Budget: Cost of Changes

Lord Eatwell Excerpts

Tuesday 12th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, what this Government have done as far as the wealthiest are concerned is to raise five times as much tax from them as the Labour Party would have done under its plans, so that the top 1% of the population of earners pay 27.7% of tax. We are very concerned to make sure that tax falls where it should: on the broadest shoulders.

[Lord Eatwell]

My Lords, I am intrigued by the noble Lord’s estimate. Let us say that there is a £150 million cost to these changes. Can he tell the House whether that is the limit of what can be afforded? Could £151 million be afforded, or perhaps two or three times that £150 million, or maybe 10 times that £150 million? What is the limit that can be afforded?

[Lord Sassoon]

My Lords, the recent Budget introduced £9 billion of tax changes. There were a number of measures on which we said we would consult. We consulted and made the changes that were appropriate, which added up to a total in the range of £120 million to £150 million. I can give the House the breakdown if it wants it. Those were the numbers that resulted from the changes that we believed appropriate, having listened to what people had to say to us.

Financial Services Bill

Lord Eatwell Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing this important Bill. Its importance can hardly be in doubt, given the core dilemma presented by the place of financial services in the British economy. On the one hand, Britain is a world leader in financial services and a considerable measure of our future prosperity depends on that industry. On the other hand, as we have seen, it is the industry that has greater potential than any other to inflict severe damage on Britain’s economy. The goal of regulation is to secure the benefits while minimising the costs and to achieve that in a manner that passes the tests of accountability, clarity, efficiency and transparency. Regrettably, the Bill fails all those four tests.

It certainly fails the test of clarity, being both complex and incomplete. The Bill is unnecessarily complicated because, instead of drafting a new template for the financial services industry, superseding all past relevant Acts and incorporating the new banking Bill that is yet to be published enacting the Vickers proposals, the Government have constructed a dog’s breakfast of amendments to earlier legislation.

Last week, noble Lords were no doubt surprised to receive a passionate entreaty from the Treasury Committee of the other place insisting that the Bill had been cobbled together with undue haste and had not received adequate consideration—in the case of some clauses, no consideration at all—and providing a checklist of serious failings in the legislation as currently drafted. From these Benches, I can assure the Treasury Committee that its despairing plea will not go unanswered. We intend to devote just as long as it takes to sort out this flawed Bill and thank goodness that the procedures of this House will allow us to do so. I am sure that all sides of the House will support this commitment, since this is essentially a non-partisan Bill. We all have a strong vested interest in getting it right. I hope that the Government will approach our deliberations in that spirit, although their negative performance in the other place was not encouraging.

The noble Lord, Lord Sassoon, referred to the regulatory failures that have been all too evident in the financial crisis. That there were serious failures is beyond doubt—most notably in the operation of the tripartite memorandum of understanding. But these were less failures of structure and more failures of the then conventional wisdom with respect to regulatory theory and practice. As the Joint Committee on the Bill noted:

“Successful regulation depends more on the regulatory culture, focus and philosophy than on structure”.

That point was made even more forcefully by Mr. Alan Greenspan in his evidence to the US House of Representatives in October 2008. Referring to the intellectual framework that guided the regulatory stance of the Federal Reserve System, Mr. Greenspan said:

“This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year”.

That was as true of the thinking of British institutions as it was of the United States.

In this context it is worth remembering why the tripartite system was created in the first place. One of the key reasons was that the Bank of England had proved to be such a fallible regulator. The cases of Johnson Matthey, BCCI and Barings come to mind. In the latter instance, the Bank’s performance was so bad that the Board of Banking Supervision was moved to comment that it would be a good idea if the Bank of England understood the products that it was supposed to be regulating.

Nonetheless, on the basis of what we have all learnt over the past four years, the fundamental thinking behind the reforms set out in this Bill is clearly well-founded, even if the execution falls a little short. The key thing that we learnt was that focusing on the stability of individual institutions, however large—so-called microprudential regulation—is not enough. The whole is bigger than the sum of the parts; systemic risk is all pervasive and by its very nature cannot be managed by individual firms. Hence the need for macroprudential regulation, spelt out so clearly in the FSA’s Turner review. But macroprudential regulation poses major new challenges to economic and financial policy-making. It will necessarily involve measures that cross what has previously been deemed to be the boundary between actions that might reasonably be left to unelected officials and actions that are necessarily the province of politically accountable decision-makers.

The essence of the macroprudential structures as set out in this Bill is that the Treasury cannot be trusted. Just as it was feared that the Treasury might approach the setting of interest rates with an inappropriate eye to political advantage, and hence the Bank of England was given control over interest rates, so now it is feared that the Treasury will fail to take away the punch bowl of loose credit in order to reap the short-term political benefits of a debt-fuelled boom. Accordingly, the Bank of England is given, via the new Financial Policy Committee, virtually autonomous control over a variety of instruments to manage the supply of, and perhaps later the demand for, credit. In addition, microprudential regulation is also taken into the Bank, in the form of the Prudential Regulation Authority.

This agglomeration of powers in the Bank of England poses two vital questions. Is the governance of the Bank of England such as to result in accountable, clear, efficient and transparent utilisation of these extraordinary powers? Equally, does the relationship between the Bank of England and the Treasury, as set out in the Bill, meet the test of these four principles? The answer given by the Treasury Committee to both of these questions is a resounding no. We on this side broadly agree with the Treasury Committee, though we differ in some details. We certainly agree that the governance of the Bank should not be a matter for the Bank itself. Our major disagreement with the Treasury Committee’s proposals is that they do not go far enough.

First, with respect to the governance of the Bank, the Government have responded to the evident lack of co-ordination in the crisis by designing a model of perfect co-ordination; namely, that one person should be responsible for everything. The Governor of the Bank of England will chair the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, as well as being in overall charge of the Bank of England’s special resolution unit and its payment and clearing and settlement systems oversight department. When he or she has some spare time, this individual will also chair a number of important international committees. Even if it is possible to find the exceptional individual who can effectively take on all these tasks simultaneously, that person will be driven mad, for many of these activities will demand contradictory policies. Moreover, if ever there were a structure likely to result in the dangers of group think, this is it, since the group is a group of one.

Side by side with the inefficient, unaccountable and untransparent role of the governor is the now anomalous position of the court of the Bank. The Financial Policy Committee is to be a committee of the court. It is envisaged that primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will sit with the court, although the court will be required to consult the FPC and Treasury, and the FPC may at any time make recommendations to the court. On a moment’s reflection, it is clear that the court’s composition and powers are simply not up to the job.

In Grand Committee we will propose wide-ranging reform to the governance of the Bank of England to ensure that it has a structure of decision-making appropriate to the first half of the 21st century, rather than to 1694. In particular, we will require a more collegiate form of decision-making and propose measures to improve the accountability of what is, after all, a public institution. I was delighted to hear from the Minister that the Government are searching for good ideas in that area. I think that we have some.

