Bank of England (Economic Affairs Committee Report)

Lord Macpherson of Earl's Court Excerpts

Thursday 2nd May 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare my interest as chairman of C Hoare & Co, a bank that opposed the setting-up of the Bank of England, became reconciled to it a couple of centuries ago, and now regards it as a privilege to be regulated by the Bank.

I congratulate the noble Lord, Lord Bridges, and members of the committee on a first-rate report. Operationally independent institutions can survive and prosper only if there is proper parliamentary accountability. All too often, that accountability can descend into cheap point-scoring. I believe this House’s Economic Affairs Committee plays a crucial role in injecting serious, rigorous and impartial thought into economic policy debate.

Like the noble Lord, Lord Bridges, I was a little disappointed by the Government’s response to the report. I should confess to having drafted similar responses, with an appropriately dead hand, in the past. I am hoping the Minister will be a little more forthcoming in her response than the Chancellor was, but I am not betting on it.

It is good news that inflation is firmly heading back towards the Bank of England’s target of 2%, but we should not underestimate the impact of the recent rise in prices. Inflation is not some technical economic construct; it has a pernicious effect on people’s lives. It affects their ability to budget and to plan. It has the biggest impact on those least able to protect their incomes, and that is usually the weakest and most marginal in society.

It is therefore important that we learn the lessons of the upsurge in inflation in 2021-22. The Bernanke report is a good start but, as others have noted, his remit was quite narrow. The Bank’s forecasting model clearly has limitations, but then so do all forecasting models. That is why we should never become mesmerised by them.

Economic policymakers need to step back from mechanistic forecasts and focus on the underlying data here and now. Sometimes that data tells a clear story. Quantitative easing was necessary in 2009 and it was effective, but later rounds of QE were an imperfect response to what were, in any case, supply shocks. Ever-increasing amounts of QE were necessary to have an impact on long-term interest rates and, in my view, resulted in an excessive build-up of money and liquidity in the system. QE did not cause inflation, but it certainly enabled it to take root.

I do not want to be too harsh on the Bank. As Bernanke observes, other central banks made similar mistakes, and the build-up of excess demand was as much the Treasury’s responsibility, through an excessively loose fiscal policy, as it was the Bank’s, but I hope the Bank will pay just a little more attention to monetary and liquidity indicators in the future.

That brings me to my second point. The Bank is doing a good job in unwinding QE, and it underlined its independence in pressing on in the autumn of 2022, despite potential political pressure from the Government. But, as QE unwinds, we are going to hear a lot about the losses sustained by the Bank. We hear rather less about the gains from the early years of QE, when interest rates were falling. Of course, had the ring-fence that the late Alistair Darling wisely put in place in 2009 remained there this would have been less of a problem, but the coalition Government chose to, in effect, draw down the gains as a way of meeting their fiscal rules. We are now paying the price.

I anticipate that future Governments, faced with even more challenging public finances, will want to put a stop to the fiscal leakage caused by QE. The key thing here is that the Government should not interfere in monetary policy: the remuneration of reserves must be a matter for the Bank. In taking any tax decisions, the Treasury needs to take into account the impact on the efficiency of the banking system as a whole.

The committee’s report is right to draw attention to the ever-increasing breadth of the Bank’s remit. It is always tempting for the Government to leave it to independent institutions to take the difficult decisions, but that carries big reputational risks since it draws the Bank further into debates best left to democratically elected politicians. It also fails to recognise that the Bank has limited instruments at its disposal. I fear the Government sometimes ignore Tinbergen’s law that you need as many policy instruments as you have independent objectives.

The committee has also made some good points on appointments. Noble Lords will not be surprised that I am more relaxed than most about the Treasury’s colonisation of senior policy positions at the Bank, and I welcome the appointment of Clare Lombardelli as a new deputy governor, who has experience working at the Bank and the OECD as well as the Treasury, but I agree with the committee that the Government need to find the right balance when it comes to appointments. I would welcome more interchange with the private sector.

