National Minimum Wage

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Thursday 6th November 2014 Lords Chamber

[Lord Newby]

My Lords, there are a number of reasons. One was that it was introduced at a time when the economy was growing, which made it easier for people to pay higher wages. That is why I am so pleased that the economy is growing so strongly now, which means that wages are rising again.

[Lord Flight (Con)]

My Lords, have the Government looked at the possibility of varying the minimum wage to reflect the cost of living in different parts of the country?

[Lord Newby]

My Lords, this has been looked at on a number of occasions and has always been rejected.

Bank of England

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Thursday 30th October 2014 Lords Chamber

[Lord Newby]

I am not sure that that is a general principle that one would wish to apply more widely.

[Lord Flight (Con)]

My Lords, I agree with the Government’s view about retaining the well tested name, but would the Government also consider retaining in full, or restoring, the Bank of England’s lender of last resort powers, which have served this country’s banking system well for 150 years?

Banks: Bridging Finance

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Monday 20th October 2014 Lords Chamber

[Lord Newby]

The noble Lord knows that 1.7 million households are waiting for social housing in the UK, and the spare room subsidy is intended to help move people into accommodation in those circumstances. I think that he would agree with me that the fundamental challenge that we in all parties face is how to increase the flow of housing, not just in aggregate but so that it is designed to meet the different requirements of different groups, including the elderly.

[Lord Flight (Con)]

My Lords, other than a few of the more enlightened ones, banks are now refusing to provide mortgage loans to anyone over 70. It is very well to say that banks can exercise discretion here, but when they are told by the regulator that that is what the regulator wants, not surprisingly they want to protect themselves, so they say, “Well, we’ll do what we’re told”. If they do otherwise, they put themselves out on a limb if something goes wrong. Basically, the regulator needs to be advised to make it clearer that it wants to see banks use their initiative.

[Lord Newby]

My Lords, as I said earlier, many lenders appear to be approaching the rules in a way that is against the spirit set out by the FCA. The FCA is reviewing the way the mortgage market review rules operate, and I hope that there will be some movement there. A number of banks and smaller building societies, in particular the Family Building Society and the Bath Building Society, of course do not have any age limits in their lending policies.

Money Laundering: UK Parliamentarians

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Tuesday 14th October 2014 Lords Chamber

[Lord Deighton]

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.

[Lord Flight (Con)]

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.

[Lord Deighton]

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.

Euro Area Crisis Update (EUC Report)

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Wednesday 23rd July 2014 Lords Chamber

[Lord Flight (Con)]

My Lords, I pay tribute to the noble Lord, Lord Harrison, for chairing our committee and for the production of this report, which, given the spread of views on the committee, is very fair and accurate. I think that the noble Lord, Lord Kerr, began to get slightly worried that he found himself agreeing with me on too many issues.

The report is, as the noble Lord, Lord Harrison, has suggested, slightly optimistic in that recovery in southern Europe is pretty weak, the public finances are still worsening, the threat of deflation remains and the unemployment position is terrible. The real problem is that the euro locked Europe into a gold standard. Italy, Portugal, Spain and so forth had happily devalued 2% or 3% every two or three years, but when they could no longer do that and Germany put great effort into becoming super-competitive by holding wage rates down, it ended up with about 30% uncompetitiveness among the countries of southern Europe as against Germanic Europe, and they are stuck with it. They have taken measures to address that. The only scope is internal devaluation, but that is extremely painful and, candidly, I am quite surprised that predominantly socialist politicians, in the cause of sustaining the euro, have been apparently happy to see the lives of a whole generation of young people in southern Europe wrecked with a massively high level of unemployment, so there is a slight problem there.

[Lord Davies of Stamford]

My Lords—

[Lord Flight]

No, I shall not give way because I do not have long to speak.

The prospect of real political and economic union is for the time being not particularly promising. The big issue is that if you are going to share a currency, you have to have transfer payments. Britain has £70 billion or £80 billion of transfer payments from the prosperous south-east to other parts; in America, some 30% of federal spending goes on transfer payments. When we went to visit every element of Germany and asked them about transfer payments, the answer we got was “Not a pfennig”. Nobody in Germany was willing to face up to the fact that, if they wanted a united Europe and if they wanted to sustain the euro, they would have to be willing to make transfer payments to the less prosperous parts of Europe.

