Budget Responsibility and National Audit Bill [Lords]

Lord Tyrie Excerpts

Tuesday 22nd March 2011 Commons Chamber

[Mr Andrew Tyrie (Chichester) (Con)]

The Chancellor took a major step by handing responsibility for fiscal forecasting to an independent body, and he took an equally bold step by asking it produce a long-term assessment of the strength of the public finances. He could have opted for a validation model, and instead he has gone for something much more adventurous.

The first inquiry of any significance that the Treasury Committee undertook after it was reformed at the start of this Parliament was on this subject. Rather than wait for the Government to come forward with a draft Bill, we took the initiative and tried to make some suggestions on how we thought it should look. We set eight criteria as minimum requirements for the new body, which for the most part the Government met. I thank the Treasury team for their co-operation in doing what they could to accommodate the Committee’s points.

Absolutely crucial to the success of the new body will be its credibility on independence. To achieve that, some new, groundbreaking arrangements have been made in the relationship between parliamentary Committees and the Executive. The Bill establishes a statutory veto for the Treasury Committee over the appointment of the chairman and executive members of the OBR. This is the first time that a Select Committee has been given such a veto over public appointments, which reflects the importance of cross-party parliamentary oversight of the OBR’s work, and the need for people of the highest calibre and independence to take on the job of running the OBR.

The Treasury Committee has already held its first appointment hearings for the OBR committee, and endorsed the appointments of Robert Chote, Stephen Nickell and Graham Parker. We also welcomed the appointment of two non-executive members. We were particular eager that there should be non-exec oversight of the work of the executives. The non-execs will provide an important check to ensure that the OBR lives up to its requirement to act transparently, objectively and independently.

Non-execs provide an opportunity for two-way traffic. If the OBR chairman becomes a patsy, they have a good chance of alerting the Treasury Committee at an early stage. If the Chancellor or the Treasury lean on the chairman too much, the non-execs offer a first line of defence. If the OBR chairman gets carried away and starts to offer a running commentary beyond his brief on the overall conduct of fiscal policy, the non-execs, as a first port of call, can say, “Steady on.”

The Committee looked carefully at how the OBR’s success ought to be measured. Economic forecasting is an imprecise art, and success on that cannot necessarily tell us much. To be seen as successful, the OBR must provide clear, impartial forecasts and a commentary that improves public debate on the key issues. It must guard against optimism and pessimism, and above all, it must avoid being drawn into political controversy. The Treasury Committee will monitor how the OBR fulfils those performance criteria. We will watch carefully and speak up if we feel that the OBR is not doing its job properly.

Of course, ultimately and simply, the OBR will be judged on the quality of its publications and its responsiveness to reasonable requests from Parliament or the Government for information or work. A few weeks ago, I wrote on behalf of the Treasury Committee to the OBR chairman to seek further information on the treatment of privatisation receipts in the accounts. Frankly, I was not encouraged by his reply. These are early days, and I very much hope that there is more responsiveness to future requests.

In two ways, the Government did not fully implement the Treasury Committee’s recommendations. The Committee asked that an independent group accountable to Parliament be set up after five years to review the OBR’s work. We said that among other things, that group should examine whether the model for the forecasting body chosen by the Chancellor was the right one in the light of experience. To make that judgment, the group would need to examine both the validation model and the much more independent model—the fully independent model—implied by the Congressional Budget Office in the United States. I think, and the Committee concluded, that judging which model is best should be done after a period of experience of the OBR’s work, which is why we suggested the five-year review. I urge the Government to agree, on a non-statutory basis, that the five-year review should report directly to Parliament rather than to the Government via the non-executives, as the legislation currently envisages.

One other proposal in the Treasury Committee report is that the OBR should retain the ability to assess the robustness of the fiscal plans of major political parties in the run-up to an election. That would enhance the quality of debate and take us forward from the world of claim and counter-claim on Labour tax bombshells and Tory stealth cuts and so on, which often leave the public perplexed and do not necessarily move the debate forward much. Although the Bill does not rule that out, it strongly discourages such a role.

I understand the OBR’s reluctance to get involved in anything that could prejudice its appearance of independence, but I hope the door is not completely closed to the idea. Public understanding of what is at stake in elections could be enhanced by the OBR’s involvement. Furthermore, the need for such scrutiny might make parties more careful with their claims and improve their pre-election proposals. I hope we can return to that idea when the OBR’s reputation for independence has been firmly established after a run of years—that could also form part of the five-year review to which I alluded.

Overall, the Treasury Committee was greatly heartened by the degree of engagement from the Government and from the Opposition over the creation of the OBR. That demonstrates that the Select Committee corridor can influence policy rather than just offer critiques of it, which I hope marks a way ahead for improving legislation more widely.

Question put and agreed to.

Bill accordingly read the Third time and passed, with an amendment.