Given that the governance of the Bank, as the Treasury Committee puts it, falls,

“well short of what would be expected in a modern institution, whether public or commercial”,

and that this is,

“especially important given that vitally important decisions made by the Bank’s executives, especially during times of financial instability, may not reasonably be made public and therefore be immediately available for scrutiny”,

the next question obviously arises. Are the powers of autonomous action endowed on the Financial Policy Committee and, accordingly, the Bank, appropriately balanced with the need for political oversight by the Treasury of the overall conduct of economic and financial policy? Does the Bill provide for sufficient parliamentary scrutiny to endow the FPC and the Bank with an appropriate level of legitimacy? Again, we believe that the Treasury Committee does not go far enough. The FPC is described by the Government as,

“a powerful new authority sitting at the apex of the regulatory architecture”.

The mechanisms to ensure democratic accountability of the FPC need to be commensurate with the strength of its powers.

The most important aspect of the relationship between the Bank and the Treasury is what should be done in a crisis. After all, it was in a crisis that the system failed. This is spelt out in Part 4 of the Bill and in the draft memorandum of understanding on crisis management. The draft memorandum of understanding, which, by the way, is in general far less clear than the old tripartite memorandum, at least makes clear that the Bank is the gatekeeper, defining when the Treasury may play a crisis management role. It is worth quoting the MoU. It states:

“The Bank has primary operational responsibility for financial crisis management. The Chancellor and the Treasury have sole responsibility for any decision involving public funds. When the Bank has formally notified the Treasury of a material risk to public funds, and either there is a serious threat to financial stability, or public funds are already committed by the Treasury to resolve or reduce such a serious threat and it would be in the public interest to do so, the Chancellor may use powers to direct the Bank. … Where the Bank is able to manage a financial crisis without public funds being put at risk, it will have autonomy in exercising its responsibilities”.

This is the most extraordinary nonsense, a fetishisation of the use of public funds. First, whatever is happening, the Treasury must wait for notification by the Bank of England before it can act. Given the Bank’s record on Northern Rock, that notification will come far too late. But secondly, and more seriously, households may be losing their savings, businesses may be collapsing, and economic activity may be in precipitate decline as the result of financial instability, but if there is no threat to public funds the Treasury is shut out of any active financial stability role until the governor invites it in.

This betrays a lack of understanding of the mutually reinforcing co-operative role that the Bank and the Treasury need to adopt to tackle macro-risk. This was put very clearly by Jacques De Larosière to the Economic Affairs Committee of your Lordships’ House three years ago. He said:

“Let us not hide ourselves from reality. Often ... fiscal policies can be part of systemic risk”.

The only sensible solution seems to be for a fundamental rewriting of Part 4 of the Bill to allow the Treasury to act when severe financial problems arise without the Bank acting as a gatekeeper. In 2008, the problem was not that the Treasury was too strong but that it was too weak. To ensure that the roles of the Bank and the Treasury are clear beyond all reasonable doubt and given that the MoU will evolve in the light of operational experience, the MoU itself must be the subject of enhanced parliamentary scrutiny. By the way, the definition in the Bill of the objectives of the Financial Policy Committee, with its peculiar emphasis on leverage, debt and credit growth in the UK, also betrays a worrying lack of understanding of the nature of systemic risk in a global financial system.

Many other aspects of the Bill require substantial revision by your Lordships’ House, ranging from procedures for consultation at all levels, the role of the tribunal in disciplinary cases, to the duty of care that retail financial institutions should exercise towards their customers, and the range of access to financial services and to the procedures for parliamentary scrutiny of the avalanche of secondary legislation that the Bill will stimulate. My noble friends and I are committed to playing a constructive part in that revision. However, at the core of the Bill—the core that we must get right—are the new procedures for macroprudential regulation. If an open and successful financial services industry is to be sustained, it is imperative that an accountable, clear, efficient and transparent mechanism for the management of systemic risk is established. Moreover, that mechanism must have as its ultimate objective the promotion of employment and growth in this country.

[Lord Forsyth of Drumlean]

The noble Lord has made a passionate and powerful speech about the importance of the Bill. Why have the Opposition agreed that it be referred to Grand Committee for its Committee stage?

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[Lord Eatwell]

Our experience from the Bill establishing the Office for Budget Responsibility, given that everyone was trying to get it right, was that we managed to have a very constructive debate. The noble Lord, Lord Sassoon, was constructive in accepting numerous amendments from the Opposition and we felt that detailed debates on complex matters could be conducted more effectively in that less formal arena.

Debt

Lord Eatwell Excerpts

Tuesday 29th May 2012 Lords Chamber

[Lord Higgins]

My Lords—

[Lord Eatwell]

My Lords, yesterday’s government announcement on VAT will add £110 million to the annual deficit and hence cumulatively to the public debt. Will the Minister explain to the House why the announcement on VAT was not first made in Parliament, in compliance with the Ministerial Code? Will he also tell us what alternative ways of spending the £110 million of petty cash were considered? Does VAT now apply to humble pie?

[Lord Sassoon]

My Lords, I am glad that in the space of three minutes the party opposite’s definition of petty cash has come down from £1 billion to £110 million. On a number of issues, including the VAT changes, we said that we would consult. We have consulted and we have come up with what we believe is the right approach, having talked to a range of interested parties.

Working Tax Credits

Lord Eatwell Excerpts

Monday 14th May 2012 Lords Chamber

[Lord Sassoon]

First, I congratulate my noble friend on her new responsibilities as her party’s spokesman on the economy. I can see that she is not going to give me an easy time. It is an important question. First of all, there are important elements of the present tax credits system, such as the child tax credit, which do not relate to hours worked. Of course, when universal credit comes in, the link to hours worked will go altogether. As my noble friend knows, that change will start with natural migration, coming in from October 2013. Then managed migration will take place from August 2014 in a way that means that nobody loses out in cash terms. So it is a transition that has been carefully thought about by my noble friend Lord Freud.

[Lord Eatwell]

My Lords, the examination by the Institute for Fiscal Studies of the impact of the April measures demonstrates that the greatest proportionate burden of those measures falls on those in the lowest deciles of the income distribution. In the light of that independent finding, would the Minister like to correct his inaccurate first Answer to my noble friend Lord Touhig?

[Lord Sassoon]

My Lords, of course I shall read the record very carefully, and if I made any inaccurate response I shall correct it—but I do not believe that I did. There were, of course, a large number of tax and benefit measures announced to come into effect in the last Budget, including 24 million households that will benefit by up to £6.50 a week from the changes to allowances as well as benefits. There are the significant above-indexation increases to child tax credits as well. Therefore, one should look at the total effect, which is very much designed to make sure that those at the lower end of the income scale are protected.

