Monetary Policy Committee
Lord Sassoon Excerpts(13 years, 9 months ago)
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Lord Myners
To ask Her Majesty’s Government what assessment they have made of the impact of the Monetary Policy Committee missing its monthly inflation target repeatedly over the last 10 years.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the UK’s monetary policy framework gives operational responsibility for maintaining price stability to the independent Monetary Policy Committee of the Bank of England. Although the rate of inflation has increased over the past months, the committee’s view is that inflation is likely to fall back to target during 2012, as the impact of temporary factors wanes, but the timing and extent of that decline in inflation are uncertain due to the margin of spare capacity in the economy.
Lord Myners
My Lords, in the final quarter of last year, we saw a reduction in GDP of 0.5 per cent, which is the thickening of a trend back towards recession, a trend that the UK alone is experiencing. Economic output is now at the same level as in the first quarter of 2008, and output is running 8 per cent below trend growth rates. Real incomes are being squeezed. The Governor of the Bank of England has forecast that they will be back to the level of 2005. House prices are falling and unemployment is rising. I put it to the Minister—
Lord Myners
Members on the other side do not like these economic facts and it is not surprising that they react as they do. I put it to the Minister that the Bank of England is having to take risks on inflation because of the severe cuts in economic activity consequent upon the Government’s reckless fiscal policy.
Lord Sassoon
My Lords, that was a nice long lecture. I think there was a question at the end of it. It is precisely because the Government took resolute and early action to restore the fiscal position to one that pulls us back from the brink of the disaster which the previous Government left us with that the Bank of England can conduct monetary policy on a prudent basis and, as I said in my earlier Answer, all forecasters that I know of are forecasting that inflation is likely to come back towards the target range.
Lord Barnett
As the Minister appears to agree with the Chancellor on almost everything, does he agree with the Governor and the majority of the members of the MPC that the interest rate should be kept at its present level?
Lord Sassoon
My Lords, I will not fall into the trap of second-guessing the MPC. As I have said, the Monetary Policy Committee of the Bank of England runs monetary policy on an independent basis. That was an establishment of the previous Government to which I pay tribute. I am certainly not going to do anything other than restate the critical importance of the independence of the Monetary Policy Committee. It is up to the committee to decide how to hit the inflation target, which it is doing with the full confidence of the Government.
Lord Newby
My Lords, does the noble Lord agree that the principal reason for having an inflation target was to bear down on domestic demand inflation, particularly wage inflation? Would he further agree that at the moment such pressure does not exist—wages are flat—and therefore it would be a mistake to put interest rates up primarily in response to external factors?
Lord Sassoon
My Lords, I am grateful to my noble friend because, while again I will resist the temptation to second-guess the Bank of England, it has indeed attributed the recent rise in inflation, which has been significantly to the depreciation of sterling, to the increase in VAT which the last Government put in place and to the rise in energy prices. These are external factors.
Lord Eatwell
My Lords, the noble Lord in his Answer earlier referred to temporary factors accelerating inflation and reducing the living standards of the British people. Is not one of the most important temporary factors that are accelerating inflation through the rest of this year the increase in VAT to 20 per cent?
Lord Sassoon
My Lords, I absolutely did not refer to the reduction in anyone’s living standards. Absolutely at the heart of the Government’s response to the situation that we inherited is the need to get growth back into the economy, and we need fairness as we do it. That is why the Government are taking steps to take almost 900,000 people out of the tax net this April; that is why, under the coalition Government’s plans, 23 million taxpayers will be up to £170 better off next year than they would otherwise be; that is why we are reducing corporation tax from 28 to 24 per cent with other measures to make sure that we get the economy growing again.
Lord Forsyth of Drumlean
My Lords, can the Minister confirm that the Government are nevertheless concerned about inflation? Does he recall the very wise words of the former Prime Minister the late Lord Callaghan, who reminded us in the 1970s that inflation is the father and mother of unemployment?
Lord Sassoon
My Lords, I absolutely agree with my noble friend that the Government are concerned about inflation. It eats into the savings of people who did all the right and prudent things through the last decade. We are concerned and are taking actions to make sure that the hard working and lower-income families in this country are protected in the current difficult economic circumstances.
Lord Lea of Crondall
My Lords, is the noble Lord aware that the City correspondents seem to be briefed that the inflation increase is attributable significantly to employment incomes rising? In fact they are not rising because, according to the ONS, the statistics now include, for the first time, three public sector banks, which pay out about £25 billion to people. That has given the impression, incorrectly, that average workers in the public sector are getting an increase.
Lord Sassoon
My Lords, forgive me but I did not quite follow the logic of all of that. All I can say is that, if we are talking about the City, the Treasury’s latest comparison of independent inflation forecasts from City and other commentators in mid-December shows that the City is forecasting inflation to come down to 1.8 per cent in 2012 and then to be steady at 2 per cent thereafter.
Budget Responsibility and National Audit Bill [HL]
Lord Sassoon Excerpts(13 years, 9 months ago)
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Lord Sassoon
“( ) The members appointed under paragraph 1(1)(c) constitute a committee of the Office to be known as the Non-executive Committee.”
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, we usefully teased out a number of issues on this Bill in Grand Committee, so I am pleased to be able to come back to the House with a number of amendments, of which this group is the first. Our amendments very much reflect a number of critical points that we discussed in Grand Committee.
Perhaps I should start with Amendment 4, on which Amendments 1 and 2 are essentially consequential. We are talking here about the independence of the OBR. Amendment 4 will formalise the role of the non-executive directors in reporting on the extent to which the OBR’s duty has been performed, in accordance with Clauses 5(1) and 5(2) of the Bill. To ensure the OBR’s credibility, it is important that the OBR is able to operate with the complete discretion provided for at Clause 5(1) and in line with the principles of Clause 5(2). Amendment 4 provides a mechanism for the non-executive directors to report on anything that they believe has prevented the OBR from carrying out its duty with complete discretion and “objectively, transparently and impartially”. Such a report will feature as part of the OBR’s annual report, which is to be laid before Parliament. For example, the non-execs might report on any interference with the preparation and publication of the OBR’s reports or any attempt to control the OBR through manipulating its budget.
Amendment 12 will remove the provision that states that the charter may include guidance on Clauses 5(2) and 5(3). That will address the particular concern raised in Grand Committee that the charter could be used to redefine the commonly used terms “objectively, transparently and impartially”. It is not the Government’s intention to subvert what these terms mean through the charter. The amendment will therefore remove the marker that strongly indicates that the charter will define what these terms mean.
Amendment 13 will change the process for amending the guidance in the charter. Concerns were raised in Committee that such modifications could be done too easily, which would again undermine the independence of the OBR. Amendment 13 requires the Treasury to publish any revisions to the guidance at least 28 days before the modified charter is laid before Parliament for approval in another place. This period of 28 days, which is consistent with the period used in other secondary legislation, will provide further opportunity for scrutiny of and comment on the guidance before it is voted on. If appropriate, the Government could respond to, or make changes in the light of, this scrutiny before the formal version is laid for approval.
Other safeguards remain in place. The charter is limited to considering the functions conferred on the OBR in the Bill and cannot add or distort them. The charter must also be approved by an affirmative resolution in another place before it comes into force.
Lord Sassoon
My Lords, I am grateful for the general support around the House which this group of amendments seems to command. I am very happy for noble Lords to take credit for the ideas in there, if they wish to do so. Although the noble Lord, Lord Eatwell, may not quite understand or want to appreciate why we have grouped these amendments together, they all touch critically on the independence of the OBR.
I am grateful to my noble friend Lady Noakes for pointing out that in the OBR’s short existence—even before it is within a statutory framework—Robert Chote and his colleagues have done a remarkable job through the quality and extent of their work to carve out an unchallenged reputation for quality of thinking and independence. Of course, we need to make sure that the Bill underpins that. In that context, I am grateful to the noble Lord, Lord Burns, who speaks from a position of great authority as a former Permanent Secretary at the Treasury, for pointing out that for all the OBR’s independence, HM Treasury will need to retain a separate capability to monitor and assess the progression of the economy. I thought that his admirable summary was the answer to the question of the noble Lord, Lord Barnett.
I had a sense of déjà vu, because I thought we were going back to Oral Questions with the first part of the noble Lord’s intervention. We will pass over our regular sparring about the Monetary Policy Committee, but his questions on why the OBR is needed and its independence were partly answered by the noble Lord, Lord Burns. Fundamentally, over the past few years, as the previous Government redefined the cycle, there was not an appropriate degree of transparency around the forecasts, which is why we believe the OBR is necessary. I do not want to dwell on that because we spent a lot of time on that at Second Reading and in Committee.
The job now is to get that independence properly enshrined in the Bill, which takes me to the suggestions from the noble Lord, Lord Eatwell. Also, on the comment from my noble friend Lord Newby, I am sorry that the parliamentary draftsmen did not precisely agree with his wording but grateful for confirmation that we got to the same result. On the couple of questions from the noble Lord, Lord Eatwell, on Clause 5(3), indeed the OBR now has a clear and explicit duty to consider government policies in its work. That is what the OBR is essentially all about: assessing the impact of government policies and, on the back of that, whether the fiscal mandate will be met. Clause 5(3) is indeed now quite clear on that.
Clause 6(1) is quite explicit that the charter may still give guidance on other topics but there is a particular signal that the charter may give particular guidance on timing. When the noble Lord comes on to press me on the draft charter, I think that we will all agree on how important the transparency of the remit is. The critical point, as I hope noble Lords would agree, is that we published the draft charter early on in our discussions, to enable that to be fully considered in Committee. As my noble friend Lord Newby said, any consequential redrafting of the charter as a result of our discussions will be small.
The essential point is that we issued a draft charter in very good time for discussion now. There is no overwhelming need to issue a new draft, simply because not a lot will have changed. We have been clear on the issues that we have looked at again. While I hear what has been said, I do not want to prejudice how the charter and the Bill might be looked at as they go through the stages in another place, as and when we send the Bill there. I hope that answers the various points that have come up on this group of amendments.
Lord Sassoon
Lord Sassoon
“Review by Non-executive Committee12A The Non-executive Committee must keep under review the way in which the Office’s duty under section 4 is performed.”
Lord Sassoon
My Lords, producing high-quality work requires the OBR to have access to all relevant information and expertise. The Bill provides for this through a right of access to information, a Budget Responsibility Committee of experts and a duty to act transparently. In response to the discussion in Grand Committee, these arrangements are intended to be bolstered by the two amendments that we are bringing forward.
Amendment 3 gives the non-executives a duty to keep under review the processes that the OBR uses to assure that it is producing the best possible work. These are likely to be management processes that the non-executives will be well placed to consider. Examples might include: whether the OBR is consulting with a wide and appropriate range of experts, including academics and internationally; whether it is working effectively with the rest of government to produce analysis; and, to make sure that it follows up lessons from internal reviews.