HM Revenue and Customs

Lord Tyrie Excerpts

Wednesday 2nd March 2011 Commons Chamber

[Mr Andrew Tyrie (Chichester) (Con)]

I am glad that the request of the Select Committee on the Treasury to hold this debate on HMRC’s estimates has been accepted. I am conscious that I am speaking on behalf of a large number of colleagues from right across the House, many of whom cannot be here today, who have spoken to me about the problems that their constituents are experiencing with HMRC. I am also speaking on behalf of hundreds of thousands of taxpayers who have encountered difficulties and feel that they have nowhere to turn. I am delighted that the Chairman of the Treasury Sub-Committee, the hon. Member for Leeds East (Mr Mudie), will follow me in the debate. He has done an excellent job in focusing the Sub-Committee on these problems and, in so doing, has built on the work done by the Sub-Committee in the previous Parliament under the chairmanship of my hon. Friend the Member for Sevenoaks (Michael Fallon). I should like to take this opportunity to thank my hon. Friend for his hard work.

“Ten years ago the Inland Revenue had the reputation of being one of the best run Departments in Whitehall. Today HMRC’s reputation is in tatters as one disaster has followed another.”

Those are not my words but the considered conclusions of the Chartered Institute of Taxation in written evidence to the Treasury Committee. I have a stack of similar evidence from other qualified bodies and people, and they are all variations on the same theme—HMRC is close to being a failing institution in some areas.

[Andrea Leadsom (South Northamptonshire) (Con)]

Does my hon. Friend agree that the Treasury Committee has heard much evidence from representatives of businesses who say that dealing with HMRC is now costing enterprises significantly more of their profit and income? Matters that used to take a few hours now seem to take literally months to resolve.

[Mr Tyrie]

I agree completely, and the next sentence of what I intended to say was to be along the lines of asking what the situation means for small business men. They are not experts in tax, they just want to get on with their job. We must constantly bear in mind the fact that when HMRC gets things wrong, its mistake can be a catastrophe for the taxpayer on the other end of the experience.

I want to tell the story of one such business man who has written to me, who wants to remain anonymous. His business was the subject of an HMRC investigation, and when it found no irregularities, it started an investigation into his personal tax affairs. As he says in his letter to me, “They investigated everything”, even challenging a gift of £15 to a nephew. He had the impression that the local tax office felt it had to find something, having invested so much time in his case. All that went on for five years—it was like being on trial for five years. Finally, a very senior manager at HMRC saw sense and transferred the case to another tax office, and a week later that small business man had an apology.

However, like so many similar cases, it is not a matter of “all’s well that ends well”. The collateral damage has been huge. That business man’s accountant estimates that his business has lost £7 million in the time and effort of handling the case, and on top of that the stress involved in such an experience would have been crippling for many people. It is not just that individual who has lost out but all those who depend on his business for their livelihood and all those who might have had jobs in it had it been able to concentrate on expansion rather than fending off HMRC. One case does not prove anything, but the sheer scale of complaints now pouring into MPs’ postbags suggests something.

[Mr Ian Liddell-Grainger (Bridgwater and West Somerset) (Con)]

Is my hon. Friend aware that HMRC is going to write off all open cases from 2007-08, which equate to just under £1 billion? It wants to sort out the overpayments, which of course affect the person whom he mentioned. The problem is that, under the four-year rule it is not sure how it can do so. Can he help me on that point?

[Mr Tyrie]

My hon. Friend makes a point that I was intending to make, and he makes it very fully. Because I want to give other people the opportunity to speak, I will not elaborate on it.

I wish to say a further word about HMRC as an institution. It has a very difficult job. Nobody likes the taxman, and it is easy to kick HMRC. I have no doubt that most people there are struggling to protect the revenue fairly and trying hard to do a reasonable job. Doing that job requires a strong sense of collegiality and loyalty to the ethic of the institution. When I was an adviser in the Treasury in the ’80s, I had a lot of contact with people in both the Inland Revenue and Customs and Excise, and I thought that they were the salt of the earth. They were immensely dedicated to their jobs and civil servants of the best sort. One had no doubt that they were a highly motivated group of people, or that morale was high.

What about now? The Cabinet Secretary runs an annual staff survey, which has been going on for many years. It shows that HMRC has the lowest morale of any Government Department. Some 25% of staff want to leave as soon as possible or within a year, and only 15% believe that the department motivates them to do their best. Only 12% say that the department is well managed, and the survey goes on with a similar litany. There is some good news, which relates to what I said a moment ago. The job content is still considered interesting by three quarters of staff, and more than three quarters say that they can rely on their colleagues. There is still some collegiality. Even that will not last unless we start to put right what has gone wrong. HMRC will become dysfunctional unless action is taken to bring to an end the string of disasters that has befallen it.

Let me give some examples. Last September, the Government were forced to announce that up to 6 million taxpayers were to receive letters informing them that they had paid the wrong amount of tax through PAYE. That had been caused largely by the introduction of a new computer system, which was simply not up and running in time, and it provoked a powerful Public Accounts Committee report, which detailed the failures. There was the matter of the incorrect PAYE notices in January 2010. That provoked even more critical treatment in the PAC report. Then there are the phone call response times—try ringing HMRC. The National Audit Office found that in 2008-09 only 57% of call attempts were answered. That disastrous performance declined even further for a time, before recovering recently. I could give other examples.

What is the root cause of the problems? Some clues probably come from that survey of staff morale. It shows that the collapse of morale appears to have coincided with the merger. I know that the survey on morale began in that form only at the time of the merger, but it charts a decline from then. I believe that the merger was probably a mistake, and I said, from the Front Bench at the time, that merging two institutions with such different cultures was unlikely to be worth the candle. However, now that the merger has occurred, I am equally clear that unscrambling it would also be risky.

