Bank of England: Monetary Policy

Lord Newby Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government whether they intend to give more powers over monetary policy to the Bank of England.

[Lord Newby]

My Lords, the Bank of England Act 1998 already gives powers of operational responsibility for monetary policy to the independent Monetary Policy Committee of the Bank of England. The Act requires the Treasury to specify the objectives of the MPC at least once every 12 months. The Chancellor set the remit for the MPC at Budget 2012 to target inflation of 2%, as measured by the 12-month increase in the consumer prices index.

[Lord Barnett]

My Lords, there have been widespread reports that the Chancellor was looking at that remit with the possibility of changing it. I appreciate that it may have been only a Lib Dem Budget leak but is it true and, if so, what does he propose to do about that kind of leak? Does the Chancellor, as has been said, believe in a looser monetary policy, and has he told the new Bank governor that that is what he wants him to do?

[Lord Newby]

My Lords, as the noble Lord will be aware, it is Budget Day tomorrow. That is the day on which the Chancellor will re-express the remit for the Monetary Policy Committee. I am afraid the noble Lord will have to wait for 24 hours.

[Lord Higgins]

Does my noble friend agree that there is sometimes confusion between interest rate policy and monetary policy? Can he say what the Government’s policy is in relation to their own actions and those of the Bank of England as far as the quantity of money is concerned?

[Lord Newby]

My Lords, as I said in my original Answer, operational responsibility for monetary policy is a matter for the independent Monetary Policy Committee of the Bank of England, not for the Treasury.

[Lord Peston]

My Lords, bearing in mind that Section 19 of the Bank of England Act 1998 gives reserve powers to the Treasury to give directions to the Bank of England, am I right that those powers have never been used? I am pretty sure that I am right. Does it not follow that the failure—despite the fact that the Act says that this is the MPC’s objective—to hit the inflation target for three years without the slightest sign that it will be hit for the next two years, coupled with monetary easing, is down to the MPC?

[Lord Newby]

My Lords, inflation has been higher than the 2% target for a number of years. The MPC has taken the view that the target would be met in the medium term and that, because the principal reasons for inflation did not include excessive domestic demand and are therefore less capable of being moderated by increases in our own interest rates, it was wiser to “see through” the temporary increase in inflation above 2% but to work, as the MPC has, on the basis that, in the medium term, inflation would indeed come down to 2%.

[Baroness Kramer]

My Lords, Paul Tucker has floated the notion that the Bank of England could charge banks for holding reserves at the Bank as an incentive to get them to lend to the real economy. Is that an issue that has been actively discussed with the Treasury and what is the Government’s view?

[Lord Newby]

My Lords, again, that is a matter for the Bank of England. To the extent that the Chancellor—and the Treasury—wishes to change the way in which the Bank of England operates, he will have an opportunity tomorrow to set out what any changes might be.

[Lord Eatwell]

My Lords, from what the noble Lord has said, the Treasury has clearly been content with the policy pursued by the Monetary Policy Committee over the past three years. Is the noble Lord also content with the impact of that policy on pensioners’ annuities?

[Lord Newby]

My Lords, the Government’s view is that it is in the long-term interests of everybody, including pensioners and families, that we deal with the deficit and get growth going on a sustainable basis. In the short term, the Bank has taken the view that to keep within the inflation target and, subject to that, to support the economic policy of the Government, including their objectives for growth and employment, it should keep interest rates low.

[Lord Vinson]

My Lords, does the noble Lord agree that many people increasingly feel that the brief given to the American Fed, which is rather wider than the brief given to our Monetary Policy Committee, would be advantageous? Instead of looking solely at inflation, it would enable the Monetary Policy Committee to examine the effect of high interest rates on the rate of exchange. The pound has been kept higher than its purchasing power parity for years and, as a result, we have a huge trading deficit. A trading nation really ought to look seriously at its rate of exchange, which ought to be one of the factors that a new remit should cover.

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[Lord Newby]

My Lords, when the previous Government established the independent Monetary Policy Committee, they decided not to follow the remit given to the Fed. No Chancellor since 1997 has decided to change that remit.

[Lord Hughes of Woodside]

My Lords, has the Minister noticed that the Deputy Governor of the Bank of England has floated the idea that banks should be entitled to charge negative interest on savings? Even the new Governor of the Bank of England, when he was in Canada, was apparently within days of allowing such a policy. This would be immensely damaging to savers. Will he put this to rest, immediately and unequivocally, and say that there is no possibility of the Government sanctioning any such idea?

[Lord Newby]

My Lords, an awful lot of ideas have been floated recently but the key remit for the Bank of England is set by the Chancellor. Within that, the Bank has operational independence on how it follows that remit. The remit has not changed but the Bank of England, with or without a new governor, always looks at questions in the general area of monetary activism.

Welfare Benefits Up-rating Bill

Lord Newby Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I start by thanking the noble Lord, Lord Low, for his support for the amendments in this group. He made the very important point that we are potentially moving into a period of greater inflation. This point was made last week by the FT, which talked about the risks of stagflation in this country. I also thank the right reverend Prelate the Bishop of Leicester for his support. He posed the key question: how will making these people poorer help the national interest? What we heard from noble Lords who oppose the amendment did not help us on that point.

I say to the Minister and to the noble Lord, Lord Bates, who prayed in aid universal credit, that it would be good to know that universal credit is on track because from everything we hear it is not. Even with universal credit as proposed, we know that something like 1.8 million people will have their benefits from work reduced in comparison to their current position.

I stress that the amendment challenges the locking-in over a three-year period of the restrictions on uprating. Uprating by less than the rate of inflation is a real-terms cut. We should recognise that it is a cut in people’s benefits. The fundamental proposition in the amendment is that these things should be looked at in the normal way on an annual basis by reference to what is happening to prices.

The noble Lord, Lord King, and the Minister said that other countries are cutting benefits. Benefits have been cut in this country, too. Council tax benefit, housing benefit, DLA, ESA and tax credits have been cut by something like £18 billion to date.

[Lord Newby]

Will the noble Lord confirm that no benefits in this country have been cut in cash terms, as they have widely been in the rest of Europe?

[Lord McKenzie of Luton]

Housing benefit is one such benefit. Council tax benefit has been dumped on local authorities with a 10% restriction on funding, which means that people’s support will be cut in cash terms. That is absolutely happening.

I say to the noble Lords, Lord King and Lord Forsyth, that it seemed that the mention of Cyprus was meant to lead us to a conclusion that bears no relation to reality. We are not dealing with a situation here that would take us anywhere close to the situation in Cyprus. We are talking about restrictions on uprating which, on the Government’s own figures, would amount to something like £1.9 billion.

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A child may live in a family with problem debt. One would therefore think that noble Lords would welcome the measures that we are seeking to take to reduce indebtedness and to encourage people to live within their means, with universal credit being paid on a monthly basis so that people get used to being responsible. A child may live in poor housing or in a troubled area, have an unstable family environment or attend a failing school. His parents may not have the skills to get out and get the job that they need, or they may be in poor health. These are a broad range of issues that ought to be reflected in our debates about child poverty. In that context, I believe that in time, primarily through encouraging more people into employment, we will see the child poverty targets in the Child Poverty Act, which this Government signed up to and agreed to, achieved by their set target date of 2020.

[Lord Newby]

My Lords, the whole House can agree on one thing. We all want to support families with children and ensure that children in this country have the opportunity to fulfil their potential. We have been discussing how we attempt to achieve that in the extremely difficult economic times in which we live.

I will spare noble Lords my speaking notes on the economic context, as we have already had a full debate on that. The only point I make in passing, in respect of the Opposition’s policies on deficit reduction, is that they passed legislation saying that by the forthcoming financial year it would be illegal not to have halved the deficit. It is therefore particularly surprising that they seem to have had no plan at the time to do it and have given no indication since of how they might have done it.

However, I must remind noble Lords again of the baseline from which these savings are being made. Tax credit expenditure increased by 340% under the previous Government compared to the benefits they replaced. Eligibility for tax credits was extended to nine out of 10 families with children and tax credits and child benefit accounted for £42 billion this year, which is over 40% of working-age welfare expenditure.

