Finance Bill

Debate between Angela Eagle and Chris Leslie

Thursday 15th July 2010 Commons Chamber

[Chris Leslie]

indicated assent.

[Ms Eagle]

My hon. Friend responds to my mention of instant gratification, but obviously it is in all our interests as a society to recognise that there is merit in assisting people to save for their retirement, so that they can avoid being reliant on benefits in their old age. As a result of the welcome increases in longevity, which have been a feature of our success as a society since the war, the average period of retirement is becoming longer and longer. Indeed, history recalls that when old-age pensions were first created 100 years ago, the life expectancy of those due to access them was a mere one year after they had been lucky enough to qualify. Clearly, by the time pension saving and old-age pensions became more widespread after the second world war, the time had gone up considerably to seven or eight years. It is now 20-odd years for men and—gratifyingly for females—even longer for women.

That shows that there are issues about longevity in society and about how to adapt our pensions arrangements to recognise that we live in what is often referred to as “an ageing society”. I believe that it is a great triumph of our organisation of society. Although it presents us with some difficult issues of policy and affordability, it should not be seen or ever portrayed as a problem; nor should the fact that these days many more pensioners reach retirement age and live longer be seen as representing some kind of burden on our society. After all, we all aspire—as I am sure you do, Mr Hoyle—to reaching retirement age and enjoying an extremely happy, long and hopefully prosperous retirement. That is what we are dealing with when we tackle the issue of pension tax relief.

I was pointing out that pension tax relief is more generous than the relief in many other areas of saving. That is because there are great benefits in encouraging people to save for their own pension, despite the fact that they are putting money away to which they often cannot gain access for many years; and also because it is more effectively and efficiently done if it can be done collectively. That is why Government incentives, in the form of tax reliefs, have always featured in the system.

This form of tax relief is often referred to as EET. This is not a stuttering, Steven Spielberg sci-fi film; it stands for exempt, exempt, taxed. That means that as savings are put away from income, they are exempt from tax. Any investment growth that comes from investment in those funds is also exempt from tax—that is the second E. The T, of course, is the thing that many people worry about—the fact that as these savings are taken as an income stream when retirement happens, taxation applies again at that stage.

I doubt whether any Member on either side of the House would quibble with the very generous tax incentives put in place over many years by Governments of all hues, colours and sorts—whether they be coalitions or otherwise—to privilege such tax savings. However, as that has developed, certain features have brought about unforeseen consequences and have not proved to be in the best interests of fairness or equity.

To establish the size of the issue and to put into perspective the amounts of money that we are dealing with under this clause, let me reveal—although I am sure that many Members will already know—that the gross annual cost of pension tax relief for the financial year 2008-09 was £28.4 billion, which at a full 2% of gross domestic product is a not insubstantial amount. Net of the tax on pension income—the T part of EET—and also of the national insurance contribution relief for employers, which are also granted by the Treasury, the figure was £18.9 billion. Therefore, the net cost of that tax relief for pension savings is close to £19 billion. Again, that is not an insubstantial amount of money or revenue forgone by the Treasury.

Another feature of the net figure is how it has been growing in the past few years, having doubled since 1998-99. From being reasonably stable, it has gone up very quickly in a relatively short space of time when we think about life spans and the development of pensions policy in this area. That change has been accompanied by a change in the distribution of the beneficiaries of the tax relief, so there was a very strong case for taking action to put it on a more sustainable and fairer footing, and that is what we were doing with the tax law that clause 5 seeks to repeal by order.

It is a feature of the system, which I am not sure could be avoided without putting huge restrictions on it, that tax relief for pension savings is granted at a marginal rate. By definition, that means that it is more valuable for higher rate taxpayers than for basic rate taxpayers. Analysis has shown that the relief was increasingly benefiting those on the very highest incomes rather than just those on higher rates. So, paradoxically, over time, the very reasonable and logical policy of granting tax exemptions on savings for pensions meant that the incentive to save for a pension was being provided, at a cost to all taxpayers, to those who needed it the least because they were the most well-off. That is the definition of “regressive” in terms of how tax relief might hit. The fact that the system was becoming even more distorted, benefiting those in the very top income brackets, was illustrated by a distributional analysis of the benefits, which revealed that higher rate taxpayers received 65% of the relief but constituted only 19% of pensions savers.