As the noble Lord, Lord Harrison, mentioned, we have yet to see how robust the banking system is with the stress test coming in October. I hope that the test will be genuine and robust, but if it reveals serious undercapitalisation of the banking system, that presents its own problem, because, in essence, it will have to be the relevant Governments who bail out the banking system. Thus the link between government debt and banking problems is not removed but, if anything, worsens.

I cannot help but comment that we have been here before in that in the 1860s, the French established a common European currency, the silver franc. We spent most of the 1870s debating whether to join it, and indeed in the British Museum there are notes and coins which were produced showing what they would be like if we did join. Walter Bagehot, the great economist, was wholly in favour of doing so. It lasted for 30 years until eventually the author, France, became so uncompetitive with something like 35% unemployment that it ditched the silver franc and ended the first attempt at a common European currency. I should add that everyone participated, including Switzerland, other than the German states because Germany had not yet united.

As the noble Lord, Lord Harrison, and others have pointed out, the report makes the point that the crisis has created the eurozone versus the peripherals. Although it is slow, I think that from now onwards there will be a gradual process towards political, economic and financial integration. Noble Lords will know the story of when Kohl and Mitterrand were discussing the euro. Kohl said, “We can’t start the euro because there isn’t much political integration”, and Mitterrand responded by saying, “We’ll never get political integration unless we put the euro into effect, which will force it”. I think that may be true. However, the UK is obviously not part of the eurozone and, as the report states, it is already a semi-detached member of the European project. In particular the loss of sovereignty over financial regulations has damaged the City of London. I describe it by saying that the City enjoyed a boom for around 40 years. It then plateaued and now it is on the way down in terms of earnings, activity and the number of people employed. The AIFMD has been particularly damaging and has moved a lot of business to New York and Singapore, and the biggest threat is the financial transaction tax. If noble Lords have not read it, I particularly recommend the report of EU Sub-Committee A on that.

The point is that although the report exhorts everyone to be friendly and co-operative—indeed the representative and lobbying bits of the City in Brussels never cease to grow, with around seven different institutions that are all there to be friendly and lush up their colleagues—there is a difference of interest. I am afraid that London is at the mercy of what suits Europe, along with its particular jealousies of London’s dominant position. The City has put up with that and got on with it, but beneath the surface there is mounting resentment. If the financial transaction tax were to go ahead, I think that it would be the straw that breaks the camel’s back.

I end by making the point that there is the irony of the British Government being the first to recommend that Europe should get its act together and get a move on with financial, political and economic unification, and yet that is the very thing which has led to Britain being a semi-detached member. The view is becoming clearer and more widely held that the right relationship for the UK is as a member of the EU customs union and the single market, but not of the EU political union. I detect that, one way or another, this is now the direction in which we are heading.

Finance Bill

Lord Flight Excerpts

Wednesday 16th July 2014 Lords Chamber

[Lord Flight (Con)]

My Lords, I first make the rather obvious point that the relative brevity of this important debate and the thinness of the Chamber reflect the lack of power of this House to amend Finance Bills. It strikes me that now that this House is essentially an appointed and not a hereditary House, that is out of date. Much though I pay credit to the noble Lord, Lord MacGregor, and his committee, it is time for the issue of this House being able properly to consider financial legislation in the same way as the other place to be looked at.

I pay my own credit to the term of office of the noble Lord, Lord MacGregor, and the excellent work that his committee has done. His committee is right in its recommendations with regard to delaying the new measures for LLPs. I agreed with everything that my noble friend Lord Lawson and the noble Lord, Lord Wakeham, had to say. With regard to the issue of the personal conduct of bankers, I was recently rereading Professor Plumb’s biography of Walpole and noted that at the time of the South Sea bubble all those involved, including the Prime Minister of the day, were promptly clapped up in the Tower and had all their estates removed. They were let out in due course, but our forebears seemed rather more effective at disciplining people who had acted improperly than we are today.

There are obviously good things in the Finance Bill, and it has been a popular Bill. In particular, I like the improved export credit finance arrangements. Many of our small and medium-sized companies have found it increasingly difficult to get export finance. I also like the transferable tax allowance and the tax allowance for fracking development. But the most radical measures have been the anti-tax avoidance measures and I want to say a little about those.

