Fiscal Rules

Lord Macpherson of Earl's Court Excerpts

Tuesday 29th October 2024 Lords Chamber

[Lord Livermore (Lab)]

The noble Lord is far more experienced in these matters than me, and I have the greatest respect for him. He mentioned three types of activity. The first one he mentioned was the manifesto commitments we gave: he mentioned the major taxes and he is absolutely right. In our manifesto, we committed to not increasing taxes on working people, which is why we will not increase the basic, higher or additional rates of income tax, national insurance or VAT. I think it is perfectly right that we do that and specify that in our manifesto. He also mentioned speculation. There has been huge speculation ahead of this Budget around specific taxes which at this Dispatch Box, on multiple occasions, I have been unable to comment on, and I think he will understand why. As for announcements being made ahead of a Budget, that is a perfectly routine thing to do, and it is right that Parliament then has the opportunity to scrutinise those at the appropriate moment.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I broadly welcome the Government’s Statement, but we have to recognise that so many fiscal rules have come and gone in recent years that the credibility of the macroeconomic framework has been severely dented. Can the Financial Secretary confirm that the investment rule will apply to a specific year and not take the form of a discredited five-year rolling period where fiscal virtue is for ever deferred? Does he agree that what matters more than any rule is whether the Government have a credible plan for promoting growth and for stabilising and ultimately reducing the country’s debt in relation to national income?

[Lord Livermore (Lab)]

Once again, I address a noble Lord who has far more experience in these matters than I do. I agree with a huge amount of what he says. I think that stability in fiscal rules is incredibly important and that they should not change particularly frequently—perhaps at the point when Governments change. I am tempted to agree with a lot of what he said, but unfortunately the Chancellor will set out the Government’s full fiscal plan, including the precise details about fiscal rules that he asks for, in tomorrow’s Budget, alongside an economic and fiscal forecast produced by the OBR.

Crown Estate Bill [HL]

Lord Macpherson of Earl's Court Excerpts

Committee stage
Monday 14th October 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, unusually, as a former Treasury official, I am generally in favour of greater devolution—the more so when the likes of the noble Lords, Lord Hain and Lord Wigley, and my noble and learned friend Lord Thomas support a proposal. But on this occasion I fear I should advocate a degree of caution.

I speak having been in the Treasury when the Crown Estate in Scotland was devolved. With hindsight, I think that was a mistake, particularly because there is considerable benefit in looking at offshore wind policy at a UK level. Indeed, the then Government missed a trick. They should have followed the example of I think the Wilson Government in the 1960s, who hived off oil sea exploration from the Crown Estate. The then coalition Government should have hived off offshore wind from the Crown Estate, not least because it gives the Royal Family, who no doubt are a deserving cause, a massive windfall, as my noble friend Lord Turnbull pointed out at Second Reading.

Although I very much understand the case that noble Lords have made on both sides of the House, I think this is something that should not be rushed. There may be a case for devolving further powers to Wales, not least because there is a case for giving Wales similar treatment to Scotland. But if the Government are sympathetic to this amendment, I encourage them to spend a bit more time working through whether there are unintended consequences and, in particular, looking through the financial implications. One thing I would not want to see happen is Wales being disadvantaged financially by devolution. This might be the right thing to do for the longer term, but I encourage the Minister to think twice before agreeing to it today.

[Baroness Humphreys (LD)]

My Lords, I apologise to your Lordships for not having taken part in the Second Reading debate. I also draw your Lordships’ attention to my registered interests and my membership of the board of Community and Voluntary Support Conwy, CVSC.

I rise to speak to Amendment 26 in my name and Amendments 1, 21 and 23 in the names of the noble Lord, Lord Wigley, and the noble Baroness, Lady Smith of Llanfaes. My Amendment 26 calls for the devolution of the Crown Estate’s powers to Wales and would require the Treasury to devolve Welsh functions of the Crown Estate commissioners to Welsh Ministers or a person nominated by Welsh Ministers.

There are increasing calls within Wales for the devolution of these powers. It is a policy of my party, the Welsh Liberal Democrats, having been debated and agreed in our Welsh conference in 2023. It would ensure that the profit from offshore energy lease agreements stays in Wales.

In July 2023, Senedd Members voted by a majority of 35 to 13 in favour of a Plaid Cymru debate calling for the devolution of the Crown Estate to the Welsh Government. As we have heard, there are similar calls at local government level. Last week, as the noble Lord, Lord Wigley, detailed, councillors in Gwynedd Council debated a motion asking their chief executive to open negotiations with the Crown Estate over “access fees”. The council paid its annual fee of £161,000 to the Crown Estate in 2023 to allow public access to beaches in Gwynedd, of which £144,000 was paid to allow access to Hafan Pwllheli marina. Councillors also believed that responsibility for the Crown Estate should be devolved to the Welsh Government, with their motion stating:

“Any profits generated by the Crown Estate, here on Welsh lands and waters, should remain in Wales, for the benefit of our residents and communities”.


