Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014
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Lord Newby
That the draft orders laid before the House on 25 June be approved.
Relevant document: 4th Report from the Joint Committee on Statutory Instruments. Considered in Grand Committee on 21 July.
Euro Area Crisis Update (EUC Report)
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Lord Newby (LD)
My Lords, I thank the noble Lord, Lord Harrison, and European Union Sub-Committee A for publishing the updated report. I also thank members of the sub-committee for organising the debate, and everybody who has spoken.
It is blindingly obvious that a stable euro area is in Britain’s interests. Some 40% of UK goods and services exports go to the euro area and the economic uncertainty emanating from the euro area at the height of the crisis had a chilling effect here. The Government welcome the return to growth in the euro area, but vulnerabilities obviously remain. We agree with the committee that the storm has not entirely passed. While growth has returned, it is weak and unemployment remains high. As the noble Lord, Lord Harrison, pointed out, growth across the euro area is ill balanced. The balance of payment surplus of Germany, for example, has reached record highs, while obviously other member states are still suffering very considerable economic problems.
The ECB’s announcement of its outright monetary transaction mechanism and its clear commitment to stand behind the euro have clearly helped relieve the pressure from the sovereign debt crisis. However, the euro area has to make some important steps to strengthen the single currency for the longer term. Countries in the euro area periphery are undergoing a painful but necessary adjustment. They need to carry on confronting head-on their problems of high deficits and low competitiveness. They are making very considerable progress. By the end of 2014, Spain is forecast to have reduced its deficit by almost five percentage points since 2012, while it, Italy and Portugal all registered current account surpluses in 2013.
My noble friend Lord Maclennan asked whether that adjustment was too quick. It is interesting to see that the rate and path of deficit reduction in Spain, for example, is much sharper than the one we have decided to follow here. It has had a number of consequences, one of which has been high unemployment and a fall in real wages. What is interesting about the Spanish economy is the extent to which it is rebalancing away from property and rebounding. The absolute pace at which some of these economies are adjusting and the extent to which that is optimal will not be clear for some time. However, they have made very significant steps and are to be congratulated, not least against a background, two or three years ago, in which many people in the UK said they would never be able to do it and that the euro would collapse as a result.
A well designed banking union comprising centralised decision-making on supervision and resolution supported by credible financing arrangements, can, in our view, support the long-term stability of the single currency. The ECB’s comprehensive assessment process is critical to restoring market confidence over the medium term and is an important step in implementing the single supervisory mechanism. We strongly support the announcements on stress tests and believe they provide for a robust process. However, all elements of banking union must protect the unity and integrity of the single market and the interests of non-participating member states and be legally sound.
Some progress has also been made on closer oversight of fiscal policy. Exit from the crisis will be easier the more the euro area does to support demand and share the burden of adjustment. The noble Lord, Lord Davies of Stamford, and my noble friend Lord Flight referred to the challenges of greater fiscal co-ordination. The noble Lord, Lord Davies, suggested an integrated unemployment insurance system, but I think my noble friend Lord Flight answered the question of how plausible that is, certainly in the short to medium term, by pointing out that the country making the transfer payments in such a system would be, to a large extent, Germany. There is very little evidence that Germany feels that is an appropriate way forward.
The Chancellor has long made clear his view that there is a remorseless logic that the euro area, like any single currency, needs closer economic and fiscal integration. The euro area needs the right governance and structures to address its current challenges, but the change in governance precipitated by the crisis has altered the EU’s decision-making structure and affected us, as we have heard from a number of noble Lords. We must ensure that any new arrangements work for those outside the euro area as well as for those within it.
My noble friend Lord Maclennan asked how we would maintain our position given these new arrangements and, although the noble Lord, Lord Kerr, thought it was slightly thin, the Financial Secretary to the Treasury pointed out that we will be and are closely involved in negotiations on EMU and in ensuring that proposals fully take into account the interests of both the euro outs and the euro ins. In answer to my noble friend Lord Maclennan’s question about how we are doing this, we are in constant contact with euro area partners at European Council and ECOFIN meetings, and we are pursuing the informal interpersonal relationships that we discussed at some length when we last had a discussion on the issue. I completely agree with the suggestion that in these interactions, we need to avoid hectoring and denouncing—something that UK Ministers of all parties, over several decades, have found exceptionally difficult in dealing with our European partners.
My noble friend Lord Maclennan asked how we are supporting the leveraging labour market reform and innovation. The Government support the attempts to tackle these issues. We support the ECB’s comprehensive assessment—stress test—and the asset quality review as a means to improve confidence in the banking system. We support the ECB’s moves further to develop the European securitisation market as an alternative to bank lending. Labour market reforms need to be undertaken on a country-by-country basis, along with wider structural reforms to promote growth.
