I beg to move,
That this House recognises that the reduction in interest rates since October 2008 has been a necessary policy response to the recession, justified by the dramatic reversal of inflationary pressures; believes that the role of Government in a recession is to support those most affected in the short term, while strengthening the economy for the recovery; notes that lower income savers have suffered significant losses as a result of interest rate reductions, and are likely to have a high marginal propensity to spend any increase in post-tax income; further notes that older savers, in particular, are a group who have acted responsibly during the so-called age of irresponsibility, and should be rewarded rather than penalised for their thrift; acknowledges the decline in the savings ratio from 9.9 per cent. to 1.8 per cent. since the second quarter of 1997; believes that more needs to be done to promote a culture of saving during the period of recovery and end Britain’s addiction to debt; and calls upon the Government, in the next Budget, to cut taxes for savers by reducing the starting rate and basic rate of tax on savings to zero, paid for by reducing the real growth rate of Government spending in 2009-10, as the Government has already committed to do in 2010-11.
In the next few days, we will learn for certain that the UK is in recession. The Chancellor has already signalled that his prediction, made as recently as the pre-Budget report in November, that the UK would resume positive growth in the second half of this year is now unlikely to be achieved. Earlier this week, the European Union published its projections showing that the UK will suffer the longest and deepest recession of any EU country except for the Baltic states and Ireland. That means that even the pre-Budget report estimate of a staggering £118 billion budget deficit for 2009-10 now looks optimistic.
Just in the course of this week, we have seen another multi-billion-pound banking rescue package as the Government desperately struggle to address the failure of the October package to deliver the credit flow that the economy so desperately needs.
The Government’s record to date consists of: a failed stamp duty holiday, which was supposed to stop house prices falling but has actually seen the fall accelerate; a failed fiscal stimulus VAT cut that has stimulated no one, been derided by retailers as pointless and succeeded only in adding another £12 billion to our £1 trillion debt mountain; and a banking rescue package that has neither saved the banks nor saved the economy by getting lending moving again.
Repossessions are rising, unemployment is rising and business failures are rising. In fact, the only things that are falling are the pound and inflation, both of which reflect the chronic weakness of the economy, which—if I may paraphrase the Prime Minister—in turn reflects the chronic weakness of the Government.
I am not sure that I understand the point that the hon. Gentleman is trying to make. I get the impression that the Conservatives are saying that the things that the Government have done are wrong, and that they will therefore have an alternative policy. If so, will he tell us what that Conservative policy is?
I hope that the hon. Gentleman will bear with me, because, as he might have anticipated, much of the remainder of my speech will set out the things we would have done, some of which the Government have now adopted in their package of proposals.
Members will recall that the Prime Minister thinks that he saved the world. The Employment Minister apparently sees light at the end of the tunnel, Baroness Vadera sees some green shoots and the Housing Minister sees an upturn in the housing market. However, I have to say to the Financial Secretary to the Treasury that everyone else—every commentator, every market, the European Union, the OECD—sees unrelenting gloom, and a longer and deeper recession in the United Kingdom than in any other major economy.
My hon. Friend is right. Members will be aware that some EU countries have already seen downgrades to their credit status, and there is speculation in the media about the UK’s credit rating status. Obviously, it is critical to all of us that the UK maintain the top investment grade credit rating for its Government paper.
The root cause of the problem is the failure of the banking system to deliver the routine credit that is needed to oil the wheels of commerce and to support businesses with the working capital that they need to protect jobs and to allow for investment for the long term. The Government’s response initially focused on fiscal policy, with the wasteful and ineffective £12 billion temporary VAT cut, to be paid for by pre-announced higher taxes after the next general election.
However, I am pleased to say that, over the past week and a half, Government policy has moved in a welcome direction, to refocus on the supply of credit through moves to address the flaws in bank bail-out No. 1—for which we have been calling since that bail-out was announced in October—and to adopt a version, of sorts, of the national loan guarantee scheme that we first proposed in November, underpinning bank lending to companies in a way that would allow banks to raise the funds to provide the credit that business needs to survive the downturn.
Is the hon. Gentleman aware that Paul Tucker, the newly appointed deputy governor of the Bank of England, said this morning that the first bail-out, last autumn, had been successful, that it had served its purpose and that it had been essential to prevent the complete collapse of the banking system? He said that the current proposals were therefore a second phase in a necessary process.
That is the Prime Minister’s spin: that this is the planned second phase. The hon. Lady needs to go back and look at what the Chancellor and the Prime Minister said last October. First, they said that the £37 billion of taxpayers’ money that they had invested would appreciate in value over the next period, when in fact £20 billion of it has already been lost. Secondly, they said that its purpose was to get banks lending again to businesses, home owners and families. That has not happened, and that is a failure in anyone’s book.
There is an ongoing debate about the merits of fiscal responses versus monetary responses, and about the respective abilities of fiscal and monetary actions to help economies out of a recession. That is a perfectly respectable academic debate, and, for a country that enters a recession in fiscal balance or with a surplus, it is an interesting and important debate. Each such country will reach its own conclusion as to the right balance between fiscal and monetary responses, no doubt informed by its own historical experience. I am thinking particularly of the agonising that has gone on in Germany.
In the UK, however, we do not have to spend our time carrying out that analysis, because we do not have the room for a fiscal stimulus. We did not fix our roof while the sun was shining. There is a clear—[Interruption.] I will say that again for the hon. Member for Islington, South and Finsbury (Emily Thornberry): we did not fix our roof while the sun was shining, which is why we are in the mess we are in today. Whether she likes it or not, there is a clear emerging consensus that a fiscal stimulus is not appropriate, given the circumstances in which this Government delivered the UK to the brink of recession in 2008.
Over the past few years half of the homes in Islington have had their roofs fixed as a result of the decent homes programme. Thank goodness for a Labour Government.
The hon. Lady obviously thinks that that is a very clever intervention. [Interruption.] Well, it has been done before, but usually with school roofs. She makes my point precisely. During the good years, the Government borrowed yet more money that they did not have and spent it, and now we have come to the recession the cupboard is bare. The Government have no room for a responsible fiscal stimulus, while many of our neighbours in Europe find that they do have such room.
There is an emerging consensus that a fiscal stimulus is not appropriate in these circumstances, and I shall set out what those circumstances are. There is a huge current budget deficit. The Economic Secretary thinks that that is funny; his Government is going to run up a budget deficit of £118 billion. Household debt stands at £1.4 trillion. There is a pattern of persistent and huge external deficits. We have a rapidly weakening–some would say collapsing—currency. There has been a record of absolute failure during the past seven years to deliver the fiscal projections made in Budget after Budget, and we have an unbalanced and highly exposed economy.
If the argument is that we started in a bad position with no fiscal room, what is the hon. Gentleman suggesting in fiscal terms? Is he saying that we cannot do anything because of our starting point? If he is saying that, I would point out that the Opposition motion would cost £4.1 billion. Where would that come from?
If the hon. Gentleman can bear with me for just a few more minutes, he will find out exactly where it is coming from. I am not saying that we can do nothing. What we have been saying since November is that this crisis was created in the credit system and the banking system, and it requires a response that is primarily monetary. That is fortunate because the UK fiscal position means that the Government are not able to provide an appropriate fiscal response.
The Government were projecting increases in spending totals that would see public spending decreasing as a share of GDP, taking on the prudent approach that we have been advocating and that they have singularly failed to adopt in the last few years.
The Government will quote in their defence sources that are generally supportive of fiscal measures—that is to say, people who tend to be on the fiscal side of the academic debate or who recommend a balance of fiscal and monetary initiatives. [Interruption.] We can quote some Germans if the Economic Secretary really wants us to; I have my Germans all lined up in a stack of papers on the Bench. What the Government will not tell us is that most of those people, under questioning, readily concede that a fiscal stimulus is not only inadvisable, but positively dangerous in the UK’s current circumstances. Some have issued specific warnings against the UK adopting a fiscal loosening. For example, in the European Commission’s economic recovery plan that we debated yesterday, we find on page 7:
“It is clear that not all Member States are in the same position. Those that took advantage of the good times to achieve more sustainable public finance positions and improve their competitiveness have more room for manoeuvre now.”
It continues, and I invite my hon. Friends to try to spot the reference here:
“For those Member States, in particular outside the Euro area, which are facing significant external and internal imbalances, budgetary policy should essentially aim at correcting such imbalances.”
In other words, there is no room for fiscal loosening. Jean-Claude Trichet, the president of the European Central Bank, warns:
“If you augment too much your own borrowing, you might be punished by markets. If you are at the limits of what you can do, you can lose more with absence of confidence and loss of confidence than you would gain from the simple channelling of additional spending.”
That is the very point that my hon. Friend the Member for Reading, East (Mr. Wilson) made about the nation’s credit rating.
A very important group of savers is Equitable Life policyholders. Does my hon. Friend agree that the manner in which the Government announced their response to the parliamentary ombudsman means that there is a risk that the issue will be thrown into the long grass and that there will be a whitewash of the whole matter?
As my hon. Friend will know, we have been calling for a very long time for the Government to publish their response on Equitable Life. We were surprised by the reference to the possibility of means-testing, but we will await the outcome of the deliberations that have been set in train to see exactly what is proposed for Equitable Life members. The Government need to ensure that that outcome is published sooner rather than later. [Interruption.] I hear the sedentary objection of the hon. Member for Leeds, East (Mr. Mudie) that I have not yet mentioned savers, but the title of the debate on the Order Paper is the “Effect of economic policy on savers”, and I wish to spend another minute at most setting out the economic policy background. I shall then explain its impact on savers.
The point of my build-up is to make it clear that monetary intervention should be the principal tool for addressing a recession that is born of a credit system failure. It is wrong to pile up more debt to try to solve a problem caused by excessive borrowing. The Government should learn the simple and obvious lesson that one cannot borrow one’s way out of debt.
We now have in place measures to support banks’ ability to lend and borrow, through guarantees and the ring-fencing of toxic assets; direct lending to larger companies; reductions in interest rates in response to the threat of declining inflation; and, tucked away in the small print of Monday’s announcement, preparations for quantitative easing—the printing of money—as a contingency. Those are the weapons that are now deployed in the battle to rescue Britain’s economy.
Let me say clearly that it is a good thing for the economy that interest rates are falling. The sharp decline in the retail prices index posted yesterday and the 1.9 per cent. gap between RPI and RPIX, which essentially reflects changes in mortgage interest costs, underscore the massive effect of a monetary stimulus. For almost every family in Britain that has a variable rate or tracker mortgage, the impact of lower mortgage costs will far exceed the impact of the Government’s so-called fiscal stimulus. Since October, interest rate cuts have saved British home owners billions, dwarfing the impact of the VAT cut.
However, that welcome relief comes at a price for all those who depend on savings and modest investments for their income. That means millions of British householders, almost by definition including many older people, who have done exactly the right thing for years, probably decades. They have saved diligently as they have worked hard, set their faces against the “buy now, pay later” culture and presciently been wary of the Prime Minister’s boast to have ended boom and bust, and they have cautiously built some savings to fall back on in hard times. In short, they are the very people who have done what successive Governments have asked them to do—people who have behaved responsibly during the Prime Minister’s age of irresponsibility. Now they are seeing their savings income slashed and their plans destroyed. To add to their anguish, many of them will have had small holdings in bank shares, which are a favourite of small investors and particularly of pensioners. Those holdings will have been almost completely annihilated in some cases.
We estimate that savers have lost something of the order of £22 billion of annual interest income as a result of the rate cuts over the past few months. Thirty-eight per cent. of no-notice accounts now pay less than 1 per cent. interest. Some banks, for example, the Julian Hodge bank—one or two older Labour Members may remember that name—already offers 0 per cent. to savers with less than £1,000. Members of all parties will have anecdotal examples of constituents who are often retired and perhaps live on small company pensions plus state pensions, supplemented by a modest income from a small accumulation of lifetime savings. In many cases, the annual or semi-annual credit of interest to their accounts represents the only available free cash to buy small luxuries or replace big ticket items. Those people now feel betrayed. They are confused about why they should be punished, and bewildered by the fact that those who saved thriftily have to pay the price for a crisis created by those who borrowed and lent profligately.