In any case, the department is reorganising itself. It is moving from a regional structure, with customer contact based on local offices, to a centralised model. We have heard that before. The experience of the banks with that centralised model, whereby they got rid of Captain Mainwaring, was distinctly mixed. However, the die is cast on the move to a centralised model and, in HMRC’s case, the performance of the new centralised model is not entirely disastrous. Its figures suggest that overall customer satisfaction was 73% in September 2010.

The key question must be whether that reorganisation can be completed while cutting so many more staff. The hon. Member for Leeds East will consider that issue. I hope that it will be completed, but it would be the triumph of hope over experience, if we consider the history of other Whitehall Departments and their reorganisations.

Of course, the large firms with which HMRC engages will not feel the effects of the reorganisation. They will continue to receive a good service. They provide most of the tax yield, and I understand why HMRC devotes so many resources to focusing on them. However, I worry greatly about the small firms—those least able to absorb the turbulence whenever HMRC reorganises itself. I worry particularly that, while HMRC may make savings, it will merely shift the burden of administration to taxpayers and their accountants in small businesses. The effect on the whole economy will not be neutral. It is not a matter of £1 spent in HMRC transferred to the private sector—it may be worse than that, eroding overall business efficiency and bringing downward pressure on GDP.

In a recent evidence session, I asked the Institute of Directors and the main bodies representing the accountants to start to estimate a full compliance cost for firms that deal with HMRC. It has never been done before and it is not easy work. However, we must have at least some core figures to enable us to monitor over time the full compliance burden placed on firms by HMRC. There is no point—absolutely no point—in creating a leaner HMRC at the price of massive compliance costs in the private sector. My challenge to the institutions that represent the private sector is to find that true cost of compliance. I also want to allude to some challenges for the department and the Government.

First, all the evidence that the Treasury Committee has seen suggests that HMRC needs to communicate better with taxpayers—it must find ways of giving clearer and more accurate answers to reasonable queries, and to give those answers quickly. Secondly, it is vital that staff have the training and experience that they need to work with taxpayers. There is no earthly point in a call-centre culture that is based entirely on read-outs from computer scripts.

Thirdly, we need to consider incentives as well as penalties as a means of encouraging the right amount of tax to be paid. Some argue that HMRC should consider a general disclosure facility to encourage the disclosure of previously undeclared tax. We need to reflect on that. There is a risk with amnesties, which is the road down which that proposal goes, but it needs to be looked at.

Fourthly, we must accept that with PAYE coming under increasing pressure as more people develop a variety of sources of income rather than rely on employment from a single source, further changes to PAYE will inevitably be necessary, as well as the coming introduction of real-time information. Those changes must be made extremely carefully if we are not to have yet another major road crash, such as we have seen in the past few years.

I should like to end by offering one crucial, big challenge to the Government. Much that is wrong with how HMRC operates is not its fault, and nor is it the fault of taxpayers. Rather, it is the fault of us—legislators. Successive Governments have put ever more complex legislation on the statute book. In 2009, a leading legal database found that the UK had the longest tax code in the world. That is a charter for accountants and for evasion opportunities. Length means more complexity, and complexity means higher costs for all of us. In evidence to the Treasury Committee, the IOD told us that KPMG estimated the total cost to the UK economy of running the tax system at 0.4% of GDP. I wager that that is an underestimation, as I alluded to a moment ago.

My challenge to the Government is that we must have tax reform. I was struck by a point made in a discussion paper in the Mirrlees review on tax administration, which begins:

“Most of modern tax theory…completely ignores administration and enforcement. The policy formation process is not much better, too often addressing implementation only after reform has been determined”.

Of course, administration should be an integral part of the decision-making process, but in recent years, tax policy formulation has been travelling in the opposite direction. The 2004 O’Donnell report resulted in most decisions on tax policy being taken in the Treasury, with implementation done by HMRC. It is widely held that the policy-making function in HMRC has gradually been downgraded, but we must reverse that. I urge the Government to return to a situation in which there is much greater creative tension between HMRC and the Treasury on policy formulation. If we do not do so, there will be more episodes in which the implementation of policy—delivery—mysteriously turns out to have an unexpectedly high cost or to be unacceptably complex.

In that respect, I very much welcome the creation of the Office of Tax Simplification. However, that will not be enough. We must have better policy and a simpler tax system that gives greater certainty and stability. I hope that the forthcoming Budget will point the way on that. Business and the self-employed in particular are crying out for such measures. We need a series of tax-reforming and simplifying Budgets. In the long run, everyone will gain: HMRC will have a better system to manage, taxpayers will have something that they can understand and the UK economy will have a tax system that creates opportunities for better long-run performance.

The tax system loses the respect of taxpayers, however grudging, when it becomes as complex as the one that it looks as if we are developing. Once we have arrived at that point, the country has a big problem. We will be on the slippery slope towards wide-scale evasion and an erosion of the tax base. I will not name the EU countries that are on that slippery slope, but there are quite a number, and we all know which they are. It is partly with that in mind that the Treasury Committee has launched an inquiry into the principles of tax policy that are needed for such reform. We will be reporting shortly. If we in the UK get those principles right, many of the problems that we have heard about today will diminish, and a more prosperous economy and stable society can result.

