Finance (No. 2) Bill

George Kerevan Excerpts

3rd reading: House of Commons
Tuesday 25th April 2017 Commons Chamber

[The Chairman of Ways and Means (Mr Lindsay Hoyle)]

I wish you well in your retirement.

[George Kerevan (East Lothian) (SNP)]

May I, too, thank the new hon. Member for Copeland (Trudy Harrison) for such a passionate and entertaining speech? It is good to have a representative of the land of Beatrix Potter here in this Chamber. I listened to her last points about the deficit and her encomium that this Government are bringing it down. I will be slightly wicked in saying that I am sure she knows that the Office for Budget Responsibility is forecasting a rise in Government borrowing this financial year, and she might care to ask why that is the case.

I have one specific question for the Minister on this group, as her introduction notably failed to explain why clause 5 has been withdrawn. That clause deals with the proposed reduction in the dividend income that investors in small companies can take. Are the Government embarrassed by the clause and is that why it is being withdrawn?

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.

Clause 5 disagreed to.

Clause 6 ordered to stand part of the Bill.

Clause 7

Workers’ services provided to public sector through intermediaries

Question proposed, That the clause stand part of the Bill.

[The Chairman of Ways and Means (Mr Lindsay Hoyle)]

With this it will be convenient to discuss the following:

Clauses 8 to 15 stand part.

Government amendment 4.

Clauses 48 to 51 and 124 to 127 stand part.

Government motion to transfer clause 127.

Clauses 128 and 129 stand part.

Government amendment 10.

That schedule 1 be the First schedule to the Bill.

Government amendments 11 and 12.

That schedule 2 be the Second schedule to the Bill.

Government amendment 57.

That schedules 16 to 18 and 27 to 29 be schedules to the Bill.

New clause 1—Review of international best practice in relation to tax avoidance and tax evasion—

‘(1) The Chancellor of the Exchequer must, within two months of the passing of this Act, commission a review of international best practice by Governments and tax collection authorities in relation to—

(a) the prevention and reduction of tax avoidance arrangements, and

(b) combatting tax evasion.

(2) A report of the review under subsection (1) must be laid before the House of Commons within six months of the passing of this Act.

(3) In this section, “tax avoidance arrangements” mean arrangements broadly comparable in their effect to arrangements in the United Kingdom which have the obtaining of a tax advantage as the main purpose, or one of the main purposes, of the arrangements.”

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[Kirsty Blackman]

I do not believe that there is a huge amount of evidence for that. When companies are looking at where to base their headquarters and their staff, corporation tax does not feature all that high up the list. They are looking for good infrastructure, schools and support for individuals in the community. Corporation tax is not at the top of the list, so I would do other things first to try to encourage inward investment, if it were me who was in government and making those decisions.

[George Kerevan]

It will be someday.

[Kirsty Blackman]

Mr Hoyle, that is the end of my comments on this group.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.

Clause 8 ordered to stand part of the Bill.

Clauses 9 and 10 disagreed to.

Clause 11 ordered to stand part of the Bill.

Clauses 12 to 16 disagreed to.

Clauses 17 and 18 ordered to stand part of the Bill.

Clauses 19 and 20 disagreed to.

Clause 21 ordered to stand part of the Bill.

Clauses 22 to 44 disagreed to.

Clauses 45 to 47 ordered to stand part of the Bill.

Clause 48

Employment Income Provided through Third Parties

Amendment made: 4, page 49, line 26, leave out

“Schedules 16 and 17 make”

and insert “Schedule 16 makes”.—(Jane Ellison.)

Clause 48, as amended, ordered to stand part of the Bill.

Clauses 49 to 56 disagreed to.

Clause 57

VAT: Zero-rating of Adapted Motor Vehicles Etc

Question proposed, That the clause stand part of the Bill.

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[Jane Ellison]

I am delighted that the hon. Gentleman has had the opportunity to put his local scout group on the record. These issues have been discussed in general terms. In particular, I spoke at the Charity Tax Group conference recently. The point that I made there was that although we are not making exceptions for a number of reasons—some of them logistical—there are many different ways in which the Government exempt tax for charities and try to support them in other ways. The existing tax reliefs that go to charities and community groups in this country are worth many billions, and many are not taken up as much as they should be. In particular, the issue of scout groups got a very thorough airing during the passage of the gift aid small donation scheme measures that we took through the House last autumn. Those measures are designed to help such groups that do a lot of their fundraising outside their headquarters. Although I cannot give him comfort on this issue, I draw his attention to the fact that there are many other ways in which we help to relieve worthy groups. In particular, I refer to that recent change, which I encourage him to discuss with the Perivale scout group, because, as I have said, that was made very much with it in mind, especially with regard to how it collects donations.

[George Kerevan]

Essentially, this is one of the taxes that the Government are keeping in. It is the third insurance premium tax rise in 18 months. Will the Minister justify why the Government are proposing this third increase, which actually increases the rate by 20%—well above the rate of inflation?

[Jane Ellison]

I am coming to that, but the Chancellor was admirably clear when he laid the change out for the House when it was announced.

The Government have worked to eliminate the deficit and to invest in Britain’s future. We want to ensure that the public finances remain sustainable and to build resilience to future shocks. We have prioritised tax changes to help ordinary working families, and encouraged businesses to invest in the UK. We are supporting jobs and helping people’s money to go further through increases to the personal allowance and the national living wage. We have committed to investing £23 billion for infrastructure in the national productivity investment fund and an extra £2 billion for social care, which will ease pressures on the national health service.

By increasing insurance premium tax, we will ensure that we can maintain the balance between that investment and controlling the deficit. The additional revenue gives the Government the flexibility to invest. IPT is a tax on insurers. They are not in any way obliged to pass on the tax through higher premiums. However, if insurers do choose to pass on the increase, it will be spread thinly across a wide range of people and businesses. In line with the informal agreement between the Government and the Association of British Insurers, firms have been given more than six months’ notice, which gives time to implement the change. The agreement aims to give insurers proper warning of a rate change and to ensure that the correct rate of tax on a policy is known when the policy is arranged.

The changes made by clause 58 will raise approximately £840 million each year to reduce the deficit, while ensuring that we can fund spending commitments. That really is the answer to the intervention by the hon. Member for East Lothian (George Kerevan). Insurance premium tax is a tax on insurers, not consumers. It will be insurance companies’ choice whether to pass on the 2% rate increase. Even if the increases were passed on in full, the impact would be modest, costing households less than 35p a week on average.

The changes made by clause 59 will protect revenue by ensuring that insurers cannot artificially avoid paying the new rate of IPT by adjusting contract dates. As I have said, the Government are committed to reducing the deficit, while still investing in the UK. This requires some difficult decisions, including this 2% increase to the standard rate of IPT. The change will be invaluable in funding vital public spending, such as the additional £2 billion committed to social care.

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[George Kerevan]

I have two points. First, I reiterate to the Minister, who artfully shifted to saying that there was a 2% rise in the tax, that there is a two percentage point rise. It is a 20% rise in the tax. I asked the Minister how she justified that massive, excessive increase relative to inflation. She did not reply—I suspect because, as a Conservative tax cutter, she is embarrassed. I have a further question for the Minister. Will she rule out extending the provision of IPT to reinsurance? Clearly, IPT has been hit on by the Government because it is one of the few things that they have not yet legislated not to increase as a form of taxation. That will doubtless change in the Conservative manifesto. But as long as this is the tax that the Government are hitting on because it is the one they have left, will the Minister state that they will not in future years extend IPT to the reinsurance market, which would net them even more money?

Question put and agreed to.

Clause 58 accordingly ordered to stand part of the Bill.

Clause 59 ordered to stand part of the Bill.

Clause 60

Landfill tax: taxable disposals

Question proposed, That the clause stand part of the Bill.

[The Chairman of Ways and Means (Mr Lindsay Hoyle)]

With this it will be convenient to consider the following:

Clauses 61 to 64 stand part.

Amendment 1, in clause 65, page 73, line 4, leave out subsection (2).

Clauses 65 to 70 stand part.

New clause 3—Review of oil and gas corporation tax rates and investment allowances—

“(1) The Chancellor of the Exchequer must, within two months of the passing of this Act, commission a review of the corporation tax rates and investment allowances applicable to companies producing oil and gas in the UK or on the UK continental shelf.

(2) A report of the review under subsection (1) must be laid before the House of Commons within six months of the passing of this Act.”

New clause 4—Review of tax regime relating to decommissioning of oil and gas infrastructure—

“(1) The Chancellor of the Exchequer must, within two months of the passing of this Act, commission a review of the ways in which the tax regime could be changed to increase the competitiveness of UK-registered companies in bidding for supply chain contracts associated with the decommissioning of oil and gas infrastructure or the development of new fields in the UK continental shelf.

(2) In undertaking the review under subsection (1), the Chancellor of the Exchequer must consult—

(a) the Department for Business, Energy and Industrial Strategy;

(b) the Oil and Gas Authority;

(c) Scottish Ministers; and

(d) such other stakeholders as the Chancellor of the Exchequer thinks appropriate.

(3) A report of the review under subsection (1) must be laid before the House of Commons within six months of the passing of this Act.”

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[Kirsty Blackman]

I appreciate the Government withdrawing the making tax digital provisions. I understand their commitment to making tax digital, but the changes are reasonable.

[George Kerevan]

With your indulgence, Sir David, I thought that this might be an appropriate moment to pay tribute to the outgoing right hon. Member for Chichester (Mr Tyrie), the Chair of the Treasury Committee, which has paid a lot of attention to making tax digital. There could be no more fitting tribute to the right hon. Gentleman leaving this House than the Government withdrawing the making tax digital provisions.

Oral Answers to Questions

George Kerevan Excerpts

Tuesday 18th April 2017 Commons Chamber

[George Kerevan (East Lothian) (SNP)]

15. What steps he is taking to support economic growth in all regions and nations of the UK.

[The Economic Secretary to the Treasury (Simon Kirby)]

In addition to the earlier answer to Question 4, in Scotland and Wales the Government are investing almost £1.3 billion in city deals for Glasgow, Aberdeen, Inverness, Cardiff and Swansea, and we are discussing further deals for Edinburgh, Stirling, the Tay cities and north Wales.

[George Kerevan]

Will the Minister guarantee that the city deal specifically for Edinburgh and my East Lothian constituency will be neither aborted nor substantially delayed by the calling of the general election?

[Simon Kirby]

What I can guarantee is that it is about time the Scottish National party started delivering for the people of Scotland. The level of growth in Scotland is a quarter of that across the UK.

Finance (No. 2) Bill

George Kerevan Excerpts

2nd reading: House of Commons
Tuesday 18th April 2017 Commons Chamber

[Jane Ellison]

I do not know whether the hon. Gentleman was in the House earlier, but the International Monetary Fund has today upgraded its growth forecast. All the economic indicators are pointing to robust growth, despite the acknowledged challenges of the negotiating period ahead.

[George Kerevan (East Lothian) (SNP)]

In the interests of this potentially more consensual period in the run-up to Prorogation, as we try to work out what will remain in the Bill, could the Financial Secretary tell the House where the £2 billion per annum to replace the non-raising of the national insurance contribution is going to come from, if she is so wedded to balancing the books?

[Jane Ellison]

The Chancellor was clear at the time and in our statements about the Budget and subsequent decisions that we are looking to balance the budget across the period. Clearly, if we are going into a general election campaign, we will have more to say about that in the manifesto. We will lay that out there; this is not the place for that.

[George Kerevan]

This is the Finance Bill!

[Jane Ellison]

Well, there are measures in the Bill that are immediately and openly about revenue raising, and we will come to some of those. The Chancellor was very direct about that when he made his Budget statement and, indeed, at the time of the autumn statement.

Let me say a bit about what the Government have done to support fairness between the generations. An essential priority for this Government is that everyone should have access to our NHS when they need it, and that everyone should enjoy security and dignity in old age. That is why we announced in the spring Budget an additional £2 billion—that has just been referred to—in funding for adult social care. This means that councils in England will have access to, in total, £9.25 billion more dedicated funding for social care over the next three years as a result of changes introduced by this Government since 2015.