The noble Lord, Lord Kerr, referred to the balance of competencies review and the challenges that it identified. It is a helpful and formidable document and has the great advantage of having a large number of sensible and practical suggestions of how decision-making processes might move forward. He identified a number of key challenges, none of which I suspect anyone in your Lordships’ House would disagree with. The one I highlight, which the noble Lord, Lord Davies of Oldham, also mentioned, is the question of staffing, which we have discussed in your Lordships’ House on a number of occasions. We discussed it at our last debate on the subject, and following that debate I wrote to the noble Lord who raised the issue of staffing and I hope that other noble Lords who took part in that debate, most of whom are here today, will have seen a copy of that letter about the initiatives that the Government were taking.
It seems to me that the banking sector needs to be willing to encourage its staff to participate in the European institutions. The sector is quick to denounce the Government but slow to take action itself and, in private moments, will admit that if it has somebody really good who would do it really well, the last thing they are prepared to do is to give that person up to do it. As long as that remains the view of the sector, the current situation will continue.
The noble Lord, Lord Kerr, made a couple of interesting and practical suggestions about the euro group and where and when its meetings might be held. I will draw those suggestions to the attention of the Chancellor.
The Government could not agree more with the points made in the report about the importance of the City of London as a leading international centre. We do not altogether share the gloomy prognosis of the noble Lord, Lord Flight, for the City. The City will evolve. Some areas of business will undoubtedly move elsewhere as global markets evolve. However recent developments, such as renminbi trading in the City and the Government’s decision to initiate a sovereign sukuk and therefore promote Islamic finance, offer very significant new areas of activity for the City which will help underpin its position as Europe’s leading international financial centre.
My noble friend Lord Maclennan asked about cross-border workers and pointed to the important role that they play in the UK economy. As I pointed out at Question Time recently, the growth in house building in the UK, that all parties now believe to be very important to the period ahead, will happen only if we continue to employ large numbers of skilled workers from the rest of the EU because it is physically impossible to train large numbers of skilled workers in the short term. For the future growth of the British economy, the continued involvement here of skilled workers from the rest of the EU is very important.
We have had an extremely interesting debate across some relatively familiar themes. I would like again to thank the committee for this contribution to the debate, and I look forward to its next update.
Pensions Advice
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Lord Kennedy of Southwark
To ask Her Majesty’s Government what safeguards will be in place to ensure that people receive sound advice when seeking to access their pension funds.
Lord Newby (LD)
My Lords, every individual with defined contributions pension savings will on retirement have a new right to free and impartial guidance to help them make informed decisions about how they use their pension savings in retirement. The Government will legislate to give the Financial Conduct Authority responsibility for setting standards for guidance and monitoring compliance with those standards. The FCA has published a consultation paper alongside the Government’s response on its proposed standards.
Lord Kennedy of Southwark (Lab)
My Lords, what has been announced by the Government so far is wholly inadequate. We all remember the pensions mis-selling scandals of the 1980s when people were enticed out of SERPS and then fleeced. What qualifications will individuals need to have in order to be able to give this advice, and what guarantees will be put in place to ensure that people do not see their pension pots go in fees, charges and wholly inappropriate products?
Lord Newby
My Lords, the key innovation in the way we are planning to introduce this change is that of giving every individual coming up to retirement an entitlement to free guidance. To ensure that the guidance is impartial, we have decided that it will be provided by independent organisations which have no actual or potential conflicts of interest; it is not going to be the pension companies providing that guidance. A team has been established within the Treasury to lead on service design and implementation, bringing together expertise from across government, the Pensions Advisory Service and the Money Advice Service. The FCA will be the ultimate backstop in terms of the quality of the advice given and the monitoring of it. We will legislate to give the authority that explicit power in the Pension Schemes Bill later in this Session.
Lord Jopling (Con)
My Lords, will the Minister endorse the wisdom of my father who, in giving me an instruction shortly before he died, said that after his death I was to ensure that my mother took no advice whatever from either the vicar or the bank manager?
Lord Newby
My Lords, being married to a vicar, I could not possibly say that vicars are not always good sources of advice. The key challenge raised by the Question is that for many people pensions are a subject of complete bemusement. This reform, which I believe is very welcome, will give people much more choice over how they spend their money in retirement. However, they will be able to spend it wisely only if they are given proper guidance, and that is what the Government are committed to ensuring.
Baroness Drake (Lab)
My Lords, guidance to help people make choices about how to spend their pension funds is of course to be welcomed, but given that the Government expect the industry to respond to greater choice by providing new retirement income products, how will they ensure that these new products meet the interests of savers in terms of quality standards, transparency and level of charges, so avoiding new manifestations of consumer detriment occurring yet again in the pensions and investment industry?
Lord Newby
My Lords, this is why we have set up a new framework for regulation and why we established the Financial Conduct Authority. We have given the authority much greater powers than the FSA had to deal explicitly with these problems. We have to be sure that the new products which are coming forward meet the standards that the noble Baroness wishes to see. The FCA is tasked with that job and is absolutely determined to avoid the problems of mis-selling that we have seen in the past.
Baroness O'Cathain (Con)
My Lords, is it at all possible that any information on pensions that goes to the ordinary man or woman in the street, like me, could be passed by the Plain English Campaign because there is nothing worse than page after page of small print in stupid words?