Amendment 5 requires the non-executives committee periodically to commission independent expert reviews of the OBR’s work. In detail, it needs to consider frequency: these reviews could be carried out at times considered appropriate by the non-executives, but “at least” every five years. In scope, the review will consider work published in the relevant period. The non-executives will determine which of the OBR’s reports are to be considered. That could be all the OBR’s work or a particular theme could be focused upon. This flexibility is important to ensure that maximum value is always gained from the reviews. There is then the question of the reviewer. The non-executives would appoint a person or body with the appropriate knowledge or experience to carry out each review. Although we expect the reviews to have minimal costs, there is provision in the Bill for the OBR to make payments to the reviewers—for example, for their expenses. Each review will be published and a copy laid before Parliament. I beg to move.
Lord Eatwell
My Lords, I think that everyone who took part in Grand Committee will feel that these amendments should be dedicated to the noble Baroness, Lady Noakes—who I am afraid is not in her place to hear this—as it was she who, at Second Reading, raised the issue of writing one’s own school report and the necessity of having an independent assessment of the OBR’s performance. Amendments 3 and 5 therefore establish the responsibility of the non-executives to keep under review the activities of the OBR, relative to its main duty. An important component of this monitoring will be the commission of the third-party reviews of the OBR’s performance, as described by the Minister.
We are entirely supportive of the Government’s amendments in this respect, other than in one crucial aspect. Amendment 5 proposes that an assessment by an independent person or body should be carried out,
“at least once in every relevant 5-year period”.
The final part of the amendment, proposed in new sub-paragraph (7), says,
“the period of 5 years beginning with 1 October 2010”.
However, as will be evident from Amendment 6, which I shall be moving, we on this side think that five years is too long a period. First, as a professional economist, I feel that five years is much too long for an organisation to be running before its activities are assessed independently. After all, the OBR will be producing more than one report a year—in fact, there will be three or four reports—so within three years there will be a substantial body of material for an independent assessor to consider. The independent review will also have value for the OBR. It will provide informed third-party input into its techniques and procedures, and postponing that for five years will unnecessarily weaken the expertise that feeds into the OBR’s work. Of course, expert appraisal of the OBR’s activity will also be an important input into parliamentary scrutiny, and I think that in parliamentary terms we should want more regular consideration than is provided by this amendment.
That parliamentary element leads me to the second reason why five years is too long. Setting a five-year appraisal period politicises a process that should be entirely apolitical. If the Government secure the constitutional reforms that they have proposed, five years will be the length of a fixed-term Parliament; hence the OBR review will become part of a five-year political cycle. Indeed, as I emphasised to noble Lords just now with regard to proposed new sub-paragraph (7) in the amendment, the timing has been set carefully so that a review takes place just after the next election. Review of the work of the OBR should be divorced from the political cycle and not linked to it in any way. That is why my Amendment 6 sets the review period at three years. This will achieve the dual objective of allowing timely consideration of the work of the OBR, giving Mr Chote and his colleagues the benefit of that professional input and stimulus, but most important of all, establishing a cycle of review which is divorced from the political cycle. That is a crucial aspect in maintaining independence and cross-party respect for the work of the OBR.
Lord Barnett
My Lords, as from time to time I disagree with my noble friend Lord Eatwell, I make it clear that on Amendment 6 I strongly agree with him. It makes sense to separate the review from the political cycle. I will disagree with him at a later stage, but on this I thought that he made a very good point.
I am never surprised at the noble Lord, Lord Burns, speaking as if he is on the Treasury Front Bench. We should not be surprised; he has been doing it all his life. He did a marvellous job in the Treasury, particularly for the five years that I was there.
I thought that my noble friend Lord Eatwell made a good point about the cycle, as did my noble friend Lord Myners, and I hope that on reflection the Minister will accept the amendment. It makes a lot of sense and he might, on this occasion, accept it.
Lord Sassoon
My Lords, I start by welcoming the noble Lord, Lord Myners, back to the Chamber. I am not sure that he had quite got his script co-ordinated with the Front Bench, but I accept his congratulations. I will put aside their slightly backhanded nature. Next time I think he should speak to his Front Bench, which seemed to be taking sole credit for the government amendments that have come forward. Nevertheless, I am grateful to him.
Lord Myners
My Lords, the Minister will recognise that, speaking as I do from the Back Benches, I speak independently. I reach my own conclusions and express my own views. My congratulations to the Minister are in no way fettered by what those on my Front Bench might have said.
Lord Sassoon
I heard the noble Lord say that he wanted to add to the congratulations, but there were none before. Anyway, I am grateful to him. Perish the thought that he might have been out of the Chamber briefing the press on his mildly diverting, if somewhat predictable, contribution to Oral Questions, but let us move on. Noble Lords have focused on only one point in responding to this group of amendments, which is whether the backstop date, because I regard it as a backstop date—the noble Lord is obviously distracted by something in the corner of the Chamber. I want to address the point about the five-year backstop dates.
Lord Sassoon
I thought that I heard support from across the Chamber on this point. As I say, the issue is one of a backstop date. The noble Lord, Lord Eatwell, is seeing chimera where none is to be seen in trying to link the political cycle with this five-year backstop date. We think that it is appropriate to have a date in there to ensure that the independent review happens at some stage, but it is most likely that the non-executive directors will indeed choose to have reviews on some other cycle or whenever they think it is appropriate. I absolutely agree with the noble Lord, Lord Burns, that we have to allow—it is proper to allow this—the non-executive committee the freedom to make up its own mind on this. A shorter period may well be decided on, particularly in the initial period of operation, just as, in the context of the Monetary Policy Committee, a review was carried out a couple of years into the new arrangements. Therefore, we should leave this to the committee’s judgment and not impose a rigid pattern on it.
It might be relevant to consider read-across or precedents from other comparable bodies. However, I have been able to tease out only one comparable read-across involving the Dutch Central Planning Bureau, which has a provision for external reviews every five years and has stuck to that model since 1945. That continues to work for that body.
Lord Eatwell
Does that body hold the review every five years or over a lesser period?
Lord Sassoon
I believe that it has the review every five years, but I think it would be wrong to have a fixed provision of five years. One of the dangers of having a shorter time such as three years is that it might become a regular feature. What we need here is flexibility but with a sensible and appropriate backstop date. It is also important to remember in this context that these external reviews are far from the only means through which the OBR is being and will be scrutinised. I remind noble Lords that the package of scrutiny goes much wider. First, there is the duty on the OBR to act transparently, which means that all its work is open to ongoing challenge and review—this is proving to be the case already—from any of the well regarded and distinguished think tanks and academics looking at its work. The OBR is required to produce an annual assessment of the accuracy of its fiscal and economic forecasts.
There is also the fact that the OBR intends to establish an advisory panel of experts to support and challenge its work on an ongoing basis, which not only is an important additional element of external challenge and review but brings the OBR into line with the best practice, drawn in this case from the United States’ CBO. I see the noble Lord nodding on that point.
On the basis of the argument put forward by the noble Lord, Lord Burns, and backed up by my noble friend Lord Newby, and considering the other elements of scrutiny that are ongoing and challenged externally, I ask the noble Lord to withdraw his amendment.
Lord Sassoon
“( ) The report must include, in particular, an assessment by the Non-executive Committee of the extent to which the Office’s duty under section 4 has been performed in accordance with section 5(1) and (2).”
Lord Sassoon
“External review14A (1) The Non-executive Committee must, at least once in every relevant 4 5-year period, appoint a person or body to review and report on such of the Office’s reports as the Committee determines.(2) In sub-paragraph (1) “the Office’s reports” means the reports which— (a) have been made in pursuance of the Office’s duty under section 4, and(b) have been published since the relevant date.(3) The “relevant date” is—
(a) in the case of the first review carried out under this paragraph, 1 October 2010;(b) in the case of subsequent reviews, the date of the last review carried out under this paragraph.(4) A person or body may be appointed under this paragraph only if the person or body has knowledge or experience likely to be relevant to the performance of the Office’s duty under section 4.
(5) The Office may, with the approval of the Treasury, make payments to the person or body in respect of the performance of the person’s or body’s functions under this paragraph.
(6) The Office must—
(a) publish each report prepared under this paragraph,(b) lay it before Parliament, and(c) send a copy of it to the Treasury.(7) In this paragraph “relevant 5-year period” means—
(a) the period of 5 years beginning with 1 October 2010;(b) each successive period of 5 years.”
Lord Barnett
The noble Lord, Lord Burns, never disappoints me. I am delighted to see that he agrees with the principle of the amendment. I agree with the principle but I disagree with the amendment. Once again, my noble friend Lord Eatwell ignores this House. He would like to see the scrutiny undertaken just by the Treasury Committee of the House of Commons. I have no objection to that and, indeed, I would be delighted if the Minister accepted it, because the Treasury Select Committee of the House of Commons, under different chairmanships, has usually done a great job and continues to do a very good job now under a Conservative chairman. Why does my noble friend not wish to have this scrutinised, as my noble friend Lord Peston and I proposed in Grand Committee, by the Economic Affairs Committee of the House of Lords? As a former chairman, I am prejudiced and my noble friend Lord Peston was a longer-term chairman of the committee. It has always done an excellent and very independent job in this House.
If the Minister is minded to accept an amendment occasionally, and can ignore the word “resist” in his brief, perhaps he might be willing to add to the amendment the words “the House of Lords Economic Affairs Committee should also carry out scrutiny”. We now have a former Chief Secretary to the Treasury chairing the committee and doing an excellent job. On this occasion, I hope that the noble Lord, Lord Sassoon, will accept the amendment as amended by my suggestion. I beg formally not to move.
Lord Sassoon
My Lords, perhaps I may just get my head round the formal non-moving of an amendment that has not been put down. I shall try to give the noble Lord, Lord Eatwell, the reassurance that he seeks in this area. The Government support the spirit of the amendment. Transparency and parliamentary scrutiny of the OBR’s budget are absolutely central to safeguarding its independence. I do not think that there is any difference between us on that point.
The next issue is getting a proportional arrangement which achieves the objective. The effect of the proposed amendment has already been achieved. In line with the Treasury Select Committee's recommendation, the annual budget of the OBR will be identified separately in the Treasury's estimate and it will be available for the Treasury Committee to scrutinise in another place. Nevertheless, we have gone further than the Treasury Committee asked for in order to enhance the transparency of the OBR’s budget and critically to protect it from any suggestion of politically motivated cuts. Again, in line with the Treasury Select Committee’s recommendation, the OBR will also be able to submit to the Treasury Select Committee an additional estimates memorandum alongside that of the Treasury in which it can explain for itself the reasons for changes in the available budget for the year ahead. I think that will go beyond what is proposed, in effect, in this amendment because the OBR will be free to explain in full what any changes in the budget mean.
I agree with the noble Lord, Lord Burns, that if we need to be concerned about anything here it is the multi-year aspects of it, which the proposed amendment does not address. The OBR has already been provided with an agreed and publicly documented multi-year budget, so that an annual budget exercise cannot be used to exert hidden pressure on the OBR. This specific element has been welcomed by the IMF.