On top of that, in the last two fiscal events we have done much to help to build a better future for our younger generation by helping people to save more of the money they earn; by investing in education and skills, which was a key theme of the autumn statement and of the Budget; and by building more affordable homes. The Finance Bill will build on this work, particularly by helping to tackle childhood obesity and to deliver a healthier future for our children.

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[Nigel Mills]

I absolutely agree: it is important that we continue to send the signal that Britain is a great place to do business and to invest. We want as much international investment here as we can get, so it is absolutely right to have a headline corporation tax rate that is as low as we can have it. I welcome the fact that we are going to get it down to 17%. The previous Chancellor hinted that he might have used 15% to give a sense of direction; perhaps the Government will look into using that in the manifesto we are about to produce.

[George Kerevan]

Can the hon. Gentleman explain why Germany, which has a much higher headline rate of corporation tax, does so much better industrially?

[Nigel Mills]

I think I would have had to attend several of the hon. Gentleman’s lectures to understand better how the German economy works, but that is not something I have ever studied. We could probably talk about euro rates and the history of investment in skills and so on, but I suspect it is not all down to corporation tax.

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[Mr Jacob Rees-Mogg (North East Somerset) (Con)]

It is a great pleasure to follow the hon. Member for Birmingham, Selly Oak (Steve McCabe) and to join in this discussion on the great subject of sugar. While listening to my hon. Friend the Member for Vale of Clwyd (Dr Davies), who told us the extraordinary fact that an average five-year-old eats his own body weight in sugar during the course of a year, I considered my own children. I do not have a five-year-old—I have a six-year-old, a four-year-old and lots of others—but the six-year-old weighs 3 stone, which seems to me to be similar to the weight likely to apply to five-year-olds. That is 42 lb, or 672 oz, so if a five-year-old is eating his own body weight in sugar in a year, he is eating 1.84 oz of sugar a day, which is equivalent to 11 teaspoons of sugar. One thinks of the lines of Mary Poppins:

“Just a spoonful of sugar helps the medicine go down”,

and one wonders whether the medicine goes down even better after 11 spoonfuls of sugar.

In spite of thinking that 11 teaspoons of sugar is quite a lot, I am not in favour of sugar taxes, because I do not think it is the job of the Government to tell me how much sugar to give to my children. I think that is a matter for parents to decide for themselves, and the tax system should be there to raise the revenue the country needs to pay its way. The tax system is not there to tell us how to live our lives. There may be an exception with tobacco, but that is not really the case with alcohol, which is a matter of raising revenue. Our rates on alcohol work very well in raising revenue, as, incidentally, do those on tobacco, which is a serious generator of funds for the Treasury to pay its way.

I am sceptical about the proposed approach. I was struck by my hon. Friend’s comments that a lot of obesity is in fact genetic. If that is the case, we are penalising people who have a genetic propensity to obesity while it is fine for people like me.

[George Kerevan]

rose—

[Mr Rees-Mogg]

I give way to another hon. Gentleman for whom it is fine to eat lots of sugar.

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[George Kerevan]

Indeed, I had a fine East Lothian Easter egg. Does the hon. Gentleman accept that the difficulty with the hands-off approach he suggests, leaving it entirely to the individual, is that there is a vast advertising industry that also influences consumer behaviour and that using a sin tax is a way of evening out that process?

[Mr Rees-Mogg]

There is indeed an advertising industry, but we live in a free country and people ought to be able to advertise products. We have a lot of misinformation, have we not? We now learn that fat is not as bad for people as it was said to be, and that people have put sugar into products from which they have removed the fat in order to make them taste nicer because fat-free products without sugar taste disgusting. Advice that turned out to be wrong has led to manufacturers doing things that then turn out to be unhealthy. I am suspicious of the advice that comes from Government and their ability to get it right. If they end up getting it wrong, force us to change our behaviour and tax us, we get the worst of all possible worlds.

A little bit of sugar does nobody any harm at all—only taking it to excess does so—and the only justification, which has indeed been made, is for children. However, I think that ignores the responsibility of parents, most of whom are responsible, and puts up the cost for responsible parents of giving their children what may, in many households, be an occasional treat rather than a regular habit. It is a tax that falls hardest on the poorest in society, who may occasionally be giving their children something that they like, because of the excesses of others. I do not really think that that is the job of the Government.

That leads me to the issue of hypothecated taxation. Ministers should write out 100 times a day, “Hypothecation is a bad idea.” That has been the Treasury orthodoxy for as long as there has been a Treasury. Hypothecated tax does not work because it produces the wrong amount of money for what it is seeking. We see that with the prospect of putting money from the sugar tax into schools. We now discover that not enough money is likely to come from the sugar tax to meet the obligations given to schools, and that money will therefore have to come out of general taxation.

If it were a good idea to put the money into schools in the first place, it ought to have come out of general taxation in the normal way. If it was not a good idea, but just a clever way of spending the money, taxpayers’ money should not have been used. If we get into the position that something is now being done that did not need to be done because it was promised as money from a tax that has not arisen, that is not a good way of carrying out Government policy. All hypothecation of taxation should be struck off: it simply leads to the wrong amounts.

That leads me to the broader point I want to make about this Finance Bill and the Budget that preceded it. It is very good news that an election has been called, because the Budget has become so hemmed in by the number of promises on taxation and revenue expenditure that have quite rightly been kept. Governments ought to keep their promises, and this Government have been absolutely rigorous in doing so, even ones that I do not like. For instance, I am not in favour of the 0.7% going on overseas aid, which I think has been a wasteful and extravagant promise when money is needed elsewhere. However, the justification was that it was in our manifesto, and in manifestos parties make a pact with the electorate that they ought to continue with except under the most extraordinary circumstances that have not arisen.

Such an approach has led to very many areas of expenditure being fixed, while taxation has been limited at the same time. The deficit has been brought down to a third of what it was when this Government came in—a very substantial achievement, of which this Government and their predecessor ought to be proud—but it has become very hard to take that any further because of the encapsulating commitments that are limiting the Chancellor’s freedom of action. That is why the Finance Bill, for all that it has 700 pages, will not lead to a great deal of fundamental reform. It is tweaking things at the edges—looking at little bits of money here and little bits there—rather than taking a fundamental or basic approach to our tax system.

Our tax system has become overly complex and, from the pressure of having to find little bits of money, it is becoming even more complex, which makes it difficult for taxpayers to pay the right amount of tax. We can see that more anti-avoidance legislation has come in to stop avoidance, because we have overcomplicated the tax system in the first place and a corrective measure has therefore had to be taken to try to prevent revenue from seeping away. A good example is the discussions we are having about perceived employment as opposed to self-employment. The Government were extremely proud of their achievement in making self-employment easier, but a constituent who came to see me explained that the £3,000 national insurance contributions exemption for small businesses had led to all the people working for him having to become individual companies, whereby it cost £3,000 a year less to pay them than if they were directly employed or were employed through one subsidiary company.

Very good ideas come into individual Budgets—particular tax breaks to encourage particular forms of behaviour to lead to certain outcomes that the Government wish to see—but they then have to be corrected by anti-avoidance measures because they get taken and used in a way that was not intended under the initial legislation. That is why the election will be a great opportunity to stand on a platform of tax simplification, and I hope we will achieve the sort of majority that will help to push that through. To achieve tax simplification, it will be necessary to ensure that avoidance is removed at source, rather than by anti-avoidance measures. That means taking away some of the existing exemptions and incentives that encourage people to set up more complex systems than they need to minimise the amount of tax they pay.

I am a defender of people taking such an approach. If Parliament legislates for tax to be collected in a certain way, with certain exemptions and thresholds, the individual taxpayer is completely and legitimately entitled to use them to their fullest extent. The approach is the fault not of the taxpayer, but of Parliament for putting exemptions into or leaving them in legislation. We should always be very careful to distinguish avoidance from evasion. Evasion is straightforwardly criminal—not paying the amount of tax that is, by law, due. Avoidance is looking at the tax system and saying, “I do not owe that tax, and I do not have to pay it because Parliament has not legislated for me to pay it.” As individual taxpayers, we are all entitled, as are all our constituents, to pay the tax Parliament requires, not a penny less or a penny more. If we had a system that was simpler overall, that would be hugely beneficial.

There is a lot about anti-avoidance in the Finance Bill, including the new rules for non-doms, about which I would be very careful. We live in a world where some very rich people want to come to the United Kingdom, and when they are here they employ people, spend money and pay taxes. We have a system that has barely changed since the days of Pitt the Younger—I cannot say I remember them, but I wish I did—and that broadly unchanged system was actually very beneficial for our economy because it brought into this country wealthy individuals who then provided economic activity. It is absolutely right to ensure that people who are obviously domiciled here in all normal senses of the word should be seen as being domiciled here, but we do not want such a difficult regime that people who might come here and contribute to our economy feel that they cannot do so.

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[Mr Rees-Mogg]

Targets are based on forecasts and forecasts have variables within them that even the wonderful, or not always wonderful, boffins cannot get absolutely right. What matters is not the precision of the forecast, but the broad trend of the economy. We have had consistent economic growth. We have the highest employment on record. This is an enormous achievement. As I said a moment ago, we have the fastest growing G7 economy.

[George Kerevan]

I cannot let the hon. Gentleman continue with his analysis of the previous Chancellor’s single plan for the economy. In the first two years of the previous Chancellor’s reign, from 2010 to 2012, there was a very rapid move to austerity—tax rises and cuts in spending. Growth slowed precipitously and by 2012 the Chancellor reversed his policy. In fact, he got the Treasury and the Bank of England to print money and pump it into the housing market, so there was a change in policy. The original austerity did not work.

[Mr Rees-Mogg]

I do not agree with that analysis. My analysis is that the austerity allowed for a looser monetary policy which had beneficial consequences, that between 2010 and 2012 it was essential to operate a very tight fiscal policy to permit exactly the type of monetary policy to which the hon. Gentleman has referred, and that it would not have been possible to maintain the confidence of the markets if we had operated a loose fiscal policy and a loose monetary policy during those two years. The lack of economic growth during that period ties in with the considerable problems—the severe crisis—experienced by the eurozone and other economies.

On this occasion, I do not agree with the hon. Gentleman’s analysis of what went wrong, although I often do agree with him. I see a continuity in the policy of my right hon. Friend the Member for Tatton. However, although no time limit has been imposed this evening, I do not feel that I should go on forever. Many Members wish to speak, and others want to have their dinner. Let me end by reiterating that we face a great choice: between the higher taxes proposed by the hon. Member for Bootle and the opportunity for lower taxes, sound economic growth and prosperity. I know you are independent, Madam Deputy Speaker, but vote Conservative.

[George Kerevan (East Lothian) (SNP)]

I shall support the amendment, although that does not prevent me from believing that there are many interesting and good things in this draft Finance Bill. However, I find myself agreeing with my colleague on the Treasury Committee, the hon. Member for North East Somerset (Mr Rees-Mogg), in one respect. We will have two Finance Bills, because the current process has been truncated, and a much smaller Bill will be passed before the dissolution of Parliament. When a second Bill arrives later in the year, we shall have a chance to be more strategic and reforming, rather than continuing to add bits and pieces and ending up with the monstrosity—in terms of length—that we have at present. That said, I think that in the final few days, as we move towards a slimmed-down Finance Bill, there may be some room for an agreement between Government and Opposition on what can be achieved. In that context, I ask the Minister to deal with a couple of points when she responds to the debate.

Inevitably, in dealing with the financial period between 2015 and 2020—the year that would normally have marked the end of the current Parliament—the autumn statement and the March Budget made certain predictions about Government expenditure and taxation, along with certain promises about what would be achieved by 2020. One Parliament cannot bind another, and this Parliament, as it reaches its end, cannot bind the one that will arrive in the summer; nor can we predict who will govern following the general election. However, I think it would be helpful to Opposition Members if the Minister provided certain clarifications about the Government’s intentions, should they be returned in June, in respect of meeting the obligations that they set themselves for the period between now and 2020.