The reasonable expectations of many millions of people, who have worked all their lives on modest incomes but have none the less scrimped and saved to support themselves in their retirement are being dashed. They are the innocent victims of Labour’s recession. They deserve better.
We believe that Government have a responsibility to help people through the recession. Therefore, earlier this month, my right hon. Friend the leader of the Conservative party set out our proposals to deliver help to those who have suffered most from the collapse in interest rates, which has benefited those of us who are borrowers. Under our plans, the basic and lower rates of tax on savings income would be abolished. That means that anybody who earns less than £32,000 a year and has savings income will pay no tax on that savings income. That means a potential saving of up to £7,200 a year. In addition, we will increase the tapered older person’s tax allowance by £2,000 a year, thus providing more support for those above retirement age, who are basic rate taxpayers and who find that the decline in their savings income means that they need to work to make ends meet in retirement. They could be up to £400 a year each better off after tax.
There is a further bonus for some of the lowest income savers in the country. Her Majesty’s Revenue and Customs estimates that 3 million people in this country, who are on low incomes and are small savers, pay too much tax on their savings interest because they fail to claim the basic rate tax deducted at source, even though they are not liable to pay it. Under the Conservative plan to abolish savings income tax for all basic rate taxpayers, the banks and building societies would no longer deduct tax at source, ensuring that the 3 million low income savers would not pay unnecessary tax. At the same time, the tax system would be simplified.
The hon. Gentleman is making an interesting opening speech. Does he agree that, by definition, the poorest pensioners are those on the lowest incomes and that 60 per cent. of pensioners, who have the lowest incomes, currently pay no income tax? They will not benefit one iota from the hon. Gentleman’s announcement. Those higher up the income spectrum can already make considerable use of individual savings accounts, which enable them to save in a tax-free environment.
The hon. Gentleman is right to the extent that the package covers people who have planned throughout their lives on the basis that they were accumulating savings to provide themselves with an income in retirement. Their circumstances have radically changed through what has happened to interest rates in the past few months. He makes an important point about ISAs. Of course they are available, but 60-odd per cent. of small savers and a disproportionately high percentage of pensioners prefer to save in ordinary bank or building society accounts. Frankly, it is not for the Government how to tell them how they should save. We need to adapt the system to accommodate the problems that they are now facing rather than airily telling them that there is a solution if only they would do things in the way in which the Government would like.
Following the question from my hon. Friend the Member for North-West Leicestershire (David Taylor), the hon. Gentleman will know that something like £20 billion is already spent on tax relief for savers. The overwhelming majority of that goes to the rich and the better-off. Could not the hon. Gentleman pay for his scheme simply by taking away that £20 billion? If he does not do that, he will make the fiscal situation worse.
If the hon. Gentleman has not already looked at our policy, which was announced several weeks ago, he should bear with me for a moment to understand exactly how we are going to pay for our proposal, as I shall spell it out.
Let me first give the House some examples of how our proposal will affect people. A 60-year-old couple who are retired and have a total pensions income of £12,000 a year each would be about £400 a year better off. A 40-year-old single mother who works part time and earns £10,000 a year, but who has some savings that produce £800 a year in income, would be £160 a year better off. Those over the retirement age who benefit from the older person’s allowance would do even better. A 65-year-old couple who are retired with a total pensions income of £14,000 a year each currently pay £902 in income tax each, which amounts to £1,804 in total. The tax bill on their pensions would fall to just £502 each, making them about £800 better off in total. If they also had £1,000 a year each in interest from savings, they would pay nothing at all on that savings interest and would save another £400 a year, which means that they would be £1,200 a year better off in total. I could give other examples.
When petrol prices were at their peak last year, I can remember the hon. Gentleman arguing passionately that the Government should introduce a fuel duty adjustment process that would result in a cut when prices were high and trigger a compensatory amount when they dropped. Now that petrol prices have dropped, has he factored into his calculations what impact that 5p increase would have on savings, particularly those of people on low incomes and pensioners, and on the overall fiscal position? Or has he abandoned the proposal?
The hon. Gentleman refers to the fuel duty stabiliser policy, which is a perfectly sensible mechanism. However, its impact would depend entirely on the point at which it was introduced. The measure is fiscally neutral over the fuel price cycle, but its impact at any point in time will depend on when it was introduced.
Let me address the point that the hon. Member for Luton, North (Kelvin Hopkins) made. The proposal that I have set out is a fully funded tax cut. It is not, as some members of the Government have claimed, a fiscal contraction. The proposal is to take money that the Government would have spent and give it back to a hard-pressed group of taxpayers to spend for themselves. We would fund the package for savers and pensioners by reducing the overall rate of growth in public expenditure in 2009-10 from the current projection of 3.4 per cent. to 2.6 per cent., producing a reduction in spending growth of £5 billion a year, of which £4.1 billion would be needed to fund the commitments that I have just set out, based on the Treasury’s figures.
I will give way in a moment, but let me finish spelling this point out first. Within that overall spending total, we are pledged to match the Government’s existing plans for 2009-10 for spending on health, schools, defence and international development, with all other Departments receiving in aggregate a 1 per cent. real-terms increase.
If the hon. Gentleman’s plan is to maintain spending on health, perhaps that answers my question, because I was going to ask him whether the Conservatives’ list of things to axe included the brand-new £350 million hospital in Stoke-on-Trent, the oncology department or the new maternity unit. He may have answered that question, so what is he going to axe instead—the police officers and police community support officers in Stoke-on-Trent or Crossrail?
The hon. Gentleman’s Government are pledged to cut £5 billion from the previously projected spending total in the following year, 2010-11, and they say that they can do that without cutting any front-line services at all. May I therefore suggest that the hon. Gentleman address his question to them and ask how they will achieve that £5 billion spending cut?
I do not think that the hon. Gentleman can duck my hon. Friend’s question so easily. Let us take the transport budget, for example. What the hon. Gentleman is proposing is that, with effect from two and a half months’ time, that budget will be reduced by £840 million. Where is the money going to come from?
I think that the right hon. Gentleman knows this, but he is quite wrong to speculate what individual budgets would be. We have ring-fenced health, schools, defence and international development budgets; we have said that the remaining Departments will receive, in aggregate, a 1 per cent. real-terms increase. We have not—neither have the Government—allocated the projected spending increase outside those ring-fenced Departments to individual Departments at this stage.
The hon. Gentleman is simply going to have to do better than that. He is proposing changes with effect from two and a half months’ time. He is telling the House that he has a proposal and he is asking the House to vote for it. It is a proposal to reduce Government spending by £5 billion, as he said, with effect from two and a half months from today. Where is the money going to come from?
If the right hon. Gentleman will tell me which Departments are going to take the hit of his £5 billion reduction in 2010-11—[Interruption.] Well, he is telling the House that he can make those cuts without any reductions in front-line services. Let us suggest a few things that might be done. We could scrap some of the failing IT projects; we could stop hiring agency staff at £200 an hour; to tick the head-count reduction boxes, we could cut down on some of the consultants used in the civil service. Perhaps we could scrap the £62,000 dinners and ask the Health Secretary, who thinks that £1 million is small beer, whether he can come up with some ideas to help the right hon. Gentleman with his problem in 2010-11.
In order to deal with the Chief Secretary’s claim that what we have announced represents a fiscal contraction, I want to cite what was said by Professor Christina Romer, the chair of President Obama’s council of economic advisers. She found that the multiplier effect of tax cuts on the economy is as large as three, while the consensus multiplier from Government spending is about one. Our tax cuts will stimulate more spending and more growth than the additional £5 billion of Government spending would if it remained as Government spending.
Households everywhere are tightening their belts and businesses have had to make themselves more efficient and leaner in order to survive, so the Government must do the same. Indeed, as I have already said, the Government have committed themselves to reducing the growth of public expenditure by an additional £5 billion in 2010-11, and they say that they can achieve it without any cuts in public services. If it can be done in 2010-11—after a general election—why cannot it be done in 2009-10? The Government need to show the same sense of urgency that families and businesses are having to show to respond to this crisis in the real world. I commend that policy initiative to the Government. After all, the Prime Minister is on the record as saying that he would like to do something to help savers. I urge the Government to implement this policy in the 2009 Budget.
The Government can be as dismissive of our policy as they like at this stage, but my hon. Friends will remember that they were dismissive when we suggested the national loan guarantee scheme, but they adopted it. They were dismissive when we said that the preference shares to the banks were over-priced, but they have swapped them for ordinary shares without a guaranteed payment. They were dismissive when we said that the terms of the inter-bank credit guarantees were wrong, but they subsequently slashed the price. They said that our plan to provide tax breaks to employers who create jobs lacked credibility, but now they have done precisely what we proposed. They have adopted our proposals for the national loans guarantee scheme; they have adopted our proposals on financial incentives to employers; they have adopted our recommendations for changing the terms of the preference shares; and they have adopted our proposals on the inter-bank guarantees.
All that is not bad for a do-nothing party. The truth is that we are the do something effective party. Most, if not all, of the Government’s effective interventions have been based on previously announced Conservative policy initiatives. [Interruption.] Government Ministers dare to suggest that we revel in the difficulties facing the economy, but let me tell—[Interruption.]
Government Ministers have dared to suggest that we revel in the difficulties the economy is facing, but I tell the Minister this: nothing could be further from the truth. We have no wish to inherit a shipwreck. It is in all our interests to minimise the damage that this Government’s recession will cause to the future prospects of the British economy and its ability to deliver on our aspirations for the future of our society.
I therefore urge the Government to consider—not for an immediate announcement, but for a Budget initiative—the proposals set out by the Conservative party. Instead of simply attacking them in a ritual party political response, why not look at them and consider their merits, in order to deliver relief to those hard-pressed savers and pensioners whom the Prime Minister himself has said he wants to help? Why do the Government not show some solidarity with struggling businesses, families and home owners across the country and commit not even to tightening their belt, but merely to reducing slightly the rate at which they are increasing the girth of their belt compared with what they had planned to do, and to doing so now instead of next year?
It is the responsibility of Government to provide, where they can, short-term support to those worst hit by the recession, but it is also the responsibility of Government to prepare the country for recovery. That means that responsible intervention by a Government during a recession must pass two tests: it must help people, families and businesses in the short term, but it must also strengthen the economy for the recovery. The Government’s VAT cut failed that test: it is questionable whether it is helping anybody very much in the short term, but what is certain is that it will lead to higher debt and taxes, undermining confidence and undermining our economy in the recovery. Our proposed package to support savers will, by contrast, help some of those most severely affected during the recession, but will also send a powerful signal about the need to rebuild the savings culture in Britain.
The hon. Gentleman has cited the example of a pensioner couple aged over 60, each with a pension income of £12,000. Does he agree that a quick calculation suggests that they are likely to be in the second highest quintile of incomes and that therefore 60 per cent.—almost two thirds—of pensioners will gain absolutely nothing? What have the poorest pensioners done to deserve such neglect by the Conservative party in its economic policies?
The hon. Gentleman is deliberately missing the point. There is always a case for helping the poorest pensioners, of course, but this is a specific initiative designed to deal with a group of people whose income has been catastrophically reduced in a very short period of time, and many of them, because they are retired, are no longer in a position to do anything about changing their planning for retirement. I am sure the hon. Gentleman has constituents who have contacted him to tell him that they are in such a situation. This is a targeted measure to deal with a particular group of victims of this recession who have been severely affected, and in our view the responsibility of a Government in a recession is to try to help those who are worst affected by it.
No, I will not give way at present.
The catastrophic collapse of lending by our banking system has been precipitated in no small part by the excessive dependence on wholesale markets. Effectively, those wholesale markets hoover up deposits of households in countries which save and recycle them as lending to countries such as ours which borrow. Under this Government’s watch, the UK savings ratio has declined from 9.7 per cent. in 1997 to just 1.8 per cent. at the last count. If we want Britain to kick the debt habit, and if we want to rebuild our economy on a sustainable basis and correct the huge external imbalances we have been running by borrowing money from foreigners so we can use it to buy their goods from them, we need to reinvent the savings culture in Britain. We need to undo the damage done by a decade of Government-encouraged borrowing and attacks on saving, like the Prime Minister’s £5 billion a year tax raid on pension funds, and rebuild confidence after the fiasco of the lost pensions and Equitable Life, which has already been mentioned. We need to start the process now if Britain’s economic recovery is to be built on a secure and stable financial footing.