In addition to all this, social media videos provide information about the Crown Estate and explain why the promoters want change, leading to greater awareness of the issue among the public.

The Crown Estate owns land estimated to be worth more than £600 million in Wales. This includes 65% of the coast of Wales and 300,000 acres of land, including any gold and silver on it. Profits on these numbers are unclear, however.

Let me be clear: there is no criticism of the Crown Estate commissioners implicit in this amendment. The commissioners operate within a system that was established 63 years ago but with a history going back to 1760, and they cannot diverge from the status quo without an Act of Parliament similar to that which devolved similar powers to Scotland in 2017. So, while the commissioners operate the system from the 1960s, history for us in Wales has moved on. Devolution has opened the eyes of the people in Wales to the opportunities and responsibilities that the new order has brought.

--- Later in debate ---

As I am sure other noble Lords are, I am keen to find common ground and a way forward on the issues in this group of amendments. My humble opinion is that the publication of these documents, and some words of reassurance from the Dispatch Box, would be helpful in this regard. I look forward to the debate on these measures and to the Minister’s response to my amendment and the others in this group. I beg to move.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, this is an interesting and important amendment that goes to the heart of Treasury control. Historically, it is fair to say that, when it came to nationalised industries, the Treasury set external finance limits that were not subject to constraints ex ante from Parliament. The proposal to borrow is definitely the right one. I recall having to jump through extraordinary hoops to enable the Crown Estate to invest in creating special purpose vehicles, usually with foreign sovereign wealth funds, to support the financing of investment. So moving to give the Crown Estate borrowing powers is the right approach.

The question then is: to what extent do those need to be constrained by Parliament? There are precedents. For example, Scotland is constrained in the quantity of its borrowing. However, the Crown Estate has more in common with nationalised industries. I hope that the Minister will confirm that in each Budget and spending review, the Treasury will publish three-year to five-year plans for the external financing limit of the Crown Estate. This will allow Parliament to scrutinise those proposals along with the rest of the Budget but should not require overarching constraint in legislation, which would effectively constrain the Treasury’s decisions on who should borrow across government and how best to allocate borrowing resources.

[Lord Howard of Rising (Con)]

My Lords, I rise to speak to Amendment 8. There should be a limit on the level of borrowings that the Crown Estate can have. It would be irresponsible to issue a blank cheque that risks, even encourages, abuse by the political system. At Second Reading, I suggested that a limit could be set as a percentage of capital reserves, and I proposed 10% as an appropriate amount. When added to the Crown Estate’s cash position, 10% would retain a generous amount of flexibility while guarding against the risk of abuse and overborrowing. Amendment 8 does just this. I thank the Minister for seeing me to discuss my amendment, but regret that he did not agree with the principle that a limit on borrowing is necessary. He believes that the approval needed by His Majesty’s Treasury would act as a sufficient safeguard. There are two important reasons why I believe that this is not the case.

First, relying on the good intentions of His Majesty’s Treasury to provide the necessary safeguards is simply insufficient. The First Lord of the Treasury is the Prime Minister. There is also the Chancellor of the Exchequer, who could, if the political ambition was sufficient, persuade His Majesty’s Treasury that a loan to the Crown Estate was desirable. The Minister said at Second Reading that he did not envisage the Crown Estate borrowing in the near future. However, there may be a less responsible Government in the future who may make use of this possible sleight of hand to encourage profligate or political spending.

Secondly, if a current or future Government wished to disguise spending, it is possible for the Crown Estate commissioners to carry out the desired spending for the Government with funds provided by the Treasury. Loans to the Crown Estate would be classed as an asset, meaning that the spending would be seen not as an expense but as a capital asset. Without restrictions on borrowing, there is an incentive for future less responsible Governments to increase lending to very high levels. A limit on the Crown Estate’s borrowing would go some way towards safeguarding against this. However, I also welcome Amendment 10, in the name of my noble friend Lady Vere of Norbiton, which provides another safeguard against this happening by ensuring that loans made to the Crown Estate are included in the Government’s assessment of the national debt.

I remain concerned about the lack of safeguarding against excessive borrowing, which poses a significant and unnecessary risk that the Crown Estate does not need to continue operating successfully. As we have heard, I am not the only member of this House who has concerns about permitting the Crown Estate limitless borrowings from His Majesty’s Treasury. Amendments 2 and 5, tabled by the noble Earl, Lord Russell, and Amendments 3, 4, 6 and 7, tabled by my noble friend Baroness Vere of Norbiton, all propose alternative limits to borrowing which would be quite acceptable. Should the Minister find these amendments too restrictive, Amendment 8 provides him with a generous alternative.