Lord Newby
My Lords, I completely agree. For many years I have been trying to persuade the financial sector to do as the medical sector does and establish a professional body of writers to try to ensure that the material that people get is comprehensible. As far as this particular process is concerned, the FCA is looking to provide a template that pensions providers will complete, which might be on as little as a single sheet of paper, that will provide the basis for the guidance that is subsequently given.
Lord Hughes of Woodside (Lab)
Do the Government recollect that millions of people, even today, are bombarded on a daily basis by different companies, offering help to get payment protection policies returned and so on and so forth? How will they guarantee that this new policy will not mean that we will be bombarded daily by people telling us that we must try to draw down our pensions?
Lord Newby
My Lords, the key thing is that people get guidance from a trusted source. There will be a commonality of approach. The FCA is producing very detailed technical guidance, which everybody providing the personalised guidance will provide. I recommend that the noble Lord looks at the FCA consultation document that came out earlier in the week, which explains how it is going to do that. There is a danger that we are so concerned that things might not work that we never innovate.
Baroness Sherlock (Lab)
My Lords, I remind the House of my interest in the Financial Ombudsman Service board. In the Budget, the Chancellor announced that everybody would get,
“free, impartial, face-to-face advice”.—[Official Report, Commons, 19/3/14; col. 793.]
on their retirement options. Now we learn that it will be guidance, not advice, and that face-to-face could mean online or over the phone. Will the Minister please tell the House how many people in 2015-16 will actually get face-to-face guidance? Will he reassure the House that that commitment will not be watered down any more? People coming up to retirement need advice they can trust.
Lord Newby
My Lords, the difference between guidance and advice is simply that within the financial services sector advice is a regulated activity which, as the noble Baroness knows, requires those who offer it to have gone through a significant process. This is a different level of advice. As far as face-to-face advice is concerned, the Treasury has undertaken a considerable amount of consultation. Many people have said that they would much prefer, in the first instance at least, to get their advice online or to do it on the phone. We have said, however, that any individual who wishes to have face-to-face advice will have it, and they will. It is simply that not everybody wants it that way.
Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014
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Lord Newby
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014
Relevant document: 4th Report from the Joint Committee on Statutory Instruments
Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014
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Lord Newby
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014
Relevant document: 4th Report from the Joint Committee on Statutory Instruments
Lord Newby (LD)
My Lords, it is a great pleasure to open this debate on these two ring-fencing instruments because today marks the latest milestone in the long process of legislation to implement the ring-fence between retail and investment banking. These two orders define what must be inside the ring-fence and what must be outside. They are the final stage of legislation on the location of the ring-fence.
Ring-fencing will protect retail bank customers against the risks of investment banking. It will help to reduce the risk that a future Government are obliged to rescue a failing bank with taxpayers’ money. Ring-fencing will achieve this; first, by insulating vital retail deposit and payments services against shocks from elsewhere in the global financial system; and, secondly, it will make retail banks that provide these vital services simpler and more resolvable. This will mean that, if a bank gets into financial difficulties, the authorities will be better able to manage its failure in an orderly way, keeping those essential retail services running but without having to rescue the bank with public funds. Ring-fencing thus aims to get the taxpayer off the hook by making retail banks both less likely to fail and more safe to fail. The ICB recommended that all the legislation needed to implement the ring-fence be in place by the end of this Parliament. The Government have committed to that timetable and we are well on track to meeting our commitment.
Last year, we took the Financial Services (Banking Reform) Act 2013 through Parliament. It established in law the principles of ring-fencing, as well as implementing the recommendations of the ICB on bail-in and depositor preference. The Act also brought in wider reforms, including those proposed by the Parliamentary Commission on Banking Standards.
The Act created the concepts of a “ring-fenced body”; “core activities”, those that must be inside the ring-fence; and “excluded activities”, those that must be outside the ring-fence. It provided that the precise definitions of “core” and “excluded” activities be set in secondary legislation. This is the purpose of the two orders before us today. The ring-fenced bodies and core activities order defines the scope of the ring-fence and the kinds of deposit that must be in the ring-fence. The excluded activities and prohibitions order defines the forms of trading in securities and commodities that must be outside the ring-fence, and imposes specific prohibitions on ring-fenced banks.
Lord Newby
My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for those questions, because they enable me to clear up, I hope, the points that he raised. He asked whether agricultural products were included in the definition of “commodity”. The answer is that, just like a metal, agricultural products —such as pork belly, or whatever, futures—are an excluded entity, along with all other commodities.
The noble Lord asked me about how to define “simple”. I am slightly inclined to say that of course it is not easy to define “simple” simply. However, the simple instruments that ring-fenced banks will be permitted to sell to their customers are defined in articles 10 and 11 of the excluded activities and prohibitions order, so there is quite a long list there. The definition or underlying concept of “simple”, is that we are primarily talking about derivatives that do not complicate the resolution of a failing bank. Why do we try to keep to simple products? We want to make it possible, relatively easily, to resolve a failing bank. Therefore simple derivatives are primarily ones that are straightforward to value; that is what makes them simple, or relatively simple.
