Financial Services (Banking Reform) Bill

Lord Watson of Invergowrie Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, despite the upbeat opening speech of the noble Lord, Lord Deighton, the Government have thus far ducked the radical banking reform required, which the cross-party Parliamentary Commission on Banking Standards called for over the course of five detailed and compelling reports. Perhaps that should not surprise too many, because the Government have failed to stand up to the banks on key issues, including the safety of major institutions, boosting choice for consumers, increasing financial inclusion, the high-risk, high-bonus culture and stimulating economic growth—and at a time when public confidence in banking is at a low ebb.

People have lost confidence in the banking industry; recent research carried out by the Which? organisation shows that just 6% of consumers trust bankers to act in their best interests. However, we continue to hear of the “one rule for us and another rule for the rest of you” mentality that seems to characterise much of banking—or at least the investment banking part of it. Last year, 82% publicly-owned RBS paid £600 million in bonuses despite a £5.2 billion pre-tax loss, but a Downing Street spokesman said:

“I think you are seeing a responsibility and restraint”.

If that is a reflection of what the Prime Minister thinks, I suggest that he is seriously out of touch.

A month ago it was reported that bank bonuses had risen by 64% in a year. The average weekly bonus paid in April was 64% higher than for the same month in 2012 and at the highest level since at least 2000. That was, at least in part, evidence that the City was cashing in on the Government’s cut to the top rate of income tax, which came into force at the start of April. With the top rate cut from 50p to 45p, people who were able to delayed their bonuses until April and enjoyed a big tax cut as a result. Did someone say, “All in it together”? Hardly—that is a different world from that inhabited by the vast majority.

Last week we were informed by the European Banking Authority that more UK bankers were paid in excess of €1 million than in any other EU country in 2011. Not just more—2,436, to be precise, with the next highest figure found in Germany, at a mere 170, or 7% of the UK figure. Perhaps unsurprisingly, of those 2,400, 74% work in investment banking. These figures illustrate the ongoing problem with huge salaries in banking at a time of austerity for most people. The issue is not simply the high levels of pay, but that bonuses are paid out without risks being understood and on the basis of projected results that often fall short of expectations. That, of course, is one of the reasons why the proposals of the PCBS on a remuneration code aimed at aligning risks with rewards is so important.

Yet the Government have determinedly resisted reforming pay by: performing a U-turn on plans for an annual binding company vote on future pay policy; blocking a requirement for staff representatives to sit on board remuneration committees; and fighting in the EU to defend high pay for bankers. Last month the Chancellor was left totally isolated by the 26 other EU Finance Ministers when he resisted setting a limit on bankers’ bonuses of a year’s salary, or two years if shareholders approved.

As many noble Lords have said, the Bill is more notable for what is missing than for what it contains. As it is merely enabling legislation the devil will, of course, be in the detail of the Government’s proposals for secondary legislation. The Bill was intended to implement the recommendations of the Independent Commission on Banking on structure, capital and loss absorbency, with certain exceptions, and the Parliamentary Commission on Banking Standards was established last year, after the Chancellor came under pressure to hold an inquiry into the industry after the LIBOR-rigging scandal. The commission was also asked to conduct pre-legislative scrutiny of the draft Bill, and this led, not surprisingly, to an expectation that the commission’s recommendations would be accepted by the Government. However, we now know that that is not the case.

The need for reform has long been clear, yet the banks have fought change. In January 2011 the then Barclays chief executive Bob Diamond told the Treasury Select Committee, barely two years after the crisis broke:

“There was a period of remorse and apology for banks. I think that period needs to be over”.

Few outside banking agreed with him, and those who took the opposite view were proved right when it emerged that the culpability of the banks, and the recklessness that led to the crisis, were just the tip of the iceberg.

Since then we have seen scandals such as the mis-selling of payment protection insurance, for which, as my noble friend Lord McFall said, banks have put aside some £17 billion to cover the costs of compensation. The final bill may reach as much as £30 billion. Then there were the shameful attempts to rig the LIBOR benchmark, for which US and UK regulators have so far fined the Royal Bank of Scotland, Barclays and Lloyds a total of £1.7 billion.

Unfortunately, the Bill has emerged in an inadequate form for dealing with the abuses that were—and, it has to be said, in some cases still are—rife within the investment banking sector. In the main, the Bill concerns ring-fencing—separating what the noble Lord, Lord Lawson, called high street banking from investment banking operations. What I believe was needed was a reserve power for full separation of the two sectors. The Chancellor was not convinced, although he performed a partial climbdown when he agreed to powers to separate banks on a firm-by-firm basis. This is not sufficient. It is vital for the Treasury to have a backstop reserve power for the whole sector.

As my noble friend Lord Eatwell said, Labour amendments at Report stage in another place would have inserted a requirement for a thorough review, every two years, of the ring-fencing of retail banks, to augment the electrification of the ring-fence. For instance, a proper and independent review of the adequacy of ring-fencing every two years would surely be better than the Government’s reliance on the Prudential Regulation Authority. But that idea was rejected by the Government in another place.

Another Labour amendment proposed sector-wide powers for full separation of banking as a backstop if ring-fencing proved ineffective, based on proposals drafted by the PCBS. Certainly ring-fencing should be given a chance to succeed—but the Bill should contain a backstop of full separation if it is shown not to be working. The Government rejected that idea too, and their own suggestion again at Report stage in another place would take six years if ring-fencing failed. That is much too slow, and could never form an effective backstop power for galvanising and electrifying the ring-fence. Like all other noble Lords, I am sure, I was interested in the promise by the noble Lord, Lord Deighton, about what he termed the streamlining if this process; we wait with interest to see what the detail will reveal—but it is possible that even that may prove to be a backstop power in little more than name only. As I have said before, full separation is the necessary backstop power, as I fear that nothing less will suffice to incentivise the banks to comply with ring-fencing.