I wonder whether we need quite so many deputy governors as we have. I recall advertising for one vacancy and conducting a process. The Chancellor ended up appointing two candidates, simply because both were very well qualified and he and the then governor could not decide who was the best.

Recent events have underlined the importance of external members of the MPC. It has been good to see, on the one hand, Swati Dhingra ploughing her lone furrow arguing for looser policy and, on the other, Catherine Mann and Jonathan Haskel making the case for tighter policy. I was struck by a recent report from an external member of the MPC that mentioned staffing shortages constraining external engagement. I wonder whether the Bank executive should provide a liaison person at a more senior level to ensure that the externals’ needs are met. Independent thought matters, and the Bank should continue to find ways of supporting external MPC members.

Finally, I should briefly mention the vexed issue of the publication of the deed of indemnity relating to the asset purchase facility. This puts me in mind of the Schleswig-Holstein question. There were probably three people who understood it: Alistair Darling, who is, very sadly, dead; me, who cannot remember; and my noble friend Lord King, who, as luck would have it, is not mad. Fortunately, he is the sanest man I know. He is also a man to be reckoned with, not least because yesterday he was appointed president of the MCC, on which I congratulate him. That the committee—and, by implication, my noble friend Lord King—has recommended that the deed be published is good enough for me. I can conclude only that the reason the Chancellor has not published the deed is that he did not understand the question. I would therefore like to ask the Minister under what, if any, circumstances the Government would publish the deed of indemnity.

To come back to where I started, this is a good report by the Economic Affairs Committee and I support its recommendations. The guiding principles of monetary policy put in place in the 1990s, not least by the noble Lord, Lord Lamont, of an inflation target of 2%, maximum transparency and an operationally independent central bank still hold good. Bank independence works and Governments interfere with it at their peril.

Spring Budget 2024

Lord Macpherson of Earl's Court Excerpts

Monday 18th March 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I worked on seven pre-election Budgets over my life sentence at the Treasury, so I feel for any Chancellor having to deliver one. He has to reconcile the usually unrealistic demands of his supporters with the need to retain integrity by doing the right thing.

There is much in the Budget and this Bill to approve of. First, on the economy, prospects seem a little brighter: inflation is falling, real wages are finally rising, and unemployment remains low. Secondly, there are some sensible tax-raising measures. As the Chancellor confirmed in his Budget speech, reforming the rules on residents and domiciles has been under discussion for 40 years or more; I welcome him finally grasping the nettle. I doubt whether it will raise quite as much money as the OBR estimates—seriously rich citizens of the world are notoriously footloose—but it is right in principle.

If you are going to cut taxes—I recognise that that is a big “if”—prioritising national insurance reductions over income tax is the act of a courageous Chancellor. In the old days, rentiers and capitalists tended to face higher tax rates than workers, who received earned income relief. That was turned on its head in the 1980s and, since then, successive Chancellors have tended to raise national insurance rates, in effect, to pay for income tax reductions. Occasionally, they felt a little guilty.

Both Lord Lawson and Gordon Brown reformed national insurance at some considerable cost, but the trend was clear: the basic rate of income tax has fallen from 35% in the mid-1970s to 20% today. Meanwhile, the effective rate of employee national insurance contributions rose from 5.5% in the mid-1970s to a peak of 13.25% in 2021. That benefited the old at the expense of the young; it privileged investment and rental income over wages and salaries. Whenever I tried to get a Chancellor interested in cutting national insurance—I worked on a package to help the low paid with the then right honourable Norman Lamont— I would get a pitying look. I was told that it would not work politically. Voters did not like paying income tax, but they thought that national insurance was paying for their pension or the NHS and so objected to it much less.

The Chancellor has turned that on its head: he is raising income tax, while cutting national insurance. It is the right thing to do; it focuses relief on those who need it and should improve labour supply. However, I worry about the number of people in modestly paid jobs—police sergeants and senior nurses come to mind—who are being dragged into higher-rate tax. Although prioritising national insurance is the right thing to do, I worry about its affordability. I welcome the Chancellor’s ambitions on public service productivity, but, having seen many an efficiency review come and go, I would be surprised if this one moves the dial sufficiently to offset rising pressures on public spending.