Banking

Lord Tyrie Excerpts

Wednesday 9th February 2011 Commons Chamber

[Mr Osborne]

Well, that has to be one of the feeblest replies to a statement that I have heard. The only person who seems to be out of his depth at the moment, rather surprisingly, is the shadow Chancellor. There was one thing missing from that rant: an apology. He was the City Minister. I will move on to all the things that we need to do to regulate the City, but I will first remind him that he stood at this Dispatch Box for two years as City Minister and could have done any of the things that were either in my statement or in his reply, but he did not. The truth is that he is man with a past, and we will not let him forget it—even if he does. I took the opportunity to look at his website on which he lists all his achievements in politics, but he does not mention the fact that he was City Minister. He does not mention the fact that he invented the system of City regulation that failed so spectacularly. He might have forgotten what he did not do in government; we will not.

Let me deal specifically with some of the right hon. Gentleman’s questions. He asks how the lending targets will be monitored. I told him in the statement that the Bank of England is going to monitor them. [Interruption.] “How are they going to be enforced?”, Opposition Members cry. The chief executive’s pay will be linked to the targets, and I made it very clear in the statement that, of course, if the deal is not met we will return to the issue.

The right hon. Gentleman talks about transparency. In 13 years, the previous Government never implemented transparency in the City of London. Some £11.5 billion of bonuses were paid in the year in which he was the City Minister, but we are introducing the most transparent regime of any major financial centre in the world.

The right hon. Gentleman continues deliberately—because I know he must know the numbers—to get the sums wrong on the bank payroll tax and bank levy. Her Majesty’s Revenue and Customs confirmed that there is a £2.3 billion net receipt from the bank payroll tax, and that is spelled out in the March 2010 Budget book, which the Labour Government published. We are raising £2.5 billion every year from a bank levy that he opposes— right?—unless he has changed his mind on that. [Interruption.] He now supports it. Well, that is good news.

Perhaps, then, the right hon. Gentleman will listen to the right hon. Member for Edinburgh South West (Mr Darling). The right hon. Member for Morley and Outwood (Ed Balls) quoted quite a lot from the newspapers in his reply. Well, this is from The Daily Telegraph: “Bankers’ bonus tax failed, admits Alistair Darling,” who said:

“I think it will be a one-off thing because, frankly, the very people you are after here are very good at getting out of these things and...will find all sorts of imaginative ways of avoiding it in the future.”

That is from the then Chancellor who actually introduced the tax on which the right hon. Gentleman now pins his entire economic prospects.

Let me end by saying this: the right hon. Gentleman calls for things that he simply did not do in government. On pay and bonuses, he says control them in the nationalised banks; he did not do that last year when he was in the Cabinet, and he did not do it at all when he was in the Treasury. He calls for transparency; he did not introduce it when he was in the Cabinet or in the Treasury. He talks about reforming the banking system; he is the person who designed the banking regulatory system that failed, but he does not admit it. He talks about the bank levy; he wrote 11 Budgets and never put one in. And on lending, he tried as a member of the Government to secure lending agreements throughout the banks, and he completely failed. The truth is this: he is a man running away from his past, with no plan for the future.

[Mr Andrew Tyrie (Chichester) (Con)]

Anybody looking reasonably at the settlement will have to agree that it is a welcome step in the right direction. In normal times, Governments should not intervene to force banks to lend or to reveal commercial details of pay, and I very much hope the Chancellor will confirm that it is a one-off, with one exception. Does he not agree that, without further transparency on bonuses, we will never know whether banks are fuelling risks and mistakes for which one day, as a result of the way they misallocate risk, we may have to pay? Will he also support the Treasury Committee’s initiative, outlined in a letter to the Financial Services Authority, and supported by Sir David Walker, to secure that much higher level of transparency?

[Mr Osborne]

I thank the Chair of the Treasury Committee for the welcome that he gives to the package. Of course, in any normal times one would not want to have to negotiate lending agreements with the banks or, indeed, be in a situation where half our banking sector was in part in the public’s hands, but that is the situation that we inherited as a Government and why I felt that the agreement with the banks was necessary, as well as the additional tax that we are levying on them.

My hon. Friend specifically raises the issue of transparency and his proposals that I know he has put to the FSA. As I said in my statement, we have a voluntary agreement this year on disclosure, which already goes beyond those of other financial centres in the world, but, having consulted, we will legislate in the coming year, and his proposals will deserve close attention.

Oral Answers to Questions

Lord Tyrie Excerpts

Tuesday 8th February 2011 Commons Chamber

[Mr Osborne]

The right hon. Gentleman is absolutely right that unemployment went up by 1 million under the previous Government. We know that even in the good years, the problem of youth unemployment increased and that we as a country were not able to do much about it. This Government are determined to tackle that head-on with reform of the welfare system so that it always pays to work and, at the same time, with the new Work programme, which will give young people the skills and opportunities they need to get off those unemployment rolls.

[Mr Andrew Tyrie (Chichester) (Con)]

In giving evidence before the Treasury Committee, Lord Turnbull made it clear that spending as a proportion of GDP should be nearer 40% than the current level of nearly 50%. The OECD has said that the deficit will retard growth. Will the Chancellor make more of the case that action is needed to tackle the deficit not just on financial grounds but to help release the wealth-creating sectors of the economy?