Furthermore, the Treasury needs to take powers to set the leverage ratio. At Report stage in another place Labour tabled an amendment to insert an overall leverage target for the UK’s financial system, including the activities of foreign international institutions. It stipulated that after every three-month period, the Financial Policy Committee of the Bank of England would notify HM Treasury of any instances in which the committee had acted to regulate leverage in the financial system to an identified target in a manner consistent with maintaining adequate credit availability and growth in the economy. That amendment sought to take forward the view of the Independent Commission on Banking, which supported the use of leveraged ratios as a backstop. It also advocated a tapering of requirements when a bank crossed a certain threshold, by increasing the minimum leverage ratio from the Basel III 3% to over 4% on a sliding scale.

The Parliamentary Commission on Banking Standards said that it was,

“essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III. Not to do so would reduce the effectiveness of the leverage ratio as a counterweight to the weaknesses of risk weighting”.

The aim of the Labour amendment was that a target should be set for the financial system as a whole, with the regulators empowered to make more sophisticated judgments about firm-by-firm leverage arrangements that could take account of institutions that were too significantly different from one another. The Government rejected that proposal too.

It is well known that the Chancellor has published an 80-page response to the PCBS’s final report, stating that the Government would implement its main recommendations, using the Bill as a vehicle. The commission’s chair, Andrew Tyrie MP, has commented that there is a marked difference between the Government’s initial welcome of proposals to give regulators the power to break up banks if they breached the division between retail and investment banking operations, and the actual amendments put before MPs in another place.

“It would barely give banks pause for thought”,

was Mr Tyrie’s assessment. In fact, he has been even more trenchant, opining that,

“the Government’s amendments would render the specific power of electrification virtually useless”.—[Official Report, Commons, 8/7/13; col. 75.]

Perhaps this has had some effect, as reflected in the words of the noble Lord, Lord Deighton.

Mr Tyrie maintained that standards in banking would improve only if the ring-fence was made more robust, with the additional power of electrification. The risk of the shock of separation would be an essential incentive to improve behaviour. He also said that it was “very disappointing” that the Government would not be giving regulators powers to call for the separation of retail and investment banks, and described their decision to ignore measures to clamp down on banks engaging in risky trading as “inexplicable”. He went on to say that the decision to ignore the proposals of the Parliamentary Commission on Banking Standards on proprietary trading was “very regrettable”.

“Why the Government has rejected these proposals—electrification and proprietary trading—is inexplicable”,

said Mr Tyrie, then adding:

“Nothing substantive has been forthcoming to justify the rejection”.

Perhaps the noble Lord, Lord Newby, will attempt to provide some justification for that this evening.

It should not be forgotten that Mr Tyrie is a Conservative MP—a man who has served on the Tory Front Bench as a shadow Financial Secretary to the Treasury. He is much respected across the party divide for his expertise in financial matters, and is a fitting successor to my noble friend Lord McFall as chair of the Treasury Select Committee. Many people might wonder why the Government find themselves unable to accept in full the unanimous recommendations of the cross-party commission chaired by him. As the noble Lord, Lord Lawson, said in his interesting-as-ever speech, Mr Tyrie appears to be persona non grata in government circles. Could that have anything to do with the fact that he was, in years gone by, the campaign manager for Kenneth Clarke in two party leadership elections? Surely not.

I shall now move on to the question of lending. I, like all noble Lords participating in this debate, have received some useful briefings from organisations with an interest in the Bill. One of these was the Federation of Small Businesses, which called for an increase in the level of data that banks provide on regional lending, to give greater transparency on which areas are lending to which people, and which businesses. This would involve data—data, for example, on deposits, new net lending, products and basic demographics, to protect client confidentiality—being collected and published, on the principle that the more the data are available, the better we can target under-performing areas and groups.

That is an area in which I believe that the Bill might usefully be amended. Indeed, it links very much with the startling report in today’s financial media that bank lending to small businesses has fallen in 98 of the 120 main postcode areas of Britain. It seems that tomorrow will see the announcement of GDP growth of around 0.5% for the second quarter of the year, and that is to be very much welcomed. But it should and could have been higher, and have been achieved earlier, if the banks had properly played their part by lending to small businesses and would-be homeowners.

The figures published today demonstrate that small firms across Britain are still struggling to get access to the finance they need because the banks have cut back on lending to them in all but those 22 postcode districts. That shocking statistic confirms widespread fears that, despite various tranches of quantitative easing and encouragement from the Chancellor, lenders are failing to support a key potential area of economic growth. British Bankers Association data show that, on a regional level, lending has fallen in every area of Britain, in all nine regions of England as well as in Scotland and Wales. But the postcode breakdown was published only reluctantly by the banks, and it is understood that the Government have used the threat of legislation elsewhere to force the future publication of lending data across 10,000 postcodes by the end of the year. That information will include not only loans to small businesses but also mortgage offers to households and unsecured personal loans. That has the potential to be a very positive development, and it might still be worth using this Bill to enshrine such a policy in legislation.