These matters have been set out at length by the OBR in its excellent Fiscal Risks and Sustainability report—further proof, if any were needed, that George Osborne was right to strengthen the institutional framework supporting sensible macroeconomic policy. The fact is that the demographic pressures that the likes of the noble Lord, Lord Fowler, worried about in the 1980s have already materialised and will only get worse in the years ahead. The triple lock has made things worse. Add in the increasing cost of social care, and we have a real problem.

Then there is the national security situation, which has deteriorated considerably over the last two years. Although generally approving of Mr Hunt’s time as Chancellor—we should all thank him for preventing the British economy from falling into the abyss in October 2022—I was disappointed by the Budget’s silence on defence spending. I do not know whether we will end up having to spend 0.5% or 1% more of national income on defence; either way, we are talking about at least £15 billion more of spending pressures. Add to that the pressures on health, social care and pensions, and we are looking at tens of billions more.

So, at some point in the coming decade, whichever party is in power, the Government are going to have to look again at a health and social care levy. As and when it is introduced, I recommend that the Government use the income tax base rather than the national insurance base. It is right that all citizens with the necessary income pay it, rather than just those who are working.

Finally, I would like to say a few words on the Chancellor’s plan for a retail offer of NatWest shares. As the accounting officer at the Treasury when RBS was taken into public ownership, I have always taken an interest in trying to get as much money back for the taxpayer as possible. The RBS share price was trading in line with the price we paid for it—around £5 in current prices—when the late Alistair Darling left office in 2010. Since then, the price has languished, partly because of wider banking reforms, partly because of low interest rates and partly because of problems specific to RBS/NatWest.

I support the principle of selling NatWest—it needs the state off its back—and hitherto the Government have secured a competitive price for it through their trading plan in the wholesale market. I fear that a successful retail offer will require a heavy discount, which means that the taxpayer will be subsidising retail investors. The case for subsidising share ownership is much weaker than it was in the 1980s, shareholding is more widespread and history suggests that banks are perhaps not the best entry point to shareholding.

I know that the Chancellor has said that any sale will be

“subject to … value for money”,

but VfM is in the eye of the beholder. Can the Minister commit to publishing the accounting officer’s advice on VfM as and when the sale goes ahead?

Alternative Investment Fund Designation Bill [HL]

Lord Macpherson of Earl's Court Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as chairman of the Scottish American Investment Company, which last year celebrated its 150th anniversary, and also as a happy shareholder in several investment trusts. I therefore feel well placed to speak both for retail investors and for the providers of investment trusts more generally.

I congratulate the noble Baronesses, Lady Altmann and Lady Bowles, for introducing the Bill, and for securing this timely Second Reading debate. I also thank them for their tireless advocacy of sensible regulation that protects consumers, even though, when I was at the Treasury, I was sometimes on the receiving end of their complaints.

The investment company industry is a British success story, but, above all, it is a Scottish success story, contributing to Edinburgh’s role as an international financial centre. Investment companies are an effective way of building a diversified portfolio. Their closed-end nature means that investors are not subject to the vagaries of sustained outflows, and the potential lock-in or gating of their savings. Looking back over their history, they have always been at the respectable end of the savings industry, providing reliability and resilience. Unlike more conventional open-ended funds, investment companies have independent boards, whose role is to put the interests of shareholders first.

Investment companies have therefore provided a great savings vehicle for all investors, including those with modest means, as well as the better off. I was recently looking at the original subscribers to the Scottish American Investment Company back in 1873. They may have included the odd wealthy widow, but they also included one William Mackenzie, a sergeant major of Stirling, who bought 20 shares, as well as John Bothron, a fish curer from Anstruther, Fife, who bought 12. Hard data on who owns investment trusts today is more difficult to come by. However, given the easy access to shareholding provided through the proliferation of platforms, I am confident that the investor base in investment companies is more diverse than it was 150 years ago. The investment trust sector manages some £260 billion-worth of assets and provides important capital to companies who need it, both in the UK and across the world. In short, the sector provides the investment resources for sustainable growth.