Let me give an example. The Government have guaranteed that they will meet their obligation to spend £1 billion derived from the sugar levy—the tax on the sugar industry—over the period ending in 2020. Normally that would fall, so I should like some indication of whether, should the Government be returned, that would continue to be their intention between now and the next Parliament It would be helpful for Opposition Members to know that. Although I think that the tax on the soft drinks industry is inadequate, and a bit quixotic in terms of what is and is not taxed, I also think that it is a step in the right direction. There are hypothecation issues, but, given that this is where we are, it would be useful if the Government guaranteed that, if re-elected, they would continue in the same direction.

City deals are another issue for Opposition Members. We were reaching an agreement with the Treasury on a number of city deals in, for instance, Edinburgh and East Lothian—some in the east of Scotland and some in the west—and I understand that the Treasury had intended to sign them off following the local government elections. Again, one Parliament cannot bind another, but I think it would be possible for the Treasury to provide some comfort on the subject of city deals before dissolution.

[Mrs Anne Main (St Albans) (Con)]

The hon. Gentleman is presenting a marvellous argument for people to vote Conservative. He is presenting the positive argument that if the Minister assures him that the wonderful things that he expects us to do will indeed be done, they will definitely be delivered if the electorate vote Conservative. I look forward to the Minister’s assurances, given that the hon. Gentleman has basically asked everyone to vote Conservative.

[George Kerevan]

I was very careful to say that I was not anticipating who would actually be in government. I was giving the present incumbents in the Treasury a chance to say what they might do should they be re-elected.

Let me move on now, because I think it important to analyse the contents of the Bill. I think that it contains two sets of structural weaknesses. The first reflects what I consider to be a change in the pulse of the economy, which has occurred since the end of 2016 and is embedded in all the latest data that we have—data that have emerged in the last month, since the start of the Easter break. I fully accept that the Government have presided over a period of economic growth since 2010. I do not want to dismiss the figures—in a number of years, our growth rate has been higher than those in other large industrialised countries—but what has underpinned that growth? All the figures suggest that it has been underpinned by consumer spending, largely funded by the rise in consumer debt.

I do not gainsay the growth, but, in her opening remarks, the Minister placed a great deal of emphasis on the Government’s success in that regard. If economic growth is founded merely on consumer spending, and that consumer spending is based on borrowing, it is not sustainable, and I think it entirely legitimate to question how long the Government can go on relying on consumer debt to fund growth. In fact, we are now approaching the end of that period. What worries me is that the fiscal plan embedded in the autumn statement and the March Budget assumes the continuation of growth that is beginning to falter.

Let me make a point that I raised after the autumn statement, and also during the Budget debate. It seems to me that the Chancellor gave himself plenty of fiscal fire power in the autumn statement through increased borrowing—or, at least, the removal of some of the more over-optimistic projections of the previous Chancellor, and some of his more egregious games with time limits in relation to when income would arrive. The current Chancellor, in the autumn statement, clearly borrowed sufficient money in order to give himself some fire power should the economy slow. The trouble is that in the autumn statement all that spending power was delayed until post-2019, which is when we will see what the Brexit deal actually is. If the economy slows between now and 2019, it will be too late to use the fiscal fire power. That was the criticism of the autumn statement that was made by me, and by other Opposition Members.

The March Budget was fiscally neutral, by and large, but it has run into some headwinds. If the incoming Government, whoever they are, post-8 June, do not make up the projected shortfall from the proposed rise in national insurance contributions by the self-employed, there is a hole of a couple of billion pounds to fill. That aside, as I have said, the March Budget was fiscally neutral. If we put together the autumn statement and the March Budget, the Chancellor has a nest egg that he can bring to bear on a slowing economy, but it is pencilled in for 2019. For the next two years, he is relying on economic growth funded by consumer debt. However, all the latest numbers show that that is no longer happening.

[Jane Ellison]

The hon. Gentleman is making an interesting speech and I welcome the consensual tone that he has struck on a number of measures. I have to push back on the charge that fiscal firepower will be delayed beyond 2019. The Chancellor was explicit in the autumn statement that we borrowed to invest in greater productivity and some of that is happening now. Some of the national productivity investment fund is for short-term investment. In addition, as the hon. Gentleman knows, Barnett consequentials of £800 million for the Scottish capital budget are there for the Scottish Government to spend as they see fit.

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[George Kerevan]

I accept what the Minister says, but the extra investment from the productivity fund that is going into the economy at the moment totals hundreds of millions, not billions, of pounds. The bulk of the spend, when it comes in 2019, will be in long lead items. A lot of it will be for housing, which is one aspect of the productivity investment fund I have never quite understood, as I do not see how investing in housing will raise industrial productivity.

Let me come back to the key point on which I want the Minister to respond. The latest data on the economy show that consumer spending is starting to slow. The first quarter retail figures, out just this month, are the worst for six years. It is clear that the reserves of spending in consumer hands are disappearing.

The previous Chancellor was very lucky in that in 2010 to 2013 windfall gains came into consumers’ hands, particularly from insurance on mis-selling. In 2015, even though wage rises were limited, there was a precipitous fall in the inflation rate. That raised real incomes. It is clear that, in 2016, because of that boost to real incomes, people started borrowing again and consumer debt started to rise. By the end of 2016, the savings ratio in the UK had fallen to historically low levels. One can sustain that amount of consumer borrowing and spending only for so long. By the end of 2016, it was beginning to fall.

Like the hon. Member for North East Somerset, I was never moved by the visions of economic Armageddon from the Bank of England and the Treasury during the Brexit discussion. However, I do think that, in the next two years, investment will be impacted upon by Brexit fears. That is not happening at the moment. Therefore, I think that there is reasonable evidence that the tapering off of consumer expenditure is not to do with the Brexit debate; that is still to come down the highway. It is to do with the fact that consumers no longer have the reserves to go on increasing their spending, in which case we are looking at an economic downturn in 2017. That is precisely the time the Chancellor should be using his economic firepower, rather than, as in the March Budget, having a fiscally neutral stance.

When questioned on the matter, the Chancellor has said that the slack would be taken up by business investment. There is no sign of that. In real terms, business fixed investment has been falling since 2015. It started to fall well before the Brexit debate. It blipped a little in the middle of 2016, but it has gone on falling. There are no organic signs anywhere that business fixed investment is increasing. Business spending is going on all sorts of things—for example, moving corporate activities to Europe to protect against Brexit—and a lot of money is being spent on buying British companies. However, we are not getting fixed investment in machinery and plant, and even if we did, it would take several years for that to feed through into productivity gains.

The latest quarterly market purchasing managers’ report suggests that growth projections from purchasing managers, who are pretty hard-headed, have halved since the last quarter of 2016. My general conclusion is that the Government are being far too optimistic about where growth is going in the UK. It is going down.

Conservative Members like to quote international comparisons. The latest OECD projections for growth in 2017—the OECD never quite got to the more insane evaluations of a collapse in growth that some other agencies did in 2016—suggest that growth in the G20 countries, in the United States, in Germany and in Canada will on average outstrip UK growth, so the situation is no longer as rosy as the Minister would have us believe. Some of the fiscal proposals in the Bill are based on a previous analysis of where the economy is. They have been overtaken by events. If we go through a general election and come to an autumn Budget and a second Finance Bill, all bets are off and we will be back to square one. That is not the way to run an economy.

Earlier, we discussed corporation tax, which is a key element. There is a long-term plan to cut it, and that hinges on what happens in the Brexit discussion. Clearly, the Government want to try, in a post-Brexit world, to make Britain a very low-tax economy, in the sense of attracting inward investment by having low levels of corporation tax. The danger of that strategy is that other countries will follow us, particularly the US; the Trump Administration have already threatened that. However, there is a stark contrast between countries such as Germany, where the headline rate of corporation tax is still 30% to 33%, and the UK, which is cutting corporation tax. Germany has much better productivity and higher industrial investment. Why is it that it can do that, and outstrip the UK economy, when we, with corporation tax that is low at the moment and going lower, cannot seem to generate the industrial investment and higher productivity?

It comes back to the issue of consumption and relying on debt-fuelled consumption to power growth. If we power our economy through consumer debt, it becomes dangerous to raise taxes on consumers, because we would immediately see a drop in consumer spending. Germany has focused on driving its economy through industrial investment and exports. Once you have that, you take the pressure off taxation on the consumer. That is the solution to the riddle and it is why the Germans seem to tax their industries more but, by running the economy at a higher level and generating more sales from exports, take the pressure off. They recycle a lot of the tax money back into industrial and infrastructure investment. They equate the basis for the industrial wealth that they tax—

[Kevin Foster]

I am listening with interest to some of the hon. Gentleman’s points. Does he agree that one of the issues that the German economy has, particularly in its industrial sector, is that many of its markets are locked into exchange rates by the euro? In more free-flowing economies and in previous exchange rates, it would have been able to devalue and so increase its competitive advantage.

[George Kerevan]

I am happy to agree with that point. The weakness of the euro is that across Europe it has locked the German supply chain into an artificially low exchange rate. On the back of that, Germany has generated a massive trade surplus, which it is not redistributing. That is undermining the whole European economy. I perfectly accept that. I was not arguing that the German economy is perfect; rather, I am suggesting that it is too simplistic to link the headline level of corporation tax with the performance of the economy, because we can find all sorts of examples that go the other way.

My real criticism, which I still direct to the Minister, is that the growth that the Conservative Government have trumpeted as their success is based on the shifting sands of consumer debt, which has now reached a level that cannot be sustained, so we need something else. We definitely do need to increase the level of industrial investment, and that requires a different set of fiscal tools in order to encourage consumer saving and recycle that consumer saving into industrial investment. That is the whole weakness that underlies the Finance Bill: it is a set of small measures based on the assumption that the economy will go on growing because consumers will go on spending. If they do not, the whole rationale of the Finance Bill falls apart.

I will now briefly move on to the second pillar, and the second strategic weakness, of the Finance Bill. In order to maintain the level of consumer spending, this Government have had to pass a series of pieces of legislation to bind their own hands when it came to raising taxes on consumers. If we do that, we then have to find money from somewhere else. Therefore, although this Bill contains a series of small tax rises here and there, in the aggregate what is happening is that this Government are being forced to start distorting the entire tax system because they have no other way to go but to invent new stealth taxes to maintain the level of income to Government.

The Clerks to the Treasury Committee came up with a rather interesting example on probate—the tax, if tax it be, on the probating of wills. The proposal for the levy on probating added to the cut in inheritance tax results in an anomaly. Where a father and mother leave a house to their children that is worth, let us say, £1 million and one penny, the inheritance tax is tiny—it works out at 40p—but the probate that has to be paid is £8,000. So in effect, cutting inheritance tax and replacing it with a probate levy gets us back to where we started. We can see that once we start down that road, we will go on increasing the levy on probate simply as a revenue earner.

That is not just happening with the tax on probate; it is happening in a whole series of small tax changes. By legislating to put a lock on income tax and other taxes, we end up having to raise revenue in a series of anomalous and distorting ways, and that makes the Finance Bill even more complicated.

[Mr Rees-Mogg]

Does the hon. Gentleman share my concern that the difficulty with doing this through charges is that they come through in a statutory instrument, whereas new taxes go through a much fuller parliamentary procedure? We should all be concerned about taxes that do not see the full rigour of parliamentary scrutiny.

[George Kerevan]

I could not agree more, and I look forward to the hon. Gentleman taking that up in the 1922 Committee—as I am sure he has.

If we run through a whole series of the provisions in the Bill for raising taxation, we see this creeping distortion of the tax system, such as the tax-free allowance on dividend incomes being cut from £5,000 to £2,000 to raise £800 million, which is a substantial, chunky sum. We can see where the tax-free allowance on dividend income is going to go. As for VAT on mobile phones used outside the EU, I can pretty well guarantee that if this Government are returned, the moment we are out of the EU that roaming tax will go on to our phone bill when we are taking our holiday in the 27 member states.