After the global financial crisis and the banking scandals that followed, we need cultural change and radical reform to protect taxpayers, rebuild public confidence in the banks and ensure that, in future, they work to support the wider economy. I and my colleagues will use the Committee stage to seek to achieve at least a measure of success in that vein.

Taxation: Evasion and Avoidance

Lord Watson of Invergowrie Excerpts

Thursday 6th June 2013 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, I, too, congratulate my noble friend Lord Foulkes, who is my friend, on achieving this important debate. It is a matter of some regret that only one Back-Bench Member from the coalition parties felt that they had anything useful to say on the subject. Perhaps that tells its own story.

Between 1999 and 2011, British companies’ profits increased by 58% but revenues from corporation tax increased by just 5%. Finally, political leaders are beginning to question that gap. That is to be welcomed. Last month, an EU summit pledged to clamp down through the sharing of information on the assets and gains of nationals banking in other countries. The Prime Minister expressed his belief that there was real momentum growing on the issue of tax and that is why he intended place it high on the agenda at the G8 summit, which he will chair in two weeks’ time.

The EU summit was the first time that European leaders had grappled with the increasingly important issue of tax evasion and avoidance. Some high-profile cases in various countries recently assisted in that process. Everyone, whether they are a football fan or not, will be aware that Bayern Munich has swept everything in front of it this season, both domestically and in Europe. However, a spoke in the club’s wheel was when its president, Uli Hoeness, was recently exposed, to much shock in Germany, over serious discrepancies in his tax affairs. Meanwhile, in France, the Cabinet Minister responsible for tax collection had to resign after admitting to having a secret account in Switzerland. You could not make that up.

It is encouraging to note that the intense debate in Britain over the tax behaviour of multinationals such as Amazon, Apple, Google and Starbucks has put the issue at the top of the political agenda. It seems that the catalyst for action at an international level has been the Obama Administration, to which the noble Baroness, Lady Kramer, referred. It will be interesting to see how effective that will prove to be in terms of obtaining information on US nationals’ assets and earnings in other countries.

The savings directive makes it compulsory for EU member states automatically to share details about other EU citizens’ bank accounts. Proponents argue that this allows Governments to detect irregular payments and other signs of tax evasion. The directive does not, however, deal with corporations, and an example would be Google, which has been much publicised and criticised in the UK for outsourcing its advertising sales to Ireland.

It is to be welcomed that Ministers, too many of whom have fixated on austerity plans and deficit reduction as the only answer to the financial crisis, are now coming to accept that there are other ways to balance the books. The campaign group UK Uncut began campaigning on the issue in 2010, and its legal challenge revealed how HMRC had waived a £20 million bill to Goldman Sachs, as well as a £6 billion bill to Vodafone. Journalists, tax experts and campaigners have been exposing some of the tax chicanery perpetrated by big business for far longer. My noble friend Lord Foulkes highlighted the fact that Amazon’s company accounts reveal that its corporation tax bill amounts to less than it gets in grants. It appears that most of those grants are for the company’s new operation in Dunfermline. How can the Government clamp down on the likes of Amazon and Google when the accounting firms used by these companies actually second staff to advise the Treasury on new tax legislation? To be blunt, the more that you can afford to pay a financial adviser, the less you will pay in tax. Figures of course vary and are open to interpretation, but tax evasion is said to cost the Treasury about £14 billion a year.

Yet, while multinationals legally avoid paying millions of pounds, it seems that HMRC concentrates more of its efforts on aggressively targeting small businesses and publishing lists of builders, clothing manufacturers, tradesmen and hairdressers who owe relatively small sums, nearly all less than £50,000. Of course, anyone avoiding or evading the payment of tax should be pursued but there should be consistency in that, not a concentration on picking off the small fry, the easy targets. If all the small fry were rolled into one, they would not stand comparison with the internet giants.

Many of us will have been taken aback by the evidence given last month to the Public Accounts Committee by the head of Google in Europe, Matt Brittin, who denied that the company’s tax operations were unethical. He defended the arrangement whereby most of Google’s taxes on money earned in Britain are channelled through Ireland to Bermuda, with the company paying an effective rate of less than 1%. However, those comments have been destroyed by a former Google employee, who told the Sunday Times:

“Google has pulled the wool over the eyes of HMRC and the British population”.

The PAC chair, Margaret Hodge MP, whom I commend on doing a first-class job, confronted Mr Brittin with Mr Jones’s evidence, but Mr Brittin denied it. Mr Jones’s information, which he says he has taken to HMRC, includes thousands of e-mails in support of what he had to say and must be taken seriously by HMRC. I hope that in due course we will hear some positive response. The revenue from Google’s deals in the UK is sent to Google Ireland Ltd, which in turn pays dividends to its parent companies in Bermuda.

Interestingly, Bermuda is one of a number of overseas territories whose leaders have been invited to meet the Prime Minister in London on the eve of this month’s G8 summit. Mr Cameron apparently plans to urge them to root out the multi-billion pound evasion industry by signing up to agreements to share tax information. His letter calling for action on tax information exchange and beneficial ownership was also sent to leaders in many territories. It is to be hoped that when the Prime Minister meets them, he will have a stick as well as a carrot to hand because it is not just the developed world that stands to benefit if the situation were to be improved. As others have mentioned, the charity ActionAid has demonstrated that nearly one in every two dollars of large corporate investment in developing countries is routed through a tax haven and says that 98% of the FTSE 100 multinational groups have companies in tax havens.