Finally, as the Minister has been made aware, I would like to degroup Amendment 9; as such, I will save my comments on it for the next group. I apologise for any inconvenience this may cause the House, but having reflected on the matter, I feel it important to deal with that amendment separately.

Budget Responsibility Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 9th September 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, this is a sensible Bill to strengthen a sensible institution. The creation of the Office for Budget Responsibility, together with the granting of operational independence to the Bank of England, has transformed macroeconomic policy-making in the UK, and it is no coincidence that the premium the UK has had to pay on its debt, relative to its G7 partners, has declined over the last 25 years.

Economic forecasting is a thankless task. Forecasts are invariably wrong. The late Denis Healey’s commented that he would like to do for economic forecasters what the Boston Strangler did for the reputation of door-to-door salesmen. In an ideal world, forecasts would not be necessary. However, Governments have to plan public spending and the taxes necessary to pay for it. They need to do so over the medium term to better understand the implications for borrowing and the debt market. Somebody has to make the projections on which the decisions that determine the well-being of the nation are based.

Over my career at the Treasury, I worked on well over 60 fiscal events. For over 50, the Chancellor determined the forecast. It is fair to say that, on the vast majority of those occasions, the Chancellor did not seek to interfere with the forecast that Treasury officials presented to him. Even then, he often had to resist pressure from the First Lord of the Treasury to raise the growth rate just a little to make tax cuts or public spending increases more “affordable”—I emphasise the inverted commas surrounding the word affordable.

Whether or not Prime Ministers or Chancellors interfered, the perception of the markets was that they did. The result was that the forecast’s credibility was always called into question and that the taxpayer had to fund an interest rate on government debt that was slightly higher than it needed to be. Two years ago, that term came to be known as the “moron premium”. I emphasise that the OBR is no better at forecasting than other institutions; the importance is that its forecasts are perceived to be unbiased, and this is borne out by the evidence.

On the detail of the Bill, I welcome the Government putting a number on what constitutes fiscally significant. It may be a little on the high side—most fiscal events over the last 30 years have made a fiscal adjustment of less than 1% of GDP—but I see the problem in setting it too low and triggering an endless round of forecasts.

I also welcome the Government’s determination to improve the credibility of public spending projections. We should be in no doubt that an incredible spending forecast is the source of the problem with which the Government are now wrestling. Had the previous Government been required to populate their spending plans with policy decisions, I rather doubt that they would have announced successive cuts in national insurance contributions.

The measures set out in the Chancellor’s letter to Richard Hughes of 29 July are a big step forward: in particular, a clear timetable for spending reviews and a requirement for the Treasury regularly to update the OBR on emerging spending pressures. Allowing the OBR to publish, in effect, corrected spending plans will improve decision-making, even if it makes life more difficult for the Chancellor in the run-up to an election.

As the Government consider further reforms to the OBR framework, I encourage the Treasury to focus on another issue that also muddies the waters in the run-up to an election: the costing of opposition policies. Every four or five years, we have to go through the absurd theatre of the Chancellor of the day publishing, to great fanfare, official costings of their opponents’ policies. Of course, they are not official costings, since the assumptions are determined by Ministers and their special advisers. The Opposition are always rightly indignant at the time, claiming that the process is terribly unfair. I had to field unhappy telephone calls from shadow Chancellors from both main parties. But, once in government, parties have an uncanny knack of forgetting about the unfairness.

While the present Government are still in their early days of missionary zeal, I encourage them to resuscitate the 2015 proposal of the then shadow Chancellor, Ed Balls, to put opposition costings in the hands of the OBR, as happens in countries such as Holland. I ask the Financial Secretary to raise this issue with the Chancellor when he returns to the Treasury.

Bank Resolution (Recapitalisation) Bill [HL]

Lord Macpherson of Earl's Court Excerpts

2nd reading
Tuesday 30th July 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare my interest as chairman of C Hoare & Co, which would almost certainly be classified as a small bank for the purposes of the Bill.

I congratulate the Minister on becoming Financial Secretary to the Treasury. After the chancellorship of the Exchequer this is the oldest Treasury ministerial post, and I am pretty sure that it is the first time that it has been held by a Member of this House. I had the good fortune of working with the Minister for a decade around the turn of the century. He has huge Treasury experience and considerable ability and was a pleasure to work with. I wish him well in what will inevitably be difficult times ahead when no doubt he will come to this House on many occasions to make Ministerial Statements.

I speak in support of the Bill, which is a model of good legislative practice with a well-handled consultation and cross-party support. It is welcome that the new Government have seamlessly picked up where the previous Government left off. Politics is all about difference, but at least 90% of governing is about continuity.