The insurance premium tax is one of the worst means that this Government have tried simply to increase revenue. They keep raising it year by year, so the increase of 20% proposed in the November autumn statement is simply a revenue-raising tax—there is no rationale other than simply to raise money. In terms of the insurance premium tax, there is a whole series of insurance forms not yet covered by the tax, so one can quickly see a future Chancellor saying, “Well, let’s put the insurance premium tax on reinsurance, or on buying shipping and aircraft. Why shouldn’t an airline pay insurance premium tax on buying an aircraft?” Rather than using the core taxes like income tax, we will end up with a series of distorting taxes, including the rise in spirit duty and the tax on whisky in the March Budget. I presume the Chancellor said to himself, “Well, with the significant fall in the value of the pound, there will be a gain in terms of export prices, so we can afford to claw some of that back as a tax,” but it is not strategic to the needs of the industry; it is simply a revenue-raising power.

What is wrong with the Bill as it stands? It misunderstands the nature of where the economy is and makes no allowance for the fact that consumer spending is about to decelerate, and it introduces a whole raft of new taxes, or increases in stealth taxes, which are fundamentally a change in direction and a distortion of economic processes.

I hope that when we come back after 8 June for a second bite of the cherry with a second Finance Bill, the Government might, should this Government be returned, be willing to look at some of these matters.

--- Later in debate ---

[Suella Fernandes]

I could not agree more. That is the point that I want to make. It is a principle of basic economics. My hon. Friend the Member for Louth and Horncastle (Victoria Atkins) referred to her A-level economics. She will be familiar with the Laffer curve and basic economics, which say that higher taxes do not necessarily lead to higher tax revenues because they reduce the tax base.

[George Kerevan]

Does this Bill not raise taxes on insurance, and on this, that and the other thing? Is the hon. Lady in favour of the Bill or not?

[Suella Fernandes]

I completely agree. I am not saying no tax rises at all. I am saying that tax rises have to be prudently applied, and this Conservative Government definitely apply that principle, as we are seeing when it comes to income tax. Let us look at why people work. They go to work because they want to preserve the amount of money that is not taxed. It is the post-tax amount, not the pre-tax amount, that we all work for. Increasing the tax rate reduces the amount that people have available for themselves and decreases the amount available to be taxed.

[George Kerevan]

They are paying for the health service.

[Suella Fernandes]

Yes, but let us see what history has shown. When Gordon Brown increased the higher rate of tax, tax revenue fell. When my right hon. Friend the Member for Tatton (Mr Osborne) dropped it again, tax revenues increased. It shows that we need to incentivise people to work and invest in education and training, and incentivise businesses to invest in this country and to employ people, which generates more economic activity and revenue that can be ploughed back into our public services. That is what Opposition Members fail to grasp and Conservative Members see very clearly. That is why under Governments led by Labour we ended up with higher taxes, higher borrowing, higher debt and in a recession that this Government are still tidying up.

To close, I am pleased that this Government are committed to enabling people to keep more of the money they earn so that individuals and businesses can take part in our economy. We can create a fairer Britain, and a country in which we can all prosper and be rewarded for our efforts.

National Spitfire Project

George Kerevan Excerpts

Tuesday 28th March 2017 Westminster Hall

[George Kerevan (East Lothian) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Davies—and may I assure you that I am at least one of your Twitter followers who does not hate you?

I declare my interest in this subject. Both my parents were in the Royal Air Force during world war two—indeed, they met there, which is why I am here now. My father was an engineer. He maintained the Merlin engines on the Spitfires, Hurricanes, Lancasters and Mosquitos. He always said thereafter that he got very bored when jet engines came along, because the Merlin was such a beautiful and sophisticated engine to maintain, whereas jet engines were too simple for him.

In an iconic fashion, the Spitfire represents the common endeavour of these islands in their crusade against evil. With a nod back to last week, that is something that we should always remember. In expressing my interest in the subject, and as a member of the Scottish National party, I want to say that the Spitfire represented something for all these islands and for all the people of these islands—for the common people, for working people and for members of the services. The importance of the prospective Spitfire monument embraces not just the aircraft, but the human endeavour that lies behind it. I think we could all agree on that, which is why I am so serious that we must finish the project. As most people here know, the project has been a long time in gestation—far too long—and it is time that we make sure that next year, the 100th anniversary of the RAF, is the year that it actually happens.

[Karl MᶜCartney (Lincoln) (Con)]

I thank the hon. Gentleman for giving way, and also you, Mr Davies, for your chairmanship. It is a pleasure to serve under you. I also love you on Twitter—and everywhere else too.

It is great to hear a member of the SNP being so positive about something. That is something of a revelation to me, sitting on this side of the Chamber. I hope the Minister is taking notice of the cross-party support at this point for the memorial. I was involved in the Sir Keith Park memorial campaign, as were others here, and I was helped by some of those who my hon. Friend the Member for Southampton, Itchen (Royston Smith) mentioned. It is great to see the project finally coming to fruition, but it does now need the Government to step up to the plate.

[George Kerevan]

I am happy to reinforce the sentiment to the Minister that the support comes from all over the islands. I want to underpin that with a little bit of extra history on the Spitfire, which I think all of us will do this afternoon.

The Merlin engines were largely manufactured at the Rolls-Royce shadow factory at Hillington, just outside Glasgow. Some 160,000 people worked at that factory and it provided the engines not just for the Spitfires, but for many of the other aircraft that served the RAF. That was part of what happened in world war two, and people did that selflessly. However, there is an interesting side to the Hillington experience of building the Merlin, because large numbers of the people making the engines were women. Initially, they were not paid the same as men; they were not even paid the same as the ordinary labouring workers were. That led to a lot of industrial unrest and, in 1943, to a major strike. Of course, that was a very difficult thing to contemplate in the middle of world war two. The feeling in the factory was that we were not just fighting against evil, but fighting for a new, democratic society, so they took industrial action—very regrettably, but they took it. The result was that for the first time in these islands a major engineering factory granted equal pay to men and women. We should weave into the Spitfire story the fact that the fight for equal pay began with the Spitfire, strange as it may seem.

I will not keep Members long, but I want to add another couple of Scottish contributions. I do so not to be sectarian, but to underline the fact that this would be a common monument and would represent all of these islands.

[Alex Chalk (Cheltenham) (Con)]

The hon. Gentleman is making a powerful speech. His parents worked on the Spitfire, as did my grandparents. Does he agree that, without the combined resources and ingenuity of all the nations of the United Kingdom, the Spitfire would surely have never flown, and that the Spitfire is a powerful reminder to us today that we truly are stronger together?

[George Kerevan]

It is self-evident that we have to defend these islands together. What divides us at the moment and in times past is how we organise our democracy, and I think we are mature enough to have that discussion. What the SNP bring, and have always brought, to the table is the idea that we will share the common defence of these islands. That has never been in question. Indeed—my hon. Friend the Member for Argyll and Bute (Brendan O’Hara) might say this in a brief moment—we often have discussions about defence issues because we do not think the Government protect these islands adequately, but that is a debate that we can have elsewhere. Our division on how we organise our democracy in these islands should not get in the way of the fact that we have a common interest in defending them. The history of the Spitfire and the second world war is an exemplar of that.

I will be very brief, as other Members want to speak. There is one other person who needs to be mentioned today with respect to the Spitfire and the battle of Britain: the man who was the head of Fighter Command, Hugh Dowding. We have all seen the film “The Battle of Britain”, which, for all its faults, I still love—when the music comes up I still get excited—and we have all seen Laurence Olivier play Hugh Dowding. There is just one slight problem—it is the same problem I had when Laurence Olivier played Earl Haig in “Oh! What a Lovely War”. Earl Haig was a crusty Scot, with a deep Scottish accent, which Laurence Olivier definitely did not have, and Hugh Dowding happened to be born in Moffat in Dumfries and Galloway. His father was a teacher at Fettes school in Edinburgh. The unity of these islands in the Spitfire story goes all the way to Hugh Dowding from Moffat, who was head of Fighter Command in those dark days. There is a large and very simple, but I think poignant, monument to Hugh Dowding, head of Fighter Command, in his home town of Moffat. That underlines the fact that the Spitfire monument in Southampton has been a long time coming.

I will finish with this. My wife was born and bred in Southampton—I know it well—and her image of the city is the bombed-out Southampton of the 1950s, so these islands are interconnected. We can have a serious debate about how we do our democracy. I grant no ground on that—Scotland will be independent—but we will all stand together in tough times. We share these islands; we will defend these islands together.

--- Later in debate ---

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I rise briefly to support the hon. Member for Southampton, Itchen (Royston Smith) in his debate this afternoon, which I congratulate him on securing. I also congratulate him on his tenacity in pursuing this aim of a national monument for the Spitfire in Southampton. The bottom line of what we are talking about today is a request for money. We need the money—ideally from the Government. The hon. Gentleman’s suggestion for where that money might come from would be an appropriate source for the rest of the funds. Many people have already contributed small and varying amounts to the fund to secure the aim of a memorial for the Spitfire on Southampton Water.

Why is the memorial so important? There are three things we might say along with all the other things that have been said about the Spitfire. In this context, I want to offer the story of my father, who was an aeronautical engineer with the Fleet Air Arm. He spent most of the war repairing aircraft, never leaving these shores. Unfortunately, the story does not neatly end with Spitfires, because he worked on Swordfish. As some hon. Members may know, Swordfish were in service at the same time as the Spitfire, but they looked like a completely different generation of aircraft. They were held together with bits of string, sealing wax and various other things. Although they did a good job, if we put the Spitfire next to the Swordfish, the Spitfire design appears to have been from the future and an imagination from I do not know where. They brought this amazing aircraft into being at a time when those aircraft were the staple—

[George Kerevan]

On that point, it is worth remembering that R. J. Mitchell also designed the Walrus biplane seaplane, which picked up so many downed RAF pilots. It looked as antediluvian as the Swordfish, but equally it was very efficient.

[Dr Whitehead]

Indeed. That underlines what I was about to say: R. J. Mitchell designed a plane that was never equalled throughout the whole of the second world war. Not only did the Spitfire save our bacon during the Battle of Britain but it went on to play all sorts of other roles across Europe and the world as the second world war progressed, due to its unique capacities and design and the way it stood head and shoulders above any other aircraft. Later in the war it was not only employed in a fighting capacity but was the first effective reconnaissance aircraft for the RAF. It could fly high at speed and take reconnaissance photographs. Indeed, it got the first reconnaissance photograph of German radar, the first photographs of the Peenemünde works for the V-1 rockets, and was instrumental as the war progressed in all sorts of other fields as well as in the battle of Britain.

Secondly, hon. Members have paid tribute today to the few who fought in the battle of Britain and the fact that they were an international cohort of pilots. Hon. Members have mentioned the large number of Polish pilots: 15% or so of the total number of pilots. They not only made a great contribution, but I understand that the particular way in which they flew the Spitfires was unlike anybody else’s, and they tested the aircraft to destruction. It did not get destroyed, it still flew, and the things they could do with that plane, as was proved throughout the war, is another tribute to the genius of the aircraft design.

Thirdly, for all those reasons, Southampton as a city is proud of its heritage as the progenitor and manufacturer of the Spitfire. As the hon. Member for Southampton, Itchen has said, the Spitfire was not only manufactured at the Supermarine works in Woolston. There was a remarkable arrangement subsequently whereby shops, factories and sheds produced that amazing aircraft literally in people’s back gardens in and around Southampton. The people from the city worked so hard to get the aircraft in the air and doing the job that they knew it could do.