[Mr Osborne]

My hon. Friend is clearly correct that it is unsustainable for the Government to be consuming almost 50% of national income. Lord Turnbull observes that under Labour and Conservative Governments in the past, the number was closer to 40%. Of course, the deficit reduction plan that we have set out brings that about.

Bank Bonuses

Lord Tyrie Excerpts

Tuesday 11th January 2011 Commons Chamber

[Mr Osborne]

I do not know how much longer we are going to have to wait for a serious economic proposal from the shadow Chancellor. I suspect that time is running out for him. Let me repeat that we have introduced a code of practice that extends to 2,500 firms. There were 25 firms covered by the code of practice presided over by the right hon. Gentleman when he was in the Cabinet. We have introduced a permanent bank tax, which he and the Cabinet stood against during the general election.

The shadow Chancellor says that he wants a properly regulated banking system. However, he has opposed our proposals to regulate the banking system, we still do not know whether he supports the proposal to give the Bank of England a serious role, and—let us be clear about this—he has absolutely no idea about how to increase lending in the British economy, which he did nothing to achieve when he was in the Cabinet. Part of the pattern of an Opposition who have no serious plans to clear up the mess that they created is their habit of jumping on every passing bandwagon,

People will look at the shadow Chancellor and say that, although it is difficult to think of a way in which he could reduce his economic credibility further after the week that he has had, he has done just that today.

[Mr Andrew Tyrie (Chichester) (Con)]

First, what steps are the Government taking to ensure that an international agreement is reached on the need for more transparency in regard to bonuses and remuneration? Secondly, does the Chancellor believe that shareholders should be much more actively engaged in restraining pay and remuneration, given the evidence that we heard from the chief executive of Barclays this morning that no conversations on the subject had taken place between Barclays and its shareholders?

[Mr Osborne]

I certainly want to see much more international action on transparency, and I have held discussions with all the European Finance Ministers about how that can happen. We also want the Basel III arrangements to be implemented by all the G20 countries, and to be translated properly into European law.

I strongly agree with the my hon. Friend’s sentiments about shareholders. We want them to be more involved in pay and remuneration, and we want to find a way of improving corporate governance in that regard. That is one of the issues that we are discussing with the banks, and I know that the Department for Business, Innovation and Skills is considering it as well.

Oral Answers to Questions

Lord Tyrie Excerpts

Tuesday 21st December 2010 Commons Chamber

[Mr Osborne]

We have a specific review of advanced manufacturing to see what more we can do to help it, and I intend the Budget on 23 March to focus very much on supporting economic growth and removing the barriers to the expansion of manufacturing businesses and others. We are looking both at specific sectors, such as advanced manufacturing and pharmaceuticals, and at cross-government issues, such as planning and employment law, so that we provide not only the economic stability that we have delivered in recent months, but the platform for economic growth.

[Mr Andrew Tyrie (Chichester) (Con)]

Further to that question and that reply, the Government’s efforts so far in that regard consist of “The path to strong, sustainable and balanced growth”. Frankly, it is an insubstantial document—well short of a strategy. The Chancellor has given us a firm lead on fiscal policy. Will he now commit to cutting through what appear to have been a large number of interdepartmental arguments about this, and give us a clear strategy for growth in his next Budget?

[Mr Osborne]

The first thing that I would say is that, of course, deficit reduction is an essential platform for economic growth. The fact that this Parliament, almost alone in Europe, is not having to discuss the sovereign debt crisis is in itself testament to the success that we have had. But we need now to turn around many Departments that have not really thought for years about this question: how do we stimulate private enterprise and private sector growth? We have inherited government machinery that is not equipped to deal with that. We are turning that around, and the Budget in March is the focus point that I expect all Departments to work towards.

Loans to Ireland Bill

Lord Tyrie Excerpts

Wednesday 15th December 2010 Commons Chamber

[Mr Andrew Tyrie (Chichester) (Con)]

Until the shadow Chancellor’s last few words, I was looking forward to saying that I agree with just about everything that has been said from both Front Benches. None the less, there is a good deal of cross-party consensus about what is being discussed.

The Chancellor is faced with a difficult situation: a regional currency crisis that is largely not of his making, a close neighbour with strong historical ties in the eye of the storm and an inherited financial commitment to assistance at the European level.

The Treasury Committee took advantage of the Chancellor’s appearance before us last week to cross-examine him on these matters in some detail. That appearance, his speech today and particularly the terms sheet, which we have just received, have given us a good deal of information, and I am grateful to him. I am relieved, according to that information, that any increase in the loan, which is permitted by the legislation, will be debated on the Floor of the House.

We now know the price of the loan for the first time, broadly speaking. It looks sensible, although I notice that it can be varied under the enabling legislation. As my hon. Friend the Member for Rochester and Strood (Mark Reckless) has pointed out, we have discovered from the terms sheet that the loan is junior in the debt hierarchy to support through the EU mechanism. It would be useful if the Minister, in the winding-up speech, told us whether the Irish can repay the loan early without penalty. I do not think that that is what is stated in paragraph 5(c) of “Other Terms” in the loan agreement—I have obviously had very little time to read it—but there is also a reference to “exceptions” in the bracketed part of the sentence.

A number of hon. Members and I would like to know whether the Government have considered purchasing assets held by the National Asset Management Agency, as an alternative to part or all of the loan.