Having been the Permanent Secretary and accounting officer when the Treasury had to nationalise Northern Rock and resolve the Icelandic banks in 2008, I am acutely aware that having the necessary powers in place makes it a whole lot easier. Of course, the Government can generally rely on common-law powers in such circumstances or, in the case of Northern Rock, pass an emergency Bill in 24 hours. I pay tribute to the late Lord Darling for managing the financial crisis so effectively with the limited powers then at his disposal, but I would not recommend a make-do-and-mend approach; it diverts finite resources from the job in hand, which is managing the crisis itself. It is better to have the right legislative and institutional framework in place, and to learn from each time the framework is tested in order to improve its functioning.

In 2008, it fell to the Treasury directly to resolve failing banks. I recall asking the Bank of England whether it would take on the role, thinking that the clue was in the name—it is a bank—and that a bank might be better at taking the necessary steps rather than a government department, but the Bank of England declined my request. Lord Darling put that right in his 2009 Act, which ensured that the resolution authority resides in the Bank of England. In my view, that is the right approach; the Bank of England is better placed to retain the necessary expertise and experience, not least because it can pay its staff more generously.

However, the Treasury needs to remain alert to one important point, which the noble Lord, Lord Moylan, touched on indirectly: the conflict of interest created by the abolition of the Financial Services Authority in 2013. The Bank of England is now the regulator and the resolution authority, and responsible for macro- prudential policy. It also in effect has the power to tax the industry through PRA fees and the wider Bank of England levy. The Bill extends its powers of taxation by allowing it to draw on the Financial Services Compensation Scheme to recapitalise a failing bank. There is nothing wrong with that in principle; it is much better that the industry finances its failures rather than the general taxpayer.

The Bank of England generally does its job well. All I am asking is that Treasury Ministers maintain adequate oversight. To this end, they need to be vigilant to three issues. First, apart from the brief period in 2007 when fear of moral hazard dominated its thinking, the Bank of England has a historical tendency to intervene. I recall Sir Douglas Wass, one of my predecessors at the Treasury, some 40 years after the event still expressing irritation at the Treasury being kept in the dark about the Bank’s intervention in the secondary banking crisis of 1973-74. I can foresee circumstances where the Bank will choose to recapitalise a small bank rather than put it into a bank insolvency process, less because it is in the national interest and more as a way of minimising the reputational damage of regulatory failure.

Secondly, because of the Bank’s power to tax the banking industry, I fear that it will pay insufficient attention to minimising the costs of resolution. I may be wrong, but my recollection is that the Bank of England incurred greater costs, with advisers and so on, in resolving the Dunfermline Building Society than the Treasury did in resolving the Icelandic banks. Unlike the Government, the Bank does not have to stand for re-election, so its incentive to contain costs is rather less.

Finally, it is important that small banks remain well capitalised. Challenger banks are adept at lobbying government and central banks for special treatment, arguing that this enhances competition. To some degree it does, but they are not slow to make political donations. I witnessed this at first hand a decade or so ago. It is important that the authorities ignore these blandishments. As my old friend the noble Lord, Lord King of Lothbury, used to observe, the best way to ensure that the banking system is safe is to ensure that it is adequately capitalised.

I should emphasise that these are minor points that are more about the spirit of Treasury oversight than the substance, and I am happy to support the Bill.

Bank of England (Economic Affairs Committee Report)

Lord Macpherson of Earl's Court Excerpts

Thursday 2nd May 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare my interest as chairman of C Hoare & Co, a bank that opposed the setting-up of the Bank of England, became reconciled to it a couple of centuries ago, and now regards it as a privilege to be regulated by the Bank.

I congratulate the noble Lord, Lord Bridges, and members of the committee on a first-rate report. Operationally independent institutions can survive and prosper only if there is proper parliamentary accountability. All too often, that accountability can descend into cheap point-scoring. I believe this House’s Economic Affairs Committee plays a crucial role in injecting serious, rigorous and impartial thought into economic policy debate.

Like the noble Lord, Lord Bridges, I was a little disappointed by the Government’s response to the report. I should confess to having drafted similar responses, with an appropriately dead hand, in the past. I am hoping the Minister will be a little more forthcoming in her response than the Chancellor was, but I am not betting on it.

It is good news that inflation is firmly heading back towards the Bank of England’s target of 2%, but we should not underestimate the impact of the recent rise in prices. Inflation is not some technical economic construct; it has a pernicious effect on people’s lives. It affects their ability to budget and to plan. It has the biggest impact on those least able to protect their incomes, and that is usually the weakest and most marginal in society.

It is therefore important that we learn the lessons of the upsurge in inflation in 2021-22. The Bernanke report is a good start but, as others have noted, his remit was quite narrow. The Bank’s forecasting model clearly has limitations, but then so do all forecasting models. That is why we should never become mesmerised by them.

Economic policymakers need to step back from mechanistic forecasts and focus on the underlying data here and now. Sometimes that data tells a clear story. Quantitative easing was necessary in 2009 and it was effective, but later rounds of QE were an imperfect response to what were, in any case, supply shocks. Ever-increasing amounts of QE were necessary to have an impact on long-term interest rates and, in my view, resulted in an excessive build-up of money and liquidity in the system. QE did not cause inflation, but it certainly enabled it to take root.

