Open-Ended Investment Companies (Amendment) Regulations 2011

Lord Sassoon Excerpts

Monday 12th December 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Open-Ended Investment Companies (Amendment) Regulations 2011.

Relevant documents: 34th Report from the Joint Committee on Statutory Instruments.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, these regulations amend the Open-Ended Investment Companies Regulations 2001 to introduce a protected cell regime for open-ended investment companies, or OEICs. They will ensure the segregation of liabilities of different sub-funds held under the same OEIC umbrella company so that investors in one sub-fund will not be liable to creditors in the event of another sub-fund failing.

I would like first to give a little background on why this legislation is needed. Open-ended investment companies are one of two major forms of pooled investment fund. UK regulations for OEICs were first approved by Parliament in 1996 to help UK fund managers compete more effectively in the European market. Collectively, there is around £580 billion in UK-domiciled funds and the work needed to administer those funds brings jobs to a number of parts of the UK, including outside the UK’s traditional fund management centres of London and Edinburgh.

Large fund managers generally operate a small number of OEIC umbrella companies with a large number of sub-funds within each umbrella, allowing them to operate a large range of funds more efficiently. The sub-funds, or cells, do not have a separate legal personality but are separately managed, charged, accounted for and assessed for tax. Under current UK law, there is no segregation of liabilities between sub-funds, so creditors of one sub-fund could have a claim on the assets of another sub-fund. While using multiple separate OEICs instead of sub-funds within a single OEIC would protect investors from this risk, it would make operations less efficient and add significant cost to end-users. In practice, the likelihood of creditors having a claim is small, both because OEICs must comply with borrowing limits imposed by the FSA and because feedback from the industry suggests that most credit agreements stipulate segregated liability. However, because this risk has never crystallised, it is not certain how these stipulations would be treated by the courts.

This legislation increases consumer protection and, by doing so, improves the competitiveness of the UK as a domicile for funds. Investors increasingly require segregated liability to address the small risk present in umbrella structures. Managers seeking to domicile their funds in the UK need to be able to offer this based on a statutory provision. This legislation does just that. It removes the risk of contagion by providing an effective ring-fencing of a sub-fund’s assets from the other sub-funds and the umbrella itself. The Government are introducing the regime to ensure that the UK can continue to compete with other jurisdictions that already operate protected cell regimes. Failure to introduce the legislation would risk funds being unwilling to domicile here.

In deciding how to implement this legislation, the Government have been mindful that, despite the undoubted benefits, there are some potential costs to operators in converting from their existing arrangements. We have, therefore, provided for a general two-year transition period, which may, at the FSA’s discretion, be extended for a further year. During this period, existing OEICs cannot enter into any new contract that is not subject to a protected cell regime unless that contract is subject to an existing master agreement which governs the terms of all contracts entered into under it. This should allow firms ample time to convert the necessary contracts, many of which will have come up for renewal in any case. For operators establishing new OEICs, the costs introduced by this legislation are negligible, so they are required to comply immediately with the new regime.

The Government’s Plan For Growth, published alongside the March Budget, also announced a moratorium on new domestic regulation for microbusinesses—firms employing nine staff or fewer—for a period of three years. The protected cells legislation complies with this announcement. Microbusinesses will be fully exempt from the legislation’s requirements for a period of three years. However, early indications are that they may seek to comply with the legislation earlier, given the benefits it brings.

The UK fund management industry has been calling strongly for a statutory protected cells regime and has warmly welcomed news of its introduction. The industry has worked closely with the Government to get the regulations right and they will bring considerable benefits to investors in UK funds and increase the competitiveness of UK industry. I hope that noble Lords will give their support to the regulations today. I beg to move.

[Lord Newby]

My Lords, this is a fascinating example of the industry asking for regulation that the FSA seems to have been slow to introduce. This is an almost unique experience for the sector, which is normally grumbling that there is too much regulation.

I am intrigued that it is being introduced here purely under domestic legislation rather than within the ambit of any EU cover, and I wonder whether there is any prospect of OEICs, in this regard, being the subject of any of the many EU directives that are currently on their way down the track or being discussed. I note that, at the moment, the jurisdictions that already have this additional regulation are a mixed bag and include Jersey, Ireland and Luxembourg. I find it slightly surprising that it has taken some time for both the UK industry and the Government to get round to implementing this legislation, given that its benefit is that it will improve the competitive position of OEICs in the UK. It seems extremely sensible. I want to confirm what I think the Minister said: that there is no suggestion that this is being introduced because there has been any difficulty with any existing OEICs. Is it purely as a pro-competitive rather than as an anti-competitive measure?

[Lord Tunnicliffe]

My Lords, I make it clear from the outset that we support this order. I am looking forward to the Minister’s answer to the noble Lord’s questions about how the regulations fit in with the EU—questions which are particularly apposite at this moment. I will content myself with a few comments on the impact assessment and two or three questions.

The impact assessment is absolutely fascinating. From my reading of it—and I am happy to be corrected here—the net benefit of the regulations will be between £18 million and £360 million, which is a pretty wide range that will involve lots of sums to prove that. The only point that I feel I can take from the impact assessment is that, in all credible scenarios, the introduction of a protected cell regime will be favourable, and I think that we can all be satisfied with that.

I have just a few questions. First, new Regulation 11A(4) provides for an exception, which is referred to in the Explanatory Note. However, for myself I cannot quite see what sorts of transactions or assets the exception refers to. Like all exceptions, one is always slightly worried that the exception ends up negating the intent of the order. I am sure that it does not, but I pose that question for assurance.

Secondly, as I understand it—once again, I could be wrong—there will be a period in which PCR products and non-PCR products will be on sale at the same time. I may have misunderstood that, but if I am right in that assumption, what actions are the Government taking to ensure that there is no confusion in the marketplace during that period of overlap? I will be happy if there is no period of overlap, but if there is one then it is important that we do not introduce confusion through these very sensible regulations.

Finally, I like reading impact assessments, which is a little burden that I have to carry. The wonderful thing about impact assessments is that I always sense that they are written by rather more junior people— I was going to say with rather less care, but care is perhaps the wrong term—as you get that little hint from things. On page 10, the impact assessment states:

“The UK fund regime has been viewed as less favourable by managers and investors for a number of reasons, with the lack of a PCR being one of them”.

Perhaps the Minister could enlighten us as to what other reasons exist and what, if anything, he is doing about them.

[Lord Sassoon]

My Lords, again those questions were short, sharp and to the point. Let me go straight to trying to answer them.

First, my noble friend Lord Newby asked about the interaction with Europe and what else is coming from Europe. The main thing that I see is an up-side opportunity in the link to the UCITS directive and the push to make sure that UK and other fund managers are able to sell products safely on a pan-European basis. I am not aware of any particular threats, but I am aware that, given the ongoing work that is looking again at the UCITS directive, there is further opportunity to complete the single market. UCITS 4 has just been implemented, and the UCITS 5 proposals that are expected from the Commission in 2012 are likely to include consumer protection measures on, for example, the use of depositories, so these regulations are part of a piece. As my noble friend said, these regulations are certainly pro-competitive but, as I touched on in my opening remarks, they also act to protect investors—they work for both the provider and the user of these products. Just to be absolutely clear, the regulations are being introduced not as a reaction to some disaster or something having gone wrong but because there is an untidiness and lack of clarity that we should tidy up ahead of the game.

I will answer the questions of the noble Lord, Lord Tunnicliffe. First, on new Regulation 11A(4), this refers to assets and liabilities which belong to the sub-funds; they do not belong to the umbrella company but have been billed to it for practical or legal reasons. They then have to be pushed down to the sub-funds. For example, there are certain generic costs such as Companies House fees and VAT for which the umbrella company, as the only entity with legal personality, is responsible but then needs to attribute to the sub-funds. It is put in there not as a means of driving a coach and horses through; it is there to deal with appropriate liabilities in particular, which have to be allocated down below the umbrella.

There was then a question about the transition period. The Government certainly recognise the importance of clarity for consumers. This is one reason why the protected cell regime will become mandatory after the transition period. In that transition period, the FSA rules require OEICs that are unprotected to make this clear in their prospectuses. Once an OEIC has converted, it will declare that it is protected. The FSA considers this approach to be proportionate and appropriate, given the low risks involved.

Lastly, there was a question about the impact assessment and the comment on page 10 about the UK regime being “viewed as less favourable”. Incidentally, this was not an impact assessment that I signed off myself so I had the pleasure of reading it afterwards. I am sure that when the noble Lord, Lord Tunnicliffe, mentioned junior people signing it off, he was referring not to my honourable friend the Financial Secretary or the officials who draft these things but to the authorship. The authorship is every bit as expert as is needed. It is great, anyway, to know that some people read the fine print. This is a long preamble to answering the noble Lord’s question.

The other major reasons why people might see the UK regime as less favourable concern perceived tax treatment of funds. The Government are taking steps to address this. For example, only last week the Government announced that they intend to improve the operation of the tax regime for property-authorised investment funds. This will mean that under some circumstances, investors may exchange their units in a dedicated PAIF feeder fund for units in the PAIFs, and vice versa, without incurring a charge to tax on capital gains at the time of exchange. This was a specific response to industry representations and will improve the competitiveness of the UK funds regime. We are responsive to other issues out there, which are generally around taxation.

I hope that that deals with the Committee’s questions. This is legislation that strengthens investor protection in a way that brings considerable benefits to the competitiveness of the UK as a domicile of funds. I therefore commend these regulations to the Committee.

Motion agreed.

Economy: Government Policies

Lord Sassoon Excerpts

Wednesday 7th December 2011 Lords Chamber

[Lord Clinton-Davis]

To ask Her Majesty’s Government what is their response to the report of the Institute for Fiscal Studies on the Chancellor of the Exchequer’s latest economic measures.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the Government took decisive action at the Autumn Statement to ensure sustainable public finances and to meet the fiscal targets set at Budget 2010.

[Lord Clinton-Davis]

The Institute for Fiscal Studies has referred to higher inflation, unprecedented cuts, the longest wage stagnation in history and plunging incomes. Is it not appropriate in the light of this respected organisation’s report that the Government should change their economic course, to avoid a major shipwreck before it is too late?

--- Later in debate ---

[Lord Sassoon]

No, my Lords, that is precisely not the conclusion from the IFS report. What the IFS report also pointed out was that Labour’s plans—the plans of Mr Alistair Darling in his March 2010 Budget—

“would, if [they] had been implemented, now of course have implied even higher debt levels over this parliament than those we will in fact see. That would have left an even bigger job to do in the next parliament”.

There would have been £100 billion of additional debt if we had followed Labour’s plans, and that was under Mr Darling. Mr Ed Balls has so far announced unfunded commitments of £91 billion a year—£326 billion of unfunded expenditure. Mr Ed Balls wishes to pave the road to Rome, if not to Athens.

[Lord Christopher]

My Lords, did not the Conservative Party embrace Labour’s spending plans?

[Lord Sassoon]

My Lords, what my right honourable friend the Chancellor said we would do is to stick precisely to the spending plans that he set out in the March Budget and the subsequent spending review. That is what we will do, and that is what will keep our interest rates low.

[Lord Vinson]

My Lords, as part of their measures to see what can help this poor old country out of its troubles, would the Government look at our huge imbalance of trade—currently running at about £30 billion a year plus? I am not suggesting for one moment that all those jobs could be done in this country, but it is the equivalent of about 1 million jobs that we are shipping overseas. There are some areas of our economy that could be done here. For instance, why do we need to import so much cement, which we can make in this country just as well as importing it from other countries? Could we not look at a sensible policy of import substitution to try to create jobs in this country that are being created unnecessarily in other countries, when we could do the jobs perfectly well ourselves?

[Lord Sassoon]

My Lords, our exporters are leading the growth in this country and indeed, although it is early days, there are some signs from the figures over the past 18 months that at last, after a decade of a declining share of world trade, the UK’s share is increasing. It is a modest increase and it is early days but our exporters are performing very strongly.

[Lord Barnett]

I would like to welcome one part of the Statement from the Chancellor, when he said that he had negotiated £20 billion of funds from pension funds for infrastructure investment. That is very welcome. However, could the noble Lord tell us how exactly it is to be financed with the pension funds? Is it a PFI deal, or what rate of interest are they going to be paid?

[Lord Sassoon]

I am grateful to the noble Lord, Lord Barnett, for welcoming this important initiative. In fact it is a case of the pension funds coming to us. That particular group of pension funds has £800 billion under management. So it will be funds that they already have under management, and they wish to allocate a greater share to the infrastructure sector. It does not hit the public sector in any way.

[Lord Newby]

On that exact point, my Lords, the IFS says that the £20 billion of additional funds from the pension funds looks to be,

“more of an ambition than a done deal”.

It adds that they,

“have little clarity as to what the nature of this potential additional spending might be”.