I will divert for a moment to address one or two of the points raised by the noble Lord, Lord Eatwell, on some of the international experience in this area. While I am sure that the Toronto Globe and Mail is a fine source of reporting, I think it is relevant to remember that the Canadian Parliamentary Budget Officer is really not in any comparable position to the OBR. Its budget is not separately identified anywhere within the estimates of expenditure presented to the Canadian Parliament. It is a very different office from the one we are looking at. The Parliamentary Budget Officer in Canada was not given an agreed and published multi-year budget. I think we are in very different territory from Canada.
Hungary was mentioned. It is interesting to note that Hungary’s Fiscal Council chairman pointed out—I do not know whether this is correct—in the context of saying it was very, very rare to introduce substantial changes or abolish fiscal councils that the only example he could point to was Venezuela under Hugo Chavez abolishing its fiscal council. So there are one or two examples but they are not comparable examples. It is precisely to guard against any suggestion of such interference that we have put in place the measures that we have.
In trying to give the noble Lord the reassurance he seeks, we have discussed already the responsibility of the OBR’s non-executives. Critical to that is their duty to report on anything that appears to them to constrain the OBR’s discretion. Of course, that would include any attempt to control the OBR through manipulating its budget. To quote the chair of the Treasury Select Committee:
“It is vital that the OBR has the resources it needs. The Committee will monitor this carefully: the terms of reference suggest that the Treasury accepts the importance of transparency and separate disclosure, and we will have the information we need”—
we, the Treasury Select Committee—
“to do our work”.
The package of measures we propose for the OBR in the Bill follows the recommendations of the Select Committee and in the judgment of the Treasury fully reflects that intention. The chair of the OBR has already made clear that he has adequate resources and that he will promptly raise any issues on funding with the Select Committee—a very public forum in which to raise any concerns.
Finally, I will quote Robert Chote at his pre-appointment hearing in front of the Select Committee. He said:
“If you accede to my appointment and I find myself being squeezed in that way, this committee will be hearing about it very promptly. That’s how we make that public and ensure that those sorts of pressures do not go unremarked”.
I suggest that there are a considerable number of safeguards in place. Indeed, we go further than the noble Lord’s amendment because we believe that the multi-year dimension is as important as, if not more important than, the single year dimension to which his amendment refers. In view of the reassurance that I have been able to give him, in particular pointing to the role that we have just now confirmed for the non-executives, I hope that he will withdraw the amendment.
Lord Eatwell
My Lords, I am grateful to all noble Lords who have taken part in this short debate, not least because there seems to be a unanimity of purpose around the House. Perhaps I may address a couple of the points that were made. The first is the point made by the noble Lord, Lord Burns, supported by the noble Lord, Lord Sassoon, about the word “annual” in my amendment. I think they are absolutely right. It should refer to the budget; the word annual should be taken out, then everything would flow quite nicely. However, the noble Lord, Lord Sassoon, still does not quite grasp the idea that the OBR should not have to fight its own corner but should be given parliamentary protection in the budgetary field for the long term, not simply for the period for which Sir Nicholas Macpherson’s letter is relevant. We are looking beyond that provision.
The one element from which I derived some comfort in the reply of the noble Lord, Lord Sassoon, was the issue of a separate line in the Estimates, which will provide the Treasury Select Committee with the opportunity separately to identify the budget of the OBR. My amendment would require that to be brought for scrutiny, rather than it simply being available, but I am willing to accept that that is a small point.
I suppose that I should accept being chided by my noble friend Lord Barnett for leaving the House of Lords Economic Affairs Committee out of the amendment. I felt that since this was particularly an expenditure matter, it should be handled by the committee in another place. I am willing to stand corrected on that point.
However, I feel that there is general unanimity around the House that this issue is important in sustaining the independence of the OBR. I am grateful for the assurances that the Minister has given. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I should perhaps speak briefly to Amendment 9 at this stage. I will respond later if other noble Lords speak to Amendments 8 and 10.
On Amendment 9, the risks and assumptions of the OBR in producing its reports are critically necessary for a full understanding of its analysis. Provision to require the OBR to set those out was originally included in the draft charter. However, we recognise that a key purpose of the Bill is to provide appropriate assurances that the good practice already adopted by the OBR will continue. For that reason, Amendment 9 will elevate the provision from the draft charter to the face of the Bill and broaden the requirement to apply to all reports produced under the OBR’s main duty.
Lord Eatwell
On Amendments 8 and 10, the noble Lord, Lord Higgins, will have to suffer the possibility of inconsistent forecasts because that is, in a way, embodied in the independence and separation of the Bank of England. The whole point of an independent Bank of England, and the way the Labour Government set up the independent status of the Monetary Policy Committee and the Bank of England, is that it should be allowed to take an independent view. That independent view will be informed by its own research. This can lead not just to forecasting inconsistency but to policy inconsistency, but that is the price we are going to pay if we think this is an appropriate policy mix. The very distinguished late economist Sir James Meade pointed out many times that this separation could lead to serious policy inconsistency, and he was entirely opposed to its, none the less, that is the way we have constructed policy-making in this country, and that separation will bring with it the possibility—indeed, the probability—of some forecast inconsistency. However, we should note that recently the Governor of the Bank of England has been making many statements about fiscal policy, which is not his territory. That is very unfortunate. He seems to have encouraged the Prime Minister to make comments on interest rates, which are not his territory either. If this separation is deemed to be a good thing by our Parliament and policy-makers, I hope that the governor and the Prime Minister will respect it.
The problem I have with Amendment 10, tabled by the noble Lord, Lord Higgins, is that I do not think the output gap is a precise notion which can be believed if you say it is 2.5 per cent or something like that. In the Budget debate and in the debate on the comprehensive spending review, I argued that it is a statistical construct. It has embedded within it a series of statistical assumptions. It was quite striking that in the first OBR report, the definition of the structural deficit was changed, to the benefit, I might add, of the Government’s arguments. Therefore, I do not want too much credibility to be put on what is a useful indicative statistic. The weight put on it can be taken too far.
I strongly support the Government’s amendments both on transparency of assumptions and consideration of the risks to which the economy might be exposed. The latter issue, with the OBR now being required to talk about the risks to which the economy is exposed, is very important. For example, let us suppose that we had had an OBR of 2006 vintage. That OBR could have expressed concerns about the fiscal risk the economy was subject to by being dependent on such a high proportion of tax revenues coming from just one sector of the economy, that of financial services. It would have had the opportunity to say, in facing that risk, that some diversification of revenue sources might be desirable. Similarly, in defining the sustainability of the public accounts, the OBR should take into account the risk to sustainability generated by the foreign balance and by the savings and spending behaviour of the private sector, and their interactions with the public balances. Providing these insights into the risks of public sector financial management would extend the debate about the public finances in a very useful way and would ensure that the debate is far better informed than it has been in the past. So I would like particularly to add the support of this side for government Amendment 9.
Lord Newby
I would like to echo the noble Lord, Lord Eatwell, in two respects; first, in his comments on Amendment 9, which I will not repeat, and secondly, in his comments on Amendment 10. I am dubious about the value of giving enhanced status to an assessment of the output gap or when the economic cycle is likely to end for reasons largely already given by the noble Lord, Lord Eatwell. The output gap is not an absolutely firm context and figure that is easily grasped and measured. As we saw with the previous Government, a lot of weight was put on the economic cycle because the golden rule about government expenditure and borrowing depended on it. The problem was that whenever a difficulty arose, lo and behold, the definition of the cycle changed to push the difficulty back. It proved to be a far more elastic concept than we thought, and the old Ricardian economic cycle that depended on grain crops just does not obtain in quite the same way today. So while I am sure that the Office for Budget Responsibility may well wish to opine on these matters, and it will be quite interesting to know what it thinks, it is of secondary importance in setting government policy. Indeed, because of its somewhat nebulous nature, I would not want us to put too much weight on it again.
Lord Sassoon
I am grateful to the noble Lord, Lord Eatwell, for his support for government Amendment 9, but let me say a few things in respect of Amendments 8 and 10 because my noble friend Lord Higgins has raised important issues. I agree with the spirit of the amendments in both cases, and I shall try to do justice to the points he has raised by explaining how I think the matters are or should be dealt with.
Amendment 8 concerns the question of economic and fiscal forecasts. On fiscal forecasts, a comparison is actually not possible because the Bank does not produce such a forecast. Rather, it incorporates the official fiscal forecast now produced by the OBR into its own economic forecasts, which reflects the expertise within the OBR and the information that the office as opposed to the Bank has access to. So that is dealt with because there is no comparison to be made.
Lord Sassoon
“( ) Any report which the Office makes in pursuance of its duty under this section must include an explanation of the factors which the Office took into account when preparing the report, including (in particular)—
(a) the main assumptions made by the Office, and(b) the main risks which the Office considered to be relevant.”
Lord Sassoon
(a) must have regard to those policies, but(b) ”
Lord Sassoon
Lord Sassoon
“( ) If the Treasury proposes to modify the guidance included in the Charter by virtue of this section, a draft of the modified guidance must be published at least 28 days before the modified Charter is laid before Parliament under section 1(6).”
Lord Touhig
My Lords, I do not intend to detain your Lordships for very long because this is exactly the same amendment that we debated in Grand Committee on 9 December. I did not press the amendment or the argument at that time because I was greatly encouraged by the debate, and in particular by the response of the Minister who certainly seemed to be in listening mode on that occasion.
I was a little disappointed to receive a letter from the Minister dated 21 December, listing the amendment that he has tabled this afternoon. I refer to the Government’s Amendment 15. This says that the Public Accounts Commission will have a role in specifying who should be consulted by former Comptrollers and Auditors-General on possible future appointments that they might wish to take up. My amendment says that this advice should be given by the Advisory Committee on Business Appointments.
As I said, I do not wish to detain your Lordships, but I point out that the amendment is based on the 15th report of the Public Accounts Commission. My noble friend Lord McFall was a member of that commission when it reported in March 2008. It referred to the subsequent employment of former Comptrollers and Auditors-General and said that a,
“C&AG should be required under the terms of his or her contract to consult the Advisory Committee on Public Appointments”—
it should have been “on Business Appointments”—
“(currently chaired by Lord Mayhew) before accepting any employment whatever after leaving the post of C&AG and to abide by the decisions of that Committee”.
The advisory committee is now chaired by the noble Lord, Lord Lang of Monkton, and its remit is simple:
“The Advisory Committee on Business Appointments is an independent body which provides advice to the Prime Minister, the Foreign Secretary, or other Ministers if requested, on applications from the most senior Crown servants who wish to take up outside appointments within 2 years of leaving Crown service”.