However, it is not just multinationals that employ every trick in the book—and, it is not unreasonable to assume, a few companies that have not yet made the book—to deprive exchequers of tax revenues. More than 100 of Britain’s richest people have been caught hiding billions of pounds in secretive offshore havens, thereby sparking an unprecedented global tax evasion investigation. In April this year, HMRC warned those involved, who were named in offshore data first offered to the authorities by a whistleblower in 2009, that they will face criminal prosecution or significant penalties if they do not voluntarily disclose their tax irregularities. HMRC was quoted as saying that the data,

“reveals extensive use of complex offshore structures to conceal assets by wealthy individuals and companies”.

HMRC is also investigating more than 200 UK accountants, lawyers and other professional advisers named in the data as advising the wealthy on setting up the elaborate offshore tax arrangements. These revelations may be shocking but are surely not surprising. They demonstrate the extraordinary lengths to which some of the wealthiest Britons are prepared to go to avoid making their fair contribution to the resources required to run our country and provide public services for its people.

If only there were more rich Brits with a social conscience such as John Caudwell who built the Phones4u empire. Mr Caudwell has personally paid more than £250 million in tax since 2008; that is 66 times more than Google paid in the same period. Mr Caudwell has called for tax avoiders to be “named and shamed” and for consumers to boycott what he called “serial offenders”. He went further and asserted that unless the Government got to grips with the problem of rich individuals and powerful corporations dodging the taxman, Britain was facing a period of social unrest. It is not sustainable, Caudwell argues, to have mega-millionaires and billionaires increasing their wealth, often by avoiding tax, while other people struggle to get by in the face of rising inflation and the severe reduction in public services over recent years.

One of the recurring issues is of course the role played by HMRC in pursuing those who refuse to make their contribution to tax revenues. We are told that there is to be new funding for HMRC, with the Government handing it almost £1 billion more to secure an additional £7 billion of revenue a year, thereby taking HMRC’s total compliance revenues to £20 billion in 2014-15. The Revenue in this spending review period wants further to expand anti-avoidance and evasion activity focused on offshore evasion, and this investment, it is claimed, will secure a further £2 billion in that period. Yet, as the noble Lord, Lord Foulkes, mentioned, there are hundreds fewer HMRC staff now than there were in 2011 due to total cuts of around £2 billion. How are these two positions to be reconciled? Surely HMRC must have more staff—and more highly paid staff to prevent them being poached by the big accountancy firms—to ensure that HMRC has the tools to make a better fist of reducing tax avoidance and evasion.

The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government, according to Margaret Hodge. They second staff to the Treasury to advise on formulating tax legislation. When those staff return to their firms, they have the very inside knowledge and insight to be able to identify loopholes in the new legislation and advise their clients on how to take advantage of them. As Ms Hodge said:

“The poacher, turned gamekeeper for a time, then returns to poaching. This is a ridiculous conflict of interest which should be banned in a code of conduct for tax advisers”.

I certainly second that. The idea could perhaps be turned on its head, with HMRC staff seconded to accountancy firms, sitting in on their meetings at which intricate plans to subvert legislation are discussed. Now I suggest that that would concentrate a few minds in a slightly different way.

The moral case on tax avoidance is overwhelming. That is why Margaret Hodge was right to be so forthright in her criticism of those individuals and corporations that route their cash through low-tax regimes at a massive cost to the UK Exchequer. Although it was encouraging that the recent Finance Bill contained the introduction of the general anti-abuse rule—again, referred to by the noble Baroness, Lady Kramer—it remains to be seen what deterrent the GAAR will have. I certainly agree with her comment that this is just a dipping of toes in water and that much more needs to be done. The rule is to be reviewed after two years, and I certainly hope that the information gained in that period will be used to ensure that it is extended.

As has been stated, changes to the international tax system will be high on the agenda at the G8 summit and there has probably never been a better time to crack down on tax havens, aggressive tax planning and transfer-pricing schemes. At least in part, this is because Governments are badly in need of tax revenue in a time of weak growth. Tax could become to the 2010s what debt relief was to the 1990s—the focus of a global campaign for reform, and I very much hope that it is.

Part of the way in which this can be undertaken is surely by the Government introducing legislation containing clear and unambiguous anti-avoidance rules. One way would be to charge corporation tax on a definable estimate of the profits generated by all UK sales to other UK companies or individuals, whether in shops or online. Where the head office is based or where the profits are declared would then be of no importance, so the tax could not be evaded by channelling the business, or by claiming to have done so, to a country with a lower tax rate.

In the end, though, the success of any campaign will depend on how the public behave. If the Government cannot, or will not, act, ordinary people should vote with their wallets by boycotting the worst offenders. That might mean higher prices and less choice, but why should we support businesses that exploit loopholes in the tax system to siphon off tax money from Britain that is so desperately needed to provide the services that maintain the fabric of society? On a personal level, in the past year I have stopped using Google as my search engine, I drink my coffee anywhere but at Starbucks and I no longer order goods through Amazon. I am certainly not alone in that but it will take a huge wave before these and other companies notice and give their conscience a makeover.

In the mean time, we have the right to look to political leaders and urge them to fasten on the shin-pads to demonstrate to the corporate giants that, when it comes to paying tax, they are finally determined to take the issue as seriously as business has for many years. We are hearing some encouraging words but those words must be translated into action—action on an international scale—if it is to be of any sustainable value.