Is the Minister able to tell us, first, what priorities the Government have assigned to that potential additional expenditure; and secondly, when he hopes the benefits of that additional funding might come through?

[Lord Sassoon]

My Lords, to repeat, the pension funds and also the insurance companies have come to Government and asked for our help. We have signed a memorandum of understanding to help them set up their vehicle as quickly as possible, because clearly they want to find an investment home for their money.

[Lord Davies of Oldham]

My Lords, does the Minister accept that the best deficit reduction strategy is in fact a growing economy? Why are the Government pursuing policies that have already reduced growth, and are destined to do so for several years?

[Lord Sassoon]

I do not accept that at all. Of course we all wish to see a strongly growing economy. The latest forecasts from the OBR are that the private sector will generate 1.7 million jobs over the forecast period. That is strong growth in the private sector.

[Baroness Wheatcroft]

My Lords, while cutting the deficit is essential, it will undoubtedly leave many people facing financial hardship. In the light of that, does the Minister have any comment on the stories this morning about the forecast growth in what is known as payday loans and the interest rates—some might say extortionate interest rates—charged on them?

[Lord Sassoon]

I completely agree with my noble friend that it is very concerning that people on low incomes should be exploited. Therefore, it is important that this issue is fully debated. However, I would also point out that the latest forecast from the IFS shows that real household disposable income will stabilise in 2012 and sharply rise in 2013.

EU: Member States’ Budgets

Lord Sassoon Excerpts

Tuesday 29th November 2011 Lords Chamber

[Lord Willoughby de Broke]

To ask Her Majesty’s Government what is their assessment of the proposal by the European Commissioner for Economic and Financial Affairs that the European Commission should have the power to scrutinise member states’ budgets and impose such financial penalties as the Commission deems fit.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the Government strongly support the recently agreed economic governance legislation to strengthen the stability and growth pact. This provides for stronger and more responsible economic governance across the European Union. Under the new legislation, a range of financial sanctions can be imposed by the Council within the euro area where member states are deemed not to have taken adequate action. Sanctions are set out under Article 136, which applies to the euro area only.

[Lord Willoughby de Broke]

My Lords, I am grateful to the Minister for that reply. However, the statement by Commissioner Olli Rehn applies not just to the eurozone but to the whole of the EU, including this country. Therefore, will the Minister confirm that today’s Autumn Statement by the Chancellor is nothing more than an aspiration—a wish list? Will he confirm to the House that this will have to be ticked off and agreed by the European Commission before it can take any effect?

[Lord Sassoon]

My Lords, this country has always been party to the stability and growth pact, but as I am sure the noble Lord knows, under Protocol 15 the UK has an opt-out, which means that we have to endeavour to avoid excessive deficits but are not subject to any sanctions such as members of the euro area are. Furthermore, the UK secured particular treatment that ensures—has ensured and will ensure—that Parliament will always be allowed to scrutinise the UK’s budget ahead of the European Commission.

[Lord Lea of Crondall]

Is it not remarkable that the very same people in all parties who are always criticising the European Union for failing—lamentably, they would say—to ensure that people such as the Greeks, Portuguese, Irish and anybody you would like to mention are not meeting their commitments should now complain when we are tightening up the very scrutiny that they have been demanding? As the noble Lord, Lord Sassoon, has said, this is not just the 17 but the 27.

[Lord Sassoon]

My Lords, I am not going to say who should be complaining about what. All I would say is that the eurozone has got itself into a position where it really needs to get on and strengthen its own governance arrangements. We will do everything to encourage it to do that but we, as the UK, have a particular position that we will also protect to make sure that Parliament is able to scrutinise our budget first.

[Lord Higgins]

My Lords, given the UK opt-out, is it the case that the final part of the noble Lord’s initial Question is not correct as far as UK is concerned?

[Lord Sassoon]

No, my Lords. I believe that the whole of my Answer was completely correct.

[Noble Lords]

Oh!

[Lord Sassoon]

I beg my noble friend’s pardon. I think that a number of false premises were used to back up that supplementary question.

[Lord Barnett]

My Lords, if the eurozone decides to strengthen its fiscal rules, which many press upon it as being vital if they are to work, but there is no question of a change in the treaty, what would the Government do, because we clearly would not be involved?

[Lord Sassoon]

My Lords, this is a fast-evolving set of proposals. Indeed, the euro area’s Finance Ministers are meeting later this afternoon. One of the issues on the table is that the Commission and the euro group are exploring the possibility of limited treaty changes, and Mr Van Rompuy is due to present the outcome of that work to the December European Council. When we see any proposals—if there are any—we will consider what we should do about them.

[Lord Forsyth of Drumlean]

My Lords, when looking at what is happening in Italy and Greece, is my noble friend not concerned that adding to a fiscal deficit problem a democratic deficit problem could result in considerable difficulties?

--- Later in debate ---

[Lord Sassoon]

Yes, my Lords, I very much share my noble friend’s concerns.

[Lord Davies of Stamford]

My Lords, a few years ago was there not a proposal that the Commission be given a duty of auditing the national accounts of member states? That proposal was turned down at the time by the Council. Is it not the case that if it had not been turned down and had been accepted, we would have had an earlier insight into the problems of Greece, the Greeks would have been unable to falsify their accounts, and the grave problems we all now face might have been significantly reduced?

[Lord Sassoon]

My Lords, I very much doubt it. We are looking at the proposals for strengthening governance as they have been put on the table, and that is clearly what needs to be done. We should not rely on the auditors to sort out all our problems.

[Lord Newby]

My Lords, if the eurozone’s Finance Ministers decide that they want limited treaty changes, will the Minister be prepared to go slightly beyond his earlier answer and confirm that the UK Government will not stand in the way of any treaty changes to bring greater discipline within the eurozone, because it is clearly in our national interest as much as theirs that new rules are put in place?

[Lord Sassoon]

I am of course prepared to go a bit further in answer to my noble friend’s question. If such treaty changes are put forward, the Government will look to advance the UK’s national interest at that point, as appropriate. Above all, that means protecting and safeguarding our essential economic interests, and we will seek to do that.

[Lord Pearson of Rannoch]

My Lords, is it not grotesque that an organisation that has not had its accounts signed off by its own internal auditors for 17 years—there being no external auditor—should be handed these powers, given that if it had been a private company in this country the directors would have been in prison every year for the past 17 years?

[Lord Sassoon]

My Lords, I certainly agree that it is very unsatisfactory that for the 17th year in a row the Court of Auditors has not been able to give an unqualified statement of assurance.

Autumn Budget Forecast

Lord Sassoon Excerpts

Tuesday 29th November 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I refer the House to the autumn Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer, copies of which have been made available in the Printed Paper Office and the text of which will be printed in full in the Official Report. I commend my right honourable friend’s Statement to the House.

The following Statement was made earlier in the House of Commons.

“Let me start by placing squarely before the House of Commons and the British public the economic situation facing our country. Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debt. We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth.

Today we set out how we will do that by demonstrating that the country has the will to live within its means and keep interest rates low; by acting to stimulate the supply of money and credit to ensure that those low interest rates are passed on to families and businesses; by matching our determination on the deficit with an active enterprise policy for business and lasting investment in our infrastructure and education so that Britain can pay its way in the future; and at every opportunity by helping families with the cost of living.

The central forecast that we publish today from the independent Office for Budget Responsibility does not predict a recession here in Britain, but it has unsurprisingly revised down its short-term growth prospects for our country, for Europe and for the world. It expects gross domestic product in Britain to grow this year by 0.9 per cent and by 0.7 per cent next year. It then forecasts 2.1 per cent growth in 2013, 2.7 per cent in 2014, followed by 3 per cent in 2015 and 3 per cent again in 2016.

The OBR is clear that this central forecast assumes that,

‘the euro area finds a way through the current crisis and that policymakers eventually find a solution that delivers sovereign debt sustainability’.

If they do not, the OBR warns that there could be a ‘much worse outcome’ for Britain. I believe that it is right. We hope that this can be averted, but if the rest of Europe heads into recession, it may prove hard to avoid one here in the UK.

We are now undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis. Like the Bank of England and the OECD yesterday, the OBR cites the chilling effect of the current instability as one of the central reasons for the reduction in its growth forecast. I want to thank Robert Chote and his fellow committee members, Stephen Nickell and Graham Parker, and their team for the rigorous work that they have done. Their forecast today demonstrates beyond any doubt their independence. This is an important point for the House. If we accept their numbers, we must also pay heed to their analysis. In addition to the eurozone crisis, the OBR gives two further reasons for the weaker forecasts. The first is what it calls the ‘external inflation shock’—the result, in its words, of,

‘unexpected rises in energy prices and global agricultural commodity prices’.

The OBR’s analysis—independent—is that this explains the slowdown in growth in Britain over the past 18 months.

Secondly, the OBR today has shown new evidence that an even bigger component of the growth that preceded the financial crisis was an unsustainable boom, and that the bust was deeper and had an even greater impact on our economy than previously thought. The result of that analysis is that the OBR has significantly reduced its assumptions about spare capacity in our economy and the trend rate of growth. That increases the OBR’s estimate of the proportion of the deficit that is structural—in other words, the part of the deficit that does not disappear even when the economy recovers. Our debt challenge is therefore even greater than we thought, because the boom was even bigger and the bust even deeper, and the effects will last even longer. Britain has had the highest structural budget deficit of any major economy in the world and the highest deficit in the entire history of our country outside war—and the last Government left it to this Government to sort that mess out.

The OBR’s analysis feeds directly through to borrowing numbers that are falling, but not at the rate that had been forecast. In 2009-10, the last Government were borrowing £156 billion a year. During the first year of this Government, that fell to £137 billion. This year the OBR expects it to fall again, to £127 billion, then to £120 billion next year, followed by £100 billion in 2013-14, £79 billion in 2014-15, then £53 billion in 2015-16 and £24 billion a year by 2016-17. However, I can report that because of the lower market interest rates that we have secured for Britain, debt interest payments over the Parliament are forecast to be £22 billion less than predicted.

The House might also like to know, given the economic events described by the Office for Budget Responsibility, what would have happened to borrowing without the action that this Government have taken.

The Treasury today estimates that borrowing by 2014-15 would have been running at well over £100 billion a year more and that Britain would have borrowed an additional £100 billion in total over the period. If we had pursued that path, we would now be in the centre of the sovereign debt storm.

The crisis we see unfolding in Europe has not undermined the case for the difficult decisions we have taken; it has made that case stronger. We held our deficit-reduction Budget on our terms last year, not on the market’s terms this year, as so many others have been forced to. In that Budget we set out a tough fiscal mandate: that we would eliminate the current structural deficit over the five-year forecast horizon. We supplemented the mandate with a fixed debt target: that we would get national debt as a proportion of national income falling by 2015-16. To be cautious, I set plans to meet both those budget rules one year early. That headroom has now disappeared, but I am clear that our rules must be adhered to, and I am taking action to ensure that they are. As a result, the OBR’s central projection is that we will meet both the fiscal mandate and the debt target.

The current structural deficit is forecast to fall from 4.6 per cent of GDP this year to become a current structural surplus of 0.5 per cent in five years’ time, and the debt-to-GDP ratio, which is forecast to stand at 67 per cent this year, is now set to peak at 78 per cent in 2014-15 and to be falling by the end of the current Parliament. So borrowing is falling, and debt will come down. It is not happening as quickly as we wished, because of the damage done to our economy by the ongoing financial crisis, but we are set to meet our budget rules, and we are going to see Britain through the debt storm.

There is a suggestion from some in the House that if you spend more, you will borrow less. That is something-for-nothing economics, and the House should know the risks that we would be running. Last April, the absence of a credible deficit plan meant that our country’s credit rating was on negative outlook and our market interest rates were higher than Italy’s; 18 months later, we are the only major western country whose credit rating has improved. Italy’s interest rates are now 7.2 per cent, and what are ours? They are less than 2.5 per cent. Yesterday we were even borrowing money more cheaply than Germany. Those who would put all that at risk by deliberately adding to our deficit must explain this.

Just a 1 per cent rise in our market interest rates would add £10 billion to mortgage bills every year: 1 per cent would mean that the average family with a mortgage would have to pay £1,000 more; 1 per cent would increase the cost of business loans by £7 billion; 1 per cent would force taxpayers to find an extra £21 billion in debt interest payments, much of it going to our foreign creditors. In other words, 1 per cent dwarfs any extra Government spending or tax cut funded by borrowing that people propose today—and that is the cost of just a 1 per cent rise. Italy’s rates have gone up by almost 3 per cent in the last year alone. We will not take this risk with the solvency of the British economy and the security of British families.