That body has the experience and background to provide the proper advice for any senior civil servant who wishes to take up an appointment after leaving public service. It would in my view be the appropriate body to give advice to former Comptrollers and Auditors-General. For the life of me, I cannot understand why the Government have not accepted this. Perhaps the Minister might say why it is that the Government now want to involve the Public Accounts Commission—another layer in between the time when a former Comptroller and Auditor-General would have to consult before he can consider taking up some other appointment. It may well be that the Public Accounts Commission will say to that former Comptroller and Auditor-General, “You must seek advice from the Advisory Committee on Business Appointments”. I do not know why we do not go straight to that point in the first place. I had hoped that the Minister would have put that in his amendment. He has not done so and I should be grateful to hear his response.
Lord Sassoon
My Lords, I see the Chamber filling up. This amendment is clearly attracting a lot of interest but, just in case noble Lords have come for some other business, let me deal briefly at this stage with Amendment 15, together with Amendment 14 tabled by the noble Lord, Lord Touhig. Having reflected on the points made on this issue in Grand Committee, I agree that clarification is indeed merited on this question of the C&AG taking up future offices or appointments. That is why the Government’s Amendment 15 makes it clear that the Public Accounts Commission would specify the person or body, such as the Advisory Committee on Business Appointments, that a former Comptroller and Auditor-General should consult before he or she takes up another office or position having left the office of C&AG. We have come forward with that important clarification.
Amendment 14, tabled by the noble Lord, Lord Touhig, seeks to name the Advisory Committee on Business Appointments as the body that former C&AGs must consult. However, there is a difficulty in naming a particular body in legislation because names and responsibilities may change over time. The fact that the body recommended in the original report from the Public Accounts Commission is different from that in the amendment makes that very point. While we need to have a degree of clarification which was not in the original Bill, writing in a particular body that exists now but may not exist in time—and was not that recommended only a short time ago by the Public Accounts Commission—means that we need to have the balance of flexibility but the certainty that the Public Accounts Commission will nominate a body up front.
The Treasury has carried out a search to see whether we could find any similar requirement elsewhere in legislation. The only mention at all of the Advisory Committee on Business Appointments is in relation to the obligation placed on it under the Freedom of Information Act, so there is no equivalent hard-wiring in legislation of its other responsibilities to deal, for example, with appointments for former Ministers. We absolutely share the noble Lord’s desire that former C&AGs should not just listen to but take to heart the advice of the nominated adviser, just as Ministers and civil servants do. Perhaps it is relevant to say that my understanding of the position of the serving C&AG is that he would be willing to consult any independent authority that the commission nominates about any employment that he proposed to take up after leaving office. This was written into the letter of appointment that he signed before taking up office. What was not written into the letter was a requirement for the C&AG to abide by the decision of the independent authority. It was expected that the decision of that authority would be made public and that that would be sufficient to ensure compliance.
In respect of future C&AGs, I think it is fair that they should know which person they needed to consult at the start, before they take on the office. It is expected that the person to be consulted should be specified in the appointment letters of all future C&AGs, which would parallel the arrangements for Ministers and senior civil servants. The terms of the C&AG’s appointment are agreed between the chair of the Public Accounts Committee and the Treasury, on behalf of the Prime Minister, and would have to be signed off by the prospective C&AG before he or she takes up office. I believe that with the government amendment we are bringing forward, along with how I have described that it will work in reality, we have sufficiently covered all the bases intended by the noble Lord’s amendment without getting into a position where we might nominate a body that could be inappropriate in a number of years’ time. On the basis of that explanation, I ask the noble Lord to consider withdrawing his amendment.
Lord Touhig
I am grateful to the Minister because he is a man of his word: he has sought to clarify the matters that we discussed in Committee. He made a fair point in saying that, if we specify a body in legislation, that body could disappear or change with future legislation. The Public Accounts Commission referred to the Advisory Committee on Public Appointments, but I do not think that it even existed. I think that the commission was mistaken and that it should have referred to the Advisory Committee on Business Appointments. I suspect that ultimately we will reach the point that I have been arguing for and that it will in fact be the Advisory Committee on Business Appointments, although the Minister is going to take us on a bit of a route, going through the Public Accounts Commission, to get there. It is a bit like me travelling to Wales via Scotland but I am sure that we will get there in the end. I beg leave to withdraw the amendment.
Lord Sassoon
Inflation
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Lord Spicer
To ask Her Majesty’s Government what plans they have to reduce the rate of inflation.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the UK’s monetary policy framework gives operational responsibility for maintaining price stability to the independent Monetary Policy Committee of the Bank of England. The MPC stated in the minutes of its December 2010 meeting that its central view remained that a substantial margin of spare capacity in the economy was likely to persist for some time and would bear down on inflation in the medium term as the impact of temporary factors waned.
Lord Spicer
I thank the Minister for that reply. Now that the consumer prices index has risen to almost twice the Bank of England’s target inflation figure, will the Government consider exchanging quantitative easing for quantitative tightening?
Lord Sassoon
My Lords, of course the Government are concerned about the current level of inflation and the impact that it has on many parts of society, particularly on working families, savers and others. However, how the Bank of England meets the Government’s set target for inflation, including decisions about what it does, if anything, about quantitative easing or the reversal of it, is an operational decision for the bank.
Lord Barnett
My Lords, can the noble Lord confirm that he is not joining those who wrongly seek to pressurise the MPC to increase interest rates? Furthermore, as he cares about transparency, will he perhaps now take the opportunity to answer the Question for Written Answer that I put to him some time ago and tell us precisely what the Treasury representative on the MPC was instructed to say to the committee about the Treasury’s view on interest rates?
Lord Sassoon
My Lords, I am very happy to confirm that the Government have every confidence in the MPC. They regard its independence as a cornerstone in making sure that the Chancellor’s inflation target is hit as far as it is in the power of the MPC to achieve it. That is what it is asked to do and there is absolutely no interference. As I have explained before, a representative of Her Majesty’s Treasury does indeed attend MPC meetings—not in any way to interfere with the independent deliberations of the MPC but to make sure that the committee is aware of relevant Treasury policy decisions, such as what is coming out of budgets. That is all I can say.
Baroness Kingsmill
My Lords, what impact on inflation does the Minister think the recent increase in VAT will have?
Lord Sassoon
My Lords, first, the recent relatively high levels of inflation reflect, among other things, the previous Government returning the rate of VAT to 17.5 per cent, so that number is included and it is one of the factors behind the rise in inflation in December. As to the effect on inflation of the increase of the standard rate from 17.5 to 20 per cent, that depends on how much of the increase is passed on to consumers, and we will wait to see on that. However, because the rise to 17.5 per cent will come out of the inflation numbers, it will partially offset the effect of the increase that comes in in January.
Lord Myners
My Lords, we fully accept the importance of the independence of the Monetary Policy Committee but the Government cannot wash their hands of any responsibility for inflation. The exchange of letters between the Chancellor of the Exchequer and the Governor of the Bank of England has now become very anodyne and routine—the same explanations are brought forward time after time. What are the Government going to do about the MPC’s inability to hit the target that the Government have set?
Lord Sassoon
My Lords, I know that it is customary for me to answer the questions and for noble Lords to ask them but five letters were written by the Governor of the Bank of England to the previous Government and I do not recall the previous Government having done anything about them in response. It is quite right that the Governor of the Bank of England explains the situation, but the previous Government put in place and supported the framework that exists, exactly as we are doing, and it is an important part of that framework that the governor writes letters.
Lord Davies of Oldham
My Lords, the Minister will surely recognise that the Government take responsibility for the VAT rise and also take responsibility for the fact that the general inflation rate impacts with particular savagery, through government policies and cuts, on the poor and less well off in our society. In present circumstances, when our citizens are suffering and the growth rate is 2 per cent or below, surely the Government should express more than a little anxiety about the possibility of a rise in interest rates.
Lord Sassoon
My Lords, I could not agree more with the starting premise of the noble Lord, Lord Davies of Oldham. The Government are concerned about the hard-pressed, hard-saving, hard-working low earners in this country. That is why, in April this year, 880,000 people will be taken out of taxation altogether. That is also why 23 million taxpayers will each receive back £170 compared with the plans of the previous Government. That is an absolute recognition of the fact that the Government understand how low-income families are suffering and are doing something about it.
Lord Bates
My Lords, will my noble friend also comment on the consequences for inflation of the reductions in corporation tax, the reductions in national insurance contributions, the freezing of council tax and business rates and, most importantly, the tackling of the deficit that have all been announced?
Lord Sassoon
I agree absolutely with my noble friend that these are all critical policies to ensure that growth gets going again. It is precisely by the Government both reducing the deficit and ensuring growth that the Monetary Policy Committee of the Bank of England will have a firm policy background against which to make its decisions that bear on the inflation target.
Baroness Falkner of Margravine
Can my noble friend indicate at what stage, after a series of letters from the MPC to the Chancellor, the latter would be prepared to reconsider the inflation target of 2 per cent and revise it in either direction?
Lord Sassoon
My right honourable friend the Chancellor has no intention of revising the target for inflation. It is a matter on which he can write a new instruction whenever he wants, but he has no such intention.
Financial Services: Shareholder Engagement
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Lord McFall of Alcluith
To ask Her Majesty’s Government what discussions they have had with the financial services industry on shareholder engagement.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Government are committed to improving shareholder engagement and have already taken significant steps, including the new remuneration disclosure rules, the FRC stewardship code and the revised corporate governance code. We have also issued a call for evidence on governance and short-termism. This will establish whether there are issues affecting the functioning of capital markets, including questions about shareholder engagement. Ministers and officials have had meetings with a variety of organisations as part of the process of policy development and delivery in this area.
Lord McFall of Alcluith
The concept of ownerless corporations was reinforced last week at the Treasury Committee when Bob Diamond admitted that there had been no engagement between institutional shareholders and Barclays regarding remuneration and risk structure. Does not this absence of stewardship and judgment only exacerbate a situation where, when companies are in trouble, the taxpayer has unlimited liability whereas the executives have very limited or no liability? Will the Government, therefore, reinvigorate the debate so that risk is understood and properly monitored to ensure that bond-holders take some of the pain, which they do not at the moment, and will there be minimum structural change to ensure that in future no bank is ever too big to fail?
Lord Sassoon
My Lords, the noble Lord, Lord McFall of Alcluith, ranges over some big questions there. To start with the remuneration issues, the introduction of the new FSA code of disclosure from 1 January will contribute to making shareholders better informed. My right honourable friend the Chancellor has taken note of Sir David Walker’s suggestion that there needs to be further international agreement in this area so the Chancellor has written to his EU counterparts to see what can be done to further drive forward aspects of disclosure. There is certainly a lot of activity going on there. As to some of the bigger questions about “too big to fail” and bond-holders and so on, I look forward to the light that the Independent Commission on Banking will doubtless shed on these important issues and I note that the chairman of the commission is scheduled to be making a speech in the next few days on this topic.
Lord Razzall
My Lords, I am sure the Minister is aware that, in hostile takeovers, the result is often determined by hedge funds which have simply acquired or borrowed stock short-term in order to make a short-term profit, irrespective of other interests. Is this an issue that the Government are prepared to discuss with the financial services industry?