As far as I know, this bilateral loan has no direct precedent. The UK has gone further than was needed to fulfil its legal obligations. The Chancellor made a strong and persuasive case, which was supported by the Opposition. However, I think that that decision needs close scrutiny, as does the decision, which straddled the previous Government’s tenure, that left the UK with extra contingent liabilities as a result of the mechanism. We may have been put in the unsatisfactory position of making EU budget payments to bail out the eurozone, even though we are not a member of it.

It is important to bear in mind that demand for a bail-out originated not with a request from Ireland, but from the fear among eurozone members of contagion spreading from Ireland to Portugal and Spain. Most hon. Members agree that bailing out the eurozone is primarily its business and not ours. It is true that the collapse of the zone would generate shockwaves throughout the region, and possibly the world. However, the eurozone does have the capacity to bail out weaker members and, to the extent that the stability of the whole financial system is at stake, our contribution should usually be made via the International Monetary Fund. It is for those reasons that I was relieved when the Chancellor confirmed before the Select Committee that the legislation will be unique to Ireland and does not contain enabling powers for further bilateral eurozone bail-outs.

[Mr Cash]

My hon. Friend says that he was reassured by the Chancellor, but does he appreciate that until 2013, we will be trapped into that mechanism, unlawful as some of us believe it to be?

[Mr Tyrie]

I appreciate that. The Chancellor has referred to 2013 on a number of occasions, and my hon. Friend has referred to the possible unlawfulness of the mechanism on a number of occasions, including in private discussions.

This is a crisis of the eurozone, for which UK taxpayers are footing part of the bill. The UK will have to engage with members of the eurozone to limit the damage now and to construct something better for the future. I will touch on a few of those points in the moments that remain. I recognise that the problems to which I refer may be intractable. First, as the Chancellor has said, the senior creditors have been exempted from a haircut. The Chancellor told us that this was because of the risk of contagion. He is probably right, but the resulting moral hazard is large and will have to be addressed.

The second issue that I wish to raise, which naturally none of the authorities wants to talk about, is the fact that even the measures for Ireland and for Greece may not prevent default. The crisis may be one of solvency, not liquidity. That has a bearing on the lender of last resort provisions for the eurozone. It is possible that a sovereign default could trigger a banking crisis and even failure in parts of the eurozone, because banks hold a large amount of sovereign debt on their balance sheets. Such a bank failure could be highly toxic.

It is worth bearing in mind that the great depression of the 1930s was triggered as much by bank failures after 1931 as it was by the stock market collapse of 1929. I do not want to play the role of Cassandra, but I plead that contingency planning at European level be done now for the risk of such a bank failure. On the basis of the eurozone’s responses to the crisis so far, I am not optimistic that that planning is being done. The eurozone is fearful of leaks, and those doing the work would be terrified of that possibility. I have no doubt that that would inhibit their work. In addition, pessimism on such issues in European circles does not exactly make such work a career-enhancing prospect for the eurocrats who would have to do it. Let us just hope that they are doing that work.

The third problem that I wish to refer to—I shall leave it at that given the time available—is the long-term future of the eurozone itself in a world in which the bond markets have discovered that the no bail-out clause is toothless. I should say at this point that I have never opposed the eurozone on ideological grounds or on grounds of principle, but I have been wary on practical grounds, particularly the ground that the no bail-out clause may turn out to have no clothes. That is exactly what has happened.

[Mr Jenkin]

Does my hon. Friend share the concern that because we are taking part in the Irish bail-out on equal terms with the euro members, we are setting a precedent that will put political pressure on the Government to take part in other bail-outs? Does he believe that the Government will be in a position to resist that pressure?

[Mr Tyrie]

I have no doubt that the Government are listening to my hon. Friend and others, who will put pressure on them to resist the pressure from other quarters. I agree with his point.

It seems to me that very little work is being done on the possibility of the euro crisis leading to more general examples of the no bail-out clause’s bluff being called. I would be surprised if there had been any such work. I cannot be sure, but it strikes me as highly unlikely. It is the Ark of the Covenant that the eurozone will continue indefinitely.

When the Chancellor came before the Treasury Committee, he assured us that eurozone members were

“having a discussion about the permanent eurozone bail-out mechanism.”

[Sajid Javid (Bromsgrove) (Con)]

Will my hon. Friend give way?

[Mr Tyrie]

I will not, because I am about to conclude.

Any new bail-out mechanism, however, may itself lack credibility in the absence of a common European fiscal policy. That is why the discovery that the no bail-out clause is a paper tiger will remain an enduring problem for the eurozone’s stability, a problem from whose consequences the UK will certainly not be immune.

Autumn Forecast

Lord Tyrie Excerpts

Monday 29th November 2010 Commons Chamber

[Mr Speaker]

A lot of Back Benchers want to say something and I would like to accommodate them, but there is important business to follow in the form of Backbench-led debates, so brevity is of the essence from the Back Benches and the Front Benches alike.

[Mr Andrew Tyrie (Chichester) (Con)]

In June, the Red Book was forecasting that the savings ratio would remain broadly steady at about 6% for the next five years, which is quite near its long-run average for the previous 40 years. On page 67 of the most recent document however, the new forecast assumes a fall in the savings ratio to just over half that, and for the remainder of the Parliament, at only 3%. Is the Chancellor worried about that fall in the savings ratio, and will he consider measures to address it?

