by time.
First, on the deficit, I am not going to enter into a Keynesian ideological argument, but I will buy front-seat tickets when my noble friend Lord Lawson and the noble Lord, Lord Skidelsky, duke that one out. The deficit has been halved, and we are on track to eliminate it in 2018-19. Progress is slower than we planned in 2010, but it is because the recession was deeper than we had understood and the recovery, as the noble Lord, Lord Skidelsky, was kind enough to point out, was stalled by the eurozone crisis and high commodity prices. The OBR has pointed out that it was not stalled by fiscal consolidation.
I do not believe that, given those circumstances, many people—possibly with the exception of my noble friend Lord Stevens—think that we should have gone faster. Since this year’s Budget, the deficit has not come down quite as quickly as expected, which is because of weaker tax revenues, both income tax and corporation tax. As the noble Lord, Lord Desai, said, life is never easy. The forecasts are dependent on highly changeable assumptions. Even the history is hard to work out, and we have seen some statistical changes which make it even more opaque, although I would point out in response to an observation made by the noble Baroness, Lady Worthington, it is not down to the Chancellor to change the accounting rules; we simply follow the external requirements.
However, the OBR expects borrowing to be a little higher than forecast in the next two years and then a little lower in the following two years, so still ending up with a small surplus in 2018-19. The noble Baroness, Lady Donaghy, was sceptical about our ability to achieve that. The OBR estimates the likelihood of the Government meeting their fiscal mandate at about 80%. The forecast shortfall in tax revenues, which is what is slowing us down, reaches about £23 billion in 2017-18. One reason that we are still on target is that two-thirds of this shortfall, £16 billion, is covered by lower debt interest costs, which result from both lower interest rates and inflation because of the indexed component. The noble Lord, Lord Bilimoria, rightly pointed out that we are therefore exposed to those interest rates. I am not going to use my crystal ball, but I think that we all understand that that is a significant risk. The primary reason that we should be so focused on bringing debt down overall is our inability to absorb shocks with the level of interest that we have to support.
There has been considerable debate around the spending reductions required. We had a discussion about how appropriate ring-fencing was—my noble friends Lord Lawson and Lord Wrigglesworth raised that—but in this Parliament we have managed to accomplish £67 billion of spending cuts even with that constraint. Our position is that we can continue to cut spending in the next Parliament at the same rate that we successfully achieved in this one. My noble friend Lord Palumbo talked about grasping the financial reality; my noble friend Lord Stevens said that yes, it can be done. I must admit that I am optimistic about our ability to reduce public spending through efficiency and reform. Part of the problem in making change in the public sector is that there one does not have the discipline of the market that drives and forces change effectively in the private sector, because you cannot survive without change. Frankly, while I do not enjoy the financial austerity that we find ourselves in, forcing people who run the public sector to determine how to do it much more efficiently is an extremely healthy discipline.
We will continue with our programme of efficiency reforms. We have done about £15 billion-worth so far in this Government; there is a plan to do the same again. It means the same things that private sector companies do, with discipline on pay and head count—which has already been practised—and the use of technology, which we are right at the beginning of in the public sector. It means rationalising all the space that we have got and centralising and deploying effectively our buying power. The opportunity is enormous and the challenge is how to grasp it.
We will continue to bear down on tax avoidance, for which my right honourable friend the Chancellor set a £5 billion target yesterday, and we will continue to seek efficiencies in the welfare budget, given that it represents a significant portion of overall spending, by freezing working-age benefits for two years and reviewing the level of the benefit cap.
On living standards, it has taken longer than we would like for earnings to recover; we all accept that. It is not surprising, given the scale of the crisis that we have been through, but the Government have sought to support people during these difficult times. There has been a lot of discussion about who is disproportionately bearing the brunt of this—the noble Lord, Lord McKenzie, among others, brought this up. All the objective distribution analysis that is produced by the Treasury demonstrates that during the course of this Government the weight of the burden has been much more evenly distributed than what was experienced under the previous Government. That is what the statistical analysis tells you. We can have this debate, but the objective analysis does not support the rhetoric that we hear from the other side.
What have the Government done to see us through this period of challenge to living standards? They have had a very active monetary policy to keep interest rates and mortgage rates low. They have raised personal allowances, which was welcomed by my noble friend Lord Wrigglesworth—that has taken 3.5 million people out of tax altogether and reduced tax for 24 million people. The noble Lord, Lord McKenzie, pointed out that that is expensive; it cost £12 billion. The right reverend Prelate the Bishop of Portsmouth was extremely clear about the pressures that people are under. We have done things to contain the cost of living pressures, by acting on council tax, energy bills, fuel duty and rail fares and by raising the national minimum wage—we had some discussion about that and in particular its enforcement, which was mentioned by my noble friend Lord Horam and the noble Baroness, Lady Donaghy. We are putting money into enforcement and it will make a significant difference. And, of course, we have now had a highly progressive stamp duty reform, which many noble Lords welcomed.
Earnings are now strengthening. The OBR forecasts this to continue. For those in full-time work for more than a year, as my noble friend Lord Younger noted, earnings grew 4% over the past year. Real household disposable income, which is probably the best measure of living standards, is forecast to increase by 1.6% in 2014—I should clarify for the benefit of the noble Lord, Lord Skidelsky, that that is 1.6% per capita. We should note that there is a compositional effect in the labour market: because so many more people are finding work, particularly young people, it weighs down on average earnings.
Productivity has been the focus of many comments today—it was absolutely the focus of the noble Lord, Lord Adonis. A number of noble Lords asked where it was in the Chancellor’s Autumn Statement. Growth and structural reform have been and continue to be a key plank of what this Government have been doing. Many of the measures which were announced yesterday were reinforcements of the general strategy that has been in place for some time. Productivity, together with low inflation and a strong jobs market, is at the heart of our ability to give people long-term improvements in living standards. That ambition was so well articulated by the right reverend Prelate the Bishop of Portsmouth, together with his support for church roof funding.
The UK’s low productivity has been a long-term problem. We had a fascinating analysis from the noble Lord, Lord Desai, of why it might be persistent. I am by nature an optimist, and we will find ways to deal with this. Many noble Lords have addressed it. My noble friend Lord Lawson gave the best example of when we have addressed it effectively: our supply side reforms back in the 1980s. My noble friend Lord Horam referred to them as well. They had the enduring impact of the labour market flexibility which has put us in such a better position than our competitors on the continent.
My noble friend Lord Higgins asked how much of our productive capacity was destroyed during the recent financial crisis and how easy it will be to rebuild it, which is what we are going through now. Looking at some of the different aspects of the productivity challenge, on tax, having low taxes, certainty in taxes and making sure that they are paid is a key part of this economic plan. My noble friend Lord Flight reminded us that momentum in business investment, contrary to what some noble Lords said, is developing strongly; it is up 27% in this Parliament, so business investment is recovering. That says something about the current environment, and the confidence that we have talked about.
My noble friend Lord Younger talked about the patent box and how supportive it is of research and development. My noble friend Lord Leigh made the point that large multinationals must pay their fair share and referred to the leadership that my right honourable friend the Prime Minister has shown globally in dealing with the issue. That is why we have introduced the diverted profits tax. Several noble Lords talked about that. The noble Lord, Lord McKenzie, wondered how it tied into the BEPS work. It is tied in, but we are first movers because, again, we are showing leadership. The noble Baroness, Lady Donaghy, asked me how high risk the revenues were. The OBR ranks the risk against each of them: it is medium to high, so not right at the top. The perfect answer to this is that it will divert revenues back into standard corporation tax, because those structures will not be put in place any more.
My noble friend Lord Lawson referred to the reforming zeal of my right honourable friend the Chancellor in both the pension changes and stamp duty. All that I can pass on to the House is that I see my right honourable friend the Chancellor up close virtually every day. I have worked with some of the best people in the private sector and believe you me, he passes my noble friend Lord Palumbo’s capability test.
The rates review has been welcomed by several noble Lords, including my noble friend Lord Rose. On the accelerated investment allowance, the reason that it has been a little stop-start is because it was intended to boost investment now. In that case, there is a justification for changing it. My noble friend Lord Lexden talked about Northern Ireland and competition from the Republic of Ireland. We will be introducing legislation to devolve corporation tax, subject to cross-party talks with the Northern Ireland Executive showing public spending sustainability. We have some significant measures coming through, as per the suggestion of the noble Lord, Lord Bilimoria.
We have had a great discussion on infrastructure, housing and regional growth. I could not agree more with the consensus around the House that we need to stop stop-go. Every day in the Treasury we do things to try to change that by putting in place long-term funding and long-term plans addressing the fundamentals. That is why we put the Davies commission in place: to sort out the south-east England runway capacity question. Our focus is absolutely on making things happen. I thank my noble friend Lady Bottomley for her kind words on that. On the HS3 project plan, we will see an interim report on transport for the north from the DfT in March 2015, so that will be the next step, replying to David Higgins’s work.
The noble Baroness, Lady Worthington, talked a lot about the merits of state versus private sector investment. The reality is that the right way to do this is a combination to maximise the amount of investment that we can get in. The skill is in structuring it right so that we get the appropriate outcomes. That is what we are working on. There is a big focus on access to finance for SMEs by extending FLS, which my noble friend Lord Leigh talked about. He also welcomed the introduction of another £400 million for the enterprise capital funds programme at the British Business Bank. My noble friends Lord Lawson and Lord Stevens and the noble Baroness, Lady Donaghy, wanted us to continue our work on cleaning up the banks. We obviously agree.