European Union Membership (Economic Implications) Bill [HL]

Lord Watson of Invergowrie Excerpts

Friday 25th November 2011 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, my noble friend Lord Desai mentioned the 1975 referendum on what was then the EEC. I voted no, against continued membership. Like many in the Labour Party, I was concerned at the restrictions that it might place on a future Labour Government introducing socialist policies, not least in the industrial sector. Of course, there was wide division in the party. But things have moved on. Were there to be a referendum tomorrow, I would vote yes to stay in and I would campaign strongly for that position.

I welcome the Bill introduced by the noble Lord, Lord Pearson. Indeed, I say “Bring it on” as regards the committee because, like my noble friend Lord Davies of Stamford, I am confident that the position of those in favour would prevail. However, I am slightly puzzled as to the wording of the Bill—not just the Title but also the Long Title, which refers to,

“a Committee of Inquiry into the economic implications”.

Clause 1 is entitled “Committee of Inquiry into withdrawal from the European Union”. That will not come as a surprise to anyone who knows anything about the noble Lord, Lord Pearson, or UKIP. None the less, it is inconsistent.

I should like to say something about the way in which the European Union has developed over the years in terms of achieving its social agenda, particularly in terms of the high level of employment, social protection, improved living, working conditions and economic and social cohesion. The adoption of legislation setting minimum requirements has improved labour standards. It certainly strengthened workers’ rights, which I say from my background in the trade union movement. It thus improved economic efficiency and, as such, is surely one of the European Union’s main achievements in the field of social policy.

EU protection issues such as transfer of undertakings, part-time workers, fixed-term contracts and the working time directive, to which the noble Lord, Lord Kakkar, referred, have been resisted by UK Governments at one time or another. But those are rights that we would not enjoy in the UK were we not under the umbrella of the European Union. I regard that as a positive aspect of our membership.

Those who oppose EU legislation in these spheres—legislation that essentially aims to protect people’s health and well-being—should consider that, apart from the suffering caused to individuals and their families, poor working conditions represent a huge cost for the EU economy. Originally, EC—as it was then—employment law was designed with the aim of ensuring that the creation of the single market did not lead to a lowering of labour standards or distortions in competition. Today, employment law also has a key role in ensuring that a high level of employment and sustained economic growth is accompanied by continuous improvement in the living and working conditions throughout the European Union. The coalition Government should bear that in mind, not least in respect of the proposals outlined by Mr Cable two days ago. Reducing protection for people at work will not save or create a single job. It is not employment law that is holding firms back: it is the tough economic climate and the problems many SMEs are still having in getting the banks to lend to them. Research from the OECD shows that there is no link between regulation and economic output. German employees have much more protection at work than ours, yet its economy is the strongest in Europe. I believe that the UK’s best interests are served by playing as active a role as possible in the decisions which influence the future direction of the Union and its member states.

In respect of this Bill, many economic benefits of EU membership can be highlighted—this view is based not on my individual opinion but on figures produced by the coalition Government. The EU is a bigger trading area that the US and Japan combined and accounts for more than half of all UK trade in goods and services. According to an Answer given in July this year by the BIS Minister Ed Davey, 3.5 million jobs are reliant on the EU single market, which is one in 10 of all UK jobs. The latest available estimates show that the greater level of trade liberalisation achieved through the single market leaves EU countries to trade twice as much with each other as they would do otherwise. As a result, the single market has contributed to income gains in the UK between 2 per cent and 6 per cent; that is about 1,100 to 3,300 per year per British household. Again, those are figures quoted in an Answer by Mr Davey.

Another BIS Minister, Mark Prisk, also stated in an Answer this year that more than 50 per cent of foreign direct investment to the UK comes from other EU member states and is worth £350 billion a year to this country. This investment flows from our full access to the single market, because the level of trade liberalisation in the EU is unparalleled anywhere in the world.

EU competition and consumer rights laws have driven down prices, opened up markets for smaller businesses and boosted consumer protections. For example, thanks to the European Union, British families and businesses now enjoy vastly reduced mobile phone roaming charges, cheaper flights and proper compensation when flights are delayed or cancelled. In terms of global trade, the UK gets the best deal through the EU. The Union is a force multiplier for the UK, because this country contributes to common positions which then carry the weight of the world’s largest trading bloc. For example, in 2003, the USA was forced to back off and lift tariffs on UK steel producers by the World Trade Organisation, which authorised the EU to impose countertariffs on US products if the USA ignored the WTO’s ruling. The EU-South Korea Free Trade Agreement, the EU's first trade deal with an Asian country, came into operation in July this year and will be of great benefit to the EU as a whole and the UK in particular.

It should also be stated that British business supports our EU Membership: 74 per cent of business leaders polled by Business for New Europe and Ipsos MORI last year believed that the UK’s withdrawal from the EU would be damaging compared to 22 per cent who did not. Every mainstream political party supports UK membership, with only UKIP and the BNP opposed.

Being either outside or on the periphery of the EU while other member states discuss the crucial issues and take the major decisions has never been a positive or even tenable position for the UK. Those who advocate either withdrawal or our retrenchment within a reformed EU need to work harder on overcoming this country’s geographical relationship with Europe. No man or woman, it is said, is an island. It has never been more accurate to say that, in these critical economic times, no country is an island.

Finance (No. 3) Bill

Lord Watson of Invergowrie Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, when introducing the Budget, the Chancellor told us that it was about reforming the nation's economy so that we have enduring growth and jobs for the future and about doing what the Government could to help families with the cost of living and the high price of oil. Four months later and after 14 months of the coalition Government, that is not how it feels for many people. As the cuts begin to bite, the popular perception is that it is hurting but it is not working. Inflation remains high, the recent small drop in unemployment is not expected to be repeated when the next figures appear, and the economy is clearly not “in recovery”, as the Chancellor claimed.