Lord Tunnicliffe
Can the noble Lord repeat what he just said? I think he said something quite profound, although he said it quickly: that, by definition, they must be instruments that would not complicate the resolution.
Lord Newby
Yes; they are derivatives that would not complicate the resolution of a failing bank. They would not complicate it because they are relatively straightforward to value. As the noble Lord can imagine, some derivatives are extremely difficult to value. If I can just slightly elaborate on that, the excluded activities and prohibitions order limits ring-fenced banks to selling forwards and futures, plus a small range of options. They may only sell derivatives to hedge against three types of common business risk, namely currency, interest rate and commodity risk. Those are the most common business risks in which the market for derivatives is most liquid and, because it is liquid in those areas, it is easier to value them. To ensure that derivatives do not have any of the features that make them hard to value, the order requires that options contracts entered into must specify the amounts that may be bought or sold under the option, be at a specified price, and exercisable on a single specified day; or, in the case of interest caps or floors, interest rates must be based on a specified principle sum for a specified period.
The order also requires that ring-fenced banks may only sell derivatives that can be valued on the basis of observable market data or of a type traded on exchanges, and whose fair values are based on level 1 or 2 inputs under international financial reporting standards. Such instruments are more liquid and could be more easily valued in resolution. Article 12 of the order creates those safeguards, as well as placing caps on the net market risks of the derivatives portfolio, the gross size of the derivatives portfolio and the proportion of the portfolio that can be made up of simple options. I hope that that has gone some way to satisfy the noble Lord on that front.
The noble Lord asked about consultation. Consultation was issued in July last year, and the summary of responses was released in December of last year. We also consulted widely with stakeholders, including the Association of Corporate Treasurers, the CBI, non-financial companies, law firms and, of course, the banking industry itself. As a result of that consultation, we have made some changes to the legislation that are largely technical, but which will ensure that ring-fencing is fully compatible with the needs of UK businesses. For example, we made some small changes to the definition of “simple derivatives”, made it permissible for ring-fenced banks to have exposures to non-systemic insurers, made a series of technical changes to ensure that exemptions for payments and trade finance are operable, and removed the caps on payments and trade finance exposures. We also prohibited ring-fencing banks from having branches in the Crown dependencies. Therefore that is relatively technical stuff, but it has improved the legislation and has been a good exercise.
The noble Lord asked how the supervisors would supervise. The PRA is the principal supervisory body. It is in day-to-day contact with the banks. If it feels that it is not getting adequate information from the banks, it has extensive powers to require further information from them if it has any specific concerns. If a generic problem were to arise, it would obviously be in a position to discuss with the Treasury whether any further changes were needed in terms of the secondary legislation or in any other respect.
As to the question of timing, as the noble Lord said, the end point for the final implementation of the ring-fence is 2019. The justification for that is so that we can get all the secondary legislation done by the end of this year, which we expect to be able to do. The PRA then has to produce very detailed rules to make sure that the system is clear and works in the way that we wish it to do. On the basis of both the primary and secondary legislation, we estimate that it could take up to two years for all those rules to be finally in place, and then a final two years for the banks to implement the rules. That does not mean that the banks will not do anything in the mean time, because making this change obviously involves them in a huge amount of effort, activity and cost, so they are beginning to think about how they are going to do it. We have always thought that this timetable is measured and proportionate. The very fact that the banks know that we are moving in this direction means that some activities that they might have undertaken in the past they will not undertake in the interim period because they know what the new rules will be and that they will abide by them.
Lord Tunnicliffe
I thank the Minister for giving way. Clearly, we would like to see this done more quickly, but I hear the Minister’s response. I presume that, alongside this, there will be a parallel activity by the banks to develop their own structure—the responsibility of directors and so on—and to be in a corporate shape for this structure. Are the Government, through the PRA, participating in or monitoring that development?
Lord Newby
Yes, they are. We are talking not about hundreds of institutions but about a small number of banks, which are very heavily regulated already. They are in daily touch with the PRA about one or other aspect of the regulations and that dialogue is ongoing. Indeed, some banks have already announced some of their broader strategic thinking. Others are keeping theirs close to their chest and, in some cases, are looking to make sure that these orders have indeed gone through before they decide what to do. In most cases, by the end of the two years before which the PRA detailed rules will not have come out, I expect the banks to become pretty clear about where they want to end up. They will do it, as I said, in consultation with the PRA because that is the way that the system operates already and will continue to operate in the future.
I hope that I have answered the noble Lord’s questions. I was involved, as was he, with the passage of the Financial Services (Banking Reform) Act, at the start of which there was a lot of scepticism about whether it would be possible to do what we have done today and define a ring-fence satisfactorily. I think that these orders indeed do so satisfactorily. It is a major step forward in a very important process to improve the safety and security of the banking sector. I commend the orders to the Committee.
Supply and Appropriation (Main Estimates) Bill
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Income Tax: Top Rate
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Lord Forsyth of Drumlean
To ask Her Majesty’s Government what effect the reduction in the top rate of income tax has had on revenue received by HM Treasury.