Exports are critical. My noble friend Lord Younger asked about the extra £45 million; £20 million of that will go to help first-time exporters, the other £25 million will go to help people in the emerging markets. There was lots of focus on skills, including by the noble Lord, Lord Adonis, and my noble friend Lord Jones. We could not agree more. Even on the infrastructure question, we have now moved beyond the pressures to deliver because the rate of delivery is such that the industry is concerned about skills. There was lots of welcome for the postgraduate scheme, including from my noble friends Lord Wrigglesworth and Lady Bottomley.
I am running out of time, so I shall not go on about our long-term commitments on science and innovation which the noble Lord, Lord Hunt, talked about. We obviously welcome the entrepreneurial explosion discussed by my noble friend Lord Flight.
Finally, I thank my noble friend Lord Younger of Leckie for introducing what has been a fascinating although highly truncated debate.
(9 years, 8 months ago)
Lords ChamberMy Lords, I refer the House to the Autumn Statement made by my right honourable friend the Chancellor of the Exchequer in the House of Commons, copies of which have been made available in the Printed Paper Office and the text of which will be printed in full in the Official Report.
I, too, look forward to the debate tomorrow. The thing that resonated with me was the noble Lord’s reference to a clear record of failure, and he should know. Let us compare records. Fortunately, the previous Government wrote its own when it left a note for the Chief Secretary, with three words: “No money left”. Let us look at the record of this Government. We have the fastest-growing economy in the G7, demonstrating well balanced growth across all the industrial sectors and spread effectively regionally. We have record levels of employment, and record falls in long-term unemployment and youth unemployment. We have restored this country’s fiscal credibility from the record deficit we inherited. We have halved the deficit this year and are still on path to eliminating it by 2018-19.
If you look at the work of the OBR, you will see that the borrowing is slightly higher this year and next year, and slightly lower in the next two years, taking us to a surplus of £4 billion in 2018-19. I fully accept that we are not as effective in reducing it as our predecessors were in increasing it, but we are doing a pretty good job, given the global economic environment. We have also seen extremely low and falling levels of inflation; we are investing in business and productivity; and we have supported people through the recovery from the depths of a savage financial crisis by reducing personal allowances, making sure that we have frozen fuel duty, freezing council taxes, capping the rise in rail fares, et cetera.
I fully accept that this country has a long-term productivity problem. I am looking forward to the debate tomorrow, in which I am sure we will get some insights into how to cure that. My right honourable friend the Chancellor was not short in his analysis or the work he is doing on that. Quite simply, productivity has to come from: increasing the Government’s own efficiency; creating space for the private sector; and increasing the dynamism of the private sector through lower taxes and infrastructure investment, which we have discussed. By the way, as regards this Government’s record on infrastructure, through this Parliament £47 billion will have been spent on infrastructure, private and public. In the previous Parliament it was £41 billion. That is a 15% increase, which, in the context of the financial environment, particularly in the first few years, is extraordinary.
The noble Lord was right to say that there has been a shortfall in tax receipts, which is the principal reason why borrowing this year is a little higher. It is higher than was forecast in the Budget, although it is still coming down and will go down every year. Everyone was prepared to say that it was going up. No, the deficit continues to come down. I should explain the situation on tax receipts, which is important. Again, it is the productivity issue: the economy has grown faster than earnings. There is also an interpretation issue; in the second half of the year, we will see tax receipts do a little better than last year, when they were front-loaded—so there is an adjustment there. The biggest reconciliation of the difference between the OBR forecast this time and at the time of the Budget is the £16 billion improvement we get in reduced interest costs because interest rates are coming down, principally because inflation is under control. I have been trying for some time to find a good reason for having a high debt level. This is the only one I can think of: when interest rates are low, the interest burden comes down. That explains two-thirds of our ability to decrease spending in a couple of years’ time to make up the shortfall in tax receipts.
I want to dwell a little longer on the earnings situation. The noble Lord is right that earnings have not recovered as fast as we all would have wanted. People have been faced with difficult challenges. I have listed the kind of measures the Government have taken to mitigate the impact on our citizens. The reason is simply because the economy recovered more slowly than we expected. That was a result of the crisis being deeper than we had understood at the time, very high commodity prices in 2011-12 and a very weak eurozone. Essentially, that delayed the recovery; that explains why it is taking longer to get the deficit down. The Government have a clear plan to get us there. In listening to the series of observations the noble Lord made, I could not, with the best will in the world, detect an alternative plan.
The noble Lord raised two other points. I absolutely agree that our export performance is weak. It has been for some time. Addressing some of our productivity problems and improving the performance of our businesses will be at the heart of improving our export performance. The weakness of the eurozone—the customer for about 40% of our exports—is of course an important factor. We have been very focused, through our interventions with UKTI and UK Export Finance, on supporting the growth of exports to other markets, which in volume terms are, I think, up about 18% since 2010. We have to support that switch away from the slow-moving markets to the faster-growing markets. I absolutely accept that.
Before opening up to broader questions, I will mention housing. It is both a supply and a demand question. We are working very hard to increase supply, whether it is through the individual schemes that my right honourable friend the Chancellor went through at Bicester, Ebbsfleet, Barking, Brent Cross and the four London estates that are being regenerated, or at Northstowe, where we are freeing up land for building. We are also putting more money into affordable housing. If noble Lords were to add up all the schemes and initiatives in the Autumn Statement, they will come up with a very sizeable increase to supply. On the demand side, Help to Buy has been very successful. Continuing low interest rates are very successful and the radical reform to stamp duty rationalises that very inefficient tax in a way that will support home buyers, particularly at the lower end of the market.
Finally, the Government have increased spending during this Parliament by nearly £13 billion to support the National Health Service. I will not repeat the individual initiatives. As the noble Lord pointed out, we have made a down payment of an extra £2 billion, which is the pro rata amount that the chief executive of the National Health Service has asked for to get it to £8 billion by the end of the next Parliament. Again, a great plan has been established. We will finance it on the basis of its merits.
My Lords, I remind the House that there are now 20 minutes for questions. The briefer the questions are, the more we will have time for.
My Lords, I very much welcome the Autumn Statement—little surprise, as this is a coalition government Statement in which the Liberal Democrats have clearly had considerable involvement. I thoroughly enjoyed the demolition of the Labour Party case by the Minister. I am surprised that he did not mention one obvious point, which comes on page 6 of the Autumn Statement. For the last couple of years we have listened to the Labour Party indicate that real wages have not increased. On page 6, the Statement indicates that the OBR now forecasts that wages will exceed inflation for the next five years. I would have thought that that rather shoots the fox.
I will ask one or two questions. First, the Chancellor deals with spending cuts on page 9 of the Autumn Statement. Even as a friend, I suspect he rather glosses over the impact that spending cuts are likely to have after 2015-16. I do not know whether the Minister can add anything on where these cuts will come from. As the Minister rightly indicates, infrastructure spending has been quite significant in these proposals, not only in the Autumn Statement, but in the road scheme announced on Monday and the infrastructure plan announced on Tuesday. Does he agree with the argument that the Liberal Democrats have been making that, when looking at spending cuts in the next Parliament, infrastructure spending should be ignored because of the long-term capital effect and capital advantage of such spending? On the proposal for postgraduate loans—a topic that is obviously very dear to my right honourable friend Vince Cable—does the Minister agree that this will have a significant impact on the possibility of research into science? Finally, on the desirable attempt to extract the tax on multinational companies, the proposal is that there should be a 25% tax on the profits of a multinational company earned in the United Kingdom. Is he able to expand on that? I understand that one of the arguments of companies such as Amazon and Starbucks is that they do not make any profits in the United Kingdom.
There were five questions there. First, I obviously accept the point that my noble friend makes about real wages, although wages exceeding inflation has been coming through only in the last year. He is absolutely right that the forecast from the OBR is that that will continue and that we will see earnings outstrip inflation, which would be a good thing.
Secondly, what is the story behind the spending cuts, which are quite significant? The simple story is that we plan to continue at the rate we have successfully implemented in this Parliament. We know that we can do it. In fact, we have managed to do it every year and still end up with an underspend. My right honourable friend the Minister for the Cabinet Office put out a paper this morning on how we will find another £10 billion of efficiency reforms on top of the nearly £15 billion that we have achieved in this Parliament. There will of course be a continuing review of welfare to ensure that we are focused on getting people back to work and that we are targeting those who really need to receive it. It represents a significant amount of our public expenditure, so that has to be part of the programme.
My noble friend asked whether we would effectively ring-fence the infrastructure investment. There is a commitment—effectively a fiscal rule—that we will retain public sector gross investment at a consistent level. If we stick to that, that is what will happen. Of course, the great success of all that we have accomplished is that so much of our infrastructure has been financed by the private sector, so it is not constrained by that measure anyway.
I think that postgraduate loans are a terrific initiative because not having money was becoming a constraint on people doing research. Therefore, that is a good thing on a number of grounds.
The multinational tax measure is looking at companies which put in place elaborate structures effectively to move their profits to offshore locations with a lower tax rate. The mechanism to capture that will dismantle those structures and look at the real profits, which we can then tax.
My Lords, like earlier Autumn and Budget Statements since 2012, there is no reference in this Statement to the likely impact of the measures on child poverty levels, despite the legal duty to eliminate child poverty by 2020. Can the Minister therefore tell your Lordships’ House what the impact of the two-year freeze in benefits for working-age families will be on child poverty levels? Also, how did that freeze fare when set against the new family test, particularly taking into account the significant reduction in the real value of benefits for children under this Government?
The fundamental approach of this Government to addressing poverty is to get people back into work and to ensure that real earnings recover and outstrip inflation, as we discussed earlier. In looking at the distributional analysis to see who is contributing towards the benefits, the top 20% pay more than the remaining 80%, so that is how the balance of our distribution looks.
I think I am actually described as non-aligned, which means that I am sort of drifting in a certain direction.