First, I find it rather sad that even in this House the language of this territory has become rather muddled and, dare I say, misleading. Let us be clear: you start off with evasion, which is criminal. That is simply breaking the law and not paying the tax that you should pay. Then there is avoidance. By definition, avoidance is within the law. If it were not, it would be evasion and without the law. But within avoidance there is a hierarchy. There are all sorts of government tax incentives such as ISAs, EIS, pension saving and the very tax incentives that are in this Finance Bill, which everyone would say were fine. They are actually there to avoid tax. The other side of the coin is that they constitute tax avoidance. I am sure that there are very few Members of this House who have not invested in ISAs or benefited from the tax incentives of pension savings. Everyone is a tax avoider in that sense.

Then we have what have been essentially government schemes, but which have been poorly drafted and have then been exploited and abused where fundamentally the issue is that the original law needs tightening up. Then, at the bottom of the heap, are what I view as unacceptable schemes—fabrications. Tax is wholly justified on those. It has always been my view that I knew one when I saw one and always felt that it was unwise for anyone to consider using one of those.

However, the measures in this Bill do not apply just to the latter—as I think the noble Lord, Lord Deighton, implied. They also apply to statutory government schemes brought in by the previous Government, where the law is somewhat unclear—in part because they were legislated in a hurry—and where there are disagreements between lawyers and HMRC, often as to what is within and without the measures that were enacted.

There is a better solution—and here I declare an interest as chair of the EIS Association. There were criticisms that EIS was at one stage subject to abuse, and the industry sat down with HMRC and went through what HMRC thought and what the industry thought. It ended up with a win-win solution whereby in future all EIS issues are subject to pre-clearance. That means that those raising the money, and the companies, know where they stand, the Revenue knows where it stands, and the whole issue is satisfactorily cleansed of criticism. This Finance Bill introduces a retrospective requirement, where the Revenue considers that a scheme has been abused, for the full amount of tax being saved to be deposited. This applies to three areas of government statutory incentives in particular: to film and sale schemes, known as Sections 42 and 48; to enterprise zones; and, where I think there is most injustice, to the Business Premises Renovation Allowance —BPRA—scheme. I might add that I have no investment in any of these areas and no direct first-hand knowledge, but a lot of perfectly responsible people have brought concerns to me, and they have been raised with the Treasury.

I start by saying that if the Treasury and HMRC considered that some schemes did not meet the statutory requirements, they should probably have disallowed them at the outset. Instead, for years things have been waiting to be sorted out and have not been addressed one way or the other.

My next point is that many people registered under the so-called DOTAS—Disclosure of Tax Avoidance Scheme—rules before there was any obligation to do so. They registered with an intention to be transparent. Ironically, it now ends up with those registering being punished and those not registering not being punished. It is a very strange anomaly in the approach that has been taken. What is happening is that HMRC is demanding money when they cannot necessarily show that the relevant investors have done something wrong.

The proposed legislation which authorises HMRC to remove funds from individuals’ bank accounts goes even further towards a somewhat overbearing state. It is such a complicated and difficult area that very few people actually know what is in the Finance Bill in this regard. However, the Treasury Select Committee and the Chartered Institute of Taxation have complained about unprecedented HMRC executive powers of decision, and of HMRC being put in the position of judge and jury, and they have complained that it creates a precedent in the UK tax system whereby the tax authorities are given power to demand payment without any right of appeal. The Treasury Select Committee also objected to the retrospective nature of the requirement for taxpayers to pay 100% up front within 90 days—potentially applying, I think, to some 65,000 cases. This puts fiscal policy on a slippery slope towards arbitrary taxation. Many individuals have been good-faith, legitimate BPRA investors over several years with no complaints from HMRC. They now find themselves on the wrong side, with notices to pay.

Moreover, the current position seems immediately to be shambolic, in that although HMRC has published an extensive list of all those to whom those arrangements are to apply, at the same time it appears to be saying—if anyone can get through to it on the telephone—that, no, they will not apply until negotiations have been completed.