Lord Newby (LD)
My Lords, the forecast Exchequer revenue effect of reducing the additional rate of income tax to 45% is estimated at around £110 million per year. This is set out in table 2.2 of Budget 2013.
Lord Forsyth of Drumlean (Con)
My Lords, I am astonished that my noble friend is not prepared to take more credit for the success of the Government’s policy. Is it not the case that the reduction in the top rate of tax from 50% to 45% has resulted in a record level of 28% of all tax revenue being paid by the top 1% of taxpayers? Is that not more than twice the level that was paid by the top 1% of taxpayers when the Labour Government under James Callaghan had a marginal tax rate of 98%? Is not the lesson that lower taxes and fairer taxes are needed in order to cut the deficit and preserve public services?
Lord Newby
My Lords, the noble Lord has a better memory than I have. I am very happy to take credit for the Government’s achievements. The proportion of income tax collected from the top 1% has gone up from about 26% to 28% during the lifetime of this Government. Certainly, income tax take from high earners is extremely resilient because they are prepared to pay it at the levels we now have.
Lord Dubs (Lab)
My Lords, is that not a fairly small sum of money compared to what we lose every year through people who dodge and evade taxes?
Lord Newby
My Lords, it is a very considerable sum of money, but we are taking steps across a range of areas to tackle evasion and avoidance, whether by individuals or firms. There is a measure in this year’s Budget specifically designed to get tax upfront from individuals who are engaged in schemes that might subsequently be found to be avoiding tax. That will generate a considerable amount of income. A number of other measures that we have taken are bringing in hundreds of millions of pounds from people who previously were able to avoid taxes.
Lord Wrigglesworth (LD)
Does my noble friend not agree that if we want a fairer tax system, it also means that we need to ensure that the broadest backs bear the greatest burdens when we are facing difficulties?
Lord Newby
Yes, my Lords, and that is why the Government have taken a raft of measures which will ensure that those with the broadest backs pay very much more than the additional amount of income tax that they might have paid had the rate remained at 50%. For example, we have increased higher rate capital gains tax, raised the stamp duty on higher value homes and reduced the cost of pensions tax relief. These measures, taken with other measures, mean that the additional amount being paid by high earners was more than £1 billion last year and will be more than £2 billion this year and more than £4 billion next year. This is real cash coming into the Exchequer as a result of measures we have taken to hit those who otherwise were avoiding tax.
Lord Davies of Oldham (Lab)
My Lords, how can the Government claim that they are being fair when they cut the top rate of tax, giving a £3 billion tax reduction for millionaires? How does the Minister think that squares with the ordinary taxpayer in the country? To say that it brings in more revenue because people who have been dodging tax altogether actually decide that they will make a contribution scarcely sounds like good government.
Lord Newby
My Lords, there is no £3 billion, as I have explained. The effect of the cut is £110 million. The other measures we have taken will bring in over a three-year period some £7 billion extra from the same people. For people on ordinary incomes, the rise in the income tax threshold means that by next year the typical basic rate taxpayer will be £805 per annum better off and 3.2 million people who were otherwise paying income tax will not be paying income tax at all.
Lord Lawson of Blaby (Con)
My Lords, it may be difficult for the party opposite and my noble friends on the Liberal Democrat Benches to understand, but taxation has one purpose, and one purpose only, which is to raise revenue. The Minister said his memory is not very good, so may I remind him that when in 1988 I reduced the top rate of income tax from 60% to 40%, it brought in much more revenue and also resulted in the wealthy paying a higher proportion of tax than ever before? Will he reconsider his previous answer?
Lord Newby
No, my Lords, it simply is not true that the sole purpose of tax is to bring in revenue. Obviously every tax does bring in revenue, but some tax is introduced in order to affect behaviour. We are about to have a plastic bag tax but I do not think that the primary purpose of that tax is to bring in money.
Lord Haskel (Lab)
My Lords, the top 1% pays more tax. Is that because their income has gone up?
Lord Newby
It is partly because their income has gone up, but proportionately it is because they are prepared to pay the tax. As noble Lords opposite know, and as the noble Lord, Lord Lawson, has just demonstrated, when you get to very high levels of tax and very wealthy people, whether they pay it or not is not simply a question of whether they get a demand from HMRC.
Baroness Neville-Rolfe (Con)
My Lords, will my noble friend also comment on the beneficial effect of the decline in corporation tax—a business tax—which has had the effect of bringing some of our best companies back to London?
Lord Newby
My Lords, the Government are very keen to ensure that the tax regime is internationally competitive. That is the effect of the corporation tax changes. As the noble Baroness said, it is having a number of beneficial effects.
Lord McFall of Alcluith (Lab)
My Lords, Martin Sorrell of WPP said that for large corporations, corporation tax is a voluntary activity. Is that what the Minster meant by his answer to the last question?
Lord Newby
It certainly is not. As the noble Lord knows, we have taken the lead internationally to make sure that companies—which for many years in some cases have not paid much tax—will pay a proportionate amount. We have taken the lead in the G20 and the OECD to make sure that we have different rules in place, rather than rules that were designed more than 100 years ago. We are going to see the first fruits of that in September; the long-term effect will be that some companies that have been able to avoid paying tax in the past almost altogether by deciding where they were domiciled will not be able to avoid it in future.