So Southampton has an indelible and deep bond with the Spitfire. It is therefore absolutely appropriate that the site that has been chosen for the memorial faces out to Southampton Water, exactly under the path where the Spitfire pilots flew the planes from Southampton—or Eastleigh—airport, depending on your point of view. They flew over Southampton Water, absolutely at the centre of everything that happened that was part of the Spitfire legacy. The idea of a monument with a Spitfire soaring above Southampton Water seems absolutely the right use for the money that I hope will come in for that monument.

I congratulate the hon. Member for Southampton, Itchen on his efforts to make sure that the money comes our way. I am confident that his further efforts and hopefully those of the Members gathered here today will nudge the Government in the direction of making sure the money is available and will lead to an early and successful conclusion to this project. I will be first to applaud the successful completion of a long mission to get a monument to provide the recognition for the Spitfire that we in Southampton know is absolutely deserved, which can then go to a wider world.

Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017

George Kerevan Excerpts

Tuesday 14th March 2017 General Committees

[George Kerevan (East Lothian) (SNP)]

It is a pleasure to serve under your chairmanship for the first time, Mr Flello. I will be quite brief.

The principles behind MiFID II are laudable. Europe’s trading market is very fractured, which has limited the ability to mobilise capital across the European boundaries. It is particularly of interest therefore in the UK, where much of the capital is centred to operate more freely across Europe. The basic thrust of MiFID II is very acceptable. The obvious question to the Minister is: post-Brexit, can he guarantee that the broadening of the market base we are getting here, and with it acceptable regulation on bond traders, will continue? We need assurance on that. Given that the market has spent such an effort in time and money to get to this stage of MiFID II, to row back would be a bad thing.

There is, however, much talk in financial circles of a “MiFID III”. The American regulating authorities have been talking for some time about trying to go even further in trading regulation, to take us beyond what would be necessary and to impose costs, which most of the industry across the UK thinks would be invidious. Again, it is for the Government to ensure that, post-Brexit—all things being equal, and leaving aside recent events north of the border—if the UK found itself in a situation where it was negotiating directly with G20 and various international agencies regarding a prospective MiFID III, companies and traders operating in the UK would not be subject to further, more intensive regulation that suited the American market rather than companies here in Europe. Those are the basic points. The detail of the arrangements that have been negotiated is quite acceptable.

[The Chair]

I remind hon. Members to rise from their seats if they wish to catch my attention; that would be helpful.

Draft Sovereign Grant Act 2011 (Change of Percentage) Order 2017

George Kerevan Excerpts

Thursday 2nd March 2017 General Committees

[Simon Kirby]

The hon. Gentleman raises an interesting point. That is exactly what we are deciding today. There will be 115,000 more visitors each year, because there will be increased access. Some 30,000 more children will be able to visit the palace—only 1,500 can currently do so. There will be an additional 110 events every year. This is a long-term solution. The hon. Member for Bootle was right to say that previous Governments of all colours should perhaps have considered this more carefully, but we are where we are and this is a sensible way forward.

[George Kerevan (East Lothian) (SNP)]

Is it the Minister’s intention, once the money has been used to refurbish the palace, to come back and change the Act and reduce the 25%?

[Simon Kirby]

It is. That is clear and I am happy to restate it.

Question put.

Oral Answers to Questions

George Kerevan Excerpts

Tuesday 28th February 2017 Commons Chamber

[Simon Kirby]

The “Breathing Space” proposals are being carefully considered by the Government and we will report on them shortly.

[George Kerevan (East Lothian) (SNP)]

Unsecured consumer credit is rising at a level last seen before the banking crisis. Does the Chancellor accept that that is unsustainable?

[Mr Philip Hammond]

Clearly, it cannot go on forever, but households do have some capacity for debt, and consumer borrowing and consumer spending have been an important component of the robustness of the economy over the past few months. What I hope to see is business investment and exports providing a greater share of the growth during 2017.

Cerberus Capital Management: Purchase of Distressed Assets

George Kerevan Excerpts

Wednesday 22nd February 2017 Westminster Hall

[George Kerevan (East Lothian) (SNP)]

It is a pleasure to speak under your chairmanship again, Mr Owen. This is a very complex issue. I shall try to cover it as briefly—

[Albert Owen (in the Chair)]

Order. The hon. Gentleman needs to move the motion.

[George Kerevan]

Indeed. I shall move the motion that we are to consider—actually, I do not have the official piece of paper with me; forgive me, Mr Owen.

As I said, this is a very complex issue. I want to be as fair as possible to everyone, including Cerberus itself. I will take interventions, but I ask hon. Members to delay introducing any individual cases until I have developed, as rapidly as possible, the—

[Albert Owen (in the Chair)]

Order. Will the hon. Gentleman take his seat? I want to start doing this properly; we have already had two debates in which the Member did not move the motion. If the hon. Gentleman just reads from the Order Paper, his motion will be in order.

[George Kerevan]

I beg to move,

That this House has considered the purchase of distressed assets by Cerberus Capital Management.

Cerberus Capital Management is an American private equity firm that specialises in distressed investing—purchasing so-called distressed or non-performing loans. Few people in the UK have heard of Cerberus, but it is the biggest purchaser of distressed assets in the world. Since 2010, Cerberus has acquired more than 1.2 million distressed or non-performing loans, worth more than $80 billion. Simply put, Cerberus is the world’s largest debt collector.

Let me begin by saying that so-called distressed loans are often anything but. Since the banking crisis of 2008, we have seen a sorry catalogue of thousands of instances in which banks have forced legitimate borrowers into distress or even insolvency through no fault of their own. The so-called distress that we are discussing is largely manufactured. That has come about for a variety of reasons: interest rate swap mis-selling, the infamous Royal Bank of Scotland global restructuring group’s dash for cash, and outright criminal fraud such as occurred at HBOS Reading.

Even where such egregious or criminal behaviour has not taken place, there are too many instances of banks deciding that they no longer wish to support small and medium-sized enterprise customers in sectors that the lender now considers non-core to its shrinking loan book. As a result, thousands of legitimate customers find themselves being sold on to firms such as Cerberus without their knowledge or against their wishes. Because loans to SMEs are unregulated, those customers have little or no redress. My intention today is to put on record the plight of those badly served bank customers and to expose the exploitative and often inadequate business model used by Cerberus—a model that is also bad for the British taxpayer.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Gentleman for bringing this matter to Westminster Hall for consideration. In the light of what he has said, does he agree that although the mortgages and loans are currently owned by entities licensed by the Financial Conduct Authority, they, like any UK mortgage, could be sold in the future to an entity that is not regulated, meaning that customers would need to seek redress under the Consumer Rights Act 2015? Does he agree that the Government must consider additional protection for people whose lives have been turned upside down since the collapse of the Northern Rock bank?

[George Kerevan]

I agree, and the hon. Gentleman gets to the heart of the issue that we want to bring before Treasury Ministers, which is that even when loans were initially regulated, they can be sold on to unregulated parties, such as Cerberus, at which point there are no guarantees about the behaviour of those companies and how customers will be treated.

[Corri Wilson (Ayr, Carrick and Cumnock) (SNP)]

Will my hon. Friend give way?

[George Kerevan]

If my hon. Friend will forgive me, I will not, because I need to develop my case a little so that the Minister knows where I am going.

Cerberus has taken advantage of the situation. It is now the biggest purchaser of distressed real estate debt in Europe. It has acquired loans from such banks as Santander, RBS, Clydesdale, Yorkshire, Lloyds and banks in Italy and Scandinavia. It purchased £13.3 billion-worth of Northern Rock mortgages in 2015. Cerberus has also—we may come to this, and I will treat it in a very gentle fashion—purchased the Northern Ireland loan book of the National Asset Management Agency, which was set up by the Irish Government to dispose of property loans inherited from failed banks. We know that that is subject to serious fraud inquiry, and I will be very careful not to step into those legal areas.

The key question is how Cerberus makes its money. It claims to make a return for its investors in the range of 17% to 20% per annum, which is a staggering amount. The key way it makes its money is through tax avoidance. That is perfectly legal, but hardly the business model that the Treasury should be encouraging.

Cerberus manages distressed debt bought in the UK and Europe through a multiplicity of shell companies based largely in the Irish Republic. Those entities usually have the word “Promontoria” in their titles. They are, in turn, subsidiaries of other Cerberus Group companies registered in the Netherlands. Essentially, the Dutch companies lend money to their Irish subsidiaries at high interest rates to effect the asset purchases. That ensures that most of the cash generated from the purchased loans, or from liquidating distressed assets, flows back to the Netherlands in the form of transfer payments. According to an investigation by The Irish Times, six key Cerberus Promontoria holding companies in Ireland collectively paid a miserly €15,500 in tax in 2015.

The tax avoidance scheme means that Cerberus can offset the risk of purchasing so-called distressed loans. With the bulk of the financial risk removed, the true surplus profit for Cerberus comes from squeezing the distressed assets. That explains why Cerberus has been prepared to outbid rival US equity firms to acquire swathes of European distressed debt. My question to the Minister, and my key point, is this: has the Treasury made any calculation of the tax loss to the UK of the purchase by Cerberus of British so-called distressed assets, mortgages and properties? In particular, what corporation tax has Cerberus paid on the loan book purchased from United Kingdom Financial Investments Ltd in 2015—the Northern Rock portfolio?

[Corri Wilson]

Does my hon. Friend agree that trying to get answers from Cerberus Capital Management on this issue is like drawing blood from a stone? Attempts to communicate with it, by both myself and my constituents who have been impacted, have proven entirely fruitless, and calls for a meeting have fallen on deaf ears.

[George Kerevan]

My hon. Friend reveals something that many other Members, and people in other jurisdictions, have discovered: the company is unwilling to engage publically and is known to be highly secretive in its operations.

I want to continue on the issue of how Cerberus makes its cash. Cerberus is not a bank. Its business is not to make loans and earn interest. It is an investment fund that seeks a capital return, and that means it has to extract more value from the loan book than it paid to acquire it. Cerberus appoints local agents to review the loan books that it purchases, and it either squeezes more revenue by increasing lending rates or puts the client into liquidation in order to realise the value of the property.

Of course, it is theoretically open for SME clients to pay off their loan by refinancing with another lender. The problem is that Cerberus and its agents have no interest in letting that happen unless they can extract facility fees, which make such a transfer prohibitively expensive in most cases. Such fees often represent a significant percentage of the overall size of the original loan. For instance, the support group working with clients caught in the mis-selling of interest rate swaps by the Clydesdale and Yorkshire banks—clients transferred to Cerberus without their consent—reports that in many cases Cerberus or its agents refuse to accept full repayment of the loans. Instead they insist on adding backdated default interest and break clause costs, which were the subject of the original mis-selling.

I will now turn briefly, if you will indulge me, Mr Owen, to events in Northern Ireland. Again, I refer to the sale by NAMA—the Northern Ireland toxic bank agency—of property loans in the north of Ireland. That is subject to criminal investigation, and I will not go there, but I want to give some of the timings and the background of what happened.

The original bidder for the NAMA assets in Northern Ireland was a company called PIMCO, which is a California-based global investment company. PIMCO withdrew from that sale when it became aware of a £15 million private fee arrangement involving PIMCO’s US lawyers, Brown Rudnick, and two Irish individuals close to NAMA. After PIMCO withdrew, Cerberus had an unsolicited approach by agents acting on behalf of NAMA itself on 6 February 2014. Barely a week later, on 14 February 2014, Cerberus asked to be, and was, admitted to the bidding process for the NAMA loan book. Cerberus submitted a bid of £1.24 billion on 1 April 2014, a scant six weeks after entering the bidding process. The Cerberus bid was accepted on 3 April. Altogether, that is a breathtaking pace for a purchase of that magnitude—from entering into discussions on 6 February to the winning bid on 3 April.