The current environment requires us to take further action on debt to ensure that Britain continues to live within its means. This is what we propose to do. First, there is no need to adjust the overall totals set out in the spending review. Taken all together, the measures that I will set out today require no extra borrowing and provide no extra savings across the whole spending review period. Secondly, I am announcing significant savings in current spending to make the fiscal position more sustainable in the medium and long term; but in the short term—over the next three years—we will use these savings to fund capital investments in infrastructure, regional growth and education, as well as help for young people to find work. Every pound spent in this way will be paid for by a pound saved permanently. That includes savings from further restraint on public sector pay.

For some workforces the two-year pay freeze will be coming to an end next spring, and for most it will be coming to an end during 2013. In the current circumstances, the country cannot afford the 2 per cent rise assumed by some government departments thereafter, so instead we will set public sector pay awards at an average of 1 per cent for each of the two years after the pay freeze ends. Many people are helped by pay progression—the annual increases in salary grades to which many are entitled even when pay is frozen. That is one of the reasons why public sector pay has risen at twice the rate of private sector pay over the last four years. While I accept that a 1 per cent average rise is tough, it is also fair to those who work to pay the taxes that will fund it. I can also announce that we are asking the independent pay review bodies to consider how public sector pay can be made more responsive to local labour markets, and we will ask them to report back by July next year. This is a significant step towards the creation of a more balanced economy in the regions of our country which does not squeeze out the private sector. Departmental budgets will be adjusted in line with the pay rises I have announced, with the exception of the NHS and school budgets, where the money saved will be retained in order to protect those budgets in real terms. This policy will save over £1 billion in current spending by 2014-15.

The deal we offer on public sector pensions is also fair to both taxpayers and public servants. The reforms are based on the independent report of John Hutton, a former Labour Pensions Secretary, and he says:

‘It is hard to imagine a better deal’,

than this. I would once again ask the unions why they are damaging our economy at a time like this and putting jobs at risk. I say call off the strikes tomorrow, come back to the table, complete the negotiations and let us agree generous pensions that are affordable to the taxpayer.

Let me turn to other areas of public spending, starting with overseas aid. This Government will stick by the commitments they have made to the poorest people in the world by increasing our international development budget—and the whole House should be proud of the help our country is providing to eradicate disease, save lives and educate children—but the spending plans of the Department for International Development meant that the UK was on course to exceed 0.7 per cent of national income in 2013. That I do not think can be justified and so we are adjusting those plans so we do not overshoot the target.

Turning to welfare payments, the annual increase in the basic state pension is protected by the triple lock introduced by this Government. This guarantees a rise either in line with earnings, prices or 2.5 per cent, whichever is greater. It means that the basic state pension will next April rise by £5.30 to £107.45—the largest ever cash rise in the basic state pension and a commitment of fairness to those who have worked hard all their lives. I wanted to make sure that poorer pensioners did not see a smaller rise in their income, so I can confirm today that we will also uprate the pension credit by £5.35 and pay for that with an increase in the threshold for the savings credit.

I also want to protect those who are not able to work because of their disabilities and those who, through no fault of their own, have lost jobs and are trying to find work, so I can confirm that we will uprate working-age benefits in line with September’s consumer prices index inflation number of 5.2 per cent. That will be a significant boost to the incomes of the poorest, especially when inflation is forecast to be considerably less than that by next April. We will also uprate with prices the disability elements of tax credits, and increase the child element of the child tax credit by £135 in line with inflation too. But we will not uprate the other elements of the working tax credit this coming year; and given the size of the uprating this year, we will no longer go ahead with the additional £110 rise in the child element, over and above inflation, that was planned. By April 2012, the child tax credit will have increased by £390 since the coalition came into power. The best way to support low-income working people is to take them out of tax altogether, and our increases in the income tax personal allowance this year and next will do that for over 1 million people.

Let me turn to future public spending. Today, I am setting expenditure totals for the two years following the end of the spending review period: 2015-16 and 2016-17. Total managed expenditure will fall during that period by 0.9 per cent a year in real terms— the same rate as set out for the existing period of the spending review, with a baseline that excludes the additional investments in infrastructure also announced today. These are large savings and we will set out in future how resources will be allocated between different areas of government.

I am also announcing a measure to control spending which is not for today or next year, or even for the next decade, but it directly addresses the long-term challenge Britain and so many other countries face with an ageing population. Our generation has been warned that the costs of providing decent state pensions are going to become more and more unaffordable unless we take further action.

Let us not leave it to our children to take emergency action to rescue the public finances; let us think ahead and take responsible, sensible steps now. Starting in 2026, we will increase the state pension age from 66 to 67, so that we can go on paying a decent pension to people who are living longer. Australia, America and Germany have all taken similar steps. This will not affect anyone within 14 years of receiving their state pension today. By saving a staggering £59 billion, it will mean a long-term future for the basic state pension.

We are showing a world that is sceptical that democratic western Governments can take tough decisions that Britain will pay its way in the world. That is the first thing that the Government can do in the current environment: keep our interest rates low and protect our country from the worst of the debt storm. But we need to make sure that those low interest rates are available to families and to businesses. It is monetary and credit policy that is, in a debt crisis, the principal and most powerful tool for stimulating demand.

Last month, the Bank of England’s Monetary Policy Committee decided to undertake further quantitative easing, and I have authorised an increase in the ceiling on its asset purchases to £275 billion. This will support demand across the economy, but we must do more to help those small businesses who cannot get access to credit at an affordable price.

We have already extended the last Government’s enterprise finance guarantee scheme, and we are today expanding it to include businesses with annual turnovers of up to £44 million and accrediting new lenders, such as Metro Bank. But this scheme is by itself not nearly ambitious enough and never will be within the constraints of state aid rules, so the Government are launching a major programme of credit easing to help small business. We have set a ceiling of £40 billion. At the same time, I have agreed with Mervyn King that we will reduce by £40 billion the asset purchase facility that the previous Government gave the Bank to buy business loans. Only a small proportion of the facility was ever used. I am publishing my exchange of letters with the governor today.

We are launching our national loan guarantee scheme. It will work on the simple principle that we use the hard-won low interest rates that the Government can borrow at to reduce the interest rates at which small businesses can borrow. We are using the credibility that we have earned in the international markets to help our domestic economy. New loans and overdrafts to businesses with a turnover of less than £50 million will be eligible for the scheme, so that it stays focused on smaller companies. We expect that it will lead to reductions of 1 percentage point in the rate of interest being charged to these companies, so a business facing a 7 per cent interest rate to get a £5 million loan could instead see its rate reduced to 6 per cent and its interest costs fall by up to £50,000.

We have developed with the Bank of England a mechanism to allocate funding to different banks based on how much they increase both net and gross lending to firms. There will be a clear audit trail to ensure the banks comply, for we will use the experience of the European Investment Bank’s loans for SMEs programme here in the UK to ensure that it works. We are getting state aid approval, so that the national loan guarantee scheme will be up and running in the next few months. Initially, £20 billion-worth of these guarantees will be available over the next two years. Alongside it, we are also launching a £1 billion business finance partnership. That is aimed at Britain’s mid-sized companies—a crucial part of our economy, neglected for too long and now identified by the CBI director-general and others as a future source of growth. The Government will invest in funds that lend directly to these businesses, in partnership with other investors such as pension funds and insurance companies. It will give these mid-cap companies a new source of investment outside the traditional banks.

If the business finance partnership takes off, I stand ready to increase its size; and we will develop further partnerships ideas and ideas for new bond issuance to help Britain’s small and medium-sized companies. No Government have attempted anything as ambitious as this before. We will not get every detail perfect first time round, but we do not want to make the best the enemy of the good. With the strain on the financial system increasing, the important thing is to get credit flowing to Britain’s small businesses.

The Government can use the low interest rates that we have secured to help young families, too, who want to buy a home but cannot afford the very large deposits that banks are now demanding. We will use mortgage indemnities to help 100,000 such families to buy newly built homes. We will also help construction firms that cannot get bank finance with a £400 million fund that will kick-start projects that already have planning permission; and we are going to reinvigorate the right to buy. This was one of the greatest social policies of all time. It brought home ownership within the reach of millions of aspiring families. It was slowly and stealthily strangled by the last Government, as discounts were cut and cut again. We will bring it back to life. Families in social housing will be able to buy their own homes at a discount of up to 50 per cent. We will use the receipts to build, for every home purchased, a new additional affordable home—so new homes for families who need them; new home ownership for families who aspire to it; and new jobs in the construction industry, so that we get Britain building. That is what our new right to buy will bring.

In the years leading up to the crash, our economy became dangerously overdependent on the success of a poorly regulated City of London. Meanwhile, employment by businesses in a region such as the West Midlands actually fell. By 2007, the previous Government were relying on finance for £1 in every £8 raised in taxation. That left Britain completely exposed when the banks failed, and I can confirm that, next month, we will publish our response to the report that we commissioned from John Vickers to protect taxpayers better.

It is this Government’s policy to ensure that we remain the home of global banks and that London is the world’s pre-eminent financial centre. That is why we will not agree to the introduction of an EU financial transaction tax. It is not a tax on bankers; it is a tax on people’s pensions. Instead, we have introduced a permanent bank levy to make sure that the banks pay their fair share. I have always said that we wished to raise £2.5 billion each and every year from this levy. To ensure we do that, I need to raise the rate of the levy to 0.088 per cent. That will be effective from l January next year. We will also take action to stop some large firms using complex asset-backed pension funding arrangements to claim double the amount of tax relief that was intended. This will save the Exchequer almost £500 million pounds a year.

Financial services will always be a very important industry for the UK, but we have to help other parts of the private sector in other parts of the country to grow. That means uncongested roads and railways for businesses to move products that cannot be reduced to a screen on a City trading floor. It means providing secure power sources at reasonable prices. It means creating new superfast digital networks for companies across our country. These do not exist today. If we look at what countries such as China or Brazil are building, we see why we risk falling behind the rest of the world. So today we are publishing the national infrastructure plan. For the first time, we are identifying over 500 infrastructure projects that we want to see built over the next decade and beyond: roads, railways, airport capacity, power stations, waste facilities and broadband networks. We are mobilising the finance needed to deliver them, too.

The savings that I have announced in the current Budget have enabled me today to fund, pound for pound, £5 billion of additional public spending on infrastructure over the next three years. New spending by Network Rail, guaranteed by the Government, will bring £1 billion more. We are committing a further £5 billion to future projects in the next spending period, so that the planning can start now. This is public money. By exploring guarantees and letting city mayors borrow against future tax receipts, we are looking for new ways to deploy it. But we need to put to work the many billions of pounds that British people save in British pension funds and get those savings invested in British projects. You could call it British savings for British jobs, Mr Speaker.

The Government have negotiated an agreement with two groups of British pension funds to unlock an additional £20 billion of private investment in modern infrastructure. We can today give the go-ahead around the country to 35 new road and rail schemes that support economic development. In the north-west, we will electrify the trans-Pennine express between Manchester and Leeds, build the Manchester Airport and Crewe link roads and work with Merseyside to turn the vision of the Atlantic gateway into reality.

In Yorkshire and Humber, there will be new stations and new tram capacity, and we will halve the tolls on the Humber Bridge. I want to pay tribute to my honourable friends the Members for Beverley and Holderness (Mr Stuart) and for Brigg and Goole (Andrew Percy), and indeed other local MPs who have campaigned for years to make this happen. Under this Government it has.

In the north-east, we will bring forward investment on the Tyne and Wear Metro. In the Midlands, the A45, the A43, the A453, the Kettering bypass, the M1 and M6 will all be improved. In the south-west, the Bristol link road and the A380 bypass will go ahead. For families across the south-west facing the highest water charges in Britain, the Government will cut the household bills of all South West Water customers by £50 a year. In the east of England, we are going to make immediate improvements to the A14. In the south-east, we will build a new railway link between Oxford, Milton Keynes and Bedford that will create 12,000 new jobs. We are going to start working on a new crossing of the lower Thames, and we will explore all the options for maintaining the UK’s aviation hub status, with the exception of a third runway at Heathrow.

Here in London, we will work with the mayor on options for other new river crossings, for example at Silvertown. We are going to support the extension of the Northern line to Battersea, which could bring 25,000 jobs to the area. Devolved Administrations in Scotland, Wales and Northern Ireland will get their Barnett share, and we are working with them to improve the links between our nations, such as the M4 in south Wales and the overnight rail service to north of the border.

This all amounts to a huge commitment to overhauling the physical infrastructure of our nation. We will match it by overhauling the digital infrastructure, too. The Government are funding plans to bring superfast broadband to 90 per cent of homes and businesses across the country, and extend mobile phone coverage to 99 per cent of families. This will help to create a living, economically vibrant countryside.