I do not want to be too harsh on the Bank. As Bernanke observes, other central banks made similar mistakes, and the build-up of excess demand was as much the Treasury’s responsibility, through an excessively loose fiscal policy, as it was the Bank’s, but I hope the Bank will pay just a little more attention to monetary and liquidity indicators in the future.

That brings me to my second point. The Bank is doing a good job in unwinding QE, and it underlined its independence in pressing on in the autumn of 2022, despite potential political pressure from the Government. But, as QE unwinds, we are going to hear a lot about the losses sustained by the Bank. We hear rather less about the gains from the early years of QE, when interest rates were falling. Of course, had the ring-fence that the late Alistair Darling wisely put in place in 2009 remained there this would have been less of a problem, but the coalition Government chose to, in effect, draw down the gains as a way of meeting their fiscal rules. We are now paying the price.

I anticipate that future Governments, faced with even more challenging public finances, will want to put a stop to the fiscal leakage caused by QE. The key thing here is that the Government should not interfere in monetary policy: the remuneration of reserves must be a matter for the Bank. In taking any tax decisions, the Treasury needs to take into account the impact on the efficiency of the banking system as a whole.

The committee’s report is right to draw attention to the ever-increasing breadth of the Bank’s remit. It is always tempting for the Government to leave it to independent institutions to take the difficult decisions, but that carries big reputational risks since it draws the Bank further into debates best left to democratically elected politicians. It also fails to recognise that the Bank has limited instruments at its disposal. I fear the Government sometimes ignore Tinbergen’s law that you need as many policy instruments as you have independent objectives.

The committee has also made some good points on appointments. Noble Lords will not be surprised that I am more relaxed than most about the Treasury’s colonisation of senior policy positions at the Bank, and I welcome the appointment of Clare Lombardelli as a new deputy governor, who has experience working at the Bank and the OECD as well as the Treasury, but I agree with the committee that the Government need to find the right balance when it comes to appointments. I would welcome more interchange with the private sector.

I wonder whether we need quite so many deputy governors as we have. I recall advertising for one vacancy and conducting a process. The Chancellor ended up appointing two candidates, simply because both were very well qualified and he and the then governor could not decide who was the best.

Recent events have underlined the importance of external members of the MPC. It has been good to see, on the one hand, Swati Dhingra ploughing her lone furrow arguing for looser policy and, on the other, Catherine Mann and Jonathan Haskel making the case for tighter policy. I was struck by a recent report from an external member of the MPC that mentioned staffing shortages constraining external engagement. I wonder whether the Bank executive should provide a liaison person at a more senior level to ensure that the externals’ needs are met. Independent thought matters, and the Bank should continue to find ways of supporting external MPC members.

Finally, I should briefly mention the vexed issue of the publication of the deed of indemnity relating to the asset purchase facility. This puts me in mind of the Schleswig-Holstein question. There were probably three people who understood it: Alistair Darling, who is, very sadly, dead; me, who cannot remember; and my noble friend Lord King, who, as luck would have it, is not mad. Fortunately, he is the sanest man I know. He is also a man to be reckoned with, not least because yesterday he was appointed president of the MCC, on which I congratulate him. That the committee—and, by implication, my noble friend Lord King—has recommended that the deed be published is good enough for me. I can conclude only that the reason the Chancellor has not published the deed is that he did not understand the question. I would therefore like to ask the Minister under what, if any, circumstances the Government would publish the deed of indemnity.

To come back to where I started, this is a good report by the Economic Affairs Committee and I support its recommendations. The guiding principles of monetary policy put in place in the 1990s, not least by the noble Lord, Lord Lamont, of an inflation target of 2%, maximum transparency and an operationally independent central bank still hold good. Bank independence works and Governments interfere with it at their peril.

Spring Budget 2024

Lord Macpherson of Earl's Court Excerpts

Monday 18th March 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I worked on seven pre-election Budgets over my life sentence at the Treasury, so I feel for any Chancellor having to deliver one. He has to reconcile the usually unrealistic demands of his supporters with the need to retain integrity by doing the right thing.

There is much in the Budget and this Bill to approve of. First, on the economy, prospects seem a little brighter: inflation is falling, real wages are finally rising, and unemployment remains low. Secondly, there are some sensible tax-raising measures. As the Chancellor confirmed in his Budget speech, reforming the rules on residents and domiciles has been under discussion for 40 years or more; I welcome him finally grasping the nettle. I doubt whether it will raise quite as much money as the OBR estimates—seriously rich citizens of the world are notoriously footloose—but it is right in principle.