[Mr Osborne]

Yes, I have, of course, seen the forecast for the savings ratio and we will want to address it. It has the savings ratio returning to its average of before the recession, and I think all parties in this House, and certainly the Government, will want to find ways of encouraging saving more effectively than was the case in the past, and to address that particular problem.

Banking Reform

Lord Tyrie Excerpts

Monday 29th November 2010 Commons Chamber

[Mr Meacher]

The hon. Gentleman makes a good point of which we need to take account, but I still think that the credit rating agencies potentially have an important role. They are listened to in the market, are the basis on which financial transactions take place, and should be trusted, but in the present circumstances they are certainly not. However, I am grateful for his question.

On bonuses, there is outrage among not just Opposition Members but, for example, right-wing Governments in Germany, France and Sweden, that a banking system that owes its continued existence to massive Government intervention should pay itself mega salaries and bonuses entirely out of line with the top of business, let alone ordinary taxpayers. There is outrage especially because those gigantic bonuses often drove the recklessness in the first place. The overweening power of the banks attracts almost universal hostility, especially given that 90% of investment bank profits, in an era of austerity, are directed not at strengthening balance sheets, at shareholders through dividends, at customers through lower fees or at taxpayers, but at bonuses.

France, among several others, has demanded a mandatory cap and that there should be no guaranteeing of bonuses, but Whitehall, as usual of course, argues that it would not be practical. However, if the G20 Governments insisted on limits and made continued liquidity provisions dependent on compliance, no bank could refuse. I believe that Her Majesty’s Government should now be taking the lead in the G20 not in succumbing to lobbying from the City of London and the British Bankers Association, but in reining back bonuses on a much greater scale than we have so far seen, and to much lower levels, and in ensuring that they be paid only in exceptional circumstances.

On the broader question of averting future financial crises, attention has so far largely focused on enhancing capital control, but that does not actually have a good record in this regard. At the outset of this latest crisis, virtually all financial institutions across the globe had capital adequacy of between one and two times the minimum Basel regulatory requirements—at least at that level, and in some cases twice as much. Basel III, which has just reached its provisional conclusions, is scarcely any improvement. The core top-tier capital requirement is only 4.5%, and the contingency capital requirement is only 2.5%. Of the EU’s top-50 banks, 45 already meet that standard, and Basel III is actually proposing that the requirement not be introduced until 2019. This is simply nowhere near good enough. A much better possibility might be counter-cyclical capital controls, enforcing different levels of bank capital at different stages in the economic cycle. I can see the point of that, but I suspect that it would leave open the problem of the degree of ratchet and the timing of it. I suspect that that would be far too problematic.

An alternative approach—many have talked about this—is the introduction in Britain of something like the Volcker rule, restricting banks from undertaking certain kinds of speculative trading, notably proprietary trading. Of course that would certainly stop banks doing what they are doing at the moment, which is trading on their own books with the money of depositors. The key point, however, is that it would not overcome the too big to fail problem when applied to investment banks. For example, I do not think it would prevent a repetition of the collapse of Lehman Brothers; neither would it address the interconnectedness—the Chancellor was speaking about this a few moments ago—of today’s banks, with counter-party relationships and exposure between commercial and investment banks, and insurance companies. That is the problem. I say this with regret, but any rule-based reform is almost certain to face the risk of regulatory arbitrage, because financial institutions invent ever more sophisticated products that are simply aimed at getting around regulatory controls. I therefore do not think that what I have described is an adequate answer. For all those reasons, the force of argument and the balance of advantage point strongly towards separating retail from investment banks, in establishing distinct, narrow banks that are conservative, transparent institutions with no financial instruments or incomprehensible balance sheets.

[Mr Andrew Tyrie (Chichester) (Con)]

rose—

[Mr Meacher]

I am being intervened on by someone whom I cannot resist. I am only too glad to give way to the Chairman of the Treasury Select Committee.

[Mr Tyrie]

I am grateful to the right hon. Gentleman. On that point, does he agree that the Government have done the right thing by creating the Vickers review? The review will examine, in depth and carefully, without rushing a reform, whether structural reform of the banks is required, and will give us guidance on how to protect ourselves from the too big to fail problem.

[Mr Meacher]

I entirely agree with that, and I was just about to make the same point myself. I hope I can also take the hon. Gentleman with me when I say that Parliament should have the opportunity to express its views to the Vickers commission before it reports, rather than simply making comments when its work is virtually a fait accompli. Indeed, that is one of the purposes of this debate.

The key advantage claimed for the model that I am describing is that it would remove the implicit taxpayer guarantee—that is, the capacity of the financial conglomerates to use retail deposits, which are implicitly guaranteed by Government, as collateral for proprietary trading; or, as the Treasury Committee put it, I think rather nicely, banks playing

“at a high-stakes casino table with…taxpayers’ chips.”

I have a lot of respect for this model, but the crux of it is that the withdrawal of the taxpayer guarantee would be a sufficient deterrent to prevent investment banks from engaging in highly risky investments that might collapse, with serious and far-reaching consequences for the national economy. The real question—which I do not think enough people have asked—is whether that is likely to be true. The fact is that if a financial institution outside the protected narrow banking boundary threatened systemic contagion, it is difficult to believe that the Government would not attempt some form of bail-out. I therefore have to say, regrettably, that I doubt whether the narrow banking model could, by itself alone, be relied on to overcome the problem of moral hazard and too big to fail.

