Finance Bill

Lord Hollick Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Hollick (Lab)]

My Lords, I am pleased to introduce the report of the sub-committee of the Economic Affairs Committee on the draft Finance Bill 2016. I particularly acknowledge the tremendous contribution made to the committee’s work by our specialist advisers, Tony Orhnial and Elspeth Orcharton, and the work of Ayeesha Waller, the clerk to our committee. I thank the Minister for his kind remarks about the committee’s work and for responding to a number of the issues that we raised.

The committee had two overriding concerns: would the measures simplify the personal tax system; and would they reduce the compliance burden imposed on taxpayers? We looked at three separate proposals in the Bill: the reform of taxation on personal savings and dividend income; the new powers for HMRC to issue simple assessments of an individual’s tax liability; and the establishment of a permanent Office of Tax Simplification.

We generally welcome the changes proposed and acknowledge that they have the potential to simplify the tax affairs of many individuals and to consolidate the role of the Office of Tax Simplification. We recommended, for instance, that taxpayers should be given more time than the 30 days proposed to dispute a simple assessment, and to expand the Office of Tax Simplification’s statutory remit to give it an integral role in the future strategy of tax policy. We are pleased to see that the 30-day limit has been extended to 60 days, but were disappointed that the statutory role of the Office of Tax Simplification has not been extended to cover its role in tax policy.

We were very critical of the way these proposals had been developed and of HMRC’s plans for implementing the changes. The Government have trumpeted their new approach to tax policy but often fall far short of what is needed. There was no significant consultation on the taxation of savings income and dividends, which, if it had taken place, could have significantly reduced the complexity of the changes. HMRC’s own research shows that taxpayers are hardly aware of how the current tax system works, let alone the changes. HMRC’s communications strategy continues to rely far too heavily on the website GOV.UK, and on the efforts of banks, building societies and other intermediaries. HMRC simply cannot, and should not try to, subcontract responsibility to third parties for explaining important tax changes.

We were concerned that not all savings instruments will have interest paid without the deduction of tax, but are pleased to note that this will be covered in the 2017 Finance Bill.

We urged the Government to reconsider their decision not to publish route maps outlining their longer-term plans for those areas of the tax system they were proposing to change. Far too often, taxpayers are blindsided by sudden and dramatic changes to tax arrangements which can undermine years of personal tax planning. This is particularly evident in the tax arrangements for personal savings and pensions, which often vary on an annual basis and are now subject to an overall review that could lead to far-reaching changes. Taxpayers need to be supported in making longer-term plans and taking personal financial responsibility. It is the role of government to set a framework that will encourage people to make the appropriate long-term provision for their pension, confident that the Government will resist the temptation to tinker endlessly with the rules.

On 15 August, some five months later than expected, HMRC published its consultation document, Making Tax Digital: Bringing Business Tax into the Digital Age. The document, which totals nearly 250 pages and asks 129 questions, is probably the largest consultation exercise ever undertaken by HMRC and calls for responses by 7 November, just a fortnight before the Autumn Statement.

There is no doubt that, over time, digital returns will simplify the filing process. There are two challenges: first, to make them work for all, and, secondly, not to use the quarterly filings proposed for business as a Trojan horse to disrupt and pressure the cash flow of small businesses by introducing a requirement to make quarterly payments.

Many questions remain. How will elderly people, who are not particularly competent at using online services, manage their tax affairs? How will rural businesses with poor broadband access be able to meet their obligations under the digital system? What help will be available to small businesses to transition to meet the digital filing requirements? We were told by HMRC’s director of process transformation, Emma Churchill, that free software would be made available to small businesses. Subsequently, HMRC announced that it would not make available free software and had agreed to leave it to the commercial sector to deliver the software while support for the transition to digital was being considered. This falls far short of the commitment to provide small businesses with the tools to transition to digital, and it should be reconsidered.

The Government continue to ignore our recommendation, also made in prior years, to introduce robust post-implementation reviews of all major tax reforms and to publish the findings. There is no case for leaving the effectiveness of new tax measures—and of HMRC itself—shrouded in mystery. Will the Government consider this recommendation anew?

The Finance Bill is the last hurrah of George Osborne’s tenure as Chancellor. During his six years as Chancellor he offered great consistency: consistently making the reduction of public sector debt the totemic goal of his economic management plan; consistently failing to meet his debt reduction targets; consistently overestimating the level of corporate investment; and consistently failing to improve—as the Minister acknowledged—Britain’s unacceptable and disappointingly low level of productivity.

By prioritising the reduction in public debt over growing the economy, he squandered the inheritance left by his wise predecessor, my noble friend Lord Darling, who recognised that growth would have to make a significant contribution to debt reduction and sought to achieve a sensible balance in his economic plan between growth and debt reduction. Fortunately, George Osborne’s consistent failure to hit his debt reduction targets proved to be a blessing in disguise, as it helped prevent the economy deteriorating further.

George Osborne also missed an historic opportunity when he failed to take advantage of ultra-low long-term interest rates to use government debt to fund much-needed investment in new and existing infrastructure in the UK. Larry Summers noted in yesterday’s FT that,

“infrastructure investment … can create quality jobs and provide economic stimulus without posing the risks of easy-money policies in the short run”.

Infrastructure spending will also help address our poor productivity.

His successor, when he appeared before the Economic Affairs Committee last Thursday, struck a more nuanced note. Yes, the Government will continue to target the reduction of public sector debt—but over a longer period, and as part of a package that will include an increase in investment in infrastructure and measures to improve productivity. The Minister is clearly having considerable influence. We look forward to seeing his proposals to achieve all this in the Autumn Statement.

Significantly boosting housebuilding, which our committee recommended in its report Building More Homes, is a priority of the new Government. However, it remains to be seen whether the Government have the will to provide the funding to local authorities, which will be an essential part of meeting current demand, particularly for social housing.

Philip Hammond made an important distinction between “grande infrastructure projets”, such as Hinkley Point and HS2, and a range of smaller and medium-scale road and rail improvements which could be implemented quickly and generate benefit over the next few years. It was disappointing to see that one of George Osborne’s important initiatives—the establishment of an infrastructure commission with statutory backing—has been downgraded to a far more modest initiative without any statutory backing. It is unfortunate that the Government are backing off from the commitment to have a strong, independent body to scrutinise infrastructure investment and other major government or taxpayer-financed projects before they are green lit. Can the Minister confirm that the commission will no longer be on a statutory basis and explain how the Government propose to subject future projects like Hinkley Point B and HS2 to robust, independent and transparent scrutiny?

A talented and skilled workforce is a key ingredient to improving productivity. Philip Hammond told us last week that he envisaged that in a post-Brexit world he expects control over the movement of people to be used in a sensible way to facilitate the movement of highly skilled people between financial institutions and businesses to support investment in the UK economy. This was welcome news in the City. Can the Minister confirm that this approach will apply to other sectors of the UK economy, such as manufacturing, the creative economy, the professional services sector and academia?

National Infrastructure

Lord Hollick Excerpts

Thursday 22nd January 2015 Lords Chamber

[Lord Hollick (Lab)]

I would like to thank my noble friend Lord Adonis for securing this debate. All major parties have enthusiastically committed to infrastructure investment, but there are some key differences that have emerged over the level of funding, the process for evaluating projects and whether responsibility should reside in Westminster or increasingly in the nations and regions of the UK.

The Conservatives are clear that they will seek to achieve an overall budget surplus by 2018-19, with investment spending maintained at the current 1.2% share of GDP. Labour has sensibly proposed to unbundle current and capital expenditure and committed to secure a current budget surplus as soon as possible, to reduce the national debt as a share of GDP, but—critically—to increase infrastructure spend as a percentage of GDP back to 1.5%. The difference between the Labour and Conservative plans for infrastructure spend has been independently assessed as being up to £20 billion by the end of the next Parliament. The case for increasing the level of infrastructure spend at a time of record low long-term borrowing rates and when it can sustain and improve the current momentum in the economy is indeed powerful.

Another key difference between the main parties is the process of evaluating and deciding which of the many competing projects to pursue. The coalition published a National Infrastructure Plan, which has been referenced, and has subsequently published updates. This approach is most important. It has focused on delivery, cost control and implementation—all of which are of absolute and vital importance. But we are invariably proceeding without a clearly articulated strategic plan. As my noble friend Lord McFall mentioned, the Economics Affairs Committee is currently reviewing the economic case for HS2. Many of our witnesses have criticised the absence of a comprehensive strategy for HS2. This, they say, has undermined public confidence and stands in the way of a thorough and transparent review of alternative solutions. Professor Overman said that the case for HS2 and the alternatives presented to Parliament was so poorly analysed that it left MPs in a quite hopeless position to make a decision.