Scotland Bill

Lord Eatwell Excerpts

Wednesday 28th March 2012 Lords Chamber

[Lord Forsyth of Drumlean]

My Lords, the amendment seeks to outlaw the practice, which my noble friend laid bare before us at an earlier stage of the Bill, whereby the Scottish Parliament is able to raise 10p in income tax but, if the tax base is narrowed, the Treasury sends it a cheque.

The current Budget, quite rightly, raised the threshold at which people pay income tax, which will be very beneficial to people in Scotland. If this system were in operation today, not only would everyone enjoy a lower tax on their income in Scotland but the Treasury would send a cheque for the equivalent amount in the reduction in the tax base to add to the block grant—which drives a coach and horses through the whole idea behind this Bill, of bringing accountability to the spending practices of the Scottish Parliament. It should not be compensated for a reduction in the tax base that arises from a reduction in income tax in the rest of the United Kingdom. It is an absurd proposal.

I am very nervous that my noble friend may accept this amendment, because it extends the powers of the Scottish Parliament very considerably, in a constructive way. I know my noble friend, at an earlier stage in the Bill, said that the Scottish Parliament cannot change the allowances, and therefore the reduction in revenue would be as a result of something that was done in the United Kingdom. The amendment provides for the Scottish Parliament to be able to change the allowances and gives it more power. I listened to the noble Lord, Lord Kerr, and can see the logic of that.

My noble friend may not like that at all, because it adds to the complexity of the devolution of income tax. I noticed he said earlier that the block grant would be about 60 per cent of the expenditure. We keep hearing that the Parliament will be raising 35 per cent of its own expenditure through tax—but that is a dishonest figure. The amount that will be raised by the 10p on income tax is about £4.5 billion. We are looking forward to discussing this later today, but it just so happens that when the Barnett committee, which was established as a result of the efforts of the noble Lord, Lord Barnett, looked at this, the estimates of the additional grant that Scotland had over and above what would be based on needs was about £4.5 billion. That is what 10p on income tax, broadly speaking, will raise. It is about 15 per cent of the block grant and it has all the problems that we have with local government finance, where a small increase in expenditure needs a large increase in income, because of the gearing effect. Therefore, it may be sensible to broaden the tax base, which is another reason for having additional sources of revenue other than income tax, such as the aggregates tax and so on and so forth. I can see myself being sucked into this process of additional tax-raising powers. It is the slippery slope that my noble friend Lord Lang referred to.

The purpose of this amendment is to deliver what all those advocates of this Bill, whom I have spent most of my life opposing, say that the Bill is about and to remove this extraordinary idea that Scotland should benefit both ways—and no self-respecting Scot would want this—by getting both the reduction in the tax and the additional grant. It is very straightforward and because the hour is late, I will not elaborate on it any further. I beg to move.

[Lord Eatwell]

My Lords, in the enforced absence of my noble and learned friend Lord Davidson, I rise with considerable trepidation to speak on these clauses. Having spent some time reading myself into the debates that your Lordships have had on this Bill, I cannot feel that they have been entirely enlightening.

With respect to the amendment proposed by the noble Lord, Lord Forsyth, I am afraid that he shot his own fox in his remarks, when he pointed out that by varying the tax base as well as tax rates he will increase enormously the complexity of any tax changes that might affect Scotland. On top of that, when you increase complexity you reduce transparency and accountability. To have proper accountability we need to have clarity. By changing both the tax base and tax rates or putting both into play, within a very short period of time we could have enormous complexity in the Scottish tax system relative to that in the reset of the United Kingdom. The notion of accountability would be lost.

[Lord Forsyth of Drumlean]

I am grateful to the noble Lord and I sympathise with him if he has had to read all our proceedings, but this is not my fox. I am opposed to having these tax powers for the very reason that, to make it work, it would be excessively complicated. It is the fox of his noble friend Lord Browne, not mine.

[Lord Eatwell]

By introducing tax allowances, the noble Lord seems to be adding to the creature to be chased.

I pose a couple of questions about this issue, which comes under the general heading of “no detriment”. As I understand it, the whole concept of no detriment is to require all government departments—and, in this case, the UK Government with respect to the devolved powers in Scotland—to take account in their decisions of any detriment that they might impose on the Scottish Parliament and its revenues.

As I understand it, any proposal of this sort would be intra-budget in the sense that it is within a budgetary year. In a letter from the noble Lord, Lord Sassoon, to the noble Lord, Lord Forsyth, dated 19 March, he stated that,

“it is highly unlikely that a UK Budget would announce a change in income tax policy to be implemented within the same fiscal year”.

I understand that he is referring to something within a budgetary period—in other words, not from one budget to the next, when the negotiated taxes, allowances and block grant are made clear—but to some amendment that takes place within a budgetary period. Perhaps he could clarify exactly what he meant by that part of his letter.

On another element of clarification, I turn to the Written Statement made by the noble and learned Lord, Lord Wallace, on the Scotland Bill, on 21 March, when he referred to the application of the model recommended to the Welsh Assembly in the Holtham report on the tax and budgetary arrangements between the UK and the Scottish Government. I would be grateful if he could clarify exactly what is meant by the Statement that it,

“will help protect the Scottish Government’s budget from wider macroeconomic shocks”.—[Official Report, 21/3/12; col. 62WS.]

Given that in the face of a macroeconomic shock any change is unlikely to be reflected in the tax base, because that takes so long to implement, what does this actually mean? Could he give us an example of how a macroeconomic shock would in some way lead to a change in the tax base affecting Scotland within a fiscal year? I am completely puzzled by that; it does not seem to make any sense at all.

There is one other area of puzzlement that I have with respect to this question, in the reference to the OBR, which appears in the amendment from the noble Lord, Lord Forsyth, and in government statements about the assessment of the impact of a change in taxation. In the report published on 21 March, the OBR said:

“We are therefore not able to produce a Scottish macroeconomic forecast to drive the Scottish tax forecast. Instead the methodologies we intend to use … are generally based on Scotland’s historic share of the relevant UK tax stream. We then generally assume that this share will be maintained at the recent average level in the future”.

However, if there is a change in allowances that assumption is invalidated, and therefore the OBR is not competent because it does not have the information it needs to perform the task which both the noble Lord, Lord Forsyth, and the Government wish it to perform.

In those circumstances the OBR says that, in due course and with a long lag, it can assess this. If the block grant is changed in the way that the Government have suggested, in response to a change in tax base—I agree with the Minister that that is how it should be done and not with the noble Lord, Lord Forsyth—and if the OBR finds that its preliminary assessment was misguided, will that be adjusted in future years or will we proceed with a methodology which the OBR admits is imperfect?

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[Lord Sassoon]

My Lords, I do not want to prolong this but I resent the suggestion that we have not tried to be accommodating on this issue. We have all been considerably inconvenienced by the difficulties of the parliamentary timetable. I merely want to make the point that that timetable has been difficult and we have all sat around waiting for things to happen. I am sorry that we have not had an opportunity to take some of that time to discuss the details of this very technical series of adjustments under these arrangements. I say at the start of my response to this discussion that it is simply not possible to go through the adjustment line by line, but I shall make some points on it.