The proposal that we put before the House today is one that delivers immediate help for hard-pressed savers, who have behaved responsibly during the age of irresponsibility, and clear support for savings after a decade of Labour’s debt binge. It is paid for by restraint and prudence in the growth of Government spending—outside that spent on schools, health, defence and aid—now, not next year, as Labour is planning. We seek a culture of thrift at the heart of government and a culture of saving at the heart of our economy. These changes will help people through the recession and provide strong foundations for the new economy that the Conservatives plan to build as Britain emerges from it, and I commend them to the House.
I beg to move an amendment, to leave out from “House” to the end of the Question and add:
“recognises the effects the global financial instability is having across the world and on the UK economy; notes that, as a result of Government action on financial stability, no individual depositor in a UK financial institution has lost savings; notes that the cut in value added tax, increased child benefit and £60 payments to all pensioners are helping families and businesses across the UK; further notes that 60 per cent. of pensioners pay no tax at all; believes savings are important in providing people with independence and security throughout their lives; welcomes cross-party support for the Saving Gateway Accounts Bill to help those of working age on low income; believes that the Saving Gateway will build on the successful pilots since 2002 to create savings accounts with the Government matching each pound saved with a contribution; notes that around eight million people on benefits and tax credits will be eligible for this incentive to save; further recognises the successful role that Individual Savings Accounts have played over the last decade with over 18 million people, including one in five people from low-income groups, choosing this method to save tax-free; welcomes the fact that four million children now have child trust funds and millions more will benefit in future; and notes that the Government contribution to child trust funds increases to £500 both at birth and age seven for lower income families.”
The world economy—we did not hear much about that in the speech made by the hon. Member for Runnymede and Weybridge (Mr. Hammond)—faces its biggest challenge in generations. The International Monetary Fund has said:
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.”
Our task in this global economic crisis is to navigate a path to get Britain through in the best possible shape and in a way that is fair to everybody. It is common ground in this debate that the crisis, with its impact on household finances and the necessary reduction in interest rates, is making saving harder. The policy priorities that I wish to set out in this debate are: first, providing clear incentives for people to save; secondly, good access to appropriate savings products; and, thirdly, improving the levels of financial capability.
Across the world, policy makers face tough challenges in responding to the global credit and commodity price shocks. Our macro-economic framework gives the Bank of England’s Monetary Policy Committee the means to support the economy through these difficult times, avoiding unnecessary volatility without compromising the commitment to long-term stability. The primary objective of monetary policy is to deliver price stability in order to provide high and stable levels of growth and employment. It also benefits savers, because inflation erodes the value of savings. Yesterday’s sharp fall in inflation, reflecting the impact of the VAT cut before Christmas, is welcome news for savers and others.
The Minister opened his speech by saying that he wants to encourage saving. Will he say whether, over the next 12 months, he wants the British people to increase the share of their income that is saved, decrease it or keep it at the same level?
The Minister welcomes the cut in the rate of inflation, but that rate is still significantly above the target set for the Bank of England. Is he not concerned, as we enter such a downturn, that we still have such high levels of inflation? That is a very toxic mix.
The hon. Member for Runnymede and Weybridge has just told the House that inflation is falling too fast. The projection that we set out at the time of the pre-Budget report is broadly right—inflation is likely to be on target next year. Although the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski) is right to say that 3.1 per cent. is outside the Government’s target range, the reduction from 4.1 to 3.1 per cent. is very welcome, not least for savers.
In saying that encouraging savers was the sensible thing to do, the Minister did not mention another factor—the security of savings. Given that the stock market is subject to many vagaries, and given the interest rate changes, does he agree that there is a strong case for a state bank, with guaranteed returns? It would be efficient and cheap to administer, because it would be a national scheme, and it would be something in which ordinary savers would have absolute confidence.
I always listen with great interest to my hon. Friend’s contributions in such debates. He made an interesting contribution yesterday, and I hope that he will do so in this debate. However, the Government’s view is that banks are best run in the commercial sector.
My hon. Friend was right to provide the opportunity to draw attention to the fact that, as a result of the Government’s intervention, no individual saver with a UK bank has lost money in the turmoil of the past few months. On Monday, my right hon. Friend the Chancellor announced a further package of measures to support the banking system and to safeguard the millions of jobs at risk from the continuing difficulties in the financial system.
I want to make a little more progress, but I will then gladly give way to the hon. Gentleman.
My right hon. Friend’s package of measures was aimed at replacing the lending capacity lost because of the withdrawal by foreign banks and other institutions from lending in the UK and the barriers preventing UK banks from expanding their lending. The package extends existing measures to support the economy through the downturn, including the package of support for the financial system announced in October to protect ordinary savers and others, and the fiscal stimulus to support the wider economy announced in the pre-Budget report.
Saving is vital to provide independence throughout people’s lives, security if things go wrong, and comfort in retirement. Since 1997, our strategy has been to promote saving and asset-ownership for all from childhood, through working life and into retirement. Our approach has been underpinned by the principle of progressive universalism—providing support to all, with the greatest support for those who need it most.
The market for savings is competitive, and several firms are offering rates well above the Bank of England’s rate. Savers can boost their income from savings by shopping around for the best interest rates. Some attractive deals are available, and the Financial Services Authority publishes comparative tables of savings accounts in its money made clear programme.
Does my right hon. Friend agree that although increasing tax thresholds and providing tax breaks for savers is attractive, the biggest risk for pensioners is through the economic and banking instability that threatens their pension schemes? That is why the Government are right to prioritise economic, financial and banking stability through the current measures to secure stability for people in the longer term.
My hon. Friend is absolutely right. That is the Government’s priority, and that is what we have been attending to. In a few moments, I will say a little more about the benefits for savers, but the proposals that the hon. Member for Runnymede and Weybridge made are much less attractive to savers than he suggests.
The Minister is right to encourage people to think more positively about saving. Does that mean that he now recognises that my hon. Friend the Member for Twickenham (Dr. Cable) was right back in 2003 when he warned about irresponsible levels of lending and pointed out that if the then Chancellor had not dismissed those warnings, more people might have been encouraged to save, instead of racking up more and more personal debt?
What has happened to the savings ratio is interesting. It has been on a long-term downward trend, and at the moment it is approximately where it was in the late 1950s. It went up until the end of the 1970s, and has been falling since. There has been a similar trajectory in the past couple of decades in most English-speaking countries.
The key statistic on savings ratios is net national saving, which combines the savings of households, firms and the Government, and I shall give the House some figures.
My right hon. Friend is right to say that savings ratios fluctuate. The Conservative spokesman quoted a higher rate in 1997, but in 1992 it was 1.1 per cent. In the 20 years to 2007—10 years under the Tories and 10 years under this Government—the average savings ratio was 3.7 per cent. and it was about that level in 2007. There is nothing surprising about that.
My hon. Friend is right. Net national saving as a percentage of gross domestic product was 3.4 per cent. in 2007, close to the average over the period since 1987 of 3.7 per cent., and much higher than the 1.1 per cent. low recorded in 1992—and, incidentally, much higher than the rate in the United States. It helps that British households are spending a smaller proportion of their income on debt interest. Total household sector interest payments are 6.2 per cent. of disposable income today, compared with more than 11.9 per cent. in 1990. That makes a big difference.
Mention has been made of ISAs. We introduced tax-advantaged individual savings accounts in 1999, and they have succeeded in developing and extending the saving habit and distributing tax relief more fairly. More than 18 million people—about one in three British adults—now have an ISA, many more than held the predecessor products. The annual investment limit for ISAs rose to £7,200, of which half can be saved in cash. We want ISA tax relief to be distributed as fairly as possible, so that support is targeted at those saving modest amounts. In that way, people who would otherwise not save can see the benefits of doing so.
It is right that we have strong incentives for saving. The model that we have now provides those incentives and we have seen a good rate of take-up of ISAs among people on low incomes—significantly higher than was the case with PEPs and TESSAs—and that is important progress.
The hon. Member for Runnymede and Weybridge talked about tax on savings. As he knows, tax on savings interest is automatically deducted by banks and building societies at a rate of 20 per cent. through the tax deduction on savings interest scheme. We announced in the pre-Budget report a campaign to encourage some 1.5 million pensioners to register their accounts and so receive their interest tax-free, and of course that is an option available to anyone in that category. I hope that it will be widely taken up.
The Financial Secretary is right in what he says about ISAs, but will he confirm that one in three savers is not saving through an ISA and that 40 per cent. of pensioner savers do not have ISAs? Older people perhaps tend to stick with what they know and, as I have said, we should change the system to accommodate them, rather than expecting them to adapt to the system.
I would hope that the hon. Gentleman would join me in drawing people’s attention to the advantages of saving through an ISA. The tax-free cash amount of £3,600 is a large amount in terms of typical household saving, and it is right to draw people’s attention to the opportunities available to save free of tax.
I am sorry to press the Financial Secretary on this, but not enough is being done. He knows that the Government have been trying to get people to take up pension credit for the past five years with limited success. The Department for Work and Pensions has accepted the power of inertia and has set up the personal account scheme on a contracting-out basis rather than a contracting-in basis. Ministers can tell people about opportunities, but they cannot make them take them up. Would it not be more sensible to create a system that would give people the benefit of the tax relief automatically?
I shall come in a moment to the flaws in the hon. Gentleman’s proposal, as I see them, and explain why I do not support it. However, I shall first return to my point, which was that I hope that he and other hon. Members would join me in drawing people’s attention to the opportunities available for tax-free saving that anyone can take advantage of.
We have talked a great deal in this debate about pensioners. It is worth making the point that the reform of pensions that we have legislated for will lead to a significant boost in the attraction of pension saving, with mandatory matching employer contributions into personal accounts. Let us look at the things that we have already put in place. The above-indexation increases in the personal tax allowances in the 2007 Budget lifted 600,000 pensioners out of tax entirely. By April next year only 40 per cent. of pensioners over 65 will pay income tax at all, and 60 per cent. will pay no income tax. Of course, pensioners are benefiting this month from the additional £60 payment being made to them, and to others, too—[Interruption.] That is quite right; the Conservatives opposed that payment.
As we have heard, the Conservative party has proposed raising the personal allowance by £2,000 for people aged 65 and over, which would cost about £1 billion. As has been pointed out, that is of no benefit at all to the clear majority of pensioners who do not pay tax at all. The Conservatives propose to fund that, as we have heard, by cutting Government spending—a disastrous proposal as we move into a downturn like this one. Timing is key. The hon. Member for Runnymede and Weybridge is proposing a big reduction in Government spending at the point when, as all of us can see, we are moving into the most difficult downturn for a very long time.
As the House knows, the Government spending plans have been published and are being developed. They take effect in two and a half months’ time, and the hon. Gentleman appears to be seriously telling the House that those figures should be reduced by £5 billion with effect from then. He does his party no favours by bringing to the House proposals that clearly have not been worked out. He has no idea where the £5 billion will come from, and he really should have an idea before he comes to speak at the Dispatch Box.
Did my right hon. Friend hear the hon. Member for Runnymede and Weybridge (Mr. Hammond) say that pension credit had been a limited success? It has helped thousands of pensioners in my constituency, particularly those with savings, and particularly women. The hon. Gentleman has not said whether he would make his tax cuts available to women pensioners who retire at 60; he has only mentioned pensioners over 65, excluding a great swathe of women pensioners who have a particularly hard time after retirement.
In the statement on Equitable Life last week, the Chief Secretary to the Treasury could not confirm that the first compensation payment will take place in 2009. The Government might even fail to meet the parliamentary ombudsman’s criteria for full redress within the next two years. Will the Financial Secretary give me an assurance that he will do everything possible to try to work on an interim payment for some of our constituents, many of whom have waited for nine years for compensation and many of whom, regrettably, will die before compensation is paid?
As the hon. Gentleman knows, my right hon. Friend the Chief Secretary set out the scheme that we want to put in place. I can assure him that we will move forward with that as quickly as we can. There is nothing more I can say about that at this stage, but we certainly want to make quick progress.