I first congratulate the Government on not achieving their deficit reduction target because, in so doing, they have played their part in contributing to a recovery in economic activity. That has allowed greater prosperity eventually to reach broader sections of society, and a fairer society that is based on a growing economy.
I have two questions. The first relates to the taxation of the profits of the likes of Google. That strikes me as rather like the game of whack-a-mole that we play at summer fairs. Whatever they do, they find another way to get round it—often with the help of the noble Lord’s previous employer, Goldman Sachs. Would it not be more sensible for us to support a global initiative to tax the owners of companies rather than the companies? Frankly, the taxation of companies is a futile game because they are getting better and better at finding ways of avoiding it.
Secondly, there is little in the Statement about monetary policy, although an accommodating monetary policy has undoubtedly helped over the last five years. If the noble Lord was still an investment banker and he had a company as a client with a large debt on one side of the balance sheet and a large asset, in the form of cash, on the other, he would advise the company to cancel them out. Why do we not do that with the gilts that have been bought through QE and at a stroke reduce borrowing as a percentage of GDP? No harm would be done; there would be no fascist printing of money because these gilts were bought for fair value in the open market. I urge the Minister to go back to the Treasury and say that the moves it has introduced are just tinkering. That is what Governments do. It is not a row of beans when these Statements come. There is no real impact on the economy. The two moves I have suggested could have a material effect.
I will be delighted to use my expertise as a poacher turned gamekeeper to help structure the profits diversion tax in a way that actually works. The noble Lord is quite right; it will only work ultimately if we capture this on a global basis. That, of course, is the work that is going on. The noble Lord will not be surprised to know that I will not be making any comments on monetary policy, which is a matter for the Bank.
I congratulate my noble friend on his kindness in not repeating the Statement because it is perfectly obvious that the noble Lord would have had nothing to say by way of reply. Does my noble friend think that it is something of a nerve for the parties opposite, including those who have now flown to the Cross Benches, to complain about the Government’s progress in reducing the deficit when they have opposed every spending cut and every initiative by us to increase revenues? Are they not rather like a bunch of arsonists complaining that the fire crew is taking too long to put out the fire?
As always—and even more so today—it is very difficult to disagree with my noble friend.
Can I press the Minister further on the health increase to which he referred? It was mentioned by the Chancellor in the other place that £2 billion will be spent every year. The Green Book states on page 68 that it will be an extra £2 billion for the NHS. Given that that is the case, can the Minister give an assurance that there will be full Barnett consequential of the full sum for the devolved Administrations?
My Lords, I congratulate the Government on at last recognising the benefits in giving tax credits to children’s television productions, on which the Liberal Democrats, Pact and the Children’s Media Foundation have campaigned for many years. This is great news, as the industry has been in decline. When will the tax credit come into force? I declare an interest as a children’s television producer.
I thank my noble friend for that question. Obviously she was in my mind when we developed that measure. It will be part of the Finance Bill next year.
Can the Minister shed some light on the increase in infrastructure spend over the forecast period? In his Statement today the Chancellor said:
“Improving productivity for all business demands a major investment in our nation’s infrastructure”.
Over the past few weeks we have been showered with press releases setting out various infrastructure projects; I stopped counting when we got to around £15 billion. I was therefore a little surprised by table 4.3, the summary of the effect of government decisions, which shows that over the forecast period there is only a £600 million increase in capital. Can the Minister tell us what the actual increase in infrastructure spend is and how it is to be financed if it is only £600 million over the next four years?
As I explained to the noble Lord earlier, we have made a very detailed analysis of infrastructure spend, which is running on average at £47 billion per year. The majority of that, more than 60%, is financed by the private sector, which of course is a great sign of the success of this Government. Every scheme which has been announced has a clear funding plan attached to it. The real transformation that has taken place with this Government is that instead of having a plan for roads one year at a time—if there is a bit more money you can tell the Highways Agency to build a road; if there is no money, you tell it to stop, which results in a very inefficient road-building programme—we have given it a proper organisation, a proper strategy and a proper financing plan over the next six years.
My Lords, does my noble friend agree that it is very good news that we have now reached the point at which the deficit has been halved, and that the Government are determined to eliminate it completely? This raises broad macroeconomic issues that we can debate tomorrow. Does he also agree that this is an extraordinarily imaginative Autumn Statement? Perhaps I may take just one example, that of the Chancellor’s decision that hospice charities should no longer be subject to VAT. That is an example of the good things in the detail of the Statement which will be very much welcomed.
One of the things I have enjoyed about working with my right honourable friend the Chancellor is that, right through to the end of this Parliament, the Treasury is looking at new measures and trying to continue to implement the plan that has been laid out with such effectiveness. To be sticking to the target of getting the deficit down within the context of a very challenging economic environment, while being focused on structural issues and other important things that affect the economy and broader society, is indeed the sign of a good Statement.
My Lords, does the Minister recall the promise made by Mr Osborne when he was the shadow Chancellor to the effect that, when his party came to Government, he would raise the inheritance tax threshold to £1 million? He wowed his party conference with that statement. That is said to have made Mr Brown put off the election, and indeed to increase the inheritance tax threshold to £325,000 and introduce transfers between spouses. What has happened to that promise? The threshold is still £325,000 and there is no mention of it in the Statement today, yet it was a central point of Tory policy at the last election. When are we going to hear more about this issue, or have the Government dropped that promise?
The Government keep all taxes under review. With respect to taxes at the end of life, the focus of the Government has been much more on pension reform, which has been radical and generous in terms of how it will treat inheritance. In fact, my right honourable friend the Chancellor confirmed today that the tax on passing on a pension pot, which had been at 55%, will be removed. He has also introduced a similar arrangement for ISAs being passed on to spouses. While we have not yet made changes to inheritance tax, we have been thoughtful about taking care of some of the issues that complement it.
My Lords, I am sure that the Great Western Air Ambulance Charity and the Kent, Surrey and Sussex Air Ambulance Trust are worthy and deserving causes. Why are they the only two air ambulances that are being singled out for LIBOR money for new helicopters? What about the air ambulances throughout the rest of the country? I just do not know how the Government can operate on the basis of singling out two particular helicopters.
My noble friend has reached the point of exhausting my detailed knowledge. It is a good point. We are of course helping them with VAT in every case, but I am happy to write to my noble friend and explain how we have made those decisions.
My Lords, while there has been a welcome increase in the number of jobs there has been a very unwelcome decline in pay. In these circumstances can the Minister say why the Government have not embraced the living wage?
The Government have of course embraced the most significant increase in the national minimum wage. The new rate of £6.50 came into effect on 1 October. This affects about a million people. I have already listed the other things that we have done. These include increasing the personal allowance on a consistent basis, by again another £100 to £10,600, as my right honourable friend announced today, as well as the other measures to deal with cost-of-living challenges.
My Lords, I congratulate the Chancellor on his Statement in noticing the shoddy disgrace in the north of England known as Pacer trains. The Statement says:
“I can today confirm that we will tender for new franchises for Northern Rail and the TransPennine Express, replacing the ancient and unpopular Pacer carriages with new and modern trains”.
Noble Lords will remember that these Pacers are four-wheel rattletraps, commonly known by people who have to travel on them as nodding donkeys. I have two questions. First, does that mean that the replacement trains will all be new and modern, or does it mean, as has been suggested, that most of them will simply be refurbished rattletraps from the London Underground or from other places? Secondly, do the Government still have the same commitment to replacing Pacer trains in other parts of the country, such as the south-west?
It is absolutely the Government’s policy to upgrade our infrastructure in the rolling stock. The Chancellor is the architect of the northern powerhouse, so his commitment to getting that done quickly and effectively for the north is right at the top of his priorities.
My Lords, the diverted profits tax is to be welcomed, although I suspect it will be difficult to implement. Can the Minister say whether it is intended to be applied to profits diverted from England to Northern Ireland and Scotland, should those countries end up with lower tax regimes?
Is the Minister aware that the new science and innovation strategy is being announced today? Is this so that it is overshadowed by the Autumn Statement, or is it part of the Autumn Statement? If it is, could we know what the strategy is?
The noble Lord is right. Though it may not have succeeded, the idea was for the Autumn Statement and the science announcement to amplify each other, but if they have had the opposite effect we will clearly have to have a word with the communications team.
Consistent with our other strategies, the science strategy is really to make sure that we are clear about what we are trying to do in the long term. We have put a financial settlement behind it that enables us to get it done. This includes a support of science as something worth while in its own right, and a very clear strategy about the things that we are good at and how they tie in to our potential economic advantage. It is likely to include the upgrading of what is effectively our laboratory base, so that that remains at the world’s cutting edge. This country has gone from about 20th in the Midlothian innovation index to second in the past five years. We want to stay there and do even better if possible. There will also be a fund for “grand challenges” where smart ideas that have great potential can apply for money. One of the most interesting things is the £250 million investment in a new advanced materials research institute in Manchester, connected to other universities. It will be called the Sir Henry Royce institute, and will be a magnificent initiative.
(9 years, 9 months ago)
Lords ChamberMy Lords, I congratulate my noble friend Lord Naseby on securing a prompt date for the Committee stage of this important Bill. The Government are supportive of the key objective of the Bill, which is to provide mutual organisations with a means to raise external capital in a way that preserves the mutual status of those firms. The mutual sector has made the case that current capital constraints are preventing friendly societies and mutual insurers acquiring other businesses that would strengthen the overall offer to members and policyholders, and may also be restricting these organisations from developing new or innovative products, especially if these products require material amounts of regulatory capital to be held. Growth in these areas would potentially be to the benefit of both with-profits policyholders and other members of the mutual.