I will give noble Lords one other piece of context. The latest OECD figures show that of all the developed countries the UK, along with Ireland, spends the highest proportion of its national income on family benefits. We are not a country that takes these things lightly or a country that has not given very high priority to supporting families. We believe that that is absolutely a right priority and we support families with children as much as we can in the circumstances. Child benefit and tax credits exist to do that. However, as we have said, we have to focus resources where they are needed most.

A number of noble Lords, including the right reverend Prelate the Bishop of Leicester and the noble Lord, Lord Bates, have mentioned that this Bill is only one of a large number of measures that the Government are taking which affect families with children, in particular poor families with children. The noble Lord, Lord Bates, referred to the pupil premium, which will cost the Government £2.5 billion by next year. This will be worth £900 per disadvantaged child—and that is £900 in hard times. We are extending flexible support for early education. Since 2010, all three and four year-olds have been entitled to 15 hours of free childcare and we are extending this to 260,000 disadvantaged two year-olds from this year. This is immensely important to these families and it will be worth around £2,900 a year for the poorest families who benefit—£2,900 extra per family. We have found these hugely significant sums of money by making reductions elsewhere, because we place such a large priority on the poorest families.

As the noble Lord, Lord Bates, said, we protected the schools budget and the NHS budget. We are spending £1.2 billion on capital expenditure in schools. However, as the noble Lord, Lord Forsyth, has said, one of the most important things we have to do is leave our children and grandchildren with a lack of deficit or a deficit that they can manage. The savings in the Bill attempt to begin to do that.

The first group of amendments would remove child benefit, child tax credit and the lower rate of disabled child addition in universal credit from the Bill. This would remove nearly half the savings from the Bill, which is around £900 million in 2015-16. I should like to make a further point on universal credit, although it has not been the subject of much debate in this group of amendments. I am sure we will be dealing with this important issue in more detail when we debate Amendment 3, to which my noble friend Lady Stowell will respond. Suffice it to say that part of the principle underlying the decisions we have taken on disability and universal credit is the need for simplicity and our desire to target support to the most severely disabled children.

The right reverend Prelate the Bishop of Ripon and Leeds referred to child benefit and expressed his concern that it had been frozen or taken away from the highest earners. What he did not say was that the Government have increased child tax credit by £180—more than inflation—to more than cover, in the first few years, the reduction in child benefit. Taking child benefit and child tax credit together, we have tilted the expenditure away from affluent families and put more of the cash into poorer ones. I think that is a sensible priority and I am surprised that he appears not to agree.

A number of noble Lords have talked about the impact of the Bill on child poverty. As has been pointed out, the Bill is forecast to increase the number of children in absolute poverty by 200,000 and the number in relative poverty by 200,000. For the avoidance of doubt and in answer to the point made by the noble Baroness, Lady Sherlock, my noble friend Lady Stowell wrote to the noble Lord, Lord McKenzie, copied to other noble Lords, on 13 March. Her letter contained the figure about absolute poverty so, far from seeking to avoid mentioning it, we chose to circulate it. I am not saying that absolute poverty is not something we should be extremely concerned about but the term does not mean what most people think of as absolute poverty. The definition of absolute poverty is 60% of the median income in 2010-11 uprated to take account of inflation. The 200,000 children mentioned in respect of absolute poverty are very largely the same as the 200,000 who are mentioned in terms of relative poverty. You certainly cannot add those two numbers together.

At previous stages of the Bill, we have discussed the definition of child poverty and the importance of tackling child poverty. We know that if we focus on the relative income line we get some very odd results. We have pointed out previously that in 2010 300,000 fewer children were said to have moved out of poverty, not because anything changed in their lives but because the rest of society got poorer. The estimate on the impact of this Bill does not take account of policies which would cause child poverty figures to move in the other direction, such as universal credit which is expected to lift up to 250,000 children out of poverty, depending on the effect of the minimum income floor. We take the issues of cash and poverty, as currently defined, very seriously, but we also think that we need a broader definition of child poverty. That is why the Government are currently consulting on a wider definition. As I set out two weeks ago, and repeat today, this Government remain committed to eradicating child poverty. We believe that income will remain an important part of any new measure on child poverty, but focusing our resources on benefits alone is not enough. We have to take action to tackle the root causes of poverty, some of which I have described today.

I also take this opportunity to mention, as an example of what the Government are doing to support children and families in work with children, the announcement made today by the Prime Minister and Deputy Prime Minister concerning increasing eligibility for support to five times as many families as is currently the case through a new tax-free childcare scheme. Families where the parents are in work will be able to claim 20% of their childcare costs—equal to the basic rate of income tax—up to £6,000. The scheme will be phased in from the autumn of 2015. More than 2.5 million hard-working families will be eligible to benefit from these new proposals, compared with existing schemes offered by fewer than 5% of employers. Families on tax credits will be eligible to receive support for 70% of their childcare costs, and we have already committed an additional £200 million in universal credit, helping 100,000 more working families.

Today’s announcement of that further £200 million of additional support in universal credit will provide working families with the equivalent of 85% of their childcare costs where the lone parent or both parents pay income tax. That additional support will improve incentives to work and ensure that it is worth while for low and middle-income parents to work up to full-time hours. It will be phased in from April 2016 when childcare support moves from tax credits to universal credit. Together, these proposals will help to ensure that working families are not held back by the costs of childcare. They will remove disincentives to work for many mothers and provide flexibility and support for businesses to generate employment.

I hope I have been able to provide some reassurance that, although we are taking difficult decisions on welfare, they are necessary decisions. We are prioritising limited resources so that they go to measures that help families with children as well as those who aspire to work hard and get on. I therefore ask the right reverend Prelate to withdraw his amendment.

[The Lord Bishop of Ripon and Leeds]

My Lords, I am grateful to all those who have taken part in this debate and, indeed, to the Minister for his extended response to the discussion. I am grateful to the noble Baroness, Lady Sherlock, for her support and for the information that 200,000 children will be in absolute poverty as a result of the Bill. We have also recently had information from the Trussell Trust about the number of children who are now being fed through food banks.

I thank the noble Lord, Lord Forsyth, for his contribution, but this is not simply a variation on the previous amendment. For one thing, it would cost only half as much at £0.9 billion, rather than the £2 billion to £3 billion which has been mentioned in relation to the whole Bill.

There have been a number of suggestions—not just from me but from a collection of other people—as to how this money could be raised. At an earlier stage in our discussions on the Bill, I made suggestions and the noble Lord, Lord Newby, responded that they were indeed possibilities but not ones that fitted in with the Government’s current priorities. That is a perfectly fair response but it is not fair to say that taxing the winter fuel allowance or dealing differently with things such as free television licences, tax relief on pension contributions, national insurance contributions or employer pension costs and so on are not possible. They are possibilities. I was not quite sure what—

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[Lord McKenzie of Luton]

My Lords, we are debating a different Bill. If the noble Lord wants to debate a proposition about public sector pay, let us have some propositions and we can consider that. The noble Lord knows full well that he is trying to lead the Opposition in a particular direction.

I come back to the point that the amendment of the noble Lord, Lord Kirkwood, is very straightforward. It just says that an automatic 1% uprating would not apply automatically if inflation reached a certain level. That seems entirely unobjectionable and I cannot see why the Government cannot accept it. If the Government do not accept it, they have to say what level of inflation, what level of real decrease in people’s circumstances, they would find acceptable, because that would be the consequence of rejecting the amendment. This is a very modest proposition. I really am surprised at the trouble that the Government are having with accepting it. I would hope at least that the noble Lord’s colleagues would stick with him on this issue as the arguments that we have heard against it are quite spurious.

[Lord Newby]

My Lords, the first amendment in this group in the name of my noble friend Lord Kirkwood would mean that the Bill would apply only if inflation was below 3% for the purposes of uprating in that year.

I shall provide a reminder of what the official inflation forecasts currently show. While inflation is forecast to be above target—that is, 2% in the near term—it will fall back towards the target in the medium term. In the final year of the Bill, the current forecasts show that inflation for the purposes of uprating in that year will be 2.2%. That was the view of the Office for Budget Responsibility at the time of the Autumn Statement. The OBR produces independent and authoritative forecasts for the economy and public finances and we take decisions based on them.