Like many in this House, I supported the UK’s membership of the European Union, for all its limitations, and I feel that, whatever its political benefits, Brexit has damaged the performance of the British economy—but that is water under the bridge. Where I can agree with successful advocates of Brexit, such as my former Minister at the Treasury, the noble Lord, Lord Lilley, is that we are all now united in wanting to grasp every opportunity Brexit provides to support economic activity. It is a little disappointing that, seven years on from the referendum vote, the Government have not made more progress in removing unnecessary regulation.

The fact is that the Alternative Investment Fund Managers Regulations 2013 were not the European Union’s finest hour. I admit to being implicated, because I was the Permanent Secretary to the Treasury at the time. As I recall, the Treasury and the FCA did their best to improve its drafting—but clearly not enough. The so-called PRIIPs regulation imposes requirements on investment companies that do not apply to listed trading companies or, even more bizarrely, real estate investment trusts. I am all in favour of transparency when it comes to transaction costs and charges, but, as defined by PRIIPs, the relevant cost metrics are positively misleading and are as likely to harm consumers as to protect them.

I will highlight a couple of areas, and I apologise if they are a little technical. First, the inclusion of future performance estimates based on evidence from past performance is a flawed approach, as any shareholder in Northern Rock or RBS can bear witness to. If any disclosure on performance is necessary, it is surely right that, in line with the current UCITS KIID requirements, past performance becomes a standard disclosure and replaces the need for future performance estimates, which have the clear potential to mislead consumers.

Secondly, I highlight the inclusion of gearing costs in the ongoing charges figure. The cost of the debt must be disclosed without information on the borrowing terms—critically, the interest rate and term to maturity. The key point here is that the costs of gearing do not benefit the investment manager; they are actually paid to the lender. Often, borrowing enhances shareholder value, especially if you took out the borrowing when interest rates were lower.

The flaws in the PRIIPs regulation discourage savers from investing in investment companies. Although I would not like to exaggerate their effect, they are potentially contributing to the scale of discounts to net asset value that many companies are currently experiencing. I therefore welcome the recent publication by the Treasury of its draft statutory instrument on the UK retail disclosure framework. The residual Treasury official in me has some sympathy for the view that, if we are to reform EU legislation, we should go about it in a holistic way. I recognise that it is important to get things right, but the result is that we are missing easy wins, and I fear that the best is becoming the enemy of the good.

In conclusion, I encourage the Minister, even at this late stage, to support the Bill. If she cannot, can she confirm that the Treasury’s and the FCA’s intent is to implement the spirit of the Bill? In short, will they amend the law so that listed investment companies will no longer be classified as alternative investment funds? Can she give us a clear timetable indicating from when any changes to the law will come into effect?

Self-employment: A1 Forms

Lord Macpherson of Earl's Court Excerpts

Monday 12th February 2024 Lords Chamber

[Baroness Vere of Norbiton (Con)]

The A1 certificates are issued all the time. As the noble Lord, Lord Livermore, pointed out, in many cases a worker needs a certificate for every time they go to a certain country, because of course the circumstances may change. However, in other cases, forms can be valid for up to two years. Therefore there is not an April deadline per se. The April 2024 date is when HMRC expects to be processing back to its normal target arrangements.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as my son is a rock musician. Does the Minister agree that the provision of music, particularly rock music, is something in which Britain has a comparative advantage? Does she also agree that, for all its benefits in other areas, Brexit has unambiguously increased the barriers to trade in this area?

[Baroness Vere of Norbiton (Con)]

I absolutely agree with the noble Lord that the UK has one of the finest music industries in the world, which of course includes rock music but also classical music and opera. It is the second-largest recorded music market in the world and contributes £6.7 billion to the UK economy. Brexit has meant that there have been changes to certain arrangements. However, the A1 form process has remained relatively stable for many years.