The Bill therefore addresses access to capital for two mutual sectors: friendly societies and mutual insurers and industrial and provident societies, now known as co-operative and community benefit societies. The Bill provides that the Treasury may make regulations, subject to the affirmative procedure, to the friendly societies and mutual insurers to issue deferred shares and to commit co-operative and community benefit societies to issue redeemable shares. At Second Reading my noble friend Lord Newby noted that the deferred share capital instrument for mutual insurers and friendly societies provides a good way forward, and he committed the Government’s support to this instrument. My noble friend also outlined at Second Reading that the Government would not extend their support to the proposed redeemable share instrument for co-operative and community benefit societies, as these societies already have a means of issuing redeemable shares. I am pleased that my noble friend Lord Naseby has accepted the Government’s support for this more limited Bill.
Government Amendments 1 to 16 achieve three objectives. First, they give effect to the Government’s commitment to support only the deferred share capital instrument for mutual insurers and friendly societies, and therefore remove the parts of the Bill that concern co-operative and community benefit societies issuing redeemable shares. Secondly, to preserve the principle of mutuality, the Bill clarifies that no friendly society or mutual insurer will grant more than one vote per person for every deferred shareholder—and, further, that no deferred shareholder will receive more votes than an ordinary member by virtue of being a deferred shareholder. Thirdly, there are several minor and technical changes to tidy up the Bill and use more appropriate legislative terminology.
Amendment 1 to Clause 1 restricts the scope of the Bill to allow HM Treasury to make regulations providing for deferred shares for friendly societies and mutual insurers. The Bill will no longer provide a means for co-operative and community benefit societies, which were formerly known as industrial and provident societies, to issue redeemable shares. In order to provide for these deferred shares, the regulations may modify the Friendly Societies Act 1992, the Companies Act 2006 and other primary legislation relating to friendly societies or mutual insurers. The Government believe that granting the regulations the power to modify primary legislation still to be enacted is both necessary and proportionate. It is necessary because there will be a period of time before these regulations are made, and in the intervening period there may be changes to existing legislation that affects friendly societies and mutual insurers which may need to be amended. It is also proportionate because it is limited to the Friendly Societies Act 1992, the Companies Act 2006 and other primary legislation relating to friendly societies and mutual insurers.
Amendments 5, 6, 7, 9, 13, 14, 15 and 16 are related consequential amendments. Government Amendments 2 and 3 make minor technical changes. Amendment 2 uses more accurate legislative terminology to clarify that the power to make regulations under the clause is exercisable by statutory instrument. Amendment 3 specifies that the statutory instrument containing regulations under this clause may not be made unless a draft has been laid before and approved by each House of Parliament. The Delegated Powers and Regulatory Reform Committee reported that it regards this delegation or procedure as appropriate.
Amendment 4 introduces a new clause that provides that holders of deferred shares will not receive more than one vote by virtue of owning a deferred share, and will not receive more votes than they would have had if they had been a member. Friendly societies and mutual insurers already have considerable freedom regarding their rules and internal governance. This maintains that freedom, but also provides that holders of deferred shares do not gain any advantage over other members by virtue of being deferred shareholders. This amendment therefore serves to protect the principle of mutuality.
Amendment 8 introduces a provision that where HMT makes a regulation to specify a particular organisation as a mutual insurer, such regulations are subject to the negative procedure. The Delegated Powers and Regulatory Reform Committee confirmed that the negative procedure is sufficient in this regard.
Amendments 10 and 11 are minor and technical changes to provide that the Treasury has the power to commence the Bill by statutory instrument and that the Treasury may make regulations by statutory instrument to commence the Bill rather than by making an order. Amendment 12 is a minor and technical change to amend the title of the Bill more accurately to reflect that the Bill applies to friendly societies and mutual insurers, permits the issue of deferred shares and restricts the voting rights of members to hold those shares. I beg to move.
My Lords, these amendments arise out of the removal of the redeemable element in the original Bill. It was removed by mutual consent, but I hope in due course, on another day, to come back to that dimension of the original Bill. These amendments meet the Delegated Powers and Regulatory Reform Committee’s ninth report of the Session. The comments from the committee were important and helpful.
The key element of the amendments is that they enable the Bill to go forward and allow friendly societies and mutual insurers to move forward in relation to the challenges they meet today. Looking back over two centuries, friendly societies and mutual insurers have provided insurance for life events for millions of ordinary people. They manage funds in excess of £90 billion on behalf of their members and customers and focus on good value and service quality. In addition, many are regional businesses, which is an important element. I had a debate the other week on cottage hospitals—or community hospitals, as some would call them. They are a wonderful vehicle for involving communities, and the vehicle of a friendly society or mutual insurer is a means of establishing that.
I applaud what the Government have done in terms of helping the whole mutual movement, building on the work done by the Major Government in 1992. We have seen progress in a great many areas of social welfare and other areas of mutuality, but there was this hole and these amendments help to fill it. I shall pick out the key elements these amendments will facilitate. They will facilitate an increase in membership of the firms involved. That is extremely helpful. The key point is that they will fuel organic growth and enable the development of new product lines. They will provide funds for firms to go through acquisitions that they may see as giving them an opportunity. I do not think I need to go into any greater detail. I went into considerable detail at Second Reading and the House may return to that on Report or at Third Reading.
(9 years, 9 months ago)
Lords ChamberMy Lords, I am delighted that the noble Lord, Lord Deighton, has joined us for this debate. I had anticipated that perhaps he would have a slightly more comfortable ride than he did earlier this afternoon in trying to justify the Government’s position on the European issue. But the noble Lord, Lord Forsyth, has made this debate pretty challenging as well and I hope therefore that the noble Lord, Lord Deighton, will enjoy sailing between the shoals of difficulty in this proposal.
We all enjoyed the contribution that the noble Lord, Lord Hodgson, made in Committee. I very much enjoyed reading his piece in the Telegraph this morning—not a journal I go to for enlightenment very often—which was an excellent explanation of the sovereign wealth fund and its benefits. But someone had to point out its problems and the noble Lord, Lord Forsyth, has certainly done that.
I would like to add a dimension to this question. Of course, it looks attractive because it looks as if we are acting like benevolent grandparents—after all, we are the right age—trying to ensure that the future for our grandchildren is reasonably rosy. I am in favour of that. I am sure we all are. But the problem is, of which decade in the 20th century, or in the 19th century, would you have said, “The resources that that society commanded in that decade ought to have had an element of hypothecation not to be spent at that time but to be looked after for the succeeding generations”? The problem with that is if you were able to anticipate the periodic crises in the capitalist society in the 19th century and also get the 20th century right, then you could make appropriate judgments. Otherwise, what we are facing is a situation where, one decade after the next, the society gets considerably richer.
We have been used to 2.3% growth. Of course I recognise the crisis that we all face at present. In fact, I have from time to time upbraided the Government’s Front Bench for seeming to portray it as a British crisis, quite unable to recognise that the whole of Europe and the advanced world, particularly the United States, are under the same strains. But we are having a period of very significant constraint upon growth at present; in fact, of course, we have had a negative position for a number of years. That is why it is right, surely, that all the resources we have available are directed towards improving the balance of this society, as the noble Lord, Lord Forsyth, has indicated. But in previous generations, such as the one after the Second World War, when it was quite usual to have 2.3% growth a year, within a quarter of a century this country had doubled its wealth. That generation would have looked pretty silly to have hypothecated money for those 30 years down the line when the growth in society ensured that the later society was so much wealthier than it was. We have to rehabilitate—and I am glad I am not the first person to actually try to do this—the word “hypothecation”. After the noble Lord, Lord Hodgson, had spoken in Committee I went and had a little chat. I probably indicated in Committee that I took issue with my colleagues at the other end who have got some responsibility for the Opposition’s position on the economy.
Hypothecation is a real problem. Once any area is hypothecated, in effect the flexibility that attends a Government is inevitably reduced and we are all operating—at this time of all times—on the tightest of margins. I think it was said by the outgoing Government at the last election that there was no money left. The incoming Government after the next election are not exactly going to be rolling in vast resources which they can allocate as they wish, hence the reason everybody is reining in the ambitions of potential Governments for the next few years.
I hope that the noble Lord, Lord Deighton, will address himself to what I think is a complex debate. He starts off, of course, from a very strong base because he is the Minister responsible for infrastructure and, after all, will always need to look a decade or more ahead rather than the immediate five years in order to get infrastructure that is effective and accurate at a location. I am not sure the noble Lord, Lord Deighton, can spend too many warm words on the enthusiasm that the Chancellor has shown over the weekend towards this idea. It is an idea worthy of exploration because the noble Lord, Lord Hodgson, has got a concept that could well capture the public mood and would encourage people to say that in fact we need to look to the longer term future in our investment plans. However, I hope that is what Governments intend to do in any case.
Therefore I have no doubt that when the Minister responds he will have warm words to say towards the noble Lord, Lord Hodgson, for the work that he has done and the speech that he has made this evening. However, I hope that he will explain why it is so very difficult for a Government to accept what is—in fact—a majestic argument for hypothecation.
My Lords, as the noble Lord, Lord Davies, has pointed out, superb cases have been made for each side of this argument by my noble friends Lord Hodgson and Lord Forsyth.
Shale gas represents a huge economic opportunity for the UK. It could create thousands of jobs, generate business investment and in future provide substantial revenue for the Exchequer. A sovereign wealth fund would create a legacy for the long term and ensure the benefits are shared with future generations, and we have heard a lot about intergenerational fairness and the issues around that. It is a complicated issue to get right.