However, the OBR is not alone in forecasting that inflation will fall back to target in the medium term. That is also the view of other major economic forecasters. I refer to the IMF, the OECD and the Bank of England. Indeed, the latest assessment of independent forecasters in February was that UK inflation would be 2.2% in the 12 months to quarter 1 of 2014 and in the 12 months to quarter 1 of 2015. That is an average assessment of people who make their living by doing this job.

The noble Lord, Lord Kirkwood, said that he thought there was a 50% chance of inflation being over 3% in the period covered by the Bill. I remind the House that that means a 50% chance that inflation will be over 3% by September 2014, because that is the last point at which the Bill has an effect in terms of benefit uprating. All I can say to my noble friend, for whom I have the greatest regard, is that his view is just not shared by any reputable international or national body that is making forecasts about inflation.

[Baroness Hollis of Heigham]

In that case, why do the Government have any problem in accepting this amendment?

[Lord Newby]

I am coming on to that. In fact, I will deal with it now. It is relevant to the point that was made by my noble friend Lord Forsyth. The purpose of the Bill, as we have debated about 20 times since Second Reading, is to give some certainty to the Government’s fiscal plans. The reason we are doing that is that a number of international bodies and rating agencies have said that this has a specific and significant impact on the way that they view the UK’s prospects. Entrenching something in a Bill has the effect of giving a degree of certainty, which is immensely useful with regard to the markets.

As my noble friend Lord Forsyth has said, there seems to be a sense that the markets think that we in the UK are in a very good position and that a little tweak here and there in terms of borrowing will make no difference. That is not the way the markets work. It starts off with a little tweak and then the markets feel that something is going wrong. Once that feeling takes hold, the markets can move very quickly.

As we have debated many times in your Lordships’ House, it does not need much of an increase in inflation to make a huge difference to the Government’s finances and the lives of ordinary people.

[Lord McKenzie of Luton]

Can the noble Lord tell me how the markets have moved in response to the Government borrowing £200 billion more than originally planned?

[Lord Newby]

The reason why they have not moved is that the Government have not changed our underlying policy.

The effect of a 1% increase in inflation on someone with a £100,000 mortgage is £1,000. These are big differences and a 1% increase in the interest rate is by no means out of line with the interest rates being paid by a raft of European countries whose borrowing as a percentage of GDP is significantly less than ours. The risk in terms of interest rates is real and present. It is not some airy-fairy possibility that would come into play only if the Government were suddenly to go mad and spend huge amounts of money. It can happen with a relatively small change.

The Government remain committed to low and stable inflation. As we have said umpteen times, it is good for individuals and for business and is a prerequisite for economic prosperity. That is why the Government set the remit for the independent Monetary Policy Committee to target inflation. The Chancellor will set the remit at Budget tomorrow, as usual. I do not know what the remit will be but I know it will not be, to quote my noble friend Lord Kirkwood, to loosen the constraints so that inflation rips. I am confident that the Government’s commitment to low inflation will remain.

My noble friend Lord Kirkwood and the noble Lord, Lord McKenzie, said, “What happens if, contrary to what the Government have said, inflation does rip? Suppose we have a circumstance that we don’t believe is going to happen”. If Governments legislated for every circumstance that they did not believe was going to happen, we would have Bills thousands of pages long. The Government can legislate and act only on the basis of a central assumption of what the future, in respect of the particular area of public policy they are dealing with, is going to be like, and that is what we have done here.

I turn to the issue that many people have faced and in many cases continue to face—real-terms reductions in pay. Inflation risk is something that everyone has to face in everyday life. We have been taking about public servants but let us just talk about them a bit more. Public servants have seen their pay frozen and then increased by 1%. When inflation rose to 5.2% in September 2011, many public servants were in the middle of a pay freeze. The Opposition supported that policy and there was no inflation guarantee within it. This includes, for example, many hard-pressed personal advisers in jobcentres who are on modest incomes and are having to see restraint in their pay in these very tough times. That is the right policy. However, the consequences have been that many out-of-work benefit recipients have seen higher cash—yes, cash—increases in their benefits payments over the past three years than many Jobcentre Plus personal advisers have seen in their salaries.

These are difficult but necessary decisions. We must remember the tough circumstances that many people in work have faced and continue to face across the country as we deal with the effects of the economic crisis. As I have said, we believe that this Bill is necessary to set out a clear and credible plan to make savings from welfare, help reduce the deficit and restore economic recovery. We are taking the tough decisions because it is necessary to give confidence to the markets. Adding to the Bill conditions such as those proposed by my noble friend Lord Kirkwood would diminish the confidence that we require.

I now turn to Amendment 12, in the name of the noble Baroness, Lady Morgan of Drefelin. This amendment would place a duty on the Secretary of State to instruct the Social Security Advisory Committee to commence a review of the level of uprating if inflation reaches 3.2% in any of the relevant periods as defined in the amendment. I hope that during this and previous debates both I and my noble friend Lady Stowell have been able to convey to the House that we understand and share noble Lords’ concerns about measuring the impacts of the Bill and all our reforms on individuals. However, as the noble Baroness slightly suggested in her speech, we believe that the amendment is unnecessary.

Noble Lords will be aware that we already have comprehensive arrangements in place to report on the impacts of government policy. First, we have already published a full account of the impacts of this Bill based on the forecast set out by the OBR. Again, these forecasts are broadly shared by the other main economic forecasters. Noble Lords will be aware that we have also published the child poverty impacts of the Bill. The Government already have a suite of ongoing reporting mechanisms in place and report on the levels of poverty every year in the households below average income series. It is only by looking at poverty issues in the round that we can have a meaningful debate about poverty. Noble Lords will be aware that the Government are currently analysing responses to their consultation on new measures of child poverty, measures that will attempt to capture the wider reality of poverty in the UK today.

Later this year we shall see the first of what will become an annual report from the Social Mobility and Child Poverty Commission, which will report on the Government’s progress towards reducing child poverty, in particular meeting the targets in the Act and implementing the most recent UK strategy. This commission, chaired by Alan Milburn, will report to Parliament and will enable detailed scrutiny of the Government’s work to eradicate child poverty.

Finally, the Government regularly produce an analysis of the cumulative impact of changes on households across the income distribution. This information is published by the Treasury at every Budget and other major fiscal events. This analysis will use updated inflation projections. We believe that it is a better approach than that in the amendment as it looks at the cumulative impacts of all changes rather than artificially isolating just one policy. The publication of cumulative impacts is a coalition initiative and was not produced by the previous Administration.

The Government have taken unprecedented steps to increase transparency and enable effective scrutiny of policy-making by publishing detailed distributional analysis of the impacts of their reforms on households. Our published distributional analysis goes further than that of any previous Government. Having these mechanisms in place means that we are confident that the Government will be able to scrutinise the effects of this Bill and of our whole suite of welfare reforms. I therefore ask the noble Baroness to withdraw her amendment.

Northern Ireland: Corporation Tax

Lord Newby Excerpts

Monday 18th March 2013 Lords Chamber

[Lord Lexden]

To ask Her Majesty’s Government, further to the answer by Lord Newby on 15 October 2012 (HL Deb, col. 1251) and the Written Answer by Lord Sassoon on 6 December 2012 (WA 187), when they plan to announce whether or not corporation tax is to be devolved to the Northern Ireland Assembly.

[Lord Newby]

My Lords, the joint ministerial working group on rebalancing the Northern Ireland economy has concluded its discussions on the potential devolution of corporation tax and reported its findings to the Prime Minister. The Prime Minister is committed to meeting the First Minister and Deputy First Minister on 26 March to discuss these findings.

[Lord Lexden]

My Lords, my noble friend will be aware of the deep concern that exists in Northern Ireland over this issue, which is taking so long to bring to a conclusion. I welcome very much the news that he gave us about the forthcoming meeting. Since the Republic of Ireland has a corporation tax rate of 12.5%, it is widely felt that Northern Ireland needs its own low rate to help it to compete for new inward investment. Will my noble friend confirm that there is widespread support among businessmen and employers in the Province for the devolution of corporation tax to the Assembly, and that all the main parties are in favour of it? Have their views been fully taken into account? Finally, I pay tribute to my noble friend and his colleagues for their commitment to rebalancing the Northern Ireland economy by stimulating the growth of the private sector, which the Province needs so badly.

