Savings Accounts and Health in Pregnancy Grant Bill

Baroness Noakes Excerpts

Tuesday 7th December 2010 Lords Chamber

[Baroness Noakes]

My Lords, the noble Baroness, Lady Howe, raised the issue of a money Bill. I remind her that money Bills are established conclusively by the certificate of the Speaker. This is not a question of government policy and, much as we might like to delve further into it, this is not something that your Lordships' House can do.

I support the Bill. When I was sitting on the Front Bench opposite, I had the privilege to speak for Her Majesty’s Official Opposition on both the Child Trust Funds Bill and the Saving Gateway Accounts Bill, and so I know a little about the schemes. As the Opposition, we did not oppose either the Child Trust Funds Bill or the Saving Gateway Accounts Bill, although we did improve both during their passage here. However, our lack of opposition was not based on a belief that either Bill represented a good use of public money. Rather, as I made plain at the time, we supported them because we were in favour of supporting savings.

We should remember that the savings ratio was a healthy 10 per cent in 1997, when the previous Government took office. It fell disastrously after that. In 2008, the savings ratio went negative: overall, people reduced their savings rather than made additional savings. The ratio has gained ground since then, as is normal in recessionary times, but it is still not at the healthy levels that we experienced in the early 1990s and earlier.

I will start with the Child Trust Fund. The timing of the fund was pure politics. It was designed so that lots of £250 vouchers would drop on the doormats of parents just at the time of the 2005 general election. It was also pure new Labour. It had been described at a seminar organised by the Institute for Public Policy Research—at the time the think tank of choice for new Labour—as “the third way within the third way”. I did not understand at the time what that meant, and the years since 2004 have provided no further enlightenment. I suspect that third-way theology has now been consigned to history by the Benches opposite and so we may never find out.

There was no proper research underpinning the Child Trust Fund proposals. No one knew what the impact would be on savings during the accumulation period, and no one knew whether the acquisition of a financial asset at 18 would make any difference to the savings behaviour of young adults. The Government asserted that a financial asset would increase the life chances of young adults, but, as the acting director of the Institute for Fiscal Studies said in giving evidence to the Public Bill Committee in another place, that analysis relied on correlation, not causation. Furthermore, no one had any idea what young people would do with their windfall of several hundred pounds when they gained access to it aged 18. There were pious hopes about education and other worthy expenditures, but many of us thought that the purveyors of drink and drugs might well be the beneficiaries, because no constraints were placed on how the money could be spent. The Government had done no modelling on likely outcomes; nor were they prepared to set any targets against which the success of the scheme could be judged. This was evidence-free, outcome-indifferent policymaking at its worst.

We have some evidence of the impact of the policy from the regular statistics that are produced by HMRC, but these require some interpretation. The previous Government typically claimed that these statistics showed the success of the scheme. Some of the child trust fund providers, mainly financial mutuals, also claimed that. I am not going to unpick all the statistics today—the noble Lord, Lord Newby, has referred to some of them—but one thing they showed was that only 24 per cent of accounts attracted additional savings beyond the Government’s contributions, and only a tiny number contributed the maximum allowed.

The 2009-10 distributional analysis figures have mysteriously disappeared from HMRC’s website today but in 2008-09 extra savings amounted to £290 million. However, no one knows whether these savings were genuinely additional or whether they were simply diverted from other savings mechanisms to which parents and others would have contributed. The previous Government did not want to know the answer to that question and never asked it.

In order to appease the critics of the abolition of child trust funds, who are largely the providers of child trust funds, the Government have announced junior ISAs to provide a specific tax-incentivised savings vehicle from next year. I am not sure that this was wholly necessary other than to provide a marketing peg for children’s savings product providers. However, if the tax cost is modest, something which promotes savings without the £500 million-plus price tag which came with the child trust fund is to be welcomed.

There is just one area which deserves further consideration, and other noble Lords have spoken about it already—namely, the position of looked-after children. These children do not have families who will save for them. They will start adult life with all the disadvantages that children in care have. When child trust funds disappear, they will have no financial assets either. As has already been stated, my honourable friend Mr Mark Hoban said in another place that he would look at what could be done to get local authorities to provide equivalent savings, and I hope that my noble friend on the Front Bench will be able to say more about that when he responds to this debate.

The child trust fund is also an untargeted, universal benefit, which is usually a good indicator of poor value for money. The savings gateway was a little different in that it was specifically targeted at low-income households. This project was piloted twice and so it was not a wholly evidence-free project. That did not, however, mean that it would be a success in creating an enduring savings habit among recipients of the benefit.

The pilot studies suggested that some savers were simply diverting their money from other forms of saving—often informal methods—and the pilots did not go on long enough to indicate whether there was persistence of savings at the end of the minimum saving period which led to the acquisition of the savings bonus. As my noble friend Lord Sassoon pointed out, the saving gateway scheme was not popular with providers. All building societies and most of the banks shunned it. The Post Office, which was keen, would get involved only with a public subsidy. The economics of the saving gateway scheme simply did not add up. Therefore, it was far from clear that the savings gateway would have flown even if it had got off the ground on implementation.

I have to say, however, that I have concerns about how to encourage those on low incomes to save. The evidence shows that 43 per cent of those on very low incomes, of less than £100 per week, have no savings whatever, and therefore they are very exposed when things go wrong in their lives. I completely support the judgment of the Government that over £100 million a year is too high a price to pay for the saving gateway scheme, which might not have done much to increase long-term savings. However, I hope that the issue of longer-term savings among the poor does not disappear off the Government’s agenda, although I am sure that gimmicks such as the savings gateway are not needed.

I know next to nothing about health and pregnancy grants other than that they are untargeted, universal benefits and, despite their names, are not related to health in any meaningful way. They could have been, and were, spent on whatever pregnant women chose. For me, that is good enough reason for abolition.

The Government have brought this Bill forward against the background of the disastrous economic circumstances which they inherited when taking office this year. It is absolutely right that we take steps to eliminate the deficit, as my right honourable friend the Chancellor has set out. In that light, the schemes being abolished by this Bill are obvious candidates. However, I believe that a respectable case can be made for repealing these schemes even if we had a firmer financial footing. It is unlikely that my party would ever have introduced them as a matter of choice and, with the small exceptions to which I have referred, I shall not regret their demise. I support the Bill, not with the reluctance of the noble Lord, Lord Newby, but with complete enthusiasm.