Northern Ireland: Illegal Petrol and Diesel
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Lord Mawhinney
To ask Her Majesty’s Government what is their estimate of the total loss to HM Treasury caused by the production and smuggling of illegal petrol and diesel in Northern Ireland.
Lord Newby (LD)
My Lords, the latest tax gap figures published by Her Majesty’s Revenue and Customs estimate the market share for illicit diesel in Northern Ireland at 12% to 13%, or around £80 million, in 2011-12. Petrol fraud was estimated as negligible.
Lord Mawhinney (Con)
I thank my noble friend for that reply. Given the illegal production and smuggling of fuel in Northern Ireland for decades, given the fact that today a quarter of all fuel sold in Northern Ireland is illegal, and bearing in mind the loss to the Treasury which my noble friend just mentioned and the fact that there has not been a single conviction, is he surprised to learn that many people in Northern Ireland believe that that set of circumstances points to the fact that a deal may have been done with the smugglers, akin to that for the on-the-runs, suggesting that if they stick to smuggling no other action will be taken against them? Can my noble friend assure us that no such deal has been conducted in writing, in words, or by a nudge or wink by this Government?
Lord Newby
My Lords, I can absolutely do that. First, perhaps I may correct the noble Lord. A quarter of all diesel consumption is not illegal; 12% to 13% is illegal; the balance is made up of diesel that is bought in the Republic and brought across. I also assure the House that it is not true that there have been no convictions in this area. There were nine convictions last year, nine convictions the previous year and four convictions the year before. It is true that, unlike in the rest of the UK—or, rather, in England and Wales—there have not been custodial sentences in Northern Ireland, but legislative change last December was undertaken specifically to deal with that problem.
Lord Alderdice (LD)
My Lords, when the Independent Monitoring Commission was established by the British and Irish Governments, we sought to investigate this problem and were shocked to discover that, despite the fact that the Northern Ireland Office had been there for a very long time and was very well resourced, almost no resource was being put in by HMRC to address it. It just did not seem a priority. We worked very hard, without trying to create a problem or embarrassment for the Government. It is true that, by the time that we were finishing up, HMRC had appointed a substantial number of people to address the problem, but there is now no Independent Monitoring Commission and the Northern Ireland Office is a shadow of its former self. How can the House be assured that there will be proper monitoring and accountability to ensure that HMRC continues to do what it needs to, because that certainly was not the case in the past?
Lord Newby
My Lords, I do not know about the past, but in very recent times HMRC has had in-house resources in Northern Ireland to deal specifically with this issue. Additional funding has gone to the road fuel testing units, which are crucial. There is the introduction of a new, more effective marker just round the corner. It is worth informing the House—to demonstrate that we are being effective in this area—that a plant capable of producing more than 8 million litres of laundered fuel was recently found and dismantled in a cattle shed in Crossmaglen.
Lord Hylton (CB)
My Lords, is the Minister aware that cheaper diesel and petrol prices in the Republic have forced the closure of most filling stations in Northern Ireland in a strip 10 or 20 miles wide along the border? Will the Government therefore move to equalise fuel taxes, as is being done in the case of corporation taxes?
Lord Newby
My Lords, the setting of the duty rates for diesel and petrol are obviously done at a UK level. Although this is a problem, it is only one of the many considerations that have to be taken into account. There has been a differential in diesel pricing between the Republic and Northern Ireland for a very long time. Some people are obviously going across the border but, as I said earlier, as a proportion of the total consumption of diesel in Northern Ireland it is relatively modest.
Lord Gordon of Strathblane (Lab)
Will the Minister consider publishing all the available data on quite legitimate cross-border traffic? It might further illuminate the debate on Scottish independence, where many people feel that you can have differential rates north and south of a land border without any apparent change in consumer behaviour.
Lord Newby
My Lords, there is a lot of data published about the duty rates. Noble Lords can see those. What is extremely difficult to do is to demonstrate with any great degree of precision exactly how much of a product crosses a border without a customs post. That is obviously a challenge between the Republic and Northern Ireland, as well as more generally within the EU.
Lord Kennedy of Southwark (Lab)
My Lords, there is also, of course, a problem of smuggling from mainland Europe into the UK. I went down to Dover a couple of years ago and was shocked to see how porous our borders are. We spoke to the customs officer there; in terms of illegal alcohol and tobacco, there just were not the staff to stop the vehicles to check them.
Lord Newby
My Lords, tobacco smuggling has been a problem for some time. The additional resources that have gone into HMRC over the course of this Parliament, which amount to about £1 billion, have among other things enabled more to be put into that area also.
Lord Browne of Belmont (DUP)
HMRC figures confirm that in 2013-14 illicit fuel was identified at some 33 filling stations. Does the Minister agree that it would be helpful if HMRC would publish the names of the filling stations concerned so that law-abiding motorists could make an informed choice not to use them?