[Lord Newby]

My Lords, I think that account has been taken of views expressed from many quarters. However, the complication, as the noble Lord will be aware, is that if the Northern Ireland Assembly were to cut the rate of corporation tax significantly, its own budget would have to be cut by an equivalent amount.

[Lord Wigley]

My Lords, will the noble Lord confirm that the Government have taken on board the recommendations of the Silk commission, which, in the context of corporation tax, recommended for Wales that, if Northern Ireland were to have corporation tax powers, so should the National Assembly for Wales? Given that the Government have welcomed the Silk commission’s first report, will he confirm that that will now happen?

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[Lord Newby]

I am not absolutely sure what the noble Lord is asking me to confirm because no decision has yet been taken on corporation tax and Northern Ireland. The Government are sympathetic to much of what has been said on the Silk report and are now in discussion, as he is aware, with the Government in Wales.

[Lord Shutt of Greetland]

My Lords, bearing in mind that it is the rebalancing of the Northern Ireland economy that is the reason for people being concerned about the rate of corporation tax, and that is why the joint ministerial group gathered, were there any other ideas that came from that group that would assist the rebalancing of the Northern Ireland economy?

[Lord Newby]

My Lords, a number of measures were announced in the Autumn Statement aimed at rebalancing, or rather promoting, the Northern Ireland economy, including another £132 million of capital expenditure, science and technology funding for the research partnership at Queen’s University and the slightly earlier decision to give the Northern Ireland Assembly decision-making powers over air passenger duty on long-haul flights.

[Lord Richard]

My Lords, as I understand it, the noble Lord, Lord Wigley, was asking the noble Lord to confirm that if this happens in Northern Ireland, the Government accept that it would happen in Wales, too. Can he confirm that?

[Lord Newby]

My Lords, that is something that we will confirm once we have a final decision in Northern Ireland.

[Lord Foulkes of Cumnock]

My Lords, does the Minister agree that any decision in relation to Northern Ireland does not constitute a precedent for any other part of the United Kingdom because Northern Ireland is the only part of the United Kingdom that has a land border with another European Union country?

[Lord Newby]

My Lords, that is the reason why this has become such a big issue in Northern Ireland. The same considerations do not apply elsewhere in the United Kingdom, although I remind the House that the differential between the rate of corporation tax in Northern Ireland and the rate in the Republic of Ireland is now significantly less than it was when this Government came into office.

[Lord Browne of Belmont]

My Lords, will the Minister confirm that the Government will take steps to ensure that any reduction in corporation tax rates in Northern Ireland does not lead to a proliferation of artificial tax avoidance arrangements such as the manipulation of transfer prices and formation of shell companies, which could lead to a loss of tax revenue both in Northern Ireland and in the rest of the United Kingdom?

[Lord Newby]

My Lords, that is one of the issues which obviously has to be considered as part of this overall discussion. As the House knows, the Government take artificial tax avoidance schemes extremely seriously.

[Lord McAvoy]

My Lords, I welcome the fact that, after two years of dithering, the Government look as if they are finally coming to a conclusion and a response. However, does the Minister agree that we need action now and not just on the issue mentioned here? Will the Government support our proposals temporarily to cut VAT, give support to small businesses through national insurance breaks and bring forward major infrastructure projects—all of which will give real help to business, construction and manufacturing, get Northern Ireland’s economy moving and put young people back to work?

[Lord Newby]

No, my Lords. Sadly—from the noble Lord’s point of view—we will not be supporting the noble Lord’s proposals, not least because, taking just the VAT proposal on its own, it would cost about £12 billion. I am not sure where he suggests we should get that money from.

[Lord Mawhinney]

My Lords, is not the major but unspoken problem that there would be widespread concern that, if corporation tax was devolved to the Northern Ireland Assembly, the Scottish Government would wish to be treated in a similar fashion? If that were the case, by how much would the budget of Scotland have to be reduced from central moneys if corporation tax in Scotland was reduced to 12.5%? Would the Minister expect the First Minister of Scotland to demand that the Scottish budget not be reduced by that amount?

[Lord Newby]

My Lords, it would not really be at the discretion of the First Minister of Scotland because the Azores criteria mean that if there is a differential cut of tax the region or nation that bears that cut has to take the full fiscal consequences of doing so. I do not have the figure on the cost of such a cut to Scotland. However, bear in mind that the estimate of such a change in Northern Ireland is that there will be a cut in its grant of between £300 million and £400 million. I think that the noble Lord can scale that up for Scotland.

Taxation: Avoidance

Lord Newby Excerpts

Thursday 14th March 2013 Lords Chamber

[Lord Collins of Highbury]

To ask Her Majesty’s Government whether they will consider new measures to force British companies to disclose any tax avoidance schemes that could be detrimental to poorer countries, and to support them in taking corrective action.

[Lord Newby]

My Lords, the UK plays a leading role on tax transparency internationally, but it is not possible to extend UK disclosure rules to other countries. Parliament has limited powers to legislate for territories outside the UK. The Government have other policies to assist developing countries more directly by, for example, building their capacity to establish and maintain effective tax systems of their own.

[Lord Collins of Highbury]

I thank the Minister for that response. David Cameron’s pledge to tackle tax avoidance as part of the UK presidency of the G8 needs to move from words to deeds. We cannot use the need for international action as an excuse for going at the pace of the slowest country. The UK should be a global leader, so will the Minister confirm that the Government will use their position at the G8 to make serious proposals that will make a substantial difference to the revenues of the poorest countries in the world?

[Lord Newby]

My Lords, I think the Government are a global leader in this area. We are taking a lead at the G8, and have taken the lead in the OECD to get the international tax rules changed. However, the other component that we are also taking a lead in is helping poorer countries to develop their own tax collection abilities. For example, work that HMRC has done in Ethiopia resulted in a sevenfold rise in the amount of tax collected in that country in the nine years from 2002.

[Baroness Gardner of Parkes]

Can the Minister tell me why, on the Inland Revenue tax return that one has to complete, one is asked to specify if one belongs to any approved tax-avoidance scheme? Can he tell me how a tax-avoidance scheme gets to be an approved tax-avoidance scheme, and what exactly that means on your Inland Revenue tax return?

[Lord Newby]

My Lords, there is something called DOTAS—the disclosure of tax avoidance schemes—which was introduced in, I think, 2004 and requires people who have come up with a tax wheeze to consult HMRC. If HMRC believes that it is a legal scheme, it gives it a number. That is the number you are supposed to put on your tax return if you subscribe to that scheme.

[Lord McConnell of Glenscorrodale]

My Lords, will the Government agree that both transparency and, as the Minister has already said, capacity, are absolutely vital here? Will they ensure that everywhere the UK provides budget support to a developing country, one of the key elements of that budget support is building the capacity for the right laws, the enforcement, and the collection of taxes to be in place inside that country?

[Lord Newby]

Yes. This is an area to which DfID is giving increasing priority. Last year we supported 48 programmes in 20 countries and spent £20 million in this area. Of course, the extent to which we can do it in any country depends on an assessment of that country’s capacity to take advice and act on it.

[Baroness Kramer]

My Lords, I very much support the GAAR, the general anti-abuse rule, which the Government are bringing in to deal with abusive tax avoidance, but would the Minister agree that the version that the Government are looking at is very narrow, with the double reasonableness test? If it proves ineffective, would it not be wise to review that test sooner rather than later?

[Lord Newby]

The road to the GAAR, as it were, was long and difficult. As the noble Baroness will know, it was resolutely opposed by the party opposite when it was in government. We are making a proportionate start, and hope that it will be successful in dealing with the most egregious tax avoidance schemes. The great thing about it is that it is a deterrent. It will definitely be kept under review, but it is a big step forward, and we should not underestimate that.

[Baroness Symons of Vernham Dean]

My Lords, the noble Lord mentioned tax avoidance in the context of the G8, which this country is hosting later this year. Are there any plans to involve HMRC in discussions on the Deauville process with regard to the Arab countries in transition that want or need to look again at their tax systems?