We should note that at that point Cerberus had no investment history in Ireland, north or south. So why did the company feel confident enough to make such a large purchase—£1.24 billion of distressed loans in the north of Ireland? The answer is that Cerberus hired the firm of lawyers that had been employed by PIMCO, Brown Rudnick, which had previously been involved in the abortive sale. It did so on 24 March 2014, a mere week before Cerberus submitted its winning bid. Cerberus admitted to the Public Accounts Committee of the Irish Parliament that it paid Brown Rudnick £15 million for that one week’s work. Why was Cerberus willing to pay so much? As it admitted to the Irish Parliament, it was to gain detailed knowledge of the debts it was buying. However, NAMA had specifically banned prospective buyers from engaging directly with debtors or key stakeholders. Irish Deputies have accused Cerberus of paying Brown Rudnick so much—£15 million for one week’s work—precisely to obtain knowledge of debtors that it would not have been able to acquire through the formal bid process. Cerberus denies that—I put that on the record—but I leave it to others to assess why the company paid Brown Rudnick so much money for such a short amount of work.

That brings me to my next line of questioning to the Minister. Will he agree to conduct an inquiry into the NAMA sale of its assets in Northern Ireland once the legal proceedings have run their course? That way the issue can be aired, and if there was wrongdoing it can be found out, but if there was not everyone can be cleared. I make no allegations of illegality against Cerberus, but I do criticise its business methods and its growing stranglehold over so-called distressed assets in the UK and Europe. Its business model is bad for small companies and bad for the UK economy. In that context, I have a final question for the Minister: is there any substance to the persistent rumours that Cerberus has approached the Treasury with a view to buying debt from Her Majesty’s Revenue and Customs?

--- Later in debate ---

[Roger Mullin]

If the messages that are being passed are going to answer some of my questions, I will not object too severely.

As I was saying, Cerberus is an example of a company that operates to standards that are the very reverse of a duty of care towards small businesses in our country. Surely we can expect the Government to be concerned about the effect on the good people who have suffered at its hands. In my constituency, a perfectly good trading company of many years’ standing was completely destroyed by the actions of Cerberus, in a similar way to another company mentioned earlier. It was willing to repay the loan, but the additional fees that it was stuck with and the way in which Cerberus operated drove it to bankruptcy. I will not name the company, because like other hon. Members I do not want to embarrass anyone who may be listening, but I am genuinely concerned about the health of the family who were treated in that way.

Let me comment on some points made by other hon. Members. My hon. Friend the Member for Ayr, Carrick and Cumnock (Corri Wilson) said in an intervention how difficult it has been to get a conversation between Cerberus and those affected by its actions. It seems that it is unwilling to speak except in the remarkable case that the hon. Member for East Antrim (Sammy Wilson) mentioned, when it sought to buy assets in Northern Ireland and was only too happy to make promises such as adopting a long-term strategy—that would be a novel thing for it to do.

[George Kerevan]

On the subject of secrecy and Cerberus, is my hon. Friend aware that Stephen Feinberg, Cerberus’s founder, is the leading candidate to undertake the review of the American secret service under Donald Trump?

[Roger Mullin]

Yes, I am aware of that. One can be fairly confident that that review of the secret service will itself be done in the greatest of secrecy.

I was also taken by some of Cerberus’s other promises that the hon. Member for East Antrim mentioned, such as making a presumption in favour of the incumbent and not squeezing value out of assets. It would appear that Cerberus has decided to act in a way that is precisely the reverse of its public promises.

I must pay yet more tribute to my hon. Friend the Member for East Lothian for the clear way in which he set out one or two facts that I hope the Minister will respond to, particularly the manufacturing of distress by the operation of such institutions and the movement from regulated to unregulated markets.

Cerberus proudly proclaims that it can make profits of 17% to 20% out of the tax avoidance schemes that it engages in, extracting value by moving between the UK, Ireland and the Netherlands. It is therefore not only small and medium-sized enterprises that are victims of the way in which Cerberus is operating, but the Treasury as well. I particularly look forward to the answer that the Minister must surely give to the question that my hon. Friend asked in his opening remarks: what has the loss been to the taxpayer in the UK from the actions of Cerberus? Everyone deserves to receive an answer to that this afternoon.

--- Later in debate ---

[Simon Kirby]

It is the long-standing policy of this Government to unwind the interventions made in the financial sector during the banking crisis of 2007-09 and return the assets acquired then to the private sector. That is a key part of restoring normality to the financial system, but in that we need to ensure value for money in getting back taxpayers’ money. We are making good progress in that. UK Asset Resolution, which is responsible for the assets of the former Northern Rock and Bradford & Bingley, has already reduced its balance sheet from £116 billion in 2010 to £37 billion last year. The sale of £13 billion of former Northern Rock mortgages to Cerberus Capital Management was another important step along the way.

As with any transaction of such complexity, the sale required careful analysis and meticulous planning. First and foremost, the Government had to consider whether the sale would meet one fundamental condition: good value for money for the British taxpayer. Secondly, however, the deal needed to ensure the continued fair treatment of existing customers. In this case, they held around 270,000 mortgages and unsecured loans. We are confident that as a result of the detailed preparation we conducted, those conditions were fully met.

It is perhaps worth providing a brief outline of the processes followed. The sale was initially announced at the 2015 Budget, following various expressions of interest and favourable market conditions. A full sales process was then launched that summer. It attracted a good level of competition, with multiple bidders involved, as the National Audit Office noted. At each stage of the process, experts in UKAR worked closely with UK Financial Investments and independent external advisers to assess against the four main criteria used in any public sale, namely: propriety, regularity, feasibility and value for money. Cerberus is an active buyer of assets across the UK and elsewhere, and UKAR carried out thorough due diligence before it was selected. Its bid represented a £280 million premium to the book value of the loans, and, importantly, it maintained the fair treatment of customers.

[George Kerevan]

I accept what the Minister is saying—it has been justified by the National Audit Office—but in the assessment of the bid from Cerberus, was any account taken of the likelihood that it would use tax avoidance measures to complete the sale?

--- Later in debate ---

[George Kerevan]

I thank all Members who have taken part in the debate, and I thank your good self, Mr Owen, for ensuring that the debate was in order.

I know that the Minister has tried to be helpful, within his brief, but the point still stands that Cerberus uses a tax model across all its purchases that is not beneficial to the Treasury. We will continue to press on this matter in the days to come.

Question put and agreed to.

Resolved,

That this House has considered the purchase of distressed assets by Cerberus Capital Management.

London Stock Exchange

George Kerevan Excerpts

Tuesday 21st February 2017 Westminster Hall

[Sir William Cash (Stone) (Con)]

I beg to move,

That this House has considered the future of the London Stock Exchange.

It is a pleasure to serve under you, Mr Hollobone. I have brought this matter for debate because the proposed merger between Deutsche Börse and the London Stock Exchange raises issues of national interest and, in my opinion, it is a slam dunk that the merger is not in the national interest.

The London Stock Exchange Group owns several key market components in the United Kingdom, including the London Stock Exchange itself, a recognised investment exchange regulated by the Financial Conduct Authority and the London Clearing House, which is supervised by the Bank of England. A number of subsidiaries of the group are also regulated by the Financial Conduct Authority. The proposed merger requires regulatory approval by the Bank of England and the Financial Conduct Authority. The most significant approvals are those required, first, from the Bank of England in connection with the London Clearing House, which I understand to be 57% owned by the London Stock Exchange, and which conducts euro clearing, and, secondly, from the Financial Conduct Authority with respect to the London Stock Exchange, which is fundamental to the City of London’s capital markets.

The London Clearing House is one of the two main clearing houses in the UK and clears all major currencies, including the euro. As I understand it, both the German and French Governments have indicated a wish to strip euro clearing out of the City. All of that has significant political involvement because it would facilitate in due course a substantial movement of UK market infrastructure to the continent and would permit Germany and France, in the context of Brexit negotiations, to achieve German and French objectives that will undermine the UK’s political leverage during those negotiations.

Her Majesty’s Treasury has certain powers to direct or make recommendations to the Bank of England or the Financial Conduct Authority to take action or not. The Prime Minister is First Lord of the Treasury, and the Chancellor of the Exchequer of course has fundamental responsibilities. The Treasury has powers of direction over the Bank of England under section 4 of the Bank of England Act 1946. It may give directions to the Bank following consultation with the Governor

“as…they think necessary in the public interest.”

The Treasury may direct the Bank to exercise its powers not to approve the acquisition of what is described as a “qualifying holding” in the London Clearing House.

It is not known whether the Bank of England has already given its approval, although the Treasury could direct such a decision to be reversed on the grounds of public interest. The powers include determining that the proposed deal is not a normal commercial deal in the light of the Brexit negotiations and to take account of the involvement of the state of Hesse, which has shown a desire to boost Frankfurt as a hub at the expense of London, which is indicated in the report of Professor Dirk Schiereck, commissioned by Deutsche Börse in January 2017. In the past few days a Minister in Hesse indicated that the headquarters of the merged group should be in Germany:

“The reasons for the headquarters being in Frankfurt are crystal clear.”

The objective could not be clearer. It is inconceivable, in the UK national interest, that the London Stock Exchange should be regulated in and operated out of Germany as we leave, and having left, the European Union. There are also questions, as yet unresolved, surrounding the new chief executive officer, who is under investigation for potential insider dealing in connection with the London Stock Exchange deal, and the regulatory relationship between the United Kingdom and the EU which forms part of the Brexit negotiations. It would not be in the public interest for the combination of the two groups to be achieved immediately in advance of those negotiations, since that would give commercial parties operating at the behest of German political masters the ability to remove the rug from underneath the UK’s feet without regard to the negotiated outcome, or to threaten to do so during the negotiations unless the UK made certain concessions.

If the deal goes through, the combined group will be able to bulk up euro clearing and exchange and business clearing generally in Frankfurt at the expense of London. Given the declared political objective to promote Frankfurt, Paris and the eurozone, that is not an outcome in the UK’s national interest.

[George Kerevan (East Lothian) (SNP)]

The hon. Gentleman is, as ever, making a logical and compelling case, but is he suggesting to the House that the owners and management of the London Stock Exchange are willingly entering into a merger that will lead to the transfer of all of their business to another country?

[Sir William Cash]

There is severe detriment to our national interest in allowing a merger of that kind when the London Stock Exchange and its group are the jewel in the crown of the City of London. Any merger raises matters of national interest such as, first, financial stability and UK taxpayer liability. The merger would create a new financial market infrastructure group controlling, inter alia, about 90% of European-listed and over-the-counter derivatives transactions, but operated for the benefit of shareholders, not users, with an unprecedented complexity of risk profile and significant uncertainty as to whether the UK taxpayer would pick up the bill were part of the combined infrastructure to fail. The uncertainty created by the lack right now of a clear Brexit deal adds considerably to the stability and taxpayer risks.

Secondly, there is loss of control of a key UK asset post-Brexit. The London Stock Exchange is a major centre of global financial markets: more than 500 foreign companies are listed in London, which is 20% of global foreign listings; and it has the highest equity market capitalisation, 170%, in relation to the GDP of all the largest economies. Majority control of that vital business will pass to Deutsche Börse shareholders, who will own 54% of the new group post-merger. Passing control of the London Stock Exchange to Deutsche Börse in the context of Brexit is not in the national interest and might undermine our negotiations with the 27 member states as we leave the EU.

The issue is not where the headquarters of the new company is located technically. I am told that formally moving the HQ to Germany, as the state of Hesse has insisted, is not likely given the need for a significant shareholder vote, but that is beside the point. The real issue is who calls the shots and in whose interests critical decisions are made. It is no answer to say that the HQ will remain in the UK if the reality is that the people really in charge are flying in for the day from Germany. Decisions must be taken in the UK and in the interests of the UK.

My third point is about competition concerns. The only substantial remedy offered by the parties to the EU Commission to allay concerns about significantly impeding effective competition is the sale of the central counterparty, Clearnet SA, based in Paris, and part of the LSEG. No disposals have been offered by Deutsche Börse, which owns trading platforms, central counterparties and settlement systems that have been integrated into a single vertical silo in Frankfurt. That is not sufficient, and I am concerned that the outcome of the European Commission’s review of the proposed merger will be determined by the EU’s political priority to ensure that Germany has control over London’s capital market infrastructure, instead of by genuine market concentration and anti-trust concerns.