This is the crux of the problem: without a clear strategy, how are the Government, let alone the public, to decide what are the most appropriate and cost-effective options, and to prioritise investment? The Treasury carries out rigorous, zero-based capital reviews to determine priorities. But it is HS2 and the Department of Transport which are responsible for providing all of the data and analysis to support this evaluation. There is no independent review and the detailed analysis is not made public. This stifles informed debate and independent analysis.

The establishment of the national infrastructure commission—described by my noble friend—by the next Labour Government, will allow future Governments the luxury of making their decisions on which infrastructure options to pursue in the light of an overall strategy, and only after rigorous independent, impartial assessment.

The huge regional disparity in infrastructure spend was a very hot topic when our HS2 enquiry took evidence in Manchester from five Midlands and northern city authorities. The cities want to combine into large metro groups and take responsibility for infrastructure planning and implementation. Spending per head on infrastructure in 2013 was £2,595 in London but a meagre £5 in the north-east and only £99 in the north-west. The cities were justified in claiming that they are being short-changed and resented their subservience to Westminster. My noble friend Lord Adonis has made a powerful case to give large metro regions the responsibility for regional infrastructure and devolved budgets to support their projects. The noble Lord, Lord Heseltine, holds similar views, as does the City Growth Commission—chaired by Jim O’Neill, who appeared before our committee—which has called for the power to approve projects and secure finance to be devolved to the regions.

It is interesting to speculate whether, if HS2’s £50 billion budget was available to promote growth and connectivity in the regions, the regional metro authorities would pursue what one economist described as the lowest common denominator solution, or a more focused series of transport initiatives. Only when the regions are freed from the grip of Westminster will we know the answer to that question.

Autumn Statement

Lord Hollick Excerpts

Wednesday 3rd December 2014 Lords Chamber

[Lord Deighton]

I thank my noble friend for that question. Obviously she was in my mind when we developed that measure. It will be part of the Finance Bill next year.

[Lord Hollick (Lab)]

Can the Minister shed some light on the increase in infrastructure spend over the forecast period? In his Statement today the Chancellor said:

“Improving productivity for all business demands a major investment in our nation’s infrastructure”.

Over the past few weeks we have been showered with press releases setting out various infrastructure projects; I stopped counting when we got to around £15 billion. I was therefore a little surprised by table 4.3, the summary of the effect of government decisions, which shows that over the forecast period there is only a £600 million increase in capital. Can the Minister tell us what the actual increase in infrastructure spend is and how it is to be financed if it is only £600 million over the next four years?

[Lord Deighton]

As I explained to the noble Lord earlier, we have made a very detailed analysis of infrastructure spend, which is running on average at £47 billion per year. The majority of that, more than 60%, is financed by the private sector, which of course is a great sign of the success of this Government. Every scheme which has been announced has a clear funding plan attached to it. The real transformation that has taken place with this Government is that instead of having a plan for roads one year at a time—if there is a bit more money you can tell the Highways Agency to build a road; if there is no money, you tell it to stop, which results in a very inefficient road-building programme—we have given it a proper organisation, a proper strategy and a proper financing plan over the next six years.

Infrastructure Bill [HL]

Lord Hollick Excerpts

Monday 10th November 2014 Lords Chamber

[Lord Hollick (Lab)]

My Lords, I was chair of the Economic Affairs Committee of your Lordships’ House during the inquiry into shale gas and oil. The committee wanted to be fully satisfied that the regulatory regime was equal to the task of protecting people and the environment. We took extensive evidence from regulators, academics, local communities, NGOs and exploration companies. We concluded that the regulations and the mandatory industry guidelines gave the regulators all the powers needed to ensure that the environment and the health and welfare of local communities could be effectively protected. The report in 2012 by the Royal Society and the Royal Academy of Engineering, already referred to by the noble Lord, Lord Jenkin, came to exactly the same conclusion.

We heard from many witnesses that the current regulation of offshore and onshore gas and oil drilling in the UK is widely regarded as best in class. Four of the proposals in Amendment 113G are already covered by existing regulations or industry guidelines, and there is no need to gold-plate them and include them in the Bill. We on the committee endorsed the recommendation in Professor MacKay’s report that fugitive methane should be measured when shale gas extraction begins. The industry agreed to this. To impose a requirement to monitor over the previous 12-month period is quite unnecessary, and only extends an already far too long 16-month timetable to get permission to drill.

We also recommended in our report, as my noble friend has mentioned, that wellhead inspections should be carried out by independent inspectors. The Environment Agency and the Health and Safety Executive will indeed conduct job inspections but the well examiners will be employed by the companies. This was raised in the debate by the Minister last week, and she pointed out that the companies would provide these. One of the important things about regulation is that not only must it be independent but it must be seen to be independent. So why not ask the companies to foot the bill—if resources are a concern, and I suppose they are—for one of the agencies to carry out these independent inspections?

Our report identified that the tortuous and bureaucratic process to approve exploratory drilling is the major impediment to finding out whether or not the UK’s shale deposits are economically exploitable. It is regrettable that amendments were not tabled to address this serious problem, which has the merit of being supported by the facts and which would have commanded cross-party support. If passed, these amendments would add further complexity to an already devilishly complex and bureaucratic approval process, and will potentially extend the timetable by a further 12 months. Having lost the argument on the facts of the case, delay is now the main weapon of choice for those who oppose fracking. To add further delay to the exploration of shale gas would be a misstep.

Shale gas and shale oil could be a major boost to our economy; create jobs and preserve them; boost public and local finances; and halve emissions by replacing coal, which currently generates 40% of our electricity. For these reasons, I will not be supporting this amendment.

[Lord Deben (Con)]

My Lords, I declare an interest as the chairman of the Committee on Climate Change. It is true that the Minister and I easily could have a conversation, but I wanted to put into context where the Committee on Climate Change stands on the basis of this amendment. Our view is that it would be quite wrong to depart from the science here, when we spend so much time in asking that small group of people who still do not think that climate change is happening, to look at the science there. In other words, we have a responsibility to keep to the science. The science is very clear that there is no fundamental reason why we should not frack and produce gas. Indeed, there is no argument scientifically opposed to it. The royal societies have done us a great deal of good in their work, because we are able to state that as clearly as any fact can be stated. Of course, no scientific fact remains fact for ever; it can always be altered by new information. That is why all scientists are properly referred to as questioning. That is why I believe that we should start with those facts and say that we should go ahead and see whether fracking can give another way of providing the energy we need.

It is very important to say to those who do not want to frack that there is always somebody who does not want to do any of these things—people who think that neither onshore nor offshore wind is acceptable, or people who do not like tidal power. I am fed up with people who have their favourite bits and dislike every other means of generation. The climate change committee has said, rightly, that we want to have a range of means whereby we can meet our future needs. Fracking could, or should, be part of that because we have already said that we will need gas into the 2030s. I thank the Government again for confirming the fourth carbon budget. Following those budgets, we still will need gas. Surely it would be better coming from our own resources than being brought in from somewhere else, particularly given that we do not always have the confidence in many of those places “somewhere else” that we have in our own resources.

That is the background. However, I warn the Government that there is always a chance of snatching defeat from victory. I am afraid that the Government are not always aware of that, so I want to encourage them not to get into that position. I think that the amendment is unnecessary. However, it seems to me that the reason it has been tabled is that there is so much misunderstanding outside. It is terribly important for the Government to underline the very significant difference between the way in which we deal with environmental questions here and the way in which they are dealt with in the United States. First, we deal with them on a national basis, whereas the United States deals with them on a state basis; secondly, there is no doubt that the United States system is lacking very considerably. There are some really disgraceful examples of failure to insist upon basic environmental protections in the United States. I do not want us to have to fight the public, who are misinformed, not about what happens in the United Kingdom but about what has happened in certain states in the United States. Nor do I want the public to take the rather ridiculous view that because it happens in the United States we can do it here, that it is the answer to everything, and there is no need to think about anything else. Both ends of that spectrum are wrong. Those who think that fracking will be the answer to everything and that there will be lower prices are clearly wrong. I say to the noble Lord that to say that it is unacceptable or that it is a sin against the Holy Ghost is also fundamentally wrong and unscientific. We ought not to go back into that same area of the dark ages, which we are invited to do by those who do not believe in climate change. We have to have a sensible, central position, which the Government have.

I would like the Government to oppose this amendment but to say publicly that they will do three things. One is to make it much clearer to everybody in a simple form how the regulations will work and how they will be enforced. The second is to make it absolutely clear that where the Select Committee of this House has recommended that independent checking is necessary, the Government will find a way of insisting that that is done. That is important not just because the House of Lords has suggested it but, frankly, because no one believes any business if it is doing its own checking. It does not matter how good or how bad the business is, we all believe that checking should be done independently—the business can pay for it but it ought to be done independently. We ought to promise that and state it.