Lord Sassoon
My Lords, the takeover panel operating independently keeps that issue and all other issues related to the good working of the takeover market under regular review. The department of business consultation, A Long-term Focus on Corporate Britain, which is currently calling for evidence, will be interested to hear what people have to say on that very topic.
Lord Naseby
Has my noble friend noted the recent statement from the Financial Reporting Council suggesting that annual reports shall no longer be printed? How does he think that will improve small shareholder engagement?
Lord Sassoon
My Lords, there is a fine balance to be struck between making sure that shareholders get all the information they require on the one hand, and on the other hand allowing companies to take advantage of electronic and other media to disseminate information in a way in which an increasing proportion of shareholders wish to receive that information and which may be environmentally friendly if it does not require large amounts of paper to be used. I am glad that the FRC is grappling with that issue.
Lord Sassoon
My Lords, this is an ongoing challenge but institutional shareholders over the last few years—under considerable pressure from the previous Government, I am happy to say—have taken steps to make sure that, where they are representatives of pension funds or other representatives, they are more active in exercising proper stewardship in the votes of the underlying shareholders they represent. I recognise that it is an important issue.
Lord Lawson of Blaby
My Lords, does my noble friend agree that one of the problems of shareholder involvement in so far as the banks are concerned is that auditors are reluctant to qualify the accounts of a bank in any way whatsoever, even if they have reservations, because this might lead to a run on the bank? Does he agree that the answer is what I put in the Banking Act 1987—to have a mandatory dialogue between the regulators and the auditors of banks so that there can be two-way communication, which unfortunately went largely by the board with the changes in legislation under the previous Government?
Lord Sassoon
I am grateful to my noble friend for reminding us of the importance of audit, particularly in relation to banks. It enables me to remind us all that the Economic Affairs Committee of your Lordships’ House will, I hope, play an important part in the broader ongoing debate about stewardship when it comes up with its current report into the role of auditors.
Lord Davies of Oldham
When thousands of our fellow citizens are losing their jobs and millions are subject to a pay freeze and the bosses of industry are rewarding themselves very high increases indeed, is it not time that institutional and all shareholders had votes on the remuneration of executives and that the votes should be binding?
Lord Sassoon
My Lords, these are important issues and they are precisely why my right honourable friend the Business Secretary has a current consultation out to look at the question of shareholder engagement in relation to the effective running of the capital markets.
Deficit Reduction
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Lord Barnett
To ask Her Majesty’s Government why the Chancellor of the Exchequer has excluded potential privatisation proceeds from his deficit reduction plans.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, since 1998, HM Treasury’s overall deficit reduction measure has been public sector net borrowing, or PSNB. Under this measure, privatisation proceeds from the selling of shares in companies do not affect the deficit.
Lord Barnett
Yes, my Lords, but, as the noble Lord knows, the Chancellor, replying to questions at the Select Committee recently, admitted that there are large sums that they are considering from the sale of assets. He also said that not all the proceeds must be used to reduce the national debt. The Conservative chairman of the Select Committee then said that he must have quite a bit in his back pocket; he was referring to the tens of billions of pounds from sales. I know that the noble Lord cannot reverse what the Chancellor said, but can he at least assure us that there is no basis in the dastardly charge that the Government are trying to build up a large fund to reduce taxation rather than some of the worst, most painful cuts that are now taking place?
Lord Sassoon
The noble Lord, Lord Barnett, called it a “dastardly charge”; I am sure that I would not characterise it quite like that. The fact is that my right honourable friend the Chancellor is hiding nothing. It is simply that, as I have explained, under the measure that has been used since 1998 for measuring the deficit, privatisation sales—the sales of shares in companies—do not rank against the deficit, so my right honourable friend can have nothing up his sleeve.
However, it is important that the Government exercise stewardship over all their assets, fixed and otherwise, so that we have an ambitious programme to raise proceeds—they may not all count for deficit reduction—which will affect the debt position. That chimes in with the modernisation of government. Of course, among the most valuable assets the Government have are the shares in the banks which were nationalised. We want to ensure that the taxpayer gets a good return on those shares.
Lord Peston
This is a difficult Question, and I am pleased to hear the Minister say that he wants the taxpayer to get a good return on the relevant assets; in other words, they will not be sold at less than their value to the taxpayer. Can the Minister say where in the Government’s accounts the proceeds of these sales will appear? I have looked myself and I cannot find anywhere where I would put them, but then I am not an expert.
Lord Sassoon
My Lords, they will and do appear in tables in the Office for Budget Responsibility’s forecasts and records of sales. For example, the sales of fixed assets are dealt with in table 2.2, and the sales of financial assets when they come in are—
The noble Lord, Lord Peston, shakes his head, but I am looking at page 21 of the OBR’s Budget 2010 supplementary material which has tables. There are not yet financial sale numbers to go in for future years, but table 2.2 is there on page 21.
Lord Hamilton of Epsom
My Lords, will the Minister ensure that he gets his timing right on selling the shares in the banks, and not make the same mistake as Gordon Brown when he was Chancellor of the Exchequer, who sold most of our gold stock for $280 an ounce when the price is now $1,300 an ounce?
Lord Sassoon
My Lords, I do not want to give any hostages to fortune, but it would be difficult for any Chancellor to get it as disastrously wrong as that Chancellor did on the gold sales.
Lord Davies of Oldham
My Lords, the Minister has made clear that he expects to reap the rewards from Labour’s investment and make profits in due course. Will he be a little clearer to the House about the banks? Will the Government introduce criteria on the effectiveness of banks in lending, for example, and even, perhaps, control of bank bonuses?
Lord Sassoon
Well, my Lords, it has come to a pretty pass when the noble Lord characterises the investment in the banks as some sort of voluntary investment to make a return. It was necessary to bail out and save the British economy because the previous model of financial regulation had completely failed. Under the stewardship of the new Government, we will do our best to get back the investment, and hopefully more, that was necessarily put in by the previous Government. That is what we are doing.
Lord Roberts of Conwy
My Lords, would my noble Friend confirm that Royal Bank of Scotland and Lloyds banking groups have considerable liabilities, which will be added to the country’s net debt in due course?
Lord Sassoon
My Lords, as my noble friend says, there are liabilities as well as assets on the Government’s balance sheet as a result of the bailout of the banks. It will be a long process, in which the management of those banks is taking the leadership, to restore them to health, both for the benefit of the shareholders, including the nation, but also to ensure that they can continue to lend money to the businesses of this country.
Lord Brooke of Alverthorpe
Will the Minister give a straight answer to the supplementary question of the noble Lord, Lord Barnett? Will he also give a commitment that the Government will set out how the proceeds will be used?
Lord Sassoon
My Lords, as and when there are proceeds they will be fully accounted for. That is the position.
Lord Dykes
My Lords, will the Minister agree that if the Government take more energetic action to deal with the tax dodgers, of which there are many—probably amounting to over £100 billion a year—there will then be less need to sell state assets?
Lord Sassoon
My Lords, we want to see that the taxpayers of this country pay what they properly should pay. Indeed, we are investing an extra £900 million over the spending review period to ensure that HMRC is able to generate many billions of pounds in additional tax revenue each year. That is quite independent of the need to look properly and hard at Government-owned assets—companies and otherwise—to see what revenue can properly be derived from those assets.
Charities: VAT
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Baroness Royall of Blaisdon
To ask Her Majesty’s Government what steps they will take to allow Sue Ryder Care and other charities to recover VAT in the same way as other bodies providing public services.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, although local authorities, government departments, the NHS and certain other public bodies incur irrecoverable VAT, just as many charities do, on certain of their activities, it is the case that a small number of VAT refund schemes operate in the public sector. Charities already benefit from a range of tax reliefs and it is not proposed to introduce any general VAT recovery scheme for the sector.
Baroness Royall of Blaisdon
My Lords, I thank the noble Lord for his Answer and for the information that he provides. I understand that this is a long-standing problem, but it has been exacerbated by the rise in VAT to 20 per cent. Does the noble Lord agree that in the context of charities such as the excellent Sue Ryder Care, whose centre in Leckhampton I know well, being asked to provide additional public services as part of the big society initiative, some solution should be found to ensure that there is a level playing field between charities, local authorities and the NHS, when all are delivering the same or similar public services?
Lord Sassoon
My Lords, I certainly take the opportunity to commend the work that Sue Ryder and many other charities do. They are facing a tough time, as are many parts of society. We find ourselves in the regrettable situation that charities will be bearing the additional VAT. The whole of society is bearing the burden of the difficult decisions on deficit reduction. The charitable sector of course benefits from significant VAT and other tax reductions and exemptions to the tune of £3 billion a year. The question of a level playing field is important, but it is of a level playing field with the public sector, which itself cannot recover all its VAT. For example, in the National Health Service, only about 20 per cent of the irrecoverable VAT is refunded, and only on outsourced services. Equally, we must remember that there are commercial providers of social care and other services who would be disadvantaged if there was a special scheme for charities.
The Countess of Mar
My Lords, is it not rather unfair to people who donate to charities from their taxed income that, in effect, the income is being taxed twice? They feel that they are doing a good deed and can be rather unhappy that the money is going into the Treasury coffers.
Lord Sassoon
I reiterate that it is important that we recognise that there are significant benefits within the VAT system for charities and that we have exemptions from the general EU rules on VAT that are not enjoyed by charities anywhere else in Europe. It is also the case that other proposals for increases in taxes would have hit charities significantly higher. If, for example, the previous Government’s proposals on increases in national insurance contributions had not been reversed by this Government, there would have been a significantly higher burden on charities than the regrettable increase in the level of irrecoverable VAT. I do not think that we should take this issue in total isolation.
Lord Lawson of Blaby
Does the Minister agree with the principle that I set out when I was Chancellor that if one wishes to encourage charities through the tax system, which I approve of, it should be through concessions for charitable giving, not through relieving particular charities from tax?
Lord Sassoon
I agree that tax relief related to charitable giving is a critical part of the piece. Indeed, gift aid is running at some £1 billion a year and is a very successful and important scheme.
Lord Morris of Manchester
My Lords, the Minister will have seen my Question on the Order Paper on this important issue. Can he say now how much was raised from charities in irrecoverable taxation in the last year for which figures are available? What kind of inducement is it to charitable giving when moneys intended for deprived and often severely disabled children go instead to the Billy Bunters of the Treasury?
Lord Sassoon
My Lords, the increase in taxation from charities, as from other parts of hard-pressed society, including working families and businesses, is regrettably necessary to reduce the enormous deficit that the country has to bear. That is the regrettable state of affairs. It is not easy to consider where the burden should fall. Charities are, in this respect, sharing part of the burden. As I said, there are other tax proposals that the previous Government had that would have hit the charity sector, in this respect, harder. Charities get tax relief of the order of £3 billion through VAT, gift aid and other provisions.