That is also the view of the independent National Institute of Economic and Social Research, which has as its president the noble Lord, Lord Burns. That organisation dismissed the Chancellor’s claim that cutting the deficit more slowly would cause a collapse in market confidence as “fundamentally flawed”, adding,

“The real hit to credibility comes from sticking to unsustainable policies. If Mr Osborne really wants a budget for growth he should amend his plans”.

It is basic economics that deficit reduction will slow growth. I echo the national institute’s calls for a major house-building programme, and measures to boost youth employment, to restore the education maintenance allowance that keeps poor students in school, and to reverse the cutting of student visas, because universities are a dynamic export industry.

None the less, I concede that the Budget contained measures that are to be welcomed. Next year the personal tax allowance will be increased to more than £8,000. Temporary tax relief for small businesses is to be extended to October next year. The Chancellor deferred for a year the proposed rise in fuel duty, until April 2012, and cancelled the fuel duty escalator for the remainder of Parliament. He increased the supplementary charge levied at North Sea oil and gas companies to 32 per cent, generating a possible £2 billion, although he has since handed back around a quarter of that in exploration allowances.

Public spending measures that included an extra 40,000 apprenticeships for young people out of work, and 100,000 new work experience placements, are also to be welcomed, although I fear they will be less worth while than the genuine jobs of the future jobs fund that the coalition has axed, which paid the minimum wage. There are also doubts as to whether employers will offer the extra apprenticeships and work placements unless they are forced to do so. There is to be a consultation on long-term plans to merge income tax and national insurance, and I echo the comments of my noble friend Lord Desai that this is long overdue. This is planned with a view to simplifying the tax system, although I am disappointed that the review will not go as far as a full merger with income tax.

I will now focus on a narrow but crucial casualty of the Government’s restructuring of the economy, and one that the Chancellor failed to address properly in his Budget speech in March. In fact, it relates to an issue highlighted by the Chancellor in last year’s Budget of a commitment that the Government made then and have since failed to honour. I hope the Minister will be able to offer an explanation as to why the Government have let down low-paid workers in the public sector across the United Kingdom, to whom they made promises before the general election and in the Budget of June 2010. At that time the Chancellor of the Exchequer announced to Parliament that:

“the Government are asking the public sector to accept a two-year pay freeze, but we will protect the lowest paid … They will each receive a flat pay rise worth £250”.—[Official Report, Commons, 22/6/10; col. 171.]

He said that the earnings level at which people would qualify would be £21,000 a year, and he estimated that 1.7 million people would benefit from that pay increase. In the Budget Statement this year, the Chancellor had a different message for low-paid public sector workers, when he said:

“I can confirm today that in the coming year all workers in the armed forces, the prison service and the NHS, and teachers and civil servants, earning £21,000 a year or less will receive a pay uplift of £250”.—[Official Report, Commons, 23/3/11; col. 963.]

That is considerably less than the promise delivered nine months earlier, and it means that only about one-third of those originally earmarked will be guaranteed to receive the £250 payment. What the Chancellor meant in effect was that only those working under ministerial control, and those whose pay and conditions are subject to pay review bodies, would be guaranteed to receive the payment. Between one Budget and the next, goalposts have been shifted with a vengeance. Research commissioned by Frank Field MP from the House of Commons Library shows that the Chancellor, in his 2010 Budget Statement, could not have been referring only to workers under ministerial control and those with pay review bodies. The Chancellor’s figure of 1.7 million workers was precisely the total number of public sector workers earning less than £21,000 in 2009, which at the time of the Chancellor’s Statement were the most recent available figures.

The Commons Library further calculated that the most reliable current estimate for the number of public sector workers under ministerial control or covered by pay review bodies is 715,000. That equates to just one-third of the 1.7 million figure, and when the most recent official statistic for 2010—that is, 2.2 million—is introduced, it leaves up to 1.5 million public sector workers denied the promised pay rise, and the victims of a deception.

Two weeks ago in another place, Frank Field introduced an amendment to the Finance (No. 3) Bill with the aim of securing justice for these low-paid public sector workers. Mr Field’s amendment, which he did not press to a vote, sought to reduce the tax liability of all public sector workers whose earned income does not exceed £21,000 in this tax year, by £250. That would have had the effect of ensuring that around 1.5 million public sector workers who are currently being denied that promised pay rise of £250 would have received it, as the Government had led them to believe. The total cost to the Treasury has been costed at around £500 million. To government Ministers, or indeed to your Lordships, £250 does not mean a great deal—indeed, it is less than our daily allowance—but for many people, £250 means a great deal.

In that debate on the Bill in another place, the Government's reasoning for abandoning their commitment was based on the unconvincing grounds that this protection will now be extended only to those workforces directly under ministerial control or whose pay and conditions are decided by pay review bodies. Not only was this not made clear at the time of the Statement, the figures the Chancellor quoted in his 2010 Budget speech made it clear that this was not what he intended.

David Gauke, the Exchequer Secretary to the Treasury, said in another place that civil servants, nurses, prison officers and the Armed Forces had already received the £250 increase and were to receive it again next year, but whether other public sector work forces, mainly in local government, received that payment was not a matter for the Minister. In most cases they will not receive that because, as Mr Gauke told the other place on 4 July:

“Decisions on the pay of local government work forces are for local government employers, rather than central Government, to negotiate. Provision was made in the local government settlement for local authorities to pay the £250 increase”.