There is an important issue, which is that there may be some situations, particularly with the BPRA, where most of the schemes are completely in compliance with the law but some are deemed not to be by HMRC, so a modest and partial amount of tax may have to be recovered. I am advised—I do not know whether it is true—that HMRC did not take full external legal advice on the measures before the Finance Bill was produced and that there is a significant possibility of judicial reviews where the courts will find against HMRC.

Finally, the accelerated payments rules are contrary to two fundamental legal principles. First, I believe that in this country we are always innocent until proven guilty; whereas what is happening here is that the standard basis of self-assessment is being overridden and taxpayers are being treated as guilty until they can prove their innocence. Secondly, there is no proper appeal mechanism. As I have already said, HMRC is judge and jury in these matters. Extraordinarily to my mind, two of the schemes are—I repeat—government, statutory schemes, state-aid approved and brought in under the previous Government.

The Treasury and HMRC have been unwilling to listen to the concerns of many people. I exhort the Treasury and HMRC to be extremely careful how they use the new powers; to endeavour to use them justly; and that HMRC itself is wholly transparent in the use of those powers.

Finance: Fiscal Devolution

Lord Flight Excerpts

Wednesday 9th July 2014 Lords Chamber

[Lord Newby]

My Lords, the principle that operates if one is devolving tax revenue to a lower tier of government is that the amount of tax devolved is subtracted from the amount of grant which that tier of government would otherwise be getting. Therefore, at the start of the process at least, there is no net shift of revenue from one area to another.

[Lord Flight (Con)]

My Lords, will the Government consider allowing our cities to raise their own municipal bond funding, as is the case in the US and as was the case in this country in the greater days of our cities? It has only had to be done through gilts since after the Second World War.

Genuine Economic and Monetary Union (EUC Report)

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Wednesday 2nd July 2014 Grand Committee

[Lord Liddle (Lab)]

My Lords, I congratulate my noble friend Lord Harrison on his committee’s excellent report. I have done that before but this is the first time that I am not doing so as Labour’s Europe spokesman. It is a great privilege to be able to address this body knowing that I am free to tell Labour what its policy ought to be rather than putting the best face on what its policy is, so I am looking forward to this speech. I should also say what a privilege it is to listen to the noble Lord, Lord Lamont. I do not agree with him on the euro but his reflections, as a former Chancellor, are extremely interesting and I would be the last person to argue that the euro does not still face difficult problems, which have to be resolved.

The euro’s future is of fundamental importance to Britain. In all the past arguments about whether we should join, the one where the pros have been conclusively proved right is that we in Britain cannot escape the consequences of the eurozone by being outside it. It has a material impact on our economy. We also have to be conscious of the fact that our circumstances might at some point in the future change. I am not arguing that there is any immediate prospect of our joining the single currency. I do not expect to see that for a very long time but Britain’s prospects could change, which might necessitate us joining the single currency.

The real danger for Britain is a repeat of what happened when we did not seize the initiative in Europe right at the start, in the 1950s. We have to be careful that a construction might be put in place that does not entirely suit our national interests. We saw that with the common agricultural policy, which led to the arguments about whether we should enter on the Tory terms in the 1970s and the renegotiation under Harold Wilson, which then led to Mrs Thatcher’s struggles for the British budget rebate, all of which poisoned our relations with our partners. We must try, as an insurance policy for Britain, to make sure that the development of the euro is one that suits us.

I want to stress the most important recommendation of this report and I am very disappointed by the Government’s reply. The recommendation is:

“The Government would be wise not to close the door on the possibility of participation in some elements of Banking Union in the future, and must stress the City of London’s strategic importance for the EU as a whole”.

I have no doubt that the Government will stress the City of London’s importance but if they want to influence the key ways in which the City’s future is determined, they must play a role in the banking union. Be in no doubt: the ECB will be the body that determines the rules by which financial markets work in Europe. It will be that body and the idea that, because we have some minority protections and a European Banking Authority we can sit back and relax, is for the birds.