The third thing is, I am afraid, even more important—namely, the Government have to give a real undertaking that, when the moment comes, there will be no question of a shortage of funds for any of the institutions that are responsible for protecting the public. The public are very suspicious that it is all too easy to say, “We would have done it but we couldn’t because it was all too long so we did some random checks”. If this measure is to go ahead, we have to know now that there is no question of there being any shortage of funds for the necessary checking, and that it will be done independently. Those of us who believe in the market believe that the cost should fall, as always, on the people who are proposing the fracking.

I end with one simple comment. I am finding it more and more difficult to deal with those who talk about the free market but do not believe in it. They talk about the free market but mean the managed and biased market that we happen to have and which is convenient for them. I do believe in a free market but that means that the costs of the production of this gas should be placed fairly and squarely on the shoulders of the producers and therefore also on the shoulders of the consumers. Given that, I do not think that we need these amendments. The Government are right to proceed on the basis that part of our means of generating for the future will be our home-produced gas.

Budget Statement

Lord Hollick Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Hollick (Lab)]

My Lords, I want to start with Tommy Cooper. When he was asked to explain how he did his sleight of hand magic, he said, “Watch my hands and ignore what I say”. Of course, that was easier said than done, because Cooper’s patter was utterly hilarious and compelling. Our Chancellor has a well practised line in patter, but if you watch his hands—in other words, what he actually does—you quickly detect the difference between what he says and what he does. He is adept at saying one thing while doing another.

Over the past few years, the Chancellor’s constant refrain in response to those calling for a Keynesian boost to get the economy moving has been, “You can’t cure debt with more debt”, but this is precisely what he has done—though not directly of course, although public debt has in fact significantly gone over his forecast. He has not overtly adopted a plan B; rather, he has resorted to off-balance-sheet measures to boost the economy. By making £120 billion in government guarantees available for additional mortgage borrowing, he has provided the private sector with a massive incentive to ignite the housing market and with it the feel-good factor.

That was last year. In this year’s Budget, the Chancellor tells us we are not saving enough, but in the next breath he announces that pensioners can now access their pension pots to finance consumption. The OBR forecasts that the savings ratio will fall from 7.2% in 2012 to 3.2% by 2018. That is before taking into account early pension fund withdrawals.

Anatole Kaletsky has rather colourfully dubbed the Chancellor a stealth convert to Keynesian Thatcherism. The Chancellor has arranged for the private sector to take the strain and privatise the borrowing that the economy needs to get us out of recession—all helped along, of course, by quantitative easing and ultra-low interest rates. This treatment has worked. As the Minister said, the UK’s growth rates have exceeded expectation and are ahead of all other major advanced economies. However, it could have worked earlier and the UK could have avoided three years of damaging economic underperformance if the Chancellor had adopted policies to boost borrowing earlier in the Parliament.

The IFS has spotted another important gap between words and actions. Despite the Chancellor’s protestations that he is ruthlessly holding the line on fiscal discipline, he has introduced permanent tax giveaways paid for by unspecified spending cuts and temporary tax increases, thus weakening long-term public finances. He has yet to spell out how he will achieve his target of cutting public expenditure by 2018 to the lowest share of national income since 1948.

GDP growth is being fuelled by a borrowing binge and house price inflation. We all know how that story ends. Will the Minister please explain why the Government expect the outturn will be different this time round? The long delayed recovery we are seeing is welcome but it is the worst—that is to say, taking the longest to get back to the previous peak in output—in our history. Output remains 15% below what might have been expected absent the financial crisis. The OBR forecasts that the output gap will close by 2018, with the prospect that there will be a permanent hole in UK output. If this forecast is correct, improved productivity is the only way to achieve above-trend growth and recover the lost ground, as the Minister said. The OBR notes that our productivity is exceptionally weak.

The substantial increase in employment is welcome, but it has led to a reduction in real wages and, therefore I presume, productivity. This may be explained by the move from good full-time jobs to a mix of part-time, sole trading, temporary contract and zero-hours contracts, and with many graduates and professionals now working in jobs for which they are well overqualified. The data on pay tell a grim story. Real average earnings have fallen by nearly 10% since 2008 and, measured by RPI, will show no recovery by 2018. Low pay and low productivity are no recipe for sustained growth or, indeed, for fairness.

The Chancellor flirted last autumn with the idea of a large increase in the minimum wage, but that came to nought. He could have been bolder and adopted a policy of requiring the public sector and those companies that hold government outsourcing contracts to pay the living wage. This would lift many working families off benefits and out of the clutches of payday lenders. Economic growth built on decent pay is more sustainable, let alone fairer, than growth based on excessive personal credit.

As the Minister said, increasing capital investment is essential to improving productivity. After four years of declining capital investment by both government and the private sector, there are welcome signs of a pick-up, with the OBR now forecasting 8% growth in business investment and 4.5% growth in government investment. The changes in the Budget to encourage business investment are also welcome. Now that increased funding is being promised, will the Minister tell the House what other barriers need to be removed if he is to achieve his ambitious infrastructure plan?

Investment in the energy sector is essential to getting prices down and to keeping the lights on, as the margin of electricity generating capacity over peak demand shrinks over the next few years. The shortcomings of energy policy have been laid bare by the Government’s dramatic intervention to introduce a £7 billion package to cut energy bills, secure investment in nuclear power and bring mothballed gas generating plants back into service as standby capacity.

But all that comes at a very high cost. The nuclear investment is predicated upon a gas price set at twice the current level and inflation linked for 35 years, all of which will give the investors—EDF—a very handsome 30%-plus return. The standby gas generation arrangements that the Government put in place will have to be underpinned by very expensive back-up contracts to provide gas. New offshore wind will, DECC calculates, be some 30% more expensive than the cost of new nuclear power—all this in a world in which energy prices are falling. The Chancellor promises a shale gas revolution but, to date, only one shale gas well has been fracked in the UK and, assuming that further drilling proves the reserves to be commercially viable, production will come on stream in volume only in the next decade.

The failure of energy policy to create a competitive, functioning energy market that is attractive to investors has forced the Government, in effect, to renationalise the energy sector by taking direct control of pricing and investment. This policy of intervention is not working on any level. Emissions are up because of the increased coal use, supply is less secure because of inadequate investment, and costs are up because of the high cost of new low-carbon supplies and the intermittent nature of the source of energy.

[Lord Forsyth of Drumlean (Con)]

I find myself agreeing with much of what the noble Lord is saying on energy policy, but how does he reconcile what he is saying with the Official Opposition’s policy to introduce price controls on the energy companies?

[Lord Hollick]

As the noble Lord can see, I am speaking from the Back Benches. The wide-ranging competition policy announced today is welcome, but there is a need for a root-and-branch review of our energy policy.

The Chancellor’s measures to boost saving and to stop pensioners being forced to buy annuities from a cartel that gives poor value for money are bold and welcome. When he announced the decision to allow pensioners to access their pension savings, the Chancellor acknowledged that pensioners would need free, impartial advice if they are to get the best out of the choices they now have. The promise to provide that advice must be met in full if pensioners’ interests are to be protected in what is a fiendishly complex and, frankly, rather rapacious industry.

I end on a note of caution. I was a director of the National Bus Company when it was privatised by the then Conservative Government in 1987 into more than 80 separate companies. By the way, it was not my policy but that of Nicholas Ridley. Employees were given the option of staying in the indexed final salary scheme, which had government backing, or taking their chances in a deferred contribution scheme. The pension salesmen’s seductive patter and the promise of a share of the commission generated by the transfer to a defined contribution scheme proved irresistible to many, who then saw their pensions fall short of their expectations, let alone the guaranteed level of the NBC scheme that they had left. This House has an opportunity to make sure that that sort of thing does not happen again by providing proper information and making truly independent advice available to people who are making a decision that is irreversible at an important time in their lives.

Autumn Statement

Lord Hollick Excerpts

Thursday 5th December 2013 Lords Chamber

[Lord Deighton]

On universal credit, I can tell your Lordships from a personal point of view that the individual whom we have brought in to manage that programme, Howard Shiplee, worked on the Olympic Games and delivering the Olympic park, so we have got the right people focused on getting the delivery of universal credit absolutely right. Our current planning assumption is that universal credit will be available in each part of Great Britain during 2016, with new claims to the benefits that it replaces having been closed down and the majority of the remaining caseload moving to universal credit in 2017. I do not have the particular numbers on how much it has cost, but I will work with DWP and provide the noble Lord with a response to that question. On capital gains tax for non-residents, we are introducing it in the normal way. The efficacy with which we have approached closing down these loopholes puts the previous Government to shame.

