Economy: Personal Savings

Lord Lilley Excerpts

Thursday 12th July 2018 Lords Chamber

[Lord Lilley (Con) (Maiden Speech)]

My Lords, I am grateful to noble Lords and staff of this House for their warm welcome and unfailing helpfulness since I arrived here.

I perhaps owe noble Lords an explanation of the title I have adopted of Lord Lilley of Offa, since many have assumed that this refers to Offa’s Dyke along the Welsh Marches, with which I have no known connection. In fact, King Offa gave his name to the ward of Offa in my constituency of Hitchin and Harpenden, where he had his palace and I for the last 20 years have had my home. He also built the abbey in St Albans, which was my previous constituency, so I selected the name Offa as a tribute to both the constituencies I had the privilege to represent for more than 34 years.

Having done so, I thought I had better check out King Offa, in case he had done anything embarrassing. I discovered that he reigned from 757 to 796 AD. At that time, our European neighbours were united under Emperor Charlemagne in what historically minded Euro enthusiasts see as a precursor to the European Union. Charlemagne, hoping to bring Britain under his sway, proposed that his son marry King Offa’s daughter. Offa, wary of England becoming a vassal state and wanting a fair and equal partnership, as the Prime Minister might say, determined that he would accept only if Offa’s son married Charlemagne’s daughter simultaneously. Emperor Charlemagne was so enraged by this impertinence that he closed all European ports to English shipping—an early example of a “no deal” outcome. However, the trade war hurt Europeans at least as much as it hurt us and, thanks to the mediation of the Church—I hope right reverend Prelates will stand by in case they are needed in the future—trade was resumed after a year or two. I am happy to say that King Offa negotiated the first trade treaty between this country and our European neighbours. This certainly is not an occasion to reflect on the lessons to be drawn from this and subsequent attempts throughout history by continental rulers to bring this country to heel by restricting our trade, except to note that they all failed.

Before moving to the less contentious subject of this debate, I hope noble Lords will bear with me if I mention, as I have been advised by several noble Lords is normal procedure on maiden speeches, the experience I hope to bring on subjects which may come before this House in future. Certainly, trade is a subject I hope to return to in future debates, though not primarily in the context of Brexit. My first career was working in developing countries on aid and development programmes and, because of that, David Cameron asked me to chair his policy commission on globalisation and global poverty alongside Bob Geldof—an unlikely pairing, but one which would bear fruit, not least in my conviction that the best route out of poverty for developing countries is trade. As a result, I founded and co-chaired for 10 years the All-Party Parliamentary Group on Trade Out of Poverty, which remains a passion of mine.

My second career was as a partner of a major firm in the City where I specialised in investment in the energy sector. In the Commons, I served on the Energy and Climate Change Committee—I hope to return to those topics, too.

As Secretary of State for Trade and Industry, I was involved in negotiating the last successful international trade treaty, the Uruguay round, and also implemented the single market programme in this country, as well as negotiating the first passporting directive, all of which I hope may be of use in forthcoming debates on the Trade Bill and Brexit.

Finally, in my five years at the Department of Social Security, followed by 20 years as an ordinary constituency Member on the Back Benches, I came to the conclusion that most of the social problems in this country are either caused or aggravated by the acute housing crisis we have in Britain—that is one of the issues I want to focus on in future—and that most of our economic problems were related to the lack of vocational and technical skills of our indigenous population. Those are the two issues I care about most, and I hope to offer every support to my supporter and noble friend Lord Baker of Dorking—he does great work on that front.

I congratulate my noble friend Lord Leigh of Hurley on securing today’s debate on an important subject, when the level of savings in this country is so low. It is matter of importance to me because, as Social Security Secretary, I was responsible for the pension system and for coping with those who had been unable or unwilling to acquire sufficient savings to cope with emergencies or, above all, with their old age.

I shall make a few brief observations. First, discussion about savings in this country is dominated by an unhealthy obsession with tax reliefs and incentives. In fact, there is little evidence that tax reliefs affect the amount people save; they affect merely the form in which they save it. Moreover, the main beneficiaries of tax incentives are, by definition, those with large savings, who are also usually those with large incomes. Tax reliefs can have no impact on those who are too poor to save and have little, if any, effect on those whose time horizons are too short to recognise the need for saving. This obsession with tax reliefs has created a bewildering labyrinth of incentives which is costly to navigate and off-putting to those with limited financial expertise, so they have the reverse effect to that which is intended.

Secondly, that is not to say that there should be no recognition of savings in the tax system. On the contrary, the tax treatment of savings should be based on the simple principle that income should not be taxed twice. You should not be taxed when you earn the money you save and when you realise those savings as a pension or whatever. This is a matter of equitable principle rather than incentives.

Thirdly, as long as people pay the same marginal tax rate when they draw down their savings as when they earned them, it makes no difference whether tax relief is given on contributions, as we do for pension schemes, or on withdrawals, as we do for ISAs. Despite what many people believe, both methods have an identical arithmetical impact. We should give one relief or the other on any source of savings, but not both or neither.

Fourthly, there may be a case for using the tax system to channel some savings into specific kinds of investment—for example, more risky equity or early-stage investments—but we should not imagine that that will increase the total level of saving and investment in the economy, and we should be cautious about encouraging people to take undue risks with their money if they are not in a position to do so.

Fifthly, the main concern of the state is to ensure that people who have the means to save for a rainy day, for temporary hardship and, above all, for their old age do save when they have that opportunity rather than becoming a tax burden on more prudent citizens. People who cannot defer gratification or have very short time horizons are the least likely to be motivated by tax incentives, however generous or ingenious. Reluctant though I am to say it, ensuring that everyone builds up their savings when they have the means to do so requires an element of compulsory saving and/or restrictions on drawing down savings. Auto-enrolment in workplace pensions is a good step in that direction, particularly for those who perhaps cannot bring themselves to go to full-scale compulsion.

Sixthly, unlike with tax reliefs and incentives, requiring everyone to save a minimum amount of their disposable income may increase the total level of saving and investment in the economy and thereby increase the level of incomes in future.

Those were the principles that lay behind the scheme that I announced in 1997 for what was called basic pension plus. It was intended that, over a generation, it would ensure that everyone received a basic pension, not only guaranteed by the state as at present—and that guarantee would continue—but backed up by a savings pot. Moreover, it would have massively increased capital ownership because everyone would own their pension pot, they could pass it on to their family if they died before it was drawn down as a pension and they could put more money into that pot and benefit from superior investment performance while being protected by the guarantee of their basic pension against underperformance. If it increased the total level of investment in the economy and that boosted economic growth by just 0.1% a year, the scheme would have paid for itself.

That particular scheme died with the 1997 election defeat and I do not imagine that it will be resurrected, but I still believe that the principles that I have outlined today should guide the evolution of our savings and pensions system in future.