For those who have looked through the adjustment carefully—the noble Lord, Lord Eatwell, clearly has, as he does at such things—I believe that the way that the adjustment works means that the block grant is protected in the way that it should be. Scotland is exposed to the effect of decisions that are taken by any variation in the 10p rate, and that is all it should be exposed to in this case. That is entirely as it should be.

I turn to some of the questions about how the adjustment will operate. The first point related to when announcements are made and in-year adjustments or adjustments within the fiscal period. It is consistent with the Government’s approach to tax policy-making that we would seek normally to make any relevant tax adjustments and announcements well in advance. For example, the adjustments to the personal allowances that were announced in the Budget this year come into effect in just over a year’s time, giving time for any adjustments of a sort that will be needed to be worked up in future. So there is nothing more behind this than simply confirming that we are conscious that an adjustment will need to be made and it will be better if it can be made in advance. That is consistent with the normal approach that we now have to tax-making.

On the question about the OBR’s description of where it is at, the important point is that the OBR will use the period between this year, 2012, and the time when the new tax powers are transferred to refine its approach, including moving from historic to actual data, so that the impact from UK policy decisions will be refined and the methodology will evolve in the periods between 2012 and 2016. I am sure that, as it has done to date, the OBR assessments will set out transparently in successive reports how its methodology is changing. In the spirit of that—although I think this anticipates a situation that we are not remotely in—notwithstanding that there are four years to refine the methodology, if we get to a position where the OBR data are used to make some block grant adjustment and it subsequently discovers that it was misguided, something has changed and it refines that adjustment, I am sure that that will be taken into account. The more important question for the moment is the time period that it has to refine its methodology over the next few years before any question of block grant adjustments comes in.

On the question of macroeconomic shocks—

[Lord Eatwell]

I do not understand what that has to do with income tax and tax allowances. When you have a shock, you do not deal with it through the allowances or tax rates, because they take too long to have an effect; you deal with it through VAT or some other measure which has immediate effect in responding to a shock.

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[Lord Lyell]

My Lords, having waited for seven hours, I am delighted that I am allowed to speak. I thank my noble and learned friend the Minister for the kind letter that he wrote to me about the Scottish taxpayer. I was very relieved to read what he wrote. I had intended to speak on an earlier amendment that was not moved. I thank him for what he wrote about the Scottish taxpayer. I hope that I may write to him about the military because he referred to their residence and what they might be doing. I thank him for that. I am delighted to see that my noble friend Lord Bates is present. He will remember what I had to say at an earlier stage about the mouse that roared; after the Titans who have been speaking, this is the one who spoke.

[Lord Eatwell]

My Lords, when I spoke on an earlier amendment, I said that I was participating in this debate with considerable trepidation. Having listened to this discussion, my trepidation has turned into a state of serious anxiety. However, I will attempt to proceed. My anxiety is raised particularly by the respect in which I hold my noble friend Lord Barnett and the power of the arguments that he put forward. However, as I listened to the debate, any support which I might have had for these amendments slowly drained away for three major reasons. The first is that there is a debate which centres round the need to devise a scheme to abolish the existing Barnett formula. However, that is not an argument in favour of the amendment; it simply identifies a public policy problem which needs to be dealt with, but which I suggest is not necessarily dealt with by this amendment. As those arguments multiplied, my support for my noble friend’s position started to fade away, as I said.

I put down a warning marker for those who have talked about a needs basis for the funding allocations to different parts of the UK. The noble Lord, Lord Lang, is absolutely right that the calculation of need can be done on a clear and objective basis. It could indeed be done by a commission looking at matters such as the number of people under a certain age and the number of people living in poverty according to a certain definition. However, when you start to attach monetary valuations to those needs, you create a policy because you are then weighting them in monetary terms. By weighting them in monetary terms, you are defining a particular policy which you wish to apply uniformly throughout the UK. If you wish to follow the purely unionist line enunciated by the noble Lord, Lord Deben, that may be a reasonable position. However, if you wish to devolve some elements of social policy to the constituent nations of the United Kingdom, you impose policy on them through the needs-based weighting of the funding associated with the underlying formula—and not only that, this amendment would impose the policy through an independent commission. Therefore, an independent commission would vary the policy. Therefore, for example, if one decided that one did not very much care about, say, care for children between the ages of five and 10, but cared very much about children from birth to the age of five, and changed the financial weighting in those two areas, you would be changing the policy because you would be changing the funding available. Handing out this sort of important policy choice to an independent commission would deny what policy-making is all about.

That is just a warning and is not the basis of my slowly ebbing support for my noble friend Lord Barnett’s position. What really settled it for me was the argument of my noble friend Lord Robertson, who made clear that this was an entirely inappropriate way to deal with an incredibly important question. I should therefore like to invoke the great academic principle of unripe time and suggest that we are facing an amendment that is distinctly unripe. We need a much more ripened argument to deal with this very complex matter.

[Lord Sassoon]

My Lords, this has been an interesting debate as we draw towards the end of consideration of the Bill. I am grateful to the noble Lord, Lord Eatwell, whose analysis I very much agree with. It has been a fascinating debate that has taken almost an hour. Sadly, as it has continued, more and more voices have been raised making all sorts of correct arguments that this is not the time and place for it. Many voices in this House accept the starting point of the noble Lord, Lord Barnett, which is that although his eponymous formula has stood the test of time, its time may nevertheless be coming. However, we are not at the point of having a ripe solution, and having a one-country answer within the vehicle of the Bill is not the way to address these proper concerns. I often find that noble Lords from all sides of the House are against me, but it is rare to find myself in substantial agreement with them.

Let me start by reminding noble Lords of one or two things that we should be clear about. First, one of the things that the Bill will do is devolve some of the financial management of income tax to the Scottish Government. However, it will not fix the Barnett formula in stone for the future, and we need to be clear about that, for the avoidance of doubt. It is also worth dwelling on Calman for a moment. My noble friend Lord Forsyth of Drumlean referred to the Calman report, but it is perhaps worth quoting at some length. Recommendation 3.4 states:

“The block grant, as the means of financing most associated with equity, should continue to make up the remainder of the Scottish Parliament’s Budget but it should be justified by need. Until such times as a proper assessment of relative spending need across the UK is carried out, the Barnett formula should continue to be used as the basis for calculating the proportionately reduced block grant”.

The Bill certainly does not therefore lock in the funding formula but, as a number of noble Lords, starting with my noble friend Lord Maclennan of Rogart, have pointed out, this is very much an issue for the whole United Kingdom and should be dealt with at the appropriate time.

Just before I come back to one or two more points on the broader issues, I should for completeness comment on the technical drafting of the amendments.