Autumn Statement 2023

Lord Macpherson of Earl's Court Excerpts

Wednesday 29th November 2023 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I too congratulate the Minister on her move to the Treasury. It is a much-maligned institution, but I am confident that she will enjoy her time there. I hope that, with time, she is given a more glamourous title than Parliamentary Secretary, if only to avoid being confused with the Chief Whip, whose official title is Parliamentary Secretary to the Treasury.

As a student of fiscal Statements—I reckon that I have worked on 30, including seven that can be termed “pre-election”—I rate this one as better than average. First, I welcome the cut in national insurance. This reverses the trend of the last 40 years, which has been to raise national insurance to finance income tax cuts. Over my adult life, the basic rate of income tax has been cut from 35% to 20%, while the employers’ national insurance rate has risen from 8.75% to 13.8%, and the rate paid by employees has more than doubled from 5.75% to 12%. This sleight of hand has been bad for the economy. The fact is that national insurance is a tax on jobs—it penalises working people and the young—while income tax cuts tend to favour the old, rentiers and those who live off capital. So I welcome the 2% cut to 10%; I hope that it will start a trend. Can the Minister say whether it is now government policy to prioritise national insurance cuts over income tax cuts? Of course, whether it is affordable is another matter, and one to which I shall come back.

Secondly, I welcome the focus on growth and, in particular, the full expensing of business investment. Normally, I would favour the widest possible tax base with the lowest tax rate, but Britain has a chronic problem of underinvestment, which is a contributory factor to our low growth, so it is right to try to tilt the playing field.

Finally, I welcome the Chancellor’s commitment to fiscal rectitude, if only by 2028. He did a great job in pulling the Truss Government back from the brink a year ago and in restoring confidence. Whoever governs in the coming period will need to keep on bearing down on borrowing and get public debt on a downward path in relation to the nation’s income. We may currently be benefiting from a rally in the bond market, but we cannot be sure that that will be sustained. The fact is that debt interest is eating into resources better spent on the public services people need.

That brings me to what I see as the problem with the Autumn Statement: I fear that the public expenditure projections are simply unrealistic. The National Health Service and the state pension are accounting for an ever-increasing proportion of public spending. The triple lock is a luxury that the country can ill afford, but all our parties seem to be committed to it. Of course, there is more the Government can do on the productivity and efficiency of public services, starting with the Civil Service, but the so-called unprotected programmes, such as criminal justice, housing and local government, have already been cut too much—as the noble Baroness, Lady Pinnock, mentioned—and the results are beginning to show.

Moreover, as the international security situation deteriorates, we need to spend more on defence, diplomacy and intelligence. Demographic pressures will only increase over the next 20 years. Much of this was set out in the OBR’s fiscal sustainability report, published in July. Can the Minister assure me that that report is informing Treasury policy and will inform the Budget come March?

I fear that, sooner or later, the Government will have to grasp the nettle and reintroduce a health and social care levy. When they do so, it should be based on the income tax base, rather than that of national insurance. The better-off elderly—I should declare an interest as the possessor of a free bus pass—should pay their fair share.

My other concern is that the Government are not going far enough on growth. Here I agree with the noble Lord, Lord Eatwell, that more private investment needs to be combined with more public investment. Yet the Government are projecting that net public investment will fall over time from some £72 billion this year to £56 billion by 2028. When inflation is taken into account, that is a cut of at least 30%. One of my biggest regrets as a Treasury official was recommending the cancellation of what is now called the Elizabeth line in the early 1990s. Of course, we need to focus on investment projects with the biggest economic return— to that end, I am no fan of HS2—but we also need to ensure that infrastructure gets sufficient resources. That means consuming less and investing more. I welcome the Chancellor’s words on planning reform, but I fear they do not go far enough. We need to make it easier to build houses and to make progress on infrastructure. Only yesterday, a telecoms industry veteran told me about the planning obstacles to delivering infra- structure in Scotland, and I see little evidence to suggest that the planning system is much better in the rest of the UK.