Does that mean that there is no solution to the too big to fail problem? Not necessarily. There is an alternative to narrow banking as a means of preventing a bank from gambling away other people’s money, which is the recent Kotlikoff proposal in the US. It is a proposal that deserves serious consideration—consideration that I hope the Vickers commission will give it. In the US context, it is proposed that all financial companies become pass-through mutual funds. They would have a 100% equity ratio, to ensure bank solvency, and the payments function of banks would be performed by cash funds that would be 100% reserve—for example, through Treasury bonds. Such banks could, of course, still initiate new mortgages and new loans, but these would not be funded through deposit accounts until they had been sold to a mutual fund. The key point is that the bank would never hold them; in other words, the bank would never have an open position. Banks would not own assets—apart, of course, from their offices and so on—and they would not then be in a position to fail or trigger a bank run. That is a significant proposal.

For those—and there are plenty of them—who want to take greater risks beyond a cash-based mutual fund, there are already hundreds of investment avenues that would continue to be available, such as foreign exchange, derivatives, real estate, hedge funds and all the rest. The key difference with this limited-purpose banking would be that any failure in such investments would be incurred by the investor, not by the bank. That is the crucial point. There would be no problem with the banks being too big to fail or trying to insure the uninsurable risk of financial contagion. Critically, there would be no future claims on the taxpayer.

This reform would overcome a critical market failure without the need for any vast new complex regulation. I say that for the benefit of those on the Government Benches. It is, in effect, a market solution. It is true that it would not necessarily prevent asset bubbles—I do not think that anything can do that, certainly not in this area—but under limited-purpose banking, such bubbles would not threaten the entire financial system. Anyway, there would be nothing to preclude some form of macro-prudential authority from having oversight in this area. I think that that would be a very good idea.

I am not suggesting that this reform would be a panacea, because I do not believe that a panacea exists in this area. It should, however, be thoroughly investigated by the Vickers commission and, I hope, by the Government. I do not think it is an exaggeration to say that at present Britain has the most profoundly dysfunctional banking system of any G7 country. It came nearer to collapse than any other in the autumn of 2008. I believe that we need to break up the mega-banks, with their addiction to mortgage lending. We need smaller banks and, in particular, specialist business banks such as infrastructure banks, housing banks, green banks, creative industries banks and knowledge economy banks. Only that kind of fundamental reform of the banking system, involving all the elements that I have described, can provide the foundation for the economic and social transformation of this country that we all want. I commend the motion to the house.

Independent Financial Advisers (Regulation)

Lord Tyrie Excerpts

Monday 29th November 2010 Commons Chamber

[Mark Garnier]

That is absolutely right.

[Mr Andrew Tyrie (Chichester) (Con)]

I apologise for breaking up my hon. Friend’s excellent speech. Does he agree that a crucial point that we must get across to the FSA tonight is that the increase in these compliance burdens will be paid for by the consumer who will therefore lose out? The loss of perspective from the FSA and the inflexibility of its approach in implementing the changes are reflected in the large number of people here today.

[Mark Garnier]

Absolutely, and I am very grateful to my hon. Friend the Chairman of the Treasury Committee for bringing that up.

The £1.7 billion costs being pushed on to the consumer mean that £1.7 billion will be taken out of the savings pool. We simply cannot take that approach if we are trying to encourage people to save and to pay off their debts. That is why the changes are so fundamentally wrong. IFAs will have to bear the brunt of them, especially those with small operations where the requirement to sit exams, recapitalise and install new compliance systems, as well as all the other requirements of RDR, will often be handled by the same individual who is offering advice to the customer. Hector Sants estimated that implementation might mean a loss to the IFA community of 20% of the professionals who work in this arena today. Adair Turner has said that this is an acceptable cost, but I do not agree. It is unacceptable that up to 3,000 professionals according to the FSA’s figures, and more according to other research, will lose their livelihoods. Among those who stay, the cost will be passed on to the consumer, as my hon. Friend the Member for Chichester (Mr Tyrie) has said.

There are many questions to ask. Will the RDR deal with the cowboys? Will a reduction in the number of IFAs encourage a savings culture or detract from it? Is it right that when we are encouraging entrepreneurs to set up new businesses, the outgoing regulator should be bringing about such devastating change to this industry? My constituent Mike Jeacock is typical of the type of IFA who is threatened by the RDR. He runs a high street shop in Stourport-on-Severn and he networks for new business among his mates in the Stourport Workmen’s Club. These are not high-rolling wealth managers prowling family offices in Mayfair. We are talking about people who earn a living honestly servicing the financial interests of people who can afford little but who need financial advice.

The retail distribution review is a significant market intervention, and market interventions, particularly of such a fundamental and far-reaching nature, require overwhelming evidence of consumer detriment and the appropriateness of the solution. In addition, any solution needs to meet cost-benefit requirements. Does the RDR satisfy these tests? It appears to be based on a combination of unfounded assertions, limited and contradictory research and, as regards some of its solutions, little more than a hunch that the outcome will somehow be better than the present system.

It is estimated that up to 10,000 experienced IFAs of good standing will be forced to retire for no valid reason.