As a Government we support the idea and want to explore—I think those were precisely the words used by the noble Lord, Lord Davies—creating a sovereign wealth fund with the money that comes from shale gas. It would be a way of making sure that this money is invested in the long-term economic health of the north of England, because of course that is where most of the reserves are located, and in other areas hosting development to create jobs and investment there. My right honourable friend the Chancellor found this an appealing concept because for him it is all part of building a northern powerhouse, which is at the heart of the Treasury’s current economic strategy. As my noble friend Lord Hodgson pointed out—
Given what my noble friend has said, what answer would my right honourable friend the Chancellor give if Alex Salmond suggested that we should set up a sovereign wealth fund now using the proceeds from North Sea oil so that Scotland would benefit from it? Where does this hypothecation end?
I think the difference between the two opportunities is that, in one case, we are right at the beginning and, in the other, we are right at the end. Now is the time to explore the opportunity with respect to shale gas.
My noble friend Lord Hodgson pointed out that a sovereign wealth fund was implemented successfully in Norway, but that fund was established in 1990, which was nearly 20 years after oil was first produced. The fund was set up when the levels of revenue were already well known—this was a point that my noble friend Lord Forsyth was also getting at. The UK shale gas industry is still in the exploration phase. We will not be able accurately to forecast the scale or timing of shale revenues until more work is done to determine the extent of gas that can be technically and commercially recovered. Therefore, coming up today with a clear plan for how this might fit into issues related to determining how we reduce the deficit and how we invest in the long term is extremely difficult without understanding what the revenues will be—I fully take on the point made there by my noble friend Lord Forsyth.
It should therefore be for future Governments to think about how such a fund could be designed, but we commit to the principle. The Chancellor will demonstrate his commitment to bring forward a proposal in the next Parliament in his Autumn Statement. With respect to the request made by my noble friend Lord Hodgson for a peg in the board now, and for those others who support this idea, I think that the right timing is when we have better information and are able to look at this matter properly. On that basis, I trust that the noble Lords, Lord Hodgson, Lord Whitty, Lord Teverson and Lord Jenkin, will agree not to press their amendment.
Perhaps I might follow up on my noble friend’s point about the Scottish position. He said that we were right at the end and not at the beginning. What would his response be to a proposition that said, “Well, for new fields that are discovered, we should have a sovereign wealth fund”? Let us bear in mind that there are considerable potential resources to the west of the Shetland Islands and so on. Surely this is a very dangerous argument given the delicate situation that we are in, where we appear to be saying that, for some parts of the country and for some energy resources, a different view will be taken of the long-term future. Is this not a very dangerous proposition which could unravel rather badly?
That is one of the reasons for our anticipating that this subject would be explored in the next Parliament rather than this one.
My Lords, I thank all those who have taken part in this debate. I am grateful to my noble friend Lord Jenkin for his experienced view. I accept his stricture that it would have been hard in 1970 to foresee the flows from North Sea oil. I thank the noble Lords, Lord Whitty and Lord Teverson, for their support.
There was a characteristically combative speech from my noble friend Lord Forsyth from which I drew four things. The first was that the priority must be debt repayment; otherwise, it is a charge on future generations. That is fine, so long as you do not think that there should be any intergenerational fairness and you think that the assets that flow from shale gas are ours to use to repay the debts that we have created. That is a philosophical question. Secondly, he said that we should not spend money that we do not have. However, a sovereign wealth fund is not spending; it is saving. It is not actually spending but making sure that we do not spend it. Thirdly, he said that it is like going along to your bank manager and asking to borrow £1.4 trillion. Of course it is, but what we are doing at the moment is saying, “We’re not going to take the actions to cut that; we’re going to pledge some future assets that actually might belong to future generations”. That is the conversation that we are having with our bank manager rather than one about how we cut our coat according to our cloth. On my noble friend’s last point, this is a permissive amendment. It is not designed to set out how things are going to work; it is designed merely to say that, if things develop in a certain way—that is, profitably—then we should look at it again at that point.
In response to the noble Lord, Lord Davies of Oldham, on the question of hypothecation, when we are talking about a finite natural resource that might belong not just to this generation, we should consider whether there is a special case for dealing with it in a particular way, which you might or might not call hypothecation.
Finally, I turn to the Minister’s reply, for which I thank him greatly. It is interesting that, given institutional concern about this, the Kuwait Investment Authority, which is the sixth largest sovereign wealth fund in the world, is worth about $600 billion. It was set up in the 1950s, at a time when Kuwait looked to this country for guidance and help and support, by a team entirely from the UK Treasury. So we have tried to deal with the sovereign wealth fund idea, but not here—only with people who were looking for our advice.
I recognise, and am grateful for, what is at least half—probably more than half and possibly two-thirds—of a loaf tonight. I think that I heard my noble friend say that he wholeheartedly commits to the principle of a sovereign wealth fund, a commitment which he said the Chancellor will reaffirm in his Autumn Statement. Further, the Chancellor will at that time commit to bringing forward a proposal for a sovereign wealth fund in the next Parliament.
There is of course many a slip between principle and practice. I equally have to recognise that my amendment is a pretty rough and ready one on which to hang such a radical new departure for British public policy. Weighing all of these factors up, I am going to trust that practice will follow principle, and watch developments closely. In the mean time, I thank my noble friend for his reply, and I beg leave to withdraw my amendment.
My Lords, this gives me the chance to congratulate the noble Lord, Lord Jenkin, on the assiduous way in which he has pursued this topic and the way in which he has clarified many of the issues. He did so to our great advantage in Committee and has been a great strength today, so the noble Lord, Lord Deighton, knows the nature of the opposition to which he needs to respond.
We regard the noble Lord, Lord Jenkin, as entirely right to raise the key question of the costs to consumers; he is certainly right to repeat the call of the Public Accounts Committee, which argued that departments should consider very carefully the costs to consumers of the policies that they pursue on infrastructure. He is also right, of course, to raise the fundamental issue of ensuring that costs are not unfairly passed on to consumers. If we had more time, we would dwell on the number of occasions where we consider that to have been the case. It is clear that in many sectors costs to consumers have risen very significantly: one in eight households says that their water bills are unaffordable, while around one-quarter of households and 64% of the poorest households spend more than 3% of their disposable income on water bills. Those bills are 40% higher in real terms than they were in 1989. Obviously the licence agreements set a maximum price, but whether Ofwat has quite the powers that it needs to alter those agreements is still unclear. Likewise, the rise in energy bills has been very well documented. The House will of course recognise the extent to which we have been concerned about electricity bills, to the point of indicating that under the next Labour Government there will be a period of time when bills are frozen.
There is an apparent lack of connection between wholesale prices and the retail prices that hit the consumer. It seems pretty obvious to us that the consumer is often getting a bad deal. None of us underestimates the extent to which infrastructure needs to be improved. I am sure that the noble Lord, Lord Deighton, will dwell on that point. However, we need to ensure that increased infrastructure investment does not fall on the consumer, mainly because currently we are very badly in need of better infrastructure delivery. It is absolutely clear that, given that output has fallen by over 19% since May 2010, less than a third of the projects in the Government’s infrastructure pipeline are classed as in construction. Therefore there is a great deal to be done. The Government are rather better at indicating promise and intent than at acting in reality. The imperative is clear. We need to ensure that our infrastructure output increases; likewise, we need to ensure that the costs are not unfairly passed on to consumers, as they have been in some areas in the recent past. I hope that, just as the noble Lord, Lord Jenkin, indicated, the presence of the noble Lord, Lord Deighton, will guarantee that we are pointing in the right direction towards achieving the right balance and a better one than has obtained in recent years.
My Lords, I shall begin by thanking my noble friend Lord Jenkin for raising this matter in the House. As we know, infrastructure investment is a key element of the Government’s economic plan. I agree with the noble Lord, Lord Davies, that it is key to improving our long-term productivity and that delivering it effectively is a part of the Government’s responsibility in working with the industries involved. Of course, we must ensure that it is delivered in a way that is affordable for consumers and taxpayers. That is a crucial and quite complicated issue. The way that we finance and deliver infrastructure in each sector differs. The road sector, which the noble Lord, Lord Berkeley, referred to, is of course financed exclusively through taxpayer funding, so the question of passing the price on does not exist, whereas the energy and water sectors, for example, are predominantly financed in the private sector.
I am pleased to have this opportunity to set out personally the Government’s position on this important issue. If we look at the future pipeline of infrastructure expenditure, it works out that about 60% of it is expected to be privately funded—water, energy and telecommunications are the sectors where that is the case. To ensure that such privately funded investment is affordable for consumers now and in the future has to be central to the Government’s approach, and independent economic regulation is at the heart of that. At the core of the argument I am going to make is that it is actually in our long-term interest to have the regulators primarily focused on this. That is where the expertise is. The fact that they operate independently of the short-term changes that may come from government policy is a very healthy thing in terms of both protecting the consumer and creating an environment that encourages investors to put their money into our infrastructure for the longer term.
In that respect, protecting the consumer is central to the work of our regulators—particularly in the case of Ofwat and Ofgem—and is enshrined in their statutory duties. They are able to take a long-term view free from political involvement, as I said. This is a tried and tested system. Indeed, the ability of regulators to undertake their work independently of government interference is a cornerstone of our regulatory system’s success. Our regulatory system, which has its challenges, is the envy of the world. We need to keep on improving it, but it is a strong competitive advantage for this country.
(9 years, 9 months ago)
Lords Chamber My Lords, I shall now repeat in the form of a Statement the Answer given by my right honourable friend the Chancellor of the Exchequer to an Urgent Question earlier this afternoon in the House of Commons. The Statement is as follows.
“Last month the previous European Commission presented Britain with a bill for £1.7 billion, which it insisted had to be paid by 1 December. The Prime Minister spoke for taxpayers when he said that was completely unacceptable, and we set out to get a better deal. After intensive discussion with the new Commission and at the ECOFIN last week, we have achieved that.
