Budget Statement

Lord Flight Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Flight (Con)]

My Lords, some insightful and important points have been made in this Budget debate which I hope the Minister will feed through to the Treasury, because I have certainly not seen some of them being made elsewhere. I was extremely pleased to be able to agree with much of what the noble Lord, Lord Desai, had to say, which has not always been the case. It seems that he sees things very much as I see them. Equally, however, some sharp and important points were made by the noble Lords, Lord Hollick and Lord Myners. It has always struck me that the QE creation of £380 billion-odd would have to be monetised because there was never any prospect of raising that amount from the bond markets when those markets are tending to fall.

I also congratulate the Minister on what I thought was a very clear presentation, whether people agree with it or not, of government policy and what is in the Budget. It is only fair to say that with a relatively limited scope, there are some measures which are good for the economy and for citizens. I welcome in particular the infrastructure measures, and again I hope that the Minister will get a move on and make them happen as soon as possible. The measures for improving export finance are important. I have observed previously that French and American export finance in particular is much more generous than it is in the UK, which often results in us losing orders.

I would like to focus on the measures relating to savings, both the ISA reforms, which I do not think anyone else has actually even commented on, and the pension reforms. I want to talk about them in the context of the all-important issue of the UK savings rate. Reference has been made to it, but no one has made the point that the main reasons for the problems and imbalances in the British economy going back 50 years are because we have had an inadequate savings rate. You can have too high a savings rate, which has been China’s problem, and you can have too low a rate, which has been our problem, as well as that of India. I think that what we really need is a national debate about the right savings rate and what would make sense to try and achieve it; that debate is well overdue.

First, however, I declare an interest as an adviser to the not-for-profit trade body, the Tax Incentivised Savings Association. The association acts on behalf of the various savings institutions and has embarked on a major process, with some 50 organisations, to produce a study on the problem of saving rates being too low and what might be done to fix it.

ISAs have been extremely important. They were really a cross-party creation because they were an adaptation by the last Labour Government of the previous PIMA regime. They have been hugely successful as a means by which people can accumulate savings for their retirement, and something like seven times as much per annum is now saved in ISAs as is saved in personal pension schemes. The reason for that is extremely simple: it is because ISAs are extremely simple. People have access to their money because it is not tied up in strings of nightmarishly complex legislation. By and large the providers of ISAs have offered a straightforward range of products, some more sophisticated than others, through which people can save. They are now supposed to be called NISAs—I always hate changes of name because you forget what has happened—and I think that they are going to be much more important than many realise in terms of helping to increase the savings rate and savings accumulation for people’s now much longer periods of retirement.

However, I should point out to the Minister that there is one small item that needs to be addressed. Generally, in a marriage at least, the man has the ISA. Statistically he is likely to die prior to his wife, but although the capital can pass to the surviving spouse free of inheritance tax, she loses the tax benefits of an ISA, which is tax-free in terms of income and capital gains. In a way the wife is being cheated because, if the husband has made that sort of provision for retirement for both of them, it is unfair that she should not participate if her husband predeceases her. Obviously it is the same case the other way round as well.

On the issue of the reforms relating to annuities, going back 13 years to when I was a Member of Parliament I used to get lots of letters from women with £10,000 or £15,000 in a small money purchase pension pot who quite rightly objected strongly to that money having to be put into a footling annuity which was going to be neither here nor there. My impression was that if these ladies had had access to the capital, they would have hung on to every penny right to the end as their reserve pot of money. I have always objected to the compulsory purchase of annuities, although obviously there is a concern that people may cash in and consume their pensions savings—indeed, the figures provide for some £2 billion of tax revenues from this source. I am not so sure they will but, again, it seems to me that it would make sense to consider some incentives for people not to do that. If people, for example, want to transfer their pension savings to an ISA, which is a much simpler way of managing their savings, why should they not be able to do that without incurring a tax charge on the way through?

My other old chestnut is that home ownership became popular because people saw it as a way of passing on some wealth to their children. It has always struck me that, if what might be left in people’s pension pots on the death of the surviving spouse could pass to their children’s pension fund free of tax, that would be another quite powerful incentive for people at all levels to save more in their pension scheme. Tax would of course be paid on it once the pension was drawn.

However, my main concern is the savings rate. All my life, at least in the 1950s and 1960s, it was stop-go balance of payments crises. We then discovered, with the freeing of capital flows, that large deficits could be financed by borrowing other people’s savings and selling the family silver. However, that was not without a price—although we have not had quite the same pattern of stop-go, we have always tended to end up with overconsumption, overborrowing and the need to put the brakes on. No one even talks much about current account deficits now. Although it is all very well to exhort people to export more, the current account deficit is, in essence, a function of public and private consumption less the savings rate compared with GDP. If that is 5% more than GDP, which it is now, there is going to be a current account deficit of 5%. No matter how hard we try to export, we are not going to tackle the current account gap unless savings are higher or consumption is lower.

I think it was the noble Lord, Lord Lawson, who discovered as Chancellor that the current account deficit did not matter much in the short term because it was financeable. However, in the long term, it still does matter. We found that we did not have a British company capable of building a nuclear power station and that the interests of most of our utilities, which were internationally owned, were often different from those of government. This is really selling the family silver to pay for cumulative current account deficits. There is a long-term price to pay, even though it may be possible to deal with it in the short term.

Finally, there is the other side of the coin, which is that although our generation here may be adequately provided for in retirement, the next generation certainly is not. Pension scheme contributions are nowhere near enough and the government commitments to welfare and health spending for that generation are simply not going to be affordable. Unless something gives—the most civilised thing would be for the savings rate to increase so that people can afford more of these things themselves—there is going to be a real mess in 20 to 30 years’ time. Even this House rather kicked under the carpet the fact that pay-as-you-go public sector pension schemes are likely to have a cash-flow deficit per annum as high as some £25 billion as early as 2017. There are plenty of studies pointing out that the overall welfare spending commitments that Governments have presently given are simply not going to be affordable in some 20 or 30 years’ time.

What is the correct savings rate? I have not seen a definitive answer. My common-sense view is that it should be an average of at least 10% over different periods, whereas it is now somewhere between 4% and 5% and forecast to go down to 3.2%. It is all very well saying that we have to use consumption to get the economy going—that is working but unless it is accompanied by measures that will lead to a higher sustained savings rate going forward, it is going to as usual end in tears, as some noble Lords have mentioned. I therefore go back to where I started: I am very hopeful that being able to save £15,000 per person per annum in a NISA will increase the savings rate. As auto-enrolment gathers momentum and contribution rates increase, or need to be increased, that will increase the savings rate as well. I commend the Treasury and the Minister to at least think about some of the tax points I have raised.

I close by saying that, given that this is now an appointed House, it is rather out of date that we are excluded from participating in the legislative process of finance Bills. It seems there is quite a bit more in the way of informed views and experience in this House on such matters than there is in the other place.