Fourthly, there has been a lack of public scrutiny and industry comment; there has been little proactive support for, or indeed criticism of, the merger from the main UK financial institutions. That is not surprising, since the parties have given 12 major investment banks a role in the deal and they are destined to share about £353 million in fees if the deal succeeds. There has also been little comment by the UK Government so far on a deal concerning a major UK asset, although they still have a public interest role to play under the Enterprise Act 2002. We need to know why it was, and who decided not to refer the merger when it first came before the Secretary of State. Vast profits and sums of money are involved, and some stand to gain financially on a grand scale. All of that can be ascertained, but the national interest must prevail.

Precious little has been put into the public domain to suggest that the deal is remotely in the public interest. On what possible basis can it be argued, in particular post-23 June and the passage through the House of Commons of the European Union (Notification of Withdrawal) Bill, that the merger is in the national interest? Furthermore, under section 1JA of the Financial Services and Markets Act 2000, the Treasury

“may at any time by notice in writing to the FCA make recommendations to the FCA about aspects of the economic policy of…Government”,

including how to ensure compatibility with the FCA’s “strategic objective”, to ensure that the London Stock Exchange functions well, and how to advance the FCA’s objective to ensure the soundness, stability and resilience of the UK’s financial system, which is defined as including the London Stock Exchange and the London Clearing House.

[Sir William Cash]

As I have said, the withdrawal Bill is quite clear. We will leave. That means that we will be insulated from the catastrophe that could occur if the eurozone collapsed. I could enlarge that point, but I will not for the time being.

There is another statutory requirement to ensure the principle of the desirability of sustainable growth in the UK’s economy in the medium or long term. Those are all statutory functions, and I strongly suggest that Her Majesty’s Treasury should decide—in fact, I urge it to—that it is not in the UK’s interests to allow a deal where there is a clear intention to take action that would cause systemic risks in the UK and be detrimental to UK tax revenues.

I move to the powers of the Bank of England, which is under a judicially reviewable statutory duty in respect of the test of approval for any acquisition of the London Clearing House. Under the European market infrastructure regulation, the test for approval in general terms for the purpose of ensuring the sound and prudent management of the London Clearing House raises questions of the suitability of the proposed acquirer and the soundness of the proposed acquisition, including the person who will direct the business of the London Clearing House. It also includes questions relating to whether the Bank of England would be able effectively to supervise, and several other factors. All those are in question in this instance.

I turn to the powers of the Financial Conduct Authority, which is required to approve the acquisition of the London Stock Exchange because it involves the acquisition of the “control” over the LSE by the new holding company. In those circumstances, the FCA has to consider the suitability of the new group holding company and the financial soundness of the acquisition to ensure sound and prudent management, and have regard to the key influence that the new group holding company will have on the London Stock Exchange. There are grave concerns about all those matters that pose a threat to the sound and prudent management of the London Stock Exchange, including questions relating to moving euro clearing out of London. The removal of euro clearing to Germany would undermine UK economic growth, because it may lead to the movement of other currency clearing out of the UK and undermine the City’s success. Moving the new holding company to Frankfurt would also be against the UK national interest.

[George Kerevan]

I grant that there is an issue about the removal of all or a substantial amount of euro clearing to the European Union jurisdiction, but that may come anyway as a result of Brexit; it is not dependent on whether this merger takes place. Indeed, one could argue that the merger might act as a barrier to such a move.

[Sir William Cash]

I was against the merger before Brexit, and I have become even more so since. I emphatically repeat my view that it is against the national interest, and I will not in any way resile from that point.

This deal would operate against the UK’s national interest in several ways. For example, the driver behind the merger is to consolidate as much market activity across the whole value chain into as few liquidity pools as possible. The reason given for that is to allow customers—primarily the world’s largest banks—to manage their capital and collateralisation requirements as efficiently as possible, particularly in the illiquid and untransparent world of OTC interest rate swaps. The most efficient way of achieving that is to have one dominant silo. This merger would bring together the two pre-eminent trading and post-trade silos in Europe, the London Stock Exchange and Clearing House and Eurex, which is owned by Deutsche Börse. One of those silos would inevitably prosper disproportionately, at the strategic and economic expense of the other. Given that a German chief executive officer would immediately be in place—whether that is the presently proposed CEO or not—and more than 54% of the shares would be owned by Deutsche Börse shareholders, and given the strength of Eurex’s existing listed derivatives clearing house, there is a very meaningful risk that the London Stock Exchange and the London Clearing House, and therefore the City as a whole, would be at the thin end of the wedge.

In the real world of markets, this works as follows. There will be no big announcements, no formal closures and no notice of intention to leave. Rather, liquidity will be shifted from one place to another through the creation of incentives and tipping points. Mirror contracts will be created that mimic what is on offer in London. Special arrangements for collateral and cross-margining in the favoured venue will be put in place. Without anyone particularly noticing, liquidity will shift away from London to the continent. Once that siphoning of liquidity begins, it will be unstoppable, and without liquidity there is no market.

Prior to Brexit, when this deal was first negotiated, that was a very attractive outcome for the LSE’s German partner. Post Brexit, control of the combined group and the shift of London’s business to Europe is an absolute necessity for Deutsche Börse and its national stakeholders. The importance of that is shown by the ever louder calls from German politicians and regulators for the combined group to be headquartered in Frankfurt. Controlling the LSE’s direction is key to Frankfurt successfully becoming the new financial centre of Europe—clearly at London’s expense. Even if the headquarters are maintained in the UK, there will be a German CEO, a majority of shares will be held by Deutsche Börse shareholders and there will be a massive political push from Frankfurt, which will lead to decisions being taken behind closed doors, against the UK’s interests.

The exchanges themselves have suggested that that loss of liquidity from London will not happen, and the solution is a so-called liquidity bridge. No market participant—apparently even the companies themselves—seems to understand what is meant by that or how it would be delivered. No reliance should be placed on it.

Finally, the acquisition of LCH.Clearnet SA by Euronext, which is largely French and Dutch-controlled and headquartered in Paris, is another political wildcard. That would enable France to exert much greater political force behind its push for euro clearing to relocate to Paris, again potentially creating systemic risk and dangerous uncertainty in the UK’s markets.

This transaction has the clear potential to strip a key activity out of the City of London. It should certainly not be nodded through in the midst of Brexit negotiations. Why weaken the City before we have even started the process of exiting the EU? I have mentioned the Enterprise Act 2002, which I understand can still be used in the public interest, including by reference to the criterion of UK financial stability.

In an important article published in the Financial Times on 13 February, Jonathan Ford makes it clear that the €29 billion merger was, as we know, conceived before the Brexit vote. The deal was supposed to take advantage of a converging EU rule book in the single market by drawing together Europe’s two most vibrant securities markets and their clearing activities, which are the financial plumbing of the system. The aim was to create

“a single…‘pool of liquidity’”

that captured scale economies, in competition with the Chicago Mercantile Exchange.

Jonathan Ford argues that to make their own common pool a reality, Deutsche Börse and the London Stock Exchange would have to be very ambitious. He doubts whether that is feasible. He indicates that there is a serious problem, namely, that

“clearing operations have a wider impact on the functioning of capital markets; not just the management of systemic risk but on the very competitiveness of financial centres.”

He states:

“Given the importance of finance to the post-Brexit economy,”

the United Kingdom has a “strong interest” in ensuring that the deal is not damaging to London as a financial centre. He argues that the Bank of England and the FCA still have vetoes, and the Government can

“determine the outcome in the wider public interest.”

He suggests that the Government would be wise to intervene to prevent the loss of future business, and indicates that it would be better to take account of the Brexit negotiations as they proceed.

The UK has long been in favour of foreign direct investment, which increases productive capacity through capital investment, transfers of technology, skills and better management. Deutsche Börse’s acquisition of LSE is not FDI. It is not cross-border investment in the UK by residents and businesses from another country with the aim of establishing a lasting investment in the UK. FDI does not cover the asset stripping and systemic risks associated with the proposed merger. Foreign investment in UK infrastructure, including in the LSE, is welcome—the LSE of course already has many foreign shareholders—but this merger must not be allowed to clamp down on competition, gut the UK’s financial infrastructure and cause significant and lasting damage to the UK. It is understood that the European Commission has already commenced proceedings and the London Stock Exchange and Deutsche Börse have received a limited statement of objections to the proposed deal.

In conclusion, I urge the Government, the Bank of England and the Financial Conduct Authority, and other regulatory authorities, including those in Germany and Brussels, to recognise that whatever the reasons may have been for the merger before 23 June 2016, the reasons since then for determining and resisting it are extremely strong and should be employed.

--- Later in debate ---

[George Kerevan (East Lothian) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Hollobone. This is an important debate, and we have discovered that an hour is not enough. I hope we can take it into the main Chamber at some point because a lot of issues need to be cleared up.

The hon. Member for Stone (Sir William Cash) is correct: this is a national issue and we have to take the national interest into consideration. The track record of takeovers and mergers in recent years has actually proven that, more often than not, the national interest has not been well served. There are a number of instances, particularly in financial services at this crucial moment in time, where dangers have to be brought into the light. The takeover by MasterCard of VocaLink, our main payments system in the UK, is systemically dangerous. It is also a technology raid, because we have the best payments technology in the world—that is another issue.

We have to judge mergers on a case-by-case basis. I say with due respect to everyone—I am not trying to make a silly debating point—that, if there has been a move to politicise this particular merger, I am afraid it has come from those who supported Brexit. They are in danger of finding problems where there are none to be found. Why would the owners of the London Stock Exchange Group walk into a merger like this if it was so disastrous for their business, and if it was so patently obvious that they were going to be out-regulated and that their business will be shifted away to another part of the world? If we look at it from that perspective, it ensures a bit of common sense in the debate.

[Sir William Cash]

Will the hon. Gentleman give way?

[George Kerevan]

I would dearly love to give way, but given the little amount of time I have, I will not. As things move on, I hope we will have the chance for further discussion.

Hon. Members might be interested to know who actually owns the two parties in the proposed merger. In fact, the bulk of the London Stock Exchange Group’s ownership is not British. It is the Qatar Investment Authority, it is BlackRock, which is a major American private equity group, and it is Invesco, which is headquartered in Bermuda—we can all ask why that is. It is not actually the jewel in the crown of the UK, as was mentioned. It is already an internationalised organisation.

If we were to ask who owns Deutsche Börse, the answer is that the majority is owned by City of London institutions. That underlines the fact that, while there are hundreds of small exchanges all over the world, particularly in Asia and Africa, the big exchanges are owned by global institutions, and they are about mobilising global amounts of capital. In particular, they are no longer simply about narrow trading in equity. They are fundamentally about finding the capital for exchanges in derivatives and interest rate swaps, which makes the whole global capital market work. For that, the capital needs to be pooled. That is why for the past 15 to 20 years, right across the globe, there has been a constant move to merge and in some way consolidate the large exchanges. As we know, it has not been easy for political and national interest reasons, but that is the way the market is going. I put it to Members that it is either this merger or another merger—a stand-alone London Stock Exchange Group is no longer tenable.

That brings me to the final point worth making. Aspects of the structure of the merger have to be discussed, particularly post-Brexit. For instance, it seems strange that it is 54% to Deutsche Börse and 46% to the London Stock Exchange, rather than 50:50. That should be discussed, but in the end, this or some other merger will go ahead. Let us look at the specific technical issues, but let us not politicise this issue, because it is the nature of the way these global markets are working.

Charter for Budget Responsibility

George Kerevan Excerpts

Tuesday 24th January 2017 Commons Chamber

[The Chancellor of the Exchequer (Mr Philip Hammond)]

I beg to move,

That the Charter for Budget Responsibility: autumn 2016 update, which was laid before this House on 17 January, be approved.