I can tell the House that we have halved the bill, delayed the bill, will pay no interest on the bill—and have changed the rules of the EU so this unacceptable behaviour never happens again. Let me briefly give the details.
At the European Council last month, the Prime Minister made it clear to the Barroso Commission that, while annual adjustments to contributions were a regular part of EU membership, a sudden and unprecedented demand for a £1.7 billion payment on 1 December was unacceptable. He got agreement of all 28 Heads of Government that it should be discussed by the Finance Ministers urgently.
That meeting took place last Friday, and followed two weeks of intensive and constructive discussion with the new Budget Commissioner—Vice-President Georgieva—and other member states. As a result of those discussions, we achieved unanimous agreement that, first, expecting payment on 1 December was indeed unacceptable. Therefore, the budget rules will be rewritten to allow for a delay in any payments, and in Britain’s case that means we will pay nothing this year, and instead make payments in two instalments in July and September, in the second half of next year.
Secondly, the suggestion that we might have to pay interest charges was rejected. It was unanimously agreed that there would be no interest charged on these delayed payments.
Thirdly, in our discussion with the new European Commission, it was agreed that a full rebate would apply to the British payment, and that this rebate would be specific, extra to any other rebate we might expect next year, and, for the first time ever, be paid simultaneously with any money owed. It was not clear we would receive a rebate, let alone such a large one. No one in this House suggested we would. Indeed, it was only confirmed to us by Vice-President Georgieva on 6 November—last Thursday evening. It means that Britain’s payments have been halved from £1.7 billion to around £850 million.
Finally, all member states agreed with us that this entire episode was unacceptable. A deal was reached to make a permanent change in European law so it never happens like this again. In the face of this budget challenge we have far exceeded the expectations or predictions made by those before Friday’s meeting. We have achieved a real result for Britain. But this is only the first step of the reform we need in Europe—reform that we on this side of the House believe should be put to a vote of the people of Britain”.
My Lords, I genuinely feel sorry for the noble Lord opposite. In 10 years or so of speaking from that Dispatch Box, I now and again had awkward cases to argue but I never had a completely bankrupt one, such as the case that the noble Lord is trying to put forward. If the Chancellor had got such a good deal, why did he not go to the other place and make a Statement today instead of being dragged there by my right honourable friend the shadow Chancellor in order to answer some questions that have arisen around this issue?
Is it not clear that the Chancellor failed to reduce the UK’s net contribution by a single penny? The analogy that has been used widely is “smoke and mirrors”. I cannot see much through smoke and at the age of 75 I do not much like what I see in the mirror. I certainly do not like the Government’s smoke and mirrors on such a significant issue as this sum. What it all revolved around is the fact which the Government seek continually to deny—that they had omitted to identify the rebate to which we were entitled, a rebate that the Commission has made abundantly clear was never in the slightest doubt. On all sides, it has been made absolutely clear that Britain was going to get the rebate, and the saving that the Chancellor has made was achieved by subtracting from the bill he was presented with the rebate to which we were entitled. What a story.
I should just like to point out that what we have seen in the past few days is complete clarification of a situation. The reality is that the net payment is £850 million. Noble Lords may understand the situation better than me but until that point everyone assumed that the payment was £1.7 billion. The rebate was not at all clear. What officials spent the past two weeks doing was clarifying that the rebate would be available in a size that has effectively halved our payments. There are also no smoke and mirrors about the fact that the payment has now been delayed—it is in two stages. We have brought the rebate forward so that it offsets the notional second half of the payment. What we have introduced in the past few days is complete and utter clarity on the arrangement in hand.
My Lords, can the Minister confirm that the policy of constructive engagement and alliance that has brought this happy result will be pursued across the whole spectrum of EU policy, instead of one of hubris, bluster, threat and brinkmanship about repatriation of powers, as that is the way to get a good result? Can he also confirm that while of course the UK must always drive a hard bargain to get the best value, given that control of EU spending is vital, our UK contributions to the EU, which give us access to the world’s biggest single market and trade agreements with 50 countries, are less than a quarter of our annual national debt payments? Finally, can he also clarify the exact way in which the final bill has been calculated and whether the rebate is being applied to all 18 years—1995 to 2013—covered by the £1.7 billion GNI recalculation? What is the effect on the rebate in the next and subsequent years?
I thank my noble friend for the questions; there is quite a list there. My right honourable friend the Chancellor has demonstrated how effective his constructive engagement has been in producing this outcome. I would expect the same result from the Prime Minister’s constructive engagement on the reform programme that we will put to the British people in 2017. It is absolutely right that we drive a hard bargain and get better value for money. If one looks at the EU budget, my right honourable friend the Prime Minister has been the first to achieve a real-terms cut for the multi-year financial facility, through to 2020, which has thereby capped the amount spent. The weakest part of our performance of the past few years in that negotiation was, frankly, the poor rebate deal that the previous Government gave away, which put us in a much weaker position. That was by far the most ineffectual piece of negotiation. It is a complicated calculation to work out these rebates, but the rebate side of the calculation does not go back for the same full period as the GNI calculation.
My Lords, the original demand from the Commission was for €1.7 billion. Its demand is still €1.7 billion, against which a British rebate of approximately half that sum has to be offset. If that is right, and I think it is, it does not seem to me that the Government have reduced the amount of the demand by one penny—certainly not by one euro. What they have done, through some creative mathematics, is bring in a rebate that we were going to get anyway and then pretend that they have reduced the €1.7 billion, which they have not.
My Lords, I am afraid that I can only repeat the position. It was far from clear that the rebate would be applied. That is the point at issue between us. We can continue to have that discussion, but it was far from clear that the rebate would be applied. That is what was accomplished in the last two weeks. The other things that have been accomplished are a deferment of the payment and that there will be no interest on those payments. We have also changed the rules so that we cannot get ambushed like this again.
My Lords, would the Minister accept a welcome for the elegant and timely decisions reached in the Council last Friday, while recognising that the clarifications relate to the timing of payments, not to their scale? Will he also recognise that such technical adjustments, as I think the Chancellor said in his Statement, are an endemic part of the EU budget process, from which the UK sometimes benefits and sometimes loses? In future, it might be better to handle it all a little more calmly.
I thank the noble Lord for pointing out that these are, in practice, technical adjustments. Of course, it was a very large technical adjustment delivered with very short notice, which is why the Prime Minister reacted in the way that he did, and why, as part of the negotiations over the past couple of weeks, we have determined that the process will not work quite that way again. In summary, I agree with the noble Lord that there is a better way to handle these things.
My Lords, would my noble friend not agree that, when the announcement was first made that we had to pay £1.7 billion—it is pounds, not euros—we were told by the Commission, other member states and, no doubt, the party opposite that it had to be paid by 1 December, or else we would have to pay interest? We have now reached a situation where it does not have to be paid by 1 December; half of it has to be paid over a period next year. By the way, there was no mention of the rebate whatever at the beginning of this conversation. If this is smoke and mirrors, can we please have more of them?
I thank my noble friend for putting, with force and eloquence, precisely the points I have been trying to make in response to the last three questions.
My Lords, can the noble Lord explain exactly what the Treasury had been up to—it had been involved in all the calculations—and how it was that, after three months of negotiations, the Chancellor did not understand what it had been doing? The Chancellor also did not advise the Prime Minister before he went to Brussels, which is why the Prime Minister was caught on the hop. If we have not got just what we were going to get back in any case, can the Minister assure us that we are still going to get the rebate in 2015 and 2016, and that we have not merely already received it back as an advance?
I can assure the noble Lord that the rebate that we are discussing with respect to halving this payment is applied specifically to this payment. It is independent of other arrangements for the rebate.
It is hard for me to put it in historical perspective, but as always, the Prime Minister and my right honourable friend the Chancellor have done an excellent job representing the interests of this country.
There is a minute, so I have just made it. The country was treated to a lot of sound and bluster from the Prime Minister stating that he was not going to pay a penny. Today, by smoke and mirrors, the Chancellor has reduced that amount to £850 million. However, is the Minister aware that people think that that is a lot of money, which is to be added to the £11 billion we shall be making in contributions?
I agree with the noble Lord that £850 million is a lot of money. We will expect value for money for that kind of investment. I should make clear that the Prime Minister said that we would not be paying £1.7 billion on 1 December. In fact, we will pay nothing on 1 December. We will pay £850 million in two payments next year.
(9 years, 10 months ago)
Lords Chamber
To ask Her Majesty’s Government whether they will make representations about the inclusion of United Kingdom parliamentarians under the definition of “Politically Exposed Persons” in the European Commission’s proposed fourth Money Laundering Directive.
My Lords, while UK parliamentarians are not currently considered to be “politically exposed persons”—or PEPs—domestically, revised global standards to which the UK is fully committed will require that they are treated as such. These global standards require enhanced due diligence and ongoing monitoring only when the business relationship is assessed as high risk. The UK will make representations when negotiating the fourth money laundering directive to ensure that it reflects these standards.
My Lords, I am afraid that my noble friend’s response is only partly reassuring. Even before the fourth directive has come in, many Members of this House and their relatives are being treated as PEPs. I myself and my son were unable to access an ATM and my brother was unable to exercise a joint power of attorney. What steps is the Treasury taking to show Members of Parliament in both Houses that in future they will not be treated in exactly the same way as a deposed dictator or a political pariah?
My Lords, the key here is in the approach of the banks in doing their due diligence appropriately. The main feature of these arrangements is that domestic PEPs should be assessed in terms of their level of risk, and in the main UK parliamentarians should be assessed as low risk and, frankly, treated in precisely the same way as any other customer. The problem is when banks do not apply the right kind of risk-based assessment and instead revert to inappropriate box-ticking approaches.