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[Lord Barnett]

My Lords, I thank all noble Lords who have spoken in the debate. I am sorry that I cannot reply to them but, given the time, I am sure that they would not expect an overly long speech from me.

To say that I am disappointed with my own Front Bench is to put it mildly. My noble friends could not even go as far as the Government in saying that they recognise the concerns about needs. I imagine that my English noble friend who replied on behalf of the Opposition had been got at by the Scots, who did not want him to support the amendment. I do not know whether that is the case but, whatever they did, I find it incredible that he, as an academic, should have come up with the idea that this is an “unripe time”. He obviously had not read the excellent Richard report.

[Lord Eatwell]

I did.

[Lord Barnett]

If he had, he would not have come up with the kind of speech that he made today. As I said, to say that I am disappointed is to put it mildly. I think that it has been appalling.

The noble Lord, Lord Sassoon, did at least repeat his concern, and it is one that the Government recognise. As many noble Lords said—even those who disagreed with the amendments—the technical drafting is not an argument. If the noble Lord wants them redrafted, I will redraft them, or I will let him redraft them—I do not mind. However, the case for doing something, whether in this Bill or elsewhere, is clearly made, as basically every speaker has said. I understand that the noble Lord, Lord Sassoon, cannot go further, because he also has a brief and he is not able to go further than he has done.

We will inevitably return to this matter because this huge disparity in the allocation of money between the different parts of the country cannot go on. As has been said in this debate, this issue concerns the whole of the UK, not just Scotland, and it cannot be set aside by talking about technical amendments or by saying that they should not appear in this Bill, or that they are being brought forward in the wrong place or at the wrong time. Of course all those things can be said but they do not alter the fact that something needs to be done here about the whole of the UK. I have listened very carefully to what has been said and, for the moment, I beg leave to withdraw the amendment.

Economy: Budget Statement

Lord Eatwell Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Eatwell]

My Lords, a year ago the Chancellor of the Exchequer presented a Budget for “enduring growth and jobs” and published a plan for growth that would,

“put fuel in the tank of the British economy”.

That was some fuel. Growth collapsed and unemployment rose by 150,000, and more than 1 million young people are now unemployed. This year, once again, the Chancellor has presented a Budget that he claims,

“helps those looking for work”,

and supports growth.

The auguries are not good. The OBR’s forecast for the growth of business investment this year is down from 7.7 per cent in November to nearly 0.7 per cent now. The forecast for growth of exports and for house-building is down. As for unemployment, another 150,000 are on the dole in 2012. No wonder that the OBR states that it has made no,

“material adjustments to our economy forecast”,

as a result of the Budget 2012 policy measures. In other words, the policy impact of the Budget on the prospects for growth and jobs is nil.

Why is the Government’s growth strategy such a spectacular failure? Why did last year’s plan for growth vanish without trace? Why does the plethora of encouraging-sounding micro-measures on energy, exports and science not make a scintilla of difference to the OBR’s growth forecast? The answer is provided by the Institute of Directors in its response to the Budget:

“The key factor blocking implementation of these”—

investment—

“plans is not cash, but confidence”.

How right it is. The Government simply do not seem to understand that it matters not how cheap finance might be, or even what the corporate tax rate might be; if companies believe that investment will yield no return, they will not invest. What is the point of investing if you have no confidence in the prospect of sales? You are simply going to lose your money.

The source of the Government’s central policy failure is revealed in a chart published in the Budget Statement. Chart 1.5 on page 20 shows what has happened to public sector net borrowing—the deficit—since 2005. Those of your Lordships who have had to suffer the interminable repetition by the noble Lord, Lord Sassoon, of the record deficit—we heard again today that the Government inherited it—may be somewhat surprised by this chart, for it shows that from 2005 to 2008 the deficit was falling from £40 billion a year to around £32 billion a year. Then, following the failure of Lehman Brothers in September 2008, the financial crisis devastated the public finances. A veritable financial tsunami cut revenues and increased spending, driving net borrowing to the peak, which we hear so often from the noble Lord, of £157 billion in May 2010.

In fact, the Government inherited a composite position: a perfectly sound financial stance, overlain by the financial consequences of the crisis. They chose to treat a unique post-war event as if it were due to policy excess. They threw the economy into reverse, devastated business confidence and cut the growth they inherited from 2 per cent to zero. That is the growth rate they inherited, and that is the consequence of their policies.

As an illustration of the Government’s folly, let us suppose that instead of a financial tsunami Britain had been hit by a real tsunami that destroyed 6 per cent of productive capacity, resulting in a sharp fall in tax revenues and an equally sharp rise in government expenditure. Would they then have chosen the path of austerity to restore the public finances? Of course not; they would have set about funding reconstruction. A sinking fund would have been established to spread the cost of restoring the economy, and would in consequence have restored the public finances, over a lengthy period. No one would have recommended bearing all the cost in just a few years, and no one would have imagined that reconstruction could be guided by market forces alone. What is the difference between this hypothetical tsunami and the all too real financial tsunami that the country has suffered? There is none, other than the Government’s failure to distinguish between a unique shock and a normal policy stance.

However, perhaps my characterisation of coalition policy as folly is a little too harsh. After all, the supposed need for austerity has provided the Government with the opportunity to dismantle the welfare state with a zeal that would never have been tolerated in normal times. To assess the impact of this budget on the bottom 50 per cent of incomes, it is necessary to include all those measures that were announced over the past year, in the 2011 Budget and in the Autumn Statement, which will come into effect next month—measures that the Institute for Fiscal Studies estimates will cost families with children an average of £530 per year.

Now set that figure of £530 against next year’s increase in the personal tax allowance announced in the Budget. Taking people out of tax sounds like a laudable goal until you remember that the poorest do not pay tax. Then consider the consequences carefully. As a result of this measure, the poorest 10 per cent of households will gain £10. The richest 10 per cent of households will benefit to the tune of £111. Indeed, of the overall cost of this measure, 70 per cent goes to the top half of the income distribution. Yet that is what Liberal Democrats call “progressive”.

Compare these crumbs thrown to the poor to the £1.6 billion of cuts to the working tax credit about to hit them this April—cuts that are supposed to increase the incentive to work, when there are no jobs. Yesterday, in addition to what has been done already, the Chancellor announced, and the noble Lord confirmed, that the coalition is planning a further £10 billion of cuts to the welfare budget. I never cease to be amazed at the savage pleasure that Tories and Liberal Democrats take in attacking the living standards of the poor. However, my credulity has been stretched to breaking point by their naked pandering to their rich friends.

It is worth examining in some detail the coalition’s case for the pre-announced cut in the 50p tax rate. HMRC’s evaluation of the impact of the tax is based on one year’s data—a sample that no self-respecting economist would ever rely on. Moreover, the self-assessment figures are clearly distorted by income being brought forward in the preceding tax year—a predominantly one-off effect.