If you are going to cut taxes—I recognise that that is a big “if”—prioritising national insurance reductions over income tax is the act of a courageous Chancellor. In the old days, rentiers and capitalists tended to face higher tax rates than workers, who received earned income relief. That was turned on its head in the 1980s and, since then, successive Chancellors have tended to raise national insurance rates, in effect, to pay for income tax reductions. Occasionally, they felt a little guilty.

Both Lord Lawson and Gordon Brown reformed national insurance at some considerable cost, but the trend was clear: the basic rate of income tax has fallen from 35% in the mid-1970s to 20% today. Meanwhile, the effective rate of employee national insurance contributions rose from 5.5% in the mid-1970s to a peak of 13.25% in 2021. That benefited the old at the expense of the young; it privileged investment and rental income over wages and salaries. Whenever I tried to get a Chancellor interested in cutting national insurance—I worked on a package to help the low paid with the then right honourable Norman Lamont— I would get a pitying look. I was told that it would not work politically. Voters did not like paying income tax, but they thought that national insurance was paying for their pension or the NHS and so objected to it much less.

The Chancellor has turned that on its head: he is raising income tax, while cutting national insurance. It is the right thing to do; it focuses relief on those who need it and should improve labour supply. However, I worry about the number of people in modestly paid jobs—police sergeants and senior nurses come to mind—who are being dragged into higher-rate tax. Although prioritising national insurance is the right thing to do, I worry about its affordability. I welcome the Chancellor’s ambitions on public service productivity, but, having seen many an efficiency review come and go, I would be surprised if this one moves the dial sufficiently to offset rising pressures on public spending.

These matters have been set out at length by the OBR in its excellent Fiscal Risks and Sustainability report—further proof, if any were needed, that George Osborne was right to strengthen the institutional framework supporting sensible macroeconomic policy. The fact is that the demographic pressures that the likes of the noble Lord, Lord Fowler, worried about in the 1980s have already materialised and will only get worse in the years ahead. The triple lock has made things worse. Add in the increasing cost of social care, and we have a real problem.

Then there is the national security situation, which has deteriorated considerably over the last two years. Although generally approving of Mr Hunt’s time as Chancellor—we should all thank him for preventing the British economy from falling into the abyss in October 2022—I was disappointed by the Budget’s silence on defence spending. I do not know whether we will end up having to spend 0.5% or 1% more of national income on defence; either way, we are talking about at least £15 billion more of spending pressures. Add to that the pressures on health, social care and pensions, and we are looking at tens of billions more.

So, at some point in the coming decade, whichever party is in power, the Government are going to have to look again at a health and social care levy. As and when it is introduced, I recommend that the Government use the income tax base rather than the national insurance base. It is right that all citizens with the necessary income pay it, rather than just those who are working.

Finally, I would like to say a few words on the Chancellor’s plan for a retail offer of NatWest shares. As the accounting officer at the Treasury when RBS was taken into public ownership, I have always taken an interest in trying to get as much money back for the taxpayer as possible. The RBS share price was trading in line with the price we paid for it—around £5 in current prices—when the late Alistair Darling left office in 2010. Since then, the price has languished, partly because of wider banking reforms, partly because of low interest rates and partly because of problems specific to RBS/NatWest.

I support the principle of selling NatWest—it needs the state off its back—and hitherto the Government have secured a competitive price for it through their trading plan in the wholesale market. I fear that a successful retail offer will require a heavy discount, which means that the taxpayer will be subsidising retail investors. The case for subsidising share ownership is much weaker than it was in the 1980s, shareholding is more widespread and history suggests that banks are perhaps not the best entry point to shareholding.

I know that the Chancellor has said that any sale will be

“subject to … value for money”,

but VfM is in the eye of the beholder. Can the Minister commit to publishing the accounting officer’s advice on VfM as and when the sale goes ahead?

Alternative Investment Fund Designation Bill [HL]

Lord Macpherson of Earl's Court Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as chairman of the Scottish American Investment Company, which last year celebrated its 150th anniversary, and also as a happy shareholder in several investment trusts. I therefore feel well placed to speak both for retail investors and for the providers of investment trusts more generally.

I congratulate the noble Baronesses, Lady Altmann and Lady Bowles, for introducing the Bill, and for securing this timely Second Reading debate. I also thank them for their tireless advocacy of sensible regulation that protects consumers, even though, when I was at the Treasury, I was sometimes on the receiving end of their complaints.

The investment company industry is a British success story, but, above all, it is a Scottish success story, contributing to Edinburgh’s role as an international financial centre. Investment companies are an effective way of building a diversified portfolio. Their closed-end nature means that investors are not subject to the vagaries of sustained outflows, and the potential lock-in or gating of their savings. Looking back over their history, they have always been at the respectable end of the savings industry, providing reliability and resilience. Unlike more conventional open-ended funds, investment companies have independent boards, whose role is to put the interests of shareholders first.