My Lords, perhaps the Minister will explain that to the clearing banks in this country. Perhaps he could explain why my daughter, who was then aged 12, was required to appear with her driving licence and a utility bill in her name in order to be allowed to have a savings account with no more than 40 quid in it.
I absolutely accept the criticisms that are made where banks behave disproportionately. It happens too often and we should work with them to fix that. I will certainly undertake to look at the revised guidance that will be coming out as part of these arrangements to ensure that the banks take a proper, risk-based approach which is sensitive to the real risks involved in these transactions. I would encourage Members to follow up with their banks when there is a problem. It is appropriate to complain to the Financial Ombudsman Service, which is a facility that we have in place. I took the liberty of looking at the number of complaints about PEPs received by the financial ombudsman. I think that there were around 50 in 2013 and 30 this year out of a total of half a million complaints. However, I encourage Members to pursue their interests.
My Lords, is the Minister aware, although I rather doubt whether he is, that my two sons coincidentally tried to open bank accounts in Singapore and in New York? In both cases they were asked who their father was, and on discovering that I was a Member of this House, were both refused accounts.
It is always difficult for me to comment on individual cases. I think that Members are making their points very clearly, with a variety of illustrations that I absolutely take on board. I will certainly follow up with the banks domestically through the Joint Money Laundering Steering Group, which provides the guidance. We are trying to strike a balance that makes it impossible for corrupt politicians, terrorists and criminals to go about their business but which leaves the rest of us unimpeded to go about our lives in a normal way.
My Lords, the position of Members of this House and of the Commons is far worse than the Minister suspects. Some 150,000 people are rated as PEPs in this country, covering virtually all Members of this House and the House of Commons, including all spouses and all children. Wearing a hat as a banker I would add that, worst of all, banks are required to look at every transaction in the account of a PEP, both in and out, to satisfy themselves that they are proper transactions. The world of PEPs is by no means limited to just those who someone thinks are high risk. It covers virtually everybody and is completely out of control.
My noble friend is correct that the PEP definition includes close family members and business associates. I go back to the original point that it is not within the banks’ responsibility to look at every transaction of a domestic PEP; they should be assessing whether that PEP is high risk. If the PEP is not high risk, the banks should treat them like every other customer. That is where we need to focus our efforts to correct this problem.
My Lords, I do not think that the Minister has taken on board the full range of problems, as other companies also put an unreasonable interpretation on this requirement. I am far from convinced that the way it has operated has at any time been useful in stopping money laundering, and we need to take a much harder look at it. It would be far better to look at other methods of checking for money laundering than simply asking for a person’s occupation and then declaring that they may therefore be a risk.
First, my Lords, I need to make the point that having an effective, comprehensive, international campaign against money laundering is a critical weapon for us, and we are taking leadership in this area. I absolutely accept that the implementation domestically needs to be significantly refined. As I have already said, I will work with the FCA and the industry bodies to ensure that we have a more proportionate application of the rules.
My Lords, the Minister started his remarks by saying that those of us in this House should have little to worry about. I have to say, from personal experience of having an account in France to look after the small needs of the home that I own there, that one is treated as if it were the Spanish Inquisition. They really do not want to know any differently. Can the Minister give an assurance to the House that he will convey to his colleagues in Europe that these rules are meant to be applied reasonably and not draconically?
I can confirm that that will be precisely the message in the final negotiations on the fourth money laundering directive.
My Lords, I am sure that the Minister will accept that his answers have not entirely reassured Members of this House who are treated as politically exposed persons. Perhaps he can explain to me and to many of my colleagues who are not members of the Government: what is it that we might do, or what might be done to us, that makes us politically exposed people?
The thing to remember is that although the intention behind this approach is to catch potentially corrupt public officials around the world, defining someone as a PEP is not an end in itself—it is merely a trigger point at which an assessment should be made of the individual’s business and whether it is high risk. It is that assessment of whether it is high risk that is not working well enough at the moment.
My Lords, is it not clear that the House is struggling with two concepts: on the one side, that the Minister might be right; and on the other, that something good might come out of Europe? On this occasion, both things obtain.
I am not sure that there is a particular answer to that. I think that I have been extremely clear about what we are trying to accomplish. I accept where the challenges are and I accept that we need to do a lot of work with the banks on the implementation of the rules to make sure that they are proportionate.
(10 years, 1 month ago)
Lords ChamberMy Lords, this Government have a clear and highly effective plan to secure our country’s economic future. It is a plan that is cutting the deficit, attracting investment and helping British households to work and to save. This Finance Bill builds on the strong foundations put in place over the past four years.
I begin with those measures aimed at increasing investment and growth. At the start of this Parliament, we set out our ambition to have the most competitive corporation tax system in the G20 and by the end, we will have delivered. We have cut our main rate at every Budget since coming to power. From 2015, it will be 8% less than the rate that we inherited. By 2016, that will mean £9.5 billion-worth of savings for businesses across the UK every year. That is why more and more businesses are starting up here and moving here. For the first time since 2007, business investment has grown for four consecutive quarters. We are helping businesses of all sizes to invest and create jobs. We have doubled the annual investment allowance to £500,000, introduced the first tax relief of its kind for investment in social enterprises and increased the research and development tax relief to provide support for early-stage companies that will become the industries of the future for us. These tax reforms are a central plank of our economic strategy. Employment is at record levels, business confidence is high and investment is forecast to grow rapidly. The Finance Bill 2014 continues to send the message that Britain is open for business.
The quid pro quo for our highly competitive tax regime is that all companies and individuals pay their dues. This Government have taken a firm line in tackling tax avoidance and aggressive tax planning. They have made more than 40 changes to tax law to tackle avoidance and introduced the UK’s first general anti-abuse rule—the GAAR. This approach is working but tough measures are still needed. Over the next five years, almost £5 billion of revenue will be brought forward from users of avoidance schemes which have been defeated in another party’s litigation, or which fall within the scope of the DOTAS rules or the GAAR. The evidence is that these cases are decided against the taxpayer, so this is a fair measure. It is fair to the millions of taxpayers who pay their fair share and expect others to do the same. This measure and others in the Bill which prevent the use of dual contracts or employment intermediaries artificially to reduce or avoid UK tax liability will help to ensure that setting up a contrived structure will not result in a tax advantage and that our tax system will help to provide a level playing field across the labour market.
Taking a firm stance against tax avoidance is an important part of delivering a tax system that is fair, but fairness goes further than just tackling avoidance. It is about making sure that those with the broadest shoulders bear the greatest burden. At our first Budget, we raised the income level at which people began paying tax and we have not stopped since. We are going beyond our original commitment to raise the personal allowance to £10,000, which we accomplished a year ahead of schedule, by introducing a personal allowance of £10,500 from 2015. To put this into perspective, when this Government came into office, the personal allowance was only £6,500. This Government have cut the number of income tax payers by a greater number in five years than any other Government in recorded history. That is not all that we are doing to help. The Bill introduces a transferable tax allowance for married couples, targeting the benefit on married couples and civil partner lower-income households.
Saving, especially saving for retirement, was a fundamental part of this Budget. Thanks to the changes in the Bill before us, from next April those individuals who have been sensible enough to put aside for their future will have far greater control over how they access and ultimately spend their savings.
I turn to this Government’s radical pension reforms, which from next April will allow individuals with defined contribution pension savings more choice and control over their pension wealth. The measures in the Bill help individuals who are approaching retirement now to benefit from that choice this year.
The Finance Bill before us reflects the Government’s commitment to greater consultation on tax policy changes. I thank my noble friend Lord MacGregor and the members of the Economic Affairs Committee for their detailed consideration of the draft Finance Bill legislation at the start of this year and for their report that followed on 11 March. I look forward to some of the contributions that follow, which I am sure will take us through their thinking.
I shall take this opportunity to respond to some of the main points raised in that very thorough report. The focus of the report was on the salaried member element of the partnerships measure, and a recommendation to defer this legislation for a year. The partnerships measure is about fairer taxation and removing distortions across different types of partnerships. It has two key elements. First, the new salaried member rules will reduce differences in the tax treatment between limited liability partnerships—the so-called LLPs—and partnerships generally by providing that individuals who are in essence employees are taxed as employees. Secondly, the mixed membership partnership element will prevent individuals from reducing their personal tax liabilities by allocating profits to a corporate member of the partnership. This measure brings in total tax and NICs revenue of about £3.3 billion over the current forecast period.
The salaried member legislation corrects an anomaly under current law that treats all members of limited liability partnerships as self-employed, regardless of the terms on which they are engaged. This legislation is based on specific statutory tests, as proposed in HMRC’s original consultation document. I would highlight that the draft legislation published last December did not go further than the original consultation proposals but merely updated them to reflect consultation responses received.
As set out in the original consultation document, the legislation has three conditions. Collectively, these capture what it means to be a partner in a traditional partnership by looking at the income entitlements of the members, the amount of capital they have at risk and whether they can significantly influence the LLP’s affairs. The legislation, which came into effect on 6 April 2014, will ensure that members of LLPs will be treated as employees for tax purposes if they are engaged on terms closer to employment.
The Government made clear from the start that the change would take effect from April 2014 and reaffirmed at Budget 2014 that there would be no deferral of this legislation. The argument, of course, is that any deferral would be unfair to the many LLPs that had already taken practical steps to implement these changes. Deferring implementation would also have a significant impact on the Government’s objectives of fairness and deficit reduction.
Noble Lords will of course be aware that the Bill before us today includes this revised legislation as part of the partnership clause and schedule. It was not amended during its passage through the Commons. This legislation will remove structural inconsistencies in the partnership rules and prevent the disguising of employment in LLPs and tax-motivated partnership allocations.