[Lord Newby]

My Lords, I think there is a willingness on the part of HMRC and the Government more generally to work with any country that seeks to do that. As I say, we are already working with 20 countries. In recent months, DfID and HMRC have been looking together at how to put together a business case to allocate more resources to this area. The interesting thing about it is that this is a relatively new area. We have realised that we have expertise that can make a big difference to a whole raft of developing countries, and we are very keen now to capitalise on it.

[Lord Phillips of Sudbury]

Will my noble friend accept that when British companies are involved in tax avoidance schemes abroad, it invariably has a British dimension, and that, sadly, some tax avoidance schemes are plain fraudulent? Is it not therefore essential that HMRC should have much more and better quality staff? Frankly, at the moment, there is a gross inequality of arms.

--- Later in debate ---

[Lord Newby]

I absolutely agree, which is why the Government have put nearly £1 billion of funding into this area and why we have reversed the cut of 10,000 compliance staff that was made under the last Government. There are now 2,500 additional people in that area. That is why the people we are recruiting for this are increasingly highly specialised.

[Lord Wills]

My Lords, what consideration are the Government giving to persuading the G8 to require multinational corporations to produce country-by-country reporting of their tax payments so that not only can the tax authorities in developing countries be better informed about what these companies are paying but the people of those countries can be better informed, so that they can hold those companies and their own states better to account?

[Lord Newby]

The Government support country-by-country reporting for the extractive industries, where some of the worst abuses are taking place. We are currently looking at broader proposals for country-by-country reporting. On the point about expanding the principle more widely, we want to make sure that we get the costs and benefits right.

[Baroness Wheatcroft]

My Lords, does the Minister agree with me that the important thing, as we have heard, is to get global companies to pay their fair share of taxes everywhere, including in Britain? One way in which to ensure that we get more from them would be to look again at the transfer pricing regime.

[Lord Newby]

Absolutely. Because the transfer pricing regime is based on international rules, we have put more resources into the OECD process, which is moving forward reasonably quickly. An interim report was produced last month, and there is now a recognition that the rules have to be changed among the major European countries and the major countries in the G20. I sincerely hope that the rules will be changed.

Regional Development

Lord Newby Excerpts

Tuesday 12th March 2013 Lords Chamber

[Lord Wigley]

To ask Her Majesty’s Government how they will reduce the geographic disparity in Gross Value Added per head within the United Kingdom.

[Lord Newby]

My Lords, the Government are committed to supporting sustained economic growth across the UK. Economic development is a devolved responsibility in Wales, Scotland and Northern Ireland. In England we are promoting growth across the regions by creating local enterprise partnerships, giving cities the powers they need to drive economic growth via the city deals, and directly investing in and growing enterprises via the regional growth fund, which has now allocated some £2.4 billion.

[Lord Wigley]

My Lords, is the Minister aware of the figures for the inner London west area that show a GVA per head of over £111,000 compared with a figure of £11,000 or £12,000 for Anglesey, the Gwent Valleys, the Wirral and Durham? Is this not a gross disparity and should the Government not give much greater priority to overcoming this?

[Lord Newby]

My Lords, it is a very great disparity—and a disparity, as the noble Lord knows, of very long standing. The good news in terms of Wales is that in 2010 and 2011 GVA grew faster per head than in either England or Scotland, so there is a bit of progress. However, changing and reversing those regional disparities is going to be a long job and it will take a large number of measures to achieve it.

[Lord Peston]

My Lords, my noble friend asked the Minister a very good economics examination question, to which I am glad to see the Minister tried gallantly to find an answer. It is a very difficult question. Is he aware that most economists would argue in favour of the so-called convergence theory that free markets would lead to the right outcome and there would be convergence of the different regions? The only trouble with that marvellous theory, like so much economic theory, is that it is totally refuted by the facts. What the facts show—and this is a problem for any Government—is that once a region is ahead, it stays ahead. It is rather like the fact that very few teams win the Premier League, even though everybody could play marvellous football just by copying the best teams. Does that not mean that while the Government should intervene, particularly with infrastructure investment biased in favour of the relevant regions, they must proceed with the utmost caution in interfering with the way the markets are working?

[Lord Newby]

My Lords, as the noble Lord will be aware, we have had active regional policies to a greater or lesser extent in the United Kingdom since the 1960s. When I studied this at university, the figures were very much in my mind. The reason it is such a difficult issue to deal with is that, for example, in the north-east the proportion of people employed in the basic industries—mining, steel, shipbuilding and engineering—fell from something like 33% to well under 10% in a couple of decades. The challenge for government in trying to reduce regional disparities is how to put in place the kinds of long-term policies, such as infrastructure apprenticeships, that can begin to redress these wider economic forces. However, I do not think that government can reverse them, certainly not in the short term.

[Lord Bates]

My Lords, I welcome my noble friend’s recollection of the north-east of England and some of the history there. Did he have an opportunity to see the recent study in the Economist magazine about the north-south divide, which looked at the data between 1997 and 2010, pointing out that during that time in the north-east of England GVA grew by 41% and yet in the south-east of England it grew by 187%? Is that not part of the origin of the divide and is it not part of the correction to get good, well paid jobs in the private sector? If so, will he welcome the fact that employment in the north-east of England is at record levels, as are exports?

[Lord Newby]

My Lords, I very much welcome that, but I revert to my earlier answer. The north-east has in effect had to reinvent itself in terms of the balance of employment, which it has done reasonably well. However, it has been comparing itself, as my noble friend did, with the City, which has had an existing strength in financial services—one which grew almost exponentially during the period that he is talking about.

[Lord Elystan-Morgan]

My Lords, would the Minister not agree that, given the parlous condition of the Welsh economy, there would seem to be an unanswerable case for a reappraisal of the Barnett formula in the light of its incapacity to serve the acute needs of the land and nation of Wales?

[Lord Newby]

My Lords, as the noble Lord knows, the Barnett formula is much discussed. The Government are not planning to change the Barnett formula during the course of this Parliament. We are trying to find a more constructive way forward. The Secretary of State for Wales is working very closely with the First Minister of Wales, looking at a raft of specific measures—whether it is possible new borrowing powers for Wales or the business case for electrification of the north Wales railway—to bring about specific changes which, it is hoped, will boost growth in the medium to long term in Wales.

[Lord Morgan]

My Lords—

[Lord Barnett]

My Lords, the Barnett formula, which, sadly, bears my name, should have been changed a long time ago, as a powerful Select Committee of this House, chaired by my noble friend Lord Richard, and many other senior Members of the House have recommended. When is that recommendation going to be put into effect by the Government?

[Lord Newby]

Not during the course of this Parliament, my Lords.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013

Lord Newby Excerpts

Tuesday 12th March 2013 Lords Chamber

Moved By

[Lord Newby]

That the draft Order laid before the House on 30 January be approved.

Relevant documents: 19th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 7 March.

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013

Lord Newby Excerpts

Monday 11th March 2013 Lords Chamber

Moved By

[Lord Newby]

That the draft orders and regulations laid before the House on 28 January be approved.

Relevant documents: 18th and 19th Reports from the Joint Committee on Statutory Instruments, considered in Grand Committee on 4 March.

Motions agreed.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013

Lord Newby Excerpts

Thursday 7th March 2013 Grand Committee

Moved By

[Lord Newby]

That the Grand Committee do report to the House that it has considered the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013.

Relevant document: 19th Report from the Joint Committee on Statutory Instruments.

[Lord Newby]

My Lords, I am pleased to introduce this instrument which was laid before the House on 30 January. I am satisfied that it is compatible with the European Convention on Human Rights. The aim of automatic enrolment was to broaden access to workplace pensions and increase savings levels, often from a very low or zero start. Our job today is to consider the figures that will apply from April. This will be the second year of live running when companies employing between 10,000 and 250 people start to go live. The automatic enrolment earnings trigger determines who can save in a workplace pension. It sets the automatic entry point. The qualifying earnings band then determines how much people save and sets employer contribution levels.

This is a balancing act. Automatic enrolment is a tailored policy. It does not force pension saving on to everyone regardless of age, earnings or individual circumstances. In setting the figures in this instrument, our overall aim is to maximise the number of people saving who can afford it, while excluding those who cannot. To do this, we need to exclude those very low earners for whom saving on top of the pension they will get from the state may not make economic sense, especially while they have other family priorities.