[Lord Hollick (Lab)]

The Statement recognises that we have a cyclical recovery and that in order to turn that into a sustainable, long-term recovery, we need investment—we have had a number of discussions on that—and an improvement in productivity. The Statement references a report, presumably prepared by the Treasury, showing that the policy pursued by this Government and their predecessor to reduce corporation tax has increased investment and raised productivity. In the light of this, is it not strange that the Government have so comprehensively rejected the recommendation of a report prepared by the Economic Affairs Committee of this House and enthusiastically endorsed by all sides in a recent debate that we take measures to ensure that all companies pay corporation tax, particularly those international companies which currently do not, and that UK companies using complex and—frankly—dodgy procedures not to pay tax here should all be required to pay tax? As a result of that, the tax rate to both large and small companies could be substantially reduced, to the benefit of productivity, and the Treasury would be no worse off.

[Lord Deighton]

I thank the noble Lord for his analysis of our need for investment. We also talked about productivity. The review that the noble Lord referred to that the Treasury did on corporation tax is what we describe as dynamic modelling, which means understanding the long-term effects of the tax cuts and demonstrating that the increase in income that flows afterwards pays for the majority of them. The way that we are dealing with making sure that overseas companies pay their fair share is through the OECD and taking leadership internationally. I think that is the only way that you can do it. You have to be able to deal with these international companies on a global basis, otherwise it is impossible to close them down, so that is probably the right way to approach it. The general trend of getting people to pay less tax and making sure that everybody pays that tax is the right strategy, and one that is working well for this country.

Tackling Corporate Tax Avoidance: EAC Report

Lord Hollick Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord Hollick (Lab)]

My Lords, it is a great privilege and pleasure to follow the noble Lord, Lord Leigh of Hurley, in his maiden speech. He is very welcome to this House. He and his family have been on the most interesting journey. His 30-year or so perspective on the tax matters that we have been looking at is most helpful. It is interesting that he was grappling with some of the same problems then, although there are also some new ones.

What struck me is that when the noble Lord said that tax arrangements were not fit for purpose, and he speaks with great authority, he used the expression that the UK was “leading the way”. One of the most disappointing things about the Government’s response is their failure to pluck up the courage to lead the way. This is something that as a country we rather hold our heads up high about and say that we believe we can find a way forward on these difficult matters, but unfortunately that has not been the response of the Government. I thank the noble Lord for his remarks.

I also thank our chairman, the noble Lord, Lord MacGregor, for leading us at a brisk pace through a complex area, and for coming up with some important and sharp points that need to be taken on board and considered at length by the Government; indeed, I hope that the House will remind them of the need to do that.

I declare my interests in several companies and partnerships, which are listed in the register of interests. As has been said, corporation tax makes an important contribution to public finances, accounting for between 9% and 10% of total tax receipts over the past decade. As we know, for the vast majority of companies—SMEs and companies that are based here—tax payment is a matter of routine: taxes are calculated, reviewed and audited, and payment is made. However, for many large companies, some based here but also some multinational companies headquartered elsewhere, the tax charge can be manipulated downwards—in some cases, near to vanishing point—to boost profits, to the great benefit of owners. This is because of the sheer complexity and asymmetry of tax laws here and in other countries.

These large companies therefore have the opportunity effectively to game the system. They are aided by a sizeable army of advisers—the big four accounting firms, top legal firms, specialist tax advisers and of course banks—all of which make a very grand living from providing that advice. Of course, many of those people also advise the Government and HMRC on the detailed framing and operation of tax regulations—tax regulations that they are then free to game when they return to the commercial world. It is a case of foxes having a free entry pass to the henhouse. The opportunity to play these games, as we heard, arises from the historic structure of corporation tax based on physical presence in one country, but this has been made redundant by globalisation and digitisation.

When I started in business in the City, tax planning used to fall into two categories: avoidance, which was legal, and evasion, which was not. Today there is a third category, aggressive avoidance, which amounts to a no-holds-barred exploitation of loopholes in national and international statutes. The activities may be contrary to the spirit of the law but they are, just, within it. The Prime Minister put it well when he said at the G8 that forms of aggressive tax avoidance,

“raise ethical issues and it’s time to call for more responsibility”,

from companies,

“and for governments to act accordingly”.

The stock defence for companies that engage in aggressive tax avoidance is that they have a duty to their shareholders to maximise their profits. Farrer, the firm of lawyers, based on opinion from leading counsel, recently published an opinion that said:

“It is not possible to construe a director’s duty to promote the success of the company as constituting a positive duty to avoid tax”,

so that defence falls away. When the Chancellor hailed the G20 communiqué that stated:

“Cross-border tax evasion and avoidance undermine our public finances and our people’s trust in the fairness of the tax system”,

he put his finger on the uncomfortable truth that while most companies and individuals are expected to pay their fair share of tax and are vigorously pursued if they do not, large companies with deep pockets to fund the defence of their tax arrangements are treated quite differently. This is the case with Goldman Sachs and Cadbury—and, I am sure, many others that we do not know about—which are able to negotiate an advantageous settlement that rarely sees the light of day. A tax system that is mandatory for all but the very biggest, for whom it is voluntary, is grossly unfair and, as many noble Lords have said, undermines the trust and sense of responsibility that are essential to the proper functioning of the tax system.

Many witnesses confirmed what business leaders say in private and sometimes in public: that the panoply of schemes to shift profits abroad, and to load up companies with debt, enables them to choose the tax charge that they wish to pay, safe in the knowledge that HMRC will not pursue them. In HMRC’s eyes, legal form triumphs over substance, so a business that earns a substantial economic rent in the UK can divide up its activities—such as purchasing, marketing, brand ownership and financing—into different corporate entities located in different countries, to take advantage of the low tax rates in those countries.

This structure completely defies the way the business is actually run. Nevertheless, it is accepted by HMRC. Google has been referenced. Interestingly, the group profit margin of Google is 22.5%. Assuming that the UK, which is one of its largest markets, would achieve the same margin on a turnover last year of £3.5 billion, it would make a profit of just short of £800 million, on which nearly £200 million of corporation tax would be paid. This compares with the £11 million that was actually paid. That is the scale. As my noble friend Lord Browne mentioned, the tax gap does not include any of this. It is a very difficult number to put your finger on but in one company, Google, that is probably the scale of tax avoidance. Eric Schmidt, the Google chairman, pointed out that Google is only following the rules and it is for the Government to determine the rules, and when they do the companies will respond accordingly. He has a point: it is the Government’s responsibility.

Cadbury, which was investigated in a most illuminating article in the FT recently, appears to have strayed a very long way from its founding Quaker principles. Its tax planning was so aggressive that it decided that a couple of schemes were so likely to raise a red flag that it stopped them after 11 months. Therefore, by the time the year-end came around Cadbury did not have to be audited. However, in the 11 months it had spirited away £30 million of profit. I would be interested to hear from the Minister on this point whether HMRC is now looking at intra-year schemes which might not appear on the books but generate considerable savings. I appreciate that he may wish to write to me on that point.

In response, the Government state that they support the principle that profits and taxing rights shall be linked with economic activities, but to achieve this we need better rules. Indeed, the OECD work is important but, as the noble Lord, Lord Lawson, colourfully described, it makes very slow progress and getting multilateral agreement will be particularly difficult. EU agreement might be easier and it would be interesting to know from the Minister whether the Government are prioritising the co-ordination of rules within the EU to reduce manipulation. Many of the schemes we heard about were in fact EU-based.

Of course, there is scope for unilateral action. In his evidence, Professor Picciotto said that,

“it is inappropriate to treat firms which are economically integrated and centrally directed”—

most of the companies we have mentioned today are—

“as if they were a collection of independent entities”.

He claimed that there was discretion under the existing transfer pricing rules of the OECD for countries to take a dim view of this and to say, “That’s not right, it doesn’t work, it’s a sham”. We should have the courage to look into that because the way these companies are reporting for tax purposes is a complete nonsense. It is a complete fiction.

The Government say—and previous Governments have made the same point—that they do not want to frighten away large companies or do anything to upset them. To be fair, as the noble Lord, Lord Leigh, said, it is important that we have a welcome mat but we do not have to lie down and be run over. Large companies such as Google, Amazon, Starbucks and Apple are not going to leave the UK, which is a major market for them, where they make a great deal of money, simply because we require them to pay the right level of tax. It is important that the Government summon up the courage to close the door on these tax avoidance schemes. Yes, as the noble Lord, Lord Leigh, said, we must be clear and consistent about it, but we must also be disciplined if we are to have a fair system. That will actually help competition because it will create a level playing field with international companies having to pay the same level of tax in the UK as the currently disadvantaged UK-based companies. Perhaps a corporation tax system that requires all companies in the UK to pay, in the PM’s words, a “fair rate of tax” will significantly boost revenues and open the door to far greater reductions in corporation tax. A wider net will raise more money, help the Exchequer and allow corporation tax rates for large and smaller companies to come down substantially below the levels that are currently planned.