Investment companies have therefore provided a great savings vehicle for all investors, including those with modest means, as well as the better off. I was recently looking at the original subscribers to the Scottish American Investment Company back in 1873. They may have included the odd wealthy widow, but they also included one William Mackenzie, a sergeant major of Stirling, who bought 20 shares, as well as John Bothron, a fish curer from Anstruther, Fife, who bought 12. Hard data on who owns investment trusts today is more difficult to come by. However, given the easy access to shareholding provided through the proliferation of platforms, I am confident that the investor base in investment companies is more diverse than it was 150 years ago. The investment trust sector manages some £260 billion-worth of assets and provides important capital to companies who need it, both in the UK and across the world. In short, the sector provides the investment resources for sustainable growth.

Like many in this House, I supported the UK’s membership of the European Union, for all its limitations, and I feel that, whatever its political benefits, Brexit has damaged the performance of the British economy—but that is water under the bridge. Where I can agree with successful advocates of Brexit, such as my former Minister at the Treasury, the noble Lord, Lord Lilley, is that we are all now united in wanting to grasp every opportunity Brexit provides to support economic activity. It is a little disappointing that, seven years on from the referendum vote, the Government have not made more progress in removing unnecessary regulation.

The fact is that the Alternative Investment Fund Managers Regulations 2013 were not the European Union’s finest hour. I admit to being implicated, because I was the Permanent Secretary to the Treasury at the time. As I recall, the Treasury and the FCA did their best to improve its drafting—but clearly not enough. The so-called PRIIPs regulation imposes requirements on investment companies that do not apply to listed trading companies or, even more bizarrely, real estate investment trusts. I am all in favour of transparency when it comes to transaction costs and charges, but, as defined by PRIIPs, the relevant cost metrics are positively misleading and are as likely to harm consumers as to protect them.

I will highlight a couple of areas, and I apologise if they are a little technical. First, the inclusion of future performance estimates based on evidence from past performance is a flawed approach, as any shareholder in Northern Rock or RBS can bear witness to. If any disclosure on performance is necessary, it is surely right that, in line with the current UCITS KIID requirements, past performance becomes a standard disclosure and replaces the need for future performance estimates, which have the clear potential to mislead consumers.

Secondly, I highlight the inclusion of gearing costs in the ongoing charges figure. The cost of the debt must be disclosed without information on the borrowing terms—critically, the interest rate and term to maturity. The key point here is that the costs of gearing do not benefit the investment manager; they are actually paid to the lender. Often, borrowing enhances shareholder value, especially if you took out the borrowing when interest rates were lower.

The flaws in the PRIIPs regulation discourage savers from investing in investment companies. Although I would not like to exaggerate their effect, they are potentially contributing to the scale of discounts to net asset value that many companies are currently experiencing. I therefore welcome the recent publication by the Treasury of its draft statutory instrument on the UK retail disclosure framework. The residual Treasury official in me has some sympathy for the view that, if we are to reform EU legislation, we should go about it in a holistic way. I recognise that it is important to get things right, but the result is that we are missing easy wins, and I fear that the best is becoming the enemy of the good.

In conclusion, I encourage the Minister, even at this late stage, to support the Bill. If she cannot, can she confirm that the Treasury’s and the FCA’s intent is to implement the spirit of the Bill? In short, will they amend the law so that listed investment companies will no longer be classified as alternative investment funds? Can she give us a clear timetable indicating from when any changes to the law will come into effect?

Self-employment: A1 Forms

Lord Macpherson of Earl's Court Excerpts

Monday 12th February 2024 Lords Chamber

[Baroness Vere of Norbiton (Con)]

The A1 certificates are issued all the time. As the noble Lord, Lord Livermore, pointed out, in many cases a worker needs a certificate for every time they go to a certain country, because of course the circumstances may change. However, in other cases, forms can be valid for up to two years. Therefore there is not an April deadline per se. The April 2024 date is when HMRC expects to be processing back to its normal target arrangements.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as my son is a rock musician. Does the Minister agree that the provision of music, particularly rock music, is something in which Britain has a comparative advantage? Does she also agree that, for all its benefits in other areas, Brexit has unambiguously increased the barriers to trade in this area?

[Baroness Vere of Norbiton (Con)]

I absolutely agree with the noble Lord that the UK has one of the finest music industries in the world, which of course includes rock music but also classical music and opera. It is the second-largest recorded music market in the world and contributes £6.7 billion to the UK economy. Brexit has meant that there have been changes to certain arrangements. However, the A1 form process has remained relatively stable for many years.

Autumn Statement 2023

Lord Macpherson of Earl's Court Excerpts

Wednesday 29th November 2023 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I too congratulate the Minister on her move to the Treasury. It is a much-maligned institution, but I am confident that she will enjoy her time there. I hope that, with time, she is given a more glamourous title than Parliamentary Secretary, if only to avoid being confused with the Chief Whip, whose official title is Parliamentary Secretary to the Treasury.