I turn to the points raised by the committee in relation to the development of tax policies in general. The Government set out a new approach to tax policy-making in 2010 following consultation. I am pleased that the committee itself said in its report:
“We commend the Government, HMRC and HMT on the quality of the consultations conducted and the tax legislation produced since 2011”.
Officials consult interested parties and groups from across the tax spectrum throughout the development of measures both to test policy and inform the Government’s understanding of the impacts. The findings are reflected in formal responses to consultations and tax information and impact notes, the majority of which are published with draft Finance Bill legislation in the autumn.
The Finance Bill contains a number of improvements from the technical consultation launched in December. We received more than 300 comments to the draft legislation that we published and have had continuing interaction with individuals and organisations since. The consultation has ensured better legislation and more effective policy.
The committee also considered the policy partnership between the Treasury and HMRC. I assure your Lordships that this is a strong, positive relationship where both departments work closely together, maintain constant contact and look at ways to improve things on a continuous basis. I can assure noble Lords that the policy partnership is kept under constant review to look for improvements. There is a big focus on improving skills and ongoing education. Part of that is being done through the introduction of the new programme, the Policy Skills Learning Programme.
To conclude, this Finance Bill legislates measures that improve our competitiveness, target tax avoidance and leave more money in people’s pockets. It carries out the Government’s economic plan, which has successfully consolidated our recovery and is now driving forward our growth and competitiveness. I commend the Bill to the House. I beg to move.
My Lords, the phrase wide-ranging debate is often used in this House, but we can justifiably describe this debate as one of the widest-ranging. It ranged from the broadest macroeconomic issues and challenges to society to the very specific and detailed implications of the taxation of limited liability partnerships. I learnt a lot and I hope that noble Lords did too. Like many of the speakers, I pay tribute to my noble friend Lord MacGregor. I could not do it more eloquently than they have done, or with the same historical experience. It is clear that his contribution is enormously valued. I also thank the other members of the Economic Affairs Sub-Committee.
I shall try to address some of the questions, and given their breadth and technical depth, I am sure that noble Lords will grant me some poetic licence. I shall start with the noble Lord, Lord Davies, who summarised very well many of the contributions, so I shall not re-summarise them in exactly the same way as he did. As to our competing visions for an economic strategy, I tried very hard to determine the alternative economic strategy that was being offered. As I understood it, the objection to our economic strategy was that the economy has not grown quite fast enough. I do not think that that is an adequate basis for winning the hearts and minds of the British electorate in attempting to get back the keys to drive this particular car. I think that we also heard that one of the explanations for the strength of the recovery was the very low base from which we started. We all know why we had such a low base; I do not really need to revisit that. The work that this Government have done to stabilise the public finances and get the situation under control, so that we can focus on the key drivers of economic growth, is our major accomplishment. My noble friend Lord Lawson reminded me that I should have congratulated my boss the Chancellor of the Exchequer on sticking to his guns. I am not sure how many people would have done the same, given the extreme pressure of those early years of government when the depth of the recession really hit home.
I also have a very different view of the fairness behind this Budget and Finance Bill. The basis of the Bill is very clear. We are doing everything that we can to make this an extraordinarily attractive environment for businesses to grow, to create jobs and to improve their productivity—the very things that create value and drive the economy forward. The concept which I think the noble Lord opposite is not addressing is how you get this economy going. The Government are creating an environment in which businesses are growing and new businesses are starting up. Businesses from around the world want to come here. I have a long queue of investors outside my office every day from all over the world who want to come to this country because they think that it is the best place in the world to invest their capital. That is a result of the environment that this Government are creating.
The noble Lord focused hugely on fairness. This Finance Bill is all about fairness. There is a huge focus on making sure that people pay their taxes, and that focus is inevitably on people right at the top of the income levels. The core income tax measure is the progressive increase of the personal allowance, and there is no fairer way to benefit people at the bottom of the income chain. So what is driving this Budget could not be more focused on those combined goals of making sure that things are done fairly, but also of making sure that we have some growth, so that we have some real proceeds from that growth to distribute across the population.
I take on board some of the suggestions about things that need to be looked at and done better. I certainly agree that responsibility around executive pay is a big issue, and my personal view is that boards need to do their job as effectively as possible. It is certainly right to say that improving productivity will be at the heart of driving forward improvements in real disposable household income, which is what we are all looking for. The OBR tells us that, given what we have done with inflation and growth, we will see those lines cross this year. It has been a long hard path, but we are getting there. I also agree that a compelling strategy for improving the supply of homes is vital for this country. So although I disagree on many of the core approaches, there are two or three things in there that any new Government should redouble their efforts to attend to.
My noble friend Lord MacGregor asked absolutely the right question about the work of this House on the Finance Bill: does it add value? All I can say is that, having spent the weekend reading the report, and having listened to this debate, I am thinking a lot harder about the real issues and how we can do our job more effectively—whether that is about how the Treasury and HMRC work together, how we train our people, how we consult, or, in particular, how focused we are on improving tax simplification and administration. The quality of the work that my noble friend has overseen makes it easy to answer yes to his question.
I am in a rather strange hypothetical position, because normally when we are discussing such issues we are having a debate after which we could amend things, but I am now defending decisions that have already been taken, so no change will result from this debate. The fundamental difference between us is whether the consultation produced such different results that we needed more time to implement the system. When I looked into this with my officials, we were not in any way persuaded that spending another 12 months working through it would have resulted in a different outcome, and we were extremely keen to ensure that we could put this legislation into practice so that we could collect the money that needed to be paid. Indeed, as I have said before, many of the partnerships that had to change as a result of the measure had already made those changes. It may have been a pragmatic decision, but on balance we feel that we were justified in getting on with this.
The noble Lord, Lord Razzall, made the point about following case law rather than statutory provisions. Again, we felt that in order to administer the rules effectively, we needed the certainty that clear tests apply. The noble Lord, Lord Joffe, made some interesting observations about how much we should invest in HMRC in order to increase the yield. Since 2010 we have invested about another £1 billion in numbers of people and systems to help us collect revenue, so the management approach of evaluating the investment we need to make to enhance the yield is indeed a way in which we think about that challenge.
It is always fascinating to learn about the current perspective of my noble friend Lord Lawson on the economy. I am interested in those things that we can control, and therefore can do something about, but I shall not comment on monetary policy. It is dangerous for a Treasury Minister to do that, given the independence of the Bank of England. It is always good to revisit our discussion on banking reform. I agree that following through those things that the Parliamentary Commission on Banking Standards recommended is absolutely right. In particular, getting SME lending going is a key focus of this Government. On energy policy, to bring my own experience to bear, it is hard to think of another area where I personally spend more time in trying to think things through and make things work which have real economy implications than energy policy. I will certainly take on board with respect to shale and getting that whole industry moving whether the way the Government are looking at that is sufficiently focused and driven. At the moment, it is managed through the growth implementation committee, which the Chancellor chairs, but it is of course one of a wide number of topics. I have discussed with industry participants how we should follow through on that.
The noble Lord, Lord Razzall, talked about the challenges of keeping our focus on managing the deficit down. I acknowledge the simple point that our work is by no means done. We are still confronted by the same issues around priorities, and the same questions around having the right debate to ensure that we understand the implications of the choices that we will continue to be forced to make.
I agree with a specific point made by my noble friend Lord Wakeham and a number of noble Lords. The best role for advisers is to help us to understand and identify the unintended consequences of the changes and proposals we put in place. That is an extraordinarily valuable role. On rationalising, modernising and simplifying our existing portfolio of taxes, obviously to get the balance right between continuing to meet our tax yield objectives and making them operate more effectively is always something that has to be worked through. Personally, I am a big advocate of the simplest possible portfolio of taxation so that we do not have all the kinds of issues we talked about today—I will move on to address the comments of my noble friend Lord Flight later—which are in the main created by complexity and the perverse incentives you end up with when you fiddle around with a tax regime over many years.
My noble friend Lord Wakeham also referred to the formal review between HMT and HMRC that the committee recommended. I made those comments in my opening remarks, but it is kept continually under review. The independent Tax Professionals Forum also scrutinised the process. The Office of Tax Simplification looked at that and commented positively on how the two worked together. Therefore I do not by any means want to suggest complacency, but that is an ongoing process. I accept absolutely that everything we do could be done better. There is no situation in life where consultation cannot ever be improved. It is like communication—you can never have enough of it. However, we are well seized of the importance of that.
My noble friend Lord Flight, as ever, took on the difficult task of making the case for those who have participated in schemes to manage their tax payments. I admire him for that. He is certainly right that we need to be careful about the language and that there are tiers of how we should regard just how heinous the abuse or avoidance is. I could not agree more that we do not want to be in a position where we are creating retrospective acts, where we are left with anomalies which make it very hard for people to work out what to do. As regards taking money out of people’s bank accounts, if you look at the process that will be gone through by HMRC before that is done—I will not read out the details—we should take some comfort from that.
My final point on tax avoidance is my own personal view. I have always been a strong advocate in the Chancellor’s ear to pursue these changes quite aggressively. It is important that everyone who could potentially avail themselves of these schemes knows that they are being treated fairly. If you were in a position personally to be able to take advantage of them, you would not want to see other people in an equivalent position, who are prepared to be more aggressive, just paying less tax. There is a real fairness issue here. I think we have got the slant of what we are doing right—a whole regime of competitive taxes where we are rigorous in expecting people to adhere to them and there is no wriggle room for people with a more aggressive frame of mind to play the system. I like the way we are heading, though I know it creates some challenges.
In conclusion, I think we have taken some difficult decisions and resolute action to tackle the enormous debts we inherited. We are all agreed that the job is not done. The whole point of this Bill is to put us back on the right path. We are supporting enterprise, helping families and ensuring everybody pays their fair share of tax. I commend the Bill to the House. I beg to move.