I agree very much with what my right hon. Friend is saying. The Opposition are talking about making Budget cuts worth £5 billion, and it is clear that local government—especially children’s services—would be in the firing line. Budgets for children’s services are under pressure already, but does he agree that the danger is that they could suffer even more, with the result that there would be more cases such as those of baby P and Victoria Climbié?
My hon. Friend is right. I think that local government would have to bear some £240 million of the cuts, and that children’s services would have to accept their share of that. The Opposition’s draconian proposal is being rushed forward on the pretence that everything could be done in a few weeks, when it clearly could not. It is especially ill advised to bring the proposal to the House at this point in the cycle, just as we enter the major downturn that all of us can see, and that the International Monetary Fund has talked about.
I am grateful to the right hon. Gentleman for being so gracious. It was mention of the IMF that made me get to my feet. He glossed over Monday’s efforts by referring simply to “further measures” that were to be taken, as if someone merely had to pop back to the shops to get a pint of milk in addition to the other groceries. It was a massive step to borrow more money in addition to the sums in the pre-Budget report, which were, of course, huge in their own right. Will the Financial Secretary tell us whether we will be drawn back to this Chamber, for a third time, to hear the announcement that we are to be bailed out by the IMF?
The announcements in October succeeded in saving the banking system. That has been recognised very widely, and this week we have set out a further set of measures aimed at restarting lending. In particular, the measures reflect the fact that so many non-UK banks have withdrawn lending. The Icelandic banks are the most obvious examples, but there are others as well. The measures are designed to fill some of the need that has not been filled until now.
I want to say a little more about the proposal that the hon. Member for Runnymede and Weybridge has put to the House. It is a classic “robbing Peter to pay Paul” policy, of the kind that only the do-nothing party opposite could have devised. I have mentioned the obvious problem with cutting government spending as we go into a recession. If the hon. Gentleman does not know what the problem is, I am certain that the new shadow Business Secretary will be happy to explain it to him.
The hon. Member for Runnymede and Weybridge has said roughly what he would do to fund his proposition. What is the benefit of the savage and swingeing cuts that are being proposed? He has not explained the planning behind them, or how they will be drawn up as we go into a recession.
As my right hon. Friend the Chancellor explained in the PBR, we have put in place a very careful piece of work. It began with the PBR, is to be reported on in the Budget and implemented a year after that, and it will allow us to make the savings that we have announced. The hon. Gentleman is saying that he could do the equivalent in a couple of months, thus allowing him to fund the proposal that he has put before the House. If I have understood him correctly, even on his own terms there will be a substantial fiscal contraction in 2010-11, because I presume that he will not be making further reductions beyond the £5 billion in that financial year. If he does want to make further reductions, we would be very interested to hear about them. Of course, the tax reduction that he proposes would stay in place in that year, with the result that there would be a large hole in the Opposition’s spending plans.
The Financial Secretary asks me a question, but if he thinks about it, it will be clear to him that lowering the rate of increase in Government spending in the current year would lower the baseline. Applying the increase that he proposes to apply the following year would mean that we would still have the savings to fund the tax-cut package that we have announced.
But the hon. Gentleman’s argument to the House is that there is a set of measures that can be introduced this year, which otherwise would have been introduced the following year. He cannot have the money again in that following year—he will have spent it on the tax reduction—so there is a large hole of several billion pounds in his spending plans. He needs to explain where that money will come from.
Let me say a little about what the effect of the Opposition’s proposal would be. The average family on less than £30,000 a year—the proposed beneficiary of the tax reduction—pays less than £5 a year tax on savings at present, so the average family would save £5 a year from the proposal. That is the price for the spending cuts that the hon. Gentleman is urging on the House.
As I said, 60 per cent. of pensioners do not pay tax. Of course, the VAT reduction is a significant help to them, with a retired single person benefiting to the tune of £110 on average from the VAT reduction, and a retired couple benefiting by £225. The new shadow Business Secretary was right to argue a few weeks ago that cutting VAT is the best kind of fiscal stimulus.
I had hoped to be able to explain to the House measures such as the saving gateway proposals, which I am glad have commanded widespread support. Those give people on lower incomes extra incentives for saving, and are to be introduced nationally next year. The child trust fund is an important innovation to encourage saving from early childhood. The employee share schemes that we introduced and encouraged have been very effective. We have offered debt advice support, and a developing programme of financial capability education in schools. Instead, given the time, I shall conclude.
The Government have taken comprehensive action to support the financial system that British businesses and individuals rely on. We are creating the right incentives to encourage saving and open up to everybody the benefits of banking, saving and other financial products. We are working to ensure that everyone who needs it can get free, impartial debt advice and the information to make informed financial decisions to provide for themselves and their families. We are navigating a path to get Britain through in the best possible shape, doing it in a way that is fair to everybody, and making sure that we are in a position to make the most of new opportunities when the recovery comes. The alternative urged upon us by the hon. Member for Runnymede and Weybridge would be unfair and deeply damaging to the economy at this point. I urge the House to reject the motion.
Order. Before I call the Liberal Democrat spokesman, I inform the House that an eight-minute limit on Back-Bench speeches will apply once the Liberal Democrat spokesman has finished his remarks.
I shall try not to test the patience of the House by giving another political rant on the state of the economy, the banking system and the rest of it. I will try to pay the motion the compliment of addressing the issue that it raises: the problem of savings. That is an entirely proper issue and it is timely. For the most part, I agree with the motion, but not with all of it.
I detect that the shadow Chief Secretary’s speech is becoming a bit of a stump speech. It has at its heart two powerfully argued propositions, one of which is that this is a disastrous Government pursuing disastrous policies. The second is that this is an ungrateful Government pursuing Conservative policies and not expressing proper appreciation for doing so. From the Liberal Democrat point of view, those are entirely consistent arguments with which we have no difficulty in agreeing, but the hon. Member for Runnymede and Weybridge (Mr. Hammond) may have to decide which of the two he wants to pursue.
The hon. Gentleman is right that there is a savings problem. Savers are among the biggest casualties of the recession and it is right that we focus on why that is so and whether anything can be done to remedy their problems. He focuses on one group of savers who have a problem—people with variable interest deposits in banks. I am not sure what share of total British savings they account for, but almost all the hon. Gentleman’s policy prescriptions are based on that narrow, specific group.
It is probably helpful to reflect on the wider problem of savers. The savers who are currently most concerned are those who are on defined contribution pension schemes, and people who are getting private pension notices through their door every quarter and dare not open the envelope because of the damage that has been done by the halving of the value of the stock exchange. This is where the real haemorrhage of savings is taking place. He is right to focus on deposit accounts or those that carry interest, but that is only one corner of a much bigger problem.
Before getting into the details of the policy, I want to try to look at the big macro-economic argument that flows backwards and forwards and that was unleashed by the Conservative leader’s speech on savings a few weeks ago. There is a great danger of getting into a ludicrous caricatured argument that says on the one hand that spending is good, saving is bad, and on the other hand that saving is good, spending is bad. Lying behind a lot of the arguments we have that rather nonsensical polarisation of the argument.
Of course it is necessary and right that we think about ways of building up long-term savings. We have an ageing population and it is essential that savings are built up for long-term care, for pensions and, for the younger generation, for deposits on homes, for higher education and much else. So of course we have to think about policies to encourage long-term saving. The problem that we have at present is a substantial difficulty that many people have because they are frightened. They are frightened because they have lost a lot of value in their savings, and they are frightened because of the loss of their job. Because they are frightened, they do not spend the money that they would otherwise spend and therefore hoard it. The purpose of policy in this world, whether it is cutting interest rates or fiscal policy, is to try to encourage them to be confident enough to spend that money. That is in no way in conflict with a sensible policy of encouraging long-term savings.
Of course the hon. Gentleman is right; the definition of household saving is very narrow. Aggregate household assets are about £8.5 trillion, which is exactly five times the aggregate household debt that the shadow spokesman was agonising about a moment or two ago. The way in which many people save is by capital repayments of their mortgage, and that is not reflected in most of the figures that the hon. Gentleman used.
May we have a firm answer from the Liberal Democrats on the issue of Equitable Life? Policyholders are claiming £5 billion in compensation as a result of the Government’s regulatory failure. If the Liberal Democrats were in government—it is highly unlikely, but if they were—how much would the hon. Gentleman commit to paying of that £5 billion?
I am amazed at that intervention because when we had the statement last week, I was here and answered it unambiguously. I do not think that the shadow Chancellor or his deputy were here. I made it absolutely clear that we supported the ombudsman’s recommendation. Several of my colleagues and several Conservative Members are rightly pressing for a proper debate and a proper statement about what the compensation scheme amounts to. It could be generous or it could be very limited; we do not know the details and we need to know what the Government are proposing. The principle behind the ombudsman’s recommendation for compensation for the victims of mis-selling is clear, and I made that clear in my response last week.
The hon. Gentleman mentions fear, but is there not another matter that I hope, in his pragmatic and common-sense way, he will raise, which is the interest rate paid by the banks, and the fact that while they would not pass on the rate cut for borrowers, they passed on the cut to savers? When Barclays now has a rate, not unusual and copied by many others, of 0.01 per cent.—in other words, a pensioner putting £1,000 in would get £1 a year interest—surely that must have a greater effect than anything that we can do on getting people to save.
The general public’s complaint is that the banks are neither fully passing on interest rate cuts nor benefiting their depositors; they are trying to build up their margins. They have to do that, but it has not been enough.
I was glad that the hon. Member for Runnymede and Weybridge (Mr. Hammond) made it absolutely clear that he supported the policy of continuing low and falling interest rates. He was quite clear, so there is no point in my cross-questioning him about that. I am intrigued, however, because in debates I am often paired with the right hon. Member for Wokingham (Mr. Redwood), who gives a very good Conservative case; he is highly economically literate, and makes his case well. I think that he argues that interest rates should now be increased. I am glad that there is clarity about what appears to be a somewhat different approach starting from the same premises.
As the motion rightly says, the problem is that people who have very low interest rates on their bank deposits feel that they are suffering and disadvantaged. I understand that. People in my constituency often come up to me and say, “Isn’t this awful? What are we going to do about it?” Some points can be made to reassure them. First, if we are going into a deflationary environment—as we almost certainly are; that is what the Bank of England is warning us about—merely to have a bank account that is increasing in real value in a world of falling prices is compensation in itself. We have not got to that point, so people are not seeing it, but that is coming down the road.
Furthermore—this relates to the Equitable Life intervention—we should stress that all bank depositors have been fully protected: their deposits have been guaranteed and completely underwritten by the state, and in that they are unlike investors in many other forms of saving. Finally, many bank depositors are enjoying a reasonable rate of interest on fixed-rate deposits. I happen to be married to somebody who, as much through accident as through anything else, has ended up with a 6 per cent. fixed interest account in the Nationwide. She is laughing all the way to the bank. Many borrowers, however, are not getting the advantage of low interest rates. The balance of advantage between borrowers and lenders is not at all straightforward.
Let me get to the heart of the issue. Given that savings are a problem in the long term, what should we do to help savers? I am thinking particularly of low-income savers, who are rightly the focus of the discussion. I was surprised that the hon. Member for Runnymede and Weybridge made no reference to one of the biggest sources of difficulty for low-income savers—the way in which the benefit system operates. People on pension credit effectively pay a 40 per cent. marginal rate of tax because of how the tapering system operates. For people on low incomes, saving is not worth while because they are penalised through the pension credit system.
There is one particularly wicked inhibition on savings in the benefit system: if people with savings of £6,000 or more apply for pension credit, the Government assume that they are earning a 7 per cent. return on that account. That contrasts with 2 per cent. on main ISA deposits in national savings. Why is the rate 7 per cent., a penal disincentive to some of the poorest people in society? If we really tried to help people on low incomes with savings—that would come at a relatively low cost—we should address that anomaly. My colleagues did a calculation to the effect that about 500,000 really very poor people are being penalised £800 a year as a result of how the savings disregard system operates.