What about the alliance of the euro-outs, which is supposed to protect our interests? Where are we with Mr Reinfeldt, after Mr Cameron’s ride in the boat with him? Is he not going down to defeat in the September election in Sweden anyway? As for the Poles, what are the prospects for Britain having any influence over Polish policy after what we now know of the expletive-laden remarks of their Foreign Secretary about his old Oxford friend, the Prime Minister? Can we really rely on Hungary and Mr Orbán when he is the man who plays footsie with Jobbik—the fascists in Hungary—who rigs the constitutional court in Hungary and who has passed laws that are offensive to press freedom in Hungary? Is that our only ally in Europe? Are we really proud of that? Do we think we can defend our interests on a crucial issue such as this simply by having an alliance with Hungary?

[Lord Flight (Con)]

Would the noble Lord not agree that the collaboration between the Bank of England and the ECB has been and remains substantial? Indeed, quite a lot of the ECB regulatory arrangements have been modelled on what has happened here. Whatever the constitutional position may be, the practical position is that the two work hand in hand.

[Lord Liddle]

I am very strongly in favour of practical co-operation between the Bank of England and the ECB but, fundamentally, it is politics that matters. It will not all be decided in an independent regulatory context. The politics will matter, and we are not well placed at the moment.

The banking union is a significant development. I am a bit more bullish about it than the committee. I think it is a glass half full, rather than a glass half empty. Some academics I greatly respect, who are experts in the field, such as the Peterson Institute’s Adam Posen and Nicolas Véron, believe that we should consider that to be a very significant development. That is why it is so important that we try, as far as we can, to get inside—beyond simply co-operation between the Bank of England and the ECB.

On the wider issue of genuine economic and monetary union, the British love playing this intellectual parlour game of what are the necessary conditions for monetary union to proceed. They never think about the United Kingdom itself: is it a satisfactory monetary union? Clearly, in the United Kingdom we have a London economy which is a tremendous success and something that we all admire, but an out-of-London economy that continues to struggle. We all know that if we imagine them as separate countries, the London pound would be far stronger than the out-of-London pound. The country functions only because of massive fiscal transfers from its richer parts to the poorer.

You can argue that those transfers are not there in the eurozone—of course, they are not, except for the structural funds—but one of the problems with our fiscal transfers in Britain is that they have been extremely opaque. They are about to become less opaque as we go for devo-max in Scotland. I forecast that we will have more political arguments about the functioning of the United Kingdom economy in the decades to come as we have arguments about whether the extent of the fiscal transfers from London and the south-east to the rest of England are sustainable in the long run.

I make that point because I think that the mistake in looking at EMU is to neglect the extent to which its survival has depended on political will. Eurosceptics in this country always underestimate the strength of that political will. An enormous number of things have been done, including the European stability mechanism, the six-pack and two-pack legislation, the fiscal treaty, the ECB supervisory powers and the banking union. A lot has been done; let us not underestimate it. At the moment, politics is making a big difference to the chances of the monetary union overcoming its problems. We are seeing less emphasis on austerity and more fiscal flexibility. In part, we saw that with Mr Juncker going around making sympathetic noises to the Italians and the Spaniards to get their support for his nomination as Commission President.

More fundamentally, there has been a shift in Germany as a result of the formation of the grand coalition, with the disappearance of the Free Democrats from the coalition and the presence of the Social Democrats. The German Vice-Chancellor, Sigmar Gabriel—a Social Democrat—has said that he believes that the south needs more fiscal space and more fiscal flexibility. What the Germans are trying to do, of course, is to link that flexibility to support for needed structural reform in the countries of the south. They are also doing something to rebalance the eurozone themselves, with policies such as the introduction of a minimum wage, which will boost spending power in Germany.

The one remarkable thing in the crisis is that, thankfully, unlike the 1930s—this is the huge historical difference from the 1930s—there has not been a political collapse and a reversion to dictatorship in any of the EU countries, despite the very brutal circumstances that they have had to face. Reforms have been made and democracy has just about survived.

We will need to see further developments before the euro is safe. German rebalancing will have to go further and they will have to be more flexible. We will have to see some debt forgiveness because as the noble Lord, Lord Lamont, said, it is difficult to see how those levels of debt are sustainable in the long run. We will have to see more of a European-led investment policy. That is one way of doing things in favour of growth but making them conditional on reform.

I see the eurozone rescue as an incomplete project but I think the politics are working in the right direction. The political will has been demonstrated. My fear is that as a Euro-out we are not really putting our minds to how we will retain influence over this construction in the years and decades ahead. This report has been an extremely valuable contribution to what is an extremely important issue for the future of the United Kingdom.