Our great cities are at the heart of our regional economies, and we will help bring world-leading, superfast broadband and wi-fi connections to 10 of them, including the capitals of all four nations. We will go ahead with the 22 enterprise zones already announced, plus two further zones in Humber and Lancashire confirmed today. I can also confirm that capital allowances of 100 per cent will be available to encourage manufacturing and other industries into the zones in Liverpool, Sheffield, the Tees valley, Humber and the Black Country. Those allowances will also be available to the north-eastern enterprise zone, and we will consider extending to the port of Blyth to create new private sector jobs there, too. This Government’s new regional growth fund for England has already allocated £1.4 billion to 169 projects around the country. For every one pound we are putting in, we are attracting six pounds of private sector money alongside it. I am today putting a further £1 billion over this Parliament into the regional growth fund for England, with support as well for the devolved Administrations. If we do not get the private sector to take a greater share of economic activity in the regions, our economy will become more and more unbalanced, as it did over the last 10 years.

Government should not assume that this will happen by itself. We must help businesses to grow and succeed, and we can do that at a national level too, with our commitment, for example, to British science. At a time of difficult choices, we made ours last year when we committed to protect the science budget. Today we are confirming almost half a billion pounds for scientific projects, from supercomputing and satellite technology to a world-beating animal health laboratory, and Government can encourage many more of our small firms to export overseas for the first time. We are doubling to 50,000 the number of SMEs we are helping, and extending support to British mid-caps, who sometimes lack the overseas ambition of their German equivalents.

We will make it easier for UK-based firms to compete for Government procurement contracts and make new applications out of government data. We will provide funds for smaller technology firms in Britain that find it difficult to turn their innovations into commercial success. We have listened to the ideas from business groups about encouraging innovation in larger companies, and we will introduce a new ‘above the line’ research and development tax credit in 2013 that will increase its visibility and generosity.

We will give particular help to our energy-intensive industries. I have not shied away from supporting sensible steps to reduce this country’s dependency on volatile oil prices and reduce our carbon emissions. I am the Chancellor who funded the first ever green investment bank and introduced the carbon price floor. Our green deal will help people to insulate their home and cut their heating bills. I am worried about the combined impact of the green policies adopted not just in Britain but by the European Union on some of our heavy, energy-intensive industries. We are not going to save the planet by shutting down our steel mills, aluminium smelters and paper manufacturers. All we will be doing is exporting valuable jobs from this country, so we will help them with the costs of the EU trading scheme and the carbon price floor, increase their climate change levy relief and reduce the impact of the electricity market reforms on those businesses, too.

This amounts to a £250 million package over the Parliament, and it will keep industry and jobs here in Britain. It is a reminder to us all that we should not price British businesses out of the world economy. If we burden them with endless social and environmental goals, however worthy in their own right, not only will we not achieve those goals, but the businesses will fail, jobs will be lost, and our country will be poorer.

Our planning reforms strike the right balance between protecting our countryside while permitting economic development that creates jobs, but we need to go further to remove the lengthy delays and high costs of the current system, with new time limits on applications and new responsibilities for statutory consultees. We will make sure that the gold-plating of EU rules on things such as habitats do not place ridiculous costs on British businesses. Planning laws need reform, and so too do employment rules. We know many firms are afraid to hire new staff because of their fear about the costs involved if it does not work out. We are already doubling the period before an employee can bring an unfair dismissal claim and introducing fees for tribunals. Now we will call for evidence on further reforms to make it easier to hire people, including changing the TUPE regulations; reducing delay and uncertainty in the collective redundancy process; and introducing the idea of compensated no-fault dismissal for businesses with fewer than 10 employees.

We will cut the burden of health and safety rules on small firms, because we have regard for the health and safety of the British economy too. This Government have introduced flexible working practices and we are committed to fair rights for employees. But what about the right to get a job in the first place or the right to work all hours running a small business and not be sued out of existence by the costs of an employment tribunal? It is no good endlessly comparing ourselves with other European countries. The entire European continent is pricing itself out of the world economy. The same is true of taxes on business. If we tax firms out of existence, or out of the country, there will not be any tax revenues for anyone. We have set as our ambition the goal of giving this country the most competitive tax regime in the G20. Our corporate tax rate has already fallen from 28 per cent to 26 per cent, and I can confirm that it will fall again next April to 25 per cent.

We are undertaking major simplification of the tax code for businesses and individuals, including, this autumn, consulting on ideas to merge the administration of income tax and national insurance. We are publishing next week rules on the taxation of foreign profits, so that multinationals stop leaving Britain, and instead start coming here, and we will end low-value consignment relief for goods from the Channel Islands, which has been used by large companies to undercut shops on our high streets. We have supported enterprise by increasing the generosity of the enterprise investment scheme. Today, we are extending this scheme specifically to help new start-up businesses to get the seed investment they need. Even at the best of times they can struggle to get finance, and in the current credit conditions that struggle too often ends in failure. From April 2012, anyone investing up to £100,000 in a qualifying new start-up business will be eligible for income tax relief of 50 per cent, regardless of the rate at which they pay tax, and to get people investing in start-up Britain in 2012, for one year only, we will also waive any tax on capital gains invested through the new scheme. We can afford this with a freeze on the general capital gains tax threshold for next year.

I also want to help existing small businesses which find the current economic conditions tough. Business rates are a disproportionately large part of their fixed costs. In the Budget, I provided a holiday on business rates for small firms until October next year. I am today extending that rate relief holiday until April 2013. Over half a million small firms, including one-third of all shops, will have reduced rate bills or no rate bills for the whole of this year and for the whole of the next financial year too. To help all businesses, including larger ones, with next year’s rise in business rates, I will allow them to defer 60 per cent of the increase in their bills to the two following years.

I also want to help any business seeking to employ a young person who is out of work. The OBR forecasts that unemployment will rise from 8.1 per cent this year to 8.7 per cent next year, before falling to 6.2 per cent by the end of the forecast. Youth unemployment has been rising for seven years and is now unacceptably high. It is little comfort that this problem is affecting all western nations today. The problem is, of course, primarily a lack of jobs. But it is made worse by a lack of skills. Too many children are leaving school after 11 years of compulsory education without the basics that they need for the world of work.

Our new youth contract addresses both problems with the offer of private sector work experience for every young person unemployed for three months. After five months, there will be weekly signing on. After nine months, we will help pay for a job or an apprenticeship in a private business. Some 200,000 people will be helped in this way but, as the Deputy Prime Minister has said, this is a contract. Young people who do not engage with this offer will be considered for mandatory work activity, and those who drop out without good reason will lose their benefits.

If we are to tackle the economic performance of this country and tackle Britain’s decades-long problems with productivity, we have to transform our school system too, so that children leave school prepared for the world of work. My right honourable friend the Secretary of State for Education is doing more to make that happen than anyone who ever had his job before him. The previous Government took six years to create 200 academies. He has created 1,200 academies in just 18 months. Supporting his education reform is a central plank of my economic policy, so today, with the savings that we have made, I am providing an extra £1.2 billion—as part of the additional investment in infrastructure—to spend on our schools.

Half of that will go to help local authorities with the greatest basic need for school places. The other £600 million will go to support my right honourable friend’s reforms and will fund 100 additional free schools. These schools will include new maths free schools for 16 to 18 year-olds. This will give our most talented young mathematicians the chance to flourish. Like the new university technical colleges, these maths free schools are exactly what Britain needs to match our competitors and produce more of the engineering and science graduates so important for our long-term economic success.

To ensure that children born into the poorest families have a real chance to become one of those graduates, we will take further steps to improve early education. Last year, it was this coalition Government who not only expanded free nursery education for all three and four year-olds, but gave children from the poorest fifth of families a new right to 15 hours of free nursery care a week at the age of two. I can tell the House today that we can double the number of children who will receive this free nursery care: 40 per cent of two year- olds—260,000 children—from the most disadvantaged families will get this support in their early years.

On education and early-years learning, this is how we change the life chances of our least well-off and genuinely lift children out of poverty and that is how we build an economy ready to compete in the world. It will take time. The damage that we have to repair is great. People know how difficult things are and how little money there is, but where we can help with the rising cost of living, we will. I have already offered councils the resources for another year’s freeze in the council tax. That will help millions of families, but I want to do more.

Commuters often travel long distances to go to work and bring an income home. Train fares are expensive and they are set to go up well above inflation to pay for the much needed investment in the new rail and new trains that we need, but RPI plus 3 per cent is too much. The Government will fund a reduction in the increase to RPI plus 1 per cent. This will apply across national rail regulated fares, across the London Tube and on London buses. It will help the millions of people who use our trains.

Millions more use their cars to go to work, and pick up the children from school. It is not a luxury for most people; it is a necessity. In the Budget I cut fuel duty by 1p. The plan was for fuel duty to be 3p higher in January and 5p higher by August next year. That would be tough for working families at a time like this, so despite all the constraints that are upon us, we are able to cancel the fuel duty increase planned for January, and fuel duty from August will be only 3p higher than it is now. Taxes on petrol will be a full 10p lower than they would have been without our action in the Budget and this autumn. Families will save £144 on filling up the average family car by the end of next year. At this tough time, we are helping where we can.

All that we are doing today—sticking to our deficit plan to keep interest rates as low as possible, increasing the supply of credit to pass those low rates on to families and businesses, rebalancing our economy with an active enterprise policy and new infrastructure, and providing help with the cost of living on fuel duty and rail fares—all that takes Britain in the right direction. It cannot transform our economic situation overnight.

People in this country understand the problems that Britain faces. They can watch the news any night of the week and see for themselves the crisis in the eurozone and the scale of the debt burden that we carry. People know that promises of quick fixes and more spending that this country cannot afford at times like this are like the promises of a quack doctor selling a miracle cure. We do not offer that today.

What we offer is a Government who have a plan to deal with our nation’s debts to keep rates low; a Government determined to support businesses and support jobs; a Government committed to take Britain safely through the storm. Leadership for tough times—that is what we offer. I commend this Statement to the House.”

--- Later in debate ---

[Lord Sassoon]

My Lords, was not all that fun? I really think that at least the noble Lord, Lord Eatwell, studied the documents, to which we will come in a minute, unlike the noble Lord, Lord Myners. There is nothing of substance from the opposition Benches, so we have the noble Lord, Lord Myners, brought out of retirement to give us a bit of theatre to cheer up our early evening. But we really have got some serious things to talk about.

The Statement made by my right honourable friend the Chancellor was made against a very difficult situation in the eurozone. The Government’s overriding priority is to demonstrate our commitment to live within this country’s means and to keep our interest rates low and stable. We have to ensure that we work to stimulate the supply of money and credit to make sure that those low interest rates are passed on to families and businesses. My right honourable friend’s Statement supports our business and invests in our infrastructure. I am pleased that the noble Lord, Lord Myners, at least welcomes that increased investment in our infrastructure because that is what will lay the foundations for sustainable growth into the future.

If the noble Lord, Lord Myners, had spent time reading the documents today, he would understand some of the facts that have been laid out by the independent Office for Budget Responsibility. Let me remind him and other noble Lords of some of that. First, yes, growth is lower. But why is growth lower? The OBR sets it out in forensic detail. First, it ascribes the lower growth to date as being substantially attributable to the higher inflation as a result of imports of commodities. Secondly, it highlights the current risks and the reasons for its reduction in the forecast growth as being principally as a result of difficulties in the eurozone. The noble Lord is shaking his head at those, but perhaps he will nod approvingly at this. Thirdly, he will have noticed when he talks about the structural deficit that the OBR’s analysis since it has re-looked at the numbers is that the so-called boom under Labour was even higher and more fictitious than before and that the structural deficit that it built up was even larger, which is why, additionally, we are not going to make up the structural shortfall that we need to make up.

Having said that, the OBR goes on to lay out its growth projections for the next few years. In terms of the top-line growth from 2012 through to 2016, those numbers in each year are forecast to be higher than the growth of the eurozone. So we should not talk down the prospects of the country. The noble Lord asked what the sources of that growth had been. If he had got as far as chart 1.4 in Autumn Statement 2011, which is not very far in, it shows exactly where the OBR expects the growth to come from. For example, it expects total investment to contribute four percentage points to growth between 2010 and 2016, while net trade will contribute two percentage points. The noble Lord, Lord Myners, shakes his head. Does he have better numbers? Does he not share the analysis of the OBR? Those are its numbers.

If the noble Lord was to look a bit further into the masterly document that the OBR has produced, its latest forecast for reduction in general government employment over the period 2011 to 2017 will be 710,000 jobs. It forecasts that in the same period the private sector will generate not 700,000 new jobs but 1.7 million new jobs. Again, I say to the noble Lord and others on the opposition Benches that the policies that this Government are driving through are those which will underpin sustained growth and, that the private sector is already delivering that growth.