There is common ground in the House on how we should look at savings reform. Like a lot of Conservative Back Benchers over the years, Liberal Democrats push for reform of the annuity system, which is a major discouragement to many forms of saving. I ask the Minister to reflect on one technical point. In this current banking crisis, the mutuals are essentially at a relative advantage because they do not have to worry about shareholder return. But the building societies often report that they are at a considerable disadvantage in attracting savers because they have to pay disproportionately for the cost of the depositor protection scheme. They seem to have a good point, albeit a technical one, and I should be interested to know whether the Government accept their case.
Much more important than either of those two points is the fact that in order to save, consumers—savers—need to feel that they have a sense of protection and that they are not going to be ripped off by cowboys. We have had a couple of decades of endless scandals, with private pension mis-selling, endowment mortgages, split-cap trusts and, of course, Equitable Life. If people are operating in an environment where they know that their savings are not safe because they may have been mis-sold, they will not save. They must have very strong consumer protection in order that the savings culture can be revived.
I agree with what the hon. Gentleman is saying. Is it not significant that the building societies that demutualised, many of which are now banks, have got into deep trouble, whereas most of the mutuals in the building society sector have survived relatively well? Perhaps we were mistaken in allowing the building societies to demutualise in the first place. Indeed, when I came here I tried very hard to persuade the Government to stop demutualisation.
We both did, but we did not succeed, and that was a loss. I entirely agree with that.
In conclusion, let me focus on the key policy issue of tax relief. The Conservative spokesman again brought to our attention the recommendations of the Low Incomes Tax Reform Group, which has for many years been putting in very carefully considered recommendations that have been largely disregarded; I hope that they will now be taken seriously. The hon. Gentleman’s main proposal is for a standard rate of tax relief on interest on savings accounts. We should consider that seriously. We are in the run-up to a Budget, it is a thoughtful idea, and we should consider its strengths and weaknesses. I should point out, however, that when interest rates are very low it would be worth very little, for obvious reasons. It would benefit substantially only those with very large savings. A deposit of £100 at current interest rates probably attracts 40p in tax relief, while a deposit of £100,000 would attract £4,000 in savings, and that is where the benefits will go. I am not saying that it is a bad idea, but it operates primarily to the benefit of people in a high interest rate environment. I do not know whether the tax relief would continue when interest rates rose.
I get a nod. In the current context, however, it would make very little difference.
It is not entirely clear to me whether the cut-off point for standard rate interest would apply to higher earners. Presumably they would get the tax relief up to the upper earnings limit, if not beyond it. Is that correct?
If the hon. Gentleman is asking whether higher rate taxpayers would benefit from this proposal, the answer is no, because, as I understand it, the basic and lower rate of savings tax is applicable only to basic rate taxpayers, not to higher rate taxpayers.
I thank the hon. Gentleman for that clarification. Presumably, then, they would derive no benefit at all. It would certainly be the case that very large savings accounts would benefit proportionately and substantially, but he is not saying that high earners would benefit. That is a helpful clarification.
I do not think that we differ enormously from the hon. Gentleman in our approach to this problem. We believe that there should be a tax cut for people on low incomes, which would apply to pensioners and non-pensioners and to earned and unearned income, but, unlike him, we believe that that should be paid for on a tax-neutral basis by high earners, including those people who currently derive substantial tax relief on upper earnings. I know that he does not agree with that, but we think that it is a more equitable way of doing it; it is certainly preferable to financing tax cuts at the bottom by non-discriminatory cuts in public spending of the kind proposed, which run completely contrary to the needs of an economy in the depths of recession. Because of the two lines at the end of his motion, we will not support it. That is a pity, because it had much good content and rightly attracts our attention to the major losses suffered by savers in the recession.
As the hon. Member for Twickenham (Dr. Cable) said, there is a risk in this debate that people might rant about economic policy. I am going to resist that temptation, and instead try to address the issue of how we should deal with savers in the current economic situation. I was disappointed in the hon. Member for Runnymede and Weybridge (Mr. Hammond), because a lot of his speech addressed the economic issues, and asked whether the Government were following the right course of action. I would like to reply to the points that he raised, but I will resist the temptation to do so now. However, those arguments have to be made. They have been made from our Front Bench, but I think that they should also be made from our Back Benches. The issue is whether we should do something, or do nothing, in response to the international economic crisis, but perhaps that debate is for another day.
This debate is about saving. I come from a family in which thrift was considered to be the right approach. My mother was no economic expansionist. She put money into a tobacco tin every week. I think she was a bit of a hoarder, and she might well have been encouraged by the present culture of holding funds rather than taking a risk on investments. That approach might have been in her interest, and even in the interest of the family, although I am not sure it would have been in the interest of the economy generally, had it been followed by everyone else in our village.
First, on a point of principle, is it always right to save? The answer is no, it is not. There are times, as the hon. Member for Twickenham said, when it is important to have high levels of spending; at other times, it is important to have high levels of saving. The imbalance in the world economy is because countries such as China have too high a savings ratio, while countries such as the United States and Britain have had too low a savings ratio over a long period of time. We need to get that back into balance.
Like many other Members, I have had letters from constituents saying, “I have been thrifty all my life. I have worked hard and put money away, and I expected it to supplement any pensions that I had when I retired. Now, I look at the return that I am getting, and it is so low that I feel as though I have lost everything. What are you, as a Member of Parliament, going to do about it?” We have to be realistic. We cannot promise what is not possible. The failure of the Conservatives’ proposals today is that, in the present circumstances, they are the wrong ones. They would give a false sense of hope to the people in all our constituencies who are saying that they have lost their life savings. They have not lost capital sums, but they have lost the revenue that was being generated from those capital sums.
The problem with speaking after the hon. Member for Twickenham in a debate is that he steals a lot of the arguments along the way, but he was right in what he said about what would happen if the Conservative proposals were put into practice. I do not know what the average return is on a savings account today—I would be interested to know whether the Treasury has any figures on that—but let us say that it is 2 per cent. Actually, I would say that that was generous. In the opening speech from the hon. Member for Runnymede and Weybridge, a figure of £10,000 a year investment income was mentioned. That is not a lot of money, but to generate that now would require a huge capital sum—possibly £500,000, on the figures that I have given. It could be even more, as I do not think there is an average 2 per cent. return on savings at the moment. Only a very small group of savers has that kind of capital to invest.
The Conservative proposals would not help the poorer pensioners who are suffering from our economic ills at the moment, although they have had assistance from the Government, which is very welcome. The proposals would not address the problems of the poorest 60 per cent. of pensioners, or the many savers in our constituencies who have been getting in touch with us. If their savings income is very low, it does not matter how much tax relief we give them; it would be of very little benefit.
The Conservatives’ motion calls for their proposals to be geared to the period in which we are pulling out of the recession. I am not sure that that would be wise either. The only way in which we can get higher levels of economic activity in this country is through higher levels of spending. That could be Government spending, private sector spending or a combination of the two. However, giving additional incentives to savers is not the right course of action at the moment because, on account of low returns on investments, it does not give any benefit to the people we are trying to help. When the economy begins to gather momentum and we begin to look to recovery would not be the time to adopt a policy to encourage saving in this country. The time to encourage saving is when we move back to a higher level of economic activity, whatever that is and whenever that may be. At that point we will need to make changes: for example, we need to reform our savings taxation structure, and it might then be appropriate to adopt some of the other policy changes that have been suggested. I do not know; it depends what the alternatives are, but the provision of additional incentives to savers is certainly not the appropriate policy at the moment.
The Conservatives have made that policy suggestion because they think that there are a lot of votes to be gained from traditional savers who are disillusioned by their current circumstances. That policy will not offer any significant help to those savers, and it is a con-trick and politically dishonest of the Conservatives to suggest otherwise. I do not have any bright ideas about this matter, but we have to look at other ways of giving help to those who have saved over the years and who are now in a difficult position.
Would the hon. Gentleman agree that one of the problems with pension credits is that the assumption is made that there is a 10 per cent. return on a person’s savings? How ludicrous is that in the current climate, and what would he do about it?
That is a valid point and it needs to be addressed by the House, but the Conservatives’ proposal is not an honest proposition to put to people who have real problems in our constituencies. I ask the Conservative party to reconsider its proposition. Let us not lead people down a blind alley on this. We could have a nasty political argument about it, but we have all agreed that we are not going to rant today—I hope that is so. Let us look at real propositions to help those who are suffering.
All human beings have a powerful instinct to save—for their families, for themselves and for their retirement. Unfortunately, during the last few years, a disproportionate amount of saving has gone into bricks and mortar. It is as simple as that. The consequence is that people’s reserves of actual saving have declined absolutely and relatively, and now that we are in a grievous economic situation, people cannot easily cope. That is the simple truth about what we face today. We are in a debt crisis. There is far too much personal debt, banking debt and Government debt. I would like to touch briefly on the personal debt and savings situation, which is so dire.
According to Credit Action, a national money education charity, during 2008 Britain’s personal debt increased by £1 million every 10 minutes, 124 properties were repossessed every day and one person was declared bankrupt or insolvent every 4.8 minutes as an exact consequence of what I just mentioned. Household debt has grown enormously higher than that of virtually every other country, even the United States, with which we share certain economic similarities. The UK’s overall household debt has now overtaken UK GDP. It currently sits at 109 per cent. of GDP—the highest in the G7. According to the chief economist of Citigroup, not only is it the highest in the G7, but the highest any G7 country has ever seen. That is the background to the current situation. Business interest repayments in personal debt have soared to £92 billion in the past 12 months. It is therefore absolutely essential in the long run that big changes are made. We need to move from an economy that this Government have built entirely on debt to one that is built more in a traditional way on savings. Britain needs to be encouraged to save for the future rather than to get further into debt, with all the consequences that we have seen. Unfortunately, the culture of saving is increasingly being replaced by a culture of dependency.
We have heard the statistics about the level of saving. In 1997 it was 9.9 per cent., and the latest figures suggest that it has now declined to 1.8 per cent. One might ask whether there is anything particularly unusual about that worldwide. OECD figures show that our savings ratios are far worse than those of almost all other industrial countries. The result is that in the current economic climate, many families across Britain are going into the recession without any real savings cushion.
Statistics published by the Alliance & Leicester reveal that 13.5 million Britons—28 per cent.—did not save at all in 2008. The same survey reveals that 18 per cent. of people dipped into their savings more last year to meet extra costs and bills, and the projection of attitudes in the coming year is even worse. The amount saved as a percentage of income has declined every autumn since 2005.
Being able to save money to provide future stability and security should not be exclusive to the affluent. No matter the size of their income, everybody should be encouraged to save. AXA has produced extraordinary figures showing that, amazingly, the only group of people who can save given the current financial and economic pressures are those earning more than £70,000 a year. That reflects the terrible squeeze on middle and lower-income earners, who have suffered grievously as a result of the interest rate reductions on their savings. The debt situation of 18 to 34-year-olds and people with mortgages also shows that the pressure is on.
The importance of families having savings cannot be stressed enough, yet according to research for MoneyExpert, nearly a third of adults would face financial disaster within two months if they lost their jobs. Half of them believe that they would last only a month. Given the tragedy of huge unemployment that is besetting us, we can see the consequences of such frightening statistics. We know about the decline in private and company pension scheme contributions, which have plummeted by 53 per cent. in the past 18 months, and people’s fears about their savings and pensions are stronger than ever. In his 2008 Budget, the Chancellor mentioned that the Government were
“committed to encouraging more people to save.”—[Official Report, 12 March 2008; Vol. 473, c. 291.]
There is absolutely no evidence that that is the case—quite the reverse.
By 2012, our national debt will be approaching £1 trillion, which means that for years to come there will be a debt burden and an interest rate burden on anyone wishing to save. The Bank of England has stated that deposit accounts now pay average interest of less than 1 per cent., and there is very limited attraction to individual savings accounts and other such accounts in the current circumstances.
I simply wish to make the point that we need to cut taxes for savers in the current economic climate, to help turn Britain from a spend, spend, spend society into a save, save, save society in the long run. As John Varley, the chief executive of Barclays, said last week,
“the Government needs to create a tax incentive for saving.”
At least the Conservative party is putting forward plans to try to encourage exactly that process.