Budget Statement

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Thursday 27th March 2014 Lords Chamber

[Lord Flight (Con)]

My Lords, some insightful and important points have been made in this Budget debate which I hope the Minister will feed through to the Treasury, because I have certainly not seen some of them being made elsewhere. I was extremely pleased to be able to agree with much of what the noble Lord, Lord Desai, had to say, which has not always been the case. It seems that he sees things very much as I see them. Equally, however, some sharp and important points were made by the noble Lords, Lord Hollick and Lord Myners. It has always struck me that the QE creation of £380 billion-odd would have to be monetised because there was never any prospect of raising that amount from the bond markets when those markets are tending to fall.

I also congratulate the Minister on what I thought was a very clear presentation, whether people agree with it or not, of government policy and what is in the Budget. It is only fair to say that with a relatively limited scope, there are some measures which are good for the economy and for citizens. I welcome in particular the infrastructure measures, and again I hope that the Minister will get a move on and make them happen as soon as possible. The measures for improving export finance are important. I have observed previously that French and American export finance in particular is much more generous than it is in the UK, which often results in us losing orders.

I would like to focus on the measures relating to savings, both the ISA reforms, which I do not think anyone else has actually even commented on, and the pension reforms. I want to talk about them in the context of the all-important issue of the UK savings rate. Reference has been made to it, but no one has made the point that the main reasons for the problems and imbalances in the British economy going back 50 years are because we have had an inadequate savings rate. You can have too high a savings rate, which has been China’s problem, and you can have too low a rate, which has been our problem, as well as that of India. I think that what we really need is a national debate about the right savings rate and what would make sense to try and achieve it; that debate is well overdue.

First, however, I declare an interest as an adviser to the not-for-profit trade body, the Tax Incentivised Savings Association. The association acts on behalf of the various savings institutions and has embarked on a major process, with some 50 organisations, to produce a study on the problem of saving rates being too low and what might be done to fix it.

ISAs have been extremely important. They were really a cross-party creation because they were an adaptation by the last Labour Government of the previous PIMA regime. They have been hugely successful as a means by which people can accumulate savings for their retirement, and something like seven times as much per annum is now saved in ISAs as is saved in personal pension schemes. The reason for that is extremely simple: it is because ISAs are extremely simple. People have access to their money because it is not tied up in strings of nightmarishly complex legislation. By and large the providers of ISAs have offered a straightforward range of products, some more sophisticated than others, through which people can save. They are now supposed to be called NISAs—I always hate changes of name because you forget what has happened—and I think that they are going to be much more important than many realise in terms of helping to increase the savings rate and savings accumulation for people’s now much longer periods of retirement.

However, I should point out to the Minister that there is one small item that needs to be addressed. Generally, in a marriage at least, the man has the ISA. Statistically he is likely to die prior to his wife, but although the capital can pass to the surviving spouse free of inheritance tax, she loses the tax benefits of an ISA, which is tax-free in terms of income and capital gains. In a way the wife is being cheated because, if the husband has made that sort of provision for retirement for both of them, it is unfair that she should not participate if her husband predeceases her. Obviously it is the same case the other way round as well.

On the issue of the reforms relating to annuities, going back 13 years to when I was a Member of Parliament I used to get lots of letters from women with £10,000 or £15,000 in a small money purchase pension pot who quite rightly objected strongly to that money having to be put into a footling annuity which was going to be neither here nor there. My impression was that if these ladies had had access to the capital, they would have hung on to every penny right to the end as their reserve pot of money. I have always objected to the compulsory purchase of annuities, although obviously there is a concern that people may cash in and consume their pensions savings—indeed, the figures provide for some £2 billion of tax revenues from this source. I am not so sure they will but, again, it seems to me that it would make sense to consider some incentives for people not to do that. If people, for example, want to transfer their pension savings to an ISA, which is a much simpler way of managing their savings, why should they not be able to do that without incurring a tax charge on the way through?

My other old chestnut is that home ownership became popular because people saw it as a way of passing on some wealth to their children. It has always struck me that, if what might be left in people’s pension pots on the death of the surviving spouse could pass to their children’s pension fund free of tax, that would be another quite powerful incentive for people at all levels to save more in their pension scheme. Tax would of course be paid on it once the pension was drawn.