On borrowing, we had all sorts of contradictory thoughts from the noble Lord. I am not sure whether he wants us to go faster or slower on the pace of balancing the budget. It was not at all clear to me. All I know is that, if we were sticking in the current environment to the previous Labour Government’s plans, borrowing in 2013-14 would not be the £79 billion which this Government will be borrowing, but £100 billion. To look at it another way, over the spending review period, under the plans of the previous Government, there would be an additional £100 billion of borrowing. That would not be just borrowing: it would be £100 billion of additional debt, with which a Labour Government would have wished to saddle this country.

As to credit easing, it will not be the Government who make the decision. Again, if the noble Lord had chosen to look at it, the banks will be taking those decisions.

The noble Lord also gets it wrong on the pension funds and infrastructure. The pension funds have come to us and have said that they wish to allocate something of the order of 2 per cent to 2.5 per cent of their funds to infrastructure. They have asked us as the Government to facilitate that, which we are happy to do.

After all, this is the noble Lord who a few months ago—perhaps last month—was advising HSBC’s retail bank to move to Paris. This is a man who does not have the best interests of British banking or the British economy at heart.

[Noble Lords]

Oh!

[Lord Sassoon]

That was reported in the press. If the noble Lord would like to deny it, he is at liberty to do so.

[Lord Myners]

I think that that borders on an accusation of treachery and that the noble Lord owes me an apology. What I said was that it would not surprise me, in the circumstances, if the board of HSBC felt that it had to consider matters of location, which is exactly what it confirmed it was doing when it gave evidence to the Treasury Select Committee. To suggest in some way that I am guilty of some form of treachery is a monstrous suggestion, which I hope that the Minister will withdraw.

[Lord Sassoon]

The noble Lord, Lord Myners, mentions treachery, which never passed my lips. He was reported as saying that he suggested that HSBC should be moving its retail bank to Paris. If in fact that was not the advice he was giving, I am very glad that he has now clarified that.

This Government are making sure that we deal with the legacy of our predecessors—of his Government —and return our economy to sustainable growth. That means sticking to our deficit plan to keep interest rates as low as possible, which is what was at the heart of my right honourable friend’s Statement this afternoon.

--- Later in debate ---

[Lord Sassoon]

My Lords, there is no one more grateful than me for not having to read out 45 minutes of Statement, however excellent it is, so I am glad of the change in the rules of the House.

The situation with the pension funds is that two groups of funds approached us to ask if we as the Government could facilitate their creation of a collective vehicle through which they might invest. We have signed a memorandum of understanding with the groups of pension funds, and we will work quickly to help them set up a vehicle that will then be in place for them. We will be reporting on progress certainly by the Budget next year. Of course, there is nothing to stop those pension funds from investing now, and indeed some of them do so through private sector vehicles.

Further, the UK pension funds are not the only bodies putting up their hands and recognising the attraction of this asset class. Noble Lords may have seen only yesterday an interesting article by the chairman of the Chinese sovereign wealth fund, the CIC, in the Financial Times, saying that it was looking to invest in this sector. The appetite for investment in UK infrastructure is very strong. The UK pension fund vehicle will be additive, and we welcome that.

The housing strategy was published on 21 November. The Government have a clear plan for supporting the housing market in order to achieve a more stable and sustainable position. Without going in detail through every element of what that strategy consists of, we are introducing the new build indemnity scheme to support builders and lenders in increasing the supply of new homes by increasing the supply of affordable mortgage finance. We are launching the new £400 million “Get Britain Building” investment fund. We are bringing more empty homes and buildings back into use. We are invigorating the right to buy, and for the first time within that, the receipts from additional right-to-buy sales will be used to support the funding of new affordable homes for rent on a one-for-one basis. We are supporting locally planned large-scale developments and we are consulting on various planning obligations. What was set out on 21 November is a substantial and important package for housing.

[Baroness Lister of Burtersett]

My Lords, can the Minister explain to the House the justification for reneging on the pledge to increase in real terms child tax credit, given that that increase was supposed to stop child poverty rising? Can he tell the House what the impact of that will be on the number of children living in poverty?

[Lord Sassoon]

My Lords, the original £110 rise over inflation was announced at a time when the expectation as regards inflation was significantly lower than has turned out to be the case. The inflation increase that will be made is much higher than intended. Inflation in all the independent forecasts is expected to come down significantly next year, so by April 2012 when the uprating comes in, the inflation expectations are going to be different. That is the basis for the change now. On the distributional effects, those have been set out in considerable detail in a document that was put up on the Treasury’s website this afternoon.

[Lord Empey]

My Lords, I welcome many of the comments made in the Budget Statement but there is one that I want to ask the Minister to clarify. He announced that he was asking the independent pay review bodies to consider how public sector pay can be made more responsive to local labour markets. Can he explain what that means? How are the regions geographically defined? Further, if there were to be a reduction in public sector pay in some of the regions, would that lead on inevitably to reductions in benefits in those areas as well?

[Lord Sassoon]

My Lords, I am grateful to the noble Lord, Lord Empey, for drawing attention to this critical issue because it is potentially an important structural change in the economy. We want to make sure that in the labour markets in all the regions of the country there is no unfair competition or crowding out in any way of the ability of the private sector to hire people. Private sector pay has to be reflective of local market conditions where until now public sector pay has been set on a national basis. We have said that we will be asking the independent pay review bodies to consider how pay can be made more responsive to local labour market conditions, and they will report to us by July 2012.

[Lord Higgins]

My Lords, I think that it is perhaps rather unfortunate that the Statement was not repeated today because it is very well worth repeating. It includes a remarkable number of individual proposals that are going to help the recovery without endangering the Chancellor’s overall objective of maintaining what I think has become known as plan A, which will result in the deficit being reduced. Is it not rather surprising that the shadow Chancellor in another place continues to say that the proposals of the Government are cutting too fast and too soon? We have seen how very difficult it is to make cuts quickly, and in fact that is one of the problems we have had to face.

In answer to the noble Lord, Lord Myners, saying just now that the Government’s proposals are not respectable, does my noble friend accept that the OECD—perhaps as respectable a body as one could possibly imagine—has warmly endorsed the overall drive of the Chancellor’s policy? Moreover, is it not clear, since we have the advantage of the IBR forecast taking into account what is in the autumn Statement rather than making a forecast based on not knowing what the effects of the Chancellor’s Statement would be, that what the Government have proposed in the autumn Statement will effectively bring matters back on course so that the plans that the Chancellor originally had will be fulfilled?

Having said that, there are some concerns about the situation with regard to monetary policy. Paragraph 3.53 in the forecast of the OBR is very strange. It is important that we should maintain growth in the money supply if we are to see recovery. Can my noble friend tell us what the situation is so far as the money supply is concerned?

[Lord Sassoon]

I am grateful to my noble friend Lord Higgins. I wondered whether we would get through this debate without mention of the money supply, but he has not disappointed me. We have had it as well. I agree absolutely with his analysis of the situation. As the OECD said yesterday, the UK’s consolidation programme strikes the right balance between addressing fiscal sustainability and preserving growth. I can also confirm what my noble friend says. The OBR analysis shows that we are on track to meet the fiscal mandate set out by the Chancellor last year. In respect of monetary easing, I can only draw my noble friend’s attention to the stance taken by the Bank of England with an additional £75 billion of asset purchases, which it believes is necessary in order to ensure that there is no undershoot of inflation, and the package of credit easing measures. The noble Lord, Lord Myners, did not seem to want to see it this way, but that package has been designed to complement the monetary easing with which the Bank of England is driving ahead.

[Lord Davies of Stamford]

My Lords, the economy has already suffered two major negative demand shocks, one from the Government’s excessively rapid fiscal retrenchment and the other from the crisis in the eurozone. Will the Government try to avoid creating a third substantial negative demand shock by allowing banks which have under Basel II to increase their capital in relation to risk assets to do so by the simple expedient of reducing their lending and their banking book? Will the Government take powers to ensure that this increase in capital is done exclusively as a result of rights issues, other capital issues or issues of synthetic capital such as contingent convertible bonds, or by increasing retention of earnings at the expense of dividends and bonuses? Does the Minister agree that, if that is not done, the Government will cause a devastating blow to the economy, which is already on the ropes from these other causes?

[Lord Sassoon]

My Lords, the first thing to remind the House of is that it was my right honourable friend the Chancellor who took the lead in ensuring that the Basel III reforms on capital were phased in over a period to 2019, which was accepted by the G20 precisely for the reasons that the noble Lord gives; that is, that we did not want to place more burdens on the credit situation in the short term. Similarly, the Vickers commission has recommended that certain of its reforms be on a similarly extended timetable for the same reason. As for today’s measures, the £20 billion of underpinning of the national loan guarantee scheme is directed at ensuring that the flow of credit to small and medium-sized businesses continues, as it must do as we go into the recovery phase of the economy.

[Baroness Wheatcroft]

My Lords, the noble Lord, Lord Myners, referred to the march of the myth-makers. Does the Minister agree with me that perhaps the biggest myth was that we had done away with boom and bust? As a result of that, what we are paying in interest on our debt is more than what we are spending on education, and that is with interest rates at the low level that plan A had assumed. What does the Minister think will happen to those interest rates if we do not stick to plan A?

[Lord Sassoon]

My Lords, I dread to think what would happen to interest rates. The interest rates on our 10-year money have stayed rock solid. They are slightly down today, at below 2.3 per cent. Where is Italy? It is north of 7 per cent. Every 1 per cent increase in our interest rates would cost this country £21 billion or £22 billion. To look at it another way, by keeping our interest rates below the levels which were forecast by the OBR only in March this year at the time of the Budget, we have saved £21 billion or £22 billion on our interest bill, money that can be much better spent on our public services. I dread to think where we would be, but it would be in horrendous territory.

[Lord Radice]

I welcome the Government’s infrastructure schemes, but what impact will the measures announced in the Autumn Statement today have on output and jobs?

[Lord Sassoon]

My Lords, I can only refer again to the numbers in the OBR’s document. I do not want to detain the House by repeating them all, but they show the cumulative effect of all these measures, including the infrastructure measures. I am grateful to the noble Lord for drawing attention to those measures because they are now more central. The economic infrastructure in particular has become central to the Government’s thinking and planning in a way that it has never been under previous Governments.

[Baroness Kramer]

My Lords, there are some key measures in the Statement on which I congratulate the Government and which completely change the framework for both businesses and infrastructure to access financing. Over the long term, they will create the capacity for accelerated growth that we should all have seen more than a decade ago.

I have two questions for the Minister. First, micro-business is obviously the beginning of the business pipeline. The national loan guarantee scheme works through the banks, which pay no regard to micro-businesses. That does not seem to be a scheme that particularly helps them. They also seem to be too small for the business finance partnership. Will there be, or are there, mechanisms within credit easing to address that particular group of essential businesses?

Secondly, the Minister will guess that I am absolutely delighted that the Northern line will be financed against the community infrastructure levy and that similar powers may be given to various city mayors through tax increment financing mechanisms. Will he look at applying this far more widely, because many small infrastructure projects could come very quickly out of the pipeline, be well managed by local authorities working in co-ordination with each other and give us a much wider distribution of infrastructure as a spur to growth?

[Lord Sassoon]

My Lords, on the first of the questions which my noble friend raises, money will indeed flow through the banks as a result of the guarantee scheme to micro-businesses, although I appreciate that it will always be tougher for them. It is worth noting that there will be banks coming into the credit easing framework that were not there previously—some of the new entrants into the market—so we are maximising the footprint through the banks. I draw attention to one of the other schemes that will be directly relevant to micro-businesses. The seed enterprise investment scheme and the related one-year CGT holiday are to encourage investment in new, early-stage companies. That will commence from April 2012, with a kick-starter of offering a CGT holiday.

On my noble friend’s second question, I well take the point about the importance of locally driven infrastructure schemes, which is why my right honourable friend the Chief Secretary announced the initial £500 million fund specifically for that purpose earlier in the autumn. Beyond that, the use of the CIL is being considered, but I would just caution that we need to think about the fiscal impact of widening that scheme.

[Lord Wills]

My Lords, since I came into this House some 18 months ago, one of the most notable features week after week has been the presence on the Bench to the right of the Minister of former Ministers who served with great distinction in previous Conservative Administrations, including three former Chancellors who served in the Treasury during the 1980s. Can the Minister shed any light on why not a single one of them is in their place today to support him in this most depressing Statement?

[Lord Sassoon]

My Lords, I take it as a sign of great confidence in the direction of policy of my right honourable friend the Chancellor of the Exchequer because former Chancellors are never shy of giving their advice. If they are not giving it today, I assume that they are satisfied.

[Lord Cormack]

My Lords, I am sure that my noble friend is entirely right in what he has just said. Am I right in believing that the money that has been earmarked for HS2 is still there? If that is the case, could I suggest to him, bearing in mind the stimulating effect on the economy that infrastructure plans have wherever they take place, that it might be better to abandon that scheme and to use that money for reinstating more Beeching lines and other things, so that people all over the country have the benefit of the money that my right honourable friend the Chancellor has said they should have? Could we abandon that scheme in favour of others?