Many older savers who have acted responsibly during the years of irresponsibility now feel threatened and penalised, as Age Concern has commented. My hon. Friend the shadow Chief Secretary has set out exactly what the incentives should be, and I say simply that this is a matter of urgency. The tax incentives that we are offering to encourage saving should not be delayed. I urge the Government to listen carefully to what my hon. Friend says and adopt those measures in the forthcoming Budget, for all the reasons that I have given. They should not delay, for the sake of the future of this country and the stability and sense of security of millions of savers of all ages and from all groups in Britain.
If we are to discuss savers’ interests at such a time, we must begin by examining the context, which is the international financial turbulence. If nothing had been done in Britain, the banks would have collapsed and most of our savers would have lost everything. If we are to consider the effects of economic policy on savers, we should begin there.
The Government have not only taken action to save the British banking system and to work with others to fight the downturn in the international finance market, but we have recapitalised the banks, which stabilised the banking system when it was on the brink of catastrophic collapse. We are now making further agreements with banks to get them lending again to get us through this period and out of the recession as quickly and with as little pain as possible.
Our taking action last year and ignoring the Conservatives’ pleas to do nothing meant that no individual saver in this country lost any money. The Conservatives now try to make political capital out of the difficulties by waving before us problems that savers may be suffering. We should ignore the Conservatives’ crocodile tears. It is hard to take them seriously when one remembers the Leader of the Opposition—the man in the shadows— advising Norman Lamont, who was Chancellor of the Exchequer when interest rates were 17 per cent. What help was that to savers?
It is hard to take Conservatives’ crocodile tears seriously when they talk about helping savers, yet savers on less than £30,000 would benefit from the proposed changes by less than £5 a year. It is hard to take those crocodile tears seriously when 60 per cent. of pensioners would not benefit from the plans because they do not pay taxes. It is hard to take seriously Conservative Members’ crocodile tears as they claim that they want to help savers, when that means that they would cut investment in public services during a downturn. That is economically illiterate.
Whatever help we may wish to give middle-income savers, I hope that we get assurances today that any such help will come when we are able to give it and not be at the expense of slowing public spending. Cutting public spending at such a time means undermining vital services, which help the poorest and those in most need.
The Conservative proposal would offer only limited help to some by cutting support and services for others, including those who need it most. The Leader of the Opposition has said that he would fund his idea by cutting investment in new Departments, but the figure given today was £4.1 billion. Where will that come from? Does it mean cutting the budget of the Department for Work and Pensions, when unemployment is unfortunately likely to increase? Does it mean cutting it to say good-bye to the proposed 220,000 apprenticeships? Does it mean cutting the new homes for social rent, when there are plans for another 10,000? Does it mean cutting investment in infrastructure, such as Crossrail? Surely it is not the time, when unemployment is unfortunately likely to increase, to cut infrastructure projects.
I appreciate that we are speculating about the jobs that Conservatives are contemplating cutting to raise the money, but we get no details from them, so they can hardly blame us for speculating on the effects of restricting Government budgets. We are told that the proposal will cost £4.1 billion, but if we cut back 1 per cent. of all the budgets, we would still be £500 million light. It has not been thought out. If one examines the way in which it was presented to the media, and considers the context in which David Cameron gave his answer—
Order. The hon. Lady must remember that we do not refer to a Member of the House in that way. She must use the correct parliamentary language.
On 5 January, the Leader of the Opposition, the right hon. Member for Witney (Mr. Cameron), stated:
“Now what I would do, let’s say there’s an election April this year, I’m free, election April this year, I’d immediately instruct my ministers to go into their departments and say instead of the increase of perhaps 2 per cent. real terms you’re expecting, it’s a 1 per cent. real terms increase”.
If that is how economic policy is developed in the Conservative party, one can understand the difficulties of those on the Opposition Front Bench in giving us the details today.
The spirit of the day is to quote the new American President. There can be no surer repudiation of the do nothing policy than that which he gave on 8 January, when he said of his plan:
“There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy.”
The Tories’ plan to help just some middle-income savers does too little. By funding it through public service cuts they are doing nothing for the millions of people who are looking to the Government to help them get through the downturn.
Under the Government’s current economic policy, prudence seems to go unrewarded. Regrettably, the Government have still not reacted to the devastating consequences that interest rate cuts have brought to a generation of savers. The Government may be offering bail-out after bail-out to over-leveraged banks. However, they are failing to help, if not reward, those in our society who have put aside money in the form of savings, especially the more vulnerable in our society, such as pensioners, who are now seeing their standard of living drop daily.
We need a savings culture at the heart of our economy if it is to grow out of this recession. Thrift and prudence will ensure confidence and the ability to invest in the future. However, recent economic policy has only consolidated a longer-term trend that has emerged under this Government. That trend, which was exemplified by the Prime Minister when he was Chancellor, is towards a Government built on a mountain of debt and indulging in their own spending binge. Encouraged by the Government’s poor household financial management, ordinary individuals have gone on a borrowing and spending binge too. The result is that in 2007 the household savings ratio fell to less than one third of what it was in 1997.
Cutting interest rates was indeed the right thing to do to deal with the current crisis. However, hanging savers out to dry in the process is completely unacceptable. We have now seen seven consecutive interest rate cuts—that is seven consecutive hits on savers and seven opportunities lost by the Government to give help to those who need it. Instead of looking after savers, the Government have written a blank cheque for the banks—many of them the very institutions that helped to create the economic mess. With taxpayers’ money keeping them afloat, those same banks continue to slash interest rates on savings accounts, which have reached as low as 0.1 per cent. for some instant access accounts.
Savers and borrowers are confused about how to play the game of interest rate roulette. With low returns on savings, high borrowing costs and interest rate cuts not being passed on to borrowers, people simply do not know what to do. With poor savings rates on offer and a drop in confidence in the banks, it is projected that 45 per cent. of people are less likely to save in the next three months. What is it that people save for? They save to put a deposit on a house, help provide care for themselves in old age or send their children to university. Without savings, none of that can happen, and that will have grave consequences for our economic recovery.
The Government may claim that their economic policies are offering real help to the people who need it most, but unfortunately those polices have failed to help the most vulnerable in our society—the poor and the elderly. With interest rates not expected to rise again in the near future, the Government must urgently create incentives to save again. Even bank bosses agree that we need tax incentives for our savers.
I thus ask the Minister at least to reflect on the proposals of my right hon. Friend the Member for Witney (Mr. Cameron) and the shadow Chancellor my hon. Friend the Member for Tatton (Mr. Osborne), as outlined in this debate by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond): to reduce to zero the 10p starting rate and the 20p basic rate of tax on savings, so that basic rate taxpayers pay no tax at all on their income from savings, thus helping them by up to £7,200 a year; and, secondly, to increase age-related personal allowances by £2,000 for those aged 65 and over, benefiting them by up to £400 a year.
To conclude, this debt-addicted Government are doing nothing for those who have been more prudent than themselves. To borrow more money to get the country out of its problems, according to Dr. Tempest, is a bit like telling a heroin addict that he needs more heroin in order to recover. This country does not want a legacy of debt; it needs a culture of saving and a Government who are willing to take urgent action to make it happen.
I am grateful for the opportunity to speak, unexpectedly, in the debate; I have a few points, which I hope will be helpful.
In a sense, we all have the same objective, which is to help the least well-off and those who are suffering most in these difficult economic circumstances. However, I think we are confusing two things: dealing with the current crisis, and what we should have for the long term in the form of savings mechanisms to encourage people to save. Those are two arguments, but we are rather confusing them at the moment.
As a number of hon. Members—most recently my hon. Friend the Member for Islington, South and Finsbury (Emily Thornberry)—have said, those who do not pay any tax will not benefit at all, and 60 per cent. of pensioners do not pay tax, so they will not benefit. I want an arrangement to help all the least well-off and to have it paid for by those who are most well-off: that is old-fashioned redistribution, which I have long supported, but it has been substantially reversed over the last 30 years. I have made the same speech many times about tax rates in the 1970s, comparing them with what they are now. If I had had my way, there would have been much more redistribution in the tax changes of the last 12 years, but I speak from the Back Benches and do not have much influence.
Tax relief on savings amounts to £20 billion a year—at least that, and possibly more—and most of it goes to those who save most, who are the rich, and those who pay most tax, who are the rich. It does not go to people on very low incomes. I suggest that one way of helping everyone on lower incomes would be to remove a substantial proportion of that tax relief and redistribute it into such things as the basic state pension. If we took that £20 billion and put it together with the £12 billion we are spending on cuts in VAT, that would amount to £32 billion a year. With 11 million pensioners, that works out, I believe, at about £3,000 a year per pensioner. Well, I think that would be an excellent way forward.
Interestingly, if that happened, the basic state pension would be about £150 a week, which it would have been if Mrs. Thatcher’s first Conservative Government had not cut the link with earnings. At that time, the basic state pension rose to 25 per cent. of average earnings, but it has gone down to about 16 per cent. now. If we raised the basic state pension to £150 a week per person, and eliminated means testing in the process, we would overcome all those problems and address the difficulty that the basic state pension is now below the official poverty level. Through that simple change, we could thus kill several birds with one stone.
I think that we could even go beyond that and look at higher rate taxes as well. My view is that we need a substantial reform of the income tax regime—restoring the 10 per cent. rate for a start. I would raise the threshold for the 40 per cent. rate somewhat and perhaps put in a 30 per cent. rate band in there, but, more importantly, put higher rate tax bands way above that. Perhaps we could go a small way towards where we were in the 1970s, if not anything like all the way. That is the logic. Redistribution is the way to help those who are least well off, and everyone would benefit, including pensioners with low savings, especially if the means-testing component was got rid of, so all savings were additional to the basic state pension. That is the way forward.
Interestingly, this could be done without any change in fiscal stance. If we raise taxes on the rich and spend the money on the poor, the overall fiscal stance does not change, so we are talking not about additional spending, but about shifting the burden of expenditure on to the rich rather than the poor.
The Conservative Front-Bench spokesman rightly pointed out that the multiplier effects of giving money to the least well-off are much greater than those of giving money to the better-off. Poor people spend all their money, because they have to, so the multiplier effect of their incomes is much greater than it is for the rich. Therefore, redistributing income from the rich to the poor would boost general consumer demand as well. The rich have a low propensity to consume, because they do not know what to spend their money on as they have so much of it, while the poor have to spend more just on simple things like heating and food every week. That would benefit the economy.
As for the long-term problem of encouraging people to save, the reality is that final salary schemes, particularly in the private sector, are dying out. Private savings schemes are insecure, and they do not offer good returns. It is estimated that one third of the likely return in such schemes is taken up with the costs of administration, advertising and so forth. Therefore, what we need is a comprehensive, substantial and compulsory state earnings-related pension scheme—SERPS—for all, so we all save sensibly through our lives and when we retire we have a decent income related to our income during our working lives. That is the sensible way forward: a high basic state pension with no means-testing and a compulsory SERPS for all would overcome all the problems.
Finally, I have mentioned several times recently the idea of a state savings bank, where we could save our money and those on modest incomes would be guaranteed a return in the end. It would not be stock market-related, so it would not suffer if the stock market fell, and it would not be related to interest rate changes in the general economy, so ordinary people would know what they were getting back. There would be defined benefits and returns for their savings in a state savings bank. It would not, perhaps, provide the high returns of those who gamble on the stock exchange, but at least the income would be secure and would be above inflation, and the Government would have a good fund to invest in infrastructure. Also, because the bank would be in the state sector, it would, effectively, be underwritten. That is the way forward; that is what I want to see for the future, and I hope one day to persuade my Front-Bench colleagues to agree.
During the Queen’s Speech debate on 3 December last year, I tackled the Prime Minister over the Government response to Equitable Life. He promised me faithfully that the Government would respond before the Christmas recess. Regrettably, that did not happen, but, finally, last week we had a Government response.
Equitable Life policyholders have been battling for nine years over a demand for £5 billion in compensation, and I have to say that the apology the Government gave was long overdue. The Government refused to take responsibility for this fiasco, even though Lord Penrose’s report highlighted failures in the Government Actuary’s Department. I pay tribute to the parliamentary ombudsman, Ms Anne Abraham, who undertook a very robust investigation into this. I applaud her, and my faith in the whole parliamentary ombudsman system has been restored, because she has been pivotal in forcing the Government to make a statement on this issue.