Yes, these measures will threaten Luxembourg’s remarkable position as the largest coffee exporter in the world and outlaw such mouthfuls as the Dutch sandwich and the Irish double dip but, frankly, these are all based on fictitious accounting and so we should shed no tears. Will the Minister confirm that the Government will look again at the discretionary measures available to them under OECD guidelines?

Mention has been made about high levels of debt. Having worked in the City and in private equity I am very familiar with the benefits and, occasionally, the disadvantages of high levels of debt. Because of the asymmetry between the tax treatment of debt and of equity as the noble Lord, Lord Lawson, and others have pointed out, the incentive is to pile on more debt. That needs to be looked at but the arrangements at the moment mean that debt can be raised to finance foreign activities and to shift profits out of the UK. The Government and HMRC need to look closely at what is going on here.

The noble Lord, Lord Smith of Clifton, mentioned the Eurobond scandal. This rather curious loophole costs the UK some £500 million a year. Yet the Government, having consulted 30-odd people in the City—the usual suspects—decided not to score. They were in front of an open goal with £500 million as the prize. For the Government to claim, as they do in this response, that they are protecting the UK Exchequer from aggressive loan financing is palpably absurd. As the Prime Minister said, it is really time for them—he did not say “them” but I will—to wake up and smell the coffee. This is now a rampant activity, which is losing the Exchequer a great deal of money.

Informed discussion of the tax system and the performance of HMRC is bedevilled by opaqueness. The Prime Minister put it in a nutshell in Davos in January this year when he said:

“We need more transparency on how governments and, yes, companies operate”.

He prefigured our report. His words have been ignored by the Treasury, whose refusal to embrace transparency for companies and to produce effective parliamentary oversight of HMRC smacks of arrogance and complacency. Without specific details of aggressive tax manipulation schemes, it is impossible for Parliament and the public to comment sensibly on the massive tax leakage the UK is suffering. It is helpful that the newspapers have been able to shed light on this but it should be a matter of public record.

In response to the report’s call for parliamentary oversight, the Government trumpet the appointment of the Tax Assurance Commissioner. Now, he is an HMRC insider. He is marking his own homework and doing his own scorecard. Perhaps the Minister can help us here. Why was this not set up as an independent body answerable to Parliament? It would have more credibility and give more comfort to taxpayers. The response also says that the National Audit Office has full access to HMRC. That is a good thing but how much detailed oversight does the National Audit Office actually take of the workings of HMRC? Can the Minister tell us what resources are deployed by the National Audit Office to oversee HMRC’s performance? How many investigations have been carried out annually over the past decade?

That the Treasury’s response to our report is supine is perhaps not wholly surprising. Our recommendation that the Treasury should review a range of radical tax proposals and promote a more assertive approach to profit manipulation probably falls into the “Too difficult, don’t bother me with that” category. Transparency and effective parliamentary oversight would put the performance of the Treasury and HMRC in the spotlight, which might prove to be uncomfortable. The Treasury and the Government are beguiled by those smart folk in the City and large companies, and do not want to disturb a cosy relationship. Of course, ignoring or sidelining the wishes of the Prime Minister, which have been very clearly set out, is a long-established Treasury pastime.

Financial Services (Banking Reform) Bill

Lord Hollick Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I will say a few words, as a director of a bank and a member of an audit committee, to give a current perspective on these issues. We have heard interesting speeches from my noble friend Lord Lawson and from other noble Lords that were not directly relevant to the amendments in this group.

One of the amendments before us concerns whether there should be a statutory requirement to make arrangements to meet auditors twice a year. As a consequence of last year’s Financial Services Act, there is already a requirement on the PRA and the FCA to make arrangements for relationships with auditors, and indeed actuaries. That has led to the revision of the code of practice developed under the FSA into the ones that have recently been produced by the PRA and the FCA.

The noble Lord, Lord McFall, referred to Andrew Bailey and the previous existence of relationships between auditors and the FSA. It may well have been true that that did not work well in practice. However, I assure noble Lords that in my experience, both the PRA and the FCA are wholly resolved to make the arrangements for working closely with auditors work extremely well. That is the nature of what they have done in producing their codes of practice. If the noble Lord, Lord Lawson, or any other noble Lord looks at the codes of practice, they will see a very different intensity of engagement from any previous code. In particular, for category 1 firms—which, I am sure, are the firms about which noble Lords are concerned—not only are two formal meetings scheduled but the guidance makes it absolutely clear that it is expected that there will be additional meetings and informal contacts with the auditors throughout the process.

We have to accept that the world has moved on. There is now a statutory underpinning of the arrangements that are made for relationships with auditors. From my perspective, both the new regulators have taken to heart any lessons to be learnt from the past and are very focused on ensuring that the arrangements work well, going forward.

[Lord Hollick (Lab)]

My Lords, I support the two amendments in this group. They address real flaws in the current arrangements. The comments of the noble Baroness, Lady Noakes, were interesting on whether the flaws are now covered by the codes of practice. The concern in the committee report to which the noble Lord, Lord Lawson, referred—I was part of that committee—was that there was no active and effective dialogue between the auditors and the regulators. Regulation requires as much light as possible to be shone on what is going on in the organisation being regulated. In part, that is to do with the provision of information and data—of which there are tonnes in banks. At another level, it is very important to give a perspective and a judgment. This goes to the heart of some of the problems.

First, and bluntly put, the auditors—as has been pointed out—are appointed, paid and retained because they work with the management of the bank. Their duty is to shareholders, of course. However, the reality is exemplified by Barclays, which had the same auditor for, I think, 240 years. It is very important that we underwrite the independence of the auditor. The statutory requirement to talk to regulators helps auditors have the necessary degree of independence so that they can inform the regulators of what they are concerned about.

The second issue is that of the accounts. As the noble Lord, Lord Flight, made clear, investors have a completely different set of accounts. They put IFRS to one side because it is incomprehensible and meaningless. It is completely pro-cyclical in banking, which is the most dangerous thing to be. The fund managers look at their own accounts, but of course if you sit on the board of a bank—as a number of Members of this House do—you see a different set of accounts as well. You see the management accounts about how the bank is trading. You look at the bankbook and try to assess the risks. Before IFRS came along, when times were good it was a practice for prudent bankers to say that some of the loans might turn bad and that it was necessary to put some provisions to one side. IFRS has stopped that practice, although we were told in our committee that IFRS is reconsidering the rules; its rules committee has recognised the shortcomings of IFRS. A Member of this House has also written a very good report which tries to get accounting back from being totally rules-based to being principles-based and asking: “Is this a going concern? Is it a true and fair view of accounts?”.

The audit firm that signed off Northern Rock to say that it was a going concern—when it was funded entirely by overnight money—made a clear misjudgment, shall we say. The bank’s own management accounts—and indeed the auditor’s own judgment—would have helped the regulator to look at that much more closely. It is therefore important that the Government think again on this. The argument about cost is not a real one; that is a bit of nonsense, to be blunt, because these sorts of accounts are published and provided to board members to review the performance of the organisation.

As for relying on expectation, we owe it to the taxpayers in this country to have rather clearer rules. Expectations and codes of conduct are all very well, and one would wish to have them clearly set out and published. However, in a matter as serious as this, it is very important that there is a legal requirement to do this. The noble Lord, Lord Lawson, wishes that he had put one into the 1987 Act. The Government owe it to the taxpayers to think again on these issues.

[Lord Phillips of Sudbury (LD)]

My Lords, I am going to build on what has been said by the noble Lords, Lord McFall, Lord Barnett and Lord Hollick. Then I will make one suggestion in respect of Amendment 92, which I support. Comment has been made about the fact that the accountancy profession has got too concentrated for public benefit. It is altogether too cosily placed vis-à-vis the very largest banks and companies. The noble Lord, Lord Hollick, referred to Barclays using the same auditors for more than 100 years; it that is not a recipe for slack auditing, I do not know what is.

The noble Lord, Lord McFall, noted that many accountancy firms provide both auditing and consultancy services. Sometimes, the non-auditing services are more valuable than the auditing services, which is a crazy situation. It is a pity that the Bill does not address that because if, as auditor, you ought to be saying some things with “rigour”—the word quoted by the noble Lord, Lord Lawson, from an article by Mr Woolf—how can you avoid a deep conflict of interest? I suggest, and experience bears me out, that you cannot bring to the very difficult task of auditing the rigour that is on occasions necessary to bring a bank or a large company to heel and to ensure, as far as any audit can, that some of the disasters we have seen are thereby avoided.