[Lord Sassoon]

My Lords, I am delighted that not only can we continue with the HS2 scheme, although it does not impact in any material way on the current spending review period, but also that a number of other exciting rail projects have been announced or confirmed today; for example, the reopening of the Oxford-Bedford link as part of the overall possible link between Oxford and Cambridge, the electrification of the trans-Pennine line, and lots more that is going in rail infrastructure.

European Union Membership (Economic Implications) Bill [HL]

Lord Sassoon Excerpts

Friday 25th November 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I start by congratulating the noble Lord, Lord Pearson of Rannoch, on getting this debate today. I disagree with the noble Lord, Lord Davies of Oldham. It is quite right that we should be debating Europe at this very difficult and challenging time. I also thank all noble Lords for what has turned out to be a valuable and thought-provoking debate. Having said that, I make it clear at the beginning that the Government have significant reservations about the Bill that we are debating today.

I am between the rock of noble Lords wanting to move on to complete two other significant Private Member’s Bills’ Second Readings today and the hard place of doing justice to what has been a very stimulating debate. The noble Lord, Lord Davies of Oldham, has already pointed out my problem, and I am grateful to him for not adding to it. I thought that the string of questions was about to come, but it did not and I am grateful for that.

As we are all aware, these are extremely dangerous times for the global economy. The crisis in the euro area continues to undermine markets across the world, the UK included. As my right honourable friend the Chancellor has said, resolving the euro area crisis would be the biggest single boost to the UK economy this autumn.

As well as resolving the immediate crisis, Europe faces significant challenges that go to the very core of its raison d’être. What is the EU’s purpose in an open and competitive global economy? What do we need to change for it to meet that vision? We are right to ask these questions, but we will be heard and make a difference only so long as we are a core member of the EU, and we will make sure under this Government that our voice is heard in Europe, exactly as it has been heard most recently on the negotiations for the EU 2012 budget. I remind my noble friends Lord Liverpool and Lord Stevens of Ludgate of what we have done to peg back the proposed increase successfully, resisting proposals for inflation-busting increases. But of course I agree with my noble friend Lord Stevens that much more needs to be done and that there needs to be real budgetary restraint by the Commission for the next few years. We have saved €12 billion against the ceiling that was there in the 2005 financial perspective, but there is much more.

While we are on this topic, I would say to the noble Lords, Lord Pearson of Rannoch and Lord Willoughby de Broke, that I do not recognise the numbers that they were quoting. The net contribution of the UK to the EU in 2010-11 is estimated at £7.6 billion, up from £4.7 billion in 2009-10, but of course the reason for that increase is because of the give-away that the last Government gave on the UK’s abatement. Having stepped up very significantly to the new level, the OBR’s figures are that the numbers now remain broadly level over the next few years.

As well as financial discipline, it is equally important that Europe pursues an ambitious agenda for growth.

[Lord Pearson of Rannoch]

For clarity’s sake I should say, following on from what the Minister has just said about our gross and net contributions, that he is talking about the Treasury figures. The figures that we gave are from the pink book and include all our contributions to the European venture, whether they go through the Treasury or not, such as the DfID budget. So I am afraid that our figures are the correct figures.

[Lord Sassoon]

My Lords, I was quoting the figures of the independent Office for Budget Responsibility, not the Treasury’s own figures, but let us turn to the more important issue: that Europe must pursue an ambitious agenda for growth. In the single market, I believe that we have one of the most powerful tools to ensure strong, sustainable and balanced growth not only across the EU but for the UK. The noble Lord, Lord Watson of Invergowrie, quoted all the figures that Ministers would customarily quote, so I am very grateful to him for helping me out. I will simply emphasise that this is a market worth €12 trillion and home to 500 million consumers.

Despite what the single market has achieved to date, however, so much more can still be done, so in answer to noble Lords, including my noble friend Lady Noakes, who rightly argue that we need assessment for well informed debate, I should say that I agree up to a point. When it comes to the forward-looking challenges as to how we are going to get the most out of the single market, yes, we need the analysis. That is why, for example, in February this year BIS published a significant study into the effects of completing the single market and the 7 per cent increase in UK GDP that could be achieved if we press forward with that project. A truly free and open single market in services and the creation of a digital single market could add as much as €800 billion to EU GDP.

In answer to the second and third so-called misconceptions mentioned by the noble Lord, Lord Pearson of Rannoch—I do not shy away from those but am very happy to address all four of them head on—I believe that it is only by being in the EU that we will drive forward the benefits of the single market and capture the very significant gains that remain out there. There is a lot to be done and it is very frustrating that things do not move forward, but it is easy to say that we can be outside it and somehow get all those benefits. If the market is to be driven forward we need to be there, at the table. We can unlock a further €60 billion of benefits to the EU from world trade through completion of EU free-trade agreements with key markets such as India, Canada and Singapore. Again, I do not agree with the noble Lord about what we could achieve in these areas if we simply had our own seat at the WTO. Just as we are doing here in the UK, we have to drive down the regulatory burdens and costs of doing business across the EU—something that was identified by a number of noble Lords in this debate.

Finally, in response to these questions of whether we could be outside it and have the benefit of the free market, the comparison that the noble Lord, Lord Stoddart of Swindon, made with Norway, for example, is simply wrong. I am grateful to the noble Lord, Lord Lea of Crondall, who has already addressed that point. Norway is a small country blessed with huge oil and gas reserves, which is what makes it principally different from countries such as the UK. We cannot simply therefore step somehow magically into their shoes. I also say to the noble Lord, Lord Stoddart of Swindon, that while overall we have to fight to increase our share of world trade and our exports, a trade deficit, taken narrowly, is not in itself a bad thing. We have to recognise the benefits of trade to both sides, and therefore cannot simply dismiss the benefits that we have from EU trade by saying that we have a deficit.

The question about the benefits of going forward but nevertheless improving the EU market is precisely why my right honourable friend the Prime Minister secured a commitment for an EU growth test: to filter out EU legislation that is harmful to growth and jobs. The Commission’s proposed financial transaction tax is one such example. The European Commission itself expects that such a tax could reduce EU GDP by as much as 3.4 per cent or €422 billion—madness. More than that, as my right honourable friend the Chancellor has said it is “a bullet aimed”, squarely,

“at the heart of London”.

I say to my noble friends Lord Ahmad of Wimbledon and Lord Liverpool that the financial transaction tax requires unanimity to go forward, and that it will not get UK support. However, just as we have done and will do on directives in financial services and on the EU budget, we will continue through the current crisis to defend the full range of Britain’s interests in Europe.

Having picked up some of the important general themes that noble Lords have raised in this debate, I shall turn briefly to one or two questions about the analysis here. I certainly agree with my noble friends Lord Risby and Lady Falkner of Margravine and the self-styled noble and maverick Lord, Lord Desai, that this all goes much wider than some narrow cost-benefit analysis. Once we start this discussion, such an analysis is important but not nearly sufficient. I also agree with my noble friend Lady Falkner that there is plenty of material out there; it is not that the debate cannot be informed by a whole range of credible and indeed less credible commentators. In 2010 the Treasury reviewed that literature, which is available on the Treasury website, so we do not shy away from looking at the issue from time to time. There was also the 2005 study, which again is available on the Treasury website. I hope that it is of some reassurance to the noble Lords, Lord Bilimoria and Lord Empey, that we at the Treasury do not spend our time doing these studies on a daily basis—I hope they would expect us to be getting with doing some more valuable work with our time—but from time to time we look at what the outside experts are coming up with.

We should remind ourselves that, in addition to the costs and benefits of the EU, we as a nation risk downplaying our prospects at every turn. It is important to recognise, for example, that in the World Bank’s ease of business rankings the UK has got back into the top 10 and is now ranked seventh. That is critical. So I believe that Britain is well placed. We have lot to do internally in the UK, of course, and I have no doubt that there will be more discussion about that next week. As I said, the EU has much more to do with our active and positive participation.

I take the points made by the two noble Lord Davieses who have spoken in this debate about the location of manufacturing and the benefits that we get from it. I agree. On other issues of trade and investment, my noble friend Lord Ryder of Wensum referred to recent remarks by the chairman of the Chinese sovereign wealth fund, the CIC, on the eurozone. That gives me an opportunity to remind the House that the same chairman of the CIC was here two weeks ago with a very large delegation of Chinese officials and businesses, looking at the opportunities in UK infrastructure. While others have to go to Beijing begging for bailouts, we are very pleased to receive delegations here to look at opportunities in the UK. That is the context in which we should see this debate.

The noble Lord, Lord Kakkar, referred to another area of great strength for the UK: our world-beating excellence in clinical research. He made some telling points but, on the broad point about working time regulations, I stress that the Government are committed to the view that working people should decide the hours that they work, and we will continue to make that abundantly clear to the European Commission.

I did not get many questions directly, but a point was specifically addressed to me by my noble friend Lord Stevens of Ludgate about the UK’s exposure to losses of the ECB. I can confirm that net losses or profits are allocated to euro-area national banks and that non-euro-area national banks, such as the Bank of England, do not receive profits or losses from the ECB. The UK makes a contribution to the capital of the ECB but that is simply in relation to the bank’s running costs.

Finally, we had two interesting and remarkable contributions at the end from a more historical perspective from the noble Lord, Lord Gilbert, and my noble friend Lord Cormack. I merely say that, of those two contributions, I was rather attracted by and appreciate that of my noble friend and his important reminder of the insights that the late Lord Dahrendorf brought to these discussions and to the country more broadly.

In brief conclusion, let me be absolutely clear that the Government believe that leaving the EU is not remotely in our national interest. Standing on the outside, we would still be subject to the rules made in Brussels on the single market but powerless to influence them. Rest assured that rules written without us will not generally be in the UK’s national interest. We have always been the driving force for open markets and free trade in the EU, and that is a role that we will continue to fulfil to ensure that the UK’s voice is still heard and the UK’s interests are protected.

International Monetary Fund

Lord Sassoon Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government by how much they expect to increase their contribution to the International Monetary Fund.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, at the G20 Britain, and all the other countries, agreed to ensure that the IMF continues to have resources to play its systemic role to the benefit of its whole membership. We stand ready to contribute within limits agreed by the House and set out in the International Monetary Fund Act 1979. However, there is currently no agreement about the timing, extent or exact method through which IMF resources will be increased.

[Lord Barnett]

In thanking the noble Lord for his Answer, I remind him that the Chief Secretary to the Treasury said on 6 November that he expected our contribution—which is the Question I asked—would be up to £40 billion. Perhaps the noble Lord could answer that as well. He and the Government recognise the need to provide funds for the IMF. Indeed, the Prime Minister said in the House on 7 November that it would be irresponsible to walk away from helping the IMF, but that it must not be used for a bailout. Can the Minister explain the difference between helping for a bailout and helping for a crisis—a very serious world crisis?

[Lord Sassoon]

My Lords, in answer to the first question, the position under the International Monetary Fund Act 1979 is that the limits agreed by Parliament currently stand at 38.8 billion SDRs, or about £38.3 billion. That is where the £40 billion figure comes from.

On the question of what the IMF is there to do, it is to look at the overall systemic risks in the world and support individual countries. It is not there to support countries in one particular zone as opposed to others or to support currencies. It is there to consider, under its criteria, country by country, where support might be needed.

[Lord Newby]

My Lords, in view of the failure of the German authorities yesterday to auction off debt, do the Government believe that the time has now come for the development of a Eurobond to provide a long-term stable approach to raising funds for the whole of the eurozone?

[Lord Sassoon]

My Lords, we are at risk of straying a bit far from the question about the IMF, but there are a number of serious points here. First, with respect to Germany or any other countries, one should not read too much into one particular bond sale that does not meet its target. That has happened to a number of countries over the years, including the UK. As for what the arrangements will be for the eurozone, we continue to wish that the eurozone makes as much progress as it can, as urgently as possible, to put the arrangements in place.

[Lord McFall of Alcluith]

My Lords, given that the eurozone crisis is potentially more damaging than the one of 2008, is the Minister aware of the IMF statistics that show that over 50 per cent of the Italian, German and French debt is held by non-residents, thereby ensuring that if there is a crisis it will not be confined to the European continent? Is there not a case for more urgent consideration with the IMF to ensure that it and the UK play their part in this global crisis to ensure a better and more stable economic future for the citizens of this country?

--- Later in debate ---

[Lord Sassoon]

The IMF does and will continue to play a pivotal role in these systemic issues. There was no agreement at the G20 for an increase in resources for the IMF because, understandably, the US and other key non-European countries want to see the euro area core’s willingness to contribute to the eurozone crisis before they commit. Meanwhile, the IMF has $400 billion available to lend, but I agree with the noble Lord that there is an urgent need to resolve all these interlinked matters.