Next, let us consider the Chancellor’s claim that as a result of changes to stamp duty and capping unlimited tax reliefs, which will yield about £500 million in a full year,

“we will be getting five times more money each and every year from the wealthiest in our society”.—[Official Report, Commons, 21/3/12; col. 806.]

The origins of this claim can be found in Table A2 of the HMRC review. The table shows that the 50p tax without what is politely called “behavioural impact”—tax avoidance—would yield £3 billion in a full year. However, extraordinarily the 45p tax will result in revenues of £2.9 billion, as the 5p difference will be enough to reverse the behavioural impact. So, while 50p triggers almost complete avoidance, 45p is paid with equanimity. If you believe that, you’ll believe anything.

There is more to come. A Government who quite rightly declare tax avoidance to be “morally repugnant” have created the perfect tax avoidance scheme. Everyone knows that the top rate will fall from 50p to 45p next year, so all those who shifted their income back to avoid the 50p rate last year will shift their income forward to avoid the 50p tax this year. This is a stealth subsidy on a grand scale. To pay for the stealth subsidy, there is the stealth tax on pensioners. Never can a £1 billion a year tax grab have been explained as “simplification” that helps the poor old dears who find the forms too complicated.

Table 2.1 of the Budget Statement provides a helpful guide to the cumulative effect of the measures taken by the Chancellor since assuming office. As of today, 90 per cent of his planned benefit cuts are still to come, resulting in a cumulative 6 per cent taken out of aggregate demand over the next four years. That is the government headwind that business in this country has to battle against.

So what are the overall effects of the Government’s policies? With total output still 4 per cent below the peak achieved in 2008, we will not return to the level of 2008 for another three years. They have transformed a shock as large as that experienced in 1930 into a depression that will last two years longer than the 1930s depression. It is no excuse to argue that everyone else is adopting the same policy. There is only one prize for the quickest lemming.

This country needs policies for growth and jobs. The coalition believes that the rich must be made richer to encourage them to work and the poor must be made poorer to encourage them to work. In the mean time, the economy stagnates, the prospects of growth retreat before our very eyes and the pain of fiscal consolidation intensifies. The Government’s stance, echoed in this mean little Budget, is fundamentally misconceived. Without measures to boost confidence in the growth of demand, supply side reforms, however worthy, will have a negligible impact. A new approach is needed. This Budget illustrates that the coalition has neither the imagination nor the will to meet that challenge.

[Lord De Mauley]

My Lords, perhaps I may respectfully remind noble Lords that this is a time-limited debate and that contributions, other than that of my noble friend the Minister and the noble Lord, Lord Davies of Oldham, are limited to 10 minutes.

[Lord Eatwell]

The noble Lord is mistaken. The Opposition have 12 minutes to reply to the opening statement by the noble Lord, Lord Sassoon.

--- Later in debate ---

[Lord Sassoon]

My Lords, I will not repeat myself. I explained the rationale for doing this, which is to make sure that the benefit is targeted correctly. The position is completely clear.

I will address one or two issues that were raised on business taxes. The noble Lord, Lord Haskel, made the point about there being other businessmen in the Chamber. I listened hard to what he said about his recent visit to the US. I, too, was in the US recently. One place I visited was Chicago, which at the moment is the headquarters of Aon, the world’s largest risk management company. It is moving its global headquarters to the UK for a number of reasons, including our lower and more competitive tax regime. I do not remotely believe that we should follow US policies in a slavish way if we want to see a growing business base in this country.

[Lord Eatwell]

As the noble Lord brought up the point, does he agree that Aon announced its decision to move here before there was any intimation that top-rate tax would be reduced?

[Lord Sassoon]

My Lords, as I understand it, Aon based its decision principally on the very clear road map on corporation tax. However, I believe that the change in top-rate tax will see many other companies reconsider their location.

On oil taxation, my noble friend Lord Northbrook asked about the apparent position in the Red Book that shows that receipts are rising. Indeed, that is the case, but it is because decommissioning certainty and the new field allowances will lead to new investment that will in turn give rise to additional tax receipts, so it is a clear win-win situation.

Turning to one or two of the pro-growth policy questions that were raised, infrastructure remains very important, but I would say to my noble friend Lord Newby, who presses, quite rightly, on this important point, that the initial commitment to £2 billion of investment by the pension funds is good news, as he recognises. It is for the pension funds to decide how much further and faster they want to go. From my experience, I observe that rapid investment decisions sometimes lead to poor investments, but that is for the pension funds. The other thing is that there is only a limited pipeline of shovel-ready projects, but as projects come through, the appetite is there.

The right reverend Prelate the Bishop of Chichester asked about Sunday trading and the Olympics. I can assure him that there will be proper time for debate in this House. I know that the right reverend Prelate the Bishop of London has written to the Chancellor today and the Chancellor will be responding shortly. I will make sure that the right reverend Prelate gets a copy of that response.

Outstanding in the contributions on the Government’s pro-business policies was, of course, the maiden speech of my noble friend Lord Heseltine. It was a one-of-a-kind maiden speech in my experience and, I am sure, the experience of all of us. He set out in a very measured and realistic way the scope of the challenge that he is taking on in the benchmarking exercise, as he characterised it. We all very much look forward to the early autumn when, I think, we will get the fruits of his deliberations.

Turning to other pro-business areas, there were a number of questions from the noble Lords, Lord Bilimoria and Lord Sugar, and other noble Lords about the National Loan Guarantee Scheme. Let me assure your Lordships that there is now lots of publicity on the participating banks’ websites and in their branches. There is clear branding of the scheme. HSBC is not in it because its funding structure is different. There is nothing about it other than its funding structure. As to where the risk falls, it falls on the banks that make the loans. The credit risk remains there.

As to our progress on the rest of our plan for growth, I draw the attention of the noble Lord, Lord Eatwell, to the progress report that was put up on the HM Treasury website yesterday.

I come back to what I heard from my noble friend Lord Bates and others who reminded us of the very positive things that are happening in business and particularly in challenged areas, such as the north-east. That is an important reminder to us of what is really going on in the economy.

Lastly on areas of business policy, I say to the noble Baroness, Lady Worthington, that we took an important step forward in our energy policy in a joined-up way between DECC and HM Treasury yesterday when the Chancellor confirmed the important look at a gas strategy as part of our overall energy mix going forward. The picture I got from talking this morning to the chief executive of one of our largest companies invested in renewable energy in this country was that the company is very supportive of the Budget, while noting, quite rightly, that there are many policy areas in this area that we have to consider.

In conclusion, we will build a recovery in this country through the ambition of those who aspire to do better for themselves and their families. I am particularly encouraged by what I have heard from noble Lords with business experience on all sides of the House.

This Government are building a sustainable and prosperous economy and a recovery that builds on our strengths across all regions of the country and all the creativity and productivity of our private sector.