So the Government have handed them that money. He continued:

“We gave them the opportunity to pursue the policy that we are pursuing at national level, but it is ultimately for them to decide how to pay their employees”.—[Official Report, Commons, 4/7/11; col. 1335.]

However, it has emerged that many local authorities have allocated the money to other budgets and have not given it to their low-paid workers. Despite that, the Government have said that they have no plans either to compel local authorities to spend the money in the way that was intended or to recall the money. Is that not a shocking example of the Government promising with one hand but taking away with the other?

I urge the Minister to take this matter on board for further discussion within the relevant departments and to reconsider this approach. The Government need to act to ensure that those promised the additional £250, those expecting it and those desperately needing it receive the payment that the Chancellor, less than a year ago, told them they would receive.

--- Later in debate ---

[Lord Sassoon]

The noble Lord says “Don’t bother” so I will not. I do not know whether other noble Lords heard; as he tells me not to write, I will not, but I have made the offer.

As to the extraordinary speech from the noble Lord, Lord Myners, which continually came back to praise the former Chancellor, Mr Darling, I can only think that he read in the Sunday newspapers, as I did, that Mr Darling is coming close to finalising his memoirs. I assume that this was a late play to make sure that Mr Darling looks favourably on the noble Lord, Lord Myners, and his part in the previous Government, but we shall see. We then got away from the pessimists but came back to one or two a bit towards the end. I am sorry that the noble Lord, Lord Haskel, joined in by talking about the Government transferring debt to the citizens. The trouble is that the government debt is the debt of the citizens and that attitude, I fear, underlay so much of what the previous Government did. They completely failed to recognise that it is the citizens who, at the end of the day, have to pick up the debt.

In terms of unrealistic ways to go about getting us out of the challenge we are in, I have to say to the noble Viscount, Lord Hanworth, that one way in which we will absolutely kill growth is if we raise further the top rate of income tax from a level which is not one that this Government wish to see in the medium term. We desperately need to encourage entrepreneurship and growth and the one thing we should not think of doing is further raising the top rate of tax. I am pleased to see the noble Lord, Lord Myners, nodding in approval.

I do not recognise the picture which the pessimists paint. However, I recognise that there are a lot of serious challenges out there, which noble Lords pointed to throughout the debate. I cannot deal with them in detail but my noble friend Lord Newby was the first—and virtually the last—speaker to refer to the European dimension, which is very difficult, while my noble friend Lord Higgins again pointed out the real challenges that there are in analysing the monetary situation and taking lessons from it.

The noble Lord, Lord Desai, raised the question of the savings rate and I completely agree with the challenge that that poses. I am delighted that the noble Lord appears to have lost none of his vigour even though it appears that Delilah may have got at Samson. It was a great reassurance that he is still on fine form. My noble friend Lord Ryder of Wensum was also on fine form. He raised a lot of points but, yes, regulation and employment are very challenging. I would point out to my noble friend that we are in the process of putting 21,000 regulations on the Red Tape Challenge website. We will indeed eliminate significant quantities of regulation while on employment law, another key area, we have already made moves on unfair dismissal to right the balance between employers and employees. My right honourable friend the Chancellor has identified five other areas where we are looking at employment regulation at the moment.

The noble Lord, Lord Watson of Invergowrie, talked about the protection that is important to lower-paid public sector workers. The Government have indeed made the £250 payment for all those within central government and are encouraging all other public sector bodies to abide by that.

[Lord Watson of Invergowrie]

On that point, the Minister mentions all other public bodies but I mentioned that local authorities have been allocated resources for this specific purpose, yet the Government appear to be allowing them to spend the money on whatever they see fit. Surely, that defeats the Government's purpose in regard to the £250 that the Minister mentioned.

Comprehensive Spending Review

Lord Watson of Invergowrie Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, this view has been expressed on numerous occasions in the six or so hours over which we have debated the spending review, but I believe that it bears repeating. Contrary to what we have heard from coalition Ministers—including the noble Lord, Lord Sassoon, in his opening remarks—the measures announced in the spending review on 20 October were not inevitable. In point of fact, the economic crisis is the opportunity that many Conservatives—although I can see just three Conservatives opposite, apart from those on the Front Bench—have been waiting for. That was demonstrated by the crass and vulgar waving of Order Papers at the end of the Chancellor’s speech almost two weeks ago.

The coalition has seized the chance to reshape the economy by announcing an £83 billion shrinkage of the state. In the Financial Times on the day after the Chancellor’s Statement, Martin Wolf, who is widely considered to be one of the world’s most influential writers on economics, dismissed the Chancellor’s claim that cutting the fiscal deficit and reducing the share of public spending in GDP was unavoidable. Martin Wolf said:

“This is not so. It was a choice to concentrate so much of the fiscal adjustment on spending. Similarly, the UK government was never Greece or Ireland … The chancellor presents the hypothesis of looming national ‘bankruptcy’. If so, the UK must have been bankrupt for much of the past two centuries”.

I am not suggesting that reducing the fiscal deficit could be avoided, but the choice of how and how quickly it should be done is a matter of political judgment—or, perhaps, of ideology. The coalition has adopted the maxim that a good crisis should not be allowed to go to waste. That view is propounded by the Chicago school’s spiritual leader, Milton Friedman, who is on record as saying,

“Only a crisis … produces real change”.

He also wrote that, after a crisis has struck,

“a new Administration has some six to nine months in which to achieve major changes; if it does not act decisively during that period, it will not have another such opportunity”.