We also need to provide low earners access to pension saving, with an employer contribution, if saving is the right decision for them. To meet all these aims, we need to bring in employers who have never provided a workers’ pension, or never paid into one, while being realistic about the costs that they will have to bear. We need to cap minimum employer contributions for higher- paid staff and let existing arrangements cater for this market. To deliver these several objectives, we need a system that makes sense for individual workers and their employers. The way that we set these figures can help to achieve this.

I think that we all accept the powerful arguments for income smoothing. We put money aside now while we have it and while we are earning so we have it in our retirement. But of course the very lowest earners may not have the cash now to sacrifice for retirement saving. That is why we believe that the automatic enrolment trigger should exclude those people who may not be well placed to make that sacrifice unless they themselves want to save.

Saving should be an individual decision for people whose earnings hover around the tax threshold. We believe the state’s role is to provide access to saving where automatic saving is not the right approach. That is why the right to opt in, with an employer contribution, is such an important feature of these reforms.

We fully recognise that any rise in the trigger disproportionately affects women. I want to be completely clear that we are not weighing equality against cost. Gender is not the issue. We think the outcome of this review is right for people on very low incomes, regardless of gender. In particular, we do not believe that it is right automatically to enrol people who do not earn enough to pay tax.

Nevertheless, as noble Lords will know, it is possible for non-taxpayers to get tax relief on pension saving depending on the scheme. This top-up may have an impact on pension savings. We are seeing evidence that schemes designed to cater for the under-pensioned market and those targeting low to moderate earners are using, or intend to use, the relief-at-source mechanism precisely because it helps low earners.

This illustrates the point that however carefully the policy targets the right groups, the enrolment process needs to work in practice. We know that people see their employer as the first port of call for anything connected with wages or their pay slip. Automatic enrolment will work best when it is simple for employers to understand, simple to administer and when pension contributions are simple to explain. We may not be quite there yet in all respects, despite some really clever and effective work from some of the lead companies to demystify pensions in the workplace. Aligning automatic enrolment thresholds with existing recognisable payroll figures can be of considerable assistance and this was strongly recognised in the response to the consultation. This will be the second year of live running and it is likely to be a challenging year, as activity starts to ramp up. The overall message we heard is that this is not the time to change course.

The automatic enrolment trigger does not exist in isolation. It is an entry point to saving that works hand in hand with the qualifying earnings band. The band sets a minimum definition of pensionable pay. In simple terms, if you earn £9,500-odd a year, you will pay pension contributions on anything over £5,500. This point about minimum savings is important. Some schemes will have their own definition of pensionable pay, perhaps more generous than the savings band we set today. We are setting a universal minimum quality standard for pension saving, rather than an aspirational target.

We have been debating how best to set the parameters for pensionable pay for automatic enrolment since the pensions commission reported in 2004. The commission originally recommended aligning private pension saving to the national insurance threshold for the state pension—at around £5,000. That was a starting point. It established a core principle: that private pension saving should build on the foundation of the state pension. The commissioners envisaged year-on-year rises, in line with average earnings.

Perhaps I may take your Lordships back to our target market of low-to-moderate earners. This is a group whose wages are less likely to increase by average earnings, so a qualifying earnings band that rises by average earnings will have a disproportionate impact on these people. We considered a variety of other approaches but perhaps I might deal here with the two distinct ones that came out of the consultation we undertook last autumn: abolishing the lower limit or freezing the band.

Abolition would mean putting contributions on earnings from pound one. This would add around £130 million to employer costs next year. It would also hit low earners very hard indeed, to the extent that pension saving could start to look like something to be avoided rather than embraced. As to freezing this year’s figures, we come back to the practical aspects of automatic enrolment. It should work in practice and it should be easy to explain and to understand. Thresholds that bear no relation to anything else on payslips would fail all those three tests.

As noble Lords will be aware, the national insurance contributions upper limit is going down. If we continue to align with national insurance, the upper limit of the qualifying earnings band would go down too. The upper limit serves two purposes. It caps mandatory employer contributions; it also distinguishes the target group of standard-rate taxpayers from earners in a higher tax band. Higher-rate taxpayers tend to have greater access to a pension scheme offering more that the minimum. The issue is whether a reduction in the top limit of the qualifying earnings band would have a disproportionate impact on the target group. The evidence suggests that it will not. Average earnings in the UK are around £26,500 a year. Average earners would not be affected by a change in a contributions rule that bites on people earning nearly £15,000 more than they do. The evidence suggests that the practical advantages of alignment outweigh a reduction in the nominal value of contributions for a subset of higher-rate taxpayers.

I said earlier that setting these thresholds is a balancing act. There is no perfect answer, either in theory or in practice. Nevertheless, we believe that we have used the evidence to consider how we can best achieve the policy intentions and have made reasonable judgments about the various trade-offs. We believe that these proposals continue to provide broad access to pension saving and maintain contributions for the target group. I commend this instrument to the Committee.

[Lord German]

My Lords, I have a single question on determining the balancing act which the Minister has just talked about. However, my question is in multiple parts. No one is more enthusiastic than I about the raising of the income tax threshold. I have used it in many speeches in your Lordships’ House to illustrate how we have taken many lower earning people out of the tax bracket altogether. However, this is an area where the balancing act does not necessarily work because of the use of the income tax threshold, which has risen well beyond the level of earnings increases and well beyond that of price increases. Here there is a negative aspect to that balance. The number of people who will now be excluded from the automatic element—the “automatic” in the title of the order—is about 420,000 individuals, of whom 320,000, or 76%, are women. The question that primarily worries me and should concern the Committee is whether these are people who should be saving for the future and will be able to maintain over a lifespan the appropriate level of saving for a worthwhile pension. This is where my question splits into several parts.

Of course, people who are excluded as a result of the above earnings increase in the income tax threshold can opt into the system. But there are ways of opting in that may not be as obvious as you might think to many people. I understand that employers are required to make the offer and provide information to their employees if they are below that threshold and within that bracket. Therefore, can the Minister tell me what is the actual requirement on employers to provide information? If it is a piece of paper stuck in an envelope along with the payslip, that may not be the most appropriate information source. This is a tricky area for people to understand and the information may not be being provided in a meaningful way. It should certainly be in clear language. There is probably a whole pension industry that has developed a language of its own in explaining what are essentially straightforward implications in a way that is often impenetrable to many people.

My second question relates to when people are excluded from the automatic element, the declared intention being that it may be inappropriate for some people to save for a pension. Will the Minister explain what “inappropriate” means to lower earners? In the Explanatory Memorandum it is quite clear that people may not need to save if the state will provide. But as noble Lords will know, the pension schemes that the state provides are not static. There is progress towards a single state pension, which may make a difference to the way in which people see their pensions over a longer period of time.

I understand that if people will be low earners for the whole of their working lives it may not be appropriate because they might find that they would get a better deal from just relying on the state. But you cannot determine what the state will provide in 30 or 40 years’ time when you are entering the jobs market at the beginning of your life span. I would be grateful for an explanation of what makes these pension contributions inappropriate for some people.

The third element to the same question is about the relief at source. The Minister has already spoken about that for people who are below the income tax threshold. They can still, using the RAS scheme, benefit from having the tax contribution taken off at source. Do the Government have any intention of promoting the relief at source in order to assist people when making a decision about whether they want to opt into the system? Do they have a view about whether that is something that should be promoted? It is another useful piece of information. If you were told that it would cost you less than if you were paying tax, you would naturally look differently on any contributions that you might have to make. With those few questions rounded into one major question with many parts, I am pleased to support the order.

[Lord McKenzie of Luton]

My Lords, I start by thanking the noble Lord, Lord Newby, for introducing this order. I find myself on pretty much precisely the same page as the noble Lord, Lord German, concerning the points and questions that he raised. When we considered this matter in May last year, we looked forward to the introduction of auto-enrolment and acknowledged the contribution of the many people along the way who had made it happen. Indeed, we also acknowledged the role of this Government in taking it forward. Perhaps this would be an opportune moment to seek an early update on how it is all going.