Economy: Quantitative Easing

Lord Eatwell Excerpts

Monday 19th March 2012 Lords Chamber

[Lord Sassoon]

No, my Lords, I certainly will not. It has actually led to inflation already. In the estimates made by the Bank of England in the third quarter bulletin in September last year, it was estimated that quantitative easing had raised UK inflation by around 0.75 to 1.5 per cent. I firmly believe that the greater benefit of raising real GDP by around 1.5 to 2 per cent was what really mattered in the economic circumstances in which we find ourselves. Then the question is what happens to the unwinding of QE? The stock will be held and sold back into the market in due course.

[Lord Eatwell]

My Lords, the noble Lord’s reference to growth of GDP is rather odd, since that is no responsibility of the Monetary Policy Committee. Its responsibility is for inflation and, as he said, it added to inflation last year which, as noble Lords will remember, was already at 5 per cent. How does the noble Lord judge the success of QE and how is it to be balanced against the decimation of the annuities of hundreds of thousands of pensioners as a result?

[Lord Sassoon]

My Lords, first it continues to be the judgment of the MPC that if it had not acted on this operation under the asset purchase facility inflation would undershoot the 2 per cent target in the medium term. I remind this House that inflation has already come down from 5.2 per cent on a CPI measure last September to 3.6 per cent in January and is expected by the Bank, and most other commentators, to fall very considerably during this year. The success of QE will be measured on the performance of inflation.

As to the question of savers and pensions, as the deputy governor, Charlie Bean, said on 21 February:

“While annuity rates have fallen, that is only part of the story. Those pension funds will typically have been invested in a mix of bonds and equities, with perhaps a bit of cash too. The rise in asset prices as a result of quantitative easing consequently also raises the value of the pension pot, providing an offset to the fall in annuity rates”.

Banking: Accounting Standards

Lord Eatwell Excerpts

Monday 19th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, I have not read every word that was said in the Committee last week, but I have certainly read the very interesting remarks of my noble friend Lord Lawson of Blaby and the very challenging seven proposals that he made, many of which the Government are already acting on in the structure of banking and regulation. I do not dismiss this issue at all, but there is a tension between the transparency and other requirements of investors on the one hand and the requirements of prudential regulators on the other. There are very difficult issues of conflicting objectives here, which it may be impossible for one set of figures fully to reconcile. However, I take my noble friend’s suggestions very much to heart.

[Lord Eatwell]

My Lords, as the noble Lord pointed out, the Financial Reporting Council is playing an important role in reviewing the IFRS proposals. However, the FRC also seems to be contemplating the abolition of the UK Accounting Standards Board. Do the Government agree with this, and will it not leave the UK without the expertise and credibility necessary to make an effective contribution to the international debate?

[Lord Sassoon]

My Lords, the structure of the various bodies that fall under the Financial Reporting Council is a matter for the Financial Reporting Council. I do not believe for one minute that anything it does to the structure of the number of bodies under the FRC will weaken the very distinguished and important contribution which the UK makes to international standard-setting.

EU: Economic and Financial Issues

Lord Eatwell Excerpts

Monday 12th March 2012 Lords Chamber

[Lord Sassoon]

Absolutely. I completely agree with my noble friend.

[Lord Eatwell]

My Lords, a Written Ministerial Statement was issued earlier today about the ECOFIN meeting in which it was argued with respect to the financial transaction tax that,

“the proposal will have significant negative impacts on jobs and growth”.

No evidence is provided for that statement. Perhaps the noble Lord can tell us what is the negative impact on jobs and growth of the current stamp duty on share transactions?

[Lord Sassoon]

I believe that the effect of UK stamp duty on jobs and growth is negligible. The European Commission conducted its own assessment of the effect of the financial transaction tax, which is what I think is relevant, and the numbers that have been produced by others indicate the range of negative impacts. We think that it makes no sense to introduce a financial transaction tax on the basis of Europe going it alone without the rest of the world being there.

Social Security (Contributions) (Re-rating) Order 2012

Lord Eatwell Excerpts

Monday 27th February 2012 Grand Committee

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I am pleased to introduce the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2012 and the Social Security (Contributions) (Re-rating) Order 2012 to the Committee. As both the regulations and the order deal with national insurance contributions, it seems sensible to debate them together. I can confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights.

All the changes covered by these two instruments were announced as part of the Chancellor’s Autumn Statement last November. It is worth noting from the start that the basis of indexation that has been used to calculate most of the changes covered by these two instruments is different from that used for the 2011-12 tax year. In the Budget last year we announced that from the 2012-13 tax year the basis for indexation of most national insurance contribution rate limits and thresholds would be the consumer prices index, CPI, instead of the retail prices index, RPI. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits. I will explain why in a moment.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary in order to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2012-13 tax year. The class 1 lower earnings limit will be increased from £102 to £107 per week from 6 April 2012. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased to £146 per week from 6 April 2012. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment given in last year’s Budget, this is being increased by RPI to £144 per week. This will help employers, large and small, during this difficult economic climate.

From April, the personal allowance for people under 65 will be increased above indexation by £630 from £7,475 to £8,105, and the basic rate limit will be decreased by £630 to £34,370. This means that the point at which higher tax kicks in will remain at £42,475 in 2012-13. As I mentioned, the upper earnings limit is not subject to CPI indexation. In order to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid, the UEL will remain at £817 per week. The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually.

There will be no changes to NICs rates in 2012-13. Employees will continue to pay 12 per cent on earnings between the primary threshold and the upper earnings limit, and 2 per cent on earnings above that. Employers will continue to pay contributions at 13.8 per cent on all earnings above the secondary threshold.

The social security order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions. Starting with the self-employed, the order raises the small earnings exception below which the self-employed may claim exemption from paying class 2 contributions. The exception will rise in April from £5,315 to £5,595 a year. Many self-employed people choose to pay these contributions to protect their benefit entitlement, although they may claim exemption from paying class 2 contributions. The rate of class 2 contributions for 2012-13 will rise from £2.50 to £2.65 a week. The rate of voluntary class 3 contributions will also increase from £12.60 to £13.25 a week.

Today’s order also sets the profit limit from which main rate class 4 contributions are paid. The lower limit at which these contributions are due will increase from £7,225 to £7,605 a year, in line with the increase to the class 1 primary threshold.

At the other end of the scale, the upper profits limit will remain at the same level as the 2011-12 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to class 4 limits will ensure that the self-employed pay contributions at the main rate of 9 per cent on a similar range of earnings as employees paying class 1 contributions at the main rate of 12 per cent. Profits above the upper profits limit are subject to the additional rate of 2 per cent, in line with the 2 per cent paid by employees.

My Lords, I commend the draft Social Security Contributions Limits and Thresholds Amendment Regulations 2012 and the draft Social Security Contributions Re-rating Order 2012 to the Committee.