As I say, I am sorry that we are not addressing that issue in this Bill. Perhaps it is not too late to table such a provision on Report. However, I fear that a great deal is lacking. I think I am right in saying that all the big four accountancy firms have been penalised or fined many millions of pounds in the past few years. I remember that in America, KPMG was fined more than $450 million for running fraudulent tax schemes for years on end. What happens to these firms’ reputation and business? Very little does, as far as I can see. I suggest to my noble friend Lord Lawson and his co-proposers of Amendment 92 that it is not clear beyond peradventure that the bank under consideration should not be present at these statutory meetings. It may seem an obvious common-sense point that you cannot have such a statutory meeting with somebody from the relevant bank being present. However, given the cynicism of our world, we should make that clear. Given that we are at a flexible stage of our consideration of the Bill, if Amendment 92 goes forward, I recommend that that provision be included in it.

--- Later in debate ---

[Lord Blackwell]

I thank my noble friend for that clarification, but I was responding to the points that were made by him and other noble Lords in advancing their arguments. If you come down to the question of “Does the PRA need more powers in order to enforce a higher or more restrictive leverage ratio?” then it can, under its existing powers, require capital add-ons to banks if it is not satisfied with the risk weightings. That is the way it would deal with it. It seems a slightly tangential point as to whether it is setting the overall leverage ratio or whether it is setting the capital ratio by other means. I should like to hear the Minister’s response on whether he thinks there is a case for this being built into the legislation.

[Lord Hollick]

I, too, strongly support this amendment. This is a serious matter. It is not a backstop, or at least I do not see capital as a backstop; I see it as the foundation upon which safer financial institutions can be built. We debated in great detail, quite properly, the regulatory process and all of the regulatory initiatives, but at the end of the day there is nothing that can protect the public and the depositors other than a strong capital foundation.

In a characteristically robust article in today’s Financial Times—which of course I will replace in the Library—John Kay said:

“It is hard enough to find people capable of running financial conglomerates—the fading reputation of Jamie Dimon, JPMorgan Chase chief executive, confirms my suspicion that managing these businesses is beyond the capacity of anyone. The search for a cadre of people employed on public-sector salaries to second guess executive decisions is a dream that could not survive even the briefest acquaintance with those who actually perform day-to-day supervisory tasks in regulatory agencies. They tick boxes because that is what they can do, and regulatory structures that are likely to be successful are structures that can be implemented by box tickers”.

He goes on to say:

“Financial stability is best promoted by designing a system that is robust and resilient in the face of failure”.

That is what a strong capital base does.

It is very important that the Financial Policy Committee has the power to do this. Of course, politicians can always be relied on to make the right decisions but, as we know, when political priorities are to encourage Chinese banks to come to London, for instance, they are allowed to open branches. I am sure that China is a better credit risk than Iceland but it gives you an insight into how decisions can be made by politicians. It is very important that the Financial Policy Committee is given the power to make these decisions, and to make them independently, just as the Bank of England does over interest rates.

[Baroness Noakes (Con)]

My Lords, I agree with much of what my noble friend Lord Blackwell said—in fact, I probably agree with all that my noble friend Lord Blackwell said—but I would like to pick up something that my noble friend Lord Lawson said when he intervened on my noble friend Lord Blackwell, that the issue was who was to decide on the leverage ratio.

The amendment before us says that the direction, which is the Treasury’s direction,

“may specify the leverage ratio to be used”.

The key issue with this amendment is not who potentially decides on the amount of the leverage ratio but the timing of the leverage ratio. People have been clear, and it is going to be a requirement of CRD IV, that there will be a leverage ratio, and the current international timing is to be 1 January 2018. As I understood it, that timing was going to drive the Government’s decision on what leverage ratio to introduce, given that they have the power to include it within the macroprudential toolkit under the legislation that has already been passed. We should not rush into a leverage ratio because there is still much work to be done on understanding how these leverage ratios, which have not been used much recently, actually work in practice.

My noble friend Lord Lawson also pooh-poohed the idea that the difference in practice between the US and the UK was significant. Some analysis done by the British Bankers’ Association has identified that on any given balance sheet the difference can be 3% under CRD IV and 5.3% under the current US rules. So we potentially have quite a significant difference, and the BBA talks about different leverage ratios as well. We also need to understand the impact of any given level of leverage ratio once the definitions are sorted out.

Mark Carney, who is chairman of the Financial Stability Board as well as Governor of our own Bank of England, has been clear that this is to be a backstop measure and that it is important to calibrate it so that the risk-weighted asset calculation of capital bites before the backstop method. Unless we are very clear when we introduce the leverage ratio about what the impacts will be, we potentially lay ourselves open to the unintended consequences of positively driving the capital requirements of the banks or, more likely, their lending capacity.

It is important that we let the current timetable for the development of the leverage ratio proceed and let the calculations be done properly. Banks are already disclosing leverage ratios to the regulators and will be disclosing considerably more information as time goes on, so there can be much more of a public debate about the impact of different leverage ratios on banks and other financial institutions.

Financial Services (Banking Reform) Bill

Lord Hollick Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Hollick]

My Lords, I declare some interests. I started work in a merchant bank in the City in the late 1960s—medieval times, as the noble Lord, Lord Lawson, described them—and then from 1975 to 2000 was chief executive of what grew to become the largest inter-dealer broker in the world, now called ICAP, where I am a shareholder. For the past two years I have been a member of the advisory board of Jefferies, a US investment bank, and a partner in GP Bullhound, a boutique investment bank—in other words, a very small investment bank—which arranges finance for young technology companies.

One of the first things that was drummed into me as a graduate trainee at a merchant bank was that banks had to put their customers first, be they depositors or borrowers. That stands in stark contrast to the infamous occasion when the chairman of Goldman Sachs was asked by a Senate committee whether he put his customers first and, of course, he was unable to answer in the affirmative because he did not: he put his institution first. It is that lack of duty of care that has burdened many of our companies, small and large, many individuals and, indeed, the Government, through many PFI schemes, with the complex and very costly interest rate swaps which extend far beyond the life of the loan. Any institution or body that had a duty of care would immediately draw the attention of those borrowers to that fact.

The Bank of England regulated wholesale markets in those days by applying judgment as well as rules and my experience, as someone appointed to rescue a secondary bank during the 1974-75 secondary banking crisis, gave me the opportunity to see at first hand the effective way in which the Bank of England managed to contain and resolve that crisis.

As chief executive of the inter-dealer broker, I met regularly with the leadership of many of the great banks operating both in London and other major financial centres. I was very struck and, indeed, alarmed by the depth of ignorance that the bank leadership, particularly directors of banks, displayed about the increasingly sophisticated products that were being traded on a proprietary basis in their organisations in different time zones. To be blunt, the attitude appeared to be that if the trading is profitable and we can all benefit from it through the bonus pool, there is no real need to get too much involved in the detail.

One of the great skills of the City is that it is adept at devising business models which can give a highly leveraged reward for success but virtually no penalty for failure. That is called getting other people’s money to work for you. Bank executives were notable beneficiaries of this particular alchemy, and they were not reined in by their boards or shareholders. As we heard, all too often, Governments of all stripes have been dazzled by the great wealth of those City chaps and too ready to take what the City says on trust. The absence of scepticism from the board, directors, shareholders, regulators and auditors allowed the financial services industry to bet the UK economy. Of course, because of the large size of the financial services industry in relation to that economy the cost of that bet is now being borne by every business and household right across the land—and will be for many years to come.

The need for fundamental reform is self-evident. I join other noble Lords in congratulating the parliamentary commission on an outstanding and very important piece of work. It and the independent commission made a compelling case for reform and provided detailed proposals on how that reform should be implemented. Now is indeed the time for fundamental reform of the structure, governance and culture of banking. It is also the time to make banking far more competitive—that will take time—and better able to service the needs of an economy desperate for the investment and funding necessary to achieve sustained growth. The measures proposed by the commissions will not give us zero-risk banking, but they can substantially reduce the overall risk to the economy of the inevitable banking failures.

The test of the Financial Services (Banking Reform) Bill is whether it seizes this historic opportunity or, under pressure from City lobbying, fudges and fumbles it. The Chancellor said that he would implement the main recommendations of the parliamentary commission and, where legislative changes are required, he would amend the banking reform Bill, but the Bill before us has fallen well short of those promises. On the fundamental structural issue of separating retail and investment banking, I entirely agree that they should be completely separate, as they have a completely different culture with completely different risk profiles. I suggest that shareholders will, over time, require them to be separated. The full separation proposed is a complicated process: three yellow cards are required, the regulator has to go to the Treasury and full separation can take place only after five years. That may be long after the problems have reached a scale where another bail-out is necessary. The chairman of the parliamentary commission, Andrew Tyrie, described the Government’s ring-fence proposals as,

“so weak as to be virtually useless”.