[Lord Blackwell]

My Lords, does my noble friend agree that it is undesirable for the IMF or indeed any other agency to fund the debts of any particular country unless that country has a sustainable plan to restore its international competitiveness?

[Lord Sassoon]

I very much agree with my noble friend. The IMF’s lending programmes are indeed conditional on programmes of that kind.

[Lord Harrison]

Given the fact that we help our fellow European countries in the contribution that we have made to Ireland, the IMF and the EFSM, what is the philosophical and practical difference between contributing to the EFSF—which is not wholly confined to the euro 17—and contributing to the future EFSM or, for that matter, any other acronym that may come along to help?

[Lord Sassoon]

It would be unproductive to be drawn into the history of the arrangements that the previous Government committed this country to, but we could go into that if noble Lords want to. This Government are completely clear: we will support the IMF on a bipartisan and all-party basis, as we have always done since its inception. It must be for the eurozone countries to put in place their mechanisms for future support.

[Lord Dykes]

My Lords, does the Minister not agree that in view of the deep urgency of this crisis, which the noble Lord, Lord Barnett, referred to—indeed, the United States is the most irresponsibly indebted country of all in the whole IMF system—there is a growing case for a significant increase in these facilities and for working with the eurozone for the good of the whole world? Otherwise this problem is going to grow and grow, including in non-euro countries.

[Lord Sassoon]

My Lords, I would just reinforce to my noble friend that at the G20 Britain and all the other countries agreed to ensure that the IMF continues to have all the resources that it needs. There is no lack of commitment to the IMF having those resources. We now need to see what proposals develop. I agree that the situation cannot drag on for ever.

[Lord Davies of Oldham]

My Lords, the noble Lord has cited the resources that are already available to the IMF but many commentators foresee that they will be inadequate to meet the depth of this crisis. If the IMF seeks to raise further funds, will the Government be contributing?

--- Later in debate ---

[Lord Sassoon]

My Lords, I have made it completely clear that we have headroom under the current law and the statutory instruments that were passed by Parliament in July 2010 and July 2011. We have always contributed to the IMF and we will continue to support it.

Sovereign Credit Ratings: EUC Report

Lord Sassoon Excerpts

Tuesday 15th November 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I start by thanking your Lordships for a thorough and insightful debate on the role of the sovereign credit rating agencies. I particularly thank the noble Lord, Lord Harrison, and the members of EU Sub-Committee A, on Economic and Financial Affairs and International Trade, for their report. It is a report of considerable importance as we continue to live with the consequences of a financial crisis in which credit rating agencies played a significant role, and as we cope with a sovereign debt crisis in which they continue to have a key role.

The Government believe that the report contains a number of valuable insights, with which they largely agree. We have had a surprising alliance of dissenting voices, starting with the noble Lord, Lord Foulkes of Cumnock, who spoke in his characteristically vigorous style. I am sorry that the noble Lord, Lord Myners, did not hear that analysis of the credit rating agency scene, which differed completely from the one that he gave. The noble Lord, Lord Monks, was also a dissenting voice. In a rather different way, the thoughtful analysis of the noble Lord, Lord Eatwell, came to some different conclusions. However, the Government believe that your Lordships’ report is very valuable and will continue to inform the European-led decisions.

We are firmly of the view that credit rating agency reform is needed. However, as the committee rightly highlights, it is also important to remember that credit rating agencies play a critical role in efficient financial markets by providing independent assessments of creditworthiness. Since the financial crisis, Europe has already agreed new regulation on CRAs, which has come into effect. Therefore, today’s new proposals constitute a third round of proposals coming out of Europe since the crisis. I should say at this point that the subject of the debate is for the Government to respond to your Lordships’ committee. I understand that many of the questions concern the European proposals that have emerged just this afternoon. I will address them as far as I can but your Lordships will appreciate the shortness of time in this debate and the fact that my first duty tonight is to respond to the committee’s report. However, we have had a third round of proposals from Europe today.

As has been noted, CRAs are now supervised under the European Securities and Markets Authority and must comply with raised standards on methodology, conflicts of interest and disclosure. That is business that is already agreed. While this represents substantial progress, the Government believe that further CRA reform should focus on three aspects which closely reflect the committee’s overall conclusions. First, it is vital to reduce overreliance on CRA ratings. That point has been made by a number of speakers this evening. We strongly agree with the report that investors must ultimately take responsibility for their own investment decisions—caveat emptor, indeed. The hard-wiring of ratings in legislation, or in the internal risk assessments of financial institutions, leads, among other things, to cliff-edge effects and instability.

Secondly—this was also recommended by the committee—we support increased disclosure of ratings assumptions and process, and of underlying assets embedded in complex products. This will encourage investors to use CRA ratings in a more sophisticated manner. It will also make CRAs more accountable for their ratings.

Finally, we support fostering competition in the credit rating agencies, but without compromising ratings quality. We agree with the committee’s recommendation against the public provision of ratings. Instead, we favour reducing reputational barriers to entry such as through initiatives to establish a central platform of CRA performance statistics. The Government also strongly agree that international consistency on CRA regulation is important. We shall continue to use the Financial Stability Board to stress this because it is not only Europe but IOSCO and others that are coming forward with proposals, so the FSB will be important.

I want to take this opportunity to respond to some of the key conclusions of the report. We agree with the committee’s assessment that CRAs cannot be held responsible for precipitating or exacerbating the euro area crisis. Sovereign downgrades in Europe have reflected fundamental internal and external imbalances and CRA reform should not distract us from the key task of addressing those imbalances. The noble Lord, Lord Eatwell, challenges me with the rather bigger question of what action needs to be taken to stabilise the eurozone. I wish that we had time for that subject tonight, but there will be other opportunities. A lot of critical action is needed. CRA reform is important but it should not distract us from the other actions that he talks about which are for another debate.

We also agree that the proposal to suspend ratings for countries receiving international aid would only reduce information in the financial markets, possibly leading to further contagion. The key to reducing the destabilising effects of rating changes is timely and effective communication by the CRAs, not suspension. The Government agree that CRAs should always seek to learn from their past performance and endeavour to provide markets with timely and accurate ratings. However, the build-up of imbalances in the euro area was not reflected in the data in the run-up to the sovereign crisis, so it is crucial that the quality of national statistics in Europe is improved to underpin the assessment by CRAs and all others.

The committee also suggests that there should be a competition inquiry into the industry—a point that was touched on by the noble Lord, Lord Harrison, and others this evening. The competent authority to survey competition in the industry is the European Commission. It should keep the industry under review. The concentrated nature of the industry has been referred to a number of times, but it is for the Commission to decide whether there is evidence of the abuse of a dominant market position on which to base a competition inquiry. Such an inquiry should have regard to the impact of recent and forthcoming reforms in the CRA industry.

As we know, the debate has been particularly timely because the European Commission today released its proposals for this further package on CRA reform, which I believe will be voted on under qualified majority voting. I have to say at this point that I very much agree with the noble Lord, Lord Kerr of Kinlochard, that it is not necessary or appropriate for the noble Lord, Lord Myners, to lampoon Commissioner Barnier. I hope that this debate is read in Brussels for a lot of the serious comment that is highly relevant to the Commission’s ongoing deliberations; but frankly the comments of the noble Lord, Lord Myners, do the UK absolutely no favours by lowering the tone of the debate in a rather demeaning manner. He sits there and laughs, but it exemplifies why the previous Government made so little progress in many European negotiations. He takes a flippant and dismissive attitude to the Commission, and it really is not necessary.

Our initial response to the Commission’s proposals is very much in line with the committee’s conclusions. We welcome the proposals to reduce the overreliance on CRA ratings and to improve the transparency of ratings, the methodology and the structured finance products. Such transparency will help foster competition. It is worth noting that already 31 CRAs have applied for registration in Europe, so there is evidence of developing competition—a point raised by my noble friend Lord Vallance of Tummel, as well as my noble friend Lady Noakes.

We oppose measures to interfere directly with industry structure or with ratings methodology. We strongly oppose efforts to harmonise and increase the scope of CRA liability, for which we already have an appropriate regime in the United Kingdom.

Clearly, many parties raised concerns about some of the proposals that were suggested earlier—particularly the ban on sovereign ratings and the thought of a publicly funded EU rating agency. We share those concerns and are glad that the Commission has agreed that they merit further reflection. I am not able to say whether it is a sine die, kick-into-the-long-grass situation; we will have to look at the detail and see what happens. However, it is a good first step to see the proposals taken off the table for the moment. Of course, we do not want to see a special regime for regulating sovereign markets, which would reduce their impartiality and comparability and hence their value in international markets.

The Government are committed to reforms that will ensure that credit ratings are credible and transparent, and will continue to serve as a useful indicator to international financial markets. The Government will continue their close engagement with European and international partners to achieve these objectives. We look forward to examining today’s Commission proposals in detail and to keeping the House fully abreast of the Government’s developing response.

House adjourned at 9.40 pm.

Al-Qaida (Asset-Freezing) Regulations 2011

Lord Sassoon Excerpts

Monday 14th November 2011 Lords Chamber

Moved By

[Lord Sassoon]

To move that the draft Regulations laid before the House on 11 October be approved.

Relevant documents: 29th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 9 November.

Motion agreed.

Al-Qaida (Asset-Freezing) Regulations 2011

Lord Sassoon Excerpts

Wednesday 9th November 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Al-Qaida (Asset-Freezing) Regulations 2011.

Relevant document: 29th Report from the Joint Committee on Statutory Instruments.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, asset freezing is a vital and necessary global response to the threat from al-Qaeda. It is a tool to disrupt the flow of funds to al-Qaeda, helping to prevent them executing attacks and supporting their networks.

As a permanent member of the UN Security Council, we are committed to meeting our obligations under the UN charter, and we support the UN’s al-Qaeda asset-freezing regime. The regulations before the Committee today will ensure that we continue to meet our international obligations and prevent funds from reaching persons associated with al-Qaeda. In particular, they reflect UN Security Council Resolutions 1988 and 1999, which were agreed in June this year.

I will provide further detail on these changes. First, it is important to clarify that the regulations we are debating today do not apply to the terrorist asset-freezing regime mandated by Resolution 1373. That resolution is implemented in the UK under the Terrorist Asset-Freezing etc. Act 2010 passed last December. The regulations under debate apply only to the UN al-Qaeda asset-freezing regime established under UN Security Council Resolution 1267 and amended by Resolution 1333 and subsequent resolutions. That regime, established in 1999, initially applied an asset freeze only against the Taliban. It was subsequently extended by successor resolutions to apply an asset freeze against Osama bin Laden and individuals associated with al-Qaeda or the Taliban.

The changes we are debating today stem from the latest periodic renewal of the mandate of the United Nations Security Council in June 2011 when it unanimously adopted Resolutions 1988 and 1989. These resolutions split the Resolution 1267 al-Qaeda and Taliban asset-freezing regime into two separate regimes, one in relation to Afghanistan and one in relation to al-Qaeda.

Resolution 1989 provides for the al-Qaeda regime, with which we are concerned today. It maintains sanctions on those individuals and entities associated with al-Qaeda who were designated under the Resolution 1267 asset-freezing regime and strengthens existing due process procedures. The improvements include the introduction of triggered sunset clauses. They will make it easier and more transparent to delist individuals who no longer meet the listing criteria and who are no longer considered to be associated with al-Qaeda. Delisting recommendations by the ombudsperson or requests by the state that made the original designation request will trigger the sunset clause. At that point the person will be delisted after 60 days unless the sanctions committee decides unanimously to maintain them on the list. Resolution 1989 also strengthens the role of the ombudsperson. The resolution recommends increased capacity for the ombudsperson’s office and greater provision by member states of information for case reviews, and encourages individuals to submit delisting petitions to the ombudsperson. The Government believe that these changes represent a very good and very necessary outcome that the UK, together with our Security Council partners, worked extremely hard to achieve.

As your Lordships are aware, the UN al-Qaeda asset-freezing regime is global in its application. All listing and delisting decisions are made by a committee of the UN Security Council, and once individuals or entities are listed, their assets must be frozen by all states as a matter of international law. Throughout the European Union, the al-Qaeda asset-freezing regime is implemented by Council Regulation (EC) No 881/2002, as subsequently amended, and is directly applicable in national law.

To implement and enforce the al-Qaeda asset-freezing regime fully in the UK, domestic regulations are needed to put in place penalties, and licensing and enforcement mechanisms. The key features of the regulations are that they define: the designated persons covered under the al-Qaeda regime; the prohibitions which apply in respect of designated persons; and the criminal penalties which apply to UK persons who breach the prohibitions. There are also provisions for the granting of licences exempting activities from the prohibitions, for the gathering and sharing of information and for allowing closed material to be employed in proceedings that challenge decisions made under the regulations.