As we set out last year, we see the merit of simplicity in the earnings band limits being aligned with the national insurance lower and upper earnings limits. This is notwithstanding that the raising of the former and the reduction of the latter means that the band is squeezed by some £1,100 for the upcoming year, with the Government estimating a reduction in pension savings of some £30 million. However, we welcome the fact that the broader definition of earnings, or its equivalent in other schemes, is being retained.

Our main concern, which I am sure will come as no surprise to the Minister, is the one touched upon by the noble Lord, Lord German, of raising the earnings trigger to the new personal allowance level. On the Government’s own figures, this will exclude around 420,000 individuals, 76% of whom are women. Of course, this is on top of those who have been excluded by aligning the trigger to the personal allowance threshold in the current year. We have heard some of the justification for that. It concerns simplicity and whether people are in a position to afford to save.

However, it seems that there is a breakdown in the Government’s logic. Let us say that the Government got the balance right in the current year. Looking at the current year, why should the increase in the personal allowance for other policy measures, which we may or may not agree with, by more than the rate of inflation and more than earnings cause the balance in adjustment as to what people can afford still to equate with the personal allowance threshold? I do not think there is a logical connection between the two. However, we are where we are on that.

The Government’s explanation was that persistent low earners tend to find that, through pensions and benefits, the state provides a level of income in retirement similar to that in working life. Of course, that assumes that today’s low earners will be tomorrow’s low earners. We would hope that as a matter of government policy that would not be the case. The noble Lord, Lord German, touched on the much heralded single-tier pension, which is supposed to negate the need for earnings-related support in the future. It takes us back to the big debates that we had around “pays to save”, when the whole concept of auto-enrolment was being considered and the structure was being put in place. If the single-tier pension is to be introduced and is successful, negating a whole raft of earnings-related means-tested support, that should make it easier to make the judgment about when it will pay to save.

I turn to the issue of tax relief and relief at source. If people are excluded from auto-enrolment due to the personal tax threshold, they are potentially missing out on this chunk of government support. The noble Lord, Lord German, raised absolutely the right point by asking what employers are required to do to make sure that people are aware of this potential benefit. I hope that the Minister can confirm that there is absolutely no intention of changing the structure of tax relief. I think it was confirmed last year that NEST will operate the relief-at-source system, so anyone who was going to be enrolled or who wished to opt into NEST would receive the benefit of that tax support.

I end on the same point as the noble Lord, Lord German, which is: if this is the way things are going to go and if there is to be this increasing raising of the threshold, which will really change the landscape over time if it continues, what publicity will be given to the right to opt in? That becomes ever more important if the threshold is to continue to be raised. What are the Government planning to do generally? What are the requirements on employers, so that those who miss out on auto-enrolment at least have the chance to consider the opt-in route? The key point of auto-enrolment was to deal with inertia, to get people into pension saving because they had to make a decision to opt out. Once you remove that requirement from them, inertia reverts and the onus is on individuals. I think that they have to be above the lower earnings limit to opt in. What support and encouragement will they be given? They should at least know that they have the choice. Given what is happening to the personal tax threshold, that is a key issue for us.

[Lord Newby]

My Lords, I thank both noble Lords who have contributed to the debate. The questions have been about not the people who will be automatically enrolled but those who might or might not.

Part of the context for this is that even with the uprating of the tax-free limit, in terms of income level we are talking about 29 hours at the minimum wage, so the vast bulk of people in the category we are discussing—people who could join if they wish but who are not automatically enrolled—are likely to be part-time workers. That comes to the final point of the noble Lord, Lord McKenzie, about what their career paths will be. I would expect quite a number of people in that category now would not necessarily be part-time workers for the rest of their lives. A lot of them will be women with children, who may go on to have a full-time job when their children are older, and we would hope that they would do so if that is appropriate. Of course if they do, they would then be automatically enrolled.

On how we make sure that people know of their rights, which is obviously important, employers must write to employees with information about rights setting out the full picture. The department has developed a language guide and template letters to help employers to communicate clearly with people new to pension saving. I must say that I have not seen that letter. I will now make it my business to read it. If it is a letter that communicates clearly on pensions, it will probably be the first one that I have seen. I am sure that the finest minds in the department have been worrying about that. It is a major problem. By and large, people are ignorant about their pension savings and pension options. It is a challenge in any scheme, but particularly here, where a lot of the people who may be in this category will never have had a pension before. I will enjoy reading that letter.

The noble Lord, Lord German, asked for a definition of “inappropriate”. It is easy to see why for a single-parent family with children, where the mother is working part-time, it is not so much inappropriate as impossible. There just is not the amount of money in the household to enable much saving to take place. Another example of where it might be inappropriate would be if a household had built up debts and had large outstanding payments due, as many people on low incomes do. It would probably be in their financial interest to try to get those debts down before undertaking any savings. I am not sure that is the complete answer but I can see circumstances where, if you were a debt adviser or financial adviser to people who had got into debt and were on low incomes, you would be advising them to pay off those debts first.

There was a question about relief-at-source schemes and how these will be made clear. I hope that the letter explaining to people what their requirements are also explains the relief-at-source mechanism, and I will be looking at that. If it is able to do that in very clear terms, that will be an even greater achievement. I have great confidence in officials at the Department for Work and Pensions being able to clarify what most people find opaque. We are still looking at how relief-at-source schemes are operating as the new system rolls forward. The evidence so far is that schemes aimed at this population are actually using relief-at-source, so at least in that respect the system is working well.

The noble Lord, Lord McKenzie, asked how many people have been auto-enrolled and how this process is going. We expect that by this April at least 1 million individuals will have been automatically enrolled. The early signs are very positive: some big employers who have gone in first are reporting very low opt-out rates. However, the department has a full evaluation programme and we will be able to produce our first reports on this in the summer.

The noble Lord, Lord McKenzie, also asked whether it was the intention to change the relief-at-source rules. This is a Treasury matter, and we are near the Budget, but I think it is fair to say—and if I am sacked for this I shall blame the noble Lord, Lord McKenzie—that I am not aware of any intention to change the relief-at-source rules. I hope I have answered the questions that noble Lords have asked me.

[Lord McKenzie of Luton]

If the noble Lord gets sacked for that statement, I shall campaign on his behalf. When he has got over the excitement of reading the letter that he is going to peruse, would he share it with us? That would be helpful.

[Lord Newby]

I will, because it deserves to have the widest possible readership. With those comments, I commend the order.

Motion agreed.

Taxation: Income Tax

Lord Newby Excerpts

Wednesday 6th March 2013 Lords Chamber

[Lord Greaves]

To ask Her Majesty’s Government what measures they will take to ensure that wage-earners who are below the income tax threshold will benefit from any future increases in the personal allowance.

[Lord Newby]

My Lords, since 2010 the Government have announced successive increases in the personal allowance totalling £2,965. Taken together, these changes will ensure that more than 2.2 million low-income individuals will be removed from income tax altogether. The Government are also taking other measures that will benefit those who are below the income tax threshold, including the introduction of universal credit, support on childcare and the pupil premium.

[Lord Greaves]

My Lords, some 4,300,000 employees already earn too little to benefit from the increase in the personal allowance this year—which I fully support—and this will rise to nearly 5 million workers in 2013-14, about 17% of the labour force, of which two-thirds will be women. How can it be right or fair that a policy trumpeted as helping low-paid workers does nothing for the lowest-paid 5 million? Will the Government look seriously at new ways to end this unfair situation?

[Lord Newby]

My Lords, some of those 5 million were paying income tax until we took them out of income tax, so they have benefited significantly from the changes that we made. The vast bulk of those 5 million are people in work who are not working full time, so one of the key things that we have to try to ensure is that more people are working full time. One of the better statistics on the labour market—which had a good year in many respects last year—is that 32,000 people who were working part time and who wanted to work full time got full-time jobs in the last quarter of last year.

[Lord Morris of Handsworth]

My Lords, interesting as it is to be debating the tax and benefits system, is not the real answer here the rapid and vigorous promotion of the living wage? That will do more for the poor than the tax and benefits system as outlined by the Minister.