This debate is not about the technicalities of fiscal policy. It is about our commitment to budget responsibility and delivering it in a way that is appropriate to our current circumstances. It is about supporting our economy through the uncertainty following the Brexit vote and preparing it to take full advantage of the new opportunities ahead. It is about securing Britain’s economic future, supporting working families and ensuring that our children are not burdened with debts that our generation chooses not to pay.

When my predecessor came into office in 2010, he inherited the highest budget deficit in post-war history, with Government borrowing £1 of every £4 that they spent. Debt had almost doubled since 2005-06, unemployment was at 8% and the UK’s percentage increase in national debt between 2007 and 2010 was the biggest in the G7. The 2008 recession showed us the price that is paid for seven years of irresponsible fiscal policy, and it demonstrated once again that it is always the poorest in our country who suffer the most when the economy crashes and unemployment rises.

We remain resolute in our determination to return the public finances to balance, to get debt falling and to pay our way in the world, but we have to do so in a way that protects our economy and our living standards in challenging times. At the same time, we must maintain our focus on the long-term challenge of productivity—a challenge we must rise to if we are to seize the opportunities that lie ahead for Britain.

In proposing this charter, I build on the work of my right hon. Friend the Member for Tatton (Mr Osborne). His plans, actioned by the hard work of millions of people up and down the United Kingdom, have turned our economy around. The employment rate is at a record high, unemployment is at an 11-year low and income inequality is at its lowest level in 30 years. The OECD and the International Monetary Fund expect the UK to have been the fastest growing economy in the G7 in 2016. The economic plan that has delivered jobs and growth also reduced the deficit from 10.1% to 4% of GDP last year, so that, in 2015-16, we borrowed £1 for every £10 we spent. These are significant achievements, but we have further to go.

In the medium term, we are well placed to take advantage of the opportunities that leaving the European Union presents. But at the time of the autumn statement, the Office for Budget Responsibility judged that, in the near term, uncertainty about our new trading relationship with the EU, coupled with the impact of higher inflation driven by the depreciation of the pound, is likely to reduce the rate of economic growth relative to its previous expectations.

[George Kerevan (East Lothian) (SNP)]

The Chancellor makes an interesting case about the strength of the economy. Does he not associate some of the growth in the economy with the fact that the Government borrowed and invested in the economy? Borrowing is therefore not necessarily a bad thing in itself.

--- Later in debate ---

[George Kerevan (East Lothian) (SNP)]

I am somewhat in awe that you are back in your place, Mr Speaker.

The Chancellor was very measured in his defence of the new charter, and his presentation was without the usual gimmicks and flamboyance of his predecessor, and was none the worse for that, but I have read my Sherlock Holmes and it is the dog that did not bark in the night that we have to look out for. It is only 15 months since we last debated a new set of Treasury rules. I am in favour of such rules; rules are put in place to create stability and sustainability in the national finances, to give confidence to lenders, and to restrain politicians from using the public purse for party advantage. That said, it should be obvious to anyone that if this Conservative Government are bent on rewriting the fiscal rulebook only 15 months after the last time they did so, their motivation and seriousness are open to question.

The Chancellor did not address that serious point. If he keeps changing the rules, even though he stands up and makes a very measured defence of the new set of rules, he has to explain why he keeps changing them if he wants people to have confidence in the next set of rules, and the Chancellor patently failed to do that.

[Mr Philip Hammond]

Let me explain to the hon. Gentleman. We suffered an exogenous shock that, according to the OBR, implied an extra £84 billion of additional borrowing over the forecast horizon. I would say that when the facts change, we should change our plan.

[George Kerevan]

That is not what rules are for. The rules should not change when the situation changes; the policy should change. The rules are there to protect our sustainability and the ability of the markets to feel confidence in the Government. Yes, of course Brexit produced an exogenous shock, the full force of which has yet to arrive in the British economy. And, yes, the Chancellor is preparing the ground for when the wave hits the economy, but the point is that that is a policy issue. Why should the rules change? The rules are there to protect sustainability. If they change every time the circumstances change, what is the point of having rules?

[Mark Field]

But surely the hon. Gentleman must recognise that the proof of the pudding will be in whether there is a sense of confidence drifting away from banks and corporates in relation to that shock. They recognise that Brexit is a major event, and we all recognise that its impact still lies some way ahead, but that impact means that it is quite legitimate not to be bound by rules that pertained 15 months ago in a rather different world from the one that we are going to have to experience in the months and years to come.

[George Kerevan]

I thank the right hon. Gentleman for illustrating clearly the point that I am trying to make. Conservative Members are saying that rules are a hostage to fortune. They are saying that the rules will change when the circumstances change and when they need to change them to get the result they want. What, therefore, is the point of having rules at all? The right hon. Gentleman confirms the point that the shadow Chancellor and I are putting forward, which is that rules are flexible politically, and that they are therefore not rules.

We can prove this by looking at this Government’s borrowing record. Between 2010, when this Government were elected, and 2015, the national debt rose by 50%. The latest forecast from the Office for Budget Responsibility suggests that between 2010 and the end of this Parliament, the national debt will have almost doubled. The Conservative Government cannot continue to blame that on the former Labour Government. This Government have doubled the national debt during their tenure of office. The Chancellor and his predecessor have got away with that because they keep coming to the House with rules and pretending that they are fiscally responsible, yet they have doubled the national debt.

[Mr Philip Hammond]

We must remember the size of the deficit that we inherited in 2010. There would have been a way of avoiding doubling the national debt, but it would have involved an even harsher period of consolidation of the public finances. The hon. Gentleman’s party and the Opposition voted against every single measure to consolidate. The previous fiscal rules called for a surplus in 2020-21. The hon. Gentleman seems to be advocating a policy response that would squeeze the economy harder in order to meet the old rules in the new circumstances. Is that what he would like?

[George Kerevan]

I am glad that the Chancellor has now admitted that this Government will have doubled the national debt by the end of this Parliament; so much for their fiscal prudence. I am happy to admit that, yes, actually I was in favour of doubling the national debt. That does not give me a problem. In fact, I think that that is what saved the economy. What I cannot abide is the rank hypocrisy of a Government who keep coming up with rule after rule in order to pretend that they are fiscally prudent—

[Mr Speaker]

Order. We need to be clear that the hon. Gentleman is not accusing any individual Minister of hypocrisy. That would be completely disorderly—[Interruption.] This is not a debating matter. Nor is it something on which I am looking for his interpretation. I am gently saying that if that is what he is saying, he must withdraw it. If he is making a charge at a collective, however, he can just about get away with it under our procedures.

[George Kerevan]

I am suitably chided, Mr Speaker. I cast no aspersions on the character of any individual on the Government Benches. As a collective, however, they have changed the rules to suit themselves, as the Chancellor has admitted. That is the basic point I am trying to get across. What possible faith can we have in this new set of rules that they will not be changed in another 15 months?

[John McDonnell]

I do not want to interfere in private banter, but I draw the hon. Gentleman’s attention to the fact that, in 2009, the person who is now Chancellor—he was then shadow Chief Secretary to the Treasury—condemned any concept of rules. In the rule that he eventually helped to develop in opposition, and that eventually came into force, there was a welfare cap that has now been completely disregarded. The deficit was meant to be not reduced but eliminated by 2015, with a reduction in debt. The rules seem to have gone out the window very early for this Chancellor.

[George Kerevan]

I agree with the right hon. Gentleman.

The Chancellor came to the Treasury Committee, and he answered questions clearly and in great detail. He pressed the point he has made today, that the new fiscal rules and the autumn statement were designed to give the Government enough fiscal headroom to meet any unforeseeable circumstances, should economic growth slow as a result of the Brexit decision. I respect that, but why give himself headroom for a future dangerous event? Why not take action now to forestall that event? In essence, the fiscal charter gives the Chancellor room, if the economy begins to slow in two, three or four years’ time, to use a fiscal surplus to invest in the economy and crank up growth. Why not do that now? The new fiscal charter gives the dangerous impression that somehow it will prevent the ill effects of Brexit because the Chancellor can intervene if something goes wrong. Why not use that fiscal headroom now?

The problem, of course, is that the underlying strength of the economy is nowhere near as strong as the Chancellor tried to make out in his introduction. Yes, there is growth but, the underpinnings of that growth over the last year are largely an expansion of consumer spending underpinned by unsecured consumer borrowing.

At the same time, post the Brexit vote, the pound has fallen substantially on international markets, which is stoking up inflation. I cannot imagine a more dangerous situation than for growth to be dependent on unsecured consumer borrowing when inflation is starting to rise.

[Jeremy Quin]

I share the hon. Gentleman’s concern about the growth in inflation, but does he not regard it as in any way contradictory that he may be advocating a massive increase in Government expenditure while warning about the risks of inflation?

[George Kerevan]

Not if we take into account the fact that if inflation starts to rise, the Bank of England, as the hon. Gentleman knows, has decided to let that inflation flow through the economy. The Bank explains that inflation in terms of the falling pound, and it is going to let inflation rise to about 3%, the top of its current forecast range. The Bank thinks that inflation will then start to decline again, but others, such as the Federation of Small Businesses, think that inflation will go above that core forecast. We could be looking at 5% inflation in two years’ time, which would have a crippling effect. [Interruption.]

The Chancellor shakes his head. All I am doing is quoting the Federation of Small Businesses, which is not an irresponsible organisation. It thinks that the Bank of England’s core forecast—taking us up to 3% against the consumer prices index—will actually be exceeded, which is a strong possibility. If we go beyond 3% inflation and head up to 5%—and remember that the Bank of England said that it will not raise interest rates to combat such a rise in inflation—consumer spending will start to fall.

In reply to the question I was asked by the hon. Member for Horsham (Jeremy Quin), my argument is that if consumer spending tanks, we are in a hard Brexit, foreign investment is falling and firms are reluctant to conduct business investment, the only agency left to plug the gap is the Government. I am pointing out that the Chancellor, rather than waiting for that to happen, beyond which point it would take two or three years for the fiscal policy to kick in, should be doing it now. That is the basic point that I am trying to make.

[Michael Fabricant]

I am listening to the hon. Gentleman with great interest and I like his debating style—it reminds me of an old professor I had at university—but has he not just contradicted himself? Early on, he said that he does not see the need for any change, although we are changing the rules, and then he gave us a nightmare scenario of the future because of Brexit and said we do need change. He has to make up his mind.

[George Kerevan]

I am very clear. I do not say that the rules should be changed, because I do not like the original rules and I do not like the rules that are being proposed. I do believe in the principle that there should be fiscal rules; there should be a fiscal mandate to restrain a Government. So my primary point, to begin with, was that if we keep changing the rules that mandate does not exist, and this Government only pay lip service to them.

Under my set of rules—I do not have the time tonight to go substantially into them and I will not press the patience of the Speaker—there would be a restraint on current expenditure, although I am more liberal when it comes to capital expenditure, which, provided it is linked to trend growth, can be counter-cyclical. We can go into that another time. It does not matter what the present rules are. The fact that the Government keep changing them is the point at issue, which is why the charter is not worth the paper it is written on—they will change it in a few months anyway. They say that is their general principle.

Let me try to come to some conclusions. Back in 1956, Harold Macmillan gave his one and only Budget speech as Chancellor. What was the ratio of the national debt to GDP? It was 150%—almost double what it is today. I read that speech the other day; I forbear to read it out, but it quoted Macaulay. Macmillan read out half of one of Macaulay’s essays—we had quite sophisticated Chancellors in those days, Mr Speaker.

Macmillan went through practically every Administration since the 1600s. In every Administration, somebody got up and complained about the level of the national debt. Macmillan’s was an expansionary Budget, let me say, with a debt to GDP ratio of 150%. Macmillan, having worked his way through Macaulay, made the point that when we look back we see the benefits of that borrowing and investment, but when we look forward all we see is the dangers. Macmillan said that the trouble is, that stops us being bold.

I would like this Chancellor to be bold. I would like him to spend more money. I would like him to spend the money before the Brexit recession hits, rather than wait until it happens and then say, “Well, I have some weapons in the armoury to deal with it.” Let us deal with the problem before it happens. That is my point.