Lord Eatwell
My Lords, I declare an interest as the master of a Cambridge college that is registered with the Charity Commission. I am sure that all noble Lords will know that changes in fiscal policy, with respect to both irrecoverable VAT and the fall in the standard rate of taxation, which has reduced the return on gift aid, have made considerable inroads into the support that government has in the past provided for charities through the fiscal system. We on this side quite understand that these are unintended consequences of fiscal policy, but we do not accept the negativism and complacency that the noble Lord has displayed. There is an easy answer to this question. He usually asks for policies because the Government cannot think them up themselves, so I will give him one: why are charities not allowed to make a return to the Treasury of the VAT paid, so that the Treasury can then apply a clear discount for charities, thus making its revenue from charities transparent, not disguised as it is at present?
Lord Sassoon
My Lords, we look at charitable-related VAT schemes and have a number under consideration at the moment. I am always happy to look at schemes. I stress that the Government have made special recognition of the importance of the charitable sector through the tough spending review. The Office for Civil Society will be spending around £470 million on programmes supporting the voluntary and community sector over the spending review period. The big society bank will have a further contribution to make and my right honourable friend the Chancellor announced a £100 million transition fund for those voluntary and community sector organisations that are affected by spending reductions. The Government absolutely recognise the support that is needed for this sector.
Finance and Insurance Market: Underwriting Fees
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Lord Harrison
To ask Her Majesty’s Government what assessment they have made of the level of underwriting fees in the United Kingdom finance and insurance market.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Office of Fair Trading is currently undertaking analysis of the way the underwriting market works and assessing whether there is potential for improving the way it functions. The report will consider how underwriting services are purchased, how underwriting services are provided and how the regulatory environment affects the provision of these services. The report is intended to be published later this month. The Government await with interest the findings of the report.
Lord Harrison
My Lords, given that City underwriters have in recent years pocketed some £2.5 billion through raised insurance claims without paying out once, not even on the capital-raising bids from RBS and Bradford & Bingley, does the Minister accept that those who lose out are the British shareholder, investor, saver and taxpayer? In light of this, will HMG undertake to implement in full Douglas Ferrans’s report on this subject to increase confidence in the industry, transparency and competition, and bring greater and strengthened rights to shareholders?
Lord Sassoon
My Lords, call me old fashioned if you like but it is probably better if I stay off the substance of matters that are the subject of inquiries by the competition authorities at the moment. I have certainly studied the Ferrans report and I note that he and his team worked closely with the OFT. It will clearly be an important input to the OFT’s studies.
Lord Myners
My Lords, we are fortunate that the Minister is here to answer this Question. He was, of course, an investment banker before he became Gordon Brown’s City ambassador. The Ferrans report, to which he refers, highlights several agency failures, which end up costing UK companies much more to raise capital and end up incurring far larger costs for UK investors, pension funds and insurance companies. I encourage the noble Lord to agree to meet Mr Ferrans and those who authored this excellent report.
Lord Sassoon
My Lords, I am happy to acknowledge that the noble Lord also has a distinguished history in this area. As well as being a fund manager, he wrote a report for the DTI in February 2005, so there are lots of poachers turned gamekeepers out there in the jungle. We should wait to see what the OFT recommends. It can recommend a range of actions, which could include matters coming back to government. I and my colleagues in government would then follow them up in the appropriate way.
Lord Newby
My Lords, does the Minister agree that the Ferrans report is yet another demonstration of the fact that if bankers are left to their own devices they behave in an uncompetitive way? While certain aspects of the report are being considered and are relevant to the OFT, it makes a number of suggestions about how some EU financial services directives could be strengthened to improve the sector and its competitiveness. Will the Minister give an undertaking that before the OFT reports, and in its ongoing discussions in Brussels, it will take forward the proposals in the Ferrans report to ensure that transparency and competition are promoted?
Lord Sassoon
My Lords, as I have already said, it is expected that the Office of Fair Trading will report later this month, so we do not have long to wait. We should consider what the appropriate action is to take after my ministerial colleagues have had a chance to consider the recommendations of the OFT report. However, I hear what my noble friend says.
Baroness Kingsmill
My Lords, I wonder whether the Minister is aware that when I was deputy chairman of the Competition Commission I conducted an inquiry into precisely this issue. This marketplace is notoriously uncompetitive and it is only as a result of constant vigilance that we can keep everyone on the straight and narrow in this area. I hope very much that the Minister will agree with me that the Competition Commission is possibly the best place to resolve these issues and that it will do so—
Baroness Kingsmill
I have asked a question. Does the Minister agree with me that it will do so by the best possible method; that is, by conducting the inquiry with a panel of peers?
Lord Sassoon
My Lords, I am obviously interested to hear from the noble Baroness who has great experience in these matters. However, as she well knows, a range of outcomes could emerge from the OFT market study. Those could include enforcement action taken by the OFT through a market investigation reference to the Competition Commission, recommendations to government to change law or regulation, voluntary action by industry players or, indeed, a clean bill of health. We should wait to see what the OFT recommends.
Lord Eatwell
My Lords, is not the truth of the matter that the complete failure of the Government to persuade the banks to lend has forced companies into increasing rights issues and that the banks have used corporate desperation as a lever to charge higher underwriting fees even when market conditions have improved? Does the Minister agree that this is prima facie evidence of an underwriting cartel? Does he regard this as a legitimate way for banks to repair their balance sheets?
Lord Sassoon
My Lords, first of all, I do not accept for one moment the premise about government action in some way preventing companies borrowing from the banks, because, as we discussed at some length yesterday, the Government are taking a considerable amount of action to make sure that the banks lend and increase the amount of lending over what they would otherwise have done. As to the noble Lord’s questions about the underwriting market, again I would wait until the OFT has come up with its report within the next few weeks.
Air Passenger Duty
Lord Sassoon Excerpts(13 years, 10 months ago)
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Lord Borrie
To ask Her Majesty’s Government what is their assessment of the potential effects on United Kingdom competitiveness of the announcement by the Chancellor of the Exchequer in June 2010 forecasting that air passenger duty revenue would increase from the current rate of £1.9 billion to £3.8 billion per annum by 2015–16.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Office for Budget Responsibility’s November forecast estimates air passenger duty revenue at £3.6 billion in 2015-16. The estimate reflects forecast growth in passenger numbers and the November 2010 rate increases as announced by the previous Government. It also assumes that duty rates are uprated by inflation each year—a standard forecasting convention. However, at the Budget, the Government committed to exploring changes to aviation tax and to consult on any major changes. We are considering evidence from stakeholders, including on the impact on UK competitiveness.
Lord Borrie
I thank the noble Lord for his answer. However, it does not deal with the great problem that so many countries on the continent of Europe either do not have any duty at all or have a much lower duty than in Britain. Therefore, the competitiveness of our airlines, airports and tourist industry is at a disadvantage. Apropos the last Question and Answer, this is surely one matter on which the Government have a measure of control. It is their duty that has been imposed and is suggested to be higher. I am sure that the Minister will agree with me that the UK tourist industry must be very disappointed with the Answer that has been given, especially when tourists from countries such as India and China—growth economies—are wanted yet are being turned away by this unduly high duty.
Lord Sassoon
My Lords, I do not believe that the tourist industry will be either surprised or disappointed because I have merely restated that we are consulting a wide range of stakeholders and listening to views of the tourist organisations, among others. On UK competitiveness, it is important to see the APD in the wider context. For example, we do not levy the APD on transit or transfer passengers. As the noble Lord, Lord Borrie, points out, other countries are introducing similar taxes—Germany introduced a similar tax on 1 January. In the wider context of competitiveness, the Government are reducing corporation tax very significantly from 28 to 24 per cent over four years from April 2011. If we talk about competitiveness, we should look at it in a much wider context.
Lord Palmer
My Lords, can the Minister explain why those in private jets are not subject to APD? This might be a very good point for his consultation paper.
Lord Sassoon
My Lords, I am listening hard to points that are raised this afternoon. Although I cannot tell noble Lords where the consultation will get to, I am very happy to listen to points, including that made by the noble Lord.
Lord Rotherwick
Is the Minister not concerned that by raising the airport passenger duty in the way that is proposed he will damage the Government’s objective of making this country one of the major tourist destinations? If a family of four from China travel to this country from their home, they will now pay £300, even though they are travelling economy.
Lord Sassoon
My Lords, it is certainly not the Government’s intention to damage the competitiveness of any sector of the economy, least of all the tourist sector. I should remind noble Lords that the duty increase that came in on 1 November was announced by the previous Government and is something we are looking at. All these factors will be considered but this is not an easy matter; the previous Government reviewed the system at least once since its introduction.
Lord Clinton-Davis
I declare an interest as the president of BALPA. How does this proposed duty improve the environment? I do not think that it will at all, but I want to hear the Minister’s response. Does not this duty impose a serious and further blow to the prospects of our beleaguered airlines, so why insist on this pernicious duty?
Lord Sassoon
My Lords, the Government have not proposed anything yet. The coalition agreement talks about a change from APD to a per plane basis. Clearly, different constructions of the duty have different effects on usage of aircraft and on the environment. However, as I say, the Government have not proposed anything yet. We are in listening mode. The effect on the airlines, environmental effects and competitiveness are all issues that must be considered.
Lord Newby
My Lords, is the Minister aware that the APD is seen to be particularly unfair on the Caribbean? Will he ensure that as part of the review which the Government are undertaking, particular attention is given to the effect of the APD on the Caribbean, not just on the tourist industry there, which is increasingly important as a proportion of its economic activity, but on the Caribbean diaspora who live in the UK?
Lord Sassoon
I am grateful to my noble friend for drawing attention to the Caribbean. The Caribbean Tourism Organisation has produced a very helpful report as a contribution to the debate. I have met the Heads of Government of the dependent territories in the Caribbean, so I have heard first hand their strength of feeling in respect of this issue. However, under the Chicago Convention we have to have an objective basis for distinguishing between one country and another.
Baroness Liddell of Coatdyke
My Lords, I declare an interest as a board member of VisitBritain. I take this opportunity to congratulate the Prime Minister on the very helpful speech that he made last week in which he recognised tourism as an engine of growth in the economy. However, will the Minister prevail on his officials to set up a monitoring committee with the Department for Culture, Media and Sport as APD will prove a significant challenge to the tourism industry at a time of huge opportunity, with everything from a royal wedding to the Olympics? Mitigating measures might well be introduced but only if there is a sufficiently adequate early warning system.
Lord Sassoon
I absolutely hear the point and I am sure that my right honourable friend the Prime Minister will be pleased that his commitment to the tourist industry has been noted. I say again that the previous Government increased the rates to where they are now, with the burden falling on tourists and all other passengers, but we are looking at the whole construct.
Banking: Bonuses
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, with the leave of the House, I will now repeat in the form of a Statement the response given by my right honourable friend the Chancellor of the Exchequer in another place. The Statement is as follows:
“Mr Speaker, we inherited from the previous Government a failed system of banking regulation and a situation where billions of pounds had been provided to bail out bankers with nothing demanded in return. It was a something-for-nothing deal that rightly left the British people seething with anger. Let me explain what we are doing to change this.