However, my main concern is the savings rate. All my life, at least in the 1950s and 1960s, it was stop-go balance of payments crises. We then discovered, with the freeing of capital flows, that large deficits could be financed by borrowing other people’s savings and selling the family silver. However, that was not without a price—although we have not had quite the same pattern of stop-go, we have always tended to end up with overconsumption, overborrowing and the need to put the brakes on. No one even talks much about current account deficits now. Although it is all very well to exhort people to export more, the current account deficit is, in essence, a function of public and private consumption less the savings rate compared with GDP. If that is 5% more than GDP, which it is now, there is going to be a current account deficit of 5%. No matter how hard we try to export, we are not going to tackle the current account gap unless savings are higher or consumption is lower.

I think it was the noble Lord, Lord Lawson, who discovered as Chancellor that the current account deficit did not matter much in the short term because it was financeable. However, in the long term, it still does matter. We found that we did not have a British company capable of building a nuclear power station and that the interests of most of our utilities, which were internationally owned, were often different from those of government. This is really selling the family silver to pay for cumulative current account deficits. There is a long-term price to pay, even though it may be possible to deal with it in the short term.

Finally, there is the other side of the coin, which is that although our generation here may be adequately provided for in retirement, the next generation certainly is not. Pension scheme contributions are nowhere near enough and the government commitments to welfare and health spending for that generation are simply not going to be affordable. Unless something gives—the most civilised thing would be for the savings rate to increase so that people can afford more of these things themselves—there is going to be a real mess in 20 to 30 years’ time. Even this House rather kicked under the carpet the fact that pay-as-you-go public sector pension schemes are likely to have a cash-flow deficit per annum as high as some £25 billion as early as 2017. There are plenty of studies pointing out that the overall welfare spending commitments that Governments have presently given are simply not going to be affordable in some 20 or 30 years’ time.

What is the correct savings rate? I have not seen a definitive answer. My common-sense view is that it should be an average of at least 10% over different periods, whereas it is now somewhere between 4% and 5% and forecast to go down to 3.2%. It is all very well saying that we have to use consumption to get the economy going—that is working but unless it is accompanied by measures that will lead to a higher sustained savings rate going forward, it is going to as usual end in tears, as some noble Lords have mentioned. I therefore go back to where I started: I am very hopeful that being able to save £15,000 per person per annum in a NISA will increase the savings rate. As auto-enrolment gathers momentum and contribution rates increase, or need to be increased, that will increase the savings rate as well. I commend the Treasury and the Minister to at least think about some of the tax points I have raised.

I close by saying that, given that this is now an appointed House, it is rather out of date that we are excluded from participating in the legislative process of finance Bills. It seems there is quite a bit more in the way of informed views and experience in this House on such matters than there is in the other place.

Employment

Lord Flight Excerpts

Thursday 9th January 2014 Lords Chamber

[Lord Deighton]

My Lords, I will apply that question to youth unemployment. In particular, we have tried to get young people into apprenticeships. The youth contract did that by providing additional support for up to 500,000 young people. Jobcentre Plus will provide support for 16 and 17 year-olds who want to find an apprenticeship or traineeship scheme. That is being phased in from this April. We are doing good work on apprenticeships. I spent yesterday in Liverpool talking about how we can use the HS2 project as a way of defining future work opportunities and to line up training and apprenticeship schemes in anticipation of the work that will flow. I absolutely accept the noble Baroness’s points.

[Lord Flight (Con)]

Will the Minister give full support to my noble friend Lord Baker’s university technical colleges, which are succeeding in getting young people adequately skilled to get into apprenticeships? In Westminster, something like two-thirds of young people so far have not been skilled enough to qualify for apprenticeships, so it is crucial to get them to that stage.

[Lord Deighton]

I absolutely endorse the work of the technical colleges and my noble friend Lord Baker. If we are looking at how to continue to improve the employment situation, on the one hand the recovery of the economy is providing the demand to support it; on the other hand, there are longer-term, structural things that we need to do, which are essentially about investing in people so that the skills they have match the jobs that will be created in the competitive economy that we are developing.