Finally, the Autumn Statement does not go far enough on skills. Many of Britain’s problems with immigration stem from our inability to develop a labour force for the 21st century. We used to rely on the Polish and central European taxpayer to train our workforce. If on the day after the 2016 referendum the Prime Minister had said we were going to prioritise further education and vocational skills and then relentlessly focused on the problem, we might just, seven years on, be beginning to see some results, but she did not, and her successors have shown even less interest in the subject. It is not too late to put that right. If we do not rise to the productivity and growth challenge, the public finances will only get worse. This Autumn Statement represents a small step forward, but whoever forms the next Government is going to have to do a whole lot more.

Bank Accounts

Lord Macpherson of Earl's Court Excerpts

Wednesday 19th July 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I am not sure that events recently pertain to the particular case raised by the noble Lord. I was pleased to meet with him and as I committed to then and commit to on an ongoing basis, we will continue to engage with the Ministry of Defence to ensure that we have an understanding of the issue and that people do not face a wider systemic barrier.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare my interest as chairman of C Hoare & Co. Does the Minister agree that customer confidentiality should lie at the heart of banking, and that a bank apparently commenting on the income and wealth of a customer is completely unacceptable?

[Baroness Penn (Con)]

I agree with the noble Lord on both points. When it comes to assessing whether that has taken place, that is a question for the regulator.

Income Tax Threshold

Lord Macpherson of Earl's Court Excerpts

Tuesday 4th July 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I could not disagree more with the noble Lord. On the personal allowance, the increases we have seen under this Government since 2010, even with the freeze in thresholds, will be more than if it had been raised in line with inflation. We have put in place unprecedented support for people after the two major shocks of Covid and Russia’s invasion of Ukraine. We need to consolidate our public finances in the face of that and it is right that everyone contributes. We have looked to change corporation tax rates while protecting the smallest businesses, and we have frozen tax thresholds. We brought down the additional rate threshold at the Autumn Statement 2022, which is a sign of those with the broadest shoulders bearing the biggest burden.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, does the Minister agree that the impact of inflation on taxpayers is corrosive, and therefore the sooner the Bank of England gets inflation back to target, the better? Does she further agree that the amendment introduced by the noble Lord, Lord Rooker, along with Audrey Wise back in 1977 is perhaps the most important principle informing our tax system?

[Baroness Penn (Con)]

On the first point, I absolutely agree with the noble Lord. As I said in answer to my noble friend, bringing inflation under control is the most effective tax cut we can give to families across the country. On the second point, I will have to check the record; it was at least a decade before I was born.

Money Laundering Regulations: Politically Exposed Persons

Lord Macpherson of Earl's Court Excerpts

Monday 28th November 2022 Lords Chamber

[Baroness Penn (Con)]

My Lords, the standards for our anti-money laundering regulations come from the FATF, which defines an international approach. My noble friend is right that we have the opportunity, having left the EU, to adapt the anti-money laundering regulations to make them more proportionate and more effective. We have already done that in a number of areas, and the piece of work we are going to do, looking at the evidence around the risk of domestic PEPs, is a further area in which we can do some work.

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as chairman of Hoare’s bank. To pick up on the point made by the noble Lord, Lord Forsyth, it is now several years since we left the European Union. The Treasury has regulatory powers to change the relevant legislation, and the Government are determined to prove the benefits of Brexit. Surely it is time to use those powers to make progress on this issue.

[Baroness Penn (Con)]

I agree with the noble Lord that we should make use of the new powers we have. As I said to the House previously, we have already made a series of amendments to the money laundering regulations to reduce unnecessary burdens—for example, scrapping the requirement for the creation of a bank account portal, which was seen as disproportionate. There is more work to do in this area, and that work is under way. We published the review of our anti-money laundering regulations in June, and we are committed to consulting on broader changes to our approach. The main focus of that is on the supervisory bodies for anti-money laundering regulations, but this issue is also being looked at as part of that work.