Greg Clark, the Cities Minister, said that he would see if the government amendments could be improved. The noble Lord, Lord Deighton, said that efforts will be made to improve them. We wait with interest.

The commission’s proposals to give the Prudential Regulation Authority the powers to inspect a bank’s trading book and ban excessive proprietary trading—to which other noble Lords have referred—and the recommendation that regulators should have the power to insist upon stricter capital leverage ratios, have both been ignored by the Government. This House must table amendments to ensure that these critically important reforms reach the statute book. Relying on the risk-weighted assets test is completely inadequate. If we do not grasp this opportunity, business will go on very much as usual and I fear that the chance to reform the City will be lost. Bank lending to non-financial companies began to contract in 2009 and has continued to do so for the past four years. The absence of certainty on bank regulation makes it difficult for banks to assess with confidence the long-term profitability of additional lending. The Government’s confused response to the parliamentary commission’s principal recommendations prolongs the agony. First they were welcomed, and now they are watered down or ignored. That adds unwanted confusion, as does the Chancellor’s meddling in RBS’s affairs.

The Bill before us today is an empty vessel. It reminds me of the prospectus issued saying that funds would be raised for purposes that “shall hereinafter be revealed”—that was for the South Sea bubble. Only ring-fencing is addressed in detail, and the proposals there are deeply flawed. There is no mention of bank governance, professional standards, duty of care, whistleblower protection, remuneration or competition. All that, we are promised, is to follow. The parliamentary commission has made detailed proposals on all these matters and we look forward to seeing them properly and faithfully reflected in the draft. Frankly, until amendments covering these matters are tabled, it is not possible to have a detailed debate on the merits of the Government’s proposals, and this is the first half—or quarter—of Second Reading. Uncertainty continues, and with it the suspicion that the Government are backsliding on some of the important reforms needed, reforms which would help to avoid another taxpayer bail-out when the next crisis hits, as it will do, and promote a healthier culture in banking. Reforms are long overdue to improve the supply and choice of banking services available to SMEs and the public at large—in particular to the unbanked.

EU: Budget Report

Lord Hollick Excerpts

Thursday 25th April 2013 Lords Chamber

[Lord Barnett]

My Lords, I congratulate my noble friend on powerfully reinforcing what my noble friend Lord Eatwell said from the Front Bench about why this government policy is so inadequate.

I must say to the noble Baroness, Lady Noakes, that I thought she was telling us that she was not too happy about even bothering with these Motions and why did we have do it. We did sign the Maastricht treaty and now this Government are following the previous Government in believing that we have to continue with these Motions. I share her certainty that we are not going to join the euro. That is not because we are as inadequate to join as, for example, Greece and Cyprus, but because Gordon Brown laid it down very clearly in five economic tests, none of which could conceivably be met by any Government. At that time I was not terribly happy with them but that made it certain that we were never going to join.

We have these two Motions before us. I have to tell the noble Lord, Lord Newby, that I could not conceivably support them. I do not know how anybody could. Indeed, if he was sitting on the Back Benches now, I am sure that he would oppose the signing of these Motions. On the first Motion, we are asked to approve what the Office for Budget Responsibility has said about the fiscal outlook and the Budget Report. I certainly do not agree with that and I could not support it. The second Motion is even worse. We are told that we should support,

“the five key priorities of the 2013 Annual Growth Survey which are in line with the Government’s domestic growth agenda”,

and,

“the Government’s view that it is important to focus on implementation of existing reform commitments”.

We are told that we have “growth-friendly fiscal consolidation”. I do not know how anyone could describe the Government’s policy as growth-friendly. I bet that the Chancellor of the Exchequer would not really be able to support that proposition.

As I said, it is impossible to support the two Motions. They are based on forecasts made by the Office for Budget Responsibility. Any forecast beyond today is difficult for anyone to support. What we have now from the Office for Budget Responsibility is regular adjustments of its forecasts. The forecasts are meaningless. I do not blame the Government for the forecasts, all of which are inadequate, but I do blame them for believing them. How anyone can believe a forecast for five years ahead I find difficult to imagine. Today’s forecast happily does not show that we are in recession, but that will be revised in a few weeks’ time by 0.1% or 0.2 %—who knows? That is only for this quarter. The noble Lord, Lord Newby, like everyone else in the Government, keeps telling us that they have cut the deficit by a quarter, a third, or whatever. The fact is that in 2010, the Government forecast that they would eliminate the budget deficit by 2015. It is now called a rolling forecast. Every year, it is rolled forward.

There is now a forecast that it will be in balance by 2018. How can anyone believe that it is possible to make a forecast five years ahead? We do not know. It could be 2019 or 2020 before we get balance; we cannot be certain that it will be in 2018. The reason is that we have not got growth. Without growth, it will get worse, inevitably. Given our constant lower growth, we cannot rely on that forecast for 2018, not 2015. All that we can rely on is what is happening now, and even that is uncertain.

In the second Motion, we are asked to support that view. How can anyone ask us to support forecasts of that kind? Even the OBR does not believe them. It states in paragraph 143 of its latest report:

“There is considerable uncertainty around our central forecast”.

I am not surprised. It is inevitable that there is uncertainty about a forecast for five years ahead. We are then told that all central forecasts are unreliable and uncertain, so why on earth are the Government accepting them and relying on them to carry on with their whole policy?

I find this whole debate, and the fact that someone like the noble Lord, Lord Newby, is blithely reading out what the Treasury have given him, surprising. Unfortunately, I have agreed to give a seminar tomorrow in the Treasury on the 1976 crisis. I took the trouble to look at what I did at the time, what I said in my book and what my dear friend Lord Healey said in his autobiography. He said that there had been a £2,000 billion error in the forecast at the time. I assume that he did not mean £2 trillion, but no one has corrected it since. Even a £2 billion error in the forecast would have been enough. He said that, without it, there would not have been a 1976 crisis. That may or may not be true, but the fact is that we had a 1976 crisis, all because we were relying on those hopeless and inadequate forecasts that Governments have believed.

Personally, because I do not believe any forecasts beyond today, I find it impossible to go along with the two Motions. I am sorry that there will not be a vote; if there were, I would be happy to vote against them.

[Lord Hollick]

My Lords, I want to discuss the political and policy judgments that have been made since the financial crisis. The previous Chancellor, my right honourable friend Alistair Darling, like everyone else, did not see the 2007-08 banking crisis coming, nor the damage that it would do to our public finances, but in the eye of the financial storm, he did an excellent job of judging what needed to be done. He organised the huge recapitalisation of the banks. He sought to find the most effective balance between policies to repair the public finances and reduce public debt and also to promote growth. He recognised that the UK’s ability to finance its ballooning deficit would require the support of the bond markets, which would need to be convinced that the Government were prepared to take the tough and correct measures to achieve those joint objectives. He rightly anticipated that external events might call for additional rebalancing of the policy mix, over and above the deployment of automatic stabilisers. His was a pragmatic and thoughtful response to an unprecedented crisis, and it commanded broad support at home and abroad.

What happened next? One of the present Chancellor’s first and very important decisions on coming into office was to ratchet up the austerity targets and to shun the flexible, carefully nuanced approach of his predecessor and instead opt to wear a very tight financial straitjacket. That approach, which we now know as plan A, was given intellectual credibility by a report from US economists Rogoff and Reinhard, which Osborne cited in a speech as,

“Perhaps the most significant contribution to our understanding of the origins of the financial crisis”.

Buoyed by that report and the plaudits from the hedge funds and bond investors in the City and, crucially, strong backing from the IMF, the Chancellor believed that he had struck exactly the right policy balance between austerity and growth which would lead to the elimination of the structural deficit by 2014-15. Crucial to that judgment was the forecast of strengthening economic growth over that period.

As we have heard from all sides of the House today, that has not come to pass. Indeed, recent employment, bank lending, government borrowing and GDP numbers all confirm that the economy is flatlining. The UK is now the worst performing major economy. As the UK’s performance has weakened, as each forecast is missed and as austerity measures are tightened and extended, confidence—an ingredient vital to economic growth— has evaporated. Domestic consumer spending is depressed, export performance has fallen well short of forecast and companies continue to defer investment projects. Rating agencies downgrade the UK, citing a weaker economic and fiscal outlook and, specifically, the lack of growth.