[Lord Newby]

My Lords, the living wage is one component in supporting the poor, and the Government have made it clear that they encourage people to use it. However, for many people who are poor the key thing is to get into work and, having got into work, to work the number of hours that are compatible with the family circumstances in which they find themselves. Particularly via the universal credit, we are taking steps to make sure that work always pays and that people are indeed encouraged to take up the maximum number of hours that are appropriate for them.

[Lord Forsyth of Drumlean]

My Lords, while congratulating the Government on raising the threshold at which people pay income tax—an ideal which was first put forward by my noble friend Lord Saatchi—perhaps I may just ask whether they have any plans to raise the threshold at which people pay national insurance. Many of the people to whom the noble Lord, Lord Greaves, referred are still paying national insurance at very high rates, and national insurance is a tax. Would we not be wise to merge national insurance and income tax so that people realise just how much is being taken out of their pay packets?

[Lord Newby]

My Lords, the Government do not have any plans to raise the threshold for national insurance simply because—as noble Lords will be aware—to do so would be extremely expensive. The Government looked at merging national insurance and income tax but have decided that they will not take that consideration any further forward for the course of this Parliament.

[Lord Brooke of Alverthorpe]

My Lords, is it not true that the 5 million people who may have benefited from the changes have in fact had to pay extra VAT since this Government came to power? They are all paying 2.5% extra in VAT. Could we not look for a reduction in the VAT rate, which in turn would then be a great stimulus to the economy?

[Lord Newby]

My Lords, the Government do not think that a reduction in the VAT rate makes any sense at this point. A 1% reduction in the VAT rate costs about £12 billion. If we were to reduce the VAT rate, we would have to find that £12 billion from somewhere else—so we do not propose to reduce it.

[Baroness Gardner of Parkes]

Is any thought being given to rates of pay for the self-employed? We have heard about the living wage, which is great, and even the basic wage is something, but I meet so many people in caring jobs who are earning less than £2 an hour. How can they live on that? The employer, who is usually employing them directly, has no obligation whatever to pay any more than that. These people are often a bit intimidated but they continue to work for that sort of miserable amount because they really care about the person.

[Lord Newby]

My Lords, as the noble Baroness knows, we have minimum wage legislation. That is the route to ensuring that people are paid a decent minimum wage.

[Baroness Farrington of Ribbleton]

My Lords, will the Minister admit that some of the people to whom I think the noble Baroness, Lady Gardner, was referring are classified as self-employed and therefore are not protected under the national minimum wage legislation? Will he write to me with details of the reductions in benefit that will occur for those who earn too little to benefit from the subject matter in the Question asked by the noble Lord, Lord Greaves, and who will therefore be losing money twice?

[Lord Newby]

I am always happy to write to the noble Baroness. On the first point she raised, if one is self-employed, the only person you can look to to pay your salary is yourself. If you earn money yourself, you are able to pay yourself well. If you have a contract with somebody as a self-employed person, you should be looking to be paid at least the minimum wage under that contract. However, many self-employed people do consultancy work of various sorts for a fixed price or produce goods and the extent to which they earn an income depends on the extent to which they are able to sell what they produce.

[Lord Davies of Oldham]

My Lords, the noble Lord’s Answer to his noble friend Lord Greaves was pathetically thin against a background where, as he must surely appreciate, unfairness is perpetrated very heavily against the low-paid and the poor, for whom the Government have scant regard, having of course withdrawn significant numbers of benefits from them. When will the Government address the fact that the economy is so lacking in demand that we are in the worst depression for 80 years? Ministers are not matching up to the challenge presented.

[Lord Newby]

My Lords, for most people the most important factor in the economy is whether they have a job. Last year, an additional half a million people got a job and it was a major step forward in their personal circumstances. The labour market has performed well, and it continues to perform well, and all forward indicators in recent surveys suggest that, across all sectors, even more people are likely to be employed in the near future.

EU: Eurozone Financial Transaction Tax

Lord Newby Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, on 14 February, the European Commission published a proposal for the implementation of a financial transaction tax through enhanced co-operation. The UK has the largest financial sector in the EU. The Government oppose the European Commission’s initial proposal for an EU-wide financial transaction tax and the UK will not be participating in an FTT introduced through enhanced co-operation by a group of member states. We are currently studying the draft proposal carefully to understand its impacts and will continue to engage fully in discussions going forward.

[Lord Willoughby de Broke]

My Lords, I am grateful to the Minister for that Answer as far as it goes, but, reading the newspapers and the Commission’s proposals, I believe that the United Kingdom will be affected. Can the Minister confirm that UK tax policy is made in Parliament and not by the European Commission and a gaggle of member states which are jealous of the City’s pre-eminence in financial services? What actions will the Government take to protect our special interests in this matter?

[Lord Newby]

My Lords, as I said in my original Answer, we are fully engaged in discussions going forward. If the FTT is introduced, it will have a number of impacts on the UK. The Government are in the process of assessing what those impacts might be.

[Lord Forsyth of Drumlean]

My Lords, can my noble friend tell us how much the European Commission expects the tax to raise? Will it not be pensioners and consumers who have to pay it?

[Lord Newby]

My Lords, the estimate that the Commission has produced is that the tax would raise €35 billion. It would not be raised from all financial institutions across the EU; it would be raised only from those established in countries which levy the tax. A tax such as this, which covers things like shares, trickles down through multifarious channels but, obviously, at the end of the day, a very large number of people end up paying a small amount towards it.

[Lord Barnett]

If the treaty eventually proposes a tax that would affect this country, will the Minister make it clear that we would veto it?

[Lord Newby]

My Lords, the noble Lord needs to understand the difference between a tax which we would levy, where there is a veto, and a tax which we would help collect, of which there are a number of existing examples in EU law and this would be another.

[Baroness Wheatcroft]

My Lords, does my noble friend agree that a tax which was to some extent a deterrent on frequent trading—for instance, algorithmic trading—might not be such a bad thing if it encouraged long-term investment in shares?

--- Later in debate ---

[Lord Newby]

My Lords, I am sure that many noble Lords share that aim. The question is whether such a tax would have that impact, and the academic work on it is ambiguous at best.

[Lord Eatwell]

Will the noble Lord explain why the Government are so allergic to the financial transaction tax, which is to be levied at less than 1% of the value of transactions and by many countries, whereas we are quite happy to have stamp duty levied on transactions at 5%, which is effective only here in the UK?

[Lord Newby]

My Lords, we have some examples of where this kind of thing has been done in the past. In 1989, Sweden introduced its version of an FTT and in the first week the volume of bond trading fell by 85%, even though the tax rate was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. Not surprisingly, Sweden is not now supporting the idea of a Europe-wide FTT.

[Baroness Kramer]

My Lords, the original concept of the financial transaction tax was that it would be global and that the funds would be used to assist the developing world. Have the British Government considered that, as many politicians on all sides support those concepts, they might take leadership in this global role, which might strengthen their hand in these much more parochial negotiations with the European Union?

[Lord Newby]

My Lords, the noble Baroness will recall that in 2011 the French Government proposed such a tax at a global level in G20 and there was widespread opposition to it from, among others, the US, China, Australia and Canada. Sadly, there is nowhere near a global consensus on whether such a tax is a good idea, and, equally, there is no consensus, even within the EU, about where the money should go. The French were, and are, keen that at least part of the proceeds should go to development aid, but the Germans, for example, propose that any receipts from the FTT should simply go into the central tax pot.

[Lord Lea of Crondall]

Given the behavioural crisis in many of the financial institutions in recent years, would the Government not be well advised to discuss the merits of such taxation around Europe, rather than reacting like Pavlov’s dog to anything just because it comes from Brussels?

[Lord Newby]

My Lords, we are engaged in discussions on this tax as it could have significant impacts not just on the City but across the EU. While the Government are not opposed in principle to a global FTT, with the lack of consensus on such a thing and faced with a proposal which we think could be damaging not just to the UK but to Europe as a whole, we are rather sceptical about it.

[Lord Pearson of Rannoch]

How do New York and other financial centres react to the international reach of this particular piece of EU lunacy?

--- Later in debate ---

[Lord Newby]

My Lords, as far as I am aware, New York has not yet responded to the most recent Commission proposals.