The Treasury Minister who gave the Government statement admitted regulatory failure and apologised, but said the compensation would be means-tested. As my friend Mr. Mark Coote, Conservative candidate for Cheltenham, said to me yesterday, why is there total support for depositors of Icelandic banks but not for Equitable Life policyholders? That is an important question. The overall liability in Icelandic banks amounted to hundreds of millions of pounds, whereas we are talking about a sum of £5 billion for Equitable Life policyholders. I am very concerned that rather than having an honest policy across the board for depositors, the Government are choosing to have the kudos for supporting Icelandic bank depositors, but not Equitable Life depositors, simply because of the amounts of money involved.
A very important part of the ombudsman’s findings was that there should be an independent tribunal to assess compensation and assess all individual claims fairly. Instead, the Treasury has asked former Lord Justice of the Court of Appeal, Sir John Chadwick, to advise on how compensation should be made, and to do so according to a very restrictive brief given to him. That concerns me greatly.
There are various questions that were not answered by last week’s statement, and that is why I have said that I am concerned that this matter could end up as a whitewash, and be kicked into the long grass; the Minister outlined neither the scale of the compensation nor the timetable for it. Those factors have huge implications for Equitable Life policyholders, and the situation is causing them profound anger and further frustration. There are rumours that they will receive only a fraction of the £5 billion to which they are entitled. As I have said, the policy involves means testing, and that could cause huge delays in the payments.
Sir John Chadwick will decide things, and I will help any of my constituents who feel that they are being neglected in this matter. I will personally take their case to Sir John Chadwick when he sets up the adjudication panel. When will people get their money? The relevant Treasury Minister refused to confirm that payments will be made in 2009. Surely interim payments must be made. For these people to have waited such a long time, and for them now to be told that they may not even receive compensation in 2009, is simply unacceptable. Even more shockingly, the Treasury Minister says that the Government may not even be able to comply with the parliamentary ombudsman’s request that this whole matter be done and dusted within two years. Again, that is simply unacceptable. So far, 30,000 people have died over the past nine years waiting to receive their help. I will hold the Government to account if any of my constituents—regrettably—dies while waiting for compensation, and I will demand that the compensation be given to their widows or widowers.
What happens next? Sir John Chadwick will have to find an office and staff to sift through the thousands of records that the Government want him to look out before awarding any payments. The Government need to give him proper resources. What resources will he be given to undertake this huge task that they have set him? How much will his budget be? What will Ministers do to ensure that the payments are made as quickly as possible? I feel so passionately about this matter, not least because of the letters that I have received from Equitable Life policyholders in my constituency, that I intend to set up the all-party group on Equitable Life policyholders, and campaign on their behalf. I will hold Sir John Chadwick and the Government to account over the next 12 months, to ensure that no stone is left unturned in this matter.
I am grateful for the opportunity to speak, although I have been told that I must finish in five minutes.
I do not support the motion because it is clearly political. There is a theme running through politics at the moment. It is the Conservatives saying—they do not say it modestly, as the hon. Member for Twickenham (Dr. Cable) does—that they said something first. They hear of something, they say it and when Labour does it they say, “They are stealing our ideas.” This is another such example; the Prime Minister came out of No. 10, there was an indication that he was considering this as part of the Budget and immediately it became an idea for the Conservatives. It was interesting that the Conservative spokesman tried to trap the Minister into saying that he objected to the idea and that he would not support it, when the hon. Gentleman knew that my hon. Friend might have to eat his words after the March Budget. Thanks to comments from the hon. Member for Twickenham and my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson), it is clear that the Opposition proposal would not help the poorest savers because the return on their savings is so small that a tax rebate would be of little interest.
The best consequence of the debate has been the spotlight on interest rates for savers and the Treasury’s calculations. The figure varied from 7 per cent. by Liberal Democrat Members to 10 per cent. by Conservative Members, but it is clearly not acceptable or realistic. If the Government were realistic and provided an actual figure, more people would be able to obtain tax credit, but they are being denied it at the moment because of the false figures based on their pensions. It is good that that has emerged from the debate.
Until the hon. Member for Braintree (Mr. Newmark) came on the scene, Opposition spokesmen, including those on the Liberal Democrat Bench, did not mention the real culprits. The debate started with the suggestion that the crisis was caused by the Labour Government, and we are so busy having a political argument that we have failed to mention the people who really caused it and who are prolonging it—the bankers. That should never be forgotten, and we should not allow the Conservatives to let them off the hook. To do so would be serious because the time will come for the House to introduce regulations to prevent a crisis from occurring and, when the hurt has passed, months later, the bankers will say, “You can’t do that, because it would stop us making money.” We will have forgotten how they behaved and the trauma that they caused. It is important to understand what they have done, to stop trying to make political capital, and to keep the real culprits in the dock.
Does the hon. Gentleman believe that regulation should be introduced so that we can set minimum rates for savers? He is right to say that tax relief on virtually no return is worth nothing. If we are going to regulate, perhaps we should regulate on that as well.
I will not go down that road, because regulation is a major issue, and the argument will move on.
Saving is a matter not for the Government, but for the banks. When I mentioned the 0.01 per cent. interest that most major banks are paying to savers, the hon. Member for Twickenham said that the banks are recapitalising. Making saving unattractive is a strange way to recapitalise.
I made a point about a pensioner putting £1,000 into a Barclays account, which would earn a pound a year. How can the banks recapitalise with proper deposits—not the funny money that has caused all the trouble—if they are paying £1 a year interest on £1,000? The banks should be making saving attractive to bring new customers in. If they want to recapitalise, they should do so with money from customers.
I seem to have used up my time. We should keep the bankers in the dock, and they should do what they are not doing—play their full part in getting us out of this crisis.
I thank the hon. Member for Leeds, East (Mr. Mudie) for keeping his remarks short so that I have time to speak. All politicians are in favour of people saving, although we are not always in favour of people doing it yet. In the long term, saving is always good, but in the short term there are sometimes reasons for wanting people to spend.
People save in several ways, including through pensions. Unfortunately, partly because of the Government’s changes to the tax regime and partly because of the history of pensions in recent years, many people do not now put their money into pensions, so we must restore confidence in the pension system. Another method of saving is through house purchase, but the recent housing boom has distorted the British economy. A third way of saving is by putting money into the bank, and there are several ways in which we can help people to increase their savings in the long term in order to help the economy.
The principal problem is that the unsustainable housing boom has been financed by banks, initially from depositors, but recently—over the past two or three years—from wholesale money markets, which have now dried up. The bubble has therefore burst. Most of the difficulties and problems that the banks are experiencing stem from property write-offs and reductions in the property market, rather than because they loaned money to Rover or Jaguar or a steel plant—enterprises that actually produce something. That is the real problem, and we are facing a credit crunch. Whoever is in government, the focus has to be on getting lending going again between banks and attracting funds. Otherwise, we will face a massive contraction. On the issue of the money supply, there is a real danger of money starting to contract if the banking system does not start to work properly.
The proposals made by my Front Bench colleagues today are not actually about saving. Savers tend to be elderly and there are seven times more of them than borrowers. So when interest rates are cut, borrowers tend to take the money and save it rather than spend it, but when they are increased, those who have small bank account savings tend to see it as part of their income and spend it. Many pensioners in Poole have lost income from the low interest rates, and my colleagues are trying—in a small way—to give some money back to those who are more likely to spend it on paying the gas bill or the council tax, or other ordinary, everyday expenses, because everybody is under pressure.
It has been claimed in this debate that those on lower income levels have more propensity to spend. Those who are elderly and who have savings accounts certainly have a higher propensity to spend if interest rates are increased. My right hon. Friend the Member for Wokingham (Mr. Redwood) has argued for higher interest rates, and indeed cutting interest rates to present levels can be deflationary, because individual borrowers save and savers, especially the elderly, do not spend. The principal beneficiaries of lower interest rates are probably companies and, in the long run, that may be a good thing. However, if the low interest rates reduce the incentive for people to save in the short term and have a detrimental impact on the elderly, that is to be deprecated.
In the long term, we need proposals to increase saving, and it would be welcome if they were cross-party proposals, because getting our citizens to save more needs cultural change. The hon. Member for Leeds, East was right: we need to get people to put more savings into banks and return to the traditional Captain Mainwaring type of banking instead of the recent approach of using hot money to stoke a boom in housing that, in the long run, will cause disruption in the economy and the loss of jobs, and hit our industrial capacity.
We have had a generally thoughtful debate about savings in the UK economy and the impact of the current economic crisis on savers.
My hon. Friend the Member for West Suffolk (Mr. Spring) gave an analytical view of the current state of the savings market, and provided a helpful backdrop to later contributions.
My hon. Friend the Member for Braintree (Mr. Newmark) set out very clearly the need for saving in the long term and why people should put some money aside for the future. My hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski) pointed out in his contribution on Equitable Life what happens when things go wrong. There has been an undue delay in helping policyholders in Equitable Life, which has consequently eroded the confidence of savers in the saving market. We need to bear that in mind.
The hon. Member for Poole (Mr. Syms) talked about the dependence on the wholesale market for funding in recent years. I will come to that later, but he is absolutely right to say that the savers’ culture must be rebuilt to ensure that banks are less dependent on wholesale markets. That would make a significant contribution to increasing the stability of the economy as a whole.
The hon. Member for Twickenham (Dr. Cable) broadly supported some of the ideas that we have put in our motion today, and I am grateful for that.
The hon. Member for Newcastle upon Tyne, North (Mr. Henderson) said that there is nothing in the measure to help the poorest. I want to point out to him a comment that has popped up two or three times in the course of this afternoon’s debate. There are people who have a savings income who pay no tax—or tax at only the 10 per cent. rate—who receive their savings net of tax and often do not know how to reclaim that tax. They are losing out. There is something in the policy for them, as it will make it easier for them to ensure that they receive their interest on a gross basis.
The hon. Member for Islington, South and Finsbury (Emily Thornberry) talked about how we would fund the policy. We have made a very clear proposal on how we would fund the tax reductions. We believe that that it is in the interests of the economy as a whole for that to take place.
The hon. Member for Leeds, East (Mr. Mudie) objected to the motion because it might be too political—I thought that the House of Commons was here to talk about the political issues. He alighted on a particular point that has raised concern among Members on both sides of the House, which is the rate of interest that is assumed for the calculation of pension credit. People might want to return to that topic and to think about it.
The hon. Member for Luton, North (Kelvin Hopkins) gave one of his typical speeches about the rate of tax. Let me point out to him that we have a state savings bank in National Savings and Investment, which raises money to help offset the national debt. It has been tasked with increasing the amount of money that it is to raise from savers this year. A state savings bank already exists, and that was perhaps the only point of agreement between us in our discussion this afternoon.
We need to return to the central point. Although it is right to tackle the recession using monetary policy and it is right to reduce interest rates, we need to remember that although low interest rates help to ease the position of borrowers, savers pay the price. As the returns on their ISAs and building society accounts tumble, so does their income. At a time like this, it is right to help those people who depend on interest income. That is why our policy to scrap the basic rate of tax on interest for basic rate taxpayers is designed to help savers today. It will reward people who have done the responsible thing through the last decade and have put money aside. It will help to cushion them from the fall in interest income that they will have seen over the course of the past few months.
Our policy is not just a short-term policy. It is a policy for the long term. It is not just about helping people who are living off savings today, but about encouraging people to save in the long term. Over the course of the last decade, the Government have presided over a collapse in the savings ratio. As part of the golden economic legacy that the Government inherited in 1997, the savings ratio was 9.9 per cent. It has fallen to 1.8 per cent. In 1997, people saved £54 billion. In 2007, that figure was down to £20 billion. When the Government came into office, one in 10 families had no savings. The most recent figures show that one in three families have no savings.
We are paying the price for the casual attitude that the Government have shown towards savings over the past decade. People are entering the recession ill-prepared for the strain on their finances. The collapse in the savings ratio means that people with low savings are likely to face more financial distress. They do not have the money for a rainy day, the cash for an unexpected expense, or the buffer that will tide them over a period of unemployment or of short-time working.
The Government’s amendment shows that they have been complacent. The measures that they have introduced, such as the child trust fund and the savings gateway, are so far unproven. They have not tried to encourage savings across the country as a whole.