[Lord Eatwell]

My Lords, when the index number used to calculate and evaluate the performance of the Bank of England was changed from RPI to CPI a few years ago, the target inflation rate was lowered from 2.5 per cent to 2 per cent to take account of the difference in the indices. No such change has been enjoyed by the rest of us. The Bank of England has a better arm-lock on the Treasury than does the general public, particularly those of us who pay national insurance contributions or, as we shall discuss later, receive tax credits.

As someone who has taught a course on index number theory for a number of years, one of the most important lessons one can take from index number analysis is that there is no such thing as a true measure of any particular variable in a complex index. In this case, there is no such thing as a true measure of inflation. The choice of index is purely a matter of the purpose for which it is to be used. In the cases before us today, the purpose of the change in the index is to increase taxation by stealth. The role of indexation is supposed to be to protect real positions, whether of benefits or contributions. As is evident from the Government’s own impact statement, which shows a benefit to the Treasury of £1 billion a year by the fiscal year 2015-16, real values are not being protected in this case.

Much has been made in the discussion of the changes to personal taxation and national insurance of the increase in the personal tax threshold. The change in the level of national insurance contributions debated today may appear minor in comparison and has received far less attention—but as it stands, the decision to index direct taxes by CPI and to contract out national insurance rebates produces a net increase to the Treasury revenue of £1 billion.

There is more to come. The two orders combine to create a fiscal drag which by 2015-16 will increase the tax burden by £1 billion a year, as I mentioned. With contribution thresholds increasing at CPI—the lower of the two standard measures of inflation—more workers will be caught in the higher bracket of payments than would otherwise have been the case. I note with interest that the impact assessment note issued by the Treasury indicates that 21 million employees will lose out by £6 a year on average in the next fiscal year. The Government are rather coy and do not tell us what will happen in the subsequent fiscal years of 2013-14, 2014-15 and 2015-16, even though they give the aggregate figure, so they must know what is happening. Why are they not telling us? If they do not know, the aggregate figure is simply a fiction. I believe the aggregate figure, so what is happening to individuals in this case? Given that the Treasury expects to raise £1 billion in 2015-16, what is the impact of the change on individuals over the course of the Parliament?

Finally, I would be grateful if the Minister could offer his view on what the benefit is of a whole variety of uprating mechanisms being used by the Government across various departments, different benefits and payments, and contributions. For example, he will be aware that other price rises such as student loan repayments or rail fares continue to be uprated at RPI. Why is one on the CPI and the other on the RPI? The answer is simply that it maximises the benefit to the Treasury. We all know that. The Minister will also be aware that the Chancellor has previously stated that he has an ambition for the default indexation assumption for indirect taxes to be moved to CPI when the fiscal position allows. Why can we not move to it now? The answer is that it would reduce the rate of taxation, and so we are sticking with the higher rate on indirect taxes so as to get the biggest benefit for the Treasury.

Let us not be deceived by this uprating story. It is a minimalist move, and one which with respect to thresholds has been designed to extract more from the contributor to national insurance. That is what is clearly conveyed in the Government’s own assessment of the figures. So in presenting the changes to thresholds and contributions, why does the Minister not simply come clean and say, “We have increased contributions”? The last Budget was one that actually increased direct taxation, contrary to what the Chancellor of the Exchequer told us.

[Lord Sassoon]

My Lords, that was a brief and focused debate, and I am grateful to the noble Lord, Lord Eatwell, for focusing on what is clearly an important issue, which is the question of the basis on which benefits and contributions are uprated. The noble Lord asked about the targeting of the Bank of England as changed by the previous Government of rail fares and a host of other things. Certainly the starting point on which we agree is one on which he is the acknowledged expert and I am not: that the measurement of inflation is far from an easy matter, as was shown when the last Government moved the targeting of the Bank of England but did not seek to change the basis on which a number of other government-related measures, such as the ones we are talking about today were not changed. Getting consistency across the piece, even if that is theoretically the right answer, is something which his Government certainly did not do.

In answer to the questions about the effects of the move of some of the indexation to the CPI it is important to point out, first, that in some cases lower increases may be beneficial. For example, increasing the lower earnings limit by the CPI, which is typically lower than the RPI, means that over time more people will qualify for contributory benefits because the lower earnings limit will rise more slowly. Similarly, the weekly class 2 and class 3 national insurance contribution rates will rise more slowly over time under CPI indexation.

If you look at national insurance contributions in isolation, some people will be worse off because the primary thresholds and the lower profits limit—the point at which they start to pay class 1 or class 4 national insurance contributions—has risen by less in 2012-13, but I should point out, as I did in my opening remarks, that the income tax personal allowance will go up significantly, by £630.

We are trying to get what the Government believe to be the most appropriate measure of the general level of prices, given that CPI is calculated in a way that more accurately reflects consumer shopping habits in response to price changes. I see a wry smile across the face of the noble Lord, Lord Eatwell. We probably do not have time for an intellectual analysis, but that is the underlying basis on which the switch has been made. As has already been pointed out, the CPI forms the basis of the Bank of England’s inflation target and is indeed more consistent with the European Central Bank harmonised index of consumer prices. I am not sure that there were questions about that, but there were assertions about it, and I hope that that clarifies the Government’s position on the noble Lord’s main points about the RPI and CPI.

On the question of the impact on individuals, let me give as much information as I have to hand. About 40,000 people will have to pay national insurance contributions because of the changes; 21 million people will lose by £6 a year; but the increase in the income tax personal allowance to £8,105 in 2012-13, to which I just referred, reduces tax bills by £214 for basic rate taxpayers, easily outweighing the small increase in national insurance contributions through the CPI indexation—£6 versus £214 as the impact of those two offsetting measures.

In addition, the Government have introduced a significant above-indexation increase in the primary threshold in 2011-12 of £29 per week, so all class 1 national insurance contribution payers earning up to about £21,600 will pay less in national insurance contributions in 2012-13 than they would have done under the usual indexation of national insurance contribution thresholds since 2010-11. I am not aware that there is available information on the impact on individuals, which clearly depends on all sorts of future decisions, not least about what happens to personal allowances in future years.

[Lord Eatwell]

Perhaps the noble Lord can help me. The Treasury document tells us that the overall impact of the changes and benefits to the Treasury will exceed £1 billion by 2015-16. That figure must be made up of the assessment of the impact on the various people who are contributing to national insurance. If we have the overall figure, why can we not be told what are the components?

[Lord Sassoon]

I was going on to say that I will certainly undertake to take that question away. As the noble Lord will be aware, sometimes only aggregate figures can be given up to the auditable standard that is required. If the information is available, subject to the usual way that these things are announced, I will see whether I can help. I will look at that and write if there is something I can do to be helpful to the Committee. However, the changes to the contribution rates generally speak for themselves. They are in the normal form of these things that are done on an annual basis other than the major change which we have debated. I commend the regulations and order to the Committee.