The high priest of the international bond market, a group that I am sure is high on the Chancellor’s Christmas card list, Bill Gross of PIMCO, the world’s largest bond investor, declared last week that,

“the UK … have erred in terms of believing that … fiscal austerity … is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth”.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research from the “garbage in, garbage out” school of analysis, with the corrected model—

[Lord Vinson]

Before the noble Lord sits down, he is leading up to a rather important figure. Earlier in his most interesting speech he recognised that Darling had the problem of a ballooning deficit of borrowing. Everything that he is saying now would increase the deficit of borrowing. Would he like to give us the sort of figure that he would like to see that borrowing figure go up to?

[Lord Hollick]

I am coming to that.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research because the corrected model shows that highly indebted economies can grow at 2% or more. Perhaps the unkindest cut of all, though, is the IMF’s verdict that plan A is not working. In the light of the weakening economy, it is urging the Chancellor to show greater flexibility and adopt measures that will help the economy to grow. The Chancellor has sought to rubbish this assessment by asserting that the IMF is itself not united in that view. However, my own inquiries suggest that this is not the case and that the damning criticism of the Chancellor’s stewardship is a widely held view within the IMF.

The forthcoming Article IV assessment of the UK economy by the IMF will provide a detailed analysis of the economy and recommendations for policy changes. It will be interesting to see whether the Chancellor chooses to fight the IMF every inch of the way, which may be his instinct, or whether he will see it as an opportunity to recognise that his experiment has failed and that new measures are needed.

As it happens, the IMF assessment coincides with the arrival of Mark Carney, the new Governor of the Bank of England, who last week described the UK as a crisis economy. Billed as an advocate of a more activist monetary policy whose monetary bazooka, according to one recent Treasury briefing, will leave us knee-deep in newly printed money, Mr Carney in recent weeks has begun to row back hard from the far reaches of monetary adventurism. He has made it crystal clear that Governments should not be looking to central banks to return countries to prosperity. Mark Carney will also have noted that his predecessor, who has one vote on the committee, has failed to persuade the MPC in recent months to increase quantitative easing.

I have suggested before that we should not be surprised if, as part of the extended negotiations to secure Mr Carney’s services for the next five years, the Chancellor privately acknowledged the need for more supply-side reforms and fiscal measures to stimulate demand to help to promote growth. The coincidence of the IMF assessment and the new governor’s arrival could just provide the opportunity for the Chancellor to alter course. To do that, though, the Chancellor and the Prime Minister would have to move off their favourite mantra that you cannot borrow your way out of debt. In one sense, that particular fox has already been shot, as the automatic stabilisers have allowed increased borrowing to fill in the financing hole left by no growth. The Chancellor now needs to take that lesson one step further and introduce fiscal measures such as lower NIC and measures to promote investment in infrastructure and new housing stock. Borrowing to invest to promote growth will pay back in increased economic activity, greater confidence and rising tax receipts.

The Government need to stop the endless tinkering with banking rules on capital, funding and liquidity. Alistair Darling bequeathed the coalition a well funded banking sector, with bank shares trading above the levels where the Government had invested. On assuming office, the coalition began reworking the banking rules, a project that continues to this day. Since the start of this Government, bank lending to non-financial businesses has fallen by an unprecedented 19%. This collapse in bank lending will not be reversed until and unless the Government allow them to get on about their real business, which is to provide credit to finance growth.

Will the Chancellor heed the advice of the IMF, the bond markets and business and acknowledge that the public finances can be repaired only if meaningful growth can be achieved and sustained? Waiting for something to turn up is the wrong policy choice. Business, hard-pressed citizens and many on his own Benches will be hoping that he has the political courage to do so. Rather than wasting his time on ludicrous Enron-like efforts to massage the deficit numbers and issuing endless press releases on growth projects that never see the light of day, the Chancellor should deploy his intellect, his energy and his ingenuity in devising and implementing growth policies that will get Britain moving forward again.

[Lord Vinson]

Perhaps the noble Lord could attempt to answer my question. He would give his whole contribution much more cogency if he could come up with a figure for the sort of level that he would like to see the Chancellor increase his borrowing to.

[Lord Hollick]

I am not talking about figures; I am talking about the importance of using the public finances to invest in growth. That is what we need. Without growth, we simply will not be able to repair the public finances.

[Lord Marlesford]

My Lords, I strongly support the fundamental economic strategy of my right honourable friend the Chancellor. On the other hand, I am not wholly happy with the way in which he has been attempting to carry it out. The objectives are right but the methods are rather questionable.

First, he has sought to reduce the deficit, and particularly government spending in many areas, which I support. There is no doubt at all that the expenditure on the whole welfare area has been wildly out of control, and it absolutely has to be gripped. Equally, there is no doubt that growth will come from actual economic activity on the ground.

Much of the problem is caused by the behaviour of the banks. I give credit to Alistair Darling for the way in which he handled the crisis. The mistake was then to use, or to expect to be able to use, the banks as a means of generating growth in the economy through quantitative easing. Far from lending the money that they had been supplied, they used it to reinforce their extremely fragile balance sheets, so QE did not achieve the objectives that the then Chancellor hoped for. The Chancellor should probably have abandoned at a much earlier stage what was effectively his support of the banks and their balance sheets. Their behaviour in the past few years since the crisis has been lamentable. It has been as unethical, selfish and greedy as ever, and it has been incompetent.

With regard to the stimulation of the economy, the time has come for more direct government expenditure on our infrastructure. There are masses of things that can be done. I am of course not talking about nonsenses such as £30 billion on HS2, which is wildly outside any parameter of time and is most unlikely to produce any useful return for the taxpayer or the nation. I am talking about things such as housing, road construction and the maintenance of our national infrastructure, because that is true investment. Giving banks more money through quantitative easing to restore their balance sheets is not true investment.

The Chancellor’s tax policies in one important area have been unwise. I am talking about the petrol tax. The Chancellor has already forgone some £1.5 billion of revenue by not increasing the petrol tax as planned. The extraordinary thing to me is that the petrol tax figure that we are talking about is always about 3p per litre, and that alone costs £500 billion a year, yet the price of petrol at the pump varies by more than that. The price at the pump basically goes up and down according to the price of oil. The Chancellor has made a huge mistake in effectively wasting the opportunity cost of the petrol tax. I hope that as soon as the time is appropriate he will go back and change that particular policy.

I agree with the noble Lord, Lord Harrison—I sit under his distinguished chairmanship on Sub-Committee A of the European Union Select Committee—that the single market in Europe is very important and should be enhanced and nurtured. However, I do not believe that, for strategic planning, Britain can rely on Europe for the future. Europe is in a frightful mess. People say that 40% of our exports go to Europe; that may be. What we should be doing is switching our effort into markets where we can compete and which are expanding, such as Asia, the United States and Latin America, and not pinning our hopes on Europe, because in Europe there is very little hope. My worry is that the European Commission has proved itself to be incompetent in offering advice to member states on how to run their economies. During the euro crisis, it came to the realisation—very late, but in a big way—that it had been a great mistake to confuse the toxic debt of banks with the toxicity of sovereign debt, and decided that they should not be confused.

Let us consider what happened with Cyprus. The European Commission, having made the mistake with the wretched Irish, the Spaniards and the Greeks of making them take the bank debt on to the government books, the very next thing was what happened in Cyprus. That is an example of unparalleled incompetence. What happened was that the Cyprus Government came forward with a plan to rescue their banking sector. Of course, they would come forward with whatever they thought suited themselves and their friends, perhaps including the Russian oligarchs. The plan that they came forward with involved raiding the balances of deposits in banks. It had been for some while a crucial component of confidence in the banking system throughout the EU that deposits in individual regulated lending institutions—banks, primarily—were underwritten up to €100,000. My criticism is that the attempt to sweep that aside so that the small depositors in Cyprus would pay their share—although I could quite see the Cypriots putting that forward—was signed off by the troika of the European Commission, the European Central Bank and, just to remind the noble Lord, Lord Layard, who is so keen on it,the IMF. Those three signed off on a policy that will for many decades, I suspect, put a deep suspicion in people’s minds about lending to banks. The United States has a much prouder record of protecting depositors in banks. I believe that one of the roles of the state is always to protect small depositors in a financial system.

That was a very depressing example, and one reason why I am rather gloomy about Europe being able to work out under the semester what its progress is to be. It is still wrestling with the crucial question, which applies primarily to the euro area, of whether there can or should be mutualisation of debt. Is it possible to have a Eurobond, a bond issued by the European Central Bank, to fund individual countries’ Governments and is underwritten centrally? For how much can this be done? We are not even clear what the total sovereign debt of the euro area is at the moment. It is very doubtful whether this Eurobond will work. There is a thought about having two sorts of bonds: a blue bond, an ECB-guaranteed bond for national Governments, and a red bond, which national Governments would issue. This strikes me as a very questionable approach. What is it trying to achieve?