Lord Newby
The slight danger is that others might not, of course. The HMRC is looking at this issue. There is a legal problem at the moment. The legislation would allow naming and shaming to take place only above a certain financial threshold, which would not be met by some of these petrol stations, which are typically small and independently owned. There is also a bad faith test in the legislation so there would need to be a change in it, but HMRC is looking at that issue.
Economy: Public Sector Net Borrowing
Lord Newby Excerpts(10 years, 8 months ago)
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Lord Sherbourne of Didsbury
To ask Her Majesty’s Government by how much public sector net borrowing has fallen between 2009-10 and 2013-14; and what is their forecast for the current financial year.
Lord Newby (LD)
My Lords, between 2009-10 and 2013-14, public sector net borrowing fell from £157.3 billion to £107 billion, or from 11% of gross domestic product to 6.6%—a fall of more than a third. The independent Office for Budget Responsibility forecast in March this year—2014-15—that underlying public sector net borrowing will fall to £95.5 billion, or 5.5% of gross domestic product, half its peak in 2009-10.
Lord Sherbourne of Didsbury (Con)
Does my noble friend agree that the reduction in the deficit over the past four years has been crucial in generating economic growth and employment? Does he also agree that it is therefore vital that the deficit reduction programme continues? Can he give the House some indication of when we might expect the deficit to be eliminated and the nation’s finances returned to balance?
Lord Newby
My Lords, on the current forecast we expect there to be a surplus in 2018-19. At the moment, as my noble friend points out, the economy is growing; we are the fastest growing economy in the G7 in the year to Q1 2014. The most recent employment figures showed that in the past year employment had risen by 780,000 and the claimant count had fallen by 406,000.
Lord Kinnock (Lab)
Do not the figures used by the Minister somewhat obscure serious facts about the years to which he referred? In the last four years of the Labour Government, including the crisis years 2008 to 2010, total net borrowing was £329 billion, while in the four years of the current Government total net borrowing has been £104 billion higher at £433 billion. Is not that rise in borrowing over those years a very serious indictment of government policies which have actually retarded growth, increased inequality and shrunk the economy? Is it not time for the Minister to offer something of an apology, rather than a pat on his own back?
Lord Newby
My Lords, it is an indictment of the previous Government. In the first year that we were in office, £1 of every £4 spent by Government was borrowed. That was completely and utterly unsustainable, and that is why we are sorting things out.
Lord Tebbit (Con)
My Lords, will my noble friend be very careful and encourage others to be careful in their use of the expressions “borrowing”, “deficit” and “debt”? The ghastly facts before us show that debt is rising remorselessly, and it will be, as he has said, some time yet before the enormous pile of debt incurred by the previous Labour Government can be brought under control and reduced?
Lord Newby
My Lords, I agree with the noble Lord. The relationship between debt and GDP is set to rise for a number of years more, even as we continue to reduce the deficit.
Baroness Symons of Vernham Dean (Lab)
My Lords, given that the Minister answers for the whole House, and given that this Question is about savings and the economy, can he please tell us why a Statement has not been made to the House, yet the Prime Minister spoke this morning at the Farnborough air show about budgetary savings that have led, apparently, to extra expenditure on counterterrorism and cybersecurity? The Prime Minister said that these were very important announcements, and they were indeed. Should they not have been made to Parliament?
Lord Newby
My Lords, there are always questions when statements are made outside the House as to whether they should have been made inside the House. If the noble Baroness is concerned about it, she of course has the option of asking an Urgent Question.
Lord Razzall (LD)
My Lords, is the Minister prepared to take this opportunity, in view of the questioning, to move from the short to the long-term and comment on last week’s report by the Office for Budgetary Responsibility, which states that by 2050 the public sector borrowing requirement will be more manageable than it would have been were it not for the actions of the coalition since 2010?
Lord Newby
Yes, my Lords; my noble friend is absolutely right. The report to which he refers demonstrates two things: first, with an ageing population, there will over a long period be significant pressures on the public finances, everything being equal; secondly, that a number of steps which have been taken with cross-party support, such as raising the retirement age, are making those long-term additional burdens more acceptable and possible to deal with in a sensible fiscal framework.
Lord Davies of Oldham (Lab)
My Lords, did not the Government promise in 2010 to balance the books by 2015, and is it not now the case that they will be lucky—well, they will be out of office, but they would have been lucky—to have balanced the books by 2018? Is the Minister aware that in the early months of this year borrowing was £2 billion higher than in the same period last year? So it is not getting better.
Lord Newby
My Lords, it is getting better. It has got better in the year up to now. The OBR says that we are on track to reduce borrowing during this year. As the noble Lord knows, there were substantial economic headwinds from the euro area crisis, high commodity prices and the ongoing impact of the financial crisis. I am not sure whether he is really proposing that we should have cut the deficit more quickly by cutting public expenditure further or putting taxes up.
Tax: Aggressive Tax Avoidance
Lord Newby Excerpts(10 years, 8 months ago)
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Lord Peston (Lab)
My Lords, on behalf of my noble friend Lord Barnett, and at his request, I beg leave to ask the Question standing in his name on the Order Paper.