That helps to explain why the coalition is forcing through a raft of cuts for which it has no mandate. The coalition is doing so not because the economy is on the verge of collapse—it is not—but, as the Nobel Prize-winning economist Paul Krugman has said, because,

“the Tories are using the deficit as an excuse to downsize the welfare state”.

That point has been made by many noble friends on these Benches today.

Not only does the spending review herald the harshest public spending cuts since the 1920s, but the coalition is using the economic crisis to reign in the state and to reorganise society. I can understand the Conservatives doing that, but my main point is that, to their shame, the Liberal Democrats are allowing themselves to be used in this iniquitous process, which is nothing less than social engineering. Neither party has a mandate to embark on this course or for the string of decisions that have been announced in blatant violation of pre-election pledges, from the abolition of universal child benefit to the privatising transformation of the NHS. That is what most people voted against in May.

Following the months of leaks about cuts that were used to soften up the public with the fatuous theme of “We are all in this together”, I would like the Minister to say how exactly the Cabinet and their families—with their trust funds and prep schools for their children—will suffer. We should be told just what sacrifices they feel they will have to make. I will not be holding my breath.

When the Labour Government proposed any policy perceived as affecting the well-off disproportionately, the usual media suspects would characterise it as a class war, but the silence from those same mouthpieces over the past two weeks has been deafening. Just what is different about the coalition attacking the poor? Millions of people really will suffer as a result of these cuts. Over the next four years, Government departments face average cuts of 19 per cent in real terms, of which the heaviest—of at least some £18 billion—will be to welfare, which is targeted at the most vulnerable.

Much has been said and written since the spending review was announced about the distributional impact, but the bottom line is that the Institute for Fiscal Studies—which, incidentally, is described even by the Daily Telegraph as the country’s most respected economic forecaster—states:

“Our analysis … shows that … with the notable exception of the richest 2% … the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way”.

The IFS is an independent body, whose former director, we should not allow it to be forgotten, is now the head of the coalition’s Office for Budget Responsibility.

There are to be deep cuts to public services that are disproportionately used by the poorest households, such as social housing and social care. The Chancellor’s insistence that those with the broadest shoulders would bear the greatest burden and that his cuts would hit the richest hardest would be laughable if it were not so serious. His own figures show that the poorest 10 per cent will bear the largest share of the spending review announcements. Even when all tax and spending measures are taken into account, the poorest 10 per cent end up second worst off of all income groups—and that is only because the Government’s calculation boosts the impact on the top 10 per cent by including the 50 per cent tax rate announced by the previous Government.

The coalition appears to be relying on the private sector to ride to its rescue by hoping for public acceptance of the endlessly repeated falsehood that Labour profligacy created the deficit that the coalition now faces. The facts tell a rather different tale. Britain’s budget deficit has mirrored the average deficit rise across the 33 most developed countries. The deficit increased from 1 per cent of GDP in 2007 to 9 per cent in 2009 as tax receipts plunged and benefit payments increased due to the crisis of 2008.

There are many other areas that could be highlighted, were there the time. For instance, why should universities be expected to face deep cuts when we need to maintain the expansion of higher education to help grow the economy? Why should the Government continue to pay to schools and academies a greater amount of money to educate each 16 to 19 year-old than they do to FE and sixth form colleges, despite evidence that colleges recruit a more disadvantaged group of students?

One area that I must highlight—as many have already done, not least my noble friends Lady Turner of Camden and Lady Gould of Potternewton—is the effect of the spending review on women and, by extension, on families. The coalition’s cuts will fall disproportionately on women, who are more likely to work in the public sector. According to research by the House of Commons Library, measures announced in the spending review will hit women twice as hard as men. That seems hard to believe, but it is because benefits typically make up one-fifth of women’s income as opposed to only one-tenth of men’s. For instance, 1 million more women than men claim housing benefit and many of those will be lone parents who now face poverty as a result of the cuts and restrictions about to be imposed. Of the £8.5 billion that will be raised by cutting direct payments to individuals, two-thirds will come from women—again that is revealed by the House of Commons Library. In June’s emergency Budget, £5.8 billion was raised from women and £2.2 billion from men. Of the £16 billion in total that is being clawed back through direct tax benefit changes, £11 billion will come from women. Yet we are told the spending review is fair.

Tories and Lib Dems do not seem to understand the way that many poorer families live. Clearly, they believe that supporting families makes them dependent, whereas the reality is that such support helps working parents to become more independent. Everyone knows that women in general live on lower incomes, yet the coalition has chosen to force them to bear a greater share of the burden.

In finishing, I will say a brief word on the effects of the cuts in housing benefit, which has also been referred to by many noble Lords. I just wish that Ministers would admit that housing benefit is not just for the unemployed. Some 300,000 people in employment receive housing benefit. The issue is about much more than a few well-off areas of London—although you would be hard-pushed to know that given the media coverage of the past two weeks—and more than 750,000 claimants could be affected by the changes to the way local housing allowance levels are calculated. That will involve families in many communities across the UK. Indeed, Department for Works and Pensions figures show that Scotland will be hard hit. Around 40,000 people in Scotland will have their housing benefit cut from next year and will lose £7 a week—over £350 a year on average—because of the changes, even before the 10 per cent reduction for the long-term unemployed is taken into consideration.

On that issue, the coalition has been forced to think again, and rightly so if it genuinely intends that the effect of the spending review should be fair. I have to say that that claim has already been revealed to be a hollow one, as millions of people will, I fear, discover to their cost in the years ahead.