As a student of fiscal Statements—I reckon that I have worked on 30, including seven that can be termed “pre-election”—I rate this one as better than average. First, I welcome the cut in national insurance. This reverses the trend of the last 40 years, which has been to raise national insurance to finance income tax cuts. Over my adult life, the basic rate of income tax has been cut from 35% to 20%, while the employers’ national insurance rate has risen from 8.75% to 13.8%, and the rate paid by employees has more than doubled from 5.75% to 12%. This sleight of hand has been bad for the economy. The fact is that national insurance is a tax on jobs—it penalises working people and the young—while income tax cuts tend to favour the old, rentiers and those who live off capital. So I welcome the 2% cut to 10%; I hope that it will start a trend. Can the Minister say whether it is now government policy to prioritise national insurance cuts over income tax cuts? Of course, whether it is affordable is another matter, and one to which I shall come back.

Secondly, I welcome the focus on growth and, in particular, the full expensing of business investment. Normally, I would favour the widest possible tax base with the lowest tax rate, but Britain has a chronic problem of underinvestment, which is a contributory factor to our low growth, so it is right to try to tilt the playing field.

Finally, I welcome the Chancellor’s commitment to fiscal rectitude, if only by 2028. He did a great job in pulling the Truss Government back from the brink a year ago and in restoring confidence. Whoever governs in the coming period will need to keep on bearing down on borrowing and get public debt on a downward path in relation to the nation’s income. We may currently be benefiting from a rally in the bond market, but we cannot be sure that that will be sustained. The fact is that debt interest is eating into resources better spent on the public services people need.

That brings me to what I see as the problem with the Autumn Statement: I fear that the public expenditure projections are simply unrealistic. The National Health Service and the state pension are accounting for an ever-increasing proportion of public spending. The triple lock is a luxury that the country can ill afford, but all our parties seem to be committed to it. Of course, there is more the Government can do on the productivity and efficiency of public services, starting with the Civil Service, but the so-called unprotected programmes, such as criminal justice, housing and local government, have already been cut too much—as the noble Baroness, Lady Pinnock, mentioned—and the results are beginning to show.

Moreover, as the international security situation deteriorates, we need to spend more on defence, diplomacy and intelligence. Demographic pressures will only increase over the next 20 years. Much of this was set out in the OBR’s fiscal sustainability report, published in July. Can the Minister assure me that that report is informing Treasury policy and will inform the Budget come March?

I fear that, sooner or later, the Government will have to grasp the nettle and reintroduce a health and social care levy. When they do so, it should be based on the income tax base, rather than that of national insurance. The better-off elderly—I should declare an interest as the possessor of a free bus pass—should pay their fair share.

My other concern is that the Government are not going far enough on growth. Here I agree with the noble Lord, Lord Eatwell, that more private investment needs to be combined with more public investment. Yet the Government are projecting that net public investment will fall over time from some £72 billion this year to £56 billion by 2028. When inflation is taken into account, that is a cut of at least 30%. One of my biggest regrets as a Treasury official was recommending the cancellation of what is now called the Elizabeth line in the early 1990s. Of course, we need to focus on investment projects with the biggest economic return— to that end, I am no fan of HS2—but we also need to ensure that infrastructure gets sufficient resources. That means consuming less and investing more. I welcome the Chancellor’s words on planning reform, but I fear they do not go far enough. We need to make it easier to build houses and to make progress on infrastructure. Only yesterday, a telecoms industry veteran told me about the planning obstacles to delivering infra- structure in Scotland, and I see little evidence to suggest that the planning system is much better in the rest of the UK.

Finally, the Autumn Statement does not go far enough on skills. Many of Britain’s problems with immigration stem from our inability to develop a labour force for the 21st century. We used to rely on the Polish and central European taxpayer to train our workforce. If on the day after the 2016 referendum the Prime Minister had said we were going to prioritise further education and vocational skills and then relentlessly focused on the problem, we might just, seven years on, be beginning to see some results, but she did not, and her successors have shown even less interest in the subject. It is not too late to put that right. If we do not rise to the productivity and growth challenge, the public finances will only get worse. This Autumn Statement represents a small step forward, but whoever forms the next Government is going to have to do a whole lot more.

Bank Accounts

Lord Macpherson of Earl's Court Excerpts

Wednesday 19th July 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I am not sure that events recently pertain to the particular case raised by the noble Lord. I was pleased to meet with him and as I committed to then and commit to on an ongoing basis, we will continue to engage with the Ministry of Defence to ensure that we have an understanding of the issue and that people do not face a wider systemic barrier.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare my interest as chairman of C Hoare & Co. Does the Minister agree that customer confidentiality should lie at the heart of banking, and that a bank apparently commenting on the income and wealth of a customer is completely unacceptable?

[Baroness Penn (Con)]

I agree with the noble Lord on both points. When it comes to assessing whether that has taken place, that is a question for the regulator.