First, we are replacing the disastrous tripartite system for regulating banks established in 1997. Instead, our plan is to put the Bank of England clearly in charge. Secondly, we have created the Independent Commission on Banking to review the structure of the banking sector and address the issue of banks that are too big to fail—an issue that the previous Government’s failure to address brought this country’s economy to its knees. The commission will report this autumn. Thirdly, we have introduced a permanent levy on the banks in the face of opposition from the previous Government. This new banking tax started coming into effect last week and once fully operational will raise £2.5 billion each and every year—£8.8 billion over this Parliament. We are looking at the IMF’s proposed financial activities tax and we will work with international partners to secure agreement. Fourthly, we have demanded that the banks sign up to the code of practice on taxation. The previous Government created the code in a flourish of press releases, but we discovered that only four out of Britain’s 15 main banks had actually signed up to it. This coalition Government have made sure that every one of those 15 banks signs up. We are legislating in this year’s Finance Bill for tough anti-avoidance measures directed at some of the practices in the financial services sector that no one had previously attempted to stop.
Specifically on remuneration and bonuses, on 1 January this year we introduced the most stringent code of practice of any financial centre in the world. There will be for the first time a strict limit on the amount of bonus payable in upfront cash. There will be a requirement that 50 per cent of bonuses are paid in shares or other non-cash instruments, which bank employees will not be allowed to sell on for an appropriate period. Guaranteed bonuses will become the exception and not the rule. Crucially, the new bonus code has been significantly extended. It will cover payments and bonuses at 2,500 firms, while the code that we inherited covered pay and bonuses at only 25 individual financial firms.
When it comes to the Royal Bank of Scotland, I am having to deal with the thoroughly inadequate contract negotiated by the previous Cabinet, which this House is probably not aware puts no constraints at all on RBS’s bonuses this year. Indeed, it explicitly encourages it to pay bonuses in line with market rules. But despite this we have made it clear that RBS will have a smaller bonus pool than last year and should be a back-marker in the industry, instead of the front-runner that it once was.
In the coming weeks all the banks will be announcing their pay and bonuses for this year. I can confirm that we are now in discussion with the banks to see whether we can reach a new settlement where the banks pay smaller bonuses than they would otherwise have done, are more transparent about those that they do pay, make a greater contribution to local communities and the regional economy, treat customers fairly and, above all, lend materially and verifiably more than they were planning to the businesses of Britain, especially the small businesses, so that they can grow and create jobs this year. That is what a new settlement with the banks looks like—one where they lend to the British economy, contribute to the British Exchequer and provide jobs for the British people, where they are responsible on pay and bonuses and where Britain can be the world centre of a properly regulated and internationally competitive financial services industry. If the banks cannot commit to that, I have made it clear to them that nothing is off the table. I will keep Parliament informed of our discussions and, if the Opposition who created this banking mess have a better idea, let us hear it”.
My Lords, that concludes the Statement.
Lord Sassoon
My Lords, I am disappointed in the response and the questions that we have just heard. My right honourable friend the Chancellor has made it clear that he is concentrating on what is really important: the big picture issue of getting rid of the former system of financial regulation, which was proven to have failed in the crisis. We are making fundamental changes to that. As I explained in repeating the Statement, there are ongoing discussions about what really matters, which is about treating customers fairly, making sure that lending is materially and verifiably more than the banks would otherwise be planning to lend and, in that context, ensuring that the banks pay smaller bonuses than they otherwise would have done. It is precisely the switch from bonuses towards lending, which the noble Lord, Lord Eatwell, is asking for, that we are concentrating on now.
In answer to the noble Lord’s questions about taxation, far from introducing any cut in tax on banks, we have introduced a permanent levy rather than a one-year levy—a levy that raises in each individual year more than the previous Government’s one-off bonus tax did. Even the previous Chancellor, Alistair Darling, admitted that that bonus tax failed to change bankers’ behaviour, whereas the bank levy that this Government have introduced reflects the relative risk in different banks’ balance sheets.
I am grateful to the noble Lord for rising to the challenge about the allowability of bankers’ bonuses or total remuneration against tax. It is an interesting suggestion. We look at the total package in the round and I am always grateful for interesting new ideas.
In respect of taxation of non-domiciled individuals, whether they are bankers or others, I remind the noble Lord that it was my right honourable friend who, when in opposition, first raised the question of non-domiciled individuals making a proper contribution to tax in this country. We have taken the lead on that.
The overall priority must be to make sure that the banks pay a fair share, as we believe they now will. At the same time, we recognise the need to keep a vibrant banking sector in this country and to keep the UK as a centre of global banking, with banks continuing to lend to all businesses, particularly the small and medium-sized businesses in this country. We will continue to work with our European partners to urge agreement, particularly on a disclosure regime by banding of remuneration. We will continue to work with our partners on consideration of a financial activities tax. The critical thing, as my right honourable friend set out today, is that the Government are working in a thoroughly practical, hands-on way to deliver results and, in particular, will continue to work with the banks to make sure that lending to the businesses of this country supports the recovery that this economy is on track for.
Lord Oakeshott of Seagrove Bay
My Lords, I thank the Minister for the Statement. I do not know whether he has read it lately, but I have here an excellent document, The Coalition: Our Programme for Government, in which Nick Clegg and David Cameron promised,
“radical plans to reform our broken banking system”.
Item 1 said on banking:
“We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial sector … We want the banking system to serve business, not the other way round”.
There is not much sign in the briefing that has been coming from No. 10 and the Treasury that they are very aware of those commitments. Can the Minister assure us that he will draw those commitments to the attention of the people in the Treasury who are working on these schemes, because frankly the messages that are coming out are not right when we are trying to do a serious negotiation with the banks to improve their behaviour?
Specifically on the Royal Bank of Scotland, what possible justification is there for Mr Hester, who is one of the highest-paid public sector workers in the country, to get any bonus at all when his bank has missed its legally binding mortgage and business lending targets by a mile?
Lord Sassoon
My Lords, I am always grateful to my noble friend Lord Oakeshott for reminding us of what is in the coalition agreement, which is always at the heart of what we do. I am sure that my colleagues in the Treasury will need absolutely no reminder of what the coalition agreement says in this area, because it is precisely because we are guided by the coalition agreement that we now have a package that, as I have explained, means that 2,500 banks as opposed to 25 are caught by the code. For all their talk, the previous Government had not actually brought in any new remuneration code. We now have one in place. We are continuing, as I said, to urge our European partners to work with us on a common set of banding disclosures. The current discussions are precisely to make sure that bonuses are lower than they would otherwise have been and that lending is higher.
In respect of the Royal Bank of Scotland, as I said in the Statement, we found ourselves having inherited a most extraordinary agreement negotiated by the previous Government that put absolutely no restrictions on RBS’s payments and bonuses this year. We want to see RBS now not as a front-runner, which seemed to be where it was encouraged to be under the previous Government’s agreement, but as a back-marker when it comes to its bonus payments for this year.
Lord Clinton-Davis
Does the noble Lord recall the words of Nick Clegg, who asked whether it did not make one angry that the banks were being allowed to ride roughshod over our economy and were still handing out bonuses by the bucketload? Is the Minister satisfied that that situation should continue and that he should issue sanctimonious and tired Statements to the House? Does he not feel ashamed of what is happening?
Lord Sassoon
My Lords, I am sorry if I will become tediously repetitive, but if the questions cover points that I thought I had made clearly, I will have to make them again. We are taking far more practical and effective action than the previous Government did. We have extended very considerably the scope and form of the disclosures on bonuses that must be made. As to the quantum, I repeat to the noble Lord, Lord Clinton-Davis, that discussions led by my right honourable friend the Chancellor are ongoing, with the intention of making sure that bonuses are lower than otherwise they would have been and that lending to British businesses is materially and verifiably higher than it would have been. That is what we want in the context also of a vibrant and healthy banking system, which is good not only for this country but for the UK's global competitiveness.
Lord Ryder of Wensum
My Lords, will my noble friend tell us whether bankers in New York and Frankfurt are being offered the same type of bonuses as bankers in London? Will he further tell us whether the American and German Governments take the same attitude to bonuses as this one?
Lord Sassoon
My Lords, I am grateful to my noble friend Lord Ryder for enabling me to remind noble Lords that other Governments are increasingly following the lead of the UK and introducing variations on the measures that we have introduced for the taxation of banks. Since the announcement of our bank levy, Germany, France and other countries have followed with similar constructs. It is critical that we make sure that, while the UK regime is the toughest interpretation among global financial centres of what has been agreed internationally, we seek to work within the framework laid down by the Financial Stability Board and endorsed by G20 Ministers. Whether it is in relation to the US, other European countries or global financial centres, we will continue to work energetically with our partners to secure, as far as is possible, common standards in this area.
Lord Myners
My Lords, in 2009 the Prime Minister said that no bonuses of more than £2,000 should be paid to bankers while banks were in receipt of government support. The coalition agreement talked about robust action and detailed programmes to handle unacceptable bonuses. On that we have heard nothing at all. When we proposed disclosures about remuneration under the Walker report, this was supported by both the Conservative and Liberal parties. The Government have done nothing to implement the Walker recommendations.
The Minister asked for ideas. I will give him four. First, shareholders should be given a clear fiduciary responsibility, for which they can be held accountable under law, to take appropriate action to oversee the companies in which they have invested their clients’ money. Secondly, banks should not be able to offset the past losses against current corporation tax liabilities while they are in receipt of central government support, which most of our major banks still are through the special liquidity scheme and the credit guarantee scheme, as a consequence of which very few will pay any corporation tax for the foreseeable future.
Thirdly, there should be a charge for the capital that banks effectively enjoy through the state guarantee. The Bank of England has estimated that this is worth £100 billion. A fair charge for that would be of the order of £12 billion to £15 billion—the annual charge for risk for capital, which the Minister will understand—rather than the derisory £2.5 billion pounds which ultimately, but not initially, will be raised under the Government's bank levy proposal. That is a considerably smaller amount than was raised under the bank payroll tax.
Finally, if the Minister finds the RBS employment agreement with Mr Hester unacceptable, he can terminate it and replace it with a new one. Will he do so, because the people of this country will not accept a situation in which in excess of 5,000 people working in British banking will receive total remuneration in excess of £1 million per annum? This is totally unacceptable and we are entitled to a decent answer from the Minister to these questions on bonuses, rather than the blather that we have heard about other matters.
Lord Sassoon
My Lords, I am not going to stand here and listen to the ridiculous tirade from the noble Lord, Lord Myners. If he had all these brilliant ideas, why did he not implement a single one of them when he was in office? It ill behoves him to come here with this litany of ideas, which may or may not be good but are given to me not in the spirit of co-operation but as a lecture telling me what we are not doing. I could repeat—but it would bore noble Lords interminably—the Statement of my right honourable friend, which gave a great list of things that we are doing and have done. The Government of the noble Lord, Lord Myners, left only 25 banks with any sort of disclosure requirements. We have extended that figure to 2,500. His Government managed to get a paltry four banks signed up to the much lauded taxation agreement. We now have the top 15 banks signed up. I could go on. It is no good the noble Lord giving me a lecture about what we should do. He had years to deal with the matter and completely failed. We are getting on in a very practical way to make sure that the banking industry and regulatory system is fixed.