The price of that complacency has been borne by families and business. Savings are the bedrock of family finances, but they are also the foundations of a stable economy. Without adequate UK savings, borrowers become increasingly dependent on the flows of capital into the UK. At the start of this decade, bank deposits broadly matched the amount of lending required in the economy. Cash in the bank was enough to fund loans to families and businesses, but the story of the decade has been that borrowing has risen without being matched by savings or bank deposits. Instead, it has been funded through international wholesale markets. In December, the Bank of England believed that the funding gap was £740 billion. That means that we need to find three quarters of a trillion pounds to fund borrowing at current levels.
The collapse of Northern Rock showed the perils of dependence on wholesale markets, which triggered the bank’s collapse—
No, as the hon. Gentleman and I have discussed Northern Rock many times before. I know that he has a particular constituency interest in that bank, but its business model depended not on UK savers but on being able to suck in money from across the world. Today, it is not just one bank that faces that problem but the banking sector and the economy as a whole.
I am grateful to the hon. Gentleman, and I understand why wholesale banking is a target at the moment. However, if surplus funds in countries such as China have to work their way through the international banking system, can that happen only through deposits? Is there not a case for intermediary markets as well?
We need to get the system into balance. Part of the problem at the moment is that we have been overly dependent on capital inflows. As my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) said earlier, we are in effect borrowing money from overseas savers to buy the goods that we import.
Over the past few months, those flows have ceased to come into the UK economy, with the result that it has seized up. Credit has ceased to flow in the markets, and we must try and restore the correct balance between saving and borrowing. It is not about saying no to wholesale markets, but rather about getting the balance right. If we are to restore stability to the economy as a whole, we need to get a better balance between what people save, borrow and invest.
The savings culture is not just about families: it is also about businesses, and strengthening the foundation of the economy. By restoring the savings culture in the UK, we will help families take greater control over their finances. We will help them to take responsibility for the future and to ride out the bad times, but we will also increase the stability of the economy as a whole. We must decrease our dependence on wholesale capital flows, reduce volatility, and increase stability.
Over the past 10 years, the Government have neglected the savings culture and gambled with our economy. People who have depended on savings are facing hardship, and those without savings face fear and uncertainty. People need to save more: higher levels of saving will help them take responsibility for the future and ride out the rough times, and they will also support greater investment in the economy.
By neglecting savings and creating a “spend now, pay later” economy that is built on weak foundations, the Government have caused instability for families and businesses alike. The Opposition’s plan to scrap the basic rate of tax on savings for basic-rate taxpayers is the right policy—not just for those who depend on savings for their income today, but to encourage tomorrow’s savers too.
I believe that we need that change if we are to bring stability back into this country and put the right balance back in place. The Government have not really tackled that issue over the past decade, but that is the sort of change that we need. I believe that only a change of Government will bring it about.
For the most part, this has been a thoughtful debate, and to that extent I agree with the hon. Member for Fareham (Mr. Hoban). We had some good contributions from my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson), for Islington, South and Finsbury (Emily Thornberry), for Luton, North (Kelvin Hopkins) and for Leeds, East (Mr. Mudie), and contributions also from the hon. Members for West Suffolk (Mr. Spring), for Braintree (Mr. Newmark), for Shrewsbury and Atcham (Daniel Kawczynski) and for Poole (Mr. Syms).
In the years since the Labour Government came to power in 1997, we have had a savings record that we can be proud of. We have taken a number of steps to encourage saving. The system of individual savings accounts that we introduced in 1999 has been highly successful. As hon. Members know, around one in three British adults hold an ISA, and only last year we acted to make ISAs even more attractive to potential savers, making them more flexible and easier to use and raising the annual tax-free investment limit to £7,200.
The child trust fund that we introduced provides every child with £250 at birth, or £500 for children in lower income families, and again at the age of seven. The policy is designed to strengthen the saving habits of future generations, promote financial inclusion and ensure that at age 18 every child will have access to a financial asset. We are delighted that more than 4 million children now hold a child trust fund account.
We are implementing a new scheme, the savings gateway, which we hope will come into operation in 2010. The savings gateway is a cash savings scheme that aims to promote saving and financial inclusion for those on lower incomes, and it provides a financial incentive to save through a Government contribution of 50p for each pound saved in the scheme, up to a monthly limit. The scheme has already been positively piloted and it will help kick-start the saving habit among those who have not saved before, as well as helping those who are currently excluded to enter the financial mainstream. Furthermore, pensions tax relief of £30 billion gross is available.
The hon. Member for Runnymede and Weybridge (Mr. Hammond) fails to give credit where credit is due. By all means let us debate the savings-related issues that exist between our parties, but let us not forget that there are savings products out there that are benefiting individuals throughout the country. On the off-chance that a saver has tuned into the debate or might Google it at a future date and might want advice from hon. Members who participated in the debate, let me say that the Financial Services Authority, through its money made clear website, provides impartial, jargon-free advice. Many savings products on the market offer competitive rates and good deals.
It took the hon. Member for Runnymede and Weybridge 25 minutes to get on to the subject of saving. He started with a number of assertions, the most outstanding of which I found to be the assertion that there was an emerging consensus that a fiscal stimulus was not appropriate. I do not know who the hon. Gentleman has been talking to, but I do not believe that there is even a consensus on the subject in the new shadow Cabinet. The Conservatives are isolated in Europe, the United States is looking to introduce a further fiscal stimulus under its new President, the Germans recently announced a fiscal stimulus, and other countries are doing so.
When the hon. Gentleman pooh-poohs the Government’s VAT cut—
I shall go on and talk about the hon. Member for Shrewsbury and Atcham in a moment.
Let us talk about VAT. The hon. Member for Runnymede and Weybridge says that the measure is not working, but I think he is wrong. He knows that it is boosting demand to the tune of £12.5 billion into the UK economy. Even the right hon. and learned Member for Rushcliffe (Mr. Clarke) said that it was the right policy. If it is good enough for the shadow shadow Chancellor, it ought to be good enough for the hon. Member for Runnymede and Weybridge.
The Minister will know that on the day of pre-Budget report the shadow Secretary of State for Business, Enterprise and Regulatory Reform made it clear that, having heard the Chancellor’s catastrophic projections of the level of deficit that he would be running, the VAT cut was simply not affordable, and he urged him to convey that message back to the Prime Minister.
I did not say that I agreed with the shadow shadow Chancellor on everything. He was right to say that the VAT cut is a most effective policy instrument, and we believe that this is making a difference. This is pounds in people’s pockets now. The average family will save something in the region of £275 a year as a result of the Government’s VAT cut, and that stands in stark contrast to the Tory tax proposals on savings, which will save the average family £5 a year.
The hon. Gentleman also needs to talk to his shadow Chancellor when he said earlier that higher rate taxpayers will not benefit from the proposals. My understanding of what the shadow Chancellor said on “Money Box” is that they would, and that higher rate taxpayers will get the 0 per cent. rate and the basic rate up to the top of the basic rate savings on their income, because savings are taxed like any other forms of income. I believe that the current proposals are effectively targeted. As he is aware, 60 per cent. of pensioners do not pay tax at the moment. Through ISAs people can save up to £3,600 a year in cash as a result of the Government’s policies. When he talks about the savings ratio, he ignores the fact that in 2007 the savings ratio was 3.4 per cent. as a percentage of GDP, pretty close to the 3.7 per cent. average that we have seen during the last 20 years, and certainly higher than that of a number of other countries, notably the United States, but also Japan and Italy.
The hon. Member for Twickenham (Dr. Cable) made a typically thoughtful speech and I agree with him totally that we should not be polarising the argument: saving is good, spending is bad, or spending is good, saving is bad. He made a couple of technical points, one about the depositor protection scheme, on which I wanted to reply to him, because I appreciate the building societies’ concerns in this matter. He will be aware that members of the Financial Services Compensation Scheme pay statutory levies in proportion to the size of their protected deposits. They benefit in the good times and it is right that they contribute in the bad times.
The hon. Gentleman also made a point about pension credit, and I think he talked about the 7 per cent. rate. We have not assumed a 7 per cent. interest rate, if I heard him correctly on this matter. Pension credit rules are more generous than those of the previous minimum income guarantee, and they assume a notional rate of income at a rate of £1 for every £500 or part of £500 savings held above the threshold. I hope that that clarifies the matter.
It was suggested that only the wealthy could afford to save. One in five people from low-income groups have an ISA compared with one in seven who used to have a TESSA or a PEP. People are saving through the child trust fund, and a third of those who save through save as you earn programmes earn £21,000 or less.
Since the Labour Government came to office, households are on average £1,250 a year better off in real terms. The poorest 20 per cent. of families are £4,100 a year better off. Whether it is through ISAs, personal pensions, the child trust fund, the forthcoming saving gateway scheme or higher rate tax thresholds for pensioners, we have put in place incentives for saving for everyone at every point in their lives.
I urge hon. Members to support the amendment in the name of the Prime Minister.
Question put (Standing Order No. 31(2)), That the original words stand part of the Question.
The House proceeded to a Division.
I ask the Serjeant at Arms to investigate the delay in the No Lobby.
Question put forthwith (Standing Order No. 31(2)), That the proposed words be there added.
The Deputy Speaker declared the main Question, as amended, to be agreed to (Standing Order No 31(2)),
That this House recognises the effects the global financial instability is having across the world and on the UK economy; notes that, as a result of Government action on financial stability, no individual depositor in a UK financial institution has lost savings; notes that the cut in value added tax, increased child benefit and £60 payments to all pensioners are helping families and businesses across the UK; further notes that 60 per cent. of pensioners pay no tax at all; believes savings are important in providing people with independence and security throughout their lives; welcomes cross-party support for the Saving Gateway Accounts Bill to help those of working age on low income; believes that the Saving Gateway will build on the successful pilots since 2002 to create savings accounts with the Government matching each pound saved with a contribution; notes that around eight million people on benefits and tax credits will be eligible for this incentive to save; further recognises the successful role that Individual Savings Accounts have played over the last decade with over 18 million people, including one in five people from low-income groups, choosing this method to save tax-free; welcomes the fact that four million children now have child trust funds and millions more will benefit in future; and notes that the Government contribution to child trust funds increases to £500 both at birth and age seven for lower income families.
On a point of order, Mr. Deputy Speaker. I am extremely shocked about what I am going to say. I was about to make my speech in the debate on savers when I received a note from my office saying that there was a police officer there, demanding to see correspondence. The police were already present in my office and I went to see them after making my speech. They said that they were investigating an important case with regard to correspondence that had been sent to Ministers and wanted to see handwriting samples from people who had written to me. I am appalled that officers can behave in that way—entering a Member of Parliament’s office, with no warrant, and demanding constituency correspondence. To my great embarrassment and eternal shame, I was so weak that I handed over the letter from my constituent that they demanded. I will have to live with that, but I am extremely embarrassed about it. After everything that has happened to my hon. Friend the Member for Ashford (Damian Green), it is disgraceful that this is happening and I urge you to investigate.
Further to that point of order, Mr. Deputy Speaker. It is clear that shocking events are taking place. Is it not appropriate for the Home Secretary to come here to make a statement? We had assurances that no offices would be entered unless a warrant was produced. That clearly has not happened today and we deserve some sort of clarification from the Home Secretary.
I understand the great concern of the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski). Clearly, I have no knowledge of the matter, but if it is as he says, it is obviously extremely serious, and my advice is to take it to the House of Commons authorities as quickly as possible.
Further to that point of order, Mr. Deputy Speaker. I was standing at the Bar of the House when my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski) raised his point of order, of which I had no knowledge at all. It seems to me, Sir, that you are representing Mr. Speaker. Should the matter not be referred immediately by you to him?
The House will have heard the point of order that has been raised. Hon. Members on both Front Benches have heard it, too. I can clearly report the matter immediately to Mr. Speaker and he will take whatever action he deems appropriate. That is all that we can do for the time being. My advice to the hon. Member for Shrewsbury and Atcham was on the course of action that he should take. I was not advising him of the course of action that I will take, which is as described by the hon. Member for South Staffordshire (Sir Patrick Cormack).