The real distortions were at the very, very top, as those on the very highest incomes were benefiting even more disproportionately. Analysis shows that about 2% of savers currently receive a quarter—25%—of all the tax relief available. I hope that the Minister will agree that that is unjustifiable. It means that if a person is privileged enough to be in the top 2% of earners by income, they are entitled to an average of £20,000 of tax relief per year per person on their pension savings, whereas the average relief available for those who are on the basic rate of tax is just £1,000.

The way in which the relief is granted, its connection to the income tax system—the fact that it is at the marginal rate—and the introduction of the 50p rate for income tax mean that if action were not taken, this massively and already grossly regressive relief would become even more distorted. That is why my right hon. Friend the shadow Chancellor, in the pre-Budget report 2009 and the Budget 2009, decided that action had to be taken to deal with the relief, which had become unsustainable and extremely unfair. It was therefore necessary to have a policy response at the medium and low-earning end of the income scale as well as a policy for the very high end. It is the policy for the very high end that is being repealed in clause 5, but I want to spend a tiny amount of time dealing with the policy at the low and medium end.

The decision to create the national employment savings trust was an essential part of the rebalancing of pension tax reliefs to ensure that they could effectively stretch further down the income distribution. Members will recall that the creation of what is now known as NEST was the outcome of a great deal of work across party lines from 2004 to design a system of pension savings that would deal with the obvious market failure in the private sector of the ability to allow low and medium earners to save in a worthwhile way in a low-cost savings vehicle.

Finance Bill

Debate between Angela Eagle and Chris Leslie

Tuesday 6th July 2010 Commons Chamber

[Ms Eagle]

Time will tell, although there is not widespread acknowledgment in the economic profession that some of the Budget forecasts are right—there is controversy about them. This will play out, however, so we will be able to see who is right in due course.

My hon. Friend the Member for Luton South (Gavin Shuker) talked about the balance of risk in the Budget and the worries about problems with infrastructure investment, the fact that it is being cut in his constituency and the implications for employment incentives. My hon. Friend the Member for Brent North (Barry Gardiner), with his characteristic ingenuity, managed to bring Harry Potter into our Budget deliberations, pointing out that our choices define who we are. I thought there was going to be a fight between him and the right hon. Member for Uxbridge and South Ruislip (Mr Randall), who has, I suspect, enjoyed rather a liquid evening. He was dragged off before anything more untoward happened.

My hon. Friend the Member for Pontypridd (Owen Smith) pointed out the wrong-headedness of the crowding out of private sector investment theory that underlies some of the judgments encompassed in the Bill.

My hon. Friend the Member for Derby North (Chris Williamson) made an extremely good speech about the seriousness of the Budget choices and made a good argument that they are wrong in this case.

Today has been quite an interesting day because of what has been happening in the Office for Budget Responsibility as we have been debating the Finance Bill. As we were coming into this debate, it was suddenly announced that Sir Alan Budd, who has become the oracle in the past six weeks, had decided to retire and leave the OBR after a mere three months in charge. That startling piece of information was played down by the Treasury, as one would expect, but it did prevent the Chief Secretary to the Treasury from praying in aid at every verse-end the forecasts that the OBR has produced to justify some of the policy decisions in the Budget.

The official line is that it was all planned in advance—that Sir Alan was always going to be away after he had set up the OBR—and that, somehow, nothing untoward has happened. However, I would be interested to know whether the Minister responding to the debate tonight can cast any further light—in the interests of transparency, of course—on what on earth has been happening with the OBR and, in particular, with Sir Alan Budd.

[Chris Leslie]

It would certainly be interesting if the Minister could cast some light on that, but would it not also jeopardise the so-called objectivity and independence of the OBR if the Chancellor simply chose Sir Alan Budd’s successor by himself?

[Ms Eagle]

These are issues to which I am sure we will return when the Bill establishing the OBR on a statutory basis comes before the House. However, following the farrago that we have seen, it is important that this House should establish the principle pretty quickly that the head of the OBR should be appointed by this House and be answerable to it. When the Bill establishing the OBR is published, I certainly hope that it contains that provision.