Lord Higgins
My Lords, is my noble friend aware that the Government are absolutely right to get rid of the failed tripartite agreement that caused many of the problems that we now face? Does he agree that we are making some progress in reducing cash payments, deferred bonuses and so on? However, I have some difficulty with his argument that bonuses are all right so long as the banks lend more. That seems to be a non sequitur, except in the sense that if we agree to the bonuses, the banks may lend more. However, they ought to be doing that anyway. The two issues are not connected except in the sense of, “We will be soft on you if you do what we want”. That is not the right approach.
As far as concerns RBS and the other banks that have been bailed out by the Government, I understand my noble friend's point about the agreement made by the previous Government. However, given the extent of participation in those banks, ought there not to be clear representation on behalf of taxpayers and the Government on the boards of the banks so that those directors could take appropriate action—because at the end of the day it is the board that decides these matters—with regard to bonuses?
Lord Sassoon
I am grateful to my noble friend Lord Higgins for recognising the progress that we are making on reform of the regulatory structures, and in relation to bonuses. We are absolutely not going soft on the banks, which is why, as we speak, discussions are ongoing to make sure that bonuses this year are lower than otherwise they would have been, and, in parallel with that, that banks will lend in a verifiable way more than they would have lent. We are not back-pedalling on any of this and are continuing to work actively with the banks.
As far as concerns the management of RBS and Lloyds, the basic construct put in place by the previous Government ensured that the banks would be managed on an arm’s-length basis without the Government directing their day-to-day operations. That is the broad principle to which we are sticking. Nevertheless, it is important that the Government, as a significant shareholder in RBS and Lloyds, make their views very clear on all matters including bonuses.
Lord Brooke of Alverthorpe
My Lords, it would help if we had some honesty in dealing with some of these issues. The Statement says that the previous Government’s failure to address them brought this country’s economy to its knees. Presumably the previous Labour Government were responsible for the banking failure in the USA, Portugal, Greece, Ireland, Spain and other parts of the world. This is a worldwide problem that is not solely related to the previous Government.
To come back to the Statement, the Chancellor said, and the Minister concluded with it, that, “if the Opposition that created this banking mess has a better idea, let us hear it”. My noble friend Lord Myners asked four questions and we await answers to them.
Lord Sassoon
My Lords, all I can say is that I will listen to any ideas. I did not hear the question at the end of the four ideas put forward but I am willing to listen to all ideas from noble Lords on a whole range of topics. I am always listening but I am puzzled that when the noble Lord had so much time in government to put those ideas into operation he did not think that they were so good at the time.
Lord McFall of Alcluith
At the Treasury Select Committee this morning Bob Diamond is reported to have said that Barclays is in the position that it is not too big to fail. Does the Minister agree with that statement and, if so, does that mean that if any big bank in distress comes to the Government in future the taxpayer will not be on the hook?
Lord Sassoon
I am grateful to the noble Lord, Lord McFall of Alcluith, for reminding us that there are other challenges as well as bankers’ bonuses to be resolved. The too-big-to-fail one is absolutely at the heart of strands of ongoing work. I did not have the opportunity to listen to the whole of what Mr Diamond said to the Treasury Select Committee but I certainly believe that whether it is in the work of the Independent Commission on Banking or in the discussions that are going on in international fora, the question of how to resolve bank failures is one to which we need to continue to give considerable priority. We are reminded that the question of the structure of banking is multifaceted and we should not focus exclusively on one aspect of it.
Lord Beecham
Will the Minister tell the House by how much the banks will benefit from the pending reduction in corporation tax?
Lord Sassoon
My Lords, clearly it depends on the level of profits they make as to how much they will benefit from the reduction in the rate of corporation tax. We look at the total package of taxation on banks, as we do for the rest of industry. We believe that by introducing in particular the levy on banks, they will be paying a fair share to the Exchequer. We need to take account of the remuneration taxes, continue to consider the costs and benefits and talk to our partners about a financial activity tax, but we must take the whole of the taxation burden on the banks in the round.
Lord Hodgson of Astley Abbotts
My Lords, does my noble friend not think it strange that the party opposite seeks to evade any responsibility for the situation in which we now find ourselves? Having created the situation in which the taxpayer has ended up as a very large shareholder in a number of UK banks, is it not now most important that those banks return to profitability so that the share price and the performance of the banks will enable the taxpayer to earn a profit on the investment? To do that, do the banks not need to be properly staffed and remunerated? Will not our proposal enable us to do something to mitigate the disastrous economic incompetence of the previous Government?
Lord Sassoon
I am grateful to my noble friend Lord Hodgson and agree with his analysis. We need a successful and vibrant banking system in this country. We need healthy banks across the system, but it is particularly important for the taxpayer that the health of RBS and Lloyds is restored so that they can get a decent return in due course from its interest in those banks.
Lord Campbell-Savours
Is it not fair to say that bonuses based on share options could be quite remunerative?
Lord Sassoon
Indeed, bonuses based on a number of forms can be remunerative. It is now a fundamental part of the package agreed by G20 Ministers, incorporated in the European capital requirements directive in force from 1 January in the UK, that a significant part of bonuses now has to be paid in a non-cash form and cannot be cashed in for a considerable period. Absolutely, that needs to be part of the structure.
Lord Greaves
My Lords, the Independent this morning has some devastating quotes in recent months from the Prime Minister, my right honourable friend the Deputy Prime Minister, the Chancellor and the Business Secretary that can only be taken by ordinary people to mean that large, multimillion pound bonuses would be stopped by the Government. That is the only reasonable interpretation to put on them. Would it be sensible, if senior members of this Government cannot deliver such things, for them not to give the impression that they are going to do so? That is simply a propaganda own goal. Would the Minister also comment on the view from a former Business Secretary that the rich have suffered enough?
Lord Sassoon
My Lords, I am conscious of the time. All I can say is that my right honourable friend the Chancellor has made it completely clear what we are doing today, which is a considerable package of things, one element of which is to talk actively to the banks with the aim of ensuring that the bonuses they will pay this year will be lower than they would otherwise have paid.
EU: Budget
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Lord Campbell of Alloway
To ask Her Majesty’s Government what steps they will take to ensure that the expenditure on accounts for the budget signed off by the European Court of Auditors shall be excluded from the contribution imposed on member states.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the UK cannot withhold its contributions to the annual European Union budget as it is required to make those contributions under obligations imposed by the treaties. The European Communities Act 1972, particularly Section 2, gives effect within the UK to Community law.
Lord Campbell of Alloway
I ask the noble Lord in response: since the findings of the Council are subservient to the approval of the Parliament, will the Government now seek change to the Lisbon treaty to enable the European Court of Auditors to oppose expenditure on a reasoned assumption that has the support of the Council of Europe, and so then to sign off the accounts? In other words, will the Government take some step, if not that step?
Lord Sassoon
My Lords, I am grateful to my noble friend for drawing attention to a clearly unsatisfactory situation. Year after year, the European accounts cannot get a clean audit opinion. However, it is the Government’s view that the way forward is not to press for treaty changes but to try to make sure that the whole system of accounting is made simpler and clarified. It should concentrate on what is important, and the capabilities of both the European Commission and other agencies—whether at the European level or, particularly, within member states—to manage the money should be enhanced so that we get out of an appalling situation that we do not want to see continue. However, treaty change is not the appropriate vehicle.
Lord Pearson of Rannoch
My Lords, can the Minister think of a better word than “grotesque” to describe the situation whereby the overall supervision of our priceless financial services has been passed to an organisation that, as he has mentioned, has been incapable of getting its own accounts signed off by its internal auditors for 16 years?
Lord Sassoon
My Lords, I said that the situation in which we find ourselves, with the European accounts not getting a clean audit opinion, is completely unacceptable. The connection between that and the regulation of financial services in Europe is somewhat tenuous. We should focus on ways of improving the budget situation. My right honourable friend the Prime Minister has already taken steps, both on this year’s budget and by talking about what we expect from the financial framework for the next seven years of the budget. Those are the ways in which we have to move forward determinedly.
Earl Cathcart
My Lords, my noble friend says that we have a treaty obligation to pay our contribution to Brussels. Quite so, but surely there is also a treaty obligation to ensure that all EU money is properly spent. Secondly, if Brussels blames the nation states for these financial irregularities, why do we not put pressure on the Commission to name and shame, and then block future payments to, those countries responsible for the fraud and mismanagement?
Lord Sassoon
My Lords, there are indeed things that we can do and will consider doing. The Council considers the budget issue in the early months of each year. It is rare—certainly it has not been done in recent years by a UK Government—to vote in Council against waving through the budget without a clean audit opinion. However, as my honourable friend the Economic Secretary has made clear in another place, the Government are ready to use our vote if we see accounts that fail to meet the standards that we think they should. She said in another place:
“If we see accounts that contain points made by the European auditors that we believe the Parliament is not taking on board, we will be ready to use our vote in future to challenge the Commission in a way that the last Government never were”.—[Official Report, Commons, 13/10/10; col. 456.]
Lord Sassoon
My Lords, I cannot tell the House that but I am very happy to write with the information. I think that it involves different auditing standards and a different structure but I shall be very happy to confirm that.
Lord Mawhinney
My Lords, those of us who have been privileged to serve at either end of this Building for the past 15 years have listened to Answers remarkably similar to the one which my noble friend has just given. Will he assure your Lordships’ House that progress is being made to the end which he desires, or are we going to listen to similar Answers for another 15 years?
Lord Sassoon
My Lords, I sincerely hope that we will not; anyway, I am sure that I will not be here giving those Answers for 15 years. We are making progress: the number of areas of qualification of the budget is going down and the level of fraud has been significantly reduced and is at a very low level, so there are certainly improvements in the detailed audits coming forward. However, that is occurring within a total picture which, I repeat, is not acceptable. We must work towards achieving more progress.
Lord Hunt of Chesterton
My Lords, does the Minister agree that many important projects and finances come through our involvement with the European Union which are valuable in areas ranging from agriculture to manufacturing? He should be well aware that, if there is excessive interest in detailed financing and control, it will be very difficult for these projects to operate.
Lord Hunt of Chesterton
You just have to listen to all the important manufacturers who find involvement in Europe extremely valuable. I hope the Government will ensure that this support is effective as well as valuable.
Lord Sassoon
My Lords, we are taking steps—for example, I think that we are one of only three or four countries which voluntarily publish audited statements on the way that co-managed funds are used in the UK. As a country we are doing everything to make the UK accounts as transparent and thoroughly audited as any, and the European Commission has noted that with approval. It is depressing that in agriculture, the largest area of spend, the error rate found by the auditors is going up.