These regulations revoke and replace the Al-Qaida and Taliban (Asset-Freezing) Regulations 2010, but I can assure your Lordships that there is no gap in the powers or penalties required to enforce the al-Qaeda asset-freezing regime in the UK. The 2010 regulations continue to have effect until the 2011 regulations come into force.

I know your Lordships understand the importance of the UK meeting its obligations to enforce the UN al-Qaeda asset-freezing regime. The regulations before the Committee are vital to meeting that obligation. Asset freezing is a critical element of the global response to the threat from al-Qaeda, and the UK fully supports the UN’s al-Qaeda asset-freezing regime. At the same time, UN Security Council Resolution 1989 strengthens existing due process procedures, which the UK has been arguing for at the Security Council.

In the Government’s view, the regulations before the Committee today represent an effective, fair and proportionate way of giving full effect to the EC regulation that meets the obligations of the Security Council resolution within the UK. I therefore commend these regulations to the Committee.

[Baroness Kramer]

My Lords, I have no objection to the regulations and I will take only a few moments of the Committee's time to seek clarification on a couple of points. From the perspective of my colleagues, it is clearly necessary to tackle not only terror but the funding of terror. This legislation is part of that overall approach. We are pleased to see the strengthening of due process and the sunset clauses that are part of the regulations.

I will ask a couple of very small questions. Will the Minister clarify that no practical implications of any significance will follow from separating the al-Qaeda regulations from those applying to the Taliban? Is this just a measure to fall into line with EU and UN resolutions? In moving from the umbrella of one set of regulations to the umbrella of another, will the process be seamless? Is there any possibility of a slip between the two? Obviously, we would not wish to see such an opportunity exploited.

My second question is perhaps of more interest to the wider community. Will the Minister give us some reassurance that these regulations will not put an additional burden on ordinary people? He will be very aware that the combination of anti-money laundering and anti-terror legislation has put a significant burden of cost on both individuals and businesses, not least when it comes to the long delays in fund transfers that the banks explain by saying that it is necessary for them to go through security procedures and checks, during which time the banks seem to hold on to the money and benefit from the interest rather than either party to the transaction. One must live with measures such as that, but we would all find it unfortunate to see any increase in the burden. I would appreciate reassurance on those points, but we support the regulations.

--- Later in debate ---

[Lord Sassoon]

I am afraid that I did not quite catch the noble and learned Lord’s question and I want to try to give him the service of an answer. His noble friend asked me lots of questions but since the noble and learned Lord asked only one, I want to make sure that I got it right. Perhaps he would not mind clarifying the question.

[Lord Davidson of Glen Clova]

It will be my pleasure. I was seeking clarification or explication of the processes which the UN employs for putting individuals on the target list and the way in which discussions by the UK Government at the UN level have improved the potential for challenge by individuals finding themselves on the UN target list. One fully appreciates that the UN target list is not simply replicated by the EU target list. It applies its own judgment in relation to these. But, given that the EU takes considerable account of what the UN does by way of placing individuals on the target list, it would be helpful to understand how a challenge might be made by an individual at the UN level. I appreciate that this is entirely tangential but it would be interesting to know as this matter has caused concern in the past.

[Lord Sassoon]

My Lords, I thank noble Lords very much for this focused short debate and for a number of questions which are absolutely to the point. Even though the noble and learned Lord says that his question is tangential, I do not think that it is at all. It goes to the heart of the UK’s concerns to make sure that when the UN did its review of the regime leading up to June 2011 we made sure that there were additional proper protections. I might come back to that in a minute.

I am grateful that all noble Lords recognise the importance of these regulations but it is equally clear that we should get the details right.

In answer to my noble friend Lady Kramer’s questions, I can certainly reassure her that absolutely nothing will slip through the gaps; there is nothing separating the old and the new regimes. We are putting in place something that ensures that there is a seamless continuation from the old combined resolution regime into the two separate regimes.

On whether there will be any additional burdens on ordinary people, I shall expand that to ordinary people and small businesses because it is important that small businesses do not have any additional burdens placed on them. Consistent with my previous answer, there should be no substantially changed burdens from the previous regimes. In fact, there has been some rationalisation of the drafting of the regulations in the process of coming forward with this new regulation. We continue to have a dialogue with representatives of small firms. I can reassure my noble friend on that. She also asked about the burden on people. It mainly will ensure that private individuals, who are in any way conceivably connected to this regime, have legitimate payments flowing to them. I believe that the regime will continue to ensure that that is the case.

I wondered why the noble Lord, Lord Myners, was writing away so furiously and I now understand that he was setting an exam paper for me.

[Lord Myners]

Pass.

--- Later in debate ---

[Lord Sassoon]

I am very grateful that, notwithstanding the earlier start time of this business, my Box team was able to get here in good time. The first questions were important ones about the penalties in the regime. I believe that prison sentences of up to two years are dissuasive. We are picking up the penalties from the previous regime and they have, therefore, been considered in the past. On the specific question about level 5, the answer is that it is a £5,000 penalty.

The noble Lord, Lord Myners, then asked about Regulation 8(3) and why there is no criminal penalty on financial institutions. Regulation 8(3) is that which requires financial institutions to tell the Treasury when they credit funds to a frozen account. Indeed, there is no criminal penalty attached to failure to comply with that requirement. Any breaches of that requirement are, I would suggest, properly dealt with as part of the FSA’s supervision of financial institutions for compliance with sanctions legislation, which is required under the Financial Services and Markets Act 2000, which provides a range of powers. Although the noble Lord is right to ask me the question, consideration has been taken of the link through to sanctions that are available under the FISMA regime.

The noble Lord then asked about publicity. If I understood his question correctly, general licences are all advertised on the Treasury website and so they are available to anyone who is interested. Those parties who are in any way involved in this or the other asset-freezing regimes are well aware, and have been for a number of years, of the channels through which the Treasury publicises licences and all other aspects of the regime. That continues, and the feedback that we receive suggests that the publicity mechanisms are effective.

There was a question about the number of licences that have been issued. The total number of licences that have been issued this year under both the Terrorist Asset-Freezing etc. Act and the al-Qaeda regime is 41. I do not have the exact split between the two regimes to hand but something of the order of a dozen were in respect of al-Qaeda designated individuals. If the noble Lord would like the exact number I would be happy to give it to him—he is shaking his head—but it is about a dozen out of 40.

Lastly, if an individual meets the normal legal aid tests then legal aid is available. These regulations have no particular impact on the availability of legal aid. It is perhaps also worth noting that legal aid is available from the European Court for challenges in respect of EU listings. Again, I believe there is no gap in the regulations. I hope that that deals with the questions asked by the noble Lord, Lord Myners.

The noble and learned Lord, Lord Davidson of Glen Clova, asked an important question about people getting on the list—and, I would suggest, being able to get themselves off it. Of course, in these and similar situations, getting people on the list will be a matter of some urgency. It is important that there is appropriate evidence and the UK is very concerned to see appropriate evidence produced in all the asset-freezing regimes, whether at a UN, EU or domestic level. I see cases under these regimes when they come forward and I know how seriously that is taken.

The almost more important question is about the mechanisms for challenge and for getting people delisted if appropriate. What is significant about the new regime under Resolution 1989 is that we were able to get in place, as I described in my opening speech, a series of much better protections in terms of the review processes, the way that the ombudsman role is beefed up, and so on. I feel much happier that, just as in the legislation for our domestic regime last year we were able to put in additional and important protections, so in a different regime the UN has moved in that direction. It was something that the UK pushed hard for.

I hope that I have answered the questions that have been brought up. In conclusion, these regulations provide a framework to implement the Security Council regulation effectively and properly. It is critical to enabling the UK to play its part in both preventing terrorist financing and in meeting those international obligations. Therefore, I commend these regulations to the Committee.

Motion agreed.

Devolved Administrations: Financial Flexibility

Lord Sassoon Excerpts

Tuesday 8th November 2011 Lords Chamber

[Lord Wigley]

To ask Her Majesty’s Government what discussions they have held with the devolved administrations concerning the future working of year-end financial flexibility.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, my right honourable friend the Chief Secretary to the Treasury announced on 18 July that the Treasury has agreed with the devolved Administrations that a modified version of the budget exchange system will apply to their underspends during the spending review period. The devolved Administrations will be able to carry forward DEL underspends up to a maximum of 0.6 per cent of resource DEL and 1.5 per cent of capital DEL from one year to the next.

[Lord Wigley]

My Lords, does the Minister agree that it is much more prudent for the devolved Administrations to carry forward, as a capital sum, any money that is unspent at year end rather than to rush to spend it? Given that the Assembly Ministers, as he said, have agreed with the Treasury a formula for devolved Administrations to carry forward underspends within these defined limits, why was the Treasury insisting on denying to Wales, and to the National Assembly, some £400 million of accrued underspends in Wales, money which Parliament had voted for use in Wales and which had been accumulated on a formula previously agreed with the Treasury? Will the Minister now discuss with his Treasury colleagues the possibility of releasing that sum over the next two years to augment the National Assembly’s much depleted capital resources?

[Lord Sassoon]

My Lords, sadly, the previous Government left us with a pot of money of some £20 billion which had been unspent by departments, which, if now spent, would simply increase our deficit; it would increase the stock of debt by £20 billion. It was necessary for the Government, as part of our deficit reduction strategy, to cancel that EYF, but the stock of cancelled underspends in the devolved Administrations was 8.4 per cent of the total, compared with 15 per cent of expenditure, which the devolved Administrations represent, so what they were prevented from spending was rather less proportionately than applied to the United Kingdom as a whole.

[Baroness Randerson]

My Lords, the decision not to allow the EYF for Wales was something which took many people there by surprise. Can the Minister tell us whether it took the Government of Wales by surprise or were there discussions with the Government prior to the decision by the Treasury at the time of the Budget?

[Lord Sassoon]

My Lords, as I have already explained, the Government inherited an extremely difficult deficit position. We took decisions that affected the whole of the United Kingdom and this one was consequential on decisions that needed to be taken to bring the deficit position under some sort of control so that departments were not completely without controls on their expenditure. After that, there were detailed discussions led by my right honourable friend the Chief Secretary, which led to the proposals which are the subject of this Question.

[Lord Touhig]

My Lords, the £400 million, to which the noble Lord, Lord Wigley, referred, could certainly help to sustain public services in Wales and boost the economy. Parliament has voted that money for the Welsh Assembly. Does the Minister not think that it is arrogance on the part of the Government to ignore the will of Parliament?

[Lord Sassoon]

My Lords, a lot of factors have to be taken into account in setting expenditure for the devolved Administrations, not least our favourite Barnett formula, but the fact remains that expenditure on a head-count basis in Wales will, in the present period, be some 12 per cent higher than the per head expenditure in the United Kingdom.

[Lord Eatwell]

My Lords, was the Welsh Assembly consulted before this decision was made?

[Lord Sassoon]

My Lords, the United Kingdom Parliament—this House and another place—was not consulted before an awful lot of spending decisions were taken. That is the way that Governments make spending decisions.

[Lord Roberts of Llandudno]

My Lords, the Minister has, I think, criticised the Barnett formula. What plans does he have to bring in a different formula regarding Wales and Scotland?

[Lord Sassoon]

My Lords, would I ever be so bold as to criticise the Barnett formula? The Barnett formula has been widely questioned, not least by the noble Lord, Lord Barnett, himself. However, the Government’s priority has to be stabilising the public finances. If, in due course, the formula is to be superseded, the challenge is that there is no consensus on how to measure needs, which would be required to bring in some needs-based formula.

[Baroness Hollis of Heigham]

My Lords, on the contrary, I would suggest to the noble Lord that there is plenty of research on how to bring in a needs-assessed formula, given that both devolved Administrations distribute their money down to local authorities on precisely that basis. Would the noble Lord therefore accept that Wales is indeed underfunded, that the Barnett formula effectively misspends and overspends by £4 billion and that a rectification of that would surely help the Minister to address the deficit?

[Lord Sassoon]

My Lords, what I said was that there was no consensus. Of course there is plenty of research but there is no consensus, and that is what is needed in this area.

[Lord Myners]

My Lords, the Minister brings considerable private sector expertise to his role, including at Union Bank of Switzerland. Can the noble Lord tell the House whether in his private sector experience he has ever come across a situation where companies say that if you do not spend the money, it will be taken away from you? What prudence does that encourage?

[Lord Sassoon]

My Lords, I believe that it was under the previous Government in 2006—the noble Lord will remember this better than me—that the health service overspent its budget and reserve by £182 million, and the previous Government stopped the EYF system. So I really do not think that we need lectures about me and my experience; it was the noble Lord’s Government who stopped it.