Lord Newby (LD)
My Lords, the Government have taken a wide range of actions to tackle all forms of tax avoidance. The general anti-abuse rule, which this Government introduced, specifically seeks to tackle abusive tax-avoidance schemes. HMRC has provided examples of the arrangements that will be captured under this rule in its very detailed published guidance. A further example of aggressive tax avoidance is detailed on the front page of today’s Times.
Lord Peston
My Lords, the reason that your Lordships are stuck with me and not my noble friend is that he is very ill indeed, and I know that all noble Lords will wish to send wishes that he recovers quickly.
Lord Peston
In particular so that he can occupy his usual place and ask some really difficult questions.
In so far as I understand this subject at all, is it not the case that aggressive tax avoidance leaves companies making enormous sums of money and millionaires paying lower rates of tax than those with average or around average incomes? Does this not bring the whole tax system in our country into disrepute? How urgently are the Government trying to deal with aggressive tax avoidance, with a view to punishing those who do it?
Lord Newby
My Lords, first of all I ask the noble Lord to pass on my good wishes and, I am sure, those of the whole House to his noble friend.
The Government take this issue extremely seriously. We have invested additionally in this area more than £1 billion over the spending review period, and taken on another 2,500 staff to work on it. The compliance yield that flowed from this work in the past year was £23.9 billion—the highest ever—and we have increased the number of people being prosecuted for tax crime to 2,600 in this Parliament, which has resulted in 2,700 years of jail sentences.
Lord Razzall (LD)
My Lords, at the G8 meeting last year—it is now the G7—the Prime Minister led on the question of tax avoidance by the multinational companies that we all know, such as Starbucks, Amazon and Google. They seem to do significant business in the UK but pay very little tax. What progress has been made in that area?
Lord Newby
My Lords, the work in that area has been carried forward by the OECD, which produced a comprehensive 15-point action plan. Work on all those points is now under way. The first deliverables, on transport pricing, are due in September this year. At the EU level, noble Lords will have seen that the EU is currently investigating the tax position in Luxembourg, Ireland and the Netherlands, specifically with Amazon, Apple and Starbucks in mind.
Lord Rooker (Lab)
I do not wish to be misunderstood, but is it not the case, generally speaking—there is evidence to support this—that when tax rates are lowered, more revenue flows into the Treasury?
Lord Newby
My Lords, there is very extensive academic literature about the so-called Laffer curve, and I suspect there are very different views on it in your Lordships’ House. It is undoubtedly the case at the extreme ends of the curve that if you tax very highly the rate falls of because people find ways of avoiding it, and if the tax rate is very low the rate falls off simply because the rate per taxable unit is so much less.
Lord Mackay of Clashfern (Con)
My Lords, is it not correct that the principal weapon of aggressive tax avoidance is misuse of allowances that are permitted for various reasons? The complexity of that system is so great that it is extremely difficult to analyse transactions to see whether or not they comply with these particular conditions properly.
Lord Newby
The noble and learned Lord points to a very important problem. There are over 1,000 tax allowances, all of which have been introduced individually for very good economic development reasons. The problem is that they are now very complicated. Some tax advisers have been extremely creative at finding ways to use these allowances, which were developed for perfectly good reasons, to enable people to avoid their tax.
Lord McFall of Alcluith (Lab)
My Lords, is the term “aggressive tax avoidance” not just semantics? Tax avoidance is tax avoidance, whether aggressive or not. By doing this we are encouraging complexity, which is to the benefit of sharp-witted accountants and lawyers. Tolley’s Tax Guide is now 20,000 pages long. I suggest that the Minister should have two ambitions: first, to have the tax book the same length as War and Peace at 1,200 pages. Secondly, he should take up the suggestion of the noble Lord who said that we need to ensure these tax-avoidance schemes are referred to the Treasury first of all to determine whether they are tax avoidance. That would eliminate the complexity.
Lord Newby
My Lords, at the start of this Parliament, we established the Office of Tax Simplification. It has done useful work in reducing the body of tax law, although clearly it has a long way to go. On the work that has been going on to tackle tax avoidance schemes, I think that the tax avoidance industry has got the message; the number of potential avoidance schemes notified to HMRC fell by 75% in the two years from 2010.
Lord Lawson of Blaby (Con)
My Lords, my noble and learned friend Lord Mackay is absolutely right, as is the noble Lord, Lord Rooker—the two things go together. When I was Chancellor some years back, I reduced tax rates substantially, eliminated a whole range of allowances and indeed abolished some stupid taxes altogether, and the result was a great increase in revenue. However, is there not another point? If, after you have done that—which I commend to the Government—there is still a real problem with avoidance of a particular tax. Is there not a case for abolishing that tax and replacing it with another one that is less easy to avoid?
Lord Phillips of Sudbury (LD)
My Lords, will my noble friend tell the House whether the Government refuse to grant contracts to the companies and individuals that are engaged in this ludicrous and anti-social avoidance?
Lord Newby
My Lords, I think that there have been a number of cases in recent times where companies have lost contracts because they have been behaving in an unreasonable way, and that is a very good principle.